Mohawk Posts Big Quarterly Gains

Don Hogsett, February 26, 2007

Shares of Mohawk Industries Inc. shot up more than 9% as the carpet and home fashions producer announced that fourth-quarter profits soared by 30%, to $129.5 million from $99.6 million last year, well in excess of Wall Street expectations.

Sales at the nation's third largest supplier of home textiles rose by 5.2%, to $1.9 billion from $1.8 billion during the same period a year ago.

Driving the surge in profits was a strong performance from Unilin, its European hard floorings business, acquired last year, which more than offset weakness in the U.S. carpet and home fashions business. Unilin recorded an operating profit of $64.7 million, bounding back from a year-before loss of $5.2 million. Unilin sales virtually doubled, rocketing up by 94.1% to $327.6 million from $168.8 million last year.

But acting as a drag to both the top and bottom lines was the core Mohawk business, where operating profits fell 14.4%, to $112.3 million from $131.2 million last year. Sales in the Mohawk business fell 6.4%, to $1.1 billion from $1.2 billion last year.

Putting more pressure on the bottom line was a former Mohawk star performer, the Dal-Tile hard flooring unit, where operating profits fell by 9.0%, to $57.6 million from $63.3 million, even though sales advanced by 3.6%, to $459.8 million from $443.7 million during the prior-year period.

Jeffrey Lorberbaum, Mohawk chairman and ceo, was stoic, saying, "Even though the industry remains soft, our business results were good for the quarter. We benefited from strong growth in the Unilin business and business initiatives to reduce costs. Our overall strategy of offering a total flooring solution combined with an expanded geographical presence has positively influenced results."

"The U.S. flooring industry continued slowing, Lorberbaum said. "The residential new construction market and the retail remodeling channel have continued their decline. The commercial channel continues to outperform the residential channel."

While the relatively new Unilin business surpassed expectations, sales in the U.S. Mohawk business fell 6% "as industry sales continued to contract," the company said. "The cost reduction programs put in place last quarter partially offset lower margins which were impacted by higher costs and reduced volume. There continues to be an increased level of promotional activity to stimulate customer activity. Our new and replacement residential carpet sales continued to fall. The commercial channel continues to grow during the quarter with some softening in the high-end category as customers have trended down. Our material costs have remained high but could improve if commodity prices soften."

Looking ahead, Mohawk hoisted a yellow caution flag, saying it anticipated "continued slow U.S. industry sales in the first quarter of 2007 that will impact margins and earnings." As a hedge, Mohawk said it has "reduced manufacturing, administration and marketing expenses based on current industry conditions, and will continue to adjust as required."

First-quarter earnings were forecast at $1.01 to $1.10 per share, vs. $1.04 last year, a range that spans a drop of 2.8% to a possible gain of 5.8%.


Qtr. 12/31 (x000) 2006 2005 % change
a. Fourth quarter results include $2.1 million in miscellaneous expenses, compared with $934,000 during the same period a year ago; and a U.S. Customs refund of $4.4 million.
b. 12-month results include miscellaneous expenses of $8.5 million, compared with $3.5 million last year; and a $19.4 million U.S. Customs refund.
Sales $1,898,594 $1,804,551 5.2
Oper. income (EBIT) 229,374 187,040 22.6
Net income 129,491a 99,633a 30.0
Per share (diluted) 1.90 1.47 29.3
Average gross margin 29.2% 26.4%
SG&A expenses 17.1% 16.1%
12 months
Sales $7,905,842 $6,620,099 19.4
Oper. income (EBIT) 839,060 672,384 24.8
Net income 455,833b 387,138b 17.7
Per share (diluted) 6.70 5.72 17.1
Average gross margin 28.2% 26.7%
SG&A expenses 17.6% 16.6%

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