Interface, Inc. — Q3 2014 Form 10-Q
Business context and period. Interface is a global commercial interiors company. This report covers the quarter and nine months ended September 28, 2014; comparative periods ended September 29, 2013. Financial statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $252.2m | $254.4m | $731.8m | $708.3m |
| Gross profit / margin | $83.6m / 33.1% | $91.8m / 36.1% | $248.7m / 34.0% | $249.2m / 35.2% |
| Operating income | $7.3m | $27.8m | $43.6m | $63.6m |
| Net income (loss) | $(0.4)m | $15.0m | $16.7m | $32.9m |
| Diluted EPS | $(0.01) | $0.23 | $0.25 | $0.50 |
| Operating cash flow | Not presented by quarter | $34.9m | $27.2m |
For the nine months, capital expenditures were $32.1m, cash dividends were $6.6m, and cash declined $4.4m to $68.5m. At September 28, current assets were $404.0m and current liabilities $144.3m. Senior notes were $247.5m and long-term credit-facility debt was $28.0m; total reported debt was approximately $275.5m. The company had $168.7m of additional borrowing capacity under its revolving facility and $3.3m of letters of credit outstanding.
Material changes and management commentary
- Q3 sales decreased 0.9% year over year, while nine-month sales increased 3.3%. Q3 weakness included a 4% decline in Europe and softer sales in parts of Asia; Americas sales were slightly lower and Asia-Pacific rose 3%.
- Q3 gross margin fell to 33.1% from 36.1%. Management attributed cost pressure to manufacturing complexity from new products, a mix shift toward lower-margin products, and yarn-supply disruptions. Nine-month cost of sales also included higher material and labor costs associated with first-half production.
- In Q3, the company recorded a $12.4m pre-tax restructuring and asset-impairment charge: $9.7m severance for a reduction of 100 employees, $2.6m asset impairment, and $0.1m other exit costs. Approximately $10m is expected to be paid in cash.
- Management expected the restructuring to be substantially complete by year-end 2014, with approximately $14m of annual cost savings beginning in 2015, and cited restructuring and manufacturing-efficiency actions as potential support for future gross-margin expansion.
- Q3 2013 results included no restructuring charge. Nine-month 2013 net income also included a $1.9m tax-dispute resolution benefit.
Outlook, financing, and risks
- After quarter-end, the company amended its syndicated credit facility on October 3, 2014: revolving capacity increased from $200m to $250m, up to $200m of Term Loan A availability was added, and facility maturity was extended to October 3, 2019. Further increases of up to $150m may be available subject to conditions. The company reported compliance with covenants and expected to remain compliant.
- After quarter-end, the company elected to redeem all remaining $247.5m of 7.625% senior notes due 2018 in two calls, at stated redemption premiums, with redemption dates of November 26 and December 1, 2014. The estimated $266.1m funding requirement was to be met with term and revolving borrowings and cash. Management estimated annualized interest savings of $12m–$13m based on then-current rates; completion and savings were forward-looking, not realized results as of the reporting date.
- Management cited commercial-interiors industry conditions, uncertainty in Eastern Europe, the Middle East and Russia, softer conditions in China and political uncertainty in Southeast Asia. Foreign-currency translation reduced accumulated other comprehensive income by $11.8m over the nine months. The filing’s sensitivity analysis estimated that a 10% currency move could change the fair value of financial instruments by a decrease of $10.1m or increase of $8.2m, while noting this excludes offsets from net foreign investments.
- The Australian replacement facility in Minto began operations in January 2014. The filing reported ordinary-course legal proceedings with none requiring disclosure, no material Q3 change in risk factors, and effective disclosure controls.
- On October 7, 2014, the company announced a program to repurchase up to 500,000 shares per fiscal year beginning in 2014. No shares were purchased under a publicly announced program during Q3.
Important facts for investors to verify
- Whether the senior-note redemptions and refinancing were completed as elected, and the resulting debt mix, interest expense, and realized savings.
- Whether the restructuring was completed on schedule and delivered the projected $14m annual savings, including associated cash costs.
- Whether gross margins recovered from Q3 pressure related to product mix, manufacturing complexity, and yarn supply.
- How regional demand, especially in Europe and Asia-Pacific, and foreign-exchange movements affected subsequent sales and earnings.
- Whether working-capital needs, capital expenditures, and planned share repurchases affected cash and liquidity.