European Business Bolsters Mohawk

Second-Quarter Results Exceed Analyst Predictions

Don Hogsett, July 30, 2007

Hurt by woes in the U.S. housing market, which put a crimp in domestic sales, second-quarter profits at Mohawk Industries Inc., a diversified flooring and home fashions company, slipped by 3.6%, to $115.3 million from $119.5 million last year.

Still that was better than analysts had expected, given a persistently weak housing market, and earnings per share came in at $1.68, solidly better than the $1.58 analysts polled by Thomson Financial had forecast.

Sales slipped by 3.9%, to $2.0 billion from $2.1 billion last year, with all of the drop coming from the U.S. market, where sales in its Mohawk carpeting and home fashions business fell by 10% as the industry suffered from slow residential sales, said Jeffrey S. Lorberbaum, chairman and ceo.

Picking up some of the slack, though, was continued growth in Mohawk's European operations, he added. "The European business maintained its strong growth and performance, partially offsetting the cyclical downturn in the U.S. Our U.S. commercial business continued performing better than our residential business. U.S. residential flooring is in a cyclical downturn with soft sales in the new home and consumer redecorating categories."

Going forward, the company said it expects the U.S. residential market will "continue to be difficult," and hoisted a yellow caution flag, warning analysts and investors that third-quarter profits could come up short.

Analysts polled by Thomson Financial had projected a profit of $1.70 per share, but now Mohawk said profits will come in between $1.61 and $1.70 per share.

Despite June price hikes of 4% to 6% in the U.S. carpeting business, rising raw material costs and heavy promoting took a bite out of margins, which narrowed to 28.2% from 28.8% a year ago. "Promotions continue at a greater pace to stimulate sales and balance asset utilization in the industry," said Lorberbaum. Acting as a further drag on the bottom line, costs climbed slightly higher when measured as a percentage of sales, to 18.1% from 17.9% a year ago.


Qtr. 6/30 (x000) 2007 2006 % change
a. Second quarter results include $2.8 million in miscellaneous income, compared with $3.6 million in miscellaneous expense during the same period a year ago. Earnings in last year's second quarter included a $6.2 million U.S. customs refund.
b. Six-month results include $1.4 million in miscellaneous expense, compared with $6.3 million last year; and a $9.1 million U.S. customs refund vs. $6.2 million refund the year before.
Sales $1,977,210 $2,058,123 -3.9%
Oper. income (EBIT) 198,248 223,045 -11.1
Net income 115,268a 119,513a -3.6
Per share (diluted) 1.68 1.76 -4.5
Average gross margin 28.2% 28.8%
SG&A expenses 18.1% 17.9%
Six months
Sales $3,841,073 $3,983,229 -3.6%
Oper. income (EBIT) 368,825 386,946 -4.7
Net income 205,646b 198,634b 3.5
Per share (diluted) 3.01 2.92 3.1
Average gross margin 28.1% 27.8%
SG&A expenses 18.5% 18.1%

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