Interface, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 3, 2016; 53 weeks, compared with 52 weeks in FY2014. Interface is a global modular carpet manufacturer, selling primarily under the Interface and FLOR brands. It reported one segment, with sales across the Americas, Europe and Asia-Pacific.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,001.9 million | $1,003.9 million |
| Gross profit / gross margin | $382.9 million / 38.2% | $340.0 million / 33.9% |
| Operating income / margin | $113.6 million / 11.3% | $70.3 million / 7.0% |
| Net income / diluted EPS | $72.4 million / $1.10 | $24.8 million / $0.37 |
| Cash provided by operating activities | $125.4 million | $46.4 million |
| Capital expenditures | $27.2 million | $38.9 million |
| Cash and cash equivalents | $75.7 million | $54.9 million |
| Total debt | $213.5 million | $263.3 million |
| Current ratio | 2.6 | 2.7 |
FY2015 net margin was approximately 7.2%, versus 2.5% in FY2014. Year-end debt comprised $197.5 million of term loans and $16.0 million of revolving borrowings under the syndicated facility; net debt was approximately $137.8 million. The facility had $230.9 million of additional revolving capacity available, plus equivalent capacity of $14.6 million under other subsidiary facilities. Cash flow from operations less capital expenditures was approximately $98.2 million.
Changes versus FY2014
- Reported sales were essentially flat, down 0.2%. Currency translation reduced FY2015 sales by approximately $79.5 million and operating income by $9.8 million. On a constant-currency basis, sales would have been higher; Europe and Asia-Pacific grew in local currency while reported results fell in U.S. dollars.
- Gross margin improved 4.3 percentage points. Management attributed lower unit costs to reduced oil-related raw-material costs, higher production volumes and fixed-cost absorption, stabilization of Australian production, resolved yarn-supply issues, and a full-year benefit from the 2014 restructuring.
- SG&A rose 4.6% to $269.3 million, or 26.9% of sales versus 25.6%. Higher incentive and performance-based stock compensation were key drivers; stock compensation expense increased to $13.9 million from $4.0 million.
- Interest expense declined to $6.4 million from $20.8 million after the 2014 refinancing of the 7.625% Senior Notes with lower-rate facility borrowings. Average borrowing rates were 2.0% in FY2015 versus 7.4% in FY2014.
- Operating cash flow increased substantially, supported by higher earnings, lower interest paid, lower receivables and higher payables/accruals; inventory increased by $26.5 million and partly offset the improvement.
Liquidity, debt and capital allocation
Management said liquidity was sufficient for foreseeable needs and reported compliance with facility covenants. The facility matures in October 2019, is secured by substantially all domestic assets and has quarterly financial tests, including a maximum consolidated net leverage ratio of 3.75:1.00 after January 3, 2016 and minimum interest coverage of 2.25:1.00. Debt is variable-rate; management estimated a 1 percentage-point rate increase would add about $2.1 million to annual interest expense.
FY2015 cash uses included $45.3 million of revolving-loan repayments, $13.3 million to repurchase and retire 650,000 shares, and $11.9 million of dividends. Dividends were $0.18 per share for the year; the Board declared a $0.05 quarterly dividend payable in March 2016. Planned FY2016 capital expenditures were estimated at $40–$50 million, and expected interest expense at $6–$8 million. Contractual cash obligations due in FY2016 totaled approximately $52.7 million.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expects continued growth from diversification beyond corporate offices, expansion in hospitality and other non-office markets, international opportunities, cost control and free-cash-flow generation for debt reduction. Americas sales mix was 44% corporate office and 56% non-office; company-wide mix was 59% and 41%, respectively.
- Backlog was $111.4 million at February 14, 2016, down from $124.3 million a year earlier; management expected the orders to ship over the following six to nine months. Backlog fluctuates with large projects and currencies.
- Principal risks include cyclical commercial construction and renovation demand, intense competition and pricing pressure, foreign-exchange movements, petroleum-based input costs, reliance on third-party nylon suppliers, and significant variable-rate debt and covenant/refinancing exposure. The filing also discusses uncertainty around the euro and the then-upcoming U.K. referendum on EU membership.
- Unusual items: FY2014 included $12.4 million of restructuring and impairment charges and $12.0 million of debt-retirement costs. FY2013 included a $7.0 million gain on final insurance settlement for the 2012 Australia fire. The replacement Minto facility began operating in January 2014; no further fire-related recovery or expense was expected.
- Other exposures include $28.3 million of unrecognized tax benefits, with $6.3 million potentially requiring cash if not favorably settled, and pension obligations. Management reported no significant environmental remediation accruals and no material off-balance-sheet arrangements. The independent auditor issued unqualified opinions on the financial statements and internal controls; controls were reported effective.
Most important facts for investors to verify
- Whether operating improvement and cash generation persist after separating currency effects, lower raw-material costs and the 53rd week from underlying demand and margins.
- How much planned FY2016 capital spending and working-capital needs leave available for debt repayment, dividends and repurchases.
- Debt amortization, variable-rate exposure and covenant headroom ahead of the October 2019 facility maturity.
- Whether non-office market growth, especially hospitality, can offset cyclicality and weakness in other regions or segments.
- The realization and timing of tax benefits or cash payments tied to unrecognized tax positions, and pension funding requirements.