Mohawk Industries, Inc. (MHK) reported adjusted earnings of $2.44 per share in the third quarter of 2014, which beat the Zacks Consensus Estimate of $2.42 by 0.8%. Earnings per share came within the company’s expected range of $2.38 and $2.47 per share.
Earnings of this leading flooring manufacturer increased 21% year over year as strong operating margin and a lower tax rate made up for a relatively softer top line performance.
Revenues Soft, Margins Go Up
Total revenue of $1.99 billion missed the Zacks Consensus Estimate of $2.05 billion. We believe that the revenue miss was due to sluggish demand in the quarter.
Nevertheless, revenues increased 1.5% year over year. Organic revenues increased 2% driven by pricing gains and successful product introduction.
Gross margins rose 60 basis points (bps) year over year to 28.3%, driven by pricing gains. As a percentage of net sales, adjusted selling, general and administrative expenses declined 50 basis points to 16.4% due to productivity improvements and better cost controls.
Adjusted operating income was $237.7 million during the quarter, up 12%, on the back of improved productivity, cost control and acquisition synergies. Operating margin grew 110 basis points (bps) to 11.9% driven by higher gross margins and better SG&A leverage. Adjusted income tax rate of 19% declined from 21% in the prior-year quarter.
Segment Details
The company operates in three segments namely Carpet, Ceramic and Laminate and Wood segment.
Carpet: Net sales of the Carpet segment amounted to $778.9 million, up 1% year over year, on the back of price increase.
Adjusted segment operating income of $74.1 million increased 20% year over year. Operating margin increased 170 bps on the back of new technology investment, higher productivity, lower cost and better quality.
Ceramic: Net sales of the Ceramic segment were $779.8 million, up 2% year over year due to price increase. Organic revenue increased 3% year over year.
Revenues increased significantly in Mexico on the back of new larger sizes, planks and market-leading designs. In Russia, sales were driven by enhancement in design, improved value and service. Segment revenues remained flat in Europe.
Adjusted segment operating income of $101.3 million increased 16% year over year, driven by higher productivity, improved quality, pricing and mix.
Laminate and Wood: Net sales of the segment were $462.6 million, up 3% year over year. Organic revenues rose 3%.
Adjusted segment operating income of $44.8 million increased 14.9% year over year. Operating margin of 11.6% was impacted by higher costs of new products and equipment start-ups.
2014 Outlook
For the fourth quarter of 2014, earnings are expected to range between $2.18 and $2.27 per share. The Zacks Consensus Estimate for the fourth quarter 2014 stands at $2.24.
Mohawk Industries carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Better-ranked stocks in the home furnishing/textile industry include Restoration Hardware Holdings, Inc. (RH), Ethan Allen Interiors Inc. (ETH) and Mattress Firm Holding Corp. (MFRM). While Ethan Allen Interiors sports a Zacks Rank #1 (Strong Buy), Restoration Hardware Holdings and Mattress Firm Holding carry a Zacks Rank #2 (Buy).
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