Interface, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended July 1, 2012. Amounts are in millions of dollars unless otherwise stated. Interface sells modular carpet and broadloom flooring; its reportable segments were Modular Carpet and Bentley Prince Street (BPS).
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $254.6 | $267.6 | $487.4 | $513.0 |
| Gross profit / margin | $84.6 / 33.2% | $94.8 / 35.4% | $160.8 / 33.0% | $181.7 / 35.4% |
| Operating income / margin | $22.0 / 8.7% | $26.1 / 9.8% | $22.6 / 4.6% | $47.7 / 9.3% |
| Net income | $10.3 | $12.8 | $4.3 | $22.6 |
| Diluted EPS | $0.16 | $0.20 | $0.07 | $0.35 |
- Q2 sales declined 4.9% year over year; currency movements reduced sales by about 3%, or $7 million. First-half sales fell 5.0%, with about $10 million of adverse currency impact.
- Q2 gross margin contracted 2.2 percentage points, as cost of sales rose to 66.8% of sales from 64.6%. Management cited lower production-volume absorption and raw-material prices about 1–2% higher. First-half cost of sales was 67.0% of sales versus 64.6%.
- Q2 SG&A declined 8.9% to $62.6 million, reflecting restructuring savings, lower selling costs and currency effects. First-half SG&A declined 9.0% to $121.9 million.
- First-half results include a $16.3 million restructuring and asset impairment charge; Q2 had no such charge. Excluding it would improve reported first-half operating income, but the filing does not provide an adjusted net income or EPS measure.
- Modular Carpet sales fell 4.6% in Q2 and 4.4% in the first half. Americas sales grew, but Europe and Asia-Pacific declined. BPS sales fell 7.4% in Q2 and 10.1% in the first half; its segment reported an operating loss of $1.2 million in Q2 and $1.8 million in the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $23.4 million, versus cash use of $21.4 million in the prior-year period. Capital expenditures were $21.7 million, resulting in cash use for investing activities of $22.9 million.
- Cash declined $13.8 million from the start of the year to $36.9 million at July 1. Main cash uses included $21.7 million of capital expenditures, $11.5 million to redeem subordinated notes, and $9.6 million of inventory growth.
- Current assets were $387.7 million and current liabilities $142.0 million. Inventory was $173.7 million, up from $166.1 million at year-end.
- Long-term debt on the balance sheet was $283.1 million. This included $275 million of 7.625% senior notes due 2018 and approximately $8.1 million of 11.375% senior secured notes due 2013. The remaining $11.5 million of 9.5% subordinated notes due 2014 was redeemed in April.
- No borrowings were outstanding under domestic or European revolving facilities. Domestic availability was $84.3 million, with additional availability of €20 million under the European facility and $18.5 million under other non-U.S. lines. The company stated it was in compliance with facility covenants.
Outlook, developments and risks
- The 2012 restructuring, primarily the closure of manufacturing and warehousing operations at Shelf, England, was substantially completed by the end of Q2. The $16.3 million charge included about $9.3 million of asset impairment; approximately $7 million is expected to require cash payments. Management expects annualized cost savings of about $9 million and anticipates further cost-of-sales improvement as savings are realized later in 2012.
- On July 20, after quarter-end, a fire substantially damaged the carpet production line at the Picton, Australia facility. It was inoperable for an undetermined period. The facility represented about 7% of annual production, 10% of net sales and 13% of operating income. Management planned to use capacity in Thailand and China to serve affected customers and said it expected no significant customer inconvenience. Property-damage and business-interruption insurance is in place.
- On July 25, the company agreed to sell BPS for $35 million cash, subject to customary adjustments; closing was expected in August 2012. BPS had approximately $49 million of net assets at quarter-end. Interface expected $7–$9 million of exit costs; the final disposal loss remained undetermined.
- Management identified commercial-interiors economic conditions and the risk factors in its 2011 Form 10-K as risks to forward-looking results. Foreign-currency translation reduced the translation account by $4.9 million in the first half, primarily due to the stronger U.S. dollar. No material legal proceedings were reported. Management concluded disclosure controls were effective.
- No formal full-year revenue or earnings guidance is stated in the provided filing text. Interim results are cautioned not to necessarily indicate full-year results.
Investor verification priorities
- Track whether restructuring savings materialize and whether gross margins recover despite lower volumes and higher input costs.
- Assess the Picton fire’s actual downtime, lost production and sales, insurance recovery, and the effectiveness of production transfers.
- Confirm BPS sale closing proceeds, working-capital adjustments, exit costs and the final disposal loss.
- Monitor inventory levels, capital spending and cash conversion alongside remaining debt maturities and credit-facility capacity.
- Evaluate continued weakness in Europe and Asia-Pacific, including the impact of reduced Australian government stimulus, and foreign-exchange exposure.