Interface, Inc. — Q1 2020 Form 10-Q
Business context and period: Interface designs and manufactures flooring products and related services. This unaudited quarter ended April 5, 2020; fiscal Q1 2020 comprised 14 weeks versus 13 weeks in the prior-year quarter.
Financial performance and position
| Metric | Q1 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $288.2 million | $297.7 million |
| Gross profit / margin | $114.3 million / 39.7% | $116.5 million / 39.1% |
| SG&A | $87.7 million | $100.1 million |
| Operating income (loss) | $(93.5) million | $16.4 million |
| Net income (loss) | $(102.2) million | $7.1 million |
| Diluted EPS | $(1.75) | $0.12 |
| Cash used in operations | $15.7 million | $11.7 million |
| Capital expenditures | $22.2 million | $20.0 million |
Net sales fell 3.2% year over year despite the additional fiscal week; currency movements reduced sales by approximately $4.9 million. Gross margin improved 0.6 percentage points, while SG&A declined 12.4%. Results included a $121.3 million goodwill and intangible-asset impairment charge ($116.5 million goodwill and $4.8 million trademarks and trade names), principally related to expected COVID-19 effects on Europe and Asia-Pacific. Excluding that charge, the filing does not state a non-GAAP earnings result.
Operating cash outflow reflected working-capital uses, including lower accounts payable and accrued expenses and inventory increases, partly offset by collections of receivables. Financing activities provided $32.5 million, including $54.0 million of new borrowings and $19.9 million of debt repayments. Cash declined $8.7 million to $72.7 million.
At April 5, cash was $72.7 million; balance-sheet debt was $627.3 million, comprising $30.9 million current and $596.4 million long-term. The credit facility had $570.7 million of term loans and $62.4 million of revolver borrowings outstanding, plus $1.6 million of letters of credit; weighted-average borrowing rate was 2.91%. Additional facility capacity was $235.9 million, with another $9.0 million available under other lines. The company reported compliance with facility covenants and said liquidity should cover obligations for the next 12 months.
Material changes and operating developments
- Regional sales: Americas declined 1.6% to $158.1 million; Europe increased 1.8% to $94.7 million; Asia-Pacific declined 19.6% to $35.4 million. China sales fell 55% amid shutdowns.
- COVID-19 began affecting the Americas and Europe late in the quarter and hit Asia-Pacific earlier. The China plant temporarily closed in late January and reopened February 9; U.S. production was temporarily suspended in March and April, with reduced production or shifts reported at other facilities.
- Foreign-currency translation and cash-flow hedges contributed to comprehensive loss; foreign-currency translation loss was $15.2 million and cash-flow hedge loss was $6.1 million.
- The company changed its share-award forfeiture accounting to recognize forfeitures as they occur; a $1.4 million cumulative impact was recorded in Q1 SG&A. Prior-year presentation was also reclassified to move certain customer-service and other costs from cost of sales to SG&A.
- Management declared $3.8 million of dividends in March, payable in Q2. The filing reports no dividends paid during Q1.
Outlook, risks, and unusual items
- Management expected COVID-19 to affect Q2 and Q3 more severely than Q1, anticipated revenue and operating-income declines in those quarters and potentially later periods, and said the full-year impact could not be reliably estimated. No specific revenue or earnings guidance was provided.
- Planned cost actions included voluntary separations, furloughs, pay and time reductions, involuntary separations, and lower discretionary spending. The company suspended merit increases and matching contributions to its 401(k) and Non-Qualified Savings Plan. It expected second-quarter one-time charges, with amounts not specified.
- Management projected 2020 capital expenditures of $45–$50 million. Backlog was approximately $202.7 million as of April 12, up from $177.8 million as of February 9, partly because projects and installations were delayed.
- COVID-19 creates risks to demand, supply and distribution, collections, liquidity, debt-covenant compliance, refinancing, and asset values. A prolonged downturn could cause further impairment charges. The company identified uncertainty around pandemic duration and recovery assumptions in its impairment testing.
- The 2019 restructuring plan targeted approximately $6.0 million of annualized savings and was expected to be completed in 2020; the combined 2018 and 2019 restructuring reserve was $8.4 million at quarter-end. The 2018 plan’s anticipated savings had largely been redeployed to growth initiatives.
- The company disclosed a voluntary report to OFAC concerning a non-U.S. affiliate’s shipment of carpet samples to a private company claiming potential Iranian airport requirements. No payment was received, and the company said it did not fulfill orders and did not intend further business with the company or, for the foreseeable future, Iran.
Important facts for investors to verify
- Whether sales, operating performance, and cash generation recovered as pandemic restrictions and project delays evolved, particularly in Q2 and Q3.
- Whether the company maintained credit-facility covenant compliance and adequate liquidity as earnings and cash flows changed.
- Whether further goodwill, intangible-asset, or property impairment charges, restructuring costs, or other COVID-related charges were recorded.
- Whether the $45–$50 million capital-expenditure plan and stated cost-saving actions were achieved, and how backlog converted into sales.
- Any developments in the OFAC matter, tax exposures, or other legal proceedings; the filing does not provide a clear outcome for these matters.