INTERFACE INC - Quarter Report: 2015 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For Quarterly Period Ended October 4, 2015

Commission File Number 001-33994

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339

(Address of principal executive offices and zip code)

(770) 437-6800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☑

Shares outstanding of each of the registrant’s classes of common stock at November 6, 2015:

INTERFACE, INC.

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.  

INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, October 4, 2015, and the comparable periods of 2014 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.

Forward-Looking Statements

This report contains statements which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry, as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014, which discussion is hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

General

During the quarter ended October 4, 2015, we had net sales of $254.7 million, compared with net sales of $252.2 million in the third quarter last year. During the first nine months of fiscal year 2015, we had net sales of $755.2 million, compared with net sales of $731.8 million in the first nine months of last year. Fluctuations in currency exchange rates had negative impacts on our sales and operating income in the 2015 reported periods, compared with the prior year periods. The following table presents the amounts (in U.S. dollars) by which the exchange rates for converting foreign currencies into U.S. dollars have negatively affected our net sales and operating income for the three months and nine months ended October 4, 2015.

In the third quarter of 2014, we committed to a restructuring plan in our continuing efforts to reduce costs across our worldwide operations. In connection with this restructuring plan, we incurred a pre-tax restructuring and asset impairment charge in the third quarter of 2014 in an amount of $12.4 million. The charge was comprised of severance expenses of $9.7 million for a reduction of 100 employees, other related exit costs of $0.1 million, and impairment of assets of $2.6 million. Approximately $10 million of the charge will result in cash expenditures, primarily severance expense.

During the third quarter of 2015, we had net income of $20.1 million, or $0.31 per share. During the third quarter of 2014, including the restructuring and asset impairment charge discussed above, we had a net loss of $0.4 million, or $0.01 per share. During the nine months ended October 4, 2015, we had net income of $54.2 million, or $0.82 per share. During the nine months ended September 28, 2014, including the restructuring and asset impairment charge discussed above, we had net income of $16.7 million, or $0.25 per share.

The first nine months of 2015 were comprised of 40 weeks, while the first nine months of 2014 were comprised of 39 weeks. (The additional week was in the first quarter of 2015.) This is a factor in certain of the comparisons discussed in this Item 2.

Results of Operations

The following table presents, as a percentage of net sales, certain items included in our Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended October 4, 2015, and September 28, 2014, respectively:

Net Sales

Below we provide information regarding net sales, and analyze those results, for the three-month and nine-month periods ended October 4, 2015, and September 28, 2014, respectively.

For the quarter ended October 4, 2015, net sales increased $2.5 million (1.0%) versus the comparable period in 2014. As discussed above, the strengthening of the U.S. dollar versus certain foreign currencies (primarily, the Euro, Australian dollar and Canadian dollar) had a negative impact of approximately $22 million on 2015 third quarter sales as compared with the third quarter of 2014. On a geographic basis, we increased sales 4% in the Americas, and experienced flat sales in Europe (as reported in U.S. dollars) and a decline of 9% (as reported in U.S. dollars) in Asia-Pacific due to negative currency impacts. In the Americas, our sales increase was primarily in the corporate office segment (up 10%), as our growth continued to outpace the market, alongside the benefits of our enhanced presence in the hospitality segment (up 21%). These increases were partially offset by sales declines in the education (down 7%) and government (down 8%) segments. Our FLOR residential consumer business experienced a 3% sales increase for the quarter, due primarily to stronger web-based sales. In Europe, the impact of the strengthening U.S. dollar was substantial, as sales in local currency were up 20% versus the third quarter last year. The increase in local currency was driven by both the corporate office segment (up 20%) and non-office segments (up 19% in the aggregate), with the education (up 36%), retail (up 36%), and government (up 9%) segments leading the non-office increases. Small declines in local currency in the hospitality (down 11%) and residential (down 23%) segments mitigated the overall increase in Europe for the quarter. In Asia-Pacific, sales in local currency were up 5% for the third quarter compared with the prior year period, with strong gains in Australia (up 20%) partially offset by declines in China and India. The sales increase in local currency in Australia came across both corporate office and non-corporate office market segments.

For the nine months ended October 4, 2015, net sales increased $23.4 million (3.2%) versus the comparable period in 2014. The strengthening of the U.S. dollar versus certain foreign currencies had a negative impact of approximately $64 million on sales in the first nine months of 2015 versus the comparable prior year period. On a geographic basis, we increased sales 9% in the Americas, partially offset by declines of 5% in Europe (as reported in U.S. dollars) and 2% in Asia-Pacific (as reported in U.S. dollars) due to currency impacts. The sales increase in the Americas was primarily in the corporate office segment (up 11%) alongside strong improvements in the hospitality (up 53%) and education (up 5%) segments. The increase in education sales in the Americas occurred during the first six months of 2015, as we experienced a third quarter decline in the segment year-over-year. In Europe, sales in local currency increased 16%, primarily driven by the corporate office segment (up 21%). Local currency sales in non-corporate office segments in the aggregate were essentially flat, with a 35% increase in the education segment being offset by a 26% decrease in the government segment – although we did experience an increase in the government segment in the 2015 third quarter, perhaps suggesting that the negative impacts of government austerity programs in the region are being reduced. In Asia-Pacific, the sales decrease in U.S. dollars was experienced across non-office market segments, with the retail (down 46%), healthcare (down 32%) and government (down 28%) segments having the largest percentage declines, tempered by a 4% increase in the corporate office segment. Negative currency impacts in the Asia-Pacific region also were substantial, as sales in local currency were up 9% versus the first nine months last year. The greatest currency impact was in Australia, where sales in local currency were up 21%, but in U.S. dollars were up less than 1%.

Cost and Expenses

The following tables present, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-month and nine-month periods ended October 4, 2015, and September 28, 2014, respectively:

For the three months ended October 4, 2015, our cost of sales decreased $11.9 million (7.0%) versus the comparable period in 2014. Fluctuations in currency exchange rates had a favorable impact of approximately $8 million on our cost of sales for the quarter compared with the prior year period. As a percentage of sales, gross profit expanded across all of our operating regions, with Americas showing the most improvement. The reduction in cost of sales was primarily a function of (1) lower raw materials costs (down approximately 6-8%) and usage compared with the third quarter of 2014, (2) higher production costs in the third quarter last year due to disruptions in yarn supply that were not experienced in the current period, (3) a higher degree of manufacturing complexity related to new product introductions in the third quarter of 2014 that led to higher manufacturing costs at that time (and have since been rectified), (4) the benefits of our restructuring initiatives taken during the third quarter of 2014, and (5) increased absorption of fixed manufacturing costs due to higher production volumes in the current period. As a result of these factors, as a percentage of net sales, cost of sales decreased to 61.5% for the three months ended October 4, 2015, compared with 66.9% in the third quarter of 2014.

For the nine months ended October 4, 2015, our cost of sales decreased $12.6 million (2.6%) versus the comparable period in 2014. Fluctuations in currency exchange rates had a favorable impact of approximately $30 million on our cost of sales for the first nine months of 2015 versus the prior year period. As a percentage of sales, our cost of sales decreased to 62.3% for the nine months ended October 4, 2015 compared with 66.0% for the comparable period of 2014. The primary reasons for this decline were (1) lower raw materials costs and usage (down approximately 6-8%) compared with the first nine months of 2014, (2) continued stabilization of our supply chain and manufacturing footprint in the Asia-Pacific region following the January 2014 start-up of our new carpet tile plant in Australia, (3) increased absorption of fixed manufacturing costs associated with higher production volumes, especially in the Americas and Europe regions, (4) the cost savings associated with our 2014 restructuring actions, and (5) the resolution of yarn supply and production issues during the fourth quarter of 2014 and early 2015 that were particularly acute in the third quarter of 2014.

For the three months ended October 4, 2015, our selling, general and administrative expenses increased $2.7 million (4.2%) versus the comparable period in 2014. Currency fluctuation had a favorable impact on selling, general and administrative expenses; if currency rates had remained the same for the third quarter of 2015 versus that of the third quarter of 2014, our selling, general and administrative expenses would have been approximately $8.5 million higher than the third quarter last year. The majority of this currency neutral increase is additional incentive compensation (approximately $5.0 million) and performance based share-based compensation ($1.5 million) because our projected performance is better in 2015 versus 2014. The largest component of the remainder ($1.0 million) is higher selling expenses due to the improved sales levels in the third quarter of 2015 versus the prior year period, particularly in the Americas. As a result, as a percentage of sales, our selling, general and administrative expenses increased to 26.2% in the third quarter of 2015, versus 25.4% in the third quarter of 2014.

For the nine months ended October 4, 2015, our selling, general and administrative expenses increased $6.1 million (3.2%) versus the comparable period in 2014. Currency fluctuation had a favorable impact on selling, general and administrative expenses; if currency rates had remained the same for the first nine months of 2015 versus that of the first nine months of 2014, our selling, general and administrative expenses would have been approximately $20 million higher than the first nine months last year. As in the three months ended October 4, 2015, substantially all of this increase can be attributed to higher incentive compensation (approximately $10 million) and performance based share-based compensation (approximately $8 million), as our projected performance is better in 2015 versus 2014. The primary factor mitigating the increase was the impact of the changes in foreign currency discussed above, as other spending categories within selling, general and administrative expenses remained relatively consistent in local currencies (due partially to cost control measures from our 2014 restructuring actions), despite the increased sales for the year to date period of 2015 versus 2014. As a result, selling, general, and administrative expenses remained consistent at 26.3% of net sales for both the first nine months of 2015 and 2014.

Interest Expense

For the three month period ended October 4, 2015, our interest expense decreased $4.3 million to $1.3 million, from $5.6 million in the third quarter of 2014. For the nine month period ended October 4, 2015, our interest expense decreased $11.5 million to $5.0 million, from $16.5 million in the comparable period last year. The reason for the decreases was the debt refinancing activities we completed in the fourth quarter of 2014, in which we redeemed all of our $247.5 million of outstanding 7.625% Senior Notes and replaced them with borrowings under our Syndicated Credit Facility. This facility is comprised of a term loan as well as a multi-currency revolving debt facility and incurs interest at a significantly lower rate than the 7.625% Senior Notes.

Liquidity and Capital Resources

General

At October 4, 2015, we had $73.7 million in cash. At that date, we had outstanding $200.0 million of term loan borrowings, $32.5 million of revolving loan borrowings and $3.1 million in letters of credit under our Syndicated Credit Facility. As of October 4, 2015, we could have incurred $214.4 million of additional borrowings under our Syndicated Credit Facility. In addition, we could have incurred an additional $14.5 million of borrowings under our other lines of credit in place at other non-U.S. subsidiaries.

Analysis of Cash Flows

We exited the quarter ended October 4, 2015 with $73.7 million in cash, an increase of $18.8 million during the first nine months of the year. The increase in cash was due to improved cash flow from operating activities of $92.7 million in the first nine months of 2015, versus $34.9 million in the first nine months of 2014. The factors driving the increase in cash from operating activities were (1) higher net income in 2015, due to better operational performance, (2) a $5.8 million reduction in cash paid for interest, as a result of our 2014 debt refinancing discussed above, and (3) $17.8 million due to a decrease in accounts receivable. The increase in cash from operating activities was partially offset by a use of $28.7 million for an increase in inventory levels. Our other primary uses of cash during the first nine months of 2015 were (1) $28.0 million of cash used to repay borrowings under our Syndicated Credit Facility, (2) $23.7 million of capital expenditures, (3) $10.5 million of cash used to repurchase and retire 500,000 shares of our outstanding common stock, and (4) $8.6 million for the payment of dividends.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our discussion below in this Item 3 is based upon the more detailed discussions of our market risk and related matters included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014, under Item 7A of that Form 10-K. Our discussion here focuses on the period ended October 4, 2015, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.

At October 4, 2015, we recognized a $28.6 million decrease in our foreign currency translation adjustment account compared to December 28, 2014, primarily because of the strengthening of the U.S. dollar against certain foreign currencies, particularly the Euro and Australian dollar.

Sensitivity Analysis. For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market sensitive instruments.

To perform sensitivity analysis, we assess the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments.

Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Item 7A of our Annual Report on Form 10-K for the year ended December 28, 2014.

As of October 4, 2015, a 10% decrease or increase in the levels of foreign currency exchange rates against the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of our financial instruments of $11.1 million or an increase in the fair value of our financial instruments of $9.0 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 1.

ITEM 1A. RISK FACTORS

There are no material changes in risk factors in the third quarter of 2015. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

The following exhibits are filed with this report:

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBITS INCLUDED HEREWTIH

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