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EX-21 - EX-21 - MOHAWK INDUSTRIES INCg22145exv21.htm
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EX-23.1 - EX-23.1 - MOHAWK INDUSTRIES INCg22145exv23w1.htm
EX-31.2 - EX-31.2 - MOHAWK INDUSTRIES INCg22145exv31w2.htm
EX-32.2 - EX-32.2 - MOHAWK INDUSTRIES INCg22145exv32w2.htm
EX-31.1 - EX-31.1 - MOHAWK INDUSTRIES INCg22145exv31w1.htm
EX-32.1 - EX-32.1 - MOHAWK INDUSTRIES INCg22145exv32w1.htm
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 01-13697
 
MOHAWK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
 
     
Delaware
  52-1604305
(State or other jurisdiction of incorporation or organization)
  (I.R.S. Employer Identification No.)
     
160 S. Industrial Blvd., Calhoun, Georgia
(Address of principal executive offices)
  30701
(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 þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act  Yes o     No þ
 
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
             
Large accelerated filer þ
       Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o     No þ
 
The aggregate market value of the Common Stock of the Registrant held by non-affiliates (excludes beneficial owners of more than 10% of the Common Stock) of the Registrant (37,727,179 shares) on June 26, 2009 (the last business day of the Registrant’s most recently completed fiscal second quarter) was $1,337,051,224. 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 February 22, 2010: 68,493,861 shares of Common Stock, $.01 par value.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement for the 2010 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     15  
  Item 2.     Properties     15  
  Item 3.     Legal Proceedings     15  
  Item 4.     Submission of Matters to a Vote of Security Holders     16  
 
PART II
  Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     17  
  Item 6.     Selected Financial Data     17  
  Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
  Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     32  
  Item 8.     Consolidated Financial Statements and Supplementary Data     34  
  Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     68  
  Item 9A.     Controls and Procedures     68  
  Item 9B.     Other Information     68  
 
PART III
  Item 10.     Directors, Executive Officers and Corporate Governance     69  
  Item 11.     Executive Compensation     69  
  Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     69  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     69  
  Item 14.     Principal Accountant Fees and Services     69  
 
PART IV
  Item 15.     Exhibits and Financial Statement Schedules     70  
 EX-10.7
 EX-21
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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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, LLC, Dal-Tile Corporation and Unilin BVBA, is a leading producer of floor covering products for residential and commercial applications in the United States (“U.S.”) and residential applications in Europe. The Company is the second largest carpet and rug manufacturer and one of the largest manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood flooring in the U.S., as well as a leading producer of laminate flooring in the U.S. and Europe. The Company had annual net sales in 2009 of $5.3 billion. Approximately 85% of this amount was generated by sales in North America and approximately 15% was generated by sales outside North America. The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. Selected financial information for the Mohawk, Dal-Tile and Unilin segments, geographic net sales and the location of long-lived assets 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 carpets, ceramic tile, laminate, rugs, carpet pad, 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 ColorCenters®,” “Mohawk Floorscapes®,” “Portico®,” “Mohawk Home®,” “Bigelow®,” “Durkan®,” “Horizon®,” “Karastan®,” “Lees®,” “Merit®,” and “Lauren Ralph Lauren®”. The Mohawk segment markets and distributes soft and hard surface products through over 28,000 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 manufacturing and distribution 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 company-owned service centers, 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.
 
The Unilin segment is a leading designer, manufacturer, licensor, distributor and marketer of laminate and hardwood flooring in Europe and the U.S. 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 one of the largest vertically-integrated laminate flooring manufacturers in the U.S. producing both laminate flooring and related high density fiberboard. Unilin sells its flooring products under the Quick-Step®, Columbia Flooring®, Century Flooring®, and Universal Flooring® brands through retailers, independent distributors and home centers. Unilin also produces roofing systems, insulation panels and other wood products.
 
Industry
 
The U.S. floor covering industry has grown from $12.4 billion in sales in 1992 to $20.2 billion in 2008. In 2008, the primary categories of the U.S. floor covering industry were carpet and rug (58%), ceramic tile (11%), resilient and rubber (11%), hardwood (10%), stone (5%) and laminate (5%). Each of these categories


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has been influenced by the average selling price per square foot, the residential builder and homeowner remodeling markets, housing starts and housing resales, average house size and home ownership. In addition, the level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy. The U.S. floor covering industry has experienced declining demand beginning in the fourth quarter of 2006 which worsened considerably during the later parts of 2008 and continued to decline throughout 2009. The global economy continues in the most significant downturn in recent history. Overall economic conditions and consumer sentiment have continued to be challenging, which has intensified the pressure on the demand for housing and flooring products.
 
The worldwide carpet and rug sales volume of U.S. manufacturers was approximately 1.4 billion square yards, or $11.7 billion, in 2008. The carpet and rugs category has two primary markets, residential and commercial. In 2008, the residential market made up approximately 68% of industry amounts shipped and the commercial market comprised approximately 32%. Of the total residential market, 69% of the dollar values of shipments are made in response to residential replacement demand.
 
The U.S. ceramic tile industry shipped 2.1 billion square feet, or $2.3 billion, in 2008. The ceramic tile industry’s two primary markets, residential applications and commercial applications, represent 58% and 42% of the 2008 industry total, respectively. Of the total residential market, 51% of the dollar values of shipments are made in response to residential replacement demand.
 
In 2008, the U.S. stone flooring industry shipped 0.2 billion square feet, representing a market of approximately $1.0 billion. Sales of U.S. stone flooring are primarily distributed to the residential market for both new construction and residential replacement.
 
In 2008, the U.S. hardwood industry shipped 0.9 billion square feet, representing a market of approximately $2.0 billion. Sales of U.S. hardwood are primarily distributed to the residential market for both new construction and residential replacement.
 
In 2008, the U.S. resilient and rubber industry shipped 3.6 billion square feet, representing a market of approximately $2.2 billion. Sales of U.S. resilient are primarily distributed to the residential market for both new construction and residential replacement.
 
In 2008, the U.S. laminate industry shipped 1.0 billion square feet, or $1.1 billion. In 2008, the European laminate industry produced approximately 5.0 billion square feet which accounted for approximately 15% of the European floor covering market. Sales of U.S. laminate flooring are primarily distributed through the residential replacement market. Sales to other end user markets are not significant.
 
Sales and Distribution
 
Mohawk Segment
 
Through its Mohawk segment, the Company designs, manufactures, distributes and markets thousands 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, hardwood, resilient floor covering, carpet pad and flooring accessories. 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 28,000 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, Horizon, “WundaWeve®,” Lauren Ralph Lauren 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 among the


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highest consumer recognition in the industry. Karastan is a leader in the high-end market. The Aladdin and Mohawk Home brand names compete primarily in the value retail price channel. The Portico and “Properties®” brand names compete primarily in the builder and multi-family markets, respectively. The Company markets its hard surface product lines, which include Mohawk Ceramic, Mohawk Hardwood, Mohawk Laminate and Congoleum across all price ranges.
 
The Company offers marketing and advertising support through dealer programs like Mohawk Floorscapes, Mohawk ColorCenter, and Karastan. These programs offer varying degrees of support to dealers in the form of sales and management training, in-store merchandising systems, exclusive promotions and assistance in certain administrative functions such as consumer credit, advertising and website technology.
 
The commercial customer base is divided into several channels: corporate office space, educational institutions, hospitality facilities, retail space, public space, government and health care facilities. Different purchase decision makers and decision-making processes exist for each channel. In addition, the Company produces and sells broadloom carpet and carpet tile under the brand names “Bigelow Commercial®,” Lees, Durkan, “Karastan Contract®,” and Merit.
 
The Company’s sales forces are generally organized based on product type and sales channels in order to best serve each type of customer. Product delivery to dealers is done predominantly on Mohawk trucks operating from strategically positioned warehouses/cross-docks that receive inbound product directly from the source of manufacture.
 
Dal-Tile Segment
 
The Dal-Tile segment designs, manufactures, distributes 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 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 sources products from other manufacturers to enhance its product offering.
 
The Company 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 50 years and are well recognized in the industry. Both of these brands are supported by a fully integrated marketing program, displays, merchandising (sample boards and chip chests), literature/catalogs and an internet website.
 
A network of sales service centers distributes primarily the Dal-Tile brand product with a fully integrated marketing program, emphasizing a focus on quality and fashion serving customers in the U.S., Canada and Puerto Rico. The service centers provide distribution points for customer pick-up, local delivery and showrooms to assist customers. The broad product offering satisfies the needs of its residential and commercial customers.
 
The independent distributor channel offers a distinct product line under the American Olean brand. Currently, the American Olean brand is distributed through independent distributors and sales service centers that service a variety of residential and commercial customers. The Company is focused on sales growth opportunities through innovative products and programs in both the residential and commercial channels.
 
The Company has four regional distribution centers in the Dal-Tile operations and shares two distributions centers with other segments. 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.


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Unilin Segment
 
The Unilin segment designs, manufactures, licenses, distributes and markets laminate and hardwood flooring in Europe and the U.S. It also designs and manufactures roofing systems, insulation panels and other wood products in Europe. Products are distributed through separate distribution channels consisting of retailers, independent distributors and home centers. Unilin U.S. operations also manufacture Mohawk branded laminate and hardwood flooring which sells through the Mohawk channel. The majority of Unilin’s laminate sales, both in the U.S. and Europe, are for residential replacement. The business is organized to address the specific customer needs of each distribution channel.
 
In the U.S., the Unilin operations have three regional distribution centers for laminate and wood products. 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 manufacturing facilities. This integration with manufacturing sites allows for quick responses to customer needs and high inventory turns.
 
The Unilin segment markets and sells laminate and hardwood flooring products under the Quick-Step, Columbia Flooring, Century Flooring, and Universal Flooring brands through retailers, independent distributors and home centers. In addition, Unilin also sells laminate and hardwood flooring products under private label. The Company believes Quick-Step is one of the leading brand names in the U.S. and European flooring industry.
 
Advertising and Promotion
 
The Company promotes its brands through advertising in television, print, social and internet 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.
 
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, nylon and triexta fiber, yarn processing, backing manufacturing, tufting, weaving, dyeing, coating and finishing. Over the past three years, the Mohawk Segment has incurred capital expenditures that have helped increase manufacturing efficiency and improve overall cost competitiveness.
 
Dal-Tile Segment
 
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. In addition, Dal-Tile also imports or sources a portion of its product to supplement its product offerings. Over the past three years, the Dal-Tile segment has invested in capital expenditures, principally in state-of-the-art equipment, to increase manufacturing capacity, improve efficiency and develop new capabilities.
 
Unilin Segment
 
The Company’s laminate flooring manufacturing operations are vertically integrated, both in the U.S. and in Europe, and include high-density fiberboard (“HDF”) production, paper impregnation, 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


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the production of laminate flooring in Belgium and North Carolina is relatively new. In addition, Unilin has significant manufacturing capability for both engineered and prefinished solid wood flooring for the U.S. and European markets. Over the past three years, the Unilin segment has invested in capital expenditures, principally in new plants and state-of-the-art equipment to increase manufacturing capacity, improve efficiency and develop new capabilities.
 
The manufacturing facilities for other activities in the Unilin business (roofing systems, insulation panels and other wood products) 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, triexta, polyester, wool, 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 most of its externally purchased fibers and resins principally from four major suppliers. Although temporary disruptions of supply of carpet raw materials were experienced in 2005, 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 has long-term clay mining rights in 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 tiles. Glazes consist of frit (ground glass), zircon, stains and other materials, with frit being the largest ingredient. The Company manufactures approximately 66% of its frit requirements.
 
Unilin Segment
 
The principal raw materials used in producing boards, laminate and hardwood flooring are wood, paper, resins, coatings and stains. Wood supply is a very fragmented market in Europe. The Company has long-standing relationships with numerous suppliers. These suppliers provide a wide variety of wood species, varying from fresh round wood to several kinds of by-products of sawmills and used wood recycled specifically for chipboard production, giving the Company a cost-effective and secure supply of raw material. In the U.S., the Company has a long-term contract with a contiguously located lumber company that supplies most of its total needs for HDF board production. The supply of various species of hardwoods and hardwood veneers used in the production of solid wood and engineered flooring is both localized and global.
 
Major manufacturers supply the papers required in the laminate flooring business in both Europe and the U.S. The Company processes most of the paper impregnation internally in its laminate flooring facilities in Europe and the U.S. 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 located within a reasonable distance of Unilin’s facilities.


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Competition
 
The principal methods of competition within the floor covering industry generally are service, style, quality, price, product innovation and technology. In each of the markets, price competition and market coverage are particularly important because there is limited differentiation among competing product lines. The Company’s investments in manufacturing equipment, computer systems and distribution systems, as well as the Company’s marketing strategy, contribute to its ability to compete primarily on the basis of performance, quality, style and service, rather than just price.
 
Mohawk Segment
 
The carpet and rug industry is highly competitive. Based on industry publications, the top 5 North American carpet and rug manufacturers (including their North American and foreign divisions) in 2008 had worldwide carpet and rug sales in excess of $8 billion of the over $11 billion market. The Company believes it is the second largest producer of carpets and rugs (in terms of sales dollars) in the world based on its 2008 sales.
 
Dal-Tile Segment
 
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 Company estimates that over 100 tile manufacturers, more than half of which are based outside the U.S., compete for sales of ceramic tile to customers located in the U.S. 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 U.S. and the world.
 
Unilin Segment
 
The Company believes it has a competitive advantage in the laminate flooring channel as a result of Unilin’s industry leading design and patented technologies, which allows the Company to distinguish its laminate and hardwood flooring products in the areas of finish, quality, installation and assembly. The Company faces competition in the laminate and hardwood flooring channel from a large number of domestic and foreign manufacturers. 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. In the U.S., the Company has vertically-integrated operations that produce both high density fiberboard and laminate flooring. The Company estimates that there are over 100 wood flooring manufacturers located in various countries. The Company believes it is one of the largest manufacturers and distributors of hardwood flooring in the U.S.
 
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, Columbia Flooring, Century Flooring, Dal-Tile, “Duracolor®,” Durkan, “Elka®,” “Everset fibers®,” Horizon, Karastan, Lees, Lauren Ralph Lauren, Mohawk, “Mohawk Greenworks®,” Mohawk Home, Portico, “PureBond®,“Quick-Step, “Smartstrand®,” “Ultra Performance System®,” “UNILIN®,” UNICLIC, Universal Flooring and “Wear-Dated®”. These trademarks represent unique innovations that highlight competitive advantages and provide differentiation from competing brands in the market.
 
Unilin owns a number of important patent families in Europe and the U.S. The most important of these patent families is the UNICLIC family, as well as the snap, pretension, clearance and beveled edge patent families, which protects Unilin’s interlocking laminate flooring panel technology. The patents in the UNICLIC family are not expected to expire until 2017.


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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, wood, vinyl 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 2009, no single customer accounted for more than 5% of total net sales, and the top ten customers accounted for less than 20% of the Company’s sales. The Company believes the loss of one major customer would not have a material adverse effect on its business.
 
Employees
 
As of December 31, 2009, the Company employed approximately 27,400 persons consisting of approximately 21,500 in the U.S., approximately 3,100 in Mexico, approximately 2,100 in Europe, approximately 600 in Malaysia and approximately 100 in Canada. The majority of the Company’s European and Mexican manufacturing employees are members of unions. Most of the Company’s U.S. employees are not a party to any collective bargaining agreement. Additionally, the Company has not experienced any strikes or work stoppages in the U.S., Mexico or Malaysia 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:”
 
  •  annual reports on Form 10-K;
 
  •  quarterly reports on Form 10-Q;
 
  •  current reports on Form 8-K; and
 
  •  amendments to the foregoing reports.
 
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 Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.
 
If any of the events described in these risks were to occur, it could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels, availability of credit and demand for housing. The current downturn in the U.S. and global economies, along with the residential and commercial markets in such economies, has negatively impacted the floor covering industry and the Company’s business. These difficult economic conditions may continue or deteriorate in the foreseeable future. Further, significant or prolonged declines in such economies or in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Company’s business.
 
The floor covering industry in which the Company participates is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels, availability of credit and demand for housing. The Company derives a majority of the Company’s sales from


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the replacement segment of the market. Therefore, economic changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company’s business and results of operations.
 
The floor covering industry is highly dependent on residential and commercial construction activity, including new construction, which is cyclical in nature and currently in a downturn. The current downturn in the U.S. and global economies, along with the housing markets in such economies, has negatively impacted the floor covering industry and the Company’s business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities have also lagged during the current downturn. The difficult economic conditions may continue or deteriorate in the foreseeable future. A significant or prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company’s business and results of operations.
 
Uncertainty in the credit market or downturns in the global economy and the Company’s business could affect the Company’s overall availability and cost of credit.
 
Uncertainty in the credit markets could affect the overall availability and cost of credit. The impact of the current situation on our ability to obtain financing, including any financing necessary to refinance our existing senior unsecured notes, in the future, and the cost and terms of it, is uncertain. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results. Further, these generally negative economic and business conditions may factor into our periodic credit ratings assessment by either or both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. The rating agency’s evaluation is based on a number of factors, which include scale and diversification, brand strength, profitability, leverage, liquidity and interest coverage. During 2009, our senior unsecured notes were downgraded by the rating agencies, which will increase the Company’s interest expense by approximately $10.5 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future, and the Company can provide no assurances that additional downgrades will not occur. Additionally, our credit facilities require us to meet certain affirmative and negative covenants that impose restrictions on our financial and business operations, including limitations relating to debt, investments, asset dispositions and changes in the nature of our business. We are also required to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that the unutilized amount available under the ABL Facility is less than 15% of the amount available under the ABL Facility. Failure to comply with these covenants could materially and adversely affect our ability to finance our operations or capital needs and to engage in other activities that may be in our best interest.
 
The Company faces intense competition in the flooring industry, which could decrease demand for the Company’s products or force it to lower prices, which could have a material adverse effect on the Company’s profitability.
 
The floor covering industry is highly competitive. The Company faces competition from a number of manufacturers and independent distributors. Some of the Company’s competitors are larger and have greater resources and access to capital than the Company does. Maintaining the Company’s competitive position may require substantial investments in the Company’s product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company’s products or force the Company to lower prices. Any of these factors or others may impact demand which could have a material adverse effect on the Company’s business.
 
The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Company’s business.
 
The principal raw materials used in the Company’s manufacturing operations include nylon and polyester and polypropylene and triexta resins and fibers, 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


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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. For certain of such raw materials, the Company is dependent on one or a small number of suppliers. An adverse change in the Company’s relationship with such a supplier, the financial condition of such a supplier or such supplier’s ability to manufacture or deliver such raw materials to the Company could lead to an interruption of supply. 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.
 
In periods of rising costs, the Company may be unable to pass raw materials and fuel-related cost increases on to its customers, which could have a material adverse effect on the Company’s profitability.
 
The prices of raw materials and fuel-related costs vary with market conditions. Although the Company generally attempts to pass on increases in raw material 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.
 
Fluctuations in currency exchange rates may impact the Company’s financial condition and results of operations and may affect the comparability of results between the Company’s financial periods.
 
The results of the Company’s foreign subsidiaries reported in the local currency are translated into U.S. dollars for balance sheet accounts using exchange rates in effect as of the balance sheet date and for the statement of operations accounts using, principally, the Company’s average rates during the period. The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. The Company may not be able to manage effectively the Company’s currency translation risks and volatility in currency exchange rates may have a material adverse effect on the Company’s consolidated financial statements and affect comparability of the Company’s results between financial periods.
 
The Company may experience certain risks associated with acquisitions.
 
The Company has typically grown its business through acquisitions. Growth through acquisitions involves risks, many of which may continue to affect the Company after the acquisition. The Company cannot give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company expects. The combination of an acquired company’s business with the Company’s existing businesses involves risks. The Company cannot be assured that reported earnings will meet expectations because of goodwill and intangible asset impairment, increased interest costs and issuance of additional securities or incurrence of debt. The Company may also face challenges in consolidating functions, integrating the Company’s organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges may result in:
 
  •  maintaining executive offices in different locations;
 
  •  manufacturing and selling different types of products through different distribution channels;
 
  •  conducting business from various locations;
 
  •  maintaining different operating systems and software on different computer hardware; and
 
  •  providing different employment and compensation arrangements for employees.
 
The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company’s revenues, level of expenses and operating results.


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Failure to successfully manage and integrate an acquisition with the Company’s existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Company’s financial condition and results of operations. Even if integration occurs successfully, failure of the acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise perform as expected, may adversely impact the Company’s financial condition and results of operations.
 
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 and integrate acquired businesses with the Company’s existing businesses; or to manage profitably acquired businesses.
 
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 materials and finished product. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.
 
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.
 
We may be exposed to litigation, claims and other legal proceedings in the ordinary course of business relating to our products, which could affect our results of operations and financial condition.
 
In the ordinary course of our business, we are subject to a variety of product-related claims, lawsuits and legal proceedings, including those relating to product liability, product warranty, product recall, personal injury, and other matters that are inherently subject to many uncertainties regarding the possibility of a loss to us. Such matters could have a material adverse effect on our business, results of operations and financial condition if we are unable to successfully defend against or resolve these matters or if our insurance coverage is insufficient to satisfy any judgments against us or settlements relating to these matters. Although we have product liability insurance, our policies may not provide coverage for certain claims against us or may not be sufficient to cover all possible liabilities. Moreover, adverse publicity arising from claims made against us, even if the claims were not successful, could adversely affect our reputation or the reputation and sales of our products.
 
Regulatory decisions could cause the prices of fuel and energy to fluctuate, and any price increases that result may reduce results of operations.
 
The Company’s manufacturing operations and shipping needs require high inputs of energy, including the use of substantial amounts of electricity, natural gas, and petroleum based products, which are subject to price fluctuations due to changes in supply and demand and are also affected by local, national and international regulatory decisions. Significant increases in the cost of these commodities, either as a result of changes in market prices due to regulatory decisions or as a result of additional costs in order to comply with regulatory decisions, may have adverse effects on the Company’s results of operations and cash flows if the Company is unable to pass such increases to its customers in a timely manner.


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Changes in laws or in the business, political and regulatory environments in which the Company operates could have a material adverse effect on the Company’s business.
 
The Company’s manufacturing facilities in Mexico and Europe represent a significant portion of the Company’s capacity for ceramic tile and laminate flooring, respectively, and the Company’s European operations represent a significant source of the Company’s revenues and profits. Accordingly, an event that has a material adverse impact on either of these operations or that changes the current tax treatment of the results thereof could have a material adverse effect on the Company. The business, regulatory and political environments in Mexico and Europe differ from those in the U.S., 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.
 
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 U.S. and countries in Europe, as well as confidentiality agreements with some of the Company’s employees, to protect that technology.
 
The Company has obtained a number of patents relating to the Company’s products and associated methods and has filed applications for additional patents, including the UNICLIC® family of patents, which protects Unilin’s interlocking laminate flooring panel technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company’s pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company’s filings, could render the Company’s intellectual property less valuable.
 
Furthermore, despite the Company’s efforts, the Company may be unable to prevent competitors and/or third parties from using the Company’s technology without the Company’s authorization, independently developing technology that is similar to that of the Company or designing around the Company’s patents. The use of the Company’s technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause the Company to lose sales or otherwise harm the Company’s business. In addition, if the Company does not obtain sufficient protection for the Company’s intellectual property, the Company’s competitiveness in the markets it serves could be significantly impaired, which would limit the Company’s growth and future revenue.
 
The Company has obtained and applied for numerous U.S. and Foreign Service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company’s pending or future applications will be approved by the applicable governmental authorities. Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations. A failure to obtain trademark registrations in the U.S. and in other countries could limit the Company’s ability to protect the Company’s trademarks and impede the Company’s marketing efforts in those jurisdictions.
 
The Company generally requires third parties with access to the Company’s trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company’s trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company’s confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances,


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the Company’s competitiveness could be significantly impaired, which would limit the Company’s growth and future revenue.
 
Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company’s products.
 
In the past, companies have claimed that certain technologies incorporated in the Company’s products infringe their patent rights. There can be no assurance that the Company will not receive notices in the future from parties asserting that the Company’s products infringe, or may infringe, those parties’ intellectual property rights. The Company cannot be certain that the Company’s products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the U.S. and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Company’s products or processes. If patents are later issued on these applications, the Company may be liable for infringement.
 
Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company’s proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others. Likewise, the Company may have similar claims brought against it by competitors. Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Company’s technical and management personnel from operations, whether or not such litigation is resolved in the Company’s favor. In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorney’s fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company’s business, financial condition and results of operations would be materially and adversely affected.
 
The Company is subject to changing regulation of corporate governance and public disclosure that have increased both costs and the risk of noncompliance.
 
The Company’s stock is publicly traded. As a result, the Company is subject to the rules and regulations of federal and state agencies and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NYSE, frequently issue new requirements and regulations, such as the Sarbanes-Oxley Act of 2002. The Company’s efforts to comply with the regulations and interpretations have resulted in, and are likely to continue to result in, increased general and administrative costs and diversion of management’s time and attention from revenue generating activities to compliance activities.
 
Declines in the Company’s business conditions may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge.
 
A decrease in the Company’s market capitalization, including a short-term decline in stock price, or a negative long-term performance outlook, could result in an impairment of its tangible and intangible assets which results when the carrying value of the Company’s assets exceed their fair value. In 2008, the Company’s goodwill and other intangible assets suffered an impairment and additional impairment charges could occur in future periods.
 
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


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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; legislative enactments and regulatory decisions; 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 0.1 million square foot headquarters office in Calhoun, Georgia on an eight-acre site. The Company also owns a 2.1 million square foot manufacturing facility located in Dalton, Georgia, used by the Mohawk segment, 1.7 million and 1.0 million square foot manufacturing facilities located in Monterey, Mexico and Muskogee, Oklahoma, respectively, used by the Dal-Tile segment, and a 1.1 million square foot manufacturing facility located in Wielsbeke, Belgium and a 0.5 million square foot manufacturing facility located in Thomasville, NC used by the Unilin segment.
 
The following table summarizes the Company’s facilities both owned and leased for each segment in square feet (in millions):
 
                                                 
    Mohawk Segment   Dal-Tile Segment   Unilin Segment
Primary Purpose
  Owned   Leased   Owned   Leased   Owned   Leased
 
Manufacturing
    16.4       0.1       4.4             7.7       0.9  
Selling and Distribution
    3.4       4.9       0.3       7.9       0.1       0.1  
Other
    1.1       0.1       0.3             0.1        
                                                 
Total
    20.9       5.1       5.0       7.9       7.9       1.0  
                                                 
 
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 there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
 
In Shirley Williams et al. v. Mohawk Industries, Inc., four plaintiffs filed a putative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia (Rome Division), 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 authorized to work in the United States, have damaged them and the other members of the putative 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 District Court in April 2004. Following appellate review of this decision, the case was returned to the District Court for further proceedings. On December 18, 2007, the plaintiffs filed a motion for class certification. On March 3, 2008, the District Court denied the plaintiffs motion for class certification. The plaintiffs then appealed the decision to the United States Court of Appeals


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for the 11th Circuit on March 17, 2008. On May 28, 2009, the Court of Appeals issued an order reversing the District Court’s decision and remanding the case back to the District Court for further proceedings on the class certification issue. Discovery has been stayed at the District Court since the appeal. In August 2009, the Company filed a petition for certiorari with the United States Supreme Court, which was denied in November 2009. The Company will continue to vigorously defend itself against this action.
 
In Collins & Aikman Floorcoverings, Inc., et. al. v. Interface, Inc., United States District Court for the Northern District of Georgia (Rome Division), Mohawk Industries, Inc. joined Collins & Aikman Floorcoverings, Inc. (“CAF”) and Shaw Industries Group, Inc. (“Shaw”) in suing Interface, Inc. (“Interface”) for declaratory judgments that United States Patent 6,908,656 (the “Patent”), assigned to Interface and relating to certain styles of carpet tiles, is not infringed and is invalid. Also in June 2005, in Interface, Inc., et al. v. Mohawk Industries, Inc., et. al. United States District Court for the Northern District of Georgia (Atlanta Division), Interface sued Mohawk Industries, Inc., Mohawk Carpet Corporation, and Mohawk Commercial, Inc. for allegedly infringing the Patent. Interface brought similar suits against entities affiliated with CAF and Shaw. Interface sought monetary damages as well as injunctive relief. The cases were consolidated in the United States District Court for the Northern District of Georgia (Rome Division). During the second quarter of 2009, the Company and Interface reached a settlement and the pending cases were dismissed by the District Court on June 26, 2009.
 
The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or year.
 
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, 2009.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market for the Common Stock
 
The Company’s common stock, $0.01 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
 
2008
               
First quarter
  $ 83.09       63.00  
Second quarter
    80.29       64.01  
Third quarter
    75.26       56.55  
Fourth quarter
    69.47       23.91  
2009
               
First quarter
  $ 46.05       16.97  
Second quarter
    51.88       28.74  
Third quarter
    53.71       31.40  
Fourth quarter
    50.49       39.84  
 
As of February 22, 2010, there were approximately 344 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 2009.
 
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 October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV (“Unilin Acquisition”). The total purchase price of the Unilin Acquisition, net of cash, was approximately Euro 2.1 billion (approximately $2.5 billion). On August 13, 2007, the Company completed the acquisition of certain wood flooring assets for $147.1 million in cash. 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.
 


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    As of or for the Years Ended December 31,  
    2009     2008     2007     2006     2005  
    (In thousands, except per share data)  
 
Statement of operations data:
                                       
Net sales
  $ 5,344,024       6,826,348       7,586,018       7,905,842       6,620,099  
Cost of sales(a)
    4,111,794       5,088,584       5,471,234       5,674,531       4,851,853  
                                         
Gross profit
    1,232,230       1,737,764       2,114,784       2,231,311       1,768,246  
Selling, general and administrative expenses
    1,188,500       1,318,501       1,364,678       1,392,251       1,095,862  
Impairment of goodwill and other intangibles(b)
          1,543,397                    
                                         
Operating income (loss)
    43,730       (1,124,134 )     750,106       839,060       672,384  
                                         
Interest expense
    127,031       127,050       154,469       173,697       66,791  
Other expense, net
    (5,588 )     21,288       (6,925 )     (252 )     (3,679 )
U.S. customs refund(c)
                (9,154 )     (19,436 )      
                                         
      121,443       148,338       138,390       154,009       63,112  
                                         
Earnings (loss) before income taxes
    (77,713 )     (1,272,472 )     611,716       685,051       609,272  
Income taxes (benefit) expense(d)
    (76,694 )     180,062       (102,697 )     220,478       214,995  
                                         
Net (loss) earnings
    (1,019 )     (1,452,534 )     714,413       464,573       394,277  
Less: Net earnings attributable to the noncontrolling interest
    4,480       5,694       7,599       8,740       7,139  
                                         
Net earnings (loss) attributable to Mohawk Industries, Inc
  $ (5,499 )     (1,458,228 )     706,814       455,833       387,138  
                                         
Basic (loss) earnings per share
  $ (0.08 )     (21.32 )     10.37       6.74       5.78  
                                         
Weighted-average common shares outstanding
    68,452       68,401       68,172       67,674       66,932  
                                         
Diluted (loss) earnings per share
  $ (0.08 )     (21.32 )     10.32       6.70       5.72  
                                         
Weighted-average common and dilutive potential common shares outstanding
    68,452       68,401       68,492       68,056       67,644  
                                         
Balance sheet data:
                                       
Working capital (includes short-term debt)
  $ 1,474,978       1,369,333       1,238,220       783,148       1,277,087  
Total assets (b and d)
    6,391,446       6,446,175       8,680,050       8,212,209       8,066,025  
Long-term debt (including current portion)
    1,854,479       1,954,786       2,281,834       2,783,681       3,308,370  
Total equity
    3,234,282       3,184,933       4,738,843       3,744,468       3,078,522  
 
 
(a) In 2005, gross margin was impacted by a non-recurring $34,300 ($22,300 net of tax) fair value adjustment to Unilin’s acquired inventory.
 
(b) In 2008, the Company recorded an impairment of goodwill and other intangibles which included $276,807 for the Mohawk segment, $531,930 for the Dal-Tile segment and $734,660 for the Unilin segment.
 
(c) In 2007 and 2006, the Company received partial refunds from the U.S. government in reference to settlement of custom disputes dating back to 1982.
 
(d) In 2007, the Company implemented a change in residency of one of its foreign subsidiaries. This tax restructuring resulted in a step up in the subsidiary’s taxable basis, which resulted in the recognition of a

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deferred tax asset of approximately $245,000 and a related income tax benefit of approximately $272,000. In 2008, the Company recorded a valuation allowance of approximately $253,000 against the deferred tax asset described above.
 
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 U.S. and Europe with net sales in 2009 of $5.3 billion. The Company is the second largest carpet and rug manufacturer in the U.S., a leading manufacturer, marketer and distributor of ceramic tile, natural stone and hardwood flooring in the U.S. and a leading producer of laminate flooring in the U.S. and Europe. In 2008, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (58%), ceramic tile (11%), resilient and rubber (11%), hardwood (10%), stone (5%) and laminate (5%).
 
The Company believes that the U.S. floor covering industry has experienced declining demand beginning in the fourth quarter of 2006 which worsened considerably during the later parts of 2008 and continued to decline throughout 2009. The global economy continues in the most significant downturn in recent history. Overall economic conditions and consumer sentiment have remained challenging, which has intensified the pressure on the demand for housing and flooring products. Although the Company cannot determine with certainty as to when market conditions will stabilize and begin to improve, the Company believes it is well-positioned in the long-term as the industry improves. The Company continues to monitor expenses based on current industry conditions and will continue to adjust as required.
 
The Company has three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment manufactures, markets and distributes its product lines primarily in North America, which include carpet, rugs, pad, ceramic tile, hardwood, resilient and laminate, through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment product lines are sold through various selling channels, which include floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment manufactures, markets and distributes its product lines primarily in North America, which include ceramic tile, porcelain tile and stone products, through its network of regional distribution centers and company-operated sales service centers using company-operated trucks, common carriers or rail transportation. The segment product lines are purchased by floor covering retailers, home centers, independent distributors, tile specialty dealers, tile contractors, and commercial end users. The Unilin segment manufactures, markets and distributes its product lines primarily in North America and Europe, which include laminate flooring, wood flooring, roofing systems and other wood products through various selling channels, which include retailers, home centers and independent distributors.
 
The Company reported net loss of $5.5 million or loss per share of $0.08 for 2009, compared to net loss of $1,458.2 million or loss per share of $21.32 for 2008. The net loss for 2008 included a $1,543.4 million impairment charge to reduce the carrying amount of the Company’s goodwill and intangible assets and a charge of $253 million to record a tax valuation allowance against the carrying amount of a deferred tax asset recognized in the fourth quarter of 2007. In addition, the change in EPS resulted from the impact of lower sales volumes, which the Company believes is attributable to continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand, the net effect of price and product mix and higher warranty requirements, partially offset by lower raw material, energy and selling general and administrative costs. During 2009, the Company recognized a higher trend of incidents related to the use of new technology in certain commercial carpet tiles and recorded a $121.2 million carpet sales allowance and a $12.4 million inventory write-off. The Company discontinued sales of these commercial carpet tiles and replaced it with an established technology. The amounts recorded reflect the Company’s best reasonable estimate but the actual amount of claims and related costs could vary from such estimates.
 
For the year ended December 31, 2009, the Company generated $672.2 million of operating cash flow which it used to reduce debt by $103.6 million and build cash. As of December 31, 2009, the Company had


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cash and cash equivalents of $531.5 million. In addition, the Company adjusted capital expenditures to align its manufacturing, distribution and selling infrastructure to market conditions.
 
Results of Operations
 
Following are the results of operations for the last three years:
 
                                                 
    For the Years Ended December 31,  
    2009     2008     2007  
                (In millions)              
 
Statement of operations data:
                                               
Net sales
  $ 5,344.0       100.0 %   $ 6,826.3       100.0 %   $ 7,586.0       100.0 %
Cost of sales
    4,111.8       76.9 %     5,088.5       74.5 %     5,471.2       72.1 %
                                                 
Gross profit
    1,232.2       23.1 %     1,737.8       25.5 %     2,114.8       27.9 %
Selling, general and administrative expenses
    1,188.5       22.2 %     1,318.5       19.3 %     1,364.7       18.0 %
Impairment of goodwill and other intangibles
                1,543.4       22.6 %            
                                                 
Operating income (loss)
    43.7       0.8 %     (1,124.1 )     (16.5 )%     750.1       9.9 %
                                                 
Interest expense
    127.0       2.4 %     127.1       1.9 %     154.5       2.0 %
Other expense, net
    (5.6 )     (0.1 )%     21.3       0.3 %     (6.9 )     (0.1 )%
U.S. customs refund
                            (9.2 )     (0.1 )%
                                                 
      121.4       2.3 %     148.4       2.2 %     138.4       1.8 %
                                                 
Earnings (loss) before income taxes
    (77.7 )     (1.5 )%     (1,272.5 )     (18.6 )%     611.7       8.1 %
Income tax (benefit) expense
    (76.7 )     (1.4 )%     180.0       2.6 %     (102.7 )     (1.4 )%
                                                 
Net (loss) earnings
    (1.0 )           (1,452.5 )     (21.3 )%     714.4       9.4 %
Less: Net earnings attributable to the noncontrolling interest
    4.5       0.1 %     5.7       0.1 %     7.6       0.1 %
                                                 
Net earnings (loss) attributable to Mohawk Industries, Inc.
  $ (5.5 )     (0.1 )%   $ (1,458.2 )     (21.4 )%   $ 706.8       9.3 %
                                                 
 
Year Ended December 31, 2009, as Compared with Year Ended December 31, 2008
 
Net sales
 
Net sales for 2009 were $5,344.0 million, reflecting a decrease of $1,482.3 million, or 21.7%, from the $6,826.3 million reported for 2008. The decrease was primarily driven by a decline in sales volumes of approximately $1,047 million due to the continued weakness in the U.S. residential remodeling and new construction markets, commercial real estate market and European demand, a decline of approximately $298 million due to unfavorable price and product mix as customers trade down to lower priced products, a decrease of approximately $81 million due to a net increase in warranty requirements described in the overview and a decline of approximately $56 million due to unfavorable foreign exchange rates and other.
 
Mohawk Segment — Net sales decreased $771.4 million, or 21.3%, to $2,856.7 million in 2009 compared to $3,628.2 million in 2008. The decrease was primarily driven by a decline in sales volumes of approximately $531 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market, a decline of approximately $151 million due to unfavorable price and product mix as customers trade down to lower priced products and a decrease of approximately $81 million due to a net increase in warranty requirements described above in the overview.
 
Dal-Tile Segment — Net sales decreased $388.6 million, or 21.4%, to $1,426.8 million in 2009 compared to $1,815.4 million in 2008. The decrease was primarily driven by a decline in sales volumes of approximately $301 million due to the continued weakness in the U.S. residential remodeling and new construction markets and the declining commercial real estate market, a decline of approximately $73 million due to unfavorable


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price and product mix as customers trade down to lower priced products and a decline of approximately $15 million due to unfavorable foreign exchange rates.
 
Unilin Segment — Net sales decreased $336.9 million, or 23.0%, to $1,128.3 million in 2009 compared to $1,465.2 million in 2008. The decrease was driven by a decline in sales volumes of approximately $215 million due to the continued weakness in the U.S. residential remodeling and new construction markets and slowing European demand, a decline of approximately $74 million due to the net effect of price and product mix as customers trade down to lower priced products and a decline of approximately $48 million due to unfavorable foreign exchange rates.
 
Quarterly net sales and the percentage changes in net sales by quarter for 2009 versus 2008 were as follows (dollars in millions):
 
                         
    2009     2008     Change  
 
First quarter
  $ 1,208.3       1,738.1       (30.5 )%
Second quarter
    1,406.0       1,840.0       (23.6 )
Third quarter
    1,382.6       1,763.0       (21.6 )
Fourth quarter
    1,347.1       1,485.2       (9.3 )
                         
Total year
  $ 5,344.0       6,826.3       (21.7 )%
                         
 
Gross profit
 
Gross profit for 2009 was $1,232.2 million (23.1% of net sales) and represented a decrease of $505.5 million compared to gross profit of $1,737.8 million (25.5% of net sales) for 2008. Gross profit in 2009 was unfavorably impacted by approximately $315 million resulting from lower sales volume, a decline of approximately $185 million due to the net effect of price and product mix, a decline of approximately $89 million due to a net increase in warranty requirements described above in the overview, restructuring charges of approximately $28 million and the impact of unfavorable foreign exchange rates of approximately $9 million, partially offset by lower manufacturing costs of approximately $120 million. The decrease in gross profit percentage is primarily attributable to unfavorable price and product mix, increased warranty requirements and restructuring costs, partially offset by lower raw material and manufacturing costs
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses for 2009 were $1,188.5 million (22.3% of net sales), reflecting a decrease of $130.0 million, or 9.9%, compared to $1,318.5 million (19.3% of net sales) for the prior year. The decrease in selling, general and administrative expenses is primarily driven by lower sales and various cost savings initiatives implemented by the Company, partially offset by approximately $8 million of unfavorable foreign exchange rates and approximately $4 million for restructuring charges. The increase in selling general and administrative expenses as a percentage of net sales is primarily a result of a higher mix of fixed costs on lower net sales, and restructuring costs.
 
Operating income (loss)
 
Operating income for 2009 was $43.7 million (0.8% of net sales) reflecting an increase of $1,167.9 million compared to an operating loss of $1,124.1 million in 2008. The change was primarily driven by the recognition of an impairment of goodwill and other intangibles of approximately $1,543.4 million in 2008. In addition, operating income in the current period was impacted by a decline of approximately $315 million due to lower sales volumes, a decline of approximately $185 million due to unfavorable price and product mix, a decrease of approximately $89 million due to a net increase in warranty requirements described above in the overview and restructuring charges of approximately $32 million, partially offset by lower manufacturing and selling, general and administrative costs of approximately $244 million.
 
Mohawk Segment — Operating loss was $126.0 million in 2009 reflecting a decrease of $90.2 million compared to operating loss of $216.2 million in 2008. The increase was primarily driven by the recognition of


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an impairment of goodwill and other intangibles of approximately $276.8 million in 2008. In addition, operating income in the current period was impacted by a decline of approximately $133 million due to lower sales volumes, a decrease of approximately $89 million due to a net increase in warranty requirements and a decline of approximately $74 million due to unfavorable price and product mix and restructuring charges of approximately $7 million, partially offset by lower manufacturing and selling, general and administrative costs of approximately $116 million.
 
Dal-Tile Segment — Operating income was $84.2 million (5.9% of segment net sales) in 2009 reflecting an increase of $407.5 million compared to operating loss of $323.4 million for 2008. The change was primarily driven by the recognition of an impairment of goodwill and other intangibles of approximately $531.9 million in 2008. In addition, operating income in the current period was impacted by a decline of approximately $108 million due to lower sales volumes, a decline of approximately $35 million due to unfavorable price and product mix and restructuring charges of approximately $12 million, partially offset by lower manufacturing and selling, general and administrative costs of approximately $23 million.
 
Unilin Segment — Operating income was $106.0 million (9.4% of segment net sales) in 2009 reflecting an increase of $670.9 million compared to operating loss of $564.9 million for 2008. The increase was primarily driven by the recognition of an impairment of goodwill and other intangibles of $734.7 million in 2008. In addition, operating income in the current period was impacted by a decline of approximately $76 million due to the net effect of price and product mix, a decline in sales volumes of approximately $74 million, restructuring charges of approximately $13 million and the impact of unfavorable foreign exchange rates of approximately $8 million, partially offset by lower raw material, manufacturing and selling, general and administrative costs of approximately $107 million.
 
Interest expense
 
Interest expense for 2009 was $127.0 million compared to $127.1 million in 2008. Interest expense in 2009 was directly impacted by higher interest rates on the Company’s notes and revolving credit facilities due to three credit rating downgrades in 2009, partially offset by lower average debt levels in the current year compared to 2008.
 
Income tax (benefit) expense
 
For 2009, the Company recorded an income tax benefit of $76.7 million on loss before taxes of $77.7 million as compared to income tax expense of $180.1 million on loss before taxes of $1,272.5 million for 2008. The change is principally due to the non-deductible 2008 goodwill impairment charge, the recognition of a $253 million valuation allowance against a deferred asset, and the geographic distribution of income (loss).
 
In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin, and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence at the time, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized as of December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the consolidated financial statements was approximately $272 million.
 
During the third quarter of 2008, the Company reassessed the need for a valuation allowance against its deferred tax assets. Cash flows had decreased from that projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current


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and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefit of the deferred tax asset related to the transaction described above as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly the Company recorded a valuation allowance against the deferred tax asset in the amount of $253 million during the quarter ended September 27, 2008.
 
Year Ended December 31, 2008, as Compared with Year Ended December 31, 2007
 
Net sales
 
Net sales for the year ended December 31, 2008, were $6,826.3 million, reflecting a decrease of $759.7 million, or 10.0%, from the $7,586.0 million reported for the year ended December 31, 2007. The decrease was primarily driven by a decline in sales volumes of approximately $971 million due to the continued decline in the U.S. residential markets, softening commercial demand and slowing European demand, partially offset by a benefit of approximately $132 million due to the net effect of price increases and product mix, and a benefit of approximately $79 million due to favorable foreign exchange rates.
 
Mohawk Segment — Net sales decreased $577.6 million, or 13.7%, to $3,628.2 million in 2008, compared to $4,205.7 million in 2007. The decrease was primarily driven by a decline in sales volumes of approximately $639 million due to the continued decline in the U.S. residential market and softening commercial demand, partially offset by a benefit of approximately $83 million due to the net effect of price increases and product mix.
 
Dal-Tile Segment — Net sales decreased $122.4 million, or 6.3%, to $1,815.4 million in 2008, compared to $1,937.7 million reported in 2007. This decrease was primarily driven by a decline in sales volumes of approximately $146 million due to the continued decline in the U.S. residential market, partially offset by a benefit of approximately $24 million due to the net effect of price increases and product mix.
 
Unilin Segment — Net sales decreased $22.4 million, or 1.5%, to $1,465.2 million in 2008, compared to $1,487.6 million in 2007. The decrease in net sales was driven by a decline in sales volume of approximately $188 million due to the continued decline in the U.S. residential market and slowing European demand, partially offset by a benefit of approximately $63 million due to the Wood Acquisition, a benefit of approximately $79 million due to favorable foreign exchange rates and a benefit of approximately $23 million due to the net effect of price increases and product mix.
 
Quarterly net sales and the percentage changes in net sales by quarter for 2008 versus 2007 were as follows (dollars in millions):
 
                         
    2008     2007     Change  
 
First quarter
  $ 1,738.1       1,863.9       (6.7 )%
Second quarter
    1,840.0       1,977.2       (6.9 )
Third quarter
    1,763.0       1,937.7       (9.0 )
Fourth quarter
    1,485.2       1,807.2       (17.8 )
                         
Total year
  $ 6,826.3       7,586.0       (10.0 )%
                         
 
Gross profit
 
Gross profit was $1,737.8 million (25.5% of net sales) for 2008 and represented a decrease of $377.0 million, or 17.8%, compared to gross profit of $2,114.8 million (27.9% of net sales) for 2007. Gross profit was unfavorably impacted by increasing costs for raw materials and energy of approximately $172 million, net of cost savings initiatives, and a decline in volumes of approximately $279 million, partially offset by the net effect of price increases and product mix of approximately $97 million.
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses for 2008 were $1,318.5 million (19.3% of net sales), reflecting a decrease of $46.2 million, or 3.4%, compared to $1,364.7 million (18.0% of net sales) for 2007.


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The decrease in selling, general and administrative expenses is attributable to various cost savings initiatives implemented by the Company, offset by approximately $25 million of unfavorable foreign exchange rates.
 
Impairment of goodwill and intangibles
 
During 2008, the Company recorded a $1,543.4 million impairment charge to reduce the carrying amount of the Company’s goodwill and intangible assets to their estimated fair value based upon the results of two interim impairment tests. The Company performed interim impairment tests because of a prolonged decline in the Company’s market capitalization which the Company believes is primarily a result of the weakness in the U.S. residential housing market and the slowing European economy. In both the third and fourth quarters of 2008, the Company concluded that the weakness in the U.S. residential housing market is likely to persist based on its review of, among other things, sequential quarterly housing starts, recent turmoil surrounding the nation’s largest mortgage lenders, the potential negative impact on the availability of mortgage financing and housing start forecasts published by national home builder associations pushing recovery in the U.S. residential housing market beyond 2009. The total impairment included $276.8 million in the Mohawk segment, $531.9 million in the Dal-Tile segment and $734.7 million in the Unilin segment. If, in the future, the Company’s market capitalization and/or the estimated fair value of the Company’s reporting units were to decline further, it may be necessary to record further impairment charges.
 
Operating (loss) income
 
Operating loss for 2008 was $1,124.1 million reflecting a decrease of $1,874.2 million compared to operating income of $750.1 million (9.9% of net sales) in 2007. The decrease was primarily driven by the recognition of impairment of goodwill and other intangibles of $1,543.4 million, a decline in sales volumes of approximately $285 million and rising costs for raw materials and energy of approximately $116 million, net of cost savings initiatives, partially offset by a benefit of approximately $130 million due to the net effect of price increases and product mix.
 
Mohawk Segment — Operating loss was $216.2 million in 2008 reflecting a decrease of $471.1 million compared to operating income of $254.9 million (6.1% of segment net sales) in 2007. The decrease was primarily due to the impairment of goodwill and other intangibles of $276.8 million, a decline in sales volumes of approximately $142 million and rising costs for raw materials and energy of approximately $82 million, net of cost savings initiatives, partially offset by a benefit of approximately $82 million due to the net effect of price increases and product mix.
 
Dal-Tile Segment — Operating loss was $323.4 million in 2008 reflecting a decrease of $582.1 million, compared to operating income of $258.7 million (13.4% of segment net sales) in 2007. The decrease was primarily due to the impairment of goodwill of $531.9 million, rising costs for raw materials and energy of approximately $31 million, net of cost savings initiatives, and a decline in sales volumes of approximately $56 million, partially offset by a benefit of approximately $41 million due to the net effect of price increases and product mix.
 
Unilin Segment — Operating loss was $564.9 million in 2008, reflecting a decrease of $837.2 million compared to operating income of $272.3 million (18.3% of segment net sales) in 2007. The decrease was primarily due to the impairment of goodwill and other intangibles of $734.7 million, a decline in sales volumes of approximately $88 million and rising costs for raw materials and energy of approximately $19 million, net of cost savings initiatives, partially offset by a benefit of approximately $7 million due to the net effect of price increases and product mix.
 
Interest expense
 
Interest expense for 2008 was $127.1 million compared to $154.5 million in 2007. The decrease in interest expense for 2008 as compared to 2007 was attributable to lower average debt and lower average interest rates on outstanding revolving debt.


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Income tax (benefit) expense
 
The 2008 provision for income tax was $180.1 million, as compared to an income tax benefit of $102.7 million for 2007. The effective tax rate for 2008 was (14.2)% as compared to an effective tax rate benefit of 16.8% for 2007. The change in the tax rate was primarily due to the impact on pre-tax earnings of the impairment charge on non-deductible goodwill, the 2008 asset restructurings, and the recognition of a valuation allowance of $253 million, which is described above, against certain deferred tax assets that the Company believes is no longer more likely than not to be realized. Without the impact of these three items, the Company would have reflected a 2008 provision for income tax of $70.5 million, as compared to a provision of $168.9 million for 2007.
 
Liquidity and Capital Resources
 
The Company’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company’s capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes and credit terms from suppliers.
 
Cash flows provided by operations for 2009 were $672.2 million compared to cash flows provided by operations of $576.1 million in 2008. The increase in operating cash flows for 2009 as compared to 2008 is primarily attributable to lower working capital requirements due to lower sales demand.
 
Net cash used in investing activities for 2009 was $114.8 million compared to $226.1 million in 2008. The decrease is due to lower capital spending as a result of lower sales and tighter management of expenditures during 2009 as compared to 2008. Capital expenditures, including $161.3 million for acquisitions have totaled $651.1 million over the past three years. Capital spending during 2010, excluding acquisitions, is expected to range from $150 million to $160 million, and is intended to be used primarily to purchase equipment and to streamline manufacturing capacity.
 
Net cash used in financing activities for 2009 was $125.8 million compared to net cash used by financing activities of $348.9 million in 2008. The change in cash used in financing activities as compared to 2008 is primarily attributable to lower debt levels as the Company manages its working capital requirements to align with its current sales.
 
On September 2, 2009, the Company entered into a $600 million four-year, senior, secured revolving credit facility (the “ABL Facility”) in connection with the replacement of the Company’s then-existing senior, unsecured, revolving credit facility (the “Senior Unsecured Facility”). At the time of its termination, the Senior Unsecured Facility consisted of a $650 million revolving credit facility, which was to mature on October 28, 2010. The ABL Facility provides for a maximum of $600 million of revolving credit, subject to borrowing base availability, including limited amounts of credit in the form of letters of credit and swingline loans. The borrowing base is equal to specified percentages of eligible accounts receivable and inventories of the Company and other borrowers under the ABL Facility, which are subject to seasonal variations, less reserves established in good faith by the Administrative Agent under the ABL Facility. All obligations under the ABL Facility, and the guarantees of those obligations, are secured by a security interest in certain accounts receivable, inventories, certain deposit and securities accounts, tax refunds and other personal property (excluding intellectual property) directly relating to, or arising from, and proceeds of, any of the foregoing. In connection with the entry into the ABL Facility, the Company incurred approximately $23.7 million in debt issuance costs which will be amortized on a straight-line basis over the four-year term of the facility and recognized as interest expense in the condensed consolidated statement of operations.
 
At the Company’s election, revolving loans under the ABL Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 3.75% and 4.25%, or (b) the higher of the prime rate, the Federal Funds rate plus 0.5%, or a daily LIBOR rate, plus an applicable margin ranging between 2.25% and 2.75%. The Company also pays a commitment fee to the Lenders under the ABL Facility on the average amount by which the aggregate commitments of the Lenders’ exceed utilization of the ABL Facility equal to 1.00% per annum during any


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quarter that this excess is 50% or more, and 0.75% per annum during any quarter that this excess is less than 50%.
 
The ABL Facility includes certain affirmative and negative covenants that impose restrictions on Mohawk’s financial and business operations, including limitations on debt, liens, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that the unutilized amount available under the ABL Facility is less than 15% of the amount available under the ABL Facility.
 
The ABL Facility is scheduled to mature on September 2, 2013 but the maturity date will be accelerated to: (i) October 15, 2010 if the Company’s outstanding 5.75% senior notes due January 15, 2011 have not been repaid, refinanced, defeased or adequately reserved for by the Company, as reasonably determined by the Administrative Agent, prior to October 15, 2010, and (ii) January 15, 2012, if the Company’s outstanding 7.20% senior notes due April 15, 2012 have not been repaid, refinanced, defeased or adequately reserved for by the Company, as reasonably determined by the Administrative Agent, prior to January 15, 2012. The Company can make adequate reserves for such senior notes with unrestricted cash on hand and unutilized borrowing availability under the ABL Facility. The Company believes cash and cash equivalents and availability under the ABL Facility will be sufficient to satisfy the October 15, 2010 requirements of the ABL Facility, although there can be no assurances the Company will have adequate reserves as defined in the ABL Facility.
 
As of December 31, 2009, the amount considered used under the ABL Facility was $113.4 million leaving a total of approximately $462 million available under the ABL Facility. The amount used under the ABL Facility is composed of $53.5 million standby letters of credit guaranteeing the Company’s industrial revenue bonds and $59.9 million of standby letters of credit related to various insurance contracts and foreign vendor commitments.
 
During 2009, the Company terminated its Euro 130.0 million, five-year unsecured, revolving credit facility and its on-balance sheet trade accounts receivable securitization agreement, which allowed for borrowings up to $250.0 million based on available accounts receivable.
 
On January 17, 2006, the Company issued $500.0 million aggregate principal amount of 5.750% notes due 2011 and $900.0 million aggregate principal amount of 6.125% notes due 2016. Interest payable on each series of the notes is subject to adjustment if either Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“Standard & Poor’s”), or both, downgrades the rating assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $3.5 million per year. Currently, the interest rates have been increased by an aggregate amount of 0.75% as a result of downgrades by Moody’s and Standard & Poor’s during 2009. These downgrades increase the Company’s interest expense by approximately $10.5 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.
 
In 2002, the Company issued $400.0 million aggregate principal amount of its senior 7.2% notes due 2012.
 
The Company may from time to time seek to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amount involved may be material.
 
As of December 31, 2009, the Company had invested cash of $464.9 million in money market AAA rated cash investments of which $367.3 million was in North America and $97.6 million was in Europe. The


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Company believes that its cash and cash equivalents on hand, cash generated from operations and availability under its ABL Facility will be sufficient to repay, defease or refinance its 5.75% senior notes due January 2011 and meet its capital expenditures and working capital requirements over the next twelve months.
 
The Company’s Board of Directors has authorized the repurchase of up to 15 million shares of the Company’s outstanding common stock. Since the inception of the program in 1999, a total of approximately 11.5 million shares have been repurchased at an aggregate cost of approximately $334.7 million. All of these repurchases have been financed through the Company’s operations and banking arrangements. No shares were repurchased during 2009, 2008 and 2007.
 
On October 31, 2005, the Company entered into a Discounted Stock Purchase Agreement (the “DSPA”) with certain members of the Unilin management team (the “Unilin Management”). The Company terminated the DSPA during the year ended December 31, 2009. Under the terms of the DSPA, the Company was obligated to make cash payments to the Unilin Management in the event that certain performance goals were satisfied. In each of the years in the five-year period ended December 31, 2010, the remaining members of Unilin Management could earn amounts, in the aggregate, equal to the average value of 30,671 shares of the Company’s common stock over the 20 trading day period ending on December 31 of the prior year. Any failure in a given year to reach the performance goals could have been rectified, and consequently the amounts payable with respect to achieving such criteria could have been made, in any of the other years. The amount of the liability is measured each period and recognized as compensation expense in the consolidated statement of operations. No expense related to the DSPA was recognized by the Company in 2009.
 
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 ABL Facility. This policy does not impact any liquid assets on the consolidated balance sheets.
 
Contractual obligations
 
The following is a summary of the Company’s future minimum payments under contractual obligations as of December 31, 2009 (in millions):
 
                                                         
    Total     2010     2011     2012     2013     2014     Thereafter  
 
Recorded Contractual Obligations:
                                                       
Long-term debt, including current maturities and capital leases
  $ 1,854.5       52.9       499.8       400.4       0.4       0.4       900.6  
Unrecorded Contractual Obligations:
                                                       
Interest payments on long-term debt and capital leases(1)
    473.4       123.3       92.1       70.2       61.9       61.9       64.0  
Operating leases
    379.4       94.3       77.1       58.5       45.2       37.3       67.0  
Purchase commitments(2)
    684.1       186.5       180.4       105.8       105.7       105.7        
Expected pension contributions(3)
    0.9       0.9                                
Uncertain tax positions(4)
    69.3       69.3                                
Guarantees
    0.7       0.7                                
                                                         
      1,607.8       475.0       349.6       234.5       212.8       204.9       131.0  
                                                         
Total
  $ 3,462.3       527.9       849.4       634.9       213.2       205.3       1,031.6  
                                                         
 
 
(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 as of December 31, 2009 to these balances.
 
(2) Includes commitments for natural gas, electricity and raw material purchases.
 
(3) Includes the estimated pension contributions for 2010 only, as the Company is unable to estimate the pension contributions beyond 2010. The Company’s projected benefit obligation as of December 31, 2009 was


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$25.5 million. These liabilities have not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.
 
(4) Excludes $48.5 million of non-current accrued income tax liabilities for uncertain tax positions. These liabilities have not been presented in the table above due to uncertainty as to amounts and timing regarding future payments.
 
Critical Accounting Policies
 
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, 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.
 
  •  Accounts receivable and revenue recognition.  Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectability 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 evaluation of specific customer accounts and the aging of accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
  •  Inventories are stated at the lower of cost or market (net realizable value).  Cost has been determined using the first-in first-out method (“FIFO”). Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. 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.
 
  •  Goodwill and other intangibles.  Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The Company considers the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified Mohawk, Dal-Tile, Unilin Flooring, Unilin Chipboard and Melamine, and Unilin Roofing as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and


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  market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as continued declines in spending for new construction, remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted. Generally, a moderate decline in estimated operating income or a small increase in WACC or a decline in market capitalization could result in an additional indication of impairment.
 
The impairment test for intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions are subject to the variability discussed above.
 
The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the trademarks. Estimated cash flows are sensitive to changes in the economy among other things.
 
The Company reviews its long-lived asset groups, which include intangible assets subject to amortization, which for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset groups may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these asset groups. If such asset groups are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.
 
The Company conducted its annual assessment of goodwill and indefinite lived intangibles in the fourth quarter and no impairment was indicated. The Company did record impairment of goodwill and other intangibles of $1,543.4 million in 2008.
 
  •  The Company’s effective tax rate is based on its income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company’s tax expense and in evaluating the Company’s tax positions. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. The Company evaluates the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that the Company is not able to realize


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  all or a portion of its deferred tax assets in the future, a valuation allowance is provided. The Company would recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. The Company recorded valuation allowances of $365.9 million in 2009, $343.6 million in 2008 and $75.0 million in 2007.
 
In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information, as required by the provisions of the Financial Accounting Standards Board (“FASB”) FASB Accounting Standards Codification Topic 740 (“ASC 740-10”), a replacement of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. As of December 31, 2009, the Company has $105.6 million accrued for uncertain tax positions.
 
  •  Environmental and legal accruals are estimates based on judgments made by the Company relating to ongoing environmental and legal proceedings, as disclosed in the Company’s consolidated financial statements. In determining whether a liability is probable and reasonably estimable, the Company consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued ASC 820-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. ASC 820-10 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. ASC 820-10 is effective for the Company’s fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The Company’s adoption of ASC 820-10 for financial assets and liabilities on January 1, 2008 and non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued ASC 805-10, formerly SFAS No. 141 (revised 2007), “Business Combinations”. ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. ASC 805-10 is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of ASC 805-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements, although the adoption of ASC 805-10 will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.
 
In December 2007, the FASB issued ASC 810-10, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51”. ASC 810-10 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when


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a subsidiary is deconsolidated. ASC 810-10 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810-10 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements. Upon adoption, the Company reclassified $31.1 million on the condensed consolidated balance sheets from other long-term liabilities to noncontrolling interest within equity and reclassified the related net earnings to net earnings attributable to the noncontrolling interest on the consolidated statements of operations.
 
In March 2008, the FASB issued ASC 815-10, formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. ASC 815-10 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of ASC 815-10 are effective for the first quarter of 2009. The adoption of ASC 815-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued ASC 825-10, formerly the FASB Staff Position on FAS 107-1 and APB 28-1,Interim Disclosures About Fair Value of Financial Instruments”. ASC 825-10 requires disclosures about fair value of financial instruments in interim reporting periods of publicly-traded companies that were previously only required to be disclosed in annual financial statements. The provisions of ASC 825-10 are effective for the second quarter of 2009. The adoption of this standard on June 27, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In May 2009, the FASB issued ASC 855-10-05, formerly SFAS No. 165, “Subsequent Events”. ASC 855-10-05 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, ASC 855-10-05 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. ASC 855-10-05 provides largely the same guidance on subsequent events which previously existed only in the auditing literature. ASC 855-10-05 is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 860, formerly SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”. ASC 860 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically, ASC 860 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. ASC 860 is effective for annual and quarterly reporting periods that begin after November 15, 2009. The adoption of this standard on January 1, 2010 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 810, formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. ASC 810 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to


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ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. ASC 810 is effective for annual and quarterly reporting periods that begin after November 15, 2009. The adoption of this standard on January 1, 2010 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 105-10, formerly SFAS No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”. ASC 105-10 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification superseded all the existing non-SEC accounting and reporting standards upon its effective date. ASC 105-10 also replaced FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” given that once in effect, the Codification carries the same level of authority. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
Impact of Inflation
 
Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004, and the prices increased dramatically during the latter part of 2008, peaking in the second half of 2008. The Company expects raw material prices to continue to fluctuate based upon worldwide demand of commodities utilized in the Company’s production processes. In the past, the Company has generally been able to pass along these price increases to its customers and has been able to enhance productivity 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 exchange rates 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.


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Any gain or loss is reclassified from other comprehensive income and recognized in cost of sales in the same period or periods during which the hedged transaction affects earnings. As of December 31, 2009, the Company had no outstanding natural gas contracts. As of December 31, 2008, the Company had natural gas contracts that mature from January 2009 to December 2009 with an aggregate notional amount of approximately 2,650 thousand MMBTU’s. The fair value of these contracts was a liability of $5.9 million as of December 31, 2008. The offset to these liabilities is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized in the cost of sales within the consolidated statements of operations and was not significant for the periods reported.
 
The Company’s natural gas long-term supply agreements are accounted for under the normal purchase provision within ASC 815, formerly SFAS No. 133 and its amendments. As of December 31, 2009, the Company had no outstanding normal purchase commitments for natural gas. As of December 31, 2008, the Company had normal purchase commitments of approximately 2,026 thousand MMBTU’s for periods maturing from January 2009 through December 2009. The contracted value of these commitments was approximately $17.2 million as of December 31, 2008.
 
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 sales in the same period or periods during which the hedged transaction affects earnings. The Company had no outstanding forward contracts to purchase Mexican pesos as of December 31, 2009. The Company had forward contracts to purchase approximately 269.1 million Mexican pesos as of December 31, 2008. The aggregate U.S. dollar value of these contracts as of December 31, 2008 was approximately $23.9 million and the fair value of these contracts was a liability of approximately $5.2 million.


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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, 2009 and 2008, and the related consolidated statements of operations, equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. 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 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 provide a reasonable basis for our opinion.
 
In our opinion, 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 13 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, included in ASC subtopic 740-10, Income Taxes-Overall, effective January 1, 2007.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mohawk Industries, Inc.’s internal control over financial reporting as of December 31, 2009, 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 February 26, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG LLP
 
Atlanta, Georgia
February 26, 2010


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Mohawk Industries, Inc.:
 
We have audited Mohawk Industries, Inc.’s internal control over financial reporting as of December 31, 2009, 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, as set forth in Item 9A of Mohawk Industries, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
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, 2009 and 2008, and the related consolidated statements of operations, equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated February 26, 2010 expressed an unqualified opinion on those consolidated financial statements.
 
/s/  KPMG LLP
 
Atlanta, Georgia
February 26, 2010


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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
December 31, 2009 and 2008
 
                 
    2009     2008  
    (In thousands, except per share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 531,458       93,519  
Receivables, net
    673,931       696,284  
Inventories
    892,981       1,168,272  
Prepaid expenses
    108,947       125,603  
Deferred income taxes
    130,990       149,203  
Other current assets
    20,693       13,368  
                 
Total current assets
    2,359,000       2,246,249  
Property, plant and equipment, net
    1,791,412       1,925,742  
Goodwill
    1,411,128       1,399,434  
Tradenames
    477,607       472,399  
Other intangible assets, net
    307,735       375,451  
Deferred income taxes and other non-current assets
    44,564       26,900  
                 
    $ 6,391,446       6,446,175  
                 
 
LIABILITIES AND EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 52,907       94,785  
Accounts payable and accrued expenses
    831,115       782,131  
                 
Total current liabilities
    884,022       876,916  
Deferred income taxes
    370,903       419,985  
Long-term debt, less current portion
    1,801,572       1,860,001  
Other long-term liabilities
    100,667       104,340  
                 
Total liabilities
    3,157,164       3,261,242  
                 
Commitments and contingencies (Note 14)
               
Equity:
               
Preferred stock, $.01 par value; 60 shares authorized; no shares issued
           
Common stock, $.01 par value; 150,000 shares authorized; 79,518 and 79,461 shares issued in 2009 and 2008, respectively
    795       795  
Additional paid-in capital
    1,227,856       1,217,903  
Retained earnings
    1,998,616       2,004,115  
Accumulated other comprehensive income, net
    296,917       254,535  
                 
      3,524,184       3,477,348  
Less treasury stock at cost; 11,034 and 11,040 shares in 2009 and 2008, respectively
    323,361       323,545  
                 
Total Mohawk Industries, Inc. stockholders’ equity
    3,200,823       3,153,803  
Noncontrolling interest
    33,459       31,130  
                 
Total equity
    3,234,282       3,184,933  
                 
    $ 6,391,446       6,446,175  
                 
 
See accompanying notes to consolidated financial statements.


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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
 
                         
    2009     2008     2007  
    (In thousands, except per share data)  
 
Net sales
  $ 5,344,024       6,826,348       7,586,018  
Cost of sales
    4,111,794       5,088,584       5,471,234  
                         
Gross profit
    1,232,230       1,737,764       2,114,784  
Selling, general and administrative expenses
    1,188,500       1,318,501       1,364,678  
Impairment of goodwill and other intangibles
          1,543,397        
                         
Operating income (loss)
    43,730       (1,124,134 )     750,106  
                         
Other expense (income):
                       
Interest expense
    127,031       127,050       154,469  
Other expense
    16,935       31,139       15,398  
Other income
    (22,523 )     (9,851 )     (22,323 )
U.S. customs refund
                (9,154 )
                         
      121,443       148,338       138,390  
                         
Earnings (loss) before income taxes
    (77,713 )     (1,272,472 )     611,716  
Income taxes (benefit) expense
    (76,694 )     180,062       (102,697 )
                         
Net (loss) earnings
    (1,019 )     (1,452,534 )     714,413  
Less: Net earnings attributable to the noncontrolling interest
    4,480       5,694       7,599  
                         
Net (loss) earnings attributable to Mohawk Industries, Inc
  $ (5,499 )     (1,458,228 )     706,814  
                         
Basic (loss) earnings per share attributable to Mohawk Industries, Inc. 
  $ (0.08 )     (21.32 )     10.37  
                         
Weighted-average common shares outstanding — basic
    68,452       68,401       68,172  
                         
Diluted (loss) earnings per share attributable to Mohawk Industries, Inc. 
  $ (0.08 )     (21.32 )     10.32  
                         
Weighted-average common shares outstanding — diluted
    68,452       68,401       68,492  
                         
 
See accompanying notes to consolidated financial statements.


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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Equity and Comprehensive Income
Years Ended December 31, 2009, 2008 and 2007
 
                                                                         
                            Accumulated
                         
                Additional
          Other
                         
    Common Stock     Paid-in
    Retained
    Comprehensive
    Treasury Stock     Noncontrolling
    Total
 
    Shares     Amount     Capital     Earnings     Income (Loss)     Shares     Amount     Interest     Equity  
    (In thousands)  
 
Balances at December 31, 2006
    78,816     $ 788     $ 1,152,420     $ 2,755,529     $ 130,372       (11,051 )   $ (323,846 )   $ 29,207     $ 3,744,470  
Shares issued under employee and director stock plans
    588       6       31,115                   5       128             31,249  
Stock-based compensation expense
                13,594                                     13,594  
Tax benefit from stock-based compensation
                6,828                                     6,828  
Distribution to noncontrolling interest
                                              (5,318 )     (5,318 )
Comprehensive income:
                                                                       
Currency translation adjustment
                            230,941                         230,941  
Unrealized gain on hedge instruments net of taxes
                            1,453                         1,453  
Pension prior service cost and actuarial gain or loss
                            1,215                         1,215  
Net earnings
                      706,814                         7,599       714,413  
                                                                         
Total comprehensive income
                                                                    948,022  
                                                                         
Balances at December 31, 2007
    79,404       794       1,203,957       3,462,343       363,981       (11,046 )     (323,718 )     31,488       4,738,845  
Shares issued under employee and director stock plans
    57       1       1,621                   6       173             1,795  
Stock-based compensation expense
                11,991                                     11,991  
Tax benefit from stock-based compensation
                334                                     334  
Distribution to noncontrolling interest
                                              (6,052 )     (6,052 )
Comprehensive loss:
                                                                       
Currency translation adjustment
                            (101,935 )                       (101,935 )
Unrealized loss on hedge instruments net of taxes
                            (7,127 )                       (7,127 )
Pension prior service cost and actuarial gain or loss
                            (384 )                       (384 )
Net loss
                      (1,458,228 )                       5,694       (1,452,534 )
                                                                         
Total comprehensive loss
                                                                    (1,561,980 )
                                                                         
Balances at December 31, 2008
    79,461       795       1,217,903       2,004,115       254,535       (11,040 )     (323,545 )     31,130       3,184,933  
Shares issued under employee and director stock plans
    57             642                   6       184             826  
Stock-based compensation expense
                9,653                                     9,653  
Tax deficit from stock-based compensation
                (342 )                                   (342 )
Distribution to noncontrolling interest, net of adjustments
                                              (2,151 )     (2,151 )
Comprehensive income:
                                                                       
Currency translation adjustment
                            36,089                         36,089  
Unrealized gain on hedge instruments net of taxes
                            7,207                         7,207  
Pension prior service cost and actuarial gain or loss
                            (914 )                       (914 )
Net loss
                      (5,499 )                       4,480       (1,019 )
                                                                         
Total comprehensive income
                                                                    41,363  
                                                                         
Balances at December 31, 2009
    79,518     $ 795     $ 1,227,856     $ 1,998,616     $ 296,917       (11,034 )   $ (323,361 )   $ 33,459     $ 3,234,282  
                                                                         
 
See accompanying notes to consolidated financial statements.


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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
 
                         
    2009     2008     2007  
    (In thousands, except per share data)  
 
Cash flows from operating activities:
                       
Net (loss) earnings
  $ (1,019 )     (1,452,534 )     714,413  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                       
Impairment of goodwill and other intangibles
          1,543,397        
Restructuring
    57,412       29,617        
Depreciation and amortization
    303,004       295,054       306,437  
Deferred income taxes
    (20,579 )     69,842       (289,902 )
Loss on disposal of property, plant and equipment
    1,481       2,272       7,689  
Excess tax deficit (benefit) from stock-based compensation
    342       (334 )     (6,828 )
Stock-based compensation expense
    9,653       11,991       13,594  
Changes in operating assets and liabilities, net of acquisitions:
                       
Receivables
    102,799       118,199       127,475  
Income tax receivable
    (72,515 )            
Inventories
    276,169       102,706       20,976  
Accounts payable and accrued expenses
    11,510       (127,905 )     (58,776 )
Other assets and prepaid expenses
    17,320       (23,774 )     31,007  
Other liabilities
    (13,372 )     7,555       14,310  
                         
Net cash provided by operating activities
    672,205       576,086       880,395  
                         
Cash flows from investing activities:
                       
Additions to property, plant and equipment
    (108,925 )     (217,824 )     (163,076 )
Acquisitions, net of cash acquired
    (5,924 )     (8,276 )     (147,097 )
                         
Net cash used in investing activities
    (114,849 )     (226,100 )     (310,173 )
                         
Cash flows from financing activities:
                       
Payments on revolving line of credit
    (412,666 )     (1,448,742 )     (1,813,731 )
Proceeds from revolving line of credit
    349,571       1,270,449       1,652,993  
Net change in asset securitization borrowings
    (47,000 )     (143,000 )      
Borrowings (payments) on term loan and other debt
    6,537       (11,819 )     (373,463 )
Debt issuance costs
    (23,714 )            
Distribution to noncontrolling interest
    (4,402 )     (6,052 )     (5,318 )
Excess tax (deficit) benefit from stock-based compensation
    (342 )     334       6,828  
Change in outstanding checks in excess of cash
    5,288       (12,007 )     (43,520 )
Proceeds from stock transactions
    884       1,915       30,875  
                         
Net cash used in financing activities
    (125,844 )     (348,922 )     (545,336 )
                         
Effect of exchange rate changes on cash and cash equivalents
    6,427       2,851       1,226  
                         
Net change in cash and cash equivalents
    437,939       3,915       26,112  
Cash and cash equivalents, beginning of year
    93,519       89,604       63,492  
                         
Cash and cash equivalents, end of year
  $ 531,458       93,519       89,604  
                         
 
See accompanying notes to consolidated financial statements.


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MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
(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 U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of 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. As of December 31, 2009, the Company had invested cash of $464,936 in money market AAA rated cash investments of which $367,305 was in North America and $97,631 was in Europe.
 
(c)   Accounts Receivable and Revenue Recognition
 
The Company is principally a carpet, rugs, ceramic tile, laminate and hardwood 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.
 
Revenues, which are recorded net of taxes collected from customers, are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectability 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. Licensing revenues received from third parties for patents are recognized based on contractual agreements.
 
(d)   Inventories
 
The Company accounts for all inventories on the first-in, first-out (“FIFO”) method. Inventories are stated at the lower of cost or market (net realizable value). Cost has been determined using the FIFO method. Costs in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. 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.


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(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 Financial Accounting Standards Board (“FASB”) FASB Accounting Standards Codification Topic 350 (“ASC 350”), formerly 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 in the fourth quarter (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 considers the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management’s judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified Mohawk, Dal-Tile, Unilin Flooring, Unilin Chipboard and Melamine, and Unilin Roofing as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples.
 
When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as continued declines in spending for new construction; remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted.
 
The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the trademarks. Estimated cash flows are sensitive to changes in the economy among other things. The impairment test for indefinite lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite lived intangible assets are determined using a discounted cash flows valuation. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions are subject to the variability discussed above.
 
Intangible assets that do not have indefinite lives are amortized based on average lives, which range from 7-16 years.


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(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 based upon level two fair value hierarchy. 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.
 
(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.
 
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. Regression analysis is used to assess effectiveness of the hedging relationship and the dollar offset method is used to measure any ineffectiveness associated with the hedges. 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, general, and administrative expenses were $43,752 in 2009, $53,643 in 2008 and $56,168 in 2007.
 
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 ASC 605-50,


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formerly, FASB, Emerging Issues Task Force 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Co-op advertising expenses, a component of advertising and promotion expenses, were $3,809 in 2009, $7,359 in 2008 and $5,686 in 2007.
 
(k)   Product Warranties
 
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.
 
(l)   Impairment of Long-Lived Assets
 
The Company reviews its long-lived asset groups, which include intangible assets subject to amortization, which for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset groups may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these asset groups. If such asset groups are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal and are no longer depreciated.
 
(m)   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. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of operations. 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.
 
(n)   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 1,355, 1,083 and 656 for 2009, 2008 and 2007, respectively. For 2009 and 2008, all outstanding common stock options to purchase common shares and unvested restricted shares (units) were excluded from the calculation of diluted loss per share because their effect on net loss per common share was anti-dilutive.


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Computations of basic and diluted (loss) earnings per share are presented in the following table:
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Net earnings (loss) attributable to Mohawk Industries, Inc
  $ (5,499 )     (1,458,228 )     706,814  
                         
Weighted-average common sharesoutstanding-basic and diluted:
                       
Weighted-average common shares outstanding — basic
    68,452       68,401       68,172  
Add weighted-average dilutive potential common shares — options and RSU’s to purchase common shares, net
                320  
                         
Weighted-average common shares outstanding-diluted
    68,452       68,401       68,492  
                         
Basic earnings (loss) per share attributable to Mohawk Industries, Inc
  $ (0.08 )     (21.32 )     10.37  
                         
Diluted earnings (loss) per share attributable to Mohawk Industries, Inc
  $ (0.08 )     (21.32 )     10.32  
                         
 
(o)   Stock-Based Compensation
 
The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the ASC 718-10, formerly SFAS No 123R “Stock Compensation”. Compensation expense is generally recognized on a straight-line basis over the options estimated lives for fixed awards with ratable vesting provisions.
 
(p)   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 Equity for the years ended December 31, 2009, 2008 and 2007 are as follows:
 
                                         
    Translation
    Hedge
    SFAS
    Tax Expense
       
    Adjustment     Instruments     158     (Benefit)     Total  
 
December 31, 2007
  $ 362,028       (126 )     2,033       46       363,981  
2008 activity
    (101,935 )     (11,024 )     (384 )     3,897       (109,446 )
                                         
December 31, 2008
    260,093       (11,150 )     1,649       3,943       254,535  
2009 activity
    36,089       11,150       (914 )     (3,943 )     42,382  
                                         
December 31, 2009
  $ 296,182             735             296,917  
                                         
 
(q)   Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued ASC 820-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. ASC 820-10 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. ASC 820-10 is effective for the Company’s fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The Company’s adoption of ASC 820-10 for financial assets and liabilities on January 1, 2008 and


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non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued ASC 805-10, formerly SFAS No. 141 (revised 2007), “Business Combinations”. ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. ASC 805-10 is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of ASC 805-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements, although the adoption of ASC 805-10 will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.
 
In December 2007, the FASB issued ASC 810-10, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51”. ASC 810-10 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810-10 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810-10 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements. Upon adoption, the Company reclassified $31,130 on the condensed consolidated balance sheets from other long-term liabilities to noncontrolling interest within equity and reclassified the related net earnings to net earnings attributable to the noncontrolling interest on the consolidated statements of operations.
 
In March 2008, the FASB issued ASC 815-10, formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. ASC 815-10 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of ASC 815-10 are effective for the first quarter of 2009. The adoption of ASC 815-10 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued ASC 825-10, formerly the FASB Staff Position on FAS 107-1 and APB 28-1,Interim Disclosures About Fair Value of Financial Instruments”. ASC 825-10 requires disclosures about fair value of financial instruments in interim reporting periods of publicly-traded companies that were previously only required to be disclosed in annual financial statements. The provisions of ASC 825-10 are effective for the second quarter of 2009. The adoption of this standard on June 27, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
In May 2009, the FASB issued ASC 855-10-05, formerly SFAS No. 165, “Subsequent Events”. ASC 855-10-05 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, ASC 855-10-05 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. ASC 855-10-05 provides largely the same guidance on subsequent events which previously existed only in the auditing literature. ASC 855-10-05 is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 860, formerly SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”. ASC 860 seeks to improve the relevance,


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representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically, ASC 860 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. ASC 860 is effective for annual and quarterly reporting periods that begin after November 15, 2009. The adoption of this standard on January 1, 2010 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 810, formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. ASC 810 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. ASC 810 is effective for annual and quarterly reporting periods that begin after November 15, 2009. The adoption of this standard on January 1, 2010 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued ASC 105-10, formerly SFAS No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”. ASC 105-10 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification superseded all the existing non-SEC accounting and reporting standards upon its effective date. ASC 105-10 also replaced FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” given that once in effect, the Codification carries the same level of authority. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
(r)  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.
 
(2)   Acquisitions
 
During 2009 and 2008, the Company acquired a business in the Unilin segment for $5,604 and certain stone center assets in the Dal-Tile segment for $8,276, respectively.
 
During 2007, the Company acquired certain wood flooring assets and liabilities of Columbia Forest Products, Inc. (“Columbia”) for approximately $147,097. The acquisition included the assets of two pre-finished solid plants and one engineered wood plant in the United States and an engineered wood plant in Malaysia. The results of operations from the date of acquisition are included in the Company’s consolidated results.


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(3)   Receivables
 
                 
    2009     2008  
 
Customers, trade
  $ 633,571       722,669  
Income tax receivable
    72,515        
Other
    30,654       35,993  
                 
      736,740       758,662  
Less allowance for discounts, returns, claims and doubtful accounts
    62,809       62,378  
                 
Receivables, net
  $ 673,931       696,284  
                 
 
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
 
2007
  $ 69,799       270,993       284,482       56,310  
2008
    56,310       274,337       268,269       62,378  
2009
    62,378       205,145       204,714       62,809  
 
 
(1) Includes $1,500 in 2007 related to the Columbia 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:
 
                 
    2009     2008  
 
Finished goods
  $ 559,339       767,138  
Work in process
    84,414       104,394  
Raw materials
    249,227       296,740  
                 
Total inventories
  $ 892,981       1,168,272  
                 
 
(5)   Goodwill and Other Intangible Assets
 
The Company conducted its annual assessment in the fourth quarter of 2009 and determined the fair values of its reporting units exceeded their carrying values. As a result, no impairment was indicated. During 2008, the Company recorded a $1,543,397 impairment charge to reduce the carrying amount of the Company’s goodwill and intangible assets to their estimated fair value based upon the results of two interim impairment tests. The total impairment included $276,807 in the Mohawk segment, $531,930 in the Dal-Tile segment and $734,660 in the Unilin segment.


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The following table summarizes the components of intangible assets:
 
Goodwill:
 
                                 
    Mohawk     Dal-Tile     Unilin     Total  
 
Balances as of December 31, 2007
  $ 199,132       1,186,013       1,412,194       2,797,339  
Goodwill recognized during the year
          900       (40,691 )     (39,791 )
Impairment charge
    (199,132 )     (531,930 )     (596,363 )     (1,327,425 )
Currency translation during the year
                (30,689 )     (30,689 )
                                 
Balance as of December 31, 2008
          654,983       744,451       1,399,434  
Goodwill recognized during the year
                1,288       1,288  
Currency translation during the year
                10,406       10,406  
                                 
Balances as of December 31, 2009
  $       654,983       756,145       1,411,128  
                                 
 
During 2009, the Company recorded additional goodwill of $1,288 in the Unilin segment in a business acquisition. During 2008, the Company recorded additional goodwill of $1,742 in the Dal-Tile segment for the acquisition of certain stone center assets. In addition, during 2008, the Company reversed $842 and $40,691 of pre-acquisition tax liabilities in the Dal-Tile and Unilin segments, respectively.
 
Intangible assets:
 
         
    Tradenames  
 
Indefinite life assets not subject to amortization:
       
Balance as of December 31, 2007
  $ 707,086  
Impairment charge
    (215,972 )
Effect of translation
    (18,715 )
         
Balance as of December 31, 2008
    472,399  
Effect of translation
    5,208  
         
Balance as of December 31, 2009
  $ 477,607  
         
 
                                 
    Customer
                   
    Relationships     Patents     Other     Total  
 
Intangible assets subject to amortization:
                               
Balance as of December 31, 2007
  $ 256,092       208,691             464,783  
Intangible assets recognized during the year
    2,980                   2,980  
Amortization during year
    (49,092 )     (29,475 )           (78,567 )
Effect of translation
    (5,916 )     (7,829 )           (13,745 )
                                 
Balance as of December 31, 2008
    204,064       171,387             375,451  
Intangible assets recognized during the year
    972             1,496       2,468  
Amortization during year
    (47,175 )     (26,812 )     (68 )     (74,055 )
Effect of translation
    1,441       2,433       (3 )     3,871  
                                 
Balance as of December 31, 2009
  $ 159,302       147,008       1,425       307,735  
                                 
 
                         
    Years Ended December 31,
    2009   2008   2007
 
Amortization expense:
                       
Aggregation amortization expense
  $ 74,055       78,567       94,953  


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Estimated amortization expense for the years ending December 31, are as follows:
 
                 
2010
          $ 73,907  
2011
            71,718  
2012
            61,758  
2013
            23,353  
2014
            21,313  
 
(6)   Property, Plant and Equipment
 
Following is a summary of property, plant and equipment:
 
                 
    2009     2008  
 
Land
  $ 195,171       191,523  
Buildings and improvements
    722,533       719,806  
Machinery and equipment
    2,348,689       2,245,075  
Furniture and fixtures
    80,722       60,744  
Leasehold improvements
    54,995       47,523  
Construction in progress
    67,415       148,886  
                 
      3,469,525       3,413,557  
Less accumulated depreciation and amortization
    1,678,113       1,487,815  
                 
Net property, plant and equipment
  $ 1,791,412       1,925,742  
                 
 
Property, plant and equipment included capitalized interest of $4,469, $6,419 and $4,446 in 2009, 2008 and 2007, respectively. Depreciation expense was $223,453, $212,281 and $207,613 for 2009, 2008 and 2007, respectively. Included in the property, plant and equipment are capital leases with a cost of $37,846 and $36,208 and accumulated depreciation of $8,348 and $5,248 as of December 31, 2009 and 2008, respectively.
 
(7)  Long-Term Debt
 
On September 2, 2009, the Company entered into a $600,000 four-year, senior, secured revolving credit facility (the “ABL Facility”) in connection with the replacement of the Company’s then-existing senior, unsecured, revolving credit facility (the “Senior Unsecured Facility”). At the time of its termination, the Senior Unsecured Facility consisted of a $650,000 revolving credit facility, which was to mature on October 28, 2010. The ABL Facility provides for a maximum of $600,000 of revolving credit, subject to borrowing base availability, including limited amounts of credit in the form of letters of credit and swingline loans. The borrowing base is equal to specified percentages of eligible accounts receivable and inventories of the Company and other borrowers under the ABL Facility, which are subject to seasonal variations, less reserves established in good faith by the Administrative Agent under the ABL Facility. All obligations under the ABL Facility, and the guarantees of those obligations, are secured by a security interest in certain accounts receivable, inventories, certain deposit and securities accounts, tax refunds and other personal property (excluding intellectual property) directly relating to, or arising from, and proceeds of, any of the foregoing. In connection with the entry into the ABL Facility, the Company incurred $23,714 in debt issuance costs which will be amortized on a straight-line basis over the four-year term of the facility and recognized as interest expense in the condensed consolidated statement of operations.
 
At the Company’s election, revolving loans under the ABL Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between 3.75% and 4.25%, or (b) the higher of the prime rate, the Federal Funds rate plus 0.5%, or a daily LIBOR rate, plus an applicable margin ranging between 2.25% and 2.75%. The Company also pays a commitment fee to the Lenders under the ABL Facility on the average amount by which the aggregate commitments of the Lenders’ exceed utilization of the ABL Facility equal to 1.00% per annum during any


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quarter that this excess is 50% or more, and 0.75% per annum during any quarter that this excess is less than 50%.
 
The ABL Facility includes certain affirmative and negative covenants that impose restrictions on Mohawk’s financial and business operations, including limitations on debt, liens, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that the unutilized amount available under the ABL Facility is less than 15% of the amount available under the ABL Facility.
 
The ABL Facility is scheduled to mature on September 2, 2013 but the maturity date will accelerate to: (i) October 15, 2010 if the Company’s outstanding 5.75% senior notes due January 15, 2011 have not been repaid, refinanced, defeased or adequately reserved for by the Company, as reasonably determined by the Administrative Agent, prior to October 15, 2010, and (ii) January 15, 2012, if the Company’s outstanding 7.20% senior notes due April 15, 2012 have not been repaid, refinanced, defeased or adequately reserved for by the Company, as reasonably determined by the Administrative Agent, prior to January 15, 2012. The Company can make adequate reserves for such senior notes with unrestricted cash on hand and unutilized borrowing availability under the ABL Facility. The Company believes cash and cash equivalents and availability under the ABL Facility will be sufficient to satisfy the October 15, 2010 requirements of the ABL Facility, although there can be no assurances the Company will have adequate reserves as defined in the ABL Facility.
 
As of December 31, 2009, the amount considered used under the ABL Facility was $113,451 leaving a total of $461,871 available under the ABL Facility. The amount used under the ABL Facility is composed of $53,542 of standby letters of credit guaranteeing the Company’s industrial revenue bonds and $59,909 of standby letters of credit related to various insurance contracts and foreign vendor commitments.
 
During 2009, the Company terminated its Euro 130,000, five-year unsecured, revolving credit facility and its on-balance sheet trade accounts receivable securitization agreement, which allowed for borrowings up to $250,000 based on available accounts receivable.
 
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. Interest payable on each series of the notes is subject to adjustment if either Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“Standard & Poor’s”), or both, downgrades the rating assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $3,500 per year. Currently, the interest rates have been increased by an aggregate amount of 0.75% as a result of downgrades by Moody’s and Standard & Poor’s during 2009. These downgrades increase the Company’s interest expense by approximately $10,500 per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit ratings could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.
 
In 2002, the Company issued $400,000 aggregate principal amount of its senior 7.2% notes due 2012.


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The fair value and carrying value of our debt instruments are detailed as follows:
 
                                 
    2009     2008  
          Carrying
          Carrying
 
    Fair Value     Value     Fair Value     Value  
 
5.75% notes, payable January 15, 2011 interest payable semiannually
  $ 508,703       498,240       450,000       500,000  
7.20% senior notes, payable April 15, 2012 interest payable semiannually
    418,400       400,000       340,000       400,000  
6.125% notes, payable January 15, 2016 interest payable semiannually
    891,900       900,000       684,000       900,000  
Securitization facility, terminated June 2009
                47,000       47,000  
Five-year senior unsecured credit facility, terminated September 2009
                55,300       55,300  
Four-year senior secured credit facility, due September 2013
                       
Industrial revenue bonds, capital leases and other
    56,239       56,239       52,486       52,486  
                                 
Total long-term debt
    1,875,242       1,854,479       1,628,786       1,954,786  
Less current portion
    52,907       52,907       94,785       94,785  
                                 
Long-term debt, excluding current portion
  $ 1,822,335       1,801,572       1,534,001       1,860,001  
                                 
 
The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values.
 
The aggregate maturities of long-term debt as of December 31, 2009 are as follows:
 
         
2010
  $ 52,907  
2011
    499,790  
2012
    400,374  
2013
    439  
2014
    354  
Thereafter
    900,615  
         
    $ 1,854,479  
         
 
(8)  Accounts Payable, Accrued Expenses and Deferred Tax Liability
 
Accounts payable and accrued expenses are as follows:
 
                 
    2009     2008  
 
Outstanding checks in excess of cash
  $ 17,900       12,612  
Accounts payable, trade
    335,401       315,053  
Accrued expenses
    169,730       210,591  
Product warranties
    66,545       56,460  
Accrued interest
    52,743       45,493  
Income taxes payable
    85,699       40,798  
Deferred tax liability
    2,836       3,030  
Accrued compensation and benefits
    100,261       98,094  
                 
Total accounts payable and accrued expenses
  $ 831,115       782,131  
                 


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(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. As of December 31, 2009, the Company had no outstanding natural gas contracts. As of December 31, 2008, the Company had natural gas contracts that matured from January 2009 to December 2009 with an aggregate notional amount of approximately 2,650 MMBTU’s. The fair value of these contracts was a liability of $5,913 as of December 31, 2008. The offset to these liabilities 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 operations and was not significant for the periods reported.
 
The Company’s natural gas long-term supply agreements are accounted for under the normal purchase provision within ASC 815, formerly SFAS No. 133 and its amendments. As of December 31, 2009, the Company had no outstanding normal purchase commitments for natural gas. As of December 31, 2008, the Company had normal purchase commitments of approximately 2,026 MMBTU’s for periods maturing from January 2009 through December 2009. The contracted value of these commitments was approximately $17,151 as of December 31, 2008.
 
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 no outstanding forward contracts to purchase Mexican pesos as of December 31, 2009. The Company had forward contracts to purchase approximately 269,129 Mexican pesos as of December 31, 2008. The fair value of these contracts was a liability of $5,237 as of December 31, 2008. The aggregate U.S. dollar value of these contracts as of December 31, 2008 was approximately $23,923. The offset to these liabilities 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 operations and was not significant for the periods reported.
 
(10)   Product Warranties
 
The Company warrants certain qualitative attributes of its products for up to 50 years. The Company records a provision for estimated warranty and related costs in accrued expenses, based on historical experience and periodically adjusts these provisions to reflect actual experience.


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Product warranties are as follows:
 
                         
    2009     2008     2007  
 
Balance at beginning of year
  $ 56,460       46,187       30,712  
Warranty claims paid during the year
    (167,053 )     (81,586 )     (54,685 )
Pre-existing warranty accrual adjustment during the year(1)
    125,124              
Warranty expense during the year(1)
    52,014       91,859       67,301  
Other(2)
                2,859  
                         
Balance at end of year
  $ 66,545       56,460       46,187  
                         
 
 
(1) The increase in warranty expense in 2009 and 2008 relates primarily to certain commercial carpet tiles that were discontinued in early 2009.
 
(2) Includes $2,859 in 2007 related to the Columbia acquisition. This amount was not charged to expense.
 
(11)  Stock Options, Stock Compensation and Treasury Stock
 
The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10. Compensation expense is recognized on a straight-line basis over the options estimated lives for fixed awards with ratable vesting provisions.
 
Under the Company’s 2007 Incentive Plan (“2007 Plan”), which was approved by the Company’s stockholders on May 16, 2007, the Company reserved up to a maximum of 3,200 shares of common stock for issuance upon the grant or exercise of stock options, restricted stock, restricted stock units (“RSU’s”) and other types of awards, to directors and key employees through 2017. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and generally vest between three and five years with a 10-year contractual term. Restricted stock and RSU’s are granted with a price equal to the market price of the Company’s common stock on the date of the grant and generally vest between three and five years.
 
Additional information relating to the Company’s stock option plans follows:
 
                         
    2009     2008     2007  
 
Options outstanding at beginning of year
    1,506       1,455       2,034  
Options granted
    76       146       64  
Options exercised
    (35 )     (46 )     (588 )
Options canceled
    (66 )     (49 )     (55 )
                         
Options outstanding at end of year
    1,481       1,506       1,455  
                         
Options exercisable at end of year
    1,165       1,035       821  
                         
Option prices per share:
                       
Options granted during the year
  $ 28.37       74.47       75.10-93.65  
                         
Options exercised during the year
  $ 16.66-48.50       19.63-73.45       16.66-88.33  
                         
Options canceled during the year
  $ 19.94-93.65       16.66-93.65       22.63-93.65  
                         
Options outstanding at end of year
  $ 16.66-93.65       16.66-93.65       16.66-93.65  
                         
Options exercisable at end of year
  $ 16.66-93.65       16.66-93.65       16.66-90.97  
                         
 
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


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cash for their annual retainers. During 2009, 2008 and 2007, a total of 2, 1 and 1 shares, respectively, were awarded to the non-employee directors under the plan.
 
In addition, the Company maintains an employee incentive program that awards restricted stock on the attainment of certain service criteria. The outstanding awards related to these programs and related compensation expense was not significant for any of the years ended December 31, 2009, 2008 and 2007.
 
The Company’s Board of Directors has authorized the repurchase of up to 15,000 shares of the Company’s outstanding common stock. For the year ended December 31, 2009, 2008 and 2007 no shares of the Company’s common stock were purchased. Since the inception of the program, a total of approximately 11,512 shares have been repurchased at an aggregate cost of approximately $334,747. All of these repurchases have been financed through the Company’s operations and banking arrangements.
 
On October 31, 2005, the Company entered into a Discounted Stock Purchase Agreement (the “DSPA”) with certain members of the Unilin management team (the “Unilin Management”). The Company terminated the DSPA during the year ended December 31, 2009. Under the terms of the DSPA, the Company was obligated to make cash payments to the Unilin Management in the event that certain performance goals are satisfied. In each of the years in the five-year period ending December 31, 2010, the remaining members of the Unilin Management could earn amounts, in the aggregate, equal to the average value of 30,671 shares of the Company’s common stock over the 20 trading day period ending on December 31 of the prior year. Any failure in a given year to reach the performance goals could have been rectified, and consequently the amounts payable with respect to achieving such criteria could have been made, in any of the other years. The amount of the liability was measured each period and recognized as compensation expense in the consolidated statement of operations. No expense related to the DSPA was recognized by the Company in 2009. The Company expensed approximately $0 and $2,300 under the DSPA for the years ended December 31, 2008 and 2007, respectively.
 
The fair value of option awards is estimated on the date of grant using the Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s common stock and other factors. The Company uses historical data to estimate option exercise and forfeiture rates within the valuation model. Optionees that exhibit similar option exercise behavior are segregated into separate groups within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on U.S. Treasury yields in effect at the time of the grant for the expected term of the award.
 
                         
    2009     2008     2007  
 
Dividend yield
                 
Risk-free interest rate
    1.7 %     2.9 %     4.8 %
Volatility
    35.3 %     24.0 %     29.0 %
Expected life (years)
    5       5       6  


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A summary of the Company’s options under the 2007 Plan as of December 31, 2009, and changes during the year then ended is presented as follows:
 
                                 
                Weighted
       
                Average
       
          Weighted
    Remaining
    Aggregate
 
          Average Exercise
    Contractual
    Intrinsic
 
    Shares     Price     Term (Years)     Value  
 
Options outstanding December 31, 2008
    1,506     $ 70.98                  
Granted
    76       28.37                  
Exercised
    (35 )     24.50                  
Forfeited and expired
    (66 )     67.00                  
                                 
Options outstanding, December 31, 2009
    1,481       70.11       4.6     $ 2,768  
                                 
Vested and expected to vest as of December 31, 2009
    1,464     $ 70.20       4.6     $ 2,669  
                                 
Exercisable as of December 31, 2009
    1,165     $ 70.61       3.8     $ 1,316  
                                 
 
The weighted-average grant-date fair value of an option granted during 2009, 2008 and 2007, was $9.17, $20.26 and $33.68, respectively. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008, and 2007 was $809, $1,169 and $22,943, respectively. Total compensation expense recognized for the years ended December 31, 2009, 2008 and 2007 was $4,552 ($2,884, net of tax), $6,646 ($4,210, net of tax) and $8,827 ($6,359, net of tax), respectively, which was allocated to selling, general and administrative expenses. The remaining unamortized expense for non-vested compensation expense as of December 31, 2009 was $3,538 with a weighted average remaining life of 2.0 years.
 
The following table summarizes information about the Company’s stock options outstanding as of December 31, 2009:
 
                                         
    Outstanding     Exercisable  
    Number of
          Average
    Number of
    Average
 
Exercise Price Range
  Shares     Average Life     Price     Shares     Price  
 
Under $42.86
    150       5.2     $ 29.11       74     $ 29.86  
$42.86-$69.46
    397       2.5       58.10       397       58.10  
$69.95-$74.47
    333       5.5       73.85       221       73.54  
$74.93-$86.51
    255       5.6       82.56       199       82.84  
$87.87-$88.00
    35       5.8       87.96       28       87.96  
$88.33-$93.65
    311       5.1       88.98       246       88.63  
                                         
Total
    1,481       4.6     $ 70.11       1,165     $ 70.61  
                                         


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A summary of the Company’s RSUs under the 2007 Plan as of December 31, 2009, and changes during the year then ended is presented as follows:
 
                                 
                Weighted
       
                Average
       
                Remaining
       
          Weighted
    Contractual
    Aggregate
 
    Shares     Average Price     Term (Years)     Intrinsic Value  
 
Restricted Stock Units outstanding December 31, 2008
    187     $ 92.94                  
Granted
    204       34.77                  
Released
    (22 )     87.50                  
Forfeited
    (10 )     76.54                  
                                 
Restricted Stock Units outstanding, December 31, 2009
    359       60.69       2.8     $ 17,066  
                                 
Vested and expected to vest as of December 31, 2009
    317     $ 60.69       2.4     $ 15,111  
                                 
 
The Company recognized stock-based compensation costs related to the issuance of RSU’s of $5,009 ($3,173, net of taxes), $4,977 ($3,153, net of taxes) and $4,446 ($3,203, net of taxes) for the years ended December 31, 2009, 2008 and 2007, respectively, which has been allocated to selling, general and administrative expenses. Pre-tax unrecognized compensation expense for unvested RSU’s granted to employees, net of estimated forfeitures, was $7,988 as of December 31, 2009, and will be recognized as expense over a weighted-average period of approximately 3.4 years.
 
Additional information relating to the Company’s RSUs under the 2007 Plan is as follows:
 
                         
    2009   2008   2007
 
Restricted Stock Units outstanding, January 1
    187       137        
Granted
    204       72       144  
Released
    (22 )     (15 )      
Forfeited
    (10 )     (7 )     (7 )
                         
Restricted Stock Units outstanding, December 31
    359       187       137  
                         
Vested and expected to vest as of December 31
    317       175       121  
                         
 
(12)   Employee Benefit Plans
 
The Company has a 401(k) retirement savings plan (the “Mohawk Plan”) open to substantially all of its employees within the Mohawk segment, Dal-Tile segment and, as of January 1, 2007, certain U.S. employees of the Unilin segment, who have completed 90 days of eligible service. For the Mohawk segment, the Company contributes $0.50 for every $1.00 of employee contributions up to a maximum of 4% of the employee’s salary and an additional $0.25 for every $1.00 of employee contributions in excess of 4% of the employee’s salary up to a maximum of 6%. For the Dal-Tile and Unilin segments, the Company contributes $.50 for every $1.00 of employee contributions up to a maximum of 6% of the employee’s salary. Employee and employer contributions to the Mohawk Plan were $34,838 and $13,822 in 2009, $40,393 and $16,024 in 2008, and $43,187 and $16,946 in 2007, respectively. The Company also made a discretionary contribution to the Mohawk Plan of approximately $1,908, $4,211 and $5,500 in 2009, 2008 and 2007, respectively.
 
The Company also has various pension plans covering employees in Belgium, France, and The Netherlands (the “Non-U.S. Plans”) that it acquired with the acquisition of Unilin. Benefits under the Non-U.S. Plans depend on compensation and years of service. The Non-U.S. Plans are funded in accordance with local regulations. The Company uses December 31 as the measurement date for its Non-U.S. Plans.


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Components of the net periodic benefit cost of the Company’s Non-U.S. pension benefit plans are as follows:
 
                         
    2009     2008     2007  
 
Service cost of benefits earned
  $ 1,315       1,881       1,927  
Interest cost on projected benefit obligation
    1,352       1,245       968  
Expected return on plan assets
    (1,069 )     (993 )     (738 )
Amortization of actuarial gain
    (322 )     (29 )     (12 )
Effect of curtailments and settlements
    (200 )            
                         
Net pension expense
  $ 1,076       2,104       2,145  
                         
 
Assumptions used to determine net periodic pension expense for Non-U.S. pension plans:
 
         
    2009   2008
 
Discount rate
  6.00%-6.60%   5.00%-5.55%
Expected rate of return on plan assets
  4.50%-6.60%   4.50%-5.55%
Rate of compensation increase
  0.00%-4.00%   1.00%-5.00%
Underlying inflation rate
  2.25%   2.00%
 
The obligations, plan assets and funding status of the Non-U.S. pension plans were as follows:
 
                 
    2009     2008  
 
Change in benefit obligation:
               
Projected benefit obligation at end of prior year
  $ 20,090       22,045  
Cumulative foreign exchange effect
    374       (962 )
Service cost
    1,356       1,809  
Interest cost
    1,395       1,198  
Plan participants contributions
    763       729  
Actuarial gain (loss)
    2,588       (3,681 )
Benefits paid
    (687 )     (1,048 )
Effect of curtailment and settlement
    (411 )      
                 
Projected benefit obligation at end of year
  $ 25,468       20,090  
                 
Change in plan assets:
               
Fair value of plan assets at end of prior year
  $ 16,371       18,728  
Cumulative foreign exchange effect
    306       (817 )
Actual return on plan assets
    3,234       955  
Employer contributions
    2,059       1,861  
Benefits paid
    (687 )     (1,048 )
Plan participant contributions
    763       729  
Actual loss
          (4,037 )
Effect of settlement
    (205 )      
                 
Fair value of plan assets at end of year
  $ 21,841       16,371  
                 
Funded status of the plans:
               
Ending funded status
  $ (3,627 )     (3,719 )
                 
Net amount recognized in consolidated balance sheets:
               
Accrued expenses (current liability)
  $        
Accrued benefit liability (non-current liability)
    (3,628 )     (3,719 )
Accumulated other comprehensive gain
    (735 )     (1,649 )
                 
Net amount recognized
  $ (4,363 )     (5,368 )
                 


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The Company’s net amount recognized in other comprehensive income related to actuarial (losses) gains was $(914), $(384) and $1,215 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Assumptions used to determine the projected benefit obligation for the Company’s Non-U.S. pension plans were as follows:
 
         
    2009   2008
 
Discount rate
  5.00%   6.00%-6.60%
Rate of compensation increase
  0.00%-6.00%   1.25%-5.25%
Underlying inflation rate
  2.00%   2.25%
 
The discount rate assumptions used to account for pension obligations reflect the rates at which the Company believes these obligations will be effectively settled. In developing the discount rate, the Company evaluated input from its actuaries, including estimated timing of obligation payments and yield on investments. The rate of compensation increase for the Non-U.S. Plans is based upon the Company’s annual reviews.
 
                 
    Non-U.S. Plans
    2009   2008
 
Plans with accumulated benefit obligations in excess of plan assets:
               
Projected benefit obligation
  $ 10,251       1,118  
Accumulated benefit obligation
    8,585       889  
Fair value of plan assets
    7,907       470  
Plans with plan assets in excess of accumulated benefit obligations:
               
Projected benefit obligation
  $ 25,468       18,972  
Accumulated benefit obligation
    21,827       15,286  
Fair value of plan assets
    21,841       15,901  
 
Estimated future benefit payments for the Non-U.S. pension plans are $1,206 in 2010, $757 in 2011, $988 in 2012, $1,157 in 2013, $1,044 in 2014 and $8,019 in total for 2015-2019.
 
The Company expects to make cash contributions of $856 to its Non-U.S. pension plans in 2010.
 
The fair value of the Non-U.S. pension plan investments were estimated using market observable data. Within the hierarchy of fair value measurements, these investments represent Level 2 fair values. The fair value and percentage of each asset category of the total investments held by the plans as of December 31, 2009 and 2008 were as follows:
 
                 
    2009     2008  
 
Non-U.S. pension plans:
               
Insurance contracts
  $ 21,841       16,371  
                 
 
The Company’s investment policy:
 
                 
    2009   2008
 
Non-U.S. pension plans:
               
Insurance contracts
    100.0 %     100.0 %
                 
 
The Company’s approach to developing its expected long-term rate of return on pension plan assets combines an analysis of historical investment performance by asset class, the Company’s investment guidelines and current and expected economic fundamentals.


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(13)   Income Taxes
 
Following is a summary of earnings (loss) from continuing operations before income taxes for United States and foreign operations:
 
                         
    2009     2008     2007  
 
United States
  $ (205,737 )     (847,624 )     357,521  
Foreign
    128,024       (424,848 )     254,195  
                         
Earnings (loss) before income taxes
  $ (77,713 )     (1,272,472 )     611,716  
                         
 
Income tax expense (benefit) for the years ended December 31, 2009, 2008 and 2007 consists of the following:
 
                         
    2009     2008     2007  
 
Current income taxes:
                       
U.S. federal
  $ (78,051 )     61,186       109,810  
State and local
    1,139       8,248       8,636  
Foreign
    20,797       41,232       71,047  
                         
Total current
    (56,115 )     110,666       189,493  
                         
Deferred income taxes:
                       
U.S. federal
    18,082       (91,813 )     25,185  
State and local
    (6,931 )     (7,511 )     (26,535 )
Foreign
    (31,730 )     168,720       (290,840 )
                         
Total deferred
    (20,579 )     69,396       (292,190 )
                         
Total
  $ (76,694 )     180,062       (102,697 )
                         
 
Income tax expense (benefit) attributable to earnings (loss) before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings (loss) before income taxes as follows:
 
                         
    2009     2008     2007  
 
Income taxes at statutory rate
  $ (27,200 )     (445,365 )     214,101  
State and local income taxes, net of federal income tax benefit
    (3,874 )     (4,113 )     10,610  
Foreign income taxes
    (12,840 )     (380 )     (25,925 )
Change in valuation allowance
    12,214       276,801       630  
Intellectual property migration to Luxembourg
                (271,607 )
Goodwill impairment
          406,577        
Notional interest
    (55,956 )     (63,694 )     (36,446 )
Tax contingencies and audit settlements
    9,634       4,990       4,406  
Change in statutory tax rate
    101       (254 )      
Other, net
    1,227       5,500       1,534  
                         
    $ (76,694 )     180,062       (102,697 )
                         


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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2009 and 2008 are presented below:
 
                 
    2009     2008  
 
Deferred tax assets:
               
Accounts receivable
  $ 22,843       21,368  
Inventories
    46,536       56,622  
Accrued expenses and other
    102,665       98,284  
Deductible state tax and interest benefit
    24,801       22,579  
Intangibles
    199,660       216,047  
Foreign and state net operating losses and credits
    214,955       158,685  
                 
Gross deferred tax assets
    611,460       573,585  
Valuation allowance
    (365,944 )     (343,572 )
                 
Net deferred tax assets
    245,516       230,013  
                 
Deferred tax liabilities:
               
Inventories
    (5,089 )     (5,624 )
Plant and equipment
    (279,668 )     (273,076 )
Intangibles
    (160,429 )     (167,271 )
LIFO change in accounting method
    (12,850 )     (25,700 )
Other liabilities
    (30,144 )     (32,125 )
                 
Gross deferred tax liabilities
    (488,180 )     (503,796 )
                 
Net deferred tax liability(1)
  $ (242,664 )     (273,783 )
                 
 
 
(1) This amount includes $85 and $29 of non-current deferred tax assets which are in deferred income taxes and other non-current assets and $2,836 and $3,030 current deferred tax liabilities which are included in accounts payable and accrued expenses in the consolidated balance sheets as of December 31, 2009 and 2008, respectively.
 
Management believes it is more likely than not the Company will realize the benefits of these deductible differences, with the exception of certain carryforward deferred tax assets discussed below, based upon the expected reversal of deferred tax liabilities and the level of historic and forecasted taxable income over periods in which the deferred tax assets are deductible.
 
In accordance with ASC 350, the company is required to test goodwill and indefinite-lived assets for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred. In 2008, the Company recorded a non-cash pretax impairment charge of $1,543,397 to reduce the carrying value of goodwill and other intangibles. The tax impact was to book an expense of $406,577 related to the portion of the impaired assets that are non-deductible for tax purposes.
 
The Company evaluates its ability to realize the tax benefits associated with deferred tax assets by analyzing its forecasted taxable income using both historic and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. The valuation allowance as of December 31, 2009 and December 31, 2008 is $365,944 and $343,572, respectively. The December 31, 2009 valuation allowance relates to net operating losses and tax credits of $168,773 and intangibles of $197,171. The December 31, 2008 valuation allowance relates to net operating losses and tax credits of $127,525 and intangibles of $216,047. For 2009, the total change in the valuation allowance was an increase of $22,372, which includes an accumulated other comprehensive income change of $6,740 primarily related to foreign currency translation, and a non-P&L change of $3,418 primarily related to current year state tax credits which have a full valuation allowance.


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As of December 31, 2009, the Company has state net operating loss carryforwards and state tax credits with potential tax benefits of $53,550, net of federal income tax benefit; these carryforwards expire over various periods based on taxing jurisdiction. A valuation allowance totaling $32,473 has been recorded against these deferred tax assets as of December 31, 2009. In addition, as of December 31, 2009, the Company has net operating loss carryforwards in various foreign jurisdictions of $161,405. A valuation allowance totaling $136,300 has been recorded against these deferred tax assets as of December 31, 2009.
 
In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin, and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized as of December 31, 2007 was approximately $245,000 and the related income tax benefit recognized in the consolidated financial statements was approximately $272,000.
 
During the third quarter of 2008, the Company reassessed the need for a valuation allowance against its deferred tax assets. Actual cash flows have been less than those projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefit of the deferred tax asset related to the European step up transaction described above, as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly, the Company recorded a valuation allowance against the deferred tax asset in the amount of $252,751 during the quarter ended September 27, 2008.
 
The Company does not provide for U.S. federal and state income taxes on the cumulative undistributed earnings of its foreign subsidiaries because such earnings are permanently reinvested. As of December 31, 2009 and 2008, the Company had not provided federal income taxes on earnings of approximately $723,000 and $654,000, respectively, from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various foreign jurisdictions. These taxes may be partially offset by U.S. foreign tax credits. Determination of the amount of the unrecognized deferred US tax liability is not practical because of the complexities associated with this hypothetical calculation.
 
Tax Uncertainties
 
In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing jurisdictions. Accordingly, the Company accrues liabilities when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken in its tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with ASC 740-10, formerly FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to the Company’s consolidated results of operations or cash flow in any given quarter or annual period.
 
The Company adopted the provisions of ASC 740-10 on January 1, 2007. Upon adoption, the Company recognized no change to opening retained earnings. As of December 31, 2009, the Company’s gross amount of unrecognized tax benefits is $105,779, excluding interest and penalties. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit of $43,014 to the Company’s effective tax rate and a balance sheet adjustment of $62,765, exclusive of any benefits related to interest and penalties.


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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
                 
    2009     2008  
 
Balance at January 1
  $ 91,887       116,857  
Additions based on tax positions related to the current year
    8,678       5,610  
Additions for tax positions of prior years
    10,630       12,167  
Reductions for tax positions of prior years
          (842 )
Reductions resulting from the lapse of the statute of limitations
    (60 )     (36,436 )
Settlements with taxing authorities
    (5,562 )     (3,877 )
Effects of foreign currency translation
    206       (1,592 )
                 
Balance at December 31
  $ 105,779       91,887  
                 
 
The Company will continue to recognize interest and penalties related to unrecognized tax benefits as a component of its income tax provision. As of December 31, 2009 and 2008, the Company has $47,870 and $39,641, respectively, accrued for the payment of interest and penalties, excluding the federal tax benefit of interest deductions where applicable. During the years ending December 31, 2009, 2008 and 2007, the Company accrued interest and penalties through continuing operations of $8,228, $3,657 and $1,115, respectively.
 
The Company’s 2004-2006 federal income tax returns are currently under examination by the Internal Revenue Service. The Company expects this examination to end within the next twelve months. The Company is also protesting through the IRS Appeals division a few open issues related to the audit of its 1999 — 2003 tax years. In connection with this protest, the Company paid a $35,844 cash bond to the IRS. The Company believes it is reasonably possible that it will effectively settle all open tax years, 1999 through 2006, with the Internal Revenue Service within the next twelve months and expects to make a cash payment of approximately $33,000 (including penalties and interest). The Company believes it is reasonably possible that the balance of unrecognized tax benefits could decrease by an additional $36,277 (which includes accrued penalties and interest expense) within the next twelve months due to settlements or statutory expirations in various tax jurisdictions. Except as noted above, the Company has substantially concluded all income tax matters related to years prior to 2004.
 
(14)   Commitments and Contingencies
 
The Company is obligated under various operating leases for office and manufacturing space, machinery, and equipment. Future minimum lease payments under non-cancelable capital and operating leases (with initial or remaining lease terms in excess of one year) as of December 31:
 
                         
                Total Future
 
    Capital     Operating     Payments  
 
2010
  $ 1,611       94,340       95,951  
2011
    1,056       77,101       78,157  
2012
    457       58,505       58,962  
2013
    522       45,153       45,675  
2014
    437       37,346       37,783  
Thereafter
    696       67,005       67,701  
                         
Total payments
    4,779       379,450       384,229  
                         
Less amount representing interest
    543                  
                         
Present value of capitalized lease payments
  $ 4,236                  
                         
 
Rental expense under operating leases was $130,227, $139,103 and $123,095 in 2009, 2008 and 2007, respectively.


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The Company had approximately $58,603 and $73,928 as of December 31, 2009 and 2008, respectively, in standby letters of credit for various insurance contracts and commitments to foreign vendors that expire within two years. In addition, as of December 31, 2009 and 2008, the Company guaranteed approximately $721 and $85,640 for building leases, respectively, related to its operating facilities in France.
 
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
 
In Shirley Williams et al. v. Mohawk Industries, Inc., four plaintiffs filed a putative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia (Rome Division), 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 authorized to work in the United States, have damaged them and the other members of the putative 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 District Court in April 2004. Following appellate review of this decision, the case was returned to the District Court for further proceedings. On December 18, 2007, the plaintiffs filed a motion for class certification. On March 3, 2008, the District Court denied the plaintiffs motion for class certification. The plaintiffs then appealed the decision to the United States Court of Appeals for the 11th Circuit on March 17, 2008. On May 28, 2009, the Court of Appeals issued an order reversing the District Court’s decision and remanding the case back to the District Court for further proceedings on the class certification issue. Discovery has been stayed at the District Court since the appeal. In August 2009, the Company filed a petition for certiorari with the United States Supreme Court, which was denied in November 2009. The Company will continue to vigorously defend itself against this action.
 
In Collins & Aikman Floorcoverings, Inc., et. al. v. Interface, Inc., United States District Court for the Northern District of Georgia (Rome Division), Mohawk Industries, Inc. joined Collins & Aikman Floorcoverings, Inc. (“CAF”) and Shaw Industries Group, Inc. (“Shaw”) in suing Interface, Inc. (“Interface”) for declaratory judgments that United States Patent 6,908,656 (the “Patent”), assigned to Interface and relating to certain styles of carpet tiles, is not infringed and is invalid. Also in June 2005, in Interface, Inc., et al. v. Mohawk Industries, Inc., et. al. United States District Court for the Northern District of Georgia (Atlanta Division), Interface sued Mohawk Industries, Inc., Mohawk Carpet Corporation, and Mohawk Commercial, Inc. for allegedly infringing the Patent. Interface brought similar suits against entities affiliated with CAF and Shaw. Interface sought monetary damages as well as injunctive relief. The cases were consolidated in the United States District Court for the Northern District of Georgia (Rome Division). During the second quarter of 2009, the Company and Interface reached a settlement and the pending cases were dismissed by the District Court on June 26, 2009.
 
The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or year.
 
The Company has received partial refunds from the United States government in reference to settling custom disputes dating back to 1982. Accordingly, the Company recorded a net gain of $9,154 ($5,799 net of taxes) in other income (expense) for the year ended December 31, 2007. No refunds were received in 2009 or 2008. Additional future recoveries will be recorded as realized.
 
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


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be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on its operations, but may have an effect on a given quarter or annual period.
 
In the normal course of business, the Company has entered into various collective bargaining agreements with its workforce in Europe, Mexico and Malaysia, either locally or within its industry sector. Historically, the Company has maintained favorable relationships with its workforce and expects to do so in the future.
 
The Company recorded pre-tax business restructuring charges of $61,725 for 2009, of which $43,436 was recorded as cost of sales and $18,289 was recorded as selling, general and administrative expenses. The Company recorded pre-tax business restructuring charges of $29,670 for 2008, of which $15,687 was recorded as cost of sales and $13,983 was recorded as selling, general and administrative expenses. The charges primarily relate to the Company’s actions taken to lower its cost structure and improve the efficiency of its manufacturing and distribution operations as it adjusts to current economic conditions.
 
The activity for 2008 and 2009 is as follows:
 
                                                 
          Inventor
                Other
       
          Write-
    Lease
          Restructuring
       
    Asset Write-Downs(1)     Downs     Impairments     Severance     Costs     Total  
 
Balance at December 31, 2007
  $                                
Provisions
                                               
Mohawk segment
    7,237             12,561       1,625       816       22,239  
Dal-Tile segment
    3,124             504       1,715             5,343  
Unilin segment
    2,088 &