SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended July 1,September 30, 2018
Commission File Number 001-33994
INTERFACE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA | 58-1451243 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
2859 PACES FERRY ROAD, SUITE 2000,1280 WEST PEACHTREE STREET, ATLANTA, GEORGIA 3033930309
(Address of principal executive offices and zip code)
(770) 437-6800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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):
Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐
Emerging Growth Company ☐ | Smaller reporting 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 ☑
Shares outstanding of each of the registrant’s classes of common stock at AugustNovember 1, 2018:
Class | Number of Shares | |||
Common Stock, $.10 par value per share |
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INDEX
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| PAGE | ||
PART I. | ||||
Item 1. | 3 | |||
Consolidated Condensed Balance Sheets – | 3 | |||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. | ||||
Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I - FINANCIAL INFORMATION
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JULY 1, 2018 | DECEMBER 31, 2017 | SEPTEMBER 30, 2018 | DECEMBER 31, 2017 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 66,983 | $ | 87,037 | $ | 107,331 | $ | 87,037 | ||||||||
Accounts receivable, net | 156,602 | 142,808 | 177,766 | 142,808 | ||||||||||||
Inventories, net | 199,127 | 177,935 | 278,815 | 177,935 | ||||||||||||
Prepaid expenses and other current assets | 38,082 | 23,087 | 36,314 | 23,087 | ||||||||||||
Total current assets | 460,794 | 430,867 | 600,226 | 430,867 | ||||||||||||
Property and equipment, net | 207,994 | 212,645 | 292,606 | 212,645 | ||||||||||||
Deferred tax asset | 17,904 | 18,003 | 23,324 | 18,003 | ||||||||||||
Goodwill, net | 67,042 | 68,754 | ||||||||||||||
Goodwill and intangible assets, net | 353,810 | 68,754 | ||||||||||||||
Other assets | 70,893 | 70,331 | 72,994 | 70,331 | ||||||||||||
Total assets | $ | 824,627 | $ | 800,600 | $ | 1,342,960 | $ | 800,600 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 61,542 | $ | 50,672 | $ | 69,353 | $ | 50,672 | ||||||||
Accrued expenses | 102,953 | 110,974 | 137,862 | 110,974 | ||||||||||||
Current portion of long-term debt | 15,000 | 15,000 | 31,315 | 15,000 | ||||||||||||
Total current liabilities | 179,495 | 176,646 | 238,530 | 176,646 | ||||||||||||
Long-term debt | 228,531 | 214,928 | 617,565 | 214,928 | ||||||||||||
Deferred income taxes | 6,750 | 6,935 | 27,475 | 6,935 | ||||||||||||
Other | 69,248 | 72,000 | 106,410 | 72,000 | ||||||||||||
Total liabilities | 484,024 | 470,509 | 989,980 | 470,509 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
Shareholders’ equity | ||||||||||||||||
Preferred stock | 0 | 0 | 0 | 0 | ||||||||||||
Common stock | 5,949 | 5,981 | 5,951 | 5,981 | ||||||||||||
Additional paid-in capital | 262,285 | 271,271 | 265,300 | 271,271 | ||||||||||||
Retained Earnings | 215,383 | 187,432 | 219,689 | 187,432 | ||||||||||||
Accumulated other comprehensive loss – foreign currency translation | (90,886 | ) | (78,943 | ) | (85,922 | ) | (78,943 | ) | ||||||||
Accumulated other comprehensive income – cash flow hedge | 3,183 | 904 | ||||||||||||||
Accumulated other comprehensive income – cash flow hedges | 3,469 | 904 | ||||||||||||||
Accumulated other comprehensive loss – pension liability | (55,311 | ) | (56,554 | ) | (55,507 | ) | (56,554 | ) | ||||||||
Total shareholders’ equity | 340,603 | 330,091 | 352,980 | 330,091 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 824,627 | $ | 800,600 | $ | 1,342,960 | $ | 800,600 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | SIX MONTHS ENDED | THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||||||||||||||
JULY 1, 2018 | JULY 2, 2017 | JULY 1, 2018 | JULY 2, 2017 | SEPTEMBER 30, 2018 | OCTOBER 1, 2017 | SEPTEMBER 30, 2018 | OCTOBER 1, 2017 | |||||||||||||||||||||||||
NET SALES | $ | 283,626 | $ | 251,700 | $ | 524,189 | $ | 472,802 | $ | 318,325 | $ | 257,431 | $ | 842,514 | $ | 730,233 | ||||||||||||||||
Cost of Sales | 174,478 | 153,803 | 321,459 | 287,103 | 218,380 | 158,887 | 539,839 | 445,990 | ||||||||||||||||||||||||
GROSS PROFIT ON SALES | 109,148 | 97,897 | 202,730 | 185,699 | 99,945 | 98,544 | 302,675 | 284,243 | ||||||||||||||||||||||||
Selling, General and Administrative Expenses | 75,445 | 64,386 | 146,039 | 129,100 | 84,160 | 67,233 | 230,199 | 196,333 | ||||||||||||||||||||||||
Restructuring and Asset Impairment Charges | 0 | 0 | 0 | 7,299 | 0 | 0 | 0 | 7,299 | ||||||||||||||||||||||||
OPERATING INCOME | 33,703 | 33,511 | 56,691 | 49,300 | 15,785 | 31,311 | 72,476 | 80,611 | ||||||||||||||||||||||||
Interest Expense | 2,261 | 1,682 | 4,355 | 3,299 | 4,852 | 1,851 | 9,207 | 5,150 | ||||||||||||||||||||||||
Other Expense | 3,261 | 698 | 3,780 | 2,092 | 1,570 | 1,051 | 5,350 | 3,143 | ||||||||||||||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 28,181 | 31,131 | 48,556 | 43,909 | 9,363 | 28,409 | 57,919 | 72,318 | ||||||||||||||||||||||||
Income Tax Expense | 7,579 | 10,193 | 12,870 | 14,424 | 1,191 | 8,970 | 14,061 | 23,394 | ||||||||||||||||||||||||
NET INCOME | $ | 20,602 | $ | 20,938 | $ | 35,686 | $ | 29,485 | $ | 8,172 | $ | 19,439 | $ | 43,858 | $ | 48,924 | ||||||||||||||||
Earnings Per Share – Basic | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 | ||||||||||||||||
Earnings Per Share – Diluted | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 | ||||||||||||||||
Common Shares Outstanding – Basic | 59,493 | 62,789 | 59,582 | 63,432 | 59,496 | 61,018 | 59,553 | 62,630 | ||||||||||||||||||||||||
Common Shares Outstanding – Diluted | 59,538 | 62,832 | 59,627 | 63,474 | 59,536 | 61,060 | 59,594 | 62,672 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED | SIX MONTHS ENDED | THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||||||||||||||
JULY 1, 2018 | JULY 2, 2017 | JULY 1, 2018 | JULY 2, 2017 | SEPTEMBER 30, 2018 | OCTOBER 1, 2017 | SEPTEMBER 30, 2018 | OCTOBER 1, 2017 | |||||||||||||||||||||||||
Net Income | $ | 20,602 | $ | 20,938 | $ | 35,686 | $ | 29,485 | $ | 8,172 | $ | 19,439 | $ | 43,858 | $ | 48,924 | ||||||||||||||||
Other Comprehensive Income / (Loss), Foreign Currency Translation Adjustment | (20,773 | ) | 9,800 | (11,943 | ) | 20,830 | 4,964 | 9,848 | (6,979 | ) | 30,678 | |||||||||||||||||||||
Other Comprehensive Income, Cash Flow Hedge | 647 | 0 | 2,279 | 0 | ||||||||||||||||||||||||||||
Other Comprehensive Income, Cash Flow Hedges | 286 | 0 | 2,565 | 0 | ||||||||||||||||||||||||||||
Other Comprehensive Income / (Loss), Pension Liability Adjustment | 3,459 | (2,048 | ) | 1,243 | (2,980 | ) | (196 | ) | (1,994 | ) | 1,047 | (4,974 | ) | |||||||||||||||||||
Comprehensive Income | $ | 3,935 | $ | 28,690 | $ | 27,265 | $ | 47,335 | $ | 13,226 | $ | 27,293 | $ | 40,491 | $ | 74,628 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
JULY 1, 2018 | JULY 2, 2017 | SEPTEMBER 30, 2018 | OCTOBER 1, 2017 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net Income | $ | 35,686 | $ | 29,485 | $ | 43,858 | $ | 48,924 | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 17,190 | 14,422 | 27,067 | 22,203 | ||||||||||||
Stock compensation amortization expense | 5,616 | 1,821 | 9,181 | 4,479 | ||||||||||||
Deferred income taxes and other | (729 | ) | 2,870 | (10,705 | ) | 5,926 | ||||||||||
Amortization of acquired intangible assets | 2,414 | 0 | ||||||||||||||
Amortization of acquired inventory step-up | 17,849 | 0 | ||||||||||||||
Working capital changes: | ||||||||||||||||
Accounts receivable | (16,410 | ) | (6,288 | ) | (5,540 | ) | (1,397 | ) | ||||||||
Inventories | (24,281 | ) | (21,087 | ) | (27,037 | ) | (22,377 | ) | ||||||||
Prepaid expenses and current assets | (17,974 | ) | (667 | ) | (9,398 | ) | (653 | ) | ||||||||
Accounts payable and accrued expenses | 5,890 | 1,389 | 10,987 | 10,804 | ||||||||||||
CASH PROVIDED BY OPERATING ACTIVITIES: | 4,988 | 21,945 | 58,676 | 67,909 | ||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (16,363 | ) | (15,352 | ) | (28,853 | ) | (22,809 | ) | ||||||||
Cash paid for business, net of cash acquired | (400,697 | ) | 0 | |||||||||||||
Other | 533 | 306 | 531 | (421 | ) | |||||||||||
CASH USED IN INVESTING ACTIVITIES: | (15,830 | ) | (15,046 | ) | (429,019 | ) | (23,230 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Repayments of long-term debt | (7,500 | ) | (54,675 | ) | (51,403 | ) | (62,085 | ) | ||||||||
Borrowing of long-term debt | 23,210 | 10,000 | 479,837 | 20,000 | ||||||||||||
Tax withholding payments for share-based compensation | (1,052 | ) | (1,406 | ) | (1,056 | ) | (1,477 | ) | ||||||||
Proceeds from issuance of common stock | 124 | 0 | 207 | 0 | ||||||||||||
Debt Issuance Costs | (8,757 | ) | (1,418 | ) | ||||||||||||
Dividends paid | (7,735 | ) | (7,575 | ) | (11,602 | ) | (11,571 | ) | ||||||||
Repurchase of common stock | (14,485 | ) | (55,667 | ) | (14,485 | ) | (81,061 | ) | ||||||||
CASH USED IN FINANCING ACTIVITIES: | (7,438 | ) | (109,323 | ) | ||||||||||||
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: | 392,741 | (137,612 | ) | |||||||||||||
Net cash used in operating, investing and financing activities | (18,280 | ) | (102,424 | ) | ||||||||||||
Net cash provided by / (used) in operating, investing and financing activities | 22,398 | (92,933 | ) | |||||||||||||
Effect of exchange rate changes on cash | (1,774 | ) | 3,535 | (2,104 | ) | 5,369 | ||||||||||
CASH AND CASH EQUIVALENTS: | ||||||||||||||||
Net change during the period | (20,054 | ) | (98,889 | ) | 20,294 | (87,564 | ) | |||||||||
Balance at beginning of period | 87,037 | 165,672 | 87,037 | 165,672 | ||||||||||||
Balance at end of period | $ | 66,983 | $ | 66,783 | $ | 107,331 | $ | 78,108 |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 – CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Commission.
The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 31, 2017, 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 prior period amounts have been reclassified to conform to the current period presentation. There was no change to consolidated assets, liabilities, cash flows or net income as a result of these reclassifications.
NOTE 2 – REVENUE RECOGNITION
Effective January 1, 2018, the Company adopted a new accounting standard with regard to revenue from customers. The Company elected the modified retrospective approach for adoption of this new standard, as is allowed by the standard. The Company did not have any significant impact from this standard as of the date of the adoption.
Revenue Recognized from Contracts with Customers
100% of the Company’s revenue is due to contracts with its customers. These contracts typically take the form of invoices for purchase of materials from the Company. The performance obligation is the delivery of these materials to customer control. Nearly 97% of the Company’s current revenue is produced from the sale of carpet, modular resilient flooring and related products (TacTiles installation materials, etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases upon delivery to the customer. The transaction price for these sales is readily identifiable.
The remaining revenue generated by the Company is for contracts to sell and install carpet and related products at customer locations. For projects underway, the Company recognized installation revenue over time as the customer simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a separate performance obligation from the sale of carpet. The majority of these projects are completed within 5 days of the start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring material and installation services and is specifically identified in the contract with the customer.
The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have similar characteristics and it is reasonable to expect that the effects from applying this approach are not materially different from applying the accounting standard to individual contracts.
The Company does not have any other significant revenue streams outside of these sales of flooring material, and the sale and installation of flooring material, as described above.
Impairment Losses
The Company does not recognize any impairment losses related to its revenue contracts due primarily to the short-term and straightforward nature of these contracts.
Disaggregation of Revenue
For the first sixnine months ended July 1,September 30, 2018, revenue from the Company’s customers is broken down by geography as follows:
Geography | Percentage of Net Sales | |||
Americas | ||||
Europe | ||||
Asia-Pacific |
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 97% of total revenue for the sixnine months ended July 1,September 30, 2018. The remaining 3% of revenue was generated from the installation of carpet and other flooring-related material.
Performance Obligations
As noted above, the Company primarily generates revenue through the sale of flooring material to end users either upon shipment or upon arrival of the product at its destination. In these instances, there typically is no other obligation to the customers other than the delivery of flooring material with the exception of warranty. The Company does offer a warranty to its customers which guarantees certain on-floor performance characteristics and warrants against manufacturing defects. The warranty is not a service warranty, and there is no ability to separate the warranty obligation from the sale of the carpet or purchase them separately. The Company’s incidence of warranty claims is extremely low, with approximately 0.2% of revenue in claims on an annual basis for the last three fiscal years. Given the nature of the warranty as well as the financial impact, the Company has determined that there is no need to identify this warranty as a separate performance obligation and the Company will continue to account for warranty on an accrual basis.
For the Company’s installation business, the sales of carpet and other flooring materials and installation services are separate deliverables which under the revenue recognition requirements should be characterized as separate performance obligations. The Company historically has not separated these obligations and has accounted for these installation projects on a completed contract basis. The nature of the installation projects is such that the vast majority – an amount in excess of 90% of these installation projects – are completed in less than 5 days. The Company’s largest installation customers are retail and corporate customers, and these are on a project-by-project basis and are short term installations. The impact of bifurcating the carpet sale from the installation sale is not considered to be material to the total Company. The Company has, however, evaluated these projects at the end of the reporting period and recorded revenue in accordance with the accounting standards for projects which were underway as of the end of the secondthird quarter of 2018.
Costs to Obtain Contracts
The Company pays sales commissions to many of its sales personnel based upon their selling activity. These are direct costs associated with obtaining the contracts. Under the accounting standard, these costs should be expensed as the revenue is earned. As these commissions become payable upon shipment (or in certain cases delivery) of product, the commission is earned as the revenue is recognized. Due to this fact pattern, there is no change to the Company’s accounting for these selling commissions. There are no other material costs the Company incurs as part of obtaining the sales contract.
NOTE 3– INVENTORIES
Inventories are summarized as follows:
July 1, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Finished Goods | $ | 137,724 | $ | 115,512 | $ | 197,869 | $ | 115,512 | ||||||||
Work in Process | 11,617 | 13,022 | 15,838 | 13,022 | ||||||||||||
Raw Materials | 49,786 | 49,401 | 65,108 | 49,401 | ||||||||||||
$ | 199,127 | $ | 177,935 | |||||||||||||
Total Inventory | $ | 278,815 | $ | 177,935 |
NOTE 4 – EARNINGS PER SHARE
The Company computes basic earnings per share (“EPS”) by dividing net income by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.
The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following tables show distributed and undistributed earnings:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | |||||||||||||||||||||||||
Earnings Per Share: | ||||||||||||||||||||||||||||||||
Basic Earnings Per Share: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.07 | $ | 0.06 | $ | 0.13 | $ | 0.12 | $ | 0.07 | $ | 0.07 | $ | 0.20 | $ | 0.19 | ||||||||||||||||
Undistributed Earnings | 0.28 | 0.27 | 0.47 | 0.34 | 0.07 | 0.25 | 0.54 | 0.59 | ||||||||||||||||||||||||
Total | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 | ||||||||||||||||
Diluted Earnings Per Share: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.07 | $ | 0.06 | $ | 0.13 | $ | 0.12 | $ | 0.07 | $ | 0.07 | $ | 0.20 | $ | 0.19 | ||||||||||||||||
Undistributed Earnings | 0.28 | 0.27 | 0.47 | 0.34 | 0.07 | 0.25 | 0.54 | 0.59 | ||||||||||||||||||||||||
Total | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 | ||||||||||||||||
Basic earnings per share | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 | ||||||||||||||||
Diluted earnings per share | $ | 0.35 | $ | 0.33 | $ | 0.60 | $ | 0.46 | $ | 0.14 | $ | 0.32 | $ | 0.74 | $ | 0.78 |
The following tables present net income that was attributable to participating securities:
Three Months Ended | Six Months Ended | |||||||||||||||
July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income Attributable to Participating Securities | $ | 0.2 | $ | 0.2 | $ | 0.3 | $ | 0.3 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income Attributable to Participating Securities | $ | 0.1 | $ | 0.1 | $ | 0.4 | $ | 0.4 |
The weighted average shares outstanding for basic and diluted EPS were as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Weighted Average Shares Outstanding | 58,910 | 62,305 | 58,999 | 62,948 | 58,917 | 60,555 | 58,974 | 62,167 | ||||||||||||||||||||||||
Participating Securities | 583 | 484 | 583 | 484 | 579 | 463 | 579 | 463 | ||||||||||||||||||||||||
Shares for Basic Earnings Per Share | 59,493 | 62,789 | 59,582 | 63,432 | 59,496 | 61,018 | 59,553 | 62,630 | ||||||||||||||||||||||||
Dilutive Effect of Stock Options | 45 | 43 | 45 | 42 | 40 | 42 | 41 | 42 | ||||||||||||||||||||||||
Shares for Diluted Earnings Per Share | 59,538 | 62,832 | 59,627 | 63,474 | 59,536 | 61,060 | 59,594 | 62,672 |
For all periods presented, there were no options or participating securities excluded from the computation of diluted EPS.
NOTE 5 – LONG-TERM DEBT
Syndicated Credit Facility
At July 1,On August 7, 2018, the Company had aamended and restated its syndicated credit facility (the “Facility”) pursuantin connection with the nora Holding GmbH (“nora”) acquisition. The purpose of the amended and restated Facility was to whichfund the lendersnora purchase price and related fees and expenses of the acquisition, and to increase the credit available to the Company and its subsidiaries following the closing of the nora acquisition in view of the larger enterprise. At September 30, 2018, the amended and restated Facility provided to the Company and certain of its subsidiaries a multicurrency revolving credit facilityloan and provided to the Company aU.S. denominated and multicurrency term loan.loans. Interest on base rate loans was charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit were 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 paid 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.
In connection with the amended and restated Facility as discussed above, the Company recorded $8.8 million of debt issuance costs associated with the new term loans that 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 July 1,September 30, 2018, the Company had outstanding $162.5$625.2 million of term loan borrowing and $81.0$32.1 million of revolving loan borrowings under the Facility, and had $5.7$3.6 million in letters of credit outstanding under the Facility. As of July 1,September 30, 2018, the weighted average interest rate on borrowings outstanding under the Facility was 3.4%3.70%.
TheUnder the amended and restated Facility, the Company is required to make quarterly amortization payments of the term loan borrowing.borrowings, which commence in the fourth quarter of 2018. The amortization payments are due on the last day of the calendar quarter. TheThere was no required quarterly amortization payment amount was $3.75 million for the secondthird quarter of 2018.
On August 7, 2018, subsequent to the end of the second quarter, the Facility was amended and restated in connection with the acquisition of nora Holding GmbH. Please see Notes 8 and 16 for additional information.
The Company is currently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $9.6 million of other lines of credit available at interest rates ranging from 2.5% to 6.5%. As of September 30, 2018, there were no borrowings outstanding under these lines of credit.
NOTE 6 – DERIVATIVE INSTUMENTS
Interest Rate Risk Management
In the third quarter of 2017, the Company entered into an interest rate swap transaction to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to this interest rate swap 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.
Cash Flow Interest Rate Swap
The Company’s interest rate swap is designated and qualifies as a cash flow hedge of forecasted interest payments. The Company reports the effective portion of the fair value gain or loss on the swap 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 lossesOperations and as a component of operating activities in the first six monthsConsolidated Condensed Statement of 2018.Cash Flows. The aggregate notional amount of the swap as of July 1,September 30, 2018 was $100 million.
As
Forward Contracts
The recently acquired nora operations 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. The Company is meeting its objective by hedging the risk of changes in its cash flows (intercompany payments for inventory) attributable to changes in the U.S. dollar/Euro exchange rate (the “hedged risk”). Changes in fair value attributable to components other than exchange rates will be excluded from the assessment of effectiveness and amortized to earnings on a straight-line basis. Changes in fair value related to the effective portion of these contracts will be reflected as a component of other comprehensive income (or other comprehensive loss). A portion of these forward contracts expire each month, with the final contract expiring in September of 2019. These contracts cover approximately 70% of the expected intercompany sales activity between the nora European manufacturing facility and the U.S. subsidiary and at this time the Company believes these are probable transactions given historical performance as well as budget projections. The current notional value of these forward currency contracts and the future intercompany sales these instruments hedge is approximately $52 million.
The table below sets forth the fair value of derivative instruments as of September 30, 2018 (in thousands):
Asset Derivatives as of | Liability Derivatives as of | |||||||||||||||
September 30, 2018 | September 30, 2018 | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Derivative instruments designated as hedging instruments: | ||||||||||||||||
Foreign currency contracts | Other current assets | $ | 1,757 | Other current liabilities | -- | |||||||||||
Interest rate swap contract | Other current assets | 3,636 | Other current liabilities | -- | ||||||||||||
$ | 5,393 | -- |
The table below sets forth the fair value of derivative instruments as of December 31, 2017 (in thousands):
Asset Derivatives as of | Liability Derivatives as of | |||||||||||||||
December 31, 2017 | December 31, 2017 | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Derivative instruments designated as hedging instruments: | ||||||||||||||||
Interest rate swap contract | Other current assets | $ | 904 | Other current liabilities | -- |
There was no significant impact to earnings from the changes in fair value of derivatives designated as cash flow interest rate swap assethedges or from amounts excluded from the assessment of hedge effectiveness during the three and nine months ended September 30, 2018. There was $3.2 millionno significant impact from the reclassification of hedged items from accumulated other comprehensive income during the three and was recordednine months ended September 30, 2018. The amount of hedged items expected to be reclassified from accumulated other comprehensive income in other assets.the next 12 months is not significant.
Other LinesThe following tables summarize the pre-tax impact that changes in the fair value of Creditderivatives designated as cash flow hedges and included in the assessment of hedge effectiveness had on accumulated other comprehensive income during the three and nine months ended September 30, 2018 (in thousands):
Subsidiaries of the Company have an aggregate of the equivalent of $9.8 million of other lines of credit available at interest rates ranging from 2.5% to 6.5%. As of July 1, 2018, there were no borrowings outstanding under these lines of credit.
Gain (Loss) Recognized in Accumulated | ||||
Three months ended September 30, 2018 | Other Comprehensive Income | |||
Foreign currency contracts | $ | (167 | ) | |
Interest rate swap contract | $ | 453 |
Gain (Loss) Recognized in Accumulated | ||||
Nine months ended September 30, 2018 | Other Comprehensive Income | |||
Foreign currency contracts | $ | (167 | ) | |
Interest rate swap contract | $ | 2,732 |
NOTE 67 – STOCK-BASED COMPENSATION
Stock Option Awards
In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange for the award.
All outstanding stock options vested prior to the end of 2013, and therefore there was no stock option compensation expense in the first sixnine months of 2018 or 2017.
As of July 1,September 30, 2018, there were 72,50062,500 stock options outstanding and exercisable, at an average exercise price of $7.99$7.88 per share. There were no stock options granted in 2018 or 2017. There were 10,00020,000 stock options exercised in the first sixnine months of 2018 and no forfeitures during those sixnine months. There were no exercises or forfeitures of stock options in the first sixnine months of 2017. The aggregate intrinsic value of the outstanding and exercisable stock options was $1.1$1.0 million as of July 1,September 30, 2018.
Restricted Stock Awards
During the sixnine months ended July 1,September 30, 2018 and July 2,October 1, 2017, the Company grantedawarded restricted stock awards for 192,000 and 244,000 shares of common stock, respectively.to certain employees. 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 earlier in the event of a change in control of the Company, or upon involuntary termination without cause.
Compensation expense related to restricted stock grants was $2.0$2.9 million and $1.3$2.0 million for the sixnine months ended July 1,September 30, 2018 and July 2,October 1, 2017, respectively. Accounting standards allow that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.
The following table summarizes restricted stock outstanding as of July 1,September 30, 2018, as well as activity during the sixnine months then ended:
Restricted Shares | Weighted Average Grant Date Fair Value | Restricted Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2017 | 463,000 | $ | 17.79 | 463,000 | $ | 17.79 | ||||||||||
Granted | 192,000 | 25.60 | 194,000 | 25.57 | ||||||||||||
Vested | 62,000 | 17.55 | 67,000 | 17.56 | ||||||||||||
Forfeited or canceled | 10,000 | 18.09 | 11,000 | 18.06 | ||||||||||||
Outstanding at July 1, 2018 | 583,000 | $ | 24.74 | |||||||||||||
Outstanding at September 30, 2018 | 579,000 | $ | 25.16 |
As of July 1,September 30, 2018, the unrecognized total compensation cost related to unvested restricted stock was $6.6$5.6 million. That cost is expected to be recognized by the end of 2021.
Performance Share Awards
During the sixnine months ended July 1,September 30, 2018 and July 2,October 1, 2017, 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 July 1,September 30, 2018, as well as the activity during the sixnine months then ended:
Performance Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding at December 31, 2017 | 669,500 | $ | 17.51 | |||||
Granted | 261,000 | 25.69 | ||||||
Vested | 119,000 | 17.78 | ||||||
Forfeited or canceled | 19,000 | 18.11 | ||||||
Outstanding at July 1, 2018 | 792,500 | $ | 20.15 |
Performance Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding at December 31, 2017 | 669,500 | $ | 17.51 | |||||
Granted | 261,000 | 25.69 | ||||||
Vested | 119,000 | 17.78 | ||||||
Forfeited or canceled | 20,000 | 18.05 | ||||||
Outstanding at September 30, 2018 | 791,500 | $ | 20.15 |
Compensation expense related to performance shares was $3.6$6.3 million and $0.5$2.4 million for the sixnine months ended July 1,September 30, 2018, and July 2,October 1, 2017, respectively. Unrecognized compensation expense related to these performance shares was approximately $7.7$5.9 million as of July 1,September 30, 2018. That cost is expected to be recognized by the end of 2021.
The tax benefits recognized with regard to restricted stock and performance shares were approximately $1.3$1.8 million for the sixnine months ended July 1,September 30, 2018.
NOTE 78 – EMPLOYEE BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for the three-month and six-monthnine-month periods ended July 1,September 30, 2018, and July 2,October 1, 2017, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
Defined Benefit Retirement Plan (Europe) | July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 182 | $ | 397 | $ | 369 | $ | 780 | $ | 178 | $ | 423 | $ | 547 | $ | 1,204 | ||||||||||||||||
Interest cost | 1,318 | 1,378 | 2,671 | 2,712 | 1,270 | 1,426 | 3,941 | 4,138 | ||||||||||||||||||||||||
Expected return on assets | (1,562 | ) | (1,628 | ) | (3,164 | ) | (3,216 | ) | (1,503 | ) | (1,697 | ) | (4,667 | ) | (4,920 | ) | ||||||||||||||||
Amortization of prior service costs | 8 | (9 | ) | 15 | (16 | ) | (11 | ) | 9 | 4 | 26 | |||||||||||||||||||||
Recognized net actuarial (gains) / losses | 281 | 320 | 569 | 629 | 270 | 318 | 839 | 930 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 227 | $ | 458 | $ | 460 | $ | 889 | $ | 204 | $ | 479 | $ | 664 | $ | 1,378 |
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
Salary Continuation Plan (SCP) | July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Interest cost | 271 | 314 | 541 | 628 | 271 | 314 | 812 | 942 | ||||||||||||||||||||||||
Amortization of prior service cost | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Amortization of (gain) / loss | 116 | 91 | 232 | 182 | 116 | 91 | 348 | 273 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 387 | $ | 405 | $ | 773 | $ | 810 | $ | 387 | $ | 405 | $ | 1,160 | $ | 1,215 |
Three Months Ended | Nine Months Ended | |||||||
Nora Defined Benefit Plan | September 30, 2018 | September 30, 2018 | ||||||
(In thousands) | (In thousands) | |||||||
Service cost | $ | 134 | $ | 134 | ||||
Interest cost | 99 | 99 | ||||||
Net periodic benefit cost | $ | 233 | $ | 233 |
NOTE 89 – ACQUISITION OF NORA
On June 14, 2018, the Company entered into a share purchase and transfer agreement to acquire the issued and outstanding shares of nora, Holding GmbH (“nora”), nora’s outstanding third partythird-party debt, and receivables related to nora’s shareholder loans. Nora is the holding company for a Germany-based manufacturer and multinational marketer of resilient floor coverings, including rubber flooring. The second quarter of 2018 includes $5.8 million of transaction related expenses related to the nora acquisition. Approximately $3.0 million of these expenses are included in selling, general and administrative expenses in the consolidated condensed statement of operations. The remainder is included in other expenses as described below.
On June 14, 2018, inIn connection with the signing of the nora share purchase and transfer agreement, the Company entered into a derivative instrument to address the foreign currency risk associated with a portion of the nora purchase price. This option instrument doesdid not qualify for hedge accounting, and the mark-to-market expense of $2.8 million to record the instrument at fair value at the end of the second quarter of 2018 was recorded in other expense in our consolidated condensed statement of operations during the second quarter. The option instrument hashad a notional value of €315 million (or approximately $364 million as of July 1,the end of the second quarter of 2018) and an initial maturity of 120 days.
As Upon completion of July 1, 2018, the fair value ofnora acquisition as discussed below, the option instrument was $1.9terminated and the Company recognized a loss of approximately $1.4 million andupon termination, which was recorded in other current assets.expense in our Consolidated Condensed Statement of Operations during the third quarter of 2018.
On August 7, 2018, subsequent to the end of the second quarter, the Company completed the acquisition of nora. Onnora for a purchase price of €385.1 million, or $447.2 million at the exchange rate as of the transaction date, including acquired cash of €40.0 million ($46.5 million) for a net purchase price of €345.1 million ($400.7 million).
Nora is an industry leader in the rubber flooring market, and this acquisition is expected to advance the Company’s growth strategy in growing market segments, particularly in the healthcare, life sciences and education market segments. Similar to Interface, nora operates on an international footprint and the Company expects the acquisition will also allow for geographic sales synergies as well.
The transaction will be accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition date. The results of operations for this acquisition have been consolidated with those of the Company from the acquisition date forward. Tangible assets and liabilities of nora systems GmbH were valued as of the option instrument discussedacquisition date using a market analysis, and intangible assets were valued using a discounted cash flow analysis.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The amounts represent a provisional measurement of the fair values, and is therefore subject to change:
As of August 7th, 2018 | ||||
(In thousands) | ||||
Cash | $ | 46,495 | ||
Accounts receivables | 30,996 | |||
Inventories | 93,352 | |||
Other assets and prepaids | 5,616 | |||
Property plant and equipment | 79,538 | |||
Intangible assets | 103,338 | |||
Total identifiable assets acquired | 359,335 | |||
Current liabilities | (27,285 | ) | ||
Deferred taxes | (29,277 | ) | ||
Other long-term liabilities | (38,929 | ) | ||
Total liabilities assumed | (95,491 | ) | ||
Net identifiable assets acquired | 263,844 | |||
Goodwill | 183,348 | |||
Net assets acquired / cash paid | $ | 447,192 |
Acquired intangibles assets of $103.3 million include $60.8 million of trademarks and tradenames that are not subject to amortization and will instead be subject to annual impairment testing, or more frequent testing should there be a significant change in business conditions. The remaining intangible assets include developed technology of $39.1 million that will be amortized on a straight-line basis over the estimated useful life of 7 years and backlog of $3.4 million that will be amortized on a straight-line basis over the estimated useful life of six months. The inventory amount above was terminated. Please see Note 16 for additional information.includes a step-up of inventory to fair value of approximately $26.6 million which will be recognized in earnings over the expected turns of the inventory. This step-up of inventory to fair value will be fully amortized by the end of 2018.
As of September 30, 2018, the balances, net of accumulated amortization where applicable, of the acquired intangible assets from the nora acquisition were (in thousands):
Developed technology | $ | 38,048 | ||
Trademarks and tradenames | 59,880 | |||
Backlog | 2,252 | |||
Goodwill | 183,348 |
As of September 30, 2018, the recognized goodwill of $183.3 million and acquired intangible assets, net of amortization of $100.2 million, were assigned pro-rata to the Company’s three operating segments. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of acquired accounts receivable was $30.1 million with the gross value being $31.9 million. The Company expects $1.8 million to be uncollectible.
The Company recognized $8.2 million of transaction costs related to the nora acquisition for the nine months ended September 30, 2018. Approximately $4.0 million of these expenses are included in selling, general and administrative expenses in the consolidated condensed statement of operations and $4.2 million are included in other expenses related to the derivative instrument the Company used to address the foreign currency risk associated with a portion of the nora purchase price. The Company also recognized $8.8 million of debt issuance costs in connection with the amended and restated credit facility, which were recorded as a reduction of long-term debt in the consolidated condensed balance sheet.
The amounts of revenue and net loss of nora included in the Company’s consolidated condensed statements of operations from the acquisition date to September 30, 2018 are as follows (in thousands):
Revenue | $ | 41,159 | ||
Net loss | (12,455 | ) |
The following represents the pro forma consolidated condensed statement of operations as if nora had been included in the consolidated results of the Company as of January 1, 2017. These are estimated for pro forma purposes only and do not necessarily reflect the results had nora been included as of the beginning of 2018 and 2017.
Pro Forma Consolidated Statement of Operations | ||||||||
(In thousands) | ||||||||
Nine months ended | Nine months ended | |||||||
September 30, 2018 | October 1, 2017 | |||||||
Revenue | $ | 1,001,919 | $ | 929,521 | ||||
Net income | 74,390 | 38,793 |
Pro forma net income for the nine months ended September 30, 2018, excludes any transaction related costs as these are non-recurring costs for the combined Company.
NOTE 910 – SEGMENT INFORMATION
Based on applicable accounting standards, the Company has determined that it has three operating segments – namely, the Americas, Europe and Asia-Pacific geographic regions. Pursuant to accounting standards, the Company has aggregated the three operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment. Nora results are included in the 2018 figures as of the date of acquisition through the end of the third quarter of 2018, and are included in our operating segments based on the geographic split of the operations.
While the Company operates as one reporting segment for the reasons discussed, included below is selected information on our operating segments.
AMERICAS |
EUROPE | ASIA- PACIFIC |
TOTAL |
AMERICAS |
EUROPE |
ASIA- PACIFIC |
TOTAL | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Three Months Ended July 1, 2018: | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2018: | ||||||||||||||||||||||||||||||||
Net Sales | $ | 176,380 | $ | 65,865 | $ | 41,381 | $ | 283,626 | $ | 182,660 | $ | 88,223 | $ | 47,442 | $ | 318,325 | ||||||||||||||||
Depreciation and amortization | 3,480 | 2,048 | 2,212 | 7,740 | 3,373 | 3,181 | 2,144 | 8,698 | ||||||||||||||||||||||||
Total assets | 314,436 | 258,138 | 193,073 | 765,647 | 472,473 | 587,228 | 201,611 | 1,261,312 | ||||||||||||||||||||||||
Three Months Ended July 2, 2017: | ||||||||||||||||||||||||||||||||
Three Months Ended October 1, 2017: | ||||||||||||||||||||||||||||||||
Net Sales | $ | 153,616 | $ | 57,811 | $ | 40,273 | $ | 251,700 | $ | 148,082 | $ | 66,677 | $ | 42,672 | $ | 257,431 | ||||||||||||||||
Depreciation and amortization | 3,310 | 1,314 | 2,090 | 6,714 | 3,386 | 1,646 | 2,211 | 7,243 | ||||||||||||||||||||||||
Six Months Ended July 1, 2018: | ||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2018: | ||||||||||||||||||||||||||||||||
Net Sales | $ | 311,605 | $ | 132,421 | $ | 80,163 | $ | 524,189 | $ | 494,265 | $ | 220,645 | $ | 127,604 | $ | 842,514 | ||||||||||||||||
Depreciation and amortization | 7,091 | 4,302 | 4,420 | 15,813 | 10,464 | 7,483 | 6,564 | 24,511 | ||||||||||||||||||||||||
Six Months Ended July 2, 2017: | ||||||||||||||||||||||||||||||||
Nine Months Ended October 1, 2017: | ||||||||||||||||||||||||||||||||
Net Sales | $ | 285,378 | $ | 113,830 | $ | 73,594 | $ | 472,802 | $ | 433,461 | $ | 180,506 | $ | 116,266 | $ | 730,233 | ||||||||||||||||
Depreciation and amortization | 6,678 | 2,611 | 4,247 | 13,536 | 10,064 | 4,257 | 6,458 | 20,779 |
A reconciliation of the Company’s total operating segment depreciation and amortization, and assets, to the corresponding consolidated amounts follows:
Three Months Ended | Three Months Ended | |||||||||||||||
DEPRECIATION AND AMORTIZATION | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Total segment depreciation and amortization | $ | 7,740 | $ | 6,714 | $ | 8,698 | $ | 7,243 | ||||||||
Corporate depreciation and amortization | 719 | 739 | ||||||||||||||
Corporate depreciation and amortization, and other | 1,179 | 539 | ||||||||||||||
Reported depreciation and amortization | $ | 8,459 | $ | 7,453 | $ | 9,877 | $ | 7,782 |
Six Months Ended | ||||||||
DEPRECIATION AND AMORTIZATION | July 1, 2018 | July 2, 2017 | ||||||
(In thousands) | ||||||||
Total segment depreciation and amortization | $ | 15,813 | $ | 13,536 | ||||
Corporate depreciation and amortization | 1,377 | 886 | ||||||
Reported depreciation and amortization | $ | 17,190 | $ | 14,422 |
ASSETS | July 1, 2018 | |||||||
(In thousands) | ||||||||
Total segment assets | $ | 765,647 | ||||||
Corporate assets and eliminations | 58,980 | |||||||
Reported total assets | $ | 824,627 |
Nine Months Ended | ||||||||
DEPRECIATION AND AMORTIZATION | September 30, 2018 | October1, 2017 | ||||||
(In thousands) | ||||||||
Total segment depreciation and amortization | $ | 24,511 | $ | 20,779 | ||||
Corporate depreciation and amortization, and other | 2,556 | 1,424 | ||||||
Reported depreciation and amortization | $ | 27,067 | $ | 22,203 |
ASSETS
|
September 30, 2018 | |||
(In thousands) | ||||
Total segment assets | $ | 1,261,312 | ||
Corporate assets and eliminations | 81,648 | |||
Reported total assets | $ | 1,342,960 |
NOTE 1011 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $3.9$7.4 million and $3.2$4.6 million for the sixnine months ended July 1,September 30, 2018 and July 2,October 1, 2017, respectively. Income tax payments amounted to $14.9$21.2 million and $11.5$14.8 million for the sixnine months ended July 1,September 30, 2018 and July 2,October 1, 2017, respectively.
NOTE 1112 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board (“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 after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, but the standard will result in the Company recording both assets and liabilities for leases currently classified as operating leases.
In January 2017, the FASB issued a new accounting standard 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. The new guidance is effective for any annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance will have a material effect on its 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. Upon adoption, 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 this standard will result in offsetting changes in operating income and “Other Expense (income)” on the consolidated statements of operations for all periods presented, with no impact on net income. The Company adopted this standard in the first quarter of 2018. As is required, the Company adjusted its previously reported 2017 financial statements for this adoption, with a reclassification of expense of approximately $0.5 million for each of the first two quarters of 2017 from the “Selling, General and Administrative Expenses” line item of the consolidated condensed statement of operations to the “Other Expenses” line item of the consolidated condensed statement of operations. There was no change to consolidated net income or earnings per share from the adoption of this standard.
In August 2017, the FASB issued a new accounting standard to improve the accounting for hedging activities. This standard will eliminate the requirement to separately measure and report hedge ineffectiveness and requires companies to recognize all elements of hedge accounting that impact earnings in the same line item in the statement of income where the hedged item is reported. The amendments ease the requirements for effectiveness testing and permit an entity to perform qualitative hedge effectiveness assessments. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adoption ofhas elected to early adopt this standard but does not anticipate thatin the adoption will have athird quarter of 2018 and there was no material effect on its consolidated financial statements.
In February 2018, the FASB issued a new accounting standard to address a narrow-scope financial reporting issue that arose as a consequence of the U.S. Tax Cuts and Jobs Act. Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The new guidance allows for a reclassification of these amounts to retained earnings, thereby eliminating these stranded tax effects. The new guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
In June 2018, the FASB issued a new accounting standard to address non-employee share-based payments. This standard will require that the accounting treatment for non-employee share-based payments for goods or services be consistent with current GAAP for employee share-based payments, including measurement of awards at grant-date fair value and the application of probability to evaluate performance conditions. This standard will also eliminate the current GAAP requirement to reassess the classification of non-employee share-based payments awards upon vesting. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. 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 its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard that modifies disclosure requirements related to fair value measurements. 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 and permits the disclosure of other relevant quantitative information for certain unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard that changes the disclosure requirements for defined benefit retirement plans. This standard eliminates the current requirement to disclose amounts in accumulated other comprehensive income that are expected to be recognized in net periodic benefit expense in the next fiscal year. The standard requires additional disclosures for an entity to explain the reasons for significant gains and losses related to changes in the benefit obligation for the period and clarifies current guidance for disclosures where projected benefit obligations or accumulated benefit obligations exceed the fair value of plan assets. The new guidance is effective for annual periods ending after December 15, 2020. Early adoption is permitted. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. This standard 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 new guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. 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 its consolidated financial statements.
NOTE 12–13– INCOME TAXES
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Company is continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our effective tax rate.
The Company is applying the guidance to address the accounting for income taxes under accounting standards in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Accounting standards provide a reasonable “measurement period” not to exceed twelve months from the date of enactment to complete the accounting of these provisional estimates. As disclosed in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2017, two material provisional estimates that impacted the Company were the U.S. statutory rate reduction and the one-time transition tax. These amounts arewere considered provisional because they useused reasonable estimates for taxes with respect to which tax returns havehad not been filed and because estimated amounts may be impacted by future regulatory and accounting guidance if and when issued.
For the sixnine months ended July 1,September 30, 2018, there were no significant changes to the Company’s provisional estimates of the income tax effects reflected in 2017 for the changes in tax law and tax rate from the enactment of the Tax Act. The impact of tax law changes on the Company’s financial statements could differ from its reasonable estimates due to further analysis of the new law, regulatory guidance, technical corrections, legislation, or guidance under U.S. generally accepted accounting principles. If significant changes occur, the Company will provide updated information in connection with future regulatory filings or the Company will adjust these provisional amounts as further information becomes available and as we refine our calculations.
During the sixnine months ended July 1,September 30, 2018, the Company’s effective tax rate was favorably impacted by the reduction in the U.S. statutory tax rate due to the enactment of the Tax Act. This favorable impact was partially offset by certain base broadening provisions of the Tax Act. For the sixnine months ended July 1,September 30, 2018, our effective tax rate was 27%24%, as compared to 33%32% for the first sixnine month of 2017.
Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first sixnine months of 2018, the Company decreased its liability for unrecognized tax benefits by $0.3$1.0 million. As of July 1,September 30, 2018, the Company had accrued approximately $28.9$28.2 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 1,September 30, 2018 reflects a reduction for $3.3 million of these unrecognized tax benefits.
NOTE 1314 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During the first sixnine months of 2018, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $0.8$1.2 million related to the Company’s defined benefit retirement plan and salary continuation plan. These reclassifications were included in the other expense line item of the Company’s consolidated condensed statement of operations.
NOTE 14 –15– REPURCHASE OF COMMON STOCK
In 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 first sixnine months of 2018, the Company repurchased and retired 615,000 shares of common stock at a weighted average price of $23.54 per share pursuant to this share repurchase program.
NOTE 15 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In the fourth quarter of 2016, the Company committed to a new 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 involves (i) a substantial restructuring of the FLOR business model that included closure of its headquarters office and most retail FLOR stores, (ii) a reduction of approximately 70 FLOR employees and a number of employees in the commercial carpet tile business, primarily in the Americas and Europe regions, and (iii) the write-down of certain underutilized and impaired assets that included information technology assets, intellectual property assets, and obsolete manufacturing, office and retail store equipment.
As a result of this plan, the Company incurred a pre-tax restructuring and asset impairment charge in the fourth quarter of 2016 of $19.8 million. In the first quarter of 2017, the Company recorded an additional charge of $7.3 million, primarily related 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 |
Costs Incurred in 2018 |
Balance at July 1, 2018 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Workforce Reduction | $ | 10,652 | $ | 1,451 | $ | 6,633 | $ | 1,543 | $ | 1,025 | ||||||||||
Asset Impairment | 11,319 | 8,019 | 3,300 | 0 | 0 | |||||||||||||||
Lease Exit Costs | 5,116 | 27 | 5,089 | 0 | 0 |
Note 16 – SUBSEQUENT EVENTS
On August 7, 2018, subsequent to the end of the second quarter, the Company completed the acquisition of nora for a purchase price of €385 million, or approximately $447 million at the exchange rate as of the transaction date, including acquired cash of approximately €41 million (approximately $47 million) for a net purchase price of approximately €344 million (approximately $400 million). The transaction will be accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition date. The determination of the fair values of the liabilities assumed and assets acquired as well as pro forma results of operations and financial position are incomplete due to the recent date of the acquisition. The results of operations for this acquisition will be consolidated with those of the Company from the acquisition date forward.
In connection with the acquisition of nora, the Company amended and restated its Syndicated Credit Facility as described in Item 1.01 of the Form 8-K the Company filed on July 26, 2018. The purpose of the amended and restated facility is to fund the purchase price and related fees and expenses of the nora acquisition, and to increase the credit available to the Company and its subsidiaries following the closing of the nora acquisition in view of the larger enterprise that will result from such transaction.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and sixnine months ended, or as of, July 1,September 30, 2018, and the comparable periods of 2017 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.
Forward-Looking Statements
This report contains statements which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as updated by the additional risk factorsfactor included in Item 1A of Part II of thisthe Quarterly Report on Form 10-Q for the quarter ended July 1, 2018, which discussions are hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Agreement to AcquireAcquisition of Nora Systems
On June 14, 2018, we entered into a Share Purchase and Transfer Agreement (the “Purchase Agreement”) to acquire all of the shares of nora Holding GmbH (“nora”), nora’s outstanding third partythird-party debt, and receivables related to nora’s shareholder loans, based on an enterprise value of €385 million (or approximately $447 million). On August 7, 2018, subsequent to the end of the second quarter, we completed the acquisition of nora pursuant tofor a purchase price of €385.1 million, or $447.2 million, at the Purchase Agreement. Includingexchange rate as of the transaction date, including acquired nora cash of approximately €41€40.0 million (approximately $47($46.5 million), the for a net purchase price was approximately €344of €345.1 million (approximately $400($400.7 million). Nora is the holding company for a Germany-based manufacturer and multinational marketer of resilient floor coverings, including rubber flooring.
The sellers have made certain fundamental warranties regarding the ownership of the shares and shareholder receivables and similar matters as set forth in the Purchase Agreement. In addition, the Purchase Agreement contains customary warranties regarding the business of nora and its subsidiaries, including warranties regarding their financial statements, operations, employment matters, employee benefits, pension matters, compliance with laws, taxes, real property, intellectual property, IT systems, insurance, litigation and other customary warranties.
We have also obtained a policy for warranty and indemnity insurance, which provides coverage for certain breaches of warranties of the sellers contained in the Purchase Agreement, subject to certain deductibles, exclusions, policy limits and certain other terms and conditions. Pursuant to the Purchase Agreement, we can make certain claims against the sellers for breaches of warranties contained therein, to the extent not insured by the warranty and indemnity insurance, subject to certain thresholds, caps and other limitations set forth therein.
General
During the quarter ended July 1,September 30, 2018, net sales were $283.6$318.3 million, compared with net sales of $251.7$257.4 million in the secondthird quarter last year. During the first sixnine months of fiscal year 2018, net sales were $524.2$842.5 million, compared with net sales of $472.8$730.2 million in the first sixnine months of last year. The 2018 periods were both positively impacted by growth in carpet tile and LVT plus the inclusion of revenue from the nora acquisition, which generated net sales of $41.2 million from August 7 through the end of the third quarter of 2018, which was the period that nora was included in Interface’s results. Fluctuations in currency exchange rates had a negative impact of approximately $2.9 million for the third quarter of 2018 and a positive impact of approximately $5.3 million and $15.1$12.1 million for the three-month and six-month periodsnine-month period of 2018 respectively, compared to the three-month and six-monthnine-month periods of 2017. The three-month period impact was primarily a result of the weakening of the Australian dollar and the Euro against the U.S. dollar. The nine-month period impact was primarily a result of a strengthening of the Euro and British Pound against the U.S. dollar.
During the secondthird quarter of 2018, net income was $20.6$8.2 million, or $0.35$0.14 per diluted share, compared with $20.9$19.4 million, or $0.33$0.32 per diluted share, in the secondthird quarter last year. During the sixnine months ended July 1,September 30, 2018, we had net income of $35.7$43.9 million, or $0.60$0.74 per diluted share, compared with net income of $29.5$48.9 million, or $0.46$0.78 per diluted share, in the first sixnine months of 2017. IncludedThe 2018 periods included the results of the acquired nora business from August 7 through the end of the third quarter of 2018. These results included amortization related to the fair value of inventory acquired of $17.8 million, and amortization of acquired intangible assets of $2.4 million. Also included in our results for the three months and sixnine months ended July 1,September 30, 2018 were $5.8$2.4 million and $8.2 million, respectively, of costs, before tax,pre-tax transaction related to the acquisition of nora.expenses. These costs were incurred in the second quarterand third quarters of 2018. Our 2018 net income was positively impacted by the reduction in the U.S. statutory tax rate due to the U.S. Tax Cuts and Jobs Act enacted in the fourth quarter of 2017. As a continuation of the plans announced in the fourth quarter of 2016, the first sixnine months of 2017 included $7.3 million of restructuring and asset impairment charges, primarily relatingrelated to closing the majority of our FLOR specialty retail stores.
Results of Operations
The following table presents, as a percentage of net sales, certain items included in our Consolidated Condensed Statements of Operations for the three-month and six-monthnine-month periods ended July 1,September 30, 2018, and July 2,October 1, 2017, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2018 | July 2, 2017 | July 1, 2018 | July 2, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 61.5 | 61.1 | 61.3 | 60.7 | 68.6 | 61.7 | 64.1 | 61.1 | ||||||||||||||||||||||||
Gross profit on sales | 38.5 | 38.9 | 38.7 | 39.3 | 31.4 | 38.3 | 35.9 | 38.9 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 26.6 | 25.6 | 27.9 | 27.3 | 26.4 | 26.1 | 27.3 | 26.9 | ||||||||||||||||||||||||
Restructuring and asset impairment charges | 0.0 | 0.0 | 0.0 | 1.5 | 0.0 | 0.0 | 0.0 | 1.0 | ||||||||||||||||||||||||
Operating income | 11.9 | 13.3 | 10.8 | 10.4 | 5.0 | 12.2 | 8.6 | 11.0 | ||||||||||||||||||||||||
Interest/Other expenses | 1.9 | 0.9 | 1.6 | 1.1 | 2.0 | 1.1 | 1.7 | 1.1 | ||||||||||||||||||||||||
Income before tax expense | 9.9 | 12.4 | 9.3 | 9.3 | 2.9 | 11.0 | 6.9 | 9.9 | ||||||||||||||||||||||||
Income tax expense | 2.7 | 4.0 | 2.5 | 3.1 | 0.4 | 3.5 | 1.7 | 3.2 | ||||||||||||||||||||||||
Net income | 7.3 | 8.3 | 6.8 | 6.2 | 2.6 | 7.6 | 5.2 | 6.7 |
Net Sales
Below we provide information regarding net sales and analyze those results for the three-month and six-monthnine-month periods ended July 1,September 30, 2018 and July 2,October 1, 2017, respectively.
Three Months Ended | Percentage | |||||||||||
July 1, 2018 | July 2, 2017 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 283,626 | $ | 251,700 | 12.7 | % |
Three Months Ended | Percentage | |||||||||||
September 30, 2018 | October 1, 2017 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 318,325 | $ | 257,431 | 23.7 | % |
Six Months Ended | Percentage | |||||||||||
July 1, 2018 | July 2, 2017 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 524,189 | $ | 472,802 | 10.9 | % |
Nine Months Ended | Percentage | |||||||||||
September 30, 2018 | October 1, 2017 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 842,514 | $ | 730,233 | 15.4 | % |
For the quarter ended July 1,September 30, 2018, net sales increased $31.9$60.9 million (12.7%(23.7%) versus the comparable period in 2017. As discussed above, the 2018 period included revenue of $41.2 million from the nora acquisition that was not present in 2017. Currency fluctuations had an approximately $5.3$2.9 million (2.1%(1.1%) positivenegative impact on secondthird quarter 2018 sales compared to the secondthird quarter of 2017. This currency impact was most pronounced in our Asia-Pacific operations, due to the weakening of the Australian dollar and Euro against the U.S. dollar. On a geographic basis, including the impact of the nora acquisition, sales in the Americas increased 23%, Europe increased 32% (34% in local currency) and Asia-Pacific increased 11%. The increase in the Americas was attributable to sales of our carpet tile and luxury vinyl tile (“LVT”) as well as the impact of the nora acquisition. The Americas sales increase was most pronounced in the corporate office, retail and residential segments, as well as continued growth in the hospitality segment for the period. The increase in the retail segment was due to increased sales in our InterfaceServices business, which provides flooring installation as well as product sales. Growth in Europe was impacted by the nora acquisition and the continued introduction of our LVT product offering as well as increases in our core modular carpet business offset by the weakening of the Euro. On a segment basis, the Europe sales increase was most significant in the hospitality, healthcare, and residential segments. The sales increase in Asia-Pacific was primarily due to the impact of the nora acquisition, partially offset by the weakening of the Australian dollar and lower sales in China and Australia. The sales increase in Asia-Pacific was primarily within the corporate office segment.
For the nine months ended September 30, 2018, net sales increased $112.3 million (15.4%) versus the comparable period in 2017. As discussed above, the 2018 period included revenue of $41.2 million from the nora acquisition that was not present in 2017. Currency fluctuations had an approximately $12.1 million (1.7%) positive impact on sales in the first nine months of 2018 compared to the first nine months of 2017. This currency impact was most pronounced in our European operations, due to the strengthening of the Euro and British Pound against the U.S. dollar. On a geographic basis, sales increased across all geographies with Americas increasing 15%, Europe increasing 14% (6% in local currency) and Asia-Pacific increasing 3%. The increase inincluding the Americas was attributable to sales of our carpet tile and luxury vinyl tile (“LVT”). The sales increase in the Americas was most pronounced in the corporate office, retail and residential segments, although hospitality and healthcare segments also showed strong growth for the period. The increase in the retail segment was due to increased sales in our InterfaceServices business, which provides flooring installation as well as product sales. In Europe, the sales increase was, as noted, aided by the strengtheningimpact of the Euro and British Pound. Growth in local currency of 6% in Europe was due to the continued introduction of our LVT product offering as well as increases in our core modular carpet business. On a segment basis, the Europe sales increase was most significant in the corporate office, education, hospitality, and healthcare segments. The sales increase in Asia-Pacific was a result of performance in Asia, primarily due to strength in China. The sales increase in Asia-Pacific was primarily within the corporate office segment.
For the six months ended July 1, 2018, net sales increased $51.4 million (10.9%) versus the comparable period in 2017. Currency fluctuations had an approximately $15.1 million (2.1%) positive impact on sales in the first six months of 2018 compared to the first half of 2017. As discussed above, this currency impact was most pronounced in our European operations, due to the strengthening of the Euro and British Pound against the U.S. dollar. On a geographic basis,nora acquisition, sales for the six-monthnine-month period increased across all geographies with Americas increasing 9%14%, Europe increasing 16% (5%22% (15% in local currency) and Asia-Pacific increasing 9%10%. The Americas sales were negatively impacted by a decline in our FLOR residential business, which closed its specialty retail stores in the first quarter of 2017, offset by increases in sales of our LVT product that was launched in the first quarter of 2017. On a segment basis, the six-monthnine-month period sales increase in the Americas was most significant in the corporate office, retail and healthcareresidential segments. The six-monthnine-month period sales increase in Europe was most significant in the corporate office, retail, hospitality and healthcare segments. As in the three-month period ended July 1,September 30, 2018 discussed above, the Asia-Pacific six-monthnine-month sales increase was primarily in the corporate office segment.
Cost and Expenses
The following tables present our overall cost of sales and selling, general and administrative expenses for the three-month and six-monthnine-month periods ended July 1,September 30, 2018, and July 2,October 1, 2017, respectively:
Three Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||||||||
Cost and Expenses | July 1, 2018 | July 2, 2017 | Change | September 30, 2018 | October 1, 2017 | Change | ||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Cost of sales | $ | 174,478 | $ | 153,803 | 13.4 | % | $ | 218,380 | $ | 158,887 | 37.4 | % | ||||||||||||
Selling, general and administrative expenses | 75,445 | 64,386 | 17.2 | % | 84,160 | 67,233 | 25.2 | % | ||||||||||||||||
Total | $ | 249,923 | $ | 218,189 | 14.5 | % | $ | 302,540 | $ | 226,120 | 33.8 | % |
Six Months Ended | Percentage | |||||||||||
Cost and Expenses | July 1, 2018 | July 2, 2017 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 321,459 | $ | 287,103 | 12.0 | % | ||||||
Selling, general and administrative expenses | 146,039 | 129,100 | 13.1 | % | ||||||||
Total | $ | 467,498 | $ | 416,203 | 12.3 | % |
Nine Months Ended | Percentage | |||||||||||
Cost and Expenses | September 30, 2018 | October 1, 2017 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 539,839 | $ | 445,990 | 21.0 | % | ||||||
Selling, general and administrative expenses | 230,199 | 196,333 | 17.2 | % | ||||||||
Total | $ | 770,038 | $ | 642,323 | 19.9 | % |
For the quarter ended July 1,September 30, 2018, cost of sales increased $20.7$59.5 million (13.4%(37.4%) compared to the secondthird quarter of 2017. Included in third quarter 2018 cost of sales is $44.9 million for nora, which includes amortization related to acquired inventory and intangible assets of $20.3 million. Currency fluctuations had an approximately $3.1$1.8 million (2.0%(1.1%) negativepositive impact on the year-over-year comparison. In absolute dollars, the increase in cost of sales was largely attributable to the increase in sales for the secondthird quarter of 2018, as described above.above and the impact of purchase price accounting amortization reflected in costs of sales related to the nora acquisition. The increase in cost of sales was higher on a percentage basis, however, than the increase in net sales as a result of delayed productivity initiatives due to increased sales and production volumes, as well as a change in the sales mix for the period weighted more heavily toward the InterfaceServices business. These service sales typically generate a lower gross margin compared to the rest of our operations. As a percentage of sales, our cost of sales increased to 61.5%68.6% for the secondthird quarter of 2018 versus 61.1%61.7% for the secondthird quarter of 2017. This increase was due to the factors discussed above.
For the sixnine months ended July 1,September 30, 2018, cost of sales increased $34.4$93.8 million (12.0%(21.0%) versus the comparable period in 2017. Included in the first nine months of 2018 cost of sales is $44.9 million for nora, which includes amortization related to acquired inventory and intangible assets of $20.3 million. Currency fluctuations had an approximately $9.0$7.1 million (3.2%(1.7%) negative impact on the year-over-year comparison. The increase for the six-month2018 nine-month period was due to the same factors for the secondthird quarter discussed above. As a percentage of sales, our cost of sales increased slightly to 61.3%64.1% for the 2018 six-monthnine-month period versus 60.7%61.1% for the comparable 2017 period. This increase as a percentage of sales was a result of the factors discussed above in the three months ended July 1,September 30, 2018 comparison, andas well as the exit of the FLOR specialty retail stores in the first quarter of 2017.
For the quarter ended July 1,September 30, 2018, selling, general and administrative (“SG&A”) expenses increased $11.1$16.9 million (17.2%(25.2%) versus the comparable period in 2017. SG&A expense for the acquired nora business was $11.3 million from August 7 through the end of the third quarter of 2018. Fluctuations in currency rates had a $1.3$0.6 million (2.1%(0.8%) negativepositive impact on the SG&A expense comparison. The increase in SG&A expense was due to transaction costs in connection with the nora acquisition of $3.0$1.0 million, higher share-based incentive compensation of $2.1$1.0 million due to performance achievement versus plan, higher selling expenses of $2.8$6.4 million related to the acquired nora business, higher selling expenses of $2.4 million due to higher sales volume, as well as planned enhancements in our selling system. These increases were offset by lower marketingand higher administrative expenses of $4.9 million due to the centralization of the global marketing function.nora acquisition. As a percentage of sales, SG&A expenses increased to 26.6%26.4% for the secondthird quarter of 2018 compared to 25.6%26.1% for the secondthird quarter of 2017.
For the sixnine months ended July 1,September 30, 2018, SG&A expenses increased $16.9$33.9 million (13.1%(17.2%) versus the comparable period in 2017. SG&A expense for the acquired nora business was $11.3 million from August 7 through the end of the third quarter of 2018. Fluctuations in currency rates had a $3.6$3.0 million (2.8%(1.6%) negative impact on the year-over-year SG&A expense comparison. The increase in SG&A expense was due to transaction costs in connection with the nora acquisition of $3.0$4.0 million, higher share-based incentive compensation of $3.8$4.7 million, and higher selling expenses of $4.6$6.0 million in our commercial business due to higher sales volume as well as planned enhancements in our selling system.system, higher selling expense of $6.4 million due to the acquired nora business, and higher administrative expenses of $10.5 million primarily due to the acquired nora business as noted above. These increases were offset by lower marketing expenses due to the centralization of the global marketing function and lower selling costs of $1.2 million due to the exit of the FLOR specialty retail stores as of the end of the first quarter of 2017. As a percentage of sales, SG&A expenses increased to 27.9%27.3% for the six-monthsnine months ended July 1,September 30, 2018, compared to 27.3%26.9% for the same period in 2017.
Interest Expense
For the three-month period ended July 1,September 30, 2018, interest expense increased $0.6$3.0 million to $2.3$4.9 million, from $1.7$1.9 million in the secondthird quarter of 2017. For the six-monthnine-month period ended July 1,September 30, 2018, interest expense increased $1.1$4.0 million to $4.4$9.2 million, from $3.3$5.2 million in the comparable period last year. The reason forincrease is primarily due to the increase wasadditional debt incurred to complete the nora acquisition, coupled with higher average interest rates on our borrowings in the first sixnine months of 2018 as compared to 2017.
Liquidity and Capital Resources
General
At July 1,September 30, 2018, we had $67.0$107.3 million in cash. At that date, we had $162.5$625.2 million in term loan borrowings, $81.0$32.1 million of revolving loan borrowings and $5.7$3.6 million in letters of credit outstanding under the Syndicated Credit Facility. As of July 1,September 30, 2018, we could have incurred $163.3had $264.3 million of additional borrowingsborrowing capacity under our Syndicated Credit Facility. In addition, we could have incurred an additional $9.8had $9.6 million of borrowingsadditional borrowing capacity available under our other credit facilities in place at other non-U.S. subsidiaries.
On August 7, 2018, subsequent to the end of the second quarter, our syndicated credit facilitySyndicated Credit Facility was amended and restated in connection with the acquisition of nora. Please see Note 165 and Note 9 in Item 1 for additional information.
Analysis of Cash Flows
As of July 1,September 30, 2018, we had $67.0$107.3 million in cash, a decreasean increase of $20.0$20.3 million during the first sixnine months of the year. The most significant factors in the decreaseincrease were cash outflows for financing activities, including (1) $51.4 million of cash used to pay down our revolving debt (2) $11.6 million of dividends paid on our common stock, and (3) $14.5 million used to repurchase and retire 615,000 shares of our outstanding common stock, (2) $7.7stock. These financing outflows were offset by borrowings of $479.8 million of dividends paid onunder our common stock,amended and (3) $7.5restated Syndicated Credit Facility primarily to fund the nora acquisition. Cash outflows for investing activities included (1) $400.7 million of cash used forto acquire the required amortization payment under our Syndicated Credit Facility. These financing outflows were partially offset by borrowings of $23.2 million under our Syndicated Credit Facility. We used $16.4nora business and (2) $28.9 million of cash for capital expenditures during the six-monthsnine-months ended July 1,September 2018. Cash flow from operations in the first sixnine months of 2018 provided $5.0$58.7 million, with net income of $35.7$43.9 million offset by working capital uses of cash of (1) $16.4$5.5 million for increases in receivables, (2) $24.3$27.0 million for increases in inventories, and (3) $18.0$9.4 million for increases in prepaid expenseexpenses and other current assets. These working capital uses of cash were partially offset by an increase in accounts payable and accrued expenses of $5.9$11.0 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 December 31, 2017, under Item 7A of that Form 10-K. The discussion here focuses on the period ended July 1,September 30, 2018, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.
At July 1,September 30, 2018, we recognized an $11.9a $7.0 million decrease in our foreign currency translation adjustment account compared to December 31, 2017, primarily because of the weakening of the Euro and British Pound against the U.S. dollar as of the end of the secondthird quarter of 2018 compared to the end of 2017.
Sensitivity Analysis. For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market sensitive instruments. To perform sensitivity analysis, we assess the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments.
Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount of our interest expense. ForAt our current amount of debt outstanding, a discussion of these hypothetical impacts on1% increase in the underlying prime rate or LIBOR rate would increase our annual interest expense please seeby approximately $6.5 million. A 1% decrease in the discussion in Item 7A ofunderlying prime rate or LIBOR rate would decrease our Annual Report on Form 10-K for the year ended December 31, 2017.annual interest expense by approximately $6.5 million.
As of July 1,September 30, 2018, 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 $9.5$13.5 million or an increase in the fair value of our financial instruments of $11.6$16.6 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 1,September 30, 2018, a 10% decrease or increase in the fair market value of the Company’s cash flow interest rate swap would lead to a decrease or increase in the recorded asset value of $0.3$0.2 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-15(b) under the Act. Based on that 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.
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.
We are subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 1.
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2017, as well as the following new risk factor, which updates the risk factors set forthsupplemented in our annual report:
If we fail to realizequarterly report on Form 10-Q for the expected synergies and other benefits of the nora acquisition, our results of operations and stock price may be negatively affected.quarter ended July 1, 2018.
We have recently completed the acquisition of nora, a manufacturer and multinational marketer of resilient floor coverings. The success of the acquisition will depend substantially on our ability to realize the expected synergies and other benefits from combining the businesses of the Company and nora. Our ability to realize these anticipated benefits and cost savings is subject to various risks and uncertainties, including the risks that:
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If we are not able to successfully combine the businesses of the Company and nora within the anticipated time frame, or at all, the expected synergies and other benefits of the transaction may not be realized fully or at all, or may take longer to realize than expected, the combined businesses may not perform as expected and the results of our operations or value of our common stock may be adversely affected.
It is also possible that the integration process could result in the loss of key employees or customers of the Company or nora, the disruption of the companies’ ongoing businesses or in unexpected integration issues, higher than expected integration costs and an overall post-closing integration process that takes longer than originally anticipated.
We will be required to devote significant management attention and resources to integrating the operations of the Company and nora. It is possible that the integration process could result in:
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Any of these consequences could adversely affect each company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or their ability to achieve the anticipated benefits of the transaction, or could reduce each company’s earnings or otherwise adversely affect the business and financial results of the combined company and the value of our common stock.
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 the quarter ended July 1,September 30, 2018:
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) | ||||||||||||
April 2-30, 2018(2) | 3,337 | $ | 24.95 | 0 | $ | 25,109,272 | ||||||||||
May 1-31, 2018 | 0 | 0 | 0 | 25,109,272 | ||||||||||||
June 1-30, 2018 | 0 | 0 | 0 | 25,109,272 | ||||||||||||
July 1, 2018 | 0 | 0 | 0 | 25,109,272 | ||||||||||||
Total | 3,337 | $ | 24.95 | 0 | $ | 25,109,272 |
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 2-31, 2018 | 0 | $ | 0 | 0 | $ | 25,109,272 | ||||||||||
August 1-31, 2018 | 0 | 0 | 0 | 25,109,272 | ||||||||||||
September 1-30, 2018(2) | 529 | 23.65 | 0 | 25,109,272 | ||||||||||||
Total | 529 | $ | 23.65 | 0 | $ | 25,109,272 |
(1) The monthly periods identified above correspond to the Company’s fiscal secondthird quarter of 2018, which commenced AprilJuly 2, 2018 and ended July 1,September 30, 2018.
(2) Includes shares acquired by the Company from employeesan employee to satisfy income tax withholding obligations in connection with the vesting of previous equity awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
None
The following exhibits are filed with this report:
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | ||
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31.1 | |||
31.2 | |||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. | ||
101.INS | XBRL Instance Document. | ||
101.SCH | XBRL Taxonomy Extension Schema Document. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||
101.PRE | XBRL Taxonomy Presentation Linkbase Document. | ||
101.DEF | XBRL Taxonomy Definition Linkbase Document. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERFACE, INC. | ||
Date: | By: | /s/ Bruce A. Hausmann |
Bruce A. Hausmann | ||
Vice President | ||
(Principal Financial Officer) |
EXHIBITS INCLUDED HEREWITH
EXHIBIT NUMBER |
DESCRIPTION OF EXHIBIT | |
31.1 | Section 302 Certification of Chief Executive Officer. | |
31.2 | Section 302 Certification of Chief Financial Officer. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |
101.DEF | XBRL Taxonomy Definition Linkbase Document. |
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