Mohawk Industries, Inc.

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Mohawk Industries, Inc.

P.O. Box 12069
160 South Industrial Boulevard
Calhoun, Georgia 30703
U.S.A.
(706) 629–7721
Fax: (706) 625–5271
Web site: http//www.mohawkind.com

Public Company
Incorporated: 1902 as Shuttleworth Brothers Company
Employees: 11,450
Sales: $1.8 billion (1996)
Stock Exchanges: NASDAQ
SICs: 2273 Carpets & Rugs; 6719 Holding Companies, Not Elsewhere Classified

With three of the industry’s most recognized brands—Karastan, Mohawk, and Bigelow—Mohawk Industries, Inc. ranks second among America’s largest carpet and rug makers. As one of the U.S. carpet industry’s oldest players, the company’s history echoes that of the trade, from its foundation in 19th century New England to its move to Georgia in the 1980s. A period of intense growth through acquisition sextupled Mohawk’s sales from $280 million in 1991 to nearly $1.8 billion by 1996. In 1995, it held 17 percent of the $9.8 billion wholesale carpet and rug market, compared to leader Shaw Industries’ 26 percent share. Mohawk’s acquisition spree gave it a family of more than a dozen brands and made it the nation’s largest manufacturer of machine-made rugs, a key segment of the maturing, consolidating market. By the mid-1990s, the company had a presence in virtually every segment of the industry, from mass-produced area rugs sold at promotional prices to custom-made wool carpets.

19th Century Origins

The company was founded in 1878 by four brothers in the Shuttleworth family. That year, the family shipped 14 used Wilton looms from Great Britain to Amsterdam, New York and launched their own carpet mill. At the time, New England, with its corresponding emphasis on textile mills, was the carpet capital of the nation. For most of its history, Mohawk and its competitors wove floor coverings from wool, a naturally waterrepellent and insulating fiber. In fact, little about the industry changed from the time of the invention of the power loom in the mid-19th century until after World War II. Even with mechanization, carpetmaking was a highly labor-intensive prospect using massive, complicated machinery. Manufacturers’ dependence on unpredictable wool production added another variable to the equation, making for steep fluctuations in expenses. For most families, carpeting was an expensive luxury, so costly that per household shipments peaked at four square yards in 1899 and did not exceed that mark until the mid-1960s.

The Shuttleworth family business was not incorporated until after the turn of the century. A generational shift in leadership probably precipitated the 1902 incorporation as Shuttleworth Brothers Company. The firm’s reputation grew substantially after 1908, when it introduced the Karnak carpet pattern. This new style was so popular that a company history noted: “Weavers worked four and five years without changing either the color or the pattern on their looms.”

Three generations of Shuttleworths dominated the carpet mill’s first century in business. In 1920, they guided the first of what would become many mergers and acquisitions. That year, the family combined its firm with carpetmakers McCleary, Wallin and Crouse to form a leading force in the then-fragmented industry. Renamed Mohawk Carpet Mills, Inc., the company was America’s only weaver with a full line of domestic carpets, encompassing the Wilton, Axminster, Velvet, and Chenille weaves. Mohawk did not rest on its laurels, creating the industry’s first textured design, Shuttlepoint; the first sculptured weave, Raleigh; and Woven Interlock, “the first successful application of the knitting principle to the manufacture of carpet.”

Postwar Era Brings Rapid Change

Several trends converged in the 1950s to reshape the carpet industry drastically. Wartime restrictions on the use of wool fueled research into alternative fibers, especially petrochemical-based synthetics like nylon and, later, acrylics. These man-made materials were much cheaper to produce and the supply was much more consistent than that of wool. At the same time, a revolution in the main weaving methods was under way. The new technique found its origins in Dalton, Georgia, which boasted a thriving cottage industry in tufted coverlets. In the late 1940s, housewives there had built up something of a tourist-trap industry in tufted bedspreads. Machines were soon developed to tuft carpets by the same process—inserting loops of fiber into a jute backing. These broadlooms could manufacture carpet many times faster than previous methods. Faster manufacturing methods, combined with the new materials developed in the ensuing decades, made the now-familiar tufted carpets inexpensive and popular. By 1968, tufted carpeting accounted for 90 percent of all carpet sales.

In 1956, Mohawk merged with Alexander Smith, Inc. to form Mohasco Industries. Though the acquisition made Mohasco the world’s largest carpet company, it proved to be poorly timed. The troubled Alexander Smith brought with it a high level of debt and a large inventory of outdated carpeting at a time when competition from imports was gaining steam. Tariff relaxations during the 1950s increased importers’ share of the U.S. industry from two percent to 25 percent by the end of the decade. At the same time, Mohasco was compelled by industry imperatives to consolidate its mills in the south. Notwithstanding these problems, Mohasco President Herbert L. Shuttleworth II, the third and last of the family to lead the business, was able to stabilize the business enough to purchase high-ranking Firth Carpet in 1962.

Diversification into Furniture in the 1960s

Dreaming of “a home furnishings empire,” Shuttleworth turned his attention to the furniture industry in 1963, acquiring nine furniture makers by 1970. Two years later, Mohasco ranked number two in the overall home furnishings market and second only to Bassett in furniture; carpet contributed only about one-fourth of sales. Forbes dubbed the company the “GM [General Motors] of the living room.”

But Shuttleworth did not forsake the core carpet business. He launched a joint venture carpet plant in Belgium as well as subsidiaries in West Germany and Mexico in the 1960s and invested more than $100 million in production capacity from 1963 to 1973. Baby boomers, who had by this time had grown to marrying and house-buying age, fueled the rapid expansion of the carpet industry in the late 1960s and early 1970s. Carpet volume increased from 138 million square yards in 1955 to 430 million square yards in 1965, surpassing one billion square yards in 1973. In the early 1970s, Mohasco’s sculptured, brightly colored “Canyon Paradise” carpet, in classic 1970s color schemes like orange and gold, became the carpet industry’s “all-time best-seller.” But when tastes changed and more muted colors came into style, Mohasco failed to pick up on the trend. Forbes compared the mill to “those clothing companies that were caught with warehouses of polyester leisure suits.”

When combined with a mid-decade recession and price controls, Mohasco’s lack of fashion savvy proved to be a major misstep; by 1975, Burlington Industries had surpassed it in carpet production. Perhaps more telling, its earnings were declining precipitously. Furthermore, carpet industry shipments peaked in 1979 over the one billion square yard mark, then entered a steep and ongoing decline. In the wake of this decline was a mature industry burdened with overcapacity and facing ferocious competition.

Reorganization in the 1980s Leads to LEO

In 1980, Mohasco hired David Kolb, an attorney who had served as comptroller and director of the nylon carpet fibers division at Allied Fibers, as CEO. Kolb was charged with turning the then unprofitable company around. The new chief undertook a five-year modernization program that encompassed plant and systems modernizations, cost reductions, and development of new managers. He even moved the company’s headquarters from Amsterdam, New York to Atlanta, Georgia, to be nearer to what had become the “carpet capitol of the world,” Dalton, Georgia. He also shifted the company to higher margin products and increased direct distribution to retailers (thereby cutting out the middleman). Having achieved his profit goals, Kolb took the carpet division private via a $120 million leveraged buyout in 1988.

Public Stock Offering Launches Acquisition Binge in the Early 1990s

Mergers and acquisitions reduced the number of carpet producers from more than 300 in 1980 to 100 by the mid-1990s, with vertically integrated—and, in Mohawk’s case, well-diversified—“mega-mills” emerging at the top of the heap.

Kolb used the $38 million proceeds of Mohawk’s 1992 public stock offering to reduce the company’s LBO debt in preparation for a rapid-fire series of acquisitions funded in part by new debt. Four key acquisitions from 1992 to 1994 catapulted Mohawk from eleventh in the industry to number two, increased its sales from less than $300 million to nearly $1.5 billion, and multiplied its market share from less than four percent to 17 percent. In addition, Mohawk’s growth rate ranked it second among the Fortune 500’s fastest growing companies in 1993.

Company Perspectives:

“The key to growth is not only to establish effective strategies, but also to follow through on them. By taking sound strategic action, we have created opportunity—opportunity to grow.

The first purchase came in October 1992. Although larger than Mohawk, Horizon Industries was vulnerable because of back-to-back losses in the early 1990s. It nearly doubled revenues. Less than eight months later, Kolb engineered the acquisition of American Rug Craftsmen (ARC), a ten-year-old manufacturer of area rugs. ARC made Mohawk the nation’s leading producer of mass-market rugs. Hoping to capitalize on fragmentation within the area rug segment, the new parent boosted ARC’s manufacturing and distribution capacity. Under the care of its doting new parent, ARC’s sales burgeoned from $50 million in 1993 to $150 million in 1996.

The August 1993 purchase of Karastan Bigelow from Field-crest Cannon added two of the industry’s best known and most valuable brands. In fact, Bigelow was named for Erastus B. Bigelow, the 19th century “Father of the Modern Carpet Industry,” so named for his invention of the power loom. The addition of Karastan Bigelow pushed Mohawk past competitor Beaulieu of America to become the United States’ second largest carpet company.

But Mohawk’s most important acquisition was yet to come. In 1994, the carpetmaker merged with highly profitable and privately held Aladdin Mills Inc. via a $430 million “pooling-of-interests.” Mohawk paid a premium price for Aladdin, but felt justified by the target’s comparatively high profitability. Aladdin’s compound sales growth had averaged 20 percent from 1988 to 1993, and after the merger, the “subsidiary” contributed 40 percent of sales and 50 percent of net income. Because Aladdin was more profitable than Mohawk, the privately held company’s owners, the Lorberbaum family, ended up with a controlling 39 percent stake in Mohawk.

In 1995, Jeffrey Lorberbaum, son of Aladdin founder Alan Lorberbaum, was appointed president and chief operating officer. Lorberbaum was charged with boosting profitability. He planned to “rationalize” the corporation’s manufacturing capacity along product lines, closing several mills over the ensuing years and consolidating their operations at the most efficient plants. He also expected to expand Aladdin’s existing warehousing and distribution system to service all of Mohawk’s operations. A more dynamic marketing program emphasized the strength of the company’s core brands.

Whether Mohawk would follow carpeting giant Shaw’s lead and begin acquiring retail carpet outlets to further integrate its operations remained to be seen in the mid-1990s. At that point, Mohawk was still concentrating on consolidating and rationalizing its family of companies and brands. Ongoing industrywide difficulties included declining wholesale prices and rising raw material costs. Mohawk’s high debt load, the legacy of the acquisition spree, did not help matters. Debt service ran at $40 million in 1995, cutting a large chunk of cash flow.

Nevertheless, Mohawk continued to eye acquisition candidates mid-decade. In 1995, it purchased Galaxy Carpet Mills Inc. for $43.3 million. The new subsidiary added $200 million in sales of higher-margin residential carpets. And in 1996, Mohawk purchased Diamond Rug & Carpet Mills, a bankrupt manufacturer of inexpensive cut pile polypropylene rugs. These two additions exemplified Mohawk’s continuing quest to add capacity in all price and quality ranges, from mass to class. That year, the company proudly trumpeted its highest-ever sales and earnings, at nearly $1.8 billion and $49 million, respectively.

Principal Subsidiaries

Mohawk Carpet Corp.; Horizon Europe, Inc.; Rainbow International, Inc.; Mohawk Marketing, Inc.; Aladdin Manufacturing Corp.; Mohawk Mills, Inc.; Horizon & Owens Properties (50%); Delaware Valley Wool Scouring, Inc.; Galaxy Carpet Mills, Inc.