Interface, Inc. — FY 2023 Form 10-K
Business context and reporting period. Interface (Nasdaq: TILE) designs and sells modular carpet, luxury vinyl tile and nora rubber flooring, with Americas (AMS) and Europe, Africa, Asia and Australia (EAAA) reportable segments. This annual report covers the 52 weeks ended December 31, 2023; it is not a standalone fourth-quarter report.
Key financial results
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Net sales | $1,261.5 million | $1,297.9 million |
| Gross profit / margin | $441.1 million / 35.0% | $437.7 million / 33.7% |
| Operating income / margin | $104.5 million / 8.3% | $75.4 million / 5.7% |
| Net income | $44.5 million | $19.6 million |
| Diluted EPS | $0.76 | $0.33 |
| Cash from operations | $142.0 million | $43.1 million |
| Cash and cash equivalents at year-end | $110.5 million | $97.6 million |
| Gross debt at year-end | $421.7 million | $526.3 million |
- Liquidity and obligations: Current assets were $583.9 million and current liabilities $214.7 million. The company reported $298.4 million of available borrowing capacity under its revolving facility, with no revolver borrowings at year-end. Approximately $104.8 million of cash was held outside the U.S.; $51.9 million was not considered permanently reinvested.
- Debt composition: $121.7 million of variable-rate term loans, at a 6.61% weighted-average rate, plus $300 million of 5.50% Senior Notes due December 2028. The credit facility matures in October 2027. A 1 percentage-point increase in the rate on variable debt would raise annual interest expense by about $1.2 million.
- Cash uses: Investing activities used $19.5 million, including $26.1 million of capital expenditures and $6.6 million in proceeds from the Thailand property sale. Financing activities used $111.6 million, including $80.9 million in term-loan repayments. The company paid $2.3 million in dividends and made no share repurchases in 2023.
Material changes versus FY 2022
- Sales fell 2.8%, reflecting lower volume of approximately 7.9%, partly offset by higher prices of approximately 5.1%. Retail and healthcare were the largest sources of weakness; education and residential living increased.
- Gross margin improved to 35.0% from 33.7%, helped by pricing and lower freight costs. SG&A rose 4.6% to $339.0 million, including higher selling costs, severance and professional fees.
- Operating income increased largely because FY 2022 included a $36.2 million goodwill and intangible-asset impairment charge. FY 2023 had no such impairment.
- Operating cash flow rose by $99.0 million, mainly from working-capital improvements, including lower receivables and inventories. Inventory declined to $279.1 million from $306.3 million.
- AMS sales declined 2.2% and adjusted operating income (AOI) declined 14.2% to $87.8 million. EAAA sales declined 3.6% and AOI declined 4.8% to $28.6 million. AOI is a segment measure that excludes specified items and is not the same as consolidated operating income.
- Foreign-exchange movements increased reported sales by $1.4 million in 2023, compared with a $58.8 million adverse impact in 2022. Other expense included $6.2 million of currency-translation losses recognized following substantial liquidation of subsidiaries in Brazil and Russia.
Outlook, risks and unusual items
- Management outlook: No specific revenue or earnings guidance was provided. Management expects lower raw-material and freight costs to continue into 2024 and support gross margin, partly offset by unfavorable fixed-cost absorption. It expects slow recovery in China, weak conditions elsewhere in Asia and commercial-office pressures to weigh on demand. Estimated 2024 capital expenditures are approximately $42 million; expected aggregate interest expense is approximately $27 million.
- Demand and operations: Commercial flooring demand is cyclical and exposed to economic conditions, interest rates, office utilization and construction activity. Backlog was approximately $195.5 million as of February 4, 2024, versus $197.4 million a year earlier, and can fluctuate with large projects and project delays.
- Costs, supply and international exposure: Risks include raw-material and freight cost volatility, reliance on a limited number of synthetic-fiber and LVT suppliers, foreign-currency movements, energy costs, and geopolitical disruption, including the Russia-Ukraine conflict and Israel-Hamas war.
- Debt and interest: The company describes its debt as substantial and has variable-rate exposure. It reported compliance with credit-facility and Senior Notes covenants and expects to remain compliant, but refinancing and future cash generation are risks.
- Cybersecurity: The November 2022 cyberattack disrupted production, shipping and inventory systems; operations substantially resumed within two weeks. The company estimated approximately $8 million of lost 2022 sales and incurred about $1.1 million of related costs in 2023. It expects ongoing security costs; insurance recovery for some losses is anticipated, not assured.
- Legal and other items: A putative securities class action settled for $7.5 million in 2023, funded by insurers. A former CEO’s appeal of a summary judgment ruling remains pending; the company says it will defend the matter. The Thailand facility sale generated a $2.7 million gain. The company recorded a 30.1% effective tax rate; FY 2022’s 53.3% rate was elevated by nondeductible impairment.
- Controls and audit: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill impairment valuation was identified as a critical audit matter because of judgment involved in revenue forecasts and discount rates; no impairment was recorded in 2023.
Important facts for investors to verify
- Whether pricing and lower input costs can offset weak volumes and manufacturing under-absorption in 2024, particularly in EAAA and commercial office markets.
- Whether the $142.0 million operating cash flow is sustainable, given the substantial working-capital contribution and the year’s lower receivables and inventory.
- Debt-service and refinancing capacity, covenant headroom, and sensitivity to variable rates as the 2027 facility maturity and 2028 notes maturity approach.
- Progress on China and broader Asia demand, backlog conversion, and any further effects from geopolitical or supply-chain disruption.
- Cybersecurity remediation, any insurance proceeds, and developments in the former CEO appeal and other contingencies.