Monday, July 21, 2008

Mohawk Industries, Inc. Announces Second Quarter Earnings

PRNewswire-FirstCall/ -- Mohawk Industries, Inc. (NYSE:MHK) today announced 2008 second quarter net earnings of $89 million and diluted earnings per share (EPS) of $1.29 (both 23% below last year). In the second quarter of 2007, net earnings and EPS were $115 million and $1.68 per share, respectively. Net sales for the quarter were $1,840 million, a decrease of 7% from 2007. The company generated cash flow from operations of $267 million. In addition, $183 million of debt was paid down improving the company's debt to capital ratio to 30%.

For the first six months of 2008, net earnings were $154 million and EPS was $2.25 (both 25% below last year). Net earnings and EPS were $206 million and $3.01 per share, respectively, in the first six months of 2007. Net sales for the first six months of 2008 were $3,578 million representing a 7% decrease from 2007. The sales decreases for both the quarter and the year to date are attributable to slowing U.S. residential housing and European demand.

In commenting on the second quarter results, Jeffery S. Lorberbaum, Chairman and CEO stated, "Our results for the second quarter were impacted by the slowing economies in the U.S. and Europe and rapidly increasing commodity costs. Declining new U.S. home construction and residential remodeling, slowing European demand and rising raw material and energy costs have contributed to the flooring industry cyclical decline. The rapidly increasing costs are impacting our margins even as we raise selling prices to offset these costs.

Our management team remains focused on improving our market position, increasing quality, introducing innovative products and providing excellent customer service. The team is relentlessly pursuing cost control, working capital management, and process improvement to manage the cycle. We believe these efforts will better position our company for growth when the market improves.

The Mohawk segment performance is under pressure with sales declining 13% below last year. The commercial and rug products are performing better while the hard surface and the cushion products are declining more than residential carpet. Higher energy, raw material and freight costs are causing dramatic cost inflation. We have announced three carpet price increases since December to offset rising costs. We are increasing our commercial carpet tile offering with new value, performance and stylized options in our brands. We have re- engineered processes and improved manufacturing productivity, quality and yields.

Dal-Tile sales are down 5% during the quarter and are doing well in a very difficult environment. Commercial and Mexican sales growth continue to buffer the impact of the declining U.S. residential industry. In July, we purchased a stone center in North Carolina to continue expanding our national presence. The major factors affecting margins are rapidly rising energy and freight costs along with customers trading down. In the second quarter we have increased product prices and energy surcharges to offset rising costs and more may be required in the future. Many cost initiatives are being executed to improve labor productivity, control expenses and reduce energy consumption. Freight costs are being reduced by utilizing lower cost transportation modes, increasing weight per load and making more direct shipments.

Unilin sales were up 13% over last year and down 7% on a constant exchange rate basis excluding the Columbia acquisition. Sales declines were experienced in the U.S. and much of Western Europe, with Russia and Eastern Europe growing. Sales in the U.K. and Spain were most impacted by the slowing European industry. Oil based material and energy inflation continues to increase the cost of most products. A 5% - 6% price increase has been announced for the U.S. laminate business during the third quarter. The new laminate production in the U.S. will be operating in the third quarter and will reduce our costs on higher end products presently imported from Europe. We have many cost initiatives to reduce energy consumption, modify processes and lower material cost.

The wood operations continue to operate at a loss. New products are being launched in the third quarter to reposition both the Columbia and Mohawk brands in the market. We have made significant improvements in manufacturing processes, reducing labor, improving quality and material yields, but negative overhead absorption is offsetting the progress. We expect our new product strategy will improve our wood sales and product mix."

The third quarter outlook is challenging given the environment. Slow demand with higher material and energy costs will continue to compress our margins. As a result, we are raising product prices and transportation fees on most products. We will adapt our strategy to the changing environment. Based on these factors our guidance for the third quarter of 2008 is $1.06 to $1.15. We have many focused initiatives under way to reduce cost, minimize working capital, improve service and bring new products to market. We remain convinced Mohawk will be a stronger company as we come out of this cycle.

Certain of the statements in the immediately preceding paragraphs, particularly anticipating future performance, business prospects, growth and operating strategies and similar matters and those that include the words "could," "should," "believes," "anticipates," "expects," and "estimates," or similar expressions constitute "forward-looking statements." For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in economic or industry conditions; competition; raw material and energy costs; timing and level of capital expenditures; integration of acquisitions; rationalization of operations; litigation and other risks identified in Mohawk's SEC reports and public announcements.

Mohawk is a leading supplier of flooring for both residential and commercial applications. Mohawk offers a complete selection of carpet, ceramic tile, laminate, wood, stone, vinyl, and rugs. These products are marketed under the premier brands in the industry, which include Mohawk, Karastan, Ralph Lauren, Lees, Bigelow, Dal-Tile, American Olean, Unilin and Quick Step. Mohawk's unique merchandising and marketing assist our customers in creating the consumers' dream. Mohawk provides a premium level of service with its own trucking fleet and over 250 local distribution locations.

There will be a conference call Tuesday, July 22, 2008 at 11:00 AM Eastern Time.

The telephone number to call is 1-800-603-9255 for US/Canada and 1-706-634-2294 for International/Local. Conference ID # 54459485. A conference call replay will also be available until Monday, July 28, 2008 by dialing 1-800-642-1687 for US/local calls and 1-706-645-9291 for International/Local calls and entering Conference ID # 54459485.


Consolidated Statement of
Earnings Data Three Months Ended Six Months Ended
(Amounts in thousands, June 28, June 30, June 28, June 30,
except per share data) 2008 2007 2008 2007

Net sales $1,840,045 1,977,210 3,578,142 3,841,073
Cost of sales 1,357,153 1,420,512 2,635,411 2,760,935
Gross profit 482,892 556,698 942,731 1,080,138
Selling, general and
administrative expenses 336,829 358,450 672,350 711,313
Operating income 146,063 198,248 270,381 368,825
Interest expense 32,742 39,138 66,509 80,717
Other (income) expense, net 1,650 (2,783) 4,429 1,476
U.S. Customs refund - - - (9,154)
Earnings before income
taxes 111,671 161,893 199,443 295,786
Income taxes 22,893 46,625 45,275 90,140
Net earnings $88,778 115,268 154,168 205,646
Basic earnings per share $1.30 1.69 2.25 3.02
Weighted-average shares
outstanding 68,403 68,167 68,389 68,037
Diluted earnings per share $1.29 1.68 2.25 3.01
Weighted-average common and
dilutive potential common
shares outstanding 68,617 68,533 68,598 68,394

Other Financial Information
(Amounts in thousands)
Net cash provided by
operating activities $266,871 225,685 186,692 314,452
Depreciation & amortization $75,052 75,382 148,308 149,228
Capital expenditures $49,839 35,428 105,810 60,384

Consolidated Balance Sheet Data
(Amounts in thousands)
June 28, June 30,
2008 2007
Current assets:
Cash & cash equivalents $64,038 57,763
Receivables 982,378 998,023
Inventories 1,250,300 1,229,326
Prepaid expenses 131,218 121,625
Deferred income taxes 138,332 173,252
Total current assets 2,566,266 2,579,989
Property, plant and equipment, net 2,018,813 1,858,282
Goodwill 2,876,724 2,719,724
Intangible assets 1,190,157 1,153,761
Deferred income taxes and other assets 307,572 27,972
$8,959,532 8,339,728
Current liabilities:
Current portion of long-term debt $290,392 364,114
Accounts payable and accrued expenses 965,743 1,061,157
Total current liabilities 1,256,135 1,425,271
Long-term debt, less current portion 1,896,642 2,137,349
Deferred income taxes and other long-term
liabilities 763,858 768,278
Total liabilities 3,916,635 4,330,898
Total stockholders' equity 5,042,897 4,008,830
$8,959,532 8,339,728

Segment Information As of or for the Three As of or for the Six
Months Ended Months Ended
(Amounts in thousands) June 28, June 30, June 28, June 30,
2008 2007 2008 2007

Net sales:
Mohawk $968,426 1,113,412 1,873,470 2,161,073
Dal-Tile 481,511 505,187 930,562 972,148
Unilin 411,525 363,531 815,280 715,627
Corporate and eliminations (21,417) (4,920) (41,170) (7,775)
Consolidated net
sales $1,840,045 1,977,210 3,578,142 3,841,073

Operating income:
Mohawk $34,593 59,730 56,834 108,175
Dal-Tile 58,169 69,353 115,110 133,748
Unilin 60,121 81,737 110,077 142,236
Corporate and eliminations (6,820) (12,572) (11,640) (15,334)
operating income $146,063 198,248 270,381 368,825

Mohawk $2,400,869 2,474,276
Dal-Tile 2,259,255 2,297,745
Unilin 4,109,314 3,337,870
Corporate and eliminations 190,094 229,837
Consolidated assets $8,959,532 8,339,728

Reconciliation of Debt to Capital

As of
(Amounts in thousands) June 28, 2008
Outstanding Debt (a) $2,187,034
Total stockholders' equity 5,042,897
Total capital (b) $7,229,931

Debt to capital percentage (a)/(b) 30%

Reconciliation of
Operating Income to
Trailing Four
Three Months Ended Quarters Ended
(Amounts in September December March 29, June 28, June 28,
thousands) 29, 2007 31, 2007 2008 2008 2008

EBITDA reconciliation:
Operating income 200,814 180,467 124,318 146,063 651,662
Other (expense)/
income 799 3 (2,779) (1,650) (3,627)
Depreciation and
amortization 75,636 81,573 73,256 75,052 305,517
of debt to
EBITDA 277,249 262,043 194,795 219,465 (c) 953,552

Reconciliation of Debt to EBITDA

Debt to EBITDA (a)/(c) 2.3

Reconciliation of Unilin Segment Net
Sales to Adjusted Unilin Segment
Net Sales

Three Months Ended
(Amounts in thousands) June 28, 2008
Unilin segment net sales $411,525
Less: Exchange rate gain 41,000
Adjusted Unilin segment net sales 370,525
Less: Wood acquisition net sales 33,863
Adjusted Unilin segment net sales $336,662

The Company believes it is useful for itself and investors to review, as applicable, both GAAP and the above non-GAAP measures in order to assess the performance of the Company's business for planning and forecasting in subsequent periods.

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