Interface, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks); comparative FY2016 also had 52 weeks. The filing includes quarterly results, but is an annual report, not a standalone Q4 filing. Interface designs, manufactures and sells modular carpet and, since 2017, luxury vinyl tile (LVT), in more than 110 countries.
Business context and performance
Interface reported one reporting segment, with regional operations in the Americas, Europe and Asia-Pacific. FY2017 sales mix was approximately 59% corporate office and 41% non-corporate office company-wide. By geography, sales were approximately 59% Americas, 25% Europe and 16% Asia-Pacific. LVT launched globally in 2017 and accounted for more than half of sales growth versus 2016.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $996.4 million | $958.6 million |
| Gross profit / gross margin | $386.0 million / 38.7% | $368.6 million / 38.5% |
| Operating income / operating margin | $109.8 million / 11.0% | $84.9 million / 8.9% |
| Net income | $53.2 million | $54.2 million |
| Diluted EPS | $0.86 | $0.83 |
| Cash from operations | $103.4 million | $98.1 million |
| Capital expenditures | $30.5 million | $28.1 million |
| Cash and cash equivalents, year-end | $87.0 million | $165.7 million |
| Long-term debt, including current portion | $229.9 million | $270.3 million |
| Working capital / current ratio | $254.2 million / 2.4 | $311.8 million / 3.0 |
FY2017 cash declined $78.6 million, principally reflecting $91.6 million of share repurchases, $72.0 million of credit-facility repayments and $15.5 million of dividends, partly offset by operating cash flow and $25.0 million of new facility borrowings. Debt less cash was approximately $142.9 million at year-end. The company had $184.1 million of additional revolving capacity available, plus $9.8 million equivalent under other subsidiary credit lines. The credit facility matures in August 2022; the company reported covenant compliance.
Changes versus FY2016
- Sales rose 3.9%; all three regions grew. Reported growth included a positive $5.5 million currency impact. Americas sales rose 3.5%, Europe 2.0% in U.S. dollars and Asia-Pacific 8.7%.
- Operating income rose to $109.8 million from $84.9 million, with operating margin increasing to 11.0% from 8.9%. Lower restructuring charges and improved cost of sales as a percentage of sales contributed; LVT margins were described as accretive to modular carpet.
- Net income decreased to $53.2 million from $54.2 million despite higher operating income. The principal unusual factor was a $15.2 million provisional tax charge associated with the Tax Cuts and Jobs Act; the effective tax rate increased to 47.0% from 31.6%.
- Cash from operations increased to $103.4 million from $98.1 million, while year-end cash fell substantially following debt repayments and increased repurchases. The company repurchased 4.6 million shares during 2017 for approximately $91.6 million.
- The 2016 restructuring plan, including closure of most FLOR retail stores and workforce reductions, was substantially completed in 2017. Charges were $7.3 million in 2017 versus $19.8 million in 2016.
Outlook, management commentary and risks
- No specific FY2018 revenue or earnings guidance is provided. Management’s stated priorities include growing carpet tile, building a modular resilient flooring business, improving supply-chain productivity, controlling SG&A and pursuing sustainability initiatives.
- Management estimated FY2018 capital expenditures of $50–$60 million and aggregate interest expense of $8–$11 million. Approximately $95.0 million of contractual cash obligations were due within one year of December 31, 2017.
- Backlog was $122.9 million at February 11, 2018, versus $107.8 million a year earlier; orders were expected to ship over the following six to nine months. Backlog can fluctuate with large-project timing and currency movements.
- Key risks include cyclical commercial construction and renovation demand; competition and potential pricing pressure from added industry capacity; petroleum-based input-cost inflation; reliance on a limited number of nylon suppliers and a single LVT supplier; foreign-exchange and geopolitical exposure, including Brexit uncertainty; and significant indebtedness with variable-rate exposure. A 1 percentage-point increase in effective interest rates was estimated to increase annual interest expense by about $2.3 million.
- The 2017 Tax Act amounts are provisional and subject to refinement. The company estimated $9.8 million of transition-tax cash payments over as many as eight years. It also disclosed $29.2 million of unrecognized tax benefits, whose resolution and timing are uncertain.
- Management noted possible disruption from the planned 2018 headquarters move and manufacturing-facility investments in LaGrange, Georgia. The company also described a multi-year sales-organization transformation that could disrupt operations and has no guaranteed benefit.
- FY2017 Q4 net income was $4.3 million, or $0.07 per diluted share, compared with $4.7 million, or $0.07 per share, in FY2016 Q4. FY2017 Q4 included the Tax Act charge.
Important facts for investors to verify
- How FY2018 operating performance develops after the strong reported sales and operating-income improvement, particularly the contribution, margins and supplier dependence of LVT.
- Whether cash conversion and liquidity remain adequate given lower year-end cash, planned capital expenditures, dividends, repurchases and debt obligations.
- The final Tax Act accounting and cash-payment amounts, including the provisional transition tax and deferred-tax remeasurement.
- Progress and costs of the LaGrange investments, headquarters relocation and sales-force transformation, and whether these initiatives deliver the expected productivity and growth.
- Exposure to foreign currency, raw-material costs and commercial-building cycles, together with compliance with credit-facility covenants and refinancing capacity.
The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2017.