Interface, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Interface manufactures modular carpet and related flooring products. This unaudited filing covers the three months ended March 31, 2013, compared with the three months ended April 1, 2012. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Net sales | $210.4 | $210.0 |
| Gross profit / margin | $71.3 / 33.9% | $70.5 / 33.6% |
| Operating income / margin | $14.0 / 6.7% | $0.3 / 0.1% |
| Net income (loss) | $7.0 | $(5.9) |
| Diluted EPS | $0.11 | $(0.09) |
| Cash from operations | $(9.0) | $24.3 |
| Capital expenditures | $14.9 | $10.4 |
- SG&A rose 6.2% to $57.3 million, or 27.2% of sales versus 25.7%. Management attributed the increase mainly to added sales staff and FLOR store costs. Cost of sales declined slightly; raw-material prices were relatively stable.
- Cash and cash equivalents were $65.1 million at quarter-end, down $25.5 million from year-end. Working capital was approximately $261.4 million.
- Total debt was approximately $283.1 million: $275.0 million of 7⅝% senior notes due 2018 and $8.1 million of senior secured notes due 2013. The domestic revolver had no borrowings and $3.6 million of letters of credit; $57.1 million of additional borrowing capacity was available. European and other non-U.S. facilities had no borrowings and stated additional capacity of approximately $25.6 million and $18.8 million, respectively.
- Quarterly cash use reflected $17.1 million of inventory growth, an $18.6 million decrease in accounts payable and accrued expenses, and capital spending, partly offset by $21.9 million from lower receivables. Dividends paid were $1.7 million.
- Comprehensive income was $2.7 million, including a $6.2 million negative foreign-currency translation adjustment and a $1.9 million positive pension adjustment.
Material changes versus the prior period
- Sales were nearly flat overall. Americas sales increased 9%, while Europe declined 9% in U.S. dollars and Asia-Pacific declined 8%. Currency movements had a slightly negative overall sales effect.
- Operating income improved substantially, but comparison is affected by the $16.3 million restructuring and asset-impairment charge recorded in Q1 2012. Q1 2013 had no new restructuring charge.
- Reported Q1 2013 income included a one-time $2.0 million tax benefit from tax-agreement resolution. The prior-year quarter included $22.7 million of sales and $0.2 million of net income from Bentley Prince Street, sold in 2012 and presented as discontinued operations.
- Cash from operations shifted to an outflow, while capital expenditures increased year over year.
Outlook, commentary, risks and unusual items
- No numerical full-year guidance is provided. Management expected sales in Asia-Pacific to improve after the replacement Australian plant became operational, anticipated in late 2013. It also expected expanded sales channels to benefit results and SG&A to decline as a percentage of sales in future periods.
- The July 2012 fire at the Picton, Australia, facility continued to disrupt supply. Management estimated the fire reduced Q1 2013 sales by approximately $2.5–$3.0 million. The facility represented about 10% of annual net sales before the fire; production was being supplied from other locations.
- The company reported $24.3 million of fire-related fixed-asset impairment and $23.1 million of excess production costs incurred through the reporting date. It considered reimbursement of incurred expenses probable; $20.7 million had been received and a $26.7 million insurance receivable was recorded. A roughly $5.2 million loss-of-profits claim for 2012 had not been recorded; further claims were still being evaluated.
- Management cited economic uncertainty in Europe, shipment delays, foreign-exchange movements and the ongoing Australian facility transition as relevant risks. The filing reported no material change in risk factors and no legal proceedings requiring disclosure. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting.
- The company reported compliance with credit-facility covenants and expected to remain compliant for the foreseeable future. Interest-rate and foreign-exchange sensitivity estimates are disclosed, but management cautioned that the currency sensitivity analysis does not capture offsets from net foreign investments.
Important facts for investors to verify
- Whether the Australian replacement facility opened on schedule and restored regional sales, and how fire-related costs and insurance recoveries develop.
- Whether operating profitability is sustainable after excluding the prior-year restructuring comparison and the current-period $2.0 million tax benefit.
- Whether inventory growth and payments of accrued liabilities reverse sufficiently to restore positive operating cash flow, particularly alongside elevated capital spending.
- The timing and refinancing or repayment plan for the $8.1 million of senior secured notes due in 2013, and continuing covenant compliance.
- Whether Europe’s sales weakness and higher SG&A are offset by growth in the Americas, FLOR stores and hospitality business.