Interface, Inc. — Q1 2022 Form 10-Q
Business context and period: Interface manufactures carpet, modular resilient and rubber flooring and related products. This unaudited report covers the 13 weeks ended April 3, 2022, compared with the 13 weeks ended April 4, 2021.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $288.0 million | $253.3 million | +13.7% |
| Gross profit / gross margin | $106.8 million / 37.1% | $96.0 million / 37.9% | Margin down 0.8 percentage point |
| Operating income / margin | $27.4 million / 9.5% | $16.9 million / 6.7% | Income up 62.6% |
| Net income | $13.3 million | $6.9 million | Up 91.6% |
| Diluted EPS | $0.22 | $0.12 | Up $0.10 |
| Cash from operating activities | $(17.7) million | $24.9 million | Down $42.6 million |
Sales growth reflected higher volume and prices, especially in corporate office, education and healthcare. Currency movements reduced consolidated sales by approximately $7.9 million. Cost of sales rose 15.3%, faster than sales, as raw-material, freight and labor costs increased. SG&A fell 1.0%; as a share of sales it declined to 27.3% from 31.3%, helping lift operating margin despite lower gross margin. The effective tax rate rose to 34.8% from 22.0%, partly reflecting the absence of a prior-year favorable tax item and other unfavorable items.
Segments and financial position
- Americas (AMS): Sales of $156.5 million, up 23.3%; adjusted operating income (AOI) of $21.1 million, up 77.4%.
- Europe, Africa, Asia and Australia (EAAA): Sales of $131.5 million, up 4.1%; AOI of $9.5 million, up 18.6%. Currency reduced EAAA sales by approximately $7.9 million and AOI by approximately $1.0 million.
- Cash and debt: Cash was $76.1 million, down from $97.3 million at January 2, 2022. Total debt principal was $528.5 million, including $300 million of 5.50% senior notes due 2028; balance-sheet debt, net of issuance costs, was $521.7 million. The company had $283.4 million of additional facility capacity and $4.0 million available under other credit lines.
- Liquidity and working capital: Management said liquidity should be sufficient for the next 12 months. Inventory rose to $319.4 million from $265.1 million, while operating cash use reflected increased inventory, accrued bonus payments and other working-capital needs.
- Other cash flows: Capital expenditures were $4.8 million. Cash declined by $21.2 million during the quarter, including a $1.6 million unfavorable foreign-exchange effect.
Outlook, risks and unusual items
- Management anticipated revenue growth in Q2 2022 versus Q1, but provided no specific full-year revenue, earnings or margin guidance in the supplied filing text.
- Management expected continued supply-chain disruption, raw-material and labor cost increases, possible shortages, higher freight costs and shipping delays. These could pressure margins, delay shipments and limit the ability to meet customer demand. The company expected its business and results to remain affected at least through the first half of 2022; recovery timing was uncertain.
- COVID-19 lockdowns in parts of China reduced sales there by approximately 14% versus Q1 2021. The filing also identifies inflation, the Russia-Ukraine conflict, energy and raw-material availability, foreign exchange and broader economic uncertainty as risks.
- The Thailand manufacturing facility closure generated $0.9 million of restructuring and impairment charges and a $1.1 million inventory write-down in cost of sales. The plan was expected to require $3–$4 million of cash expenditures and deliver about $1.7 million in annualized savings, with completion expected in fiscal 2022.
- Backlog was approximately $266.6 million as of April 24, 2022, versus $215.6 million as of February 6, 2022; project and installation delays remained a risk.
- The company reported compliance with credit-facility covenants. A putative securities class action remained pending on a motion to dismiss; the company said it believed the action was without merit. The former CEO’s remaining claims had been dismissed on summary judgment, subject to possible appeal.
Important facts for investors to verify
- Whether sales growth and backlog convert into shipments and cash despite supply constraints and China-related disruption.
- Whether pricing and cost actions can offset inflation and restore gross margin, particularly in EAAA.
- Whether inventory levels normalize and operating cash flow improves after the quarter’s substantial working-capital use.
- Debt, variable-rate exposure and covenant headroom as interest rates and operating conditions change.
- Actual costs, savings and timing from the Thailand closure, and developments in the pending class action and other disclosed risks.