Mohawk's 2Q gets boost from recent acquisition

Don Hogsett, Staff Staff, July 22, 2002

Spurred on by wider margins and sharply higher sales — driven by a big acquisition that added almost $300 million to sales during the quarter — second-quarter profits at Mohawk Industries Inc. shot up by 62.5 percent, to $75.5 million from $46.5 million last year.

Sales rocketed up by 41.9 percent, to $1.2 billion from $864 million last year, boosted by the March acquisition of Dal-Tile, a floor tile producer that further diversifies the company from its base in carpeting and extends its reach into the hard floor coverings business. Dal-Tile brought in $289.3 million in sales during the period.

But it wasn't enough to assuage the fears of an antsy Wall Street, and anxious investors knocked the textiles producer's stock down by 14 percent, or $7.70 a share, to $47.50, when profits fell $0.01 short of expectations and the company voiced concern about rising raw material costs and a "less optimistic" outlook for the second half of the year and then sharply scaled back its earnings guidance for the third quarter.

Facing an order slowdown in carpeting and home fashions, as well as rising fiber prices, Mohawk warned investors that earnings in the third and fourth quarters will grow at a far slower pace than expected, by 4 percent to 6 percent, compared with earlier guidance to Wall Street of a 10 percent to 15 percent increase for the third quarter.

One brokerage firm, Raymond James, downgraded Mohawk shares from a "strong buy" to a "market perform," and other analysts jumped on the bandwagon, if not adjusting their rating, at least paring their earnings estimates for the balance of this year and next.

Credit Suisse First Boston analyst Dennis Rosenberg maintained his "buy" rating on the stock, saying he remains "optimistic about Mohawk's growth prospects as it leverages its distribution to substantially expand Dal-Tile's footprint." But with orders slowing down for residential replacement carpets and in home fashions, he whittled his earnings estimate for all of this year to $4.15 a share from an earlier forecast of $4.35.

Helping to fuel earnings growth during the second quarter, in addition to stronger sales, average gross margin widened strongly, by 260 basis points, or 2.6 percentage points, to 27.6 percent from 25.0 percent the prior year.

Mohawk Industries Inc.

Qtr. 6/29 (x000) 2002 2001 % change
a-Sales in the period include $938.4 million in core Mohawk sales, up 8.5 percent from a year ago; and $289.3 million in sales from the recently acquired Dal-Tile operation. Six-month results include core Mohawk sales of $1.8 billion, up 8.2 percent from a year ago; and Dal-Tile sales of $317.8 million.
b-Second-quarter results include $154,000 in miscellaneous income, compared with miscellaneous expense of $1.6 million last year. Six-month results include $997,000 in miscellaneous income vs. year-before expenses of $3.0 million.
c- Per-share diluted earnings reflect a 29.8 percent increase in the number of average shares outstanding during the second quarter, to 68.6 million from 52.9 million a year ago. For the six months year-to-date, the average number of shares outstanding increased by 17.7 percent, to 62.3 million from 52.9 million.
Sales $1,227,747a $864,958 41.9
Oper. income (EBIT) 139,063 83,561 66.4
Net income 75,518b 46,466b 62.5
Per share (diluted) 1.10c 0.88c 25.0
Average gross margin 27.6% 25.0%
SG&A expenses 16.3% 15.3%
Six months
Sales 2,094,457a 1,642,297 27.5
Oper. income (EBIT) 213,331 137,166 55.5
Net income 118,728b 73,672b 61.2
Per share (diluted) 1.91c 1.39c 37.4
Average gross margin 26.4% 24.0%
SG&A expenses 16.3% 15.6%

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