Interface, Inc. — FY2011 Form 10-K
Business context and period. Interface designs, manufactures and sells modular carpet, with additional broadloom and related flooring products and services. The company reported for the fiscal year ended January 1, 2012 (52 weeks); comparisons are with the fiscal year ended January 2, 2011. Modular Carpet is the dominant segment. Sales were approximately 56% Americas, 29% Europe and 15% Asia-Pacific.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $1,057.1 million | $961.8 million |
| Gross profit / margin | $362.1 million / 34.3% | $336.8 million / 35.0% |
| Operating income / margin | $87.3 million / 8.3% | $92.7 million / 9.6% |
| Income from continuing operations | $39.4 million; $0.60 diluted EPS | $10.1 million; $0.14 diluted EPS |
| Net income attributable to Interface | $38.7 million; $0.59 diluted EPS | $8.3 million; $0.13 diluted EPS |
| Cash provided by operating activities | $24.4 million | $47.4 million |
| Capital expenditures | $38.1 million | $31.7 million |
| Cash and cash equivalents at year-end | $50.6 million | $69.2 million |
| Long-term debt, carrying value | $294.5 million | $294.4 million |
| Working capital / current ratio | $256.8 million / 2.7 | $224.6 million / 2.3 |
Operating cash flow less capital expenditures was approximately negative $13.7 million in FY2011. The filing does not provide a company-defined free-cash-flow figure for the year.
Changes versus prior period
- Sales rose 9.9%. Modular Carpet sales increased 10.5% to $953.0 million; Bentley Prince Street sales increased 4.5% to $104.0 million.
- Modular Carpet growth reflected higher average selling prices (about 4%), recovery in corporate-office demand, and growth in selected education, healthcare and residential markets. Bentley Prince Street growth was primarily corporate-office driven; several non-office markets declined.
- Despite sales growth, operating income fell $5.5 million and gross margin declined 0.7 percentage points. Management cited 7–9% higher raw-material prices, increased production costs, and lower fixed-cost absorption in the fourth quarter. Cost of sales increased 11.2%; SG&A increased 11.5%.
- Operating cash flow decreased $23.0 million, with inventory increases of $31.6 million and reductions in accounts payable and accruals of $17.6 million among the principal uses of cash. Cash declined by $18.6 million.
- Interest expense decreased to $26.2 million from $33.1 million, following refinancing and retirement of higher-rate debt. FY2010 included $44.4 million of bond-retirement expense; FY2011 did not.
Outlook, risks and notable items
- No revenue or earnings guidance is provided. Management expected approximately $11 million of annual savings from the FY2011 restructuring plan, which included $6.2 million of charges and reductions affecting about 110 employees.
- For FY2012, management estimated capital expenditures of $25–30 million and aggregate interest expense of $23–26 million. Contractual cash obligations due within one year were approximately $63.8 million.
- At year-end, cash was $50.6 million; the domestic revolver had no borrowings and $4.1 million of letters of credit outstanding, with $84.1 million of additional borrowing availability. European and other subsidiary facilities also had no borrowings. Management stated liquidity should be sufficient for foreseeable needs.
- Debt included $275 million of 7.625% senior notes due 2018, $8.1 million of 11.375% secured notes due 2013 and $11.5 million of 9.5% subordinated notes due 2014. The company disclosed starting redemption of the remaining subordinated notes on February 24, 2012, planned for completion April 9, 2012.
- Key risks include cyclical construction and renovation demand, petroleum-based input-cost volatility and the ability to pass costs through, dependence on third-party synthetic-fiber suppliers, foreign-exchange and European economic exposure, and substantial debt and restrictive covenants. Approximately 52% of sales were denominated in non-U.S. currencies.
- European defined-benefit plans had a $10.3 million net liability; expected 2012 contributions and direct benefit payments were $5.5 million and $10.4 million, respectively. A Canada–U.S. bilateral transfer-pricing agreement remained under negotiation; its final outcome could differ materially from the company’s estimate.
- The estate of former Chairman Ray C. Anderson held approximately 51% of Class B shares, which have the right to elect a majority of directors. The filing also describes a shareholder rights plan that may deter certain takeover transactions.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether sales momentum persists and whether growth extends beyond corporate-office markets, particularly in weaker government and hospitality categories.
- Whether pricing and productivity can offset raw-material inflation and restore gross and operating margins.
- Whether operating cash flow improves as inventory builds unwind, given FY2011 operating cash flow below capital expenditures.
- Whether the restructuring delivers the projected $11 million annual savings and how much cash severance remains payable.
- Debt maturities, covenant headroom, the subordinated-note redemption, and the company’s capacity to reduce net debt.
- Potential outcomes of the tax agreement negotiations, pension funding requirements, foreign-currency movements and supplier continuity.