TILE

Business Context and Reporting Period

Company: Interface, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 5, 2009
Business Overview: Interface operates two primary reportable segments: Modular Carpet (including InterfaceFLOR, Heuga, and FLOR) and Bentley Prince Street (broadloom, modular carpet, and area rugs). The company previously sold its Fabrics Group segment, which is now reported as discontinued operations.

Key Financial Metrics

Note: Debt includes $14.6 million current portion of long-term debt, $144.6 million Senior Notes, and $135.0 million Senior Subordinated Notes.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 28.4% year-over-year for the quarter and 26.2% for the six-month period. This was driven by reduced order activity in renovation and construction projects due to the global financial crisis. Currency fluctuations negatively impacted sales by approximately 6% in the quarter and 8% for the six months.
• Segment Performance:
  • Modular Carpet: Sales down 28.1% (quarter) and 25.2% (six months). The corporate office segment was the primary driver of the decline (down 37% in the quarter).
  • Bentley Prince Street: Sales down 30.7% (quarter) and 33.3% (six months), driven by a market shift away from broadloom carpet and declines in hospitality and residential segments.
• Profitability: Operating income decreased 37.6% for the quarter and 62.8% for the six months compared to the prior year. Gross margins compressed due to under-absorption of fixed overhead costs associated with lower production volumes.
• Restructuring: The company recorded $1.9 million in restructuring charges for the quarter and $7.6 million for the six months, related to workforce reductions and facility closures.

Guidance, Outlook, and Unusual Items

• Debt Refinancing: In June 2009, the company issued $150 million of 11 3/8% Senior Secured Notes due 2013. Net proceeds were used to repurchase $127.2 million of its 10.375% Senior Notes due 2010. This transaction incurred $6.1 million in bond offering expenses and premiums, which impacted the current period's results.
• Litigation Settlement: The company recognized $5.9 million of income from litigation settlements in the second quarter, which partially offset operating expenses.
• Restructuring Plans:
  • 2008 Plan: Substantially completed in Q1 2009, expected to yield $30 million in annualized savings.
  • 2009 Plan: Adopted in Q1 2009 with additional charges in Q2. Expected to yield $21 million in annualized savings.
• Liquidity: As of July 5, 2009, the company held $89.9 million in cash. It had $49.9 million of additional borrowing capacity under its domestic revolving credit facility and approximately $45.3 million under its European facility.
• Outlook: Management expects improvement in cost of sales and SG&A as a percentage of net sales in the second half of 2009 compared to the first half, driven by restructuring initiatives.

Key Facts for Investor Verification

• Debt Structure: Verify the terms and covenants of the new 11 3/8% Senior Secured Notes and the remaining balance of the 10.375% Senior Notes.
• Restructuring Execution: Monitor the realization of the projected $51 million in combined annualized cost savings from the 2008 and 2009 restructuring plans.
• Market Demand: Assess the recovery of the commercial interiors and construction sectors, which are the primary drivers of the Modular Carpet segment.
• Currency Exposure: Evaluate the impact of the strengthening U.S. dollar on European sales, which reported a 33% decline in the quarter due to currency effects.
• Discontinued Operations: Confirm that the Fabrics Group segment remains fully divested with no ongoing operational impact.