Interface, Inc. — Q3 2012 Form 10-Q
Business context and period. This unaudited report covers the quarter ended September 30, 2012, and the first nine months of fiscal 2012, compared with the corresponding 2011 periods. Following the sale of Bentley Prince Street, Modular Carpet (Interface, Heuga and FLOR) was the company’s sole reportable segment. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales from continuing operations | $242.9 | $248.7 | $682.4 | $708.6 |
| Gross profit / margin | $82.9 / 34.1% | $87.2 / 35.1% | $232.1 / 34.0% | $254.9 / 36.0% |
| Operating income / margin | $23.1 / 9.5% | $24.6 / 9.9% | $45.9 / 6.7% | $70.8 / 10.0% |
| Continuing-operations income | $11.1 | $11.7 | $15.5 | $33.3 |
| Net income (loss) | $(5.8) | $12.2 | $(1.4) | $34.8 |
| Diluted EPS | $(0.09) | $0.19 | $(0.02) | $0.53 |
- Sales declined 2.4% in Q3 and 3.7% year to date. Currency movements reduced sales by approximately $6 million and $16 million, respectively. Q3 Americas sales rose 6%; Europe declined 8% in U.S. dollars, and Asia-Pacific fell 19%, significantly affected by the Australia fire.
- Gross margin narrowed as a share of sales, reflecting raw-material cost increases of 2–3% and lower fixed-cost absorption, including disruption at the Australian facility. SG&A declined 7.3% in Q3 and 8.7% year to date, reflecting cost controls, restructuring savings, currency and lower incentive compensation.
- Discontinued operations, including sale-related losses and costs, generated a Q3 after-tax loss of $16.8 million and a nine-month loss of $17.0 million; the comparable 2011 periods recorded income of $0.5 million and $1.5 million. Bentley Prince Street was sold in Q3 for a stated purchase price of $33.4 million after working-capital and other adjustments; the cash-flow statement reports $32.2 million of net sale proceeds.
Cash, debt and liquidity
- Nine-month operating cash flow was $43.9 million, versus $10.0 million in 2011. Investing activities provided $11.8 million, including sale proceeds and $10.0 million of insurance proceeds; capital expenditures were $28.8 million. Financing used $15.5 million, including redemption of $11.5 million of subordinated notes and $4.3 million in dividends.
- Cash was $91.7 million at September 30, up from $50.6 million at January 1. Current assets were $409.5 million and current liabilities $151.4 million.
- Reported senior notes were $283.1 million. The company had no borrowings on its domestic or European credit facilities; $3.9 million of letters of credit were outstanding under the domestic facility. Additional borrowing capacity was $60.5 million domestically, approximately $25.7 million in Europe, and $18.9 million under other non-U.S. lines. Management reported covenant compliance and expected to remain compliant for the foreseeable future.
Outlook, commentary and key risks
- No numerical revenue or earnings guidance is provided. Management said supply-chain adjustments for Australia were progressing and expected restructuring savings and improved supply-chain execution to support gross-margin improvement.
- The July fire rendered the Picton production line inoperable. Management estimated it reduced Q3 sales by approximately $7–8 million. The site represented about 7% of annual production, 10% of sales and 13% of operating income. Production was shifted to other facilities; shipment delays affected Q3 results.
- Fire-related costs totaled $19.3 million through September 30, including $9.8 million of fixed-asset impairment. The company had received $10.0 million from its insurer and recorded a further $9.3 million insurance receivable for recoverable costs. It had not recorded a claim for lost profits; recovery remained subject to further information and becoming probable.
- Other notable items include $17.1 million of nine-month restructuring and asset-impairment charges, primarily related to ceasing operations at Shelf, England, and a $1.0 million Q3 fire-related loss not considered recoverable. Risks cited include commercial-interiors market conditions, currency movements, raw-material costs, demand weakness and execution of the Australia recovery. The filing says ordinary-course legal proceedings did not require disclosure; no material change to internal controls was reported.
Investor verification points
- Confirm continuing-operations sales and margins separately from Bentley Prince Street discontinued results and disposal costs.
- Track whether Australian production and shipments normalize, and whether the estimated $7–8 million sales impact and insurance recoveries are ultimately confirmed.
- Assess realization of restructuring savings against severance, exit costs and impairment charges.
- Review cash generation excluding sale and insurance proceeds, capital spending, debt maturities and available borrowing capacity.
- Monitor regional demand, foreign-exchange effects, raw-material inflation and compliance with credit-facility covenants.