Mohawk Industries, Inc. (MHK): assessing financial performance during a period of rapid expansion.
Johnson, Larry A. ; Helms, Marilyn M. ; Baxter, Joseph T. 等
CASE DESCRIPTION
The primary subject matter of this case concerns the financial
performance of Mohawk Industries, Inc. a leading company in the
floorcovering industry. Secondary issues include industry
competitiveness, competition, and ways to maintain the company's
continued growth and successful performance given their many recent
acquisitions. The case has a difficulty level of three, appropriate for
junior level students. The class is designed to be taught in 1.5 class
hours and is expected to require two hours of outside preparation by
students.
CASE SYNOPSIS
Headquartered in Calhoun, GA, Mohawk is a full-line flooring
producer and manufactures carpet, rugs, ceramic tile, laminate flooring,
vinyl, and other surfaces for commercial and residential customers.
Mohawk Industries, Inc. is the leading floor covering producer in the
world and second only to Shaw Industries, Inc. in the production of
tufted carpet.
Mohawk acquired nineteen firms in thirteen years (1992-2005) as
they continue their consolidation in the carpet industry while
broadening their product line into hard surface flooring. Mohawk's
2005 acquisition of Unilin, a Belgian-based laminate floor covering
manufacturer, followed their purchase of Dal-Tile in 2002; which
combined, doubled the size of the company in three years from
(2002-2005). Students are provided six years of Income and Balance Sheet
data and asked to assess Mohawk's financial performance and present
their rationale as to whether Mohawk can continue their pace of
continued growth and successful financial performance given the many
recent acquisitions.
Students are asked to examine the company as it becomes an even
larger player in the rapidly consolidating carpet and floorcovering
industry. Mohawk's sales have been boosted by a strong U.S. housing
market and higher selling prices. However, Mohawk's share of carpet
and vinyl flooring has fallen while laminate, wood, and ceramic flooring
segments have grown. Laminate sales comprised only five percent of the
U.S. floorcovering market but they were up nine percent in 2005.
Industry-wide, carpet and rug sales continued to grow by seven percent
from 2004 to 2005, wood flooring grew by eight percent, and all hard
surfaces grew by five percent. The rise in the rug segment by five
percent was a result of the growth in hard surface flooring since even
with wood or laminate floors, consumers continue to decorate with area
and scatter rugs (Floor Focus 2006 Annual Report).
INTRODUCTION
Can Mohawk maintain their rapid acquisition rate of nineteen firms
in thirteen years and continue their consolidation of the carpet and
floorcovering industry while maintaining their past record of financial
performance? Mohawk's 2005 acquisition of Unilin, a Belgian-based
laminate floor covering manufacturer, follows the 2002 purchase of
Dal-Tile; which, combined doubled the size of the company in three years
from (2002-2005).
Mohawk began in the carpet industry over 127 years ago. Today they
are the leading producer and distributor of home and commercial flooring
worldwide including all major flooring categories: carpet, rugs,
hardwood, laminate, ceramic tile, and vinyl sheet flooring. They are
also a leading producer of yarn, area rugs, and bath mats. While Mohawk
has traditionally been a carpet manufacturer, the latest acquisitions
are an attempt to diversify into the faster growing hard surface
flooring (non-carpet) market segment.
Unilin had 2004 revenues of $1 billion and employed more than 2,400
people in Europe. The Unilin acquisition adds the European
company's wood flooring, shelving, chipboard, and roofing products
to Mohawk's range of products. Since their acquisition of Unilin,
U.S. Mohawk's sales have been boosted by a strong U.S. housing
market and higher floorcoverning selling prices as evidenced by eight
percent gain in second quarter profits in 2005. However, Mohawk's
share of carpet and vinyl flooring are falling while laminate, wood, and
ceramic flooring segments are growing. Laminate sales comprised only
five percent of the U.S. floorcovering market but they were up nine
percent in 2005. Industry-wide, carpet and rug sales continued to grow
by seven percent from 2004 to 2005, wood flooring by eight percent, and
all hard surfaces grew by 5 percent. The rise in the rug segment by five
percent was a result of the growth in hard surface flooring. (Floor
Focus 2006 Annual Report) Even with wood or laminate floors, consumers
continue to decorate with area and scatter rugs.
Mohawk's acquisition of Unilin was greeted with surprise by
others in the flooring industry. In the 2005 Mohawk Annual Report, Jeff
Lorberbaum (Mohawk Chairman, President and CEO) and Frans De Cock,
(Unilin President), gave justification for the Unilin acquisition. Mr.
De Cock cited Mohawk's strength in its distribution channel while
Mr. Lorberbaum cited Unilin's patented technologies, European
market presence, and the continued diversification of Mohawk's
product line.
Carpet tile is a growing category among designers and architects.
Mohawk designs, manufactures and markets residential and commercial
flooring products distributed through authorized Mohawk dealers. The
retail replacement business, however, is down as fewer consumers shop in
traditional retail stores. The move to shopping at "big-box"
home improvement retailers has also reduced the number of retail
locations for purchasing floorcovering.
Mohawk operates under four divisions with its own products,
features, and brand names, providing goods for all significant market
segments, distribution channels, and price points. Mohawk's family
of well-known brands include: Aladdin, Alexander Smith, American Olean,
American Rug Craftsmen, American Weavers, Bigelow, Dal-Tile, Galaxy,
Harbinger, Helios, Horizon, Image, Karastan, Lees Carpet, World,
WundaWeve, Custom Weave, Mohawk, and Mohawk Home. In addition to the
Unilin acquisition, Mohawk has added carpet tile products to the
Lees' and Mohawk brand.
History of Mohawk Acquisitions
Mohawk Carpet Mills had its beginning in 1878 when four brothers
from the Shuttleworth family brought 14 second-hand looms from England
to New York. By 1908, the fledging firm introduced a new carpet. Flooded
with orders, the weavers worked five years without changing either the
color or the pattern on their looms.
In 1920, the Shuttleworth Brothers Company merged with the nearby
firm of McCleary, Wallin and Crouse to form Mohawk Carpet Mills, Inc.
The corporate name was derived from the Mohawk River Valley in upstate
New York. Even in the 1920s, mergers were strategic and designed to give
the resulting company a competitive edge. The 1950s became a period of
expansion for Mohawk. They moved south, constructing manufacturing
facilities in Mississippi and South Carolina. During the next fifteen
years, through product innovations, market expansions, mergers and
acquisitions, Mohawk expanded its offerings. Beginning in 1992, a series
of strategic mergers and acquisitions redefined not only Mohawk but also
the entire floor covering industry.
Each acquisition expanded Mohawk's presence in the
floor-covering industry--Horizon Industries in 1992; American Rug
Craftsman and Karastan-Bigelow in 1993; Aladdin Mills in 1994; Galaxy
Carpet Mills in 1995; certain assets from Diamond Carpet Mills in 1997;
Newmark Rug Company; American Weavers & World Carpets/WundaWeve in
1998; Durkan Patterned Carpets and Image Industries in 1999; Alliance
Pad in 2000; Dal-Tile and American Olean in 2001 (a move that made
Mohawk a leading supplier of ceramic and stone floor covering); Lees
Carpets in 2003; Wayne-Tex in 2005 and Unilin in 2005. Through
aggressive acquisitions and internal growth, Mohawk's goal was to
create a strong, diversified company--the world's largest floor
covering supplier, the country's leading recycler of plastic soda
bottles (which becomes polyester carpeting) and one of the
country's largest and most efficient distribution and trucking
companies. They employed more than 34,000 employees in 2005, half of
them in Georgia.
Mohawk also offers woven bedspreads, tapestries, pillows, throws
and window blinds. Mohawk products are found in major retailers across
the country and the world--from Home Depot to Bloomingdales, from
Lowe's to Macy's, from Target and Wal-Mart to specialty
boutiques in large cities and small towns.
Consolidation in the Flooring Industry
The floorcovering industry is recognized by most analysts as an
attractive industry. The purchase of Shaw Industries Inc. by Berkshire
Hathaway in 2001 attests to the hidden value of this "old
world" industry by Warren Buffet, founder of Berkshire Hathaway.
With the vertical integration of the industry, most firms are dependent
on suppliers for nylon pellets and other petroleum-based raw materials;
but Mohawk, like other large manufacturers, extrudes their own yarn.
They purchase dye and use large quantities of water for carpet dyeing.
Entry barriers are high due to the size necessary to be competitive.
With industry consolidation, customers have a number of color and
texture choices, but have few choices of manufacturer. Most
manufacturers make a number of floorcovering products and most retail
outlets sell the products of multiple manufacturers. Switching costs
between companies by customers is low and few buy carpet based on brand
name or manufacturer but rather rely on information provided by sales
representatives in the retail outlets.
Consolidation of the flooring industry is a major strategic
objective for Mohawk Industries. For Mohawk and Shaw, the two leaders in
the carpet and floorcovering industry, growth by acquisition has
historically been the norm. Most mid-sized players have been acquired.
They will not significantly increase their horizontal presence by
further acquisitions since they are already selling or manufacturing
flooring in every hard and soft surface category and few large or
mid-sized competitors remain. Since most wood, vinyl, and stone flooring
products are purchased by these two firms, the potential exists to
integrate backward into these sourced products and raw material
production. Other vertical acquisitions are possible moving backward
toward the source of supply (raw materials, backing, dyes) or forward
toward retail outlets. However, Shaw's past move into retail sales
alienated their competitors and was quickly abandoned. Further global
expansion is also possible. With rising fuel costs, it makes sense to
have a manufacturing presence in Europe and Asia to reach these growing
markets faster and cheaper. European buyers are concerned more about
recycled content and one avenue for growth to make floorcovering
products appealing in the international market is to further adapt their
manufacturing processes toward this goal. While Mohawk has environmental
programs in place, the acquisition of other "green" companies
will further their environmental goal. Still other home or office
textiles might also be acquisition targets (i.e., wall coverings,
sheets, towels, etc.).
Analysts seem positive about the acquisitions by leading players
within the floorcovering industry and of Mohawk in particularly. With
each acquisition, the stock price increased each year (except 1996,
2002, and 2006) the company has made acquisitions. (See the Stock Price
History, Exhibit 1 and 2.)
This trend in stock price is typical of companies in the
late-growth, early-maturity stage of their life cycle. Beginning in 1992
a series of strategic mergers and acquisitions redefined Mohawk and the
entire floorcovering industry. As in any merger or acquisition,
management faces challenges of assimilation of the various corporate
cultures into one organization. There is also an issue of changing or
redefining the management and organizational structure. Problems may
exist due to the nature of the various computer software packages and
hardware and the programming staff is left to combine data and
information. While the IT issues are beyond the scope and coverage of
this case, they do represent an important point to consider.
The relatively large market share of the two industry leaders
(Mohawk and Shaw combined have a floorcovering market share of 46% in
2005 according to the Floor Focus Annual Report (2006) is evident, yet
further mergers and acquisitions seem likely as the industry continues
its consolidation. Small players that remain are niche players offering
custom, one-of-a-kind, products for an up-scale customer or market.
Other small players may also be low-end producers of entry-level
bases-grade floorcovering products.
Finance and Accounting
[GRAPHIC 1 OMITTED]
Mohawk reported net earnings of $358.2 million and earnings per
share (EPS) of $5.30, for 2005, which is slightly lower than $368.6
million and $5.53 per share in 2004, but up 15% compared to net earnings
of $310.1 million and $4.68 EPS for 2003. In 2005, Mohawk had annual
operating revenues of $6,620 million and a $627 million operating profit
before depreciation. Total 2005 net income was $358 million. This
represents a five-year annual revenue growth rate of 17.99% and a five
year earnings per share growth rate of 9.72%. The income statement,
balance sheet, and stock price history for six years are shown in
Exhibits 1, 2, 3, and 4.
QUESTIONS
Through 2005, Mohawk has continued a strategy of expansion through
internal growth and acquisitions. Assess Mohawk's financial
performance and present your rationale as to whether Mohawk can continue
their pace of successful financial performance given the recent
acquisitions.
1. Prepare graphical highlights of Mohawk's financial
performance over time and discuss changes over time.
2. Prepare common size financial statements (Income Statement and
Balance Sheet) and discuss significant changes over time.
3. Calculate liquidity, leverage, asset management, and
profitability ratios. Show major trends graphically and describe the
strengths and weaknesses of each ratio category.
4. Use the DuPont Identity framework to decompose Mohawk's
Return on Equity and discuss changes in operating efficiency, asset use,
and financial leverage over time.
5. What are Mohawk's internal and sustainable growth rates and
earnings per share? How have they changed and why? (Mohawk has a 100%
dividend retention rate)
REFERENCES
"2006 Annual Report", Floor Focus, May 2006, Floor Daily
Mohawk Industries 2004 Annual Report. Mohawk Industries, Inc.
Mohawk Industries 2005 Annual Report. Mohawk Industries, Inc.
Websites
http://www.mohawk-flooring.com
http://www.mohawkind.com
http://www.cnbc.com
Carpet Industry History
http://www.daltonchamber.org
Competitors
http://www.shawfloors.com
http://www.jjindustries.com
http://www.armstrong.com
http://www.beaulieu-usa.com
http://www.mannington.com
http://www.interfaceinc.com
http://www.cafloorcoverings.com
http://www.berkshirehathaway.com
Trade Associations
http://www.carpet-rug.org/
http://www.americanfloor.org/
Larry A Johnson, Dalton State College
Marilyn M. Helms, Dalton State College
Joseph T. Baxter, Dalton State College
Exhibit 2. History of Mohawk Industries
Inc. Stock Price
2005
Month Dec Nov Oct Sep
Stock Price 86.98 87.98 78.05 80.25
2004
Month Dec Nov Oct Sep
Stock Price 91.25 87.70 85.08 79.39
2003
Month Dec Nov Oct Sep
Stock Price 70.54 72.08 74.12 71.32
2002
Month Dec Nov Oct Sep
Stock Price 56.95 61.61 53.55 49.65
2001
Month Dec Nov Oct Sep
Stock Price 54.88 45.86 43.20 36.75
2000
Month Dec Nov Oct Sep
Stock Price 27.38 23.69 21.81 21.81
2005
Month Aug Jul Jun May
Stock Price 85.38 87.82 82.50 83.42
2004
Month Aug Jul Jun May
Stock Price 76.92 73.54 73.33 74.24
2003
Month Aug Jul Jun May
Stock Price 72.96 67.41 55.53 57.71
2002
Month Aug Jul Jun May
Stock Price 49.50 47.50 61.53 65.52
2001
Month Aug Jul Jun May
Stock Price 44.60 44.00 35.20 32.03
2000
Month Aug Jul Jun May
Stock Price 23.75 26.69 21.73 23.81
2005
Month Apr Mar Feb Jan
Stock Price 77.81 84.30 89.74 88.51
2004
Month Apr Mar Feb Jan
Stock Price 77.14 82.35 83.30 69.58
2003
Month Apr Mar Feb Jan
Stock Price 55.47 47.94 49.38 52.68
2002
Month Apr Mar Feb Jan
Stock Price 64.33 60.09 62.93 54.96
2001
Month Apr Mar Feb Jan
Stock Price 32.66 28.08 29.95 31.50
2000
Month Apr Mar Feb Jan
Stock Price 24.81 22.37 22.19 23.44
Source: http://www.yahoo.com
Exhibit 3--Income Statement 2000-2005, Mohawk Industries, Inc.
(In thousands, except
per share data)
Years Ended
December 31, 2000-2005
Year 2005 2004 2003
Net sales 6,620,099 5,880,372 4,999,381
Cost of sales 4,896,965 4,259,531 3,605,579
Gross profit 1,723,134 1,620,841 1,393,802
Selling, gen. &
admin. expenses 1,095,862 985,251 851,773
Legal settlement
Operating income 627,272 635,590 542,029
Other expense (income):
Interest expense 66,791 53,392 55,575
Other expense 11,714 9,731 6,252
Other income -8,254 -4,922 -8,232
Total other expense (income) 70,251 58,201 53,595
Earnings before income taxes 557,021 577,389 488,434
Income taxes 198,826 208,767 178,285
Net earnings 358,195 368,622 310,149
Basic earnings per share 5.35 5.53 4.68
Wtd-avg common shares
outstanding 66,932 66,682 66,251
Diluted earnings per share 5.30 5.46 4.62
Weighted-average
common and dilutive
potential common
shares outstanding 67,644 67,557 67,121
(In thousands, except
per share data)
Years Ended
December 31, 2000-2005
Year 2002 2001 2000
Net sales 4,522,336 3,445,945 3,404,034
Cost of sales 3,282,269 2,613,043 2,581,185
Gross profit 1,240,067 832,902 822,849
Selling, gen. &
admin. expenses 718,002 505,745 505,734
Legal settlement 7,000
Operating income 522,065 327,157 310,115
Other expense (income):
Interest expense 68,972 29,787 38,044
Other expense 13,455 7,780 5,660
Other income -3,991 -1,826 -1,218
Total other expense (income) 78,436 35,741 42,486
Earnings before income taxes 443,629 291,416 267,629
Income taxes 159,140 102,824 105,030
Net earnings 284,489 188,592 162,599
Basic earnings per share 4.46 3.60 3.02
Wtd-avg common shares
outstanding 63,723 52,418 53,769
Diluted earnings per share 4.39 3.55 3.00
Weighted-average
common and dilutive
potential common
shares outstanding 64,861 53,141 54,255
Source: 2005 Mohawk Annual Report
Exhibit 4 Mohawk Industries Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2000-2005
(In thousands, except per share data)
Year 2005 2004 2003
ASSETS
Current assets:
Cash and cash
equivalents 134,585
Receivables 848,666 660,650 573,500
Inventories 1,166,913 1,017,983 832,416
Prepaid expenses
and other assets 140,789 49,381 43,043
Deferred income taxes 49,534 55,311 84,260
Total current assets 2,340,487 1,783,325 1,533,218
Property, plant and
equipment, net 1,810,728 905,332 919,085
Goodwill 2,621,963 1,377,349 1,368,700
Tradenames 622,094 272,280
Other intangible assets 552,003 50,366 325,339
Other assets 44,248 14,466 17,233
Total Assets 7,991,523 4,403,118 4,163,575
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt 113,809 191,341 248,795
Accts payable &
accrued expenses 998,105 623,061 637,940
Total current liabilities 1,111,914 814,402 886,735
Deferred income taxes 625,887 191,761 183,669
Ltd, less current portion 3,194,561 700,000 763,618
Other long-term
liabilities 32,041 30,618 31,752
Total Liabilities 4,964,403 1,736,781 1,865,774
Stockholders' equity:
(see yearly notes in
Annual Reports)
Common stock
Additional paid-in capital 1,123,991 1,058,537 1,035,773
Retained earnings 2,268,578 1,910,383 1,541,761
Accumed other -47,433 -2,441 2,313
comprehensive loss 3,345,921 2,967,254 2,580,577
Less treasury stock
318,801 300,917 282,776
Total stockholders'
equity 3,027,120 2,666,337 2,297,801
Total Liab.es & 7,991,523 4,403,118 4,163,575
Stockholder Equity
Year 2002 2001 2000
ASSETS
Current assets:
Cash and cash
equivalents
Receivables 501,129 404,875 358,809
Inventories 678,008 531,405 574,595
Prepaid expenses
and other assets 37,368 24,884 26,973
Deferred income taxes 82,074 70,058 66,474
Total current assets 1,298,579 1,031,222 1,026,851
Property, plant and
equipment, net 855,324 619,703 650,053
Goodwill 1,277,453 109,167 112,376
Tradenames
Other intangible assets 146,700
Other assets 18,687 8,393 6,098
Total Assets 3,596,743 1,768,485 1,795,378
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt 27,427 158,366 224,391
Accts payable &
accrued expenses 630,306 423,495 375,268
Total current liabilities 657,733 581,861 599,659
Deferred income taxes 145,973 84,955 75,808
Ltd, less current portion 793,000 150,067 365,437
Other long-term
liabilities 17,158 3,051 114
Total Liabilities 1,613,864 819,934 1,041,018
Stockholders' equity:
(see yearly notes in
Annual Reports)
Common stock 614 608
Additional paid-in capital 1,006,550 197,247 183,303
Retained earnings 1,231,612 947,123 758,531
Accumed other 1,126 -2,837
comprehensive loss 2,240,051 1,142,147 942,442
Less treasury stock
257,172 193,596 188,082
Total stockholders'
equity 1,982,879 948,551 754,360
Total Liab.es & 3,596,743 1,768,485 1,795,378
Stockholder Equity
Source: 2005 Mohawk Annual Report
