Interface, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the 13 weeks ended July 3, 2016, and six months ended July 3, 2016; comparatives are the periods ended July 5, 2015. Interface reports one operating segment, with operations in the Americas, Europe, and Asia-Pacific, and cited conditions in the commercial interiors industry. The six-month 2016 period comprised 26 weeks versus 27 weeks in 2015.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $248.2m | $263.6m | $470.8m | $500.5m |
| Gross profit / margin | $99.1m / 39.9% | $101.3m / 38.4% | $185.8m / 39.5% | $186.7m / 37.3% |
| Operating income / margin | $31.8m / 12.8% | $33.2m / 12.6% | $52.8m / 11.2% | $54.6m / 10.9% |
| Net income | $20.7m | $21.7m | $33.6m | $34.0m |
| Diluted EPS | $0.32 | $0.33 | $0.51 | $0.51 |
For the quarter, revenue declined 5.9% year over year; net income fell about 4.9%. For the six months, revenue fell 5.9% and net income about 1.4%. Gross margin improved in both periods, while SG&A as a percentage of sales rose to 27.1% from 25.8% for Q2 and to 28.2% from 26.4% for the six months. Management attributed improved gross margin to lower petroleum-based input costs, favorable product mix, and manufacturing efficiencies despite lower production volumes.
- Cash flow, six months: Operating cash flow was $29.9m, versus $50.9m; capital expenditures were $12.8m, versus $12.1m. Operating cash flow less capital expenditures was approximately $17.2m, compared with $38.7m.
- Cash and liquidity: Cash was $88.4m at July 3, 2016, versus $75.7m at January 3, 2016. Current assets were $416.5m and current liabilities $138.4m. The company reported $214.2m of additional borrowing capacity under its syndicated facility and $14.7m under other lines.
- Debt: Long-term debt, including the current portion, totaled approximately $224.3m; facility borrowings comprised $192.5m of term loans and $31.8m of revolving loans. The facility’s weighted average borrowing rate was 2.4%, and it matures in October 2019. The company said it was in covenant compliance and expected to remain compliant for the foreseeable future.
- Capital returns: The company repurchased 662,500 shares during the first six months for $10.4m and paid $6.5m in dividends. In Q2 it amended its repurchase authorization to up to $50m, with no stated expiration date.
Material changes and management commentary
Q2 sales declined across the Americas, Europe, and Asia-Pacific. In the Americas, delayed projects from a major InterfaceServices retail customer and softer oil-and-gas demand weighed on results. European sales were affected by customer uncertainty ahead of the Brexit referendum, particularly in corporate office and education. Asia-Pacific weakness in Australia reflected large project shipments in the prior-year period that did not recur; growth in India and China partly offset it. For the first six months, currency movements reduced reported sales by approximately $4.3m and operating income by $0.3m.
Lower raw-material costs, improved material use and production efficiency, and a shift toward margin-accretive products supported gross-margin gains. Marketing and selling investments increased, partly offset by lower performance-based incentive compensation. Management said delayed InterfaceServices projects were expected in the second half of 2016, but the filing provides no formal revenue or earnings guidance.
Risks, contingencies, and unusual items
- Variable-rate facility debt exposes the company to higher interest expense if short-term rates rise; management noted that currency-rate changes also affect reported results and financial instruments.
- The company recorded approximately $28.1m of unrecognized tax benefits; its deferred tax asset reflected a $14.2m reduction for these benefits.
- Management identified no material change in risk factors and no legal proceedings requiring disclosure. Interim statements were unaudited, and management cautioned that interim results are not necessarily indicative of full-year results.
- Management stated that adoption of the revenue-recognition standard was not expected to materially affect financial condition or results; several other accounting standards were being evaluated or were not expected to have significant effects.
Important facts for investors to verify
- Whether delayed customer projects materialize in the second half and whether weakness in oil-and-gas, European office and education, and Asia-Pacific non-office segments persists.
- Whether gross-margin improvements from input costs, product mix, and manufacturing efficiencies can continue as sales and production volumes change.
- How operating cash flow, working-capital movements, capital spending, buybacks, and dividends affect cash and debt levels.
- Exposure to variable interest rates, foreign-exchange movements, and the $28.1m unrecognized tax-benefit balance.
- Management’s full-year outlook is not quantified in this filing; verify any subsequent guidance or updates.