Interface, Inc. — Q3 2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 2, 2022 (13 and 39 weeks, respectively); unaudited. Comparisons are to the periods ended October 3, 2021. Unless noted, figures are in millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $327.8 | $312.7 | $962.4 | $860.8 |
| Gross profit | $108.8 | $106.3 | $332.3 | $311.4 |
| Gross margin | 33.2% | 34.0% | 34.5% | 36.2% |
| Operating income | $28.0 | $24.8 | $90.0 | $70.9 |
| Net income | $14.1 | $11.0 | $44.2 | $33.4 |
| Diluted EPS | $0.24 | $0.19 | $0.75 | $0.57 |
- Q3 sales rose 4.8%; nine-month sales rose 11.8%. Management attributed growth mainly to higher pricing and volume and recovery in commercial markets.
- Operating margin was 8.5% in Q3 versus 7.9%; for the nine months it was 9.3% versus 8.3%. Net margin was 4.2% versus 3.4% in Q3 and 4.6% versus 4.0% year to date.
- Cost inflation pressured profitability: gross margin fell 0.8 percentage points in Q3 and 1.7 points year to date, primarily due to raw-material and freight costs. SG&A was 24.7% of sales in Q3 versus 24.9%, and 25.0% year to date versus 27.5%.
- By segment, Q3 AMS sales increased 10.0% and adjusted operating income (AOI) increased 15.7%; EAAA sales decreased 1.9% and AOI decreased 26.9%. Nine-month AMS sales and AOI increased 21.1% and 36.4%; EAAA sales increased 1.1% while AOI decreased 2.4%.
Cash flow, balance sheet and liquidity
- Operating cash flow was $14.9 million for the nine months, down from $64.1 million. Management cited increased working-capital use, especially a $71.5 million inventory cash outflow, and accrued bonus payments.
- Investing cash outflow was $13.3 million, including $13.3 million of capital expenditures. Financing cash outflow was $10.5 million. Cash declined $17.8 million to $79.4 million.
- At October 2, cash was $79.4 million and total debt principal was $527.6 million: $201.6 million of term loans, $26.0 million of revolver borrowings and $300.0 million of senior notes. Current and long-term debt, net of issuance costs, totaled $521.5 million.
- Available borrowing capacity was $272.4 million under the syndicated facility and $2.0 million under another subsidiary line. The company reported compliance with facility covenants and expected sufficient liquidity for obligations over the next 12 months and longer-term obligations.
- Inventory increased to $319.1 million from $265.1 million at fiscal year-end, attributed to higher input and freight costs, customer demand and supply-chain disruption. Current assets were $603.1 million and current liabilities $237.9 million.
Material developments, outlook and risks
- Management expected a sequential revenue increase in Q4 2022, but anticipated continued supply-chain and manufacturing disruption, raw-material cost increases and labor shortages. It said these pressures could constrain production and shipments and adversely affect gross margins. The filing gives no numerical Q4 revenue or earnings guidance.
- Currency translation reduced reported sales by approximately $19.0 million (6.1%) in Q3 and $42.4 million (4.9%) year to date. China COVID-related restrictions adversely affected sales there by approximately 12% for the first nine months versus the prior year.
- A restructuring plan includes the Thailand plant closure and workforce reductions. The company recorded $1.6 million of restructuring charges and a $2.5 million inventory write-down year to date; it expected $3–$4 million of cash costs, completion in Q1 2023 and annualized savings of approximately $1.7 million. Russia operations were permanently closed during Q3; about $3.0 million of assets, including $2.6 million of cash, remained there at quarter-end during liquidation.
- Goodwill assigned to EMEA was $29.4 million. Its fair value exceeded carrying value by about 20% at the latest test in Q4 2021; inflation, share-price volatility and geopolitical conditions could prompt a future impairment test and charge.
- On October 14, 2022, after quarter-end, the credit facility was amended to extend maturity to October 2027 and replace U.S.-dollar LIBOR benchmarks with SOFR.
- Other items to monitor: a putative class action related to a previously concluded SEC investigation is proceeding after a motion to dismiss was denied; the company says it will defend the case. A former CEO’s appeal in a separate lawsuit is also pending. Unrecognized tax benefits were $8.1 million; the company expected to recognize $2.2 million in Q4 following a statute-of-limitations lapse.
- The company repurchased 1.13 million shares year to date at a weighted average $12.83 per share under a $100 million authorization. Backlog was approximately $236.2 million as of October 23, 2022.
Important facts for investors to verify
- Whether pricing and volume growth can offset persistent raw-material, freight and labor inflation, and whether gross margins stabilize.
- Whether working-capital demands—particularly elevated inventory—improve enough to restore operating cash generation.
- Current borrowing availability, interest-rate exposure and covenant headroom, including the terms and effects of the post-quarter credit amendment.
- Whether EMEA goodwill remains recoverable and whether Thailand restructuring savings and closure costs track management’s estimates.
- Developments in the pending litigation, tax positions and Russia-entity liquidation, and any related financial effects.