Interface, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the periods ended July 1, 2012. Financial statements are unaudited. Amounts below are in millions unless otherwise noted.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $243.5 | $229.5 | $453.9 | $439.6 |
| Gross profit / margin | $86.2 / 35.4% | $78.7 / 34.3% | $157.5 / 34.7% | $149.2 / 33.9% |
| Operating income / margin | $21.8 / 9.0% | $22.5 / 9.8% | $35.8 / 7.9% | $22.8 / 5.2% |
| Net income | $11.0 | $10.3 | $18.0 | $4.3 |
| Diluted EPS | $0.17 | $0.16 | $0.27 | $0.07 |
- Q2 sales increased 6.1%; six-month sales increased 3.3%. Management said currency translation had no significant impact on either comparison.
- Gross margin improved in both periods, with management citing higher production-volume absorption and lean-manufacturing benefits. Q2 operating income nevertheless declined as SG&A rose 14.6%, including sales and marketing spending on product launches, FLOR stores, staffing and marketing initiatives.
- Six-month operating income improved year over year, but the comparison benefited from the absence of the prior-year $16.3 million restructuring and asset impairment charge. 2013 six-month results also included a $1.9 million tax benefit from tax-agreement resolutions.
Cash flow, liquidity and debt
- Cash from operating activities was negative $9.0 million for the first six months, versus positive $23.4 million a year earlier. Cash used in investing was $15.6 million, including $33.8 million of capital expenditures, partly offset by $19.8 million of insurance proceeds. Cash used in financing was $2.1 million, including $3.3 million of dividends.
- Cash fell to $61.4 million at June 30, 2013, from $90.5 million at December 30, 2012. Working-capital uses included $19.7 million for higher inventory, $14.6 million for prepaid expenses and other current assets, and $14.3 million from lower accounts payable and accrued expenses.
- Total current assets were $403.5 million and current liabilities $148.6 million. Debt included $275.0 million of 7.625% senior notes due 2018 and $8.1 million of 11.375% senior secured notes due 2013; the latter was reported as current debt. Interest expense was $5.9 million in Q2 and $12.1 million for six months.
- No borrowings were outstanding under the domestic or European credit facilities at quarter-end. Available additional borrowing capacity was $69.0 million domestically, approximately $26.0 million in Europe, and $17.7 million under other non-U.S. lines. Management reported compliance with domestic facility covenants and expected continued compliance.
Business changes, outlook and risks
- Q2 sales by geography: Americas rose 11.6%, Europe declined 3.2% (5.3% in local currency), and Asia-Pacific rose 4.1%. Six-month changes were +10.4%, -6.1% (-7.5% in local currency), and -1.8%, respectively. Management attributed European weakness to economic uncertainty; Americas growth was led by corporate office and residential/FLOR activity.
- The July 2012 fire at the Picton, Australia facility continued to affect the region. The company reported $52.4 million of incurred fire-related costs, $40.5 million of insurance reimbursements received, and an $11.9 million receivable at June 30. It received another $13.8 million after quarter-end, on July 25, 2013. A separate approximately $5.2 million claim for lost profits had not been recorded as a receivable. A replacement Australian facility was expected to become operational in late 2013, with commissioning expected in Q4.
- Management expected SG&A to decline as a percentage of sales in the second half of 2013 as sales and marketing initiatives begin to yield benefits. The filing provides no specific revenue or earnings guidance; interim results are not necessarily indicative of full-year results.
- Other risks and uncertainties include commercial-interiors market conditions, continued European weakness, execution and supply-chain effects related to the Australian facility, foreign-currency movements, and interest-rate exposure. The company reported a $12.9 million year-to-date foreign-currency translation loss. It had approximately $23.0 million accrued for unrecognized tax benefits. Risk factors were unchanged from the 2012 Form 10-K; disclosed legal proceedings were described as ordinary-course matters not requiring specific disclosure.
- Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow improves as inventory and other working-capital uses unwind, and how capital spending compares with cash generation.
- Actual recovery and timing of the remaining fire-related insurance receivable and the unrecorded lost-profit claim; progress and cost of commissioning the replacement facility.
- Whether Americas growth and sales initiatives translate into revenue and margin gains sufficient to offset higher SG&A, and whether European demand stabilizes.
- Repayment or refinancing of the $8.1 million secured notes due 2013, alongside the ongoing cost and maturity profile of the 2018 senior notes.
- Effects of the $1.9 million tax-resolution benefit on comparisons, and any subsequent changes in the $23.0 million unrecognized-tax-benefit accrual.