| Risk Factors Certain Factors affecting the Companyapstas Performance In addition to the other information provided in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock |
| If any of the events described in these risks were to occur, it could have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| 9 ______________________________________________________________________ The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels and demand for housing |
| A prolonged decline in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Companyapstas business |
| The floor covering industry in which the Company participates is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending and interest rate levels |
| The Company derives a majority of the Companyapstas sales from the replacement segment of the market |
| Therefore, economic changes that result in a prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Companyapstas business and results of operations |
| The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature |
| Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, a prolonged decline in residential or commercial construction activity could have a material adverse effect on the Companyapstas business and results of operations |
| The construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry |
| The industry could experience similar downturns in the future, which could have a negative impact on the Companyapstas business |
| The Company may be unable to pass increases in the costs of raw materials and fuel-related costs on to its customers, which could have a material adverse effect on the Companyapstas profitability |
| The prices of raw materials and fuel-related costs vary with market conditions |
| As a result of recent hurricanes and other general economic factors, the Companyapstas costs of carpet raw materials and fuel-related costs are currently higher than historical averages and may remain so indefinitely |
| Although the Company generally attempts to pass on increases in the costs of raw materials and fuel-related costs to its customers, the Companyapstas ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Companyapstas products |
| There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered |
| During such periods of time, the Companyapstas profitability may be materially adversely affected |
| The Company faces intense competition in the industry, which could decrease demand for the Companyapstas products or force it to lower prices, which could have a material adverse effect on the Companyapstas profitability |
| The floor covering industry is highly competitive |
| The Company faces competition from a number of manufacturers and independent distributors |
| Some of the Companyapstas competitors are larger and have greater resources and access to capital than the Company does |
| Maintaining the Companyapstas competitive position may require substantial investments in the Companyapstas product development efforts, manufacturing facilities, distribution network and sales and marketing activities |
| Competitive pressures may also result in decreased demand for the Companyapstas products or force the Company to lower prices |
| The Company may not be able to successfully integrate Unilin or other acquisitions that the Company may make in the future |
| The process of combining the businesses of Unilin with the Companyapstas existing businesses involves risks |
| The Company will face challenges in consolidating functions, integrating the Companyapstas organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel |
| These challenges will result principally because the two companies currently * maintain executive offices in different locations; * manufacture and sell different types of products through different distribution channels; * conduct business from various locations; * maintain different operating systems and software on different computer hardware; and * have different employment and compensation arrangements for their employees |
| 10 ______________________________________________________________________ In addition, the majority of Unilinapstas operating facilities are located in Europe, where the Company has not previously operated a manufacturing facility |
| As a result, the integration will be complex and will require additional attention from members of management |
| The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Companyapstas revenues, level of expenses and operating results |
| The Company may face similar challenges in combining the Companyapstas businesses with any other businesses that the Company acquires in the future |
| Failure to successfully manage and integrate Unilin with the Companyapstas existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Companyapstas financial condition and results of operations |
| Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Companyapstas financial condition and results of operations |
| The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions |
| The Company has not yet completed the testing of the adequacy of Unilinapstas internal control over financial reporting, and it is possible that the Companyapstas testing or that of the Companyapstas independent auditors in connection with the audit of the Companyapstas financial results for the year ended December 31, 2006, will reveal material weaknesses in Unilinapstas internal control over financial reporting |
| As part of the integration of Unilin, the Company is in the process of documenting and testing of the Unilinapstas internal control over financial reporting to allow management and the Companyapstas independent registered public accounting firm to report in 2006 on the effectiveness of the internal control over financial reporting as it pertains to Unilinapstas operations |
| The adequacy of Unilinapstas internal control over financial reporting has not previously been attested to by any independent accounting firm, as no such attestation was required by virtue of Unilinapstas status as a foreign, privately-held company |
| The Company anticipates completing the testing of Unilinapstas internal control over financial reporting by the end of 2006 |
| The Companyapstas testing, or the subsequent testing by the Companyapstas independent registered public accounting firm, may reveal deficiencies in the Companyapstas internal control over financial reporting |
| In that event, the Companyapstas management may not be able to report that the Companyapstas internal control over financial reporting is effective, and the Companyapstas auditors will not be able to express an opinion on the Companyapstas internal control over financial reporting, which could have a material adverse effect on the Companyapstas business |
| A failure to identify suitable acquisition candidates and to complete acquisitions could have a material adverse effect on the Companyapstas business |
| As part of the Companyapstas business strategy, the Company intends to continue to pursue acquisitions of complementary businesses |
| Although the Company regularly evaluates acquisition opportunities, the Company may not be able successfully to identify suitable acquisition candidates; to obtain sufficient financing on acceptable terms to fund acquisitions; to complete acquisitions; or to manage profitably acquired businesses |
| The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Companyapstas business |
| The principal raw materials used in the Companyapstas manufacturing operations include nylon, polyester and polypropylene resins and fibers and carpet backings, which are used primarily in the Companyapstas carpet and rugs business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in the Companyapstas ceramic tile business; wood, paper, and resins which are used primarily in the Companyapstas laminate flooring business; and other materials |
| An extended interruption in the supply of these or other raw materials used in the Companyapstas business or in the supply of suitable substitute materials would disrupt the Companyapstas operations, which could have a material adverse effect on the Companyapstas business |
| 11 ______________________________________________________________________ The Company has been, and in the future may be, subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant |
| The Companyapstas operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials |
| The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts |
| The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties |
| The nature of the Companyapstas operations, including the potential discovery of presently unknown environmental conditions, exposes it to the risk of claims under environmental, health and safety laws and regulations |
| The Company could incur material costs or liabilities in connection with such claims |
| Changes in international trade laws and in the business, political and regulatory environment in Mexico and Europe could have a material adverse effect on the Companyapstas business |
| The Companyapstas Monterrey, Mexico manufacturing facility and the Companyapstas manufacturing facilities in Europe represent a significant portion of the Companyapstas total manufacturing capacity for ceramic tile and laminate flooring, respectively |
| In addition, as a result of the Unilin Acquisition, the Company now has more significant general operations abroad, particularly in Europe |
| Accordingly, an event that has a material adverse impact on the Companyapstas Mexican operations could have a material adverse effect on the Companyapstas tile operations as a whole |
| Similarly, an event that has a material adverse impact on the Companyapstas European operations could have a material adverse effect on the Companyapstas laminate flooring operations, as a whole |
| The business, regulatory and political environments in Mexico and in Europe differ from those in the United States, and the Companyapstas Mexican and European operations are exposed to legal, currency, tax, political, and economic risks specific to the countries in which they occur, particularly with respect to labor regulations, which tend to be more stringent in Europe and, to a lesser extent, Mexico |
| The Company cannot assure investors that the Company will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where the Company does business and therefore that the foregoing factors will not have a material adverse effect on the Companyapstas operations or upon the Companyapstas financial condition and results of operations |
| The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ( "e GATT "e ) and the North American Free Trade Agreement ( "e NAFTA "e ) |
| The Company is uncertain what effect reduced import duties under GATT may have on the Companyapstas operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States |
| Although NAFTA lowers the tariffs imposed on the Companyapstas ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico |
| Fluctuations in currency exchange rates may impact the Companyapstas financial condition and results of operations and may affect the comparability of results between the Companyapstas financial periods |
| The results of the Companyapstas foreign subsidiaries reported in the local currency are translated into US dollars for balance sheet accounts using exchange rates in effect at the balance sheet date and for the statement of earnings accounts using the Companyapstas weighted average rates during the period |
| The exchange rates between some of these currencies and the US dollar in recent years have fluctuated significantly and may continue to do so in the future |
| Although the Company has not yet experienced material losses due to foreign currency fluctuation, the Company may not be able to manage effectively the Companyapstas currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the carrying value of the Companyapstas debt and results of operations and affect comparability of the Companyapstas results between financial periods |
| 12 ______________________________________________________________________ If the Company is unable to protect the Companyapstas intellectual property rights, particularly with respect to the Companyapstas patented laminate flooring technology and the Companyapstas registered trademarks, the Companyapstas business and prospects could be harmed |
| The future success and competitive position of certain of the Companyapstas businesses, particularly the Companyapstas laminate flooring business, depend in part upon the Companyapstas ability to obtain and maintain proprietary technology used in the Companyapstas principal product families |
| The Company relies, in part, on the patent, trade secret and trademark laws of the United States and countries in Europe, as well as confidentiality agreements with some of the Companyapstas employees, to protect that technology |
| The Company has obtained a number of patents relating to the Companyapstas products and associated methods and has filed applications for additional patents, including the UNICLIC^® family of patents, which protects Unilinapstas interlocking laminate flooring panel technology |
| The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Companyapstas pending patent applications will be approved |
| In addition, patent filings by third parties, whether made before or after the date of the Companyapstas filings, could render the Companyapstas intellectual property less valuable |
| Furthermore, despite the Companyapstas efforts, the Company may be unable to prevent competitors and/or third parties from using the Companyapstas technology without the Companyapstas authorization, independently developing technology that is similar to that of the Company or designing around the Companyapstas patents |
| The use of the Companyapstas technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause us to lose sales or otherwise harm the Companyapstas business |
| In addition, if the Company does not obtain sufficient protection for the Companyapstas intellectual property, the Companyapstas competitiveness in the markets it serves could be significantly impaired, which would limit the Companyapstas growth and future revenue |
| The Company has obtained and applied for numerous US and foreign service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate |
| The Company cannot guarantee that any of the Companyapstas pending or future applications will be approved by the applicable governmental authorities |
| Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations |
| A failure to obtain trademark registrations in the United States and in other countries could limit the Companyapstas ability to protect the Companyapstas trademarks and impede the Companyapstas marketing efforts in those jurisdictions |
| The Company requires third parties with access to the Companyapstas trade secrets to agree to keep such information confidential |
| While such measures are intended to protect the Companyapstas trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Companyapstas confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties |
| In any of these circumstances, the Companyapstas competitiveness could be significantly impaired, which would limit the Companyapstas growth and future revenue |
| Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Companyapstas products |
| The Company has in the past had companies claim that certain technologies incorporated in the Companyapstas products infringe their patent rights |
| There can be no assurance that the Company will not receive notices in the future from parties asserting that the Companyapstas products infringe, or may infringe, those parties &apos intellectual property rights |
| The Company cannot be certain that the Companyapstas products do not and will not infringe issued patents or other intellectual property rights of others |
| Historically, patent applications in the United States and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Companyapstas products or processes |
| If patents are later issued on these applications, the Company may be liable for infringement |
| 13 ______________________________________________________________________ Furthermore, the Company may initiate claims or litigation against parties for infringement of the Companyapstas proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others |
| Likewise, the Company may have similar claims brought against it by competitors |
| Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Companyapstas technical and management personnel from operations, whether or not such litigation is resolved in the Companyapstas favor |
| In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorneys fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology |
| There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all |
| In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Companyapstas business, financial condition and results of operations would be materially and adversely affected |
| Forward-Looking Information Certain of the statements in this Annual Report on Form 10-K, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "e believes, "e "e anticipates, "e "e forecast, "e "e estimates "e or similar expressions constitute "e forward-looking statements "e within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended |
| For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 |
| There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties |
| The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; energy costs; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; litigation; and other risks identified in Mohawkapstas SEC reports and public announcements |