Mohawk Industries, Inc. (MHK): assessing financial performance during a period of rapid expansion.(Instructor's Note)

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).

INSTRUCTORS' NOTES

Decision Focus

The decision focus of this case is: Will Mohawk be able to maintain its rapid acquisition rate of 19 firms in 13 years and continue its consolidation of the carpet and floorcovering industry while maintaining financial success?

With the summer 2005 acquisition of Unilin, a Belgian-based laminate floor covering manufacturer, Mohawk created a larger presence in the laminate flooring market along with an expanded range of flooring products and a larger European customer base. While the acquisition, valued at $2.6 billion, surprised local carpet competitors in the Northwest Georgia area, where Mohawk as well as most of the industry is clustered, analysts were upbeat about Mohawk's future. Unilin had 2004 revenues of $1 billion and employed more than 2,400 people in Europe and the U.S. The Unilin acquisition came just three years after Mohawk bought Dal-Tile, the largest U.S. ceramic tile maker. 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).

Main Features of the Case

Students are asked to analyze the company's financial history to determine if avenues for growth through acquisitions are still available. The case provides insights into strategic and managerial issues and includes market and financial information on Mohawk with general information on the industry and Mohawk's main competitor, Shaw Industries, Inc. The financial analysis provides insight into how the operations, profitability, and capital structure of Mohawk has changed due to the most recent acquisitions.

The case study was developed from extensive use of secondary research from readings, articles, the company's annual reports, web sites, and reports from trade organizations in the carpet and floorcovering industry as well as interviews and personal experience working with the industry.

TEACHING APPROACH AND PLAN

This case is designed to meet multiple objectives. For example, it can be used as a case exercise for students with limited knowledge of financial analysis, as one would encounter in a principles of finance course. In an extended coverage format, as described below, the case can be used in advanced classes including strategic management or a capstone financial analysis course where students would be challenged to link business strategy to financial performance. While the case can be adapted by the instructor to fit a wide range of teaching applications, these two primary formats are presented. They include: (1) a one-class session format focusing primarily on financial analysis, and (2) a two-class session format extending the financial analysis and linking strategy to financial performance.

Teaching Plan for a Single (50 or 75 Minute) Class Session

Class Time

The case works well as a single class session exercise following an introductory chapter or instructional session on financial ratio analysis.

Students

Students should be assigned the case for homework and asked to compute the assigned ratios for class discussion. This assignment is consistent with financial statement analyses for the principles of finance course where students have limited background in financial analysis or for use as an introductory review exercise for an intermediate-level finance course for college juniors and seniors. The case could also be used as an effective training exercise on financial statement analysis and ratio computation for non-financial students in continuing education or other similar training courses.

Student Preparation/Assignment Questions

1. Prepare graphical highlights of Mohawk's financial performance and discuss changes over time. (While it is not imperative for students to use a computerized spreadsheet, (e.g. Excel), students should be encouraged to do so.)

2. Prepare common size financial statements and discuss any significant changes over time. (See Exhibits 1 and 2).

3. Calculate liquidity, leverage, asset management, and profitability and market value ratios. Show major trends graphically and describe strengths and weaknesses.

Program Goals and Learning Objectives

The single session format of ratio analysis and discussion supports the educational program goals of functional area knowledge in finance, introductory analysis of business conditions, financial ratio analysis, and limited critical thinking and decision-making. A single in-class session would focus on the learning objectives of:

* preparing standardized financial statements for comparison purposes

* computing and interpreting common financial ratios to better understand the determinants of Mohawk's profitability and growth, and

* discussing the strengths and weaknesses of financial statement analysis.

Teaching Plan

Student preparation of the financial ratios for homework would support the in-class activities of reviewing the ratio analysis computation and checking answers. The professor may want to divide the class into small groups of four or five students to review their answers and computations. It is important for students to attempt the preparation of common size financial statements and attempt the ratio computation. This will lessen the in-class time spent on data computation and allow more time for discussion of the meaning of the ratios as well as a review of financial trends and discussion of the company's financial strengths and weaknesses.

The answers to homework questions/problems are presented below. The instructor should have students address each of the assigned questions. It is suggested that the instructor address each question sequentially so as to move from a broad view of financial and operational performance to the key issues of capital structure and sources of financing and their impact on growth and earnings.

Solutions to Assignment Questions

Mohawk continues a strategy of rapid expansion through internal growth and acquisitions. Assess Mohawk's financial performance and present your case as to whether Mohawk can continue their pace of successful financial performance given the recent acquisitions. (While it is not imperative for students to use a computerized spreadsheet (e.g. Excel), students should be encouraged to do so.)

1. Prepare graphical highlights of Mohawk's financial performance and discuss changes over time.

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Mohawk has continued its rapid rate of expansion since 2000 increasing sales from $3.4 billion in 2000 to $6.6 billion in 2005 for an average annual growth rate of 19%. After tax net earnings have increased as well from $163 million in 2000 to $358 million in 2005 for an annual average growth rate of 24%.

An "A" student should recognize the primary financial indicators and contrast them over time. The student should focus on whether increases in sales due to acquisitions result in consistent increases in earnings thus creating value to stockholders. If diversion should occur, the student should note that further analysis of operational efficiency or capital structure changes would be in order.

2. Prepare common size financial statements and discuss any significant changes over time. (See Exhibits 1 and 2.)

A review of the Common Size Income Statement shows operating consistency over time. Even with Mohawk's rapid rate of growth, gross profits have maintained very consistent growth ranging from 24.17% to 27.88% of sales. Earnings before income taxes have ranged from 7.86% to 9.82% of sales with net earnings ranging from 4.78% to 6.27% of sales. Interest expense has increased relative to sales since 2001 but is still consistent over time.

Mohawk's acquisition of Unilin has added more fixed assets to the balance sheet which resulted in a general decline in current assets relative to all assets. Other notable changes include an increase in long-term debt and a reduction of retained earnings. These changes suggest the recent acquisitions were financed with a combination of debt and retained earnings. Also notable is the increase of intangible assets on the balance sheet. Total intangibles including goodwill, trade names, and other intangible assets have increased from 6.26% of total assets in 2000 to 47.50% of total assets in 2005.

An "A" student should recognize that the company has been able to maintain its growth strategy without detrimental impacts on its cost structure or earnings. The student, however, should focus on changes in the balance sheet. Increases in long-term debt, reductions in retained earnings, and an increase in less marketable intangible assets could lead to financial distress during industry downturns.

3. Calculate liquidity, leverage, asset management, and profitability and market value ratios. Show major trends graphically and describe strengths and weaknesses. RATIO ANALYSIS 2005 2004 2003 2002 2001 2000 LIQUIDITY RATIOS, SHORT-TERM SOLVENCY Current 2.10 2.19 1.73 1.97 1.77 1.71 Quick 1.06 0.94 0.79 0.94 0.86 0.75 Cash 0.12 LEVERAGE RATIOS, LONG-TERM SOLVENCY Total debt 0.62 0.39 0.45 0.45 0.46 0.58 Debt-equity 1.64 0.65 0.81 0.81 0.86 1.38 Equity multiplier 2.64 1.65 1.81 1.81 1.86 2.38 Times interest earned 8.34 10.81 8.79 6.43 9.78 7.03 ASSET MANAGEMENT, TURNOVER RATIOS Inventory turnover 4.20 4.18 4.33 4.84 4.92 4.49 Days in inventory 86.98 87.23 84.27 75.40 74.23 81.25 Receivables turnover 7.80 8.90 8.72 9.02 8.51 9.49 Days in receivables 46.79 41.01 41.87 40.45 42.89 38.47 Total asset turnover 0.83 1.34 1.20 1.26 1.95 1.90 Capital intensity 1.21 0.75 0.83 0.80 0.51 0.53 PROFITABILITY MEASURES Profit margin 0.05 0.06 0.06 0.06 0.05 0.05 Return on assets 0.04 0.08 0.07 0.08 0.11 0.09 Return on equity 0.12 0.14 0.13 0.14 0.20 0.22 MARKET VALUE RATIOS Earnings per share 5.35 5.53 4.68 4.46 3.60 3.02 Price-earning, PE 16.25 16.51 15.07 12.76 15.25 7.75 Book value per share 44.75 39.47 34.23 30.57 17.85 13.90 Market-to-book 1.94 2.31 2.06 1.86 3.07 1.69 Stock price 86.98 91.25 70.54 56.95 54.88 23.44 Dividend payout 0 0 0 0 0 0 Retention ratio 1 1 1 1 1 1

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The financial ratio analysis reveals consistent financial performance in the areas of short-term solvency and asset management. Profitability measures, while lower than the level of profitability of the pre-2001 recession, are generally consistent. The return on assets has been trending down as a result of the recent acquisitions; however, return on equity has remained steady even with increasing debt levels. One notable change is the increase in financial leverage due to the increase in long-term debt. Debt relative to assets and debt relative to equity has increased significantly.

An "A" student would calculate the key financial ratios in each major category and then focus on at least two categories that present positive and negative trends. The student should also note the rate of growth is being absorbed with little negative impact on operations. However, he should note that the change in the firm's capital structure to include more debt has impacted the firm's long-term solvency and profitability.

Teaching Plan for a Double (100 or 150 Minutes) Session

Class Time

A two-session sequence or a 2.5 hours class would include the ratio analysis previously discussed above but would add additional coverage of the strategic implications of the mergers and acquisitions and discuss more forward-looking strategies for Mohawk, Inc

Students

The two-session format is designed for students that have more advanced financial analysis and strategic management skills. The case would be appropriate for senior level finance majors, managerial finance courses, a strategic management course, or a continuing education professional improvement workshop. The ratio analysis computations would be a review for these more advanced students or professionals.

Student Preparation/Assignment Questions

1. Prepare graphical highlights of Mohawk's financial performance and discuss changes over time. (While it is not imperative for students to use a computerized spreadsheet (e.g. Excel), students should be encouraged to do so.)

2. Prepare common size financial statements and discuss any significant changes over time. (See Exhibits 1 and 2).

3. Calculate liquidity, leverage, asset management, and profitability and market value ratios. Show major trends graphically and describe strengths and weaknesses.

4. Use the DuPont Identity framework to decompose Mohawk's Return on Equity and discuss any changes in operating efficiency, asset use, and financial leverage over time. (See Ross, Westerfield, Jordan, 2007, pp. 60-63.

5. What are Mohawk's internal and sustainable growth rates and earnings per share? How have they changed and why?

6. Discuss growth issues or challenges in a mature company and/or industry.

7. Discuss both the financial and non-financial issues associated with merging companies.

8. Consider the interplay of strategic alternatives, financial outcomes, and implications of possible continued mergers and acquisitions for the industry.

Program Goals and Learning Objectives

The double session format of ratio analysis, discussion, and coverage of the strategic issues of mergers and acquisitions asks students to move beyond the computation of financial ratios and discuss their implications. This longer format can also support student learning through report preparation, graphical presentation of data, oral presentation of analysis, and the use of spreadsheet software (Excel [R], for example) in the financial and/or strategic analysis. Students can be assigned the eight questions above to consider in a report. In addition, team presentations of the findings and conclusions will provide practice with oral communication skills and teamwork.

In addition to the single session learning objectives of:

* preparing standardized financial statements for comparison purposes

* computing and interpreting common financial ratios to better understand the determinants of Mohawk's profitability and growth, and

* discussing the strengths and weaknesses of financial statement analysis.

The double session would add additional focus on the learning objectives of:

* using the DuPont Identity framework to decompose Mohawk's Return on Equity and discussing any changes in operating efficiency, asset use, and financial leverage over time. (See Ross, Westerfield, Jordan, 2007, pp. 60-63.

* determining Mohawk's internal and sustainable growth rates and earnings per share? How have they changed and why?

* recognizing growth issues in a mature company and industry,

* identifying financial and non-financial issues associated with merging companies, and

* determining the interplay of strategic alternatives, financial outcomes, and implications of possible continued mergers and acquisitions for the industry.

Teaching Plan

The teaching plan for the first session of the double session format should be consistent with the one session format. Again, it is recommended that the class begin with a brief introduction to the floorcovering industry and its history. Students should prepare the assigned questions prior to class and then, as a group, address the case questions in class.

The case analysis could also be conducted as a take-home or in-class examination of the financial and market data with strategic issues. The analysis would include a review of major industry players to understand the parallel changes at Shaw Industries, Inc. (http://www.shawfloors.com) who has also grown through a number of acquisitions. Consolidation of the industry should be discussed as well as consolidation of the retail outlets (now largely limited to big-box home improvement retailers). A discussion of the lifecycle of manufacturing companies and their maturity strategies could also be addressed in the second session.

Solutions to Assigned Questions

Mohawk continues a strategy of rapid expansion through internal growth and acquisitions. Assess Mohawk's financial performance and present your case as to whether Mohawk can continue their pace of successful financial performance given the recent acquisitions. (While it is not imperative for students to use a computerized spreadsheet (e.g. Excel), students should be encouraged to do so.)

1. Prepare graphical highlights of Mohawk's financial performance and discuss changes over time.

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Mohawk has continued their rapid rate of expansion since 2000 increasing sales from $3.4 billion in 2000 to $6.6 billion in 2005 for an average annual growth rate of 19%. After tax net earnings have increased as well from $163 million in 2000 to $358 million in 2005 for an annual average growth rate of 24%.

An "A" student should recognize the primary financial indicators and contrast them over time. The student should focus on whether increases in sales due to acquisitions results in consistent increases in earnings thus creating value to stockholders. If diversion should occur, the student should note that further analysis of operational efficiency or capital structure changes would be in order.

2. Prepare common size financial statements and discuss any significant changes over time. (See Exhibits 1 and 2.)

A review of the Common Size Income Statement shows operating consistency over time. Even with Mohawk's rapid rate of growth, gross profits have held very consistent ranging fro 24.17% to 27.88% of sales. Earnings before income taxes have ranged from 7.86% to 9.82% of sales with net earnings ranging from 4.78% to 6.27% of sales. Interest expense has increased relative to sales since 2001 but is still consistent over time.

Mohawk's acquisition of Unilin has added more fixed assets to the balance sheet which resulted in a general decline in current assets relative to all assets. Other notable changes include an increase in long-term debt and a reduction of retained earnings. These changes suggest the recent acquisitions were financed with a combination of debt and retained earnings. Also notable is the increase of intangible assets on the balance sheet. Total intangibles including goodwill, trade names, and other intangible assets has increased from 6.26% of total assets in 2000 to 47.50% of total assets in 2005.

An "A" student should recognize that the company has been able to maintain its growth strategy without detrimental impacts on its cost structure or earnings. The student, however, should focus on changes in the balance sheet. Increases in long-term debt, reductions in retained earnings, and an increase in less marketable intangible assets could lead to financial distress during industry downturns.

3. Calculate liquidity, leverage, asset management, and profitability and market value ratios. Show major trends graphically and describe strengths and weaknesses. RATIO ANALYSIS 2005 2004 2003 2002 2001 2000 LIQUIDITY RATIOS, SHORT-TERM SOLVENCY Current 2.10 2.19 1.73 1.97 1.77 1.71 Quick 1.06 0.94 0.79 0.94 0.86 0.75 Cash 0.12 LEVERAGE RATIOS, LONG-TERM SOLVENCY Total debt 0.62 0.39 0.45 0.45 0.46 0.58 Debt-equity 1.64 0.65 0.81 0.81 0.86 1.38 Equity multiplier 2.64 1.65 1.81 1.81 1.86 2.38 Times interest earned 8.34 10.81 8.79 6.43 9.78 7.03 ASSET MANAGEMENT, TURNOVER RATIOS Inventory turnover 4.20 4.18 4.33 4.84 4.92 4.49 Days in inventory 86.98 87.23 84.27 75.40 74.23 81.25 Receivables turnover 7.80 8.90 8.72 9.02 8.51 9.49 Days in receivables 46.79 41.01 41.87 40.45 42.89 38.47 Total asset turnover 0.83 1.34 1.20 1.26 1.95 1.90 Capital intensity 1.21 0.75 0.83 0.80 0.51 0.53 PROFITABILITY MEASURES Profit margin 0.05 0.06 0.06 0.06 0.05 0.05 Return on assets 0.04 0.08 0.07 0.08 0.11 0.09 Return on equity 0.12 0.14 0.13 0.14 0.20 0.22 MARKET VALUE RATIOS Earnings per share 5.35 5.53 4.68 4.46 3.60 3.02 Price-earning, PE 16.25 16.51 15.07 12.76 15.25 7.75 Book value per share 44.75 39.47 34.23 30.57 17.85 13.90 Market-to-book 1.94 2.31 2.06 1.86 3.07 1.69 Stock price 86.98 91.25 70.54 56.95 54.88 23.44 Dividend payout 0 0 0 0 0 0 Retention ratio 1 1 1 1 1 1

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The financial ratio analysis reveals consistent financial performance in the areas of short-term solvency and asset management. Profitability measures, while lower than the level of profitability of the pre-2001 recession, are generally consistent. The return on assets has been trending down as a result of the recent acquisitions; however, return on equity has remained steady even with increasing debt levels. One notable change is the increase in financial leverage due to the increase in long-term debt. Debt to assets and debt relative to equity has increased significantly.

An "A" student would calculate the key financial ratios in each major category and then focus on at least two categories that present positive and negative trends. The student should also note the rate of growth is being absorbed with little negative impact on operations. However, the change in the firm's capital structure to include more debt has impacted the firm's long-term solvency and profitability.

4. Use the DuPont Identity framework to decompose Mohawk's Return on Equity and discuss any changes in operating efficiency, asset use, and financial leverage over time. (See Ross, Westerfield, Jordan, 2007, pp. 60-63) Is this a text that anyone using this case would be expected to use? DuPont Identity 2005 2004 2003 2002 2001 2000 Profit margin 0.05 0.06 0.06 0.06 0.05 0.05 Asset turnover 0.83 1.34 1.20 1.26 1.95 1.90 Equity multiplier 2.64 1.65 1.81 1.81 1.86 2.38 Return on equity 0.12 0.14 0.13 0.14 0.20 0.22

Return on equity has remained consistent since 2002 ranging from 12% to 14%. However, Mohawk's operations and capital structure has changed considerably due to their acquisitions of non-carpet flooring. Since 2001, Mohawk's asset turnover has declined from 1.95 in 2001 to 0.83 in 2005, which suggests their latest acquisitions are more capital intensive. In addition, the equity multiplier has increased from 1.86 in 2001 to 2.64 in 2005 and suggests its use of long-term debt to finance its acquisitions has changed its capital structure. This increased use or leverage continues to reward stockholders; but, it could subject the company to financial distress during market down-turns.

An "A" student should be able to break down the DuPont Identity into its relevant parts (ratios) and discuss changes in the operational efficiency, asset use efficiency, and financial leverage of the firm over time. Most notable is the asset turnover and changes in the firm's financial leverage.

5. What are Mohawk's internal and sustainable growth rates and earnings per share? How have they changed and why? 2005 2004 2003 Internal growth rate 4.69% 9.14% 8.05% Sustainable growth rate 13.42% 16.04% 15.60% Earning per share growth rate -3.19% 18.08% 4.86% 2002 2001 2000 Internal growth rate 8.59% 11.94% 9.96% Sustainable growth rate 16.75% 24.82% 27.48% Earning per share growth rate 24.09% 18.98% N/A

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Mohawk does not pay dividends to stockholders. This 100% retention rate has allowed a combination of retained earnings and debt to finance acquisitions. Therefore, both the internal and sustainable growth rates have been declining. This suggests Mohawk's growth may be slowing to a more sustainable level. This is also evident by the 21.27% decline in the growth rate of earnings per share from 2004 to 2005.

An "A" student should be able to calculate the market value ratios and be able to convert them into internal and sustainable growth rates and explain how they have changed. The student should note the firm's dividend payout and/or retention policy and how that has fostered growth over time. The student should be able to discuss the determinants of growth and their effect on the internal and sustainable growth rates. (see Ross, et. al. 2007, pp. 64-66)

For example:

* Profit margin: An increase in profit margin will increase the firm's ability to generate funds internally thereby increasing its sustainable growth rate.

* Total asset turnover: An increase in the firm's total asset turnover increases the sales for each dollar of assets. This increases the firm's need for new assets as sales grow thereby increasing the sustainable growth rate.

* Financial policy: An increase in the firm's debt-equity ratio increases the firm's financial leverage thereby increasing the sustainable growth rate.

* Dividend policy: A decrease in the percentage paid out as dividends increases the retention thereby increasing both the internal and sustainable growth rates.

The two session case asks students to address additional strategic issues associated with a rapidly growing manufacturing firm. While the instructor has latitude to discuss a wide range of issues, the following should assist addressing some of the key strategic issues.

* Recognizing growth issues in a mature company and industry.

In an industry in the mature stage of the lifecycle, further growth through acquisition may be difficult. First, there may be no appropriate targets for acquisition. Secondly, size issues and a maximum efficient scale may be reached. Finally, the cost of growth and difficulties in assimilating additional companies, cultures, and systems may be challenging. The industry is dominated with large industry players like Mohawk Industries, Inc. and Shaw, Inc. The economic structure is an oligopolistic one and the other competitors are niche players that are typically either unprofitable or undesirable for the larger firms. It may be interesting to discover the smaller players and their foci (institutional and commercial accounts, specialty carpets for automobiles, boats, motor homes, and trailers, and high end, mass-customized designer rugs, for example).

An "A" student should be able to discuss some of the benefits and costs associated with continued growth. Growth increases economies of scale by lowering per unit fixed cost. The student should use the financial data to show changes in Mohawk's fixed cost per unit of sales over the six-year period.

* Greater market share would lead to market power and improved product pricing.

Since markets for mature industries grow more slowly, the student should expand on the benefits of growth through acquisitions rather than internal growth. The "A" student should also address growth through vertical integration. The acquisition of suppliers lowers supply chain costs and allows better coordination of supply acquisition and production.

The students should also note some of the difficulties of continued growth including the difficulty of merging different business cultures, overlapping product lines, and the integration of different management information systems.

* Financial and non-financial issues associated with merging companies.

Since internal growth opportunities are limited, an "A" student should begin to focus on the company's capital structure and discuss Mohawk's use of debt as a means of funding acquisitions and the increased financial stress due to elevated debt levels. Even non-financial issues can have financial underpinnings. Mergers made as an attempt to consolidate fragmented markets, broaden product lines, or improve supply chain management can have an impact on operating performance. An "A" student should further the discussion of the asset management financial ratios and discuss any changes over time.

* The interplay of strategic alternatives, financial outcomes, and implications of possible continued mergers and acquisitions for the industry.

An "A" student should note that regardless of the growth avenue, market share growth is the goal. Market share growth encompasses a number of strategies. Further internal growth is through process improvements and leveraging knowledge across all lines supported by real-time information systems. Acquisition is also a means to achieve a strategic goal. Acquisition offers a fast way to gain existing infrastructure including transportation and distribution centers. In other cases, the acquisition of information systems architecture has been sufficient reason to acquire another company. Purchasing sole source suppliers allows firms to have improved supply chain management through an uninterrupted source of raw materials.

An "A" student should again bring in further discussion of Mohawk's internal and sustainable growth rates and address strategic options related to future acquisitions. Firms can reduce financial leverage over time by paying down debt or issuing new equity. While lowering financial exposure, it differs in the timing of acquisitions since internal financing takes place over a longer period of time. The "A" student should stress Mohawk's need to generate free cash flow and use cash for debt repayment before continuing the pace of acquisitions.

CITED REFERENCES

"2006 Annual Report", Floor Focus, May 2006. Floor Daily

Ross, S.A., R.W. Westerfield, and B.D. Jordan. Essentials of Corporate Finance. Fifth Edition, McGraw- Hill Irwin, 2007

http://www.carpet-rug.org/

http://www.shawfloors.com

THEORETICAL READINGS

Adams, W. (1990) The Structure of American Industry. New York: Collier Macmillan.

Grant, R. M., (1995), Contemporary Strategy Analysis, Blackwell, Oxford, England.

Greiner, L. E. (1998) "Evolution and Revolution as Organizations Grow," Harvard Business Review, May 1.

Higgins, R. C., (1995), Analysis for Financial Management, Irwin, Boston

Oster, S. M. (1990), Modern Competitive Analysis, Oxford University Press, Oxford, England.

Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York.

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press, New York.

Porter, M.E. (1990) Competitive Advantage of Nations. New York: Free Press.

ASSOCIATED READINGS

"Carpet Maker Looks to Europe," Atlanta Journal Constitution, July 5, 2005 at www.ajc.com/business/content/business/0705/05bizmohawk.html.

"2006 Annual Report", Floor Focus, May 2006.

Helm, D. (2005). "Top 15 Specified Carpet Manufacturers" Floor Focus, 14(5), June, p. 25-49.

Jones, J. (2005). "Mohawk Acquisition to Boost Company," The Daily Citizen, Friday, A1, A3.

Oliver, C. (2005) "American Products Have an Edge on the Overseas Competition," The Daily Citizen, Dalton, Georgia, Friday, March 25, p. 3.

Pare, M. (2005) "Investors React Favorably to Mohawk's Venture into Laminates," Chattanooga Times Free Press, July 5, 2005, D1.

Patton, R. L. (2004). Shaw Industries: A History, The University of Georgia Press.

"Scoring Flooring Industry Stats for 2004" Floor Covering News, July 11/18. 2005, Volume 20, Number 9. p. 1-18. Mohawk Websites

http://www.mohawk-flooring.com

http://www.mohawkind.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/

Cluster Analysis

http://www.isc.hbs.edu/MetaStudy2002Bib.pdf

Larry A Johnson, Dalton State College

Marilyn M. Helms, Dalton State College

Joseph T. Baxter, Dalton State College Exhibit 1: Mohawk Industries, Inc. Common Size Income Statement (In percent, except per share data) Years Ended December 31, 2000-2005 Year 2005 2004 2003 Net sales 100.00% 100.00% 100.00% Cost of sales 73.97% 72.44% 72.12% Gross profit 26.03% 27.56% 27.88% Selling, general & administrative expenses 16.55% 16.75% 17.04% Legal settlement 0.00% 0.00% 0.00% Operating income 9.48% 10.81% 10.84% Other expense (income): 0.00% 0.00% 0.00% Interest expense 1.01% 0.91% 1.11% Other expense 0.18% 0.17% 0.13% Other income -0.12% -0.08% -0.16% Total other expense (income) 1.06% 0.99% 1.07% Earnings before income taxes 8.41% 9.82% 9.77% Income taxes 3.00% 3.55% 3.57% Net earnings 5.41% 6.27% 6.20% (In percent, except per share data) Years Ended December 31, 2000-2005 Year 2002 2001 2000 Net sales 100.00% 100.00% 100.00% Cost of sales 72.58% 75.83% 75.83% Gross profit 27.42% 24.17% 24.17% Selling, general & administrative expenses 15.88% 14.68% 14.86% Legal settlement 0.00% 0.00% 0.21% Operating income 11.54% 9.49% 9.11% Other expense (income): 0.00% 0.00% 0.00% Interest expense 1.53% 0.86% 1.12% Other expense 0.30% 0.23% 0.17% Other income -0.09% -0.05% -0.04% Total other expense (income) 1.73% 1.04% 1.25% Earnings before income taxes 9.81% 8.46% 7.86% Income taxes 3.52% 2.98% 3.09% Net earnings 6.29% 5.47% 4.78% Exhibit 2: Mohawk Industries, Inc. Common Size Balance Sheet (In thousands, except per share data) ASSETS 2005 2004 2003 Current assets: Cash and cash equivalents 1.68% 0.00% 0.00% Receivables 10.62% 15.00% 13.77% Inventories 14.60% 23.12% 19.99% Prepaid expenses and other assets 1.76% 1.12% 1.03% Deferred income taxes 0.62% 1.26% 2.02% Total current assets 29.29% 40.50% 36.82% Property, plant and equipment, net 22.66% 20.56% 22.07% Goodwill 32.81% 31.28% 32.87% Trade-names 7.78% 6.18% 0.00% Other intangible assets 6.91% 1.14% 7.81% Other assets 0.55% 0.33% 0.41% Total Assets 100.00% 100.00% 100.00% LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt 1.42% 4.35% 5.98% Accounts payable and accrued expenses 12.49% 14.15% 15.32% Total current liabilities 13.91% 18.50% 21.30% Deferred income taxes 7.83% 4.36% 4.41% Long-term debt, less current portion 39.97% 15.90% 18.34% Other long-term liabilities 0.40% 0.70% 0.76% Total Liabilities 62.12% 39.44% 44.81% Stockholders' equity: (see yearly notes in Annual Reports) Common stock 0.00% 0.00% 0.00% Additional paid-in capital 14.06% 24.04% 24.88% Retained earnings 28.39% 43.39% 37.03% Accumulated other comprehensive loss -0.59% -0.06% 0.06% Less treasury stock 0.00% 0.00% 0.00% Total stockholders' equity 37.88% 60.56% 55.19% Total Liabilities and Stockholder Equity 100.00% 100.00% 100.00% ASSETS 2002 2001 2000 Current assets: Cash and cash equivalents 0.00% 0.00% 0.00% Receivables 13.93% 22.89% 19.99% Inventories 18.85% 30.05% 32.00% Prepaid expenses and other assets 1.04% 1.41% 1.50% Deferred income taxes 2.28% 3.96% 3.70% Total current assets 36.10% 58.31% 57.19% Property, plant and equipment, net 23.78% 35.04% 36.21% Goodwill 35.52% 6.17% 6.26% Trade-names 0.00% 0.00% 0.00% Other intangible assets 4.08% 0.00% 0.00% Other assets 0.52% 0.47% 0.34% Total Assets 100.00% 100.00% 100.00% LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt 0.76% 8.95% 12.50% Accounts payable and accrued expenses 17.52% 23.95% 20.90% Total current liabilities 18.29% 32.90% 33.40% Deferred income taxes 4.06% 4.80% 4.22% Long-term debt, less current portion 22.05% 8.49% 20.35% Other long-term liabilities 0.48% 0.17% 0.01% Total Liabilities 44.87% 46.36% 57.98% Stockholders' equity: (see yearly notes in Annual Reports) Common stock 0.00% 0.03% 0.03% Additional paid-in capital 27.99% 11.15% 10.21% Retained earnings 34.24% 53.56% 42.25% Accumulated other comprehensive loss 0.03% -0.16% 0.00% Less treasury stock 0.00% 0.00% 0.00% Total stockholders' equity 55.13% 53.64% 42.02% Total Liabilities and Stockholder Equity 100.00% 100.00% 100.00%