UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For Quarterly Period Ended October 4, 20152, 2016

Commission File Number 001-33994

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

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):

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 November 6, 2015:4, 2016:

INTERFACE, INC.

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following tables present net income (loss) that was attributable to participating securities:

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

For the three-month period ended September 28, 2014,all periods presented, there were no stock options have been included inor participating securities excluded from the calculationcomputation 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 stock options have been included in the calculation of diluted EPSEPS.

As of October 4, 2015,2, 2016, the unrecognized total compensation cost related to unvested restricted stock was approximately $12.1$5.6 million. That cost is expected to be recognized by the end of 2019.

For

Performance Share Awards

In 2016, the Company issued awards of performance shares to certain employees. These awards 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 October 2, 2016, as well as the activity during the nine months then ended:

Compensation expense related to the performance shares for the nine months ended October 4, 2015, and September 28, 2014, the Company recognized tax benefits with regard2, 2016 was $1.0 million. Unrecognized compensation expense related to restricted stockthese performance shares was approximately $6.5 million as of $4.0 million and $0.6 million, respectively.October 2, 2016. No performance shares were granted or outstanding during 2015.

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 28, 2014,January 3, 2016, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, October 4, 2015,2, 2016, and the comparable periods 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 October 4, 2015,2, 2016, we had net sales of $254.7$248.3 million, compared with net sales of $252.2$254.7 million in the third quarter last year. During the first nine months of fiscal year 2015,2016, we had net sales of $755.2$719.1 million, compared with net sales of $731.8$755.2 million in the first nine months of last year. Fluctuations in currency exchange rates had negative impacts on our sales and operating income in the 20152016 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 negatively affected our net sales and operating income for the three months and nine months ended October 4, 2015.2, 2016. The impacts of changes in foreign currency presented in the tables are calculated based on applying the prior year period's average foreign currency exchange rates to the current year period.

InDuring the third quarter of 2014,2016, 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 quarterhad net income of 2014 in an amount of $12.4 million. The charge was comprised of severance expenses of $9.7$15.9 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.

or $0.25 per share. During the third quarter of 2015, we had net income of $20.1 million, or $0.31 per share. During the third quarter of 2014, including the restructuring and asset impairment charge discussed above,nine months ended October 2, 2016, we had a net lossincome of $0.4$49.4 million, or $0.01$0.76 per share. During the nine months ended October 4, 2015, we had net income of $54.2 million, or $0.82 per share. During the nine months ended September 28, 2014, including the restructuring and asset impairment charge discussed above, we had net income of $16.7 million, or $0.25 per share.

The first nine months of 2016 were comprised of 39 weeks, while the first nine months of 2015 were comprised of 40 weeks, while the first nine months of 2014 were comprised of 39 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.

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-month periods ended October 2, 2016, and October 4, 2015, and September 28, 2014, respectively:

Net Sales

Below we provide information regarding net sales, and analyze those results, for the three-month and nine-month periods ended October 2, 2016, and October 4, 2015, and September 28, 2014, respectively.

For the quarter ended October 4, 2015,2, 2016, net sales increased $2.5decreased $6.3 million (1.0%(2.5%) versus the comparable period in 2014.2015. As discussednoted above, on a consolidated basis, currency fluctuations did not have a significant impact on the strengthening ofcomparison, as weakness in the U.S. dollar versus certain foreign currencies (primarily,British Pound was offset by a recovery in the Euro, Australian dollarDollar and Canadian dollar) had a negative impact of approximately $22 million on 2015 third quarter sales as compared with the third quarter of 2014.Euro. On a geographic basis, we increasedexperienced sales 4%declines in the Americas (down 3.4%) and experienced flatEurope (5.7%), while sales in our Asia-Pacific region increased 7.4%. In the Americas, the decrease in sales was almost entirely attributable to a decline in the corporate office market (down 10%), and was a result of customer deferrals of projects in this segment. This decrease was offset partially by a 1% increase in non-office segments, with increases in the hospitality (up 19%) and healthcare (up 13%) market segments negated by a decrease in the government segment (down 16%). Our direct-to-consumer FLOR business experienced a 1% sales increase for the third quarter versus the comparable period in 2015. In Europe, (as reportedthe economic and political uncertainty surrounding the Brexit referendum was the primary driver of the sales decline, as the decrease was most severe in U.S. dollars)the United Kingdom and was partially offset by increases in Central and Southern Europe, with Germany leading the way in growth. On a segment basis, the European sales decline was most significant in the corporate office market with a 3% decline; however, with the exception of the hospitality market segment (up 33%), all other market segments were down for the quarter with education (down 20%) being the most significant. The sales increases in Asia-Pacific were primarily experienced in Australia (up 10%), China (up 21%) and India (up 5%), offset by a decline of 9% (as reported13% in U.S. dollars)Southeast Asia, Japan and Korea. On a segment basis, the increase in Asia-Pacific sales for the quarter was due to negative currency impacts. In the Americas, our salesa 11% increase was primarily in the corporate office segment, (up 10%), as our growth continued to outpace the market, alongside the benefits of our enhanced presence in the hospitality segment (up 21%). These increases were partially offset by sales declinesa decline of 4% in the education (down 7%) and government (down 8%) segments. Our FLOR residential consumer business experienced a 3% sales increase for the quarter, due primarily to stronger web-based sales. In Europe, the impact of the strengthening U.S. dollar was substantial, as sales in local currency were up 20% versus the third quarter last year. The increase in local currency was driven by both the corporate office segment (up 20%) and non-office segments (up 19% in the aggregate), with the education (up 36%), retail (up 36%), and government (up 9%) segments leading the non-office increases. Small declines in local currency in the hospitality (down 11%) and residential (down 23%) segments mitigated the overall increase in Europe for the quarter. In Asia-Pacific, sales in local currency were up 5% for the third quarter compared with the prior year period, with strong gains in Australia (up 20%) partially offset by declines in China and India. The sales increase in local currency in Australia came across both corporate office and non-corporate office market segments.

For the nine months ended October 4, 2015,2, 2016, net sales increased $23.4decreased 36.1 million (3.2%(4.8%) versus the comparable period in 2014. The strengthening of the U.S. dollar versus certain foreign currencies2015. Fluctuations in currency had a negativesmall impact of approximately $64 million on sales inthe comparison; if currency rates had remained consistent from the first nine months of 2015, versus the comparable prior year period.decease would have been approximately $8.1 million less. On a geographic basis, we increasedexperienced sales 9%declines in the Americas (down 5.2%) and Europe (down 8%), partially offset by declinesan increase of 5%2.6% in Europe (as reported in U.S. dollars) and 2% inour Asia-Pacific (as reported in U.S. dollars) due to currency impacts. The sales increase inbusiness. In the Americas, the sales decline was primarilymost significant in the corporate office segment (up 11%) alongside strong improvements in the hospitality (up 53%) and education (up 5%) segments. The increase in education sales in the Americas occurred during the first six months of 2015, as we experiencedthe year, when sales were down 6% year over year. The decline on a third quarter decline in the segment year-over-year. In Europe,year-to-date basis was due to lower sales in local currency increased 16%, primarily driven by the corporate office market (down 6%). Other than the hospitality (up 15%) and healthcare (up 9%) market segments, all other market segments experienced a decline for the first nine months of 2016 as compared to the first nine months of 2015. In Europe, the decline was again due primarily to uncertainty leading up to and after the Brexit vote, as well as other geopolitical and other socio-economic issues. The decline in Europe was most significant in the corporate office market segment (down 8%) as well as the education market segment (down 30%). These declines were offset by smaller increases in the retail (up 12%) and hospitality (up 26%) market segments. The sales increase in Asia-Pacific was due to a strong corporate office market (up 9%) and government market segment (up 21%over 80%). Local currency sales in non-corporate office segments in the aggregateThese increases were essentially flat, with a 35% increase in the education segment beingpartially offset by a 26% decreasedecreases in the government segment – although we did experience an increaseother non-office markets in the government segment in the 2015 third quarter, perhaps suggesting that the negative impacts of government austerity programs in the region are being reduced. In Asia-Pacific, the sales decrease in U.S. dollars was experienced across non-office market segments, with the retail (down 46%39%), healthcareeducation (down 32%16%) and governmenthospitality (down 28%31%) market segments having the largest percentage declines, tempered by a 4% increase in the corporate office segment. Negative currency impacts in the Asia-Pacific region also were substantial, as sales in local currency were up 9% versus the first nine months last year. The greatest currency impact was in Australia, where sales in local currency were up 21%, but in U.S. dollars were up less than 1%.most significant negative impact.

Cost and Expenses

The following tables present, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-month and nine-month periods ended October 2, 2016, and October 4, 2015, and September 28, 2014, respectively:

For the three months ended October 4, 2015,2, 2016, our cost of sales decreased $11.9$1.3 million (7.0%(0.8%) versus the comparable period in 2014.2015. Fluctuations in currency exchange rates haddid not have a favorablesignificant impact on the comparison between periods. Despite the decrease in absolute dollars, as a percentage of approximately $8 million onsales, our cost of sales for the quarter compared with the prior year period. As a percentage of sales, gross profit expanded across all of our operating regions, with Americas showing the most improvement. The reduction in cost of sales was primarily a function of (1) lower raw materials costs (down approximately 6-8%) and usage compared with the third quarter of 2014, (2) higher production costs in the third quarter last year due to disruptions in yarn supply that were not experienced in the current period, (3) a higher degree of manufacturing complexity related to new product introductionsincreased in the third quarter of 2014 that led2016 to higher manufacturing costs at that time (and have since been rectified)62.6%, (4) the benefits of our restructuring initiatives taken duringversus 61.5% the third quarter of 2014,2015. This percentage increase was attributable entirely to our Americas business unit, as both our European and (5) increased absorptionAsia-Pacific regions experienced decreases in cost of fixed manufacturing costs due to higher production volumes in the current period. As a result of these factors,sales as a percentage of net sales cost of sales decreased to 61.5% for the three months ended October 4, 2015, compared with 66.9% in the third quarter of 2014.2016 compared to the corresponding period in 2015. The reasons for the increase in cost of sales as a percentage of sales in the Americas were (1) a transition to a new centralized warehouse and distribution center in the region, which led to additional costs during the transition period, and (2) lower manufacturing volume and, as a result, less absorption of fixed costs. We expect these additional costs related to the warehouse centralization efforts to subside by the end of the fourth quarter of 2016. The decreases in cost of sales as a percentage of sales in Europe and Asia-Pacific are a direct result of better manufacturing efficiencies and lower raw material costs in these regions.

For the nine months ended October 4, 2015,2, 2016, our cost of sales decreased $12.6$30.1 million (2.6%(6.4%) versus the comparablecorresponding period in 2014.2015. Fluctuations in currency exchange rates haddid not have a favorablesignificant impact of approximately $30 million on our cost of sales for the comparison between periods. The first nine months of 2015 versus2016 showed improvement as a percentage of sales due to lower raw materials costs, higher average selling prices and a mix shift towards higher margin accretive products, such as skinny planks. These decreases to cost of sales were partially offset, however, by the prior year period. Asfactors discussed above in the Americas for the third quarter of 2016 with regard to additional costs associated with our transition to centralized warehouse and distribution center and lower absorption of fixed costs on lower production volume. In total, as a percentage of sales, our cost of sales decreaseddeclined to 61.2% for the nine-month period ended October 2, 2016, versus 62.3% for the nine months ended October 4, 2015 compared with 66.0% forcorresponding period in 2015. As discussed above, we expect the comparable period of 2014. The primary reasons for this decline were (1) lower raw materialsadditional warehouse centralization costs and usage (down approximately 6-8%) compared with the first nine months of 2014, (2) continued stabilization of our supply chain and manufacturing footprint in the Asia-Pacific region following the January 2014 start-up of our new carpet tile plant in Australia, (3) increased absorption of fixed manufacturing costs associated with higher production volumes, especially in the Americas and Europe regions, (4)to subside by the cost savings associated with our 2014 restructuring actions, and (5) the resolutionend of yarn supply and production issues during the fourth quarter of 2014 and early 2015 that were particularly acute in the third quarter of 2014.2016.

For the three months ended October 4, 2015,2, 2016, our selling, general and administrative expenses increased $2.7$0.5 million (4.2%(0.7%) versus the comparable period in 2014. Currency fluctuation had2015. Fluctuations in currency exchange rates did not have a favorablesignificant impact on the comparison between periods. The increase in selling, general and administrative expenses; if currency rates had remained the sameexpenses was due entirely to higher marketing expense for the third quarter of 2015 versus2016 of approximately $1.0 million. These additional expenses were primarily related to the rollout of our modular resilient flooring (luxury vinyl tile) products, which are hard surface flooring products that complement our modular carpet products, as well as additional marketing expenses related to our core modular carpet offerings. These increases were offset by lower selling costs of the third quarter of 2014, our selling, general and administrative expenses would have been approximately $8.5$0.5 million higher than the third quarter last year. The majority of this currency neutral increase is additional incentive compensation (approximately $5.0 million) and performance based share-based compensation ($1.5 million) because our projected performance is better in 2015 versus 2014. The largest component of the remainder ($1.0 million) is higher selling expenses due to lower sales activity for the improvedquarter. Due to the slight overall increase in expenses discussed above, as well as lower sales levels, in the third quarter of 2015 versus the prior year period, particularly in the Americas. As a result, as a percentage of sales our selling, general and administrative expenses increased to 27.0% for the three months ended October 2, 2016, compared to 26.2% infor the thirdthree months ended October 4, 2015. Our selling, general and administrative expenses did have a small sequential decline as a percentage of sales from the second quarter of 2015, versus 25.4% in the third quarter2016, when they were 27.1% of 2014.sales.