Business Context and Reporting Period
Company: Interface, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 1, 2007 (Second Quarter of Fiscal 2007)
Business Overview: Interface, Inc. operates primarily through three segments: Modular Carpet, Bentley Prince Street, and Specialty Products. The company is currently undergoing significant portfolio restructuring, having sold its Specialty Products segment (Pandel, Inc.) in March 2007 and entered into an agreement to sell its Fabrics Group business segment in June 2007, with the sale completed in the third quarter.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 1, 2007 |
Three Months Ended July 2, 2006 |
Six Months Ended July 1, 2007 |
Six Months Ended July 2, 2006 |
|---|---|---|---|---|
| Net Sales | $264,962 | $223,184 | $508,454 | $421,318 |
| Gross Profit | $92,225 | $75,708 | $175,453 | $143,632 |
| Operating Income | $30,893 | $24,091 | $55,201 | $44,177 |
| Net Income (Loss) | $998 | $5,885 | $(39,618) | $(11,203) |
| Diluted EPS | $0.02 | $0.11 | $(0.64) | $(0.21) |
| Cash from Operations | N/A | N/A | $23,555 | $(6,862) |
| Cash and Equivalents | $89,346 | $26,225 | $89,346 | $26,225 |
| Total Debt (Current + Long-Term) | $87,999 | N/A | $87,999 | N/A |
Note: Debt figures for July 1, 2007, include $79.2 million current portion of long-term debt and $8.8 million long-term debt. Senior Notes ($175.0 million) and Senior Subordinated Notes ($135.0 million) are also outstanding.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18.7% in the quarter and 20.7% year-to-date compared to the prior year, driven by strong performance in the Modular Carpet and Bentley Prince Street segments. Currency fluctuations positively impacted sales by approximately 2% in the quarter and 3% year-to-date.
- Profitability: While operating income from continuing operations improved significantly (up 28% in the quarter), Net Income for the six-month period turned negative ($39.6 million loss) primarily due to non-recurring charges related to discontinued operations.
- Discontinued Operations: The company recorded a loss from discontinued operations of $12.3 million for the quarter and $62.0 million for the six months ended July 1, 2007. This includes significant impairment charges ($44.5 million goodwill, $3.8 million intangibles, and $13.6 million assets) related to the Fabrics Group segment.
- Segment Performance:
- Modular Carpet: Sales up 20.9% (quarter) and 22.3% (YTD).
- Bentley Prince Street: Sales up 16.2% (quarter) and 19.8% (YTD).
- Specialty Products: Sales were zero in the quarter following the March 2007 sale of Pandel, Inc.
- Cost Structure: Cost of sales as a percentage of net sales decreased slightly to 65.2% (quarter) and 65.5% (YTD) due to improved manufacturing efficiencies and price increases, despite higher raw material and labor costs.
Guidance, Outlook, and Risks
- Discontinued Operations: The sale of the Fabrics Group business segment was completed in the third quarter of 2007 for approximately $60.7 million in cash, with a potential earn-out of up to $6.5 million. The company expects to incur approximately $6.0 million in additional costs related to this sale before the end of 2007.
- Liquidity: As of July 1, 2007, the company held $89.3 million in cash. It had no borrowings under its domestic revolving credit facility (with $62.7 million available) and approximately $8.8 million outstanding under its European facility.
- Debt Management: The company repurchased $22.4 million of its 7.3% senior notes during the first six months of 2007, reducing interest expense.
- Risks: The filing references standard risk factors including economic conditions in the commercial interiors industry and foreign currency exchange rate fluctuations. A 10% change in exchange rates could impact the fair value of financial instruments by approximately $8.9 million (decrease) or $7.3 million (increase).
- Management Commentary: Management attributes sales growth to improving economic conditions in the Americas, Europe, and Asia-Pacific, as well as increased demand in the corporate office, hospitality, and education sectors.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final settlement amount and any remaining liabilities associated with the Fabrics Group sale and the Re:Source dealer wind-down.
- Impairment Charges: Confirm the final tax implications and the specific allocation of the $61.9 million in impairment charges recorded in the first half of 2007.
- Debt Covenants: Review the specific terms of the amended domestic credit facility and European credit agreement to ensure ongoing compliance, particularly regarding the fixed charge coverage test.
- Currency Exposure: Assess the company's hedging strategies given the sensitivity analysis indicating significant exposure to Euro/USD fluctuations.
- Segment Sustainability: Evaluate whether the double-digit growth in Modular Carpet and Bentley Prince Street segments is sustainable without the discontinued operations.