Mohawk Dips Nearly 5% After Disclosing Federal Securities Violation Class Action

The shares of Mohawk Industries, Inc. MHK dipped in the after-hours session on Monday after the company disclosed that it is facing a class action over alleged federal securities law violations.

What Happened

In a filling with the Securities and Exchange Commission, the flooring products manufacturer said the lawsuit was filed against the company and Chief Executive Officer Jeff Lorberbaum in the Northern District of Georgia on June 29.

The petitioners have alleged that Mohawk fabricated sales "by attempting delivery to customers that were closed and recognizing these attempts as sales."

The complaint says that the company overproduced goods to "report higher operating margins," and maintained a higher inventory than it could sell.

The Georgia-based company also "valued certain inventory improperly or improperly delivered inventory with knowledge that it was defective and customers would return it," the lawsuit alleges, according to the filing.

Mohawk said it "intends to vigorously defend itself in the lawsuit," and the company is well-positioned "with a strong balance sheet and limited debt."

Moody's Says Allegations ‘Credit Negative'

In a note later in the day, Moody's Investor Service said the allegations against Mohawk are "credit negative and suggest aggressive business practices and potential corporate governance weaknesses."

Moody's added that the company, nevertheless, has "good liquidity" bolstered by recent debt offerings.

The firm maintained its Baa1 rating on Mohawk's debt, saying the "allegations will take time to litigate."

Price Action

Mohawk shares traded 4.7% lower at $72.99 in the after-hours session on Monday. The shares had closed the regular session 8.7% higher at $76.60.