Interface, Inc. — Q2 2017 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 2, 2017; comparative periods ended July 3, 2016. Financial statements are unaudited. Interface operates in the Americas, Europe, and Asia-Pacific, with carpet, hard-surface flooring, and related products; it reports as one segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $251.7m | $248.2m | $472.8m | $470.8m |
| Gross profit / margin | $97.9m / 38.9% | $99.1m / 39.9% | $185.7m / 39.3% | $185.8m / 39.5% |
| Operating income / margin | $33.0m / 13.1% | $31.8m / 12.8% | $48.4m / 10.2% | $52.8m / 11.2% |
| Net income | $20.9m | $20.7m | $29.5m | $33.6m |
| Diluted EPS | $0.33 | $0.32 | $0.46 | $0.51 |
| Operating cash flow | — | $21.9m | $34.5m |
Q2 sales increased 1.4%; first-half sales increased 0.4%. Q2 net margin was 8.3% in both years; first-half net margin was 6.2%, versus 7.1%. Currency movements reduced 2017 sales by about $2.7m in Q2 and $4.9m in the first half, and reduced operating income by about $0.5m in each period.
Balance sheet, liquidity, and cash flow
- At July 2, cash was $66.8m, down $98.9m from January 1. Current assets were $410.4m and current liabilities $156.9m.
- Debt was approximately $230.4m: $177.5m term borrowings and $52.9m revolver borrowings; $2.6m of letters of credit were outstanding. Weighted-average facility interest rate was 2.6%. The company reported $194.5m of additional facility borrowing capacity and $9.8m available on other lines.
- First-half investing cash use was $15.0m, including $15.4m capital expenditures. Financing cash use was $109.3m, including $55.7m of share repurchases, $54.7m of debt repayments, and $7.6m of dividends. Inventory growth used $21.1m of operating cash; accounts receivable growth used $6.3m.
Material changes and management commentary
- Q2 gross margin declined 1.0 percentage point year over year, reflecting higher raw-material costs and the exit of higher-margin FLOR specialty retail stores. Management cited backing and yarn input-cost increases, partly offset by productivity improvements and restructuring savings.
- SG&A fell 3.7% in Q2 and 2.2% for the first half, reflecting lower FLOR selling costs, more centralized functions, and restructuring savings. Higher incentive compensation and costs for luxury vinyl tile launches partly offset savings.
- Americas sales rose 4% in Q2 and Asia-Pacific sales rose 6%; Europe sales declined 6%. Modular resilient flooring products launched in 2017 were progressing according to plan, with most sales in the Americas. FLOR store exits weighed on sales, partly offset by gains in other FLOR channels.
- First-half operating income included $7.3m of restructuring and asset impairment charges, recorded in Q1. The charges related primarily to FLOR store closures and included lease exit costs, asset impairment, and severance. The broader plan included restructuring FLOR, reducing staff, and writing down certain assets.
- Management expected raw-material price inflation to increase cost of sales as a percentage of sales for the remainder of 2017. The filing provides no numerical full-year revenue or earnings guidance.
Capital allocation, contingencies, and risks
- The company repurchased and retired about 2.8m shares for $55.7m during the first half. A new program authorized up to $100m of repurchases with no stated expiration; approximately $75.4m remained at quarter-end.
- On August 8, 2017, after quarter-end, Interface amended and restated its credit facility, extending maturity to August 2022 and liberalizing the restricted-payments covenant, among other changes. Management reported covenant compliance and expected continued compliance.
- Accrued unrecognized tax benefits were approximately $28.4m at July 2, 2017; the liability increased by $0.5m during the first half. The filing reports ordinary-course legal proceedings but none requiring disclosure, and no material change in risk factors.
- Management identified commercial-interiors economic conditions and the risks in its 2016 Form 10-K as factors that could affect forward-looking statements. Foreign-exchange movements affect reported results; debt carries variable interest rates.
Important facts for investors to verify
- Whether raw-material inflation, particularly backing and yarn costs, pressures margins in the second half, and whether restructuring and productivity savings offset it.
- Sales trends by region and market, including the performance of new modular resilient flooring and the effect of FLOR store closures.
- Cash conversion and working-capital needs, especially inventory growth, alongside planned capital spending and shareholder returns.
- Debt repayment, borrowing capacity, variable-rate exposure, covenant headroom, and the effect of the August 2022 facility amendment.
- Execution and remaining costs of the restructuring, and the status and ultimate resolution of unrecognized tax benefits.