Interface, Inc. — Q1 2023 Form 10-Q
Business and period. Interface designs and manufactures commercial flooring, including modular carpet and resilient and rubber flooring. This unaudited report covers the 13 weeks ended April 2, 2023, compared with the 13 weeks ended April 3, 2022. Results are not necessarily indicative of the full year.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $295.8 million | $288.0 million |
| Gross profit / margin | $95.9 million / 32.4% | $106.8 million / 37.1% |
| Operating income / margin | $9.5 million / 3.2% | $27.4 million / 9.5% |
| Net income (loss) | $(0.7) million | $13.3 million |
| Diluted EPS | $(0.01) | $0.22 |
| Cash from (used in) operations | $29.6 million | $(17.7) million |
| Capital expenditures | $5.7 million | $4.8 million |
| Interest expense | $8.5 million | $6.9 million |
Sales rose 2.7%, primarily on higher prices (approximately 6%); currency movements reduced sales by about $7.2 million. Cost of sales increased 10.3%, and SG&A rose 9.9%. Management attributed margin pressure to raw-material inflation, lower manufacturing volumes and weaker fixed-cost absorption, alongside higher selling and severance costs. Other expense was $1.5 million versus $0.2 million.
Segments: Americas sales rose 8.1% to $169.2 million, while adjusted operating income (AOI) fell 46.7% to $11.3 million (6.7% of sales, versus 13.5%). EAAA sales fell 3.8% to $126.6 million and AOI fell 58.7% to $3.9 million (3.1% of sales, versus 7.2%). Asia sales were approximately 30% lower year over year, reflecting weaker demand and slower recovery in parts of the region.
Financial position and liquidity
At April 2, 2023, cash was $101.3 million. Gross debt was $507.0 million, including $197.6 million of term loans, $9.4 million of revolving borrowings and $300.0 million of senior notes; net debt was approximately $405.7 million. The company had $289.0 million of additional facility borrowing capacity and $1.6 million of letters of credit outstanding. Total current assets were $611.8 million and current liabilities were $221.5 million. Management said liquidity was sufficient for obligations over the next 12 months and expected cash generation to meet long-term obligations. The company reported compliance with debt covenants.
Operating cash flow improved year over year, mainly from working-capital movements, including customer collections and a smaller inventory-related cash use than in the prior-year quarter. Cash increased by $3.7 million to $101.3 million. Inventory was $312.7 million, up from $306.3 million at fiscal year-end; receivables were $147.8 million, down from $182.8 million.
Outlook, risks and unusual items
- Management anticipated Q2 fiscal 2023 revenue growth compared with Q1, but did not provide a numerical forecast or full-year guidance.
- Management expected continued supply-chain and manufacturing disruption, raw-material cost increases and lower fixed-cost absorption to pressure gross margins, potentially causing shipping delays and limiting the ability to meet customer demand. Backlog was approximately $208.9 million as of April 23, 2023.
- A November 2022 cyberattack led the company to shut down certain shipping, inventory and production systems; operations substantially resumed within two weeks. The company incurred approximately $0.4 million of additional investigation costs in Q1 2023, expects ongoing security costs, and anticipates insurance recovery for part of its cyber-related costs.
- The company agreed to sell its closed Thailand manufacturing facility for approximately $6.7 million, with closing expected in Q2 2023. The 2021 restructuring plan was expected to yield approximately $1.7 million in annualized savings; completion was expected after the facility sale.
- A putative class action has a preliminary $7.5 million settlement, subject to court approval. The company accrued the loss and expected insurance recovery. A former CEO’s motion for reconsideration was pending, and a trial on the company’s counterclaim was scheduled to begin September 12, 2023.
- Macroeconomic risks include inflation, higher interest rates, supply-chain disruption and COVID-19 impacts in China. Variable-rate debt exposes the company to higher interest expense; Q1 interest expense rose primarily because of higher term-loan rates.
Investor facts to verify
- Whether pricing, volume and cost actions can restore gross and segment margins after the sharp Q1 declines.
- Whether sequential Q2 sales growth materializes and whether Asia demand and currency headwinds improve.
- Whether cash-flow improvement is sustainable or largely reflects working-capital timing, including collections tied to delayed billings.
- Debt reduction, variable-rate interest costs, facility availability and ongoing covenant compliance.
- Insurance recovery and total costs related to the cyber event, and the timing and proceeds of the Thailand facility sale.
- Court approval and insurance coverage for the proposed class-action settlement, and developments in the former CEO litigation.