Interface, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Interface (Nasdaq: TILE) designs, manufactures and sells modular carpet, luxury vinyl tile (LVT) and rubber flooring, serving commercial and institutional markets worldwide. Fiscal 2020 ended January 3, 2021 and comprised 53 weeks; fiscal 2019 ended December 29, 2019 and comprised 52 weeks. The company attributed the year’s results primarily to COVID-19 disruptions and lower demand.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,103.3 million | $1,343.0 million |
| Gross profit / gross margin | $410.6 million / 37.2% | $533.0 million / 39.7% |
| Operating income (loss) | $(39.3) million / (3.6)% | $130.9 million / 9.7% |
| Net income (loss) | $(71.9) million; $(1.23) per diluted share | $79.2 million; $1.34 per diluted share |
| Cash from operations | $119.1 million | $141.8 million |
| Capital expenditures | $62.9 million | $74.6 million |
| Cash and cash equivalents | $103.1 million | $81.3 million |
| Total debt outstanding | $585.2 million | $602.5 million |
Operating cash flow less capital expenditures was approximately $56.1 million in FY2020. At year-end, the company also reported $295.4 million of available borrowing capacity under its revolving facility. Management said liquidity was sufficient for obligations over the next 12 months. FY2020 dividends were $0.095 per share, down from $0.26 in FY2019.
Material changes versus the prior year
- Sales fell 17.9%, with declines in all regions: Americas 21.6%, Europe 10.7% in U.S. dollars, and Asia-Pacific 17.7%. COVID-19-related weakness was especially pronounced in corporate office demand.
- Company-wide sales mix shifted toward non-corporate office markets: 53% of sales versus 39% in FY2019. Residential living and public buildings grew in the Americas, while results varied by market and region.
- Gross margin declined 2.5 percentage points, primarily reflecting weaker fixed-cost absorption from lower production volumes. SG&A fell 14.4% in dollars but rose to 30.2% of sales from 29.0%.
- Results included a $121.3 million goodwill and intangible-asset impairment charge, $12.9 million of severance costs, a $5.0 million SEC settlement fine, and a $5.0 million fixed-asset impairment charge. Payroll support programs reduced costs by approximately $7.3 million.
- Operating cash flow decreased $22.7 million. Working-capital releases, including lower receivables and inventory, partially offset lower earnings and a $60.9 million cash use from accounts payable and accrued expenses.
Outlook, risks and unusual items
- Management expected FY2021 first-quarter revenue and operating income to decline sequentially from the fourth quarter of FY2020, citing customary seasonality and continued COVID-19 effects. It said the recovery timeline remained uncertain; no full-year revenue or earnings guidance was provided in the filing.
- In November 2020, the company issued $300 million of 5.50% senior notes due 2028, using proceeds primarily to repay credit-facility borrowings. The facility was extended to November 2025. Management estimated FY2021 interest expense of $32–33 million and capital expenditures of approximately $30 million.
- COVID-19 risks include further demand weakness, project delays, supply-chain and operating disruptions, and possible additional asset impairments. Other risks include substantial debt and covenant compliance, variable interest rates, foreign exchange exposure, competition, raw-material and supplier dependence, and execution of the nora integration and sales-organization transformation.
- The company recorded the $121.3 million impairment in the first quarter; its annual year-end goodwill test indicated no additional impairment. The SEC settlement resolved an investigation into historical 2014–2017 EPS calculations and rounding practices: the company paid a $5.0 million fine, consented to a cease-and-desist order, and neither admitted nor denied wrongdoing.
- Litigation includes a former CEO’s claims seeking substantial unspecified and specified damages, and a securities class action related to the SEC investigation. The company said it believed the claims were without merit and intended to defend itself. The filing does not state a clear estimate of potential loss.
- The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective. The audit identified goodwill impairment valuation as a critical audit matter.
Investor facts to verify
- Whether revenue and margins recover as corporate-office, construction and renovation demand normalize, and whether the shift toward non-corporate markets persists.
- Debt-service capacity, covenant headroom, refinancing access and the effect of variable rates; confirm the company’s reported $295.4 million revolving availability and compliance status.
- Whether cost actions deliver the anticipated savings, including approximately $15 million of annualized savings from 2020 separation initiatives, while reinstated 2021 benefits and salary increases raise costs.
- Potential further goodwill, intangible-asset or fixed-asset impairments if pandemic-related forecasts deteriorate, and developments in the former CEO and securities class-action litigation.
- Cash availability by jurisdiction: $101.4 million of the $103.1 million year-end cash balance was held outside the United States, with most described as indefinitely reinvested.