Interface, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 4, 2021; the quarter comprised 13 weeks. The company sells flooring products and related installation services. Six-month comparisons are affected by period length: 2021 had 26 weeks versus 27 weeks in 2020.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $294.8 million | $259.5 million | $548.0 million | $547.7 million |
| Gross profit / margin | $109.0 million / 37.0% | $97.3 million / 37.5% | $205.0 million / 37.4% | $211.6 million / 38.6% |
| Operating income (loss) | $29.2 million | $17.4 million | $46.1 million | $(76.1) million |
| Net income (loss) | $15.5 million | $4.7 million | $22.4 million | $(97.5) million |
| Diluted EPS | $0.26 | $0.08 | $0.38 | $(1.67) |
| Operating cash flow | — | $35.1 million | $32.4 million |
Q2 sales rose 13.6%; six-month sales were nearly flat, up 0.1%. Foreign exchange added approximately $13.1 million to Q2 sales and $25.0 million to six-month sales. Excluding the 2020 impairment charge, the six-month year-over-year operating comparison is substantially stronger than reported: 2020 included a $121.3 million goodwill and intangible-asset impairment.
Gross margin declined as a share of sales, primarily due to higher raw-material costs; management also cited freight and labor costs and supply-chain constraints. Q2 operating margin was 9.9%, versus 6.7%; six-month operating margin was 8.4%, versus a reported loss margin of 13.9% in 2020. SG&A was $79.8 million in Q2, down 0.3%, and $159.1 million for six months, down 5.1%.
Segments and material changes
- Americas (AMS): Q2 sales increased 3.6% to $156.7 million, while adjusted operating income (AOI) fell 11.9% to $21.1 million, reflecting raw-material, freight, overtime and compensation costs. Six-month sales fell 8.3% to $283.6 million and AOI fell 30.5% to $33.0 million.
- Europe, Africa, Asia and Australia (EAAA): Q2 sales rose 27.6% to $138.1 million and AOI rose to $10.0 million from $3.5 million. Six-month sales increased 10.9% to $264.4 million and AOI increased 92.6% to $18.0 million. Currency contributed materially to sales growth.
- In Q2 2020, other expense included a $4.2 million write-down of raw-material inventory damaged in a storage-facility fire. Q2 2021 interest expense rose to $7.3 million from $5.0 million, primarily reflecting the senior notes and amortization of terminated interest-rate swaps.
Cash, debt and liquidity
At July 4, 2021, cash was $102.4 million. Total debt principal was $564.6 million, comprising $264.6 million of term loans and $300.0 million of 5.50% senior notes due 2028; there were no revolving borrowings. Debt, net of cash, was approximately $462.2 million. The company reported $298.4 million of additional capacity under its syndicated facility and $6.0 million under other facilities. It stated that liquidity should be sufficient for the next 12 months and that it was in compliance with debt covenants.
Six-month investing cash use was $12.1 million, mainly capital expenditures. Financing used $21.3 million, including $56.8 million of debt repayments and $38.0 million of borrowings. Cash declined $0.7 million to $102.4 million. Inventory increased to $258.2 million from $228.7 million at fiscal year-end, with management citing inventory build to support customer demand.
Outlook, risks and contingencies
- Management anticipated Q3 2021 revenue growth versus Q3 2020, but gave no numerical full-year guidance in the provided filing text.
- Management expected continued supply-chain and manufacturing disruption, significant raw-material cost increases, labor shortages (particularly in the U.S.), higher freight costs and shipping delays. These could pressure margins, delay shipments and constrain the ability to meet demand.
- COVID-19 effects remained uncertain, including possible renewed restrictions, changes in construction and renovation activity and customer spending, and disruptions to suppliers, freight, distribution and manufacturing. The company warned of possible further impairment losses if conditions deteriorate.
- Backlog was approximately $231.8 million as of July 25, 2021, compared with $177.7 million as of February 7, 2021; project delays and supply and distribution disruptions remained relevant.
- Two lawsuits remained pending: claims by a former CEO, with the company’s summary-judgment motion pending, and a putative securities class action, with the company’s motion to dismiss pending. The company said it believes both matters are without merit and intends to defend them.
- OFAC issued a Cautionary Letter on May 19, 2021 regarding a previously disclosed shipment of carpet samples to Iran by a non-U.S. affiliate; the voluntary disclosure process concluded without a penalty.
- The 2019 restructuring plan had a $0.3 million reserve at July 4, 2021 and was expected to be completed in fiscal 2021, with approximately $6.0 million in annualized savings expected.
Important facts to verify
- Whether sales growth and the higher backlog convert into delivered revenue despite raw-material availability, freight, labor and project-timing constraints.
- How much cost inflation can be offset through pricing, and whether gross margins recover from the Q2 and six-month declines.
- Whether Americas performance improves and EAAA growth persists after accounting for favorable currency effects.
- Debt repayment, interest expense, covenant headroom and working-capital needs, especially as inventory and receivables evolve.
- Developments in the pending litigation and any further financial or regulatory consequences from the disclosed Iran-related matter.