Interface, Inc. — Q1 2021 Form 10-Q
Business context and period: The quarter ended April 4, 2021, covered 13 weeks, compared with 14 weeks in the prior-year quarter. Interface manufactures flooring-related products and reports two segments: Americas (AMS) and Europe, Africa, Asia and Australia (EAAA). COVID-19 continued to weigh on demand, particularly in corporate offices.
Key financial results
| Metric | Q1 2021 | Prior-year quarter |
|---|---|---|
| Net sales | $253.3 million | $288.2 million |
| Gross profit / margin | $96.0 million / 37.9% | $114.3 million / 39.7% |
| Operating income (loss) | $16.9 million | $(93.5) million |
| Net income (loss) | $6.9 million | $(102.2) million |
| Diluted EPS | $0.12 | $(1.75) |
| Operating cash flow | $24.9 million | $(15.7) million |
Gross margin declined 1.8 percentage points, mainly reflecting lower production volumes and fixed-cost absorption. SG&A was $79.3 million, down 9.6%, but increased to 31.3% of sales from 30.4%. Q1 2020 included a $121.3 million goodwill and intangible-asset impairment; excluding that unusual charge, the comparison in operating results is substantially different from the reported year-over-year swing.
Cash and equivalents were $106.9 million at April 4, 2021, versus $103.1 million at January 3. Operating cash flow benefited from working-capital movements, including lower variable-compensation payments and higher accounts payable and accrued expenses; inventory and prepaid expenses were uses of cash. Capital expenditures were $5.2 million. Financing cash outflow was $13.0 million, including net debt repayments.
Debt principal totaled $570.9 million: $270.9 million under the syndicated facility and $300.0 million of 5.50% senior notes due 2028. Debt, net of issuance costs, was $562.6 million, including $15.2 million current. There were no revolving borrowings and $298.4 million of additional facility capacity; cash and available capacity support management’s view that liquidity is sufficient for the next 12 months. The company reported compliance with debt covenants.
Changes and segment performance
- Consolidated sales fell 12.1%; currency movements added approximately $11.8 million, or 4.1%, to the year-over-year comparison. The shorter quarter also affects comparability.
- AMS sales declined 19.7% to $127.0 million and adjusted operating income (AOI) fell 49.4% to $11.9 million. Weakness was concentrated in corporate, hospitality, public buildings and education; lower fixed-cost leverage, raw-material and freight costs also pressured results.
- EAAA sales declined 2.9% to $126.3 million, including an approximately $11.2 million favorable currency effect. AOI rose 38.2% to $8.0 million, supported by improved gross margins and lower SG&A.
- Total reported operating income was $16.9 million, compared with a prior-year operating loss that included the impairment charge. Restructuring charges were reduced by $0.1 million in Q1 2021.
Outlook, risks and unusual items
Management anticipated that Q2 2021 would remain adversely affected by COVID-19, while expecting revenue and operating income growth versus Q2 2020; no specific numerical forecast was provided. The timing and pace of recovery remained uncertain. Management cited uncertainty around construction and renovation activity, corporate and consumer spending, office-working patterns, and the ability of sales channels, suppliers, manufacturers and distributors to operate through disruptions. Raw-material availability and cost, freight costs, and potential further asset impairments are additional concerns.
Backlog was approximately $202.9 million as of April 25, 2021, versus $177.7 million as of February 7, 2021; project delays and supply or distribution disruptions may affect conversion. The company recorded $1.4 million of involuntary severance costs in SG&A. A 2019 restructuring plan was expected to be completed in fiscal 2021 and yield approximately $6.0 million in annualized savings.
A putative class action related to the subject matter of a concluded SEC investigation was amended to add the former CFO as a defendant. The company said it believes the action is without merit and intends to defend itself. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand recovery in corporate, hospitality, education and other commercial markets improves, and whether Q2 growth expectations are achieved.
- Whether margin pressure from lower production volumes, raw materials and freight costs persists, particularly in AMS.
- Whether working-capital needs, inventory levels and operating cash generation remain manageable.
- Debt-covenant compliance, available borrowing capacity, and the effect of variable interest rates and scheduled repayments on interest expense.
- Whether backlog converts to sales on schedule despite project delays and supply-chain disruption.
- Developments in the class action, COVID-19-related risks, and any indicators of additional goodwill, intangible-asset or property impairment.