SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | |
þ | | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | |
| | For Quarterly Period Ended July 3, 2011 |
For Quarterly Period Ended October 3, 2010
Commission File Number 001-33994
INTERFACE, INC.
(Exact(Exact name of registrant as specified in its charter)
| | |
|
GEORGIA | | 58-1451243 |
(State or other jurisdiction of | | (I.R.S.(I.R.S. Employer |
incorporation or organization) | | Identification No.) |
2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
(Address(Address of principal executive offices and zip code)
(770) 437-6800
(Registrant’s(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. Yesþ Noo
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). Yesþ Noo No o
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):
| | | | | | |
Large accelerated filero | | Accelerated filerþ | | Non-accelerated filero | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Shares outstanding of each of the registrant’s classes of common stock at NovemberAugust 5, 2010:
2011:
| | | | |
Class | | Number of Shares | |
| Class A Common Stock, $.10 par value per share | | | 57,034,13258,579,758 | |
| Class B Common Stock, $.10 par value per share | | | 7,244,0526,895,457 | |
INTERFACE, INC.
INDEX
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PART I. | FINANCIAL INFORMATION | |
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| Item 1. | Financial Statements
| 3
|
| | Consolidated Condensed Balance Sheets – October 3, 2010 and January 3, 2010
| 3
|
| | Consolidated Condensed Statements of Operations – Three Months and Nine Months Ended October 3, 2010 and October 4, 2009 | 4
|
| | Consolidated Statements of Comprehensive Income – Three Months and Nine Months Ended October 3, 2010 and October 4, 2009 | 5
|
| | Consolidated Condensed Statements of Cash Flows – Nine Months Ended October 3, 2010 and October 4, 2009 | 6
|
| | Notes to Consolidated Condensed Financial Statements
| 7
|
| Item 2.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations
| 21
|
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| Item 3. | Quantitative and Qualitative Disclosures about Market RiskPAGE | 26
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| Item 4. | Controls and Procedures
| 27
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PART II. | OTHER INFORMATION | | 3 | |
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| Item 1. | | | |
| 27
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| Risk Factors1. Legal Proceedings
| 27
| | 26 | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | 28
| | 26 | |
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| | Defaults Upon Senior Securities | 28
| | 26 | |
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| | Removed and Reserved | 28
| | 26 | |
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| | Item 5. | Other Information 26 | 28
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| | | 26 | |
| Item 6. | Exhibits
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28EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
PART I -— FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN
(IN THOUSANDS)
| | | | | | | | | |
| | OCT. 3, 2010 | | | JAN. 3, 2010 | | | JULY 3, 2011 | | JANUARY 2, 2011 | |
| | (UNAUDITED) | | | | | | (UNAUDITED) | |
ASSETS | | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and Cash Equivalents | | $ | 80,854 | | | $ | 115,363 | | | $ | 27,299 | | $ | 69,236 | |
Accounts Receivable, Net | | | 140,759 | | | | 129,833 | | |
Accounts Receivable, net | | | 163,173 | | 151,463 | |
Inventories | | | 133,774 | | | | 112,249 | | | 170,517 | | 136,766 | |
Prepaid Expenses and Other Current Assets | | | 24,727 | | | | 19,649 | | | 29,354 | | 24,362 | |
Deferred Income Taxes | | | 9,175 | | | | 9,379 | | | 9,780 | | 10,062 | |
Assets of Business Held for Sale | | | 1,500 | | | | 1,500 | | | 1,200 | | 1,200 | |
| | | | | | |
TOTAL CURRENT ASSETS | | | 390,789 | | | | 387,973 | | | 401,323 | | 393,089 | |
| | | | | | | | | |
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation | | | 166,093 | | | | 162,269 | | |
PROPERTY AND EQUIPMENT, less accumulated depreciation | | | 188,290 | | 177,792 | |
DEFERRED TAX ASSET | | | 42,295 | | | | 44,210 | | | 50,798 | | 53,022 | |
GOODWILL | | | 76,951 | | | | 80,519 | | | 81,148 | | 75,239 | |
OTHER ASSETS | | | 54,801 | | | | 52,268 | | | 57,678 | | 56,291 | |
| | | | | | |
TOTAL ASSETS | | $ | 730,929 | | | $ | 727,239 | | | $ | 779,237 | | $ | 755,433 | |
| | | | | | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | |
Accounts Payable | | $ | 48,962 | | | $ | 35,614 | | | $ | 50,195 | | $ | 55,859 | |
Accrued Expenses | | | 111,249 | | | | 101,143 | | | 100,680 | | 112,657 | |
Current Portion of Long-Term Debt | | | -- | | | | 14,586 | | |
| | | | | | |
TOTAL CURRENT LIABILITIES | | | 160,211 | | | | 151,343 | | | 150,875 | | 168,516 | |
| | | | | | | | | |
SENIOR NOTES | | | 146,127 | | | | 145,184 | | | 282,990 | | 282,951 | |
SENIOR SUBORDINATED NOTES | | | 110,000 | | | | 135,000 | | | 11,477 | | 11,477 | |
DEFERRED INCOME TAXES | | | 7,079 | | | | 7,029 | | | 8,498 | | 7,563 | |
OTHER | | | 41,102 | | | | 42,502 | | | 35,079 | | 36,054 | |
| | | | | | |
TOTAL LIABILITIES | | | 464,519 | | | | 481,058 | | | 488,919 | | 506,561 | |
| | | | | | | | | |
Commitments and Contingencies | | | | | | | | | |
| | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | | |
Preferred Stock | | | -- | | | | -- | | | — | | — | |
Common Stock | | | 6,423 | | | | 6,328 | | | 6,546 | | 6,445 | |
Additional Paid-In Capital | | | 348,580 | | | | 343,348 | | | 359,107 | | 349,662 | |
Retained Earnings (Deficit) | | | (35,187 | ) | | | (55,332 | ) | | | (30,228 | ) | | | (49,770 | ) |
Accumulated Other Comprehensive Income – Foreign Currency Translation Adjustment | | | (24,307 | ) | | | (24,057 | ) | |
Accumulated Other Comprehensive Income – Pension Liability | | | (32,231 | ) | | | (33,186 | ) | |
TOTAL SHAREHOLDERS' EQUITY – Interface, Inc. | | | 263,278 | | | | 237,101 | | |
Non-Controlling Interest in Subsidiary | | | 3,132 | | | | 9,080 | | |
TOTAL SHAREHOLDERS' EQUITY | | | 266,410 | | | | 246,181 | | |
Accumulated Other Comprehensive Loss — Foreign Currency Translation Adjustment | | | | (12,742 | ) | | | (26,269 | ) |
Accumulated Other Comprehensive Loss — Pension Liability | | | | (32,365 | ) | | | (31,196 | ) |
| | $ | 730,929 | | | $ | 727,239 | | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 290,318 | | 248,872 | |
| | | | | | |
| | | $ | 779,237 | | $ | 755,433 | |
| | | | | | |
See accompanying notes to consolidated condensed financial statements.
-3-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | |
| | | | | | | | | | | | |
| | OCT. 3, 2010 | | | OCT. 4, 2009 | | | OCT. 3, 2010 | | | OCT. 4, 2009 | |
| | | | | | | | | | | | |
NET SALES | | $ | 252,724 | | | $ | 218,364 | | | $ | 696,502 | | | $ | 628,969 | |
Cost of Sales | | | 163,244 | | | | 145,952 | | | | 453,514 | | | | 424,282 | |
GROSS PROFIT ON SALES | | | 89,480 | | | | 72,412 | | | | 242,988 | | | | 204,687 | |
| | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | | 61,441 | | | | 53,487 | | | | 176,597 | | | | 160,122 | |
Income from Litigation Settlements | | | -- | | | | -- | | | | -- | | | | (5,926 | ) |
Restructuring Charge | | | -- | | | | -- | | | | 3,131 | | | | 7,627 | |
OPERATING INCOME | | | 28,039 | | | | 18,925 | | | | 63,260 | | | | 42,864 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 8,409 | | | | 9,537 | | | | 25,346 | | | | 24,936 | |
Bond Retirement Expenses | | | -- | | | | -- | | | | 1,085 | | | | 6,096 | |
Other Expense | | | 463 | | | | 156 | | | | 1,008 | | | | 56 | |
| | | | | | | | | | | | �� | | | | |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE | | | 19,167 | | | | 9,232 | | | | 35,821 | | | | 11,776 | |
Income Tax Expense | | | 6,825 | | | | 3,542 | | | | 13,365 | | | | 5,661 | |
| | | | | | | | | | | | | | | | |
Income from Continuing Operations | | | 12,342 | | | | 5,690 | | | | 22,456 | | | | 6,115 | |
Loss from Discontinued Operations, Net of Tax | | | -- | | | | -- | | | | -- | | | | (650 | ) |
NET INCOME | | | 12,342 | | | | 5,690 | | | | 22,456 | | | | 5,465 | |
| | | | | | | | | | | | | | | | |
Income Attributable to Non-Controlling Interest in Subsidiary | | | (264 | ) | | | (233 | ) | | | (876 | ) | | | (495 | ) |
NET INCOME ATTRIBUTABLE TO INTERFACE, INC. | | $ | 12,078 | | | $ | 5,457 | | | $ | 21,580 | | | $ | 4,970 | |
| | | | | | | | | | | | | | | | |
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.09 | |
Discontinued Operations | | | -- | | | | -- | | | | -- | | | | (0.01 | ) |
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.08 | |
| | | | | | | | | | | | | | | | |
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.09 | |
Discontinued Operations | | | -- | | | | -- | | | | -- | | | | (0.01 | ) |
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.08 | |
| | | | | | | | | | | | | | | | |
Common Shares Outstanding – Basic | | | 64,025 | | | | 63,190 | | | | 63,623 | | | | 63,197 | |
Common Shares Outstanding – Diluted | | | 64,578 | | | | 63,487 | | | | 64,106 | | | | 63,258 | |
| | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JULY 3, 2011 | | | JULY 4, 2010 | | | JULY 3, 2011 | | | JULY 4, 2010 | |
| | | | | | | | | | | | | | | | |
NET SALES | | $ | 267,640 | | | $ | 226,587 | | | $ | 513,042 | | | $ | 443,778 | |
Cost of Sales | | | 172,865 | | | | 146,453 | | | | 331,339 | | | | 290,270 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
GROSS PROFIT ON SALES | | | 94,775 | | | | 80,134 | | | | 181,703 | | | | 153,508 | |
Selling, General and Administrative Expenses | | | 68,638 | | | | 58,668 | | | | 134,038 | | | | 115,156 | |
Restructuring Charge | | | — | | | | — | | | | — | | | | 3,131 | |
| | | | | | | | | | | | |
OPERATING INCOME | | | 26,137 | | | | 21,466 | | | | 47,665 | | | | 35,221 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 6,783 | | | | 8,115 | | | | 13,439 | | | | 16,937 | |
Bond Retirement Expense | | | — | | | | — | | | | — | | | | 1,085 | |
Other Expense | | | 171 | | | | 447 | | | | 49 | | | | 545 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE | | | 19,183 | | | | 12,904 | | | | 34,177 | | | | 16,654 | |
Income Tax Expense | | | 6,369 | | | | 4,896 | | | | 11,539 | | | | 6,540 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NET INCOME | | | 12,814 | | | | 8,008 | | | | 22,638 | | | | 10,114 | |
| | | | | | | | | | | | | | | | |
Income Attributable to Non-Controlling Interest in Subsidiary | | | — | | | | (376 | ) | | | — | | | | (612 | ) |
| | | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO INTERFACE, INC. | | $ | 12,814 | | | $ | 7,632 | | | $ | 22,638 | | | $ | 9,502 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Basic | | $ | 0.20 | | | $ | 0.12 | | | $ | 0.35 | | | $ | 0.15 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Diluted | | $ | 0.20 | | | $ | 0.12 | | | $ | 0.35 | | | $ | 0.15 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Common Shares Outstanding — Basic | | | 65,398 | | | | 63,515 | | | | 65,108 | | | | 63,423 | |
Common Shares Outstanding — Diluted | | | 65,677 | | | | 64,118 | | | | 65,363 | | | | 63,917 | |
See accompanying notes to consolidated condensed financial statements.
-4-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(UNAUDITED)
(IN THOUSANDS)
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | |
| | | | | | |
| | OCT. 3, 2010 | | | OCT. 4, 2009 | | | OCT. 3, 2010 | | | OCT. 4, 2009 | |
| | | | | | | | | | | | |
Net Income | | $ | 12,342 | | | $ | 5,690 | | | $ | 22,456 | | | $ | 5,465 | |
Other Comprehensive Income, Foreign | | | | | | | | | | | | | | | | |
Currency Translation Adjustment and Pension Liability Adjustment | | | 23,247 | | | | 6,832 | | | | 1,786 | | | | 18,353 | |
Comprehensive Income | | $ | 35,589 | | | $ | 12,522 | | | $ | 24,242 | | | $ | 23,818 | |
| | | | | | | | | | | | | | | | |
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary | | | (1,081 | ) | | | (353 | ) | | | (1,957 | ) | | | (739 | ) |
Comprehensive Income Attributable to Interface, Inc. | | $ | 34,508 | | | $ | 12,169 | | | $ | 22,285 | | | $ | 23,079 | |
| | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JULY 3, 2011 | | | JULY 4, 2010 | | | JULY 3, 2011 | | | JULY 4, 2010 | |
| | | | | | | | | | | | | | | | |
Net Income | | $ | 12,814 | | | $ | 8,008 | | | $ | 22,638 | | | $ | 10,114 | |
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment | | | 4,092 | | | | (14,149 | ) | | | 12,358 | | | | (21,462 | ) |
| | | | | | | | | | | | |
Comprehensive Income (Loss) | | | 16,906 | | | | (6,141 | ) | | | 34,996 | | | | (11,348 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary | | | — | | | | (358 | ) | | | — | | | | (874 | ) |
| | | | | | | | | | | | |
Comprehensive Income (Loss) Attributable to Interface, Inc. | | $ | 16,906 | | | $ | (6,499 | ) | | $ | 34,996 | | | $ | (12,222 | ) |
| | | | | | | | | | | | |
See accompanying notes to consolidated condensed financial statements.
-5-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
| | | | | | | | | |
| | NINE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | OCT. 3, 2010 | | | OCT. 4, 2009 | | | JULY 3, 2011 | | JULY 4, 2010 | |
OPERATING ACTIVITIES: | | | | | | | |
Net Income | | $ | 22,456 | | | $ | 5,465 | | | $ | 22,638 | | $ | 10,114 | |
Loss from Discontinued Operations | | | -- | | | | 650 | | |
Income from Continuing Operations | | | 22,456 | | | | 6,115 | | |
Adjustments to Reconcile Income to Cash Provided by Operating Activities: | | | | | | | | | |
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: | | |
Premiums Paid to Repurchase Senior Notes | | | 792 | | | | 5,264 | | | — | | 792 | |
Depreciation and Amortization | | | 19,253 | | | | 18,856 | | | 13,112 | | 11,415 | |
Stock Compensation Amortization Expense | | | 8,120 | | 1,488 | |
Deferred Income Taxes and Other | | | (167 | ) | | | (3,863 | ) | | 3,276 | | | (929 | ) |
Working Capital Changes: | | | | | | | | | |
Accounts Receivable | | | (10,069 | ) | | | 27,535 | | | | (7,995 | ) | | | (7,077 | ) |
Inventories | | | (20,453 | ) | | | 13,457 | | | | (30,010 | ) | | | (14,024 | ) |
Prepaid Expenses | | | (7,404 | ) | | | (1,104 | ) | | | (4,083 | ) | | | (7,412 | ) |
Accounts Payable and Accrued Expenses | | | 27,196 | | | | (20,399 | ) | | | (26,442 | ) | | 18,277 | |
| | | | | | | | | | | | | |
CASH PROVIDED BY OPERATING ACTIVITIES: | | | 31,604 | | | | 45,861 | | |
| | |
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | | (21,384 | ) | | 12,644 | |
| | | | | | |
| | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | |
Capital Expenditures | | | (18,443 | ) | | | (9,897 | ) | | | (18,814 | ) | | | (11,312 | ) |
Other | | | (1,816 | ) | | | 1,370 | | | | (1,995 | ) | | | (628 | ) |
| | | | | | | | | | | | | |
| | |
CASH USED IN INVESTING ACTIVITIES: | | | (20,259 | ) | | | (8,527 | ) | | | (20,809 | ) | | | (11,940 | ) |
| | | | �� | | | | | | | | | |
| | |
FINANCING ACTIVITIES: | | | | | | | | | |
Borrowing of Long-Term Debt | | | -- | | | | 144,452 | | |
Repurchase of Senior and Senior Subordinated Notes | | | (39,586 | ) | | | (138,002 | ) | |
Debt Issuance Costs | | | -- | | | | (6,161 | ) | |
Premiums Paid to Repurchase Senior and Senior Subordinated Notes | | | (792 | ) | | | (5,264 | ) | |
Repurchase of Senior Notes | | | — | | | (39,586 | ) |
Other | | | | (505 | ) | | — | |
Premiums Paid to Repurchase Senior Notes | | | — | | | (792 | ) |
Proceeds from Issuance of Common Stock | | | 1,803 | | | | 58 | | | 2,579 | | 1,174 | |
Dividends Paid to Interface, Inc. Shareholders | | | (1,435 | ) | | | (478 | ) | |
Dividends Paid to Joint Venture Partner | | | (7,904 | ) | | | -- | | |
Dividends Paid | | | | (2,612 | ) | | | (794 | ) |
| | | | | | |
| | | | | | | | | |
CASH USED IN FINANCING ACTIVITIES: | | | (47,914 | ) | | | (5,395 | ) | | | (538 | ) | | | (39,998 | ) |
| | | | | | | | | | | | | |
Net Cash Provided by (Used in) Operating, Investing and | | | | | | | | | |
Financing Activities | | | (36,569 | ) | | | 31,939 | | |
| | |
Net Cash Used in Operating, Investing and Financing Activities | | | | (42,731 | ) | | | (39,294 | ) |
Effect of Exchange Rate Changes on Cash | | | 2,060 | | | | 2,242 | | | 794 | | | (2,901 | ) |
| | | | | | |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS: | | | | | | | | | |
Net Change During the Period | | | (34,509 | ) | | | 34,181 | | | | (41,937 | ) | | | (42,195 | ) |
Balance at Beginning of Period | | | 115,363 | | | | 71,757 | | | 69,236 | | 115,363 | |
| | | | | | | | | | | | | |
| | |
Balance at End of Period | | $ | 80,854 | | | $ | 105,938 | | | $ | 27,299 | | $ | 73,168 | |
| | | | | | |
See accompanying notes to consolidated condensed financial statements.
-6-
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 –— CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 3, 2010,2, 2011, as filed with the Commission.
The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 3, 2010,2, 2011, consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
As described below in Note 9, the Company has sold its Fabrics Group business segment. The results of operations and related disposal costs, gains and losses for this business are classified as discontinued operations for all periods presented.
Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 –— INVENTORIES
Inventories are summarized as follows:
| | | | | | | | | |
| | Oct. 3, 2010 | | | Jan. 3, 2010 | | | July 3, 2011 | | January 2, 2011 | |
| | (In thousands) | | | (In thousands) | |
Finished Goods | | $ | 77,593 | | | $ | 65,478 | | | $ | 109,170 | | $ | 78,303 | |
Work in Process | | | 18,776 | | | | 15,764 | | | 18,979 | | 16,731 | |
Raw Materials | | | 37,405 | | | | 31,007 | | | 42,368 | | 41,732 | |
| | $ | 133,774 | | | $ | 112,249 | | | | | | |
| | | $ | 170,517 | | $ | 136,766 | |
| | | | | | |
NOTE 3 –— EARNINGS (LOSS) PER SHARE
The Company computes basic earnings (loss) per share (“EPS”) attributable to common shareholders by dividing income from continuing operations attributable to common shareholders, income from discontinued operations attributable to common shareholders and net income attributable to Interface, Inc. common shareholders, by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings. Income attributable to non-controlling interest in subsidiary is in cludedincluded in the calculation of basic and diluted EPS from continuing operations.operations, where applicable.
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In the first quarter of 2009, theThe Company adopted a newly issued accounting standard, which requires the Company to includeincludes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations when the inclusion of these shares would be dilutive. As a result, the Company has includedincludes all of its outstanding restricted stock awards in the calculation of basic and diluted EPS for all periods presented. This accounting standard also requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings.EPS. Distributed earnings representinclude common stock dividends and dividends earned on unvested share-based paym entpayment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. Unvested share-based amountsawards of restricted stock are paid dividends equally with all other shares of common stock. The following table showstables show distributed and undistributed earnings:
| | Three Months Ended | | | Nine Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | |
| | | | | | | | | | | | |
Earnings Per Share from Continuing Operations | | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic Earnings Per Share Attributable to | | | | | | | | | | | | |
Common Shareholders: | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.02 | | | $ | 0.01 | |
Undistributed Earnings | | | 0.18 | | | | 0.08 | | | | 0.32 | | | | 0.08 | |
Total | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | |
Diluted Earnings Per Share Attributable to | | | | | | | | | | | | | | | | |
Common Shareholders: | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.02 | | | $ | 0.01 | |
Undistributed Earnings | | | 0.18 | | | | 0.08 | | | | 0.32 | | | | 0.08 | |
Total | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | |
Earnings (Loss) Per Share from Discontinued Operations | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic and Diluted Earnings (Loss) Per Share Attributable to | | | | | | | | | | | | | | | | |
Common Shareholders: | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | |
Undistributed Earnings (Loss) | | | -- | | | | -- | | | | -- | | | | (0.01 | ) |
Total | | $ | -- | | | $ | -- | | | $ | -- | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Basic Earnings Per Share | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.08 | |
Diluted Earnings Per Share | | $ | 0.19 | | | $ | 0.09 | | | $ | 0.34 | | | $ | 0.08 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | July 3, 2011 | | | July 4, 2010 | | | July 3, 2011 | | | July 4, 2010 | |
| | | | |
Earnings Per Share | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic Earnings Per Share Attributable to Common Shareholders: | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.01 | |
Undistributed Earnings | | | 0.18 | | | | 0.11 | | | | 0.31 | | | | 0.14 | |
| | | | | | | | | | | | |
Total | | $ | 0.20 | | | $ | 0.12 | | | $ | 0.35 | | | $ | 0.15 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted Earnings Per Share Attributable to Common Shareholders: | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.01 | |
Undistributed Earnings | | | 0.18 | | | | 0.11 | | | | 0.31 | | | | 0.14 | |
| | | | | | | | | | | | |
Total | | $ | 0.20 | | | $ | 0.12 | | | $ | 0.35 | | | $ | 0.15 | |
| | | | | | | | | | | | |
The following table presentstables present net income from continuing operations and net income attributable to Interface, Inc. that was attributable to participating securities:
| | Three Months Ended | | | Nine Months Ended | | | | | | | | | | | | | | | | | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Three Months Ended | | Six Months Ended | |
| | | | | (In millions) | | | | | | July 3, 2011 | | July 4, 2010 | | July 3, 2011 | | July 4, 2010 | |
Income from Continuing Operations | | $ | 0.3 | | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.1 | | |
| | | (In millions) | |
Net Income | | | $ | 0.3 | | $ | 0.2 | | $ | 0.6 | | $ | 0.2 | |
Net Income Attributable to Interface, Inc. | | | 0.3 | | | | 0.1 | | | | 0.6 | | | | 0.1 | | | $ | 0.3 | | $ | 0.1 | | $ | 0.6 | | $ | 0.2 | |
The weighted average shares outstanding for basic and diluted EPS were as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | July 3, 2011 | | July 4, 2010 | | July 3, 2011 | | July 4, 2010 | |
| | | | | (In thousands) | | | | | | (In thousands) | |
Weighted Average Shares Outstanding | | | 62,284 | | | | 61,796 | | | | 61,882 | | | | 61,803 | | | 63,623 | | 62,277 | | 63,333 | | 62,185 | |
Participating Securities | | | 1,741 | | | | 1,394 | | | | 1,741 | | | | 1,394 | | | 1,775 | | 1,238 | | 1,775 | | 1,238 | |
| | | | | | | | | | |
Shares for Basic Earnings Per Share | | | 64,025 | | | | 63,190 | | | | 63,623 | | | | 63,197 | | | 65,398 | | 63,515 | | 65,108 | | 63,423 | |
Dilutive Effect of Stock Options | | | 553 | | | | 297 | | | | 483 | | | | 61 | | | 279 | | 603 | | 255 | | 494 | |
| | | | | | | | | | |
Shares for Diluted Earnings Per Share | | | 64,578 | | | | 63,487 | | | | 64,106 | | | | 63,258 | | | 65,677 | | 64,118 | | 65,363 | | 63,917 | |
| | | | | | | | | | |
For the quartersthree-month periods ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, options to purchase 389,00020,000 and 292,000205,000 shares of common stock, respectively, were not included in the computation of diluted earnings per shareEPS as their impact would be anti-dilutive. For the nine-monthsix-month periods ended OctoberJuly 3, 20102011, and OctoberJuly 4, 2009,2010, options to purchase 404,00020,000 and 1,358,000245,000 shares of common stock, respectively, were not included in the computation of diluted earnings per shareEPS as their impact would be anti-dilutive.
NOTE 4 –— SEGMENT INFORMATION
Based on the quantitative thresholds specified in applicableby accounting standards, the Company has determined that it has two reportable segments: (1) the Modular Carpet segment, which includes its InterfaceFLOR, Heuga and FLOR modular carpet businesses, as well as its Intersept antimicrobial sales and licensing program, and (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses. In 2007, the Company sold its former Fabrics Group business segment (see Note 9 for further information). Accordingly, the Company has included the operations of the former Fabrics Group business segment in discontinued operations.
-8-
The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010,2, 2011, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision-maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations o fof the individual segment. The nine-month period ended October 4, 2009 includes $5.9 million of income at the corporate level from litigation settlements. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.
Segment Disclosures
Summary information by segment follows:
| | | | | | | | | | | | |
| | Modular | | | Bentley | | | | |
| | Carpet | | | Prince Street | | | Total | |
| | (In thousands) | |
Three Months Ended July 3, 2011 | | | | | | | | | | | | |
Net Sales | | $ | 240,566 | | | $ | 27,074 | | | $ | 267,640 | |
Depreciation and Amortization | | | 6,700 | | | | 565 | | | | 7,265 | |
Operating Income | | | 26,937 | | | | 96 | | | | 27,033 | |
| | | | | | | | | | | | |
Three Months Ended July 4, 2010 | | | | | | | | | | | | |
Net Sales | | $ | 202,695 | | | $ | 23,892 | | | $ | 226,587 | |
Depreciation and Amortization | | | 4,752 | | | | 563 | | | | 5,315 | |
Operating Income (Loss) | | | 25,374 | | | | (1,145 | ) | | | 24,229 | |
| | Modular Carpet | | | Bentley Prince Street | | | Total | | | | | | | | | | | | | |
| | (In thousands) | | | Modular | | Bentley | | | |
Three Months Ended October 3, 2010 | | | | | | | | | | |
Net Sales | | $ | 226,513 | | | $ | 26,211 | | | $ | 252,724 | | |
Depreciation and Amortization | | | 4,251 | | | | 538 | | | | 4,789 | | |
Operating Income | | | 29,450 | | | | 45 | | | | 29,495 | | |
| | | | | | | | | | | | | | Carpet | | Prince Street | | Total | |
Three Months Ended October 4, 2009 | | | | | | | | | | | | | |
| | | (In thousands) | |
Six Months Ended July 3, 2011 | | |
Net Sales | | $ | 194,107 | | | $ | 24,257 | | | $ | 218,364 | | | $ | 459,846 | | $ | 53,196 | | $ | 513,042 | |
Depreciation and Amortization | | | 4,534 | | | | 586 | | | | 5,120 | | | 14,803 | | 1,123 | | 15,926 | |
Operating Income (Loss) | | | 20,292 | | | | (1,024 | ) | | | 19,268 | | | 52,271 | | | (61 | ) | | 52,210 | |
| | |
Six Months Ended July 4, 2010 | | |
Net Sales | | | $ | 396,702 | | $ | 47,076 | | $ | 443,778 | |
Depreciation and Amortization | | | 8,417 | | 1,122 | | 9,539 | |
Operating Income (Loss) | | | 42,554 | | | (2,556 | ) | | 39,998 | |
| | Modular Carpet | | | Bentley Prince Street | | | Total | |
| | (In thousands) | |
Nine Months Ended October 3, 2010 | | | | | | | | | |
Net Sales | | $ | 623,215 | | | $ | 73,287 | | | $ | 696,502 | |
Depreciation and Amortization | | | 12,668 | | | | 1,660 | | | | 14,328 | |
Operating Income (Loss) | | | 72,004 | | | | (2,511 | ) | | | 69,493 | |
| | | | | | | | | | | | |
Nine Months Ended October 4, 2009 | | | | | | | | | | | | |
Net Sales | | $ | 557,127 | | | $ | 71,842 | | | $ | 628,969 | |
Depreciation and Amortization | | | 13,153 | | | | 1,847 | | | | 15,000 | |
Operating Income (Loss) | | | 44,442 | | | | (5,981 | ) | | | 38,461 | |
A reconciliation of the Company’s total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | July 3, 2011 | | | July 4, 2010 | | | July 3, 2011 | | | July 4, 2010 | |
| | (In thousands) | | | (In thousands) | |
DEPRECIATION AND AMORTIZATION | | | | | | | | | | | | | | | | |
Total segment depreciation and amortization | | $ | 7,265 | | | $ | 5,315 | | | $ | 15,926 | | | $ | 9,539 | |
Corporate depreciation and amortization | | | 1,385 | | | | 1,464 | | | | 5,306 | | | | 3,364 | |
| | | | | | | | | | | | |
Reported depreciation and amortization | | $ | 8,650 | | | $ | 6,779 | | | $ | 21,232 | | | $ | 12,903 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
OPERATING INCOME | | | | | | | | | | | | | | | | |
Total segment operating income | | $ | 27,033 | | | $ | 24,229 | | | $ | 52,210 | | | $ | 39,998 | |
Corporate income, expenses and other reconciling amounts | | | (896 | ) | | | (2,763 | ) | | | (4,545 | ) | | | (4,777 | ) |
| | | | | | | | | | | | |
Reported operating income | | $ | 26,137 | | | $ | 21,466 | | | $ | 47,665 | | | $ | 35,221 | |
| | | | | | | | | | | | |
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| | Three Months Ended | | | Nine Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | |
| | (In thousands) | | | (In thousands) | |
DEPRECIATION AND AMORTIZATION | | | | | | | | | | | | |
Total segment depreciation and amortization | | $ | 4,789 | | | $ | 5,120 | | | $ | 14,328 | | | $ | 15,000 | |
Corporate depreciation and amortization | | | 1,562 | | | | 1,691 | | | | 4,925 | | | | 3,856 | |
Reported depreciation and amortization | | $ | 6,351 | | | $ | 6,811 | | | $ | 19,253 | | | $ | 18,856 | |
| | | | | | | | | | | | | | | | |
OPERATING INCOME | | | | | | | | | | | | | | | | |
Total segment operating income | | $ | 29,495 | | | $ | 19,268 | | | $ | 69,493 | | | $ | 38,461 | |
Corporate income, expenses and other reconciling amounts | | | (1,456 | ) | | | (343 | ) | | | (6,233 | ) | | | 4,403 | |
Reported operating income | | $ | 28,039 | | | $ | 18,925 | | | $ | 63,260 | | | $ | 42,864 | |
| | �� | | | | | | | |
| | | July 3, 2011 | | January 2, 2011 | |
| | Oct. 3, 2010 | | | Jan. 3, 2010 | | | (In thousands) | |
ASSETS | | (In thousands) | | | | | | | | |
Total segment assets | | $ | 605,210 | | | $ | 561,948 | | | $ | 667,659 | | $ | 610,024 | |
Discontinued operations | | | 1,500 | | | | 1,500 | | | 1,200 | | 1,200 | |
Corporate assets and eliminations | | | 124,219 | | | | 163,791 | | | 110,378 | | 144,209 | |
| | | | | | |
Reported total assets | | $ | 730,929 | | | $ | 727,239 | | | $ | 779,237 | | $ | 755,433 | |
| | | | | | |
NOTE 5 –— LONG-TERM DEBT
7 5/8% Senior Notes
On December 3, 2010, the Company completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. The Company used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of the 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes pursuant to a Company tender offer.
As of July 3, 2011, the balance of the 7 5/8% Senior Notes outstanding was $275 million. The estimated fair value of the 7 5/8% Senior Notes as of July 3, 2011, based on then current market prices, was $288.1 million.
11 3/8% Senior Secured Notes
On June 5, 2009, the Company completed ana private offering of $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013 (the “Senior“11 3/8% Senior Secured Notes”). Interest on the 11 3/8% Senior Secured Notes is payable semi-annually on May 1 and November 1.1, beginning November 1, 2009. The 11 3/8% Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries. The Senior Secured Notes are secured by a second-priority lien on substantially all of the Company’s and certain of the Company’s domestic subsidiaries’ assets that secure the Company’s domestic revolving credit facility (discussed below) on a first-priority basis.
The Senior Secured Notes were sold at a price of 96.301% of their face value, resulting in $144.5 million of gross proceeds. The $5.5 million original issue discount is being amortized over the life of the notes through interest expense.
The Company may redeem all or a part of the Senior Secured Notes from time to time at a price equal to 100% of the principal amount plus a make-whole premium. Prior to May 1, 2012, the Company may redeem up to 35% of the Senior Secured Notes with cash proceeds from specified equity offerings at a price equal to 111.375% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption. As of OctoberJuly 3, 2010,2011, the balance of the 11 3/8% Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $146.1$8.0 million. The estimated fair value of the Senior Secured Notes as of OctoberJuly 3, 2010,2011, based on then current market prices, was $171.8$8.1 million.
10.375% Senior Notes
On February 1, 2010, the Company repaid the remaining balance of $14.6 million of these notes at maturity.
9.5% Senior Subordinated Notes
As of October 3, 2010,On February 4, 2004, the Company had outstanding $110.0completed a private offering of $135 million in 9.5% Senior Subordinated Notes due 2014. Interest on these notes is payable semi-annually on February 1 and August 1 beginning August 1, 2004. As of July 3, 2011, the Company had outstanding $11.5 million in 9.5% Senior Subordinated Notes due 2014 (the “9.5% Senior Subordinated Notes”). The estimated fair value of the 9.5% Senior Subordinated Notes as of OctoberJuly 3, 2010,2011, based on then current market prices, was $113.3$11.5 million. During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of these notes at a price equal to 103.167% of the face value of the notes. Accordingly, the premium paid in connection with this redemption was approximately $0.8 million. In addition, the Company wrote off the portion of the unamortized debt issuance costs related to the redeemed bonds, an amount equal to $0.3 million. These expenses are contained in the “Bond Retirement Expenses”Expense” line item in ourthe Company’s consolidated condensed statements of operations.
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Tender Offer
Credit Facilities
On November 3, 2010,June 24, 2011, the Company announcedamended and restated its primary revolving credit facility. Under the commencement ofamended and restated facility (the “Facility”), as under its predecessor, the Company’s obligations are secured by a tender offer relating tofirst priority lien on substantially all of the assets of Interface, Inc. and each of its outstanding Senior Secured Notes and Senior Subordinated Notes and a solicitation of consents frommaterial domestic subsidiaries, which subsidiaries also guarantee the holders of the notes to amend the indentures governing the notes.Facility. The tender offer is scheduled to expire at 11:59 P.M., Eastern Time, on December 2, 2010, unless extended or earlier terminated, and the consent solicitation is scheduled to expire at 5:00 P.M., Eastern Time, on November 17, 2010, unless extended or earlier terminated.
Credit Facilities
The Company maintains a domestic revolving credit agreement (the “Facility”) that provides a maximum aggregate amount of $100 million of loans and letters of credit available to usthe Company at any one time (subjectremains $100 million (with the option to further increase that amount to up to a borrowing base) with an option for us to increase that maximum aggregate amount toof $150 million (upon— the same option amount as in its predecessor — subject to the satisfaction of certain conditions, andconditions), subject to a borrowing base).base described in the Facility. The Facility differs from its predecessor in the following key respects:
The stated maturity date of the Facility has been extended to June 24, 2016.
The borrowing base governing borrowing availability has been expanded in certain respects.
The applicable interest rates and unused line fees have been reduced. Interest is now charged at varying rates computed by applying a margin ranging from 0.75% to 2.25% (reduced from the range of 1.75% to 4.00%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and the average excess borrowing availability during the most recently completed fiscal quarter. The unused line fee was reduced to 0.375% per annum from 0.75% per annum.
The negative covenants have been relaxed in certain respects, including with respect to the amount of other indebtedness and liens the Company is presentlymay incur or allow to exist.
The dollar threshold to trigger the applicability of the Facility’s only financial covenant, a fixed charge coverage test, and the assertion of cash dominion by the lender group has been reduced.
The events of default have been amended to make certain of the events of default less restrictive by increasing the applicable dollar thresholds thereunder.
The lender group has been changed in compliance with all covenantscertain respects, and the lending commitments have been reallocated among the lenders. In addition, the threshold of “Required Lenders” for purposes of certain amendments and consents under the Facility and anticipates that it will remain in compliance withhas been lowered to more than 50% of the covenants foraggregate amount of the foreseeable future. lending commitments from more than 66 2/3% of the aggregate amount of the lending commitments.
As of OctoberJuly 3, 2010,2011, there were zero borrowings and $8.1$5.2 million in letters of credit outstanding under the Facility. As of OctoberJuly 3, 2010,2011, the Company could have incurred $62.6$83.2 million of additional borrowings under the Facility.
Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank N.V. Under this Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time. As of OctoberJuly 3, 2010,2011, there were no borrowings outstanding under this facility, and the Company could have incurred €20€20 million (approximately $27.3$28.9 million) of additional borrowings under the facility.
Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $11.4$17.8 million of lines of credit available. As of OctoberJuly 3, 2010,2011, there were no borrowings outstanding under these lines of credit.
NOTE 6 –— STOCK-BASED COMPENSATION
Stock Option Awards
In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services –— the requisite service period (usually the vesting period) –— in exchange for the award. The grant date fair value for options and similar instruments will be estimated using option pricing models. Under applicable accounting standards, the Company is required to select a valuation technique or option pricing model. The Company uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense ac cordingly.accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.
During the first ninesix months of 20102011 and 2009,2010, the Company recognized stock option compensation costs of $1.1$0.6 million and $1.0$0.6 million, respectively. In the thirdsecond quarters of 20102011 and 2009,2010, the Company recognized stock option compensation costs of $0.4$0.3 million and $0.4$0.3 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at OctoberJuly 3, 2010,2011, approximated $1.6$0.9 million, and the weighted average period of time over which this cost will be recognized is approximately two years.one year.
-11-
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first ninesix months of fiscal years 2010 and 2009:year 2010. There were no stock options granted in the first six months of 2011.
| | Nine Months Ended Oct. 3, 2010 | | Nine Months Ended Oct. 4, 2009 |
Risk free interest rate | | | 2.09 | % | | | 1.6 | % |
Expected life | | 5.5 years | | | 5.5 years | |
Expected volatility | | | 61 | % | | | 61 | % |
Expected dividend yield | | | 0.3 | % | | | 2.6 | % |
| | | | |
| | Six Months Ended | |
| | July 4, 2010 | |
Risk free interest rate | | | 2.3 | % |
Expected life | | 5.5 years
| |
Expected volatility | | | 61 | % |
Expected dividend yield | | | 0.5 | % |
The weighted average grant date fair value of stock options granted during the first ninesix months of fiscal 2010 was $6.79$4.14 per share.
The following table summarizes stock options outstanding as of OctoberJuly 3, 2010,2011, as well as activity during the ninesix months then ended:
| | Shares | | | Weighted Average Exercise Price | | | | | | | | | |
Outstanding at January 3, 2010 | | | 1,576,000 | | | $ | 5.75 | | |
| | | Weighted Average | |
| | | Shares | | Exercise Price | |
Outstanding at January 2, 2011 | | | 1,148,500 | | $ | 5.75 | |
Granted | | | 239,000 | | | | 12.43 | | | — | | — | |
Exercised | | | 437,000 | | | | 4.43 | | | 484,500 | | 5.55 | |
Forfeited or canceled | | | 32,500 | | | | 6.29 | | | 7,000 | | 11.47 | |
Outstanding at October 3, 2010 | | | 1,345,500 | | | $ | 7.19 | | |
| | | | | | | | | | | | | |
Exercisable at October 3, 2010 | | | 592,000 | | | $ | 7.95 | | |
Outstanding at July 3, 2011 | | | 657,000 | | $ | 8.92 | |
| | | | | | |
| | |
Exercisable at July 3, 2011 | | | 418,000 | | $ | 7.05 | |
| | | | | | |
At OctoberJuly 3, 2010,2011, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $10.0$7.2 million and $4.0$5.4 million, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).
Cash proceeds and intrinsic value related to total stock options exercised during the first ninesix months of fiscal years 20102011 and 20092010 are provided in the following table:
| | Nine Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | |
| | (In millions) | |
Proceeds from stock options exercised | | $ | 1.8 | | | $ | 0.1 | |
Intrinsic value of stock options exercised | | $ | 3.9 | | | $ | 0.2 | |
For the nine months ended October 3, 2010 and October 4, 2009, thetable below. The Company recognized adid not recognize any significant tax benefit with regard to stock options of $0.2 million and $0.2 million, respectively.in either period presented.
| | | | | | | | |
| | Six Months Ended | |
| | July 3, 2011 | | | July 4, 2010 | |
| | (In thousands) | |
Proceeds from stock options exercised | | $ | 2,579 | | | $ | 1,174 | |
Intrinsic value of stock options exercised | | | 5,819 | | | | 2,660 | |
Restricted Stock Awards
During the ninesix months ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, the Company granted restricted stock awards for 529,000668,000 and 27,000 shares, respectively, of Class B common stock. These awards (or a portion thereof) vest with respect to each recipient over a two to five-yearfive year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, these shares (or a portion thereof) could vest earlier upon the attainment of certain performance criteria, in the event of a change in control of the Company, or upon involuntary termination without cause.
Compensation expense related to outstanding restricted stock grants was $1.9$8.1 million and $1.5 million for the ninesix months ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively. Accounting standards require that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.
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The following table summarizes restricted stock activity as of OctoberJuly 3, 2010,2011, and during the ninesix months then ended:
| | Shares | | | Weighted Average Grant Date Fair Value | | | | | | | | | |
Outstanding at January 3, 2010 | | | 1,394,000 | | | $ | 13.04 | | |
| | | Weighted Average | |
| | | Shares | | Grant Date Fair Value | |
Outstanding at January 2, 2011 | | | 1,740,000 | | $ | 13.04 | |
Granted | | | 529,000 | | | | 12.22 | | | 668,000 | | 17.08 | |
Vested | | | 183,000 | | | | 7.67 | | | 600,000 | | 12.23 | |
Forfeited or canceled | | | -- | | | | -- | | | 33,000 | | 14.13 | |
Outstanding at October 3, 2010 | | | 1,740,000 | | | $ | 12.22 | | |
| | | | | | |
Outstanding at July 3, 2011 | | | 1,775,000 | | $ | 15.03 | |
| | | | | | |
As of OctoberJuly 3, 2010,2011, the unrecognized total compensation cost related to unvested restricted stock was $13.8approximately $15.0 million. That cost is expected to be recognized by the end of 2015.
2014.
For the ninesix months ended OctoberJuly 3, 20102011, and OctoberJuly 4, 2009,2010, the Company recognized a tax benefitbenefits with regard to restricted stock of $0.5$2.1 million and $0.1$0.3 million, respectively.
NOTE 7 –— EMPLOYEE BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for the three-month and nine-monthsix-month periods ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
Defined Benefit Retirement Plan (Europe) | | July 3, 2011 | | | July 4, 2010 | | | July 3, 2011 | | | July 4, 2010 | |
| | (In thousands) | | | (In thousands) | |
Service cost | | $ | 74 | | | $ | 86 | | | $ | 145 | | | $ | 178 | |
Interest cost | | | 2,932 | | | | 2,616 | | | | 5,770 | | | | 5,379 | |
Expected return on assets | | | (3,041 | ) | | | (2,670 | ) | | | (5,975 | ) | | | (5,492 | ) |
Amortization of prior service costs | | | 21 | | | | 21 | | | | 42 | | | | 44 | |
Recognized net actuarial (gains)/losses | | | 155 | | | | 397 | | | | 305 | | | | 813 | |
| | | | | | | | | | | | |
Net periodic benefit cost | | $ | 141 | | | $ | 450 | | | $ | 287 | | | $ | 922 | |
| | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
Defined Benefit Retirement Plan (Europe) | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | |
| | (In thousands) | | | (In thousands) | |
Service cost | | $ | 88 | | | $ | 584 | | | $ | 266 | | | $ | 1,655 | |
Interest cost | | | 2,715 | | | | 2,786 | | | | 8,094 | | | | 7,921 | |
Expected return on assets | | | (2,772 | ) | | | (2,685 | ) | | | (8,264 | ) | | | (7,642 | ) |
Amortization of prior service costs | | | 22 | | | | 22 | | | | 66 | | | | 62 | |
Recognized net actuarial (gains)/losses | | | 413 | | | | 466 | | | | 1,226 | | | | 1,326 | |
Net periodic benefit cost | | $ | 466 | | | $ | 1,173 | | | $ | 1,388 | | | $ | 3,322 | |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
Salary Continuation Plan (SCP) | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | July 3, 2011 | | July 4, 2010 | | July 3, 2011 | | July 4, 2010 | |
| | (In thousands) | | | (In thousands) | | | (In thousands) | | (In thousands) | |
Service cost | | $ | 86 | | | $ | 81 | | | $ | 257 | | | $ | 243 | | | $ | 98 | | $ | 86 | | $ | 196 | | $ | 171 | |
Interest cost | | | 280 | | | | 271 | | | | 841 | | | | 812 | | | 284 | | 280 | | 568 | | 561 | |
Amortization of transition obligation | | | 55 | | | | 55 | | | | 164 | | | | 164 | | | 55 | | 55 | | 110 | | 110 | |
Amortization of prior service cost | | | 12 | | | | 12 | | | | 36 | | | | 36 | | | 12 | | 12 | | 24 | | 24 | |
Amortization of loss | | | 68 | | | | 70 | | | | 205 | | | | 209 | | | 95 | | 68 | | 185 | | 137 | |
| | | | | | | | | | |
Net periodic benefit cost | | $ | 501 | | | $ | 489 | | | $ | 1,503 | | | $ | 1,464 | | | $ | 544 | | $ | 501 | | $ | 1,083 | | $ | 1,003 | |
| | | | | | | | | | |
NOTE 8 –— 2010 RESTRUCTURING CHARGES
2010 Restructuring Charge
CHARGE
In the first quarter of 2010, the Company adopted a restructuring plan primarily related to workforce reduction in its European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A total of approximately 50 employees were affected by this restructuring plan. In connection with this plan, the Company recorded a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involvesinvolved cash expenditures, primarily severance expenses. It is anticipated that this restructuring plan will generate annual savings of approximately $3.2 million. Actions and expenses related to this plan were s ubstantiallysubstantially completed in the first quarter of 2010.
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A summary of these restructuring activities is presented below:
| | Total Restructuring Charge | | | Costs Incurred in 2010 | | | Balance at Oct. 3, 2010 | |
| | (In thousands) | |
Workforce reduction | | $ | 3,131 | | | $ | 1,859 | | | $ | 1,272 | |
| | | | | | | | | | | | | | | | |
| | Total | | | | | | | | | | |
| | Restructuring | | | Costs Incurred | | | Costs Incurred | | | Balance at | |
| | Charge | | | in 2010 | | | in 2011 | | | July 3, 2011 | |
| | (In thousands) | |
Workforce reduction | | $ | 3,131 | | | $ | 2,674 | | | $ | 391 | | | $ | 66 | |
The table below details these restructuring activities by segment:
| | | | | | | | | | | | | | | | |
| | Modular | | | Bentley | | | | | | | |
| | Carpet | | | Prince Street | | | Corporate | | | Total | |
| | (In thousands) | |
| | | | |
Total amounts expected to be incurred | | $ | 2,951 | | | $ | 180 | | | $ | — | | | $ | 3,131 | |
Cumulative amounts incurred to date | | | 2,885 | | | | 180 | | | | — | | | | 3,065 | |
Total amounts incurred in the six-month period ended July 3, 2011 | | | 391 | | | | — | | | | — | | | | 391 | |
| | Modular Carpet | | | Bentley Prince Street | | | Corporate | | | Total | |
| | (In thousands) | |
| | | | | | | | | | | | |
Total amounts expected to be incurred | | $ | 2,951 | | | $ | 180 | | | $ | -- | | | $ | 3,131 | |
Cumulative amounts incurred to date | | | 1,679 | | | | 180 | | | | -- | | | | 1,859 | |
Total amounts incurred in the nine-month period ended October 3, 2010 | | | 1,679 | | | | 180 | | | | -- | | | | 1,859 | |
2009 Restructuring Plan
In the first quarter of 2009, the Company adopted a restructuring plan, primarily comprised of a further reduction in the Company’s worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for its products on a global level. In connection with the plan, the Company recorded a pre-tax restructuring charge of $5.7 million, comprised of $4.0 million of employee severance expense and $1.7 million of other exit costs (primarily costs to exit the Canadian manufacturing facilities, lease exit costs and other costs). Approximately $5.2 million of the restructuring charge involves cash expenditures, primarily severance expense. In the second quarter of 2009, the Company recorded an additional $1.9 million restructuring char ge as a continuation of this plan. The charge in the second quarter of 2009 was due to approximately 80 additional employee reductions, and related entirely to employee severance expense.
A summary of these restructuring activities is presented below:
| | Total Restructuring Charges | | | Costs Incurred in 2009 | | | Costs Incurred In 2010 | | | Balance at Oct. 3, 2010 | |
| | (In thousands) | |
Facilities consolidation | | $ | 970 | | | $ | 970 | | | $ | -- | | | $ | -- | |
Workforce reduction | | | 5,873 | | | | 3,920 | | | | 1,671 | | | | 282 | |
Other charges | | | 784 | | | | 784 | | | | -- | | | | -- | |
| | $ | 7,627 | | | $ | 5,674 | | | $ | 1,671 | | | $ | 282 | |
The table below details these restructuring activities by segment:
| | Modular Carpet | | | Bentley Prince Street | | | Corporate | | | Total | |
| | (In thousands) | |
Total amounts expected to be incurred | | $ | 6,865 | | | $ | 762 | | | $ | -- | | | $ | 7,627 | |
Cumulative amounts incurred to date | | | 6,583 | | | | 762 | | | | -- | | | | 7,345 | |
Total amounts incurred in the nine-month period ended October 3, 2010 | | | 1,671 | | | | -- | | | | -- | | | | 1,671 | |
NOTE 9 –— DISCONTINUED OPERATIONS
In 2007, the Company sold its Fabrics Group business segment. All activity related to this business has been included in discontinued operations. Assets and liabilities of this business segment have been reported in assets and liabilities held for sale for all reported periods.
Summary operating results for the above-described discontinuedDiscontinued operations are as follows:
| | Three Months Ended | | Nine Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | Oct. 3, 2010 | | Oct. 4, 2009 | |
| | (In thousands) | | (In thousands) | |
Net sales | | $ | -- | | | $ | -- | | $ -- | | $ | -- | |
Loss on operations before taxes on income | | | -- | | | | -- | | -- | | | (1,000 | ) |
Tax benefit | | | -- | | | | -- | | -- | | | 350 | |
Loss on operations, net of tax | | | -- | | | | -- | | -- | | | (650 | ) |
Thehad no net sales and no net income or loss on operations for the nine months ended October 4, 2009 reflects charges taken to reduce the carrying value of long-lived assets to their approximate fair market value.
Assets and liabilities, including reserves, related to the above-described discontinued operations that were held for sale consistin either of the following:
| | Oct. 3, 2010 | | | Jan. 3, 2010 | |
| | (In thousands) | |
Current assets | | $ | -- | | | $ | -- | |
Property and equipment | | | 1,500 | | | | 1,500 | |
Other assets | | | -- | | | | -- | |
Current liabilities | | | -- | | | | -- | |
Other liabilities | | | -- | | | | -- | |
three-month or six-month periods ended July 3, 2011 and July 4, 2010.
NOTE 10 –— SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $21.2$11.2 million and $27.9$15.7 million for the ninesix months ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively. Income tax payments amounted to $10.8$11.1 million and $14.4$7.5 million for the ninesix months ended OctoberJuly 3, 2011, and July 4, 2010, and October 4, 2009, respectively.
NOTE 11 –— RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010,June 2011, the Financial Accounting Standards Board (“FASB”) amended an accounting standard regarding the presentation of comprehensive income. This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods ending after December 31, 2012, with earlier adoption permitted. As this amendment only effects presentation, there is not expected to be any impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued new accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Such criteria now require additional fair value related disclosures. It also clarified existing fair value disclosureperforming Step 2 if qualitative factors indicate that it is more likely than not that an impairment to goodwill exists. This recent guidance about the level of disaggregation and about inputs and valuation techniques. This new guidance wasis effective for the first reporting periodfiscal years beginning after December 15, 2009 except2010, as well as for certain disclosure requirements effective for the first reporting period beginning after December 15, 2010.interim periods within such years. The adoption of this standard did not have any significant impact on the Company’s consolidated condensed financial statements.
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In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of vendor-specific objective evidence or third partythird-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. The standard will bebecame effective for the Company in the first quarter of 2011. Early adoption is permitted. The Company is currently evaluating the impact, if any, that the adoption of this standard may have on its consolidated financial statements.
In June 2009, the FASB issued a new standard which changes the consolidation model for variable interest entities. This standard requires companies to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the company (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the company. The standard was effective for the Company as of January 4, 2010. The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.
NOTE 12 –— INCOME TAXES
Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first ninesix months of 2010,2011, the Company increased its liability for unrecognized tax benefits by $0.3$0.5 million. As of OctoberJuly 3, 2010,2011, the Company had accrued approximately $9.9$8.7 million accrued for unrecognized tax benefits.
NOTE 13 – DIVIDEND TO NON-CONTROLLING INTEREST PARTNER
In the third quarter of 2010, the Company’s Thailand manufacturing joint venture paid dividends on a pro rata basis to its shareholders, including a dividend to the non-controlling interest partner in the joint venture. All operations, assets and liabilities of this joint venture are currently and have been previously consolidated by the Company. The dividend paid to the non-controlling interest partner was $7.9 million and had the effect of lowering the non-controlling interest in subsidiary balance as presented in the Company’s balance sheet.
On November 3, 2010, the Company purchased the shares of the Thailand manufacturing joint venture that were held by the non-controlling interest partner for approximately $4.3 million. After this purchase, the Company now owns all of the shares of the Thailand venture.
NOTE 14 –— SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013, and its 9.5% Senior Subordinated Notes due 2014.2014 and its 7 5/8% Senior Notes due 2018. These guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.
-15-
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINETHREE MONTHS ENDED OCTOBERJULY 3, 20102011
| | | | | | | | | | | | | | | | | | | | |
| | | | | | NON- | | | INTERFACE, INC. | | | CONSOLIDATION | | | | |
| | GUARANTOR | | | GUARANTOR | | | (PARENT | | | AND ELIMINATION | | | CONSOLIDATED | |
| | SUBSIDIARIES | | | SUBSIDIARIES | | | CORPORATION) | | | ENTRIES | | | TOTALS | |
| | (In thousands) | |
Net sales | | $ | 172,328 | | | $ | 138,845 | | | $ | — | | | $ | (43,533 | ) | | $ | 267,640 | |
Cost of sales | | | 126,770 | | | | 89,628 | | | | — | | | | (43,533 | ) | | | 172,865 | |
| | | | | | | | | | | | | | | |
Gross profit on sales | | | 45,558 | | | | 49,217 | | | | — | | | | — | | | | 94,775 | |
Selling, general and administrative expenses | | | 29,577 | | | | 33,341 | | | | 5,720 | | | | — | | | | 68,638 | |
| | | | | | | | | | | | | | | |
Operating income | | | 15,981 | | | | 15,876 | | | | (5,720 | ) | | | — | | | | 26,137 | |
Interest/Other expense | | | 12,031 | | | | 3,418 | | | | (8,495 | ) | | | — | | | | 6,954 | |
| | | | | | | | | | | | | | | |
Income (loss) before taxes on income and equity in income of subsidiaries | | | 3,950 | | | | 12,458 | | | | 2,775 | | | | — | | | | 19,183 | |
Income tax expense (benefit) | | | 1,311 | | | | 4,136 | | | | 922 | | | | — | | | | 6,369 | |
Equity in income (loss) of subsidiaries | | | — | | | | — | | | | 10,961 | | | | (10,961 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | | 2,639 | | | | 8,322 | | | | 12,814 | | | | (10,961 | ) | | | 12,814 | |
Net income (loss) attributable to Interface, Inc. | | $ | 2,639 | | | $ | 8,322 | | | $ | 12,814 | | | $ | (10,961 | ) | | $ | 12,814 | |
| | | | | | | | | | | | | | | |
-16-
| | GUARANTOR SUBSIDIARIES | | | NON-GUARANTOR SUBSIDIARIES | | | INTERFACE, INC. (PARENT CORPORATION) | | | CONSOLIDATION AND ELIMINATION ENTRIES | | | CONSOLIDATED TOTALS | |
| | (IN THOUSANDS) | |
| | | |
Net sales | | $ | 448,398 | | | $ | 351,527 | | | $ | -- | | | $ | (103,423 | ) | | $ | 696,502 | |
Cost of sales | | | 332,637 | | | | 224,300 | | | | -- | | | | (103,423 | ) | | | 453,514 | |
Gross profit on sales | | | 115,761 | | | | 127,227 | | | | -- | | | | -- | | | | 242,988 | |
Selling, general and administrative expenses | | | 74,812 | | | | 82,795 | | | | 18,990 | | | | -- | | | | 176,597 | |
Restructuring charges | | | 418 | | | | 2,713 | | | | -- | | | | -- | | | | 3,131 | |
Operating income (loss) | | | 40,531 | | | | 41,719 | | | | (18,990 | ) | | | -- | | | | 63,260 | |
Interest/Other expense | | | 18,726 | | | | 8,059 | | | | (431 | ) | | | -- | | | | 26,354 | |
Bond retirement expenses | | | -- | | | | -- | | | | 1,085 | | | | -- | | | | 1,085 | |
Income (loss) before taxes on income and equity in income of subsidiaries | | | 21,805 | | | | 33,660 | | | | (19,644 | ) | | | -- | | | | 35,821 | |
Income tax expense (benefit) | | | 8,559 | | | | 13,069 | | | | (8,263 | ) | | | -- | | | | 13,365 | |
Equity in income (loss) of subsidiaries | | | -- | | | | -- | | | | 32,961 | | | | (32,961 | ) | | | -- | |
Income (loss) from continuing operations | | | 13,246 | | | | 20,591 | | | | 21,580 | | | | (32,961 | ) | | | 22,456 | |
Loss on discontinued operations, net of tax | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Net income (loss) | | | 13,246 | | | | 20,591 | | | | 21,580 | | | | (32,961 | ) | | | 22,456 | |
Income attributable to non-controlling interest in subsidiary | | | -- | | | | (876 | ) | | | -- | | | | -- | | | | (876 | ) |
Net income (loss) attributable to Interface, Inc. | | $ | 13,246 | | | $ | 19,715 | | | $ | 21,580 | | | $ | (32,961 | ) | | $ | 21,580 | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREESIX MONTHS ENDED OCTOBERJULY 3, 20102011
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | CONSOLIDATION | | | | |
| | | | | | NON- | | | INTERFACE, INC. | | | AND | | | | |
| | GUARANTOR | | | GUARANTOR | | | (PARENT | | | ELIMINATION | | | CONSOLIDATED | |
| | SUBSIDIARIES | | | SUBSIDIARIES | | | CORPORATION) | | | ENTRIES | | | TOTALS | |
| | (In thousands) | |
Net sales | | $ | 329,525 | | | $ | 270,449 | | | $ | — | | | $ | (86,932 | ) | | $ | 513,042 | |
Cost of sales | | | 244,123 | | | | 174,148 | | | | — | | | | (86,932 | ) | | | 331,339 | |
| | | | | | | | | | | | | | | |
Gross profit on sales | | | 85,402 | | | | 96,301 | | | | — | | | | — | | | | 181,703 | |
Selling, general and administrative expenses | | | 55,900 | | | | 62,839 | | | | 15,299 | | | | — | | | | 134,038 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | 29,502 | | | | 33,462 | | | | (15,299 | ) | | | — | | | | 47,665 | |
Interest/Other expense | | | 12,831 | | | | 6,926 | | | | (6,269 | ) | | | — | | | | 13,488 | |
Income (loss) before taxes on income and equity in income of subsidiaries | | | 16,671 | | | | 26,536 | | | | (9,030 | ) | | | — | | | | 34,177 | |
Income tax expense (benefit) | | | 5,697 | | | | 8,990 | | | | (3,148 | ) | | | — | | | | 11,539 | |
Equity in income (loss) of subsidiaries | | | — | | | | — | | | | 28,520 | | | | (28,520 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | | 10,974 | | | | 17,546 | | | | 22,638 | | | | (28,520 | ) | | | 22,638 | |
Net income (loss) attributable to Interface, Inc. | | $ | 10,974 | | | $ | 17,546 | | | $ | 22,638 | | | $ | (28,520 | ) | | $ | 22,638 | |
| | | | | | | | | | | | | | | |
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| | GUARANTOR SUBSIDIARIES | | | NON- GUARANTOR SUBSIDIARIES | | | INTERFACE, INC. (PARENT CORPORATION) | | | CONSOLIDATION AND ELIMINATION ENTRIES | | | CONSOLIDATED TOTALS | |
| | (IN THOUSANDS) | |
| | | |
Net sales | | $ | 174,146 | | | $ | 120,587 | | | $ | -- | | | $ | (42,009 | ) | | $ | 252,724 | |
Cost of sales | | | 128,177 | | | | 77,076 | | | | -- | | | | (42,009 | ) | | | 163,244 | |
Gross profit on sales | | | 45,969 | | | | 43,511 | | | | -- | | | | -- | | | | 89,480 | |
Selling, general and administrative expenses | | | 26,707 | | | | 28,926 | | | | 5,808 | | | | -- | | | | 61,441 | |
Restructuring charges | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Operating income (loss) | | | 19,262 | | | | 14,585 | | | | (5,808 | ) | | | -- | | | | 28,039 | |
Interest/Other expense | | | 7,186 | | | | 3,572 | | | | (1,886 | ) | | | -- | | | | 8,872 | |
Income (loss) before taxes on income and equity in income of subsidiaries | | | 12,076 | | | | 11,013 | | | | (3,922 | ) | | | -- | | | | 19,167 | |
Income tax expense (benefit) | | | 4,360 | | | | 3,881 | | | | (1,416 | ) | | | -- | | | | 6,825 | |
Equity in income (loss) of subsidiaries | | | -- | | | | -- | | | | 14,584 | | | | (14,584 | ) | | | -- | |
Income (loss) from continuing operations | | | 7,716 | | | | 7,132 | | | | 12,078 | | | | (14,584 | ) | | | 12,342 | |
Loss on discontinued operations, net of tax | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Net income (loss) | | | 7,716 | | | | 7,132 | | | | 12,078 | | | | (14,584 | ) | | | 12,342 | |
Income attributable to non-controlling interest in subsidiary | | | -- | | | | (264 | ) | | | -- | | | | -- | | | | (264 | ) |
Net income (loss) attributable to Interface, Inc. | | $ | 7,716 | | | $ | 6,868 | | | $ | 12,078 | | | $ | (14,584 | ) | | $ | 12,078 | |
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 3, 2011
OCTOBER 3, 2010 | | | | | | | | | | | | | | | | | | | | |
| | | | | | NON- | | | INTERFACE, INC. | | | CONSOLIDATION | | | | |
| | GUARANTOR | | | GUARANTOR | | | (PARENT | | | AND ELIMINATION | | | CONSOLIDATED | |
| | SUBSIDIARIES | | | SUBSIDIARIES | | | CORPORATION) | | | ENTRIES | | | TOTALS | |
| | (In thousands) | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,210 | | | $ | 23,039 | | | $ | 3,050 | | | $ | — | | | $ | 27,299 | |
Accounts receivable | | | 67,981 | | | | 94,571 | | | | 621 | | | | — | | | | 163,173 | |
Inventories | | | 92,450 | | | | 78,067 | | | | — | | | | — | | | | 170,517 | |
Prepaids and deferred income taxes | | | 9,745 | | | | 18,576 | | | | 10,813 | | | | — | | | | 39,134 | |
Assets of business held for sale | | | — | | | | 1,200 | | | | — | | | | — | | | | 1,200 | |
| | | | | | | | | | | | | | | |
Total current assets | | | 171,386 | | | | 215,453 | | | | 14,484 | | | | — | | | | 401,323 | |
Property and equipment less accumulated depreciation | | | 83,598 | | | | 99,756 | | | | 4,936 | | | | — | | | | 188,290 | |
Investment in subsidiaries | | | 264,098 | | | | 222,470 | | | | 84,607 | | | | (571,175 | ) | | | — | |
Goodwill | | | 6,954 | | | | 74,194 | | | | — | | | | — | | | | 81,148 | |
Other assets | | | 6,232 | | | | 12,859 | | | | 89,385 | | | | — | | | | 108,476 | |
| | | | | | | | | | | | | | | |
| | $ | 532,268 | | | $ | 624,732 | | | $ | 193,412 | | | $ | (571,175 | ) | | $ | 779,237 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities | | $ | 51,454 | | | $ | 109,689 | | | $ | (10,268 | ) | | $ | — | | | $ | 150,875 | |
Senior notes and senior subordinated notes | | | — | | | | — | | | | 294,467 | | | | — | | | | 294,467 | |
Deferred income taxes | | | 1,614 | | | | 11,175 | | | | (4,291 | ) | | | — | | | | 8,498 | |
Other | | | 1,978 | | | | 5,083 | | | | 28,018 | | | | — | | | | 35,079 | |
| | | | | | | | | | | | | | | |
Total liabilities | | | 55,046 | | | | 125,947 | | | | 307,926 | | | | — | | | | 488,919 | |
| | | | | | | | | | | | | | | | | | | | |
Common stock | | | 94,145 | | | | 102,199 | | | | 6,546 | | | | (196,344 | ) | | | 6,546 | |
Additional paid-in capital | | | 249,302 | | | | 12,525 | | | | 359,107 | | | | (261,827 | ) | | | 359,107 | |
Retained earnings (deficit) | | | 135,182 | | | | 417,460 | | | | (470,974 | ) | | | (111,896 | ) | | | (30,228 | ) |
Foreign currency translation adjustment | | | (1,407 | ) | | | (4,510 | ) | | | (5,717 | ) | | | (1,108 | ) | | | (12,742 | ) |
Pension liability | | | — | | | | (28,889 | ) | | | (3,476 | ) | | | — | | | | (32,365 | ) |
| | | | | | | | | | | | | | | |
| | $ | 532,268 | | | $ | 624,732 | | | $ | 193,412 | | | $ | (571,175 | ) | | $ | 779,237 | |
| | | | | | | | | | | | | | | |
-18-
| | GUARANTOR SUBSIDIARIES | | | NON-GUARANTOR SUBSIDIARIES | | | INTERFACE, INC. (PARENT CORPORATION) | | | CONSOLIDATION AND ELIMINATION ENTRIES | | | CONSOLIDATED TOTALS | |
| | (IN THOUSANDS) | |
ASSETS | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 234 | | | $ | 48,489 | | | $ | 32,131 | | | $ | -- | | | $ | 80,854 | |
Accounts receivable | | | 63,900 | | | | 75,537 | | | | 1,322 | | | | -- | | | | 140,759 | |
Inventories | | | 66,816 | | | | 66,958 | | | | -- | | | | -- | | | | 133,774 | |
Prepaids and deferred income taxes | | | 8,695 | | | | 17,304 | | | | 7,903 | | | | -- | | | | 33,902 | |
Assets of business held for sale | | | -- | | | | 1,500 | | | | -- | | | | -- | | | | 1,500 | |
Total current assets | | | 139,645 | | | | 209,788 | | | | 41,356 | | | | -- | | | | 390,789 | |
Property and equipment less accumulated depreciation | | | 75,169 | | | | 85,645 | | | | 5,279 | | | | -- | | | | 166,093 | |
Investment in subsidiaries | | | 289,057 | | | | 195,828 | | | | 46,657 | | | | (531,542 | ) | | | -- | |
Goodwill | | | 6,954 | | | | 69,997 | | | | -- | | | | -- | | | | 76,951 | |
Other assets | | | 8,576 | | | | 13,145 | | | | 75,375 | | | | -- | | | | 97,096 | |
| | $ | 519,401 | | | $ | 574,403 | | | $ | 168,667 | | | $ | (531,542 | ) | | $ | 730,929 | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | $ | 53,200 | | | $ | 88,358 | | | $ | 18,653 | | | $ | -- | | | $ | 160,211 | |
Senior secured notes and senior subordinated notes | | | -- | | | | -- | | | | 256,127 | | | | -- | | | | 256,127 | |
Deferred income taxes | | | 1,615 | | | | 10,455 | | | | (4,991 | ) | | | -- | | | | 7,079 | |
Other | | | 2,204 | | | | 10,558 | | | | 28,340 | | | | -- | | | | 41,102 | |
Total liabilities | | | 57,019 | | | | 109,371 | | | | 298,129 | | | | -- | | | | 464,519 | |
| | | | | | | | | | | | | | | | | | | | |
Common stock | | | 94,145 | | | | 102,199 | | | | 6,423 | | | | (196,344 | ) | | | 6,423 | |
Additional paid-in capital | | | 249,302 | | | | 12,525 | | | | 348,580 | | | | (261,827 | ) | | | 348,580 | |
Retained earnings (deficit) | | | 120,396 | | | | 392,613 | | | | (475,933 | ) | | | (72,263 | ) | | | (35,187 | ) |
Foreign currency translation adjustment | | | (1,461 | ) | | | (16,161 | ) | | | (5,577 | ) | | | (1,108 | ) | | | (24,307 | ) |
Pension liability | | | -- | | | | (29,276 | ) | | | (2,955 | ) | | | -- | | | | (32,231 | ) |
Non-controlling interest in subsidiary | | | -- | | | | 3,132 | | | | -- | | | | -- | | | | 3,132 | |
| | $ | 519,401 | | | $ | 574,403 | | | $ | 168,667 | | | $ | (531,542 | ) | | $ | 730,929 | |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINESIX MONTHS
ENDED JULY 3, 2011
ENDED OCTOBER 3, 2010 | | | | | | | | | | | | | | | | | | | | |
| | | | | | NON- | | | INTERFACE, INC. | | | CONSOLIDATION AND | | | | |
| | GUARANTOR | | | GUARANTOR | | | (PARENT | | | ELIMINATION | | | CONSOLIDATED | |
| | SUBSIDIARIES | | | SUBSIDIARIES | | | CORPORATION) | | | ENTRIES | | | TOTALS | |
| | (In thousands) | |
Net cash provided by (used for) operating activities | | $ | (21,126 | ) | | $ | (152 | ) | | $ | 2,804 | | | $ | (2,910 | ) | | $ | (21,384 | ) |
| | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchase of plant and equipment | | | (10,006 | ) | | | (8,456 | ) | | | (352 | ) | | | — | | | | (18,814 | ) |
Other | | | (79 | ) | | | (24 | ) | | | (1,892 | ) | | | — | | | | (1,995 | ) |
| | | | | | | | | | | | | | | |
Net cash used for investing activities | | | (10,085 | ) | | | (8,480 | ) | | | (2,244 | ) | | | — | | | | (20,809 | ) |
| | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Other | | | 31,335 | | | | (1,724 | ) | | | (33,026 | ) | | | 2,910 | | | | (505 | ) |
Proceeds from issuance of common stock | | | — | | | | — | | | | 2,579 | | | | — | | | | 2,579 | |
Dividends paid | | | — | | | | — | | | | (2,612 | ) | | | — | | | | (2,612 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used for) financing activities | | | 31,335 | | | | (1,724 | ) | | | (33,059 | ) | | | 2,910 | | | | (538 | ) |
Effect of exchange rate change on cash | | | — | | | | 794 | | | | — | | | | — | | | | 794 | |
| | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | | 124 | | | | (9,562 | ) | | | (32,499 | ) | | | — | | | | (41,937 | ) |
Cash at beginning of period | | | 1,086 | | | | 32,601 | | | | 35,549 | | | | — | | | | 69,236 | |
| | | | | | | | | | | | | | | |
Cash at end of period | | $ | 1,210 | | | $ | 23,039 | | | $ | 3,050 | | | $ | — | | | $ | 27,299 | |
| | | | | | | | | | | | | | | |
| | GUARANTOR SUBSIDIARIES | | | NON-GUARANTOR SUBSIDIARIES | | | INTERFACE, INC. (PARENT CORPORATION) | | | CONSOLIDATION AND ELIMINATION ENTRIES | | | CONSOLIDATED TOTALS | |
| | (IN THOUSANDS) | |
Net cash provided by (used in) operating activities | | $ | 20,008 | | | $ | 17,322 | | | $ | (9,290 | ) | | $ | 3,564 | | | $ | 31,604 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchase of plant and equipment | | | (7,950 | ) | | | (8,808 | ) | | | (1,685 | ) | | | -- | | | | (18,443 | ) |
Other | | | (98 | ) | | | (61 | ) | | | (1,657 | ) | | | -- | | | | (1,816 | ) |
Net cash used for investing activities | | | (8,048 | ) | | | (8,869 | ) | | | (3,342 | ) | | | -- | | | | (20,259 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Repurchase of Senior and Senior Subordinated Notes | | | -- | | | | -- | | | | (39,586 | ) | | | -- | | | | (39,586 | ) |
Other | | | (12,275 | ) | | | 4,812 | | | | 11,027 | | | | (3,564 | ) | | | -- | |
Proceeds from issuance of common stock | | | -- | | | | -- | | | | 1,803 | | | | -- | | | | 1,803 | |
Premiums paid to repurchase Senior and Senior Subordinated Notes | | | -- | | | | -- | | | | (792 | ) | | | -- | | | | (792 | ) |
Dividends paid to Interface, Inc. shareholders | | | -- | | | | -- | | | | (1,435 | ) | | | -- | | | | (1,435 | ) |
Dividends paid to joint venture partner | | | -- | | | | (7,904 | ) | | | -- | | | | -- | | | | (7,904 | ) |
Net cash used in financing activities | | | (12,275 | ) | | | (3,092 | ) | | | (28,983 | ) | | | (3,564 | ) | | | (47,914 | ) |
Effect of exchange rate change on cash | | | 4 | | | | 2,056 | | | | -- | | | | -- | | | | 2,060 | |
Net increase (decrease) in cash | | | (311 | ) | | | 7,417 | | | | (41,615 | ) | | | -- | | | | (34,509 | ) |
Cash at beginning of period | | | 545 | | | | 41,072 | | | | 73,746 | | | | -- | | | | 115,363 | |
Cash at end of period | | $ | 234 | | | $ | 48,489 | | | $ | 32,131 | | | $ | -- | | | $ | 80,854 | |
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 January 3, 2010,2, 2011, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and ninesix months ended, or as of, OctoberJuly 3, 2010,2011, and the comparable periods of 20092010 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 January 3, 2010,2, 2011, 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.
11 3/7 5/8% Senior Secured Notes
On June 5, 2009,December 3, 2010, we completed ana private offering of $150$275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. We used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of our 11 3/8% Senior Secured Notes due 2013 (the “Senior Secured Notes”). Interest on the Senior Secured Notes is payable semi-annually on May 1 and November 1. The Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of our domestic subsidiaries. The Senior Secured Notes are secured by a second-priority lien on substantially all of our and certain of our domestic subsidiaries’ assets that secure our domestic revolving credit facility (discussed below) on a first-priority basis.
The Senior Secured Notes were sold at a price of 96.301% of their face value, resulting in $144.5 million of gross proceeds. The $5.5 million original issue discount is being amortized over the life of the notes through interest expense. After deducting the initial purchasers’ discount and other fees and expenses associated with the sale, net proceeds were $139.5 million. We used $132.9 million of those net proceeds to repurchase $127.2 million aggregate principal amount of our 10.375% Senior Notes due 2010 pursuant to a tender offer we conducted. (Included in the $132.9 million used to repurchase the $127.2 million aggregate principal amount of 10.375% Senior Notes was a purchase price premium of $5.7 million). In addition, we used $4.5 million of the net proceeds to p ay accrued interest on the $127.2 million aggregate principal amount of the 10.375% Senior Notes due 2010 that we repurchased. The remaining $2.1 million of the net proceeds was used to repay a portion of the 10.375% Senior Notes due 2010 that were fully repaid at maturity in February of 2010.
Partial Redemption of 9.5% Senior Subordinated Notes due 2014
In the first quarter of 2010, we redeemed $25approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes (the “Senior Subordinated Notes”) atpursuant to a price equal to 103.167% of the face value of the notes, plus accrued interest to the redemption date.
Tender Offer
On November 3, 2010, we announced the commencement of aCompany tender offer relating to all of our outstanding Senior Secured Notes and Senior Subordinated Notes and a solicitation of consents from the holders of the notes to amend the indentures governing the notes. The tender offer is scheduled to expire at 11:59 P.M., Eastern Time, on December 2, 2010, unless extended or earlier terminated, and the consent solicitation is scheduled to expire at 5:00 P.M., Eastern Time, on November 17, 2010, unless extended or earlier terminated.offer.
Restructuring Plans
2010 Restructuring Plan
In the first quarter of 2010, we adopted a restructuring plan primarily related to workforce reduction in our European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A total of approximately 50 employees were affected by this restructuring plan. In connection with this plan, we recorded a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involvesinvolved cash expenditures, primarily severance expenses. It is anticipated that this restructuring plan will generate annual savings of approximately $3.2 million. Actions and expenses related to this plan were substantially completed in the first quarter of 2010.
2009 Restructuring Plan
In the first quarter of 2009, we adopted a restructuring plan, primarily comprised of a further reduction in our worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for our products on a global level. In connection with the plan, we recorded a pre-tax restructuring charge of $5.7 million, comprised of $4.0 million of employee severance expense and $1.7 million of other exit costs (primarily costs to exit the Canadian manufacturing facilities, lease exit costs and other costs). In the second quarter of 2009, we recorded an additional $1.9 million restructuring charge as a continuation of this plan. The charge in the second quarter of 2009 was due to approximately 80 additional employee reductions, and related en tirely to employee severance expense. Actions and expenses related to this plan were substantially completed in the first six months of 2009.
Discontinued Operations
In 2007, we sold our Fabrics Group business segment. In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics Group business segment for all periods reflected herein, as “discontinued operations.” Consequently, our discussion of revenues or sales and other results of operations (except for net income or loss amounts), including percentages derived from or based on such amounts, excludes this discontinued operation unless we indicate otherwise.
Our discontinued operations had no net sales and a loss of $0.7 million in the nine-month period ended October 4, 2009 (these results are included in our statements of operations as part of the “Loss from Discontinued Operations, Net of Taxes”). Our discontinued operations had no net sales or income or loss in either of the three-month and nine-monthor six-month periods ended OctoberJuly 3, 2011 and July 4, 2010.
General
During the quarter ended OctoberJuly 3, 2010,2011, we had net sales of $252.7$267.6 million, compared with net sales of $218.4$226.6 million in the thirdsecond quarter last year. Fluctuations in currency exchange rates negativelypositively impacted 2010 third2011 second quarter sales by 1%6% (approximately $2.5$13 million), compared with the prior year period. During the first ninesix months of fiscal 2010,year 2011, we had net sales of $696.5$513.0 million, compared with net sales of $629.0$443.8 million in the first ninesix months of last year. Fluctuations in currency exchange rates positively impacted sales in the first ninesix months of 20102011 by 2%4% (approximately $11$17.0 million), compared with the prior year period.
-20-
Included in our results for the ninesix months ended October 3,July 4, 2010 is $1.1 million of bond retirement expenses (comprised of $0.8 million of premiums and $0.3 million of write-offs of unamortized debt issuance costs) related to the partial redemption of our 9.5% Senior Subordinated Notes discussed above.in the Note entitled “Long-Term Debt” in Item 1. Also included in the nine-monthsix-month period ended October 3,July 4, 2010 is $3.1 million of restructuring charges, as described above.
Included in our results for the nine-month period ended October 4, 2009 is $6.1 million of costs related to the tender offer for our 10.375% Senior Notes inDuring the second quarter of 2009. In addition, this nine-month period also includes income of $5.9 million related to settlements of litigation.
During the third quarter of 2010,2011, we had net income attributable to Interface, Inc. of $12.1$12.8 million, or $0.19$0.20 per diluted share, compared with net income attributable to Interface, Inc. of $5.5$7.6 million, or $0.9$0.12 per diluted share, in the thirdsecond quarter last year. Income from continuing operationsof 2010. Net income in the thirdsecond quarter of 20102011 was $12.3$12.8 million, or $0.19$0.20 per diluted share, compared with net income from continuing operations of $5.7$8.0 million, or $0.09$0.12 per diluted share, in the thirdsecond quarter of 2009.
2010.
During the ninesix months ended OctoberJuly 3, 2010,2011, we had net income attributable to Interface, Inc. of $21.6$22.6 million, or $0.34$0.35 per diluted share, compared with net income attributable to Interface, Inc. of $5.0$9.5 million, or $0.08$0.15 per diluted share, in the first ninesix months of last year. Income from continuing operations2010. Net income was $22.5$22.6 million, or $0.34$0.35 per diluted share, in the ninesix months ended OctoberJuly 3, 2010,2011, compared with net income from continuing operations of $6.1$10.1 million, or $0.09$0.15 per diluted share, in the first ninesix months of 2009.
2010.
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-monthsix-month periods ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | July 3, 2011 | | July 4, 2010 | | July 3, 2011 | | July 4, 2010 | |
| | | | | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of sales | | | 64.6 | | | | 66.8 | | | | 65.1 | | | | 67.5 | | | 64.6 | | 64.6 | | 64.6 | | 65.4 | |
| | | | | | | | | | |
Gross profit on sales | | | 35.4 | | | | 33.2 | | | | 34.9 | | | | 32.5 | | | 35.4 | | 35.4 | | 35.4 | | 34.6 | |
Selling, general and administrative expenses | | | 24.3 | | | | 24.5 | | | | 25.4 | | | | 25.5 | | | 25.6 | | 25.9 | | 26.1 | | 25.9 | |
Income from litigation settlements | | | -- | | | | -- | | | | -- | | | | (0.9 | ) | |
Restructuring charge | | | -- | | | | -- | | | | 0.4 | | | | 1.2 | | | — | | — | | — | | 0.7 | |
| | | | | | | | | | |
Operating income | | | 11.1 | | | | 8.7 | | | | 9.1 | | | | 6.8 | | | 9.8 | | 9.5 | | 9.3 | | 7.9 | |
Bond retirement expenses | | | -- | | | | -- | | | | 0.2 | | | | 1.0 | | |
Bond retirement expense | | | — | | — | | — | | 0.2 | |
Interest/Other expenses | | | 3.5 | | | | 4.4 | | | | 3.8 | | | | 4.0 | | | 2.6 | | 3.8 | | 2.6 | | 3.9 | |
Income from continuing operations before tax expense | | | 7.6 | | | | 4.2 | | | | 5.1 | | | | 1.9 | | |
| | | | | | | | | | |
Income from operations before tax expense | | | 7.2 | | 5.7 | | 6.7 | | 3.8 | |
Income tax expense | | | 2.7 | | | | 1.6 | | | | 1.9 | | | | 0.9 | | | 2.4 | | 2.2 | | 2.2 | | 1.5 | |
Income from continuing operations | | | 4.9 | | | | 2.6 | | | | 3.2 | | | | 1.0 | | |
Discontinued operations, net of tax | | | -- | | | | -- | | | | -- | | | | 0.1 | | |
| | | | | | | | | | |
Net income | | | 4.9 | | | | 2.6 | | | | 3.2 | | | | 0.9 | | | 4.8 | | 3.5 | | 4.4 | | 2.3 | |
Net income attributable to Interface, Inc. | | | 4.8 | | | | 2.5 | | | | 3.1 | | | | 0.8 | | | 4.8 | | 3.4 | | 4.4 | | 2.1 | |
| | | | | | | | | | |
Below we provide information regarding net sales for each of our operating segments, and analyze those results for the three-month and nine-monthsix-month periods ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively.
Net Sales by Business Segment
Net sales by operating segment and for our companyCompany as a whole were as follows for the three-month and nine-monthsix-month periods ended OctoberJuly 3, 2010,2011, and OctoberJuly 4, 2009,2010, respectively:
| | | | | | | | | | | | |
| | Three Months Ended | | | Percentage | |
Net Sales By Segment | | July 3, 2011 | | | July 4, 2010 | | | Change | |
| | (In thousands) | | | | | |
Modular Carpet | | $ | 240,566 | | | $ | 202,695 | | | | 18.7 | % |
Bentley Prince Street | | | 27,074 | | | | 23,892 | | | | 13.3 | % |
| | | | | | | | | |
Total | | $ | 267,640 | | | $ | 226,587 | | | | 18.1 | % |
| | | | | | | | | |
-21-
| | | | | | | | | | | | |
| | Six Months Ended | | | Percentage | |
Net Sales By Segment | | July 3, 2011 | | | July 4, 2010 | | | Change | |
| | (In thousands) | | | | | |
Modular Carpet | | $ | 459,846 | | | $ | 396,702 | | | | 15.9 | % |
Bentley Prince Street | | | 53,196 | | | | 47,076 | | | | 13.0 | % |
| | | | | | | | | |
Total | | $ | 513,042 | | | $ | 443,778 | | | | 15.6 | % |
| | | | | | | | | |
| | Three Months Ended | | | Percentage |
Net Sales By Segment | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change |
| | (In thousands) | | | | |
Modular Carpet | | $ | 226,513 | | | $ | 194,107 | | | | 16.7 | % |
Bentley Prince Street | | | 26,211 | | | | 24,257 | | | | 8.1 | % |
Total | | $ | 252,724 | | | $ | 218,364 | | | | 15.7 | % |
| | Nine Months Ended | | | Percentage |
Net Sales By Segment | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change |
| | (In thousands) | | | | |
Modular Carpet | | $ | 623,215 | | | $ | 557,127 | | | | 11.9 | % |
Bentley Prince Street | | | 73,287 | | | | 71,842 | | | | 2.0 | % |
Total | | $ | 696,502 | | | $ | 628,969 | | | | 10.7 | % |
Modular Carpet Segment.For the quarter ended OctoberJuly 3, 2010,2011, net sales for the Modular Carpet segment increased $32.4$37.9 million (16.7%(18.7%) versus the comparable period in 2009.2010. On a geographic basis, we experienced increases in net sales in the Americas, Europe and Asia-Pacific (up 12%, 11% and 49%, respectively)all regions for the quarter ended OctoberJuly 3, 2010,2011 versus the comparable period in 2009. (The2010, with our Americas, Europe and Asia-Pacific regions experiencing sales increase in Europegrowth of 16%, 27%, and 11%, respectively, during the quarter. (Europe experienced 11% sales growth in local currency was 22%.currency.) TheseGlobally, these increases arewere primarily attributable to the continued general rebound of the corporate office market, growth in our non-office commercial segments, particularly in the education, government, and healthcare segments, and increasing demand in emerging markets due to an improving overall economic climates in those regions.climate. Sales growth in the Americas is attributable towas driven primarily by the improving corporate office market segment(up 24%), as well increases in the government (up 19%), education (up 14%) and healthcare (up 29%) as well asmarket segments. Only the success of our end market diversification strategy. With the exception of retail market segment (down 20%17%), all non-office markets showed a decline in the Americas sawAmericas. Sales growth in the quarter. The sales increase in Europe was leddriven primarily by the corporate office market (up 13%37% in U.S. dollars, and 25%20% in local currency) and government, but we also saw sales increases in other market segments, particularly in the education (up 10%31% in U.S. dollars, and 22%15% in local currency) market segments.segment. These increases in Europe were offset somewhatmitigated by a decline in the healthcare market segment (down 47%20% in U.S. dollars, and 42%30% in local currency). The market segment. Asia-Pacific also experienced sales growth in Asia-Pacific was due primarily to the strengthincreases in the corporate office market (up 38%19%) and education, as well as increases in all non-office market segment (up over 100%). Withsegments with the exception of the hospitality market segmentgovernment (down 22%45%), all Asia-Pacific market segments saw increases in the period.
Our new modular carpet plant in China is currently under construction and we expect it to become fully operational during the fourth quarter of 2010.
.
For the ninesix months ended OctoberJuly 3, 2010,2011, net sales for the Modular Carpet segment increased $66.1$63.1 million (11.9%(15.9%) versus the comparable period in 2009.2010. On a geographic basis, we experienced increases in net sales in the Americas, Europe and Asia-Pacific (up 10%, 1% and 51%, respectively)all regions for the ninesix months ended OctoberJuly 3, 2010,2011 versus the comparable period in 2009. (The2010, with our Americas, Europe and Asia-Pacific regions experiencing sales increase in Europegrowth of 12%, 20%, and 20%, respectively, during the period. (Europe experienced 12% sales growth in local currencycurrency.) The recovery of the corporate office market segment was 5%.) Thesethe primary driver of these increases, are primarily attributable to the improving economic climates in those regions.coupled with growth from our end market diversification strategy and emerging markets. Sales growth in the Americas iswas due to the continued recoveryincreases in the corporate office market (up 24%) as well as increases in the government (up 14%), education (up 4%6%) and hospitalityhealthcare (up 21%14%) market segments. These increases were partially offset by decreases in the retail (down 7%) and hospitality (down 23%) market segments. Sales growth in Europe was attributable to an increase in the corporate office market (up 23% in U.S. dollars, 16% in local currency) as well as increases in the government (up 29% in U.S. dollars, 21% in local currency), education (up 20% in U.S. dollars, 11% in local currency) and retail (up 10% in U.S. dollars, 4% in local currency) market segments. These increases in Europe were somewhat offset by a decline in the retail market segmenthospitality (down 8% ). The sales increase in Europe was led by the corporate office (up 1%10% in U.S. dollars, and 5% in local currency), retail (up 19% in U.S. dollars and 25% in local currency) and hospitality (up 18% in U.S. dollars and 22%16% in local currency) market segments. Thesesegment. Asia-Pacific saw increases were mitigated by declines in the government (down 3% in U.S. dollars, up 2% in local currency) and healthcare (down 34% in U.S. dollars and 31% in local currency) market segments. The sales growth in Asia-Pacific was across all market segments.segments with the exception of government (down 23%), with the corporate office market being the most significant increase (up 22%) versus the comparable period in 2010.
Bentley Prince Street Segment.In our Bentley Prince Street segment, net sales for the quarter ended OctoberJuly 3, 20102011 increased $2.0$3.2 million (8.1%($13.3%) versus the comparable period in 2009.2010. The increase was due to the strength of the corporate office market (up 12%40%) was the primary driver behind this increase. We also saw increases in the education (up 19%) and governmentresidential (up 27%87%) market segments. These increases were somewhatpartially offset by declinesdecreases in the government (down 58%), healthcare (down 51%26%) and residentialhospitality (down 30%46%) market segments.
For the ninesix months ended OctoberJuly 3, 2010,2011, net sales for the Bentley Prince Street segment increased $1.4$6.1 million (2.0%(13%) versus the comparable period in 2009. During this period, Bentley Prince Street saw2010. This increase was primarily attributed to the corporate office market (up 33%) as well as increases in the governmentretail (up 41%29%) and corporate officeresidential (up 6%30%) market segments andsegments. These increases were somewhat mitigated by decreases in the government (down 31%) and healthcare (down 30%) and residential (down 58%33%) market segments.
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CostsCost and Expenses
Company Consolidated.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 nine-monthsix-month periods ended OctoberJuly 3, 2011, and July 4, 2010, and October 4, 2009, respectively:
| | | | | | | | | | | | |
| | Three Months Ended | | | Percentage | |
Cost and Expenses | | July 3, 2011 | | | July 4, 2010 | | | Change | |
| | (In thousands) | | | | | |
Cost of sales | | $ | 172,865 | | | $ | 146,453 | | | | 18.0 | % |
Selling, general and administrative expenses | | | 68,638 | | | | 58,668 | | | | 17.0 | % |
| | | | | | | | | |
Total | | $ | 241,503 | | | $ | 205,121 | | | | 17.7 | % |
| | | | | | | | | |
| | Three Months Ended | | | Percentage |
Cost and Expenses | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change |
| | (In thousands) | | | | |
Cost of sales | | $ | 163,244 | | | $ | 145,952 | | | | 11.8 | % |
Selling, general and administrative expenses | | | 61,441 | | | | 53,487 | | | | 14.9 | % |
Total | | $ | 224,685 | | | $ | 199,439 | | | | 12.7 | % |
| | Nine Months Ended | | | Percentage |
Cost and Expenses | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change |
| | (In thousands) | | | | |
Cost of sales | | $ | 453,514 | | | $ | 424,282 | | | | 6.9 | % |
Selling, general and administrative expenses | | | 176,597 | | | | 160,122 | | | | 10.3 | % |
Total | | $ | 630,111 | | | $ | 584,404 | | | | 7.8 | % |
| | | | | | | | | | | | |
| | Six Months Ended | | | Percentage | |
Cost and Expenses | | July 3, 2011 | | | July 4, 2010 | | | Change | |
| | (In thousands) | | | | | |
Cost of sales | | $ | 331,339 | | | $ | 290,270 | | | | 14.1 | % |
Selling, general and administrative expenses | | | 134,038 | | | | 115,156 | | | | 16.4 | % |
| | | | | | | | | |
Total | | $ | 465,377 | | | $ | 405,426 | | | | 14.8 | % |
| | | | | | | | | |
For the quarter ended OctoberJuly 3, 2010,2011, our cost of sales increased $17.3$26.4 million (11.8%(18.0%) versus the comparable period in 2009. This comparison includes a negative impact of approximately $1 million (1%) due to fluctuations2010. Fluctuations in currency exchange rates.rates accounted for approximately $8.0 million (5%) of the increase. The primary components of the $17.3 million increase in cost of sales were increases in raw materialmaterials costs (approximately $11.5$18 million) and labor costs (approximately $1.7$2.6 million) associated with higher production and sales volumes in the thirdsecond quarter of 20102011 compared with the prior year period. Our raw materialmaterials prices in the thirdsecond quarter of 20102011 were approximately 3-4%10-12% higher than raw materialmaterials prices in the third quartercorresponding period of 2009.the prior year. As a percentage of net sales, cost of sales decreased toremained consistent at 64.6% for the second quarter ended October 3, 2010,of 2011, versus 66. 8%64.6% in the comparable period in 2009. The percentage decrease was primarily due to improvedsecond quarter of 2010, as the increased raw materials costs were offset by the increased absorption of fixed manufacturing efficiencies in both our Modular Carpetcosts associated with higher sales and Bentley Prince Street business segments. The improved manufacturing efficiencies are largely a result of the increase in sales volume as well as our continued focus on cost control across our business.
production volumes.
For the ninesix months ended OctoberJuly 3, 2010,2011, our costcosts of sales increased $29.2$41.1 million (6.9%(14.1%) versus the comparable period in 2009.2010. Fluctuations in currency exchange rates accounted for approximately $8$11.0 million (2%(4%) of the increase. The primary components of the $29.2 million increase in cost of sales were increases in raw materialmaterials costs (approximately $19.5$27 million) and labor costs (approximately $2.9$4 million) associated with higher production and sales volumes in the first ninesix months of 2010.2011 compared with the prior year period. Our raw materialmaterials prices in the first ninesix months of 20102011 were approximately 3-4%10-12% higher than raw materialmaterials prices in the first nine monthscorresponding period of 2009.the prior year. As a percentage of net sales, cost of salesgoods sold decreased to 65.1%64.6% for the nine-month periodsix months ended OctoberJuly 3, 2010,2011, versus 67.5%65.4% in the comparable period in 200 9. The percentageprior year. This decrease wasis due primarily due to increased absorption of fixed costs associated with higher sales volumes, as well as improved manufacturing efficienciesefficiency and costs controls, especially in our Bentley Prince Street business segment. This improvement was somewhat offset by the increased price for raw materials experienced by both our Modular Carpet and Bentley Prince Street business segments. The improved manufacturing efficiencies are largely a result of the increase in sales volume, coupled with the full realization of our restructuring plans implemented during early 2009.
For the quarter ended OctoberJuly 3, 2010,2011, our selling, general and administrative expenses increased $8.0$10.0 million (14.9%(17.0%) versus the comparable period in 2009. This comparison includes a negative impact of approximately $1 million (2%) due to fluctuations2010. Fluctuations in currency exchange rates.rates accounted for approximately $3.5 million (6%) of this increase. The primary components of the $8.0 million increase in selling, general and administrative expenses were (1) a $2.9 million increase in incentive compensation due to the attainment of performance goals in the third quarter of 2010, (2) a $2.3$4.9 million increase in selling expenses, commensurate with the increase in sales volume as well as continued investments in our salesconsumer market and end market diversification strategy, and personnel, and (3)(2) a $3.3$2.6 million increase in marketing expenses, primarily in international markets as we continue to invest in our end market diversification strategy. Du e to increased sales volume,worldwide brand presence. Despite these increases, as a percentage of net sales, selling, general and administrative expenses decreased slightly to 24.3%25.6% for the quarter ended OctoberJuly 3, 2010,2011, versus 24.5%25.9% for the comparable period in 2009.
quarter ended July 4, 2010. This decrease as a percentage of sales was due to the strong sales growth experienced during the quarter ended July 3, 2011.
For the ninesix months ended OctoberJuly 3, 2010,2011, our selling, general and administrative expenses increased $16.5$18.9 million (10.3%(16.4%) versus the comparable period in 2009.2010. Fluctuations in currency exchange rates accounted for approximately $2$4.5 million (1%(4%) of thethis increase. The primary components of the $16.5 million increase in selling, general and administrative expenses were (1) a $7.8an $8.9 million increase in selling expenses due to the increased sales volume during the period, as well as continued investment in our selling strategies, (2) a $6.9 million increase in overall administrative costs due, in part, to increases in non-cash incentive compensation due the attainment of performance goals inbased pay during the first ninesix months of 2010, (2)2011, and (3) a $6.7$2.5 million increase in marketing expenses due to the continued investmentas we invest in our end market diversification strategy and (3) a $4.0 million increase in selling expenses, commensurate withmarketing platforms around the increase in sales volumeworld. Due to these increases, as well as investments in our sales strategy and personnel. As a percentage of net sales, selling, general and administrative expenses stayed relatively consistent (25.4%increased slightly to 26.1% for the six months ended July 3, 2011, versus 25.9% for the corresponding period in the first nine months of 2010 versus 25.5% in the first nine months of 2009) year-over-year.2010.
-23-
Cost and Expenses by Segment.The following table presents the combined cost of sales and selling, general and administrative expenses for each of our operating segments:
| | | | | | | | | | | | |
Cost of Sales and Selling, General and | | Three Months Ended | | | Percentage | |
Administrative Expenses (Combined) | | July 3, 2011 | | | July 4, 2010 | | | Change | |
| | (In thousands) | | | | | |
Modular Carpet | | $ | 213,630 | | | $ | 177,331 | | | | 20.5 | % |
Bentley Prince Street | | | 26,978 | | | | 25,027 | | | | 7.8 | % |
Corporate Expenses and Eliminations | | | 895 | | | | 2,763 | | | | (67.6 | %) |
| | | | | | | | | |
Total | | $ | 241,503 | | | $ | 205,121 | | | | 17.7 | % |
| | | | | | | | | |
| | | | | | | | | | | | | |
Cost of Sales and Selling, General and | | Three Months Ended | | | Percentage | | Six Months Ended | | Percentage | |
Administrative Expenses (Combined) | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change | | July 3, 2011 | | July 4, 2010 | | Change | |
| | (In thousands) | | | | | | (In thousands) | |
Modular Carpet | | $ | 197,063 | | | $ | 173,815 | | | | 13.4 | % | | $ | 407,025 | | $ | 351,215 | | | 15.9 | % |
Bentley Prince Street | | | 26,166 | | | | 25,281 | | | | 3.5 | % | | 53,257 | | 49,434 | | | 7.7 | % |
Corporate Expenses and Eliminations | | | 1,456 | | | | 343 | | | | 324.5 | % | | 5,095 | | 4,777 | | | 6.7 | % |
| | | | | | | | |
Total | | $ | 224,685 | | | $ | 199,439 | | | | 12.7 | % | | $ | 465,377 | | $ | 405,426 | | | 14.8 | % |
| | | | | | | | |
Cost of Sales and Selling, General and | | Nine Months Ended | | | Percentage |
Administrative Expenses (Combined) | | Oct. 3, 2010 | | | Oct. 4, 2009 | | | Change |
| | (In thousands) | | | | |
Modular Carpet | | $ | 548,278 | | | $ | 505,819 | | | | 8.4 | % |
Bentley Prince Street | | | 75,600 | | | | 77,061 | | | | (1.9 | %) |
Corporate Expenses and Eliminations | | | 6,233 | | | | 1,524 | | | | 309.0 | % |
Total | | $ | 630,111 | | | $ | 584,404 | | | | 7.8 | % |
Interest Expenses
Expense
For the three-month period ended OctoberJuly 3, 2010,2011, interest expense decreased $1.1$1.3 million to $8.4$6.8 million versus $9.5$8.1 million in the comparable period in 2009.2010. This decrease iswas due to lower debt levelsthe issuance of our 7 5/8% Senior Notes in the thirdfourth quarter of 2010, versus 2009, becausethe proceeds of which we used to complete the previously discussed tender offer for substantially all of our 11 3/8% Senior Secured Notes, as well as a portion of our outstanding 9.5% Senior Subordinated Notes. Our use of the proceeds from our 7 5/8% Senior Notes to retire higher interest debt led to a significant reduction in our quarterly interest expense, as compared to the firstsecond quarter of 2010 we repaid the remaining $14.6 million of Senior Notes due 2010 and redeemed $25.0 million of our Senior Subordinated Notes due 2014.2010. For the nine-monthsix-month period ended OctoberJuly 3, 2010,2011, interest expense increased $0.4decreased by $3.5 million to $25.3$13.4 million versus $24.9$16.9 million in the comparable period in 2009. This increase was due primarily to our issuance of $150 million aggregate principle amount of 11 3/8% Senior Secured Notes in June of 2009. These notes, which were issued at a discount to their face value, carry a hig her principal balance and rate of interest than the $127.2 million aggregate principal amount of 10.375% Senior Notes that were repaid with the issuance net proceeds. Another factor in each of these increases was the amortization of the deferred debt costs associated with the Senior Secured Notes. As discussed above,2010 due to the factors identified above, as well as the redemption of $39.6 million reduction of debt in the first quarter of 2010. As the first quarter of 2011 did not have this debt outstanding as compared to the first quarter of 2010, the increasedecrease in interest expense forwas even more pronounced in the nine monthssix-month period ended OctoberJuly 3, 2010 was less pronounced than in previous periods of 2010.
2011 versus the three-month period ended July 3, 2011.
Liquidity and Capital Resources
General
At OctoberJuly 3, 2010,2011, we had $80.9$27.3 million in cash. At that date, we had no borrowings and $8.1$5.2 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of OctoberJuly 3, 2010,2011, we could have incurred $62.6$83.2 million of additional borrowings under our domestic revolving credit facility and €20.0 million (approximately $27.3$28.9 million) of additional borrowings under our European credit facility. In addition, we could have incurred an additional $11.4$17.8 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.
Our primary sourcessource of cash during the nine-month periodsix months ended OctoberJuly 3, 2010, were (1) $27.2 million due to an increase in accounts payable and accrued expenses, and (2) $1.82011 was $2.6 million of cash received as a result of exercises of employee stock options. Our primary uses of cash during this period were (1) $25.8 million to redeem an aggregate principal amount of $25.0 million of our 9.5% Senior Subordinated Notes due 2014, (2) $20.5$30.0 million due to increased inventory levels as we produce to meet anticipated demand for the second half of 2011, (2) $26.4 million due to decreases in accounts payable and accruals, and (3) $18.4$18.8 million for capital expenditures, (4) $14.6 million to pay at maturity the remaining balance of our 10.375% Senior Notes due 2010, and (5) $7.9 million for the payment of a dividend to the joint venture partner of our Thailand manufacturing joint venture.expenditures.
On October 28, 2010, we announced an increase in our regular quarterly cash dividend from $0.01 per share to $0.02 per share.
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 January 3, 2010,2, 2011, under Item 7A of that Form 10-K. Our discussion here focuses on the period ended OctoberJuly 3, 2010,2011, 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 OctoberJuly 3, 2010,2011, we recognized a $0.3$13.5 million decreaseincrease in our foreign currency translation adjustment account compared withto January 3, 2010,2, 2011, primarily because of the strengthening of the U.S. dollar against the euro over the nine-month period. This effect of the strengthening of the U.S. dollar versus the Euro was partially offset by the weakening of the U.S. dollar against certain foreign currencies, particularly the Australian dollar and Canadian dollar.Euro.
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. The market value of instruments affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at OctoberJuly 3, 2010.2011. The values that result from these computations are compared with the market values of these financial instruments at OctoberJuly 3, 2010.2011. The differences in this comparison are the hypothetical gains or losses associated with e acheach type of risk.
As of OctoberJuly 3, 2010,2011, based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the market value of our fixed rate long-term debt would be impacted by a net decrease of approximately $7.1$23.1 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of our fixed rate long-term debt of approximately $7.4$25.7 million.
As of OctoberJuly 3, 2010,2011, 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 $11.4$10.6 million or an increase in the fair value of our financial instruments of $9.3$8.7 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.
-25-
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 thirdsecond quarter of 2010.2011. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for fiscal year 2009.2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
On August 8, 2011, Ray C. Anderson, founder and Chairman of the Company, died at age 77 after a 20-month battle with cancer. The Company expects to elect a successor Chairman at its Board of Directors meeting in October 2011.
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
EXHIBIT
NUMBER
| DESCRIPTION OF EXHIBIT
|
| |
EXHIBIT | | | |
NUMBER | | | DESCRIPTION OF EXHIBIT |
10.1 | | | Seventh Amended and Restated Credit Agreement, dated as of June 24, 2011, among Interface, Inc., InterfaceFLOR, LLC, the lenders listed therein, Wells Fargo Bank, National Association, and Bank of America, N.A. (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed June 30, 2011, previously filed with the Commission and incorporated herein by reference). |
31.1 | | | Section 302 Certification of Chief Executive Officer. |
31.2 | | | Section 302 Certification of Chief Financial Officer. |
32.1 | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. |
32.2 | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. |
101.INS | | | XBRL Instance Document (filed electronically herewith). |
101.SCH | | | XBRL Taxonomy Extension Schema Document (filed electronically herewith). |
101.CAL | | | XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith). |
101.LAB | | | XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith). |
101.PRE | | | XBRL Taxonomy Presentation Linkbase Document (filed electronically herewith). |
101.DEF | | | XBRL Taxonomy Definition Linkbase Document (filed electronically herewith). |
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.
| INTERFACE, INC. |
| | |
| INTERFACE, INC.
| |
Date: November 10, 2010August 11, 2011 | By: | /s//s/ Patrick C. Lynch
| |
| | Patrick C. Lynch | |
| | Senior Vice President (Principal Financial Officer) | |
-27-
| | (Principal Financial Officer) | | |
EXHIBIT INDEX
EXHIBIT
NUMBER
| DESCRIPTION OF EXHIBIT
|
| |
EXHIBIT | | | |
NUMBER | | | DESCRIPTION OF EXHIBIT |
31.1 | | | Section 302 Certification of Chief Executive Officer. |
31.2 | | | Section 302 Certification of Chief Financial Officer. |
32.1 | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. |
32.2 | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. |
101.INS | | | XBRL Instance Document (filed electronically herewith). |
101.SCH | | | XBRL Taxonomy Extension Schema Document (filed electronically herewith). |
101.CAL | | | XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith). |
101.LAB | | | XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith). |
101.PRE | | | XBRL Taxonomy Presentation Linkbase Document (filed electronically herewith). |
101.DEF | | | XBRL Taxonomy Definition Linkbase Document (filed electronically herewith). |