Mohawk Chops Costs, Boosts Profits

Don Hogsett, October 25, 2004

Calhoun, Ga. — Building sales at a rapid pace while hacking away at costs, Mohawk Industries Inc. pushed third quarter profits up far in excess of Wall Street expectations, 23.3 percent, to $112.7 million from $91.4 million last year.

Earnings per share, the number that Wall Street watches, climbed to $1.67 a share, up from $1.36 last year, easily exceeding a consensus Wall Street forecast of $1.54. Applauding the stronger than expected profits,analysts and investors drove the textiles producer's stock up $5.55 a share, or 7.4 percent, in unusually heavy mid-day trading on Thursday, Oct. 21, the day after the company put out the news.

Helped by its acquisition of Lees Carpets, Mohawk pushed sales ahead 17.5 percent, to $1.5 billion from $1.3 billion last year. Sales in the core Mohawk floor coverings and home business advanced 16.9 percent, to $1.1 billion, while sales in the Dal-Tile business, acquired last year, rose at an even faster pace, 19.2 percent, to $400.2 million from $335.8 million. The new Lees business, by itself, added about 5 percent to the company's sales.

In another lift to the bottom line, Mohawk kept cutting away at overhead costs, reducing expenses 50 basis points, or one-half of a percentage point, to 15.3 percent of sales from 15.8 percent a year ago.

Going forward, Mohawk said continued economic expansion should help its business during the fourth quarter. But hanging a question mark over any forecasts, the company said, "Certain economic factors such as consumer confidence, job trends and oil and other energy costs could impact our business. And rising raw material costs could put a squeeze on margins."

Weighing all the possibilities, Mohawk said it is forecasting fourth quarter earnings could be relatively flat with last year, in the range of $1.46 to $1.55 a share, compared with $1.51 a year ago.

Honing in on raw material costs, Jeffrey Lorberbaum, chairman and CEO, commented, "There continue to be raw material and energy cost pressures as natural gas and oil are both at or near historic highs. These cost increases have impacted our margins in the third quarter of 2004."

Average gross margin contracted modestly, to 27.9 percent from 28 percent a year ago.

To offset costs, Lorberbaum added, "We implemented multiple price increases for carpet products during the first nine months of the year, with the latest increase in October. Although we have not received formal notice of further increases, the continuing high level of commodity costs is troubling. We believe costs will moderate over the long term, but the short-term trend of these costs is uncertain."

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