Mohawk, Flooring Maker, Faces Lawsuit and SEC Inquiry

Mohawk Industries shares are lower Tuesday after the flooring maker said it was the subject of a lawsuit and an SEC inquiry.
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Mohawk Industries  (MHK) - Get Report shares on Tuesday were lower after the flooring-products maker disclosed it was being sued in federal court for securities-law violations and was the subject of a Securities and Exchange Commission investigation into the alleged violations.

Shares of the Calhoun, Ga., company at last check were 7.4% lower at $70.90. 

Mohawk said in an SEC filing that the complaint, brought by the pension fund Public Employees' Retirement System of Mississippi, was filed in the Northern District of Georgia against the company and its chief executive, Jeff Lorberbaum.

The suit alleges the company fabricated revenue by attempting delivery to customers that were closed and recognizing the items as sales. 

In addition, the complaint said the company overproduced products to report higher operating margins and maintained significant inventory that was not salable; and valued certain inventory improperly or improperly delivered inventory knowing that it was defective and customers would return it.

"The company intends to vigorously defend itself in the lawsuit," Mohawk said in the filing.

Moody's Investors Service said in a statement that allegations of "channel stuffing and intentionally overproduced product are credit negative and suggest aggressive business practices and potential corporate governance weaknesses."

"However, because the company has good liquidity bolstered by recent debt offerings and the allegations will take time to litigate," Moody's said, "there is no impact on the company's Baa1 senior unsecured rating and stable outlook."

Wells Fargo analyst Truman Patterson lowered his price target on Mohawk to $70 from $80 while keeping an underweight rating on the shares. 

SunTrust Robinson Humphrey analyst Keith Hughes said in a note that "the allegations set forth in shareholder lawsuit took most in this industry by surprise."

"It is hard to reconcile how such a large and wide ranging conspiracy that is alleged was not suspect more in an industry that is mostly headquartered in North Georgia," said Hughes, who has $119 price target and a buy rating on the shares. "Secrets have historically not been well kept in the flooring industry."