Business context and reporting period
Interface, Inc. (Nasdaq: TILE) designs and sells flooring products and related installation services. This unaudited Form 10-Q covers the quarter ended October 3, 2021, and the first nine months of fiscal 2021. Both quarterly comparison periods were 13 weeks; the 2021 and 2020 nine-month periods were 39 and 40 weeks, respectively. The company reports two segments: Americas (AMS) and Europe, Africa, Asia and Australia (EAAA).
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $312.7m | $278.6m | $860.8m | $826.3m |
| Gross profit / margin | $106.3m / 34.0% | $102.2m / 36.7% | $311.4m / 36.2% | $313.8m / 38.0% |
| Operating income (loss) | $24.8m | $15.9m | $70.9m | $(60.2)m |
| Net income (loss) | $11.0m | $5.9m | $33.4m | $(91.5)m |
| Diluted EPS | $0.19 | $0.10 | $0.57 | $(1.56) |
- Q3 sales rose 12.2%; nine-month sales rose 4.2%. Nine-month 2021 sales benefited by $27.5m from currency translation. The 2021 nine-month period had one fewer week.
- Gross margin narrowed to 34.0% in Q3 and 36.2% year to date, as raw-material, freight and labor costs and supply-chain disruption increased costs.
- Q3 SG&A fell 11.8% to $77.7m; nine-month SG&A fell 7.4% to $236.9m. The company cited lower prior-year severance and SEC-related legal costs, partly offset by higher performance-based compensation.
- Q3 segment sales/AOI: AMS $176.8m/$21.6m, up 23.7%/6.5%; EAAA $135.9m/$8.6m, essentially flat sales and AOI up 9.8%. Nine-month AMS AOI fell 19.4% to $54.6m, while EAAA AOI rose 54.8% to $26.6m.
- Nine-month operating cash flow was $64.1m, down from $97.3m; capital expenditures were $17.4m. Cash declined $10.2m from year-end to $92.8m, including $53.1m of financing cash outflows.
- At October 3, cash was $92.8m and total debt was $532.6m, comprising $232.6m of term loans and $300.0m of 5.50% senior notes due 2028. There were no revolving borrowings and $298.4m of available capacity under the syndicated facility. Current assets were $535.7m and current liabilities $234.8m.
Changes, outlook, risks and unusual items
- Compared with 2020, nine-month results improved from a loss to a profit, principally because 2020 included a $121.3m goodwill and intangible-asset impairment. No new goodwill or intangible impairment indicators were identified in the first nine months of 2021.
- COVID-19 effects on supply and manufacturing persisted, including raw-material shortages and inflation, shipping delays, higher freight costs and labor shortages, particularly in the United States. Management said these pressures could constrain timely production and shipments and further weigh on margins.
- Management anticipated Q4 2021 revenue growth compared with Q4 2020, but expected continued supply-chain cost increases and disruption. It provided no specific full-year revenue or earnings forecast in the supplied filing text. Backlog was approximately $244.0m as of October 24, 2021, versus $177.7m as of February 7, 2021.
- A restructuring plan announced September 8 targets approximately 188 employee reductions and closure of the Thailand manufacturing facility by the end of Q1 2022. Expected pre-tax charges are $4m–$5m, future cash costs $3m–$4m, and annualized savings approximately $1.7m, with completion expected in fiscal 2022.
- The company said it was in compliance with credit-facility covenants and expected sufficient liquidity for the next 12 months. It warned that prolonged COVID-19 effects, customer spending and project delays, supply availability and costs, and operations could materially affect results and cash flows.
- Other notable items: interest expense increased to $7.7m in Q3 and $22.3m year to date, partly due to senior-note interest and amortization of terminated swap losses. Two legal matters remain pending: a former CEO lawsuit and a putative class action related to the concluded SEC investigation; the company disputes the claims and intends to defend itself.
Important facts for investors to verify
- Whether supply constraints, input-cost inflation and labor shortages continue to reduce gross margins or impede fulfillment.
- Whether Q4 revenue growth and the reported backlog convert into sales, given project timing and customer spending uncertainties.
- Progress, cash costs, expected savings and execution risks for the Thailand closure and workforce restructuring.
- Debt repayment capacity, interest costs and continued compliance with credit-facility covenants.
- Developments in the pending litigation and any resulting financial exposure; the filing text does not provide a clear quantified estimate.