Server: Microsoft-IIS/4.0 Date: Thu, 18 Dec 1997 04:40:37 GMT Content-Type: text/html Accept-Ranges: bytes Last-Modified: Tue, 28 Oct 1997 16:12:46 GMT ETag: "92d1fd53bce3bc1:15814" Content-Length: 16330 Mohawk Industries - Message From Our CEO

 

David L. Kolb, Chariman and Chief Exexcutive OfficerTo our fellow stockholders:

I am pleased to report that Mohawk Industries delivered the best performance of its history in 1996.

Sales reached a record $1.8 billion, a 9 percent increase over 1995 and more than triple the industry rate of growth.

At $51 million, $1.48 per share, earnings before non-recurring items were the highest in our Company's history. Earnings before non-recurring items grew 79 percent over 1995. Return on equity increased from 10.6 percent to 16.9 percent while operating income before non-recurring items as a percent of net sales improved from 5.1 percent to 6.9 percent.

Higher earnings in 1996 were the result of dramatically improved internal efficiencies, lower materials costs, a growing market share, and continued innovation in product offerings and customer support in all areas of our business. During 1995, the Company's results were negatively impacted by pricing pressures due to soft market conditions and raw material cost increases.

Although our improvement in 1996 was extremely gratifying, we are far more excited about the accomplishments we have made this year in laying the groundwork for future growth.

In our residential business, we are in the final phase of building what we believe will be the best infrastructure in the carpet industry. We will use that infrastructure to position ourselves as the low-cost producer at all price points and as the leader in quality and service.

With approximately three-fourths of the residential consolidation work in place, we are demonstrating significant cost savings by focusing manufacturing to achieve maximum efficiency and improved work flow.

Our plan is to use this dynamic, flexible new infrastructure as a springboard for future growth. We believe that it will eventually enable us to add new businesses... to grow the Company beyond the limits of the carpet industry.

Our accomplishments in 1996 toward building that foundation for the future are detailed in the narrative section of this report.

In a year rich with achievements, perhaps the most important for our future is implementation of a new, state-of-the-art information system. To understand why this technology is key to our future, you have to understand our past.

As part of our growth strategy, we acquired companies that complemented our capabilities. In a little over two years, beginning in October 1992, we acquired five major companies. During that period, we quintupled in size. Our first action after closing an acquisition is always to sit down together to share information, to determine how we can make the Company stronger by more effectively assimilating the acquisition. Shared information effectively utilized is a powerful force in bringing people together to work toward a common goal.

But as we faced integrating separate companies into a single entity with separate product categories and distinct brands, we realized the need for common information systems. As we began to restructure our manufacturing operations, distribution networks and administrative functions, we encountered computers on different platforms with different software and databases.

The difficulty of electronically communicating across the Company interfered with doing things in the most efficient way. For example, if we wanted to ship a Mohawk carpet on an Aladdin truck because it was cheaper and faster to do that, we had to manually process parts of the transaction. A customer who ordered Mohawk, Galaxy and Aladdin carpets had to call three different customer service departments to order carpet and establish credit three times.

Before we could successfully realign our operations for responsiveness and efficiency, we had to have an information system that could handle all our residential operations. In addition, it was imperative that the new technology we installed allow us the flexibility to expand into new areas.

We are happy to report that implementation of this system -- we believe the best in the industry -- is on schedule. The final phase of implementation for our residential operations will be completed early in 1997. This technology is perhaps one of the most important underpinnings of our future growth.

With the new information system as the foundation, we are completing integration of manufacturing and distribution. In addition to maximizing efficiencies and lowering cost, restructuring will also help us differentiate our products and services in our customers' eyes. We believe our Company will be a leader in the industry with this kind of unified approach, this totally integrated infrastructure of information, manufacturing and distribution.

Now let's put this restructuring effort in the context of our long-term strategy.

We have told you that our goal is to be a profit leader and a growth company in a mature industry which has experienced slow growth over the past several years. At the onset of this journey, we squarely faced the realities of our industry -- slow growth, overcapacity, low profits, fierce price competition, insufficient service differentiation and an accelerating pace of change.

We knew we could not overcome those realities and move forward by conducting business as usual. Our strategy for the future springs from a deep knowledge of our industry coupled with a willingness to set aside some of its paradigms... the ones that no longer work. We knew we had to be fast, flexible and focused.

So how have we done so far in acting on our strategy, accomplishing our goal of growth and creating opportunities for the future?

We set out to locate acquisitions to complement our Company's competencies and market presence. In just over two years, we acquired Horizon Industries, American Rug Craftsmen, Karastan-Bigelow, Aladdin Mills and Galaxy Carpet Mills.

We were looking for companies that would extend our coverage of the market, that would bring us capabilities we did not have. Karastan-Bigelow, for example, brought us an exclusive, high-end market presence. American Rug Craftsmen put us into the booming rug business, and Aladdin brought one of the best-run manufacturing and distribution operations in the industry. Galaxy gave us a higher level of market presence at the most popular price points.

That strategy has worked to fuel our growth. In implementing this strategy, we have focused our resources on flexibility, offering our customers diversity and a broad product mix with one of the widest ranges of prices in the industry.

And our acquisitions enabled us to take advantage of the fastest growing segments of the market. For example, before we acquired American Rug Craftsmen in 1993, we had no rug business. Infusion of our capital into their well-managed operation allowed them to take better advantage of the escalating demand for rugs. Since we bought their business, sales have almost tripled. Together, American Rug Craftsmen, Karastan and Aladdin make Mohawk Industries the largest manufacturer of rugs and mats in the world.

Creating synergy by combining the strengths of all our companies and offsetting weaknesses has allowed us to become the fastest growing major carpet company in the world. In 1991 before considering the pooled acquisition of Aladdin, we had sales of approximately $279 million. Sales at the end of 1996 had skyrocketed to $1.8 billion.

We are continuing to make acquisitions that can contribute to our growth. This year, the purchase of Fiber One (a polypropylene fiber producer) provided us with an additional 40 million pounds of extrusion capacity with space available to double that capacity and with the expertise of Fiber One's top-flight manufacturing personnel.

We have also entered into an agreement to acquire the assets of Diamond Rug and Carpet Mills, Inc., a large northwest Georgia carpet mill. The acquisition will add approximately 100 million pounds of extrusion capacity for polypropylene.

Besides complementing our product mix and our capabilities, we believed we could integrate our acquisitions, eliminate duplication and use economies of scale and a streamlined structure to cut costs and fuel growth. In 1995, we closed five plants, achieving significant manufacturing savings in 1996. As 1996 began, we were manufacturing more carpet with significantly fewer resources. This year, we have made enormous progress in realignment of capabilities to achieve the best quality at significantly reduced costs. Net sales per employee increased from $139,000 in 1995 to $152,000 in 1996. We believe additional improvements can be achieved during the next few years as a result of changes implemented in 1996 and changes that will be implemented in 1997. Details of that ongoing effort follow in the narrative section of this report.

We have also achieved internal growth by capturing greater market share. We intensified our efforts to support our retailers as partners with accelerated training opportunities, flexible dealer programs, responsive products, improved quality and the highest level of customer service.

What now?

We believe many opportunities for expansion and profit improvement remain within our industry. But our vision for the future does not stop there.

We are confident we can use our expertise and strong financial position to duplicate our success with carpet and rugs to include other related products -- products like resilient and wood flooring, laminates, marble or ceramic tile, and window treatments. During 1996, we sold carpet underlay in all regions and ceramic tiles in two regions.

In addition, we can respond to the needs of large customers, be they home centers, mass merchandisers, department or furniture stores. While many vendors can develop products for large customers, few have the resources -- the cash and the infrastructure -- to meet their demands for supply. We have the resources to respond effectively.

Officers and directors as a group own approximately 40 percent of Mohawk's stock and a significant portion of the compensation of our senior managers is dependent on the Company's financial performance. Our interests are closely aligned with those of our stockholders.

Our success to date has been achieved not by accident, but by design and hard work. We look forward with you to a future in which we create our own opportunities. It has been a good year of adding value and we look forward to continued value enhancement.

DAVID L. KOLB
Chairman and Chief Executive Officer


JEFFREY S. LORBERBAUM
President and Chief Operating Officer


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