- THE MAGAZINE
Mohawk Industries, Inc. recently announced 2008 third quarter sales of $1,763 million, a decrease of 9% from 2007. The company generated cash flow from operations of $185 million, paid down debt of $128 million and has over $800 million available under current credit facilities. As a result of Mohawk’s declining stock price and deteriorating industry conditions, accounting rules required non-cash charges for a preliminary goodwill and other intangibles impairment of $1,216 million net of tax and for a deferred tax asset impairment of $253 million.
While the company’s goodwill and other intangibles impairment analysis is not yet complete, Mohawk believes the preliminary amount is a reasonable estimate and will adjust the charge, if required. These impairment charges do not require any cash payments or impact operations, liquidity or debt covenants. Including the non-cash write offs during the quarter, the company reported a net loss of $1,394 million, or $20.37 per share. Excluding the non-cash write off, non-GAAP net earnings were $76 million, or $1.10 per share. In the third quarter of 2007, net earnings were $122 million, or $1.78 per share.
Net sales for the first nine months of 2008 were $5,341 million, representing an 8% decrease from 2007. For the first nine months of 2008, the loss was $1,239 million, or $18.12 per share, including a non-cash write off for a preliminary goodwill and other intangibles impairment of $1,216 million net of tax and for a deferred tax asset impairment of $253 million. Excluding the non-cash write off's, non-GAAP net earnings were $230 million, or $3.35 per share, in the first nine months of 2008.
In commenting on the third quarter results, Jeffrey S. Lorberbaum, chairman and chief executive officer, said, “We generated strong cash flow from operations of $185 million during the period while our earnings were under pressure from falling demand and higher costs. All of our businesses are focused on reducing overhead costs, managing working capital and enhancing sales and margins. The U.S. economy is declining, with consumers reducing discretionary expenditures. Residential home sales and remodeling are at low levels and commercial projects are being impacted by tightening credit and softening business conditions. The European economy has become significantly weaker and affected both our flooring and non-flooring products. Government intervention should help stabilize the banking system and improve availability of credit. We are hopeful that the declining energy and commodity prices will help strengthen consumer confidence and lead to an improvement in the flooring market next year.
“Dal-Tile’s third quarter sales declined 5% below the prior year, with business deteriorating through the quarter. We believe Dal-Tile is performing much better than the overall ceramic market. We are increasing our product offerings to the hospitality, multifamily and other commercial segments. New commercial introductions in the American Olean brand will add to our commercial sales through independent distributors. We have begun our factory-direct program for large customers and expanded our product line for the Mexican market. We are reducing our ceramic production in the fourth quarter with both shorter work schedules and shift reductions. Our sales, distribution and administrative infrastructures are being reduced further to adapt to the poor environment. Savings in trucking costs are being achieved through increased fleet utilization and synergies with other Mohawk shipments.”
The fourth quarter outlook is challenging due to the slowing economy, tightening credit, and falling consumption of consumers and businesses. Mohawk does not expect to benefit significantly from declining oil and energy until the first half of 2009. In the quarter, the company’s businesses will reduce inventory with increased shut downs and be impacted by a decline in product mix. The stronger dollar is expected to negatively impact results in the period. Based on these factors, Mohawk’s EPS guidance for the fourth quarter of 2008 is $0.20 to $0.30. Excluded from this guidance is a fourth quarter restructuring charge of $25 to $30 million related to closing facilities that will benefit future operations.
Mohawk anticipates that its 2009 results will improve from those of the second half in 2008. The company believes that, during 2009, higher selling prices and lower costs should help margins. Actions taken in 2008 to reduce overhead, improve productivity, shut down high-cost capacity and manage inventories will positively impact operations. Consumer discretionary spending for flooring will improve from substantial government stimulus, additional liquidity, lower gas and falling commodity prices.
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