UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

                     [Mark One]

[X ]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to

 

 

 

Commission File Number

01-19826

 

 

MOHAWK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

52-1604305

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

P. O. Box 12069, 160 S. Industrial Blvd., Calhoun, Georgia

30701

(Address of principal executive offices)

(Zip Code)

 

 

Registrant's telephone number, including area code:  (706) 629-7721

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Title of Each Class

Name of Each Exchange on Which Registered

 

Common Stock, $.01 par value

 

New York Stock Exchange

 

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ]     No [   ]

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes [   ]     No [ x ]

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ]     No [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  Large accelerated filer [ x ]     Accelerated filer [   ]   Non-accelerated filer [   ]

      Indicate by check whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). 
Yes [  ]     No [ x  ]

      The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant (41,675,793 shares) on July 2, 2005 (the last business day of the Registrant's most recently completed fiscal second quarter) was $3,425,750,185. The aggregate market value was computed by reference to the closing price of the Common Stock on such date.

      Number of shares of Common Stock outstanding as of March 14, 2006: 67,621,254 shares of Common Stock, $.01 par value.

                                               DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders-Part III.


 



 

 

Table of Contents

Page No.

Part I

Item 1.

Business

3

Item 1a.

Risk Factors

9

Item 1b.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

14

Item 4.

Submission of Matters to a Vote of Security Holders

15

Part II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer

 

   Purchases of Equity Securities

16

Item 6.

Selected Financial Data

17

Item 7.

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

18

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

25

Item 8.

Consolidated Financial Statements and Supplementary Data

27

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

59

Item 9A

Controls and Procedures

59

Item 9B

Other Information

59

Part III

Item 10.

Directors and Executive Officers of the Registrant and Related Stockholder Matters

60

Item 11.

Executive Compensation

60

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related

   Stockholder Matters

60

Item 13.

Certain Relationships and Related Transactions

60

Item 14.

Principal Accountant Fees and Services

60

 

Part IV

Item 15.

Exhibits and Financial Statement Schedules

60



PART I

Item 1. Business

General

      Mohawk Industries, Inc., ("Mohawk" or the "Company"), a term which includes the Company and its subsidiaries, including its primary operating subsidiaries, Mohawk Carpet Corporation, Aladdin Manufacturing Corporation, Dal-Tile International Inc. and Unilin Flooring BVBA, Unilin Holding Inc., and their subsidiaries (the Unilin Group), is a leading producer of floor covering products for residential and commercial applications in the United States and Europe. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile and natural stone in the United States as well as a leading producer of laminate flooring in the United States and Europe. The Company had annual net sales in 2005 in excess of $6.6 billion. Approximately 98% of this amount was generated by sales in North America and 2% was generated by sales outside North America. Selected financial information for the Mohawk, Dal-Tile, and Unilin segments is set forth in Note 16 to the Consolidated Financial Statements.

     The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpet, rug, carpet pad, ceramic tile, laminate, hardwood and resilient, in a broad range of colors, textures and patterns for residential and commercial applications in both new construction and remodeling. The Mohawk segment markets and distributes its carpets and rugs under its soft surface floor covering brands and ceramic tile, laminate, hardwood and resilient under its hard surface floor covering brands. The Mohawk segment positions its products in all price ranges and emphasizes quality, style, performance and service. The Mohawk segment is widely recognized through its premier brand names, which include "Mohawk®," "Aladdin®," "Mohawk Home®," "Bigelow®," "Custom Weave®," "Durkan®," "Helios®," "Horizon®," "Karastan®," "Lees®," "MeritTM ," "Ralph Lauren®" and "WundaWeve®." The Mohawk segment markets and distributes soft and hard surface products through over 30,000 customers, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. Some products are also marketed through private labeling programs. The Mohawk segment's soft surface operations are vertically integrated from the extrusion of resin to the manufacture and shipment of finished carpets and rugs.

      The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products used in the residential and commercial markets for both new construction and remodeling. Most of the Dal-Tile segment's ceramic tile products are marketed under the "Dal-Tile®" and "American Olean®" brand names and sold through independent distributors, home center retailers, tile and flooring retailers and contractors. The Dal-Tile segment operations are vertically integrated from the production of raw material for body and glaze preparation to the manufacturing and distribution of ceramic and porcelain tile.

      On October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV (the "Unilin Acquisition").  The total purchase price for acquiring Unilin, net of cash, was approximately Euro 2.2 billion (approximately $2.6 billion).  The results of operations for the Unilin business have been included with the Unilin segment results and in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the laminate flooring market. The Unilin segment, which is headquartered in Belgium, is a leading manufacturer, distributor and marketer of laminate flooring in Europe and the United States. Unilin is one of the leaders in laminate flooring technology, having commercialized direct pressure laminate, or DPL, a technology used in a majority of laminates today, and has developed the patented UNICLIC® glueless installation system and a variety of other new technologies, such as beveled edges, multiple length planks and new surface technologies. Unilin is the only vertically-integrated laminate flooring manufacturer in the United States producing both laminate flooring and related high density fiberboard. Unilin sells its laminate flooring products under the Quick-Step® brand through independent distributors and specialty stores in Europe and the United States, as well as through traditional retailers in France, Belgium and the Netherlands and, in some circumstances, under private label names. Unilin also produces insulated roofing and other wood-based panels.

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Industry

      The United States floor covering industry has grown from $12.4 billion in sales in 1992 to $22.8 billion in 2004. In 2004, the primary categories of the United States floor covering industry were carpet and rug (62%), ceramic tile (13%), hardwood (10%), resilient and rubber (9%), and laminate (6%). Each of these categories has been positively impacted by:

•            increases in average selling price per square foot;

•            increases in the residential builder and homeowner remodeling markets;

•            growth in housing starts and housing resales;

•            increases in average house size; and

•            increases in home ownership.

     Compound average growth rates for all categories, except the resilient and rubber category, for the period from 1999 through 2004 have met or exceeded the growth rates (measured in sales dollars) for the gross domestic product of the United States over the same period.  Ceramic tile, laminate and hardwood continued to exceed the growth rate for housing starts over the same period. During this period, the compound average growth rate was 3.0% for carpets and rugs, 7.0% for ceramic tile, 0.6% for resilient and rubber, 17.4% for laminate and 9.4% for hardwood.

      According to the most recent figures available from the United States Department of Commerce, worldwide carpet and rug sales volume of American manufacturers and their domestic divisions was approximately 2.3 billion square yards in 2004. This volume represents a market in excess of $14 billion. The overall level of sales in the floor covering industry is influenced by a number of factors, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

      Broadloom carpet, defined as carpet over six feet by nine feet in size, has two primary markets, residential and commercial, with the residential market making up approximately 76% of industry amounts shipped in 2004 and the commercial market comprising approximately 24%. An estimated 49% of industry shipments are made in response to replacement demand, which usually involves exact yardage, or "cut order," shipments that typically provide higher profit margins than sales of carpet sold in full rolls. Because the replacement business generally involves higher quality carpet cut to order by the manufacturer, rather than the dealer, this business tends to be more profitable for manufacturers than the new construction business.

      The United States ceramic tile industry shipped 3.1 billion square feet, or $2.9 billion, in 2004. Sales in the ceramic tile industry are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

     The ceramic tile industry's two primary markets, residential applications and commercial applications, represent 69.8% and 28.8% of the industry total, respectively. Of the total residential market, 61% of the dollar values of shipments are for new construction.

     In 2004, the United States laminate industry shipped 1.1 billion square feet, representing a market of approximately $1.4 billion, and the European laminate industry shipped 5.2 billion square feet. In 2003, the laminate industry accounted for approximately 10% of the European floor covering markets. Sales in the laminate industry are influenced by the same factors that influence the carpet industry, including consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

4




      

Sales and Distribution

      Mohawk Segment

      Through its Mohawk segment, the Company designs, manufactures and markets hundreds of styles of carpet and rugs in a broad range of colors, textures and patterns. In addition, the Mohawk segment markets and distributes ceramic tile, laminate, carpet pad, hardwood and resilient floor covering. The Mohawk segment positions product lines in all price ranges and emphasizes quality, style, performance and service. The Mohawk segment markets and distributes its soft and hard surface product lines to  over 30,000 customers, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. Some products are also marketed through private labeling programs. Sales to residential customers represent a significant portion of the total industry and the majority of the Company's carpet and rug sales.

      The Company has positioned its premier residential carpet and rug brand names across all price ranges. "Mohawk®," "Custom Weave®," "WundaWeve®," "Horizon®," "Helios®" and "Karastan®" are positioned to sell primarily in the medium-to-high retail price channels in the residential broadloom market. These lines have substantial brand name recognition among carpet dealers and retailers, with the "Karastan®" and "Mohawk®" brands having the highest consumer recognition in the industry. "Karastan®" is the leader in the exclusive high-end market. The "Aladdin®" and "Mohawk Home®" brand names compete primarily in the value retail price channel. The Company markets its hard surface product lines, which include "Mohawk Ceramic®", "Mohawk Hardwood®", "Mohawk Resilient®" and "Mohawk Laminate®" across all price ranges. In addition, the Company markets its decorative throws and pillows, woven bedspreads, textile wall hangings and blankets primarily through the retail channel.

     The Company offers marketing and advertising support through dealer programs like Karastan Gallery, Mohawk ColorCenter, Mohawk Floorscapes and Mohawk Floorz. These programs offer varying degrees of support to dealers in the form of sales and management training, merchandising systems, exclusive promotions and assistance in certain administrative functions such as consumer credit, advertising and insurance.

     The commercial customer base is divided into several channels: corporate office space, educational institutions, hospitality facilities, retail space and health care facilities. In addition, the Company produces and sells carpet for the federal government and other niche businesses. Different purchase decision makers and decision-making processes exist for each channel.

     The Company's sales forces are generally organized based on product type and sales channels in order to best serve each type of customer. A hub-and-spoke distribution network accomplishes the product distribution on a regional level. In this system, trucks generally deliver product from manufacturing and central distribution centers to regional and satellite warehouses. From there, it is shipped to retailers or to local distribution warehouses, then to retailers.

      Dal-Tile Segment

      The Dal-Tile segment designs, manufactures and markets a broad line of ceramic tile, porcelain tile and natural stone products. Products are distributed through separate distribution channels consisting of retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel, and dedicated sales forces support the various channels.

      The Company has six regional distribution centers in the Dal-Tile operations. These centers help deliver high-quality customer service by focusing on shorter lead times, increased order fill rates and improved on-time deliveries to customers. These distribution centers also enhance the ability to plan and schedule production and manage inventory requirements.

     A network of approximately 250 sales service centers located in the United States, Canada and Puerto Rico distributes primarily the "Dal-Tile®" brand product, serving customers in all 50 states and portions of Canada and Puerto Rico. The service centers provide distribution points for both customer pick-up and delivery and include showrooms to assist customers with product selection.

     The Company serves as a "one-stop" source that provides customers with one of the ceramic tile industry's broadest product lines-a complete selection of glazed floor tile, glazed wall tile, glazed and unglazed ceramic mosaic tile, porcelain tile, quarry tile and stone products, as well as allied products. In addition to products manufactured by the Company's ceramic tile business, the Company also purchases products from other manufacturers to enhance its product offering.

5




     The independent distributor channel offers a distinct product line under the "American Olean®" brand. Currently, the "American Olean®" brand is distributed through approximately 200 independent distributor locations that service a variety of residential and commercial customers. The Company is focused on increasing its presence in the independent distributor channel, particularly in tile products that are most commonly used in flooring applications.

     The Company believes that it has two of the leading brand names in the U.S. ceramic tile industry-"Dal-Tile®" and "American Olean®".  The "Dal-Tile®" and "American Olean®" brand names date back over fifty and seventy-five years, respectively and are well recognized in the industry.

     The Company's sales service centers primarily distribute the "Dal-Tile®" brand, with a fully integrated marketing program, emphasizing a focus on quality and fashion. The broad product offering satisfies the needs of its residential, commercial and builder customers. The "American Olean®" brand consists of a full product offering and is distributed primarily through independent distributors. Both of these brands are supported by a fully integrated marketing program, displays, merchandising (sample boards, chip chests), literature/catalogs and an Internet website.

      Unilin Segment

     The Unilin segment's laminate flooring products are distributed through separate distribution channels consisting of retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.

     In the United States, the Unilin operations have three regional distribution centers. These distribution centers help deliver high-quality customer service and also enhance the Company's ability to plan and schedule production and manage inventory requirements.

     In Europe, the Unilin operations distribute products directly from its manufacturing facilities. This integration with its manufacturing sites allows for quick responses to customer needs and low inventory levels.

     In the Unilin business, the Company markets and sells laminate flooring products under the "Quick-Step®" brand, which the Company believes is one of the leading brand names in the U.S. and European laminate industry.

Advertising and Promotion

      The Company promotes its brands through national advertising in both television and print media as well as in the form of cooperative advertising, point-of-sale displays, advertising and sponsorship of a cycling team, and marketing literature provided to assist in marketing various flooring styles. The Company also continues to rely on the substantial brand name recognition of its product lines. The cost of producing display samples, a significant promotional expense, is partially offset by sales of samples and support from suppliers in the carpet and rug business.

Manufacturing and Operations

       Mohawk Segment

      The Company's manufacturing operations are vertically integrated and include the extrusion of resin and post-consumer plastics into polypropylene, polyester and nylon fiber, yarn processing, tufting, weaving, dyeing, coating and finishing. Capital expenditures are primarily focused on increasing capacity, improving productivity and reducing costs. Over the past three years, the Company has incurred capital expenditures that have helped increase manufacturing efficiency and capacity and improve overall cost competitiveness.

      Dal-Tile Segment

     Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally in new plant and state-of-the-art equipment to increase manufacturing capacity, improve efficiency and develop new capabilities.

6




      The Company believes that its manufacturing organization offers competitive advantages due to its ability to manufacture a differentiated product line consisting of one of the industry's broadest product offerings of colors, textures and finishes, as well as the industry's largest offering of trim and angle pieces and its ability to utilize the industry's newest technology.

      Unilin Segment

     The Company's laminate flooring manufacturing operations are vertically integrated, both in the United States and in Europe, and include high-density fiberboard ("HDF") production, short-cycle pressing, cutting and milling. The European operations also include resin production. Unilin has state-of-the-art equipment that results in competitive manufacturing in terms of cost and flexibility. Most of the equipment for the production of laminate flooring in Belgium and North Carolina is relatively new. The Company's laminate flooring plant in North Carolina is one of the largest in the United States. In addition, Unilin is the only fully integrated laminate manufacturer in the United States with its own "HDF" production facility.

     The manufacturing facilities for other activities in the Unilin business (insulated roofing and other wood-based panels) are all configured for cost-efficient manufacturing and production flexibility and are competitive in the European market.

Raw Materials and Suppliers

      Mohawk Segment

      The principal raw materials the carpet and rug business uses are nylon, polypropylene, polyester and wool resins and fibers; synthetic backing materials; latex and various dyes and chemicals. Major raw materials used in the Company's manufacturing process are available from independent sources and the Company obtains all of its externally purchased nylon fibers principally from two major suppliers: Invista Inc., and Solutia, Inc.  Although temporary disruptions of supply of carpet raw materials have been experienced as a result of recent hurricanes, the carpet and rug business has not experienced significant shortages of raw materials in recent years. The Company believes that there is an adequate supply of all grades of resin and fiber, which are readily available.

      Dal-Tile Segment

     In the ceramic tile business, the Company manufactures tile primarily from clay, talc, nepheline syenite and glazes. The Company has entered into a long-term supply agreement for most of its talc requirements.

     The Company owns long-term clay mining rights in Alabama, Kentucky and Mississippi that satisfy nearly all of its clay requirements for producing unglazed quarry tile. The Company purchases a number of different grades of clay for the manufacture of its non-quarry tile. The Company believes that there is an adequate supply of all grades of clay and that all are readily available from a number of independent sources.

     The Company has two suppliers for its nepheline syenite requirements. If these suppliers were unable to satisfy the requirements, the Company believes that alternative supply arrangements would be available.

     Glazes are used on a significant percentage of manufactured tile. Glazes consist of frit (ground glass), zircon, stains and other materials, with frit being the largest ingredient. The Company manufactures approximately 45% of its frit requirements.

 Unilin Segment

     The principal raw materials used in producing boards and laminate flooring are wood, paper and resin.

     Wood supply is a very fragmented market in Europe. The Company has long-standing relationships with approximately 25 suppliers. These suppliers provide a wide variety of wood species, varying from fresh round wood to several kinds of by-products of sawmills and used wood recycled specifically for chipboard production, giving the Company a cost-effective and secure supply of raw material.

7




     In the United States, the Company has a long-term contract with a strategic partner that supplies approximately 90% of its total needs for wood on a vendor-managed inventory program.

     Major manufacturers supply the papers required in the laminate flooring business in both Europe and the United States. The Company does more than 90% of the paper impregnation internally in its laminate flooring facilities in Europe and the United States. In Europe, the resins for paper impregnation are manufactured by the Company, which permits greater control over the laminate flooring manufacturing process, enabling the Company to produce higher-quality products.

     The Company buys the balance of its resin requirements from a number of companies. The Company believes there are ample sources of supply. All the plants of the Company are located within a distance of about 100 miles to the chemical plants manufacturing those types of resins used in its laminate products.

Competition

     The principal methods of competition within the floor covering industry generally are service,  style, quality, price and, to a certain extent, product innovation and technology. In each of the markets other than laminate flooring, price competition and market coverage are particularly important because there is limited differentiation among competing product lines. In the laminate flooring market, the Company believes it has a competitive advantage as a result of Unilin's high-end products and patented technologies, which allows the Company to distinguish its laminate flooring products in the areas of finish, quality, installation and assembly. In the Mohawk and Dal-Tile segments, the recent investments in modernized advanced manufacturing and data processing equipment, the extensive diversity of equipment that has been invested, as well as the Company's marketing strategy and distribution system contribute to its ability to compete primarily on the basis of performance, quality, style and service, rather than just price. The carpet and rug industry has experienced substantial consolidation in recent years, and the Company is one of the largest carpet and rug manufacturers in the world. While the ceramic tile industry is more fragmented, the Company believes it is substantially larger than the next largest competitor and that it is the only significant manufacturer with its own North American distribution system. The laminate flooring industry has a number of significant competitors more than either the carpet and rug industry or the ceramic tile industry. The Company faces competition in the laminate flooring market from a large number of domestic and foreign manufacturers.

     Mohawk Segment

     The carpet and rug industry is highly competitive. Based on industry publications, the top 20 North American carpet and rug manufacturers (including their American and foreign divisions) in 2004 had worldwide sales in excess of $12.5 billion, and in 1998 the top 20 manufacturers had sales in excess of $9.6 billion. In 2004, the top five manufacturers had worldwide sales in excess of $10.0 billion. The Company believes it is the second largest producer of carpets and rugs (in terms of sales volume) in the world based on its 2004 sales.

     Dal-Tile Segment

     The Company estimates that over 100 tile manufacturers, more than half of which are based outside the United States, compete for sales of ceramic tile to customers located in the United States. Although the U.S. ceramic tile industry is highly fragmented at both the manufacturing and distribution levels, the Company believes it is one of the largest manufacturers, distributors and marketers of ceramic tile in the United States and the world.

     Unilin Segment

     Laminate flooring is the fastest growing product in the floor covering industry and is produced by more than 130 industrial manufacturers in 25 countries. The Company believes it is one of the largest manufacturers, distributors and marketers of laminate flooring in the world, with a focus on high-end products. The Company is also the only vertically-integrated laminate flooring manufacturer in the United States producing both high density fiberboard and laminate flooring.

8




Patents and Trademarks

     Intellectual property is important to the Company's business, and the Company relies on a combination of patent, copyright, trademark and trade secret laws to protect its interests.

     The Company uses several trademarks that it considers important in the marketing of its products, including "Aladdin®," "American Olean®," "Bigelow®," "Custom Weave®," "Dal-Tile®," "Durkan®," "Helios®," "Horizon®," "Karastan®," "Lees®," "Mohawk®," "Mohawk Home," "PERSPECTIVE, ®" "Portico, ®" "Quick-Step®," "UNICLIC®," "UNILIN®," and "WundaWeve®."

     Unilin owns a number of patent families, totaling approximately 150 patents and applications in Europe and the United States. The most important of these patent families is the UNICLIC® family, which protects Unilin's interlocking laminate flooring panel technology. The patents in the UNICLIC® family are not expected to expire until at least 2017.

Sales Terms and Major Customers

     The Company's sales terms are the same as those generally available throughout the industry. The Company generally permits its customers to return carpet, rug, ceramic tile, and laminate flooring purchased from it within specified time periods from the date of sale, if the customer is not satisfied with the quality of the product.

     During 2005, no single customer accounted for more than 10% of total net sales, and the top ten customers accounted for less than 15% of the Company's sales. The Company believes the loss of one or a few major customers would not have a material adverse effect on its business.

Employees

     As of March 10, 2006, the Company employed approximately 37,700 persons. Approximately 460  United States employees, approximately 3,500 Mexico employees, and the majority of European manufacturing employees are members of unions. Other than with respect to these employees, the Company is not a party to any collective bargaining agreements. Additionally, the Company has not experienced any strikes or work stoppages in the United States or Mexico for over 20 years. The Company believes that its relations with its employees are good.

Available Information

      The Company's Internet address is http://mohawkind.com. The Company makes the following reports filed by it available, free of charge, on its website under the heading "Investor Information:"

      The foregoing reports are made available on the Company's website as soon as practicable after they are filed with, or furnished to, the Securities and Exchange Commission ("SEC").

Item 1a. Risk Factors

      Certain Factors affecting the Company's Performance

      In addition to the other information provided in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.

      If any of the events described in these risks were to occur, it could have a material adverse effect on the Company's business, financial condition and results of operations.

9




The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels and demand for housing. A prolonged decline in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Company's business.

      The floor covering industry in which the Company participates is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending and interest rate levels. The Company derives a majority of the Company's sales from the replacement segment of the market. Therefore, economic changes that result in a prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company's business and results of operations.

      The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, a prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business and results of operations.

      The construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry. The industry could experience similar downturns in the future, which could have a negative impact on the Company's business.

The Company may be unable to pass increases in the costs of raw materials and fuel-related costs on to its customers, which could have a material adverse effect on the Company's profitability.

      The prices of raw materials and fuel-related costs vary with market conditions. As a result of recent hurricanes and other general economic factors, the Company's costs of carpet raw materials and fuel-related costs are currently higher than historical averages and may remain so indefinitely. Although the Company generally attempts to pass on increases in the costs of raw materials and fuel-related costs to its customers, the Company's ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company's products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered. During such periods of time, the Company's profitability may be materially adversely affected.

The Company faces intense competition in the industry, which could decrease demand for the Company's products or force it to lower prices, which could have a material adverse effect on the Company's profitability.

      The floor covering industry is highly competitive. The Company faces competition from a number of manufacturers and independent distributors. Some of the Company's competitors are larger and have greater resources and access to capital than the Company does. Maintaining the Company's competitive position may require substantial investments in the Company's product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products or force the Company to lower prices. Any of these factors could have a material adverse effect on the Company's business.

The Company may not be able to successfully integrate Unilin or other acquisitions that the Company may make in the future.

      The process of combining the businesses of Unilin with the Company's existing businesses involves risks. The Company will face challenges in consolidating functions, integrating the Company's organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges will result principally because the two companies currently

10




      In addition, the majority of Unilin's operating facilities are located in Europe, where the Company has not previously operated a manufacturing facility. As a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company's revenues, level of expenses and operating results. The Company may face similar challenges in combining the Company's businesses with any other businesses that the Company acquires in the future.

      Failure to successfully manage and integrate Unilin with the Company's existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Company's financial condition and results of operations. Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Company's financial condition and results of operations. The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions.

The Company has not yet completed the testing of the adequacy of Unilin's internal control over financial reporting, and it is possible that the Company's testing or that of the Company's independent auditors in connection with the audit of the Company's financial results for the year ended December 31, 2006, will reveal material weaknesses in Unilin's internal control over financial reporting.

      As part of the integration of Unilin, the Company is in the process of documenting and testing of the Unilin's internal control over financial reporting to allow management and the Company's independent registered public accounting firm to report in 2006 on the effectiveness of the internal control over financial reporting as it pertains to Unilin's operations. The adequacy of Unilin's internal control over financial reporting has not previously been attested to by any independent accounting firm, as no such attestation was required by virtue of Unilin's status as a foreign, privately-held company. The Company anticipates completing the testing of Unilin's internal control over financial reporting by the end of 2006. The Company's testing, or the subsequent testing by the Company's independent registered public accounting firm, may reveal deficiencies in the Company's internal control over financial reporting. In that event, the Company's management may not be able to report that the Company's internal control over financial reporting is effective, and the Company's auditors will not be able to express an opinion on the Company's internal control over financial reporting, which could have a material adverse effect on the Company's business.

A failure to identify suitable acquisition candidates and to complete acquisitions could have a material adverse effect on the Company's business.

      As part of the Company's business strategy, the Company intends to continue to pursue acquisitions of complementary businesses. Although the Company regularly evaluates acquisition opportunities, the Company may not be able successfully to identify suitable acquisition candidates; to obtain sufficient financing on acceptable terms to fund acquisitions; to complete acquisitions; or to manage profitably acquired businesses.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Company's business.

      The principal raw materials used in the Company's manufacturing operations include nylon, polyester and polypropylene resins and fibers and carpet backings, which are used primarily in the Company's carpet and rugs business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in the Company's ceramic tile business; wood, paper, and resins which are used primarily in the Company's laminate flooring business; and other materials. An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on the Company's business.

11




The Company has been, and in the future may be, subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

      The Company's operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

      The nature of the Company's operations, including the potential discovery of presently unknown environmental conditions, exposes it to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico and Europe could have a material adverse effect on the Company's business.

      The Company's Monterrey, Mexico manufacturing facility and the Company's manufacturing facilities in Europe represent a significant portion of the Company's total manufacturing capacity for ceramic tile and laminate flooring, respectively.  In addition, as a result of the Unilin Acquisition, the Company now has more significant general operations abroad, particularly in Europe. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the Company's tile operations as a whole.  Similarly, an event that has a material adverse impact on the Company's European operations could have a material adverse effect on the Company's laminate flooring operations, as a whole.  The business, regulatory and political environments in Mexico and in Europe differ from those in the United States, and the Company's Mexican and European operations are exposed to legal, currency, tax, political, and economic risks specific to the countries in which they occur, particularly with respect to labor regulations, which tend to be more stringent in Europe and, to a lesser extent, Mexico.  The Company cannot assure investors that the Company will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where the Company does business and therefore that the foregoing factors will not have a material adverse effect on the Company's operations or upon the Company's financial condition and results of operations.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on the Company's operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Fluctuations in currency exchange rates may impact the Company's financial condition and results of operations and may affect the comparability of results between the Company's financial periods.

      The results of the Company's foreign subsidiaries reported in the local currency are translated into U.S. dollars for balance sheet accounts using exchange rates in effect at the balance sheet date and for the statement of earnings accounts using the Company's weighted average rates during the period.  The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. Although the Company has not yet experienced material losses due to foreign currency fluctuation, the Company may not be able to manage effectively the Company's currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the carrying value of the Company's debt and results of operations and affect comparability of the Company's results between financial periods.

12




If the Company is unable to protect the Company's intellectual property rights, particularly with respect to the Company's patented laminate flooring technology and the Company's registered trademarks, the Company's business and prospects could be harmed.

      The future success and competitive position of certain of the Company's businesses, particularly the Company's laminate flooring business, depend in part upon the Company's ability to obtain and maintain proprietary technology used in the Company's principal product families. The Company relies, in part, on the patent, trade secret and trademark laws of the United States and countries in Europe, as well as confidentiality agreements with some of the Company's employees, to protect that technology.

      The Company has obtained a number of patents relating to the Company's products and associated methods and has filed applications for additional patents, including the UNICLIC® family of patents, which protects Unilin's interlocking laminate flooring panel technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company's pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company's filings, could render the Company's intellectual property less valuable.

      Furthermore, despite the Company's efforts, the Company may be unable to prevent competitors and/or third parties from using the Company's technology without the Company's authorization, independently developing technology that is similar to that of the Company or designing around the Company's patents. The use of the Company's technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause us to lose sales or otherwise harm the Company's business. In addition, if the Company does not obtain sufficient protection for the Company's intellectual property, the Company's competitiveness in the markets it serves could be significantly impaired, which would limit the Company's growth and future revenue.

      The Company has obtained and applied for numerous U.S. and foreign service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company's pending or future applications will be approved by the applicable governmental authorities. Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations. A failure to obtain trademark registrations in the United States and in other countries could limit the Company's ability to protect the Company's trademarks and impede the Company's marketing efforts in those jurisdictions.

      The Company requires third parties with access to the Company's trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company's trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances, the Company's competitiveness could be significantly impaired, which would limit the Company's growth and future revenue.

Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company's products.

      The Company has in the past had companies claim that certain technologies incorporated in the Company's products infringe their patent rights. There can be no assurance that the Company will not receive notices in the future from parties asserting that the Company's products infringe, or may infringe, those parties' intellectual property rights. The Company cannot be certain that the Company's products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Company's products or processes. If patents are later issued on these applications, the Company may be liable for infringement.

13




      Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company's proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others. Likewise, the Company may have similar claims brought against it by competitors. Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from operations, whether or not such litigation is resolved in the Company's favor. In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorneys fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially and adversely affected.

Forward-Looking Information

      Certain of the statements in this Annual Report on Form 10-K, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; energy costs; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; litigation; and other risks identified in Mohawk's SEC reports and public announcements.

Item 1b. Unresolved Staff Comments

       None

Item 2. Properties

       The Company owns a 47,500 square foot headquarters office in Calhoun, Georgia on an eight-acre site. The Company also owns a 2,089,000 square foot manufacturing facility located in Dalton, Georgia, used by the Mohawk segment, a 1,773,145 square foot manufacturing facility located in Monterey, Mexico used by the Dal-Tile segment and a 1,128,535 square foot manufacturing facility located in Wielsbeke, Belgium used by the Unilin segment. The following table summarizes the Company's facilities both owned and leased for each segment in square feet:

 

Mohawk Segment

 

Dal-Tile Segment

 

Unilin Segment

Primary Purpose

Owned

 

Leased

 

Owned

 

Leased

 

Owned

 

Leased

Manufacturing

20,059,803 

685,338 

4,589,135 

22,000 

6,676,517 

831,600 

Selling and Distribution

4,174,479 

5,996,943 

152,811 

6,961,621 

Other

910,548 

321,312 

36,000 

   Total

25,144,830 

6,682,281 

5,063,258 

7,019,621 

6,676,517 

831,600 

          The Company's properties are in good condition and adequate for its requirements. The Company believes its principal plants are generally adequate to meet its production plans pursuant to the Company's long-term sales goals. In the ordinary course of business, the Company monitors the condition of its facilities to ensure that they remain adequate to meet long-term sales goals and production plans.

 Item 3. Legal Proceedings

      The Company is involved in litigation from time to time in the regular course of its business. Except as noted below or under the section "-Environmental Matters," there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

14




      In Shirley Williams, et al vs. Mohawk Industries, Inc., four plaintiffs filed a purported class action lawsuit in January 2004, in the United States District Court for the Northern District of Georgia, alleging that they are former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not permitted to work in this country, have damaged them and the other members of the purported class by suppressing the wages of the Company's hourly employees in Georgia. The plaintiffs seek a variety of relief, including (a) treble damages; (b) return of any allegedly unlawful profits; and (c) attorney's fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District in April 2004. The Company then sought and obtained permission to file an immediate appeal of the Northern District's decision to the United States Court of Appeals for the 11th Circuit. In June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005, the Company filed a motion requesting review by the full 11th Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which petition was granted in December of 2005. The Company believes it has meritorious defenses and intends to continue vigorously defending itself against this action.

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

Environmental Matters

      The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment and disposal of solid and hazardous materials, and the cleanup of contamination associated therewith.  Because of the nature of the Company's business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations.  The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided accruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on its operations, but may have an effect on the results of operations for a given quarter or annual period.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders of the Company during the fourth quarter ended December 31, 2005.

15




PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for the Common Stock

      The Company's common stock, $.01 par value per share (the "Common Stock") is quoted on the New York Stock Exchange ("NYSE") under the symbol "MHK."  The table below shows the high and low sales prices per share of the Common Stock as reported on the NYSE Composite Tape, for each fiscal period indicated.

Mohawk

 

Common Stock

 

High

 

Low

2004            

First quarter

 $

85.79 

68.77 

Second quarter

82.98 

68.89 

Third quarter

81.60 

69.07 

Fourth quarter

92.44 

74.05 

2005            

First quarter

 $

94.72 

82.15 

Second quarter

89.00 

76.54 

Third quarter

92.45 

76.19 

Fourth quarter

89.71 

74.55 

2006            

First quarter (through March 13, 2006)

 $

90.88 

80.05 

      As of March 13, 2006, there were approximately 384 holders of record of Common Stock. The Company has not paid or declared any cash dividends on shares of its Common Stock since completing its initial public offering. The Company's policy is to retain all net earnings for the development of its business, and presently, it does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of future cash dividends will be at the sole discretion of the Board of Directors and will depend upon the Company's profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

      The Company did not repurchase any of its common stock during the fourth quarter of 2005.

      On October 31, 2005, the Company entered into an agreement to issue 585,549 shares of Common Stock to certain Unilin officers for $81.00 per share, for an aggregate purchase price of $47.4 million. The shares of Common Stock purchased by the Unilin officers, 389,976 of which were issued on November 7, 2005, and 195,573 of which were issued on November 9, 2005, were issued in reliance on the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by the issuer not involving a public offering. All of these securities were acquired by the recipients for investment and with no view toward public resale or distribution of the securities without registration. There was not any public solicitation and the issued stock certificates bear restrictive legends.

 

16




Item 6. Selected Financial Data

      The following table sets forth the selected financial data of the Company for the periods indicated, which information is derived from the consolidated financial statements of the Company. On March 20, 2002, the Company acquired all the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile") in exchange for approximately $1,469 million, consisting of approximately 12.9 million shares of the Company's common stock, options to purchase approximately 2.1 million shares of the Company's common stock and $718 million in cash. The acquisition was accounted for using the purchase method of accounting. On November 10, 2003, the Company acquired certain assets and assumed certain liabilities of the Lees Carpet division of Burlington Industries, Inc. ("Lees Carpet") for approximately $350 million in cash. The acquisition was recorded using the purchase method of accounting.  On October 31, 2005 the Company acquired all the outstanding shares of Unilin Holding NV.  The total purchase price of the Unilin Acquisition, net of cash, was approximately Euro .2 billion (approximately $2.6 billion).  The acquisition was recorded using the purchase method of accounting. The consolidated financial statements include the results of all acquisitions from the date of acquisition. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere herein.

At or for the Years Ended December 31,

2005

2004

 

2003

2002 (c)

2001

(In thousands, except per share data)

Statement of earnings data:

 

 

 

 

 

 

Net sales

 $

6,620,099 

5,880,372 

4,999,381 

4,516,957 

3,441,267 

Cost of sales (a)

4,896,965 

4,259,531 

3,605,579 

3,247,865 

2,583,669 

 Gross profit

1,723,134 

1,620,841 

1,393,802 

1,269,092 

857,598 

Selling, general and administrative

 expenses

1,095,862 

985,251 

851,773 

747,027 

530,441 

 Operating income

627,272 

635,590 

542,029 

522,065 

327,157 

Interest expense (b)

66,791 

53,392 

55,575 

68,972 

29,787 

Other expense (income), net

3,460 

4,809 

(1,980)

9,464 

5,954 

70,251 

58,201 

53,595 

78,436 

35,741 

 Earnings before income taxes

557,021 

577,389 

488,434 

443,629 

291,416 

Income taxes

198,826 

208,767 

178,285 

159,140 

102,824 

 Net earnings

 $

358,195 

368,622 

310,149 

284,489 

188,592 

Basic earnings per share

 $

5.35 

5.53 

4.68 

4.46 

3.60 

Weighted-average common shares

 outstanding

66,932 

66,682 

66,251 

63,723 

52,418 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

4.39 

3.55 

Weighted-average common and

   dilutive potential common shares

   outstanding

67,644 

67,557 

67,121 

64,861 

53,141 

Balance sheet data:

 

Working capital

 $

1,228,573 

968,923 

592,310 

640,846 

449,361 

Total assets

7,991,523 

4,403,118 

4,163,575 

3,596,743 

1,768,485 

Long-term debt (including

   current portion)

3,308,370 

891,341 

1,012,413 

820,427 

308,433 

Stockholders' equity

3,027,120 

2,666,337 

2,297,801 

1,982,879 

948,551 

(a)     In 2005, the Company recorded a non-recurring $34,300 (net of tax of $22,300) fair value adjustment  to Unilin's acquired inventory.

(b)     In December 2002, the Company discontinued hedge accounting for its interest rate swap. The impact of discontinuing the hedge was to increase interest expense by approximately $10.7 million.

17




(c)     In 2002, the Company adopted the provisions of Financial Accounting Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets" which required the Company to cease amortizing goodwill and evaluate such goodwill and indefinite intangibles for impairment.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

      The Company is a leading producer of floor covering products for residential and commercial applications in the United States and Europe with net sales in 2005 in excess of $6.6 billion. The Company is the second largest carpet and rug manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile and natural stone, in the United States and a leading producer of laminate flooring in the United States and Europe.

      The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment distributes its product lines, which include carpet, rug, pad, ceramic tile, hardwood, resilient and laminate through its network of approximately 52 regional distribution centers and satellite warehouses using its fleet of company-operated trucks, common carrier or rail transportation. The segment product lines are purchased by independent floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products distributed through approximately 250 company-operated sales service centers and regional distribution centers using primarily common carriers and rail transportation. The segment product lines are purchased by tile specialty dealers, tile contractors, floor covering retailers, commercial end users, independent distributors and home centers. The Unilin segment manufactures and markets laminate flooring products which are distributed through separate distribution channels consisting of retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.

      The primary categories of the United States floor covering industry include carpet and rug (62%), ceramic tile (12%), hardwood (10%), resilient and rubber (9%) and laminate (6%). Compound average growth rates for all categories, except the resilient and rubber category, for the period from 1999 through 2004 have met or exceeded the growth rates (measured in sales dollars) for the gross domestic product of the United States over the same period.  Ceramic tile, laminate and hardwood continued to exceed the growth rate for housing starts over the same period. During this period, the compound average growth rate was 3.0% for carpet and rug, 7.0% for ceramic tile, 0.6% for resilient and rubber, 17.4% for laminate and 9.4% for hardwood.

       On October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV. The total purchase price of the Unilin Acquisition, net of cash of $167.5 million, was approximately Euro 2.2 billion (approximately $2.6 billion).  The results of operations for the Unilin segment have been included in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the laminate flooring market.

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the commercial carpet division of Burlington Industries, Inc., known as Lees Carpet, from W.L. Ross & Company for approximately $350 million in cash. The results of operations for Lees Carpet have been included with the Mohawk segment results and in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

     The Company reported net earnings of $358.2 million or diluted earnings per share ("EPS") of $5.30, compared to net earnings of $368.6 million and $5.46 EPS for 2004. The decrease in EPS resulted from a non-recurring $34.3 million (net of tax of $22.3 million) fair value adjustment applied to Unilin's acquired inventory, continuing raw material and energy cost increases, offset by sales growth and better leveraging of selling, general and administrative costs when compared to the year ended December 31, 2004.

18




Results of Operations

Following are the results of operations for the last three years:

For the Years Ended December 31,

2005

 

2004

 

2003

 

(In thousands)

Statement of earnings data:

Net sales

 $

6,620,099 

100.0 %

5,880,372 

100.0 %

4,999,381 

100.0 %

Cost of sales

4,896,965 

74.0 %

4,259,531 

72.4 %

3,605,579 

72.1 %

 Gross profit

1,723,134 

26.0 %

1,620,841 

27.6 %

1,393,802 

27.9 %

Selling, general and administrative

 expenses

1,095,862 

16.6 %

985,251 

16.8 %

851,773 

17.0 %

 Operating income

627,272 

9.5 %

635,590 

10.8 %

542,029 

10.9 %

Interest expense

66,791 

1.0 %

53,392 

0.9 %

55,575 

1.1 %

Other (income) expense, net

3,460 

0.1 %

4,809 

0.1 %

(1,980)

0.0 %

70,251 

1.1 %

58,201 

1.0 %

53,595 

1.1 %

 Earnings before income taxes

557,021 

8.4 %

577,389 

9.8 %

488,434 

9.8 %

Income taxes

198,826 

3.0 %

208,767 

3.6 %

178,285 

3.6 %

 Net earnings.

 $

358,195 

5.4 %

368,622 

6.3 %

310,149 

6.2 %

Year Ended December 31, 2005, as Compared with Year Ended December 31, 2004

      Net sales for the year ended December 31, 2005, were $6,620.1 million, reflecting an increase of $739.7 million, or approximately 12.6%, over the $5,880.4 million reported for the year ended December 31, 2004. The increased net sales are primarily attributable to price increases and internal sales growth and the Unilin Acquisition. The Mohawk segment recorded net sales of $4,716.7 million in 2005 compared to $4,368.8 million in 2004, representing an increase of $347.9 million or approximately 8.0%. The increase was attributable to price increases and internal growth within the nylon filament and polyester carpets, commercial carpet tile, and hard surface flooring offset by declines in nylon staple and polypropylene carpets and home products. The Dal-Tile segment recorded net sales of $1,734.8 million in 2005, reflecting an increase of $223.3 million or 14.8%, over the $1,511.5 million reported in the year ended December 31, 2004. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2005 versus 2004 were as follows (dollars in thousands)

2005

2004

Change

        First quarter

 $

1,493,222 

1,389,725 

7.4 

%

        Second quarter

1,624,692 

1,485,897 

9.3 

        Third quarter

1,697,634 

1,529,651 

11.0 

        Fourth quarter

1,804,551 

1,475,099 

22.3 

               Total year

 $

6,620,099 

5,880,372 

12.6 

%

      Gross profit was $1,723.1 million (26.0% of net sales) for 2005 and $1,620.8 million (27.6% of net sales) for 2004. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs, an increase in the LIFO reserve requirement, a non-recurring fair value adjustment applied to Unilin's acquired inventory, and higher import costs.

      Selling, general and administrative expenses for 2005 were $1,095.9 million (16.6% of net sales) compared to $985.3 million (16.8% of net sales) for 2004. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

19




      Operating income for 2005 was $627.3 million (9.5% of net sales) compared to $635.6 million (10.8% of net sales) in 2004. Operating income attributable to the Mohawk segment was $381.7 million (8.1% of segment net sales) in 2005 compared to $424.3 million (9.7% of segment net sales) in 2004. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $260.2 million (15.0% of segment net sales) in 2005, compared to $219.8 million (14.5% of segment net sales) in 2004. The increase in operating income as a percentage of net sales is primarily attributable to product mix shift and implementing increased pricing to help offset increased raw material, energy, transportation, and higher import costs.

      Interest expense for 2005 was $66.8 million compared to $53.4 million in 2004. The increase in interest expense was attributable to the debt raised to fund the Unilin Acquisition.

      Income tax expense was $198.8 million, or 35.7% of earnings before income taxes for 2005 compared to $208.8 million, or 36.2% of earnings before income taxes for 2004. The improved rate was primarily attributable to the utilization of tax credits and the one-time effect of state tax law changes.

Year Ended December 31, 2004, as Compared with Year Ended December 31, 2003

      Net sales for the year ended December 31, 2004, were $5,880.4 million, reflecting an increase of $881.0 million, or approximately 17.6%, over the $4,999.4 million reported for the year ended December 31, 2003. The increased net sales are primarily attributable to strong internal sales growth from both the Mohawk and Dal-Tile segments. The Mohawk segment recorded net sales of $4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in all product categories and the Lees Carpet acquisition. The Dal-Tile segment recorded net sales of $1,511.5 million in 2004, reflecting an increase of $243.0 million or 19.2%, over the $1,268.5 million reported in the year ended December 31, 2003. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2004 versus 2003 were as follows (dollars in thousands):

2004

2003

Change

        First quarter

 $

1,389,725 

1,083,422 

28.3 

%

        Second quarter

1,485,897 

1,245,870 

19.3 

        Third quarter

1,529,651 

1,301,547 

17.5 

        Fourth quarter

1,475,099 

1,368,542 

7.8 

               Total year

 $

5,880,372 

4,999,381 

17.6 

%

      Sales in the first and fourth quarters of 2004 were impacted by a shift of four days from the fourth to the first quarter when compared to 2003.

      Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8 million (27.9% of net sales) for 2003. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs and higher import costs.

      Selling, general and administrative expenses for 2004 were $985.3 million (16.8% of net sales) compared to $851.8 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9% of net sales) in 2003. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of segment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales is primarily attributable to higher energy costs, import costs and transportation costs.

20




      Interest expense for 2004 was $53.4 million compared to $55.6 million in 2003. The decrease in interest expense was attributable to a larger benefit from a fair value adjustment related to an interest rate swap during 2004 when compared to 2003.

      Income tax expense was $208.8 million, or 36.2% of earnings before income taxes for 2004 compared to $178.3 million, or 36.5% of earnings before income taxes for 2003. The improved rate was a result of the utilization of tax credits.

Liquidity and Capital Resources

      The Company's primary capital requirements are for working capital, capital expenditures and acquisitions.  The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes, the sale of receivables and credit terms from suppliers.

      Cash flows generated by operations for 2005 were $561.5 million compared to $242.8 million for 2004. The increase was primarily attributable to an increase in accounts payable and accrued expenses, which increased from $623.1 million at the beginning of 2005 to $998.1 million at December 31, 2005.  In addition, inventory turnover increased during 2005. The increases were primarily attributable to sales growth within both the Mohawk and Dal-Tile segments and the Unilin Acquisition.

      Net cash used in investing activities in 2005 was $2.9 billion compared to $121.6 million for 2004. The increase was primarily attributable to the Unilin Acquisition and higher capital expenditures. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $3.0 billion for acquisitions, have totaled $3.5 billion over the past three years. Capital spending during 2005 for the Mohawk, Dal-Tile and Unilin segments combined, excluding acquisitions, is expected to range from $290 million to $310 million, and will be used primarily to purchase equipment and to add manufacturing and distribution capacity.

      Net cash provided by financing activities for 2005 was $2,440.7 million compared to cash provided in 2004 of $121.2 million. The primary reason for the change was an increase in debt levels as a result of the Unilin Acquisition in 2005 when compared to 2004.

      On October 28, 2005, the Company entered into a $1.5 billion 364-day senior, unsecured, bridge term loan facility, which is referred to as the bridge credit facility, and a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility, which is referred to as the new senior unsecured credit facilities.  The new senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines.  The Company entered into both the bridge credit facility and the new senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

      The senior multi-currency unsecured credit facility consists of (i) a $750 million revolving credit facility, (ii) a $389.2 million term loan facility and (iii) a Euro 300 million term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced by the amount of letters of credit issued under this facility. At December 31, 2005, the amount of these letters of credit was $78.3 million.  At the Company's election, both the credit facility and the new senior credit facilities bear interest at (i) the greater of (x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130 million , or approximately $156 million (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This revolving credit facility bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

21




      The Company's new senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants. The Company was in compliance with these covenants at December 31, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.06% to 0.25%, depending upon the Company's senior unsecured long-term debt rating as determined by certain credit rating agencies.

      At December 31, 2005, a total of approximately $507.9 million was available under the new senior unsecured credit facilities, and the Euro revolving credit facility, compared to $234.1 million available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the new senior unsecured credit facilities at December 31, 2005, was $1.1 billion. The amount used under the unsecured credit facilities is composed of $1.1 billion in borrowings, $55.6 million in letters of credit guaranteeing the Company's industrial revenue bonds and $22.7 million in standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500 million aggregate principal amount of 5.750% notes due 2011 and $900 million aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the outstanding balance of the bridge credit facility and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is 2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. At December 31, 2005, the Company had $40 million outstanding compared to $90 million at December 31, 2004. The Securitization Facility is secured with trade receivables. During the third quarter of 2005, the Company extended the term of its Securitization Facility until August 2006.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's outstanding common stock. For the year ended December 31, 2005, a total of approximately 186,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $14.5 million. Since the inception of the program in 1999, a total of approximately 11.4 million shares have been repurchased at an aggregate cost of approximately $326.1 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

      The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assets on the consolidated balance sheets.

      The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2005 (in thousands):

Payments due by period

2006

2007

2008

2009

2010

Thereafter

Total

Long-term debt

 $

113,809 

314,277 

11,259 

4,275 

1,063,178 

1,801,572 

3,308,370 

Estimated interest payments (1)

174,731 

160,205 

154,393 

153,885 

146,479 

316,354 

1,106,047 

Operating leases

93,553 

75,247 

61,973 

51,558 

37,064 

103,116 

422,511 

Purchase commitments (2)

168,235 

163,995 

161,545 

72,497 

566,272 

 $

550,328 

713,724 

389,170 

282,215 

1,246,721 

2,221,042 

5,403,200 

                  
(1)     For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2005 to these balances.
(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.

22




Critical Accounting Policies

      In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.

      The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies are defined as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The Company believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and represent critical accounting policies.

23




Recent Accounting Pronouncements

     In December 2004, the FASB issued FASB Staff Position 109-1, Application of FASB Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption will have a material impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the prospective or retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 which did not have a material impact on the Company's consolidated financial statements.

24




      In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this standard, if any, will depend upon accounting changes or errors that may occur in future periods. The Company adopted SFAS 154 effective December 31, 2005.

Impact of Inflation

     Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry have experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004. For the period from 1999 through 2005 the carpet and tile industry experienced moderate inflation in the prices of raw materials and fuel-related costs. In the past, the Company has generally been able to pass along these price increases to its customers and has been able to enhance productivity to help offset increases in costs resulting from inflation in its operations.

Seasonality

     The Company is a calendar year-end company. With respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest.  The second, third and fourth quarters typically produce higher net sales and operating income in these segments.  These results are primarily due to consumer residential spending patterns for floor covering, which historically have decreased during the first two months of each year following the holiday season. The Unilin segment second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the weakest due to the European holiday in late summer,

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the exchange rate and natural gas markets may have on its operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes.

Natural Gas Risk Management

      The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU").

      The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset applied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2005, the Company had natural gas contracts that mature from January 2006 to October 2006 with an aggregate notional amount of approximately 660,000 MMBTU's. The fair value of these contracts was an asset of $1.9 million. At December 31, 2004, the Company had natural gas contracts that matured from January 2005 to March 2005 with an aggregate notional amount of approximately 1 million MMBTU's. The fair value of these contracts was a liability of $1.3 million. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized directly in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates will be reclassified out of accumulated other comprehensive income in the next twelve months is a gain of approximately $1.9 million.

25




      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2005, the Company had normal purchase commitments of approximately 1.8 million MMBTU's for periods maturing from January 2006 through October 2006. The contracted value of these commitments was approximately $17.2 million and the fair value of these commitments was approximately $20.5 million, at December 31, 2005. At December 31, 2004, the Company had normal purchase commitments of approximately 1.9 million MMBTU's for periods maturing from January 2005 through March 2006. The contracted value of these commitments was approximately $9.9 million and the fair value of these commitments was approximately $11.9 million, at December 31, 2004.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. The Company had forward contracts to purchase approximately 8 million Mexican pesos at December 31, 2005. The aggregate U.S. dollar value of these contracts at December 31, 2005 was approximately $0.7 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2004.

      The Company also had forward exchange contracts to sell the British Pound and Canadian Dollar for a notional amount of $5.6 million at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impact of the change in fair value on the statements of operations was not significant for the period ended December 31, 2005.

26




Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

28

Consolidated Balance Sheets as of December 31, 2005 and 2004

32

Consolidated Statements of Earnings for the Years ended December 31, 2005, 2004 and 2003

33

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years ended

     December 31, 2005, 2004 and 2003

34

Consolidated Statements of Cash Flows for the Years ended December 31, 2005, 2004 and 2003

35

Notes to Consolidated Financial Statements

36

27




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Mohawk Industries, Inc.:

      We have audited the accompanying consolidated balance sheets of Mohawk Industries, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We did not audit the combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (Unilin Group), which financial statements reflect total assets constituting approximately 41 percent and total revenues constituting approximately 3 percent in 2005, of the related consolidated totals.  Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Unilin Group, is based solely on the report of the other auditors.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mohawk Industries, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

/s/: KPMG
      KPMG

Atlanta, Georgia
March 15, 2006

28




 

 

Report of Independent Registered Public Accounting Firm

The Shareholders and the Board of Directors
Unilin Flooring BVBA and Unilin Holding Inc.
Ooigem, Belgium

      We have audited the accompanying combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin Group) as of December 31, 2005 and the related combined consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the two month period then ended. These financial statements are the responsibility of the combined Companies' management. Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The combined Companies are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the combined Companies' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Unilin Group at December 31, 2005 and the results of their operations and their cash flows for the two month period then ended in conformity with accounting principles generally accepted in the United States of America.

February 17, 2006

/s/: BDO Atrio Bedrijfsrevisoren Burg. CVBA
      BDO Atrio Bedrijfsrevisoren Burg. CVBA

29




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Mohawk Industries, Inc.:

      We have audited management's assessment, included in the "Management's Report on Internal Control over Financial Reporting" set forth in Item 9A of Mohawk Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005, that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mohawk Industries, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management's assessment that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

      As described in the Management's Report on Internal Control Over Financial Reporting, management excluded from  its assessment of the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (Unilin Group), which  businesses were acquired on October 31, 2005 and whose financial statements reflect total assets constituting approximately 14% (excluding goodwill and identified intangible assets of approximately 27%) and revenues of approximately 3% of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.  Accordingly, our audit of internal control over financial reporting of Mohawk Industries, Inc. also excluded an evaluation of the internal control over financial reporting of the Unilin Group.

 

30




      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mohawk Industries, Inc., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/: KPMG
      KPMG

Atlanta, Georgia
March 15, 2006
 

31




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

 Consolidated Balance Sheets
December 31, 2005 and 2004

(In thousands, except per share data)

ASSETS

2005

2004

Current assets:

       Cash and cash equivalents

 $

134,585 

-   

       Receivables

848,666 

  

660,650 

       Inventories

1,166,913 

  

1,017,983 

       Prepaid expenses and other assets

140,789 

  

49,381 

       Deferred income taxes

49,534 

  

55,311 

                      Total current assets

2,340,487 

  

1,783,325 

Property, plant and equipment, net

1,810,728 

  

905,332 

Goodwill

2,621,963 

1,377,349 

Tradenames

622,094 

272,280 

Other intangible assets

552,003 

50,366 

Other assets

44,248 

  

14,466 

 $

7,991,523 

  

4,403,118 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

       Current portion of long-term debt

 $

113,809 

191,341 

       Accounts payable and accrued expenses

998,105 

  

623,061 

                      Total current liabilities

1,111,914 

814,402 

Deferred income taxes

625,887 

  

191,761 

Long-term debt, less current portion

3,194,561 

  

700,000 

Other long-term liabilities.

32,041 

  

30,618 

                       Total liabilities

4,964,403 

1,736,781 

  

Stockholders' equity:

  

       Preferred stock, $.01 par value; 60 shares authorized;

        no shares issued

-   

-   

       Common stock, $.01 par value; 150,000 shares authorized; 78,478

         and 77,514 shares issued in 2005 and 2004, respectively

785 

775 

       Additional paid-in capital

1,123,991 

1,058,537 

       Retained earnings.

2,268,578 

1,910,383 

       Accumulated other comprehensive loss

(47,433)

(2,441)

3,345,921 

2,967,254 

       Less treasury stock at cost; 10,981 and 10,755 shares in 2005

         and 2004, respectively

318,801 

300,917 

                       Total stockholders' equity

3,027,120 

2,666,337 

 $

7,991,523 

  

4,403,118 

See accompanying notes to consolidated financial statements.

32




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 2005, 2004 and 2003

(In thousands, except per share data)

2005

2004

2003

Net sales

 $

6,620,099 

5,880,372 

4,999,381 

Cost of sales

4,896,965 

4,259,531 

3,605,579 

       Gross profit

1,723,134 

1,620,841 

1,393,802 

Selling, general and administrative expenses

1,095,862 

985,251 

851,773 

       Operating income

627,272 

635,590 

542,029 

Other expense (income):

   Interest expense

66,791 

53,392 

55,575 

   Other expense

11,714 

9,731 

6,252 

   Other income

(8,254)

(4,922)

(8,232)

70,251 

58,201 

53,595 

       Earnings before income taxes

557,021 

577,389 

488,434 

Income taxes

198,826 

208,767 

178,285 

       Net earnings

 $

358,195 

368,622 

310,149 

Basic earnings per share

 $

5.35 

5.53 

4.68 

Weighted-average common shares outstanding

66,932 

66,682 

66,251 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

Weighted-average common and dilutive potential

    common shares outstanding

67,644 

67,557 

67,121 

See accompanying notes to consolidated financial statements.

33




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

 Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2005, 2004 and 2003

(In thousands)

Accumulated

Additional

other

Total

Common stock

paid-in

Retained

comprehensive

Treasury stock

stockholders'

Shares

Amount

capital

earnings

income (loss)

Shares

Amount

equity

Balances at December 31, 2002

76,371 

 $

763 

 $

1,006,550 

 $

1,231,612 

 $

1,126 

(10,006)

 $

(257,172)

 $

1,982,879 

Stock options exercised

679 

18,283 

18,290 

Purchase of treasury stock

(593)

(27,839)

(27,839)

Grant to employee profit sharing plan

2,080 

72 

1,929 

4,009 

Grant to executive incentive plan

63 

12 

306 

369 

Tax benefit from exercise of stock

 options

8,757 

8,757 

Comprehensive Income:

 Currency translation adjustment

47 

47 

 Unrealized gain on hedge instruments

 net of taxes

1,140 

1,140 

 Net earnings

310,149 

310,149 

Total Comprehensive Income

311,336 

Balances at December 31, 2003

77,050 

770 

1,035,733 

1,541,761 

2,313 

(10,515)

(282,776)

2,297,801 

Stock options exercised

464 

14,952 

14,957 

Purchase of treasury stock

(250)

(18,413)

(18,413)

Grant to executive incentive plan

 and other

307 

10 

272 

579 

Tax benefit from exercise of stock

 options

7,545 

7,545 

Comprehensive Income:

 Currency translation adjustment

(1,675)

(1,675)

 Unrealized loss on hedge instruments

 net of taxes

(3,079)

(3,079)

 Net earnings

368,622 

368,622 

Total Comprehensive Income

363,868 

Balances at December 31, 2004

77,514 

775 

1,058,537 

1,910,383 

(2,441)

(10,755)

(300,917)

2,666,337 

Stock options exercised

378 

10,070 

10,074 

Stock issuance

586 

47,429 

47,435 

Purchase of treasury stock . ..

(186)

(14,521)

(14,521)

Grant to executive incentive plan

 

 

 and other

2,717 

(40)

(3,363)

(646)

Tax benefit from exercise of stock

       

 options

5,238 

5,238 

Comprehensive Income:

 Currency translation adjustment

(47,074)

(47,074)

 Unrealized gain on hedge instruments

 net of taxes

2,082 

2,082 

 Net earnings

358,195 

358,195 

Total Comprehensive Income

313,203 

Balances at December 31, 2005

78,478 

 $

785 

 $

1,123,991 

 $

2,268,578 

 $

(47,433)

(10,981)

 $

(318,801)

 $

3,027,120 

See accompanying notes to consolidated financial statements.

34




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

 Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003

(In thousands)

2005

2004

2003

Cash flows from operating activities:

     Net earnings

 $

358,195 

368,622 

310,149 

     Adjustments to reconcile net earnings to net cash

       provided  by operating activities:

          Depreciation and amortization

149,329 

123,088 

106,615 

          Deferred income taxes

(6,866)

38,700 

34,775 

          Tax benefit on stock options exercised

5,238 

7,545 

8,757 

          Loss on sale of property, plant and equipment

4,676 

3,037 

3,267 

          Changes in assets and liabilities, net of

           effects of acquisitions:

             Receivables

3,574 

(85,417)

(47,443)

             Inventories

11,542 

(179,765)

(104,964)

             Accounts payable and accrued expenses

91,960 

(25,241)

(2,769)

             Other assets and prepaid expenses

(60,877)

(6,598)

(5,592)

             Other liabilities

4,773 

(1,134)

6,595 

               Net cash provided by operating activities

561,544 

242,837 

309,390 

Cash flows from investing activities:

      Additions to property, plant and equipment

(247,306)

(106,601)

(114,631)

      Acquisitions, net of cash

(2,613,529)

(14,998)

(384,121)

               Net cash used in investing activities

(2,860,835)

(121,599)

(498,752)

Cash flows from financing activities:

     Net change in short term credit lines

(37,721)

(3,981)

37,299 

     Payments on revolving line of credit

(539,294)

     Proceeds from revolving line of credit

856,940 

     Proceeds from bridge credit facility

1,400,000 

     Net change in asset securitization borrowings

(50,000)

(92,000)

182,000 

     Payments on term loans

(15,055)

(25,034)

(26,492)

     Proceeds on term loans

750,000 

     Payments of other debt

(30,861)

(57)

(821)

     Change in outstanding checks in excess of cash

63,670 

3,290 

6,925 

     Acquisition of treasury stock

(14,521)

(18,413)

(27,839)

     Common stock transactions

57,509 

14,957 

18,290 

                Net cash provided by (used in) financing activities

2,440,667 

(121,238)

189,362 

                Effect of exchange rate changes on cash and cash equivalents

(6,791)

                Net change in cash.

134,585 

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

 $

134,585 

See accompanying notes to consolidated financial statements.

35




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003

(In thousands, except per share data)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

      The consolidated financial statements include the accounts of Mohawk Industries, Inc. and its subsidiaries (the "Company" or "Mohawk").  All significant intercompany balances and transactions have been eliminated in consolidation.

      The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

(b) Cash and Cash Equivalents

       The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents.

(c) Accounts Receivable and Revenue Recognition

      The Company is principally a carpet, rugs, ceramic tile and laminate manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and laminate flooring products in the United States. In addition, the Company manufactures laminate and sells carpet, rugs and laminate flooring products in Europe principally for residential and commercial use. The Company grants credit to customers, most of whom are retail-flooring dealers and commercial end users, under credit terms that the Company believes are customary in the industry.

      The Company warrants certain qualitative attributes of its flooring products. The Company has recorded a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.

      Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectibility can be reasonably assured.  The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluations of specific customer accounts. Royalty revenues received from third parties for patents are recognized based on contractual agreements. The amount of patent revenue for the year ended December 31, 2005 was $10,461 and is recorded in net sales.

(d) Inventories

      Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) for approximately 86% (69% of total inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in, first-out method (FIFO), which is used to value inventory within the Dal-Tile and Unilin segments and inventory not valued under the LIFO method in the Mohawk segment. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, anticipated future selling price, expected sales below cost,  excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

36




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(e) Property, Plant and Equipment

      Property, plant and equipment are stated at cost, including capitalized interest.  Depreciation is calculated on a straight-line basis over the estimated remaining useful lives, which are 25-35 years for buildings and improvements, 5-15 years for machinery and equipment, the shorter of the estimated useful life or lease term for leasehold improvements and 3-7 years for furniture and fixtures.

(f) Goodwill and Other Intangible Assets

      In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual basis (or on an interim basis if an event occurs that might reduce the fair value of the reporting unit below its carrying value). The Company conducts testing for impairment during the fourth quarter of its fiscal year. Intangible assets that do not have indefinite lives are amortized based on average lives, which range from 7-16 years.

(g) Income Taxes

      Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(h) Financial Instruments

      The Company's financial instruments consist primarily of receivables, accounts payable, accrued expenses and long-term debt.  The carrying amount of receivables, accounts payable and accrued expenses approximates its fair value because of the short-term maturity of such instruments. The carrying amount of the Company's floating rate debt approximates its fair value. Interest rates that are currently available to the Company for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of the Company's long-term debt. The estimated fair value of the Company's long-term debt at December 31, 2005 and 2004 was $3,282,715 and $961,120, compared to a carrying amount of $3,308,370 and $891,341, respectively.

(i) Derivative Instruments

      Accounting for Derivative Instruments and Hedging Activities requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in its fair value are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company engages in activities that expose it to market risks, including the effects of changes in interest rates, exchange rates and natural gas commodity prices. Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, exchange rate and natural gas commodity markets may have on operating results. The Company does not engage in speculative transactions, nor does it hold or issue financial instruments for trading purposes.

37




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      The Company formally documents hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking hedged items. This process includes linking all derivatives that are designated as fair value and cash flow hedges to specific assets, liabilities or firm commitments on the consolidated balance sheet or to forecasted transactions. The Company also formally assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective, the derivative expires, or is sold, terminated, or exercised, or the derivative is discontinued because it is unlikely that a forecasted transaction will occur, the Company discontinues hedge accounting prospectively for that specific hedge instrument.

(j) Advertising Costs and Vendor Consideration

      Advertising and promotion expenses are charged to earnings during the period in which they are incurred.  Advertising and promotion expenses included in selling, administrative, and general expenses were $41,339 in 2005, $31,474 in 2004 and $26,990 in 2003.

      Vendor consideration, generally cash, is classified as a reduction of net sales, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. The Company makes various payments to customers, including slotting fees, advertising allowances, buy-downs and co-op advertising. All of these payments reduce gross sales with the exception of co-op advertising. Co-op advertising is classified as a selling, general and administrative expense in accordance with EITF 01-09. Co-op advertising expenses, a component of advertising and promotion expenses, were $14,408 in 2005, $10,389 in 2004 and $9,355 in 2003.

 (k) Impairment of Long-Lived Assets

      Long-lived assets and intangibles subject to amortization are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds the expected undiscounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.

(l) Foreign Currency Translation

      The Company's subsidiaries that operate outside the United States use their local currency as the functional currency, with the exception of operations carried out in Canada and Mexico, in which case the functional currency is the U.S. dollar. Other than Canada and Mexico, the functional currency is translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive income, net of tax where applicable. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of earnings. The assets and liabilities of the Company's Canada and Mexico operations are re-measured using a month end rate, except for non-monetary assets and liabilities, which are re-measured using the historical exchange rate. Income and expense accounts are re-measured using an average monthly rate for the period, except for expenses related to those balance sheet accounts that are re-measured using historical exchange rates. The resulting re-measurement adjustment is reported in the consolidated statements of operations when incurred.

 

38




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(m) Earnings per Share ("EPS")

      Basic net earnings per share ("EPS") is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

      Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method.  Common stock options that were not included in the diluted EPS computation because the options' exercise price was greater than the average market price of the common shares for the periods presented were 351, 21 and 605 for 2005, 2004 and 2003, respectively.

      Computations of basic and diluted earnings per share are presented in the following table:

Years Ended December 31,

2005

2004

2003

Net earnings.

 $

358,195 

368,622 

310,149 

Weighted-average common and dilutive potential

      common shares outstanding:

      Weighted-average common shares outstanding.

66,932 

66,682 

66,251 

      Add weighted-average dilutive potential common

        shares - options to purchase common

        shares, net.

712 

875 

870 

Weighted-average common and dilutive potential

        common shares outstanding

67,644 

67,557 

67,121 

Basic earnings per share

 $

5.35 

5.53 

4.68 

Diluted earnings per share

 $

5.30 

5.46 

4.62 

(n) Stock-Based Compensation

      Effective January 1, 2003, the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and requires prominent disclosure in both the annual and interim financial statements of the method of accounting used and the financial impact of stock-based compensation. As permitted by SFAS. 123, the Company accounts for stock options granted as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based upon the intrinsic value of the award.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the modified prospective or modified retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

39




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      If the Company had elected to recognize compensation expense under SFAS 123 based upon the fair value at the grant dates for awards under its plans, the Company's net earnings per share would have been reduced as follows:

2005

2004

2003

         Net earnings as reported.

 $

358,195 

368,622 

310,149 

         Deduct: Stock-based employee compensation

           expense determined under fair value based

           method for all options, net of related tax effects

(8,628)

(7,519)

(6,284)

         Pro forma net earnings.

 $

349,567 

361,103 

303,865 

        Net earnings per common share (basic)

         As reported

 $

5.35 

5.53 

4.68 

         Pro forma

 $

5.22 

5.42 

4.59 

        Net earnings per common share (diluted)

         As reported

 $

5.30 

5.46 

4.62 

         Pro forma.

 $

5.18 

5.36 

4.54 

      The average fair value of options granted during 2005, 2004 and 2003 was $37.29, $34.39 and $24.73, respectively. This fair value was estimated using the Black-Scholes option pricing model based on a weighted-average market price at grant date of $87.19 in 2005, $74.62 in 2004 and $53.93 in 2003 and the following weighted-average assumptions:

2005

2004

2003

        Dividend yield.

-   

        Risk-free interest rate

4.0 %

2.9 %

2.3 %

        Volatility.

37.7 %

43.1 %

44.9 %

        Expected life (years)

 

(o) Comprehensive Income

      Comprehensive income includes foreign currency translation of assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and transactions and derivative financial instruments designated as cash flow hedges. The Company does not provide income taxes on currency translation adjustments, as earnings from foreign subsidiaries are considered to be indefinitely reinvested.

      Amounts recorded in Accumulated other comprehensive income on the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 are as follows:

Translation

Hedge

Tax expense

Adjustment

Instruments

(benefit)

Total

2003

 $

47 

3,569 

(1,302)

2,314 

2004

(1,628)

(1,280)

467 

(2,441)

2005

(48,702)

1,998 

(729)

(47,433)

40




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(p) Effect of New Accounting Pronouncements

     In December 2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company did not elect to repatriate any foreign earnings during 2005 and accordingly, the adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption will have a material impact on the Company's consolidated financial statements.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 which did not have a material impact on the Company's consolidated financial statements.

       In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this standard, if any, will depend upon accounting changes or errors that may occur in future periods. The Company adopted SFAS 154 effective December 31, 2005.

 (q) Fiscal Year

      The Company ends its fiscal year on December 31. Each of the first three quarters in the fiscal year ends on the Saturday nearest the calendar quarter end.

41




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(r) Reclassifications

      The Company reclassified certain prior period financial statement balances to conform to current presentations.

(2) Acquisitions

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the carpet division of Burlington Industries, Inc. ("Lees Carpet") from W.L. Ross & Company for approximately $352,009 in cash. The results of Lees Carpet have been included with the Mohawk segment results in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

      The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition for Lees Carpet:

 

        Current assets

 $

62,939 

        Property, plant and equipment

53,424 

        Goodwill

78,083 

        Intangible assets

178,340 

        Other assets

52 

          Total assets acquired

372,838 

        Current liabilities

12,829 

        Other liabilities

8,000 

          Total liabilities assumed

20,829 

             Net assets acquired.

 $

352,009 

      Of the approximately $178,340 of acquired intangible assets, approximately $125,580 was assigned to trade names and not subject to amortization. The remaining $52,760 was assigned to customer relationships with a weighted-average useful life of approximately 15 years. Goodwill of approximately $78,083 was assigned to the Mohawk segment. The goodwill is deductible for income tax purposes.

      On October 31, 2005 the Company acquired all the outstanding shares of Unilin Holdings NV by acquiring Unilin Flooring. BVBA, which then purchased Unilin Holdings NV. The Company simultaneously acquired all the outstanding shares of Unilin Holding Inc., and its subsidiaries. (together with Unilin Flooring BVBA. "Unilin"). Unilin, together with its subsidiaries is a leading manufacturer, distributor and marketer of laminate flooring in Europe and the United States.   The total preliminary purchase price of acquiring Unilin, net of cash of $165,709, was Euro 2,110,176 or $2,546,349 based on the prevailing exchange rate at the closing.  The acquisition was accounted for by the purchase method and, accordingly, the results of operations of Unilin have been included in the Company's consolidated financial statements from October 31, 2005.  The purchase price was allocated to the assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. Intangibles and property plant and equipment values were established with the assistance of an independent third party. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,249,720 was recorded as goodwill. The primary reason for the acquisition was to expand the Company's presence in the laminate flooring market.

42




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      The Company considered whether identifiable intangible assets existed during the purchase price negotiations and during the subsequent purchase allocation period. Accordingly the Company recognized goodwill, tradenames, patents, customer lists, contingent assets and backlogs.

      In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill recorded in the Unilin Acquisition will not be amortized. Additionally, the Company determined that the tradenames intangible assets have indefinite useful lives because they are expected to generate cash flows indefinitely. Goodwill and the tradenames intangible assets are subject to annual impairment testing.

      The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, excluding cash of $165,709. The Company is in the process of finalizing the valuation and accordingly, the allocation of the purchase price has not been finalized

        Current assets

 $

387,695 

        Property, plant and equipment

774,677 

        Goodwill

1,249,720 

        Intangible assets

882,886 

        Other assets

890 

          Total assets acquired

3,295,868 

        Current liabilities

275,214 

        Long-term debt

32,027 

        Other liabilities

442,278 

          Total liabilities assumed

749,519 

             Net assets acquired

 $

2,546,349 

      Of the $882,886 of acquired intangibles, $356,521 was assigned to registered tradenames that are not subject to amortization.  The remaining acquired intangibles were assigned to customer relationships for $270,709 (7 year weighted average useful life) and patents for $255,656 (12 year weighted average useful life). The $1,249,720 of goodwill is not deductible for tax purposes.

      The following unaudited pro forma financial information presents the combined results of operations of the Company and Unilin as if the acquisition had occurred at the beginning of 2004, after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition, and the amortization of intangible assets. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company and Unilin constituted a single entity during such periods. The following table discloses the results for the fiscal years ended December 31:

2005 (a)

2004

        Net sales

 $

7,553,506 

6,873,858 

        Net earnings (a)

400,408 

374,755 

        Basic earnings per share

5.98 

5.62 

        Diluted earnings per share

5.92 

5.55 

         
(a) Excludes a non-recurring $34,300 (net of tax of $22,300) fair value adjustment applied to Unilin's acquired inventory and $6,000 (net of tax of $3,900) adjustment related to non-recurring transaction costs.

43




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

     During 2005, the Company acquired certain assets of a carpet backing manufacturer and all outstanding shares of a distributor of natural stone slabs for approximately $67,642. Goodwill related to the acquisitions was approximately $10,955.

(3) Receivables

        Receivables are as follows:

2005

2004

        Customers, trade

 $

925,714 

746,233 

        Other

25,662 

9,720 

951,376 

755,953 

        Less allowance for discounts, returns, claims and

           doubtful accounts

102,710 

95,303 

                       Net receivables

 $

848,666 

660,650 

      The following table reflects the activity of allowances for discounts, returns, claims and doubtful accounts for the years ended December 31:

        Additions        
   

Balance at

 

charged to

   

Balance

   

beginning

 

costs and

     

at end

of  year

expenses (1)

Deductions (2)

of year

        2003

 $

84,673 

279,583 

269,839 

94,417 

        2004

94,417 

310,368 

309,482 

95,303 

        2005

95,303 

324,024 

316,617 

102,710 

      
(1) Includes $ 2,035 for 2005 related to the Unilin Acquisition which was not charged to costs and expenses.
(2) Represents charge-offs, net of recoveries.

(4) Inventories

        The components of inventories are as follows:

2005

 

2004

        Finished goods

 $

754,663 

665,565 

        Work in process

89,179 

86,883 

        Raw materials

323,070 

265,535 

                       Total inventories.

 $

1,166,913 

1,017,983 

      There were no LIFO liquidations in either 2005 or 2004. Inventories, included above, in the amount of $764,140 and $710,016 at December 31, 2005 and 2004, respectively, were valued at the lower of LIFO cost or market. If the LIFO method had not been used inventories would have been $48,560 and $3,402 higher than reported at December 31, 2005 and 2004, respectively, which approximates the difference between replacement and carrying value.

44




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(5) Goodwill and Other Intangible Assets

      The Company evaluates its goodwill and indefinite life intangibles on an annual basis for impairment. The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment, and the Unilin segment.  Accordingly the Company has assigned the acquired goodwill and indefinite life intangibles to the respective reporting segments. During the fourth quarter of 2005, the Company evaluated the goodwill and indefinite life intangibles using the discounted cash flow approach and determined that there was no impairment.

      The following table summarizes the components of intangible assets:

2005

2004

      Carrying amount of amortized intangible assets:

        Customer relationships

 $

326,039 

54,160 

        Patents

256,256 

600 

 Effect of translation

(9,902)

-   

 $

572,393 

54,760 

      Accumulated amortization of amortized intangible assets:

        Customer relationships

 $

13,467 

4,324 

        Patents

7,006 

70 

 Effect of translation

(83)

-   

 $

20,390 

4,394 

      Indefinite life intangible assets:

Trade names

628,801 

272,280 

Effect of translation

(6,707)

-   

 $

622,094 

272,280 

          Total other intangible assets

 $

1,174,097 

322,646 

       Aggregate amortization expense

        For the year ended December 31

 $

15,996 

3,843 

       Estimated amortization expense for years ended

          December 31, are as follows:

        2006

 $

77,103 

        2007

83,733 

        2008

65,410 

        2009

64,282 

        2010

62,640 

45




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004 are as follows:

 

 

 

 

 

Mohawk

Dal-Tile

 

 Unilin

Total

        Balances as of January 1, 2004

 $

195,083 

1,173,617 

1,368,700 

        Goodwill acquired during the year

1,549 

7,100 

8,649 

        Balances as of December 31, 2004

196,632 

1,180,717 

1,377,349 

        Goodwill acquired during the year

1,500 

10,955 

1,249,720 

1,262,175 

 Effect of translation

(17,561)

(17,561)

        Balances as of December 31, 2005

 $

198,132 

1,191,672 

1,232,159 

2,621,963 

      The increase in goodwill during 2005 was attributable to the acquisitions made within the Mohawk and Dal-Tile reporting segments and the Unilin Acquisition.

(6) Property, Plant and Equipment

        Following is a summary of property, plant and equipment:

2005

2004

        Land

 $

155,670 

59,638 

        Buildings and improvements

559,723 

378,389 

        Machinery and equipment

1,802,370 

1,233,140 

        Furniture and fixtures

44,765 

44,371 

        Leasehold improvements

28,784 

24,120 

        Construction in progress

233,525 

78,165 

2,824,837 

1,817,823 

        Less accumulated depreciation and amortization

1,014,109 

912,491 

                       Net property, plant and equipment

 $

1,810,728 

905,332 

      Property, plant and equipment includes capitalized interest of $6,000, $3,197 and $5,634 in 2005, 2004 and 2003, respectively. Depreciation expense was $133,333, $117,768 and $104,450 for 2005, 2004 and 2003, respectively.  Included in the property, plant and equipment are capital leases with a cost of $135,210 and accumulated depreciation of $118 at December 31, 2005.

(7) Long-Term Debt

      On October 28, 2005, the Company entered into a $1,500,000 364-day senior, unsecured, bridge term loan facility, which is referred to herein as the bridge credit facility, and a $1,500,000 five-year, senior, unsecured, revolving credit and term loan facility, which is referred to herein as the senior unsecured credit facilities.  The senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines.  The Company entered into both the bridge credit facility and the senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

46




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      The new senior multi-currency unsecured credit facilities consist of (i) a multi-currency $750,000 revolving credit facility, (ii) a $389,200 term loan facility and (iii) a Euro 300,000 (based on the then prevailing exchange rate) term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced by the amount of letters of credit issued under this facility. At December 31, 2005, the amount of these letters of credit was $78,338.  At the Company's election, both the bridge credit facility and the new senior credit facilities bear interest at (i) the greater of (x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130,000, or approximately $156,000 (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This agreement bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

      The Company's new senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants.  The Company was in compliance with these covenants at December 31, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.060% to 0.25% depending upon the Company's senior unsecured long-term debt rating as determined by certain rating agencies.

      At December 31, 2005, a total of approximately $507,918 was available under the new senior unsecured credit facilities, and the Euro 130,000 credit agreement, compared to $234,130 available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the senior unsecured credit facilities at December 31, 2005, was $1,140,379. The amount used under the unsecured credit facilities is composed of $1,062,041 borrowings, $55,599 standby letters of credit guaranteeing the Company's industrial revenue bonds and $22,739 standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500,000 aggregate principal amount of 5.750% notes due 2011 and $900,000 aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the bridge credit facility, and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is 2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350,000 based on available accounts receivable. At December 31, 2005, the Company had $40,000 outstanding compared to $90,000 at December 31, 2004. The Securitization Facility is secured by trade receivables. During the third quarter of 2005, the Company extended the term of its Securitization Facility until August 2006.

47




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

      Long-term debt consists of the following:

2005

2004

        Short term uncommitted credit lines

 $

37,721 

        Five year unsecured credit facility, due October 28, 2010

1,062,041 

        Securitization Facility, due August 1, 2006

40,000 

90,000 

       6.50% senior notes, payable April 15, 2007

          interest payable semiannually

300,000 

300,000 

        7.20% senior notes, payable April 15, 2012

          interest payable semiannually

400,000 

400,000 

        364-day senior, unsecured bridge term credit facility,

          due October 27, 2006

1,400,000 

        7.14%-7.23% senior notes, payable in annual principal

          installments beginning in 1997, due September 1, 2005,

          interest payable semiannually

9,447 

        Industrial revenue bonds, capital leases and other

106,329 

54,173 

                        Total long-term debt

3,308,370 

891,341 

        Less current portion

113,809 

191,341 

                        Long-term debt, excluding current portion

 $

3,194,561 

700,000 

       The aggregate maturities of long-term debt as of

          December 31, 2005 are as follows:

        2006

 $

113,809 

        2007

314,277 

        2008

11,259 

        2009

4,275 

        2010

1,063,178 

        Thereafter

1,801,572 

 $

3,308,370 

(8) Accounts Payable and Accrued Expenses

        Accounts payable and accrued expenses are as follows:

2005

2004

        Outstanding checks in excess of cash

 $

97,389 

33,719 

        Accounts payable, trade

401,543 

277,851 

        Accrued expenses

325,856 

180,978 

        Income taxes payable

36,504 

16,143 

        Accrued compensation

136,813 

114,370 

                      Total accounts payable and accrued expenses

 $

998,105 

623,061 

48




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(9) Derivative Financial Instruments

Natural Gas Risk Management

      The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU").

      The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset applied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2005, the Company had natural gas contracts that mature from January 2006 to October 2006 with an aggregate notional amount of approximately 660 MMBTU's. The fair value of these contracts was an asset of $1,941. At December 31, 2004, the Company had natural gas contracts that mature from January 2005 to March 2005 with an aggregate notional amount of approximately 1,010 MMBTU's. The fair value of these contracts was a liability of $1,280.  The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates that will be reclassified out of accumulated other comprehensive income in the next twelve months is a gain of approximately $1,941.

      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2005, the Company had normal purchase commitments of approximately 1,867 MMBTU's for periods maturing from January 2006 through October 2006. The contracted value of these commitments was approximately $17,219 and the fair value of these commitments was approximately $20,488, at December 31, 2005.  At December 31, 2004, the Company had normal purchase commitments of approximately 1,892 MMBTU's for periods maturing from January 2005 through March 2006. The contracted value of these commitments was approximately $9,879 and the fair value of these commitments was approximately $11,941, at December 31, 2004.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. The Company had forward contracts to purchase approximately 8,000 Mexican pesos at December 31, 2005. The aggregate U.S. dollar value of these contracts at December 31, 2005 was approximately $697. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2004.

      The Company also had forward exchange contracts to sell the British Pound and Canadian Dollar for a notional amount of $5,555 at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impact of the change in fair value on the statements of operations was not significant for the period ended December 31, 2005.

49




                                                                                                                   

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

(10) Product warranties

      The Company warrants certain qualitative attributes of its products for up to 20 years. The Company records a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.

        Product warranties are as follows:

2005

2004

2003

               Balance at beginning of year

 $

23,473 

24,063 

28,919 

                Warranty claims

(46,850)

(45,553)

(50,040)

                Warranty expense

49,365 

44,963 

45,184 

                Balance at end of year

 $

25,988 

23,473 

24,063 

(11) Stock Options, Stock Compensation and Treasury Stock

      Under the 2002 Long-Term Incentive Plan, options may be granted to directors and key employees through 2012 to purchase a maximum of 3,200 shares of common stock. Under the 2002 plan, options that were not issued from the 1992, 1993 and 1997 plans were cancelled.  During 2005, 2004 and 2003, options to purchase 460, 411 and 565 shares, respectively, were granted under the 2002 plan. Options granted under each of these plans expire 10 years from the date of grant and become exercisable at such dates and at prices as determined by the Compensation Committee of the Company's Board of Directors.

      During 1996, the Company adopted the 1997 Non-Employee Director Stock Compensation Plan.  The plan provides for awards of common stock of the Company for non-employee directors to receive in lieu of cash for their annual retainers.  During 2005, 2004 and 2003, a total of 1, 1 and 1 shares, respectively, were awarded to the non-employee directors under the plan.

      Additional information relating to the Company's stock option plans follows:

2005

2004

2003

Options outstanding at beginning of year

2,281 

2,413 

2,624 

Options granted

460 

411 

565 

Options exercised

(378)

(464)

(679)

Options canceled

(87)

(79)

(97)

Options outstanding at end of year

2,276 

2,281 

2,413 

Options exercisable at end of year

857 

791 

765 

Option prices per share:

Options granted during the year

$

76.73-89.46 

61.33-90.97 

48.50-74.93 

Options exercised during the year

$

9.33-82.50 

9.33-65.02 

6.67-63.14 

Options canceled during the year

$

30.53-90.97 

11.17-82.50 

9.33-63.90 

Options outstanding at end of year

$

11.33-90.97