Interface, Inc. — Q1 2018 Form 10-Q
Business context and period. The quarter ended April 1, 2018, comprised 13 weeks. Interface sells carpet, modular resilient flooring and related products, with a smaller installation business. Results are unaudited and interim results are not necessarily indicative of the full year.
Financial performance
Amounts below are in millions, except per-share data and percentages.
- Revenue: $240.6, up 8.8% from $221.1. Currency translation added approximately $9.8, or 4.4%, to the comparison. Sales increased 3% in the Americas, 19% in Europe (4% in local currency), and 16% in Asia-Pacific.
- Profit and margins: Gross profit was $93.6; gross margin was 38.9%, versus 39.7%. Operating income was $23.0, with a 9.6% operating margin versus 7.1%. Net income was $15.1 versus $8.5; diluted EPS was $0.25 versus $0.13.
- Costs: Cost of sales rose 10.3%, faster than revenue, reflecting higher raw-material costs and the loss of higher-margin FLOR retail sales, partly offset by production efficiencies. SG&A rose 9.1% but remained 29.3% of sales.
- Cash flow: Operating cash flow was negative $5.8, versus positive $6.1 a year earlier. Working-capital outflows included $17.2 for inventory, $16.3 for prepaid and other current assets, and $7.1 from lower accounts payable and accrued expenses. Capital expenditures were $7.4.
- Liquidity and debt: Cash was $67.9, down $19.2 during the quarter. Long-term debt, including current maturities, was $243.9 at quarter-end. Facility borrowings comprised $166.3 of term loans and $77.6 of revolving loans; the weighted-average rate was 3.0%. The company reported $166.7 of additional facility borrowing capacity, plus $9.9 available under other lines, and was in compliance with facility covenants.
- Other balance-sheet items: Total assets were $815.5; current assets were $441.3 and current liabilities $169.6. Inventory increased to $197.4 from $177.9 at year-end. The filing reported total shareholders’ equity of $338.4.
Material changes versus prior year
- Revenue growth reflected new luxury vinyl tile offerings across regions, growth in Asia, and favorable foreign exchange. In the Americas, LVT growth more than offset continued effects of FLOR retail-store closures.
- Net income benefited from the lower U.S. statutory tax rate under the Tax Cuts and Jobs Act. The effective tax rate was 26%, compared with 33%.
- Q1 2017 included $7.3 of restructuring and asset-impairment charges, primarily associated with closing most FLOR retail stores; there were no such charges in Q1 2018.
- Interest expense increased to $2.1 from $1.6, attributed to higher average borrowing rates. Share repurchases totaled $14.5 for 615,000 shares, and dividends paid were $3.9.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management cited commercial-interiors economic conditions and the risk factors in the 2017 Form 10-K, with no material risk-factor changes reported for the quarter.
- Management said it expected to remain in compliance with credit-facility covenants for the foreseeable future. Variable-rate debt exposes interest expense to changes in benchmark rates; the company had a $100 million interest-rate swap notional amount.
- The company was still evaluating the Tax Act’s effects; provisional estimates could change as further analysis and guidance become available. It accrued approximately $29.0 for unrecognized tax benefits.
- Q1 2018 operating cash use and the increase in inventory and prepaid assets were notable working-capital developments. Management attributed the cash decline principally to share repurchases, dividends, debt amortization, and capital spending, partly offset by new borrowing.
- Adoption of the new revenue standard had no significant impact at adoption. The company stated that upcoming lease-accounting adoption would put assets and liabilities for operating leases on the balance sheet; its impact was still under evaluation.
Important facts for investors to verify
- Track whether revenue growth continues excluding the approximately $9.8 million favorable currency effect, and whether LVT demand persists by region.
- Monitor gross margin against raw-material costs, product mix, and the absence of FLOR’s higher-margin retail sales.
- Assess whether working-capital investment reverses and operating cash flow improves.
- Confirm debt levels, borrowing capacity, variable-rate exposure, and covenant compliance in subsequent filings.
- Review updates to provisional Tax Act estimates and the approximately $29.0 million unrecognized-tax-benefit balance.
- Reconcile the MD&A’s rounded prior-year sales reference of $222.1 million with the financial statements’ reported $221.1 million.