Interface, Inc. — Q1 2016 Form 10-Q
Reporting period: 13 weeks ended April 3, 2016; comparative quarter ended April 5, 2015 was 14 weeks. Interim financial statements are unaudited. The company reports one segment, with operations in the Americas, Europe, and Asia-Pacific.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $222.6 million | $236.9 million | Down 6.1% |
| Gross profit / margin | $86.6 million / 38.9% | $85.4 million / 36.1% | Margin up 2.8 points |
| Operating income / margin | $21.0 million / 9.4% | $21.4 million / 9.0% | Income down 1.7% |
| Net income | $12.9 million | $12.3 million | Up 4.6% |
| Diluted EPS | $0.20 | $0.19 | Up $0.01 |
| Operating cash flow | $(4.3) million | $22.1 million | Down $26.4 million |
| Capital expenditures | $4.5 million | $4.6 million | — |
Cash and cash equivalents were $83.2 million at quarter-end, versus $75.7 million at January 3, 2016. Total debt was approximately $232.6 million: $195.0 million term borrowings and $37.6 million revolver borrowings. The company reported $209.3 million of additional borrowing capacity under its syndicated facility and $14.8 million under other lines; $3.1 million of letters of credit were outstanding. The facility matures in October 2019, and the weighted-average borrowing rate was 2.3%. Management said the company was in covenant compliance and expected to remain compliant.
Changes and operating drivers
- Sales fell $14.4 million year over year; currency translation reduced sales by about $3.7 million. The shorter quarter also affects comparisons.
- Sales declined 6% in the Americas and 10% in Europe in U.S. dollars (9% in local currency), while Asia-Pacific sales rose 3%. Management cited deferred corporate and retail purchases, weaker FLOR promotions, government spending delays, and economic and geopolitical uncertainty in Europe. Asia growth was led by Southeast Asia and India.
- Gross margin improved as lower input costs—raw material costs per unit were down 6–8%—and manufacturing efficiencies, pricing, and product mix offset lower sales and a 12% decline in units produced.
- SG&A increased 2.4% to $65.6 million and rose to 29.5% of sales from 27.0%. Higher strategic marketing, administrative, and selling costs were partly offset by lower performance-based stock compensation.
- Operating cash flow was negative, primarily reflecting a $31.7 million reduction in accounts payable and accrued expenses and a $9.4 million inventory increase, partly offset by $13.2 million released from receivables. The company borrowed $17.7 million on its revolver during the quarter.
Outlook, risks, and notable items
The filing provides no specific financial guidance. Management described commercial interiors market uncertainty, customer purchase deferrals, European geopolitical and economic disruption, and exposure to foreign exchange and variable interest rates. A hypothetical 10% currency move would change the fair value of financial instruments by a decrease of $10.2 million or an increase of $12.4 million; management cautioned that this sensitivity excludes offsetting changes in net foreign investments.
On April 27, 2016, after quarter-end, the company amended its repurchase program to authorize up to $50 million of common-stock repurchases, with no stated expiration date. During Q1 it repurchased 4,300 shares under the public program; the larger total of 327,650 shares shown in the filing includes employee shares withheld for taxes. The company accrued approximately $28.6 million for unrecognized tax benefits, including a $0.3 million increase during the quarter. No material change in risk factors was reported; ordinary-course legal proceedings were not required to be disclosed.
Key facts for investors to verify
- Assess the effect of the 13-week versus 14-week comparison on sales and earnings trends.
- Track whether customer deferrals, especially in the Americas and Europe, reverse as management expected for certain projects.
- Determine whether improved gross margins persist and offset higher SG&A relative to sales.
- Monitor working-capital movements, operating cash generation, revolver usage, and debt repayment.
- Review execution and potential cash use under the new $50 million repurchase authorization, alongside tax contingencies and foreign-exchange exposure.