Interface, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 28, 2014 (52 weeks). Interface is a global modular carpet and carpet-tile manufacturer; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Interface sells under the Interface and FLOR brands in more than 110 countries. FY2014 sales mix was approximately 57% Americas, 28% Europe and 15% Asia-Pacific. Management is diversifying beyond corporate offices into markets including hospitality, education, healthcare, retail and residential. The former Bentley Prince Street business was sold in 2012 and is reported as discontinued operations. The replacement Minto, Australia facility began operating in January 2014.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,003.9 million | $960.0 million |
| Gross profit / margin | $340.0 million / 33.9% | $341.1 million / 35.5% |
| Operating income / margin | $70.3 million / 7.0% | $95.6 million / 10.0% |
| Net income | $24.8 million | $48.3 million |
| Diluted EPS | $0.37 | $0.73 |
| Cash provided by operations | $46.4 million | $66.6 million |
| Capital expenditures | $38.9 million | $91.9 million |
Calculated operating cash flow less capital expenditures was approximately $7.5 million in 2014, versus negative $25.2 million in 2013; this is a simple calculation, not a company-reported GAAP measure. Fourth-quarter 2014 sales were $272.1 million and net income was $8.1 million, compared with $251.7 million and $15.3 million, respectively, in fourth-quarter 2013.
At year-end, cash was $54.9 million, working capital $240.9 million and the current ratio 2.7. Long-term debt was $263.3 million, all under the syndicated credit facility; shareholders’ equity was $306.6 million. The company reported $183.4 million of additional revolving borrowing availability under that facility and $19.0 million available under other subsidiary credit lines. The FY2014 dividend was $0.14 per share.
Changes, unusual items and management outlook
- Sales grew 4.6% year over year, led by the Americas and Europe; reported regional growth was 5% in each, while Asia-Pacific grew 1%. Currency movements reduced consolidated sales growth by about 1%.
- Profitability weakened despite higher sales: cost of sales rose 7.3%, faster than sales, and gross margin declined 1.6 percentage points. Management attributed much of the cost increase to higher production volumes and first-half start-up inefficiencies at the new Australian facility.
- FY2014 included $12.4 million of restructuring and asset impairment charges, including severance for 100 employee reductions. It also included $12.0 million of debt-retirement expenses, including redemption premiums and write-off of unamortized debt costs.
- Interface redeemed all remaining 7.625% Senior Notes in 2014, paying $247.5 million principal and $9.3 million in premiums. It funded the redemptions with term and revolving credit-facility borrowings and cash. Facility borrowings carried a 2.2% weighted-average rate at year-end, but are variable-rate debt.
- Management estimated FY2015 interest expense of $8–10 million and capital expenditures of $40–50 million. It said liquidity should meet foreseeable needs and expected covenant compliance; these are forward-looking statements, not guarantees.
- Backlog was $124.3 million at February 15, 2015, versus $117.4 million a year earlier; orders were expected to ship over the following six to nine months. Management cautions backlog fluctuates with large-project timing and currency.
Risks and contingencies
- Demand is cyclical and exposed to commercial construction and renovation activity. Other key risks include competition, petroleum-based input costs, reliance on a limited number of synthetic-fiber suppliers, international operations and foreign-exchange movements.
- Debt creates interest-rate, refinancing and covenant risks. The credit facility is secured by substantially all of the company’s and domestic subsidiaries’ assets; covenant breaches could permit acceleration. The company reported compliance at year-end.
- Foreign-currency translation and pension adjustments reduced comprehensive income: FY2014 comprehensive loss was $18.8 million despite net income of $24.8 million. Foreign-currency translation reduced equity by $28.4 million during the year.
- Unrecognized tax benefits were $27.3 million; $5.5 million could require future cash payment if not favorably settled. Contractual cash obligations totaled $478.2 million, including debt, leases, interest and pension obligations; $43.1 million was due within one year.
- Management reported no material off-balance-sheet arrangements, no significant environmental remediation accruals and no legal proceedings requiring disclosure. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth can translate into margin recovery after FY2014 gross-margin compression and Australian facility start-up costs.
- Actual cash generation, capital spending and debt reduction against management’s FY2015 estimates.
- Floating-rate exposure, credit-facility covenant headroom and repayment requirements following the note refinancing.
- Regional and segment demand trends, especially ongoing foreign-exchange effects and the performance of non-office markets.
- Cash consequences of pension funding, tax uncertainties and the restructuring plan; also confirm shipment and conversion of reported backlog.