Interface, Inc. — FY2012 Form 10-K
Business context and reporting period. Interface designs, manufactures and sells modular carpet globally, primarily for commercial and institutional interiors, with growing residential sales through FLOR. Fiscal 2012 was the 52 weeks ended December 30, 2012. After selling Bentley Prince Street in August 2012, the company reported one continuing operating segment; comparisons generally exclude the divested business from continuing results.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $932.0 million | $953.0 million |
| Gross profit / margin | $317.2 million / 34.0% | $334.7 million / 35.1% |
| Operating income / margin | $64.6 million / 6.9% | $85.7 million / 9.0% |
| Continuing income; diluted EPS | $22.9 million; $0.35 | $38.3 million; $0.58 |
| Net income; diluted EPS | $5.9 million; $0.09 | $38.7 million; $0.59 |
| Cash from operations | $46.9 million | $24.4 million |
| Capital expenditures | $42.4 million | $38.1 million |
Operating cash flow less capital expenditures was approximately $4.5 million. Year-end cash was $90.5 million, up from $50.6 million. Working capital was $268.8 million and the current ratio was 2.7. Total debt was approximately $283.1 million: $275.0 million of 7⅝% senior notes due 2018 and $8.1 million of 11⅜% secured notes due in November 2013. The company had no revolver borrowings, $3.9 million of letters of credit outstanding, and stated $62.8 million of additional domestic revolver borrowing availability. Shareholders’ equity was $295.7 million.
Material changes and unusual items
- Sales declined 2.2% year over year. Americas sales rose 5.1%, while Europe fell 8.1% and Asia-Pacific fell 13.2%. Currency translation reduced reported sales by $23.5 million and operating income by $2.0 million.
- Gross margin fell to 34.0% from 35.1%, reflecting raw-material inflation, lower fixed-cost absorption and disruption from the Australian fire. Cost of sales was 66.0% of sales, versus 64.9%.
- Operating income included $19.4 million of restructuring and asset-impairment charges, principally related to closure of the Shelf, England facility, and $1.7 million of non-production fire-related expenses. The restructuring plan affected about 145 employees.
- A July 2012 fire made the Picton, Australia production line inoperable. Management estimated it reduced 2012 sales by $13–18 million. The company reported $43.6 million of fire-related impairment and incremental production costs, a $22.9 million insurance receivable and $20.7 million received by year-end; it had not recognized a recovery for lost profits.
- Bentley Prince Street generated a $17.0 million discontinued-operations loss, net of tax, in 2012; the sale generated $32.2 million in net proceeds. The discontinued business reported $57.0 million in 2012 sales.
- Fourth-quarter sales were $249.6 million and continuing income was $7.4 million. Fourth-quarter gross profit was $85.1 million; the filing does not provide a clear quarterly gross-margin percentage in the quarterly table.
Outlook, risks and contingencies
Management expected the new Minto, Australia facility to become operational in late 2013 and said supply-chain stabilization and the facility could help Asia-Pacific performance. It estimated 2013 capital expenditures of $30–40 million, aggregate interest expense of $23–26 million and contractual cash obligations of approximately $65.1 million due during 2013. Backlog was $108.4 million at February 15, 2013, versus $101.1 million a year earlier, and was expected to ship over the following six to nine months. The filing gives no specific full-year sales or earnings guidance.
Key risks include cyclicality in commercial renovation and construction, intense competition, petroleum-based input-cost increases, reliance on third-party synthetic-fiber suppliers, foreign exchange and international-market exposure, and substantial indebtedness with restrictive covenants and refinancing risk. The company reported compliance with credit-facility covenants. It disclosed $25.2 million of unrecognized tax benefits, with timing of any payment uncertain, and expected resolution of a Canadian tax agreement in 2013. Routine litigation and environmental matters were not expected by management to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the amount, timing and collectability of remaining Australian-fire insurance proceeds, including the unrecorded lost-profit claim, and track the Minto facility’s cost and start-up schedule.
- Assess whether restructuring savings offset ongoing cost inflation and whether gross and operating margins recover from FY2012 levels.
- Review the 2013 maturity of the $8.1 million secured notes, refinancing and repayment plans, covenant headroom, and the effect of debt service on cash available for investment.
- Evaluate the sustainability of operating cash flow after capital spending, pension contributions and other contractual obligations.
- Track sales trends by region and market segment, especially Asia-Pacific recovery, currency effects and continued growth in residential and other non-office markets.