Interface, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended October 4, 2020. Interface sells flooring products and related installation services. The quarter and prior-year quarter each included 13 weeks; the first nine months of 2020 included 40 weeks, compared with 39 weeks in 2019. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $278.6 million | $348.4 million | $826.3 million | $1,003.5 million |
| Gross profit / margin | $102.2 million / 36.7% | $137.7 million / 39.6% | $313.8 million / 38.0% | $395.0 million / 39.3% |
| Operating income (loss) | $15.9 million | $43.7 million | $(60.2) million | $103.0 million |
| Net income (loss) | $5.9 million | $26.2 million | $(91.5) million | $62.8 million |
| Diluted EPS | $0.10 | $0.45 | $(1.56) | $1.06 |
| Operating cash flow | Not presented by quarter | $97.3 million | $89.9 million |
- Q3 sales fell 20.0% year over year; nine-month sales declined 17.7%. Q3 sales by region were Americas $142.9 million (-27.1%), Europe $92.9 million (-12.4%), and Asia-Pacific $42.9 million (-7.5%).
- Q3 SG&A was $88.2 million, or 31.6% of sales, versus $93.4 million and 26.8% a year earlier. Lower selling and payroll costs and $2.8 million of wage-support benefits were partly offset by $7.7 million of severance and a $5.0 million SEC settlement fine.
- Nine-month results include a $121.3 million goodwill and intangible-asset impairment charge, principally recorded in Q1. Excluding that charge, reported operating loss would not be comparable to a company-reported adjusted measure; the filing does not provide an adjusted result in the supplied text.
Financial position and cash flow
- At October 4, 2020, cash was $103.7 million, versus $81.3 million at December 29, 2019. Current assets were $515.0 million and current liabilities $244.8 million.
- Debt totaled approximately $586.0 million: $562.3 million of term borrowings and $23.7 million revolving borrowings. The company reported $274.7 million of additional facility capacity and $9.6 million available on other lines; $1.6 million of letters of credit were outstanding. Weighted-average facility borrowing rate was 3.15%.
- Operating cash flow of $97.3 million less capital expenditures of $46.9 million implies approximately $50.4 million of cash flow after capital spending. Investing activities used $47.1 million; financing activities used $30.2 million, including $114.0 million of debt repayments and $93.0 million of borrowings. Cash dividends paid were $5.0 million; no common-stock repurchases were made.
- Total assets were $1.306 billion and shareholders’ equity $287.0 million at quarter-end, compared with $1.423 billion and $368.2 million at year-end 2019. Goodwill and intangibles declined to $240.1 million, reflecting impairment.
Changes, outlook, and risks
- Management attributed weaker demand across all regions primarily to COVID-19, which disrupted commercial construction, renovation, and customer projects. Production was reduced or temporarily suspended at several facilities; employees also worked remotely under safety measures.
- Management anticipated further year-over-year declines in revenue and operating income in Q4 2020, and potentially subsequent quarters, while noting that the timing and pace of recovery were uncertain. No specific numerical revenue or earnings guidance was provided.
- Cost-reduction programs included separations, furloughs, reduced shifts, and lower discretionary spending. Management expected approximately $13 million of annualized savings from separation initiatives. The 2019 restructuring plan was expected to yield about $6 million in annualized savings; the 2018 plan’s savings were largely redeployed to growth initiatives.
- On July 15, 2020, the company amended its credit facility, easing the net-leverage covenant temporarily for seven quarters while increasing pricing at higher leverage levels and restricting acquisitions, dividends, repurchases, and new credit facilities during the relief period without lender consent. The company said it was in compliance and expected to remain compliant for the foreseeable future.
- Management said liquidity should be sufficient for the next 12 months. Key uncertainties include the pandemic’s duration, customer spending and project delays, supply-chain and distribution disruptions, foreign-exchange movements, variable-rate debt costs, and potential further asset impairments. The company had $6.8 million of manufacturing-related purchase obligations expected to be funded in the remainder of 2020.
- Other unusual items: a $4.2 million write-down of raw materials damaged in a Q2 storage-facility fire; a $3.1 million Q2 fixed-asset impairment; a $5 million SEC settlement fine relating to historical EPS accounting practices (the company neither admitted nor denied wrongdoing); and a $14.4 million release of unrecognized tax benefits expected in Q4 2020 after a tax statute of limitations expired.
- Backlog was approximately $189.4 million as of October 25, 2020, compared with $177.8 million as of February 9, 2020; project delays and supply/distribution disruptions affected timing.
Important facts for investors to verify
- Whether revenue and order trends recover, particularly in the Americas and in commercial, retail, healthcare, hospitality, and other exposed markets.
- Whether gross margins stabilize as volume changes, production levels, and cost-reduction actions affect operations.
- Debt covenant headroom, borrowing costs, facility availability, and the temporary restrictions under the amended credit agreement.
- Cash generation, working-capital needs, planned capital spending, and the sustainability of dividend payments amid continuing uncertainty.
- Whether the impairment assumptions remain reasonable and whether further goodwill, intangible, or fixed-asset charges arise; also verify the Q4 tax-benefit recognition and the expected savings from restructuring.