The improvement in EPS results from strong sales growth in both the Mohawk and Dal-Tile segments, better leverage of selling, general and administrative costs, and the Lees Carpet acquisition. These gains, however, were offset by higher raw material and energy costs. Net sales for the quarter increased 19 percent to $1.49 billion compared to $1.25 billion for the second quarter of 2003. The sales increase was primarily due to organic growth in both segments and the Lees acquisition.
The Mohawk segment net sales of $1.1 billion in the second quarter of 2004 increased 19 percent from $93.7 million due to growth in all products as a result of improving general economic conditions and the Lees acquisition. The Dal-Tile segment net sales of $380.4 million in the second quarter of 2004 grew 19 percent from $320.4 million primarily from internal growth.
EPS for the first half of 2004 was $2.27 (30 percent above last year) and net earnings were $153.5 million (32 percent above last year) compared to $1.74 EPS and $116.6 million in net earnings for the first half of 2003. This increase in EPS and earnings is attributable to strong sales growth, better leverage of selling, general and administrative costs and the Lees acquisition, offset by higher raw material and energy costs.
Net sales for the first half of 2004 were $2.88 billion, which represents a 23 percent increase from the first-half 2003 sales of $2.33 billion. This sales increase resulted from strong organic growth, the acquisition of Lees and four additional days in the first quarter of 2004, the company said. The company's fiscal calendar for 2004, when compared to 2003, increased by four days in the first quarter which added approximately 3 percent to sales in the first half of 2004. The fourth quarter will have four less days than the prior year reducing sales approximately 7 percent.
"As the economy continues to improve, our sales are expanding in both business segments year over year," said Jeffrey S. Lorberbaum, Mohawk chairman and CEO. "The Mohawk residential replacement business continues to grow as consumer confidence improves over last year.
"The Mohawk commercial category is experiencing sales increases as businesses invest in new space and renovations," he continued. "Although mortgage rates have increased, the residential new construction business continues at a strong pace. The Mohawk hard-surface product offerings continue to be broadened and are experiencing strong growth. Our Home Product sales also expanded during the quarter.
"The Dal-Tile segment sales momentum continues in all product categories with floor tile and stone products leading the others. Dal-Tile has become the largest distributor of stone flooring and countertops in the highly fragmented U.S. market. We have recently completed another small acquisition in the latter part of the second quarter. The new Muskogee, Okla., porcelain tile facility is running well at approximately 85 percent capacity. In the future, we will continue increasing the production of higher value porcelain tile in the plant. "There continues to be cost pressures from natural gas and oil selling at or near historic highs," Lorberbaum added. "These cost increases have reduced our margins in the second quarter of 2004. In addition, the cost of commodity chemicals such as benzene (a major component of nylon) has increased dramatically more than oil. To mitigate these, we implemented multiple price increases for carpet products during the first half, with the latest in mid-June. Presently, we are receiving notices of further carpet raw material cost increases in the third quarter. As a result, we are currently determining the timing and amount of selling price increases required. Additionally, we have implemented price increases during the first half on many hard surface products and the Mohawk segment has added a fuel surcharge in line with the industry to pass through changes in distribution costs. "In the second quarter, our working capital position remains strong with inventory turns improving to 4.7 times and our debt to capitalization ratio improving to 28.6 percent. Additionally, we repurchased 100,000 shares of stock at an average price of $71.83. " The company anticipates the economy continuing to expand throughout the year, and expects revenue growth to moderate as comparisons with the prior year become more difficult in the second half. Future cost changes in natural gas, oil and commodity chemicals could impact margins either positively or negatively in the second half, the company said. Based on these factors, Mohawk's third-quarter forecast for EPS is from $1.45 to $1.52.