Interface, Inc. — Q3 2013 Form 10-Q
Business context and period: Interface designs and manufactures commercial flooring products. This unaudited report covers the quarter and nine months ended September 29, 2013; comparisons are with the corresponding 2012 periods. Bentley Prince Street was sold in 2012, and its results are presented as discontinued operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $254.4 million | $242.9 million | $708.3 million | $682.4 million |
| Gross profit / margin | $91.8 million / 36.1% | $82.9 million / 34.1% | $249.2 million / 35.2% | $232.1 million / 34.0% |
| Operating income / margin | $27.8 million / 10.9% | $23.1 million / 9.5% | $63.6 million / 9.0% | $45.9 million / 6.7% |
| Continuing-operations income | $15.0 million | $11.1 million | $32.9 million | $15.5 million |
| Net income (loss) | $15.0 million | $(5.8) million | $32.9 million | $(1.4) million |
| Diluted EPS | $0.23 | $(0.09) | $0.50 | $(0.02) |
Cash flow, nine months: Operating cash flow was $27.2 million, down from $43.9 million. Investing activities used $23.0 million, including $47.9 million of capital expenditures, partly offset by $23.0 million of insurance proceeds. Financing activities used $4.1 million, including $5.3 million in dividends. Cash declined $1.2 million to $89.4 million.
Balance sheet at September 29, 2013: Current assets were $432.7 million and current liabilities $167.5 million (current ratio approximately 2.6). Total debt was approximately $283.1 million: $275.0 million of 7.625% senior notes due 2018 and $8.1 million of 11.375% secured notes due 2013. The company reported $89.4 million cash and no borrowings under its existing revolving facilities. Total liabilities were $495.2 million and shareholders’ equity $323.2 million.
Material changes and management commentary
- Sales rose 4.8% in Q3 and 3.8% year to date. Q3 regional sales increased 6.2% in the Americas, were flat in Europe in U.S. dollars (down 5.6% in local currency), and rose 9.8% in Asia-Pacific. Nine-month sales increased 8.8% in the Americas and 1.8% in Asia-Pacific, while Europe declined 4.1% in U.S. dollars.
- Gross margin improved as cost of sales grew more slowly than sales, reflecting greater fixed-cost absorption and lean-manufacturing benefits. SG&A increased 10.2% in Q3 and 10.4% year to date, driven by selling and marketing costs, FLOR store expansion, personnel additions, research and development, and incentive compensation.
- Prior-year comparisons include a $16.8 million after-tax discontinued-operations loss in Q3 2012 and $17.0 million for the first nine months of 2012. The prior periods also included restructuring charges and Australia-fire losses. The 2013 nine-month result includes a one-time $1.9 million tax benefit from advance pricing agreements.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cites commercial-interiors economic conditions and the risk factors in the company’s 2012 Form 10-K; no material changes to risk factors were reported.
- Australia facility fire: The 2012 Picton fire caused production disruption and additional costs while other sites supplied the region. A replacement facility in Minto was expected to become operational in January 2014. Through September 29, 2013, recorded fire-related costs were $56.8 million; $54.9 million had been reimbursed and $1.9 million was recorded as an insurance receivable. A roughly $7.0 million lost-profits claim, and possible additional claims, were not recorded as receivables because recovery had not yet become probable.
- Post-quarter financing actions: The company entered into a new $200 million multicurrency revolving facility on October 22, 2013, with a five-year term, financial covenants, and substantially all domestic assets pledged as collateral. There were no borrowings and $7.6 million of letters of credit outstanding at closing. Separately, it elected to redeem $27.5 million principal of its 7.625% notes at 103% plus accrued interest, scheduled for November 27, 2013; the remaining $8.1 million of 11.375% notes was repaid at maturity after quarter-end.
- The company accrued approximately $23.3 million for unrecognized tax benefits. It reported no material legal proceedings requiring disclosure and stated disclosure controls were effective.
Important facts for investors to verify
- Whether sales growth and gross-margin gains persisted, particularly given higher SG&A and weaker European demand.
- Timing, recoverability, and accounting treatment of the remaining Australia-fire insurance receivable and unrecorded lost-profits claims; confirm completion and operating performance of the Minto facility.
- Execution and cash impact of the scheduled $27.5 million note redemption, repayment of the maturing secured notes, and terms, covenant compliance, and availability under the new revolving facility.
- Capital-spending needs, inventory growth, and operating cash conversion, which weakened year over year despite higher earnings.
- Effect of the $1.9 million tax-resolution benefit on comparability and any subsequent changes to the $23.3 million uncertain-tax-benefit accrual.