Interface, Inc. — Q3 2023 Form 10-Q
Business context and period. Interface manufactures and installs modular carpet, resilient flooring, rubber flooring and related products. The unaudited quarter ended October 1, 2023 comprised 13 weeks; the nine-month period comprised 39 weeks. Comparisons are with the corresponding 2022 periods.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $311.0 million | $327.8 million | $936.4 million | $962.4 million |
| Gross profit / margin | $110.3 million / 35.5% | $108.8 million / 33.2% | $317.9 million / 34.0% | $332.3 million / 34.5% |
| Operating income / margin | $31.0 million / 10.0% | $28.0 million / 8.5% | $69.4 million / 7.5% | $90.0 million / 9.3% |
| Net income | $9.9 million | $14.1 million | $25.0 million | $44.2 million |
| Diluted EPS | $0.17 | $0.24 | $0.43 | $0.75 |
Cash flow. Nine-month operating cash flow was $114.2 million, versus $14.9 million in 2022, primarily reflecting working-capital cash inflows, including customer collections and lower inventory. Capital expenditures were $17.2 million. Cash used in investing activities was $10.6 million, including $6.6 million of proceeds from the Thailand facility sale. Cash used in financing was $80.8 million, primarily reflecting debt repayments. Cash increased $22.1 million to $119.6 million.
Debt and liquidity. At October 1, total debt principal was $449.3 million: $143.4 million of term loans, $5.9 million of revolving borrowings and $300.0 million of 5.50% senior notes due 2028. The term-loan and revolving-facility weighted average rate was 6.66%. The company reported $292.5 million of additional facility borrowing capacity and said liquidity was sufficient for the next 12 months. It was in compliance with debt covenants.
At period-end, current assets were $585.8 million and current liabilities were $210.2 million. Accounts receivable was $143.9 million, down from $182.8 million at January 1; inventory was $289.3 million, down from $306.3 million.
Material changes and management commentary
- Q3 sales fell 5.1%, mainly from lower volume (approximately 12%), partly offset by higher pricing (approximately 7%). Demand weakness was concentrated in retail, public buildings and corporate offices. Currency movements increased Q3 sales by approximately $4.9 million.
- Q3 gross margin improved to 35.5%, reflecting higher pricing and lower raw-material and freight costs, partly offset by weaker fixed-cost absorption and product mix. Operating income rose, but net income declined as other expense increased sharply.
- Nine-month operating income fell 22.9% and net income fell 43.5%. Lower sales, inflationary raw-material costs, weaker manufacturing fixed-cost absorption and higher SG&A contributed. Nine-month SG&A increased 4.3%, including higher selling expenses, severance and $1.0 million of Cyber Event costs.
- Q3 other expense included a $6.2 million foreign-currency translation loss recognized upon substantial liquidation of subsidiaries in Brazil and Russia. Nine-month interest expense rose to $25.0 million, primarily due to higher borrowing rates.
- AMS nine-month sales declined 1.6% and adjusted operating income (AOI) declined 21.3%; EAAA sales declined 4.2% and AOI declined 35.1%. In Q3, EAAA AOI increased 44.3%, while AMS AOI declined 6.6%.
Outlook, risks and contingencies
Management expected fiscal 2023 net sales to decline versus fiscal 2022. It anticipated lower raw-material and freight costs, continued weaker manufacturing fixed-cost absorption, and higher SG&A costs, primarily due to inflation. Management expected operating cash flows and other liquidity sources to meet foreseeable requirements. Backlog was approximately $210.3 million as of October 22, 2023, compared with $197.4 million as of February 5, 2023; management attributed the increase to project and installation timing.
Management cited inflation, higher interest rates, geopolitical conflicts, supply-chain challenges, slow recovery in China and Asia, and financial pressure in the global commercial office market as risks to demand, costs and margins. The November 2022 Cyber Event investigation was substantially completed early in Q3 2023; the company expects ongoing security costs and anticipates insurance recovery for some costs, without specifying an amount.
The court approved final settlement of a putative class action on October 19, 2023; insurers funded the $7.5 million settlement into escrow. A former CEO appealed a judgment in the company’s favor; the company said it considers the lawsuit and appeal without merit and intends to defend vigorously. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand and volume trends, especially in retail, corporate offices and Asia, improve or further pressure sales and fixed-cost absorption.
- Whether pricing, input-cost relief and cost actions can sustain margins, and whether management’s fiscal 2023 outlook is achieved.
- How higher variable interest rates affect interest expense, debt reduction and covenant headroom.
- The realized amount and timing of any Cyber Event insurance recovery, and any related future costs or liabilities.
- Developments in the former CEO appeal and completion of the class-action settlement process.