Management’s tone during a conference call was flat & weak, as they were clearly saddened over Ray Anderson’s passing. Ray Anderson was the carpet industry’s Steve Jobs. He founded Interface, later shocking investors with his revolutionary 1994 speech on Sustainability.
- Revenue growth slowed, +8.1% (to $273MM) down from 18% in 2Q’11, 13% in 1Q’11.
- Operating income of $25MM. This translated to 9.3% of sales, down from 9.8% in 2Q’11, and 11% the year earlier period.
- Orders were $284MM, up 6.8% from a year ago. Down sharply from 13% in 2Q’11.
- Cash Flow from Operations, at $31MM was a pleasant surprise, rising 63% from a year ago. The large increase was mostly attributed to Deferred Income Taxes, rather than earnings, so the increase may be transient.
- Book Value grew a decent 16%, likely surpassing cost of capital, especially debt costs (as the company refinanced bonds in January’11)
- EPS was $0.19 vs the same a year ago. Earnings were clean (negligible charges or non-cash gains/losses)
- The flat EPS was victim to 2 factors we’ve discussed several times. 1) input cost pressures, and 2) slowing demand in Western Europe (and Australia/Japan). Management, which already increased prices 3x this year, will not increase prices during 4Q’11.
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Given the above, management’s proactively slimming its cost-structure in 4Q. This will result in costs of $6.5MM to $8MM. (Cash costs likely under $7MM for severance,etc.). Management’s expecting profits to increase by $11MM/yearly and we expect these savings will be reaped in 2012.
- The German market continued to remain “robust” (see PMI Output chart on bottom).
- Pockets of weakness in several mature markets including Japan, Australia and certain countries of Western Europe.
- The new factory in China continues to ramp up well. During quarter, added a second shift. This “scaling up” of production will allow the factory to become profitable for the first time next quarter (4Q’11).
- The Commercial Office market is moderating, however, management believes this may just be a short-term phenomenon
How are earnings affecting the stock price ?
- Based on 9Mos numbers, Full Year 2011 EPS likely $0.65-$0.75 per share, yielding a Price-Earnings multiple of ~ 19x.
- A high Beta (GoogleFinance) of 2.4x, a P/E of 19x, and high operating leverage continue indicating these are risky shares.
- Though, IFSIA’s shares already partially-discounted the recent earnings reports as they had already declined from $20 to $12 between July’11 and Aug’11.