Interface, Inc. — Q2 2011 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended July 3, 2011, compared with the periods ended July 4, 2010. Interface reports Modular Carpet and Bentley Prince Street segments; its former Fabrics Group is reported as discontinued operations and had no sales or earnings in either comparison period.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $267.6 million | $226.6 million | $513.0 million | $443.8 million |
| Gross profit / margin | $94.8 million / 35.4% | $80.1 million / 35.4% | $181.7 million / 35.4% | $153.5 million / 34.6% |
| Operating income / margin | $26.1 million / 9.8% | $21.5 million / 9.5% | $47.7 million / 9.3% | $35.2 million / 7.9% |
| Net income attributable to Interface | $12.8 million | $7.6 million | $22.6 million | $9.5 million |
| Diluted EPS | $0.20 | $0.12 | $0.35 | $0.15 |
Cash flow and liquidity. Six-month operating cash flow was negative $21.4 million, versus positive $12.6 million a year earlier. Investing cash outflow was $20.8 million, including $18.8 million of capital expenditures; financing cash outflow was $0.5 million. Cash declined $41.9 million to $27.3 million. Management attributed major cash uses to a $30.0 million inventory build for anticipated second-half demand, a $26.4 million decline in accounts payable and accruals, and capital spending.
At July 3, current assets were $401.3 million and current liabilities $150.9 million. Total liabilities were $488.9 million. Senior notes and subordinated notes totaled $294.5 million on the balance sheet; cash was $27.3 million. The domestic revolver had no borrowings, $5.2 million of letters of credit, and $83.2 million of additional borrowing capacity. European and other non-U.S. facilities also had no borrowings and approximately $46.7 million of stated additional capacity combined.
Material changes and management commentary
- Sales rose 18.1% in Q2 and 15.6% for the six months. Currency movements contributed approximately $13 million (6%) to Q2 growth and $17 million (4%) to six-month growth.
- Both segments grew sales: Modular Carpet increased 18.7% in Q2 and 15.9% year to date; Bentley Prince Street increased 13.3% and 13.0%, respectively. Management cited a rebound in corporate office markets, growth in education, government and healthcare markets, and emerging-market demand. Segment operating income improved overall, while Bentley Prince Street remained slightly loss-making for the six-month period.
- Q2 gross margin was unchanged year over year; six-month margin improved 0.8 percentage points. Raw-material prices were approximately 10–12% above prior-year levels. Management said higher volume, fixed-cost absorption, manufacturing efficiency and cost controls partly offset input-cost pressure.
- SG&A rose 17.0% in Q2 and 16.4% for the six months, reflecting higher selling, marketing and administrative costs, including incentive-based pay. Q2 SG&A as a share of sales edged down; the six-month ratio edged up.
- Interest expense declined to $6.8 million in Q2 and $13.4 million for the six months, primarily following refinancing and repayment of higher-rate debt. In 2010, the comparable six-month period included $3.1 million of restructuring charges and $1.1 million of bond-retirement expense; neither was recorded in the 2011 period.
Outlook, risks and unusual items
The filing provides no quantitative earnings or sales guidance. Management said inventory was being built to meet anticipated second-half demand, but cautioned that interim results are not necessarily indicative of full-year performance. Risks cited include economic conditions in commercial interiors, raw-material cost increases, foreign-exchange movements and the risk factors incorporated from the 2010 Form 10-K. The filing reports $8.7 million accrued for unrecognized tax benefits, including a $0.5 million increase in the first half, and describes ordinary-course legal proceedings that were not required to be disclosed in detail.
The revolving credit facility was amended and extended to June 24, 2016, with lower interest margins and unused fees and revised covenants and borrowing terms. The company reported no defaults and no material changes to its risk factors. After quarter-end, founder and Chairman Ray C. Anderson died on August 8, 2011; the company expected to elect a successor at the Board meeting in October. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether sales growth and expected second-half demand translate into operating cash flow, given the large inventory build and negative first-half operating cash flow.
- Whether raw-material inflation can be offset by pricing, productivity and fixed-cost absorption, and how margins develop.
- Debt maturities, interest costs, revolver availability and compliance with the amended facility’s borrowing-base and covenant provisions.
- Segment trends by geography and end market, particularly weakness in selected retail, hospitality, healthcare and government markets.
- The impact of currency movements, the resolution of unrecognized tax benefits, and succession following the Chairman’s death.