Business Context and Reporting Period
Company: Interface, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 28, 2008
Business Overview: Interface operates primarily through two reportable segments: Modular Carpet (including InterfaceFLOR, Heuga, and FLOR) and Bentley Prince Street (broadloom, modular carpet, and area rugs). The company previously operated a Specialty Products segment (Pandel, Inc.), which was sold in March 2007. Results for the Fabrics Group and Re:Source dealer businesses are reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 28, 2008 |
Three Months Ended Sept 30, 2007 |
Nine Months Ended Sept 28, 2008 |
Nine Months Ended Sept 30, 2007 |
|---|---|---|---|---|
| Net Sales | $278,423 | $279,471 | $835,164 | $787,925 |
| Gross Profit | $94,917 | $97,929 | $294,476 | $273,382 |
| Operating Income | $31,022 | $34,750 | $95,429 | $89,951 |
| Net Income (Loss) | $8,430 | $8,556 | $38,428 | $(31,062) |
| Diluted EPS | $0.14 | $0.14 | $0.62 | $(0.50) |
| Cash from Operations (9mo) | $35,594 (2008) vs $42,058 (2007) | |||
| Cash and Equivalents | $85,521 (as of Sept 28, 2008) | |||
| Total Debt | $310,000 (Senior Notes + Senior Subordinated Notes) |
Margins (Nine Months 2008): Gross Margin was 35.3%; Operating Margin was 11.4%.
Material Changes vs. Prior Period
- Revenue: Net sales for the nine months ended September 28, 2008, increased 6.0% to $835.2 million compared to $787.9 million in the prior year. This growth was driven by an 8.1% increase in the Modular Carpet segment, offset by a 4.7% decline in the Bentley Prince Street segment. Currency fluctuations positively impacted sales by approximately 3%.
- Profitability: Net income for the nine months ended September 28, 2008, was $38.4 million, a significant improvement from a net loss of $31.1 million in the same period in 2007. The 2007 loss was heavily influenced by impairment charges and losses on the disposal of the Fabrics Group and Pandel, Inc. businesses.
- Discontinued Operations: The company recorded a loss from discontinued operations of $5.2 million for both the three-month and nine-month periods ended September 28, 2008. This includes a $4.2 million after-tax charge related to a reserve against a contingent purchase price from the 2007 sale of the Fabrics Group, which was deemed less than probable to be received.
- Cost Structure: Cost of sales increased 5.1% year-over-year for the nine-month period, primarily due to higher product and labor costs and currency translation effects. Selling, General, and Administrative (SG&A) expenses increased 9.6%, driven by marketing investments and currency translation, partially offset by lower incentive compensation.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The $4.2 million charge related to the Fabrics Group earn-out reserve and a $0.9 million charge for asset write-downs in discontinued operations were significant non-recurring items impacting the current period's net income.
- Liquidity and Capital Resources: As of September 28, 2008, the company held $85.5 million in cash and cash equivalents. It had no borrowings outstanding under its domestic revolving credit facility (with $65.6 million available) or its European facility (with approximately $30.7 million available). The company repurchased approximately $19.4 million of its 10.375% Senior Notes subsequent to the quarter end.
- Risk Factors: Management highlighted the risk of the worldwide financial and credit crisis, noting that reduced liquidity and credit availability could lead to an economic recession, adversely affecting customer demand and the company's ability to access capital markets.
- Outlook: The filing does not contain specific forward-looking financial guidance for the full year 2008 beyond the standard caution regarding economic conditions and the impact of the financial crisis.
Key Facts for Investor Verification
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $5.2 million loss from discontinued operations, which included a one-time reserve charge.
- Currency Sensitivity: Assess the impact of foreign currency exchange rates, which provided a 3% positive boost to sales but also increased costs due to the strength of the Euro against the U.S. dollar.
- Debt Obligations: Confirm the status of the $310 million in long-term notes (Senior Notes due 2010 and Senior Subordinated Notes due 2014) and the recent open-market repurchase of $19.4 million of Senior Notes.
- Segment Performance: Monitor the divergence between the growing Modular Carpet segment (up 8.1% YTD) and the declining Bentley Prince Street segment (down 4.7% YTD).
- Working Capital: Review the $39.5 million cash outflow for working capital needs (inventory and payables) during the nine-month period as a potential indicator of future cash flow pressure.