Interface, Inc. (NASDAQ: TILE) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 29, 2019 (52 weeks). This is an annual filing; selected fourth-quarter results are included below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Interface is a global flooring company specializing in modular carpet, luxury vinyl tile (LVT) and rubber flooring. Its 2019 results included nora, the rubber-flooring business acquired in August 2018, for a full year, compared with approximately five months in 2018. Management’s strategy emphasizes growth in resilient flooring and non-corporate-office markets, productivity and cost control, and sustainability.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,343.0 million | $1,179.6 million |
| Gross profit / gross margin | $525.5 million / 39.1% | $424.4 million / 36.0% |
| Operating income / operating margin | $130.9 million / 9.7% | $76.4 million / 6.5% |
| Net income | $79.2 million | $50.3 million |
| Diluted EPS | $1.34 | $0.84 |
| Cash from operations | $141.8 million | $91.8 million |
| Capital expenditures | $74.6 million | $54.9 million |
| Cash, year-end | $81.3 million | $81.0 million |
| Current ratio | 2.1 | 2.5 |
Operating cash flow less capital expenditures was approximately $67.1 million in 2019. The company reported $602.5 million of borrowings under its syndicated facility before unamortized debt issuance costs; balance-sheet debt was $596.2 million after those costs. Cash net of facility borrowings was approximately $521.2 million. The facility had $276.9 million of additional borrowing capacity, alongside $2.2 million of letters of credit. Interest expense was $25.7 million, up from $15.4 million.
Fourth quarter: Net sales were $339.5 million, net income $16.4 million and diluted EPS $0.28, compared with $337.1 million, $6.4 million and $0.11, respectively, in Q4 2018. FY2019 dividends were $0.26 per share.
Material changes versus the prior year
- Sales increased 13.9%; management attributed the rise principally to higher volume and nora’s full-year inclusion, with no material contribution from price changes. Currency movements reduced the year-over-year sales comparison by approximately $26.2 million.
- Sales rose across regions as reported: Americas 11.0%, Europe 23.0% and Asia-Pacific 8.5%. Legacy carpet and LVT sales grew 3.6% in the Americas; legacy European sales grew 2.6% in local currency; legacy Asia-Pacific sales were approximately flat in local currency.
- Gross margin improved to 39.1% from 36.0%, primarily reflecting productivity and the nonrecurrence of the 2018 nora inventory step-up amortization. Operating income improved despite higher SG&A and restructuring charges.
- The effective tax rate was 22.2%, versus 8.6% in 2018, when a $6.7 million tax benefit related to finalizing Tax Act accounting reduced the rate.
- Cash from operations increased to $141.8 million. The company repaid $111.7 million and borrowed $90.0 million under its facility, spent $74.6 million on capital expenditures, repurchased $25.2 million of stock and paid $15.4 million in dividends.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management estimated 2020 capital expenditures of $50–$60 million and interest expense of $24–$25 million, based on then-current debt levels and interest rates.
- A December 2019 restructuring covering approximately 105 employees and two office leases is expected to cost about $9.0 million in cash and generate approximately $6.0 million of annualized savings, partly in 2020 and the balance in 2021. The 2019 restructuring and other charges totaled $12.9 million, including approximately $5.0 million of noncash charges primarily related to insurance assets.
- Backlog was $177.8 million at February 9, 2020, down from $190.4 million a year earlier; the company expected these orders to ship over the following six to nine months. Backlog can fluctuate with project timing and currency movements.
- Key exposures include cyclical commercial construction and renovation demand, competitive and pricing pressure, petroleum-based input costs, reliance on a limited number of synthetic-fiber suppliers and a sole LVT supplier, foreign exchange, and significant debt with variable-rate exposure. A 1 percentage-point increase in effective interest rates was estimated to raise annual interest expense by about $3.3 million; swaps fixed rates on $250 million of term borrowings.
- The company temporarily closed its China manufacturing facility through February 9, 2020 amid the coronavirus outbreak; the duration and financial effect of disruption were not then estimable. Management also cited potential disruption to the LVT supply chain, whose sole supplier’s primary facility is in South Korea.
- The SEC investigation into historical EPS calculations and rounding practices remained ongoing. The company also disclosed a lawsuit by former CEO Jay Gould following his January 2020 termination for cause; the company said it considered the claims without merit. The filing provides no clear estimate of potential financial exposure from either matter.
- Management reported compliance with facility covenants and expected continued compliance. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; goodwill valuation was identified as a critical audit matter. No goodwill impairment was recorded, though the filing noted competitive pressure and share-price volatility could warrant a future write-down.
Important facts for investors to verify
- How much reported growth and margin improvement came from nora, legacy business performance, productivity and nonrecurring purchase-accounting effects.
- Current debt balances, covenant headroom, refinancing plans ahead of the August 2023 facility maturity, and sensitivity to rates and currency changes.
- Whether restructuring savings are realized as projected and whether transformation initiatives improve sales productivity without disrupting customer relationships.
- Updates on the SEC EPS investigation, the former CEO lawsuit, and any resulting costs, sanctions or control findings.
- Effects of China-related disruption and LVT and fiber supplier concentration on production, delivery, sales and cash flow.