Interface, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended July 5, 2020. The quarter comprised 13 weeks; the first half comprised 27 weeks, versus 26 weeks in the prior-year period. Interface designs and sells flooring products and related installation services, reported as one segment with Americas, Europe, and Asia-Pacific operating regions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $259.5m | $357.5m | $547.7m | $655.2m |
| Gross profit / margin | $97.3m / 37.5% | $140.7m / 39.4% | $211.6m / 38.6% | $257.3m / 39.3% |
| Operating income (loss) | $17.4m | $42.9m | $(76.1)m | $59.3m |
| Net income (loss) | $4.7m | $29.5m | $(97.5)m | $36.6m |
| Diluted EPS | $0.08 | $0.50 | $(1.67) | $0.61 |
Q2 sales fell 27.4% year over year, with declines in the Americas (27.0%), Europe (24.9%), and Asia-Pacific (33.3%). First-half sales fell 16.4%. COVID-19 was the primary stated cause; foreign exchange reduced sales by about $2.8m in Q2 and $7.5m in the first half. Q2 operating margin was 6.7%, versus 12.0% a year earlier.
First-half results included a $121.3m goodwill and intangible-asset impairment charge, comprising $116.5m of goodwill and $4.8m of acquired trade-name impairment. The goodwill charge was allocated to Europe ($99.2m) and Asia-Pacific ($17.3m); no further goodwill or intangible impairment indicators were identified at quarter-end. Excluding the impairment, the reported first-half operating loss would have been operating income of approximately $45.1m; this is a simple arithmetic adjustment, not a company-reported non-GAAP measure.
Cash, debt and liquidity
- Cash and cash equivalents were $91.8m at July 5, 2020, up from $81.3m at December 29, 2019.
- First-half operating cash flow was $32.4m; investing cash use was $35.7m, including $35.7m of capital expenditures. Financing provided $15.6m. Cash increased $10.5m.
- Facility borrowings were $566.8m of term loans and $58.8m revolving loans; $1.6m of letters of credit were outstanding. The company reported $239.6m of additional facility capacity and $9.5m available under other subsidiary credit lines. Weighted-average facility borrowing rate was 2.75%.
- Balance-sheet current assets were $533.4m and current liabilities $232.6m. Reported debt carrying value, including current and long-term portions, totaled $620.2m.
- Management said liquidity was sufficient for obligations over the next 12 months. The company was in compliance with facility covenants at July 5.
Outlook, risks and notable items
- Management expected COVID-19 to continue adversely affecting Q3 2020 and anticipated year-over-year revenue and operating-income declines in both Q3 and Q4; recovery timing and pace were uncertain. No specific quarterly or full-year numerical guidance was provided.
- Cost actions included employee separations and furloughs, reduced shifts, lower discretionary spending and capital spending, and suspended salary increases and retirement-plan matching contributions. Management cited approximately $7m in expected annualized savings from separation initiatives. Q2 payroll-support program benefits reduced SG&A by about $3.8m; Q2 severance costs were $2.9m.
- On July 15, 2020, the company amended its credit facility, after quarter-end. The amendment relaxed the net-leverage covenant for seven quarters, revised pricing, and temporarily restricted acquisitions, dividends, share repurchases, and new credit facilities without lender consent. Approximately $1.5m of amendment costs were incurred.
- Other unusual items included a $3.1m Q2 fixed-asset impairment related to certain FLOR design-center closures and abandoned or delayed projects, and a $4.2m write-down of fire-damaged raw materials recorded in other expense.
- Backlog was approximately $193.1m as of July 26, 2020, compared with $177.8m as of February 9, 2020. The filing cautions that project delays and supply/distribution disruptions could affect orders and deliveries.
- Key risks include prolonged pandemic effects on customer construction and renovation spending, receivable collections, inventory, supply chains, production and customer service; possible further asset impairments; and variable-rate debt and foreign-exchange exposure.
Investor verification points
- Track regional sales, order rates and backlog conversion as COVID-related disruption and project delays evolve.
- Review covenant headroom, borrowing costs, and compliance with the amended facility’s temporary restrictions.
- Assess operating cash generation, capital expenditure needs, and working-capital trends against debt service and liquidity.
- Monitor impairment assumptions and any further charges, particularly in Europe and Asia-Pacific, along with recovery in gross margin.
- Confirm whether anticipated cost savings materialize and distinguish recurring performance from payroll-support benefits, severance, and other unusual expenses.