Interface, Inc. — Q3 2015 Form 10-Q
Reporting period: Fiscal quarter ended October 4, 2015 (13 weeks); nine-month period ended October 4, 2015 (40 weeks), compared with 39 weeks in the first nine months of 2014. Interim financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $254.7M | $252.2M | $755.2M | $731.8M |
| Gross profit / margin | $98.0M / 38.5% | $83.6M / 33.1% | $284.7M / 37.7% | $248.7M / 34.0% |
| Operating income / margin | $31.3M / 12.3% | $7.3M / 2.9% | $85.9M / 11.4% | $43.6M / 6.0% |
| Net income (loss) | $20.1M | $(0.4)M | $54.2M | $16.7M |
| Diluted EPS | $0.31 | $(0.01) | $0.82 | $0.25 |
Cash flow and liquidity: Nine-month operating cash flow was $92.7M, versus $34.9M a year earlier. Capital expenditures were $23.7M; cash ended at $73.7M, up $18.8M from year-end 2014. Inventory growth used $28.7M of cash, partly offset by a $17.9M cash benefit from lower receivables. At October 4, current assets were $394.4M and current liabilities $144.1M.
Debt: Debt was approximately $232.5M ($200.0M term loan and $32.5M revolver); the company repaid $28.0M during the nine-month period. Borrowings carried a 2.0% weighted-average rate. The company reported $214.4M of additional syndicated-facility borrowing capacity and no borrowings on its other available lines of credit. It stated that it was in compliance with facility covenants and expected to remain so for the foreseeable future.
Material changes and management commentary
- Quarterly sales grew 1.0%; nine-month sales grew 3.2%, although the latter comparison includes an extra week in 2015.
- Currency movements reduced reported sales by approximately $21.9M in Q3 and $64.1M year to date, and reduced operating income by approximately $2.0M and $6.9M, respectively. Management noted local-currency sales growth in Europe and Asia-Pacific despite weaker reported-dollar results.
- Gross margin improved substantially. Management attributed lower cost of sales to raw-material savings, improved manufacturing and supply-chain performance, higher production volumes, and benefits from the 2014 restructuring. SG&A increased 4.2% in Q3, including higher incentive and performance-based compensation.
- Interest expense declined to $1.3M in Q3 and $5.0M year to date, compared with $5.6M and $16.5M, respectively, following the 2014 refinancing of 7.625% senior notes with lower-cost syndicated-facility debt.
- The prior-year periods included a $12.4M restructuring and asset-impairment charge related to a 100-employee reduction; there was no such charge in 2015. The filing reports $0.6M of remaining workforce-reduction costs at October 4, 2015.
Outlook, risks, and contingencies
The filing provides no specific sales or earnings guidance. Management said results are subject to commercial-interiors industry conditions and the risk factors in its 2014 Form 10-K; it cautioned that interim results are not necessarily indicative of full-year results. Key exposures include foreign-currency fluctuations and variable-rate debt. Foreign-currency translation reduced accumulated other comprehensive income by $28.6M from year-end 2014. A hypothetical 10% currency-rate move produced modeled fair-value changes of $(11.1)M or +$9.0M, which management cautioned do not represent actual net exposure. Accrued unrecognized tax benefits were approximately $27.3M. The company reported ordinary-course legal proceedings, none requiring disclosure, and no material third-quarter changes to risk factors. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether operating and gross-margin improvement persists after adjusting for currency, the prior-year restructuring charge, and the extra 2015 year-to-date week.
- Whether reported sales trends and regional demand remain consistent with management’s local-currency commentary.
- How inventory growth, capital spending, dividends, and share repurchases affect future cash generation and debt reduction.
- Future interest expense, borrowing capacity, and covenant headroom under the syndicated credit facility.
- Developments in currency exposure and the company’s $27.3M of accrued unrecognized tax benefits.