Interface, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019. Financial statements are unaudited. Interface makes flooring products; approximately 98% of nine-month revenue came from product sales, with the balance from installation.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $348.4 million | $318.3 million | $1,003.5 million | $842.5 million |
| Gross profit / margin | $135.8 million / 39.0% | $99.9 million / 31.4% | $389.8 million / 38.8% | $302.7 million / 35.9% |
| Operating income / margin | $43.7 million / 12.6% | $15.8 million / 5.0% | $103.0 million / 10.2% | $72.5 million / 8.6% |
| Net income | $26.2 million | $8.2 million | $62.8 million | $43.9 million |
| Diluted EPS | $0.45 | $0.14 | $1.06 | $0.74 |
Q3 sales increased 9.4%; nine-month sales increased 19.1%. Growth reflected the nora acquisition and LVT gains. Management reported Q3 sales increases of 7% in the Americas and 20% in Europe, while Asia-Pacific declined 2%; nine-month sales increased across all regions. Foreign exchange reduced sales by approximately $7.0 million in Q3 and $21.1 million year to date.
Q3 gross margin improvement primarily reflected the absence of the 2018 nora inventory step-up amortization. Nine-month margin improvement also reflected productivity initiatives. SG&A rose 8.6% in Q3 and 24.3% year to date, including additional nora-period expenses and higher legal costs related to the SEC matter. Interest expense increased to $6.6 million in Q3 and $20.2 million year to date, primarily due to acquisition-related debt and higher average rates.
Cash, debt, and liquidity
For the first nine months, operating cash flow was $89.9 million, versus $58.7 million in 2018. Capital expenditures were $53.9 million, versus $28.9 million. Cash increased $4.2 million from year-end to $85.2 million. Cash generation included working-capital outflows, notably $11.8 million for inventory.
At September 29, cash was $85.2 million. Facility borrowings were $588.0 million of term loans and $45.1 million on the revolver; $2.5 million of letters of credit were outstanding. The company reported $252.4 million of additional facility borrowing capacity and $9.4 million available under other lines. Balance-sheet debt was $626.3 million, including current debt and net of debt issuance costs. The weighted-average facility borrowing rate was 3.62%. The company reported compliance with its credit covenants.
Material developments, outlook, and risks
- nora acquisition: Completed August 2018 for a net purchase price of $400.7 million. Its 2019 results are included for the full periods shown, unlike the partial 2018 comparison. The acquisition expanded the product range and exposure to healthcare, life sciences, and education markets.
- Restructuring: The plan includes workforce reductions and asset/lease exits. A $0.7 million charge was recorded in Q3 2019; $6.3 million of restructuring liabilities remained at quarter-end. Management expected the plan to be substantially complete during 2019 and estimated approximately $12 million of gross annual savings in fiscal 2019, with essentially all savings redeployed to sales and growth initiatives and negligible net income-statement savings.
- No specific company financial forecast or formal guidance is provided in the supplied filing text. Management cited commercial-interiors industry economic conditions as a risk and noted adverse currency effects. Variable-rate debt exposes interest expense to rate changes; $250 million of debt principal was covered by interest-rate swaps.
- SEC investigation: The SEC investigation concerns historical EPS calculations and rounding practices for 2014–2017. The company received an additional subpoena in August 2019 and said it was cooperating. Related legal expenses increased year over year; the filing text does not state an outcome or quantify a potential liability.
- Other notable items: A $3.1 million tax benefit from remeasurement of an unrecognized tax position contributed to a lower nine-month effective tax rate of 22.0%, compared with 24.3%. Accrued unrecognized tax benefits were approximately $25.9 million. Lease-standard adoption added $110.1 million of operating lease right-of-use assets and $107.3 million of operating lease liabilities at quarter-end.
Important facts for investors to verify
- How much reported sales growth reflects organic demand, LVT, and the nora acquisition, and how currency movements affect comparable growth.
- Whether margin gains persist after the 2018 inventory step-up comparison effect and as acquisition-related and restructuring costs evolve.
- Debt repayment, interest-rate sensitivity, covenant headroom, and cash needs for the $14.5 million of manufacturing expansion purchase obligations expected to be funded during the rest of 2019.
- Developments and potential financial implications, if any, from the SEC investigation and the company’s tax positions.
- Whether restructuring savings are realized and whether planned reinvestment produces measurable returns.