Interface, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks); fourth quarter ended December 30, 2018. Amounts below are U.S. dollars unless stated otherwise.
Business context
Interface is a global flooring company focused on modular carpet tile, luxury vinyl tile (LVT), and rubber flooring. It acquired German rubber-flooring business nora on August 7, 2018, expanding its resilient flooring offering and exposure to healthcare, education, and other non-office markets. nora contributed $112.6 million of sales from acquisition through year-end. The company reports one segment, with sales across the Americas, Europe, and Asia-Pacific.
Financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,179.6 million | $996.4 million |
| Gross profit / margin | $424.4 million / 36.0% | $386.0 million / 38.7% |
| Operating income / margin | $76.4 million / 6.5% | $111.6 million / 11.2% |
| Net income / diluted EPS | $50.3 million / $0.84 | $53.2 million / $0.86 |
| Cash from operations | $91.8 million | $103.4 million |
| Capital expenditures | $54.9 million | $30.5 million |
| Cash and cash equivalents, year-end | $81.0 million | $87.0 million |
| Total long-term debt, including current portion | $618.6 million | $229.9 million |
| Working capital / current ratio | $335.3 million / 2.5 | $254.2 million / 2.4 |
Sales rose 18.4%, reflecting nora, LVT growth, and favorable currency translation ($8.4 million); sales growth was reported in all regions. Legacy Interface carpet and LVT sales grew approximately 8% in the Americas and 9% in Europe in U.S.-dollar terms, while Asia-Pacific legacy sales grew 1%. Gross margin contracted 2.7 percentage points, reflecting nora purchase-accounting charges, delayed productivity initiatives, and a mix shift toward lower-margin InterfaceSERVICES sales. Operating income also absorbed higher SG&A and $20.5 million of restructuring and impairment charges.
Net income included a $6.7 million tax benefit from finalizing Tax Act accounting. The effective tax rate was 8.6%, versus 47.0% in 2017, when the company recorded $15.2 million of provisional Tax Act charges. FY2018 also included $9.5 million of nora transaction-related costs and $32.1 million of nora purchase-accounting amortization for acquired inventory and intangible assets.
Fourth-quarter sales were $337.1 million and net income was $6.4 million, or $0.11 per share, compared with $266.2 million and $4.3 million, or $0.07 per share, in fourth-quarter 2017. The 2018 quarter included a $6.7 million tax benefit, $20.5 million of restructuring and impairment charges, and nora purchase-accounting amortization and transaction costs.
Cash, debt, and liquidity
Operating cash flow declined to $91.8 million, principally due to working-capital use, including $18.8 million for inventory and $15.5 million for prepaid and other current assets. The nora acquisition used $400.7 million net of acquired cash and was funded in substantial part with new term debt. The company also repaid $64.5 million of revolving borrowings, spent $54.9 million on capital expenditures, paid $15.5 million in dividends, and repurchased $14.5 million of shares. Year-end borrowings under the amended credit facility were $626.7 million, with $3.6 million of letters of credit outstanding; $285.9 million of additional revolving capacity was available. The facility matures in August 2023 and carries variable rates; $100 million of term debt was covered by an interest-rate swap. The company reported covenant compliance.
Outlook, risks, and unusual items
- Management estimated 2019 capital expenditures of $65–$75 million and interest expense of $24–$26 million. These are estimates, not formal earnings or revenue guidance.
- The late-2018 restructuring targets approximately 200 job reductions, principally in Europe and Asia-Pacific, and is expected to be substantially complete in the first half of 2019. Estimated gross annual savings are $12 million, but management expects to redeploy essentially all savings into sales and growth initiatives, leaving negligible net income-statement savings. Approximately $12 million of future cash expenditures are expected.
- Backlog was $190.4 million at February 10, 2019, versus $122.9 million a year earlier; the current figure includes nora. Orders were expected to ship within six to nine months, and backlog can fluctuate with large projects and currencies.
- Key risks include cyclical commercial construction and renovation demand; competition and pricing pressure; petroleum-based input costs; reliance on a small number of synthetic-fiber suppliers and a sole LVT supplier; foreign-exchange exposure and Brexit uncertainty; and execution, integration, and debt-service risks from the nora acquisition. A 1 percentage-point increase in effective interest rates would add approximately $6.2 million to annual interest expense.
- nora acquisition valuations remained provisional through the reporting date. Management excluded nora from its 2018 internal-control assessment because of acquisition timing; nora represented 23% of year-end assets and 9% of FY2018 revenue. The auditor issued unqualified opinions on the financial statements and on the company’s internal control assessment, with nora excluded from the latter.
Most important facts for investors to verify
- Whether nora integration, synergies, and profitability improve after the reported $20.0 million net loss from acquisition date through year-end.
- How much of FY2018 sales growth and margin pressure is recurring versus attributable to acquisition timing, purchase accounting, transaction costs, and sales mix.
- Debt reduction progress, variable-rate exposure, covenant headroom, and the capacity to fund planned capital expenditures and dividends.
- Execution and cash costs of the restructuring, and whether reinvested savings translate into incremental sales and returns.
- Whether backlog converts to shipments and sales, and whether 2019 demand, foreign exchange, and raw-material costs support management’s expectations.