SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x
þQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended October 2, 2011

July 1, 2012

Commission File Number 001-33994

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

GEORGIA 
GEORGIA58-1451243

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339

(Address of principal executive offices and zip code)

(770) 437-6800

(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.    Yesþx    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).    Yesþx    Noo¨

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 filerox  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¨    Noþx

Shares outstanding of each of the registrant’s classes of common stock at November 4, 2011:

August 1, 2012:

Class

 
Class

Number of Shares

Class A

Common Stock, $.10 par value per share

 58,598,808
Class B Common Stock, $.10 par value per share6,880,40765,967,061

 

 


INTERFACE, INC.

INDEX

PAGE
      PAGE 
FINANCIAL INFORMATION
Item 1.

Financial Statements

   3  
    

   3  
    

   4  
    

   5  
    

   6  
    

   7  
  Item 2.  

   2120  
  Item 3.  

25
Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION
Item 1.

Legal Proceedings

   26  
  Item 1A.  

   26  
  Item 2.  
27
27

   2726  
27
27
27
27
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 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 STATEMENTSItem 3.

Defaults Upon Senior Securities

26
Item 4.

Mine Safety Disclosures

26
Item 5.

Other Information

26
Item 6.

Exhibits

26


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

         
  OCT. 2, 2011  JAN. 2, 2011 
  (UNAUDITED)     
ASSETS        
CURRENT ASSETS:        
Cash and Cash Equivalents $44,386  $69,236 
Accounts Receivable, Net  158,009   151,463 
Inventories  171,116   136,766 
Prepaid Expenses and Other Current Assets  28,365   24,362 
Deferred Income Taxes  9,110   10,062 
Assets of Business Held for Sale  1,200   1,200 
       
TOTAL CURRENT ASSETS  412,186   393,089 
         
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation  188,070   177,792 
DEFERRED TAX ASSET  46,997   53,022 
GOODWILL  76,566   75,239 
OTHER ASSETS  55,486   56,291 
       
TOTAL ASSETS $779,305  $755,433 
       
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts Payable $57,481  $55,859 
Accrued Expenses  96,261   112,657 
       
TOTAL CURRENT LIABILITIES  153,742   168,516 
         
SENIOR NOTES  283,010   282,951 
SENIOR SUBORDINATED NOTES  11,477   11,477 
DEFERRED INCOME TAXES  8,471   7,563 
OTHER  34,074   36,054 
       
TOTAL LIABILITIES  490,774   506,561 
         
Commitments and Contingencies        
         
SHAREHOLDERS’ EQUITY:        
Preferred Stock      
Common Stock  6,546   6,445 
Additional Paid-In Capital  360,184   349,662 
Retained Earnings (Deficit)  (19,369)  (49,770)
Accumulated Other Comprehensive Loss — Foreign Currency Translation Adjustment  (27,601)  (26,269)
Accumulated Other Comprehensive Loss — Pension Liability  (31,229)  (31,196)
       
TOTAL SHAREHOLDERS’ EQUITY  288,531   248,872 
       
  $779,305  $755,433 
       

   JULY 1, 2012  JANUARY 1, 2012 
   (UNAUDITED)    

ASSETS

   

CURRENT ASSETS:

   

Cash and Cash Equivalents

  $36,878   $50,635  

Accounts Receivable, net

   141,132    156,170  

Inventories

   173,684    166,073  

Prepaid Expenses and Other Current Assets

   25,578    23,407  

Deferred Income Taxes

   10,442    9,699  
  

 

 

  

 

 

 

TOTAL CURRENT ASSETS

   387,714    405,984  

PROPERTY AND EQUIPMENT, less accumulated depreciation

   190,652    190,119  

DEFERRED TAX ASSET

   46,419    47,290  

GOODWILL

   72,132    74,557  

OTHER ASSETS

   54,653    54,322  
  

 

 

  

 

 

 

TOTAL ASSETS

  $751,570   $772,272  
  

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

CURRENT LIABILITIES:

   

Accounts Payable

  $56,891   $55,289  

Accrued Expenses

   85,072    93,884  
  

 

 

  

 

 

 

TOTAL CURRENT LIABILITIES

   141,963    149,173  

SENIOR NOTES

   283,070    283,030  

SENIOR SUBORDINATED NOTES

   —      11,477  

DEFERRED INCOME TAXES

   8,485    8,391  

OTHER

   37,188    39,162  
  

 

 

  

 

 

 

TOTAL LIABILITIES

   470,706    491,233  

Commitments and Contingencies

   

SHAREHOLDERS’ EQUITY:

   

Preferred Stock

   —      —    

Common Stock

   6,596    6,548  

Additional Paid-In Capital

   364,376    361,400  

Retained Earnings (Deficit)

   (15,067  (16,764

Accumulated Other Comprehensive Loss – Foreign Currency Translation Adjustment

   (38,745  (33,883

Accumulated Other Comprehensive Loss – Pension Liability

   (36,296  (36,262
  

 

 

  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

   280,864    281,039  
  

 

 

  

 

 

 
  $751,570   $772,272  
  

 

 

  

 

 

 

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. 2, 2011  OCT. 3, 2010  OCT. 2, 2011  OCT. 3, 2010 
                 
NET SALES $273,106  $252,724  $786,148  $696,502 
Cost of Sales  178,681   163,244   510,020   453,514 
             
GROSS PROFIT ON SALES  94,425   89,480   276,128   242,988 
                 
Selling, General and Administrative Expenses  69,087   61,441   203,125   176,597 
Restructuring Charge           3,131 
             
OPERATING INCOME  25,338   28,039   73,003   63,260 
                 
Interest Expense  6,428   8,409   19,867   25,346 
Bond Retirement Expenses           1,085 
Other Expense (Income)  (175)  463   (126)  1,008 
             
                 
INCOME BEFORE INCOME TAX EXPENSE  19,085   19,167   53,262   35,821 
Income Tax Expense  6,917   6,825   18,456   13,365 
             
                 
NET INCOME  12,168   12,342   34,806   22,456 
                 
Income Attributable to Non-Controlling Interest in Subsidiary     (264)     (876)
             
NET INCOME ATTRIBUTABLE TO INTERFACE, INC. $12,168  $12,078  $34,806  $21,580 
             
                 
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Basic $0.19  $0.19  $0.53  $0.34 
             
                 
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Diluted $0.19  $0.19  $0.53  $0.34 
             
                 
Common Shares Outstanding — Basic  65,469   64,025   65,228   63,623 
Common Shares Outstanding — Diluted  65,676   64,578   65,457   64,106 

   THREE MONTHS ENDED   SIX MONTHS ENDED 
   JULY 1, 2012   JULY 3, 2011   JULY 1, 2012   JULY 3, 2011 

NET SALES

  $254,607    $267,640    $487,367    $513,042  

Cost of Sales

   170,012     172,865     326,569     331,339  
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT ON SALES

   84,595     94,775     160,798     181,703  

Selling, General and Administrative Expenses

   62,562     68,638     121,930     134,038  

Restructuring and Asset Impairment Charge

   —       —       16,316     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

   22,033     26,137     22,552     47,665  

Interest Expense

   6,139     6,783     12,792     13,439  

Other Expense

   274     171     711     49  
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

   15,620     19,183     9,049     34,177  

Income Tax Expense

   5,362     6,369     4,725     11,539  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

  $10,258    $12,814    $4,324    $22,638  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share – Basic

  $0.16    $0.20    $0.07    $0.35  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share – Diluted

  $0.16    $0.20    $0.07    $0.35  
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Shares Outstanding – Basic

   65,952     65,398     65,701     65,108  

Common Shares Outstanding – Diluted

   66,128     65,677     65,868     65,363  

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. 2, 2011  OCT. 3, 2010  OCT. 2, 2011  OCT. 3, 2010 
                 
Net Income $12,168  $12,342  $34,806  $22,456 
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment  (13,723)  23,247   (1,365)  1,786 
             
Comprehensive Income (Loss) $(1,555) $35,589  $33,441  $24,242 
                 
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary     (1,081)     (1,957)
             
Comprehensive Income (Loss) Attributable to Interface, Inc. $(1,555) $34,508  $33,441  $22,285 
             

   THREE MONTHS ENDED   SIX MONTHS ENDED 
   JULY 1, 2012  JULY 3, 2011   JULY 1, 2012  JULY 3, 2011 

Net Income

  $10,258   $12,814    $4,324   $22,638  

Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment

   (11,879  4,092     (4,896  12,358  
  

 

 

  

 

 

   

 

 

  

 

 

 

Comprehensive Income (Loss)

  $(1,621 $16,906    $(572 $34,996  
  

 

 

  

 

 

   

 

 

  

 

 

 

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 
  OCT. 2, 2011  OCT. 3, 2010 
OPERATING ACTIVITIES:        
Net Income $34,806  $22,456 
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:        
Premiums Paid to Repurchase Senior Subordinated Notes     792 
Depreciation and Amortization  19,900   17,352 
Stock Compensation Amortization Expense  8,558   1,901 
Deferred Income Taxes and Other  8,244   (167)
Working Capital Changes:        
Accounts Receivable  (6,808)  (10,069)
Inventories  (34,862)  (20,453)
Prepaid Expenses  (3,850)  (7,404)
Accounts Payable and Accrued Expenses  (16,001)  27,196 
       
         
CASH PROVIDED BY OPERATING ACTIVITIES:  9,987   31,604 
       
         
INVESTING ACTIVITIES:        
Capital Expenditures  (30,759)  (18,443)
Other  (1,624)  (1,816)
       
         
CASH USED IN INVESTING ACTIVITIES:  (32,383)  (20,259)
       
         
FINANCING ACTIVITIES:        
Repurchase of Senior and Senior Subordinated Notes     (39,586)
Premiums Paid to Repurchase Senior Subordinated Notes     (792)
Proceeds from Issuance of Common Stock  2,610   1,803 
Dividends Paid to Interface, Inc. Shareholders  (3,921)  (1,435)
Other  (509)   
Dividends Paid to Joint Venture Partner     (7,904)
       
         
CASH USED IN FINANCING ACTIVITIES:  (1,820)  (47,914)
       
         
Net Cash Used in Operating, Investing and Financing Activities  (24,216)  (36,569)
Effect of Exchange Rate Changes on Cash  (634)  2,060 
       
         
CASH AND CASH EQUIVALENTS:        
Net Change During the Period  (24,850)  (34,509)
Balance at Beginning of Period  69,236   115,363 
       
         
Balance at End of Period $44,386  $80,854 
       

   SIX MONTHS ENDED 
   JULY 1, 2012  JULY 3, 2011 

OPERATING ACTIVITIES:

   

Net Income

  $4,324   $22,638  

Adjustments to Reconcile Net Income to Cash Provided by (Used in) Operating Activities:

   

Depreciation and Amortization

   12,650    13,112  

Stock Compensation Amortization Expense

   2,164    8,120  

Deferred Income Taxes and Other

   (2,356  3,276  

Working Capital Changes:

   

Accounts Receivable

   14,751    (7,995

Inventories

   (9,606  (30,010

Prepaid Expenses and Other Current Assets

   (2,524  (4,083

Accounts Payable and Accrued Expenses

   4,026    (26,442
  

 

 

  

 

 

 

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   23,429    (21,384
  

 

 

  

 

 

 

INVESTING ACTIVITIES:

   

Capital Expenditures

   (21,747  (18,814

Other

   (1,137  (1,995
  

 

 

  

 

 

 

CASH USED IN INVESTING ACTIVITIES:

   (22,884  (20,809
  

 

 

  

 

 

 

FINANCING ACTIVITIES:

   

Repurchase of Senior Subordinated Notes

   (11,477  —    

Other

   —      (505

Proceeds from Issuance of Common Stock

   131    2,579  

Dividends Paid

   (2,627  (2,612
  

 

 

  

 

 

 

CASH USED IN FINANCING ACTIVITIES:

   (13,973  (538
  

 

 

  

 

 

 

Net Cash Used in Operating, Investing and Financing Activities

   (13,428  (42,731

Effect of Exchange Rate Changes on Cash

   (329  794  
  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS:

   

Net Change During the Period

   (13,757  (41,937

Balance at Beginning of Period

   50,635    69,236  
  

 

 

  

 

 

 

Balance at End of Period

  $36,878   $27,299  
  

 

 

  

 

 

 

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 2, 2011,1, 2012, 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 2, 2011,1, 2012, 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, certainwhere applicable.

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 INVENTORIES

Inventories are summarized as follows:

         
  Oct. 2, 2011  Jan. 2, 2011 
  (In thousands) 
Finished Goods $103,157  $78,303 
Work in Process  20,114   16,731 
Raw Materials  47,845   41,732 
       
  $171,116  $136,766 
       

   July 1, 2012   January 1, 2012 
   (In thousands) 

Finished Goods

  $101,867    $98,894  

Work in Process

   21,201     17,606  

Raw Materials

   50,616     49,573  
  

 

 

   

 

 

 
  $173,684    $166,073  
  

 

 

   

 

 

 

NOTE 3 EARNINGS PER SHARE

The Company computes basic earnings per share (“EPS”) attributable to common shareholders by dividing net income attributable to 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 included in the calculation of basic and diluted EPS, where applicable.

-7-


The Company includes 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. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. The following tables show distributed and undistributed earnings:
                 
  Three Months Ended  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
Basic Earnings Per Share Attributable to Common Shareholders:
                
Distributed Earnings $0.02  $0.01  $0.06  $0.02 
Undistributed Earnings  0.17   0.18   0.47   0.32 
             
Total $0.19  $0.19  $0.53  $0.34 
             
                 
Diluted Earnings Per Share Attributable to Common Shareholders:
                
Distributed Earnings $0.02  $0.01  $0.06  $0.02 
Undistributed Earnings  0.17   0.18   0.47   0.32 
             
Total $0.19  $0.19  $0.53  $0.34 
             

-7-


   Three Months Ended   Six Months Ended 
   July 1, 2012   July 3, 2011   July 1, 2012   July 3, 2011 

Earnings Per Share

        

Basic Earnings Per Share:

        

Distributed Earnings

  $0.02    $0.02    $0.04    $0.04  

Undistributed Earnings

   0.14     0.18     0.03     0.31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $0.16    $0.20    $0.07    $0.35  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings Per Share:

        

Distributed Earnings

  $0.02    $0.02    $0.04    $0.04  

Undistributed Earnings

   0.14     0.18     0.03     0.31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $0.16    $0.20    $0.07    $0.35  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presentstables present net income and net income attributable to Interface, Inc. that was attributable to participating securities:

                 
  Three Months Ended  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
  (In millions) 
Net Income $0.3  $0.3  $0.9  $0.6 
Net Income Attributable to Interface, Inc. $0.3  $0.3  $0.9  $0.6 

   Three Months Ended   Six Months Ended 
   July 1, 2012   July 3, 2011   July 1, 2012   July 3, 2011 
       (In millions)     

Net Income

  $0.3    $0.3    $0.1    $0.6  

The weighted average shares outstanding for basic and diluted EPS were as follows:

                 
  Three Months Ended  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
  (In thousands) 
Weighted Average Shares Outstanding  63,703   62,284   63,462   61,882 
Participating Securities  1,766   1,741   1,766   1,741 
             
Shares for Basic Earnings Per Share  65,469   64,025   65,228   63,623 
Dilutive Effect of Stock Options  207   553   229   483 
             
Shares for Diluted Earnings Per Share  65,676   64,578   65,457   64,106 
             

   Three Months Ended   Six Months Ended 
   July 1, 2012   July 3, 2011   July 1, 2012   July 3, 2011 
       (In thousands)     

Weighted Average Shares Outstanding

   63,927     63,623     63,676     63,333  

Participating Securities

   2,025     1,775     2,025     1,775  
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares for Basic Earnings Per Share

   65,952     65,398     65,701     65,108  

Dilutive Effect of Stock Options

   176     279     167     255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares for Diluted Earnings Per Share

   66,128     65,677     65,868     65,363�� 
  

 

 

   

 

 

   

 

 

   

 

 

 

For the quartersthree-month periods ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, options to purchase 249,000274,000 and 389,00020,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive. For the nine-monthsix-month periods ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, options to purchase 20,000274,000 and 404,00020,000 shares of common stock, respectively, were not included in the computation of diluted EPS 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 Interface, 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.

operations, where applicable.

 

-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 2, 2011,1, 2012, 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 of the individual segment. 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 October 2, 2011            
Net Sales $248,721  $24,385  $273,106 
Depreciation and Amortization  5,493   554   6,047 
Operating Income (Loss)  26,333   (63)  26,270 
             
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 
             
  Modular  Bentley    
  Carpet  Prince Street  Total 
  (In thousands) 
Nine Months Ended October 2, 2011            
Net Sales $708,567  $77,581  $786,148 
Depreciation and Amortization  20,296   1,677   21,973 
Operating Income (Loss)  78,604   (124)  78,480 
             
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 

 

   Modular
Carpet
   Bentley
Prince Street
  Total 
   (In thousands) 

Three Months Ended July 1, 2012

     

Net Sales

  $229,546    $25,061   $254,607  

Depreciation and Amortization

   6,010     562    6,572  

Operating Income (Loss)

   24,034     (1,232  22,802  

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  

-9-

   Modular
Carpet
   Bentley
Prince  Street
  Total 
   (In thousands) 

Six Months Ended July 1, 2012

     

Net Sales

  $439,562    $47,805   $487,367  

Depreciation and Amortization

   12,371     1,099    13,470  

Operating Income (Loss)

   25,086     (1,796  23,290  

Six Months Ended July 3, 2011

     

Net Sales

  $459,846    $53,196   $513,042  

Depreciation and Amortization

   14,803     1,123    15,926  

Operating Income (Loss)

   52,271     (61  52,210  


A reconciliation of the Company’s total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows:
                 
  Three Months Ended  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
  (In thousands)  (In thousands) 
DEPRECIATION AND AMORTIZATION                
Total segment depreciation and amortization $6,047  $4,789  $21,973  $14,328 
Corporate depreciation and amortization  1,179   1,562   6,485   4,925 
             
Reported depreciation and amortization $7,226  $6,351  $28,458  $19,253 
             
                 
OPERATING INCOME                
Total segment operating income $26,270  $29,495  $78,480  $69,493 
Corporate income, expenses and other reconciling amounts  (932)  (1,456)  (5,477)  (6,233)
             
Reported operating income $25,338  $28,039  $73,003  $63,260 
             
         
  Oct. 2, 2011  Jan. 2, 2011 
ASSETS (In thousands) 
Total segment assets $664,457  $610,024 
Discontinued operations  1,200   1,200 
Corporate assets and eliminations  113,648   144,209 
       
Reported total assets $779,305  $755,433 
       

   Three Months Ended  Six Months Ended 
   July 1, 2012  July 3, 2011  July 1, 2012  July 3, 2011 
   (In thousands)  (In thousands) 

DEPRECIATION AND AMORTIZATION

     

Total segment depreciation and amortization

  $6,572   $7,265   $13,470   $15,926  

Corporate depreciation and amortization

   698    1,385    1,344    5,306  
  

 

 

  

 

 

  

 

 

  

 

 

 

Reported depreciation and amortization

  $7,270   $8,650   $14,814   $21,232  
  

 

 

  

 

 

  

 

 

  

 

 

 

OPERATING INCOME

     

Total segment operating income

  $22,802   $27,033   $23,290   $52,210  

Corporate income, expenses and other reconciling amounts

   (769  (896  (738  (4,545
  

 

 

  

 

 

  

 

 

  

 

 

 

Reported operating income

  $22,033   $26,137   $22,552   $47,665  
  

 

 

  

 

 

  

 

 

  

 

 

 

-9-


   July 1, 2012   January 1, 2012 
   (In thousands) 

ASSETS

    

Total segment assets

  $644,061    $658,190  

Corporate assets and eliminations

   107,509     114,082  
  

 

 

   

 

 

 

Reported total assets

  $751,570    $772,272  
  

 

 

   

 

 

 

NOTE 5 LONG-TERM DEBT

7 5/8% Senior Notes

On December

As of both July 1, 2012, and July 3, 2010,2011, the Company completed a private offering ofhad outstanding $275 million aggregate principal amount ofin 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 October 2, 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 October 2,July 1, 2012, and July 3, 2011, based on then current market prices, was $279.1 million.
$292.2 million and $288.1 million, respectively.

11 3/8% Senior Secured Notes

On June 5, 2009,

As of July 1, 2012, and July 3, 2011, the Company completed a private offering of $150had outstanding $8.1 million aggregate principal amount ofand $8.0 million, respectively, in 11 3/8% Senior Secured Notes due 2013 (the “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, 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 on a first-priority basis.

As of October 2, 2011, the balanceestimated fair value of the 11 3/8% Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $8.0 million. The estimated fair value of the Senior Secured Notes as of October 2,July 1, 2012, and July 3, 2011, based on then current market prices, was $8.8 million and $8.1 million.
million, respectively.

9.5% Senior Subordinated Notes

On February 4, 2004,April 9, 2012, the Company completed a private offeringredeemed all of $135the remaining $11.5 million of 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 October 2, 2011, the Company hadits 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 October 2, 2011, based on then current market prices, was $11.5 million.

-10-


During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of the 9.5% Senior Subordinated Notes at a price equal to 103.167%100% of the face valueprincipal amount of the notes. Accordingly,notes, plus accrued interest through 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 Expense” line item in the Company’s consolidated condensed statements of operations.
date.

Credit Facilities

On June 24, 2011, the

The Company amended and restated its primarymaintains a domestic revolving credit facility. Under the amended and restated facilityagreement (the “Facility”), as under its predecessor, the Company’s obligations are secured by that provides a first priority lien on substantially all of the assets of Interface, Inc. and each of its material domestic subsidiaries, which subsidiaries also guarantee the Facility. The maximum aggregate amount of $100 million of loans and letters of credit available to the Companyus at any one time remains $100 million (with the(subject to a borrowing base) with an option for us to further increase that maximum aggregate amount to up to a maximum of $150 million — the same option amount as in its predecessor — subject to(upon the satisfaction of certain conditions),conditions, and subject to a borrowing base describedbase). The Company is presently in compliance with all covenants under the Facility. The Facility differs from its predecessorand anticipates that it will remain in compliance with 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 may incur or allow to exist.
The 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 raised.
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 certain 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 has been lowered to more than 50% of the aggregate amount of the lending commitments from more than 66 2/3% of the aggregate amount of the lending commitments.
covenants for the foreseeable future. As of October 2, 2011,July 1, 2012, there were zero borrowings and $5.2$3.9 million in letters of credit outstanding under the Facility. As of October 2 2011,July 1, 2012, the Company could have incurred $80.6$84.3 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 AMROThe Royal Bank of Scotland N.V. (“RBS”). Under this Credit Agreement, ABN AMRORBS provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time.of €20 million. As of October 2, 2011,July 1, 2012, there were no borrowings outstanding under this facility, and the Company could have incurred €14.0€20 million (approximately $19.0$24.9 million) of additional borrowings under the facility.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $18.2$18.5 million of lines of credit available. As of October 2, 2011,July 1, 2012, there were no borrowings outstanding under these lines of credit.

-11-


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.model that meets the criteria stated in the standard. The Company uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

-10-


During the first ninesix months of 20112012 and 2010,2011, the Company recognized stock option compensation costs of $0.7$0.4 million and $1.1$0.6 million, respectively. In the thirdsecond quarters of 20112012 and 2010,2011, the Company recognized stock option compensation costs of $0.2 million and $0.4$0.3 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at October 2, 2011,July 1, 2012, approximated $0.7$0.2 million, and the weighted average period of time over which this cost will be recognized is approximately one year.

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 nine months of fiscal year 2010. There were no stock options granted in 2011.
Nine Months Ended
Oct. 3, 2010
Risk free interest rate2.09%
Expected life5.5 years
Expected volatility61%
Expected dividend yield0.3%
The weighted average grant date fair value of stock options granted during the first nine months of fiscal 2010 was $6.79 per share.

The following table summarizes stock options outstanding as of October 2, 2011,July 1, 2012, as well as activity during the ninesix months then ended:

         
      Weighted Average 
  Shares  Exercise Price 
Outstanding at January 2, 2011  1,148,500  $7.51 
Granted      
Exercised  487,000   4.43 
Forfeited or canceled  23,500   6.29 
       
Outstanding at October 2, 2011  638,000  $7.19 
       
         
Exercisable at October 2, 2011  498,000  $7.95 
       

   Shares   Weighted Average
Exercise Price
 

Outstanding at January 1, 2012

   592,500    $9.12  

Granted

   —       —    

Exercised

   23,500    $5.59  

Forfeited or canceled

   34,000    $11.72  
  

 

 

   

 

 

 

Outstanding at July 1, 2012

   535,000    $8.85  
  

 

 

   

 

 

 

Exercisable at July 1, 2012

   419,200    $7.80  
  

 

 

   

 

 

 

At October 2, 2011,July 1, 2012, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $2.3$2.6 million and $2.3$2.5 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).

-12-


Cash proceeds and intrinsic value related to total stock options exercised during the first ninesix months of fiscal years 20112012 and 20102011 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period.
         
  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010 
  (In millions) 
Proceeds from stock options exercised $2.6  $1.8 
Intrinsic value of stock options exercised $5.9  $3.9 
period presented.

   Six Months Ended 
   July 1, 2012   July 3, 2011 
   (In thousands) 

Proceeds from stock options exercised

  $131    $2,579  

Intrinsic value of stock options exercised

   179     5,819  

Restricted Stock Awards

During the ninesix months ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, the Company granted restricted stock awards for 668,000573,500 and 529,000668,000 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 sharesawards (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 restricted stock grants was $8.6$2.2 million and $1.9$8.1 million for the ninesix months ended October 2,July 1, 2012, and July 3, 2011, and October 3, 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.

The following table summarizes restricted stock activity as of October 2, 2011,July 1, 2012, and during the ninesix months then ended:

         
      Weighted Average 
  Shares  Grant Date Fair Value 
Outstanding at January 2, 2011  1,740,000  $13.04 
Granted  668,000   17.08 
Vested  600,000   12.23 
Forfeited or canceled  42,000   14.21 
       
Outstanding at October 2, 2011  1,766,000  $15.03 
       

   Shares   Weighted Average
Grant  Date Fair Value
 

Outstanding at January 1, 2012

   1,749,000    $15.08  

Granted

   573,500     13.25  

Vested

   241,500     13.20  

Forfeited or canceled

   56,000     15.11  
  

 

 

   

 

 

 

Outstanding at July 1, 2012

   2,025,000    $14.79  
  

 

 

   

 

 

 

-11-


As of October 2, 2011,July 1, 2012, the unrecognized total compensation cost related to unvested restricted stock was $13.3approximately $13.9 million. That cost is expected to be recognized by the end of 2015.

For the ninesix months ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, the Company recognized tax benefits of $2.4 million and $0.5 million, respectively, with regard to restricted stock.

stock of $0.3 million and $2.1 million, respectively.

-13-


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 October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively:

                 
  Three Months Ended  Nine Months Ended 
Defined Benefit Retirement Plan (Europe) Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
  (In thousands)  (In thousands) 
Service cost $72  $88  $217  $266 
Interest cost  2,835   2,715   8,605   8,094 
Expected return on assets  (2,935)  (2,772)  (8,910)  (8,264)
Amortization of prior service costs  21   22   63   66 
Recognized net actuarial (gains)/losses  149   413   454   1,226 
             
Net periodic benefit cost $142  $466  $429  $1,388 
             
                 
  Three Months Ended  Nine Months Ended 
Salary Continuation Plan (SCP) Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
  (In thousands)  (In thousands) 
Service cost $98  $86  $295  $257 
Interest cost  284   280   853   841 
Amortization of transition obligation  55   55   164   164 
Amortization of prior service cost  12   12   36   36 
Amortization of loss  93   68   277   205 
             
Net periodic benefit cost $542  $501  $1,625  $1,503 
             

   Three Months Ended  Six Months Ended 

Defined Benefit Retirement Plan (Europe)

  July 1, 2012  July 3, 2011  July 1, 2012  July 3, 2011 
   (In thousands)  (In thousands) 

Service cost

  $113   $74   $229   $145  

Interest cost

   2,542    2,932    5,086    5,770  

Expected return on assets

   (2,817  (3,041  (5,638  (5,975

Amortization of prior service costs

   13    21    26    42  

Recognized net actuarial losses

   231    155    460    305  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic benefit cost

  $82   $141   $163   $287  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended  Six Months Ended 

Salary Continuation Plan (SCP)

  July 1, 2012  July 3, 2011  July 1, 2012  July 3, 2011 
   (In thousands)  (In thousands) 

Service cost

  $113   $98   $226   $196  

Interest cost

   254    284    507    568  

Amortization of transition obligation

   —      55    —      110  

Amortization of prior service cost

   12    12    24    24  

Amortization of loss

   67    95    134    185  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic benefit cost

  $446   $544   $891   $1,083  
  

 

 

  

 

 

  

 

 

  

 

 

 

NOTE 8 — 2010 RESTRUCTURING CHARGE

CHARGES

2012 Restructuring Charge

In the first quarter of 2010,2012, the Company adoptedcommitted to a new restructuring plan primarily related to workforce reduction in its European modular carpet operations. This reduction wascontinuing efforts to reduce costs across its worldwide operations and more closely align its operations with reduced demand levels in response to the continued challenging economic climatecertain markets. The plan primarily consists of ceasing manufacturing and warehousing operations at its facility 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.Shelf, England. In connection with this restructuring plan, the Company recordedincurred a pre-tax restructuring and asset impairment charge in the first quarter of $3.12012 in an amount of $16.3 million. Substantially allThe charge is comprised of employee severance expenses of $5.4 million, other related exit costs of $1.6 million, and a charge for impairment of assets of approximately $9.3 million. Approximately $7 million of the charge will result in cash expenditures, primarily severance expense. Actions and expenses related to this plan were substantially completed by the end of the second quarter of 2012.

A summary of these restructuring activities is presented below:

   Total
Restructuring
Charge
   Costs Incurred
in 2012
   Balance at
July 1,  2012
 
   (In thousands) 

Workforce Reduction

   5,356     1,843     3,513  

Fixed Asset Impairment

   9,364     9,364     —    

Other Related Exit Costs

   1,596     —       1,596  

-12-


The table below details these restructuring activities by segment:

   Modular
Carpet
   Bentley
Prince  Street
   Corporate   Total 
   (In thousands) 

Total amounts expected to be incurred

  $16,316    $—      $—      $16,316  

Cumulative amounts incurred to date

   11,207     —       —       11,207  

Total amounts incurred in 2012

   11,207     —       —       11,207  

2011 Restructuring Charge

In the fourth quarter of 2011, the Company committed to a restructuring plan intended to reduce costs across its worldwide operations and more closely align its operations with reduced demand in certain markets. As a result of this plan, the Company incurred pre-tax restructuring and asset impairment charges of $6.2 million in the fourth quarter of 2011. The majority of this charge involves($5.4 million) relates to the severance of approximately 110 employees in Europe, Asia and the United States. The remainder of the charge ($0.8 million) relates to contract termination and fixed asset impairment costs. Approximately $5.4 million of this charge will result in cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed inby the first quarterend of 2010.

2011.

A summary of these restructuring activities is presented below:

                 
  Total          
  Restructuring  Costs Incurred  Costs Incurred  Balance at 
  Charge  in 2010  in 2011  Oct. 2, 2011 
  (In thousands) 
Workforce reduction $3,131  $2,674  $457  $ 

   Restructuring
Charge
   Costs Incurred
in 2011
   Costs Incurred
in 2012
   Balance at
July 1,  2012
 
   (In thousands) 

Workforce Reduction

   5,401     1,147     2,572     1,682  

Fixed Asset Impairment

   776     776     —       —    

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  2,951   180      3,131 
Total amounts incurred in the nine-month period ended October 2, 2011  457         457 

 

   Modular
Carpet
   Bentley
Prince  Street
   Corporate   Total 
   (In thousands) 

Total amounts expected to be incurred

  $5,755    $422    $—      $6,177  

Cumulative amounts incurred to date

   4,073     422     —       4,495  

Total amounts incurred in 2012

   2,430     142     —       2,572  

-14-


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.operations, where applicable. Assets and liabilities of this business segment have been reported in assets and liabilities held for sale, for all periods presented. where applicable.

Discontinued operations had no net sales and no net income or loss in either of the three-month or nine-monthsix-month periods ended October 2, 2011,July 1, 2012 and OctoberJuly 3, 2010.

2011.

NOTE 10 SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $12.0 million and $21.2$11.2 million for the ninesix months ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively. Income tax payments amounted to $15.2$6.0 million and $10.8$11.1 million for the ninesix months ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively.

-13-


NOTE 11 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding the performance of a company’s annual goodwill impairment evaluation. This standard allows companies to assess qualitative factors to determine if it is more-likely-than-notmore likely than not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. This standard is effective for fiscal years beginning after December 31, 2011. At this time the Company does not expectThe adoption of this standard willdid not have any significant impact on itsthe Company’s consolidated financial statements.

In June 2011, the 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, iswas to be effective for interim and annual periods ending after December 31, 2012, with earlier adoption permitted. In December of 2011, the FASB issued an amendment to this statement which defers the requirements of this standard. As this amendment only effectsaffects 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 performing Step 2 if qualitative factors indicate that it is more likely than not that an impairment to goodwill exists. This recent guidance is effective for fiscal years beginning after December 15, 2010, as well as for interim periods within such years. The adoption of this standard did not have any significant impact on the Company’s consolidated condensed financial statements.
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-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 became effective for the Company in the first quarter of 2011. 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 2011,2012, the Company increased its liability for unrecognized tax benefits by $0.1 million. As of October 2, 2011,July 1, 2012, the Company had accrued approximately $8.2$7.8 million accrued for unrecognized tax benefits.

-15-


NOTE 13 — DIVIDEND TO NON-CONTROLLING INTEREST PARTNER
In– SHARE CONVERSION

On March 5, 2012, the third quarternumber of 2010,issued and outstanding shares of Class B Common Stock constituted less than 10% of 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, assetsaggregate number of issued 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 theoutstanding shares of the Thailand manufacturing joint ventureCompany’s Class A Common Stock and Class B Common Stock (that is, on that were held bydate, 6,459,556 shares of an aggregate of 65,372,375 shares), as the non-controlling interest partnercumulative result of varied transactions that caused the conversion of shares of Class B Common Stock into shares of Class A Common Stock. Accordingly, in accordance with the respective terms for approximately $4.3 million. After this purchase, the Company now owns allClass B Common Stock and the Class A Common Stock in Article V of the sharesCompany’s Articles of Incorporation (the “Articles”), the Class A Common Stock and Class B Common Stock are now, irrevocably from March 5, 2012, a single class of Common Stock in all respects, with no distinction whatsoever between the voting rights or any other rights and privileges of the Thailand venture.
holders of Class A Common Stock and the holders of Class B Common Stock. The Company intends to eliminate future uses of (or references to) the terms “Class A” and “Class B” in connection with the Common Stock, except for historical purposes or to facilitate transition by certain stock listing or administrative services organizations who are accustomed to the old designations for the Common Stock.

NOTE 14 SUBSEQUENT EVENT

– FIRE AT AUSTRALIAN MANUFACTURING FACILITY

On October 26, 2011, the Company committedJuly 20, 2012, subsequent to a restructuring plan intended to reduce costs across its worldwide operations and more closely align its operations with reduced demand levels in certain markets. As a result of this plan, the Company expects to incur restructuring and asset impairment charges of approximately $6.5 million to $8.0 million during the fourth quarter of 2011. The majority of the charge will relate to reductions of approximately 100 employees (approximately $5-6 million) as well as smaller amounts for contract termination costs (approximately $0.5-1.0 million) and impairment of assets (approximately $0.8-1.0 million). The Company anticipates that approximately $5.5-6.5 million of this charge will result in future cash expenditures, primarily severance expense. Actions related to this restructuring plan are expected to be completed by the end of the fourthsecond quarter of 2011,2012, a fire occurred at the Company’s manufacturing facility in Picton, Australia. The facility’s carpet production line, primarily comprised of tufting and backing machinery, sustained substantial damage and will be inoperable for an undetermined period of time. Other areas of the Company’s Picton site relating to yarn preparation and warehousing were undamaged by the fire. The finished goods inventory and some raw materials for the business are kept at separate offsite locations and were not affected by this incident.

The Picton facility serves the Company’s customers throughout Australia and New Zealand. It represents approximately 7% of the Company’s total annual production, 10% of its net sales, and 13% of its operating income. The Company will utilize adequate production capacity at its manufacturing facilities in Thailand and China to meet customer demand typically serviced from Picton. The Company does not expect any significant inconvenience to customers. The Company has business interruption and property damage insurance.

-14-


NOTE 15 – SUBSEQUENT EVENT – PENDING SALE OF BENTLEY PRINCE STREET

On July 25, 2012, the Company entered into a Stock Purchase Agreement with an affiliate of Dominus Capital, L.P., a private equity investment firm, for the sale of the Company’s Bentley Prince Street business segment. The aggregate purchase price under the Agreement would be $35.0 million paid in cash at the closing of the transaction, subject to possible working capital and/or other similar adjustments. The Company expects the closing of the transaction to occur in August of 2012. As of the end of the second quarter of 2012, Bentley Prince Street had net assets of approximately $49 million. The Company expects to generate annual savingsrecord exit costs related to the divestiture of approximately $11.0 million$7-$9 million. The final loss on disposal will be calculated based on the ending balance sheet of Bentley Prince Street as a result thereof.

of the date of closing.

NOTE 15 —16 – 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 its 9.5% Senior Subordinated Notes due 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.

 

-16-

-15-


INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED OCTOBER 2, 2011

                     
          INTERFACE,  CONSOLIDATION    
      NON-  INC.  AND    
  GUARANTOR  GUARANTOR  (PARENT  ELIMINATION  CONSOLIDATED 
  SUBSIDIARIES  SUBSIDIARIES  CORPORATION)  ENTRIES  TOTALS 
  (IN THOUSANDS) 
                     
Net sales $182,658  $134,854  $  $(44,406) $273,106 
Cost of sales  134,448   88,639      (44,406)  178,681 
                
Gross profit on sales  48,210   46,215         94,425 
Selling, general and administrative expenses  30,972   32,062   6,053      69,087 
                
Operating income (loss)  17,238   14,153   (6,053)     25,338 
Interest/Other expense  7,823   2,763   (4,333)     6,253 
                
Income (loss) before taxes on income and equity in income of subsidiaries  9,415   11,390   (1,720)     19,085 
Income tax expense (benefit)  3,412   4,128   (623)     6,917 
Equity in income (loss) of subsidiaries        13,265   (13,265)   
                
Net income (loss)  6,003   7,262   12,168   (13,265)  12,168 
Income attributable to non-controlling interest in subsidiary               
                
Net income (loss) attributable to Interface, Inc. $6,003  $7,262  $12,168  $(13,265) $12,168 
                
JULY 1, 2012

   GUARANTOR
SUBSIDIARIES
   NON-
GUARANTOR
SUBSIDIARIES
   INTERFACE,  INC.
(PARENT
CORPORATION)
  CONSOLIDATION
AND ELIMINATION
ENTRIES
  CONSOLIDATED
TOTALS
 
   (In thousands) 

Net sales

  $167,714    $117,526    $—     $(30,633 $254,607  

Cost of sales

   121,595     79,050     —      (30,633  170,012  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit on sales

   46,119     38,476     —      —      84,595  

Selling, general and administrative expenses

   29,477     27,063     6,022    —      62,562  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Operating income (loss)

   16,642     11,413     (6,022  —      22,033  

Interest/Other expense

   11,007     2,870     (7,464  —      6,413  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Income before taxes on income and equity in income of subsidiaries

   5,635     8,543     1,442    —      15,620  

Income tax expense

   1,934     2,933     495    —      5,362  

Equity in income (loss) of subsidiaries

   —       —       9,311    (9,311  —    
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income (loss)

  $3,701    $5,610    $10,258   $(9,311 $10,258  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

 

-17-

-16-


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINESIX MONTHS ENDED OCTOBER 2, 2011

                     
      NON-  INTERFACE, INC.  CONSOLIDATION AND    
  GUARANTOR  GUARANTOR  (PARENT  ELIMINATION  CONSOLIDATED 
  SUBSIDIARIES  SUBSIDIARIES  CORPORATION)  ENTRIES  TOTALS 
  (IN THOUSANDS) 
                     
Net sales $512,183  $405,303  $  $(131,338) $786,148 
Cost of sales  378,571   262,787      (131,338)  510,020 
                
Gross profit on sales  133,612   142,516         276,128 
Selling, general and administrative expenses  86,872   94,901   21,352      203,125 
                
Operating income (loss)  46,740   47,615   (21,352)     73,003 
Interest/Other expense  20,654   9,689   (10,602)     19,741 
                
Income (loss) before taxes on income and equity in income of subsidiaries  26,086   37,926   (10,750)     53,262 
Income tax expense (benefit)  9,110   13,118   (3,772)     18,456 
Equity in income (loss) of subsidiaries        41,784   (41,784)   
                
Net income (loss)  16,976   24,808   34,806   (41,784)  34,806 
Income attributable to non-controlling interest in subsidiary               
                
Net income (loss) attributable to Interface, Inc. $16,976  $24,808  $34,806  $(41,784) $34,806 
                
JULY 1, 2012

   GUARANTOR
SUBSIDIARIES
   NON-
GUARANTOR
SUBSIDIARIES
  INTERFACE,
INC.

(PARENT
CORPORATION)
  CONSOLIDATION
AND
ELIMINATION
ENTRIES
  CONSOLIDATED
TOTALS
 
   (In thousands) 

Net sales

  $310,498    $238,181   $—     $(61,312 $487,367  

Cost of sales

   227,938     159,943    —      (61,312  326,569  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit on sales

   82,560     78,238    —      —      160,798  

Selling, general and administrative expenses

   56,296     54,668    10,966    —      121,930  

Restructuring and asset impairment charge

   1,143     15,173    —      —      16,316  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Operating income (loss)

   25,121     8,397    (10,966  —      22,552  

Interest/Other expense

   18,242     6,603    (11,342  —      13,503  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before taxes on income and equity in income of subsidiaries

   6,879     1,794    376    —      9,049  

Income tax expense

   2,055     2,278    392    —      4,725  

Equity in income (loss) of subsidiaries

   —       —      4,340    (4,340  —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $4,824    $(484 $4,324   $(4,340 $4,324  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

 

-18-

-17-


CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 2, 2011
                     
      NON-  INTERFACE, INC.  CONSOLIDATION    
  GUARANTOR  GUARANTOR  (PARENT  AND ELIMINATION  CONSOLIDATED 
  SUBSIDIARIES  SUBSIDIARIES  CORPORATION)  ENTRIES  TOTALS 
  (IN THOUSANDS) 
ASSETS                    
Current Assets:                    
Cash and cash equivalents $1,813  $30,456  $12,117  $  $44,386 
Accounts receivable  67,456   89,877   676      158,009 
Inventories  96,980   74,136         171,116 
Prepaids and deferred income taxes  9,071   17,598   10,806      37,475 
Assets of business held for sale     1,200         1,200 
                
Total current assets  175,320   213,267   23,599      412,186 
Property and equipment less accumulated depreciation  83,806   99,589   4,675      188,070 
Investment in subsidiaries  241,113   153,434   189,892   (584,439)   
Goodwill  6,954   69,612         76,566 
Other assets  6,545   12,138   83,800      102,483 
                
  $513,738  $548,040  $301,966  $(584,439) $779,305 
                
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY                    
Current Liabilities $15,340  $52,044  $86,358  $  $153,742 
Senior notes and senior subordinated notes        294,487      294,487 
Deferred income taxes  11,124   1,615   (4,268)     8,471 
Other  4,242   1,902   27,930      34,074 
                
Total liabilities  30,706   55,561   404,507      490,774 
                     
Common stock  94,145   102,199   6,546   (196,344)  6,546 
Additional paid-in capital  249,302   12,525   360,184   (261,827)  360,184 
Retained earnings (deficit)  141,184   424,722   (460,115)  (125,160)  (19,369)
Foreign currency translation adjustment  (1,599)  (19,119)  (5,775)  (1,108)  (27,601)
Pension liability     (27,848)  (3,381)     (31,229)
                
  $513,738  $548,040  $301,966  $(584,439) $779,305 
                

JULY 1, 2012

   GUARANTOR
SUBSIDIARIES
  NON-
GUARANTOR
SUBSIDIARIES
  INTERFACE,  INC.
(PARENT
CORPORATION)
  CONSOLIDATION
AND ELIMINATION
ENTRIES
  CONSOLIDATED
TOTALS
 
   (In thousands) 

ASSETS

      

Current assets:

      

Cash and cash equivalents

  $1,446   $26,419   $9,013   $—     $36,878  

Accounts receivable

   66,614    73,936    582    —      141,132  

Inventories

   98,789    74,895    —      —      173,684  

Prepaids and deferred income taxes

   8,993    17,926    9,101    —      36,020  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   175,842    193,176    18,696    —      387,714  

Property and equipment less accumulated depreciation

   83,319    103,735    3,598    —      190,652  

Investment in subsidiaries

   267,400    198,892    124,800    (591,092  —    

Goodwill

   6,955    65,177    —      —      72,132  

Other assets

   5,680    10,552    84,840    —      101,072  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $539,196   $571,532   $231,934   $(591,092 $751,570  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities

  $47,794   $75,227   $18,942   $—     $141,963  

Senior notes

   —      —      283,070    —      283,070  

Deferred income taxes

   188    11,302    (3,005  —      8,485  

Other

   1,406    8,565    27,217    —      37,188  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

   49,388    95,094    326,224    —      470,706  

Common stock

   94,145    102,199    6,596    (196,344  6,596  

Additional paid-in capital

   249,302    12,525    364,376    (261,827  364,376  

Retained earnings (deficit)

   148,441    425,226    (455,813  (132,921  (15,067

Foreign currency translation adjustment

   (2,080  (29,647  (7,018  —      (38,745

Pension liability

   —      (33,865  (2,431  —      (36,296
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $539,196   $571,532   $231,934   $(591,092 $751,570  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

-19-

-18-


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINESIX MONTHS

ENDED OCTOBER 2, 2011

                     
      NON-  INTERFACE, INC.  CONSOLIDATION    
  GUARANTOR  GUARANTOR  (PARENT  AND ELIMINATION  CONSOLIDATED 
  SUBSIDIARIES  SUBSIDIARIES  CORPORATION)  ENTRIES  TOTALS 
  (IN THOUSANDS) 
Net cash provided by (used in) operating activities $(7,940) $11,306  $5,694  $927  $9,987 
                
Cash flows from investing activities:                    
Purchase of plant and equipment  (15,048)  (15,343)  (368)     (30,759)
Other  (399)  (1,083)  (142)     (1,624)
                
Net cash used for investing activities  (15,447)  (16,426)  (510)     (32,383)
                
Cash flows from financing activities:                    
Other  24,114   3,609   (27,305)  ( 927)  (509)
Proceeds from issuance of common stock        2,610      2,610 
Dividends paid to Interface, Inc. shareholders        (3,921)     (3,921)
                
Net cash used in financing activities  24,114   3,609   (28,616)  (927)  (1,820)
Effect of exchange rate change on cash     (634)        (634)
                
Net increase (decrease) in cash  727   (2,145)  (23,432)     (24,850)
Cash at beginning of period  1,086   32,601   35,549      69,236 
                
Cash at end of period $1,813  $30,456  $12,117  $  $44,386 
                
JULY 1, 2012

   GUARANTOR
SUBSIDIARIES
  NON-
GUARANTOR
SUBSIDIARIES
  INTERFACE,  INC.
(PARENT
CORPORATION)
  CONSOLIDATION
AND ELIMINATION
ENTRIES
  CONSOLIDATED
TOTALS
 
   (In thousands) 

Net cash provided by operating activities

  $6,532   $2,812   $10,667   $3,418   $23,429  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

      

Purchase of plant and equipment

   (7,292  (14,443  (12  —      (21,747

Other

   390    (31  (1,496  —      (1,137
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used for investing activities

   (6,902  (14,474  (1,508  —      (22,884
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

      

Repurchase of senior subordinated notes

   —      —      (11,477  —      (11,477

Other

   715    2,536    167    (3,418  —    

Proceeds from issuance of common stock

   —      —      131    —      131  

Dividends paid

   —      —      (2,627  —      (2,627
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used for) financing activities

   715    2,536    (13,806  (3,418  (13,973

Effect of exchange rate change on cash

   —      (329  —      —      (329
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash

   345    (9,455  (4,647  —      (13,757

Cash at beginning of period

   1,101    35,874    13,660    —      50,635  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash at end of period

  $1,446   $26,419   $9,013   $—     $36,878  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

-20-

-19-


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2, 2011,1, 2012, 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, October 2, 2011,July 1, 2012, and the comparable periods of 20102011 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 2, 2011,1, 2012, 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.

7 5/8% Senior Notes
On December 3, 2010, we 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. 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 and approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes pursuant to a Company tender offer.

2012 Restructuring Plans

Charge

In the first quarter of 2010,2012, we adoptedcommitted to a new restructuring plan primarily related to workforce reduction in our European modular carpet operations. This reduction wascontinuing efforts to reduce costs across our worldwide operations and more closely align our operations with reduced demand levels in response to the continued challenging economic climatecertain markets. The plan primarily consists of ceasing manufacturing and warehousing operations at our facility 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.Shelf, England. In connection with this restructuring plan, we recordedincurred a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involved cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completedasset impairment charge in the first quarter of 2010.

2012 in an amount of $16.3 million. The charge is comprised of employee severance expenses of $5.4 million, other related exit costs of $1.6 million, and a charge for impairment of assets of approximately $9.3 million. Approximately $7 million of the charge will result in cash expenditures, primarily severance expense. The restructuring plan was substantially completed in the second quarter of 2012, and is expected to yield annualized cost savings of approximately $9 million.

2011 Restructuring Charge

In Octoberthe fourth quarter of 2011, we committed to a restructuring plan intended to reduce costs across our worldwide operations and more closely align our operations with reduced demand levels in certain markets. As a result of this plan, we expect to incurincurred pre-tax restructuring and asset impairment charges of approximately $6.5$6.2 million to $8.0 million duringin the fourth quarter of 2011. The majority of this charge ($5.4 million) relates to the severance of approximately 110 employees in Europe, Asia and the United States. The remainder of the charge will relate($0.8 million) relates to reductions of approximately 100 employees (approximately $5-6 million) as well as smaller amounts for contract termination costs (approximately $0.5-1.0 million) and fixed asset impairment of assets (approximately $0.8-1.0 million). We anticipate that approximately $5.5-6.5costs. Approximately $5.4 million of this charge will result in future cash expenditures, primarily severance expense.expenses. Actions and expenses related to this restructuring plan are expected to bewere substantially completed by the end of the fourth quarter of 2011, and we expect to generate annual savings of approximately $11.0 million as a result thereof.

2011.

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.operations,

where applicable.

Our discontinued operations had no net sales and no net income or loss in either of the three-month or nine-monthsix-month periods ended October 2, 2011July 1, 2012 and OctoberJuly 3, 2010.

2011.

Recent Events

In July 2012, a fire occurred at the Company’s facility in Picton, Australia, and the Company entered into an agreement to sell its Bentley Prince Street business segment. Please see Notes 14 and 15 in the notes to consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

 

-21-

-20-


General

General
During the quarter ended October 2, 2011,July 1, 2012, we had net sales of $273.1$254.6 million, compared with net sales of $252.7$267.6 million in the thirdsecond quarter last year. Fluctuations in currency exchange rates positivelynegatively impacted 2011 third2012 second quarter sales by 4%3% (approximately $10$7 million), compared with the prior year period. During the first ninesix months of fiscal year 2011,2012, we had net sales of $768.1$487.4 million, compared with net sales of $696.5$513.0 million in the first ninesix months of last year. Fluctuations in currency exchange rates positivelynegatively impacted sales in the first ninesix months of 20112012 by 4%2% (approximately $26$10 million), compared with the prior year period.

Included in our results for the ninesix months ended October 3, 2010July 1, 2012 is $1.1a restructuring charge of $16.3 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 in the Note entitled “Long-Term Debt” in Item 1. Also included in the nine-month period ended October 3, 2010 is $3.1 million of restructuring charges, as described above.

During the thirdsecond quarter of 2011,2012, we had net income attributable to Interface, Inc. of $12.2$10.3 million, or $0.19 per diluted share, compared with net income attributable to Interface, Inc. of $12.1 million, or $0.19 per diluted share, in the third quarter of 2010. Net income in the third quarter of 2011 was $12.1 million, or $0.19$0.16 per diluted share, compared with net income of $12.3$12.8 million, or $0.19$0.20 per diluted share, in the thirdsecond quarter of 2010.

2011. During the ninesix months ended October 2, 2011,July 1, 2012, including the $16.3 million restructuring charge described above, we had net income attributable to Interface, Inc. of $34.8$4.3 million, or $0.53$0.07 per diluted share, compared with net income attributable to Interface, Inc. of $21.6$22.6 million, or $0.34$0.35 per diluted share, in the first ninesix months of 2010. Net income was $34.8 million, or $0.53 per diluted share, in the nine months ended October 2, 2011, compared with net income of $22.5 million, or $0.34 per diluted share, in the first nine months of 2010.
2011.

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 October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively:

                 
  Three Months Ended  Nine Months Ended 
  Oct. 2, 2011  Oct. 3, 2010  Oct. 2, 2011  Oct. 3, 2010 
                 
Net sales  100.0%  100.0%  100.0%  100.0%
Cost of sales  65.4   64.6   64.9   65.1 
             
Gross profit on sales  34.6   35.4   35.1   34.9 
Selling, general and administrative expenses  25.3   24.3   25.8   25.4 
Restructuring charge           0.4 
             
Operating income  9.3   11.1   9.3   9.1 
Bond retirement expenses           0.2 
Interest/Other expenses  2.3   3.5   2.5   3.8 
             
Income before tax expense  7.0   7.6   6.8   5.1 
Income tax expense  2.5   2.7   2.3   1.9 
             
Net income  4.5   4.9   4.4   3.2 
Net income attributable to Interface, Inc.  4.5   4.8   4.4   3.1 
             

   Three Months Ended  Six Months Ended 
   July 1, 2012  July 3, 2011  July 1, 2012  July 3, 2011 

Net sales

   100.0  100.0  100.0  100.0

Cost of sales

   66.8    64.6    67.0    64.6  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit on sales

   33.2    35.4    33.0    35.4  

Selling, general and administrative expenses

   24.6    25.6    25.0    26.1  

Restructuring and asset impairment charge

   —      —      3.3    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   8.7    9.8    4.6    9.3  

Interest/Other expenses

   2.5    2.6    2.8    2.6  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before tax expense

   6.1    7.2    1.9    6.7  

Income tax expense

   2.1    2.4    1.0    2.2  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

   4.0    4.8    0.9    4.4  
  

 

 

  

 

 

  

 

 

  

 

 

 

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 October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively.

-22-


Net Sales by Business Segment

Net sales by operating segment and for our Company as a whole were as follows for the three-month and nine-monthsix-month periods ended October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively:

             
  Three Months Ended  Percentage 
  Oct. 2, 2011  Oct. 3, 2010  Change 
Net Sales By Segment (In thousands)    
Modular Carpet $248,721  $226,513   9.8%
Bentley Prince Street  24,385   26,211   (7.0)%
          
Total $273,106  $252,724   8.1%
          
             
  Nine Months Ended  Percentage 
  Oct. 2, 2011  Oct. 3, 2010  Change 
Net Sales By Segment (In thousands)    
Modular Carpet $708,567  $623,215   13.7%
Bentley Prince Street  77,581   73,287   5.9%
          
Total $786,148  $696,502   12.9%
          

   Three Months Ended   Percentage 

Net Sales By Segment

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Modular Carpet

  $229,546    $240,566     (4.6)% 

Bentley Prince Street

   25,061     27,074     (7.4)% 
  

 

 

   

 

 

   

 

 

 

Total

  $254,607    $267,640     (4.9)% 
  

 

 

   

 

 

   

 

 

 

-21-


   Six Months Ended   Percentage 

Net Sales By Segment

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Modular Carpet

  $439,562    $459,846     (4.4)% 

Bentley Prince Street

   47,805     53,196     (10.1)% 
  

 

 

   

 

 

   

 

 

 

Total

  $487,367    $513,042     (5.0)% 
  

 

 

   

 

 

   

 

 

 

Modular Carpet Segment.Segment. For the quarter ended October 2, 2011,July 1, 2012, net sales for the Modular Carpet segment increased $22.2declined $11.0 million (9.8%(4.6%) versus the comparable period in 2010.the prior year. On a geographic basis, sales increases in the Americas (up 6%) were offset by declines in the Europe (down 13% in U.S. dollars and 2% in local currencies) and Asia-Pacific (down 18%) regions. Sales growth in the Americas was due to increases in both the corporate office market (up 5%) and non-office markets. The strongest performing non-office market segments were residential (up 18%), retail (up 15%) and education (up 13%). The increase in the residential segment was due to new FLOR store openings as well as same store growth. These increases in the Americas were somewhat offset by declines in the government (down 25%) and healthcare (down 4%) market segments. In Europe, the sales decline was due primarily to negative currency translation impacts, as most market segments were flat in local currencies, with the exception of the retail (down 25% in local currencies and 33% in U.S. dollars) and government (down 10% in local currencies and 20% in U.S. dollars) market segments. Asia-Pacific, in the face of strong prior year comparable sales in the second quarter, saw declines in almost all market segments, with education (down 55%) showing the most significant decline due to the curtailment of government stimulus programs that had been in place in 2011 – particularly in Australia.

For the six months ended July 1, 2012, net sales for the Modular Carpet segment declined $20.3 million (4.4%) versus the comparable period in the prior year. On a geographic basis, we experienced increases in net sales in the Americas (up 8%3%) and Europe (up 19% in U.S. dollars, 9% in local currency). Asia-Pacific also saw a sales increase as compared to the third quarter of 2010 (up less than 1%). Worldwide, the increases were due to continued success in the corporate office market segment, success in certain non-office commercial market segments, and continuing strong demand in emerging markets. Sales growth in the Americas was driven primarily by the improving corporate office market segment (up 16%) as well as growth in the residential (up 38%) and education (up 13%) market segments. These increases were moderatedoffset by declines in the retailEurope (down 13%)2% in local currencies and hospitality (down 41%) market segments. Sales growth in Europe was due to the corporate office market segment (up 25%8% in U.S. dollars, 15% in local currency) as well as smaller increases in the education (up 25% in U.S. dollars, 14% in local currency) and hospitality (up 31% in U.S. dollars, 20% in local currency) market segments. Mitigating these increases were declines in the residential (down 53% in U.S. dollars, 57% in local currency) and retail (down 11% in U.S. dollars, 18% in local currency). Asia-Pacific saw increases in the corporate office (up 9%) and hospitality (up over 100%) market segments. These increases were primarily offset by a decline in the education market segment (down 43%).

For the nine months ended October 2, 2011, net sales for the Modular Carpet segment increased $85.4 million (13.7%) versus the comparable period in 2010. On a geographic basis, we experienced increases in net sales in all regions for the nine months ended October 2, 2011, versus the comparable period in 2010, with our Americas, Europedollars) and Asia-Pacific regions experiencing sales growth of 11%, 19% and 13%, respectively, during the period (Europe experienced 11% sales growth in local currency)(down 17%). The continued recovery of the corporate office market was the largest factor in this increase in sales, although smaller increases occurred in certain non-office commercial market segments. In the Americas, the corporate officeresidential market segment saw an increase of 21% duringmade the nine-month period. Success in certain non-office commercial markets also fueled the sales increase, particularly in the educationlargest gain (up 8%34%), residential (up 19%) and government (up 7%) market segments. These increases were offset somewhat by decreases in the retail (down 9%) and hospitality (down 30%) market segments. Sales growth in Europe was alsoparticularly due to the strengthopening of seven FLOR retail stores compared with the number of stores at the end of the second quarter of 2011. The education (up 9%), retail (up 6%) and corporate office (up 3%) market segment (up 24% in U.S. dollars, 15% in local currency), as well as success insegments also experienced increases during the government (up 21% in U.S. dollars, 13% in local currency) and education (up 22% in U.S. dollars, 12% in local currency) market segments.period. These gains were somewhat offset by a decline in the residentialgovernment market segment (down 51%22%) during the first six months of 2012 versus the prior year period. In Europe, all market segments declined as reported in U.S. dollars 54%for the six months ended July 2, 2012, versus the comparable period in 2011, due to adverse currency translation impacts. However, in local currency) in Europe. Asia-Pacific saw increases across almost all market segments, with the exception of the government (down 25%) and education (down 3%) market segments. As in other regions,currencies, the corporate office market segment (up 17%)in Europe experienced an increase of 4%. Asia-Pacific saw the most significant increaselargest decline in the education segment (down 59%), primarily as a result of the curtailment of government stimulus programs that had been in place in 2011 – particularly in Australia. The corporate office (down 6%) and hospitality (down 45%) market segments also experienced declines in Asia-Pacific region.
compared with the first six months of 2012.

Bentley Prince Street Segment.Segment. In our Bentley Prince Street segment, net sales for the quarter ended October 2, 2011, decreased $1.8July 1, 2012 declined $2.0 million (7.0%(7.4%) versus the comparable period in 2011. The primary driver of the prior year. Thedecrease in sales was the decline in the corporate office market remained strong as compared to the third quarter of 2010, showing an increase in sales of 17%segment (down 21%). This increasedecrease was partially offset by decreasesincreases in the education (down 49%government (up 58%) and government (down 35%hospitality (up over 100%) market segments, as a result of spending reductions by federal, state and local governments.

segments.

-23-


For the ninesix months ended October 2, 2011,July 1, 2012, net sales for the Bentley Prince Street segment increased $4.3declined $5.4 million (5.9%(10.1%) versus the comparable period in 2011. The decrease was primarily attributable to the prior year. The corporate office market segment continues to be(down 17%) as well as a decline in the driving force behind this increase, showing improvement of 27% versus the first nine months of 2010. This increase wasgovernment market segment (down 4%). These declines were partially mitigated by declinesincreases in almost all non-office commercial markets, particularly the government (down 33%healthcare (up 22%) and education (down 19%hospitality (up 13%) market segments. The retail market segment was the only non-office commercial segment to show an increase during the period (up 29%).

-22-


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 October 2,July 1, 2012, and July 3, 2011, and October 3, 2010, respectively:

             
  Three Months Ended  Percentage 
Cost and Expenses Oct. 2, 2011  Oct. 3, 2010  Change 
  (In thousands)     
Cost of sales $178,681  $163,244   9.5%
Selling, general and administrative expenses  69,087   61,441   12.4%
          
Total $247,768  $224,685   10.3%
          
             
  Nine Months Ended  Percentage 
Cost and Expenses Oct. 2, 2011  Oct. 3, 2010  Change 
  (In thousands) 
Cost of sales $510,020  $453,514   12.5%
Selling, general and administrative expenses  203,125   176,597   15.0%
          
Total $713,145  $630,111   13.2%
          

   Three Months Ended   Percentage 

Cost and Expenses

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Cost of sales

  $170,012    $172,865     (1.7)% 

Selling, general and administrative expenses

   62,562     68,638     (8.9)% 
  

 

 

   

 

 

   

 

 

 

Total

  $232,574    $241,503     (3.7)% 
  

 

 

   

 

 

   

 

 

 
   Six Months Ended   Percentage 

Cost and Expenses

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Cost of sales

  $326,569    $331,339     (1.4)% 

Selling, general and administrative expenses

   121,930     134,038     (9.0)% 
  

 

 

   

 

 

   

 

 

 

Total

  $448,499    $465,377     (3.6)% 
  

 

 

   

 

 

   

 

 

 

For the quarter ended October 2, 2011,July 1, 2012, our cost of sales increased $15.4decreased $2.9 million (9.5%(1.7%) versus the comparable period in 2010. Fluctuationsthe prior year. Almost all of the decrease was attributable to fluctuations in currency exchange rates accounted for approximately $6.0 million (4%) of the increase. An increase in raw material costs (up 10-12% year-over-year) was the most significant factor in the increase.second quarter of 2012 versus the second quarter of 2011. Our raw materials prices in the second quarter of 2012 were approximately 1-2% higher than in the comparable period of 2012. Due to the increase in raw material costs, as well as lower absorption of fixed overhead costs due toassociated with lower production volumes, versus the third quarter of 2010, as a percentage of sales, cost of sales increased to 65.4%66.8% for the thirdthree months ended July 1, 2012, versus 64.6% in the comparable prior year period. On a sequential basis versus the first quarter of 2011 versus 64.6% for the third quarter of 2011. As raw materials costs moderate,2012, we expect to seesaw an improvement in cost of sales as a percentage of sales. We believe that as the savings related to our first quarter 2012 restructuring plan are fully realized in the later part of 2012, cost of sales will further decrease as a percentage of sales going forward.

sales.

For the ninesix months ended October 2, 2011, ourJuly 1, 2012, cost of sales increased $56.5decreased $4.8 million (12.5%(1.4%) versus the comparable period in 2010. Fluctuations in currency exchange ratesthe prior year. Currency fluctuation accounted for approximately $17 million (4%)the majority of the increase. The primary components of this increase in cost of sales weredecline versus the increases in2011 period. Our raw materials costs (approximately $38 million) and labor costs (approximately $6 million) associated withprices were approximately 2-3% higher production volumes, particularly infor the first six months of 2011, compared with the prior year period. Our raw materials costs during2012 versus the first ninesix months of 2011 were approximately 10-12% higher than raw materials2011. Due to this cost increase, coupled with lower absorption of fixed costs in the corresponding period of the prior year. As a percentage of net sales,associated with lower production volumes, cost of sales remained relatively consistent for the nine month period ended October 2, 2011, at 64.9% versus 65.1% in the comparable period of 2010. The slight improvement in costs of sales as a percentage of sales was primarily dueincreased to higher absorption67.0% for the 2012 period versus 64.6% for the 2011 period. As noted above, we believe that as the savings related to our first quarter 2012 restructuring plan are fully realized in the later part of fixed overhead costs2012, cost of sales will further decrease as a resultpercentage of higher production volumes in the first nine months of 2011 as compared to 2010, particularly in the first six months of 2011.

sales.

For the quarter ended October 2, 2011,July 1, 2012, our selling, general and administrative expenses increased $7.6expense decreased $6.1 million (12.4%(8.9%) versus the comparable period in 2010.2011. Fluctuations in currency exchange rates accounted for approximately $2 million (4%)of this decrease. The primary component of the increase. The primary components of this increasedecrease in selling, general and administrative expenses was lower selling and marketing expenses of approximately $3.0 million. This decrease was primarily due to the realization of savings from our restructuring plans which were (1) a $5.1 million increaseput in selling expense, commensurate with the increaseplace in saleslate 2011 and early 2012, as well as selected investments made in our consumer market and diversification strategies, and (2) a $1.4 million increase in marketing expenses, primarily in international markets as we continued to grow our brand awareness and presence. These increases were somewhat offset by a $2.6 million decrease in incentives as performance targets were not achieved to the same levellower selling costs associated with lower sales volume in the thirdsecond quarter of 2011 as they were2012 versus the comparable period in 2011. Administrative expenses also declined approximately $2.0 million in the third quarterperiod versus the prior year, also a result of 2010.our restructuring programs. Due to the above factors,these items, as a percentage of net sales our selling, general and administrative expenses increaseddecreased to 25.3%24.6% for the thirdsecond quarter of 20112012 versus 24.3%25.6% for the thirdsecond quarter of 2010.

2011.

-24-


For the ninesix months ended October 2, 2011,July 1, 2012, our selling, general and administrative expenses increased $26.5decreased $12.1 million (15%(9.0%) versus the comparable period in 2010. Fluctuationsthe prior year. As noted above, this decrease was largely due to the impact of our restructuring plans put in currency exchange rates accounted forplace in late 2011 and early 2012. Selling and marketing expenses decreased by approximately $7$3.0 million (4%)during the first six months of 2012 versus 2011 due to the increase. The primary componentssavings from these plans, although this decrease was slightly offset by increased marketing costs due to trade show and similar expenses, primarily in the first three months of this increase in selling, general and administrative2012. Administrative expenses were (1) a $13.9declined by approximately $8.0 million increase in selling expense, commensurate withduring the increase in sales2012 six-month period, due to savings from our restructuring plans, as well as selected investments made in our consumer market and diversification strategies, (2) a $3.9 million increase in marketing expenses, primarily in international markets as we continued to grow our brand awareness and presence, and (3) higher overall administrative costslower levels of $7.9 million due, in part, to increases in non-cash incentive based pay during the first nine months of 2011, particularlycompensation in the first six months of the year. Due to these increases, as a percentage of net sales, selling, general and administrative expenses increased to 25.8% for the nine months ended October 2, 2011,2012 versus 25.4% for the corresponding period in 2010.
2011.

-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:

             
  Three Months Ended  Percentage 
Cost of Sales and Selling, General and Administrative Expenses (Combined) Oct. 2, 2011  Oct. 3, 2010  Change 
  (In thousands)     
Modular Carpet $222,388  $197,063   12.9%
Bentley Prince Street  24,448   26,166   (6.6)%
Corporate Expenses and Eliminations  932   1,456   (36.0)%
          
Total $247,768  $224,685   10.3%
          
             
  Nine Months Ended  Percentage 
Cost of Sales and Selling, General and Administrative Expenses (Combined) Oct. 2, 2011  Oct. 3, 2010  Change 
  (In thousands)     
Modular Carpet $629,413  $548,278   14.8%
Bentley Prince Street  77,705   75,600   2.8%
Corporate Expenses and Eliminations  6,027   6,233   (3.3)%
          
Total $713,145  $630,111   13.2%
          

Cost of Sales and Selling, General and  Three Months Ended   Percentage 

Administrative Expenses (Combined)

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Modular Carpet

  $205,512    $213,630     (3.8)% 

Bentley Prince Street

   26,293     26,978     (2.5)% 

Corporate Expenses and Eliminations

   769     895     (14.1)% 
  

 

 

   

 

 

   

 

 

 

Total

  $232,574    $241,503     (3.7)% 
  

 

 

   

 

 

   

 

 

 
Cost of Sales and Selling, General and  Six Months Ended   Percentage 

Administrative Expenses (Combined)

  July 1, 2012   July 3, 2011   Change 
   (In thousands)     

Modular Carpet

  $398,129    $407,025     (2.2)% 

Bentley Prince Street

   49,601     53,257     (6.9)% 

Corporate Expenses and Eliminations

   769     5,095     (84.9)% 
  

 

 

   

 

 

   

 

 

 

Total

  $448,499    $465,377     (3.6)% 
  

 

 

   

 

 

   

 

 

 

Interest ExpensesExpense

For the three-month period ended October 2, 2011,July 1, 2012, our interest expense decreased $2.0$0.7 million to $6.4$6.1 million, versus $8.4$6.8 million in the comparable period of 2011. The primary reason for this decrease was the redemption of the remaining $11.5 million of our 9.5% Senior Subordinated Notes early in 2010.the second quarter of 2012, leading to lower interest expense for the balance of the quarter. The decrease was also due in part to lower amounts of bank fees for the second quarter of 2012 versus 2011. For the six months ended July 1, 2012, our interest expense decreased by approximately $0.6 million to $12.8 million, versus $13.4 million in the comparable period of 2011. This decrease was due to the issuance of our 7 5/8% Senior Notes insame factors described for the fourth quarter of 2010, the 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 third quarter of 2010. For the nine-monththree-month period ended October 2, 2011, interest expense decreased by $5.5 million to $19.9 million versus $25.3 million in the comparable period in 2010 due to the factors identified above, as well as the repayment or redemption of $39.6 million of bonds in the first quarter of 2010.

July 1, 2012.

Liquidity and Capital Resources

General

At October 2, 2011,July 1, 2012, we had $44.4$36.9 million in cash. At that date, we had no borrowings and $5.2$3.9 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of October 2, 2011,July 1, 2012, we could have incurred $80.6$84.3 million of additional borrowings under our domestic revolving credit facility and €14.0€20.0 million (approximately $19.0$24.9 million) of additional borrowings under our European credit facility. In addition, we could have incurred an additional $18.2$18.5 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.

-25-


Analysis of Cash Flows

Our primary sourcesources of cash during the ninesix months ended October 2, 2011 was $2.6July 1, 2012 were (1) $14.8 million of cash received asdue to a result of exercises of employee stock options.reduction in accounts receivable, and (2) $4.0 million due to an increase in accounts payable and accrued expenses. Our primary uses of cash during this period were (1) $34.9 million due to increased inventory levels as we produced to meet anticipated demand for the second half of 2011, (2) $30.8$21.7 million for capital expenditures, (2) $11.5 million for the redemption of our remaining 9.5% Senior Subordinated Notes, and (3) $16.0$9.6 million due to decreases in accounts payable and accruals.

for increased inventory levels.

-24-


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2, 2011,1, 2012, under Item 7A of that Form 10-K. Our discussion here focuses on the period ended October 2, 2011,July 1, 2012, 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 October 2, 2011,July 1, 2012, we recognized a $1.3$4.9 million decrease in our foreign currency translation adjustment account compared withto January 2, 2011,1, 2012, primarily because of the strengthening of the U.S. dollar against certain foreign currencies, overparticularly the nine-month period.

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 October 2, 2011.July 1, 2012. The values that result from these computations are compared with the market values of these financial instruments at October 2, 2011.July 1, 2012. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

As of October 2, 2011,July 1, 2012, 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 $20.5$15.8 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 $25.4$6.4 million.

As of October 2, 2011,July 1, 2012, 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 $10.2$8.4 million or an increase in the fair value of our financial instruments of $8.3$6.8 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
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.

 

-26-

-25-


PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS
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 changesITEM 1A. RISK FACTORS

The specific risk factor under the heading “The estate of our former Chairman currently has sufficient voting power to elect a majority of our Board of Directors,” set forth in risk factors in the third quarter of 2011. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,”IA in our Annual Report on Form 10-K for fiscal year 2010.

2011, is no longer applicable. For a discussion of risk factors, see that Item in our 2011 Form 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.REMOVED AND RESERVED
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.OTHER INFORMATION
ITEM 5. OTHER INFORMATION

None

ITEM 6.EXHIBITS
ITEM 6. EXHIBITS

The following exhibits are filed with this report:

EXHIBIT

NUMBER

  
EXHIBIT
NUMBER

DESCRIPTION OF EXHIBIT

  10.1Seventh 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 first on October 27, 2011, previously filed with the Commission and incorporated herein by reference).
31.1  Section 302 Certification of Chief Executive Officer.
31.2
  31.2  Section 302 Certification of Chief Financial Officer.
32.1
  32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32.2
  32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350.
101.INS  XBRL Instance Document (filed(furnished electronically herewith)*
101.SCH  XBRL Taxonomy Extension Schema Document (filed(furnished electronically herewith)*
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document (filed(furnished electronically herewith)*
101.LAB  XBRL Taxonomy Extension Label Linkbase Document (filed(furnished electronically herewith)*
101.PRE  XBRL Taxonomy Presentation Linkbase Document (filed(furnished electronically herewith)*
101.DEF  XBRL Taxonomy Definition Linkbase Document (filed(furnished electronically herewith)*

*In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.

 

-27-

-26-


SIGNATURE

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.
Date: November 10, 2011August 9, 2012 By:

/s/ Patrick C. Lynch

 
  Patrick C. Lynch
 
  Senior Vice President
(Principal Financial Officer)

 

-28-

-27-


EXHIBIT INDEX

EXHIBIT

NUMBER

  
EXHIBIT INDEX
EXHIBIT
NUMBER

DESCRIPTION OF EXHIBIT

  
31.1  Section 302 Certification of Chief Executive Officer.Officer
  31.2  Section 302 Certification of Chief Financial Officer.Officer
  32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350.1350
  32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350.1350
101.INS  XBRL Instance Document (filed(furnished electronically herewith)*
101.SCH  XBRL Taxonomy Extension Schema Document (filed(furnished electronically herewith)*
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document (filed(furnished electronically herewith)*
101.LAB  XBRL Taxonomy Extension Label Linkbase Document (filed(furnished electronically herewith)*
101.PRE  XBRL Taxonomy Presentation Linkbase Document (filed(furnished electronically herewith)*
101.DEF  XBRL Taxonomy Definition Linkbase Document (filed(furnished electronically herewith)*

*In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.

 

-29--28-