Interface, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 29, 2013 (52 weeks); comparison is primarily with fiscal 2012. Interface is a global manufacturer and seller of modular carpet, operating under Interface, FLOR and Heuga brands in more than 110 countries. Bentley Prince Street was sold in 2012 and is reported as discontinued operations.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $960.0 million | $932.0 million |
| Gross profit / margin | $341.1 million / 35.5% | $317.2 million / 34.0% |
| Operating income / margin | $95.6 million / 10.0% | $64.6 million / 6.9% |
| Continuing-operations income | $48.3 million | $22.9 million |
| Net income | $48.3 million | $5.9 million |
| Diluted EPS | $0.73 | $0.09 |
| Cash from operations | $67.5 million | $46.9 million |
| Capital expenditures | $91.9 million | $42.4 million |
| Cash and cash equivalents at year-end | $72.9 million | $90.5 million |
| Long-term debt at year-end | $273.8 million | $275.0 million |
| Working capital / current ratio | $257.9 million / 3.0 | $273.2 million / 2.7 |
Revenue rose 3.0%. Operating income improved substantially, with gross margin expansion and no 2013 restructuring charge, but results also included unusual insurance and tax benefits. SG&A increased 9.1% to $252.4 million, including higher FLOR and sales-force costs, marketing, and stock compensation. Interest expense declined to $23.8 million; the effective tax rate fell to 30.1% from 39.9%.
Markets and material changes
- Americas sales increased 7.3%, led by corporate office, residential and hospitality. European sales declined 2.0% in U.S. dollars (5.3% in local currency); Asia-Pacific declined 2.5%, largely reflecting Australia-related disruption and a weaker Australian dollar.
- The Australia facility fire reduced estimated sales by $18–23 million in 2013. The replacement Minto facility began operating in January 2014. The final insurance settlement produced a $7.0 million gain in 2013.
- Continuing operations benefited from market recovery in the Americas and lean-manufacturing and supply-chain improvements. The 2012 comparison included $19.4 million of restructuring and impairment charges, $1.7 million of fire-related expenses, and a $17.0 million after-tax loss on discontinued operations from the Bentley Prince Street sale.
- Sales mix continued diversifying: Americas modular-carpet sales were 48% corporate office and 52% non-corporate office; company-wide mix was 60% and 40%, respectively.
Liquidity, debt and outlook
Year-end debt comprised $247.5 million of 7.625% Senior Notes due 2018 and $26.3 million drawn under a new $200 million revolving credit facility maturing in October 2018; $173.4 million of additional facility borrowing capacity remained, before considering other availability and conditions. The facility is secured and subject to leverage and interest-coverage covenants. Management reported covenant compliance and expected continued compliance. Cash included $55.5 million held outside the U.S., which the company generally considers permanently reinvested.
Operating cash flow was below capital expenditures, reflecting the Minto build-out and other investment; cash declined $17.7 million during the year. Management estimated 2014 capital expenditures of $40–50 million, interest expense of $20–22 million, and contractual cash obligations of approximately $57.6 million due within one year. It expected SG&A to decline as a percentage of sales and anticipated improved Australian sales after Minto opened. Backlog was $117.4 million at February 16, 2014, versus $108.4 million a year earlier, and was expected to ship within six to nine months. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Key risks include cyclical commercial construction and renovation demand, intense competition, petroleum-based input-cost inflation, reliance on a small number of synthetic-fiber suppliers, international and foreign-exchange exposure, and significant indebtedness and refinancing risk.
- The 2013 results included a $7.0 million Australia insurance gain, a $1.9 million tax benefit from resolution of a Canada-U.S. pricing agreement, and $1.7 million of debt-retirement expense. These items affect comparisons with underlying operating performance.
- Unrecognized tax benefits were $27.4 million; timing and resolution are uncertain. The filing states that $5.6 million could require cash if not favorably settled. Pension obligations and assumptions are also material; expected contractual pension cash obligations total $124.1 million over the periods presented.
- Management reported no material pending legal proceeding, no significant environmental remediation accrual, and no material off-balance-sheet arrangements. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile the Australia insurance recovery disclosures: the narrative says $56.0 million of 2013 proceeds, while the cash flow statement lists $25.973 million in operating activities and $23.024 million in investing activities. Confirm the amounts, classification and timing, and the $7.0 million gain calculation.
- Assess recurring earnings excluding the insurance gain and tax-dispute benefit, and account for the higher SG&A and expected investment spending.
- Track Australian production ramp-up, sales recovery and any remaining effects of the Picton fire.
- Review debt service capacity, credit-facility covenants, 2018 maturities, cash location and availability, and the tax and pension obligations.
- Monitor regional demand, foreign-exchange movements, raw-material costs and supplier continuity; compare backlog conversion with reported sales.