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Mohawk 2Q Results Down, but Ahead of Expectations

Floor covering company Mohawk Industries, parent of area, accent and bath rug business Mohawk Home, struggled during its second quarter despite efforts to slash expenses and reduce inventories. Although earnings slumped nearly 50%, the performance surpassed expectations.

"Our results improved from the first quarter as we benefited from increased sales, lower costs and higher utilization rates," said Jeffrey Lorberbaum, chairman and ceo, during the company's second quarter earnings conference call July 31. "We are transitioning to a leaner, lower cost structure to emerge in a stronger position when the economy recovers."

Profit fell 48.3% to $46 million for the second quarter ended June 27, with diluted earnings per share of 67 cents compared to $1.29 in last year's second quarter.

Operating income for the period was $75 million. A restructuring charge of $12 million was recorded in the quarter, primarily related to the closure of a European laminate facility. Excluding that restructuring charge, operating income was $87 million, and earnings per share were 79 cents. Total sales fell 24% to $1.406 billion. The company's Mohawk segment — which includes the Mohawk Home business — saw its sales decrease 21%. The residential side of the business — under which Mohawk Home products fall — saw its sales declined beginning to stabilize.

"We're really looking at it more on a sequential basis, and on a sequential basis it looks like maybe we've bottomed out," Lorberbaum said.

However, the rugs business has lately seen some tougher times, and the company is working to change that trend. As "even our moderately-priced rug sales are weakening," he said, the company is "value-engineering new products to create lower priced alternatives."

A bright spot on that note has been Mohawk's residential products featuring the SmartStrand brand — a fiber featuring the DuPont-trademarked Sorona renewably sourced polymer, which substitutes 37% of the petroleum used in the product with corn-based ethanol. These have been "well accepted by the consumers and we temporarily exceeded our suppliers' capacities, which will be corrected in the third period," Lorberbaum said.

The caveat, however, is that these goods remain a "niche product" that represents "a limited" part of the carpet business, he added.

"It's not in line with the top three raw materials — nylon, polypropylene and polyester — but a growing niche of the piece," Lorberbaum said.

Also helping the carpet and rug businesses during the second quarter were improved raw material costs, which leveled during the second quarter after peaking in earlier periods.

During the quarter Mohawk worked on its balance sheet, generating more than $200 million in free cash flow, paying $122 million of debt and investing $26 million in capital expenditures, Lorberbaum said. "We ended the period with a balance of over $225 million in cash. The results benefited from aggressively driving costs down, improving working capital, tighter control over capital expenditure."

For the first six months of 2009, Mohawk's net loss was $60 million or a net loss per share of $0.87. Its operating loss for the same period last year was $71 million.

Lorberbaum said that by reducing production levels and cutting inventories in the first quarter, "we operated all of our facilities at higher production rates. We further reduced inventory levels for last quarter by $50 million and lowered headcount and other variable costs — reducing the infrastructure, adjusting production levels with demand, improving productivity, and consolidating some of our distribution structure."

Furthermore, Mohawk is "providing innovative products and services to bring value to our customers, redesigning processes, and managing our cash utilization."

To streamline the business, the company is investing in computerized process controls and inventory management and distribution systems.

Mohawk plans to maintain its focus on cost reduction initiatives. "We continue to cut administrative, manufacturing and logistics costs focusing on productivity, service and quality enhancements," Lorberbaum said.

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