Interface, Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 2, 2011; comparative periods are the three and nine months ended October 3, 2010. Financial statements are unaudited. The company reports Modular Carpet and Bentley Prince Street segments; the former Fabrics Group is presented as discontinued operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $273.1 million | $252.7 million | $786.1 million | $696.5 million |
| Gross profit | $94.4 million | $89.5 million | $276.1 million | $243.0 million |
| Operating income | $25.3 million | $28.0 million | $73.0 million | $63.3 million |
| Net income attributable to Interface | $12.2 million | $12.1 million | $34.8 million | $21.6 million |
| Diluted EPS | $0.19 | $0.19 | $0.53 | $0.34 |
- Sales increased 8.1% in Q3 and 12.9% year to date. Foreign exchange added approximately 4% to sales in both comparisons—about $10 million and $26 million, respectively.
- Gross margin was 34.6% in Q3 versus 35.4% a year earlier, and 35.1% for the nine months versus 34.9%. Operating margin was 9.3% in Q3 versus 11.1%, and 9.3% year to date versus 9.1%.
- Q3 operating income declined despite higher sales, as cost of sales and SG&A rose. Nine-month earnings improved, helped in part by lower interest expense and the absence of the prior-year restructuring and bond-retirement charges.
- Operating cash flow was $10.0 million for the nine months, down from $31.6 million. Capital expenditures were $30.8 million, compared with $18.4 million; cash declined by $24.9 million to $44.4 million.
- At October 2, current assets were $412.2 million and current liabilities $153.7 million. Working capital was $258.4 million. Inventories rose to $171.1 million from $136.8 million.
- Debt carrying value was $294.5 million, comprising senior notes and senior subordinated notes. The company had $44.4 million cash. It reported no borrowings on its domestic or European facilities; domestic availability was $80.6 million, with additional stated availability of approximately $19.0 million in Europe and $18.2 million under other non-U.S. lines.
Changes and operating trends
- Modular Carpet sales rose 9.8% in Q3 and 13.7% for the nine months. Bentley Prince Street sales fell 7.0% in Q3 but rose 5.9% year to date.
- Management attributed growth mainly to improving corporate-office demand and strength in certain non-office markets and emerging markets. Weakness included retail and hospitality in parts of the business, and government and education demand at Bentley Prince Street.
- Q3 cost of sales was 65.4% of sales versus 64.6%; management cited raw-material costs 10–12% higher year over year and lower fixed-cost absorption from lower production volumes. For the first nine months, cost of sales was 64.9% versus 65.1%.
- SG&A increased 12.4% in Q3 and 15.0% year to date, including spending on selling, marketing, consumer-market and diversification initiatives, as well as higher administrative and incentive compensation costs.
- Interest expense fell to $6.4 million in Q3 from $8.4 million and to $19.9 million year to date from $25.3 million, reflecting the refinancing of higher-rate debt. The June 2011 amended revolving facility extends to June 2016 and reduces borrowing margins and unused-line fees.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management said it expected cost of sales as a percentage of sales to decrease as raw-material costs moderate.
- A restructuring plan committed to October 26, 2011 is expected to generate fourth-quarter 2011 charges of $6.5–$8.0 million, including reductions of approximately 100 employees. Approximately $5.5–$6.5 million is expected to be cash expenditure; annual savings are estimated at approximately $11 million. Actions were expected to be completed by year-end.
- The 2010 restructuring plan was substantially completed; $457,000 of related costs were incurred in the first nine months of 2011, with no remaining balance reported at October 2.
- Q3 other comprehensive loss was $13.7 million, primarily reflecting currency translation and pension adjustments; comprehensive loss attributable to Interface was $1.6 million.
- Accrued unrecognized tax benefits were approximately $8.2 million. Management reported no material change in risk factors, no legal proceedings requiring disclosure, and effective disclosure controls; it identified economic conditions in commercial interiors and the previously disclosed annual-report risk factors as risks.
Investor verification points
- Reconcile the MD&A statement that nine-month 2011 sales were $768.1 million with the financial statements and segment tables, which report $786.1 million.
- Assess whether weaker Q3 operating margin, higher raw-material costs and increased inventory affect near-term cash generation and profitability.
- Monitor execution and cash costs of the announced restructuring, and whether projected annual savings of approximately $11 million are achieved.
- Review debt maturities, covenant and borrowing-base conditions, and available liquidity; the filing reports $80.6 million of domestic revolver availability and no borrowings as of period-end.