1. The Right Choice. MOHAWK INDUSTRIES 2005AR A N N UA L R EP O R T

2. FINANCIAL HIGHLIGHTS NET SALES EARNINGS PER SHARE (in billions) *Excludes a non-recurring $34.3 million (net of tax of $22.3 million) inventory fair value adjustment related to the Unilin Acquisition. This results in an $0.33 per share increase in diluted earnings per share, based on weighted out-standing shares of 67,644. Highlights (in thousands, except per share data) Years Ended December 312005 20042003 2002 2001Net Sales$6,620,099 $5,880,372 $4,999,381 $4,516,957 $3,441,267 Gross Profit $1,723,134 $1,620,841 $1,393,802 $1,269,092 $ 857,598 Operating Income $ 627,272$ 635,590$ 542,029$ 522,065$ 327,157 Net Earnings $ 358,195$ 368,622$ 310,149$ 284,489$ 188,592 Diluted Earnings Per Share $5.30$5.46$4.62$4.39$3.55 3. PG 01 INTRODUCTION THE RIGHT CHOICE. Whether you are a consumer selecting a oor covering, or, in our case, a company acquiring another business, it is important to make sure your choice is based on the right reasons. Business Prole From its beginning as a carpet and rug manufacturer, Mohawk Industries has evolved into one of the worlds leading ooring companies. Its product line encompasses tufted and woven carpet, rugs, ceramic tile, laminate, stone, wood, vinyl, carpet cushion and niche home products, such as throws and bedspreads. Mohawk is head- quartered in Calhoun, Georgia. Its shares trade on the New York Stock Exchange under the ticker symbol MHK. 4. PG 02 SECTION 1THE RIGHT CHOICE. THE RIGHT CHOICE. Puts Us Closer to Becominga Total Flooring Company 5. PG 03 THE CARPET CHOICE THE RIGHT CHOICE.ResidentialFashion Brands Commercial Three lines Aladdin, Horizon and For those seeking a fashion-forward lookBigelow, Mohawk Commercial, Durkan, WundaWeve provide one of the industrysand exceptional quality, the Karastan, Karastan Contract and Lees cover millions largest product selections, offering consum- CustomWeave, Ralph Lauren and Helios of square feet in corporate ofces, hotels, ers a wide range of values, colors, fashions brands are among the best names in carpeting. schools, airports and retail stores throughout and styles.the country. Carpet is unmatched in its ability to bring warmth to a room and softness to a floor. Our portfolio of carpet brands ensures that customers can choose from a wide variety of styles, colors, textures and price points. Mohawk CushionCarpet cushion is a critical component to carpet performance. It extends the life of carpet by acting as ashock absorber, providing additional softness, improving acoustical and insulating properties and hidingthe unevenness of a suboor. Mohawk is a leading manufacturer and distributor of carpet cushion, offeringa variety of thicknesses and densities. 6. PG 04 THE RIGHT CHOICE.A MORE DIVERSIFIED PRODUCT LINEMohawks strategic goal to become a total ooring company is driven by one simple fact:there are more ooring options for residential and commercial space than ever before andfewer ooring rules than ever before. Remember when vinyl was the obvious choice fora kitchen oor and wall-to-wall carpet was a given in every living room? No more. Flooringhas become yet another way to express personal taste and creativity in dcor.This wide variety of ooring options is the primarycategories. The Company is the largest supplier inreason the ooring industry has, and continues tothe ceramic and stone product categories and one ofenjoy, healthy growth rates, averaging ve percent the largest laminate suppliers. Mohawk has achievedannually in recent years. In fact, every ooring category, these market positions while continuing to maintain awith the exception of vinyl, has grown over the past top two position in broadloom carpet and a numberdecade. Accompanying this overall growth has beenone position in rugs and mats.a shift in category growth. Though carpet remains theMohawk balances its acquisition strategy with atop choice for oor covering, hard surfaces, such as commitment to its core broadloom carpet business.ceramic, stone, laminate and wood are becoming The Companys 125-plus years of innovation inmore popular choices. These hard surfaces also are manufacturing, design and marketing have estab-the fastest growing categories in the industry, averag-lished Mohawk as a leader in the broadloom producting ten percent per year, versus three percent for category. Ongoing investment in the development ofbroadloom carpet.new products for residential and commercial applica-Mohawk has positioned its business very well totions, as well as manufacturing improvements andcapitalize on these industry trends. A focused and national television and print advertising campaignsaggressive acquisition program has expanded theensure continued strong market positions for MohawksCompanys presence in hard surface categories in carpet brands.recent years. So much so that Mohawks presence in The breadth and depth of Mohawks producthard surface categories is now above the industryportfolio reects its highly diversied customer base.average. Broadloom carpet and rugs still represent The Company has over 30,000 customers with nothe majority of sales; however, the Companys salesindividual customer accounting for more than vemix has changed dramatically since 2001, with hard percent of sales. This customer base also is well-surfaces increasing from approximately 5 percent toproportioned among three primary end-use markets approximately 35 percent of total sales in 2005. new residential construction, commercial and, by farEqually impressive are the dominant market the largest, residential replacement.positions that Mohawk has established in hard surfaceFavorable Industry Growth TrendsDemographic and population trends support continued growth for the ooring industry.Housing demand is driven by household formation, which is expected to remain strongthrough this decade as a result of aging Baby-Boomers, their children and new immigrants. 7. PG 05 An Industry SnapshotWITH GROWTH HAS COME A SHIFT IN MARKET SHARE AMONG PRODUCT CATEGORIES.THE RIGHT CHOICE. 2004 INDUSTRY PRODUCT CATEGORY MIX INDUSTRY END-USE MARKETS Carpet/Rugs 62% Residential Replacement 55% Ceramic 12% New Construction 25% Hardwood 10% Commercial/Transportation 20% Vinyl/Rubber 9% Laminate 6% Other 1% Source: Floor Covering WeeklySource: Floor Covering Weekly FLOORING CATEGORY 5 & 10 YEAR SALES CATEGORY GROWTH 10 %15 %20 % 0% 5% 5-year Laminate 10-year Ceramic/TileHardwoodVinylCarpet/RugsTotal U.S. Flooring The Top Player: Mohawk is the largest supplier of ooring in the United States and holds top market positions within every major ooring category. Over the past decade, acquisitions and internal growth have nearly doubled Mohawks overall share to 23 percent of the market.Record Remodeling Levels Remodeling is big business these days. According to the Joint Center for Housing Studies of Harvard University and the U.S. Department of Commerce, remodeling expenditures by home- owners and rental property owners totaled $233 billion in 2003, up 53 percent since 1995. This represents 40 percent of all residential construction and improvement spending, which is more than two percent of the U.S. economy. 0 5 10 1520 8. PG 06 SECTION 2 THE RIGHT CHOICE. THE RIGHT CHOICE. Wins Us Best in Class 9. PG 07THE LAMINATE CHOICETHE RIGHT CHOICE. Laminate ooring offers consumers many versatile looks. Widths range from traditional- to wide-width planks and nishes offer the look of numeroushardwood species, as well as ceramic and natural stone. Different types of grooves and oor pattern layouts also add unique visual interest.One of the virtues of laminate ooring is its ease of installation, particularly with the Unilin Uniclic system. Thanks to the simplicity of this system, it is an ideal method for do-it-yourself homeowners, which makes laminate ooring an even more affordable choice.Fast installation that requires no glue, sanding or other messy processes means that a new laminate oor can make a room in no time. Just installed laminate can be walked on immediately after installation and furniture moved quickly back into place. Laminate has been the fastest growing ooring category over the past ve years. It provides the look of other surfaces, such as hardwood or stone, with a variety of design possibilities. Stylish versatility, scratch resistance and simple installation make laminate a winning choice.Unilin in Europe Unilin is the laminate ooring market leader in Europe, where it enjoys a 19 percent share of the UK market, a 14 percent share in France and a 25 percent share in the Benelux countries. The majority of its distribution in Europe is through specialty stores. Unilin possesses backward integration in Europe, just as Mohawk does in its North America operations. 10. PG 08 THE RIGHT CHOICE.MARKET-LEADING ACQUISITIONSAcquisitions have been a part of Mohawks diversication strategy. In the past 14 years,the Company has completed 19 acquisitions, representing over $3.5 billion in sales. Ineach case, the acquisition has enabled the Company either to extend its category reach,expand manufacturing capabilities, enhance its price point coverage within a category orgrow into new distribution channels.The acquisition of Karastan Bigelow in 1993, for an easy bolt-on acquisition to the existing organiza-instance, provided an entre to the luxury segment tion.of broadloom carpet and rugs through the highlyLast year, Mohawk found another rare opportu-respected Karastan brand. In 2003, the acquisition nity in Unilin, one of the worlds leading producers of of Lees Carpet gave Mohawk a major position in laminate products. Like Dal-Tile, Unilin possessesthe commercial modular ooring market. Mohawksstrong management and nancial performance, astwo largest acquisitions to date, however, are well as a unique set of operating attributes. Theunique in that the transactions not only extendedBelgium-based company was a pioneer in the fastthe Companys product range, but also catapulted itgrowing European laminate market during the 1990s.immediately to the top of two major product categories.It is well positioned to participate in the U.S. marketIndeed, the acquisitions of Dal-Tile and Unilin have which is expected to grow at 15 percent annually.been transforming moments in Mohawks evolutionIn the United States, Unilin is the only vertically inte-into a total ooring company.grated laminate producer and is among the top laminateIn 2002, Mohawk became the leading provider of brands. They are also the market leader in the premiumceramic tile in the United States through its purchase laminate segment.of Dal-Tile. It was a unique opportunity for Mohawk. In addition to these impressive credentials, UnilinWith annual sales in 2005 of $1.7 billion, Dal-Tile wasis known for product innovation and its strong patentand remains the largest player in the ceramic market-portfolio. In 1989, Unilin introduced direct pressureplace by a wide margin. Dal-Tile owns two of the mostlaminate, the product that is the basis of todays indus-widely recognized brands in ceramic tile, Dal-Tile and try. In 1996, its patented Uniclic system representedAmerican Olean, and offers the most comprehensive a technological breakthrough in laminate installation.product line in the industry. Its products enjoy broad More recently, Unilin introduced a new design thatdistribution through company-operated sales servicesimulates hardwood oors, complete with beveledcenters, independent distributors and home centeredges. Last year, another design innovation that dupli-retailers. It also possesses the largest ceramic tilecates the look of premium, hand-scraped hardwoodsmanufacturing capacity of any U.S.-based manufac-began hitting the market. Like Dal-Tile, Unilin bringsturer. With strong management and a record of solidMohawk everything necessary to be a major player innancial performance, Dal-Tile came to Mohawk as another fast-growing, high-return product category.The Stone Market LeaderNatural stone, such as granite, marble and limestone, is a popular choice, not only for ooring, but also for countertops and backsplashes. Several acquisitions in recent years have made Mohawks Dal-Tile division the market leader in the stone product categories. 11. PG 09 Unilin Laminate INNOVATION IN PRODUCTS AND INSTALLATION METHODS CREATE A LEADING MARKET POSITION.THE RIGHT CHOICE.LAMINATE FLOORING COMPONENTSA photograph or picture is placed on topof high-density fiberboard and then sealedwith melamine resin. 1. 2. 3. 1. Transparent, Wear-Resistant Overlay4. 2. Decor Layer (Master) Core 3. HDF Quick-Step 4. Melamine UnderlayerUNICLIC SLIDING METHODEase of installation makes laminate a popularchoice for the do-it-yourself market. 1.2.3. U.S. LAMINATE FLOORING SALES GROWTH (Annual Sales in Millions) UNICLIC ANGLING METHOD This patented installation process wasthe first glue-less locking system whenintroduced in 1996. 1. 2.3. Source: Floor Covering WeeklyUnilins patented Uniclic installation method has helped establishleading laminate market positions in France, the United Kingdom, theBenelux countries and the United States. Unilin Roong Roong systems and other wood-based panels complement Unilins laminate ooring business. These systems reduce the time and labor of roof installation through a process that involves only four, rather than seven, steps. Other wood-based panels offer a wide range of high value decorative products, as well as humidity-resistant and re-resistant performance characteristics. 12. PG 10 SECTION 3THE RIGHT CHOICE. THE RIGHT CHOICE. Helps a Growth VehicleGrow Faster 13. PG 11 THE CERAMIC & STONE CHOICETHE RIGHT CHOICE. Ceramic tile offers a unique Natural stone countertops way to express individualand backsplashes such as style in any room of the granite, marble or travertine, house, from the kitchen to have become de rigueur in the living room to the sunroom.todays upscale kitchens. One of the most versatileLike its ceramic counterpart, decorative materials, tile can natural stone can be cut in a cover oor and wall surfaces variety of shapes and sizes in virtually any color, shape or to create a variety of looks. pattern, as well as a wide range of nishes. Old world rustic, sleekMarble, travertine, onyx, contemporary, high fashion granite, slate and tumbled design, traditional classics natural stone are among the these are just a few of themost popular choices for moods that ceramic tile canstone ooring today and can bring to an environment. be found in virtually everytype of living space.Whether on floors, walls or countertops, ceramic and stone provide an infinite numberof ways to create highly customized looks for any type of space. Glazed or unglazed,fine porcelain or natural stone, large pavers or intricate mosaics, ceramic and stonesurfaces present a unique opportunity to add style and beauty to an environment.Mohawk University Consumers face many considerations when making a ooring purchase. This means a knowledgeable retail sales force is critical to the process. To help customers grow sales, Mohawk offers the industrys premier training program, Mohawk University, where experts provide classes in selling skills, hard and soft surface product information and business management. In 2006, Mohawk University will offer 252 classes in 79 cities in the United States and Canada. 14. PG 12 THE RIGHT CHOICE.GROWTH ACCELERATION STRATEGIESMohawk buys companies with the intent to build upon their strengths. A Mohawkacquisition immediately becomes part of the largest ooring company in North America one that has the capital and resources needed to maximize growth potential. Whetherit is realizing revenue synergies or nding new scales of economy for cost efciency,Mohawks goal is to maximize its return and create new value for shareholders.The acquisition of Dal-Tile is an excellent example ofthe laminate market that Dal-Tile brought in ceramics.this process. Since Dal-Tile joined Mohawk in 2002, itUnilin, which is the only vertically integrated laminatehas increased its manufacturing capacity by 14 percentproducer in North America, has recently increasedthrough the construction of new facilities in Oklahomacapacity at its North Carolina manufacturing facility byand Mexico. Product selection has expanded, partic- 100 million square feet per year. Additionally, Unilinsularly in the residential segment. Over half of Dal-Tilesstrong management team remains with the Companysales service centers have been remodeled and sales and Frans De Cock, Unilins president, now sits onpersonnel increased. Because tile offers so manyMohawks board.different design options, Dal-Tile has establishedIncreasing market share will be a major growthgallery selection centers that showcase the entiredriver for Unilin. In Europe, laminate ooring hasproduct portfolio in six major U.S. markets.grown rapidly over the past decade and now accountsDal-Tile investments are demonstrating clearfor 10 percent of ooring sales. In the United States,results. The division has averaged sales growth ofa less mature market, laminate accounts for just sixapproximately 15 percent annually since 2002, approxi-percent of sales, but has grown 17 percent annually,mately four percent higher than before the acquisition. taking share primarily from vinyl and wood ooring.Dal-Tile has increased its share in the residential mar-Accelerating market penetration is a top priorityket as it tries to match its historical share strength in for Unilin in North America. As part of Mohawk, Unilinthe commercial market. The divisions sales mix has will continue to grow its brand through independentchanged with an emphasis on higher-margin products. distributors and dealers. Given the relative ease ofThrough Dal-Tiles marketing team, Mohawk has beeninstallation, home improvement retailers are a majorable to nd new opportunities to place its imported source of laminate sales, and Unilin intends to expandceramic tile product line, signicantly contributing to its share of this market as well. Mohawks relationshipthe sales growth of Mohawk Hard Surfaces. Finally, as with an extensive network of independent dealerspart of Mohawk, Dal-Tile has built a leading presence also represents an opportunity to introduce new prod-in stone surfaces through a series of acquisitions anducts under the Mohawk label. Finally, Unilins recordstrong internal growth. of innovation and technological breakthroughs offersMohawk expects a similar success story with the promise of new product introductions in theUnilin, which brings many of the same strengths inyears ahead.Sustainability Mohawk believes sustainability makes good business sense and constantly seeks ways to reduce, recycle, reuse and renew. From 1995 to 2003, for instance, the Company reduced water use by 50 percent, and, within a two-year period, achieved a 70 percent reduction in phosphorous emissions in one of its Georgia operations. In short, Mohawk recognizes that how it does business today impacts the quality of life for people tomorrow. 15. PG 13 More Opportunity FASTER GROWTH IS AN ADVANTAGE OF BECOMING PARTOF NORTH AMERICAS LARGEST FLOORING COMPANY. THE RIGHT CHOICE. DAL-TILE DESIGN CENTERDAL-TILE SALES 2002-2005(dollars in billions) Dal-Tile sales have averaged approximately 15 percent in annual growth since becoming a part of Mohawk. UNILIN GROWTH OPPORTUNITIES Laminate market share Introduction of new growth as a substituteproducts under the ooring for other cate- Mohawk brand for spe- gories, such as vinyl cialty retail distribution. and wood. New product develop- Expanded penetrationment and technological of independent dealer innovation. and home improvement retail distribution channels.Vertically integrated manufacturing, market leading brands, experiencedmanagement and solid nancial performance are some of the similaritiesfound in Unilin and Dal-Tile, Mohawks two largest acquisitions to date.Dal-Tile Design Centers Tile and stone offer endless design options and there is no better place to view the possibilities than Dal-Tiles Design Centers. Now open in six major markets, these showrooms display the divisions full line of products under one roof. Design consultants are on hand to offer ideas to buyers who are contemplating an installation. 16. PG 14 SECTION 4THE RIGHT CHOICE. THE RIGHT CHOICE. Stretches Our DistributionEven Farther 17. PG 15 MORE CHOICESTHE RIGHT CHOICE. Solid handcrafted hardwood oors have been a standardMohawk is a national distributor of Congoleum vinyl of quality for centuries. Mohawk distributes a full rangeproducts, which offer versatility, durability and an exceptionally of hardwood ooring in a variety of species and nishes. wide selection of colors and styles. Mohawks line of bath fashions complements both contem- Mohawks fashionable doormats accentuate the exterior of a porary and traditional dcors. The fashionable and practicalhome. The Matrix mat features a recycled rubber molding tech- line of bath rugs accents the beauty of ceramic tile oors andnology that adds dimensional quality to the design of doormats. stone countertops, further illustrating Mohawks position asMatrix mats are enhanced with TuffTone, a new patent pending a total ooring provider. surface application that adds color, function and durability. Mohawk ooring selections include a full line of hardwood and vinyl options. Mohawk also makes the room in more ways than covering oors, countertops and walls. Mohawk Home features a wide variety of bath rugs, mats, bedspreads and decorative throws that span a range of styles and price points. RecyclingRecycling is not only an environmental responsibility at Mohawk, but also a core part of its manufacturing. A fewexamples: Each year, the Company transforms three billion bottles (25 percent of all plastic drink bottles collectedin North America) into 160 million pounds of recycled polyester ber for carpets. It also annually recycles 720,000tires into durable doormats and uses 15 million pounds of foam rubber scraps per month at each of its carpetpadding facilities. 18. PG 16 THE RIGHT CHOICE.INFRASTRUCTURE LEVERAGEAs North Americas largest ooring company, Mohawk possesses a sales and distributioninfrastructure unmatched in the industry. This infrastructure not only provides competitiveadvantages, but also provides the opportunity to realize economies of scale as the productportfolio expands. This is most evident in Mohawks distribution chain. As the leader in ooring sales in the U.S., Mohawk has When Mohawk enters a new ooring category,relationships with the vast majority of independentit can offer a selection of new products to this baseooring retailers, retail marketing groups and big boxof retailers, often through re-branding programs,retailers as well as with many contractors and otherthereby creating a new distribution channel with adistributors of ooring. Included in this distribution wealth of promotional resources and support.chain is Mohawks extensive network of more than In addition to its strong retail distribution network,2,500 aligned flooring retailers, which represents Mohawk operates a vast logistics organization. Thenearly 10 percent of all independent retail dealers in Companys transportation eet combined with ware-the United States. Three major merchandising pro-housing operations coast-to-coast ensures that it cangrams support these retailers: supply product to any retailer in the country within days. This operation is a highly exible transporta- Mohawk Floorscapes The 500 storefronts that tion system, able to deliver carpet, tile, laminate orparticipate in the program co-brand their stores any other type of ooring. The system has an excellentwith Mohawk and realize the majority of their record of product accuracy and on-time delivery,sales from Mohawk products. Mohawk supports thanks to Mohawks Real-Time Visibility software,them with the latest Mohawk retail merchandising which provides another level of reliability to Mohawkssystems, training programs, customer nance retail partners.programs and advertising and marketing support. Mohawks substantial logistics and distribution Mohawk ColorCenter These 2,000 storefronts systems provide strong competitive advantages ingenerate a substantial amount of their sales from the marketplace. With a highly diverse base of overMohawk products through a-store-within-a- 30,000 customers and several different distributionstore. Mohawk supports them with specialized channels, Mohawk is able to leverage its infrastruc-training, merchandising and warranty information. ture to its advantage in the marketplace. Additionally, Mohawk Floorz This program is aimed at largerthe Company has some of the best known brands inretailers, currently about 80 stores, and provides the industry, allowing for differentiation of products toa variety of special programs and products tominimize channel conict.support their in-stock positions.Backward IntegrationMohawks supply chain runs both ways. In addition to the forward integration that its national distributioninfrastructure affords, the Company also controls manufacturing for its broadloom product line, carpetpad and carpet backing, and provides ber extrusion for over 60 percent of its capacity requirements.Unilin and Dal-Tile also feature backward integration as part of their business model, though Dal-Tilesources a portion of its ceramic tile internationally. 19. PG 17 Distribution Size & Scale AN EVER-EXPANDING PRODUCT PORTFOLIO FURTHER LEVERAGES A NATIONAL INFRASTRUCTURE.THE RIGHT CHOICE. NATIONAL DISTRIBUTION NETWORK From the factory floor to the warehouse floor to the retail floor, Mohawk is able to deliver any product to any location quickly and accurately.1,000 TRUCKS19 REGIONAL WAREHOUSES43 SATELLITE WAREHOUSES2,000 TRAILERS 21 FACTORY WAREHOUSES 255 DAL-TILE SALES CENTERSMohawks national distribution network is comparable to a small nationalfreight company. Unparalleled distribution assets, vast logisticsexperience and state-of-the-art software systems enable this operationto service over 30,000 customers nationwide. Value-Added Marketing Floor covering retailers who align with Mohawk not only get leading brands and product lines but also an impressive suite of value-added services. The Company supports its retail partners through consumer advertising campaigns, incentive programs, customized training, direct mail and point-of- purchase materials, Web site design and purchasing discounts. 20. PG 18 SECTION 5THE RIGHT CHOICE.THE RIGHT CHOICE. Our strategy is to ensure that no matter which ooring consumers choose hard or soft surface there is a Mohawk product to meet their needs.Jeffrey S. Lorberbaum, Chairman, President and Chief Executive Ofcer 21. PG 19THE RIGHT CHOICE. A Letter to Our Shareholders Managing a business successfully comes down to making already are hard at work to capitalize on the opportunities the right choices the long-term strategic decisions, as wellpresented by the Mohawk and Unilin combination. as the daily nuts and bolts issues. Mohawk produced solid results in 2005 and continued the Companys transforma- Mohawk Segment Manages External Challenges tion into a total ooring provider. While we will remember Unilin as the single most importantCertainly, the acquisition of Unilin was the most signicant strategic decision in 2005, we also will remember the year strategic decision of the year and one of the most importantas one in which we were faced with countless operating in Mohawks history. Hard surface ooring continues to grow decisions to manage the challenges created by hurricanes in popularity and consumers have more options from whichKatrina and Rita. The disruptions to the petrochemical to choose than ever before. While we continue to invest in ourindustry in the Gulf region were felt across our entire supply core carpet manufacturing business, our strategy is to ensure chain. From raw material shortages to freight transportation that no matter which ooring consumers choose hard or issues, nearly every aspect of our manufacturing and dis- soft surface there is a Mohawk product to meet their needs. tribution operation was put to the test. Fortunately, we were With strong positions already established in residential andable to minimize the effects of most temporary disruptions. commercial carpet, ceramic tile and stone, Unilin now providesAs expected, the storms pushed already high raw material Mohawk with the laminate component of what is very close to costs even higher, in some cases as much as 50 percent. being a complete ooring portfolio of market leading products.For the second consecutive year, the industry absorbedIt is important to note the market leading aspect of thisthese increases in a rational manner by passing through portfolio. There are many ways to enter a ooring category, but additional price increases. few ways to become a market leader in a short period of time. Lower consumer condence inuenced by rising heating Just as our 2002 acquisition of Dal-Tile made Mohawk the larg-and gasoline costs as well as higher interest rates resulted est supplier of ceramic tile, the purchase of Unilin immediatelyin a softening of the residential replacement market for broad- places us among the top laminate suppliers in the Unitedloom carpet, which accounts for over 50 percent of industry States and Europe.sales. Sustained demand in the new residential construc-With Unilin, we have acquired world-class assets and strengths among them, leading market shares in Europe,There are many ways to enter a ooring excellent growth prospects in North American distributioncategory, but few ways to become a channels, a distinctive brand, superior technology and an experienced management team. Again, as with Dal-Tile, wemarket leader in a short period of time. 22. PG 20 THE RIGHT CHOICE. tion and commercial industry segments, along with several Dal-Tile Enjoys Double-Digit Growth price increases, helped the Mohawk segment increase Dal-Tile had another solid performance in 2005. This market revenues 8 percent to $4.717 billion in 2005. leader in ceramic tile experienced strong growth in the The commercial market is a bright spot in the business. residential builder sector, where investments in a broader Two years after our acquisition of Lees, a leader in the com- product line and marketing are paying off. Robust demand mercial market, we continue to be pleased with the position in new construction, as well as a rebound in the commercial it has provided us in commercial carpet tiles. This product end of the market, helped push division sales up 15 percent carries a higher average price point than broadloom carpetfrom last year. The addition of stone products in recent and is serving us well as a growth vehicle. years, now sold through all tile service centers and 17 stone Another promising development in our Mohawk segment slab locations, also is driving top-line growth for Dal-Tile. was the debut of SmartStrand, a proprietary technical devel-Like Unilin and Mohawk, Dal-Tile is a vertically inte- opment created through an exclusive partnership with DuPont grated operation, which presents additional opportunities that utilizes its Sorona polymers. This innovative ber tech-for protable growth. By the end of 2006, Dal-Tile will realize nology combines the durability of high-performance bersapproximately 20 percent more manufacturing capacity with stain resistance that is engineered into the ber to provide through the expansion of its plants in Mexico and Oklahoma. new levels of protections. The November retail rollout has been well received by Mohawks customer base and is being SmartStrand with DuPont Sorona supported through educational material directed to retail polymer is one of the most innovative customers sales staff so that they can better articulate the Sorona advantages to consumers. technologies in many years. We are particularly excited that DuPont Sorona will transition to a new bio-based manufacturing process during 2006. This process utilizes fermentation based on corn sugar, This increase in capacity will lead to greater manufacturing a renewable resource, rather than a petrochemical process.exibility, higher inventory turns and increased margins. We This represents a major step forward in efforts to move our intend to continue upgrading the ceramic product mix industry toward greener production of materials and to com- and will be manufacturing more value-added ceramic lines bat potentially higher petrochemical prices in the future. Ourthat sell at higher price points. partnership with DuPont demonstrates how our strong indus- try position can provide signicant competitive advantages. Past Performance and Future Prospects Are Solid Mohawk Home, which offers consumers a wide varietyThough there was no shortage of external challenges in of bath and area rugs, bedspreads, throws and doormats, 2005, the Companys consolidated performance remained has continued to develop an impressive distribution, rang-solid. Net sales for the year grew 13 percent to $6.620 billion ing from big box retailers to boutique shops. Mohawk Home primarily as a result of the Unilin acquisition, internal growth has chosen to exit some import categories, which had lowerand price increases. Diluted earnings per share were $5.30 margins, impacting sales in 2005. The Home Division con-in 2005, or $5.63 after adjusting to exclude a non-recurring tinues as the industry leader in area and bath rugs.fair value inventory adjustment of $34.3 million (before taxes) related to the Unilin acquisition. The adjusted earnings per 23. PG 21 THE RIGHT CHOICE. share represent a three percent increase over earnings persurface products, led by the expansion of Unilins business in share in 2004. In addition, our earnings were negativelyNorth America. Dal-Tile will build upon the momentum in its impacted by LIFO inventory charges of approximately business to add more sales service centers, introduce new $45.0 million during 2005.products and grow its natural stone business.Our expectation is that raw material costs should stabilize in 2006. We will continue to manage these withMohawk Continues to Be the Right Choice our retail partners. The expansion of our ber extrusion andWe believe Mohawk remains the right choice for investors yarn conversion capabilities will provide increased capacityseeking a market leader in an industry with attractive pros- and exibility to satisfy requirements for both nylon and pects, namely recurring demand, a diversied customer base, polyester ber. consolidated manufacturing and limited foreign competition,Technology investments, such as our new Real Timerelative to many other industries. Always an essential part of Visibility (RTV) software program for residential carpet andany space, oorings great range of materials today carpet, hardwood retailers, will provide our customers with improvedceramic, laminate, wood have made it a popular decorating delivery information and inventory management. This year, vehicle in an age when interest in remodeling is at a high level. Mohawk rolled out a new Corporate Environmental Policy, Remodeling expenditures constitute a signicant part of all which renes standards for continuous improvement in allconstruction spending and represent more than 2 percent areas of environmental stewardship, including the respon- of the total U.S. economy. sible use of raw materials and natural resources, as well as Within this industry, Mohawk presents a compelling processes at our facilities that can reduce the environmental case. Our broadloom carpet business provides a strong impact of our activities in communities where we operate. market foundation. The success of our Dal-Tile acquisitionOur biggest priority in the coming year, however, will behas made us the leader in ceramic tile and stone and the on the top line, where we intend to capitalize on the substantial recent Unilin purchase positions us perfectly to claim a opportunities before us. We remain optimistic about the marketleading share in the growing laminate category. We have for commercial carpet, and we are positioned to deliver value relationships with over 30,000 customers. Our manufactur- and service as we capture an even larger percentage of this ing and distribution infrastructure is second to none. And, category. Through print and electronic advertising, consumergrowing sales provide increasing leverage to these xed awareness of our residential carpet line has increased. Weassets. For all these reasons and more, we are condent also are helping our customers sales associates offer better that we will continue to reward you for making Mohawk the advice to consumers through training programs offered byright choice as an investment. Mohawk University. Look for more growth from all of our hard Our industry enjoys recurring demand, a diversied customer base, consolidated Jeffrey S. Lorberbaum manufacturing and limited foreign Chairman, President and Chief Executive Ofcer competition. March 30, 2006 24. PG 22 SECTION 6 Q&A UNILIN PRESIDENT FRANS DEJEFFREY LORBERBAUM AND MOHAWK CHAIRMAN & CEO COCK THE RIGHT CHOICE. Weve made what we consider to be the best laminate company in the world a part of Mohawk. 25. PG 23 THE RIGHT CHOICE. THE RIGHT CHOICE A Conversation About Our Most Recent Acquisition 3. Does Mohawk intend to bring Unilinindustry, and we are continuing toroong products to the United States? invest in capabilities and technologiesthat will enable us to stay ahead of the Mr. Lorberbaum: Unilins niche strategycurve. We are working on a multitude in insulated roong and other woodof innovative projects, and as these panel products makes for protabletechnologies are ready they will be and growing businesses in Europe. Weadded to our product lines. are happy to have them in our portfolio. For the foreseeable future, however,6. Now that a European-based business our priority is to pursue growth in the is a part of Mohawk, will you begin North American ooring market. to explore other international opportunities? 4. What are the rst priorities for inte-gration of the two companies? Mr. Lorberbaum: Our interest in Unilin (Pictured above from left to right) Jeffrey S. Lorberbaum and Frans De Cockwas driven by its potential in the North Mr. De Cock: We already have identiedAmerican ooring market, not by any opportunities in the logistics area forobjective to expand internationally right both ocean freight and domestic freight 1. Why was Unilin the right acquisitionaway. As it happened, the best way to transportation. We also have just com-for Mohawk at this time?fulll our North American objectives was pleted an expansion of our manufac-through a European company. In theMr. Lorberbaum: This was a one-of-a- turing facilities in North Carolina, whichfuture, if it makes sense to enter thekind opportunity. We consider Unilin allows us to meet the growing demandEuropean market in other productto be the best laminate company in for laminate in North America throughcategories, then we can capitalize onthe world. Unilin is the market leader U.S.-based manufacturing. We willUnilin as an entre into the region.in Europe and the only vertically inte-use Mohawks excellent distributiongrated laminate player in the United capabilities and unparalleled client7. With solid market positions in carpet,States. Unilin possesses patentedrelationships to introduce new products. tile, stone and now laminate, whattechnologies and excellent brands. Mr. Lorberbaum: We are drawing upon are your next category expansion Unilins expertise to develop new lami- priorities? 2. Conversely, why did Unilin choose nate products under the Mohawk brand,to become a part of Mohawk? Mr. Lorberbaum: We have a presence which we expect to introduce through-in every major ooring category andMr. De Cock: Our next strategic prior- out the year. We also are focused onhave truly transformed Mohawk into aity was to grow the North American expanding market share in all of Unilinstotal ooring company. Today, overbusiness. We determined that the bestexisting distribution channels, includ-40 percent of our revenues come fromway to do so was in partnership with ing home improvement retailers andproducts other than carpet, and cur-another company. It made sense to go independent distributors and dealers.rently we are fully integrated in carpet,with the industry leader. No other oor-rugs, ceramic tile and laminate. Oppor-ing company can match the breadth5. Unilin has pioneered many industrytunities exist to backward integrate inand depth of Mohawks distributioninnovations in the laminate category.wood and vinyl products that arechannels. This strength was veryAre there any new product develop-currently sold as sourced products.attractive to us. ments that we can expect in theWe expect to remain opportunistic innear term?the marketplace. Mr. De Cock: We have always been at the forefront of innovation in our 26. PG 24 BOARD OF DIRECTORS AND OFFICERSTHE RIGHT CHOICE. DIRECTORS Jeffrey S. LorberbaumFrans De Cock Robert N. Pokelwaldt (a)(b)President Chairman of the Board, President Former Chairman and Chief ExecutiveUnilin and Chief Executive OfficerOfficer of York International Corporation(a manufacturer of air conditioning andJohn F. Fiedler (b)(c)cooling systems) Leo Benatar (b)(c)Former Chairman and Principal of Benatar and Associates andChief Executive OfficerS.H. Jack Sharpe Former Chairman of Engraph, Inc., a sub-Borg-Warner Automotive Inc. sidiary of Sonoco Products Company (an Executive Vice President(a manufacturer of automotive parts) international manufacturer of industrial Mohawk Residential Business and consumer packaging products)David L. KolbW. Christopher WellbornFormer Chairman and Phyllis O. Bonanno (a)Chief Operating OfficerChief Executive Officer President andMohawk Industries, Inc. Chief Executive Officer of International Trade Solutions, Inc.Larry W. McCurdy (a)(b)Former Chairman,(a) Audit Committee Bruce C. Bruckmann (a)(c)President and Chief Executive (b) Compensation Committee Managing DirectorOfficer of Echlin, Inc. (a worldwide(c) Nominatingand Corporate Bruckmann, Rosser, Sherrill & Co., Inc.manufacturer of motor vehicle parts)Governance Committee (a venture capital firm)OFFICERS Jeffrey S. Lorberbaum William B. KilbrideH. Monte Thornton Chairman, President and PresidentPresident Chief Executive Officer Mohawk HomeMohawk FlooringW. Christopher Wellborn Jerry L. MeltonHarold G. Turk Chief Operating Officer Vice President President Human ResourcesDal-Tile Frank H. Boykin Donald R. RileyJoe W. Yarbrough Vice President Finance and Chief Financial Officer Chief Information OfficerVice PresidentOperations Frans De Cock President Unilin Board of Directors (shown above from left to right): David L. Kolb, Officers (shown above from left to right): William B. Kilbride, Larry W. McCurdy, W. Christopher Wellborn, John F. Fiedler, Joe W. Yarbrough, Harold G. Turk, Frank H. Boykin, Frans De Cock, S.H. Jack Sharpe, Phyllis O. Bonanno, Jeffrey S. Lorberbaum, Frans De Cock, H. Monte Thornton, Leo Benatar, Robert N. Pokelwaldt, Jeffrey S. Lorberbaum, W. Christopher Wellborn, Donald R. Riley, and Jerry L. Melton. and Bruce C. Bruckmann. 27. PG 25 FINANCIAL REVIEW THE RIGHT CHOICE. TABLE OF CONTENTSSelected Financial Data26Managements Discussion and Analysis of Financial Condition and Results of Operations28Consolidated Statements of Earnings40Consolidated Balance Sheets41Consolidated Statements of Shareholders Equity and Comprehensive Income42Consolidated Statements of Cash Flows43Notes to Consolidated Financial Statements 44Reports of Independent Registered Public Accounting Firms60Shareholders Information64 28. PG 26SELECTED FINANCIAL DATAMohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. At or For the Years Ended December 31,2005 2004 2003 (In thousands, except per share data) Statement of earnings data: Net sales $6,620,099 5,880,3724,999,381 Cost of sales (a)4,896,965 4,259,5313,605,579 Gross profit1,723,1341,620,8411,393,802Selling, general and administrative expenses1,095,862985,251851,773 Restructuring costs(b) Carrying value reduction of property, plant andequipment and other assets(c) Class action legal settlement(d) Compensation expense for stock option exercises(e) Operating income627,272635,590542,029Interest expense(f) 66,791 53,392 55,575 Acquisition costs World merger(g) Other expense (income), net3,4604,809 (1,980) 70,251 58,201 53,595Earnings before income taxes 557,021577,389488,434 Income taxes198,826208,767178,285 Net earnings$ 358,195368,622310,149 Basic earnings per share(h) $5.35 5.53 4.68Weighted-average common shares outstanding(h) 66,932 66,682 66,251Diluted earnings per share(h) $5.30 5.46 4.62Weighted-average common and dilutive potential common shares outstanding(h)67,644 67,557 67,121 Balance sheet data: Working capital $1,228,573 968,923592,310 Total assets 7,991,523 4,403,1184,163,575 Short-term notes payable Long-term debt (including current portion) 3,308,370 891,3411,012,413 Stockholders equity 3,027,120 2,666,3372,297,801 (a) In 2005, the Company recorded a non-recurring $34,300 (net of tax of $22,300) fair value adjustment to Unilins acquired inventory.(b) During 1996, the Company recorded pre-tax restructuring costs of $0.7 million related to certain mill closings whose operations have been consolidated into other Mohawk facilities.(c) During 1996, the Company recorded a charge of $3.1 million arising from the write-down of property, plant and equipment to be disposed of related to the closing of a manufacturing facility in 1996 and revision in the estimate of fair value of certain property, plant and equipment based on current market conditions related to mill closings in 1995. During 1997, the Company recorded a charge of $5.5 million arising from a revision in the estimated fair value of certain property, plant and equipment held for sale based on current appraisals and other market information related to a mill closing in 1995. During 1998, the Company recorded a change of $2.9 million for the write-down of assets to be disposed of relating to the acquisition of World.(d) The Company recorded a non-recurring charge of $7.0 million in 2000, reflecting the settlement of two class-action lawsuits.(e) A charge of $2.6 million was recorded in 1997 for income tax reimbursements to be made to certain executives related to the exercise of stock options granted in 1988 and 1989 in connection with the Companys 1988 leveraged buyout. 29. PG 27SELECTED FINANCIAL DATAMohawk Industries, Inc. and SubsidiariesTHE RIGHT CHOICE.2002(i)20012000 19991998 1997 19964,516,957 3,441,2673,400,905 3,208,8132,846,6462,519,3402,322,682 3,247,865 2,583,6692,556,772 2,414,3122,156,1951,953,1101,804,107 1,269,092 857,598844,133 794,501690,451566,230 518,575747,027 530,441527,018 499,704441,355389,889 373,120 700 2,9005,500 3,060 7,000 2,600 522,065 327,157310,115 294,797246,196168,241 141,69568,972 29,78738,044 32,63231,023 36,474 39,772 17,7009,4645,954 4,4422,266 2,6673384,586 78,436 35,74142,486 34,89851,390 36,812 44,358 443,629 291,416267,629 259,899194,806131,42997,337 159,140 102,824105,030 102,660 79,552 51,86640,395 284,489 188,592162,599 157,239115,25479,563 56,9424.463.60 3.02 2.631.91 1.33 0.9663,723 52,41853,769 59,73060,393 59,962 59,310 4.393.55 3.00 2.611.89 1.32 0.95 64,861 53,14154,255 60,34961,134 60,453 59,899640,846 449,361427,192 560,057438,474389,378390,889 3,596,743 1,768,4851,795,378 1,682,8731,405,4861,233,3611,226,959 21,200 820,427 308,433589,828 596,065377,089402,854486,952 1,982,879 948,551754,360 692,546611,059493,841409,616 (f) In December 2002, the Company discontinued hedge accounting for its interest rate swap. The impact of discontinuing the hedge was to increase interest expense by approximately $10.7 million.(g) The Company recorded a charge of $17.7 million in 1998 for transaction expenses related to the World merger.(h) The Board of Directors declared a 3-for-2 stock split on October 23, 1997, which was paid on December 4, 1997, to holders of record on November 4, 1997. Earnings per share and weighted-average common share data have been restated to reflect the split.(i) In 2002, the Company adopted the provisions of Financial Accounting Standards Board SFAS No. 142 Goodwill and Other Intangible Assets which required the Company to cease amortizing goodwill and evaluate such goodwill and indefinite intangibles for impairment. 30. PG 28 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. Overviewresilient and rubber category, for the period from 1999 through 2004 have met or exceeded the growth rates (measured in sales The Company is a leading producer of oor covering products dollars) for the gross domestic product of the United States over for residential and commercial applications in the United States the same period. Ceramic tile, laminate and hardwood continued and Europe with net sales in 2005 in excess of $6.6 billion. The to exceed the growth rate for housing starts over the same period. Company is the second largest carpet and rug manufacturer, During this period, the compound average growth rate was 3.0% and a leading manufacturer, marketer and distributor of ceramic for carpet and rug, 7.0% for ceramic tile, 0.6% for resilient and tile and natural stone in the United States and a leading producer rubber, 17.4% for laminate and 9.4% for hardwood. of laminate ooring in the United States and Europe. On October 31, 2005, the Company acquired all the out- The Company has three reporting segments, the Mohawk standing shares of Unilin Holding NV (the Unilin Acquisition). segment, the Dal-Tile segment and the Unilin segment. The The total purchase price of the Unilin Acquisition, net of cash Mohawk segment distributes its product lines, which include of $167.5 million, was approximately 2.2 billion (approximately carpet, rug, pad, ceramic tile, hardwood, resilient and laminate $2.6 billion). The results of operations for the Unilin segment through its network of approximately 52 regional distribution cen- have been included in the Companys consolidated nancial ters and satellite warehouses using its eet of company-operated statements since that date. The primary reason for the acqui- trucks, common carrier or rail transportation. The segment product sition was to expand the Companys presence in the laminate lines are purchased by independent oor covering retailers, home ooring market. centers, mass merchandisers, department stores, independent On November 10, 2003, the Company acquired the assets distributors, commercial dealers and commercial end users. The and assumed certain liabilities of the commercial carpet division Dal-Tile segment product lines include ceramic tile, porcelain tile of Burlington Industries, Inc., known as Lees Carpet, from W.L. and stone products distributed through approximately 250 com- Ross & Company for approximately $350 million in cash. The pany-operated sales service centers and regional distribution results of operations for Lees Carpet have been included with centers using primarily common carriers and rail transportation. the Mohawk segment results and in the Companys consolidated The segment product lines are purchased by tile specialty dealers, nancial statements since that date. The primary reason for the tile contractors, oor covering retailers, commercial end users, acquisition was to expand the Companys presence in the com- independent distributors and home centers. The Unilin segment mercial carpet market. manufactures and markets laminate ooring products which are The Company reported net earnings of $358.2 million or distributed through separate distribution channels consisting of diluted earnings per share (EPS) of $5.30, compared to net retailers, contractors, commercial users, independent distributors earnings of $368.6 million and $5.46 EPS for 2004. The decrease and home centers. The business is organized to address the in EPS resulted from a non-recurring $34.3 million (net of tax of specic customer needs of each distribution channel. $22.3 million) fair value adjustment applied to Unilins acquired The primary categories of the United States floor cover- inventory, continuing raw material and energy cost increases, ing industry include carpet and rug (62%), ceramic tile (12%), offset by sales growth and better leveraging of selling, general hardwood (10%), resilient and rubber (9%) and laminate (6%). and administrative costs when compared to the year ended Compound average growth rates for all categories, except the December 31, 2004. 31. PG 29 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and SubsidiariesTHE RIGHT CHOICE. Results of Operations Following are the results of operations for the last three years:For the Years Ended December 31,2005 2004 2003 (In thousands) Statement of earnings data: Net sales $ 6,620,099 100.0%5,880,372 100.0% 4,999,381 100.0% Cost of sales 4,896,965 74.0% 4,259,53172.4% 3,605,579 72.1%Gross profit 1,723,134 26.0% 1,620,84127.6% 1,393,802 27.9% Selling, general and administrative expenses 1,095,862 16.6% 985,25116.8% 851,773 17.0%Operating income627,272 9.5% 635,59010.8% 542,029 10.9% Interest expense 66,7911.0%53,3920.9% 55,575 1.1% Other (income) expense, net 3,4600.1%4,809 0.1% (1,980)0.0%70,2511.1%58,2011.0% 53,595 1.1%Earnings before income taxes557,021 8.4% 577,3899.8%488,434 9.8% Income taxes 198,826 3.0% 208,7673.6%178,285 3.6%Net earnings $358,195 5.4% 368,6226.3%310,149 6.2% Year Ended December 31, 2005, as Compared withQuarterly net sales and the percentage changes in net Year Ended December 31, 2004 sales by quarter for 2005 versus 2004 were as follows (dollars inthousands) Net sales for the year ended December 31, 2005, were $6,620.1 mil- lion, reflecting an increase of $739.7 million, or approximately 2005 2004Change 12.6%, over the $5,880.4 million reported for the year ended Decem- ber 31, 2004. The increased net sales are primarily attributable toFirst quarter$1,493,222 1,389,7257.4% price increases and internal sales growth and the Unilin Acquisi-Second quarter1,624,692 1,485,8979.3 tion. The Mohawk segment recorded net sales of $4,716.7 mil- Third quarter 1,697,634 1,529,651 11.0 lion in 2005 compared to $4,368.8 million in 2004, representingFourth quarter1,804,551 1,475,099 22.3 an increase of $347.9 million or approximately 8.0%. The increaseTotal year $6,620,099 5,880,372 12.6% was attributable to price increases and internal growth within the nylon filament and polyester carpets, commercial carpet tile, Gross prot was $1,723.1 million (26.0% of net sales) for and hard surface ooring offset by declines in nylon staple and2005 and $1,620.8 million (27.6% of net sales) for 2004. The polypropylene carpets and home products. The Dal-Tile seg- reduction in percentage was primarily attributable to increased ment recorded net sales of $1,734.8 million in 2005, reecting raw material costs, energy costs, transportation costs, an an increase of $223.3 million or 14.8%, over the $1,511.5 millionincrease in the LIFO reserve requirement, a non-recurring fair reported in the year ended December 31, 2004. The increase was value adjustment applied to Unilins acquired inventory, and mostly attributable to strong internal growth in all product catego- higher import costs. ries with stone and oor tile reecting the strongest growth. 32. PG 30 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. Selling, general and administrative expenses for 2005 wereQuarterly net sales and the percentage changes in net $1,095.9 million (16.6% of net sales) compared to $985.3 million sales by quarter for 2004 versus 2003 were as follows (dollars in (16.8% of net sales) for 2004. The reduction in percentage was thousands): attributable to better leveraging of selling, general and adminis-20042003Change trative expenses. Operating income for 2005 was $627.3 million (9.5% of netFirst quarter $1,389,7251,083,42228.3% sales) compared to $635.6 million (10.8% of net sales) in 2004.Second quarter 1,485,8971,245,87019.3 Operating income attributable to the Mohawk segment wasThird quarter1,529,6511,301,54717.5Fourth quarter 1,475,0991,368,542 7.8 $381.7 million (8.1% of segment net sales) in 2005 compared toTotal year$5,880,3724,999,38117.6% $424.3 million (9.7% of segment net sales) in 2004. The percentage decrease in operating income was attributable to the higher raw material costs, energy costs and transportation costs. Operating Sales in the rst and fourth quarters of 2004 were impacted income attributable to the Dal-Tile segment was $260.2 million (15.0%by a shift of four days from the fourth to the first quarter when of segment net sales) in 2005, compared to $219.8 million (14.5% ofcompared to 2003. segment net sales) in 2004. The increase in operating income as aGross prot was $1,620.8 million (27.6% of net sales) for 2004 percentage of net sales is primarily attributable to product mix shift and $1,393.8 million (27.9% of net sales) for 2003. The reduction and implementing increased pricing to help offset increased rawin percentage was primarily attributable to increased raw material material, energy, transportation, and higher import costs. costs, energy costs, transportation costs and higher import costs.Interest expense for 2005 was $66.8 million compared to Selling, general and administrative expenses for 2004 were $53.4 million in 2004. The increase in interest expense was attrib-$985.3 million (16.8% of net sales) compared to $851.8 million utable to the debt raised to fund the Unilin Acquisition.(17.0% of net sales) for 2003. The reduction in percentage was Income tax expense was $198.8 million, or 35.7% of earn- attributable to better leveraging of selling, general and adminis- ings before income taxes for 2005 compared to $208.8 million, or trative expenses. 36.2% of earnings before income taxes for 2004. The improved Operating income for 2004 was $635.6 million (10.8% of net rate was primarily attributable to the utilization of tax credits andsales) compared to $542.0 million (10.9% of net sales) in 2003. the one-time effect of state tax law changes.Operating income attributable to the Mohawk segment was$424.3 million (9.7% of segment net sales) in 2004 compared to Year Ended December 31, 2004, as Compared with $364.0 million (9.8% of segment net sales) in 2003. The percent- Year Ended December 31, 2003 age decrease in operating income was attributable to higher rawmaterial costs, energy costs and transportation costs. Operating Net sales for the year ended December 31, 2004, were $5,880.4 mil-income attributable to the Dal-Tile segment was $219.8 million lion, reflecting an increase of $881.0 million, or approximately(14.5% of segment net sales) in 2004, compared to $187.2 million 17.6%, over the $4,999.4 million reported for the year ended(14.8% of segment net sales) in 2003. The decrease in operating December 31, 2003. The increased net sales are primarily attrib-income as a percentage of net sales is primarily attributable to utable to strong internal sales growth from both the Mohawk andhigher energy costs, import costs and transportation costs. Dal-Tile segments. The Mohawk segment recorded net sales of Interest expense for 2004 was $53.4 million compared $4,368.8 million in 2004 compared to $3,730.8 million in 2003,to $55.6 million in 2003. The decrease in interest expense was representing an increase of $638.0 million or approximatelyattributable to a larger benet from a fair value adjustment related 17.1%. The increase was attributable to strong internal growth in allto an interest rate swap during 2004 when compared to 2003. product categories and the Lees Carpet acquisition. The Dal-TileIncome tax expense was $208.8 million, or 36.2% of earn- segment recorded net sales of $1,511.5 million in 2004, reectingings before income taxes for 2004 compared to $178.3 million, or an increase of $243.0 million or 19.2%, over the $1,268.5 million36.5% of earnings before income taxes for 2003. The improved reported in the year ended December 31, 2003. The increase wasrate was a result of the utilization of tax credits. mostly attributable to strong internal growth in all product catego- ries with stone and oor tile reecting the strongest growth. 33. PG 31 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and SubsidiariesTHE RIGHT CHOICE. Liquidity and Capital ResourcesThe senior multi-currency unsecured credit facility consists of (i) a $750 million revolving credit facility, (ii) a $389.2 million term The Companys primary capital requirements are for working loan facility and (iii) a 300 million term loan facility, all of which capital, capital expenditures and acquisitions. The Companys mature on October 28, 2010. Availability under the revolving capital needs are met primarily through a combination of inter- credit facility is reduced by the amount of letters of credit issued nally generated funds, bank credit lines, term and senior notes, under this facility. At December 31, 2005, the amount of these let- the sale of receivables and credit terms from suppliers. ters of credit was $78.3 million. At the Companys election, bothCash flows generated by operations for 2005 were the credit facility and the new senior credit facilities bear interest $561.5 million compared to $242.8 million for 2004. The increase at (i) the greater of (x) prime rate or (y) the overnight federal funds was primarily attributable to an increase in accounts payable rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on and accrued expenses, which increased from $623.1 million at the Companys senior, unsecured, long-term debt rating. the beginning of 2005 to $998.1 million at December 31, 2005. InOn November 8, 2005, one of the Companys subsidiaries addition, inventory turnover increased during 2005. The entered into a 130 million, or approximately $156 million (based increases were primarily attributable to sales growth within both on the then prevailing exchange rate), five-year unsecured, the Mohawk and Dal-Tile segments and the Unilin Acquisition. revolving credit facility, maturing on November 8, 2010, which isNet cash used in investing activities in 2005 was $2.9 bil- referred to as the Euro revolving credit facility. This revolving credit lion compared to $121.6 million for 2004. The increase was facility bears interest at EURIBOR plus an indexed amount based primarily attributable to the Unilin Acquisition and higher capital on the Companys senior, unsecured, long-term debt rating. The expenditures. Capital expenditures were incurred primarily to Company guaranteed the obligations of that subsidiary under modernize, add and expand manufacturing and distribution this revolving credit facility and of any of the Companys other facilities and equipment. Capital expenditures, including $3.0 bil- subsidiaries that become borrowers under this credit facility. As of lion for acquisitions, have totaled $3.5 billion over the past three December 31, 2005, the Company had no borrowings outstanding years. Capital spending during 2006 for the Mohawk, Dal-Tile under this facility. and Unilin segments combined, excluding acquisitions, isThe Companys new senior unsecured credit facilities and expected to range from $290 million to $310 million, and will be the Euro revolving credit facility both contain debt to capital ratio used primarily to purchase equipment and to add manufactur- requirements and other customary covenants. The Company ing and distribution capacity. was in compliance with these covenants at December 31, 2005.Net cash provided by financing activities for 2005 was Under both of these credit facilities, the Company must pay $2,440.7 million compared to cash provided in 2004 of $121.2 mil- an annual facility fee ranging from 0.06% to 0.25%, depending lion. The primary reason for the change was an increase in debt upon the Companys senior unsecured long-term debt rating as levels as a result of the Unilin Acquisition in 2005 when compared determined by certain credit rating agencies. to 2004.At December 31, 2005, a total of approximately $507.9 mil-On October 28, 2005, the Company entered into a $1.5 bil- lion was available under the new senior unsecured credit facilities, lion 364-day senior, unsecured, bridge term loan facility, which is and the Euro revolving credit facility, compared to $234.1 million referred to as the bridge credit facility, and a $1.5 billion ve-year, available under both the then-existing credit facility and uncom- senior, unsecured, revolving credit and term loan facility, which is mitted credit lines at December 31, 2004. The amount used under referred to as the new senior unsecured credit facilities. The new the new senior unsecured credit facilities at December 31, 2005, senior unsecured credit facilities replaced a then-existing credit was $1.1 billion. The amount used under the unsecured credit facility and various uncommitted credit lines. The Company facilities is composed of $1.1 billion in borrowings, $55.6 million entered into both the bridge credit facility and the new senior in letters of credit guaranteeing the Companys industrial revenue unsecured credit facilities to nance the Unilin Acquisition and to bonds and $22.7 million in standby letters of credit related to vari- provide for working capital requirements. ous insurance contracts and foreign vendor commitments. 34. PG 32 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. On January 17, 2006, the Company issued $500 million of 2005, the Company extended the term of its Securitization aggregate principal amount of 5.750% notes due 2011 and $900 Facility until August 2006. million aggregate principal amount of 6.125% notes due 2016. The Companys Board of Directors has authorized the The net proceeds from the issuance of these notes were used to repurchase of up to 15 million shares of the Companys out- pay off the outstanding balance of the bridge credit facility andstanding common stock. For the year ended December 31, accordingly the Company reclassied the bridge credit facility as2005, a total of approximately 186,000 shares of the long-term debt. Interest payable on each series of notes will be Companys common stock were purchased at an aggregate increased in the event of a downgrade in the Companys debtcost of approximately $14.5 million. Since the inception of the rating determined by certain rating agencies. The maximumprogram in 1999, a total of approximately 11.4 million shares increase in the event of a downgrade is 2%. If the Companys have been repurchased at an aggregate cost of approxi- debt rating subsequently improves, then the interest rates would mately $326.1 million. All of these repurchases have been be reduced accordingly.financed through the Companys operations and banking The Company has an on-balance sheet trade accounts arrangements. receivable securitization agreement (the Securitization Facility). The outstanding checks in excess of cash represent trade The Securitization Facility allows the Company to borrow up to payables checks that have not yet cleared the bank. When the $350 million based on available accounts receivable. Atchecks clear the bank, they are funded by the revolving credit December 31, 2005, the Company had $40 million outstanding facility. This policy does not impact any liquid assets on the compared to $90 million at December 31, 2004. The Securitization consolidated balance sheets. Facility is secured with trade receivables. During the third quarter The following is a summary of the Companys future minimum payments under contractual obligations as of December 31, 2005 (in thousands): Payments due by period 2006 20072008 2009 2010 Thereafter Total Long-term debt $113,809 314,277 11,2594,275 1,063,1781,801,5723,308,370 Estimated interest payments(1)174,731 160,205154,393153,885 146,479316,3541,106,047 Operating leases 93,55375,247 61,973 51,55837,064103,116422,511 Purchase commitments(2) 168,235 163,995161,545 72,497 566,272$550,328 713,724389,170282,215 1,246,7212,221,0425,403,200(1) For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2005 to these balances. (2) Includes commitments for natural gas, foreign currency, and raw material purchases. 35. PG 33 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and SubsidiariesTHE RIGHT CHOICE. Critical Accounting Policies inventory within both the Dal-Tile and Unilin segments andinventory not valued under the LIFO method in the Mohawk In preparing the consolidated nancial statements in conformitysegment. Inventories on hand are compared against with accounting principles generally accepted in the Unitedanticipated future usage, which is a function of historical States of America, the Company must make decisions whichusage, and anticipated future selling price, expected sales impact the reported amounts of assets, liabilities, revenues andbelow cost, excessive quantities, and an evaluation for expenses, and related disclosures. Such decisions include theobsolescence. Actual results could differ from assumptions selection of appropriate accounting principles to be appliedused to value obsolete, excessive inventory or inventory and the assumptions on which to base accounting estimates. Inexpected to be sold below cost and additional reserves reaching such decisions, the Company applies judgment basedmay be required. on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those Goodwill and indenite life intangible assets are subject to estimated at the time the consolidated nancial statements are annual impairment testing. The impairment tests are based prepared. on determining the fair value of the specied reporting units The Companys significant accounting policies are and indenite life intangible assets based on management described in Note 1 to the Consolidated Financial Statements judgments and assumptions using estimated future cash included elsewhere in this report. Some of those significant ows. These judgments and assumptions could materially accounting policies require the Company to make subjective or change the value of the specied reporting units and inde- complex judgments or estimates. Critical accounting policies are nite life intangible assets and, therefore, could materially dened as those that are both most important to the portrayal impact the Companys consolidated nancial statements. of a companys financial condition and results and require Intangible assets with denite lives are amortized over their managements most difcult, subjective, or complex judgment, useful lives. The useful life of a definite-lived intangible often as a result of the need to make estimates about the effect of asset is based on assumptions and judgments made by matters that are inherently uncertain and may change in subse- management at the time of acquisition. Changes in these quent periods. judgments and assumptions that could include a loss of The Company believes the following accounting policies customers, a change in the assessment of future opera- require it to use judgments and estimates in preparing its con- tions or a prolonged economic downturn could materially solidated nancial statements and represent critical account- change the value of the definite-lived intangible assets ing policies. and, therefore, could materially impact the Companys nancial statements. Accounts receivable and revenue recognition. Revenuesare recognized when there is persuasive evidence of an Deferred tax assets and liabilities are recognized forarrangement, delivery has occurred, the price has been the future tax consequences attributable to differencesxed or is determinable, and collectibility can be reasonably between the nancial statement carrying amounts of exist-assured. The Company provides allowances for expected ing assets and liabilities and their respective tax bases.cash discounts, returns, claims and doubtful accounts Deferred tax assets and liabilities are measured usingbased upon historical bad debt and claims experience and enacted tax rates expected to apply to taxable income inperiodic evaluation of specic customer accounts and the the years in which the temporary differences are expectedaging of accounts receivable. If the nancial condition of to be recovered or settled. The effect on deferred taxthe Companys customers were to deteriorate, resulting in assets and liabilities of a change in the tax rates is recog-an impairment of their ability to make payments, additional nized in earnings in the period that includes the enactmentallowances may be required. date. Additionally, taxing jurisdictions could retroactively disagree with the Companys tax treatment of certain Inventories are stated at the lower of cost or market (net real- items, and some historical transactions have income taxizable value). Cost is determined using the last-in, rst-out effects going forward. Accounting rules require thesemethod (LIFO) for approximately 86% (69% of total consoli- future effects to be evaluated using current laws, rules anddated inventory) of the inventory within the Mohawk segment, regulations, each of which can change at any time and inwhich matches current costs with current revenues, and an unpredictable manner.the rst-in, rst-out method (FIFO), which is used to value 36. PG 34 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. Environmental and legal accruals are estimates baseddoes not expect its adoption will have a material impact on the on judgments made by the Company relating to ongo-Companys consolidated nancial statements. ing environmental and legal proceedings, as disclosedIn December 2004, the FASB issued SFAS No. 123 (revised in the Companys consolidated financial statements. In2004), Share-Based Payment (SFAS 123R), which replaces determining whether a liability is probable and reasonablySFAS No. 123, Accounting for Stock-Based Compensation estimable, the Company consults with its internal experts.(SFAS 123) and supersedes APB Opinion No. 25, Accounting The Company believes that the amounts recorded in the for Stock Issued to Employees. SFAS 123R requires all share- accompanying nancial statements are based on the bestbased payments to employees, including grants of employee estimates and judgments available to it.stock options, to be recognized in the nancial statements based on their fair values. Transition may be accomplished using either Recent Accounting Pronouncementsthe prospective or retrospective method. The Company currently measures compensation costs related to share-based pay- In December 2004, the FASB issued FASB Staff Position ments under APB Opinion No. 25. In April 2005, the Securities 1091, Application of FASB Statement No. 109, Accounting for and Exchange Commission announced that the effective date of Income Taxes (SFAS 109) to the Tax Deduction on Qualied SFAS 123R should be no later than the beginning of the rst scal Production Activities Provided by the American Jobs Creation year beginning after June 15, 2005. The Company will adopt SFAS Act of 2004 (FSP 109-1). The American Jobs Creation Act 123R in the rst quarter of 2006 after completing its evaluation. of 2004 (the Jobs Act), enacted October 22, 2004, provides In March 2005, the FASB issued FASB Interpretation No. 47, a tax deduction for income from qualied domestic production Accounting for Conditional Asset Retirement Obligations, an activities. FSP 1091 provides the treatment for the deduction interpretation of FASB Statement No. 143 (FIN 47), which as a special deduction as described in SFAS 109. FSP 1091 requires an entity to recognize a liability for the fair value of a con- is effective prospectively as of January 1, 2005. The adoption of ditional asset retirement obligation when incurred if the liabilitys FSP 109-1 did not have a signicant impact on the Companys fair value can be reasonably estimated. FIN 47 is effective no consolidated nancial statements. later than the end of fiscal years ending after December 15, In December 2004, the FASB issued FASB Staff Position 2005. Effective December 31, 2005, the Company adopted 109-2, Accounting and Disclosure Guidance for the Foreign FIN 47 which did not have a material impact on the Companys Earnings Repatriation Provision within the American Jobs Cre- consolidated nancial statements. ation Act of 2004 (FSP 109-2), which provides guidance under In May 2005, the FASB issued SFAS No. 154, Accounting SFAS 109 with respect to recording the potential impact of the Changes and Error Correctionsa replacement of APB Opinion repatriation provisions of the Jobs Act on enterprises income No. 20 and FASB Statement No. 3 (SFAS 154). This State- tax expense and deferred tax liability. FSP 109-2 states that an ment replaces APB Opinion No. 20, Accounting Changes, enterprise is allowed time beyond the nancial reporting period and FASB Statement No. 3, Reporting Accounting Changes in of enactment to evaluate the effect of the Jobs Act on its plan for Interim Financial Statements. SFAS 154 requires retrospective reinvestment or repatriation of foreign earnings for purposes of application to prior periods financial statements for changes applying FASB Statement No. 109. The adoption of FSP 109-2 in accounting principle, unless it is impracticable to determine did not have a signicant impact on the Companys consolidated either the period-specic effects or the cumulative effect of the nancial statements. change. SFAS 154 also requires that a change in depreciation, In November 2004, the FASB issued SFAS No. 151, Inven- amortization, or depletion method for long-lived, non-nancial tory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS assets be accounted for as a change in accounting estimate 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, effected by a change in accounting principle. SFAS 154 is effec- Inventory Pricing, to clarify the accounting for abnormal amounts tive for accounting changes and corrections of errors made in of idle facility expense, freight, handling costs and wasted material scal years beginning after December 15, 2005. The impact of (spoilage). Among other provisions, the new rule requires that items this standard, if any, will depend upon accounting changes or such as idle facility expense, excessive spoilage, double freight, errors that may occur in future periods. The Company adopted and re-handling costs be recognized as current-period charges SFAS 154 effective December 31, 2005. regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS 151 requires that the Impact of Ination allocation of xed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFASInation affects the Companys manufacturing costs, distribution 151 is effective for fiscal years beginning after June 15, 2005.costs and operating expenses. The carpet, tile and laminate The Company will adopt SFAS 151 effective January 1, 2006 and industry have experienced signicant ination in the prices of 37. PG 35 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and SubsidiariesTHE RIGHT CHOICE. raw materials and fuel-related costs beginning in the rst quarter activity is typically accompanied by an increase in remodeling of 2004. For the period from 1999 through 2005 the carpet andand replacement activity, a prolonged decline in residential or tile industry experienced moderate ination in the prices of raw commercial construction activity could have a material adverse materials and fuel-related costs. In the past, the Company has effect on the Companys business and results of operations. generally been able to pass along these price increases to itsThe construction industry has experienced significant customers and has been able to enhance productivity to helpdownturns in the past, which have adversely affected suppliers offset increases in costs resulting from ination in its operations. to the industry. The industry could experience similar down-turns in the future, which could have a negative impact on the SeasonalityCompanys business. The Company is a calendar year-end company. With respect toThe Company may be unable to pass increases in the its Mohawk and Dal-Tile segments its results of operations forcosts of raw materials and fuel-related costs on to its cus- the rst quarter tend to be the weakest. The second, third andtomers, which could have a material adverse effect on the fourth quarters typically produce higher net sales and operatingCompanys protability. income. These results are primarily due to consumer residentialThe prices of raw materials and fuel-related costs vary with mar- spending patterns for floor covering, which historically haveket conditions. As a result of recent hurricanes and other general decreased during the rst two months of each year following theeconomic factors, the Companys costs of carpet raw materials holiday season. The Unilin segment second and fourth quartersand fuel-related costs are currently higher than historical aver- typically produce higher net sales and earnings followed byages and may remain so indenitely. Although the Company a moderate first quarter and a weaker third quarter. The thirdgenerally attempts to pass on increases in the costs of raw quarter is traditionally the weakest due to the European holidaymaterials and fuel-related costs to its customers, the Companys in late summer.ability to do so is dependent upon the rate and magnitude of Certain Factors Affecting theany increase, competitive pressures and market conditions for Companys Performancethe Companys products. There have been in the past, and maybe in the future, periods of time during which increases in these In addition to the other information provided in this Annualcosts cannot be recovered. During such periods of time, the Report, the following risk factors should be considered whenCompanys protability may be materially adversely affected. evaluating an investment in shares of Common Stock. If any of the events described in these risks were to occur,The Company faces intense competition in the industry, it could have a material adverse effect on the Companys busi-which could decrease demand for the Companys products ness, nancial condition and results of operations.or force it to lower prices, which could have a materialadverse effect on the Companys protability. The oor covering industry is sensitive to changes in gen-The oor covering industry is highly competitive. The Company eral economic conditions, such as consumer confidencefaces competition from a number of manufacturers and indepen- and income, corporate and government spending, interestdent distributors. Some of the Companys competitors are larger rate levels and demand for housing. A prolonged decline inand have greater resources and access to capital than the Com- spending for replacement oor covering products or newpany does. Maintaining the Companys competitive position may construction activity could have a material adverse effect onrequire substantial investments in the Companys product devel- the Companys business.opment efforts, manufacturing facilities, distribution network and The oor covering industry in which the Company participatessales and marketing activities. Competitive pressures may also is highly dependent on general economic conditions, such asresult in decreased demand for the Companys products or force consumer condence and income, corporate and governmentthe Company to lower prices. Any of these factors could have a spending and interest rate levels. The Company derives a major-material adverse effect on the Companys business. ity of the Companys sales from the replacement segment of the market. Therefore, economic changes that result in a prolongedThe Company may not be able to integrate successfully decline in spending for remodeling and replacement activitiesUnilin or other acquisitions that the Company may make in could have a material adverse effect on the Companys busi-the future. ness and results of operations.The process of combining the businesses of Unilin with theThe floor covering industry is highly dependent on con-Companys existing businesses involves risks. The Company struction activity, including new construction, which is cyclicalwill face challenges in consolidating functions, integrating the in nature. Although the impact of a decline in new construction 38. PG 36 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mohawk Industries, Inc. and Subsidiaries THE RIGHT CHOICE. Companys organizations, procedures, operations and producton the effectiveness of the internal control over nancial report- lines in a timely and efcient manner and retaining key person-ing as it pertains to Unilins operations. The adequacy of Unilins nel. These challenges will result principally because the twointernal control over nancial reporting has not previously been companies currentlyattested to by any independent accounting firm, as no suchattestation was required by virtue of Unilins status as a foreign, maintain executive ofces in different locations;privately-held company. The Company anticipates completing manufacture and sell different types of products through the testing of Unilins internal control over nancial reporting by different distribution channels; the end of 2006. The Companys testing, or the subsequent test- conduct business from various locations; ing by the Companys independent registered public accounting maintain different operating systems and software on different rm, may reveal deciencies in the Companys internal control computer hardware; and over nancial reporting. In that event, the Companys manage- have different employment and compensation arrange-ment may not be able to report that the Companys internal ments for their employees. control over nancial reporting is effective, and the Companysauditors will not be able to express an opinion on the Companys In addition, the majority of Unilins operating facilities are internal control over financial reporting, which could have a located in Europe, where the Company has not previously oper-material adverse effect on the Companys business. ated a manufacturing facility. As a result, the integration will be complex and will require additional attention from members ofA failure to identify suitable acquisition candidates and to management. The diversion of management attention and anycomplete acquisitions could have a material adverse effect difculties encountered in the transition and integration processon the Companys business. could have a material adverse effect on the Companys revenues,As part of the Companys business strategy, the Company level of expenses and operating results. The Company may faceintends to continue to pursue acquisitions of complementary similar challenges in combining the Companys businesses withbusinesses. Although the Company regularly evaluates acquisi- any other businesses that the Company acquires in the future.tion opportunities, the Company may not be able successfully Failure successfully to manage and integrate Unilin with to identify suitable acquisition candidates; to obtain sufcient the Companys existing operations could lead to the potentialnancing on acceptable terms to fund acquisitions; to complete loss of customers of the acquired business, the potential loss ofacquisitions; or to manage acquired businesses protably. employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences The Company may be unable to obtain raw materials on a that could affect the Companys nancial condition and results timely basis, which could have a material adverse effect on of operations. Even if integration occurs successfully, failurethe Companys business. of the Unilin Acquisition or any future acquisition to achieve The principal raw materials used in the Companys manufac- levels of anticipated sales growth, protability or productivity turing operations include nylon, polyester and polypropylene or otherwise not perform as expected, may adversely impact resins and bers and carpet backings, which are used primarily the Companys nancial condition and results of operations.in the Companys carpet and rugs business; talc, clay, neph- The Company has incurred, and will continue to incur, certaineline syenite and various glazes, including frit (ground glass), liabilities and expenses in connection with the Unilin Acquisi-zircon and stains, which are used exclusively in the Companys tion or any future acquisitions. ceramic tile business; wood, paper, and resins which are usedprimarily in the Companys lamin