Business context and reporting period
Interface, Inc. (Nasdaq: TILE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company sells commercial flooring products and related installation services. Comparisons are with the three and six months ended July 1, 2018.
Results include nora, acquired in August 2018, so reported growth is not directly comparable with the prior-year periods. nora contributed $75.6 million of second-quarter sales and $135.7 million for the first six months. Flooring products represented approximately 98% of first-half revenue.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $357.5 million | $283.6 million | $655.2 million | $524.2 million |
| Gross profit / margin | $138.6 million / 38.8% | $109.1 million / 38.5% | $254.0 million / 38.8% | $202.7 million / 38.7% |
| Operating income / margin | $42.9 million / 12.0% | $33.7 million / 11.9% | $59.3 million / 9.1% | $56.7 million / 10.8% |
| Net income | $29.5 million | $20.6 million | $36.6 million | $35.7 million |
| Diluted EPS | $0.50 | $0.35 | $0.61 | $0.60 |
Second-quarter sales rose 26.0%; first-half sales rose 25.0%. Management attributed the increases primarily to nora and LVT growth, partly offset by unfavorable currency effects of approximately $6.1 million in Q2 and $14.1 million in the first half. Sales increased across all regions. First-half SG&A rose 33.3% and reached 29.7% of sales, versus 27.9% a year earlier; higher expenses included nora costs, a global sales meeting and increased legal expenses related to an SEC matter.
Interest expense increased to $6.8 million in Q2 and $13.6 million for the first half, largely reflecting acquisition-related debt and higher average borrowing rates. The first-half effective tax rate was 17.6%, compared with 26.5%, helped by discrete tax benefits, including a $3.1 million benefit related to remeasurement of an unrecognized tax position.
First-half operating cash flow was $20.4 million, versus $5.0 million in 2018. Capital expenditures were $34.9 million, versus $16.4 million; operating cash flow less capital expenditures was therefore approximately negative $14.5 million. Cash increased $3.3 million from year-end to $84.3 million. Working-capital uses included increased inventory and lower accounts payable and accrued expenses.
At June 30, cash was $84.3 million and total current assets and current liabilities were $582.9 million and $234.3 million, respectively. Credit-facility borrowings were $598.9 million of term loans and $80.5 million revolving loans, with $2.5 million of letters of credit outstanding. The weighted-average borrowing rate was 3.88%; additional facility capacity was $217.0 million, plus $9.5 million available under other lines. The company reported compliance with its credit covenants. Balance-sheet long-term debt was $641.1 million and current debt was $31.1 million.
Material changes, outlook, and risks
- Cost of sales as a share of revenue improved slightly, which management attributed primarily to productivity initiatives. First-half operating margin nevertheless declined, amid higher SG&A and interest costs.
- The company completed its $100 million share repurchase authorization during Q2, repurchasing approximately 1.6 million shares for $25.2 million. First-half dividends paid were $7.8 million.
- A restructuring plan announced in December 2018 includes approximately 200 workforce reductions and other actions. The prior-year fourth quarter included a $20.5 million charge; $4.0 million of costs were incurred in 2019 through June, with $7.9 million remaining in the disclosed activity summary. The plan was expected to generate about $12 million of gross savings in fiscal 2019, substantially redeployed to sales and strategic growth initiatives, leaving negligible net income-statement savings. Manufacturing expansion purchase obligations were $12.9 million, expected to be funded in the second half of 2019.
- The filing provides no specific revenue or earnings guidance. Management cited commercial-interiors economic conditions and previously disclosed risk factors as uncertainties. It reported higher legal expenses related to an SEC matter and no material update to the legal proceedings disclosed in the prior-quarter 10-Q.
- The company adopted lease accounting in 2019, recording approximately $115 million of operating lease assets and liabilities at adoption. At June 30, operating lease liabilities were $114.1 million. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of sales growth and future performance is attributable to nora and LVT, versus underlying comparable growth, and how currency movements may affect reported results.
- Whether the company can sustain productivity-driven margin improvement while controlling SG&A, including legal expenses related to the SEC matter.
- Cash conversion and working-capital trends, given first-half capital expenditures exceeded operating cash flow.
- Debt repayment, borrowing costs, covenant headroom and the company’s ability to fund planned capital spending and other commitments.
- Progress and realized net savings from restructuring, alongside the planned redeployment of gross savings to growth initiatives.
- The status and potential financial consequences of the SEC-related matter and the $25.6 million accrued liability for unrecognized tax benefits.