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 July 5, 2015April 3, 2016
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’sRegistrant'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 (oror 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’sregistrant's classes of common stock at August 4, 2015:May 5, 2016:
Class | Number of Shares | |||
Common Stock, $.10 par value per share |
|
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 | 13 | |
Item 3. |
| ||
Item 4. |
| ||
PART II. | |||
Item 1. |
| ||
Item 1A. |
| ||
Item 2. |
| ||
Item 3. |
| ||
Item 4. |
| ||
Item 5. |
| ||
Item 6. |
|
PARTI - FINANCIAL INFORMATION
ITEM 1.FINANCIALSTATEMENTS FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSEDBALANCESHEETS
(IN THOUSANDS)
JULY 5, 2015 | DECEMBER 28, 2014 | APRIL 3, 2016 | JANUARY 3, 2016 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and Cash Equivalents | $ | 71,821 | $ | 54,896 | $ | 83,212 | $ | 75,696 | ||||||||
Accounts Receivable, net | 137,546 | 157,093 | 118,698 | 130,322 | ||||||||||||
Inventories | 164,205 | 142,167 | 173,601 | 161,174 | ||||||||||||
Prepaid Expenses and Other Current Assets | 21,989 | 20,780 | 22,461 | 22,490 | ||||||||||||
Deferred Income Taxes | 9,617 | 9,732 | 8,627 | 8,726 | ||||||||||||
TOTAL CURRENT ASSETS | 405,178 | 384,668 | 406,599 | 398,408 | ||||||||||||
PROPERTY AND EQUIPMENT, less accumulated depreciation | 216,681 | 227,347 | 212,893 | 211,489 | ||||||||||||
DEFERRED TAX ASSET | 24,988 | 33,138 | 16,906 | 20,110 | ||||||||||||
GOODWILL | 64,530 | 70,509 | 65,971 | 63,890 | ||||||||||||
OTHER ASSETS | 58,788 | 59,252 | 64,103 | 62,652 | ||||||||||||
TOTAL ASSETS | $ | 770,165 | $ | 774,914 | $ | 766,472 | $ | 756,549 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Accounts Payable | $ | 56,273 | $ | 49,464 | $ | 45,839 | $ | 52,834 | ||||||||
Current Portion of Long-Term Debt | 7,500 | 0 | 12,500 | 11,250 | ||||||||||||
Accrued Expenses | 80,421 | 94,323 | 70,837 | 88,933 | ||||||||||||
TOTAL CURRENT LIABILITIES | 144,194 | 143,787 | 129,176 | 153,017 | ||||||||||||
LONG-TERM DEBT | 251,615 | 263,338 | 220,112 | 202,281 | ||||||||||||
DEFERRED INCOME TAXES | 11,240 | 11,002 | 10,060 | 10,505 | ||||||||||||
OTHER | 47,217 | 50,148 | 47,775 | 48,380 | ||||||||||||
TOTAL LIABILITIES | 454,266 | 468,275 | 407,123 | 414,183 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Preferred Stock | 0 | 0 | 0 | 0 | ||||||||||||
Common Stock | 6,585 | 6,597 | 6,546 | 6,570 | ||||||||||||
Additional Paid-In Capital | 368,725 | 368,603 | 367,726 | 370,327 | ||||||||||||
Retained Earnings | 68,481 | 39,737 | 109,891 | 100,270 | ||||||||||||
Accumulated Other Comprehensive Loss – Foreign Currency Translation Adjustment | (79,175 | ) | (58,936 | ) | ||||||||||||
Accumulated Other Comprehensive Loss – Pension Liability | (48,717 | ) | (49,362 | ) | ||||||||||||
Accumulated Other Comprehensive Income (Loss) – Foreign Currency Translation Adjustment | (82,132 | ) | (91,511 | ) | ||||||||||||
Accumulated Other Comprehensive Income (Loss) – Pension Liability | (42,682 | ) | (43,290 | ) | ||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 315,899 | 306,639 | 359,349 | 342,366 | ||||||||||||
$ | 770,165 | $ | 774,914 | $ | 766,472 | $ | 756,549 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSEDSTATEMENTS OFOPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | SIX MONTHS ENDED | THREE MONTHS ENDED | ||||||||||||||||||||||
JULY 5, 2015 | JUNE 29, 2014 | JULY 5, 2015 | JUNE 29, 2014 | APRIL 3, 2016 | APRIL 5, 2015 | |||||||||||||||||||
NET SALES | $ | 263,637 | $ | 260,624 | $ | 500,541 | $ | 479,616 | $ | 222,554 | $ | 236,904 | ||||||||||||
Cost of Sales | 162,385 | 170,239 | 313,857 | 314,545 | 135,922 | 151,472 | ||||||||||||||||||
GROSS PROFIT ON SALES | 101,252 | 90,385 | 186,684 | 165,071 | 86,632 | 85,432 | ||||||||||||||||||
Selling, General and Administrative Expenses | 68,033 | 66,042 | 132,065 | 128,701 | 65,605 | 64,032 | ||||||||||||||||||
OPERATING INCOME | 33,219 | 24,343 | 54,619 | 36,370 | 21,027 | 21,400 | ||||||||||||||||||
Interest Expense | 1,790 | 5,420 | 3,678 | 10,918 | 1,519 | 1,888 | ||||||||||||||||||
Other Expense (Income) | (446 | ) | (128 | ) | 826 | (154 | ) | |||||||||||||||||
Other Expense | 449 | 1,272 | ||||||||||||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 31,875 | 19,051 | 50,115 | 25,606 | 19,059 | 18,240 | ||||||||||||||||||
Income Tax Expense | 10,153 | 5,980 | 16,071 | 8,510 | 6,165 | 5,918 | ||||||||||||||||||
NET INCOME | $ | 21,722 | $ | 13,071 | $ | 34,044 | $ | 17,096 | ||||||||||||||||
Net Income | $ | 12,894 | $ | 12,322 | ||||||||||||||||||||
Earnings Per Share – Basic | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 | ||||||||||||
Earnings Per Share – Diluted | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 | ||||||||||||
Common Shares Outstanding – Basic | 65,995 | 66,473 | 66,208 | 66,472 | 65,685 | 66,420 | ||||||||||||||||||
Common Shares Outstanding – Diluted | 66,044 | 66,550 | 66,253 | 66,558 | 65,723 | 66,471 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVECOMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
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 |
THREE MONTHS ENDED | ||||||||
APRIL 3, 2016 | APRIL 5, 2015 | |||||||
Net Income | $ | 12,894 | $ | 12,322 | ||||
Other Comprehensive Income (Loss), Foreign Currency TranslationAdjustment | 9,379 | (25,299 | ) | |||||
Other Comprehensive Income, Pension Liability Adjustment | 608 | 3,202 | ||||||
Comprehensive Income (Loss) | $ | 22,881 | $ | (9,775 | ) |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASHCASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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 |
THREE MONTHS ENDED | ||||||||
APRIL 3, 2016 | APRIL 5, 2015 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 12,894 | $ | 12,322 | ||||
Adjustments to reconcile income to cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 7,517 | 7,789 | ||||||
Stock compensation amortization expense | 1,258 | 4,472 | ||||||
Deferred income taxes and other | 1,946 | 4,399 | ||||||
Working capital changes: | ||||||||
Accounts receivable | 13,242 | 29,901 | ||||||
Inventories | (9,387 | ) | (22,391 | ) | ||||
Prepaid expenses and current assets | (63 | ) | (5,029 | ) | ||||
Accounts payable and accrued expenses | (31,703 | ) | (9,374 | ) | ||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (4,296 | ) | 22,089 | |||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (4,461 | ) | (4,574 | ) | ||||
Other | (270 | ) | 38 | |||||
CASH USED IN INVESTING ACTIVITIES | (4,731 | ) | (4,536 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Repayments of long-term debt | 0 | (3,000 | ) | |||||
Borrowing of long-term debt | 17,667 | 0 | ||||||
Proceeds from issuance of common stock | 0 | 157 | ||||||
Dividends paid | (3,273 | ) | (2,656 | ) | ||||
Repurchase of common stock | (75 | ) | (4,857 | ) | ||||
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: | 14,319 | (10,356 | ) | |||||
Net cash provided by operating, investing andfinancing activities | 5,292 | 7,197 | ||||||
Effect of exchange rate changes on cash | 2,224 | (3,091 | ) | |||||
CASH AND CASH EQUIVALENTS: | ||||||||
Net change during the period | 7,516 | 4,106 | ||||||
Balance at beginning of period | 75,696 | 54,896 | ||||||
Balance at end of period | $ | 83,212 | $ | 59,002 |
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 28, 2014,January 3, 2016, 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 28, 2014,January 3, 2016 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 20152016 was comprised of 1413 weeks, while the first quarter of 20142015 was comprised of 13 weeks. Each of the second quarters of 2015 and 2014 was comprised of 1314 weeks.
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 – INVENTORIES
Inventories are summarized as follows:
July 5, 2015 | December 28, 2014 | April 3, 2016 | January 3, 2016 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Finished Goods | $ | 105,756 | $ | 89,688 | $ | 113,897 | $ | 101,697 | ||||||||
Work in Process | 10,915 | 9,898 | 9,454 | 9,865 | ||||||||||||
Raw Materials | 47,534 | 42,581 | 50,250 | 49,612 | ||||||||||||
$ | 164,205 | $ | 142,167 | $ | 173,601 | $ | 161,174 |
NOTE 3 – EARNINGS PER SHARE
The Company computes basic earnings per share (“EPS”) by dividing net income 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. EPS when the Company is in an income position. Awards of performance shares are not included in basic or diluted EPS until the underlying performance condition has been satisfied.Distributedearnings 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 | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | April 3, 2016 | April 5, 2015 | |||||||||||||||||||
Earnings Per Share: | ||||||||||||||||||||||||
Basic Earnings Per Share: | ||||||||||||||||||||||||
Distributed Earnings | $ | 0.04 | $ | 0.03 | $ | 0.08 | $ | 0.05 | $ | 0.05 | $ | 0.04 | ||||||||||||
Undistributed Earnings | 0.29 | 0.17 | 0.43 | 0.21 | 0.15 | 0.15 | ||||||||||||||||||
Total | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 | ||||||||||||
Diluted Earnings Per Share: | ||||||||||||||||||||||||
Distributed Earnings | $ | 0.04 | $ | 0.03 | $ | 0.08 | $ | 0.05 | $ | 0.05 | $ | 0.04 | ||||||||||||
Undistributed Earnings | 0.29 | 0.17 | 0.43 | 0.21 | 0.15 | 0.15 | ||||||||||||||||||
Total | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 | ||||||||||||
Basic earningsper share | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 | ||||||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.20 | $ | 0.51 | $ | 0.26 | $ | 0.20 | $ | 0.19 |
The following tables presenttable presents net income that was attributable to participating securities:securities.
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 |
Three Months Ended | ||||||||
April 3, 2016 | April 5, 2015 | |||||||
(In millions) | ||||||||
Net Income | $ | 0.1 | $ | 0.3 |
The weighted average shares outstanding for basic and diluted EPS were as follows:
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | April 3, 2016 | April 5, 2015 | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Weighted Average Shares Outstanding | 64,497 | 65,012 | 64,710 | 65,011 | 65,107 | 64,930 | ||||||||||||||||||
Participating Securities | 1,498 | 1,461 | 1,498 | 1,461 | 578 | 1,490 | ||||||||||||||||||
Shares for Basic Earnings Per Share | 65,995 | 66,473 | 66,208 | 66,472 | 65,685 | 66,420 | ||||||||||||||||||
Dilutive Effect of Stock Options | 49 | 77 | 45 | 86 | 38 | 51 | ||||||||||||||||||
Shares for Diluted Earnings Per Share | 66,044 | 66,550 | 66,253 | 66,558 | 65,723 | 66,471 |
For all periods presented,the three months ended April 3, 2016 and April 5, 2015, there were no stock options or participating securities excluded from the computation of diluted EPS.
NOTE 4 – LONG-TERM DEBT
7.625% Senior Notes
As of June 29, 2014, the Company had outstanding $247.5 million in 7.625% Senior Notes due 2018 (the “7.625% Senior Notes”). 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 June 29, 2014, based on then current market prices, was $259.9 million.
Syndicated Credit Facility
The Company has a syndicated credit facility (the “Facility”) pursuant to which the lenders provide to the Company and certain of its subsidiaries a multicurrency revolving credit facility and provide to the Company a term loan. The facility matures in October of 2019. Interest on base rate loans is charged at 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 July 5, 2015,April 3, 2016, the Company had $200outstanding $195.0 million of term loan borrowing and $59.1$37.6 million of revolving loan borrowings outstanding under the Facility, and had $3.1 million in letters of credit outstanding under the Facility. As of July 5, 2015,April 3, 2016, the weighted average interest rate on borrowings outstanding under the Facility was 1.9%2.3%.
The
Beginning in the fourth quarter of 2015, the Company isbecame required to make quarterly amortization payments of the term loan borrowing. The amortization payments are due on the last day of the calendar quarter, commencing with an initial amortizationquarter. The payment amount for each of the first three quarters of 2016 is $2.5 million on December 31, 2015.per quarter. 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 Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $19.0$14.8 million of other lines of credit available at interest rates ranging from 2%3% to 6%. As of July 5, 2015,April 3, 2016, 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.
All outstanding stock options vested prior to the end of 2013, and therefore there was no stock option compensation expense in 2014the first quarter of 2015 or 2015.2016.
As of April 3, 2016, there were 87,500 stock options outstanding and exercisable, at an average exercise price of $8.75 per share. There were no stock options granted in 20142016 or 2015. The following table summarizesThere were no exercises or forfeitures of stock options outstanding asin the first quarter of July 5, 2015, as well as activity during the six months then ended:
Shares | Weighted Average Exercise Price | |||||||
Outstanding at December 28, 2014 | 126,000 | $ | 9.23 | |||||
Granted | 0 | 0 | ||||||
Exercised | 38,500 | 9.27 | ||||||
Forfeited or canceled | 0 | 0 | ||||||
Outstanding at July 5, 2015 | 87,500 | 8.75 | ||||||
Exercisable at July 5, 2015 | 87,500 | $ | 8.75 |
At July 5, 2015, the2016. The aggregate intrinsic value of both in-the-money optionsthe outstanding and options exercisable was $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 six monthswas $0.8 million as of 2015 and 2014 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period presented.April 3, 2016.
Six Months Ended | ||||||||
July 5, 2015 | June 29, 2014 | |||||||
(In thousands) | ||||||||
Proceeds from stock options exercised | $ | 359 | $ | 159 | ||||
Intrinsic value of stock options exercised | 421 | 299 |
Restricted Stock Awards
During the sixthree months ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, the Company granted restricted stock awards for 597,000242,000 and 490,000579,000 shares respectively, of common stock. Restricted stock, awardsrespectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a two to five yearthree-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, certain 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 grants was $9.1$1.0 million and $2.7$4.5 million for the sixthree months ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, 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 activityoutstanding as of July 5, 2015, andApril 3, 2016, as well as activity during the sixthree months then ended:
Shares | Weighted Average Grant Date Fair Value | Restricted Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 28, 2014 | 1,391,000 | $ | 17.12 | |||||||||||||
Outstanding at January 3, 2016 | 1,470,000 | $ | 17.92 | |||||||||||||
Granted | 597,000 | 16.43 | 242,000 | 17.16 | ||||||||||||
Vested | 290,500 | 13.99 | 974,000 | 18.53 | ||||||||||||
Forfeited or canceled | 199,500 | 13.58 | 160,000 | 16.71 | ||||||||||||
Outstanding at July 5, 2015 | 1,498,000 | $ | 17.92 | |||||||||||||
Outstanding at April 3, 2016 | 578,000 | $ | 16.91 |
As of July 5, 2015,April 3, 2016, the unrecognized total compensation cost related to unvested restricted stock was approximately $14.3$7.0 million. That cost is expected to be recognized by the end of 2019.
For
Performance Share Awards
In 2016, the sixCompany issued awards of performance shares to certain employees. These awards will vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s continued employment through the last date of the performance period, and will be settled in shares of our common stock or in cash at the Company's election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.
The following table summarizes the performance shares outstanding as of April 3, 2016, as well as the activity during the three months then ended:
Shares | ||||
Outstanding at January 3, 2016 | 0 | |||
Granted | 418,200 | |||
Exercised | 0 | |||
Forfeited or canceled | 0 | |||
Outstanding at April 3, 2016 | 418,200 |
The weighted average grant date fair value of the performance shares awarded in the first quarter of 2016 was $17.44 per share. Compensation expense related to the performance shares for the three months ended July 5, 2015, and June 29, 2014, the Company recognized tax benefits with regardApril 3, 2016 was $0.3 million. Unrecognized compensation expense related to restricted stockthese performance shares was approximately $6.6 million as of $3.5 million and $0.7 million, respectively.April 3, 2016.
NOTE 6 – EMPLOYEE BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for the three-month and six-month periods ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
Defined Benefit Retirement Plan (Europe) | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | April 3, 2016 | April 5, 2015 | ||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||||||||||||||||
Service cost | $ | 265 | $ | 188 | $ | 534 | $ | 363 | $ | 258 | $ | 269 | ||||||||||||
Interest cost | 2,111 | 2,849 | 4,204 | 5,364 | 1,720 | 2,093 | ||||||||||||||||||
Expected return on assets | (2,265 | ) | (3,195 | ) | (4,512 | ) | (6,020 | ) | (1,997 | ) | (2,247 | ) | ||||||||||||
Amortization of prior service costs | 9 | 13 | 17 | 25 | 27 | 8 | ||||||||||||||||||
Recognized net actuarial losses | 242 | 175 | 481 | 328 | ||||||||||||||||||||
Recognized net actuarial (gains)/losses | 184 | 239 | ||||||||||||||||||||||
Net periodic benefit cost | $ | 362 | $ | 30 | $ | 724 | $ | 60 | $ | 192 | $ | 362 |
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
Salary Continuation Plan (SCP) | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | April 3, 2016 | April 5, 2015 | ||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||||||||||||||||
Service cost | $ | 148 | $ | 125 | $ | 297 | $ | 250 | $ | 111 | $ | 148 | ||||||||||||
Interest cost | 278 | 268 | 556 | 535 | 317 | 278 | ||||||||||||||||||
Amortization of prior service cost | 0 | 6 | 0 | 12 | 0 | 0 | ||||||||||||||||||
Amortization of loss | 131 | 67 | 261 | 133 | ||||||||||||||||||||
Amortization of (gain)/loss | 202 | 131 | ||||||||||||||||||||||
Net periodic benefit cost | $ | 557 | $ | 466 | $ | 1,114 | $ | 930 | $ | 630 | $ | 557 |
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.
While the Company operates as one reporting segment for the reasons discussed, included below is selected information on our operating segments.
Summary information by operating segment follows:
AMERICAS | EUROPE | ASIA-PACIFIC | TOTAL | |||||||||||||
(in thousands) | ||||||||||||||||
Three Months Ended April 3, 2016: | ||||||||||||||||
�� | ||||||||||||||||
Net Sales | $ | 130,417 | $ | 57,958 | $ | 34,179 | $ | 222,554 | ||||||||
Depreciation and amortization | 3,657 | 1,274 | 2,216 | 7,147 | ||||||||||||
Total assets | 221,071 | 251,630 | 190,499 | 663,200 | ||||||||||||
Three Months Ended April 5, 2015: | ||||||||||||||||
Net Sales | $ | 139,347 | $ | 64,507 | $ | 33,050 | $ | 236,904 | ||||||||
Depreciation and amortization | 3,941 | 1,205 | 2,365 | 7,511 |
A reconciliation of the Company’s total operating segment depreciation and amortization, and assets to the corresponding consolidated amounts follows:
Three Months Ended | ||||||||
DEPRECIATION AND AMORTIZATION | April 3, 2016 | April 5, 2015 | ||||||
(In thousands) | ||||||||
Total segment depreciation and amortization | $ | 7,147 | $ | 7,511 | ||||
Corporate depreciation and amortization | 370 | 278 | ||||||
Reported depreciation and amortization | $ | 7,517 | $ | 7,789 |
ASSETS | April 3, 2016 | |||
(In thousands) | ||||
Total segment assets | $ | 663,200 | ||
Corporate assets and eliminations | 103,272 | |||
Reported total assets | $ | 766,472 |
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $3.3$1.1 million and $9.9$1.6 million for the six monthsthree month periods ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, respectively. Income tax payments amounted to $3.5$4.8 million and $4.0$1.7 million for the six monthsthree month periods ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, respectively.
NOTE 9 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2015,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 for this standard was initially effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, in August of 2015, the FASB delayed the effective date of the standard for one full year. While the Company is currently reviewing this new standard, it does not believe that the adoption of this standard will have a material impact on its financial condition or results of operations.
In January 2015, the 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 willdid not have any significant effectimpact on our ongoing financial reporting.condition or results of operations.
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,The adoption of this standard willdid not have any impact on our ongoing financial condition or results of operations.
In April 2015, the FASB issued an accounting standard to simplify the presentation of debt issuance costs. This accounting standard requires debt issuance costs to be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability. In August 2015, the FASB issued an accounting standard update that allows the presentation of debt issuance costs related to line-of-credit arrangements as an asset on the balance sheet under the simplified guidance, regardless of whether there are any outstanding borrowings on the related arrangements. The guidance in these accounting standards is to be applied retrospectively and is effective for interim and annual reporting but we do not believeperiods beginning after December 15, 2015. The Company’s debt issuance costs relate to its Syndicated Credit Facility and, as a result, these costs have been, and will continue to be, included as an asset on the balance sheet. Thus, the adoption of this standard did not have any impact on our financial statements.
In July 2015, the FASB issued an accounting standard to simplify the accounting for inventory. This standard requires all inventories to be measured at the lower of cost and net realizable value, except for inventory that is accounted for using the LIFO or the retail inventory method, which will be measured under existing accounting standards. The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this new standard and does not expect it to have a significant impact on its consolidated financial statements.
In November 2015, the FASB issued an accounting standard which requires deferred tax assets and liabilities, as well as any related valuation allowance, to be classified as noncurrent on the balance sheet. As a result, each jurisdiction will only have one net noncurrent deferred tax asset or liability. This standard does not change the existing requirement that only permits offsetting within a jurisdiction. The amendments in the standard may be applied either prospectively or retrospectively to all prior periods presented. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. As this standard impacts only presentation, the Company does not expect it to have any significant effect on ourits ongoing financial reporting.
In February 2016, the FASB issued a new accounting standard regarding leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of adoption of the new standard on our consolidated financial statements.
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 sixthree months of 2015,2016, the Company decreasedincreased its liability for unrecognized tax benefits by $0.1$0.3 million. As of July 5, 2015,April 3, 2016, the Company had accrued approximately $27.2$28.6 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 5, 2015April 3, 2016 reflects a reduction for $21.9$14.2 million of these unrecognized tax benefits.
NOTE 11 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During the first six monthsquarter of 2015,2016, 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$0.4 million related to the Company’s defined benefit 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 PLAN
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 | 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 1312 – REPURCHASE OF COMMON STOCK
In the fourth quarter of 2014, the Company announced a program to repurchase up to 500,000 shares of common stock per fiscal year, commencing with the 2014 fiscal year. During the first quarter of 2015,2016, the Company repurchased and retired 250,0004,300 shares of its common stock at a weighted average purchase price of $19.39$17.31 per share. DuringOn April 27, 2016, subsequent to the secondend of the first quarter, of 2015, the Company repurchased and retired 250,000 sharesannounced that it amended the share repurchase program to authorize the repurchase of up to $50 million of common stock at a weighted average purchase price of $22.41 per share.stock. The amended program has no specific expiration date.
ITEM 2.MANAGEMENT’S 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 28, 2014,January 3, 2016, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and six months ended, or as of, July 5, 2015,April 3, 2016, and the comparable periodsperiod of 20142015 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.
Forward-Looking Statements
This report contains statements which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014,January 3, 2016, 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.
General
During the quarter ended July 5, 2015,April 3, 2016, we had net sales of $263.6$222.6 million, compared with net sales of $260.6 million in the second quarter last year. During the first six months of fiscal year 2015, we had net sales of $500.5 million, compared with net sales of $479.6$236.9 million in the first six months ofquarter last year. Fluctuations in currency exchange rates had a negative impactsimpact of approximately $3.7 million on our sales and operating income infor the 2015 reported periods,2016 first quarter compared with the prior year periods.period. The following table presents the amounts (in U.S. dollars) by which the exchange rates for converting foreign currencies into U.S. dollars have negatively affected our net sales and operating income for the three months and six months ended July 5, 2015.
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 secondfirst quarter of 2015 we had net income of $21.7 million, or $0.33 per diluted share, compared with net income of $13.1 million, or $0.20 per diluted share, in the second quarter of 2014. During the six months ended July 5, 2015, we had net income of $34.0 million, or $0.51 per diluted share, compared with net income of $17.1 million, or $0.26 per diluted share, in the first six months of 2014.
The first six months of 2015 werewas comprised of 2714 weeks, while the first six monthsquarter of 2014 were2016 was comprised of 2613 weeks. (The additional week was in the first quarter of 2015.) This is a factor in certain of the comparisons discussed in this Item 2.
During the first quarter of 2016, we had net income of $12.9 million, or $0.20 per diluted share, compared with net income of $12.3 million, or $0.19 per diluted share, in the first quarter last year.
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 six-month periods ended JulyApril 3, 2016 and April 5, 2015, and June 29, 2014, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | April 3, 2016 | April 5, 2015 | |||||||||||||||||||
Net sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 61.6 | 65.3 | 62.7 | 65.6 | 61.1 | 63.9 | ||||||||||||||||||
Gross profit on sales | 38.4 | 34.7 | 37.3 | 34.4 | 38.9 | 36.1 | ||||||||||||||||||
Selling, general and administrative expenses | 25.8 | 25.3 | 26.4 | 26.8 | 29.5 | 27.0 | ||||||||||||||||||
Operating income | 12.6 | 9.3 | 10.9 | 7.6 | 9.4 | 9.0 | ||||||||||||||||||
Interest/Other expenses | 0.5 | 2.0 | 0.9 | 2.2 | ||||||||||||||||||||
Interest/Other expense | 0.9 | 1.3 | ||||||||||||||||||||||
Income before tax expense | 12.1 | 7.3 | 10.0 | 5.3 | 8.6 | 7.7 | ||||||||||||||||||
Income tax expense | 3.9 | 2.3 | 3.2 | 1.8 | 2.8 | 2.5 | ||||||||||||||||||
Net income | 8.2 | 5.0 | 6.8 | 3.6 | 5.8 | 5.2 |
Net Sales
Below we provide information regarding net sales, and analyze those results, for the three-month and six-month periods ended JulyApril 3, 2016, and April 5, 2015, and June 29, 2014, respectively.
Three Months Ended | Percentage | |||||||||||
July 5, 2015 | June 29, 2014 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 263,637 | $ | 260,624 | 1.2 | % |
Six Months Ended | Percentage | |||||||||||
July 5, 2015 | June 29, 2014 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 500,541 | $ | 479,616 | 4.4 | % |
Three Months Ended | Percentage | |||||||||||
April 3, 2016 | April 5, 2015 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 222,554 | $ | 236,904 | (6.1% | ) |
For the quarter ended July 5, 2015,April 3, 2016, net sales increased $3.0declined $14.4 million (1.2%(6.1%) versus the comparable period in 2014. As discussed above, the strengthening of the U.S. dollar versus certain foreign currencies (primarily, the Euro, Australian dollar and Canadian dollar)2015. Currency fluctuations had aan approximately $3.7 million (1.5%) negative impact of approximately $24 million on 2015 secondfirst quarter 2016 sales as compared to the second quarter of 2014. In the Americas, we increased 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 12% increase, as the rebound in this market continued and we gained market share in the U.S. Non-office segments were up 3% in the aggregate, with increases in the hospitality (up 55%) and education (up 10%) segments being partially offset by declines in the retail (down 12%), healthcare (down 9%) and residential (down 4%) segments. The decline in the residential segment was primarily in the multi-family sector, as our FLOR residential consumer business posted a 4% sales increase for the 2015 second quarter, primarily due to stronger web-based sales. In Europe, the sales increase in local currency was approximately 16%, due to the strength of the corporate office market segment (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 government 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 the corporate office market, primarily in Australia.
For the six months ended July 5, 2015, net sales increased $20.9 million (4.4%) versus the comparable period in 2014. The strengthening of the U.S. dollar versus certain foreign currencies had a negative impact of approximately $43 million on 2015 first half sales as compared to the first halfquarter of 2014.2015. On a geographic basis, we experienced sales increasesdeclines in the Americas (up 11%(down 6%) and Asia-Pacific (up 2%) versus the first six months of 2014. Due to the impact of currency fluctuations, Europe experienced a sales decline of 7% as reported(down 10% in U.S. dollars and 9% in local currency) but an increase of 3% in local currency of 14%.Asia-Pacific. In the Americas, the sales increase was almost evenly balanced between the corporate office and non-office segments, with corporate office sales increasing 12% and non-office segments increasing 10%. All non-office market segments showed an increase for the first six months of 2015, with the exception of the retail (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 Europe was mostlydecline occurred largely in the corporate office market which grew 21%. Non-office segments in Europe(down 5%), as many large customers, particularly in the aggregate were down 9%energy sector, deferred purchases in local currency, with the most significantlight of current market conditions. Also impacting this decline comingwas a deferral of retail projects for one of our largest customers in the sector to the second half of the year. Our residential FLOR business experienced a decline of 17%, as the Spring promotion was not as robust in the first quarter of 2016 as compared to 2015. The government market segment was down 31% due to a significant order in the continued austerity measuresfirst quarter of 2015 that was not expected to recur in place throughout2016, as well as delays in government spending surrounding the region.2016 election cycle. These decreases were offset slightly by essentially flat sales in our other market segments. In Asia-Pacific,Europe, the sales growth of 2% camedecline was primarily as a result of the significant uncertainty in the region with several geopolitical and economic disruptions underway, including the pending vote on the exit of the United Kingdom from the European Union, the terror attacks in the region, the refugee crisis and slowdowns in the financial services and energy sectors. All of these factors led to significant uncertainty in Europe and impacted buying decisions across all market segments, with the corporate office market.market (down 10%) taking the brunt of the negative impact. Our non-corporate office market segments in the region were down approximately 5% for the quarter as compared to last year, with increases in retail (up 32%) and hospitality (up 22%) market segments offset by declines in government (down 19%) and education (down 23%) market segments. In Asia-Pacific, the increase was primarily attributable to sales improvement in Asia, specifically Southeast Asia (up 9%) and India (up over 50%). The increase in the region was primarily due to increased new construction and refurbishment projects in Australia. With the exception of the hospitalitycorporate office segment (up 17%11%), allas non-office segments were down 12% in Asia-Pacific showed declines for the period,aggregate with retail (down 46%) and hospitality (down 37%) having the most significant beingdeclines. In Australia, we saw an increase of 5% in retail (down 35%) and healthcare (down 24%).local currency, as the favorable economic trends continue in that region, but this was effectively nullified by currency translation impacts. Sales in China were down approximately 7% for the first three months of 2016 as compared to the corresponding period of 2015.
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 six-month periods ended JulyApril 3, 2016, and April 5, 2015, and June 29, 2014, respectively:
Three Months Ended | Percentage | |||||||||||
Cost and Expenses | July 5, 2015 | June 29, 2014 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 162,385 | $ | 170,239 | (4.6 | %) | ||||||
Selling, general and administrative expenses | 68,033 | 66,042 | 3.0 | % | ||||||||
Total | $ | 230,418 | $ | 236,281 | (2.5 | %) |
Six Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||||||||
Cost and Expenses | July 5, 2015 | June 29, 2014 | Change | April 3, 2016 | April 5, 2015 | Change | ||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Cost of sales | $ | 313,857 | $ | 314,545 | (0.2 | %) | $ | 135,922 | $ | 151,472 | (10.3% | ) | ||||||||||||
Selling, general and administrative expenses | 132,065 | 128,701 | 2.6 | % | 65,605 | 64,032 | 2.4 | % | ||||||||||||||||
Total | $ | 445,922 | $ | 443,246 | 0.6 | % | $ | 201,527 | $ | 215,504 | (6.5% | ) |
For the three monthsquarter ended July 5, 2015,April 3, 2016, our cost of sales decreased $7.9$15.6 million (4.6%(10.3%) versusas compared to the comparable periodfirst quarter of 2015. Fluctuations in 2014. Currency fluctuation hadcurrency exchange rates did not have a favorablesignificant impact (approximately 1%) on the decline. Sales were down 6.1% for the quarter, which explains the majority of the decline in cost of sales; if currency rates had remainedsales. The remainder of the samedecrease was due to the following factors: (1) lower raw materials costs for the second quarterfirst three months of 2016 as compared to the corresponding period of 2015, versus thatas our per-unit input costs were down 6-8% during the quarter, primarily as a result of lower petroleum and related feedstock costs; (2) better material usage and production efficiencies as we continue to implement lean manufacturing practices; (3) higher average selling prices, particularly in the second quarterAmericas and Asia; and (4) introduction of 2014, our cost of sales would have been approximately $13 million higher. Asmargin accretive products such as additional skinny plank designs. These initiatives led to significant production efficiencies and gross margin improvements, as despite a percentage of sales,12% decline in units produced 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 and 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.
For the six months ended July 5, 2015, our cost of sales decreased $0.7 million (0.2%) versus the comparable period of 2014. Currency fluctuation had a favorable impact on cost of sales; if currency rates had remained the same for the first half of 2015 versus that of the first half of 2014, our cost of sales would have been approximately $23 million higher. As a percentage of sales, our costs of sales for the first six months of 2015 experienced a significant decline to 62.7%, as compared to 65.6% for the comparable period of 2014. 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 activities in 2014. The gross margin improvements accelerated during 2015, and as such, the improvement is more significant in the three months ended July 5, 2015 versus the six month period ended July 5, 2015.
For the three month period ended July 5, 2015, our selling, general and administrative expenses increased $2.0 million (3.0%) versus the comparable period in 2015. Currency fluctuation had a favorable impact on selling, general and administrative expense; if currency rates had remained the same for the second quarter of 2015 versus that of the second quarter of 2014, our selling, general and administrative expenses would have been approximately $5 million higher. The largest driver of the increase in selling, general and administrative expenses versus the 2014 period is approximately $5.2 million of higher 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 lower selling and marketing expenses, down $1.4 million and $1.7 million, respectively. These declines, however, were largely due to the currency translation effects discussed above, as in local currencies these expenditures remained relatively consistent year over year. Due to the increased administrative expenses discussed above, our selling, general and administrative expenses increased to 25.8%61.1% of sales for the three months ended July 5, 2015, versus 25.3% of sales inApril 3, 2016, as compared to 63.9% for the corresponding period in 2014. On a 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 periodquarter ended July 5, 2015,April 3, 2016, our selling, general and administrative (“SG&A”) expenses increased $3.4$1.6 million (2.6%(2.4%) versus the comparable period in 2014. Currency fluctuation2015. Fluctuations in currency exchange rates had a positiveslight (approximately 1%) negative impact on selling, general and administrative expenses; if currency rates had remained the sameour SG&A expenses for the first six monthsquarter of 2015 versus2016. The change in these expenses was due to (1) higher marketing expense of approximately $2.8 million for budgeted strategic branding and market development campaigns across the global organization in order to continue to penetrate additional markets, particularly in Europe, (2) higher administrative costs of approximately $1.3 million, primarily at the corporate level for additional senior level personnel as we transition to a more globally integrated structure focusing on functional area alignment, and (3) higher selling costs of approximately $0.5 million associated with personnel additions in key markets and global selling initiatives. These increases were somewhat offset by $3.2 million less of performance-based share-based compensation amounts in the first six monthsquarter of 2014, our selling, general and administrative expenses2016 versus 2015, as in the prior year period it was deemed probable that shares would have been approximately $9 million higher. The increase was largely duevest based on 2015 performance. 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 betterthese budgeted spending initiatives, combined with the decline 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 downsales discussed above, as a percentage of sales versus the first six months of 2014, dueSG&A expenses increased 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 expenses29.5% for the first six monthsquarter of 2015 declined2016 as compared to 26.4%, versus 26.8% in27.0% for the first six monthscorresponding period of 2014.2015.
Interest Expense
For the three monththree-month period ended July 5, 2015, ourApril 3, 2016, interest expense decreased $3.6by $0.4 million to $1.8$1.5 million, from $5.4versus $1.9 million in the second quarter of 2014. For the six monthfor three-month period ended JulyApril 5, 2015, our interest expense decreased $7.2 million to $3.7 million, from $10.9 million in the comparable period last year.2015. The reason for the decreasesdecrease was the debt refinancing activities we completed in the fourth quarter of 2014, in which we redeemed all of our $247.5 million oflower daily average outstanding 7.625% Senior Notes and replaced them with borrowings under our Syndicated Credit Facility. This facility is comprisedFacility during the first quarter of a term loan2016 as well as a multi-currency revolving debt facility and incurs interest at a significantly lower rate thancompared to the 7.625% Senior Notes.first quarter of 2015.
Liquidity and Capital Resources
General
At July 5, 2015,April 3, 2016, we had $71.8$83.2 million in cash. At that date, we had $200.0$195.0 million in term loan borrowings, $59.1$37.6 million of revolving loan borrowings and $3.1 million in letters of credit outstanding under theour Syndicated Credit Facility. As of July 5, 2015,April 3, 2016, we could have incurred $187.8$209.3 million of additional borrowings under our Syndicated Credit Facility.InFacility. In addition, we could have incurred an additional $19.0$14.8 million of borrowings under our other lines of credit facilities in place at other non-U.S. subsidiaries.
Analysis of Cash Flows
Our primary sourcesources of cash during the sixthree months ended July 5, 2015 was $15.2April 3, 2016 were (1) $17.7 million due toof revolving loan borrowings under our Syndicated Credit Facility, and (2) $13.2 million from a reduction in accounts receivable during the quarter. Most of accounts receivable.the revolving loan borrowings were made by our Australian subsidiary in Australian dollars and then converted into U.S. dollars, to take advantage of a strong Australian dollar and lock in a favorable exchange rate into U.S. dollars, which are used by that business for certain raw material purchases. Our primary uses of cash during the six month then endedperiod were (1) $27.2$31.7 million from a reduction of accruals and accounts payable outstanding at the end of 2015, particularly in the areas of employee payroll, incentives and related items, (2) $9.4 million for increasedan increase in inventory, levels, (2) $12.1(3) $4.5 million for capital expenditures, (3) $10.5and (4) $3.3 million for stock repurchases, and (4) $5.3 million for dividend payments.the payment of dividends on our common stock.
ITEM 33.QUANTITATIVE. 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 28, 2014,January 3, 2016, under Item 7A of that Form 10-K. Our discussion here focuses on the periodquarter ended July 5, 2015,April 3, 2016, 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 July 5, 2015,April 3, 2016, we recognized a $20.2$9.4 million decreaseincrease in our foreign currency translation adjustment account compared to December 28, 2014,January 3, 2016, primarily because of the strengthening of the U.S.Euro and Australian dollar against certain foreign currencies, particularly the Euro and AustralianU.S. 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.
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 that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount 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 year ended December 28, 2014.January 3, 2016.
As of July 5, 2015,April 3, 2016, 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$10.2 million or an increase in the fair value of our financial instruments of $8.3$12.4 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.CONTROLSAND 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 PresidentChairman 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 PresidentChairman 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.LEGALPROCEEDINGS
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.RISKFACTORS
There are no material changes in risk factors in the secondfirst quarter of 2015.2016. 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 28, 2014.January 3, 2016.
ITEM 2.UNREGISTEREDSALES 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 theour first quarter ended July 5, 2015:April 3, 2016:
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 |
Period(1) | Total Number of Shares Purchased | Average Price Paid 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) | ||||||||||||
January 4-31, 2016(3) | 3,671 | $ | 15.86 | 0 | 350,000 | |||||||||||
February 1-29, 2016(3) | 319,679 | $ | 16.89 | 0 | 350,000 | |||||||||||
March 1-31, 2016 | 4,300 | $ | 17.31 | 4,300 | 345,700 | |||||||||||
April 1-3, 2016 | 0 | N/A | 0 | 345,700 | ||||||||||||
Total | 327,650 | $ | 16.88 | 4,300 | 345,700 |
(1)The monthly periods identified above correspond to the Company’s fiscal secondfirst quarter of 2015,2016, which commenced April 6, 2015January 4, 2016 and ended July 5, 2015.April 3, 2016.
(2)(2) In 2014, the Company announced a program to repurchase up to 500,000 shares of common stock per fiscal year, commencing with the 2014 fiscal year. In November 2015, the Board of Directors amended the program to provide that the 500,000 shares of common stock previously approved for repurchases for the 2016 fiscal year may be repurchased by the Company, in management’s discretion, during the period commencing November 19, 2015 and ending at the conclusion of fiscal year 2016. Following that amendment, 150,000 shares previously approved for repurchases for the 2016 fiscal year were repurchased in 2015.
(3)(3) Includes certainComprised of 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.DEFAULTSUPONSENIOR SECURITIES
None
ITEM 4.MINESAFETYDISCLOSURES
Not applicableapplicable.
ITEM 5.OTHERINFORMATION
None
ITEM 6.EXHIBITS
The following exhibits are filed with this report:
EXHIBIT NUMBER |
DESCRIPTION OF EXHIBIT | ||
|
| ||
|
| ||
|
| ||
31.1 | Section 302 Certification of Chief Executive Officer. | ||
31.2 | Section 302 Certification of Chief Financial Officer. | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. | ||
101.INS | XBRL Instance | ||
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 HEREWITH
EXHIBIT NUMBER |
DESCRIPTION OF EXHIBIT | |||
|
| |||
|
| |||
|
| |||
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 |
-21-
-20-