TILE

Business Context and Reporting Period

Company: Interface, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 5, 2009
Business Overview: Interface, Inc. operates in two primary reportable segments: Modular Carpet (including InterfaceFLOR, Heuga, and FLOR) and Bentley Prince Street (broadloom, modular carpet, and area rugs). The company reported results for the first quarter of 2009, which included the classification of its former Fabrics Group business as discontinued operations.

Key Financial Metrics

Note: Total Debt includes $141.8 million in current portion of long-term debt and $135.0 million in Senior Subordinated Notes.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 23.9% year-over-year. The Modular Carpet segment fell 21.9% and the Bentley Prince Street segment fell 35.9%. Management attributed this to the worldwide financial crisis, reduced construction activity, and unfavorable currency exchange rates (a 9% negative impact).
• Profitability Reversal: The company swung from a net income of $14.1 million in Q1 2008 to a net loss of $4.2 million in Q1 2009. Operating income dropped significantly due to lower sales volumes and restructuring charges.
• Restructuring Charges: A pre-tax restructuring charge of $5.7 million was recorded in Q1 2009 (compared to $0 in Q1 2008). This was part of a new plan to reduce the workforce by approximately 290 employees and exit certain facilities, expected to yield $17 million in annualized savings.
• Discontinued Operations: The company reported a loss of $0.7 million from discontinued operations (Fabrics Group) in Q1 2009, compared to no activity in the prior year.
• Debt Repurchase: The company used $10.3 million in cash to repurchase a portion of its 10.375% Senior Notes during the quarter.

Guidance, Outlook, and Risks

• Liquidity and Debt Maturity: The company faces a significant maturity of $141.8 million in 10.375% Senior Notes due February 1, 2010. Management plans to refinance or repay this using available cash ($54.9 million), expected operating cash flow ($35-$50 million for 2009), and credit facilities.
• Refinancing Risk: Management noted that while they believe refinancing is possible, the unprecedented credit crisis may force them to accept less favorable terms or utilize cash reserves and credit lines, potentially impacting future liquidity.
• Cost Reduction: Restructuring initiatives from late 2008 and early 2009 are expected to generate over $47 million in total savings for 2009. Management anticipates cost of sales and SG&A as a percentage of net sales will improve as these initiatives are fully realized.
• Subsequent Events: On April 24, 2009, the European credit facility was expanded to €32 million. On May 14, 2009, the domestic revolving credit facility was amended to allow for up to $175 million in new senior notes to refinance the 2010 debt, though interest rates and fees were increased.

Investor Verification Checklist

• Debt Refinancing Status: Verify the company's progress in refinancing the $141.8 million Senior Notes due February 2010, given the tight credit markets.
• Restructuring Execution: Monitor the realization of the projected $47 million in annualized cost savings from the 2008 and 2009 restructuring plans.
• Currency Impact: Assess the ongoing impact of the strengthening U.S. Dollar on European sales, which reported a 31.1% decline in Q1 2009.
• Credit Facility Covenants: Review the amended terms of the domestic and European credit facilities, specifically the increased interest rates and stricter covenants (e.g., fixed charge coverage ratio).
• Discontinued Operations: Confirm the final disposition and remaining liabilities associated with the Fabrics Group segment.