UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended September 28, 2014July 5, 2015
Commission File Number 001-33994
INTERFACE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA | 58-1451243 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | 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. Yes ☑ No ☐
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). Yes ☑ No ☐
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 filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Shares outstanding of each of the registrant’s classes of common stock at October 28, 2014:August 4, 2015:
Class | Number of Shares | |||
Common Stock, $.10 par value per share | 65,854,724 |
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INTERFACE, INC.
PAGE | ||||
PART I. | ||||
Item 1. | 3 | |||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Conditionand Results of Operations |
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Item 3. |
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Item 4. |
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PART II. | ||||
Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PARTI - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSEDBALANCE SHEETS
(IN THOUSANDS)
Sept. 28, 2014 | Dec. 29, 2013 | JULY 5, 2015 | DECEMBER 28, 2014 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and Cash Equivalents | $ | 68,463 | $ | 72,883 | $ | 71,821 | $ | 54,896 | ||||||||
Accounts Receivable, net | 140,214 | 131,936 | 137,546 | 157,093 | ||||||||||||
Inventories | 161,964 | 149,643 | 164,205 | 142,167 | ||||||||||||
Prepaid Expenses and Other Current Assets | 21,583 | 23,411 | 21,989 | 20,780 | ||||||||||||
Deferred Income Taxes | 11,806 | 10,232 | 9,617 | 9,732 | ||||||||||||
TOTAL CURRENT ASSETS | 404,030 | 388,105 | 405,178 | 384,668 | ||||||||||||
PROPERTY AND EQUIPMENT, less accumulated depreciation | 236,389 | 230,845 | 216,681 | 227,347 | ||||||||||||
DEFERRED TAX ASSET | 29,951 | 34,162 | 24,988 | 33,138 | ||||||||||||
GOODWILL | 73,324 | 77,941 | 64,530 | 70,509 | ||||||||||||
OTHER ASSETS | 65,582 | 65,282 | 58,788 | 59,252 | ||||||||||||
TOTAL ASSETS | $ | 809,276 | $ | 796,335 | $ | 770,165 | $ | 774,914 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Accounts Payable | $ | 52,164 | $ | 52,515 | $ | 56,273 | $ | 49,464 | ||||||||
Current Portion of Long-Term Debt | 7,500 | 0 | ||||||||||||||
Accrued Expenses | 92,136 | 77,672 | 80,421 | 94,323 | ||||||||||||
TOTAL CURRENT LIABILITIES | 144,300 | 130,187 | 144,194 | 143,787 | ||||||||||||
SENIOR NOTES | 247,500 | 247,500 | ||||||||||||||
LONG TERM DEBT | 27,988 | 26,326 | ||||||||||||||
LONG-TERM DEBT | 251,615 | 263,338 | ||||||||||||||
DEFERRED INCOME TAXES | 15,912 | 15,049 | 11,240 | 11,002 | ||||||||||||
OTHER | 32,871 | 36,486 | 47,217 | 50,148 | ||||||||||||
TOTAL LIABILITIES | 468,571 | 455,548 | 454,266 | 468,275 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Preferred Stock | 0 | 0 | 0 | 0 | ||||||||||||
Common Stock | 6,645 | 6,631 | 6,585 | 6,597 | ||||||||||||
Additional Paid-In Capital | 375,401 | 374,597 | 368,725 | 368,603 | ||||||||||||
Retained Earnings | 34,299 | 24,226 | 68,481 | 39,737 | ||||||||||||
Accumulated Other Comprehensive Loss – Foreign Currency Translation Adjustment | (42,394 | ) | (30,585 | ) | (79,175 | ) | (58,936 | ) | ||||||||
Accumulated Other Comprehensive Loss – Pension Liability | (33,246 | ) | (34,082 | ) | (48,717 | ) | (49,362 | ) | ||||||||
TOTAL SHAREHOLDERS’ EQUITY | 340,705 | 340,787 | 315,899 | 306,639 | ||||||||||||
$ | 809,276 | $ | 796,335 | $ | 770,165 | $ | 774,914 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSEDSTATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | NINE MONTHS ENDED | THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | JULY 5, 2015 | JUNE 29, 2014 | JULY 5, 2015 | JUNE 29, 2014 | |||||||||||||||||||||||||
NET SALES | $ | 252,191 | $ | 254,448 | $ | 731,807 | $ | 708,300 | $ | 263,637 | $ | 260,624 | $ | 500,541 | $ | 479,616 | ||||||||||||||||
Cost of Sales | 168,596 | 162,695 | 483,141 | 459,062 | 162,385 | 170,239 | 313,857 | 314,545 | ||||||||||||||||||||||||
GROSS PROFIT ON SALES | 83,595 | 91,753 | 248,666 | 249,238 | 101,252 | 90,385 | 186,684 | 165,071 | ||||||||||||||||||||||||
Selling, General and Administrative Expenses | 63,958 | 63,918 | 192,659 | 185,606 | 68,033 | 66,042 | 132,065 | 128,701 | ||||||||||||||||||||||||
Restructuring and Asset Impairment Charge | 12,386 | 0 | 12,386 | 0 | ||||||||||||||||||||||||||||
OPERATING INCOME | 7,251 | 27,835 | 43,621 | 63,632 | 33,219 | 24,343 | 54,619 | 36,370 | ||||||||||||||||||||||||
Interest Expense | 5,614 | 6,303 | 16,532 | 18,368 | 1,790 | 5,420 | 3,678 | 10,918 | ||||||||||||||||||||||||
Other Expense | 931 | 114 | 777 | 519 | ||||||||||||||||||||||||||||
Other Expense (Income) | (446 | ) | (128 | ) | 826 | (154 | ) | |||||||||||||||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 706 | 21,418 | 26,312 | 44,745 | 31,875 | 19,051 | 50,115 | 25,606 | ||||||||||||||||||||||||
Income Tax Expense | 1,082 | 6,461 | 9,592 | 11,826 | 10,153 | 5,980 | 16,071 | 8,510 | ||||||||||||||||||||||||
NET INCOME (LOSS) | $ | (376 | ) | $ | 14,957 | $ | 16,720 | $ | 32,919 | |||||||||||||||||||||||
NET INCOME | $ | 21,722 | $ | 13,071 | $ | 34,044 | $ | 17,096 | ||||||||||||||||||||||||
Earnings (Loss) Per Share – Basic | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | |||||||||||||||||||||||
Earnings (Loss) Per Share – Diluted | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | |||||||||||||||||||||||
Earnings Per Share – Basic | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | ||||||||||||||||||||||||
Earnings Per Share – Diluted | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | ||||||||||||||||||||||||
Common Shares Outstanding – Basic | 66,465 | 66,183 | 66,470 | 66,160 | 65,995 | 66,473 | 66,208 | 66,472 | ||||||||||||||||||||||||
Common Shares Outstanding – Diluted | 66,465 | 66,317 | 66,554 | 66,289 | 66,044 | 66,550 | 66,253 | 66,558 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | |||||||||||||
Net Income (Loss) | $ | (376 | ) | $ | 14,957 | $ | 16,720 | $ | 32,919 | |||||||
Other Comprehensive Income (Loss), ForeignCurrency Translation Adjustment | (15,991 | ) | 7,503 | (11,809 | ) | (5,422 | ) | |||||||||
Other Comprehensive Income (Loss), Pension Liability Adjustment | 2,049 | (1,404 | ) | 836 | 163 | |||||||||||
Comprehensive Income (Loss) | $ | (14,318 | ) | $ | 21,056 | $ | 5,747 | $ | 27,660 |
THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
JULY 5, 2015 | JUNE 29, 2014 | JULY 5, 2015 | JUNE 29, 2014 | |||||||||||||
Net Income | $ | 21,722 | $ | 13,071 | $ | 34,044 | $ | 17,096 | ||||||||
Other Comprehensive Income (Loss), Foreign | ||||||||||||||||
Currency Translation Adjustment | 5,060 | 1,078 | (20,239 | ) | 4,182 | |||||||||||
Other Comprehensive Income (Loss), Pension Liability Adjustment | (2,557 | ) | (776 | ) | 645 | (1,213 | ) | |||||||||
Comprehensive Income | $ | 24,225 | $ | 13,373 | $ | 14,450 | $ | 20,065 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OFCASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED | ||||||||
Sept. 28, 2014 | Sept. 29, 2013 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 16,720 | $ | 32,919 | ||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: | ||||||||
Depreciation and Amortization | 20,124 | 18,625 | ||||||
Stock Compensation Amortization Expense | 2,989 | 5,071 | ||||||
Deferred Income Taxes and Other | 1,739 | 5,032 | ||||||
Cash Received from Insurance Company | 0 | 10,648 | ||||||
Working Capital Changes: | ||||||||
Accounts Receivable | (7,373 | ) | (4,220 | ) | ||||
Inventories | (15,518 | ) | (22,842 | ) | ||||
Prepaid Expenses and Other Current Assets | 1,799 | (14,481 | ) | |||||
Accounts Payable and Accrued Expenses | 14,417 | (3,513 | ) | |||||
CASH PROVIDED BY OPERATING ACTIVITIES: | 34,897 | 27,239 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital Expenditures | (32,123 | ) | (47,939 | ) | ||||
Cash Received from Insurance Company | 0 | 23,024 | ||||||
Other | (1,950 | ) | 1,875 | |||||
CASH USED IN INVESTING ACTIVITIES: | (34,073 | ) | (23,040 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Borrowing of Long-Term Debt | 1,877 | 0 | ||||||
Proceeds from Issuance of Common Stock | 159 | 1,163 | ||||||
Dividends Paid | (6,647 | ) | (5,294 | ) | ||||
Debt Issuance Costs | (106 | ) | 0 | |||||
CASH USED IN FINANCING ACTIVITIES: | (4,717 | ) | (4,131 | ) | ||||
Net Cash Provided By (Used In) Operating, Investing andFinancing Activities | (3,893 | ) | 68 | |||||
Effect of Exchange Rate Changes on Cash | (527 | ) | (1,219 | ) | ||||
CASH AND CASH EQUIVALENTS: | ||||||||
Net Change During the Period | (4,420 | ) | (1,151 | ) | ||||
Balance at Beginning of Period | 72,883 | 90,533 | ||||||
Balance at End of Period | $ | 68,463 | $ | 89,382 |
SIXMONTHS ENDED | ||||||||
JULY 5, 2015 | JUNE 29, 2014 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 34,044 | $ | 17,096 | ||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: | ||||||||
Depreciation and Amortization | 15,539 | 13,312 | ||||||
Stock Compensation Amortization Expense | 9,100 | 2,674 | ||||||
Deferred Income Taxes and Other | 9,287 | 234 | ||||||
Working Capital Changes: | ||||||||
Accounts Receivable | 15,209 | (12,403 | ) | |||||
Inventories | (27,150 | ) | (21,929 | ) | ||||
Prepaid Expenses and Other Current Assets | (2,328 | ) | (118 | ) | ||||
Accounts Payable and Accrued Expenses | (2,841 | ) | 1,938 | |||||
CASH PROVIDED BY OPERATING ACTIVITIES: | 50,860 | 804 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital Expenditures | (12,126 | ) | (22,017 | ) | ||||
Other | (462 | ) | (1,658 | ) | ||||
CASH USED IN INVESTING ACTIVITIES: | (12,588 | ) | (23,675 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Repayments of Long-Term Debt | (3,000 | ) | (2,289 | ) | ||||
Borrowing of Long-Term Debt | 0 | 5,952 | ||||||
Proceeds from Issuance of Common Stock | 359 | 159 | ||||||
Repurchase of Common Stock | (10,469 | ) | 0 | |||||
Dividends Paid | (5,300 | ) | (3,989 | ) | ||||
CASH USED IN FINANCING ACTIVITIES: | (18,410 | ) | (167 | ) | ||||
Net Cash Provided by (Used in) Operating, Investing andFinancing Activities | 19,862 | (23,038 | ) | |||||
Effect of Exchange Rate Changes on Cash | (2,937 | ) | 167 | |||||
CASH AND CASH EQUIVALENTS: | ||||||||
Net Change During the Period | 16,925 | (22,871 | ) | |||||
Balance at Beginning of Period | 54,896 | 72,883 | ||||||
Balance at End of Period | $ | 71,821 | $ | 50,012 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
NOTESTO 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 December 29, 2013,28, 2014, 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 December 29, 201328, 2014, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The first quarter of 2015 was comprised of 14 weeks, while the first quarter of 2014 was comprised of 13 weeks. Each of the second quarters of 2015 and 2014 was comprised of 13 weeks.
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 – INVENTORIES
Inventories are summarized as follows:
Sept. 28, 2014 | December 29, 2013 | July 5, 2015 | December 28, 2014 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Finished Goods | $ | 105,827 | $ | 96,199 | $ | 105,756 | $ | 89,688 | ||||||||
Work in Process | 10,851 | 9,569 | 10,915 | 9,898 | ||||||||||||
Raw Materials | 45,286 | 43,875 | 47,534 | 42,581 | ||||||||||||
$ | 161,964 | $ | 149,643 | $ | 164,205 | $ | 142,167 |
NOTE 3 – EARNINGS (LOSS) PER SHARE
The Company computes basic earnings (loss) per share (“EPS”) by dividing net income (loss) 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.
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. The following tables show distributed and undistributed earnings:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
Earnings(Loss)Per Share | ||||||||||||||||||||||||||||||||
Earnings Per Share: | ||||||||||||||||||||||||||||||||
Basic Earnings (Loss) Per Share | ||||||||||||||||||||||||||||||||
Basic Earnings Per Share: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.03 | $ | 0.03 | $ | 0.10 | $ | 0.08 | $ | 0.04 | $ | 0.03 | $ | 0.08 | $ | 0.05 | ||||||||||||||||
Undistributed Earnings | (0.04 | ) | 0.20 | 0.15 | 0.42 | 0.29 | 0.17 | 0.43 | 0.21 | |||||||||||||||||||||||
Total | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | |||||||||||||||
Diluted Earnings (Loss) Per Share | ||||||||||||||||||||||||||||||||
Diluted Earnings Per Share: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.03 | $ | 0.03 | $ | 0.10 | $ | 0.08 | $ | 0.04 | $ | 0.03 | $ | 0.08 | $ | 0.05 | ||||||||||||||||
Undistributed Earnings | (0.04 | ) | 0.20 | 0.15 | 0.42 | 0.29 | 0.17 | 0.43 | 0.21 | |||||||||||||||||||||||
Total | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | |||||||||||||||
Basic Earnings (Loss) Per Share | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | |||||||||||||||||||||||
Diluted Earnings (Loss) Per Share | $ | (0.01 | ) | $ | 0.23 | $ | 0.25 | $ | 0.50 | |||||||||||||||||||||||
Basic earningsper share | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | ||||||||||||||||||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 |
The following tables present net income (loss) that was attributable to participating securities:
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income (Loss) | $ | 0.0 | $ | 0.4 | $ | 0.4 | $ | 0.9 |
Three Months Ended | Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income | $ | 0.5 | $ | 0.3 | $ | 0.8 | $ | 0.4 |
The weighted average shares outstanding for basic and diluted EPS were as follows:
Three Months Ended | NineMonths Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Weighted Average Shares Outstanding | 65,045 | 64,446 | 65,050 | 64,423 | 64,497 | 65,012 | 64,710 | 65,011 | ||||||||||||||||||||||||
Participating Securities | 1,420 | 1,737 | 1,420 | 1,737 | 1,498 | 1,461 | 1,498 | 1,461 | ||||||||||||||||||||||||
Shares for Basic Earnings (Loss) Per Share | 66,465 | 66,183 | 66,470 | 66,160 | ||||||||||||||||||||||||||||
Shares for Basic Earnings Per Share | 65,995 | 66,473 | 66,208 | 66,472 | ||||||||||||||||||||||||||||
Dilutive Effect of Stock Options | 0 | 134 | 84 | 129 | 49 | 77 | 45 | 86 | ||||||||||||||||||||||||
Shares for Diluted Earnings (Loss) Per Share | 66,465 | 66,317 | 66,554 | 66,289 | ||||||||||||||||||||||||||||
Shares for Diluted Earnings Per Share | 66,044 | 66,550 | 66,253 | 66,558 |
For the three-month period ended September 28, 2014, no stock options have been included in the calculation of diluted EPS as the Company was in a net loss position and inclusion of these stock options would have been anti-dilutive. For all other periods presented, all outstanding stockthere were no options have been included inor participating securities excluded from the calculationcomputation of diluted EPS.
NOTE 4 – LONG-TERM DEBT
7.625%7.625% Senior Notes
As of September 28,June 29, 2014, and September 29, 2013, the Company had outstanding $247.5 million and $275.0 million in 7.625% Senior Notes due 2018 (the “7.625% Senior Notes”), respectively.. These notes were redeemed in their entirety in the fourth quarter of 2014. The estimated fair value of the 7.625% Senior Notes as of September 28,June 29, 2014, and September 29, 2013, based on then current market prices, was $257.4 million and $298.4 million, respectively.$259.9 million.
On October 10, 2014, subsequent to the end of the third quarter, the Company elected to redeem $27.5 million aggregate principal amount of 7.625% Senior Notes at a price equal to 103% of the principal amount of the notes redeemed, plus accrued interest to the redemption date of November 26, 2014. On October 17, 2014, the Company elected to redeem the remaining $220 million aggregate principal amount of 7.625% Senior Notes that had not previously been called for redemption, at a price equal to 103.813% of the principal amount of the notes redeemed, plus accrued interest to the redemption date of December 1, 2014.
11.375% Senior Secured NotesSyndicated Credit Facility
As of September 29, 2013, the Company had outstanding $8.1 million in 11.375% Senior Secured Notes due 2013 (the “11.375% Senior Secured Notes”). The estimated fair value of the 11.375% Senior Secured Notes as of September 29, 2013, based on then current market prices, was $8.1 million. The Company repaid the $8.1 million balance of these notes at maturity in November 2013.
Credit Facilities
On October 22, 2013, the Company entered intohas a Syndicated Facility Agreement among the Company, certain wholly-owned foreign subsidiaries of the Company as borrowers, certain subsidiaries of the Company as guarantors, Bank of America, N.A. as Administrative Agent, The Royal Bank of Scotland, as Syndication Agent, SunTrust Bank and Regions Bank, as Co-Documentation Agents, and the other lenders party thereto. Pursuantsyndicated credit facility (the “Facility”) pursuant to the Syndicated Facility Agreement,which the lenders provide to the Company and certain of its subsidiaries a multicurrency revolving credit facility (the “Syndicated Credit Facility”)and provide to the Company a term loan. The facility matures in October of up to $200 million2019. Interest on base rate loans is charged at any one time.varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.
As of September 28, 2014,July 5, 2015, the Company had $28.0$200 million of term loan borrowing and $59.1 million of revolving loan borrowings outstanding under the Syndicated Credit Facility, with a weighted average interest rate of approximately 4.5%, and had $3.3$3.1 million in letters of credit outstanding under the Syndicated Credit Facility. As of September 28, 2014,July 5, 2015, the Company could have incurred $168.7 million of additionalweighted average interest rate on borrowings outstanding under the Syndicated Credit Facility.Facility was 1.9%.
On October 3, 2014, subsequentThe Company is required to the end of the third quarter, the Company amended the Syndicated Facility Agreement. The amendment expands the aggregate borrowing availability for revolving loans under the Syndicated Credit Facility from $200 million to $250 million, provides for up to $200 million of new Term Loan A borrowing availability which may be used to repurchase or redeem (before December 31, 2014) the Company’s 7.625% Senior Notes, and extends the maturity of the Syndicated Credit Facility to October 3, 2019. The amendment provides for requiredmake amortization payments of any Term Loan A borrowing, as well as mandatory prepayments of any Term Loan A borrowing (and anythe term loans made available pursuant to any future multicurrency loan facility increase) from certain asset sales, casualty events and debt issuances, subject to certain qualifications and exceptions as provided for therein. Pursuant toborrowing. The amortization payments are due on the amendment, the Company has the option to further increase (in the future) the borrowing availability under the Syndicated Credit Facility, either for revolving loans or term loans, by up to $150 million, subject to the receipt of lender commitments for such increase and the satisfaction of certain other conditions. All other termslast day of the Syndicated Credit Facility, including covenants, interest rates and fees, eventscalendar quarter, commencing with an initial amortization payment of default and collateral, remain substantially unchanged.$2.5 million on December 31, 2015. The quarterly amortization payment amount increases to $3.75 million on December 31, 2016.
The Company is currently in compliance with all covenants under the Syndicated Credit Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
Other non-U.S. subsidiariesLines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $8.4$19.0 million of other lines of credit available.available at interest rates ranging from 2% to 6%. As of September 28, 2014,July 5, 2015, there were no borrowings outstanding under these lines of credit.
NOTE 5 – STOCK-BASED COMPENSATION
Stock OptionAwards
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 accounting standards, the Company is required to select a valuation technique or option pricing 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.
During the first nine months of 2013, the Company recognized stock option compensation expenses of $0.1 million. All outstanding stock options vested prior to 2014,the end of 2013, and therefore there have beenwas no stock option compensation expenses during 2014.expense in 2014 or 2015.
There were no stock options granted in 2014 or 2015. The following table summarizes stock options outstanding as of September 28, 2014,July 5, 2015, as well as activity during the ninesix months then ended:
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding at December 29, 2013 | 184,000 | $ | 8.18 | |||||||||||||
Outstanding at December 28, 2014 | 126,000 | $ | 9.23 | |||||||||||||
Granted | 0 | 0 | 0 | 0 | ||||||||||||
Exercised | 20,500 | 4.31 | 38,500 | 9.27 | ||||||||||||
Forfeited or canceled | 2,500 | 1.49 | 0 | 0 | ||||||||||||
Outstanding at September 28, 2014 | 161,000 | $ | 8.99 | |||||||||||||
Outstanding at July 5, 2015 | 87,500 | 8.75 | ||||||||||||||
Exercisable at September 28, 2014 | 161,000 | $ | 8.99 | |||||||||||||
Exercisable at July 5, 2015 | 87,500 | $ | 8.75 |
At September 28, 2014,July 5, 2015, the aggregate intrinsic value of both in-the-money options outstanding and options exercisable was $1.2$1.4 million (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).
Cash proceeds and intrinsic value related to total stock options exercised during the first ninesix months of fiscal years2015 and 2014 and 2013 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period presented.
Nine Months Ended | Six Months Ended | |||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||
(Inmillions) | (In thousands) | |||||||||||||||
Proceeds from stock options exercised | $ | 0.2 | $ | 1.2 | $ | 359 | $ | 159 | ||||||||
Intrinsic value of stock options exercised | 0.3 | 1.2 | 421 | 299 |
Restricted Stock Awards
During the ninesix months ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, the Company granted restricted stock awards for 490,000597,000 and 670,000490,000 shares, respectively, of common stock. TheseRestricted stock awards (or a portion thereof) vest with respect to each recipient over a two to five 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, awards (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 awardsgrants was $3.0$9.1 million and $5.0$2.7 million for the ninesix months ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, 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 awards outstandingactivity as of September 28, 2014,July 5, 2015, and activity during the ninesix months then ended:
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 29, 2013 | 1,707,500 | $ | 15.62 | |||||||||||||
Outstanding at December 28, 2014 | 1,391,000 | $ | 17.12 | |||||||||||||
Granted | 490,000 | 21.28 | 597,000 | 16.43 | ||||||||||||
Vested | 546,500 | 16.22 | 290,500 | 13.99 | ||||||||||||
Forfeited or canceled | 231,000 | 17.14 | 199,500 | 13.58 | ||||||||||||
Outstanding at September 28, 2014 | 1,420,000 | $ | 17.10 | |||||||||||||
Outstanding at July 5, 2015 | 1,498,000 | $ | 17.92 |
As of September 28, 2014,July 5, 2015, the unrecognized total compensation cost related to unvested restricted stock was approximately $11.5$14.3 million. That cost is expected to be recognized by the end of 2017.2019.
For the ninesix months ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, the Company recognized tax benefits with regard to restricted stock of $0.6$3.5 million and $2.0$0.7 million, respectively.
NOTE 6 – EMPLOYEE BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for the three-month and nine-monthsix-month periods ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, respectively:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Defined Benefit Retirement Plan (Europe) | Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 176 | $ | 212 | $ | 539 | $ | 632 | $ | 265 | $ | 188 | $ | 534 | $ | 363 | ||||||||||||||||
Interest cost | 2,664 | 2,391 | 8,028 | 7,147 | 2,111 | 2,849 | 4,204 | 5,364 | ||||||||||||||||||||||||
Expected return on assets | (2,988 | ) | (2,488 | ) | (9,008 | ) | (7,438 | ) | (2,265 | ) | (3,195 | ) | (4,512 | ) | (6,020 | ) | ||||||||||||||||
Amortization of prior service costs | 10 | 22 | 38 | 66 | 9 | 13 | 17 | 25 | ||||||||||||||||||||||||
Recognized net actuarial losses | 164 | 243 | 492 | 727 | 242 | 175 | 481 | 328 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 26 | $ | 380 | $ | 89 | $ | 1,134 | $ | 362 | $ | 30 | $ | 724 | $ | 60 |
Three Months Ended | NineMonths Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Salary Continuation Plan (SCP) | Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 125 | $ | 134 | $ | 375 | $ | 401 | $ | 148 | $ | 125 | $ | 297 | $ | 250 | ||||||||||||||||
Interest cost | 268 | 249 | 803 | 748 | 278 | 268 | 556 | 535 | ||||||||||||||||||||||||
Amortization of prior service cost | 6 | 12 | 18 | 36 | 0 | 6 | 0 | 12 | ||||||||||||||||||||||||
Amortization of loss | 67 | 110 | 201 | 331 | 131 | 67 | 261 | 133 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 466 | $ | 505 | $ | 1,397 | $ | 1,516 | $ | 557 | $ | 466 | $ | 1,114 | $ | 930 |
NOTE 7 – SEGMENT INFORMATION
Based on applicable accounting standards, the Company has determined that it has three operating segments – namely, the Americas, Europe and Asia-Pacific geographic regions. Pursuant to accounting standards, the Company has aggregated the three operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment.
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $3.3 million and $9.9 million for the six months ended July 5, 2015, and June 29, 2014, respectively. Income tax payments amounted to $3.5 million and $4.0 million for the six months ended July 5, 2015, and June 29, 2014, respectively.
NOTE 9 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which eliminates the concept of extraordinary items from generally accepted accounting principles. The standard does not affect disclosure guidance for events or transactions that are unusual in nature or infrequent in their occurrence. The standard is effective for interim and annual periods in fiscal years beginning after December 15, 2015. The standard allows prospective or retrospective application. Early adoption is permitted if applied from the beginning of the fiscal year of adoption. We do not believe the adoption of this standard will have any significant effect on our ongoing financial reporting.
In February 2015, the FASB issued an accounting standard which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The new accounting standard is effective for annual and interim periods in fiscal years beginning after December 15, 2015. We are currently evaluating the impact, if any, this standard will have on our ongoing financial reporting, but we do not believe the adoption of this standard will have any significant effect on our ongoing financial reporting.
NOTE 10 – INCOMETAXES
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 six months of 2015, the Company decreased its liability for unrecognized tax benefits by $0.1 million. As of July 5, 2015, the Company had accrued approximately $27.2 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 5, 2015 reflects a reduction for $21.9 million of these unrecognized tax benefits.
NOTE 11 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During the first six months of 2015, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $0.8 million related to the Company’s defined retirement benefit plan and salary continuation plan. These reclassifications were included in the selling, general and administrative expenses line item of the Company’s consolidated condensed statement of operations.
NOTE 12 – 2014 RESTRUCTURING CHARGEPLAN
In the third quarter of 2014, the Company committed to a new restructuring plan in its continuing efforts to reduce costs across its worldwide operations. In connection with this restructuring plan, the Company incurred a pre-tax restructuring and asset impairment charge in the third quarter of 2014 in an amount of $12.4 million. The charge was comprised of severance expenses of $9.7 million for a reduction of 100 employees, other related exit costs of $0.1 million, and a charge for impairment of assets of $2.6 million. Approximately $10 million of the charge will result in cash expenditures, primarily severance expense.
A summary of these restructuring activities is presented below:
Total RestructuringCharge | Costs Incurred in 2014 | Balance at Sept. 28, 2014 | ||||||||||
(In thousands) | ||||||||||||
Workforce Reduction | $ | 9,669 | $ | 108 | $ | 9,561 | ||||||
Fixed Asset Impairment | 2,584 | 2,584 | 0 | |||||||||
Other Related Exit Costs | 133 | 0 | 133 |
NOTE 9 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $10.6 million and $11.6 million for the nine months ended September 28, 2014, and September 29, 2013, respectively. Income tax payments amounted to $5.8 million and $7.1 million for the nine months ended September 28, 2014, and September 29, 2013, respectively.
Total RestructuringCharge | Costs Incurred in 2014 | Cost Incurredin2015 | Balance at July 5, 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Workforce Reduction | $ | 9,669 | $ | 2,732 | $ | 5,801 | $ | 1,136 | ||||||||
Fixed Asset Impairment | 2,584 | 2,584 | 0 | 0 | ||||||||||||
Other Related Exit Costs | 133 | 133 | 0 | 0 |
NOTE 1013 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding recognition of revenue from contracts with customers. In summary, the core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. While the Company is currently reviewing this new standard, it is not expected that the adoption of this guidance will have a material impact on our financial condition or results of operations.
In July 2013, the FASB issued an accounting standard regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, or similar tax credit carryforward, exists. This standard clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax benefit is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be netted with the deferred tax asset. The Company implemented this standard in the first quarter of 2014, which resulted in reductions of deferred tax asset (long-term) and long-term other liabilities of approximately $21.8 million each. Pursuant to this standard, the Company also adjusted its December 29, 2013 consolidated balance sheet, resulting in decreases in its deferred tax asset (long-term) and long-term other liabilities of approximately $21.8 million each.
NOTE 11 – INCOMETAXESREPURCHASE OF COMMON STOCK
In the firstfourth quarter of 2013,2014, the Company executed advance pricing agreements for tax years 2006 through 2011announced a program to repurchase up to 500,000 shares of common stock per fiscal year, commencing with the Canada Revenue Agency and the U.S. Internal Revenue Service in relation to the U.S. bilateral advanced pricing agreement filed in 2008. As a result of executing the advance pricing agreements, the Company was able to reduce its liability for unrecognized tax benefits in2014 fiscal year. During the first quarter of 2013 by $1.9 million. This benefit has been included in2015, the “Income Tax Expense (Benefit)” lineCompany repurchased and retired 250,000 shares of common stock at a weighted average purchase price of $19.39 per share. During the Company’s consolidated condensed statementsecond quarter of operations for2015, the nine months ended September 29, 2013.Company repurchased and retired 250,000 shares of common stock at a weighted average purchase price of $22.41 per share.
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 nine months of 2014, the Company decreased its liability for unrecognized tax benefits by $0.8 million. As of September 28, 2014, the Company had accrued approximately $26.6 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of September 28, 2014 reflects a reduction for $21.8 million of these unrecognized tax benefits (see Note 10 for additional information).
NOTE 12 – FIRE AT AUSTRALIAN MANUFACTURING FACILITY
In July 2012, a fire occurred at the Company’s manufacturing facility in Picton, Australia, rendering the facility inoperable. In January 2014, the Company commenced operations at a new facility in Minto, Australia to service the Australia and New Zealand markets. For further information, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2013.
NOTE 13 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During the first nine months of 2014, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $0.7 million related to the Company’s defined benefit retirement plan and salary continuation plan. These reclassifications were included in the selling, general and administrative expenses line item of the Company’s consolidated condensed statement of operations.
NOTE 14 – SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 7.625% Senior Notes due 2018. The Guarantor Subsidiaries are 100% owned by the Company, and these guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2014
GUARANTORSUBSIDIARIES | NON-GUARANTORSUBSIDIARIES | INTERFACE, INC. (PARENTCORPORATION) | CONSOLIDATION AND ELIMINATIONENTRIES | CONSOLIDATEDTOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales | $ | 165,513 | $ | 124,193 | $ | 0 | $ | (37,515 | ) | $ | 252,191 | |||||||||
Cost of sales | 122,076 | 84,035 | 0 | (37,515 | ) | 168,596 | ||||||||||||||
Gross profit on sales | 43,437 | 40,158 | 0 | 0 | 83,595 | |||||||||||||||
Selling, general and administrative expenses | 27,925 | 29,952 | 6,081 | 0 | 63,958 | |||||||||||||||
Restructuring and asset impairment charge | 4,592 | 7,794 | 0 | 0 | 12,386 | |||||||||||||||
Operating income (loss) | 10,920 | 2,412 | (6,081 | ) | 0 | 7,251 | ||||||||||||||
Interest/other expense | 7,120 | 3,217 | (3,792 | ) | 0 | 6,545 | ||||||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 3,800 | (805 | ) | (2,289 | ) | 0 | 706 | |||||||||||||
Income tax expense (benefit) | 5,824 | (1,234 | ) | (3,508 | ) | 0 | 1,082 | |||||||||||||
Equity in income (loss) of subsidiaries | 0 | 0 | (1,595 | ) | 1,595 | 0 | ||||||||||||||
Net income (loss) | $ | (2,024 | ) | $ | 429 | $ | (376 | ) | $ | 1,595 | $ | (376 | ) |
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2014
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales | $ | 472,358 | $ | 371,778 | $ | 0 | $ | (112,329 | ) | $ | 731,807 | |||||||||
Cost of sales | 343,496 | 251,974 | 0 | (112,329 | ) | 483,141 | ||||||||||||||
Gross profit on sales | 128,862 | 119,804 | 0 | 0 | 248,666 | |||||||||||||||
Selling, general and administrative expenses | 84,068 | 88,434 | 20,157 | 0 | 192,659 | |||||||||||||||
Restructuring and asset impairment charge | 4,592 | 7,794 | 0 | 0 | 12,386 | |||||||||||||||
Operating income (loss) | 40,202 | 23,576 | (20,157 | ) | 0 | 43,621 | ||||||||||||||
Interest/other expense | 20,448 | 8,680 | (11,819 | ) | 0 | 17,309 | ||||||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 19,754 | 14,896 | (8,338 | ) | 0 | 26,312 | ||||||||||||||
Income tax expense | 11,234 | 4,119 | (5,761 | ) | 0 | 9,592 | ||||||||||||||
Equity in income (loss) of subsidiaries | 0 | 0 | 19,297 | (19,297 | ) | 0 | ||||||||||||||
Net income (loss) | $ | 8,520 | $ | 10,777 | $ | 16,720 | $ | (19,297 | ) | $ | 16,720 |
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2014
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTAL | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net Income (Loss) | $ | (2,024 | ) | $ | 429 | $ | (376 | ) | $ | 1,595 | $ | (376 | ) | |||||||
Currency Translation Adjustment | (270 | ) | (15,601 | ) | (120 | ) | 0 | (15,991 | ) | |||||||||||
Pension Liability Adjustment | 0 | 2,006 | 43 | 0 | 2,049 | |||||||||||||||
Comprehensive Income (Loss) | $ | (2,294 | ) | $ | 13,166 | $ | (453 | ) | $ | 1,595 | $ | (14,318 | ) |
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME (LOSS) FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2014
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTAL | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net Income (Loss) | $ | 8,520 | $ | 10,777 | $ | 16,720 | $ | (19,297 | ) | $ | 16,720 | |||||||||
Currency Translation Adjustment | 29 | (11,727 | ) | (111 | ) | 0 | (11,809 | ) | ||||||||||||
Pension Liability Adjustment | 0 | 705 | 131 | 0 | 836 | |||||||||||||||
Comprehensive Income (Loss) | $ | 8,549 | $ | (245 | ) | $ | 16,740 | $ | (19,297 | ) | $ | 5,747 |
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 28, 2014
GUARANTORSUBSIDIARIES | NON-GUARANTORSUBSIDIARIES | INTERFACE, INC. (PARENTCORPORATION) | CONSOLIDATION AND ELIMINATIONENTRIES | CONSOLIDATEDTOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,874 | $ | 33,749 | $ | 32,840 | $ | 0 | $ | 68,463 | ||||||||||
Accounts receivable | 56,296 | 83,394 | 524 | 0 | 140,214 | |||||||||||||||
Inventories | 75,686 | 86,278 | 0 | 0 | 161,964 | |||||||||||||||
Prepaids and deferred income taxes | 5,451 | 22,558 | 5,380 | 0 | 33,389 | |||||||||||||||
Total current assets | 139,307 | 225,979 | 38,744 | 0 | 404,030 | |||||||||||||||
Property and equipment less accumulated depreciation | 86,344 | 147,334 | 2,711 | 0 | 236,389 | |||||||||||||||
Investment in subsidiaries | 579,844 | 207,421 | (90,979 | ) | (696,286 | ) | 0 | |||||||||||||
Goodwill | 6,542 | 66,782 | 0 | 0 | 73,324 | |||||||||||||||
Other assets | 1,653 | 10,375 | 83,505 | 0 | 95,533 | |||||||||||||||
$ | 813,690 | $ | 657,891 | $ | 33,981 | $ | (696,286 | ) | $ | 809,276 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities | $ | 46,745 | $ | 78,931 | $ | 18,624 | $ | 0 | $ | 144,300 | ||||||||||
Senior notes | 0 | 0 | 247,500 | 0 | 247,500 | |||||||||||||||
Long term debt | 0 | 27,988 | 0 | 0 | 27,988 | |||||||||||||||
Deferred income taxes | 0 | 18,281 | (2,369 | ) | 0 | 15,912 | ||||||||||||||
Other | 35 | 6,954 | 25,882 | 0 | 32,871 | |||||||||||||||
Total liabilities | 46,780 | 132,154 | 289,637 | 0 | 468,571 | |||||||||||||||
Common stock | 94,145 | 102,199 | 6,645 | (196,344 | ) | 6,645 | ||||||||||||||
Additional paid-in capital | 249,302 | 12,525 | 375,401 | (261,827 | ) | 375,401 | ||||||||||||||
Retained earnings (deficit) | 425,896 | 475,546 | (629,028 | ) | (238,115 | ) | 34,299 | |||||||||||||
Foreign currency translation adjustment | (2,433 | ) | (33,784 | ) | (6,177 | ) | 0 | (42,394 | ) | |||||||||||
Pension liability | 0 | (30,749 | ) | (2,497 | ) | 0 | (33,246 | ) | ||||||||||||
$ | 813,690 | $ | 657,891 | $ | 33,981 | $ | (696,286 | ) | $ | 809,276 |
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2014
GUARANTORSUBSIDIARIES | NON-GUARANTORSUBSIDIARIES | INTERFACE, INC. (PARENTCORPORATION) | CONSOLIDATION AND ELIMINATIONENTRIES | CONSOLIDATEDTOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 12,014 | $ | 19,367 | $ | 9,219 | $ | (5,703 | ) | $ | 34,897 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of plant and equipment | (16,020 | ) | (21,250 | ) | (266 | ) | 5,413 | (32,123 | ) | |||||||||||
Other | 151 | (894 | ) | (1,207 | ) | 0 | (1,950 | ) | ||||||||||||
Net cash used for investing activities | (15,869 | ) | (22,144 | ) | (1,473 | ) | 5,413 | (34,073 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowing of long-term debt | 0 | 1,877 | 0 | 0 | 1,877 | |||||||||||||||
Debt issuance costs | 0 | 0 | (106 | ) | 0 | (106 | ) | |||||||||||||
Other | 3,234 | (17,538 | ) | 14,014 | 290 | 0 | ||||||||||||||
Proceeds from issuance of common stock | 0 | 0 | 159 | 0 | 159 | |||||||||||||||
Dividends paid | 0 | 0 | (6,647 | ) | 0 | (6,647 | ) | |||||||||||||
Net cash provided by (used for) financing activities | 3,234 | (15,661 | ) | 7,420 | 290 | (4,717 | ) | |||||||||||||
Effect of exchange rate change on cash | 0 | (527 | ) | 0 | 0 | (527 | ) | |||||||||||||
Net increase (decrease) in cash | (621 | ) | (18,965 | ) | 15,166 | 0 | (4,420 | ) | ||||||||||||
Cash at beginning of period | 2,495 | 52,714 | 17,674 | 0 | 72,883 | |||||||||||||||
Cash at end of period | $ | 1,874 | $ | 33,749 | $ | 32,840 | $ | 0 | $ | 68,463 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013,28, 2014, 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, September 28, 2014,July 5, 2015, and the comparable periods of 20132014 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. These forward-looking statements include, but are not limited to, statements regarding the planned bond redemptions and debt refinancing and anticipated interest savings therefrom, as well as the anticipated future charges, expenditures and savings relating to the restructuring plan adopted in the third quarter of 2014. 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 risks associated with the possible nonsatisfaction of the conditions to borrowing under the Company’s Syndicated Credit Facility, which facility is needed to complete the bond redemptions described in this report, as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2013,28, 2014, 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.
2014 Restructuring Charge
In the third quarter of 2014, we committed to a restructuring plan in our continuing efforts to reduce costs across our worldwide operations. In connection with this restructuring plan, we incurred a pre-tax restructuring and asset impairment charge in the third quarter of 2014 in an amount of $12.4 million. The charge was comprised of severance expenses of $9.7 million for a reduction of 100 employees, other related exit costs of $0.1 million, and impairment of assets of $2.6 million. Approximately $10 million of the charge will result in cash expenditures, primarily severance expense. This restructuring plan is anticipated to be substantially completed by the end of 2014, and is expected to yield annual cost savings of approximately $14 million beginning in 2015.
Fire at Australia Facility
In July 2012, a fire occurred at our manufacturing facility in Picton, Australia, which served customers throughout Australia and New Zealand. The fire caused extensive damage to the facility, as well as disruption to business activity in the region. Following the fire, we utilized adequate production capacity at our manufacturing facilities in Thailand, China, the U.S. and Europe to meet customer demand formerly serviced from Picton. While this has been executed with success, there were, as expected, business disruptions and delays in shipments that affected sales following the fire. We have now completed the build-out of a new manufacturing facility in Minto, Australia, which commenced operations in January 2014. For additional information on the fire, please see the Note entitled “Fire at Australian Manufacturing Facility” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.
General
During the quarter ended September 28, 2014,July 5, 2015, we had net sales of $252.2$263.6 million, compared with net sales of $254.4$260.6 million in the thirdsecond quarter last year. Fluctuations in currency exchange rates did not have a significant impact during the quarter compared with the prior year period. During the first ninesix months of fiscal year 2014,2015, we had net sales of $731.8$500.5 million, compared with net sales of $708.3$479.6 million in the first ninesix months of last year. Fluctuations in currency exchange rates did nothad negative impacts on our sales and operating income in the 2015 reported periods, compared with the prior year periods. The following table presents the amounts (in U.S. dollars) by which the exchange rates for converting foreign currencies into U.S. dollars have a significant impact on this comparison.negatively affected our net sales and operating income for the three months and six months ended July 5, 2015.
Included in our results for the third quarter of 2014 is the pre-tax restructuring and asset impairment charge of $12.4 million described above.
Three Months Ended July 5, 2015 | Six Months Ended July 5, 2015 | |||||||
(In millions) | ||||||||
Net sales | $ | (24.1 | ) | $ | (43.3 | ) | ||
Operating income | (3.4 | ) | (5.5 | ) |
During the thirdsecond quarter of 2014, including the restructuring and asset impairment charge discussed above, we had a net loss of $0.4 million, or $0.01 per share. We had net income of $15.0 million, or $0.23 per share, in the third quarter of 2013. During the nine months ended September 28, 2014, including the restructuring and asset impairment charge discussed above,2015, we had net income of $16.7$21.7 million, or $0.25$0.33 per share.diluted share, compared with net income of $13.1 million, or $0.20 per diluted share, in the second quarter of 2014. During the ninesix months ended September 29, 2013,July 5, 2015, we had net income of $32.9$34.0 million, or $0.50$0.51 per share. Includeddiluted share, compared with net income of $17.1 million, or $0.26 per diluted share, in the results forfirst six months of 2014.
The first six months of 2015 were comprised of 27 weeks, while the first ninesix months of 20132014 were comprised of 26 weeks. (The additional week was in the first quarter of 2015.) This is a one-time tax dispute resolution benefitfactor in certain of $1.9 million related to the execution of bilateral pricing agreements. See the discussioncomparisons discussed in Note 11 of Part I,this Item 1 of this report, entitled “Income Taxes,” for further information.2.
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 September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, respectively:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Sept. 28, 2014 | Sept. 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0% | 100.0% | 100.0% | 100.0% | ||||||||||||||||||||
Cost of sales | 66.9 | 63.9 | 66.0 | 64.8 | 61.6 | 65.3 | 62.7 | 65.6 | ||||||||||||||||||||||||
Gross profit on sales | 33.1 | 36.1 | 34.0 | 35.2 | 38.4 | 34.7 | 37.3 | 34.4 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 25.4 | 25.1 | 26.3 | 26.2 | 25.8 | 25.3 | 26.4 | 26.8 | ||||||||||||||||||||||||
Restructuring and asset impairment charge | 4.9 | -- | 1.7 | -- | ||||||||||||||||||||||||||||
Operating income | 2.9 | 10.9 | 6.0 | 9.0 | 12.6 | 9.3 | 10.9 | 7.6 | ||||||||||||||||||||||||
Interest/Other expenses | 2.6 | 2.5 | 2.4 | 2.7 | 0.5 | 2.0 | 0.9 | 2.2 | ||||||||||||||||||||||||
Income before tax expense | 0.3 | 8.4 | 3.6 | 6.3 | 12.1 | 7.3 | 10.0 | 5.3 | ||||||||||||||||||||||||
Income tax expense | 0.4 | 2.5 | 1.3 | 1.7 | 3.9 | 2.3 | 3.2 | 1.8 | ||||||||||||||||||||||||
Net income (loss) | (0.1 | ) | 5.9 | 2.3 | 4.6 | |||||||||||||||||||||||||||
Net income | 8.2 | 5.0 | 6.8 | 3.6 |
Net Sales
Below we provide information regarding net sales and analyze those results for the three-month and nine-monthsix-month periods ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, respectively.
Three Months Ended | Percentage | |||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 252,191 | $ | 254,448 | (0.9 | )% |
Three Months Ended | Percentage | |||||||||||
July 5, 2015 | June 29, 2014 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 263,637 | $ | 260,624 | 1.2 | % |
Nine Months Ended | Percentage | |||||||||||
(In thousands) | ||||||||||||
Sept. 28, 2014 | Sept. 29, 2013 | Change | ||||||||||
Net Sales | $ | 731,807 | $ | 708,300 | 3.3 | % |
Six Months Ended | Percentage | |||||||||||
July 5, 2015 | June 29, 2014 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 500,541 | $ | 479,616 | 4.4 | % |
For the three monthsquarter ended September 28, 2014,July 5, 2015, net sales decreased $2.3increased $3.0 million (0.9%(1.2%) versus the comparable period in 2013. On2014. As discussed above, the strengthening of the U.S. dollar versus certain foreign currencies (primarily, the Euro, Australian dollar and Canadian dollar) had a geographic basis,negative impact of approximately $24 million on 2015 second quarter sales as compared to the second quarter of 2014. In the Americas, we experiencedincreased sales 7%, which was partially offset by declines of 7% in Europe (as reported in U.S. dollars) and 6% in Asia-Pacific (as reported in U.S. dollars) due to the negative currency impacts discussed above. In the Americas, the corporate office market segment led the way with a slight decline (less than 1%)12% increase, as the rebound in this market continued and we gained market share in the Americas, a 4% decline in Europe (in local currency and as translated into U.S. dollars), and aNon-office segments were up 3% increase in the Asia-Pacific region. In the Americas,aggregate, with increases in the hospitality (up 53%55%) and residentialeducation (up 15%10%) market segments werebeing partially offset by declines in the retail (down 6%12%), healthcare (down 9%) and educationresidential (down 2%4%) market segments. The increasedecline in the residential market segment was primarily in the multi-family sector, as our FLOR residential consumer business FLOR, experienced an 8% declineposted a 4% sales increase for the quarter. The corporate office market segment2015 second quarter, primarily due to stronger web-based sales. In Europe, the sales increase in the Americas experienced a small increase (up less than 1%) for the quarter. The decline in Europelocal currency was approximately 16%, due to the negative impactsstrength of political unrest and economic uncertainty in Eastern Europe, the Middle East and Russia. In Europe, the corporate office segment experienced an increase of 2%, which was more than offset by declines in non-office market segments, particularly government (down 40%) and education (down 19%). In Asia-Pacific, we saw a strong sales increase in Australia (up 13%) as a result of the full impact of our return to local manufacturing there, offset by weaker sales performance in Asia (down 6%). The sales decline in Asia was a result of generally softer economic conditions in China and political uncertainty in Southeast Asia. In the Asia-Pacific region, the largest sales increases were seen in the healthcare (up over 100%) and education (up 53%) market segments. These increases were partially offset by declines in the retail (down 33%) and government (down 51%) market segments. In Asia-Pacific, the corporate office market segment was essentially even compared(up 21%) which comprises the bulk of the sales in the region. Non-office segments in Europe were down 3% in the aggregate in local currency, with the third quartergovernment segment showing the largest decline (down 48%) due to the continued austerity programs in place through the region. In Asia-Pacific, the sales increase in local currency was 4%, which was almost entirely due to the strength of 2013.the corporate office market, primarily in Australia.
For the ninesix months ended September 28, 2014,July 5, 2015, net sales increased $23.5$20.9 million (3.3%(4.4%) versus the comparable period in 2013. This2014. The strengthening of the U.S. dollar versus certain foreign currencies had a negative impact of approximately $43 million on 2015 first half sales increase was seenas compared to the first half of 2014. On a geographic basis, we experienced sales increases in the Americas (up 11%) and Asia-Pacific (up 2%) versus the first six months of 2014,2014. Due to the impact of currency fluctuations, Europe experienced a sales decline of 7% as we experienced declining sales in the third quarter of 2014 compared with the third quarter of 2013. On a geographic basis, sales increased in the Americas (up 3%) and Europe (up 8%reported in U.S. dollars, or 5%but an increase in local currency) for the nine-month period, partially offset by a decline in Asia-Pacificcurrency of 3%14%. In the Americas, the largest sales increases were in the hospitality (up 34%), residential (up 20%), education (up 5%) and retail (up 6%) market segments. Corporate office segment sales in the Americas increased by approximately 1% for the period. These increases were partially offset by a decline in the government (down 4%) market segment. In Europe,increase was almost evenly balanced between the corporate office segment accountedand non-office segments, with corporate office sales increasing 12% and non-office segments increasing 10%. All non-office market segments showed an increase for almost the entiretyfirst six months of 2015, with the exception of the increaseretail (down 5%) and healthcare (essentially flat) segments. Hospitality (up 74%) and education (up 11%) market segments represented the most significant increases over the first six months of 2014. In local currency, the increase in U.S. dollars, or 7%Europe was mostly in local currency), as non-officethe corporate office market, which grew 21%. Non-office segments in Europe in the aggregate were essentially even year-over-year.down 9% in local currency, with the most significant decline coming in the government segment due to the continued austerity measures in place throughout the region. In Asia-Pacific, the sales decline occurred mostly ingrowth of 2% came as a result of the corporate (down 6%office market. (up 9%) primarily due to increased new construction and refurbishment projects in Australia. With the exception of the hospitality segment (up 17%), all non-office segments in Asia-Pacific showed declines for the period, with the most significant being in retail (down 28%) and government (down 61%) market segments. These declines were partially mitigated by sales increases in the education (up 35%) and healthcare (up over 100%(down 24%) market segments..
Cost and Expenses
The following table presents, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-month and nine-monthsix-month periods ended September 28,July 5, 2015, and June 29, 2014, and September 29, 2013, respectively:
Three Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||||||||
Cost and Expenses | Sept. 28, 2014 | Sept. 29, 2013 | Change | July 5, 2015 | June 29, 2014 | Change | ||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Cost of sales | $ | 168,596 | $ | 162,695 | 3.6 | % | $ | 162,385 | $ | 170,239 | (4.6 | %) | ||||||||||||
Selling, general and administrative expenses | 63,958 | 63,918 | 0.0 | % | 68,033 | 66,042 | 3.0 | % | ||||||||||||||||
Total | $ | 232,554 | $ | 226,613 | 2.6 | % | $ | 230,418 | $ | 236,281 | (2.5 | %) |
Nine Months Ended | Percentage | Six Months Ended | Percentage | |||||||||||||||||||||
Cost and Expenses | Sept. 28, 2014 | Sept. 29, 2013 | Change | July 5, 2015 | June 29, 2014 | Change | ||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Cost of sales | $ | 483,141 | $ | 459,062 | 5.2 | % | $ | 313,857 | $ | 314,545 | (0.2 | %) | ||||||||||||
Selling, general and administrative expenses | 192,659 | 185,606 | 3.8 | % | 132,065 | 128,701 | 2.6 | % | ||||||||||||||||
Total | $ | 675,800 | $ | 644,668 | 4.8 | % | $ | 445,922 | $ | 443,246 | 0.6 | % |
For the three months ended September 28, 2014,July 5, 2015, our costscost of sales increased $5.9decreased $7.9 million (3.6%(4.6%) versus the comparable period in the prior year. Fluctuations in currency exchange rates did not have2014. Currency fluctuation had a significantfavorable impact on this comparison. Ourcost of sales; if currency rates had remained the same for the second quarter of 2015 versus that of the second quarter of 2014, our cost of sales would have been approximately $13 million higher. As a percentage of sales, our cost of sales declined significantly to 61.6% for the second quarter of 2015 versus 65.3% for the second quarter of 2014. Gross profit margin improved across all three of our primary geographic regions, with the Americas showing the largest improvement versus 2014. The key factors in the improvement were (1) reduced raw material costs of 5-7% on a global level due to lower input prices did not experience significant fluctuation duringand usage, (2) better absorption of fixed costs associated with higher production volumes, particularly in the Americas and Europe, (3) the normalization of operations in Australia and rebalancing of production in the Asia-Pacific region compared with the inefficiencies associated with the startup of the new facility in Australia in 2014, (4) continued implementation of lean manufacturing practices in our Americas business, and (5) the cost savings associated with our restructuring activities in the third quarter of 2014 compared with2014.
For the third quarter of 2013. The increase insix months ended July 5, 2015, our cost of sales is largely asdecreased $0.7 million (0.2%) versus the comparable period of 2014. Currency fluctuation had a resultfavorable impact on cost of increased manufacturing complexity associated with new product introductions duringsales; if currency rates had remained the current year period. We also experienced asame for the first half of 2015 versus that of the first half of 2014, our cost of sales mix toward lower gross margin products during the 2014 third quarter as we continue to expand in market segments with historically lower penetration of carpet tile. In addition, disruptions in yarn supply also caused manufacturing inefficiencies in the 2014 third quarter.would have been approximately $23 million higher. As a result of these factors, as a percentage of sales, costour costs of sales increased to 66.9% for the threefirst six months ended September 28, 2014,of 2015 experienced a significant decline to 62.7%, as compared with 63.9%to 65.6% for the comparable period of 2013. In connection with2014. The reasons for the decline for the six month period are similar to the reasons addressed above for the three month period: (1) reduced raw materials costs of 5-7%, (2) higher production volumes which led to greater absorption of fixed costs, (3) the continued stabilization of the supply chain and manufacturing footprint in the Asia-Pacific region, (4) improvements in manufacturing efficiencies, and (5) the impacts of our restructuring actions taken during the third quarter of 2014, as well as other manufacturing efficiency initiatives, we expect to seeactivities in 2014. The gross margin expansionimprovements accelerated during 2015, and as such, the improvement is more significant in future periods.the three months ended July 5, 2015 versus the six month period ended July 5, 2015.
For the nine monthsthree month period ended September 28, 2014,July 5, 2015, our cost of salesselling, general and administrative expenses increased $24.1$2.0 million (5.2%(3.0%) versus the comparable period in the prior year. Fluctuations in currency exchange rates did not have2015. Currency fluctuation had a significantfavorable impact on this comparison. Our raw material prices did not experience significant fluctuation duringselling, general and administrative expense; if currency rates had remained the first nine months of 2014 compared with the first nine months of 2013. The increase in cost of sales was due to the factors described abovesame for the three months ended September 28, 2014, as well as increased materials costs ($12 million) and labor costs ($1.8 million) associated with higher production levels duringsecond quarter of 2015 versus that of the first six monthssecond quarter of 2014. Due to these factors, as a percentage of sales, cost of sales increased to 66.0% for the first nine months of 2014 versus 64.8% for the first nine months of 2013.
For the three months ended September 28, 2014, our selling, general and administrative expenses remained essentially even withwould have been approximately $5 million higher. The largest driver of the comparable periodincrease in 2013. Within the selling, general and administrative expenses line item, we experienced current yearversus the 2014 period increases in selling expense (up $1.3 million) associated with our targeted sales personnel additions, primarily within our Americas business, and $0.7is approximately $5.2 million of increased marketing expense for global marketing efforts. These increases were almost entirelyhigher administrative expenses largely comprised of share-based payment expenses and incentive compensation amounts, as our projected performance is better in 2015 versus 2014. This increase was offset by reduced administrative costs associated with lower levels of incentive compensation as performance targetsselling and marketing expenses, down $1.4 million and $1.7 million, respectively. These declines, however, were not metlargely due to the same levelcurrency translation effects discussed above, as in 2013. Aslocal currencies these expenditures remained relatively consistent year over year. Due to the increased administrative expenses discussed above, we implemented a restructuring plan in the third quarter of 2014 which is expected to reduce our selling, general and administrative expense going forward. As a percentage of sales, selling, general and administrative expenses increased to 25.4%25.8% of sales for the three months ended September 28, 2014,July 5, 2015, versus 25.1% for25.3% of sales in the comparable period of 2013.
For the nine months ended September 28, 2014, our selling, general and administrative expenses increased $7.1 million (3.8%) versus the comparablecorresponding period in 2013. All of this increase occurred in the first six months of 2014, as these expenses were essentially even in the third quarter of 2014 compared with the third quarter of 2013. The increase for the nine-month period was primarily due to increased selling expense ($5.5 million) associated with increased sales for the first six months of 2014, particularly in our European operations, and targeted sales force additions in key end user markets, particularly in the Americas. We also experienced an increase in marketing expense of approximately $1.2 million for continued global marketing campaigns and new product introductions in the current year period. The rate of sales increase for the nine months ended September 28, 2014 kept pace with these additional expenses, and as2014. On a result,sequential basis, however, selling general and administrative expenses as a percentage of sales is lower, compared with 27.0% in the first quarter of 2015.
For the six month period ended July 5, 2015, our selling, general and administrative expenses increased only slightly to 26.3%$3.4 million (2.6%) versus the comparable period in 2014. Currency fluctuation had a positive impact on selling, general and administrative expenses; if currency rates had remained the same for the period,first six months of 2015 versus 26.2%the first six months of 2014, our selling, general and administrative expenses would have been approximately $9 million higher. The increase was largely due to higher administrative expenses of $8.9 million largely comprised of share-based payment expenses and incentive compensation amounts, as our projected performance is better in 2015 versus 2014.These increases were partially offset by lower marketing (down $3.3 million) and selling (down $1.7 million) costs. While currency impacts were the primary factor in these declines, across all regions selling and marketing expenses were down as a percentage of sales versus the first six months of 2014, due to both higher sales as well as cost savings as a result of our restructuring actions which took place in the third quarter of 2014. Due to these initiatives, as a percentage of sales, selling, general and administrative expenses for the nine-month period ended September 29, 2013.first six months of 2015 declined to 26.4%, versus 26.8% in the first six months of 2014.
Interest Expense
For the three-monththree month period ended September 28, 2014,July 5, 2015, our interest expense decreased $0.7$3.6 million to $5.6$1.8 million, versus $6.3from $5.4 million in the second quarter of 2014. For the six month period ended July 5, 2015, our interest expense decreased $7.2 million to $3.7 million, from $10.9 million in the comparable period of 2013. Forlast year. The reason for the nine months ended September 28, 2014, our interest expense decreased $1.9 million to $16.5 million, versus $18.4 million indecreases was the comparable period of 2013. The primary reasons for these decreases were the redemption of $27.5 million of our 7.625% Senior Notesdebt refinancing activities we completed in the fourth quarter of 2013, as well as the repayment at maturity2014, in which we redeemed all of the remaining $8.1our $247.5 million of our 11.375%outstanding 7.625% Senior Subordinated Notes in the fourth quarter of 2013. While we did haveand replaced them with borrowings outstanding under our Syndicated Credit Facility for the third quarterFacility. This facility is comprised of a term loan as well as a multi-currency revolving debt facility and first nine months of 2014, which were not present in the third quarter and first nine months of 2013, these borrowings wereincurs interest at a significantly lower interest rate than the senior notes which were repaid and redeemed in the fourth quarter of 2013.7.625% Senior Notes.
Liquidity and Capital Resources
General
At September 28, 2014,July 5, 2015, we had $68.5$71.8 million in cash. At that date, we had $28.0$200.0 million in term loan borrowings, $59.1 million of revolving loan borrowings and $3.3$3.1 million in letters of credit outstanding under ourthe Syndicated Credit Facility. As of September 28, 2014,July 5, 2015, we could have incurred $168.7$187.8 million of additional borrowings under our Syndicated Credit Facility. InFacility.In addition, we could have incurred an additional $8.4$19.0 million of borrowings under our other lines of credit in place at other non-U.S. subsidiaries.
On October 3, 2014, subsequent to the end of the third quarter, we amended our Syndicated Credit Facility. The amendment expands the aggregate borrowing availability for revolving loans under the Syndicated Credit Facility from $200 million to $250 million, provides for up to $200 million of new Term Loan A borrowing availability which may be used to repurchase or redeem (before December 31, 2014) the Company’s 7.625% Senior Notes, and extends the maturity of the Syndicated Credit Facility to October 3, 2019. The amendment provides for required amortization payments of any Term Loan A borrowing, as well as mandatory prepayments of any Term Loan A borrowing (and any term loans made available pursuant to any future multicurrency loan facility increase) from certain asset sales, casualty events and debt issuances, subject to certain qualifications and exceptions as provided for therein. Pursuant to the amendment, we have the option to further increase (in the future) the borrowing availability under the Syndicated Credit Facility, either for revolving loans or term loans, by up to $150 million, subject to the receipt of lender commitments for such increase and the satisfaction of certain other conditions. All other terms of the Syndicated Credit Facility, including covenants, interest rates and fees, events of default and collateral, remain substantially unchanged.
Following the amendment of our Syndicated Credit Facility, on October 10, 2014, we elected to redeem $27.5 million aggregate principal amount of our 7.625% Senior Notes at a price equal to 103% of the principal amount of the notes redeemed, plus accrued interest to the redemption date of November 26, 2014. In addition, on October 17, 2014, we elected to redeem the remaining $220 million aggregate principal amount of 7.625% Senior Notes that had not previously been called for redemption, at a price equal to 103.813% of the principal amount of the notes redeemed, plus accrued interest to the redemption date of December 1, 2014. These redemptions are expected to require $266.1 million, and to be funded through a combination of Term Loan A and revolving borrowings under the expanded Syndicated Credit Facility, and cash on hand. It is estimated that the redemptions and refinancing of this debt will result in $12 million to $13 million in annualized interest savings, based on current interest rates.
Analysis of Cash Flows
Our primary sourcessource of cash during the ninesix months ended September 28, 2014 were (1) $14.4 million due to an increase in accounts payables and accruals, (2) $1.9 million of borrowings under our Syndicated Credit Facility, and (3) $1.8July 5, 2015 was $15.2 million due to a decrease in prepaid expenses and other current assets.reduction of accounts receivable. Our primary uses of cash during this periodthe six month then ended were (1) $32.1 million for capital expenditures, (2) $15.5$27.2 million for increased inventory levels, (2) $12.1 million for capital expenditures, (3) $10.5 million for stock repurchases, and (3) $7.4(4) $5.3 million due to an increase in accounts receivable.for dividend payments.
ITEM 3.3. 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 December 29, 2013,28, 2014, under Item 7A of that Form 10-K. Our discussion here focuses on the period ended September 28, 2014,July 5, 2015, 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 September 28, 2014,July 5, 2015, we recognized an $11.8a $20.2 million decrease in our foreign currency translation adjustment account compared to December 29, 2013,28, 2014, primarily because of the strengthening of the U.S. dollar against certain foreign currencies.currencies, particularly the Euro and Australian dollar.
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
Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair 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 changesthat debt instrument. Changes in the rates attributable tounderlying prime lending rate or LIBOR rate would, however, impact the market risk being measured. The discount rates usedamount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Item 7A of our Annual Report on Form 10-K for the present value computations were selected based on market interest and foreign currency exchange rates in effect at Septemberyear ended December 28, 2014. The values that result from these computations are compared with the market values of these financial instruments at September 28, 2014. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.
As of September 28, 2014, 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 $0.7 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 $0.7 million.
As of September 28, 2014,July 5, 2015, 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 $10.1 million or an increase in the fair value of our financial instruments of $8.2$8.3 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.
ITEM 4.CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PARTII - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
We are subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 1.
ITEM 1A.RISK FACTORS
There wereare no material changes in risk factors in the thirdsecond quarter of 2014.2015. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.28, 2014.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information with respect to purchases made by or on behalf of the Company, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during our thirdthe quarter ended September 28, 2014:July 5, 2015:
Period(1) | Total Number of SharesPurchased(2) | Average Price Paid Per Share(3) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(4) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans orPrograms(4) | ||||||||||||
June 30, 2014 | 0 | 0 | 0 | 0 | ||||||||||||
July 1 – July 31, 2014 | 5,176 | $ | 18.41 | 0 | 0 | |||||||||||
August 1 – August 31, 2014 | 0 | 0 | 0 | 0 | ||||||||||||
September 1 – September 28, 2014 | 1,991 | 16.86 | 0 | 0 | ||||||||||||
Total | 7,167 | $ | 17.98 | 0 | 0 |
Period(1) | Total Numberof Shares Purchased | Average PricePaid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans orPrograms(2) | ||||||||||||
April 6-30, 2015 | 0 | N/A | 0 | 250,000 | ||||||||||||
May 1-31, 2015(3) | 251,232 | $ | 22.40 | 250,000 | 0 | |||||||||||
June 1-30, 2015 | 0 | N/A | 0 | 0 | ||||||||||||
July 1-5, 2015 | 0 | N/A | 0 | 0 | ||||||||||||
Total | 251,232 | $ | 22.40 | 250,000 | 0 |
(1)The monthly periods identified above correspond to the Company’s fiscal thirdsecond quarter of 2014,2015, which commenced June 30, 2014April 6, 2015 and ended September 28, 2014.July 5, 2015.
(2)(2) The referenced shares were acquired by the Company from certain of our employees to satisfy income tax withholding obligations in connection with the vesting, in the third quarter ofIn 2014, of certain previous awards of restricted stock.
(3) The referenced price paid per share represents the fair market value of all shares acquired from employees on the date the shares vested, which is equal to the closing price of the Company’s common stock on the NASDAQ stock exchange on the day preceding the vesting date. The total represents the weighted average price paid per share.
(4)We did not have a publicly announced stock repurchase program in place in the third quarter of 2014. On October 7, 2014, subsequent to the end of the third quarter, the Company announced a program to repurchase up to 500,000 shares of common stock per fiscal year, commencing with the 2014 fiscal year.
(3) Includes certain shares acquired by the Company from employees to satisfy income tax withholding obligations in connection with the vesting of previous grants of restricted stock.
ITEM 3.DEFAULTS UPONSENIOR SECURITIES
None
ITEM 4.MINE SAFETYDISCLOSURES
Not applicable
ITEM 5.OTHER INFORMATION
None
ITEM 6.EXHIBITS
The following exhibits are filed with this report:
EXHIBIT NUMBER |
DESCRIPTION OF EXHIBIT |
10.1 |
|
10.2 | Interface, Inc. Omnibus Stock Incentive Plan, as amended and restated February 18, 2015 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 20, 2015, previously filed with the Commission and incorporated herein by reference). |
10.3 | Employment Contract of Robert Boogaard dated as of July 6, 2015 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on July 10, 2015, previously filed with the Commission and incorporated herein by reference). |
31.1 | Section 302 Certification of Chief Executive Officer. |
31.2 | Section 302 Certification of Chief Financial Officer. |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. |
101.INS | XBRL Instance |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Presentation Linkbase |
101.DEF | XBRL Taxonomy Definition Linkbase |
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: | By: |
| |
Patrick C. Lynch | |||
Senior Vice President | |||
(Principal Financial Officer) |
EXHIBITS INCLUDED HEREWTIHHEREWITH
EXHIBIT NUMBER |
DESCRIPTION OF EXHIBIT | |
10.1 | Employment and Change in Control Agreement of Robert A. Coombs dated May 15, 2015 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 19, 2015, previously filed with the Commission and incorporated herein by reference). | |
10.2 | Interface, Inc. Omnibus Stock Incentive Plan, as amended and restated February 18, 2015 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 20, 2015, previously filed with the Commission and incorporated herein by reference). | |
10.3 | Employment Contract of Robert Boogaard dated as of July 6, 2015 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on July 10, 2015, previously filed with the Commission and incorporated herein by reference). | |
31.1 | Section 302 Certification of Chief Executive | |
31.2 | Section 302 Certification of Chief Financial | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § | |
101.INS | XBRL Instance | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Presentation Linkbase | |
101.DEF | XBRL Taxonomy Definition Linkbase |
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