Interface, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2022 (13 and 26 weeks, respectively); unaudited. Comparisons are with the corresponding 2021 periods.
Business context and results
Interface sells flooring products and related installation services through its Americas (AMS) and Europe, Africa, Asia and Australia (EAAA) segments. Management attributed higher sales mainly to recovering commercial markets, higher volume and pricing, including demand in corporate office, education, healthcare and retail.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $346.6 million | $294.8 million | $634.6 million | $548.0 million |
| Gross profit | $116.7 million | $109.0 million | $223.5 million | $205.0 million |
| Operating income | $34.5 million | $29.2 million | $61.9 million | $46.1 million |
| Net income | $16.8 million | $15.5 million | $30.1 million | $22.4 million |
| Diluted EPS | $0.28 | $0.26 | $0.51 | $0.38 |
| Gross margin | 33.7% | 37.0% | 35.2% | 37.4% |
| Operating margin | 10.0% | 9.9% | 9.7% | 8.4% |
| Net margin | 4.9% | 5.2% | 4.6% | 4.1% |
Financial position and cash flow
- Cash and liquidity: Cash was $91.7 million at July 3, versus $97.3 million at January 2. Current assets were $626.7 million and current liabilities $249.4 million.
- Debt: Total principal debt was $551.8 million: $251.8 million under the syndicated facility and $300.0 million of 5.50% senior notes due 2028. Balance-sheet debt, net of issuance costs and current portion, was $530.7 million long term, plus $14.7 million current. The company reported $253.8 million of additional facility capacity and $4.0 million available under other lines; it was in covenant compliance.
- Cash flow, first half: Operating activities used $12.7 million, compared with $35.1 million provided in 2021. Investing used $9.1 million, principally capital expenditures; financing provided $21.5 million. Cash declined $5.6 million, including a $5.3 million adverse effect from exchange rates.
- Working capital: Inventory rose $53.0 million to $318.1 million from January 2, reflecting demand and inventory build as well as higher input and freight costs. Management linked the operating cash outflow primarily to working-capital needs and accrued bonus payments.
Material changes and segment performance
- Q2 sales increased 17.6%; first-half sales increased 15.8%. Currency translation reduced sales by approximately $15.5 million in Q2 and $23.4 million in the first half.
- Cost of sales grew faster than revenue: 23.7% in Q2 and 19.8% in the first half. Inflation in raw materials, freight and labor reduced gross margin by 3.3 percentage points in Q2 and 2.2 points in the first half year over year.
- AMS sales rose 32.0% in Q2 and 28.1% in the first half; segment adjusted operating income (AOI) increased 34.6% and 50.0%, respectively. EAAA sales rose 1.2% and 2.6%, while AOI increased 1.7% and 9.3%. EAAA results faced substantial adverse currency effects and China lockdown-related disruption.
- The first-half effective tax rate was 35.0%, versus 25.7% in 2021, primarily reflecting the prior-year nonrecurring favorable tax-benefit change and other unfavorable tax items, including nondeductible Thailand closure charges.
Outlook, risks and unusual items
- Outlook: Management anticipated a sequential revenue decline in Q3 2022 versus Q2. It expected supply-chain and manufacturing challenges to continue into the second half, including raw-material and labor cost increases, possible shortages and shipping delays. No specific full-year revenue or earnings guidance was provided in the filing text.
- Operating risks: COVID-19, inflation, labor and material shortages, shipping disruption, and geopolitical uncertainty could affect demand, costs, production and cash flow. Lockdowns in parts of China adversely affected China sales by approximately 15% for the first six months versus 2021. The company said its Russia and Ukraine business activity was not material, but disclosed approximately $2.2 million of assets in Russia, including $1.7 million cash.
- Restructuring: The 2021 plan included closing the Thailand manufacturing facility, with approximately $5.6 million of cumulative charges incurred by July 3 and an estimated $6.5 million total. The company recorded a $2.1 million inventory write-down in the first half. It expected $3–$4 million of cash expenditures, completion in fiscal 2022 and annualized savings of approximately $1.7 million.
- Capital returns and commitments: A new $100 million share-repurchase authorization was adopted in Q2; 415,223 shares were repurchased for $5.6 million at a weighted-average $13.44 per share. A fiberglass procurement commitment of approximately $22.5 million extends through 2026, with about $4.5 million expected to be purchased within 12 months.
- Legal matters: The former CEO appealed a judgment for the company. A putative class-action complaint related to a previously concluded SEC investigation remained pending; the court denied the company’s motion to dismiss, and the company stated it intended to defend itself. The filing provides no clear quantified exposure for these matters.
- Management assessment: The company said liquidity should be sufficient for obligations over the next 12 months and anticipated covenant compliance. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether pricing and sales growth can offset continued inflation and restore gross margins.
- Whether inventory levels convert to sales and operating cash flow, and whether working-capital needs require further borrowing.
- Actual Q3 revenue relative to management’s expected sequential decline, including the impact of China restrictions and foreign-exchange movements.
- Progress, cash costs and realized savings from the Thailand closure and restructuring plan.
- Debt, borrowing capacity and covenant compliance as interest rates and operating conditions change.
- Developments and any quantified exposure in the pending litigation, along with the effects of European energy and supply risks related to the Russia-Ukraine conflict.