Mohawk Profits Up, Outlook Tough

Calhoun, Ga. — Getting a big lift from a recent acquisition, deep cuts in capital spending and an $8.8 million refund from U.S. Customs, Mohawk Industries pushed third-quarter profits up by 10.3%, to $127.7 million from $115.8 million last year.

Sales, similar to earnings, were lifted by this year's acquisition of Unilin, a European hard flooring operation. Sales climbed higher by 19.2%, to $2.0 billion from $1.7 billion last year.

But to underscore the importance and strong contribution from the new Unilin operation, pull its numbers out of the total and the results at Mohawk's slow-growth U.S. operations are stuck in neutral, sales edging up just 2.2% and operating profits declining by 5.7%.

Illustrating the slowdown in U.S. operations, sales in the core Mohawk business declined by 1.2%, to $1.2 billion, and operating profits fell by 9.4%, to $110.5 million from $121.9 million. Dal-Tile sales grew by 11.5%, to $501.2 million from $449.4 million, but operating profits hit the wall, unchanged at $69 million.

The added growth from Unilin comes at a price. Even after Mohawk paid down $168 million in debt during the period, long-term debt still more than tripled, jumping up by 248.4%, to $2.4 billion from just $700,000 last year. Interest expense on the debt more than quadrupled, shooting up by 314.4%, to $44.7 million from $10.8 million during last year's third quarter.

Interest expense during this year's third quarter chewed up 20.0% of the company's operating profit of $222.7 million.

With the housing market slowing, rising gas prices eating into consumers' discretionary income, and demand for its floor coverings products slowing, the outlook for the current fourth quarter grew more subdued, said Jeffrey Lorberbaum, chairman and ceo. Mohawk said continued slow sales in the fourth quarter will result in unabsorbed overhead costs, eating into margins and profits. Clearing the decks for a downturn, Mohawk said, "We are reducing our manufacturing, administration, and marketing expenses." Looking forward, the company forecast a fourth-quarter profit of $1.51 to $1.60 per share, flat to modestly ahead of last year's level.

Hurt by the slide in its core carpeting business, Mohawk said, "As all levels of the industry try to stimulate consumer purchases, we see more promotional activity," squeezing margins and leading to slowdowns in its plants. "Production schedules have been reduced to reflect lower demand and control inventory levels." During the quarter, Mohawk said it closed a staple yarn plant, triggering $500,000 in closing costs. "We will continue to review the business and adjust to the changing environment."

Wall Street, miffed by what it heard from one of the few bright lights in the American textiles industry, last Friday knocked the stock down in heavy trading by 3.8%, or $2.98 a share, to $74.81 by mid-day. Leading the retreat, brokerage house USB cut its rating on Mohawk shares to 'neutral' from a prior 'buy' rating.

Helping to bolster the bottom line, average gross margin widened during the quarter by 80 basis points, or eight-tenths of a percentage point, to 28.1% from 27.3%. But it wasn't enough to offset rising costs, which climbed higher by 100 basis points, or 1.0 percentage points, to 17.1% of sales from 16.1% last year. Measured in real dollars, costs jumped up by 26.2%, far in excess of the gain in sales, to $345.8 million from $274.1 million, a jump of $71.7 million.