Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
Mohawk Industries, Inc. (“Mohawk” or the “Company”), a term which includes the Company and its subsidiaries, is a leading global flooring manufacturer that creates products to enhance residential and commercial spaces around the world. The Company's vertically integrated manufacturing and distribution processes provide competitive advantages in the production of carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring.
The consolidated financial statements include the accounts of the Company and its subsidiaries. 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, 2013
, the Company had cash of
$54,066
of which
$31,278
was held outside the United States. As of
December 31, 2012
, the Company had cash of
$477,672
of which
$438,184
was held outside the United States. As of
December 31, 2012
, the Company had invested cash of
$417,541
of which
$415,877
was invested in A-1/P-1 rated money market cash investments in Europe.
(c) Accounts Receivable and Revenue Recognition
The Company is principally a carpet, rugs, ceramic tile, laminate and hardwood flooring manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and laminate flooring products in the U.S. and to a lesser extent, Europe and Russia principally for residential and commercial use. The Company grants credit to customers, most of whom are retail-flooring dealers, home centers 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, sales allowances and doubtful accounts based upon historical bad debt and claims experience and periodic evaluations of specific customer accounts and the aging of accounts receivable. 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 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.
(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.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(f) Accounting for Business Combinations
The Company accounts for business combinations under the acquisition method of accounting which requires it to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of operations.
(g) Goodwill and Other Intangible Assets
In accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 350,
“Intangibles-Goodwill and Other,”
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 Carpet, Ceramic, Laminate and Wood Flooring, Laminate and Wood Chipboard and Melamine, and Laminate and Wood 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. During 2012, the Company adopted Accounting Standard Update No. 2011-08,
"Testing Goodwill for Impairment,"
and early adopted Accounting Standard Update No. 2012-02,
"Testing Indefinite-Lived Intangible Assets for Impairment."
As a result, beginning in 2012, the first step of the impairment tests for our indefinite lived intangible assets is a thorough assessment of qualitative factors to determine the existence of events or circumstances that would indicate that it is not more likely than not that the fair value of these assets is less than their carrying amounts. If the qualitative test indicates it is not more likely than not that the fair value of these assets is less than their carrying amounts, a quantitative assessment is not required. If a quantitative test is necessary, the second step of our impairment test involves comparing the estimated fair value of a reporting unit to its carrying amount. 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. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Intangible assets that do not have indefinite lives are amortized based on average lives, which range from
7
-
16
years.
(h) Income Taxes
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
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. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense.
(i) Financial Instruments
The Company’s financial instruments consist primarily of receivables, accounts payable, accrued expenses and long-term debt. The carrying amounts of receivables, accounts payable and accrued expenses approximate their 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.
(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
$42,627
in
2013
,
$29,175
in
2012
and
$35,847
in
2011
.
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. Co-op advertising expenses, a component of advertising and promotion expenses, were
$4,307
in
2013
,
$6,424
in
2012
and
$3,520
in
2011
.
(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
Prior to the second quarter of 2012, operations carried out in Mexico used the U.S. Dollar as the functional currency. Effective April 1, 2012, the Company changed the functional currency of its Mexico operations to the Mexican Peso. The Company believes that the completion of a second plant in Mexico and growth in sales to the local Mexican market indicated a significant change in the economic facts and circumstances that justified the change in the functional currency. The effects of the change in functional currency were not significant to the Company's consolidated financial statements.
The Company’s subsidiaries that operate outside the United States use their local currency as the functional currency. 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 accumulated other comprehensive income,
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
net. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of operations.
(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 and unvested restricted shares (units) that were not included in the diluted EPS computation because the price was greater than the average market price of the common shares for the periods presented were
0
,
891
and
1,180
for
2013
,
2012
and
2011
, respectively.
Computations of basic and diluted earnings per share from continuing operations are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Earnings from continuing operations attributable to Mohawk Industries, Inc.
|
$
|
366,681
|
|
|
250,258
|
|
|
173,922
|
|
Weighted-average common shares outstanding-basic and diluted:
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
71,773
|
|
|
68,988
|
|
|
68,736
|
|
Add weighted-average dilutive potential common shares - options and RSU’s to purchase common shares, net
|
528
|
|
|
318
|
|
|
228
|
|
Weighted-average common shares outstanding-diluted
|
72,301
|
|
|
69,306
|
|
|
68,964
|
|
Earnings per share from continuing operations attributable to Mohawk Industries, Inc.
|
|
|
|
|
|
Basic
|
$
|
5.11
|
|
|
3.63
|
|
|
2.53
|
|
Diluted
|
$
|
5.07
|
|
|
3.61
|
|
|
2.52
|
|
(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 ASC 718-10, “
Stock Compensation
”. Compensation expense is generally recognized on a straight-line basis over the awards' 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 pensions. The Company does not provide income taxes on currency translation adjustments, as earnings from foreign subsidiaries are considered to be indefinitely reinvested.
Effective January 1, 2013, the Company adopted recently issued accounting guidance that requires the Company to separately disclose, on a prospective basis, the change in each component of other comprehensive income (loss) relating to reclassification adjustments and current period other comprehensive income (loss). As the guidance relates to presentation only, the adoption did not have a material impact on the Company's results of operations, financial position or cash flows.
The changes in accumulated other comprehensive income by component, net of tax, for years ended
December 31, 2013
,
2012
and
2011
are as follows:
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Pensions (1)
|
|
Total
|
Balance as of December 31, 2010
|
$
|
176,982
|
|
|
1,115
|
|
|
178,097
|
|
Current period other comprehensive loss before reclassifications
|
(42,006
|
)
|
|
(452
|
)
|
|
(42,458
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2011
|
134,976
|
|
|
663
|
|
|
135,639
|
|
Current period other comprehensive income (loss) before reclassifications
|
25,685
|
|
|
(1,591
|
)
|
|
24,094
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2012
|
160,661
|
|
|
(928
|
)
|
|
159,733
|
|
Current period other comprehensive income before reclassifications
|
18,185
|
|
|
771
|
|
|
18,956
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2013
|
$
|
178,846
|
|
|
(157
|
)
|
|
178,689
|
|
(1) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 13).
(q) Self-Insurance Reserves
The Company is self-insured in the U.S. for various levels of general liability, auto liability, workers’ compensation and employee medical coverage. Insurance reserves, excluding workers' compensation, are calculated on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed utilizing historical claim trends. Projected settlements and incurred but not reported claims are estimated based on pending claims and historical trends and data. Though the Company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material differences in actual settlements and claims could have an adverse effect on the Company's results of operations and financial condition.
(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
Marazzi Acquisition
On
December 20, 2012
, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with LuxELIT S.á r.l., a Luxembourg limited liability company, and Finceramica S.p.A., an Italian corporation (collectively, “Sellers”), to acquire the shares of Fintiles S.p.A., an Italian corporation ("Marazzi"). On
April 3, 2013
, pursuant to the terms of the Share Purchase Agreement, the Company completed the acquisition of Marazzi for an enterprise value of
$1,522,731
, including acquired indebtedness. The Marazzi results are reflected in the Ceramic segment.
The equity value of Marazzi was paid to the Sellers in cash and in the Company's common stock (the “Shares”). The number of Shares transferred as part of the consideration was calculated using the average closing price for the Company's common stock over a 30-day trading period ending March 19, 2013.
Pursuant to the Share Purchase Agreement, the Company (i) acquired the entire issued share capital of Marazzi and (ii) acquired
$901,773
of indebtedness of Marazzi, in exchange for the following consideration:
|
|
•
|
A cash payment of
$307,052
; and
|
|
|
•
|
2,874
newly issued Shares for a value of
$313,906
.
|
The Company funded the cash portion of the Marazzi acquisition through a combination of proceeds from the
3.85%
Senior Notes (as discussed in Note 9), cash on hand and borrowings under the 2011 Senior Credit Facility. The Company incurred
$15,660
of direct transaction costs, of which
$14,199
were recorded in selling, general and administrative expenses and
$1,461
were recorded in other expense for the year ended
December 31, 2013
.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The Marazzi acquisition makes the Company a global leader in ceramic tile. The addition of Marazzi will allow the Company to expand its U.S. distribution, source ceramic tile from Europe, and provide industry leading innovation and design to all of its global ceramic customers. The acquisition will provide opportunities to improve performance by leveraging best practices, operational expertise, product innovation and manufacturing assets across the enterprise.
The following table summarizes the allocation of the aggregate purchase price of the Marazzi acquisition to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Enterprise value
|
$
|
1,522,731
|
|
Assumed indebtedness
|
(901,773
|
)
|
Consideration transferred
|
$
|
620,958
|
|
|
|
Working capital
|
$
|
428,624
|
|
Property, plant and equipment, net
|
773,594
|
|
Tradenames
|
215,357
|
|
Customer relationships
|
21,792
|
|
Equity method investments
|
32
|
|
Goodwill
|
279,083
|
|
Other long-term assets
|
18,499
|
|
Long-term debt, including current portion
|
(901,773
|
)
|
Other long-term liabilities
|
(70,090
|
)
|
Deferred tax liability
|
(137,952
|
)
|
Noncontrolling interest
|
(6,208
|
)
|
Consideration transferred
|
$
|
620,958
|
|
|
|
The Company is continuing to obtain information to complete its valuation of intangible assets, as well as to determine the value of the acquired assets and liabilities including tax assets, liabilities and other attributes. The purchase price allocation is preliminary until the Company obtains final information regarding their fair values. During the year ended December 31, 2013, the Company recorded certain immaterial measurement period adjustments to the purchase price allocation, which are reflected in the table above. Intangible assets subject to amortization of
$21,792
related to customer relationships have an estimated average life of
10 years
. In addition to the amortizable intangible assets, there is an additional
$215,357
in indefinite-lived trademark intangible assets. The goodwill of
$279,083
was allocated to the Ceramic segment. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Marazzi acquisition. These benefits include opportunities to improve the Company's ceramic performance by leveraging best practices, operational expertise, product innovation and manufacturing assets across the segment. The goodwill is not expected to be deductible for tax purposes. Marazzi contributed net sales from continuing operations of
$897,112
to the year ended
December 31, 2013
. Marazzi contributed net income from continuing operations of
$8,992
to the year ended
December 31, 2013
. The fair value of inventories acquired included a step-up in the value of inventories of approximately
$31,041
, which was charged to cost of sales in the year ended
December 31, 2013
.
In connection with the acquisition of Marazzi, the Company became a party to an off-balance sheet accounts receivable securitization facility ("Marazzi Securitization Facility") pursuant to which the Company services receivables sold to a third party. As of
December 31, 2013
, the amount utilized under the Marazzi Securitization Facility was
€15,383
. The Company is in the process of terminating this facility.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The following unaudited pro forma consolidated results of operations have been prepared as if the Marazzi acquisition occurred as of January 1, 2012 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2013
|
|
December 31, 2012
|
Net sales:
|
|
|
|
|
As reported
|
|
$
|
7,348,754
|
|
|
5,787,980
|
|
Pro forma
|
|
7,611,235
|
|
|
6,878,589
|
|
|
|
|
|
|
Net earnings from continuing operations attributable to Mohawk Industries, Inc.:
|
|
|
|
|
As reported
|
|
$
|
366,681
|
|
|
250,258
|
|
Pro forma
|
|
399,313
|
|
|
243,760
|
|
|
|
|
|
|
Basic earnings per share from continuing operations attributable to Mohawk Industries, Inc.:
|
|
|
|
|
As reported
|
|
$
|
5.11
|
|
|
3.63
|
|
Pro forma
|
|
5.51
|
|
|
3.39
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations attributable to Mohawk Industries, Inc.:
|
|
|
|
|
As reported
|
|
$
|
5.07
|
|
|
3.61
|
|
Pro forma
|
|
5.47
|
|
|
3.38
|
|
The pro forma earnings and per share results for the year ended
December 31, 2012
included amounts charged to cost of sales for the step-up to fair value in inventories of approximately
$22,242
, net of tax. The pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.
Other Acquisitions
On January 10, 2013, the Company completed its purchase of Pergo, a leading manufacturer of laminate flooring in the U.S. and the Nordic countries. The total value of the acquisition was approximately
$145,000
. Pergo complements the Company's specialty distribution network in the U.S., leverages its geographic position in Europe, expands its geographic reach to the Nordic countries and India and enhances its patent portfolio. The acquisition's results and purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition. The Company's acquisition of Pergo resulted in a goodwill allocation of
$18,456
, indefinite-lived trademark intangible assets of
$16,834
and intangible assets subject to amortization of
$15,188
. The factors contributing to the recognition of the amount of goodwill include the opportunity to optimize the assets of Pergo with the Company's existing Laminate and Wood segment assets while strengthening the design and product performance of the Pergo and Unilin brands. The Pergo results are reflected in the Laminate and Wood segment.
On May 3, 2013, the Company completed the acquisition of Spano, a Belgian chipboard manufacturer. The total value of the acquisition was approximately
$160,000
. Spano extends the Laminate and Wood segment's customer base into new channels of distribution and adds technical expertise and product knowledge that the Company can leverage. The acquisition's results and a preliminary purchase price allocation have been included in the condensed consolidated financial statements since the date of the acquisition. The Company's acquisition of Spano resulted in a preliminary goodwill allocation of
$36,639
. The factors contributing to the recognition of the amount of goodwill include the extension of the Company's customer base into new channels of distribution and the opportunity for synergies in manufacturing assets and processes, raw materials and operational efficiencies. The Spano results are reflected in the Laminate and Wood segment.
The Company invested in a Brazilian joint venture in the Laminate and Wood segment for
$7,007
in
2012
. Also in
2012
, the Company increased its equity method ownership in a Chinese joint venture from
34%
to
49%
through a restructuring
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
transaction in which the majority equity owner acquired certain assets of the joint venture. The Company purchased a non-controlling interest within the Ceramic segment for
$35,000
in
2012
. The Company acquired an Australian distribution business in the Laminate and Wood segment for
$24,097
in
2011
.
(3) Restructuring, Acquisition and Integration-Related Costs
The Company incurs costs in connection with acquiring, integrating and restructuring acquisitions and in connection with its global cost-reduction/productivity initiatives. For example:
|
|
•
|
In connection with acquisition activity, the Company typically incurs costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and
|
|
|
•
|
In connection with the Company's cost-reduction/productivity initiatives, it typically incurs costs and charges associated with site closings and other facility rationalization actions and workforce reductions.
|
Restructuring, acquisition transaction and integration-related costs consisted of the following during the year ended
December 31, 2013
,
2012
and
2011
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Cost of sales
|
|
|
|
|
|
|
|
Restructuring costs
|
|
$
|
36,949
|
|
(a)
|
14,816
|
|
(b)
|
17,546
|
|
(b)
|
Acquisition integration-related costs
|
|
12,202
|
|
|
—
|
|
|
—
|
|
|
Restructuring and integration-related costs
|
|
$
|
49,151
|
|
|
14,816
|
|
|
17,546
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
Restructuring costs
|
|
$
|
32,540
|
|
(a)
|
3,748
|
|
(b)
|
5,663
|
|
(b)
|
Acquisition transaction-related costs
|
|
14,199
|
|
|
—
|
|
|
—
|
|
|
Acquisition integration-related costs
|
|
16,049
|
|
|
—
|
|
|
—
|
|
|
Restructuring, acquisition and integration-related costs
|
|
$
|
62,788
|
|
|
3,748
|
|
|
5,663
|
|
|
|
|
|
|
|
|
|
|
(a) The restructuring costs for 2013 primarily relate to the Company’s actions taken to lower its cost structure and improve efficiencies of manufacturing operations and administrative functions, as well as actions related to the Company's acquisition of Pergo, Marazzi and Spano.
(b) The restructuring costs for 2012 and 2011 primarily relate to the Company's actions taken to lower its cost structure and improve efficiencies of manufacturing and distribution operations as the Company adjusted to changing economic conditions.
In addition,
$1,481
of acquisition and integration-related costs was recorded in other expense for the year ended
December 31, 2013
.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The restructuring activity for the
twelve months ended
December 31, 2013
and
2012
, respectively is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
impairments
|
|
Asset write-downs
|
|
Severance
|
|
Other
restructuring
costs
|
|
Total
|
Balance as of December 31, 2011
|
$
|
10,956
|
|
|
—
|
|
|
2,378
|
|
|
1,511
|
|
|
14,845
|
|
Provision - Carpet segment
|
—
|
|
|
6,687
|
|
|
4,069
|
|
|
(252
|
)
|
|
10,504
|
|
Provision - Ceramic segment
|
373
|
|
|
3,727
|
|
|
2,009
|
|
|
—
|
|
|
6,109
|
|
Provision - Laminate and Wood segment
|
—
|
|
|
138
|
|
|
1,775
|
|
|
38
|
|
|
1,951
|
|
Cash payments
|
(3,872
|
)
|
|
—
|
|
|
(7,333
|
)
|
|
(1,297
|
)
|
|
(12,502
|
)
|
Non-cash items
|
—
|
|
|
(10,552
|
)
|
|
—
|
|
|
—
|
|
|
(10,552
|
)
|
Balance as of December 31, 2012
|
7,457
|
|
|
—
|
|
|
2,898
|
|
|
—
|
|
|
10,355
|
|
Provision - Carpet segment
|
1,320
|
|
|
1,024
|
|
|
10,777
|
|
|
708
|
|
|
13,829
|
|
Provision - Ceramic segment
|
—
|
|
|
777
|
|
|
9,372
|
|
|
11,210
|
|
|
21,359
|
|
Provision - Laminate and Wood segment
|
—
|
|
|
—
|
|
|
20,371
|
|
|
13,008
|
|
|
33,379
|
|
Provision - Corporate
|
—
|
|
|
—
|
|
|
922
|
|
|
—
|
|
|
922
|
|
Cash payments
|
(2,873
|
)
|
|
—
|
|
|
(26,196
|
)
|
|
(13,199
|
)
|
|
(42,268
|
)
|
Non-cash items
|
—
|
|
|
(1,801
|
)
|
|
—
|
|
|
(11,727
|
)
|
|
(13,528
|
)
|
Balance as of December 31, 2013
|
$
|
5,904
|
|
|
—
|
|
|
18,144
|
|
|
—
|
|
|
24,048
|
|
The Company expects the remaining lease impairments, severance and other restructuring costs to be paid over the next
four
years.
(4) Discontinued Operations
On
January 22, 2014
, the Company sold a non-core sanitary ware business acquired as part of the Marazzi acquisition because the Company did not believe the business was consistent with its long-term strategy. The Company determined that the business meets the definition of discontinued operations. Sales attributable to discontinued operations for the year ended
December 31, 2013
were immaterial. The loss on sale of
$16,569
(
$15,651
, net of tax) related to the disposition of the business was recorded in discontinued operations for the year ended
December 31, 2013
.
(5) Receivables
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
Customers, trade
|
$
|
1,076,824
|
|
|
691,553
|
|
Income tax receivable
|
7,590
|
|
|
—
|
|
Other
|
55,498
|
|
|
25,793
|
|
|
1,139,912
|
|
|
717,346
|
|
Less allowance for discounts, returns, claims and doubtful accounts
|
77,037
|
|
|
37,873
|
|
Receivables, net
|
$
|
1,062,875
|
|
|
679,473
|
|
The following table reflects the activity of allowances for discounts, returns, claims and doubtful accounts for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning
of year
|
|
Acquisitions
|
|
Additions
charged to
costs and
expenses
|
|
Deductions(1)
|
|
Balance
at end
of year
|
2011
|
$
|
45,755
|
|
|
—
|
|
|
161,073
|
|
|
163,123
|
|
|
43,705
|
|
2012
|
43,705
|
|
|
—
|
|
|
180,616
|
|
|
186,448
|
|
|
37,873
|
|
2013
|
37,873
|
|
|
36,992
|
|
|
197,973
|
|
|
195,801
|
|
|
77,037
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
|
|
(1)
|
Represents charge-offs, net of recoveries.
|
(6) Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
Finished goods
|
$
|
1,039,478
|
|
|
695,606
|
|
Work in process
|
129,080
|
|
|
103,685
|
|
Raw materials
|
403,767
|
|
|
334,445
|
|
Total inventories
|
$
|
1,572,325
|
|
|
1,133,736
|
|
(7) Goodwill and Other Intangible Assets
The Company conducted its annual impairment assessment in the fourth quarter of
2013
and determined the fair values of its reporting units and trademarks exceeded their carrying values. As a result, no impairment was indicated.
The following table summarizes the components of intangible assets:
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carpet
|
|
Ceramic
|
|
Laminate and Wood
|
|
Total
|
Balances as of December 31, 2011
|
|
|
|
|
|
|
|
Goodwill
|
$
|
199,132
|
|
|
1,186,913
|
|
|
1,316,555
|
|
|
2,702,600
|
|
Accumulated impairments losses
|
(199,132
|
)
|
|
(531,930
|
)
|
|
(596,363
|
)
|
|
(1,327,425
|
)
|
|
—
|
|
|
654,983
|
|
|
720,192
|
|
|
1,375,175
|
|
Currency translation during the year
|
—
|
|
|
—
|
|
|
10,596
|
|
|
10,596
|
|
Balances as of December 31, 2012
|
|
|
|
|
|
|
|
Goodwill
|
199,132
|
|
|
1,186,913
|
|
|
1,327,151
|
|
|
2,713,196
|
|
Accumulated impairments losses
|
(199,132
|
)
|
|
(531,930
|
)
|
|
(596,363
|
)
|
|
(1,327,425
|
)
|
|
—
|
|
|
654,983
|
|
|
730,788
|
|
|
1,385,771
|
|
Goodwill recognized during the year
|
—
|
|
|
279,083
|
|
|
55,095
|
|
|
334,178
|
|
Currency translation during the year
|
—
|
|
|
(6,184
|
)
|
|
22,327
|
|
|
16,143
|
|
Balances as of December 31, 2013
|
|
|
|
|
|
|
|
Goodwill
|
199,132
|
|
|
1,459,812
|
|
|
1,404,573
|
|
|
3,063,517
|
|
Accumulated impairments losses
|
(199,132
|
)
|
|
(531,930
|
)
|
|
(596,363
|
)
|
|
(1,327,425
|
)
|
|
$
|
—
|
|
|
927,882
|
|
|
808,210
|
|
|
1,736,092
|
|
During 2013, the Company's acquisition of Pergo resulted in a goodwill allocation of
$18,456
. Also during 2013, the Company's acquisition of Marazzi and Spano resulted in preliminary goodwill allocations of
$279,083
and
$36,639
, respectively.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Intangible assets:
|
|
|
|
|
|
Tradenames
|
Indefinite life assets not subject to amortization:
|
|
Balance as of December 31, 2011
|
$
|
450,432
|
|
Currency translation during the year
|
5,071
|
|
Balance as of December 31, 2012
|
455,503
|
|
Intangible assets acquired during the year
|
232,191
|
|
Currency translation during the year
|
12,898
|
|
Balance as of December 31, 2013
|
$
|
700,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
Patents
|
|
Other
|
|
Total
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
Balances as of December 31, 2011
|
$
|
64,958
|
|
|
88,544
|
|
|
1,166
|
|
|
154,668
|
|
Amortization during the year
|
(38,595
|
)
|
|
(18,747
|
)
|
|
(121
|
)
|
|
(57,463
|
)
|
Currency translation during the year
|
(153
|
)
|
|
1,234
|
|
|
10
|
|
|
1,091
|
|
Balances as of December 31, 2012
|
26,210
|
|
|
71,031
|
|
|
1,055
|
|
|
98,296
|
|
Intangible assets acquired during the year
|
21,792
|
|
|
15,188
|
|
|
—
|
|
|
36,980
|
|
Amortization during the year
|
(6,456
|
)
|
|
(19,336
|
)
|
|
(458
|
)
|
|
(26,250
|
)
|
Currency translation during the year
|
(548
|
)
|
|
2,188
|
|
|
344
|
|
|
1,984
|
|
Balances as of December 31, 2013
|
$
|
40,998
|
|
|
69,071
|
|
|
941
|
|
|
111,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Cost
|
Acquisitions
|
Currency translation
|
Accumulated amortization
|
Net Value
|
Customer Relationships
|
$
|
351,873
|
|
21,792
|
|
(548
|
)
|
332,119
|
|
40,998
|
|
Patents
|
280,623
|
|
15,188
|
|
2,188
|
|
228,928
|
|
69,071
|
|
Other
|
1,489
|
|
—
|
|
344
|
|
892
|
|
941
|
|
Total
|
$
|
633,985
|
|
36,980
|
|
1,984
|
|
561,939
|
|
111,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Cost
|
Currency translation
|
Accumulated amortization
|
Net Value
|
Customer Relationships
|
$
|
347,447
|
|
4,426
|
|
325,663
|
|
26,210
|
|
Patents
|
275,178
|
|
5,445
|
|
209,592
|
|
71,031
|
|
Other
|
1,478
|
|
11
|
|
434
|
|
1,055
|
|
Total
|
$
|
624,103
|
|
9,882
|
|
535,689
|
|
98,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Amortization expense
|
$
|
26,250
|
|
|
57,463
|
|
|
70,364
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Estimated amortization expense for the years ending December 31 are as follows:
|
|
|
|
|
2014
|
$
|
25,225
|
|
2015
|
22,714
|
|
2016
|
20,025
|
|
2017
|
18,266
|
|
2018
|
8,290
|
|
(8) Property, Plant and Equipment
Following is a summary of property, plant and equipment:
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
Land
|
$
|
325,976
|
|
|
178,110
|
|
Buildings and improvements
|
1,059,136
|
|
|
730,668
|
|
Machinery and equipment
|
3,166,457
|
|
|
2,550,779
|
|
Furniture and fixtures
|
115,954
|
|
|
98,519
|
|
Leasehold improvements
|
60,289
|
|
|
54,880
|
|
Construction in progress
|
222,337
|
|
|
145,368
|
|
|
4,950,149
|
|
|
3,758,324
|
|
Less accumulated depreciation and amortization
|
2,248,406
|
|
|
2,065,472
|
|
Net property, plant and equipment
|
$
|
2,701,743
|
|
|
1,692,852
|
|
Additions to property, plant and equipment included capitalized interest of
$8,167
,
$4,577
and
$6,197
in
2013
,
2012
and
2011
, respectively. Depreciation expense was
$276,432
,
$217,393
and
$220,580
for
2013
,
2012
and
2011
, respectively. Included in the property, plant and equipment are capital leases with a cost of
$7,207
and
$7,219
and accumulated depreciation of
$5,817
and
$5,581
as of
December 31, 2013
and
2012
, respectively.
(9) Long-Term Debt
Senior Credit Facilities
On
July 8, 2011
, the Company entered into a
$900,000
,
5
-year, senior, secured revolving credit facility (the "2011 Senior Credit Facility"). On
January 20, 2012
, the Company entered into an amendment to the 2011 Senior Credit Facility that provided for an incremental term loan facility in the aggregate principal amount of
$150,000
. On
September 25, 2013
, the Company entered into a
$1,000,000
,
5
-year, senior revolving credit facility (the "2013 Senior Credit Facility") and terminated the 2011 Senior Credit Facility, including the term loan, which was originally set to mature on
July 8, 2016
. No early termination penalties were incurred as a result of the termination.
The 2011 Senior Credit Facility provided for a maximum of
$900,000
of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of
$8,285
in connection with its 2011 Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$12,277
related to the Company’s prior senior, secured revolving credit facility, were being amortized over the term of the 2011 Senior Credit Facility.
On
January 20, 2012
, the Company entered into an amendment to the 2011 Senior Credit Facility that provided for an incremental term loan facility in the aggregate principal amount of
$150,000
. The Company paid financing costs of
$1,018
in connection with the amendment to its 2011 Senior Credit Facility. These costs were deferred and were being amortized over the remaining term of the 2011 Senior Credit Facility. The incremental term loan facility provided for
eight
scheduled quarterly principal payments of
$1,875
, with the first such payment due on June 30, 2012, followed by
four
scheduled quarterly principal payments of
$3,750
, with remaining quarterly principal payments of
$5,625
prior to maturity.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
At the Company’s election, revolving loans under the 2011 Senior Credit Facility bore interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between
1.25%
and
2.0%
, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus
0.5%
, and a monthly LIBOR rate plus
1.0%
, plus an applicable margin ranging between
0.25%
and
1.0%
. The Company also paid a commitment fee to the lenders under the 2011 Senior Credit Facility on the average amount by which the aggregate commitments of the lenders exceeded utilization of the 2011 Senior Credit Facility ranging from
0.25%
to
0.4%
per annum. The applicable margin and the commitment fee were determined based on the Company’s Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increased).
All obligations of the Company and the other borrowers under the 2011 Senior Credit Facility were required to be guaranteed by all of the Company’s material domestic subsidiaries, and all obligations of borrowers that were foreign subsidiaries were guaranteed by those foreign subsidiaries of the Company which the Company designated as guarantors.
The 2011 Senior Credit Facility included certain affirmative and negative covenants that imposed restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company’s business. Many of these limitations were subject to numerous exceptions. The Company was also required to maintain a Consolidated Interest Coverage Ratio of at least
3.0
to
1.0
and a Consolidated Net Leverage Ratio of no more than
3.75
to
1.0
, each as of the last day of any fiscal quarter, as defined in the 2011 Senior Credit Facility. The 2011 Senior Credit Facility also contained customary representations and warranties and events of default, subject to customary grace periods.
The 2013 Senior Credit Facility provides for a maximum of
$1,000,000
of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans and is scheduled to mature on
September 25, 2018
. The Company paid financing costs of
$1,836
in connection with its 2013 Senior Credit Facility. These costs were deferred and, along with unamortized costs of
$11,440
related to the Company’s 2011 Credit Facility, are being amortized over the term of the 2013 Senior Credit Facility.
At the Company's election, revolving loans under the 2013 Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, 3 or 6 month periods, as selected by the Company, plus an applicable margin ranging between
1.00%
and
1.75%
, or (b) the higher of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus
0.5%
, and a monthly LIBOR rate plus
1.0%
, plus an applicable margin ranging between
0.00%
and
0.75%
. The Company also pays a commitment fee to the Lenders under the 2013 Senior Credit Facility on the average amount by which the aggregate commitments of the Lenders' exceed utilization of the 2013 Senior Credit Facility ranging from
0.125%
to
0.25%
per annum. The applicable margins and the commitment fee are determined based on whichever of the Company's Consolidated Net Leverage Ratio or its senior unsecured debt rating (or if not available, corporate family rating) results in the lower applicable margins and commitment fee (with applicable margins and the commitment fee increasing as that ratio increases or those ratings decline, as applicable).
The obligations of the Company and its subsidiaries in respect of the 2013 Senior Credit Facility are unsecured.
All obligations of the Company and the other Borrowers under the 2013 Senior Credit Facility are required to be guaranteed by all of the Company's material domestic subsidiaries and all obligations of Borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.
If at any time (a) either (i) the Company's corporate family rating or senior unsecured rating, whichever is in effect from Moody's Investors Service, Inc. (the “Moody's Rating”) is Baa3 or better (with a stable outlook or better) and the Company's corporate rating from Standard & Poor's Financial Services LLC (the “S&P Rating”) is BB+ or better (with a stable outlook or better) or (ii) the Moody's Rating is Ba1 or better (with a stable outlook or better) and the S&P Rating is BBB- or better (with a stable outlook or better) and (b) no default or event of default shall have occurred and be continuing, then upon the Company's request, the foregoing guarantees will be automatically released. The Company is required to reinstate such guarantees after having been released if: (a) both (i) the Moody's Rating is Ba2 and (ii) the S&P Rating is BB, (b) (i) the Moody's Rating is Ba3 or lower and (ii) the S&P Rating is below BBB- (with a stable outlook or better) or (c) (i) the Moody's Rating is below Baa3 (with a stable outlook or better) and (ii) the S&P Rating is BB- or lower.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The 2013 Senior Credit Facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations, including limitations on liens, indebtedness, investments, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of the Company's business. Many of these limitations are subject to numerous exceptions. The Company is also required to maintain a Consolidated Interest Coverage Ratio of at least
3.0
to 1.0 and a Consolidated Net Leverage Ratio of no more than
3.75
to 1.0, each as of the last day of any fiscal quarter.
The 2013 Senior Credit Facility also contains customary representations and warranties and events of default, subject to customary grace periods.
The 2013 Senior Credit Facility is scheduled to mature on
September 25, 2018
. However, the maturity date will accelerate, resulting in the acceleration of any unamortized deferred financing costs, to
October 16, 2015
, if on that date any of the Company's
6.125%
notes due
January 15, 2016
remains outstanding and the Company has not delivered to the Administrative Agent a certificate demonstrating that, after giving pro forma effect to the repayment in cash in full on that date of all of the
6.125%
notes that remain outstanding, the amount the Company would be permitted to draw under the 2013 Senior Credit Facility, together with the aggregate consolidated amount of unrestricted cash and cash equivalents of the Company, would exceed
$200,000
. While there can be no assurance, the Company currently believes that if any of the
6.125%
notes remains outstanding on
October 16, 2015
, the amount the Company would be permitted to draw under the 2013 Senior Credit Facility, together with the aggregate consolidated amount of the Company’s unrestricted cash and cash equivalents, would exceed
$200,000
on
October 16, 2015
.
As of
December 31, 2013
, the amount utilized under the 2013 Senior Credit Facility was
$458,541
resulting in a total of
$541,459
available under the 2013 Senior Credit Facility. The amount utilized included
$364,005
of borrowings,
$46,823
of standby letters of credit guaranteeing the Company’s industrial revenue bonds and
$47,713
of standby letters of credit related to various insurance contracts and foreign vendor commitments.
Senior Notes
On January 31, 2013, the Company issued
$600,000
aggregate principal amount of
3.85%
Senior Notes due
February 1, 2023
. The Company paid financing costs of
$6,000
in connection with the
3.85%
Senior Notes. These costs were deferred and are being amortized over the term of the
3.85%
Senior Notes.
On January 17, 2006, the Company issued
$900,000
aggregate principal amount of
6.125%
notes due
January 15, 2016
. Interest payable on these notes is subject to adjustment if either Moody’s or S&P, or both, upgrades or downgrades the rating assigned to the notes. Each rating agency downgrade results in a
0.25%
increase in the interest rate, subject to a maximum increase of
1%
per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each
0.25%
increase in the interest rate of these notes would increase the Company’s interest expense by approximately
$63
per quarter per
$100,000
of outstanding notes. In 2009, interest rates increased by an aggregate amount of
75
basis points as a result of downgrades by Moody’s and S&P. In the first quarter of 2012, interest rates decreased by
50
basis points as a result of the upgrades from S&P and Moody’s. In the first quarter of 2013, interest rates decreased by an additional
25
basis points as a result of an upgrade by Moody's. Accordingly, the current rate in effect is
6.125%
. Any future downgrades in the Company’s credit ratings could 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
7.20%
notes due
April 15, 2012
. During 2011, the Company repurchased
$63,730
of its senior
7.20%
notes, at an average price equal to
102.72%
of the principal amount. On April 16, 2012, the Company repaid the remaining
$336,270
principal amount of outstanding senior
7.20%
notes, together with accrued interest of
$12,106
, at maturity using available borrowings under its 2011 Senior Credit Facility.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Accounts Receivable Securitization
On December 19, 2012, the Company entered into a
three
-year on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to
$300,000
based on available accounts receivable and is secured by the Company's U.S. trade accounts receivable. Borrowings under the Securitization Facility bear interest at commercial paper interest rates, in the case of lenders that are commercial paper conduits, or LIBOR, in the case of lenders that are not commercial paper conduits, in each case, plus an applicable margin of
0.75%
per annum. The Company also pays a commitment fee at a per annum rate of
0.30%
on the unused amount of each lender's commitment. At
December 31, 2013
, the amount utilized under the Securitization Facility was
$300,000
.
The fair value and carrying value of the Company’s debt instruments are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
3.85% senior notes, payable February 1, 2023 interest payable semiannually
|
$
|
569,400
|
|
|
600,000
|
|
|
—
|
|
|
—
|
|
6.125% notes, payable January 15, 2016 interest payable semiannually
|
983,700
|
|
|
900,000
|
|
|
1,011,600
|
|
|
900,000
|
|
Five-year senior secured credit facility, due July 8, 2016
|
—
|
|
|
—
|
|
|
153,875
|
|
|
153,875
|
|
Five-year senior secured credit facility, due September 25, 2018
|
364,005
|
|
|
364,005
|
|
|
—
|
|
|
—
|
|
Securitization facility
|
300,000
|
|
|
300,000
|
|
|
280,000
|
|
|
280,000
|
|
Industrial revenue bonds, capital leases and other
|
96,003
|
|
|
96,003
|
|
|
49,067
|
|
|
49,067
|
|
Total long-term debt
|
2,313,108
|
|
|
2,260,008
|
|
|
1,494,542
|
|
|
1,382,942
|
|
Less current portion
|
127,218
|
|
|
127,218
|
|
|
55,213
|
|
|
55,213
|
|
Long-term debt, less current portion
|
$
|
2,185,890
|
|
|
2,132,790
|
|
|
1,439,329
|
|
|
1,327,729
|
|
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, 2013
are as follows:
|
|
|
|
|
2014
|
$
|
127,218
|
|
2015
|
301,065
|
|
2016
|
900,918
|
|
2017
|
1,096
|
|
2018
|
325,793
|
|
Thereafter
|
603,918
|
|
|
$
|
2,260,008
|
|
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(10) Accounts Payable, Accrued Expenses and Deferred Tax Liability
Accounts payable and accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
Outstanding checks in excess of cash
|
$
|
18,012
|
|
|
25,480
|
|
Accounts payable, trade
|
631,732
|
|
|
387,871
|
|
Accrued expenses
|
273,230
|
|
|
180,039
|
|
Product warranties
|
35,818
|
|
|
32,930
|
|
Accrued interest
|
35,618
|
|
|
26,843
|
|
Deferred tax liability
|
11,235
|
|
|
6,309
|
|
Income taxes payable
|
1,095
|
|
|
2,074
|
|
Accrued compensation and benefits
|
186,853
|
|
|
111,890
|
|
Total accounts payable and accrued expenses
|
$
|
1,193,593
|
|
|
773,436
|
|
|
|
|
|
(11) 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.
Product warranties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Balance at beginning of year
|
$
|
32,930
|
|
|
30,144
|
|
|
37,265
|
|
Acquisitions
|
3,389
|
|
|
—
|
|
|
—
|
|
Warranty claims paid during the period
|
(52,011
|
)
|
|
(55,314
|
)
|
|
(57,163
|
)
|
Pre-existing warranty accrual adjustments during the year
|
—
|
|
|
—
|
|
|
4,473
|
|
Warranty expense during the period
|
51,510
|
|
|
58,100
|
|
|
45,569
|
|
Balance at end of year
|
$
|
35,818
|
|
|
32,930
|
|
|
30,144
|
|
(12) Stock-Based Compensation
The Company recognizes compensation expense for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10. Compensation expense is recognized on a straight-line basis over the options’ or other awards’ estimated lives for fixed awards with ratable vesting provisions.
Under the Company’s 2007 Incentive Plan (“2007 Plan”), the Company's principal stock compensation plan prior to May 9, 2012, the Company reserved up to a maximum of
3,200
shares of common stock for issuance upon the grant or exercise of stock options, restricted stock, restricted stock units (“RSUs”) and other types of awards, to directors and key employees through
December 31, 2022
. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five
years with a
10
-year contractual term. Restricted stock and RSUs are granted with a price equal to the market price of the Company’s common stock on the date of the grant and generally vest between
three
and
five
years. On May 9, 2012, the Company's stockholders approved the 2012 Long-Term Incentive Plan (“2012 Plan”), which allows the Company to reserve up to a maximum of
3,200
shares of common stock for issuance upon the grant or exercise of awards under the 2012 Plan. No additional awards may be granted under the 2007 Plan after May 9, 2012.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Additional information relating to the Company’s stock option plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Options outstanding at beginning of year
|
995
|
|
|
1,305
|
|
|
1,371
|
|
Options granted
|
—
|
|
|
83
|
|
|
76
|
|
Options exercised
|
(561
|
)
|
|
(277
|
)
|
|
(82
|
)
|
Options forfeited and expired
|
(9
|
)
|
|
(116
|
)
|
|
(60
|
)
|
Options outstanding at end of year
|
425
|
|
|
995
|
|
|
1,305
|
|
Options exercisable at end of year
|
343
|
|
814
|
|
|
1,106
|
|
Option prices per share:
|
|
|
|
|
|
Options granted during the year
|
$
|
—
|
|
|
66.14
|
|
|
57.34
|
|
Options exercised during the year
|
$ 28.37-93.65
|
|
|
28.37-88.33
|
|
|
28.37-63.14
|
|
Options forfeited and expired during the year
|
$ 48.50-88.33
|
|
|
46.80-93.65
|
|
|
28.37-93.65
|
|
Options outstanding at end of year
|
$ 28.37-93.65
|
|
|
28.37-93.65
|
|
|
28.37-93.65
|
|
Options exercisable at end of year
|
$ 28.37-93.65
|
|
|
28.37-93.65
|
|
|
28.37-93.65
|
|
During
2013
,
2012
and
2011
, a total of
3
,
2
and
3
shares, respectively, were awarded to the non-employee directors in lieu of cash for their annual retainers.
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, 2013
,
2012
or
2011
.
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, 2013
, the Company repurchased approximately
1
share at an average price of
$123.16
in connection withe the exercise of stock options under the Company's 2012 Incentive Plan. For the years ended
December 31, 2012
and
2011
,
no
shares of the Company’s common stock were purchased. Since the inception of the program, a total of approximately
11,519
shares have been repurchased at an aggregate cost of approximately
$335,236
. All of these repurchases have been financed through the Company’s operations and banking arrangements.
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.
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Risk-free interest rate
|
—
|
%
|
|
1.0
|
%
|
|
2.0
|
%
|
Volatility
|
—
|
%
|
|
47.1
|
%
|
|
48.1
|
%
|
Expected life (years)
|
0
|
|
|
5
|
|
|
5
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
A summary of the Company’s options under the 2002, 2007 and 2012 Plans as of
December 31, 2013
, and changes during the year then ended is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic
value
|
Options outstanding, December 31, 2012
|
995
|
|
|
$
|
74.87
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(561
|
)
|
|
77.70
|
|
|
|
|
|
Forfeited and expired
|
(9
|
)
|
|
58.22
|
|
|
|
|
|
Options outstanding, December 31, 2013
|
425
|
|
|
$
|
71.50
|
|
|
4.4
|
|
$
|
32,899
|
|
Vested and expected to vest as of December 31, 2013
|
423
|
|
|
$
|
71.54
|
|
|
4.3
|
|
$
|
32,729
|
|
Exercisable as of December 31, 2013
|
343
|
|
|
$
|
73.60
|
|
|
3.5
|
|
$
|
25,837
|
|
The weighted-average grant-date fair value of an option granted during
2013
,
2012
and
2011
was
$0
,
$28.71
and
$25.39
, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2013
,
2012
, and
2011
was
$20,101
,
$4,226
and
$1,148
, respectively. Total compensation expense recognized for the years ended
December 31, 2013
,
2012
and
2011
was
$1,366
(
$865
, net of tax),
$2,176
(
$1,378
, net of tax) and
$1,885
(
$1,194
, 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, 2013
was
$992
with a weighted average remaining life of
1.1
years.
The following table summarizes information about the Company’s stock options outstanding as of
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Exercise price range
|
Number of
shares
|
|
Average
life
|
|
Average
price
|
|
Number of
shares
|
|
Average
price
|
Under $46.80
|
38
|
|
|
5.6
|
|
$
|
37.53
|
|
|
34
|
|
|
$
|
37.52
|
|
$57.34-$57.34
|
73
|
|
|
7.2
|
|
57.34
|
|
|
53
|
|
|
57.34
|
|
$66.14-$66.14
|
82
|
|
|
8.1
|
|
66.14
|
|
|
23
|
|
|
66.14
|
|
$69.95-$81.90
|
107
|
|
|
2.0
|
|
77.94
|
|
|
107
|
|
|
77.94
|
|
$83.12-$88.33
|
99
|
|
|
1.6
|
|
86.38
|
|
|
99
|
|
|
86.38
|
|
$89.46-$93.65
|
26
|
|
|
3.1
|
|
93.57
|
|
|
27
|
|
|
93.57
|
|
Total
|
425
|
|
|
4.4
|
|
$
|
71.50
|
|
|
343
|
|
|
$
|
73.60
|
|
A summary of the Company’s RSUs under the 2007 and 2012 Plans as of
December 31, 2013
, and changes during the year then ended is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
average price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic value
|
Restricted Stock Units outstanding, December 31, 2012
|
605
|
|
|
$
|
57.87
|
|
|
|
|
|
Granted
|
301
|
|
|
110.14
|
|
|
|
|
|
Released
|
(152
|
)
|
|
104.27
|
|
|
|
|
|
Forfeited
|
(21
|
)
|
|
77.73
|
|
|
|
|
|
Restricted Stock Units outstanding, December 31, 2013
|
733
|
|
|
$
|
78.62
|
|
|
2.2
|
|
$
|
109,168
|
|
Expected to vest as of December 31, 2013
|
683
|
|
|
|
|
|
2.1
|
|
$
|
101,764
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The Company recognized stock-based compensation costs related to the issuance of RSU’s of
$16,945
(
$10,735
, net of taxes),
$11,887
(
$7,530
, net of taxes) and
$4,262
(
$2,700
, net of taxes) for the years ended
December 31, 2013
,
2012
and
2011
, 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
$30,124
as of
December 31, 2013
, and will be recognized as expense over a weighted-average period of approximately
2.6
years.
Additional information relating to the Company’s RSUs under the 2007 and 2012 Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Restricted Stock Units outstanding, January 1
|
605
|
|
|
495
|
|
|
404
|
|
Granted
|
301
|
|
|
260
|
|
|
196
|
|
Released
|
(152
|
)
|
|
(140
|
)
|
|
(91
|
)
|
Forfeited
|
(21
|
)
|
|
(10
|
)
|
|
(14
|
)
|
Restricted Stock Units outstanding, December 31
|
733
|
|
|
605
|
|
|
495
|
|
Expected to vest as of December 31
|
683
|
|
|
551
|
|
|
438
|
|
(13) Employee Benefit Plans
The Company has a 401(k) retirement savings plan (the “Mohawk Plan”) open to substantially all U.S. and Puerto Rico based employees who have completed
90
days of eligible service. The Company contributes
$.50
for every
$1.00
of employee contributions up to a maximum of
6%
of the employee’s salary based upon each individual participants election. Employee and employer contributions to the Mohawk Plan were
$38,632
and
$15,994
in
2013
,
$35,986
and
$15,046
in
2012
and
$34,595
and
$14,541
in
2011
, respectively.
The Company also has various pension plans covering employees in Belgium, France, and the Netherlands (the “Non-U.S. Plans”) within the Laminate and Wood segment. 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.
Components of the net periodic benefit cost of the Non-U.S. Plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Service cost of benefits earned
|
$
|
2,450
|
|
|
1,870
|
|
|
1,708
|
|
Interest cost on projected benefit obligation
|
1,285
|
|
|
1,367
|
|
|
1,400
|
|
Expected return on plan assets
|
(1,094
|
)
|
|
(1,192
|
)
|
|
(1,232
|
)
|
Amortization of actuarial loss (gain)
|
13
|
|
|
(10
|
)
|
|
(26
|
)
|
Net pension expense
|
$
|
2,654
|
|
|
2,035
|
|
|
1,850
|
|
Assumptions used to determine net periodic pension expense for the Non-U.S. Plans:
|
|
|
|
|
|
2013
|
|
2012
|
Discount rate
|
3.25%
|
|
4.50%
|
Expected rate of return on plan assets
|
.0327
|
|
2.50%-3.50%
|
Rate of compensation increase
|
2.00%-4.00%
|
|
2.00%-4.00%
|
Underlying inflation rate
|
2.00%
|
|
2.00%
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The obligations, plan assets and funding status of the Non-U.S. Plans were as follows:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Change in benefit obligation:
|
|
|
|
Projected benefit obligation at end of prior year
|
$
|
37,551
|
|
|
29,231
|
|
Cumulative foreign exchange effect
|
1,813
|
|
|
669
|
|
Service cost
|
2,450
|
|
|
1,870
|
|
Interest cost
|
1,285
|
|
|
1,367
|
|
Plan participants contributions
|
886
|
|
|
827
|
|
Actuarial loss
|
(2,952
|
)
|
|
5,179
|
|
Benefits paid
|
(1,337
|
)
|
|
(1,552
|
)
|
Prior service cost
|
(7
|
)
|
|
—
|
|
Effect of curtailment and settlement
|
—
|
|
|
(40
|
)
|
Projected benefit obligation at end of year
|
$
|
39,689
|
|
|
37,551
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at end of prior year
|
$
|
32,558
|
|
|
26,109
|
|
Cumulative foreign exchange effect
|
1,444
|
|
|
515
|
|
Actual return on plan assets
|
(940
|
)
|
|
4,771
|
|
Employer contributions
|
2,114
|
|
|
1,888
|
|
Benefits paid
|
(1,337
|
)
|
|
(1,552
|
)
|
Plan participant contributions
|
886
|
|
|
827
|
|
Fair value of plan assets at end of year
|
$
|
34,725
|
|
|
32,558
|
|
Funded status of the plans:
|
|
|
|
Ending funded status
|
$
|
(4,964
|
)
|
|
(4,993
|
)
|
Net amount recognized in consolidated balance sheets:
|
|
|
|
Accrued benefit liability (non-current liability)
|
$
|
(4,964
|
)
|
|
(4,993
|
)
|
Accumulated other comprehensive income
|
157
|
|
|
928
|
|
Net amount recognized
|
$
|
(4,807
|
)
|
|
(4,065
|
)
|
The Company’s net amount recognized in other comprehensive income related to actuarial gains (losses) was
$771
,
$(1,591)
and
$(452)
for the years ended
December 31, 2013
,
2012
and
2011
, respectively.
Assumptions used to determine the projected benefit obligation for the Non-U.S. Plans were as follows:
|
|
|
|
|
|
2013
|
|
2012
|
Discount rate
|
3.50%
|
|
3.25%
|
Rate of compensation increase
|
2.00%-4.00%
|
|
2.00%-4.00%
|
Underlying inflation rate
|
2.00%
|
|
2.00%
|
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-
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
U.S. Plans is based upon the Company’s annual reviews.
|
|
|
|
|
|
|
|
|
Non-U.S. Plans
|
|
December 31,
2013
|
|
December 31,
2012
|
Plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
21,579
|
|
|
15,067
|
|
Accumulated benefit obligation
|
20,302
|
|
|
12,396
|
|
Fair value of plan assets
|
18,934
|
|
|
11,702
|
|
Plans with plan assets in excess of accumulated benefit obligations:
|
|
|
|
Projected benefit obligation
|
$
|
18,110
|
|
|
22,484
|
|
Accumulated benefit obligation
|
15,554
|
|
|
20,640
|
|
Fair value of plan assets
|
15,791
|
|
|
20,856
|
|
Estimated future benefit payments for the Non-U.S. Plans are as follows:
|
|
|
|
|
|
2014
|
|
$
|
1,013
|
|
2015
|
|
1,084
|
|
2016
|
|
1,121
|
|
2017
|
|
1,669
|
|
2018
|
|
1,756
|
|
Thereafter
|
|
10,777
|
|
The Company expects to make cash contributions of
$2,155
to the Non-U.S. Plans in
2014
.
The fair value of the Non-U.S. Plans' 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, 2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Non-U.S. Plans:
|
|
|
|
Insurance contracts (100%)
|
$
|
34,725
|
|
|
32,558
|
|
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.
(14) Other Expense (Income)
Following is a summary of other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Foreign currency losses (gains)
|
$
|
9,531
|
|
|
(5,599
|
)
|
|
10,423
|
|
All other, net
|
(417
|
)
|
|
5,902
|
|
|
3,628
|
|
Total other expense
|
$
|
9,114
|
|
|
303
|
|
|
14,051
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(15) Income Taxes
Following is a summary of earnings from continuing operations before income taxes for United States and foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
United States
|
$
|
288,627
|
|
|
164,122
|
|
|
78,224
|
|
Foreign
|
156,944
|
|
|
140,370
|
|
|
121,650
|
|
Earnings before income taxes
|
$
|
445,571
|
|
|
304,492
|
|
|
199,874
|
|
Income tax expense (benefit) from continuing operations for the years ended
December 31, 2013
,
2012
and
2011
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Current income taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
84,686
|
|
|
26,204
|
|
|
13,957
|
|
State and local
|
9,774
|
|
|
4,583
|
|
|
5,118
|
|
Foreign
|
46,450
|
|
|
13,775
|
|
|
7,190
|
|
Total current
|
140,910
|
|
|
44,562
|
|
|
26,265
|
|
Deferred income taxes:
|
|
|
|
|
|
U.S. federal
|
5,280
|
|
|
31,106
|
|
|
8,994
|
|
State and local
|
(5,720
|
)
|
|
4,704
|
|
|
(3,488
|
)
|
Foreign
|
(62,085
|
)
|
|
(26,773
|
)
|
|
(10,122
|
)
|
Total deferred
|
(62,525
|
)
|
|
9,037
|
|
|
(4,616
|
)
|
Total
|
$
|
78,385
|
|
|
53,599
|
|
|
21,649
|
|
Income tax expense (benefit) attributable to earnings from continuing operations before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings from continuing operations before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Income taxes at statutory rate
|
$
|
155,950
|
|
|
106,572
|
|
|
69,956
|
|
State and local income taxes, net of federal income tax benefit
|
9,317
|
|
|
6,004
|
|
|
2,821
|
|
Foreign income taxes
|
(80,937
|
)
|
|
(66,538
|
)
|
|
(45,112
|
)
|
Change in valuation allowance
|
(1,846
|
)
|
|
5,703
|
|
|
(2,052
|
)
|
Tax contingencies and audit settlements
|
(4,076
|
)
|
|
(3,598
|
)
|
|
(5,911
|
)
|
Other, net
|
(23
|
)
|
|
5,456
|
|
|
1,947
|
|
|
$
|
78,385
|
|
|
53,599
|
|
|
21,649
|
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
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, 2013
and
2012
are presented below:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
17,346
|
|
|
12,289
|
|
Inventories
|
50,423
|
|
|
38,801
|
|
Employee benefits
|
55,479
|
|
|
53,519
|
|
Accrued expenses and other
|
72,582
|
|
|
44,289
|
|
Deductible state tax and interest benefit
|
7,927
|
|
|
13,119
|
|
Intangibles
|
92,164
|
|
|
113,282
|
|
Federal, foreign and state net operating losses and credits
|
438,272
|
|
|
247,786
|
|
Gross deferred tax assets
|
734,193
|
|
|
523,085
|
|
Valuation allowance
|
(375,859
|
)
|
|
(321,585
|
)
|
Net deferred tax assets
|
358,334
|
|
|
201,500
|
|
Deferred tax liabilities:
|
|
|
|
Inventories
|
(11,140
|
)
|
|
(8,106
|
)
|
Plant and equipment
|
(413,989
|
)
|
|
(277,324
|
)
|
Intangibles
|
(208,159
|
)
|
|
(128,433
|
)
|
Other liabilities
|
(25,387
|
)
|
|
(7,854
|
)
|
Gross deferred tax liabilities
|
(658,675
|
)
|
|
(421,717
|
)
|
Net deferred tax liability (1)
|
$
|
(300,341
|
)
|
|
(220,217
|
)
|
|
|
(1)
|
This amount includes
$9,183
and
$4,317
of non-current deferred tax assets which are in deferred income taxes and other non-current assets and
$11,235
and
$6,309
current deferred tax liabilities which are included in accounts payable and accrued expenses in the consolidated balance sheets as of
December 31, 2013
and
2012
, respectively.
|
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, 2013
,
2012
and
2011
is
$375,859
,
$321,585
and
$334,215
, respectively. The valuation allowance as of
December 31, 2013
relates to the net deferred tax assets of certain of the Company’s foreign subsidiaries as well as certain state net operating losses and tax credits. The total change in the
2013
valuation allowance was an increase of
$54,274
which includes
$12,471
related to foreign currency translation. The total change in the
2012
valuation allowance was a decrease of
$12,630
, which includes
$5,863
related to foreign currency translation. The total change in the
2011
valuation allowance was an increase of
$9,088
, which includes
$7,040
related to foreign currency translation.
Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances, 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.
As of
December 31, 2013
, the Company has state net operating loss carry forwards and state tax credits with potential tax benefits of
$51,928
, net of federal income tax benefit; these carry forwards expire over various periods based on taxing jurisdiction. A valuation allowance totaling
$37,115
has been recorded against these state deferred tax assets as of
December 31, 2013
. In addition, as of
December 31, 2013
, the Company has net operating loss carry forwards in various foreign jurisdictions with potential tax benefits of
$386,344
. A valuation allowance totaling
$248,055
has been recorded against these deferred tax assets as of
December 31, 2013
.
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 deemed to be permanently reinvested. As of
December 31, 2013
, the Company had not provided federal income taxes on earnings of approximately
$1,200,000
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.
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Determination of the amount of the unrecognized deferred U.S. 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. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest and penalties in income tax expense (benefit). 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.
In January 2012, the Company received a
€23,789
assessment from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of
€1,583
earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. The Company has not been re-assessed by the Belgian tax authority for the 2008 tax year.
However, on December 28, 2012, the Belgian tax authority issued assessments for the years ended December 31, 2005 and December 31, 2009, in the amounts of
€46,135
and
€35,567
, respectively, including penalties, but excluding interest. The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company's protests, and the Company has petitioned the applicable Belgian court to hear the case.
In December 2013, the Belgian tax authority, issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of
€38,817
,
€39,635
, and
€43,117
, respectively, including penalties, but excluding interest. The Company intends to file formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed.
The Company continues to disagree with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Although there can be no assurances, the Company believes 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, liquidity or cash flows in a given quarter or year.
As of
December 31, 2013
, the Company’s gross amount of unrecognized tax benefits is
$56,545
, excluding interest and penalties. If the Company were to prevail on all uncertain tax positions,
$37,732
of the unrecognized tax benefits would affect the Company’s effective tax rate, exclusive of any benefits related to interest and penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Balance as of January 1
|
$
|
53,835
|
|
|
46,087
|
|
Additions based on tax positions related to the current year
|
3,840
|
|
|
3,142
|
|
Additions for tax positions of prior years
|
15,275
|
|
|
17,006
|
|
Reductions for tax positions of prior years
|
(5,736
|
)
|
|
(3,571
|
)
|
Reductions resulting from the lapse of the statute of limitations
|
(6,075
|
)
|
|
(1,764
|
)
|
Settlements with taxing authorities
|
(4,594
|
)
|
|
(7,065
|
)
|
Balance as of December 31
|
$
|
56,545
|
|
|
53,835
|
|
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, 2013
and
2012
, the Company has
$13,890
and
$5,874
, respectively, accrued for
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
the payment of interest and penalties, excluding the federal tax benefit of interest deductions where applicable. During the years ending
December 31, 2013
,
2012
and
2011
, the Company accrued interest and penalties through the consolidated statements of operations of
$74
,
$(1,585)
and
$(3,755)
, respectively.
The Company believes that its unrecognized tax benefits could decrease by
$4,315
within the next twelve months. The Company has effectively settled all Federal income tax matters related to years prior to 2009. Various other state and foreign income tax returns are open to examination for various years.
(16) 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:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
Total Future
Payments
|
2014
|
$
|
771
|
|
|
96,694
|
|
|
97,465
|
|
2015
|
458
|
|
|
78,301
|
|
|
78,759
|
|
2016
|
462
|
|
|
50,415
|
|
|
50,877
|
|
2017
|
266
|
|
|
35,239
|
|
|
35,505
|
|
2018
|
41
|
|
|
21,644
|
|
|
21,685
|
|
Thereafter
|
—
|
|
|
31,132
|
|
|
31,132
|
|
Total payments
|
1,998
|
|
|
313,425
|
|
|
315,423
|
|
Less amount representing interest
|
173
|
|
|
|
|
|
Present value of capitalized lease payments
|
$
|
1,825
|
|
|
|
|
|
Rental expense under operating leases was
$116,541
,
$97,587
and
$103,416
in
2013
,
2012
and
2011
, respectively.
The Company had approximately
$47,713
and
$50,540
in standby letters of credit for various insurance contracts and commitments to foreign vendors as of
December 31, 2013
and
2012
, respectively that expire within
two
years.
The Company is involved in litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.
Beginning in August 2010, a series of civil lawsuits were initiated in several U.S. federal courts alleging that certain manufacturers of polyurethane foam products and competitors of the Company’s carpet underlay division had engaged in price fixing in violation of U.S. antitrust laws. The Company has been named as a defendant in a number of the individual cases (the first filed on August 26, 2010), as well as in
two
consolidated amended class action complaints (the first filed on February 28, 2011) on behalf of a class of all direct purchasers of polyurethane foam products, and the second filed on March 21, 2011, on behalf of a class of indirect purchasers. All pending cases in which the Company has been named as a defendant have been filed in or transferred to the U.S. District Court for the Northern District of Ohio for consolidated pre-trial proceedings under the name
In re: Polyurethane Foam Antitrust Litigation
, Case No. 1:10-MDL-02196.
In these actions, the plaintiffs, on behalf of themselves and/or a class of purchasers, seek
three
times the amount of unspecified damages allegedly suffered as a result of alleged overcharges in the price of polyurethane foam products from at least 1999 to the present. Each plaintiff also seeks attorney fees, pre-judgment and post-judgment interest, court costs, and injunctive relief against future violations. In April 2011, the Company filed a motion to dismiss the class action claims brought by the direct purchasers, and in May 2011, the Company moved to dismiss the claims brought by the indirect purchasers. On July 19, 2011, the Court issued a written opinion denying all defendants’ motions to dismiss. In December 2011, the Company was named as a defendant in a Canadian Class action,
Hi ! Neighbor Floor Covering Co. Limited v. Hickory Springs Manufacturing Company, et al
., filed in the Superior Court of Justice of Ontario, Canada and
Options Consommateures v. Vitafoam, Inc. et.al.
, filed in the Superior Court of Justice of Quebec, Montreal, Canada, both of which allege similar claims
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
against the Company as raised in the U.S. actions and seek unspecified damages and punitive damages. The Company denies all of the allegations in these actions and will vigorously defend itself.
The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and we are unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
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, recycling and disposal of solid and hazardous materials and finished product, 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 financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.
(17) Consolidated Statements of Cash Flows Information
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Net cash paid (received) during the years for:
|
|
|
|
|
|
Interest
|
$
|
86,173
|
|
|
80,985
|
|
|
119,463
|
|
Income taxes
|
$
|
137,650
|
|
|
43,650
|
|
|
34,479
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Fair value of net assets acquired in acquisition
|
$
|
1,714,462
|
|
|
—
|
|
|
37,486
|
|
Noncontrolling interest of assets acquired
|
(14,577
|
)
|
|
—
|
|
|
—
|
|
Liabilities assumed in acquisition
|
(942,513
|
)
|
|
—
|
|
|
(13,389
|
)
|
Shares issued for acquisitions
|
(313,906
|
)
|
|
—
|
|
|
—
|
|
|
$
|
443,466
|
|
|
—
|
|
|
24,097
|
|
(18) Segment Reporting
The Company has
three
reporting segments: the Carpet segment, the Ceramic segment and the Laminate and Wood segment. The Carpet segment designs, manufactures, sources and markets its floor covering product lines, including carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, which it distributes primarily in North America through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment’s product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, shop at home, buying groups, commercial dealers and commercial end users. The Ceramic segment designs, manufactures, sources and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, which it distributes primarily in North America, Europe and Russia through its network of regional distribution centers and Company-operated service centers using company-operated trucks, common carriers or rail transportation. The segment’s product lines are sold through Company-operated service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Laminate and Wood segment designs, manufactures, sources, licenses and markets laminate, hardwood flooring, roofing elements, insulation boards, MDF, chipboards and other wood products, which it distributes primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.
Amounts disclosed for each segment are prior to any elimination or consolidation entries. Corporate general and administrative expenses attributable to each segment are estimated and allocated accordingly. Segment performance is
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
evaluated based on operating income. No single customer accounted for more than 10% of net sales for the years ended December 31,
2013
,
2012
or
2011
.
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Net sales:
|
|
|
|
|
|
Carpet
|
$
|
2,986,096
|
|
|
2,912,055
|
|
|
2,927,674
|
|
Ceramic
|
2,677,058
|
|
|
1,616,383
|
|
|
1,454,316
|
|
Laminate and Wood
|
1,792,260
|
|
|
1,350,349
|
|
|
1,344,764
|
|
Intersegment sales
|
(106,660
|
)
|
|
(90,807
|
)
|
|
(84,496
|
)
|
|
$
|
7,348,754
|
|
|
5,787,980
|
|
|
5,642,258
|
|
Operating income (loss):
|
|
|
|
|
|
Carpet
|
$
|
209,023
|
|
|
158,196
|
|
|
109,874
|
|
Ceramic
|
209,825
|
|
|
120,951
|
|
|
101,298
|
|
Laminate and Wood
|
159,365
|
|
|
126,409
|
|
|
127,147
|
|
Corporate and intersegment eliminations
|
(31,282
|
)
|
|
(26,048
|
)
|
|
(22,777
|
)
|
|
$
|
546,931
|
|
|
379,508
|
|
|
315,542
|
|
Depreciation and amortization:
|
|
|
|
|
|
Carpet
|
$
|
94,314
|
|
|
95,648
|
|
|
90,463
|
|
Ceramic
|
97,126
|
|
|
41,176
|
|
|
42,723
|
|
Laminate and Wood
|
105,907
|
|
|
132,183
|
|
|
151,884
|
|
Corporate
|
11,524
|
|
|
11,286
|
|
|
12,664
|
|
|
$
|
308,871
|
|
|
280,293
|
|
|
297,734
|
|
Capital expenditures (excluding acquisitions):
|
|
|
|
|
|
Carpet
|
$
|
158,690
|
|
|
97,972
|
|
|
125,630
|
|
Ceramic
|
110,750
|
|
|
49,426
|
|
|
66,419
|
|
Laminate and Wood
|
88,293
|
|
|
56,605
|
|
|
78,615
|
|
Corporate
|
8,817
|
|
|
4,291
|
|
|
4,909
|
|
|
$
|
366,550
|
|
|
208,294
|
|
|
275,573
|
|
Assets:
|
|
|
|
|
|
Carpet
|
$
|
1,786,085
|
|
|
1,721,214
|
|
|
1,769,065
|
|
Ceramic
|
3,787,785
|
|
|
1,731,258
|
|
|
1,732,818
|
|
Laminate and Wood
|
2,716,759
|
|
|
2,672,389
|
|
|
2,533,070
|
|
Corporate and intersegment eliminations
|
203,548
|
|
|
178,823
|
|
|
171,275
|
|
|
$
|
8,494,177
|
|
|
6,303,684
|
|
|
6,206,228
|
|
Geographic net sales:
|
|
|
|
|
|
North America
|
$
|
5,512,182
|
|
|
4,798,804
|
|
|
4,619,771
|
|
Rest of world
|
1,836,572
|
|
|
989,176
|
|
|
1,022,487
|
|
|
$
|
7,348,754
|
|
|
5,787,980
|
|
|
5,642,258
|
|
Long-lived assets (1):
|
|
|
|
|
|
North America
|
$
|
2,332,296
|
|
|
1,968,561
|
|
|
1,996,517
|
|
Rest of world
|
2,105,539
|
|
|
1,110,062
|
|
|
1,090,812
|
|
|
$
|
4,437,835
|
|
|
3,078,623
|
|
|
3,087,329
|
|
Net sales by product categories (2):
|
|
|
|
|
|
Soft surface
|
$
|
2,756,627
|
|
|
2,696,462
|
|
|
2,722,113
|
|
Tile
|
2,744,289
|
|
|
1,676,971
|
|
|
1,513,210
|
|
Laminate and wood
|
1,847,838
|
|
|
1,414,547
|
|
|
1,406,935
|
|
|
$
|
7,348,754
|
|
|
5,787,980
|
|
|
5,642,258
|
|
|
|
(1)
|
Long-lived assets are composed of property, plant and equipment, net, and goodwill.
|
|
|
(2)
|
The Soft surface product category includes carpets, rugs, carpet pad and resilient. The Tile product category includes ceramic tile, porcelain tile and natural stone. The Wood product category includes laminate, hardwood, roofing elements, insulation boards, MDF, chipboards, other wood-based products and licensing.
|
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
(19) Quarterly Financial Data (Unaudited)
The supplemental quarterly financial data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
March 30,
2013
|
|
June 29,
2013
|
|
September 28,
2013
|
|
December 31,
2013
|
Net sales
|
$
|
1,486,815
|
|
|
1,976,299
|
|
|
1,961,536
|
|
|
1,924,104
|
|
Gross profit
|
377,066
|
|
|
514,056
|
|
|
516,890
|
|
|
512,797
|
|
Net earnings
|
50,495
|
|
|
84,572
|
|
|
119,068
|
|
|
94,651
|
|
Basic earnings per share
|
0.73
|
|
|
1.17
|
|
|
1.64
|
|
|
1.30
|
|
Diluted earnings per share
|
0.72
|
|
|
1.16
|
|
|
1.63
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
March 31,
2012
|
|
June 30,
2012
|
|
September 29,
2012
|
|
December 31,
2012
|
Net sales
|
$
|
1,409,035
|
|
|
1,469,793
|
|
|
1,473,493
|
|
|
1,435,659
|
|
Gross profit
|
359,426
|
|
|
388,464
|
|
|
372,837
|
|
|
369,331
|
|
Net earnings
|
40,377
|
|
|
73,188
|
|
|
70,304
|
|
|
66,389
|
|
Basic earnings per share
|
0.59
|
|
|
1.06
|
|
|
1.02
|
|
|
0.96
|
|
Diluted earnings per share
|
0.58
|
|
|
1.06
|
|
|
1.01
|
|
|
0.96
|
|