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TILE > SEC Filings for TILE > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for INTERFACE INC

Form 10-Q for INTERFACE INC


8-May-2014

Quarterly Report


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 29, 2013, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter ended, or as of, March 30, 2014, and the comparable period of 2013 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 29, 2013, 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.

Fire at Australia Facility

In July 2012, a fire occurred at our manufacturing facility in Picton, Australia, which served customers throughout Australia and New Zealand. The fire caused extensive damage to the facility, as well as disruption to business activity in the region. Since the fire, we have utilized adequate production capacity at our manufacturing facilities in Thailand, China, the U.S. and Europe to meet customer demand formerly serviced from Picton. While this has been executed with success, there were, as expected, business disruptions and delays in shipments that affected sales following the fire. We have now completed the build-out of a new manufacturing facility in Minto, Australia, which commenced operations in January 2014. For additional information on the fire, please see the Note entitled "Fire at Australian Manufacturing Facility" in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.

General

During the quarter ended March 30, 2014, we had net sales of $219.0 million, compared with net sales of $210.4 million in the first quarter last year. Fluctuations in currency exchange rates had a slightly negative impact (less than 1%) for the 2014 first quarter compared with the prior year period.

During the first quarter of 2014, we had net income of $4.0 million, or $0.06 per diluted share, compared with net income of $7.0 million, or $0.11 per diluted share, in the first quarter last year. Included in the results for the first quarter of 2013 was a one-time tax dispute resolution benefit of $2.0 million related to the execution of bilateral pricing agreements. For additional information on the tax dispute resolution benefit, please see Note 10 in the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


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 periods ended March 30, 2014, and March 31, 2013, respectively:



                                                         Three Months Ended
                                                March 30, 2014        March 31, 2013

Net sales                                                 100.0 %               100.0 %
Cost of sales                                              65.9                  66.1
Gross profit on sales                                      34.1                  33.9
Selling, general and administrative expenses               28.6                  27.2
Operating income                                            5.5                   6.7
Interest/Other expense                                      2.5                   3.1
Income before tax expense                                   3.0                   3.5
Income tax expense                                          1.2                   0.2
Net income                                                  1.8                   3.3

Net Sales

Below we provide information regarding net sales and analyze those results for the three-month periods ended March 30, 2014, and March 31, 2013, respectively.

Three Months Ended Percentage March 30, 2014 March 31, 2013 Change

(In thousands)

Net Sales 218,992 210,369 4.1 %

For the quarter ended March 30, 2014, net sales increased $8.6 million (4.1%) versus the comparable period in 2013. On a geographic basis, we experienced sales increases in the Americas (up 5%) and Europe (up 15% in U.S. dollars, or 11% in local currency), somewhat offset by a sales decrease in Asia-Pacific (down 17%). In the Americas, sales growth was due to the continued success of our market segmentation strategy. All non-office market segments experienced growth, with the hospitality (up 26%), retail (up 18%), education (up 12%) and residential (up 14%) segments having the largest percentage gains. These increases were offset by a modest 2% decline in the corporate office segment. Americas sales also were negatively impacted by severe winter weather, which caused a loss of five production days at our U.S. manufacturing facility and lowered overall consumer spending. In Europe, sales increased in nearly all market segments, with the largest percentage gains occurring in the corporate office (up 13% in U.S. dollars, or 8% in local currency), government (up 26% in U.S. dollars, or 21% in local currency) and retail (up 38% in U.S. dollars, or 33% in local currency) market segments. The decline in Asia-Pacific was primarily experienced in the corporate office segment (down 19%), which constitutes the bulk of the sales in this region. We also experienced declines in the government (down 63%) and retail (down 33%) market segments. The decline in Asia-Pacific was due to a combination of softer demand, the transition in Australia from an import model to the start-up of our new plant in January 2014, currency translation effects in Australia, and a more pronounced seasonal impact from the Chinese New Year in 2014.

Cost and Expenses



The following table presents our overall cost of sales and selling, general and
administrative expenses for the three-month periods ended March 30, 2014, and
March 31, 2013, respectively:



                                                        Three Months Ended                 Percentage
             Cost and Expenses                  March 30, 2014       March 31, 2013          Change
                                                          (In thousands)
Cost of sales                                  $        144,306     $        139,117                3.7 %
Selling, general and administrative expenses             62,659               57,258                9.4 %
Total                                          $        206,965     $        196,375                5.4 %


For the quarter ended March 30, 2014, our costs of sales increased $5.2 million (3.7%) versus the comparable period in the prior year. Currency translation did not have a significant impact on the comparison between the periods on a consolidated basis. The increase in cost of sales is primarily attributable to higher raw materials costs (approximately $3.5 million) and labor costs (approximately $0.5 million) associated with increased production volumes compared to the first quarter of 2013. On a per unit basis, we experienced a slight decline in raw materials costs in the first quarter of 2014 versus that of 2013. As a percentage of net sales, cost of sales declined to 65.9% in the first quarter of 2014 versus 66.1% in the first quarter of 2013. This percentage decrease was primarily due to our lean manufacturing initiatives and improved efficiencies related to higher production volumes, with the biggest improvement seen in our European operations. This improvement was somewhat offset by inefficiencies associated with the start-up of our new manufacturing facility in Australia in January this year. We expect gross profit margin in Asia-Pacific to normalize later this year as we complete the ramp-up of the new Australian plant.

For the quarter ended March 30, 2014, our selling, general and administrative expenses increased $5.4 million (9.4%) versus the comparable period in 2013. Currency translation did not have a significant impact on the comparison between the periods on a consolidated basis. The increase was primarily attributable to:
(1) increased selling expense of $2.2 million associated with higher sales as well as targeted sales team additions, primarily in our European ($1.2 million) and Americas ($0.8 million) operations; (2) increased administrative cost of $2.1 million primarily related to executive level forfeitures of stock-based compensation in the first quarter of 2013 that did not reoccur in the first quarter of 2014; and (3) increased global marketing costs of $0.8 million related to continued targeted endeavors to increase market penetration in non-corporate office market segments. We also saw an increase in selling expenses for our FLOR retail stores ($0.3 million) due to stores being added in 2013 that were not in place in the first quarter of 2013. Due to these increases, selling, general and administrative costs increased as a percentage of sales to 28.6% in the first quarter of 2014 versus 27.2% in the first quarter of 2013.

Interest Expense

For the three-month period ended March 30, 2014, interest expense decreased by $0.7 million to $5.5 million, versus $6.2 million for three-month period ended March 31, 2013. The reason for this decrease was the repayment at maturity of the remaining $8.1 million of our 11.375% Senior Subordinated Notes in the fourth quarter of 2013, as well as the redemption of $27.5 million of our 7.625% Senior Notes in the fourth quarter of 2013. While we did have outstanding borrowings under our Syndicated Credit Facility for the first quarter of 2014 which were not present in the first quarter of 2013, these borrowings were at a significantly lower interest rate than the senior notes which were repaid and redeemed in the fourth quarter of 2013.

Liquidity and Capital Resources

General

At March 30, 2014, we had $62.5 million in cash. At that date, we had $30.9 million of borrowings and $4.2 million in letters of credit outstanding under our Syndicated Credit Facility. As of March 30, 2014, we could have incurred $169.1 million of additional borrowings under our Syndicated Credit Facility. In addition, we could have incurred an additional $8.4 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.

Analysis of Cash Flows

Our primary sources of cash during the three months ended March 30, 2014 were
(1) $8.1 million due to reductions in accounts receivable, and (2) $4.1 million of borrowings on our Syndicated Credit Facility. Our primary uses of cash during this period were (1) $20.0 million for increased inventory levels, (2) $9.1 million for capital expenditures, and (3) $3.3 million due to a decrease in accounts payable and accrued expenses.

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