SECURITIES AND EXCHANGE COMMISSION
☑
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☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended October 1, 2017
July 5, 2020 Commission File Number 001-33994
001-33994 (Exact name of registrant as specified in its charter)
GEORGIA
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Georgia | | 58-1451243 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer |
incorporation or organization)
| | Identification No.) |
2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
1280 West Peachtree Street, Atlanta, Georgia30309
(Address of principal executive offices and zip code)
(770)
(
Registrant’sRegistrant’s telephone number, including area code)Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.10 Par Value Per Share | TILE | Nasdaq Global Select Market |
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 ☑þ 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 ☑þ No ☐¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): |
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| Large accelerated filer☑ | þ | Accelerated filer☐ | ¨ | Non-accelerated filer☐Emerging Growth
Company ☐
| ¨ | Smaller reporting company | ☐ | |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
☐ No ☑þ Shares outstanding of each of the
registrant’sregistrant’s classes of common stock at November 3, 2017:August 6, 2020: |
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Class | Number of Shares |
Common Stock, $0.10 par value per share | 58,547,753 |
INTERFACE, INC.
INDEX
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| Class
| PAGE |
| Number of Shares
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| Common Stock, $.10 par value per share
| | 60,251,423
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INTERFACE, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
| | OCTOBER 1, 2017 | | | JANUARY 1, 2017 | |
| | (UNAUDITED) | | | | | |
ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash and Cash Equivalents | | $ | 78,108 | | | $ | 165,672 | |
Accounts Receivable, net | | | 133,869 | | | | 126,004 | |
Inventories | | | 186,126 | | | | 156,083 | |
Prepaid Expenses and Other Current Assets | | | 24,358 | | | | 23,123 | |
TOTAL CURRENT ASSETS | | | 422,461 | | | | 470,882 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT, less accumulated depreciation | | | 212,332 | | | | 204,508 | |
DEFERRED TAX ASSETS | | | 30,805 | | | | 33,117 | |
GOODWILL | | | 68,029 | | | | 61,218 | |
OTHER ASSETS | | | 68,772 | | | | 65,714 | |
TOTAL ASSETS | | $ | 802,399 | | | $ | 835,439 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts Payable | | $ | 52,313 | | | $ | 45,380 | |
Current Portion of Long-Term Debt | | | 15,000 | | | | 15,000 | |
Accrued Expenses | | | 101,346 | | | | 98,703 | |
TOTAL CURRENT LIABILITIES | | | 168,659 | | | | 159,083 | |
| | | | | | | | |
LONG-TERM DEBT | | | 219,506 | | | | 255,347 | |
DEFERRED INCOME TAXES | | | 5,819 | | | | 4,728 | |
OTHER | | | 76,223 | | | | 75,552 | |
TOTAL LIABILITIES | | | 470,207 | | | | 494,710 | |
| | | | | | | | |
Commitments and Contingencies | | | | | | | | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Preferred Stock | | | 0 | | | | 0 | |
Common Stock | | | 6,025 | | | | 6,424 | |
Additional Paid-In Capital | | | 282,424 | | | | 359,451 | |
Retained Earnings | | | 183,423 | | | | 140,238 | |
Accumulated Other Comprehensive Income (Loss) – Foreign Currency Translation Adjustment | | | (79,844 | ) | | | (110,522 | ) |
Accumulated Other Comprehensive Income (Loss) – Pension Liability | | | (59,836 | ) | | | (54,862 | ) |
TOTAL SHAREHOLDERS’ EQUITY | | | 332,192 | | | | 340,729 | |
| | $ | 802,399 | | | $ | 835,439 | |
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| | | | | | | |
| JULY 5, 2020 | | DECEMBER 29, 2019 |
| (UNAUDITED) | | |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 91,844 |
| | $ | 81,301 |
|
Accounts receivable, net | 139,410 |
| | 177,482 |
|
Inventories, net | 263,721 |
| | 253,584 |
|
Prepaid expenses and other current assets | 38,411 |
| | 35,768 |
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Total current assets | 533,386 |
| | 548,135 |
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Property and equipment, net | 338,177 |
| | 324,585 |
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Operating lease right-of-use assets | 100,091 |
| | 107,044 |
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Deferred tax asset | 23,350 |
| | 19,683 |
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Goodwill and intangibles, net | 226,828 |
| | 346,474 |
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Other assets | 79,136 |
| | 77,128 |
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| | | |
Total assets | $ | 1,300,968 |
| | $ | 1,423,049 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 64,894 |
| | $ | 75,687 |
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Accrued expenses | 122,505 |
| | 140,652 |
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Current portion of operating lease liabilities | 14,124 |
| | 15,914 |
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Current portion of long-term debt | 31,061 |
| | 31,022 |
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Total current liabilities | 232,584 |
| | 263,275 |
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Long-term debt | 589,130 |
| | 565,178 |
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Operating lease liabilities | 86,716 |
| | 91,829 |
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Deferred income taxes | 32,341 |
| | 35,550 |
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Other long-term liabilities | 102,001 |
| | 99,015 |
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Total liabilities | 1,042,772 |
| | 1,054,847 |
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Commitments and contingencies |
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Shareholders’ equity | | | |
Preferred stock | — |
| | — |
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Common stock | 5,854 |
| | 5,842 |
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Additional paid-in capital | 246,323 |
| | 250,306 |
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Retained earnings | 184,206 |
| | 286,056 |
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Accumulated other comprehensive loss – foreign currency translation | (112,224 | ) | | (113,139 | ) |
Accumulated other comprehensive loss – cash flow hedge | (10,654 | ) | | (4,163 | ) |
Accumulated other comprehensive loss – pension liability | (55,309 | ) | | (56,700 | ) |
| | | |
Total shareholders’ equity | 258,196 |
| | 368,202 |
|
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Total liabilities and shareholders’ equity | $ | 1,300,968 |
| | $ | 1,423,049 |
|
See accompanying notes to consolidated condensed financial statements.
-3-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | |
| | | | | | | | | | | | | | | | |
| | OCTOBER 1, 2017 | | | OCTOBER 2, 2016 | | | OCTOBER 1, 2017 | | | OCTOBER 2, 2016 | |
| | | | | | | | | | | | | | | | |
NET SALES | | $ | 257,431 | | | $ | 248,349 | | | $ | 730,233 | | | $ | 719,110 | |
Cost of Sales | | | 158,887 | | | | 155,431 | | | | 445,990 | | | | 440,434 | |
| | | | | | | | | | | | | | | | |
GROSS PROFIT ON SALES | | | 98,544 | | | | 92,918 | | | | 284,243 | | | | 278,676 | |
Selling, General and Administrative Expenses | | | 67,633 | | | | 67,175 | | | | 197,660 | | | | 200,108 | |
Restructuring and Asset Impairment Charges | | | 0 | | | | 0 | | | | 7,299 | | | | 0 | |
OPERATING INCOME | | | 30,911 | | | | 25,743 | | | | 79,284 | | | | 78,568 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 1,851 | | | | 1,654 | | | | 5,150 | | | | 4,763 | |
Other Expense | | | 651 | | | | 739 | | | | 1,816 | | | | 1,072 | |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | | 28,409 | | | | 23,350 | | | | 72,318 | | | | 72,733 | |
Income Tax Expense | | | 8,970 | | | | 7,446 | | | | 23,394 | | | | 23,278 | |
| | | | | | | | | | | | | | | | |
NET INCOME | | $ | 19,439 | | | $ | 15,904 | | | $ | 48,924 | | | $ | 49,455 | |
| | | | | | | | | | | | | | | | |
Earnings Per Share – Basic | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
| | | | | | | | | | | | | | | | |
Earnings Per Share – Diluted | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
| | | | | | | | | | | | | | | | |
Common Shares Outstanding – Basic | | | 61,018 | | | | 64,805 | | | | 62,630 | | | | 65,285 | |
Common Shares Outstanding – Diluted | | | 61,060 | | | | 64,842 | | | | 62,672 | | | | 65,322 | |
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| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JULY 5, 2020 | | JUNE 30, 2019 | | JULY 5, 2020 | | JUNE 30, 2019 |
NET SALES | $ | 259,504 |
| | $ | 357,507 |
| | $ | 547,673 |
| | $ | 655,195 |
|
Cost of Sales | 162,210 |
| | 216,777 |
| | 336,068 |
| | 397,943 |
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GROSS PROFIT ON SALES | 97,294 |
| | 140,730 |
| | 211,605 |
| | 257,252 |
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Selling, General and Administrative Expenses | 80,058 |
| | 97,838 |
| | 167,741 |
| | 197,973 |
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Restructuring Charges | (157 | ) | | — |
| | (1,275 | ) | | — |
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Goodwill and Intangible Asset Impairment Charge | — |
| | — |
| | 121,258 |
| | — |
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OPERATING INCOME (LOSS) | 17,393 |
| | 42,892 |
| | (76,119 | ) | | 59,279 |
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Interest Expense | 4,965 |
| | 6,810 |
| | 10,595 |
| | 13,603 |
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Other Expense | 5,139 |
| | 304 |
| | 6,630 |
| | 1,318 |
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INCOME (LOSS) BEFORE INCOME TAX EXPENSE | 7,289 |
| | 35,778 |
| | (93,344 | ) | | 44,358 |
|
Income Tax Expense | 2,580 |
| | 6,279 |
| | 4,114 |
| | 7,800 |
|
| | | | | | | |
NET INCOME (LOSS) | $ | 4,709 |
| | $ | 29,499 |
| | $ | (97,458 | ) | | $ | 36,558 |
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Earnings (Loss) Per Share – Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
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Earnings (Loss) Per Share – Diluted | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
|
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Common Shares Outstanding – Basic | 58,484 |
| | 59,285 |
| | 58,466 |
| | 59,459 |
|
Common Shares Outstanding – Diluted | 58,484 |
| | 59,291 |
| | 58,466 |
| | 59,465 |
|
See accompanying notes to consolidated condensed financial statements.
-4-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME(IN THOUSANDS)
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | |
| | | | | | | | | | | | | | | | |
| | OCTOBER 1, 2017 | | | OCTOBER 2, 2016 | | | OCTOBER 1, 2017 | | | OCTOBER 2, 2016 | |
| | | | | | | | | | | | | | | | |
Net Income | | $ | 19,439 | | | $ | 15,904 | | | $ | 48,924 | | | $ | 49,455 | |
Other Comprehensive Income (Loss), Foreign | | | | | | | | | | | | | | | | |
Currency Translation Adjustment | | | 9,848 | | | | 2,759 | | | | 30,678 | | | | 3,827 | |
Other Comprehensive Income (Loss), Pension Liability Adjustment | | | (1,994 | ) | | | 834 | | | | (4,974 | ) | | | 3,632 | |
Comprehensive Income | | $ | 27,293 | | | $ | 19,497 | | | $ | 74,628 | | | $ | 56,914 | |
|
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| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JULY 5, 2020 | | JUNE 30, 2019 | | JULY 5, 2020 | | JUNE 30, 2019 |
Net Income (Loss) | $ | 4,709 |
| | $ | 29,499 |
| | $ | (97,458 | ) | | $ | 36,558 |
|
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment | 16,160 |
| | 4,249 |
| | 915 |
| | (954 | ) |
Other Comprehensive Loss, Cash Flow Hedge | (351 | ) | | (4,667 | ) | | (6,491 | ) | | (7,973 | ) |
Other Comprehensive Income (Loss), Pension Liability Adjustment | (342 | ) | | 829 |
| | 1,391 |
| | 738 |
|
Comprehensive Income (Loss) | $ | 20,176 |
| | $ | 29,910 |
| | $ | (101,643 | ) | | $ | 28,369 |
|
See accompanying notes to consolidated condensed financial statements.
-5-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| | NINE MONTHS ENDED | |
| | OCTOBER 1, 2017 | | | OCTOBER 2, 2016 | |
OPERATING ACTIVITIES: | | | | | | | | |
Net Income | | $ | 48,924 | | | $ | 49,455 | |
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: | | | | | | | | |
Depreciation and Amortization | | | 22,203 | | | | 22,474 | |
Stock Compensation Amortization Expense | | | 4,479 | | | | 3,390 | |
Deferred Income Taxes and Other | | | 5,926 | | | | 5,049 | |
Working Capital Changes: | | | | | | | | |
Accounts Receivable | | | (1,397 | ) | | | 1,449 | |
Inventories | | | (22,377 | ) | | | (454 | ) |
Prepaid Expenses and Other Current Assets | | | (653 | ) | | | (1,008 | ) |
Accounts Payable and Accrued Expenses | | | 10,804 | | | | (1,462 | ) |
| | | | | | | | |
CASH PROVIDED BY OPERATING ACTIVITIES: | | | 67,909 | | | | 78,893 | |
| | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | |
Capital Expenditures | | | (22,809 | ) | | | (20,912 | ) |
Other | | | (421 | ) | | | 1,140 | |
| | | | | | | | |
CASH USED IN INVESTING ACTIVITIES: | | | (23,230 | ) | | | (19,772 | ) |
| | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | |
Borrowing of Long-Term Debt | | | 20,000 | | | | 20,329 | |
Repayment of Long-Term Debt | | | (62,085 | ) | | | (17,500 | ) |
Tax Withholding Payments for Share-Based Compensation | | | (1,477 | ) | | | (4,661 | ) |
Repurchase of Common Stock | | | (81,061 | ) | | | (10,443 | ) |
Debt Issuance Cost | | | (1,418 | ) | | | 0 | |
Dividends Paid | | | (11,571 | ) | | | (10,429 | ) |
| | | | | | | | |
CASH USED IN FINANCING ACTIVITIES: | | | (137,612 | ) | | | (22,704 | ) |
| | | | | | | | |
Net Cash Provided By (Used In) Operating, Investing and | | | | | | | | |
Financing Activities | | | (92,933 | ) | | | 36,417 | |
Effect of Exchange Rate Changes on Cash | | | 5,369 | | | | 1,616 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS: | | | | | | | | |
Net Change During the Period | | | (87,564 | ) | | | 38,033 | |
Balance at Beginning of Period | | | 165,672 | | | | 75,696 | |
| | | | | | | | |
Balance at End of Period | | $ | 78,108 | | | $ | 113,729 | |
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| SIX MONTHS ENDED |
| JULY 5, 2020 | | JUNE 30, 2019 |
OPERATING ACTIVITIES: | | | |
Net income (loss) | $ | (97,458 | ) | | $ | 36,558 |
|
Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | |
Depreciation and amortization | 21,748 |
| | 22,698 |
|
Stock compensation amortization expense (benefit) | (2,216 | ) | | 4,832 |
|
Deferred income taxes and other | (17,364 | ) | | (11,577 | ) |
Amortization of acquired intangible assets | 2,631 |
| | 3,252 |
|
Goodwill and intangible asset impairment | 121,258 |
| | — |
|
Working capital changes: | | | |
Accounts receivable | 37,660 |
| | (4,637 | ) |
Inventories | (8,792 | ) | | (13,349 | ) |
Prepaid expenses and current assets | 1,005 |
| | (6,206 | ) |
Accounts payable and accrued expenses | (26,045 | ) | | (11,139 | ) |
| | | |
CASH PROVIDED BY OPERATING ACTIVITIES | 32,427 |
| | 20,432 |
|
| | | |
INVESTING ACTIVITIES: | | | |
Capital expenditures | (35,665 | ) | | (34,926 | ) |
Other | (29 | ) | | 33 |
|
| | | |
CASH USED IN INVESTING ACTIVITIES | (35,694 | ) | | (34,893 | ) |
| | | |
FINANCING ACTIVITIES: | | | |
Repayments of long-term debt | (47,779 | ) | | (16,670 | ) |
Borrowing of long-term debt | 70,000 |
| | 70,000 |
|
Tax withholding payments for share-based compensation | (1,488 | ) | | (3,264 | ) |
Proceeds from issuance of common stock | 93 |
| | 60 |
|
Dividends paid | (4,392 | ) | | (7,763 | ) |
Repurchase of common stock | — |
| | (25,154 | ) |
Finance lease payments | (810 | ) | | — |
|
| | | |
CASH PROVIDED BY FINANCING ACTIVITIES: | 15,624 |
| | 17,209 |
|
| | | |
Net cash provided by operating, investing and financing activities | 12,357 |
| | 2,748 |
|
Effect of exchange rate changes on cash | (1,814 | ) | | 519 |
|
| | | |
CASH AND CASH EQUIVALENTS: | | | |
Net change during the period | 10,543 |
| | 3,267 |
|
Balance at beginning of period | 81,301 |
| | 80,989 |
|
| | | |
Balance at end of period | $ | 91,844 |
| | $ | 84,256 |
|
See accompanying notes to consolidated condensed financial statements.
-6-
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1
– CONDENSED FOOTNOTESSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As contemplated by the Securities and Exchange Commission (the
“Commission”“Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 1, 2017,December 29, 2019, 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
forfor the full year. The January 1, 2017,December 29, 2019, 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.Certain
The six month period ended July 5, 2020 includes 27 weeks, and the six month period ended June 30, 2019 includes 26 weeks. The three month periods ended July 5, 2020 and June 30, 2019 both include 13 weeks.
Risks and Uncertainties
The World Health Organization declared the COVID-19 outbreak a pandemic, and many companies have experienced disruptions in their operations. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that, except for the goodwill and intangible asset impairment discussed in Note 10 “Goodwill and Intangible Assets,” the decline in 2020 revenue, and its consequent impacts on production volume, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at July 5, 2020. The Company’s primary credit facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum net debt to EBITDA ratio, as defined by the credit facility agreement. On July 15, 2020, the Company amended its Syndicated Credit Facility. See Note 16 entitled “Subsequent Events” for additional information. The full extent of the future impact of COVID-19 on the Company’s operations is uncertain. A prolonged COVID-19 pandemic may continue to have a material adverse impact on our operations, financial condition, and supply chains. It may negatively impact our ability to collect outstanding receivables, manage inventory, and service customers. The impact of COVID-19 could result in additional impairment losses related to goodwill, intangible assets, and property, plant and equipment.
As the virus spreads through communities, it could impact the physical health, mental health, and productivity of our workforce as many of them are required to shelter in place and work from home for prolonged periods of time, and it could also impact our ability to reach our customers and collaborate with them as they are required to shelter in place and work from home for prolonged periods of time. The COVID-19 pandemic is having broad and negative implications on the global economy, which affects the size and timing of our customers’ capital budgets, and could result in delays or terminations of new and existing renovation projects, remodeling projects, new construction projects, and other projects where our products are used.
COVID-19 Impact
We continue to monitor our operations and have implemented various programs to mitigate the effects of COVID-19 on our business including reductions in employee headcount, labor costs, marketing expenses, consulting spend, travel costs, various other costs, and capital expenditures, as well as suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives. Government grants and payroll protection programs are available globally to provide assistance to companies impacted by the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted in the United States (see Note 13 entitled “Income Taxes” for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”), provide benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments. The NOW Program provides eligible companies with reimbursement of labor costs as an incentive to retain employees on the payroll. During the second quarter the Company recognized benefits under several payroll protection programs as reductions to payroll costs.
Reclassifications
In fiscal year 2020, the Company made certain classification and presentation changes related to customer service and other costs. Previously, these costs were presented as a component of cost of sales. Beginning in fiscal year 2020, these costs are presented as a component of selling, general and administrative (“SG&A”) expense. The Company determined that this change better reflects how management views and operates the business. Reclassifications of the comparative prior periodyear 2019 amounts have been reclassifiedmade to conform to the current presentation as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
Statement of Operations Line Item | | As Reported | | Reclassification | | As Reclassified |
| | (In thousands) |
Cost of Sales | | $ | 218,917 |
| | $ | (2,140 | ) | | $ | 216,777 |
|
Selling, General and Administrative Expenses | | 95,698 |
| | 2,140 |
| | 97,838 |
|
Total | | $ | 314,615 |
| | $ | — |
| | $ | 314,615 |
|
| | | | | | |
| | Six Months Ended June 30, 2019 |
Statement of Operations Line Item | | As Reported | | Reclassification | | As Reclassified |
| | (In thousands) |
Cost of Sales | | $ | 401,207 |
| | $ | (3,264 | ) | | $ | 397,943 |
|
Selling, General and Administrative Expenses | | 194,709 |
| | 3,264 |
| | 197,973 |
|
Total | | $ | 595,916 |
| | $ | — |
| | $ | 595,916 |
|
Recently Adopted Accounting Pronouncements
On December 30, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 326, Credit Losses. This standard requires a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of valuation allowances for credit losses. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The Company adopted the new standard using a modified retrospective approach with no cumulative-effect adjustment to retained earnings to recognize expected credit losses on trade accounts receivable. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.
On December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other,” that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. See Note 10 entitled “Goodwill and Intangible Assets” for additional information.
On December 30, 2019, the Company adopted ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period presentation. These reclassifications hadand permits the disclosure of other relevant quantitative information for certain unobservable inputs. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.
On December 30, 2019, the Company adopted ASU 2018-15, “Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. The ASU also requires that the costs for implementation activities during the application development phase be capitalized in a hosting arrangement service contract, and costs during the preliminary and post implementation phase are expensed. The Company adopted this standard, which will be applied on a prospective basis, with no material impact to the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740 related to intraperiod tax allocation, the calculation of income taxes in interim periods, and the accounting for outside basis differences of foreign subsidiaries and equity method investments. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740, including franchise or similar taxes partially based on income, the accounting for a step-up in tax basis goodwill, and interim recognition of an enacted change in tax laws or rates, by clarifying and amending existing guidance. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact of adoption of this standard but does not anticipate that the adoption will have a material effect on
reporting income, comprehensive income, cash flows, total assets or shareholders equity as previously reported.its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard addresses the risks from the discontinuation of the London Interbank Offered Rate (LIBOR) and provides optional expedients and exceptions to contracts, hedging relationships and other transactions that reference LIBOR if certain criteria are met. This new guidance is effective and may be applied beginning March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption of this standard.
NOTE 2 – REVENUE RECOGNITION
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for the six months ended July 5, 2020. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material.
Disaggregation of Revenue
For the six months ended July 5, 2020, revenue from the Company’s customers is broken down by geography as follows:
|
| | |
Geography | | Percentage of Net Sales |
Americas | | 56.5% |
Europe | | 30.4% |
Asia-Pacific | | 13.1% |
Inventories are summarized as follows:
| | Oct. 1, 2017 | | | Jan. 1, 2017 | |
| | (In thousands) | |
Finished Goods | | $ | 123,708 | | | $ | 104,742 | |
Work in Process | | | 13,046 | | | | 8,711 | |
Raw Materials | | | 49,372 | | | | 42,630 | |
| | $ | 186,126 | | | $ | 156,083 | |
|
| | | | | | | |
| July 5, 2020 | | December 29, 2019 |
| (In thousands) |
Finished Goods | $ | 178,506 |
| | $ | 184,336 |
|
Work in Process | 16,720 |
| | 13,152 |
|
Raw Materials | 68,495 |
| | 56,096 |
|
Inventories, net | $ | 263,721 |
| | $ | 253,584 |
|
NOTE
34 – EARNINGS PER SHAREThe Company computes basic earnings
or loss per share (“EPS”) by dividing net income or loss by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in
ourthe basic and diluted EPS calculations when the inclusion of these shares would be dilutive.
Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following tables show distributed and undistributed earnings:-7- |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Earnings (Loss) Per Share | July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
Basic Earnings (Loss) Per Share: | | | | | | | |
Distributed Earnings | $ | 0.01 |
| | $ | 0.07 |
| | $ | 0.08 |
| | $ | 0.13 |
|
Undistributed Earnings (Loss) | 0.07 |
| | 0.43 |
| | (1.75 | ) | | 0.48 |
|
Total | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
|
| | | | | | | |
Diluted Earnings (Loss) Per Share: | | | | | | | |
Distributed Earnings | $ | 0.01 |
| | $ | 0.07 |
| | $ | 0.08 |
| | $ | 0.13 |
|
Undistributed Earnings (Loss) | 0.07 |
| | 0.43 |
| | (1.75 | ) | | 0.48 |
|
Total | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
|
| | | | | | | |
Basic Earnings (Loss) Per Share | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
|
Diluted Earnings (Loss) Per Share | $ | 0.08 |
| | $ | 0.50 |
| | $ | (1.67 | ) | | $ | 0.61 |
|
| | Three Months Ended | | | Nine Months Ended | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
Earnings Per Share | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic Earnings Per Share | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.07 | | | $ | 0.06 | | | $ | 0.19 | | | $ | 0.10 | |
Undistributed Earnings | | | 0.25 | | | | 0.19 | | | | 0.59 | | | | 0.66 | |
Total | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
| | | | | | | | | | | | | | | | |
Diluted Earnings Per Share | | | | | | | | | | | | | | | | |
Distributed Earnings | | $ | 0.07 | | | $ | 0.06 | | | $ | 0.19 | | | $ | 0.10 | |
Undistributed Earnings | | | 0.25 | | | | 0.19 | | | | 0.59 | | | | 0.66 | |
Total | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
| | | | | | | | | | | | | | | | |
Basic Earnings Per Share | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
Diluted Earnings Per Share | | $ | 0.32 | | | $ | 0.25 | | | $ | 0.78 | | | $ | 0.76 | |
The following tables present presents net income that was attributable to participating securities:
| | Three Months Ended | | | Nine Months Ended | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
| | | | | | (In millions) | | | | | |
Net Income Attributable to Participating Securities | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.4 | | | $ | 0.4 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In millions) |
Net Income Attributable to Participating Securities | $ | — |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
|
The weighted average shares
outstanding for basic and diluted EPS were as follows: | | Three Months Ended | | | Nine Months Ended | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
| | | | | | (In thousands) | | | | | |
Weighted Average Shares Outstanding | | | 60,555 | | | | 64,241 | | | | 62,167 | | | | 64,721 | |
Participating Securities | | | 463 | | | | 564 | | | | 463 | | | | 564 | |
Shares for Basic Earnings Per Share | | | 61,018 | | | | 64,805 | | | | 62,630 | | | | 65,285 | |
Dilutive Effect of Stock Options | | | 42 | | | | 37 | | | | 42 | | | | 37 | |
Shares for Diluted Earnings Per Share | | | 61,060 | | | | 64,842 | | | | 62,672 | | | | 65,322 | |
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Weighted Average Shares Outstanding | 58,024 |
| | 58,760 |
| | 58,006 |
| | 58,934 |
|
Participating Securities | 460 |
| | 525 |
| | 460 |
| | 525 |
|
Shares for Basic EPS | 58,484 |
| | 59,285 |
| | 58,466 |
| | 59,459 |
|
Dilutive Effect of Stock Options | — |
| | 6 |
| | — |
| | 6 |
|
Shares for Diluted EPS | 58,484 |
| | 59,291 |
| | 58,466 |
| | 59,465 |
|
For
all periods presented, the three and six months ended July 5, 2020, there were no20,000 stock options in each respective period excluded from the computation of diluted EPS because the impact would be anti-dilutive. For the three and six months ended June 30, 2019, there were 0 stock options or participating securities excluded from the computation of diluted EPS.
Syndicated Credit Facility
The
At July 5, 2020, the Company
has a syndicated credit facilitymaintained an amended and restated Syndicated Credit Facility (the “Facility”)
pursuant to which
the lenders provideprovided to the Company and certain of its subsidiaries a multicurrency revolving
credit facilityloan and
provide to the Company aU.S. denominated and multicurrency term
loan.loans. Interest on base rate loans
iswas charged at varying rates computed by applying a margin depending on the
Company’sCompany’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit arewere 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 payspaid 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. Debt issuance costs associated with term loans are reflected as a reduction of long-term debt in accordance with applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of October1, 2017,July 5, 2020 and December 29, 2019, the unamortized debt costs recorded as a reduction of long-term debt were $5.4 million and $6.3 million, respectively.
Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of revolving debt, net of accumulated amortization, were $1.1 million and $1.3 million as of July 5, 2020 and December 29, 2019, respectively. These amounts are included in other assets in the Company’s consolidated condensed balance sheets. The Company amortizes these costs over the life of the related debt.
As of July 5, 2020, the Company had outstanding
$173.8$566.8 million of term loan borrowing and
$60.8$58.8 million of revolving loan borrowings under the Facility, and had
$6.0$1.6 million in letters of credit outstanding under the Facility. As of
October 1, 2017,December 29, 2019, the Company had outstanding $581.6 million of term loan borrowing and $20.9 million of revolving loan borrowings under the Facility, and had $2.2 million in letters of credit outstanding under the Facility. As of July 5, 2020 and December 29, 2019, the weighted average interest rate on borrowings outstanding under the Facility was
2.6%.The2.75% and 3.27%, respectively. As of July 5, 2020 and December 29, 2019, the carrying value of the Company’s borrowings under the Facility approximates its fair value as the Facility bears interest rates that are similar to existing market rates.
Under the Facility, the Company is required to make quarterly amortization payments of the term loan
borrowing. The amortization paymentsborrowings, which are due on the last day of the calendar quarter.
The quarterly amortization payment amount was $3.75 million for the third quarter of 2017 and will remain this amount for all future quarters until maturity. The Company is currently in compliance with all covenants under the FacilityFacility. On July 15, 2020, the Company amended its Syndicated Credit Facility. See Note 16 entitled “Subsequent Events” for additional information.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $9.5 million of other lines of credit available at interest rates ranging from 2.0% to 6.0% as of both July 5, 2020 and
anticipates that it will remain in compliance with the covenants for the foreseeable future.December 29, 2019. As of July 5, 2020 and December 29, 2019, there were 0 borrowings outstanding under these lines of credit.
NOTE 6 – DERIVATIVE INSTRUMENTS
Interest Rate Risk Management
In the third quarter of 2017
, and the Company amended and restated the syndicated credit facility. The terms and conditionsfirst quarter of the amended and restated credit facility (the “Amended Facility”) are substantially similar to the preceding Facility, with the following key changes: | ●
| The Amended Facility matures in August of 2022;
|
| ●
| The restricted payments covenant in the Amended Facility has been liberalized (and now allows for, among other things, the repurchase of the full amount of the new share repurchase program described below); and
|
| ●
| Permits the potential release of the lenders’ liens on certain real property and equipment in connection with an anticipated property tax abatement transaction in Georgia.
|
Interest Rate Risk Management
Shortly after entering into the Amended Facility, 2019, the Company entered into an interest rate swap transactiontransactions in notional amounts of $100 million and $150 million, respectively, to fix the variable interest rate on a portion of its term loan borrowingsborrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to thisthese interest rate swapswaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in LIBOR, the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the Company’s debt principal equal to the outstanding swap notional amount.
amounts.
Cash Flow Interest Rate
SwapThe Company’sSwaps
Both of the interest rate
swap isswaps described above are designated and
qualifiesqualify as
a cash flow
hedgehedges of forecasted interest payments. The Company reports the
effective portionchanges in fair value of the
fair value gain or loss on the swapswaps as a component of other comprehensive income (or other comprehensive loss).
Gains or losses (if any) on any ineffective portion of derivative instruments in cash flow hedging relationships are recorded in the period in which they occur as a component of other expense (or other income) in the Consolidated Condensed Statement of Operations. There were no such gains or losses in the third quarter of 2017. The aggregate notional amount of the
swapinterest rate swaps as of
October 1, 2017July 5, 2020 was
$100$250 million.
Forward Contracts
Our European operations, from time to time, are party to currency forward contracts designed to hedge the cash flow risk of intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. As of October 1, 2017,July 5, 2020, there were no active forward currency contracts.
Derivative Transactions Not Designated as Hedging Instruments
Our Asia-Pacific operations, from time to time, purchase foreign currency options to economically hedge inventory purchases denominated in foreign currencies other than their functional currency. The Company’s objective with respect to these foreign currency options is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to payment on inventory purchases. These options are classified as non-designated derivative instruments. Gains and losses on the changes in fair value of these foreign currency options are recognized in earnings each period. As of July 5, 2020, the Company had outstanding foreign currency options with an aggregate notional amount of $17.0 million.
The table below sets forth the fair value of derivative instruments as of July 5, 2020:
|
| | | | | | | | | | | |
| Asset Derivatives as of July 5, 2020 | | Liability Derivatives as of July 5, 2020 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| (In thousands) |
Derivative instruments designated as hedging instruments: | | | | | | | |
Interest rate swap contracts | Other current assets | | $ | — |
| | Accrued expenses | | $ | 14,893 |
|
Derivative instruments not designated as hedging instruments: | | | | | | | |
Foreign currency options | Other current assets | | 320 |
| | Accrued expenses | | — |
|
| | | $ | 320 |
| | | | $ | 14,893 |
|
The table below sets forth the fair value of derivative instruments as of December 29, 2019:
|
| | | | | | | | | | | |
| Asset Derivatives as of December 29, 2019 | | Liability Derivatives as of December 29, 2019 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| (In thousands) |
Derivative instruments designated as hedging instruments: | | | | | | | |
Interest rate swap contracts | Other current assets | | $ | — |
| | Accrued expenses | | $ | 5,801 |
|
Derivative instruments not designated as hedging instruments: | | | | | | | |
Foreign currency options | Other current assets | | 251 |
| | Accrued expenses | | — |
|
| | | $ | 251 |
| | | | $ | 5,801 |
|
There was no significant impact to net income (loss) from the changes in fair value of derivatives designated as cash flow hedges during the three and six months ended July 5, 2020. We expect that approximately $5.2 million related to cash flow hedges will be reclassified from accumulated other comprehensive loss as an increase to interest rate swap liability was $0.2 millionexpense in the next 12 months.
The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges had on accumulated other comprehensive loss, net of tax, during the three and was recordedsix months ended July 5, 2020 and June 30, 2019:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Foreign currency contracts gain (loss) | $ | — |
| | $ | 204 |
| | $ | — |
| | $ | (159 | ) |
Interest rate swap contracts loss | (351 | ) | | (4,871 | ) | | (6,491 | ) | | (7,814 | ) |
Loss recognized in accumulated other comprehensive loss | $ | (351 | ) | | $ | (4,667 | ) | | $ | (6,491 | ) | | $ | (7,973 | ) |
Gains and losses from derivatives designated as cash flow hedges reclassified from accumulated other comprehensive income (loss) into net income (loss) are discussed in
accrued liabilities.Note 14 entitled “Items Reclassified From Accumulated Other LinesComprehensive Loss.”
The following tables summarize gains and losses on derivatives not designated as hedging instruments within the consolidated condensed statements of
CreditSubsidiaries ofoperations for the Company have an aggregate ofthree and six months ended July 5, 2020 and June 30, 2019:
|
| | | | | | | | | |
| | | Three Months Ended |
| Statement of Operations Location | | July 5, 2020 | | June 30, 2019 |
| | | (In thousands) |
Foreign currency options loss | Other expense | | $ | (1,629 | ) | | $ | (144 | ) |
| | | | | |
| | | Six Months Ended |
| Statement of Operations Location | | July 5, 2020 | | June 30, 2019 |
| | | (In thousands) |
Foreign currency options gain (loss) | Other expense | | $ | 79 |
| | $ | (549 | ) |
NOTE 7 – SHAREHOLDERS’ EQUITY
The following tables depict the
equivalent of $9.8 million of other lines of credit available at interest rates ranging from 2.5% to 6.5%. As of October 1, 2017, there were no borrowings outstanding under these lines of credit. NOTE activity in the accounts which make up shareholders’ equity for the three and six months ended July 5, – STOCK-BASED COMPENSATION
2020 and June 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| SHARES | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED EARNINGS | | PENSION LIABILITY | | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | CASH FLOW HEDGE |
| (In thousands) |
Balance, at December 29, 2019 | 58,416 |
| | $ | 5,842 |
| | $ | 250,306 |
| | $ | 286,056 |
| | $ | (56,700 | ) | | $ | (113,139 | ) | | $ | (4,163 | ) |
Net loss | — |
| | — |
| | — |
| | (102,167 | ) | | — |
| | — |
| | — |
|
Stock issuances under employee plans | 220 |
| | 22 |
| | 197 |
| | — |
| | — |
| | — |
| | — |
|
Other issuances of common stock | 107 |
| | 10 |
| | 1,720 |
| | — |
| | — |
| | — |
| | — |
|
Unamortized stock compensation expense related to restricted stock awards | — |
| | — |
| | (1,731 | ) | | — |
| | — |
| | — |
| | — |
|
Cash dividends declared, $0.065 per common share | — |
| | — |
| | — |
| | (3,807 | ) | | — |
| | — |
| | — |
|
Forfeitures and compensation expense related to stock awards | (255 | ) | | (25 | ) | | (4,114 | ) | | — |
| | — |
| | — |
| | — |
|
Pension liability adjustment | — |
| | — |
| | — |
| | — |
| | 1,733 |
| | — |
| | — |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (15,245 | ) | | — |
|
Cash flow hedge unrealized loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,140 | ) |
Balance, at April 5, 2020 | 58,488 |
| | $ | 5,849 |
| | $ | 246,378 |
| | $ | 180,082 |
| | $ | (54,967 | ) | | $ | (128,384 | ) | | $ | (10,303 | ) |
Net income | — |
| | — |
| | — |
| | 4,709 |
| | — |
| | — |
| | — |
|
Stock issuances under employee plans | 12 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Other issuances of common stock | 70 |
| | 7 |
| | 2,294 |
| | — |
| | — |
| | — |
| | — |
|
Unamortized stock compensation expense related to restricted stock awards | — |
| | — |
| | (2,300 | ) | | — |
| | — |
| | — |
| | — |
|
Cash dividends declared, $0.01 per common share | — |
| | — |
| | — |
| | (585 | ) | | — |
| | — |
| | — |
|
Forfeitures and compensation expense related to stock awards | (26 | ) | | (3 | ) | | (48 | ) | | — |
| | — |
| | — |
| | — |
|
Pension liability adjustment | — |
| | — |
| | — |
| | — |
| | (342 | ) | | — |
| | — |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 16,160 |
| | — |
|
Cash flow hedge unrealized loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (351 | ) |
Balance, at July 5, 2020 | 58,544 |
| | $ | 5,854 |
| | $ | 246,323 |
| | $ | 184,206 |
| | $ | (55,309 | ) | | $ | (112,224 | ) | | $ | (10,654 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| SHARES | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED EARNINGS | | PENSION LIABILITY | | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | CASH FLOW HEDGE |
| (In thousands) |
Balance, at December 30, 2018 | 59,508 |
| | $ | 5,951 |
| | $ | 270,269 |
| | $ | 222,214 |
| | $ | (43,610 | ) | | $ | (101,487 | ) | | $ | 1,326 |
|
Net income | — |
| | — |
| | — |
| | 7,059 |
| | — |
| | — |
| | — |
|
Stock issuances under employee plans | 509 |
| | 51 |
| | 379 |
| | — |
| | — |
| | — |
| | — |
|
Other issuances of common stock | 224 |
| | 22 |
| | 3,900 |
| | — |
| | — |
| | — |
| | — |
|
Unamortized stock compensation expense related to restricted stock awards | — |
| | — |
| | (3,922 | ) | | — |
| | — |
| | — |
| | — |
|
Cash dividends declared, $0.065 per common share | — |
| | — |
| | — |
| | (3,900 | ) | | — |
| | — |
| | — |
|
Forfeitures and compensation expense related to stock awards | (225 | ) | | (22 | ) | | 29 |
| | — |
| | — |
| | — |
| | — |
|
Pension liability adjustment | — |
| | — |
| | — |
| | — |
| | (91 | ) | | — |
| | — |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (5,203 | ) | | — |
|
Cash flow hedge unrealized loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,306 | ) |
Balance, at March 31, 2019 | 60,016 |
| | $ | 6,002 |
| | $ | 270,655 |
| | $ | 225,373 |
| | $ | (43,701 | ) | | $ | (106,690 | ) | | $ | (1,980 | ) |
Net income | — |
| | — |
| | — |
| | 29,499 |
| | — |
| | — |
| | — |
|
Stock issuances under employee plans | 2 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
|
Other issuances of common stock | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Unamortized stock compensation expense related to restricted stock awards | — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | — |
|
Cash dividends declared, $0.065 per common share | — |
| | — |
| | — |
| | (3,863 | ) | | — |
| | — |
| | — |
|
Forfeitures and compensation expense related to stock awards | (28 | ) | | (3 | ) | | 1,506 |
| | — |
| | — |
| | — |
| | — |
|
Share repurchases | (1,556 | ) | | (156 | ) | | (24,998 | ) | | — |
| | — |
| | — |
| | — |
|
Pension liability adjustment | — |
| | — |
| | — |
| | — |
| | 829 |
| | — |
| | — |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 4,249 |
| | — |
|
Cash flow hedge unrealized loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,667 | ) |
Balance, at June 30, 2019 | 58,433 |
| | $ | 5,843 |
| | $ | 247,221 |
| | $ | 251,009 |
| | $ | (42,872 | ) | | $ | (102,441 | ) | | $ | (6,647 | ) |
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.There were no stock options granted during 2015-2017.
All outstanding stock options vested prior to the end of 2013, and therefore there was
no0 stock option compensation expense in the first
ninesix months of 20162020 or 2017.2019.
As of
October 1, 2017,July 5, 2020, there were
82,50020,000 stock options outstanding and exercisable, at an average exercise price
of $8.53$12.43 per share. There were 5,0000 stock options granted in the first six months of 2020 or 2019. There were 7,500 stock options exercised and 0 stock options forfeited in the first six months of 2020. There were 10,000 stock options exercised in the first ninesix months of 2017. There were no2019 and 5,000 stock option forfeitures during the 2017 period.those six months. The aggregate intrinsic value of the outstanding and exercisable stock options was $1.1 millionhad no intrinsic value as of October 1, 2017.July 5, 2020.
-9-
Restricted Stock Awards
During the
ninesix months ended
October 1, 2017,July 5, 2020 and June 30, 2019, the Company granted restricted stock awards for 248,000308,100 and 224,000 shares of common stock.stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-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 (or vest earlier) upon the attainment of certain performance criteria,earlier in the event of a change in control of the Company, or upon involuntary termination without cause.Compensation expense
(benefit) related to restricted stock grants was
$2.0$(0.2) million and $2.4$1.5 million for the ninesix months ended October 1, 2017July 5, 2020, and October 2, 2016,June 30, 2019, respectively. Accounting standards require that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense byfor restricted stock forfeited during the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.period.
The following table summarizes restricted stock outstanding as of
October 1, 2017,July 5, 2020, as well as activity during the ninesix months then ended: | | Restricted Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding at January 1, 2017 | | | 505,000 | | | $ | 17.05 | |
Granted | | | 248,000 | | | | 17.89 | |
Vested | | | 284,000 | | | | 16.61 | |
Forfeited or canceled | | | 6,000 | | | | 16.99 | |
Outstanding at October 1, 2017 | | | 463,000 | | | $ | 17.77 | |
|
| | | | | | |
| Restricted Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 29, 2019 | 468,200 |
| | $ | 28.63 |
|
Granted | 308,100 |
| | 13.08 |
|
Vested | (162,100 | ) | | 19.22 |
|
Forfeited or canceled | (153,700 | ) | | 19.67 |
|
Outstanding at July 5, 2020 | 460,500 |
| | $ | 24.53 |
|
As of
October 1, 2017,July 5, 2020, the unrecognized total compensation cost related to unvested restricted stock was $5.0$4.7 million. That cost is expected to be recognized by the end of 2020.2023.
PerformanceShare AwardsIn 2017,
During the six months ended July 5, 2020 and June 30, 2019, 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 1, 2017,July 5, 2020, as well as the activity during the ninesix months then ended: | | Performance Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding at January 1, 2017 | | | 368,500 | | | $ | 17.20 | |
Granted | | | 354,000 | | | | 17.80 | |
Vested | | | 31,000 | | | | 17.22 | |
Forfeited or canceled | | | 22,000 | | | | 17.29 | |
Outstanding at October 1, 2017 | | | 669,500 | | | $ | 17.51 | |
|
| | | | | | |
| Performance Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 29, 2019 | 512,000 |
| | $ | 19.71 |
|
Granted | 263,700 |
| | 15.36 |
|
Vested | (164,300 | ) | | 19.74 |
|
Forfeited or canceled | (192,000 | ) | | 19.67 |
|
Outstanding at July 5, 2020 | 419,400 |
| | $ | 16.99 |
|
Compensation expense (benefit) related to the performance shares was $(2.0) million and $3.3 million for the ninesix months ended October 1, 2017 was $2.4 million.July 5, 2020 and June 30, 2019, respectively. The Company has reduced its expense for performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $6.2$7.0 million as of OctoberJuly 5, 2020. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2023.
Tax expense recognized with regard to restricted stock and performance shares was approximately $0.5 million for the six months ended July 5, 2020.
NOTE 8 – LEASES
General
We have operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. Our leases have terms ranging from 1
2017.to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option. We record a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region.
As of July 5, 2020, there were no significant right-of-use assets and lease obligations from leases that had not commenced as of the end of the second quarter.
The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to our leases as of July 5, 2020 and December 29, 2019:
-10- |
| | | | | | | | | | | | | | | |
| July 5, 2020 | | December 29, 2019 |
Balance Sheet Location | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
| (In thousands) |
Operating lease right-of-use assets | $ | 100,091 |
| | | | $ | 107,044 |
| | |
| | | | | | | |
Current portion of operating lease liabilities | $ | 14,124 |
| | | | $ | 15,914 |
| | |
Operating lease liabilities | 86,716 |
| | | | 91,829 |
| | |
Total operating lease liabilities | $ | 100,840 |
| | | | $ | 107,743 |
| | |
| | | | | | | |
Property and equipment | | | $ | 4,954 |
| | | | $ | 5,007 |
|
| | | | | | | |
Accrued expenses | | | $ | 1,455 |
| | | | $ | 1,489 |
|
Other long-term liabilities | | | 1,485 |
| | | | 1,673 |
|
Total finance lease liabilities | | | $ | 2,940 |
| | | | $ | 3,162 |
|
Lease Costs
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
Lease cost | (In thousands) |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | $ | 335 |
| | $ | 278 |
| | $ | 635 |
| | $ | 424 |
|
Interest on lease liabilities | 16 |
| | 11 |
| | 34 |
| | 19 |
|
Operating lease cost | 6,759 |
| | 5,930 |
| | 12,981 |
| | 11,601 |
|
Short-term lease cost | 166 |
| | 408 |
| | 341 |
| | 1,146 |
|
Variable lease cost | 924 |
| | 613 |
| | 1,570 |
| | 758 |
|
Total lease cost | $ | 8,200 |
| | $ | 7,240 |
| | $ | 15,561 |
| | $ | 13,948 |
|
| | | | | | | |
Other supplemental information | | | | | | | |
| | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from finance leases | $ | 16 |
| | $ | 11 |
| | $ | 34 |
| | $ | 19 |
|
Operating cash flows from operating leases | 5,569 |
| | 5,395 |
| | 11,450 |
| | 10,505 |
|
Financing cash flows from finance leases | 411 |
| | 271 |
| | 810 |
| | 517 |
|
Right-of-use assets obtained in exchange for new finance lease liabilities | 340 |
| | 551 |
| | 553 |
| | 551 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | 3,088 |
| | 4,069 |
| | 4,065 |
| | 6,536 |
|
Lease Term and Discount Rate
The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of ContentsJuly 5, 2020 and December 29, 2019:
|
| | | | | |
| July 5, 2020 | | December 29, 2019 |
Weighted-average remaining lease term – finance leases (in years) | 2.70 |
| | 2.76 |
|
Weighted-average remaining lease term – operating leases (in years) | 10.62 |
| | 10.60 |
|
Weighted-average discount rate – finance leases | 2.37 | % | | 2.06 | % |
Weighted-average discount rate – operating leases | 5.93 | % | | 5.86 | % |
Maturity Analysis
A maturity analysis of lease payments under non-cancellable leases is presented as follows:
|
| | | | | | | |
Fiscal Year | Operating Leases | | Finance Leases |
| (In thousands) |
2020 (excluding the six months ended July 5, 2020) | $ | 10,334 |
| | $ | 816 |
|
2021 | 17,476 |
| | 1,063 |
|
2022 | 14,369 |
| | 619 |
|
2023 | 11,850 |
| | 400 |
|
2024 | 10,120 |
| | 141 |
|
Thereafter | 75,880 |
| | — |
|
Total future minimum lease payments (undiscounted) | 140,029 |
| | 3,039 |
|
Less: Present value discount | (39,189 | ) | | (99 | ) |
Total lease liability | $ | 100,840 |
| | $ | 2,940 |
|
Policy Elections
We made an accounting policy election not to separate lease and non-lease components for all asset classes, except for data center assets, and will account for the lease payments as a single component. We also made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use asset and lease liability recorded on the consolidated condensed balance sheets. These leases primarily represent month-to-month operating leases for vehicles and office equipment where we were reasonably certain that we would not elect an option to extend the lease.
NOTE
69 – EMPLOYEE BENEFIT PLANSOn December 31, 2019, a plan amendment was executed to eliminate future service accruals in the Dutch defined benefit plan, resulting in a curtailment of the plan. This plan remains in existence and will continue to pay vested benefits. Active participants will no longer accrue benefits after December 31, 2019, and instead will participate in an industry-wide multi-employer plan beginning in fiscal year 2020. During the three and six months ended July 5, 2020, the Company recorded multi-employer pension expense related to multi-employer contributions of $0.6 million and $1.3 million, respectively.
The following tables provide the components of net periodic benefit cost for the
three-month three and nine-month periodssix months ended October 1, 2017,July 5, 2020 and October 2, 2016, respectively: | | Three Months Ended | | | Nine Months Ended | |
Defined Benefit Retirement Plans (Europe) | | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
| | (In thousands) | | | (In thousands) | |
Service cost | | $ | 423 | | | $ | 260 | | | $ | 1,204 | | | $ | 781 | |
Interest cost | | | 1,426 | | | | 1,610 | | | | 4,138 | | | | 5,058 | |
Expected return on assets | | | (1,697 | ) | | | (1,876 | ) | | | (4,920 | ) | | | (5,880 | ) |
Amortization of prior service costs | | | 9 | | | | 9 | | | | 26 | | | | 27 | |
Recognized net actuarial losses | | | 318 | | | | 169 | | | | 930 | | | | 537 | |
Net periodic benefit cost | | $ | 479 | | | $ | 172 | | | $ | 1,378 | | | $ | 523 | |
| | Three Months Ended | | | Nine Months Ended | |
Salary Continuation Plan (SCP) | | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
| | (In thousands) | | | (In thousands) | |
Service cost | | $ | 0 | | | $ | 110 | | | $ | 0 | | | $ | 330 | |
Interest cost | | | 314 | | | | 317 | | | | 942 | | | | 952 | |
Amortization of loss | | | 91 | | | | 203 | | | | 273 | | | | 608 | |
Net periodic benefit cost | | $ | 405 | | | $ | 630 | | | $ | 1,215 | | | $ | 1,890 | |
June 30, 2019: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Defined Benefit Retirement Plans (Europe) | July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Service cost | $ | — |
| | $ | 184 |
| | $ | — |
| | $ | 369 |
|
Interest cost | 870 |
| | 1,266 |
| | 1,761 |
| | 2,547 |
|
Expected return on assets | (1,038 | ) | | (1,428 | ) | | (2,102 | ) | | (2,873 | ) |
Amortization of prior service cost | 26 |
| | 16 |
| | 52 |
| | 32 |
|
Amortization of net actuarial losses | 320 |
| | 249 |
| | 646 |
| | 502 |
|
Net periodic benefit cost | $ | 178 |
| | $ | 287 |
| | $ | 357 |
| | $ | 577 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Salary Continuation Plan | July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Interest cost | $ | 235 |
| | $ | 289 |
| | $ | 469 |
| | $ | 577 |
|
Amortization of net actuarial losses | 139 |
| | 93 |
| | 279 |
| | 187 |
|
Net periodic benefit cost | $ | 374 |
| | $ | 382 |
| | $ | 748 |
| | $ | 764 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
nora Defined Benefit Plan | July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Service cost | $ | 259 |
| | $ | 216 |
| | $ | 517 |
| | $ | 433 |
|
Interest cost | 110 |
| | 171 |
| | 221 |
| | 345 |
|
Amortization of net actuarial losses | 110 |
| | — |
| | 110 |
| | — |
|
Net periodic benefit cost | $ | 479 |
| | $ | 387 |
| | $ | 848 |
| | $ | 778 |
|
In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within Operating Income in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense in the consolidated condensed statements of operations.
NOTE 10 – GOODWILL AND INTANGIBLE ASSETS
During the first quarter of 2020, we performed a qualitative assessment of goodwill impairment indicators, considering macroeconomic conditions related to the COVID-19 pandemic and its potential impact to sales and operating income. We expect that the duration of the COVID-19 pandemic and its adverse impacts on the global economy, global travel restrictions, COVID-19 related government shutdowns, disruptions to our supply chain, distribution disruption, and disruption to our customers’ plans to spend capital on projects that use our products and services will result in lower revenue and operating income. As a result, we determined that there were indicators of impairment, and the Company proceeded with a quantitative assessment of goodwill for all reporting units at the end of the first quarter.
In performing the first quarter quantitative goodwill impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. Our reporting units are one level below our reporting segment level. In preparing the valuations, past, present and future expectations of performance were considered, including the impact of the COVID-19 pandemic. This methodology was consistent with the approach used to perform the annual quantitative goodwill assessment in prior years. The weighted average cost of capital used in the goodwill impairment testing ranged between 10.0% and 10.5%, which primarily fluctuated based on a country risk premium assigned to the geographical region of the reporting unit. There is inherent uncertainty associated with key assumptions used in our impairment testing including the duration of the economic downturn associated with the COVID-19 pandemic and the recovery period. As a result of the first quarter assessment, we determined that the fair value for two reporting units was less than the carrying value and recognized a goodwill impairment loss of $116.5 million in the first quarter of 2020. The expected decline in revenue due to the impact of COVID-19 contributed to the lower fair value of our Europe and Asia-Pacific reporting units. As such, the goodwill impairment loss was allocated to our Europe and Asia-Pacific reporting units in the amounts of $99.2 million and $17.3 million, respectively. We determined that the goodwill in our Americas reporting unit was not impaired as the fair value exceeded the carrying value by more than 90% at April 5, 2020. There were no indicators of additional goodwill impairment as of July 5, 2020.
The changes in the carrying amounts of goodwill for the six months ended July 5, 2020 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
BALANCE, AT DECEMBER 30, 2019 | | ACQUISITIONS | | PURCHASE PRICE ACCOUNTING ADJUSTMENTS | | IMPAIRMENT | | FOREIGN CURRENCY TRANSLATION | | BALANCE, AT JULY 5, 2020 |
(In thousands) |
$ | 257,439 |
| | $ | — |
| | $ | — |
| | $ | (116,495 | ) | | $ | 3,121 |
| | $ | 144,065 |
|
Additionally, we determined that the trademarks and trade names intangible assets related to the acquired nora business were also impaired and recognized an impairment loss of $4.8 million in the first quarter of 2020. The carrying value of intangible assets after the impairment was $82.7 million at July 5, 2020. There were no indicators of additional intangible asset impairment as of the end of the second quarter of 2020.
NOTE
7 11 – SEGMENT INFORMATIONBased on applicable accounting standards, the Company has determined that it has
three3 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 reportingreportable 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 reporting1 reportable segment for the reasons discussed, included below is selected information on our operating segments.
| | AMERICAS | | | EUROPE | | | ASIA-PACIFIC | | | TOTAL | |
| | | | | | | | | | | | | | | | |
Three Months Ended October 1, 2017: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Sales | | $ | 148,082 | | | $ | 66,677 | | | $ | 42,672 | | | $ | 257,431 | |
Depreciation and amortization | | | 3,386 | | | | 1,646 | | | | 2,211 | | | | 7,243 | |
Total assets | | | 274,946 | | | | 255,330 | | | | 186,966 | | | | 717,242 | |
| | | | | | | | | | | | | | | | |
Three Months Ended October 2, 2016: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Sales | | $ | 147,500 | | | $ | 62,682 | | | $ | 38,167 | | | $ | 248,349 | |
Depreciation and amortization | | | 3,635 | | | | 1,253 | | | | 2,213 | | | | 7,101 | |
| | | | | | | | | | | | | | | | |
Nine Months Ended October 1, 2017: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Sales | | $ | 433,461 | | | $ | 180,506 | | | $ | 116,266 | | | $ | 730,233 | |
Depreciation and amortization | | | 10,064 | | | | 4,257 | | | | 6,458 | | | | 20,779 | |
| | | | | | | | | | | | | | | | |
Nine Months Ended October 2, 2016: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Sales | | $ | 426,677 | | | $ | 181,904 | | | $ | 110,529 | | | $ | 719,110 | |
Depreciation and amortization | | | 10,903 | | | | 3,824 | | | | 6,598 | | | | 21,325 | |
Summary information by operating segment follows:
-11- |
| | | | | | | | | | | | | | | | |
| | AMERICAS | | EUROPE | | ASIA- PACIFIC | | TOTAL |
| | (In thousands) |
Three Months Ended July 5, 2020: | | | | | | | | |
Net Sales | | $ | 151,222 |
| | $ | 71,874 |
| | $ | 36,408 |
| | $ | 259,504 |
|
Depreciation and amortization | | 3,009 |
| | 4,417 |
| | 1,919 |
| | 9,345 |
|
Total assets | | 685,080 |
| | 536,782 |
| | 172,737 |
| | 1,394,599 |
|
| | | | | | | | |
Three Months Ended June 30, 2019: | | | | | | | | |
Net Sales | | $ | 207,250 |
| | $ | 95,665 |
| | $ | 54,592 |
| | $ | 357,507 |
|
Depreciation and amortization | | 3,300 |
| | 4,651 |
| | 2,108 |
| | 10,059 |
|
| | | | | | | | |
Six Months Ended July 5, 2020: | | | | | | | | |
Net Sales | | $ | 309,313 |
| | $ | 166,564 |
| | $ | 71,796 |
| | $ | 547,673 |
|
Depreciation and amortization | | 6,069 |
| | 8,858 |
| | 3,937 |
| | 18,864 |
|
| | | | | | | | |
Six Months Ended June 30, 2019: | | | | | | | | |
Net Sales | | $ | 367,876 |
| | $ | 188,715 |
| | $ | 98,604 |
| | $ | 655,195 |
|
Depreciation and amortization | | 6,551 |
| | 9,331 |
| | 4,240 |
| | 20,122 |
|
A reconciliation of the Company’sCompany’s total operating segment depreciation and amortization and assets to the corresponding consolidated amounts follows:
| | Three Months Ended | |
DEPRECIATION AND AMORTIZATION | | October 1, 2017 | | | October 2, 2016 | |
| | (In thousands) | |
Total segment depreciation and amortization | | $ | 7,243 | | | $ | 7,101 | |
Corporate depreciation and amortization | | | 539 | | | | 413 | |
Reported depreciation and amortization | | $ | 7,782 | | | $ | 7,514 | |
| | Nine Months Ended | |
DEPRECIATION AND AMORTIZATION | | October 1, 2017 | | | October 2, 2016 | |
| | (In thousands) | |
Total segment depreciation and amortization | | $ | 20,779 | | | $ | 21,325 | |
Corporate depreciation and amortization | | | 1,424 | | | | 1,149 | |
Reported depreciation and amortization | | $ | 22,203 | | | $ | 22,474 | |
ASSETS | | October 1, 2017 | | | | | |
| | (In thousands) | | | | | |
Total segment assets | | $ | 717,242 | | | | | |
Corporate assets and eliminations | | | 85,157 | | | | | |
| | | | | | | | |
Reported total assets | | $ | 802,399 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Depreciation and Amortization | July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Total segment depreciation and amortization | $ | 9,345 |
| | $ | 10,059 |
| | $ | 18,864 |
| | $ | 20,122 |
|
Corporate depreciation and amortization | 1,463 |
| | 1,295 |
| | 2,884 |
| | 2,576 |
|
Reported depreciation and amortization | $ | 10,808 |
| | $ | 11,354 |
| | $ | 21,748 |
| | $ | 22,698 |
|
|
| | | |
Assets | July 5, 2020 |
| (In thousands) |
Total segment assets | $ | 1,394,599 |
|
Corporate assets | 134,082 |
|
Eliminations | (227,713 | ) |
Reported total assets | $ | 1,300,968 |
|
NOTE
812 – SUPPLEMENTAL CASH FLOW INFORMATIONCash payments for
interestinterest amounted to $4.6$11.1 million and $4.0$12.0 million for the ninesix months ended October 1, 2017July 5, 2020 and October 2, 2016,June 30, 2019, respectively. Income tax payments, net of refunds, amounted to $14.8$6.9 million and $9.9$16.4 million for the ninesix months ended October 1, 2017July 5, 2020 and October 2, 2016,June 30, 2019, respectively.See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases.
NOTE
913 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSIn May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding recognition of revenue from contracts with customers that will supersede the existing revenue recognition under U.S. GAAP. In summary, the core principle of this standard, along with amendments in 2015 and 2016, 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 exchangeINCOME TAXES
The Company determines its provision for
those goods or services. Additionally, the new standard requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurements and recognition. The standard, as amended, will be effectiveincome taxes for
annual periods beginning after December 15, 2017, including interim periods
within that reporting period. Nearly 95%using an estimate of
its annual effective tax rate and records any changes affecting the
Company’s current revenue is produced from the sale of carpet, hard surface flooring and related products (TacTiles installation system, etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases upon delivery to the customer. There does not exist any performance or any other obligation after the sale of these products outside of the product warranty, which has not historically been of significance compared to total product sales. There is a small portion of the Company’s revenues (less than 6%) that is for the sale and installation of carpet and related products. Of these projects, the overwhelming majority are completed in less than 5 days and therefore the Company does not expect a significant shiftestimated annual effective tax rate in the
timing of revenue recognition for these sales either. While the Company is continuing its review of this new standard and the manner in which it will be implemented, given the nature of the Company’s sales it currently believes that revenue recognition under the new standard will be mostly consistent under both the current and new standards, with performance obligations being satisfied under the majority of contracts with customers upon shipment.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 adoption of this new standard did not have any significant impact on the Company’s 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, 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. The Company adopted this standard in the first quarter of 2017, and recorded a reduction of current assets of $10.0 million and a corresponding increase in long term assets of $5.9 million as well as a reduction of long term liabilities of $4.1 million. The Company applied this standard retrospectively and as a result has adjusted the balance sheet as of the end of 2016 by these amounts as well.
In March 2016, the FASB issued an accounting standard update to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current U.S. GAAP practice, or account for forfeitures when they occur. This update will be effective for fiscal periods beginning after December 15, 2016, including interim periods within that reporting period. The element of the new standard that will have the most impact on the Company’s financial statements will be income tax consequences. Excess tax benefits and tax deficiencies on stock-based compensation awards will now be included in the tax provision within the consolidated statement of operations as discrete items in the reporting period in which they occur, rather than the previous accountingchange occurs, including discrete tax items.
During the six months ended July 5, 2020, the Company recorded a total income tax provision of
recording them in additional paid-in capital$4.1 million on
the consolidated balance sheet. The adoptiona pre-tax loss of
this standard resulted$93.3 million resulting in an
increase in deferredeffective tax
assetsrate of
approximately $5.8 million, with(4.4)%. The effective tax rate for this period was primarily impacted by a
corresponding increase to equity accounts, as of implementation in the first quarter of 2017. There was an impact of this standard on the consolidated statement of cash flows upon adoption, as under the standard when an employer withholds shares for tax withholding purposes those related tax payments will be treated as financing activities, not as operating activities. Upon adoption in the first quarter of 2017, this resulted in a reclassification of $4.6 million of such tax payments in the first quarter of 2016 from operating activities to financing activities. The Company has elected to continue our current policy of estimating forfeitures of stock-based compensation awards at the time of grant and revising in subsequent periods to reflect actual forfeitures, which is allowable under the new standard.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 evaluatingnon-deductible goodwill impairment. Excluding the impact of our pending adoptionthe goodwill impairment, the effective tax rate was 17.8% for the period compared to 17.6% during the six months ended June 30, 2019. The increase in the effective tax rate, excluding the goodwill impairment, was due to unfavorable changes related to company-owned life insurance and unrecognized tax benefits, which were offset by the favorable impacts of the new standard on our consolidated financial statements.
In March 2017, the FASB issued a new accounting standard regarding the treatment of net periodic benefit costs. This standard will require segregation of these net benefit costs between operating and non-operating expenses. Currently, the Company reports the net benefit costs associated with its defined benefit plans as a component of operating income. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. When the new standard is implemented, only the service cost component of defined benefit plan costs will be reported within operating income, while all other components of net benefit cost will be presented within the “Other Expense (income)” line item on the Consolidated Statements of Operations. The standard requires retrospective application, and as such upon adoption of this standard will result in offsetting changes in operating income and “Other Expense (income)” on the Consolidated Statements of Operations for all periods of 2018 and 2017, with no impact on net income or earnings per share.
NOTE 10 – INCOMETAXES
Accounting standards require that allamending prior year 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. returns.
In the first
ninesix months of
2017,2020, the Company
increaseddecreased its liability for unrecognized tax benefits by
$0.8$0.4 million. As of
October 1, 2017,July 5, 2020, the Company had accrued approximately
$28.7$25.1 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of
October 1, 2017July 5, 2020 reflects a reduction for
$3.3$2.8 million of these unrecognized tax benefits.
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, it is reasonably possible that approximately $14.7 million of unrecognized tax benefits may be recognized within the next 12 months due to a lapse of statute of limitations.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic and provides certain tax relief to businesses. Tax provisions of the CARES Act include, among other things, the deferral of certain payroll taxes, relief for retaining employees, and certain income tax provisions for corporations. During the six months ended July 5, 2020, the Company deferred approximately $1.4 million in payroll taxes under the CARES Act. Other than the deferral of payroll taxes, the CARES Act did not have an impact on the Company’s tax accounts, including its effective tax rate, during the six months ended July 5, 2020. The Company expects it will defer approximately $4.0 million in payroll taxes under the CARES Act during fiscal year 2020 which will result in a corresponding increase in its payroll tax accrual. The CARES Act and other similar foreign government support programs are not expected to have a material impact on the Company’s tax accounts during the year.
NOTE
1114 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOMEDuring the first nine months of 2017, the Company did not reclassify any significant amountsLOSS
Amounts reclassified out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $1.2 million relatedincome (loss) (“AOCI”) to the Company’s defined benefit retirement planconsolidated condensed statements of operations during the three and salary continuation plan. These reclassifications were includedsix months ended July 5, 2020 and June 30, 2019 are reflected in the selling, generaltables below:
|
| | | | | | | | | |
| | | Three Months Ended |
| Statement of Operations Location | | July 5, 2020 | | June 30, 2019 |
| | | (In thousands) |
Interest rate swap contracts gain (loss) | Interest expense | | $ | (1,124 | ) | | $ | 156 |
|
Amortization of benefit plan prior service cost and net actuarial losses | Other expense | | (595 | ) | | (358 | ) |
Total loss reclassified from AOCI, net | | | $ | (1,719 | ) | | $ | (202 | ) |
| | | | | |
| | | Six Months Ended |
| Statement of Operations Location | | July 5, 2020 | | June 30, 2019 |
| | | (In thousands) |
Interest rate swap contracts gain (loss) | Interest expense | | $ | (1,616 | ) | | $ | 295 |
|
Amortization of benefit plan prior service cost and net actuarial losses | Other expense | | (1,087 | ) | | (721 | ) |
Total loss reclassified from AOCI, net | | | $ | (2,703 | ) | | $ | (426 | ) |
NOTE 15 – RESTRUCTURING CHARGES
For the six months ended July 5, 2020, the Company recorded a reduction of $1.3 million of previously recognized restructuring charges due to changes in expected cash payments. At July 5, 2020, the total restructuring reserve was $6.8 million for both the 2019 and
administrative expenses line item2018 restructuring plans. Below is a discussion of the
Company’s consolidated condensed statement of operations.restructuring plan activities by year. 2019 Restructuring Plan
-13-
NOTE 12 – 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. In the second quarter of 2016, the Company amended the share purchase program to authorize the repurchase of up to $50 million of common stock, with no specific expiration date. During the first three months of 2017, the Company repurchased and retired 1,601,896 shares of common stock at a weighted average purchase price of $19.36 per share. These repurchases completed the $50 million repurchase plan.
In the second quarter of 2017, the Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $100 million of its outstanding shares of common stock. The program has no specific expiration date. During the second and third quarters of 2017, pursuant to this new program, the Company repurchased and retired an aggregate of 2,575,847 shares of common stock at a weighted average price of $19.38 per share.
NOTE 13 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In the fourth quarter of 2016,On December 23, 2019, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved a reduction of approximately 105 employees and early termination of 2 office leases. As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0 million. The charge was comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million).
The restructuring plan is expected to result in cash expenditures of approximately $9.0 million for payment of the employee severance and lease exit costs, as described above. The Company expects to complete the restructuring plan in fiscal year 2020 and expects the plan to yield annualized savings of approximately $6.0 million. A portion of the annualized savings is expected to be realized on the income statement in fiscal year 2020, with the remaining portion of the annualized savings expected to be realized in fiscal year 2021.
A reconciliation of the 2019 plan restructuring reserve is presented below:
|
| | | | | | | | | | | | | | | |
| BALANCE, AT DECEMBER 30, 2019 | | DEDUCTIONS 2020 | | CHARGED TO EXPENSES 2020 | | BALANCE, AT JULY 5, 2020 |
| (In thousands) |
Workforce Reduction | $ | 8,634 |
| | $ | (1,996 | ) | | $ | (353 | ) | | $ | 6,285 |
|
Other Exit Costs | 139 |
| | — |
| | — |
| | 139 |
|
Total | $ | 8,773 |
| | $ | (1,996 | ) | | $ | (353 | ) | | $ | 6,424 |
|
2018 Restructuring Plan
On December 29, 2018, the Company committed to a restructuring plan in its continuing efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involvesinvolved (i) a substantial restructuring of its sales and administrative operations in the FLOR business model that includes closure of its headquarters office and most retail FLOR stores,United Kingdom, (ii) a reduction of approximately 70 FLOR200 employees, and a number of employees in the commercial carpet tile business, primarily in the AmericasEurope and EuropeAsia-Pacific geographic regions, and (iii) the write-down of certain underutilized and impaired assets that includeincluded information technology assets, intellectual property assets and obsolete manufacturing officeequipment.
The restructuring plan was substantially completed at the end of the second quarter of 2020. The Company redeployed essentially all of the anticipated savings toward the funding of sales and
retail store equipment.strategic growth initiatives, yielding negligible net savings on the Company’s income statement.
A reconciliation of the 2018 plan restructuring reserve is presented below:
|
| | | | | | | | | | | | | | | |
| BALANCE, AT DECEMBER 30, 2019 | | DEDUCTIONS 2020 | | CHARGED TO EXPENSES 2020 | | BALANCE, AT JULY 5, 2020 |
| (In thousands) |
Workforce Reduction | $ | 1,898 |
| | $ | (1,385 | ) | | $ | (223 | ) | | $ | 290 |
|
Other Exit Costs | 774 |
| | — |
| | (699 | ) | | 75 |
|
Total | $ | 2,672 |
| | $ | (1,385 | ) | | $ | (922 | ) | | $ | 365 |
|
NOTE 16 – SUBSEQUENT EVENTS
Cost Reducing Initiatives and Related Charges
As a resultwe continue to monitor the impact of this plan,COVID-19 and mitigate its effects to our operations, the Company incurredexpects to continue to pursue a pre-tax restructuringvariety of cost reducing initiatives including but not limited to voluntary incentive separation programs, temporary employee furloughs and asset impairment chargeother time-and-pay reduction programs, applications to participate in various government sponsored “wage support” programs, involuntary separations where necessary to streamline roles and responsibilities, potential facility closures to streamline operations, and various other cost reducing and cost avoidance activities.
Syndicated Credit Facility
On July 15, 2020, the
fourthCompany entered into a second amendment to its Syndicated Credit Facility (the “Facility”). This amendment, among other changes, provides for the following: (1) amends the consolidated net leverage ratio covenant making it less restrictive for a period of seven consecutive fiscal quarters beginning with the third quarter of
2016 of $19.8 million. Infiscal year 2020 through the first quarter of 2017,fiscal year 2022 (the “Relief Period”); (2) amends the pricing grid used to determine interest rate margins on outstanding loans as well as the commitment fee on the unused portion of the Facility to include additional consolidated net leverage ratio levels with increased pricing at higher levels of leverage; (3) amends interest rate provisions to provide for interest rate floors, as applicable, on certain tranches of term loans outstanding; and (4) provides temporary restrictions during the Relief Period on the Company’s ability to make acquisitions, pay dividends, repurchase shares, or enter into new credit facilities without lender consent. The Company recorded an additional charge of $7.3incurred approximately $1.5 million primarily relatedin debt issuance costs to exit costs associated with the closure of most FLOR retail stores in the first quarter of 2017. The charge in the first quarter of 2017 was comprised of lease exit costs of $3.4 million, asset impairment charges of $3.3 million and severance charges of $0.6 million.A summary of these restructuring activities is presented below:
| | Total Restructuring Charge | | | Costs Incurred in 2016 | | | Costs Incurred in 2017 | | | Balance at October 1, 2017 | |
| | | | | | (in thousands) | |
Workforce Reduction | | $ | 10,652 | | | $ | 1,451 | | | $ | 6,537 | | | $ | 2,664 | |
Asset Impairment | | | 11,319 | | | | 8,019 | | | | 3,300 | | | | 0 | |
Lease Exit Costs | | | 5,116 | | | | 27 | | | | 5,027 | | | | 62 | |
execute this amendment.
-14-
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended
January 1, 2017,December 29, 2019, under Part II, 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 1, 2017,July 5, 2020, and the comparable periods of 20162019 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. The six month period ended July 5, 2020 includes 27 weeks, and the six month period ended June 30, 2019 includes 26 weeks. The three month periods ended July 5, 2020 and June 30, 2019 both include 13 weeks.
Forward-Looking Statements
This report contains statements which may constitute
“forward-looking“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 the ongoing COVID-19 pandemic and the economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2017, which discussion is hereby incorporatedDecember 29, 2019, as supplemented by reference.the additional risk factors included in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 5, 2020. 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.
Impact of the COVID-19 Pandemic
The World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. The COVID-19 pandemic has had material adverse effects on our business, results of operations, and financial condition, and it is anticipated that this will continue for an indefinite period of time. The duration of the pandemic will ultimately determine the extent to which our operations are impacted. We continue to monitor our operations and have implemented various programs to mitigate the effects on our business including reductions in employees, labor costs, marketing expenses, consulting expenses, travel costs, various other costs, and capital expenditures, as well as suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives.
During the second quarter of 2020, the COVID-19 pandemic continued to impact our global operations, resulting in lower revenue across all geographic regions. For the three months ended July 5, 2020, consolidated net sales declined 27.4% compared to the same period last year. As discussed above, the Company implemented, and continues to implement, various cost cutting initiatives to mitigate the effects of COVID-19 on our operations. During the three months ended July 5, 2020, the Company recorded $2.9 million of voluntary and involuntary severance costs, which are included in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations. We anticipate future annualized savings of approximately $7 million as a result of these separation initiatives.
As a result of the COVID-19 pandemic, government grants and payroll protection programs are available globally to provide assistance to companies impacted by the pandemic. The CARES Act enacted in the United States (see Note 13 entitled “Income Taxes” of Part I, Item 1 of this 10-Q for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”), provide benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments. The NOW Program provides eligible companies with reimbursement of labor costs as an incentive to retain employees on the payroll. During the second quarter of 2020, the Company qualified for benefits under several payroll protection programs and recognized a reduction in payroll costs of approximately $3.8 million during the quarter, which are recorded as a reduction of selling, general and administrative expenses in the Consolidated Condensed Statements of Operations, as the Company believes it is likely that the benefits received will not be repaid.
The COVID-19 pandemic had less of an impact on our global operations for the first six months of 2020 (as compared with the impact on the second quarter of 2020), as the effects of the pandemic did not begin to impact our business substantially until the end of the first quarter. For the first six months of 2020, consolidated net sales declined 16.4% compared to the same period last year primarily due to COVID-19. Due to reduced demand and to enhance employee safety measures, we temporarily suspended production in our U.S. manufacturing facilities from March 18, 2020 to March 23, 2020, and then again from April 6, 2020 to April 13, 2020. We also substantially reduced production in our Craigavon, UK facility beginning on April 20, 2020 through the end of the second quarter, and our Thailand, China, and Australia plants are operating in reduced shifts in light of reduced demand. During the first quarter of 2020, our Asia-Pacific region was primarily impacted by COVID-19 due to government shutdowns in China and the temporary closure of our China plant in late January 2020 to February 9, 2020. In addition, almost all of our salesforce and administrative employees globally continue to work remotely in accordance with local government orders and “shelter in place” directives.
During the quarter ended
October 1, 2017, we hadJuly 5, 2020, net sales of $257.4were $259.5 million compared with net sales of $248.3$357.5 million in the thirdsecond quarter last year. During the first ninesix months of fiscal year 2017, we hadended July 5, 2020, net sales of $730.2were $547.7 million, compared with net sales of $719.1$655.2 million in the first ninesix months of last year. Fluctuations in currency exchange rates had positive impacts on our salesThe second quarter and operating income infirst half of 2020 were negatively impacted by the third quarter 2017 versuseffects of the prior year period; for the nine-month period ended October 1, 2017, fluctuationsCOVID-19 pandemic as discussed above. Fluctuations in currency exchange rates had a negative impact on our sales but a positive impact on operating income compared with the prior year 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 affected our net sales and operating incomeof approximately $2.8 million for the three monthssecond quarter of 2020 and nine months ended October 1, 2017. The impactsa negative impact of changes in foreign currency presented inapproximately $7.5 million for the tables are calculated based on applying the prior year period’s average foreign currency exchange ratessix month period of 2020 compared to the current year period.Impact of Changes in Foreign Currency on: | | Three Months Ended October 1, 2017 | | | Nine Months Ended October 1, 2017 | |
| | (In millions) | |
Net sales | | $ | 4.0 | | | $ | (1.0 | ) |
Operating income | | | 0.6 | | | | 0.2 | |
three and six month periods of 2019, mostly driven by the weakening of the Euro, British Pound sterling and the Australian dollar against the U.S. dollar.
Goodwill, Intangible Asset and Fixed Asset Impairment
During the thirdfirst quarter of 2017,2020, we had net incomerecognized a charge of $19.4$121.3 million for the impairment of goodwill and certain intangible assets. See Note 10 entitled “Goodwill and Intangible Assets” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. No additional goodwill or $0.32 per diluted share, compared with net income of $15.9 million, or $0.25 per diluted share, in the third quarter of 2016. During the nine months ended October 1, 2017, we had net income of $48.9 million, or $0.78 per share, compared with net income of $49.5 million, or $0.76 per share, in the first nine months of 2016. The first nine months of 2017 include $7.3 million of restructuring andintangible asset impairment charges (all of which were recorded during the second quarter. During the second quarter of 2020, we recognized fixed asset impairment charges of $3.1 million related to certain FLOR design center closures and other projects that were abandoned or indefinitely delayed. These charges are included in selling, general and administrative expenses in the first quarter) as a continuationConsolidated Condensed Statements of the plans announced in the fourth quarter of 2016, primarily related to closing our FLOR specialty retail stores.Operations.
-15-
Results of Operations
The following table presents, as a percentage of net sales, certain items included in our
Consolidated Condensed Statementsconsolidated condensed statements of Operationsoperations for the three-monththree and nine-monthsix month periods ended October 1, 2017July 5, 2020 and October 2, 2016, respectively: | | Three Months Ended | | | Nine Months Ended | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Oct. 1, 2017 | | | Oct. 2, 2016 | |
| | | | | | | | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of sales | | | 61.7 | | | | 62.6 | | | | 61.1 | | | | 61.2 | |
Gross profit on sales | | | 38.3 | | | | 37.4 | | | | 38.9 | | | | 38.8 | |
Selling, general and administrative expenses | | | 26.3 | | | | 27.0 | | | | 27.1 | | | | 27.8 | |
Restructuring and Asset Impairment Charges | | | 0.0 | | | | 0.0 | | | | 1.0 | | | | 0.0 | |
Operating income | | | 12.0 | | | | 10.4 | | | | 10.9 | | | | 10.9 | |
Interest/Other expenses | | | 1.0 | | | | 1.0 | | | | 0.9 | | | | 0.8 | |
Income before tax expense | | | 11.0 | | | | 9.4 | | | | 9.9 | | | | 10.1 | |
Income tax expense | | | 3.5 | | | | 3.0 | | | | 3.2 | | | | 3.2 | |
Net income | | | 7.6 | | | | 6.4 | | | | 6.7 | | | | 6.9 | |
June 30, 2019:
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 5, 2020 | | June 30, 2019 | | July 5, 2020 | | June 30, 2019 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 62.5 |
| | 60.6 |
| | 61.4 |
| | 60.7 |
|
Gross profit on sales | 37.5 |
| | 39.4 |
| | 38.6 |
| | 39.3 |
|
Selling, general and administrative expenses | 30.9 |
| | 27.4 |
| | 30.6 |
| | 30.2 |
|
Restructuring charges | (0.1 | ) | | — |
| | (0.2 | ) | | — |
|
Goodwill and intangible asset impairment charge | — |
| | — |
| | 22.1 |
| | — |
|
Operating income (loss) | 6.7 |
| | 12.0 |
| | (13.9 | ) | | 9.1 |
|
Interest/Other expenses | 3.9 |
| | 2.0 |
| | 3.1 |
| | 2.3 |
|
Income (loss) before tax expense | 2.8 |
| | 10.0 |
| | (17.0 | ) | | 6.8 |
|
Income tax expense | 1.0 |
| | 1.8 |
| | 0.8 |
| | 1.2 |
|
Net income (loss) | 1.8 | % | | 8.2 | % | | (17.8 | )% | | 5.6 | % |
Below
we provideis information regarding
our net sales, and
analyzeanalysis of those results,
, for the three-monththree and nine-monthsix month periods ended October 1, 2017,July 5, 2020, and October 2, 2016, respectively. | | Three Months Ended | | | Percentage | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Change | |
| | (In thousands) | | | | | |
Net Sales | | $ | 257,431 | | | $ | 248,349 | | | | 3.7 | % |
| | Nine Months Ended | | | Percentage | |
| | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Change | |
| | (In thousands) | | | | | |
Net Sales | | $ | 730,233 | | | $ | 719,110 | | | | 1.5 | % |
June 30, 2019:
|
| | | | | | | | | | |
| Three Months Ended | | Percentage Change |
| July 5, 2020 | | June 30, 2019 | |
| (In thousands) | | |
Net Sales: | | | | | |
Americas | $ | 151,222 |
| | $ | 207,250 |
| | (27.0 | )% |
Europe | 71,874 |
| | 95,665 |
| | (24.9 | )% |
Asia-Pacific | 36,408 |
| | 54,592 |
| | (33.3 | )% |
Total Net Sales | $ | 259,504 |
| | $ | 357,507 |
| | (27.4 | )% |
|
| | | | | | | | | | |
| Six Months Ended | | Percentage Change |
| July 5, 2020 | | June 30, 2019 | |
| (In thousands) | | |
Net Sales: | | | | | |
Americas | $ | 309,313 |
| | $ | 367,876 |
| | (15.9 | )% |
Europe | 166,564 |
| | 188,715 |
| | (11.7 | )% |
Asia-Pacific | 71,796 |
| | 98,604 |
| | (27.2 | )% |
Total Net Sales | $ | 547,673 |
| | $ | 655,195 |
| | (16.4 | )% |
For the quarter ended
October 1, 2017,July 5, 2020, net sales
increased $9.1decreased $98.0 million
(3.7%(27.4%) versus the comparable period in
2016.2019. The sales decline was primarily due to the impact of the COVID-19 pandemic as discussed above. Currency fluctuations had an approximately
$4.0$2.8 million
(2.0%(0.8%)
positivenegative impact on
the 2017 thirdsecond quarter
2020 sales compared to the
thirdsecond quarter of
2016.2019. This
positivecurrency impact was
mostly due to the
resultweakening of
a strengtheningthe Euro,
British Pound sterling, Chinese Renminbi, and Australian dollar
as compared toagainst the
prior year period.U.S. dollar. On
a geographic basis, sales increased in all regions, with Americas commercial sales (defined as Americas sales less the FLOR residential sales) up 2%,net sales in the Americas decreased 27.0%, Europe up 6%decreased 24.9% and Asia-Pacific decreased 33.3%. The sales decreases across all geographic regions were, as translated into U.S. dollars (2%discussed above, due to the impacts of COVID-19, resulting in local currency),lower sales globally. The sales decrease in the Americas was most significant in the corporate, retail, leisure and transportation market segments, partially offset by increases in the hospitality and residential/living market segments. On a market segment basis, the sales decrease in Asia-Pacific up 12%. Third quarterEurope was most significant in the corporate, retail, hospitality and residential/living market segments, partially offset by increases in the healthcare and leisure market segments. The sales weredecrease in Europe was also negatively impacted by the exitweakening of the FLOR specialtyEuro. On a market segment basis, the sales decrease in Asia-Pacific was most significant in the corporate, retail, stores at the end of the first quarter of 2017, although this washealthcare, public buildings and hospitality market segments partially offset by gains in FLOR’s other sales channels. Global sales increased most significantly in the corporate office, education, government and healthcare segments. These increases were partially offset by declines in the retail segment and in the residential segment, which is largely a result of the exit of the FLOR specialty retail stores. In the Americas, the increase in sales was primarily due to sales of luxury vinyl tile (“LVT”), which is a hard surface modular flooring product line launched in the first quarter of 2017. In Europe, sales increased 2% in local currency, with increases in the United Kingdom, Germany and Southern and Central Europe. As noted above, due toresidential/living market segment. The sales decrease in Asia-Pacific was also impacted by the strengtheningweakening of the Euro, our sales in Europe improved by 6% as translated into U.S. dollars. Sales in Asia-Pacific saw increases across the region with the exception of China.Australian dollar.
For the
ninesix months ended
October 1, 2017,July 5, 2020, net sales
increased $11.1decreased $107.5 million (1.5%(16.4%) versus the comparable period in 2016.2019. The sales decline was primarily due to the impact of the COVID-19 pandemic, as discussed above, more pronounced in the second quarter as the effects of the pandemic did not begin to impact our business substantially until the end of the first quarter. Currency fluctuations had an approximately $1.0$7.5 million (less than 1%(1.1%) negative impact on net sales for the first ninesix months of 2017 as2020 compared to the same period in 2016.first six months of 2019. This currency impact was mostly due to the weakening of the Euro, British Pound sterling, Chinese Renminbi, and Australian dollar against the U.S. dollar. On a geographic basis, net sales were up 2%for the first six months of 2020 in the Americas commercial businessdecreased 15.9%, Europe decreased 11.7% and up 5%Asia-Pacific decreased 27.2%. The sales decreases across all geographic regions were, as discussed above, due to the impacts of COVID-19, resulting in Asia-Pacific. In Europe,lower sales were down approximately 1% bothglobally. The sales decrease in local currencythe Americas was seen in the corporate, retail, and as translated into U.S. dollars. We experienced salesleisure market segments, partially offset by increases in ourthe hospitality and residential/living market segments. On a market segment basis, the sales decrease in Europe was most significant in the corporate, office, educationretail, public buildings, residential/living and government segments. These increases werehospitality market segments, partially offset by declinesincreases in the healthcareleisure and hospitalitytransportation market segments. Sales wereThe sales decrease in Europe was also negatively impacted by the exit of FLOR specialty retail stores at the endweakening of the first quarter of 2017. As noted above, we launched LVTEuro. The sales decrease in the first quarterAsia-Pacific region was impacted by COVID-19 shutdowns and the weakening of 2017. Sales of these products are progressing according to planthe Chinese Renminbi and have been primarilyAustralian dollar. On a market segment basis, the sales decrease in Asia-Pacific was most significant in the Americas, although they were launched in Europecorporate, retail, healthcare, public buildings and Asia-Pacifictransportation market segments partially offset by increases in the second quarter of this year and sales activity in those regions is progressing in line with expectations as well.residential/living market segment.Cost and Expenses
The following
tablestables present on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-monththree and nine-monthsix month periods ended October 1, 2017July 5, 2020, and October 2, 2016, respectively: | | Three Months Ended | | | Percentage | |
Cost and Expenses | | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Change | |
| | (In thousands) | | | | | |
Cost of sales | | $ | 158,887 | | | $ | 155,431 | | | | 2.2 | % |
Selling, general and administrative expenses | | | 67,633 | | | | 67,175 | | | | 0.7 | % |
Total | | $ | 226,520 | | | $ | 222,606 | | | | 1.8 | % |
| | Nine Months Ended | | | Percentage | |
Cost and Expenses | | Oct. 1, 2017 | | | Oct. 2, 2016 | | | Change | |
| | (In thousands) | | | | | |
Cost of sales | | $ | 445,990 | | | $ | 440,434 | | | | 1.3 | % |
Selling, general and administrative expenses | | | 197,660 | | | | 200,108 | | | | (1.2% | ) |
Total | | $ | 643,650 | | | $ | 640,542 | | | | 0.5 | % |
June 30, 2019:
|
| | | | | | | | | | |
| Three Months Ended | | Percentage Change |
| July 5, 2020 | | June 30, 2019 | |
| (In thousands) | | |
Cost of sales | $ | 162,210 |
| | $ | 216,777 |
| | (25.2 | )% |
Selling, general and administrative expenses | 80,058 |
| | 97,838 |
| | (18.2 | )% |
|
| | | | | | | | | | |
| Six Months Ended | | Percentage Change |
| July 5, 2020 | | June 30, 2019 | |
| (In thousands) | | |
Cost of sales | $ | 336,068 |
| | $ | 397,943 |
| | (15.5 | )% |
Selling, general and administrative expenses | 167,741 |
| | 197,973 |
| | (15.3 | )% |
For the quarter ended
October 1, 2017, costsJuly 5, 2020, cost of sales increased $3.5decreased $54.6 million (2.2%(25.2%) as compared to the thirdsecond quarter of 2016. Fluctuations in currency exchange rates2019, primarily due to lower net sales. Cost of sales also includes the amortization of acquired intangible assets of $1.3 million for each of the second quarters of 2020 and 2019, respectively. Currency translation had a small (1%an approximately $2.0 million (0.9%) positive impact on the year-over-year comparison. The increase in costs of sales was a function of higher sales for the 2017 third quarter, as sales increased 3.7% versus the prior year period. The percentage increase in costs of sales was lower than the increase in sales due to improved manufacturing performance during the quarter, a result of our productivity and process improvement gains as well as savings from our restructuring activities undertaken in the fourth quarter of 2016. In addition, in the third quarter of 2016, there were costs related to our move to a centralized warehouse facility in the U.S. that did not repeat in 2017. As a percentage of sales, costs of sales decreased to 61.7% for the third quarter of 2017 as compared to 62.6% for the third quarter of 2016 due to the factors noted above. This improvement came despite slightly lower production volumes in the third quarter of 2017 versus the same period in 2016 as well as higher raw material input prices.For the nine months ended October 1, 2017, cost of sales increased $5.5 million (1.3%) versus the comparable period in 2016. Fluctuations in currency exchange rates did not have a significant impact on the comparison. This increase in costs of sales was largely because of increased sales for the period, as sales increased 1.5% versus the prior year period. As a percentage ofnet sales, our cost of sales decreased slightlyincreased to 61.1%62.5% for the ninesecond quarter of 2020 versus 60.6% for the second quarter of 2019.
For the six months ended
October 1, 2017, from 61.2% for the comparable period in 2016. This decrease is a result of the Company’s productivity initiatives delivering benefits slightly in advance of higher raw material input prices and despite lesser absorption of fixed costs associated with lower production volumes. We expect continued raw material price inflation, as well as less absorption of fixed costs associated with lower production levels, for the balance of 2017 and, as a result,July 5, 2020, cost of sales
asdecreased $61.9 million (15.5%) compared to the first six months of 2019, primarily due to lower net sales. Cost of sales also includes the amortization of acquired intangible assets of $2.6 million and $3.2 million for the first six months of 2020 and 2019, respectively. Currency translation had an approximately $5.3 million (1.3%) positive impact on the year-over-year comparison. As a percentage of
net sales,
is expectedour cost of sales increased to
increase61.4% for the
remainderfirst six months of
2017.2020 versus 60.7% for the first six months of 2019.
For the
three monthsquarter ended
October 1, 2017,July 5, 2020, selling, general and administrative (“SG&A”) expenses increased $0.5decreased $17.8 million (0.7%) versus the comparable period last year. Fluctuations in current exchange rates did not have a significant impact on the comparison. This increase in SG&A expenses is a result of additional incentive based compensation due to higher projected attainment of performance goals in the third quarter of 2017 as compared to the prior year period. This increase in incentive-based compensation was offset almost entirely by (1) lower selling expenses due to the exit of the FLOR specialty retail stores, (2) lower functional expenses as we continue our transition to more centralized services, and (3) savings as a result of our restructuring plans implemented in the fourth quarter of 2016. These savings were realized despite higher expenses associated with our LVT product launches in 2017. As a result of the savings discussed above, as a percentage of sales, our SG&A expenses declined to 26.3% for the three months ended October 1, 2017 versus 27.0% for the comparable period in 2016.For the nine-month ended October 1, 2017, SG&A expenses decreased $2.5 million (1.2%(18.2%) versus the comparable period in 2016. This decline was2019. Currency translation had a function$0.5 million (0.5%) positive impact on the year-over-year comparison. SG&A expenses were lower for the second quarter of decreases2020 primarily due to (1) lower selling expenses of $16.1 million due to lower net sales, (2) $3.8 million of payroll protection credits, and (3) lower overall payroll costs due to lower performance-based incentive compensation as well as the impact of voluntary and involuntary employee separations and furloughs, which were partially offset by $2.9 million of severance expenses recorded during the quarter. As a percentage of sales, SG&A expenses increased to 30.9% for the second quarter of 2020 versus 27.4% for the second quarter of 2019.
For the six months ended July 5, 2020, SG&A expenses decreased $30.2 million (15.3%) versus the comparable period in 2019. Currency translation had a $1.4 million (0.7%) positive impact on the year-over-year comparison. SG&A expenses were lower for the first six months of 2017 offset by2020 primarily due to (1) lower selling expenses of $23.7 million due to lower net sales, (2) lower stock compensation expense of $7.0 million, (3) $3.8 million of payroll protection credits, and (4) lower overall payroll costs as discussed above. As a slight increae inpercentage of sales, SG&A expenses increased to 30.6% for the first six months of 2020 versus 30.2% for the first six months of 2019.
Other Expense
Other expenses increased $4.8 million and $5.3 million during the three
and six months ended
October 1, 2017. Fluctuations in currency exchanges rates did not haveJuly 5, 2020, respectively, compared to 2019 primarily due to a
significant impact on the comparison. The decline for the nine-month period was$4.2 million write-down of damaged raw material inventory as a result of
(1) lower functional expenses, as we move towards more centralized services and realize associated savings, (2) lower selling expenses in the second and third quarters of 2017 associated with exiting the FLOR specialty retail stores, and (3) savings associated with our previously announced restructuring plans. These savings were offset by higher incentive compensation due to higher attainment of performance goals in 2017 versus 2016, as well as costs associated with the rollout of our LVT product offerings. Due to these decreases, as well as higher sales for the first nine months of 2017, our SG&A expenses declined to 27.1% of sales as compared to 27.8% of sales for the first nine months of 2016.a fire at a storage facility. InterestExpense
-17-
Interest Expense
For the three-month periodquarter ended October 1, 2017, ourJuly 5, 2020, interest expense increased $0.2 million to $1.9decreased $1.8 million, from $1.7 million in the third quarter of 2016. For the nine-month period ended October 1, 2017, our interest expense increased $0.4 million to $5.2 million, from $4.8$6.8 million in the comparable period last year. The increases wereyear to $5.0 million, primarily due to higher weighted average borrowing rates forlower interest rates. For the 2017 periods versus those ofsix months ended July 5, 2020, interest expense decreased $3.0 million, from $13.6 million in the 2016 periods as well as higher average daily outstanding borrowing amounts under our Syndicated Credit Facility during the 2017 periods.
comparable period last year to $10.6 million, primarily due to lower interest rates.
Liquidity and Capital Resources
At
October 1, 2017,July 5, 2020, we had $78.1$91.8 million in cash and cash equivalents.cash. At that date, we had outstanding $173.8$566.8 million ofin term loan borrowings, $60.8borrowing, $58.8 million of revolving loan borrowings, and $6.0$1.6 million in letters of credit under our Syndicated Credit Facility.As of October 1, 2017, we could have incurred $183.2 million of additional borrowingsoutstanding under our Syndicated Credit Facility. In addition,As of July 5, 2020, we could have incurred anhad additional $9.8borrowing capacity of $239.6 million under the Syndicated Credit Facility and $9.5 million of borrowingsborrowing capacity under our other lines of credit facilities in place at other non-U.S. subsidiaries.
Analysis We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months.
Amendment of
Cash FlowsWe exited the quarter ended October 1, 2017 with $78.1 million in cash, a decrease of $87.6 million during the first nine months of the year. The decrease in cash was primarily a result of cash outflows for financing activities, with the most significant factors being (1) $81.1 million of cash used to repurchase and retire 4.2 million shares of our outstanding common stock, (2) $62.1 million of cash used to repay borrowings under the Syndicated Credit Facility (including required amortization payments of $11.3 million), and (3) $11.6 million for the payments of dividends. These financing cash outflows were partially offset by $20.0 million of borrowings underDue to COVID-19 Impact
On July 15, 2020, we entered into a second amendment to our Syndicated Credit Facility. We also usedSee Note 16 entitled “Subsequent Events” within Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Analysis of Cash Flows
The following table presents a summary of cash of $22.8flows for the six-month periods ended July 5, 2020 and June 30, 2019, respectively:
|
| | | | | | | |
| Six Months Ended |
| July 5, 2020 | | June 30, 2019 |
| (In thousands) |
Net cash provided by (used in): | | | |
Operating activities | $ | 32,427 |
| | $ | 20,432 |
|
Investing activities | (35,694 | ) | | (34,893 | ) |
Financing activities | 15,624 |
| | 17,209 |
|
Effect of exchange rate changes on cash | (1,814 | ) | | 519 |
|
Net change in cash and cash equivalents | 10,543 |
| | 3,267 |
|
Cash and cash equivalents at beginning of period | 81,301 |
| | 80,989 |
|
Cash and cash equivalents at end of period | $ | 91,844 |
| | $ | 84,256 |
|
Cash provided by operating activities was $32.4 million for the six months ended July 5, 2020, which represents an increase of $12.0 million from the prior year comparable period. The increase was primarily due to working capital expenditureschanges, specifically an increase in the first nine months of 2017. These uses were partiallyaccount receivable collections offset by $67.9the change to accounts payable and accrued expenses.
Cash used in investing activities was $35.7 million for the six months ended July 5, 2020 which represents an increase of cash generated$0.8 million from operating activities during the nine-monthprior year comparable period. The factors driving the cash from operations were (1) $48.9 million of net income for the period, and (2) $10.8 million of cash generatedincrease was primarily due to an increase in accounts payable and accruals. These inflows were partially offsetcapital expenditures from the prior year comparable period.
Cash provided by operating cash outflowsfinancing activities was $15.6 million for the six months ended July 5, 2020 which represents a decrease of $22.4$1.6 million from the prior year comparable period. The decrease was primarily due to an increasehigher repayments of revolving loan borrowings.
Purchase Obligations
We have outstanding purchase obligations of $9.7 million related to expanding our manufacturing capabilities, which we expect to fund during the remainder of 2020.
Forward-Looking Statement on Impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full year fiscal 2020 results and beyond are uncertain. We believe the most significant elements of uncertainty are (1) the intensity and duration of the impact on construction, renovation, and remodeling; (2) corporate, government, and consumer spending levels and sentiment; and (3) the ability of our sales channels, supply chain, manufacturing, and distribution partners to continue operating through disruptions. Any or all of these factors could negatively impact our financial position, results of operations, cash flows, and outlook. As the impact of the COVID-19 pandemic continues to affect companies with global operations, we anticipate that our business and results in inventory.the third quarter of 2020 will continue to be adversely affected, and the timeline and pace of recovery is uncertain. While we are unable to predict with certainty, we anticipate continued year-over-year declines in revenue and operating income in the third and fourth quarters of fiscal year 2020, and perhaps during quarterly periods thereafter.
The Company has implemented several cost reduction and avoidance initiatives to align with anticipated customer demand, including a voluntary employee separation program, temporary employee furloughs and other time-and-pay reduction programs, involuntary employee separations where necessary to streamline roles and responsibilities, and various other cost reducing initiatives. The Company has also suspended merit-based salary increases, as well as its 401(k) and Non-Qualified Savings Plan (NSP) matching contributions, and will benefit from lower than originally anticipated performance-based compensation and variable compensation for 2020. In addition, the Company has reduced its capital spending plans.
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company’s cash flows from operations can be affected by numerous factors including the uncertainty of COVID-19 and its impact on global operations, raw material availability and cost, demand for our products, and other factors described in “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Backlog
As of July 26, 2020, the consolidated backlog of orders was approximately $193.1 million. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, backlog was approximately $177.8 million as of February 9, 2020. Disruptions in supply and distribution chains, global travel restrictions and government shelter in place orders due to the impact of COVID-19 have resulted in delays of construction projects and flooring installations in many regions worldwide.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
The discussion below in this Item 3 is based upon the more detailed discussions of our market risk and related matters included in our Annual Report on Form 10-K for the fiscal year ended
January 1, 2017December 29, 2019, under Part II, Item 7A of that Form 10-K. OurThe discussion here focuses on the periodsix months ended October 1, 2017,July 5, 2020, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.At October 1, 2017, we recognized a $30.7 million increase in our foreign currency translation adjustment account compared to January 1, 2017, primarily because of the weakening of the U.S. dollar against certain foreign currencies, particularly the Euro and the Australian dollar.
Sensitivity Analysis.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
Part II, Item 7A of our Annual Report on Form 10-K for the year ended
January 1, 2017.December 29, 2019.As of October 1, 2017,July 5, 2020, 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 $9.6$11.8 million or an increase in the fair value of our financial instruments of $11.7$14.4 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.
As of July 5, 2020, a 100 basis point decrease in interest rates would result in an increase in the recorded liability of our interest rate swaps of approximately $5.2 million while a 100 basis point increase in interest rates would result in a decrease in the recorded liability of our interest rate swaps of approximately $6.3 million.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our 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.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Based on
thatthe evaluation, our President and Chief Executive Officer and our 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.Report to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We
From time to time, we are subjecta party to various legal proceedings, whether arising in the ordinary course of business noneor otherwise. The disclosure set forth in Note 17 to the consolidated financial statements included in Item 8 of whichthe December 29, 2019 Annual Report on Form 10-K is required to be disclosed under this Item 1.incorporated by reference herein.
ITEM 1A. RISK FACTORS
There are no material changes
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in the third quarter of 2017. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,” inof our Annual Reportannual report on Form 10-K for the fiscal year ended January 1, 2017.December 29, 2019, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 5, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information with respect to purchases made by or on behalf of the Company, or any “affiliated purchaser” (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during theour second quarter ended October 1, 2017: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) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) | |
| | | | | | | | | | | | | | | | |
July 3-31, 2017(3) | | | 21,638 | | | $ | 19.67 | | | | 20,010 | | | $ | 75,037,949 | |
August 1-31, 2017 | | | 1,311,102 | | | $ | 19.04 | | | | 1,311,102 | | | | 50,077,293 | |
September 1-30, 2017 | | | 0 | | | | N/A | | | | 0 | | | | 50,077,293 | |
October 1, 2017 | | | 0 | | | | N/A | | | | 0 | | | | 50,077,293 | |
Total | | | 1,332,740 | | | $ | 19.75 | | | | 1,331,112 | | | | 50,077,293 | |
July 5, 2020:
|
| | | | | | | | | | | | | | |
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 | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
April 6 - May 3, 2020(2) (3) | | 19,867 |
| | $ | 10.50 |
| | — |
| | $ | — |
|
May 4 - May 31, 2020(2) | | 428 |
| | 9.02 |
| | — |
| | — |
|
June 1 - July 5, 2020(2) | | 292 |
| | 8.50 |
| | — |
| | — |
|
Total | | 20,587 |
| | $ | 10.44 |
| | — |
| | $ | — |
|
(1)The monthly periods identified above correspond to the Company’s fiscal thirdsecond quarter of 2017,2020, which commenced July 3, 2017April 6, 2020 and ended October 1, 2017.July 5, 2020.
(2) In April 2017, the Company announced a new share purchase program authorizing the repurchase of up to $100 million of common stock. This amended program has no specific expiration date.(3)
Includes 1,628 shares acquired by the Company from employees at a price of $19.65 per share to satisfy income tax withholding obligations in connection with the vesting of previous grantsequity awards. (3) Includes 6,741 shares withheld that vested during the first quarter of equity awards.2020 at the average share price in effect at that time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.
MINE SAFETY DISCLOSURESNot applicableapplicable.
ITEM 5. OTHER INFORMATION
None
The following exhibits are filed with this report:
EXHIBIT
NUMBER
| DESCRIPTION OF EXHIBIT
|
10.1
| |
EXHIBIT NUMBER | |
10.1 | |
10.2 | Interface, Inc., certain subsidiaries of the Company as borrowers, certain subsidiaries of the Company as guarantors, Bank of America, N.A. as Administrative Agent, and the other lenders party thereto 2020 Omnibus Stock Incentive Plan (included as Exhibit 99.1 to the Company’s current reportCompany’s Current Report on Form 8-K filed on August 9, 2017,May 28, 2020, previously filed with the Commission and incorporated herein by reference). |
10.2 10.3 | Second Amendment to Second Amended and Restated Security and PledgeSyndicated Facility Agreement dated as of August 8, 2017, among Interface, Inc., certain subsidiaries of the Company as obligors, and Bank of America, N.A. as Administrative AgentJuly 15, 2020 (included as Exhibit 99.210.1 to the Company’s current reportCompany’s Current Report on Form 8-K filed on August 9, 2017,July 16, 2020, previously filed with the Commission and incorporated herein by reference). |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document. – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document. Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. Document. |
101.PRE | XBRL Taxonomy Presentation Linkbase Document. Document. |
101.DEF | XBRL Taxonomy Definition Linkbase Document. |
104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended July 5, 2020, formatted in Inline XBRL
|
-20-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| INTERFACE, INC. |
| | |
Date: November 9, 2017 August 11, 2020 | By: | /s/ Bruce A. Hausmann |
| | Bruce A. Hausmann |
| | Vice President
|
| | Chief Financial Officer (Principal Financial Officer) |
EXHIBITS INCLUDED HEREWTIH