SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended July 4, 1999
Commission File Number 0-12016
INTERFACE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1451243
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
---------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 437-6800
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Shares outstanding of each of the registrant's classes of common stock at
August 12, 1999:
Class Number of Shares
- ---------------------------------------------- ----------------
Class A Common Stock, $.10 par value per share 46,649,872
Class B Common Stock, $.10 par value per share 6,563,602
1
INTERFACE, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheets - July 4, 1999 and January 3, 1999 3
Statements of Income - Three Months and Six Months 4
Ended July 4, 1999 and July 5, 1998
Statements of Comprehensive Income - Three Months and 5
Six Months Ended July 4, 1999 and July 5, 1998
Statements of Cash Flows - Six Months 6
Ended July 4, 1999 and July 5, 1998
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
JULY 4, JANUARY 3,
1999 1999
---- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,086 $ 9,910
Accounts Receivable 224,912 194,803
Inventories 187,742 199,338
Prepaid Expenses 48,094 26,607
Deferred Tax Asset 7,606 7,866
----------- -----------
TOTAL CURRENT ASSETS 473,440 438,524
PROPERTY AND EQUIPMENT, less
accumulated depreciation 242,500 245,312
EXCESS OF COST OVER NET ASSETS ACQUIRED 283,258 302,969
OTHER ASSETS 59,448 50,059
----------- -----------
$ 1,058,646 $ 1,036,864
=========== ===========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES:
Notes Payable $ 20,038 $ 26,855
Accounts Payable 64,991 80,154
Accrued Expenses 101,527 115,317
Current Maturities of Long-Term Debt 2,701 2,786
----------- -----------
TOTAL CURRENT LIABILITIES 189,257 225,112
LONG-TERM DEBT, less current maturities 175,548 112,651
SENIOR NOTES 150,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 22,070 23,482
----------- -----------
TOTAL LIABILITIES 661,875 636,245
----------- -----------
Minority Interest 1,891 1,795
Common Stock 5,996 5,983
Additional Paid-In Capital 224,261 231,959
Retained Earnings 226,424 219,230
Accumulated Other Comprehensive Income - Foreign Currency
Translation (37,656) (31,668)
Minimum Pension Liability Adjustment (6,399) (6,399)
Treasury Stock, 7,200,000, Class A Shares, at Cost (17,746) (20,281)
----------- -----------
$ 1,058,646 $ 1,036,864
=========== ===========
See accompanying notes to consolidated condensed financial statements
3
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JULY 4, JULY 5, JULY 4, JULY 5,
1999 1998 1999 1998
---- ---- ---- ----
NET SALES $ 305,452 $ 316,864 613,318 635,816
Cost of Sales 209,793 211,218 421,051 422,409
--------- --------- ------- -------
GROSS PROFIT ON SALES 95,659 105,646 192,267 213,407
Selling, General and Administrative Expenses 75,396 77,577 152,098 158,200
--------- --------- --------- ---------
OPERATING INCOME 20,263 28,069 40,169 55,207
Other (Expense) Income - Net (9,971) (9,072) (20,686) (19,490)
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 10,292 18,997 19,483 35,717
Taxes on Income 3,963 7,333 7,548 13,770
--------- --------- --------- ---------
NET INCOME $ 6,329 $ 11,664 $ 11,935 $ 21,947
========= ========= ========= =========
Basic Earnings Per Share $ .12 $ .22 $ .23 $ .43
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ .12 $ .22 $ .23 $ .42
========= ========= ========= =========
Average Shares Outstanding -- Basic 52,987 52,183 52,941 51,099
--------- --------- --------- ---------
Average Shares Outstanding -- Diluted 52,987 54,015 52,953 52,930
--------- --------- --------- ---------
See accompanying notes to consolidated condensed financial statements.
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 4, JULY 5, JULY 4, JULY 5,
1999 1998 1999 1998
---- ---- ---- ----
Net Income $6,329 $11,664 $ 11,935 $ 21,947
Other Comprehensive Income, Foreign
Currency Translation Adjustment 1,392 1,796 (7,380) (3,742)
------ ------- -------- --------
Comprehensive Income $7,721 $13,460 $ 4,555 $ 18,205
====== ======= ======== ========
See accompanying notes to consolidated condensed financial statements.
5
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
JULY 4, JULY 5,
1999 1998
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: $(28,883) $ (6,361)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (18,209) (20,831)
Acquisitions/Divestiture of businesses 6,217 (42,559)
Other (9,859) (3,347)
-------- --------
(21,851) (66,737)
--------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 57,837 8,487
Issuance/Repurchase of common stock (6,621) 69,581
Dividends paid (4,738) (3,774)
-------- --------
46,478 74,294
--------
Net cash provided by (used for) operating,
investing and financing activities (4,256) 1,196
Effect of exchange rate changes on cash (568) (775)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (4,824) 421
Balance at beginning of period 9,910 10,212
-------- --------
Balance at end of period $ 5,086 $ 10,633
======== ========
See accompanying notes to consolidated condensed financial statements
6
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 notes to the
Company's year-end financial statements contained in its Annual Report to
Shareholders for the fiscal year ended January 3, 1999, as filed with the
Commission.
The financial information included in this report has been prepared by
the Company, without audit, and should not be relied upon to the same extent as
audited financial statements. 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.
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
July 4, January 3,
1999 1999
-------- --------
Finished Goods $118,501 $123,941
Work in Process 28,536 31,908
Raw Materials 40,705 43,489
-------- --------
$187,742 $199,338
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
During the first quarter of 1999, the Company completed the sale of
Joseph, Hamilton & Seaton Ltd., a U.K.-based contract carpet distributor
acquired in connection with the acquisition of the European carpet businesses of
Readicut International Plc. The Company received cash consideration of
approximately $11.2 million in the sale.
During the first half of 1999, the Company acquired five service
companies located in the U.S. As consideration in the acquisitions, the Company
issued Common Stock valued at approximately $.8 million and paid $1.9 million in
cash. All transactions have been accounted for as purchases and accordingly, the
results of operations of the acquired companies have been included within the
consolidated financial statements since their acquisition dates. The excess of
the purchase price over the fair value of the net assets acquired was
approximately $1.2 million and is being amortized over 25 years.
During 1998, the Company acquired four floorcovering contractors, four
carpet maintenance companies, two additional service companies, and a
raised/access flooring manufacturer, all located in the U.S. The Company also
purchased the vinyl floorcoverings business of Scan-Lock A/S located in Denmark,
and Glenside Fabrics Limited, a manufacturer of upholstery fabrics, located in
Meltham, U.K. As consideration for the acquisitions, the Company issued Common
Stock valued at approximately $1.0 million, $16.9 million in cash, and $.2
million in a note receivable. All transactions have been accounted for as
purchases, and accordingly, the results of operations of the acquired companies
have been included within the consolidated financial statements since their
acquisition dates. The excess of the purchase price over the fair value of the
net assets acquired was approximately $11.7 million and is being amortized over
periods of 25 to 40 years.
NOTE 4 - CONCURRENT PUBLIC OFFERINGS
On April 2, 1998, the Company completed concurrent public offerings of
$150 million aggregate principal amount of 7.30% Senior Notes due 2008 and
3,450,000 shares of Class A Common Stock. The Company used the net proceeds of
both offerings of $212.7 million to reduce amounts outstanding under its senior
credit facility, and for general corporate purposes, including working capital
and acquisitions.
7
NOTE 5 - STOCK SPLIT
On June 15, 1998, the Company paid a two-for-one stock split, effected
in the form of a 100% stock dividend, to all common shareholders of record as of
June 1, 1998. In connection with the stock split, the Company issued 29,690,566
shares of Common Stock in the aggregate (including treasury shares). All earlier
references to shares of the Company's Common Stock contained elsewhere in these
Notes have been retroactively adjusted to reflect the stock split.
NOTE 6 - STOCK REPURCHASES
The Company adopted a share repurchase program in 1998, pursuant to
which it is authorized to repurchase up to 2,000,000 shares of Common Stock in
the open market or in private transactions over a two-year period. To date, the
Company has repurchased and retired an aggregate of 968,000 shares of Common
Stock under this program, at prices ranging from $8.45 to $16.78 per share.
NOTE 7 - EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares of Class A and
Class B Common Stock outstanding during the period. Shares issued or reacquired
during the period have been weighted for the portion of the period that they
were outstanding. Basic earnings per share has been computed based upon 52,941
shares and 51,099 shares outstanding for the periods ended July 4, 1999 and July
5, 1998, respectively. Diluted earnings per share is calculated in a manner
consistent with that of basic earnings per share while giving effect to all
dilutive potential common shares that were outstanding during the period.
Diluted earnings per share has been computed based upon 52,953 shares and 52,930
shares outstanding for the periods ended July 4, 1999 and July 5, 1998,
respectively. For the purposes of computing earnings per common share and
dividends per common share, the Company is treating as treasury stock (and
therefore not outstanding) the shares that are owned by a wholly-owned
subsidiary (an aggregate of 7,200,000 Class A shares recorded at cost).
The following is a reconciliation from basic earnings per share to
diluted earnings per share for each of the periods presented:
(In Thousands Except Per Share)
Average
For the Six-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
- --------------------------------------------------------------------------------------------------------
July 4, 1999 $11,935 52,941 $ .23
Effect of Dilution:
Options -- 12
-----------------------------------------------
Diluted $11,935 52,953 $ .23
===============================================
- --------------------------------------------------------------------------------------------------------
July 5, 1998 $21,947 51,099 $ .43
Effect of Dilution:
Options -- 1,831
-----------------------------------------------
Diluted $21,947 52,930 $ .42
===============================================
- --------------------------------------------------------------------------------------------------------
8
NOTE 8 - COMPREHENSIVE INCOME
Effective the first quarter of 1998, the Company adopted FAS 130,
"Comprehensive Income". This statement established the standards for reporting
and displaying comprehensive income and its components (revenues, expenses,
gains and losses) as part of a full set of financial statements. This statement
requires that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Since this statement applies only to the presentation of
comprehensive income, it does not have any impact upon results of operations,
financial position, or cash flows.
NOTE 9 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131 which establishes
standards for the way that public business enterprises report information about
operating segments in their financial statements. The standard defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker aggregates operating
segments based on the type of products produced by the segment. Based on the
quantitative thresholds specified in SFAS 131, the Company has determined that
it has two reportable segments. The two reportable segments are Floorcovering
Products/Services and Interior Fabrics. The Floorcovering Products/Services
segment manufactures, installs and services commercial modular and broadloom
carpet, while the Interior Fabrics segment manufactures panel and upholstery
fabrics.
The accounting policies of the operating segments are the same as
those described in Summary of Significant Accounting Policies. Segment amounts
disclosed are prior to any elimination entries made in consolidation. The chief
operating decision maker evaluates performance of the segments based on
operating income. Costs excluded from this profit measure primarily consist of
allocated corporate expenses, interest expense and income taxes. Corporate
expenses are primarily comprised of corporate overhead expenses. Thus, operating
income includes only the costs that are directly attributable to the operations
of the individual segment. Assets not identifiable to any individual segment are
corporate assets, which are primarily comprised of cash and cash equivalents,
short-term investments, intangible assets and intercompany amounts, which are
eliminated in consolidation.
SEGMENT DISCLOSURES Summary information by segment follows:
Floorcovering Interior
For the Six-Month Period Ended products/services fabrics Other Total
- ----------------------------------------------------------------------------------------------------------------------
(in Thousands)
July 4, 1999
Net sales $487,174 $ 99,050 $ 27,094 $ 613,318
Depreciation and amortization 16,159 4,713 954 21,826
Operating income 34,728 10,539 198 45,465
Total assets $929,996 $211,345 $ 46,838 $1,188,179
- ----------------------------------------------------------------------------------------------------------------------
July 5, 1998
Net sales $501,174 $113,764 $ 20,878 $ 635,816
Depreciation and amortization 14,525 4,942 1,754 21,221
Operating income 43,661 15,125 (399) 58,387
Total assets $921,795 $215,132 $ 43,693 $1,180,620
- ---------------------------------------------------------------------------------------------------------------------
9
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
Six-Month
Period Ended
-------------------------------------------
(IN THOUSANDS) July 4, 1999 July 5, 1998
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 21,826 $ 21,221
Corporate depreciation and amortization 310 324
----------- -----------
Reported depreciation and amortization $ 22,136 $ 21,545
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 45,465 $ 58,387
Corporate expenses and other reconciling amounts (5,296) (3,180)
----------- -----------
Reported operating income $ 40,169 $ 55,207
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Total segment assets $ 1,188,179 $ 1,180,620
Corporate assets and eliminations (129,533) (143,756)
----------- -----------
Reported total assets $ 1,058,646 $ 1,036,864
- -----------------------------------------------------------------------------------------------------------------
NOTE 10 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 7.3% senior notes due
2008 and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor
Financial Statements are presented herein pursuant to requirements of the
Commission.
INTERFACE, INC. AND SUBSIDIARIES
NOTE 10 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JULY 4, 1999
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Net sales $ 480,914 $ 194,796 $ -- $(62,392) $ 613,318
Cost of sales 351,084 132,359 -- (62,392) 421,051
--------- --------- -------- -------- ---------
Gross profit on sales 129,830 62,437 -- -- 192,267
Selling, general and administrative
expenses 93,860 42,361 15,877 -- 152,098
--------- --------- -------- -------- ---------
Operating income 35,970 20,076 (15,877) -- 40,169
Other (expense) income (9,151) (2,419) (9,116) -- (20,686)
--------- --------- -------- -------- ---------
Income before taxes on income 26,819 17,657 (24,993) -- 19,483
and Equity in income of subsidiaries
Taxes on income 10,408 6,886 (9,746) -- 7,548
--------- --------- -------- -------- ---------
Equity in income of subsidiaries -- -- 27,182 (27,182) --
--------- --------- -------- -------- ---------
Net income applicable to
common shareholders $ 16,411 $ 10,771 $ 11,935 $(27,182) $ 11,935
========= ========= ======== ======== =========
10
BALANCE SHEET
JULY 4, 1999
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,361 $ (1,642) $ 2,367 $ -- $ 5,086
Accounts receivable 161,173 78,705 (14,966) -- 224,912
Inventories 124,042 63,700 -- -- 187,742
Miscellaneous 12,526 31,911 11,263 -- 55,700
--------- --------- --------- ----------- -----------
Total current assets 302,102 172,674 (1,336) -- 473,440
Property and equipment
less accumulated depreciation 152,979 72,825 16,696 -- 242,500
Investment in subsidiaries 32,765 3,287 820,432 (856,484) --
Miscellaneous 14,529 7,531 37,388 -- 59,448
Excess of cost over net assets acquired 185,019 94,901 3,338 -- 283,258
-----------
$ 687,394 $ 351,218 $ 876,518 $ (856,484) $ 1,058,646
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 5,692 $ 14,346 $ -- $ -- $ 20,038
Accounts payable 31,050 29,478 4,463 -- 64,991
Accrued expenses 76,912 32,097 (7,482) -- 101,527
Current maturities of long-term debt 1,648 1,053 -- -- 2,701
--------- --------- --------- ----------- -----------
Total current liabilities 115,302 76,974 (3,019) -- 189,257
Long-term debt, less
current maturities 7,023 46,869 121,656 -- 175,548
Senior notes and senior subordinated
notes -- -- 275,000 -- 275,000
Deferred income taxes/other 15,158 4,552 2,360 -- 22,070
Minority interests -- 1,891 -- -- 1,891
--------- --------- --------- ----------- -----------
Total liabilities 137,483 130,286 395,997 -- 663,766
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,996 (196,344) 5,996
Additional paid-in capital 191,411 12,525 224,261 (203,936) 224,261
Retained earnings 209,564 143,373 254,054 (380,567) 226,424
Foreign currency translation adjustment
income (3,100) (37,165) (3,790) -- (44,055)
Treasury stock, 7,200,000 Class A
shares, at cost -- -- -- (17,746) (17,746)
--------- --------- --------- ----------- -----------
$ 687,394 $ 351,218 $ 876,518 $ (856,484) $ 1,058,646
========= ========= ========= =========== ===========
11
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 4, 1999
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Net cash provided by operating activities $ 21,196 $(13,841) $(36,238) $ -- $(28,883)
Cash flows from investing activities:
Purchase of plant and equipment (15,302) (2,350) (557) -- (18,209)
Acquisitions, net of cash acquired -- -- 6,217 -- 6,217
Other assets (6,359) 4,636 (8,136) -- (9,859)
------- ------- ------- -------- --------
Net cash provided by (used in) investing
activities (21,661) 2,286 (2,476) 0 (21,851)
Cash flows from financing activities:
Net borrowings (repayments) (1,319) 5,247 53,909 -- 57,837
Proceeds from issuance/repurchase of
common stock -- -- (6,621) -- (6,621)
Cash dividends paid -- -- (4,738) -- (4,738)
------- ------- ------- -------- -------
Net cash provided by (used in) financing
activities (1,319) 5,247 42,550 -- 46,478
Effect of exchange rate change on cash -- (568) -- -- (568)
------- ------- ------- -------- -------
Net increase (decrease) in cash (1,784) (6,876) 3,836 -- (4,824)
Cash at beginning of year 6,145 5,234 (1,469) -- 9,910
------- ------- ------- -------- -------
Cash at end of year $ 4,361 $ (1,642) $ 2,367 $ -- $ 5,086
======== ======== ======== ===== ========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This report contains statements which may constitute "forward-looking
statements" under applicable securities laws, including statements regarding the
intent, belief or current expectations of the Company and members of its
management team, as well as the assumptions on which such statements are based.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the Safe
Harbor Compliance Statement for Forward-Looking Statements included as Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999, and 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.
General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics and specialty products. During the quarter ended July
4, 1999, the Company had revenues and net income of $305.5 million and $6.3
million, respectively.
The Company's business, as well as the commercial interiors market in
general, is somewhat cyclical in nature. In recent years, the Company has
benefited from a recovery in the U.S. commercial office market which began in
the mid-1990's. However, many of the Company's business segments have
experienced decreased demand levels over the last three quarters. As a result,
the Company's results of operations, and its prospects for the balance of 1999,
have been adversely affected. A significant sustained downturn in the market
would materially impair the Company's revenues and earnings prospects.
During the fourth quarter of 1998, the Company recorded a pre-tax
restructuring charge in the amount of $25.3 million related to plant closures
and consolidations of operations in Asia, Europe and the U.S., which resulted in
an aggregate headcount reduction of approximately 287 salaried and hourly
employees and the write-down and disposal of certain assets. The restructuring
charge is comprised of $13.0 million of cash expenditures for severance benefits
and relocation costs (of which $4.5 million remained unpaid at July 4, 1999 and
is included in accrued expenses) and $12.3 million of non-cash charges,
primarily for the write-down of impaired assets. The Company anticipates that
the restructuring will be completed by the end of the third quarter 1999. The
restructuring is expected to yield annual cost savings of approximately $8
million.
Results of Operations
For the three month and six month periods ended July 4, 1999, the
Company's net sales decreased $11.4 million (3.6%) and $22.5 million (3.5%),
respectively, compared with the same periods in 1998. The decreases were
primarily attributable to (i) a decline in sales of broadloom carpet in the U.S.
by the Company's Bentley Mills subsidiary, due to personnel turnover and a
narrower distribution channel, (ii) a decline in sales of broadloom carpet in
Europe, particularly in the United Kingdom, due to the divestiture of Joseph,
Hamilton & Seaton, Ltd. and Firth's shift in focus towards corporate accounts,
and (iii) decreased sales volume in the Company's interior fabrics operations
resulting from continued soft market conditions. The decrease was offset
somewhat by increased sales volume (i) in the Company's Asia-Pacific division,
which continues to show signs of recovery from the recent economic downturn in
that region, and (ii) in the Company's architectural products division, driven
in part by the 1998 acquisition of Atlantic Access Flooring and its line of
steel panel products. Although sales in the Company's U.S. floorcovering
operations were essentially flat, there was a shift in the relative mix of
sales, with increased service revenues offsetting lower product sales.
Cost of sales, as a percentage of net sales, increased to 68.7% for
both the three month and six month periods ended July 4, 1999, compared to 66.7%
and 66.4%, respectively, for the same periods in 1998. The increase was
primarily attributable to (i) the failure to fully absorb overhead expenses, as
a result of the decline in sales, and (ii) the shift in the relative mix of
sales towards service revenues, which historically have had lower gross profit
margins than product sales.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 24.7% in the second quarter of 1999, compared to 24.5% in
the same period in 1998, primarily as a result of consulting and development
expenses associated with the
13
Year 2000 initiative. However, the SG&A cost-to-sales ratio decreased to 24.8%
in the six-month period ended July 4, 1999, compared to 24.9% in the same period
in 1998. The decrease was attributable primarily to the Company's recent
restructuring activities and the adoption of a "shared services" program in the
Americas floorcovering businesses.
For the three month and six month periods ended July 4, 1999, other
expenses increased $.9 million and $1.2 million, respectively, compared to the
same periods in 1998, due primarily to higher overall levels of bank debt
resulting from a seasonal reduction in accruals related to employee bonuses and
profit-sharing payments, and certain pension payments related to the Firth
acquisition.
As a result of the aforementioned factors, the Company's net income
decreased 45.7% to $6.3 million and 45.6% to $11.9 million, respectively, for
the three month and six month periods ended July 4, 1999, compared to the same
periods last year.
Liquidity and Capital Resources
The Company's primary source of cash during the six months ended July
4, 1999 was $56.0 million from long-term financing. The primary uses of cash
during the six months ended July 4, 1999 were (i) $18.2 million for additions to
property and equipment in the Company's manufacturing facilities, (ii) $10
million for European minimum pension obligations, and (iii) $7.3 million for
repurchases of common stock. Management believes that cash provided by
operations and long-term loan commitments will provide adequate funds for
current commitments and other requirements in the foreseeable future.
In 1998, the Company adopted a share repurchase program, pursuant to
which it is authorized to repurchase up to 2,000,000 shares of Class A Common
Stock in the open market or in private transactions over a two-year period.
During the first half of 1999, the Company repurchased and retired 793,000
shares of Class A Common Stock at an average price of $9.00 per share. To date,
the Company has repurchased an aggregate of 968,000 shares under this program.
Year 2000
As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year 2000
issue. The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit codes to perform computations or decision-making
functions. The Company has done a comprehensive review of its computer programs
to identify the systems that would be affected by the Year 2000 issue. The
Company has retained IBM Corporation to assist in its Year 2000 conversion
process.
The Company categorizes its systems into one of two categories: those
that are linked to the Company's AS-400 computer network ("IT Systems"), and
those that are not ("Non-IT Systems"). The Company currently estimates the total
cost of modifying its IT Systems to be Year 2000 ready to be approximately $23.4
million. Of such amount, approximately $13.9 million is attributable to the cost
of new hardware and software which will be required in connection with the
global consolidation of the Company's management and financial accounting
systems. This new equipment and upgraded technology will have a definable value
lasting beyond the Year 2000. In these instances, where Year 2000 compliance is
ancillary, the Company intends to capitalize and depreciate such costs. The
remaining $9.5 million (based on current estimates) will be expensed as
incurred. With respect to Non-IT Systems, the Company currently estimates the
total cost of the modifications necessary to be Year 2000 ready to be
approximately $2 million, although it could be more. The Company intends to fund
these costs through operating cash flows.
During the quarter ended July 4, 1999, the Company expensed
approximately $1.3 million in regard to modifications of both IT Systems and
Non-IT Systems. To date, the Company has expensed approximately $7.6 million in
the aggregate in regard to such modifications. The Company does not separately
track its internal costs related to Year 2000 compliance, the majority of which
are compensation expenses for employees in its information technology
department.
The company has standardized its IT platforms (computers, system
software and network components) and completed functional and Year 2000 testing.
AS/400's are 100% migrated to standards. PC servers are 100% migrated to
standards, with the exception of Europe and Asia-Pacific operations, which are
scheduled for completion in September 1999. PC clients are 100% migrated to
standard with the exception of Re:Source Americas, where completion is scheduled
for September 1999. Voice PBX and Voice Mail platforms are implemented and
certified Year 2000 ready. All WAN and LAN assets are implemented and certified
Year 2000 ready.
14
For Application software on AS/400's, migration to the standard, Year
2000-tested financial, payroll and human resource systems is complete and the
applications are in service in the Americas. Payroll system evaluation,
remediation and contingency planning continues in Europe and Asia-Pacific.
Service provider system implementations of standard applications are 75%
complete, with deployment scheduled for completion in November 1999 (Year 2000
testing concurrently). Manufacturing unit systems (orders and manufacturing) are
being handled on a business unit by business unit basis. Mill systems
remediation, integration and testing activities are complete and implementation
is scheduled for completion in August 1999, except for Nortex which is scheduled
for September 1999 and Prince Street Technologies which is scheduled for October
1999.
Remediation and testing of Non-IT equipment is scheduled for
completion in August 1999, with the exception of one system at Intek which is
expected to be completed in September 1999.
The Company has not deferred in any material respect any of its other
information technology projects to accommodate its Year 2000 compliance efforts.
The Company is continuing the process of reviewing its Year 2000
exposure to third party suppliers and customers. Surveys have been sent to
critical suppliers and, in certain cases, on-site Year 2000 audits are being
performed. The Company's most reasonably likely worst-case Year 2000 scenario is
that a key supplier's systems will malfunction and, as a result, the Company
will suffer a period of business interruption during which it is unable to meet
related obligations to its customers. The Company is currently unaware of any
Year 2000 problems faced by any suppliers which are likely to have a material
adverse effect on the Company. However, many third parties remain reluctant to
provide detailed information concerning the status of their Year 2000 readiness,
particularly if they have not completed an analysis of their systems.
The Company is in the process of developing and implementing
contingency plans in the event of supply problems. The principal contingencies
under consideration include identifying and qualifying substitute suppliers for
key materials, stockpiling certain critical supplies, and pursuing long-term
supply contracts providing the Company with preferential treatment in the event
of shortages. These plans are targeted for completion by the end of the third
quarter of 1999.
The Company believes that no single customer represents so significant
a portion of its revenues that failure on the part of such a customer to plan
effectively for Year 2000 would materially impact the Company's financial
condition. In addition, the Company believes that the diversity of its customer
base minimizes the potential financial impact of such an event. However, if
broad customer buying trends are reduced due to Year 2000 issues, the Company's
revenues and profitability could be adversely affected.
There can be no guarantee that the foregoing cost estimates or
deadlines will be achieved and actual results could differ from those
anticipated. Specific factors that might cause differences include, but are not
limited to, the ability to locate and correct all relevant computer codes, and
the ability of suppliers, customers and other companies on which the Company
relies to modify or convert their systems to be Year 2000 compliant. This risk
is particularly acute with respect to non-U.S. third parties, as it is widely
reported that many non-U.S. businesses and governments are not addressing their
Year 2000 issues on a timely basis.
Euro Conversion
A single currency called the euro was introduced in Europe on January
1, 1999. Eleven of the fifteen member countries of the European Union adopted
the euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
January 1, 2002 (but not later than July 1, 2002). During this transition
period, parties may settle transactions using either the euro or a participating
country's legacy currency.
The increased price transparency resulting from the use of a single
currency in the eleven participating countries may affect the ability of the
Company to price its products differently in various European markets.
Introduction of the euro may reduce the amount of the Company's
exposure to changes in foreign exchange rates, due to the netting effect of
having assets and liabilities denominated in a single currency as opposed to the
various legacy currencies. Conversely, because there will be less diversity in
the Company's exposure to foreign currencies, movements in the euro's value in
U.S. dollars could have a more pronounced effect, whether positive or negative.
As a result of the adoption of the euro, the Company's foreign exchange hedging
costs could be reduced in the future.
15
Certain of the Company's business functions have introduced
euro-capability as of January 1, 1999, including, for example, systems for
making and receiving certain payments, pricing and invoicing. Other business
functions will be converted for the euro by the end of the transition period
(December 31, 2001), but may be converted earlier where operationally efficient
or cost-effective, or to meet customer needs. The Company does not expect the
costs associated with these modifications to have a material adverse effect on
future operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the scope and volume of its global operations, the
Company is exposed to an element of market risk from changes in interest rates
and foreign currency exchange rates. The Company's results of operations and
financial condition could be impacted by this risk. The Company manages its
exposure to market risk through its regular operating and financial activities
and, to the extent appropriate, through the use of derivative financial
instruments.
The Company employs derivative financial instruments as risk
management tools and not for speculative or trading purposes. The Company
monitors the use of derivative financial instruments through the use of
objective measurable systems, well-defined market and credit risk limits, and
timely reports to senior management according to prescribed guidelines. The
Company has established strict counterparty credit guidelines and only enters
into transactions with financial institutions with a rating of investment grade
or better. As a result, the Company considers the risk of counterparty default
to be minimal.
INTEREST RATE MARKET RISK EXPOSURE. Changes in interest rates affect
the interest paid on certain of the Company's debt. To mitigate the impact of
fluctuations in interest rates, management of the Company has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. The Company maintains the fixed/variable rate mix
within these parameters either by borrowing on a fixed-rate basis or entering
into interest rate swap transactions. In the interest rate swaps, the Company
agrees to exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR. The interest rate swap agreements generally have
maturity dates ranging from fifteen to twenty-four months.
At July 4, 1999, the Company had utilized interest rate swap
agreements to effectively convert approximately $43.7 million of variable rate
debt to fixed rate debt. The Company anticipates that for the balance of fiscal
1999 it will utilize swap agreements or other derivative financial instruments
to convert comparable amounts of variable rate to fixed rate debt.
FOREIGN CURRENCY EXCHANGE MARKET RISK EXPOSURE. A significant portion
of the Company's operations consists of manufacturing and sales activities in
foreign jurisdictions. The Company manufactures its products in the U.S.,
Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and
sells its products in more than 100 countries. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between the U.S. dollar and
many other currencies, including the Dutch guilder, British pound sterling,
German mark, French franc, Canadian dollar, Australian dollar, Thai baht,
Japanese yen, and, beginning in 1999, the euro. When the U.S. dollar strengthens
against a foreign currency, the value of anticipated sales in those currencies
decreases, and vice-versa. Additionally, to the extent the Company's foreign
operations with functional currencies other than the U.S. dollar transact
business in countries other than the U.S., exchange rate changes between two
foreign currencies could ultimately impact the Company. Finally, because the
Company reports in U.S. dollars on a consolidated basis, foreign currency
exchange fluctuations can have a translation impact on the Company's financial
position.
To mitigate the short-term effect of changes in currency exchange
rates on the Company's sales denominated in foreign currencies, the Company
regularly hedges by entering into currency swap contracts to hedge certain firm
sales commitments denominated in foreign currencies. In these currency swap
agreements, the Company and a counterparty financial institution exchange equal
initial principal amounts of two currencies at the spot exchange rate. Over the
term of the swap contract, the Company and the counterparty exchange interest
payments in their swapped currencies. At maturity, the principal amount is
reswapped, at the contractual exchange rate. At April 4, 1999, the contracts
served to hedge firmly committed sales in Dutch guilders and Japanese yen. The
contracts generally have maturity dates of fifteen to twenty-four months.
At July 4, 1999, the Company had approximately $10.5 million (notional
amount) of foreign currency hedge contracts outstanding. The Company expects to
hedge a comparable notional amount for the balance of fiscal 1999. The Company,
as of July 4,
16
1999, recognized a $6.0 million decrease in its foreign currency translation
adjustment account compared to January 3, 1999 because of the weakening of
certain currencies against the U.S. dollar and the transition to the euro as the
local reporting currency in Europe.
SENSITIVITY ANALYSIS. For purposes of specific risk analysis, the
Company uses sensitivity analysis to measure the impact that market risk may
have on the fair values of the Company's market sensitive instruments.
To perform sensitivity analysis, the Company assesses the risk of loss
in fair values associated with the impact of hypothetical changes in interest
rates and foreign currency exchange rates on market sensitive instruments. The
market value of instruments affected by interest rate and foreign currency
exchange rate risk is computed based on the present value of future cash flows
as impacted by the changes in the rates attributable to the market risk being
measured. The discount rates used for the present value computations were
selected based on market interest and foreign currency exchange rates in effect
at July 4, 1999. The market values that result from these computations are
compared with the market values of these financial instruments at July 4, 1999.
The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
As of July 4, 1999, based on a hypothetical immediate 150 basis point
increase in interest rates, with all other variables held constant, the market
value of the Company's fixed rate long-term debt would be impacted by a net
decrease of $15.7 million. Conversely, a 150 basis point decrease in interest
rates would result in a net increase in the market value of the Company's fixed
rate long-term debt of $25.9 million. At January 3, 1999, a 150 basis point
movement would have resulted in the same changes.
As of July 4, 1999, a 10% movement 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 the Company's financial
instruments of $1.3 million or an increase in the fair value of the Company's
financial instruments of $1.1 million. At January 3, 1999, a 10% movement would
have resulted in the same changes. As the impact of offsetting changes in the
fair market value of the Company's net foreign investments is not included in
the sensitivity model, these results are not indicative of the Company's actual
exposure to foreign currency exchange risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1998, the Company sent two "cease and desist" letters to
Collins & Aikman Floorcoverings, Inc. ("CAF"), demanding that CAF cease
manufacturing certain carpet products which the Company believes infringe upon
certain of its copyrighted product designs. The Company and CAF subsequently
began settlement negotiations in an attempt to resolve the Company's claims.
On July 28, 1998, CAF filed a complaint (the "Complaint") against the
Company and certain other parties in the U.S. District Court for the Northern
District of Georgia, Atlanta Division. In the Complaint, CAF alleges that the
Company has infringed upon certain of CAF's copyrighted product designs. The
Complaint also contains a claim against the Company for tortious interference
with contractual rights relating to a consulting agreement between CAF and David
Oakey, a former consultant of CAF and current consultant of the Company. CAF is
seeking damages and injunctive relief in connection with the foregoing claims.
On September 28, 1998, the Company filed its Answer and Counterclaims
to the Complaint, which includes certain counterclaims against CAF for copyright
infringement. The Company continues to believe that CAF's claims are unfounded
and that the Company has meritorious defenses to such claims. Moreover, the
Company intends to aggressively assert its claims against CAF.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of shareholders on May 18,
1999.
(b) Not applicable.
(c) The matters considered at the annual meeting, and the votes cast
for, against or withheld, as well as the number of abstentions
and broker non-votes, relating to each matter, are as follows:
(i) Election of the following directors:
Class A For Withheld
------- --- --------
Dianne Dillon-Ridgley 39,408,245 1,075,749
Carl I. Gable 39,407,845 1,076,149
June M. Henton 39,408,845 1,075,149
J. Smith Lanier, II 39,408,645 1,075,349
Thomas R. Oliver 39,408,545 1,075,449
Clarinus C. Th. van Andel 39,408,745 1,075,249
Class B For Withheld
------- --- --------
Ray C. Anderson 4,982,741 0
Brian L. DeMoura 4,982,741 0
Charles R. Eitel 4,982,741 0
Daniel T. Hendrix 4,982,741 0
Leonard G. Saulter 4,982,741 0
John H. Walker 4,982,741 0
Gordon D. Whitener 4,982,741 0
(ii) Proposal to approve the Company's Executive
Bonus Plan:
For: 43,643,386
Against: 1,628,030
Abstain: 195,319
(iii) Proposal to implement the MacBride Principles:
For: 5,542,413
Against: 32,703,214
Abstain: 1,625,053
Broker Non-Votes: 5,596,055
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
18
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Restated Articles of Incorporation (included as Exhibit 3.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended July 5, 1998, previously filed with the Commission and
incorporated herein by reference).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1,
1990, previously filed with the Commission and incorporated
herein by reference).
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's
Articles of Incorporation and Bylaws defining the rights of
holders of Common Stock of the Company.
4.2 Rights Agreement between the Company and Wachovia Bank, N.A.,
dated as of March 4, 1998, with an effective date 4.2 of March
16, 1998 (included as Exhibit 10.1A to the Company's
registration statement on Form 8-A/A dated March 12, 1998,
previously filed with the Commission and incorporated herein by
reference).
4.3 Indenture governing the Company's 9.5% Senior Subordinated Notes
due 2005, dated as of November 15, 1995, among the Company,
certain U.S. subsidiaries of the Company, as Guarantors, and
First Union National Bank of Georgia, as Trustee (included as
Exhibit 4.1 to the Company's registration statement on Form S-4,
File No. 33-65201, previously filed with the Commission and
incorporated herein by reference); and Supplement No. 1 to
Indenture, dated as of December 27, 1996 (included as Exhibit
4.2(b) to the Company's Annual Report on Form 10-K for the year
ended December 29, 1996, previously filed with the Commission
and incorporated herein by reference).
4.4 Form of Indenture governing the Company's 7.3% senior notes due
2008, among the Company, certain U.S. subsidiaries of the
Company, as Guarantors, and First Union National Bank, as
trustee (included as Exhibit 4.1 to the Company's registration
statement on Form S-3/A, File No. 333-46611, previously filed
with the Commission and incorporated herein by reference).
10.1 Executive Bonus Plan.
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended
July 4, 1999.
19
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: August 16, 1999 By: /s/ Daniel T. Hendrix
--------------------------
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
20
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Executive Bonus Plan.
27.1 Financial Data Schedule.
21