Interface, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Interface, Inc. designs and manufactures modular carpet and related flooring products. This unaudited report covers the three months ended April 1, 2012; comparisons are with the three months ended April 3, 2011. Reportable segments are Modular Carpet and Bentley Prince Street. The former Fabrics Group is presented as discontinued operations and had no sales or earnings in either period.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $232.8 million | $245.4 million |
| Gross profit / gross margin | $76.2 million / 32.7% | $86.9 million / 35.4% |
| Operating income | $0.5 million | $21.5 million |
| Net income (loss) | $(5.9) million | $9.8 million |
| Diluted EPS | $(0.09) | $0.15 |
| Cash provided by (used in) operations | $24.3 million | $(18.2) million |
- Cash and cash equivalents were $63.1 million at April 1, 2012, versus $50.6 million at January 1, 2012. Capital expenditures were $10.4 million; dividends paid were $1.3 million.
- Total debt carrying value was approximately $294.5 million, consisting primarily of $283.1 million of senior notes and $11.5 million of senior subordinated notes. No borrowings were outstanding under the domestic or European credit facilities. Domestic borrowing availability was $69.7 million; additional availability was approximately $26.6 million in Europe and $18.9 million at other non-U.S. subsidiaries.
- Current assets were $401.6 million and current liabilities $154.9 million at quarter-end.
Material changes versus prior period
- Sales fell 5.2%. Modular Carpet sales decreased 4.2% to $210.0 million; Bentley Prince Street sales decreased 12.9% to $22.7 million.
- Gross margin contracted to 32.7% from 35.4%. Management attributed the increase in cost of sales as a share of revenue to raw-material prices 5–6% higher year over year and lower fixed-cost absorption from reduced production volumes.
- SG&A declined 9.2% to $59.4 million, reflecting lower non-cash incentive compensation, savings from prior restructuring, and lower marketing costs.
- Operating results included a $16.3 million restructuring and asset impairment charge. The filing does not present a separate adjusted operating-income measure.
- Operating cash flow improved by $42.5 million year over year, principally reflecting a $31.9 million cash benefit from lower accounts receivable; inventory increases used $3.8 million.
Outlook, management commentary, risks and unusual items
- In March 2012, the company announced a restructuring plan, primarily closing manufacturing and warehousing operations at its Shelf, England facility. The $16.3 million charge included approximately $9.3 million of asset impairment, $5.4 million of severance, and $1.6 million of other exit costs. Approximately $7 million is expected to require future cash expenditure. Completion was expected substantially in Q2 2012; management estimated annualized cost savings of approximately $9 million.
- Management expected cost of sales as a percentage of sales to improve as restructuring benefits are realized. The filing provides no broader quantified revenue or earnings guidance.
- Demand was uneven: Asia-Pacific modular carpet sales declined 17%, including a sharp education-market decline following the curtailment of government stimulus programs. Bentley Prince Street sales were affected by weakness in corporate office, government, and hospitality markets. Currency movements reduced Q1 sales by approximately $3 million.
- On April 9, 2012, after quarter-end, the company redeemed all $11.5 million of its 9.5% senior subordinated notes at par plus accrued interest. The company reported compliance with credit-facility covenants and expected continued compliance.
- Foreign-currency translation increased accumulated other comprehensive income by $7.9 million during the quarter. The filing’s sensitivity analysis estimated that a 150-basis-point rate increase would reduce the market value of fixed-rate debt by about $16.5 million; currency sensitivity figures exclude offsetting changes in foreign net investments.
- Unrecognized tax benefits accrued were approximately $7.9 million. The company reported ordinary-course legal proceedings, none requiring disclosure in the filing. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Shelf, England closure was completed as expected and whether the estimated $9 million annualized savings were achieved.
- Whether sales and gross margins stabilized, particularly given lower demand in Asia-Pacific and key commercial markets and elevated input costs.
- Cash conversion and working-capital trends: Q1 operating cash flow benefited substantially from receivables collection, while inventory rose.
- Debt-service capacity and liquidity after the April 9 note redemption, including available revolver capacity and ongoing covenant compliance.
- Potential cash costs from restructuring and the resolution or movement of the $7.9 million unrecognized tax-benefit balance.