Interface, Inc. — Q1 2017 Form 10-Q
Reporting period: 13 weeks ended April 2, 2017; comparative period was the 13 weeks ended April 3, 2016. Financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $221.1 | $222.6 | Down 0.7% |
| Gross profit / margin | $87.8 / 39.7% | $86.6 / 38.9% | Margin up 0.8 percentage points |
| Operating income / margin | $15.3 / 6.9% | $21.0 / 9.4% | Down 27.1% |
| Net income | $8.5 | $12.9 | Down 33.7% |
| Diluted EPS | $0.13 | $0.20 | Down $0.07 |
| Cash from operations | $7.4 | $0.3 | Up $7.1 |
| Capital expenditures | $8.5 | $4.5 | Up $4.0 |
Gross-margin improvement reflected lower yarn costs and manufacturing productivity gains. Operating income and earnings fell despite that improvement, principally because Q1 2017 included $7.3 million of restructuring and asset impairment charges.
Cash, debt and liquidity
- Cash was $80.0 at April 2, down $85.6 from January 1. Operating cash flow was positive, but cash used for investing and financing totaled $95.7, including $50.5 of debt repayments, $31.1 of share repurchases, $8.5 of capital expenditures and $3.8 of dividends.
- Debt on the balance sheet was approximately $223.0, including $15.0 current and $208.0 long-term. Facility borrowings were $181.3 of term loans and $41.8 of revolver borrowings; the weighted-average rate was 2.5%. The facility matures in October 2019.
- The company reported $205.6 of additional borrowing capacity under its syndicated facility and another $9.8 available under other subsidiary credit lines. It was in compliance with facility covenants and expected to remain so for the foreseeable future.
- Working capital was $245.6 (current assets of $401.2 less current liabilities of $155.6). Inventory increased $21.6 from year-end to $177.7.
Operating trends and material changes
- Reported sales declined $1.5; currency movements reduced the year-over-year comparison by approximately $2.3. Excluding that impact, sales were modestly higher.
- Americas sales rose 1%, led by non-corporate office markets, government and hospitality; corporate office declined. Europe sales fell 3% in reported dollars but increased nearly 3% in local currency. Asia-Pacific sales fell 2.5%, including an 11% decline in Asia, partly offset by Australia.
- FLOR residential sales rose 7%, supported by web sales. The company launched a luxury vinyl tile offering in the Americas.
- SG&A was $65.2, down 0.7%; higher incentive compensation and selling costs, including costs related to the LVT rollout, were offset by centralized-function and restructuring savings.
- Cash and total assets declined from year-end, while long-term debt fell by $47.3. Share repurchases included 1.6 million shares at a weighted-average $19.36, completing the prior $50 million program.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management expected cost of sales as a percentage of sales to rise during the remainder of 2017, citing expected raw-material price increases from Q2 and the loss of higher-margin FLOR retail sales following store closures.
- The ongoing restructuring plan includes closing FLOR headquarters and most FLOR retail stores, workforce reductions and asset write-downs. Q1 charges were $3.4 million of lease exit costs, $3.3 million of impairments and $0.6 million of severance. Cumulative charges were $27.1 million through Q1; $10.4 million of workforce and lease-exit costs remained in the disclosed activity summary.
- On April 26, 2017, the company authorized a new share repurchase program of up to $100 million, subject to an amendment to the syndicated credit facility permitting the full amount. The program has no stated expiration date.
- Variable-rate debt exposes the company to interest-rate changes; foreign exchange movements affect reported sales and financial instruments. Management’s sensitivity analysis estimated that a 10% currency-rate movement would change the fair value of financial instruments by a decrease of $8.5 million or an increase of $10.4 million, respectively; management cautioned this does not represent actual net exposure.
- Accrued unrecognized tax benefits were approximately $28.2 million at quarter-end. Management reported no material change in risk factors, no material control changes, and effective disclosure controls. Ordinary-course legal proceedings were not required to be disclosed in detail.
Important facts for investors to verify
- Whether raw-material inflation and the FLOR closures cause the anticipated gross-margin pressure, and whether restructuring produces expected savings.
- Progress in Asia-Pacific and corporate-office markets, and the durability of Americas growth, FLOR web sales and the new LVT offering.
- Facility covenant headroom and the required credit-facility amendment for the new $100 million repurchase authorization.
- Inventory growth, cash conversion and capital spending relative to operating cash flow.
- The timing and cash costs of remaining restructuring actions, as well as the resolution and potential cash impact of unrecognized tax benefits.