Interface, Inc. — Q1 2015 Form 10-Q
Reporting period: 14 weeks ended April 5, 2015, compared with 13 weeks ended March 30, 2014. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Interim financial statements are unaudited.
Financial performance
- Revenue: Net sales were $236.9 million, up 8.2% from $219.0 million. Currency movements reduced reported sales by approximately $19 million year over year; the additional week in the 2015 quarter also affects comparability.
- Profit and margins: Gross profit was $85.4 million versus $74.7 million; gross margin improved to 36.1% from 34.1%. Operating income rose to $21.4 million from $12.0 million, with operating margin of 9.0% versus 5.5%. Net income increased to $12.3 million from $4.0 million; diluted EPS was $0.19 versus $0.06.
- Expenses and taxes: SG&A was $64.0 million, up 2.2%, but declined to 27.0% of sales from 28.6%. Interest expense fell to $1.9 million from $5.5 million following the 2014 refinancing. Income tax expense was $5.9 million; the filing reports no separate effective tax rate.
- Cash flow: Operating cash flow was $22.1 million, compared with cash use of $2.6 million in the prior-year quarter. Capital expenditures were $4.6 million, implying operating cash flow less capital expenditures of approximately $17.5 million. Cash increased to $59.0 million from $54.9 million at year-end.
- Debt and liquidity: Debt under the syndicated facility totaled $259.0 million: $200.0 million term borrowings and $59.0 million revolver borrowings. The weighted-average borrowing rate was 2.2%. The company reported $187.9 million of additional facility borrowing capacity and $19.0 million available under other subsidiary credit lines; $3.1 million of letters of credit were outstanding. Management said the company was compliant with facility covenants and expected to remain so for the foreseeable future.
- Balance sheet: Total assets were $741.4 million and shareholders’ equity was $295.0 million at April 5, 2015. Inventory rose to $158.7 million from $142.2 million at year-end.
Material changes and management commentary
- Sales increased in the Americas (17%) and Asia-Pacific (13%). Europe sales fell 8% as reported in U.S. dollars, but rose 12% in local currency. Management cited U.S. dollar strength, particularly against the euro, as a significant reporting headwind.
- Cost of sales declined to 63.9% of revenue from 65.9%. Management attributed the margin improvement to higher production volumes and fixed-cost absorption, lower raw-material prices, normalized Asia-Pacific production and supply chains, and savings from restructuring. Raw-material cost per unit was down approximately 4–6%.
- SG&A increased mainly due to higher share-based compensation and incentive compensation, partly offset by lower marketing and selling costs following restructuring.
- Foreign-currency translation reduced other comprehensive income by $25.3 million, primarily due to the stronger U.S. dollar against the euro and Australian dollar. Comprehensive loss was $9.8 million, despite positive net income.
- The 2014 restructuring plan included a $12.4 million pre-tax charge. The filing reports approximately $5.0 million of workforce-reduction costs incurred in 2015 and a $2.0 million remaining balance at April 5, 2015.
- The company repurchased and retired 250,000 shares under its annual repurchase program at a weighted-average price of $19.39 per share. The broader quarterly purchase total was 302,245 shares, including shares acquired for employee tax withholding.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management’s forward-looking statements identify commercial-interiors industry economic conditions and the risk factors in the company’s 2014 Form 10-K as uncertainties; management undertook no obligation to update forward-looking statements. The company reported no material first-quarter changes to its risk factors. It was subject to ordinary-course legal proceedings, none required disclosure in the filing. Accrued unrecognized tax benefits were approximately $27.1 million; $21.8 million of these reduced the reported deferred tax asset.
Most important facts for investors to verify
- How much of reported sales and earnings growth reflects underlying demand versus the extra reporting week, foreign-exchange movements, and post-restructuring effects.
- Whether improved gross margin and cash generation are sustainable as inventory increased and production volumes change.
- Debt repayment requirements, borrowing capacity, variable-rate exposure, and continued compliance with credit-facility covenants.
- Potential outcomes and timing for the $27.1 million of unrecognized tax benefits and the remaining restructuring costs.
- Foreign-exchange exposure: the filing’s sensitivity analysis estimated that a 10% exchange-rate move could change the fair value of financial instruments by a decrease of $8.8 million or an increase of $7.2 million; management cautioned this does not represent actual net exposure.