Mohawk's Profits Come Back to Earth

Don Hogsett, February 21, 2005

Calhoun, Ga. — Cooling off a long ride of strong earnings growth, fourth quarter profits at Mohawk Industries Inc. squeaked ahead 0.3 percent, to $102.5 million from $102.1 million last year. With costs climbing and margins under pressure, the company came in slightly shy of Wall Street targets, triggering a modest sell-off in Mohawk shares.

The company might have reported a small earnings drop but for a deep 13.5 percent cut in interest expense, which saved it $1.9 million.

Wall Street had been expecting earnings of $1.53 per share, and when the company came in slightly lower, at $1.52, disappointed traders knocked Mohawk stock down almost 3 percent, or $2.64 a share, to $89.72 during mid-day trading on Wednesday, Feb. 16, the day after the news came out.

The closing quarter came as something of a rude awakening to investors who had become accustomed to strong, steady earnings growth. In sharp contrast to the relatively flat fourth quarter, earnings had grown 23.3 percent during the third quarter; 16.2 percent during the second quarter; and a whopping 59.2 percent during the first quarter of the year. Helped by stronger results earlier during the year, profits for all of 2004 shot up 18.9 percent, to $368.6 million from $310.1 million a year ago.

Mohawk sales improved 7.8 percent during the closing quarter, to $1.5 billion from $1.4 billion last year, helped by a strong 10.7 percent increase in its Dal-Tile division, and a 6.8 percent increase in its core carpet and home fashions business, aided by the Lees carpet acquisition. Sales might have climbed somewhat higher, but this year's fourth quarter contained four fewer days than the prior-year period, reducing comparable sales by about 7 percent, “with a larger impact on earnings,” the company reported.

Putting pressure on the bottom line, in addition to the calendar, were higher raw material costs eroding margins, rising costs and sharply higher inventories. Average gross margin narrowed slightly, 20 basis points, or two-tenths of a percentage point, to 28.2 percent from 28.4 percent a year ago. At the same time, costs climbed 80 basis points, or eight-tenths of a percentage point, to 16.5 percent from 15.7 the preceding year. Taking a further bite out of profits, inventories rose sharply faster than sales, 22.3 percent, to $1 billion from $832.4 million a year ago.

Jeffrey Lorberbaum, chairman and CEO, said, “We are pleased with the positive fourth quarter results in this time of rising raw material costs. Our company continues to manage costs and pricing to offset raw material and energy cost increases during the year.”

Mohawk Industries Inc.

Qtr. 12/31 (x000) 2004 2003 %change
a. Fourth quarter results include $71,000 in miscellaneous income, compared with $728,000 during the same period a year ago.
b. 12-month results include miscellaneous expense of $4.8 million, compared with $2 million in miscellaneous income during 2003.
Sales $1,475,099 $1,368,542 7.8
Oper. Income (EBIT) 172,830 174,364 -0.9
Net income 102,470a 102,142a 0.3
Per share (diluted) 1.52 1.51 0.7
Average gross margin 28.2% 28.4%
SG&A expenses 16.5% 15.7%
Nine months
Sales 5,880,372 4,999,381 17.6
Oper. Income (EBIT) 635,590 542,029 17.3
Net income 368,622b 310,149b 18.9
Per share (diluted) 5.46 4.62 18.2
Average gross margin 27.6% 27.9%
SG&A expenses 16.8% 17.0%

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