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TILE > SEC Filings for TILE > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for INTERFACE INC

Form 10-Q for INTERFACE INC


7-Aug-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 and six months ended, or as of, June 29, 2014, and the comparable periods 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 June 29, 2014, we had net sales of $260.6 million, compared with net sales of $243.5 million in the second quarter last year. Fluctuations in currency exchange rates did not have a significant impact during the quarter compared with the prior year period. During the first six months of fiscal year 2014, we had net sales of $479.6 million, compared with net sales of $453.9 million in the first six months of last year. Fluctuations in currency exchange rates did not have a significant impact on this comparison.

During the second quarter of 2014, we had net income of $13.1 million, or $0.20 per diluted share, compared with net income of $11.0 million, or $0.17 per diluted share, in the second quarter of 2013. During the six months ended June 29, 2014, we had net income of $17.1 million, or $0.26 per diluted share, compared with net income of $18.0 million, or $0.27 per diluted share, in the first six months of 2013. Included in the results for the first six months of 2013 was a one-time tax dispute resolution benefit of $1.9 million related to the execution of bilateral pricing agreements. See the discussion in Note 10 of Part I, Item 1 of this Report, entitled "Income Taxes," for further information.


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 six-month periods ended June 29, 2014, and June 30, 2013, respectively:

                                              Three Months Ended                       Six Months Ended
                                       June 29, 2014       June 30, 2013       June 29, 2014       June 30, 2013

Net sales                                   100.0%              100.0%              100.0%              100.0%
Cost of sales                                65.3                64.6                65.6                65.3
Gross profit on sales                        34.7                35.4                34.4                34.7
Selling, general and administrative
expenses                                     25.3                26.5                26.8                26.8
Operating income                              9.3                9.0                 7.6                 7.9
Interest/Other expenses                       2.0                2.4                 2.2                 2.7
Income before tax expense                     7.3                6.5                 5.3                 5.1
Income tax expense                            2.3                2.0                 1.8                 1.2
Net income                                    5.0                4.5                 3.6                 4.0

Net Sales

Below we provide information regarding net sales and analyze those results for the three-month and six-month periods ended June 29, 2014, and June 30, 2013, respectively.

Three Months Ended Percentage June 29, 2014 June 30, 2013 Change

(In thousands)

Net Sales $ 260,624 $ 243,483 7.0 %

Six Months Ended Percentage
June 29, 2014 June 30, 2013 Change
(In thousands)

Net Sales $ 479,616 $ 453,852 5.7 %

For the quarter ended June 29, 2014, net sales increased $17.1 million (7.0%) versus the comparable period in 2013. On a geographic basis, we experienced sales increases across all of our geographic regions, with the Americas up 4%, Europe up 15% (or 9% in local currency), and Asia-Pacific up 5%. In the Americas, the increase was largely driven by non-office market segments, with the largest percentage increases occurring in the hospitality (up 30%), retail (up 21%) and education (up 7%) market segments. Sales in the Americas corporate office market segment were up approximately 1%. These increases were partially offset by a 9% sales decline in our FLOR residential business, primarily due to somewhat disappointing results from our annual summer sale event. The Americas region also experienced smaller declines in the government (down 4%) and healthcare (down 2%) market segments. Europe showed strong sales growth during the quarter, as the economies of that region continue to recover. The corporate office market segment (up 18% in U.S. dollars, or 13% in local currency) led the way in the European region, followed by the government (up 9%) and education (up 15%) segments. The sales increase in Asia-Pacific was due largely to performance in Australia, where we saw sales increase 9% (or 15% in local currency), alongside 6% growth in China. The increases in Asia-Pacific came largely in the healthcare (up over 100%) and education (up 50%) market segments, tempered by declines in the government (down 68%) and retail (down 16%) segments. The corporate office market segment was essentially even in Asia-Pacific versus the second quarter of 2013.

For the six months ended June 29, 2014, net sales increased $25.8 million (5.7%) versus the comparable period in 2013. On a geographic basis, we saw increases in the Americas (up 5%) and Europe (up 15% in U.S. dollars, or 10% in local currency). Sales in Asia-Pacific declined 7% in the first six months of 2014 versus the same period in 2013. The increase in the Americas was due primarily to the education (up 9%), hospitality (up 24%) and retail (up 15%) market segments. Only the government segment (down 4%) experienced a decline during the period. The corporate office segment in the Americas was essentially even for the first six months of 2014 versus the prior year period. Sales in Europe increased 15% in U.S. dollars (or 10% in local currency) for the six-month period, due primarily to the corporate office segment (16% increase in U.S. dollars, or 11% in local currency) and all non-office market segments with the exception of healthcare (down 38%). The sales decline in Asia-Pacific was largely a result of a slow start in the first quarter of 2014 due to softer demand and the impacts of transitioning from an import model in Australia to the start-up of our new plant there. As discussed above, sales began recovering in the Asia-Pacific region in the second quarter of 2014. For the first six months of 2014 versus the comparable period in 2013, the sales decline in the Asia-Pacific region was primarily in the corporate office (down 9%), government (down 66%) and retail (down 24%) market segments. These declines were offset somewhat by increases in the healthcare (up over 100%) and education (up 28%) segments.


Cost and Expenses

The following table presents, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-month and six-month periods ended June 29, 2014, and June 30, 2013, respectively:

                                                       Three Months Ended                Percentage
             Cost and Expenses                  June 29, 2014       June 30, 2013          Change
                                                         (In thousands)
Cost of sales                                  $    170,239        $    157,250              8.3%
Selling, general and administrative expenses         66,042              64,430              2.5%
Total                                          $    236,281        $    221,680              6.6%




                                                        Six Months Ended                 Percentage
             Cost and Expenses                  June 29, 2014       June 30, 2013          Change
                                                         (In thousands)
Cost of sales                                  $    314,545        $    296,367              6.1%
Selling, general and administrative expenses        128,701             121,688              5.8%
Total                                          $    443,246        $    418,055              6.0 %

For the quarter ended June 29, 2014, our costs of sales increased $13.0 million (8.3%) 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. On a per-unit basis, raw material prices remained flat to slightly down for the second quarter of 2014 versus the second quarter of 2013. In absolute dollars, the increase in cost of sales is primarily attributable to higher raw material costs (approximately $9 million) and labor costs (approximately $1.3 million) associated with higher production volumes during the 2014 second quarter. As a percentage of net sales, cost of sales in the second quarter of 2014 increased to 65.3% versus 64.6% in the second quarter of 2013. The percentage increase was due to higher manufacturing costs and complexities associated with new product introductions, as well as product expansion into new markets at initially lower selling prices. Cost of sales declined as a percentage of net sales versus the first quarter of 2014, as the integration of our new manufacturing facility in Minto, Australia progressed. The sequential improvement also reflects the lean manufacturing procedures we continue to implement worldwide. We expect further gross margin expansion throughout the balance of 2014.

For the six months ended July 29, 2014, our costs of sales increased $18.2 million (6.1%) versus the comparable period in 2013. Currency translation did not have a significant impact on the comparison between the periods on a consolidated basis. On a per-unit basis, raw material prices remained flat to slightly down for the first six months of 2014 versus the same period in 2014. In absolute dollars, the increase in cost of sales is primarily attributable to higher raw material costs (approximately $12 million) and labor costs (approximately $1.8 million) associated with higher production volumes in 2014. As a percentage of net sales, cost of sales increased to 65.6% for the first six months of 2014 versus 65.3% in the same period of 2013. This percentage increase was due to the factors discussed above regarding new product introductions and our product and market mix, as well as the costs and negative manufacturing variances associated with the ramp-up of our new plant in Australia in 2014.

For the quarter ended June 29, 2014, selling, general and administrative expense increased $1.6 million (2.5%) 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 a direct result of the higher sales level during the second quarter of 2014 versus the second quarter of 2013, as selling expenses rose $2.1 million year-over-year. On a geographic basis, this increase in selling expense was seen evenly across our three regions. The increase was offset somewhat by lower levels of marketing expenditures in the Americas and Europe, as well as lower levels of incentive based pay, including stock compensation, in the current year period. As a percentage of net sales, selling, general and administrative expenses declined to 25.3% for the second quarter of 2014, compared with 26.5% in the second quarter of 2013. This percentage decline is a direct result of the tighter spending controls we implemented during 2014, particularly in the second quarter. We expect further reductions in selling, general and administrative expenses, as a percentage of net sales, in the second half of 2014.


For the six month period ended June 29, 2014, our selling, general and administrative expenses increased $7.0 million (5.8%) versus the comparable period in 2013. Most of this increase ($5.4 million) took place in the first three months of 2014, primarily due to $2.2 million of incremental selling expenses as well as $2.1 million of administrative expenses mostly related to executive level stock forfeitures that occurred in the first quarter of 2013 that did not take place in the first quarter of 2014. For the full six month period ended June 29, 2013, selling expenses increased $4.3 million. Other increases were seen in the administrative area ($2.0 million), primarily due to the aforementioned forfeiture of executive stock compensation in the prior year period, as well as smaller increases in marketing ($0.5 million) and research and development ($0.3 million) costs. Selling, general and administrative expenses were 26.8% of net sales for the first six months of 2014, which is the same percentage of net sales for the first six months of 2013. However, as discussed above in the quarterly comparison, there was a decrease as a percentage of sales in the second quarter of 2014 versus that of 2013, which was a result of the sales acceleration as well as the implementation of our cost savings initiatives in the second quarter of 2014.

Interest Expense

For the three-month period ended June 29, 2014, our interest expense decreased by $0.5 million to $5.4 million from $5.9 million in the comparable period of the prior year. For the six months ended June 29, 2014, interest expense decreased by $1.1 million to $10.9 million from $12.1 million in the prior year period. The primary reasons for these decreases were the redemption of $27.5 million of our 7.625% Senior Notes in the fourth quarter of 2013, as well as the repayment at maturity of the remaining $8.1 million of our 11.375% Senior Subordinated Notes in the fourth quarter of 2013. While we did have borrowings outstanding under our Syndicated Credit Facility for the second quarter and first six months of 2014, which were not present in the second quarter and first six months 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 June 29, 2014, we had $50.0 million in cash. At that date, we had $31.5 million of borrowings and $3.3 million in letters of credit outstanding under the Syndicated Credit Facility. As of June 29, 2014, we could have incurred $165.2 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 lines of credit in place at other non-U.S. subsidiaries

Analysis of Cash Flows

Our primary sources of cash during the six months ended June 29, 2014 were (1) $3.7 million of borrowings under our Syndicated Credit Facility, and (2) $1.9 million due to an increase in accounts payable and accrued expenses. Our primary uses of cash during the six months ended June 29, 2014 were (1) $22.0 million for capital expenditures, (2) $21.9 million due to increased inventory levels,
(3) $12.4 million due to an increase in accounts receivable, and (4) $4.0 million for payment of dividends.

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