Overview
In 2011, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (53%), resilient and rubber (14%), ceramic tile (12%), hardwood (10%), stone (6%) and laminate (5%). Each of these categories is influenced by the average selling price per square foot, the residential builder and homeowner remodeling markets, housing starts and housing resales, average house size and home ownership. In addition, the level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy. The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, primarily in North America through its network of regional distribution centers and satellite warehouses using company-operated trucks, common carrier or rail transportation. The segment's product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America through its network of regional distribution centers and Company-operated service centers using company-operated trucks, common carriers or rail transportation. The segment's product lines are sold through Company-owned service centers, independent distributors, home center retailers, tile and flooring retailers and contractors. The Unilin segment designs, manufactures, sources, licenses, distributes and markets laminate, hardwood flooring, roofing systems, insulation panels and other wood products, primarily in North America and Europe through various selling channels, which include retailers, independent distributors and home centers.
Net earnings attributable to the Company were $250.3 million, or diluted EPS of $3.61 for 2012 compared to net earnings attributable to the Company of $173.9 million, or diluted EPS of $2.52 for 2011. The increase in EPS was primarily attributable to the favorable net impact of price and product mix, improved manufacturing efficiencies, higher sales volume, lower interest expense and the change in the net impact of unrealized foreign exchange gains/losses, partially offset by higher input costs, increases in costs to support new product introductions and geographic expansion and higher tax expense primarily attributable to the geographic dispersion of earnings.
For the year ended December 31, 2012, the Company generated $587.6 million of cash from operating activities which it partially used for capital expenditures, repayment of borrowings, the purchase of the non-controlling interest within the Dal-Tile segment and a joint venture investment. As of December 31, 2012, the Company had cash and cash equivalents of $477.7 million, of which $42.6 million was in the United States and $435.1 million was in foreign countries.

Recent Developments

On December 20, 2012, the Company entered into a definitive share purchase agreement to acquire Fintiles S.p.A. and its subsidiaries (collectively, the "Marazzi Group"), for an estimated transaction value of approximately €1,170 million, or $1,504.4 million. The Company expects to complete the transaction during the first half of 2013 pending customary governmental approvals and the satisfaction of other closing conditions.
On January 10, 2013, the Company announced that it completed the acquisition of Pergo, a leading manufacturer of premium laminate flooring. The Company remitted approximately $150 million in cash for the acquisition using both European and U.S. cash available.

On January 28, 2013, the Company entered into an agreement to purchase Spano Invest NV, a Belgian panel board manufacturer, for €125 million ($168 million) in cash. This transaction is expected to close in the second half of 2013 pending customary governmental approvals and the satisfaction of other closing conditions.

The results of operations do not include the effect of the foregoing acquisitions, as the Pergo acquisition closed after December 31, 2012, and the Marazzi and Spano acquisitions remain pending.

Results of Operations
Following are the results of operations for the last three years:

                                                 For the Years Ended December 31,
                                      2012                     2011                     2010
                                                          (In millions)
Statement of operations
data:
Net sales                    $ 5,788.0       100.0 %   5,642.3       100.0 %   5,319.1       100.0  %
Cost of sales (1)              4,297.9        74.3 %   4,225.4        74.9 %   3,916.5        73.6  %
Gross profit                   1,490.1        25.7 %   1,416.9        25.1 %   1,402.6        26.4  %
Selling, general and
administrative expenses (2)    1,110.6        19.2 %   1,101.3        19.5 %   1,088.4        20.5  %
Operating income                 379.5         6.6 %     315.6         5.6 %     314.2         5.9  %
Interest expense (3)              74.7         1.3 %     101.6         1.8 %     133.2         2.5  %
Other expense (income) (4)         0.3         0.0 %      14.1         0.2 %     (11.6 )      (0.2 )%
Earnings before income taxes     304.5         5.3 %     199.9         3.5 %     192.6         3.6  %
Income tax expense                53.6         0.9 %      21.7         0.4 %       2.7         0.1  %
Net earnings                     250.9         4.3 %     178.2         3.2 %     189.9         3.6  %
Less: Net earnings
attributable to the
noncontrolling interest            0.6         0.0 %       4.3         0.1 %       4.4         0.1  %
Net earnings attributable to
Mohawk Industries, Inc.      $   250.3         4.3 %     173.9         3.1 %     185.5         3.5  %
(1) Cost of sales includes:
Restructuring charges        $    14.8         0.3 %      17.5         0.3 %      12.4         0.2  %
(2) Selling, general and
administrative expenses
include:
Restructuring charges              3.7         0.1 %       5.7         0.1 %       0.8           -  %
Lease charges                        -           - %       6.0         0.1 %         -           -  %
(3) Interest expense
includes:
Debt extinguishment costs            -           - %       1.1           - %       7.5         0.1  %
(4) Other expense (income)
includes:
Unrealized foreign currency
losses                               -           - %       9.1         0.2 %         -           -  %
U.S. customs refund                  -           - %         -           - %      (7.7 )      (0.1 )%
Acquisitions purchase
accounting                           -           - %         -           - %       1.7           -  %

Year Ended December 31, 2012, as Compared with Year Ended December 31, 2011

Net sales

Net sales for 2012 were $5,788.0 million, reflecting an increase of $145.7 million, or 2.6%, from the $5,642.3 million reported for 2011. The increase was primarily driven by the favorable net impact of price and product mix of approximately $146 million and higher volume of approximately $92 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $92 million.

Mohawk Segment-Net sales decreased $15.6 million, or 0.5%, to $2,912.1 million for 2012, compared to $2,927.7 million for 2011. The decrease was primarily driven by lower volume of approximately $142 million, which was partially offset by the favorable net impact of price and product mix of approximately $126 million. The volume decreases were primarily attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the retail channel.

Dal-Tile Segment-Net sales increased $162.1 million, or 11.1%, to $1,616.4 million for 2012, compared to $1,454.3 million for 2011. The increase was primarily driven by volume increases of approximately $157 million and the favorable net

impact of price and product mix of approximately $11 million, partially offset by the net impact of unfavorable foreign exchange rates of approximately $6 million. The volume increases were primarily attributable to improvement in the U.S. commercial and residential channels and growth in the Mexican market.

Unilin Segment-Net sales increased $5.5 million, or 0.4%, to $1,350.3 million for 2012, compared to $1,344.8 million for 2011. The increase was primarily driven by volume increases of approximately $84 million and the favorable net impact of price and product mix of approximately $8 million, partially offset by the impact of unfavorable foreign exchange rates of approximately $86 million. The volume increases were primarily attributable to flooring products primarily in Russia, Australia and North America, as well as increases in wood panel and insulation products.
Quarterly net sales and the percentage changes in net sales by quarter for 2012 versus 2011 were as follows (dollars in millions):

                  2012        2011     Change
First quarter  $ 1,409.0    1,343.6     4.9  %
Second quarter   1,469.8    1,477.9    (0.5 )%
Third quarter    1,473.5    1,442.5     2.1  %
Fourth quarter   1,435.7    1,378.3     4.2  %
Total year     $ 5,788.0    5,642.3     2.6  %

Gross profit

Gross profit for 2012 was $1,490.1 million (25.7% of net sales), an increase of $73.2 million or 5.2%, compared to gross profit of $1,416.9 million (25.1% of net sales) for 2011. The increase in gross profit dollars was primarily attributable to the favorable net impact of price and product mix of approximately $62 million, operations productivity of approximately $52 million and higher sales volume of approximately $22 million, partially offset by higher input costs of approximately $42 million and the impact of unfavorable foreign exchange rates of approximately $19 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for 2012 were $1,110.6 million (19.2% of net sales), compared to $1,101.3 million (19.5% of net sales) for 2011. Selling, general and administrative expenses decreased as a percentage of net sales compared to the prior year primarily due to increased sales volume. The increase in selling, general and administrative expenses in dollars was primarily driven by increases in costs to support new product introductions and geographic expansion of approximately $31 million, partially offset by favorable foreign exchange rates of approximately $15 million and lower amortization costs of approximately $9 million.

Operating income

Operating income for 2012 was $379.5 million (6.6% of net sales) reflecting an increase of $64.0 million, or 20.3%, compared to operating income of $315.5 million (5.6% of net sales) for 2011. The increase in operating income was primarily driven by the favorable net impact of price and product mix of approximately $62 million, operations productivity of approximately $52 million and sales volume increases of approximately $22 million, partially offset by higher input costs of approximately $42 million and increases in selling costs to support new product introductions, geographic expansion and higher sales volume of approximately $31 million.

Mohawk Segment-Operating income was $158.2 million (5.4% of segment net sales) for 2012 reflecting an increase of $48.3 million compared to operating income of $109.9 million (3.8% of segment net sales) for 2011. The increase in operating income was primarily driven by the favorable net impact of price and product mix of approximately $67 million, higher operations productivity of approximately $18 million and lower restructuring costs of approximately $15 million, partially offset by lower sales volume of approximately $36 million and higher input costs of approximately $18 million.

Dal-Tile Segment-Operating income was $121.0 million (7.5% of segment net sales) for 2012 reflecting an increase of $19.7 million compared to operating income of $101.3 million (7.0% of segment net sales) for 2011. The increase in operating income was primarily driven by sales volume increases of approximately $42 million and favorable foreign exchange rates of approximately $6 million, partially offset by increases in selling costs to support new product introductions and higher sales volume of approximately $16 million, manufacturing start-up and restructuring costs of approximately $9 million and higher input costs of approximately $7 million.

Unilin Segment-Operating income was $126.4 million (9.4% of segment net sales) for 2012 reflecting a decrease of $0.7 million compared to operating income of $127.1 million (9.5% of segment net sales) for 2011. The decrease in operating income was primarily driven by higher input costs of approximately $18 million, increases in costs to support new product introductions and geographic expansion of approximately $11 million and unfavorable foreign exchange rates of approximately $10 million, partially offset by operations productivity of approximately $25 million and sales volume increases of approximately $15 million.

Interest expense

Interest expense was $74.7 million for 2012, reflecting a decrease of $26.9 million compared to interest expense of $101.6 million for 2011. The decrease in interest expense in 2012 was due to lower outstanding debt and lower interest rates on that outstanding debt. The lower interest rates were primarily attributable to the shift from higher interest rate senior notes to the Senior Credit Facility and the rating agency upgrades discussed in "Liquidity and Capital Resources".

Other expense

Other expense was $0.3 million for 2012, reflecting a change of $13.7 million compared to other expense of $14.1 million for 2011. The change was primarily attributable to net foreign currency losses of approximately $16 million. The unrealized foreign currency losses in the prior year were primarily a result of volatility in the Mexican Peso and Canadian Dollar that occurred late in the third quarter of 2011. Prior to the second quarter of 2012, operations carried out in Mexico used the U.S. dollar as the functional currency. Effective April 1, 2012, the Company changed the functional currency of its Mexico operations to the Mexican peso. See Note 1(l) of the Notes to the Consolidated Financial Statements.

Income tax expense

For 2012, the Company recorded income tax expense of $53.6 million on earnings before income taxes of $304.5 million for an effective tax rate of 17.6%, as compared to an income tax expense of $21.7 million on earnings before income taxes of $199.9 million, resulting in an effective tax rate of 10.8% for 2011. The difference in the effective tax rate for the comparative period is primarily due to the geographical dispersion of earnings and losses, a favorable IRS audit settlement in 2011, and the expiration of statutes of limitations for both Federal and State tax purposes.
Year Ended December 31, 2011, as Compared with Year Ended December 31, 2010 Net sales
Net sales for 2011 were $5,642.3 million, reflecting an increase of $323.2 million, or 6.1%, from the $5,319.1 million reported for 2010. The increase was primarily due to higher sales volume of approximately $143 million, favorable price and product mix of approximately $127 million and the impact of favorable foreign exchange rates of approximately $53 million.
Mohawk Segment-Net sales increased $82.8 million, or 2.9%, to $2,927.7 million in 2011, compared to $2,844.9 million in 2010. The increase was primarily driven by favorable price and product mix of approximately $64 million, and higher sales volume of approximately $19 million.
Dal-Tile Segment-Net sales increased $86.9 million, or 6.4%, to $1,454.3 million in 2011, compared to $1,367.4 million in 2010. The increase was primarily driven by higher sales volume of approximately $75 million, favorable price and product mix of approximately $9 million and the impact of favorable foreign exchange rates of approximately $3 million.
Unilin Segment-Net sales increased $156.5 million, or 13.2%, to $1,344.8 million in 2011, compared to $1,188.3 million in 2010. The increase was primarily due to favorable price and product mix of approximately $55 million, the impact of favorable foreign exchange rates of approximately $51 million and higher sales volume of approximately $51 million.

Quarterly net sales and the percentage changes in net sales by quarter for 2011 versus 2010 were as follows (dollars in millions):

                  2011        2010     Change
First quarter  $ 1,343.6    1,347.2    (0.3 )%
Second quarter   1,477.9    1,400.1     5.6  %
Third quarter    1,442.5    1,309.6    10.1  %
Fourth quarter   1,378.3    1,262.2     9.2  %
Total year     $ 5,642.3    5,319.1     6.1  %

Gross profit
Gross profit for 2011 was $1,416.9 million (25.1% of net sales) compared to gross profit of $1,402.6 million (26.4% of net sales) for 2010. Gross profit dollars were impacted by favorable price and product mix of approximately $124 million, lower manufacturing costs of approximately $69 million, higher sales volume of approximately $27 million and favorable foreign exchange rates of approximately $16 million, substantially offset by higher inflationary costs of approximately $206 million, primarily related to raw materials, and approximately $7 million of higher restructuring charges. The lower manufacturing costs are primarily a result of cost savings initiatives implemented and various restructuring activities taken by the Company, including facility consolidations, workforce reductions and productivity improvements resulting from capital investments. In addition, the gross profit for 2010 included insurance settlement proceeds of approximately $9 million related to a flood in the Company's Mexican manufacturing facility. Selling, general and administrative expenses Selling, general and administrative expenses for 2011 were $1,101.3 million (19.5% of net sales) compared to $1,088.4 million (20.5% of net sales) for 2010. As a percentage of sales, selling, general and administrative expenses for 2011 decreased 1.0% compared to the prior year as a result of the Company's ability to leverage its various cost savings initiatives. The dollar increase in selling, general and administrative expenses is primarily a result of unfavorable foreign exchange rates of approximately $9 million, a lease charge (discussed below) of approximately $6 million and higher restructuring charges of approximately $5 million, partially offset by the various cost savings initiatives implemented by the Company including facility consolidations and productivity improvements.
During the fourth quarter of 2011, the Company corrected an immaterial error in its consolidated financial statements. The error related to accounting for operating leases. The correction of $6.0 million resulted in an additional charge ("lease charge") to selling, general and administrative expense in the Company's 2011 consolidated statement of operations. The Company believes the correction of this error to be both quantitatively and qualitatively immaterial to its quarterly results for 2011 or to any of its previously issued consolidated financial statements. The correction had no impact on the Company's cash flows as previously presented.
Operating income
Operating income for 2011 was $315.6 million (5.6% of net sales), reflecting a $1.4 million increase, compared to an operating income of $314.2 million (5.9% of net sales) for 2010. The increase in operating income was primarily a result of favorable price and product mix of approximately $124 million, lower manufacturing and selling, general and administrative expenses of approximately $77 million, higher sales volume of $27 million and the impact of favorable foreign exchange rates of approximately $7 million, substantially offset by higher inflationary costs of approximately $206 million, primarily related to raw materials, higher restructuring charges of approximately $11 million and a lease charge (discussed in selling, general and administrative expenses) of approximately $6 million. The lower manufacturing costs and selling, general and administrative expenses are primarily a result of cost saving initiatives implemented and various restructuring actions taken by the Company, including facility consolidations, workforce reductions and productivity improvements resulting from capital investments. In addition, the operating income for 2010 included insurance settlement proceeds of approximately $9 million related to a flood in the Company's Mexican manufacturing facility.
Mohawk Segment-Operating income was $109.9 million (3.8% of segment net sales) for 2011, reflecting a decrease of $13.0 million, compared to operating income of $122.9 million (4.3% of segment net sales) for 2010. Operating income was negatively impacted by higher inflationary costs of approximately $138 million, primarily related to raw materials, higher restructuring charges of approximately $14 million and a lease charge (discussed in selling, general and administrative expenses) of approximately $3 million, substantially offset by lower manufacturing costs and selling, general and administrative expenses of approximately $76 million and favorable price and product mix of approximately $64 million. The

lower manufacturing costs and selling, general and administrative expenses were primarily a result of cost savings initiatives implemented and various restructuring actions taken by the Company, including facility consolidations, workforce reductions and productivity improvements resulting from capital investments.
Dal-Tile Segment-Operating income was $101.3 million (7.0% of segment net sales) for 2011, reflecting an increase of $4.0 million, compared to operating income of $97.3 million (7.1% of segment net sales) for 2010. Operating income was favorably impacted by higher sales volume of approximately $18 million, lower manufacturing costs and selling, general and administrative expenses of approximately $10 million and favorable price and product mix of approximately $6 million, partially offset by higher inflationary costs of approximately $18 million, primarily related to raw materials and a lease charge (discussed in selling, general and administrative expenses) of approximately $3 million. The lower manufacturing costs and selling, general and administrative expenses are primarily a result of cost savings initiatives implemented and various restructuring actions taken by the Company, including workforce reductions and productivity improvements resulting from capital investments. In addition, the operating income for 2010 included insurance settlement proceeds of approximately $9 million related to a flood in the Company's Mexican manufacturing facility.
Unilin Segment-Operating income was $127.1 million (9.5% of segment net sales) for 2011 reflecting an increase of $12.8 million compared to operating income of $114.3 million (9.6% of segment net sales) for 2010. The increase was primarily driven by favorable price and product mix of approximately $54 million, lower manufacturing costs of approximately $10 million, favorable foreign exchange rates of approximately $7 million, higher sales volume of approximately $7 million and lower restructuring costs of approximately $2 million, substantially offset by higher inflationary costs of approximately $50 million, primarily related to raw materials, and higher selling, general and administrative costs of approximately $17 million. The lower manufacturing costs are primarily a result of cost savings initiatives implemented and various restructuring actions taken by the Company, including facility consolidations and productivity improvements resulting from capital investments. Interest expense
Interest expense was $101.6 million for 2011, reflecting a decrease of $31.5 million compared to interest expense of $133.2 million for 2010. The decrease in interest expense resulted from lower interest costs on the Company's outstanding debt and lower debt levels. In addition, the 2010 interest expense includes a $7.5 million premium paid to extinguish approximately $200 million aggregate principal amount of senior notes.
Other expense (income)
Other expense for 2011 was $14.1 million as compared to other income in the prior year of $11.6 million. The unfavorable impact of $25.7 million was primarily a result of unfavorable changes in net foreign currency gains/losses of approximately $13 million, and losses associated with the minority interest of approximately $5 million. In addition, other income for 2010 included an approximately $8 million benefit from customs refunds partially offset by acquisitions purchase accounting adjustments of $1.7 million. The unrealized foreign currency losses are attributable to certain of the Company's consolidated foreign subsidiaries that measure financial conditions and results using the U.S. dollar rather than the local currency. The unrealized foreign currency losses were primarily a result of volatility in the Mexican Peso and the Canadian Dollar that occurred late in the third quarter of 2011. The customs refunds from the U.S. government resulted from settling customs disputes dating back to 1986. The Company is pursuing additional recoveries for years subsequent to 1986 but there can be no assurances such recoveries will occur. Additional future recoveries, if any, will be recorded as realized. Income tax expense
For 2011, the Company recorded an income tax expense of $21.6 million on earnings before income taxes of $199.9 million for an effective tax rate of 10.8%, as compared to an income tax expense of $2.7 million on earnings before income taxes of $192.6 million for an effective tax rate of 1.4% for 2010. The difference in the effective tax rate for the comparative period is primarily due to the benefit from the settlement of certain tax contingencies of $7.2 million and $30.0 million, respectively, in 2011 and 2010. In addition, both years were effected by the geographical dispersion of earnings and losses for the current period.

Liquidity and Capital Resources
The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines and credit terms from suppliers.

Cash flows provided by operating activities for 2012 were $587.6 million compared to $301.0 million provided by operating activities for 2011. The . . .