Interface, Inc. (TILE), a worldwide carpet tile company and global leader in sustainability, today announced results for the third quarter ended October 2, 2016.

"While our third quarter financial results suffered from continued sluggish market demand in Europe and the U.S., I am encouraged with our progress on strategic initiatives to accelerate top line growth and improve our manufacturing assets to drive productivity," said Daniel T. Hendrix, Chairman and Chief Executive Officer of the Company. "For the first time in the past year and a half, our quarterly orders were positive versus the prior year period. Importantly, we also saw increasing order strength over the quarter from July through September. Net sales in the first half of the year were down nearly 6%, and the third quarter saw a slight improvement with sales down only 2.5%. With our order trends, we expect to deliver positive sales growth in the fourth quarter."

Jay Gould, the Company's President and Chief Operating Officer commented, "After six straight quarters of triple-digit gross margin expansion, we had a 105 basis point contraction to 37.4%. This decline was directly linked to investments we are making to improve our flagship Troup County, Georgia manufacturing and warehousing facilities. Upon completion of this transformational project, we anticipate a $30 million annualized cost improvement. As a percentage of sales, our SG&A expenses remained at elevated levels. Consequently, we are tightly controlling and continually targeting reductions in SG&A expenses worldwide. We also launched our new modular resilient flooring product line in the third quarter. The customer reaction has been highly positive and we anticipate solid orders over the coming year."

THIRD QUARTER 2016 FINANCIAL SUMMARY & HIGHLIGHTS

Sales: Net sales for the third quarter of 2016 were $248.3 million, down 2.5% compared with sales of $254.7 million in the third quarter of 2015.

Our Asia-Pacific business was the strongest performer in the third quarter of 2016. Sales in this region were up 7.4% due to substantial gains in China and Australia, partially offset by softer sales in Southeast Asia, Japan and Korea.
Third quarter 2016 sales in our Americas business were down 3.4% compared with the third quarter last year. The decline occurred in the U.S. (down 4%) and Canada (down 13%), somewhat mitigated by an increase in Latin/South America (up 2%). The InterfaceServices business increased 3%, as it began to deliver more retail projects that had been delayed to the second half of this year. Overall, the corporate office segment was down 10%, while non-office segments in the aggregate were up 1%. Among non-office segments, strong gains in the hospitality (up 19%) and healthcare (up 13%) segments were largely offset by a decrease in the government segment (down 16%). FLOR sales grew 1% year over year.
In Europe, our net sales were down 5.7%, as the region continued to be impacted by geopolitical and economic issues that are pulling down consumer and business confidence. The majority of the decline occurred in the U.K., reflecting the fallout and uncertainty from its vote to leave the European Union, a substantial impact from the decline of the Pound Sterling versus the Euro, as well as reduced investments in the territory following concerns about the possibility of a "hard Brexit." The decrease was somewhat mitigated by solid gains in Central and Southern Europe, with Germany leading that growth.

Operating Income: Third quarter 2016 operating income decreased to $25.7 million, or 10.4% of sales, compared with $31.3 million, or 12.3% of sales, in the third quarter last year. Gross profit margin was 37.4% in the third quarter of 2016, down 105 basis points compared with 38.5% in the prior year period. The decline in gross margin was primarily due to the transition to a new centralized warehouse and distribution center in our Americas business, along with a reduction of manufacturing volume. SG&A expenses were $67.2 million, or 27.0% of sales, in the third quarter of 2016, versus $66.7 million, or 26.2% of sales, in the third quarter of 2015. The SG&A increase was mostly due to marketing efforts to grow our core carpet tile business and launch our important new modular resilient flooring (luxury vinyl tile) products in a four-city test market.

Net Income: Net income during the third quarter of 2016 declined to $15.9 million, or $0.25 per share, compared with net income of $20.1 million, or $0.31 per share, in the third quarter last year.

Patrick C. Lynch, Senior Vice President and Chief Financial Officer, commented, "Apart from the gross margin decline in the Americas business, the third quarter was operationally sound, with improvements in gross margin in our other geographic regions and at FLOR. We generated a substantial amount of cash, while paying down $7.5 million in debt, scaling back manufacturing volume by 9%, and drawing down inventories by $4.5 million."

Year to Date 2016 Financial Results

Sales: For the first nine months of 2016, net sales were $719.1 million, down 4.8% compared with $755.2 million in the first nine months last year.

Operating Income: Operating income for the 2016 nine-month period was $78.6 million, or 10.9% of sales, versus $85.9 million, or 11.4% of sales, in the first nine months of 2015.

Net Income: The Company reported net income of $49.5 million, or $0.76 per share, for the first nine months of 2016. This compares with net income of $54.2 million, or $0.82 per share, in the first nine months of 2015.

Mr. Hendrix concluded, "Notwithstanding the setback in gross margin for the third quarter, we are generally pleased with the direction our Company is heading. Our path to growth in earnings and shareholder value is focused on three priorities – growing our core carpet tile business, improving operations at our flagship production facility in the U.S., and creating a substantial market presence with complementary modular resilient flooring products. We've seen our sales and orders turn positive over the past few months, and our third quarter rollout of modular resilient flooring products is resonating strongly with our customers, creating an encouraging backlog of orders and robust sampling activity in the project pipeline. The Americas transition to a centralized warehouse, which drove the third quarter gross margin decline, is an integral component of our longer term plan to optimize operations in the U.S. that is expected to yield even greater long term benefits. Moreover, we remain on track to deliver a very healthy full year gross margin north of 38%. In addition, we will keep a tight focus on managing SG&A expenses toward our goal of 25% of net sales. I'm very encouraged about our prospects based on the trends we are seeing as well as the actions we are taking to grow our top line and enhance our operational efficiency."