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 March 31, 2002
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 May
10, 2002:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 43,879,339
Class B Common Stock, $.10 par value per share 7,188,598
INTERFACE, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheets - 3
March 31, 2002 and December 30, 2001
Consolidated Condensed Statements of Operations - Three Months 4
Ended March 31, 2002 and April 1, 2001
Consolidated Statements of Comprehensive Income (Loss) - 4
Three Months Ended March 31, 2002 and April 1, 2001
Consolidated Condensed Statements of Cash Flows - 5
Three Months Ended March 31, 2002 and April 1, 2001
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 30,
2002 2001
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,111 $ 793
Accounts Receivable 157,067 161,070
Inventories 170,733 168,249
Prepaid Expenses 38,028 31,018
Deferred Income Tax 16,718 17,640
--------- ---------
TOTAL CURRENT ASSETS 384,657 378,770
PROPERTY AND EQUIPMENT, less
accumulated depreciation 251,387 260,327
GOODWILL 251,130 251,874
OTHER ASSETS 71,166 63,783
--------- ---------
$ 958,340 $ 954,754
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 68,494 $ 65,805
Accrued Expenses 94,758 100,566
Current Maturities of Long-Term Debt -- 1,667
--------- ---------
TOTAL CURRENT LIABILITIES 163,252 168,038
LONG-TERM DEBT, less current maturities 13,188 178,327
SENIOR NOTES 325,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES and OTHER 26,516 26,474
--------- ---------
TOTAL LIABILITIES 652,956 647,839
--------- ---------
Minority Interest 4,546 4,440
--------- ---------
SHAREHOLDERS' EQUITY:
Common Stock 5,099 5,082
Additional Paid-In Capital 219,818 219,490
Retained Earnings 175,078 175,940
Accumulated Other Comprehensive Income -
Foreign Currency Translation (88,096) (86,976)
Minimum pension liability (11,061) (11,061)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 300,838 302,475
--------- ---------
$ 958,340 $ 954,754
See accompanying notes to consolidated condensed financial statements.
-3-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
NET SALES $ 234,425 $306,511
Cost of Sales 168,084 217,593
--------- --------
GROSS PROFIT ON SALES 66,341 88,918
Selling, General and Administrative Expenses 55,865 71,813
--------- --------
OPERATING INCOME 10,476 17,105
Interest Expense 10,375 9,564
Other Expense (Income) - Net 309 273
--------- --------
INCOME (LOSS) BEFORE TAXES ON INCOME (208) 7,268
Income Tax (Benefit) Expense (102) 2,838
--------- --------
NET INCOME (LOSS) $ (106) $ 4,430
========= ========
Basic Earnings (Loss) Per Share $ 0.00 $ 0.09
========= ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ 0.09
========= ========
Average Shares Outstanding -- Basic 50,017 49,972
========= ========
Average Shares Outstanding -- Diluted 50,017 50,945
========= ========
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
MARCH 31, APRIL 1,
2002 2001
-------- --------
Net Income (Loss) $ (106) $ 4,430
Other Comprehensive Income, Foreign
Currency Translation Adjustment (1,120) (10,623)
------- --------
Comprehensive Income (Loss) $(1,226) $ (6,193)
======= ========
See accompanying notes to consolidated condensed financial statements.
-4-
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
------------------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 3,784 $(23,004)
--------- --------
INVESTING ACTIVITIES:
Capital expenditures (2,444) (10,771)
Acquisitions/Divestitures of businesses -- --
Other (5,830) (1,394)
--------- --------
(8,274) (12,165)
--------- --------
FINANCING ACTIVITIES:
Net borrowing (repayment) of long-term debt (168,413) 32,737
Proceeds from issuance of bonds 175,000 --
Proceeds from issuance of common stock 77 --
Repurchase of common stock -- (1,407)
Dividends paid (762) (2,291)
--------- --------
5,902 29,039
--------- --------
Net cash provided by (used for) operating,
investing and financing activities 1,412 (6,130)
Effect of exchange rate changes on cash (94) (448)
--------- --------
CASH AND CASH EQUIVALENTS:
Net change during the period 1,318 (6,578)
Balance at beginning of period 793 7,861
--------- --------
Balance at end of period $ 2,111 $ 1,283
========= ========
See accompanying notes to consolidated condensed financial statements.
-5-
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 on Form
10-K for the fiscal year ended December 30, 2001, 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:
(In thousands)
March 31, December 30,
2002 2001
--------- ------------
Finished Goods $ 90,724 $ 84,191
Work in Process 36,875 35,204
Raw Materials 43,134 48,854
-------- --------
$170,733 $168,249
======== ========
NOTE 3 - RESTRUCTURING CHARGES
During 2001, the Company recorded a pre-tax restructuring charge of
$65.1 million. The charge reflected: (i) the withdrawal from the European
broadloom market; (ii) the consolidation in the Company's raised/access
flooring operations; (iii) the further rationalization of the U.S. broadloom
operations; (iv) a worldwide workforce reduction of approximately 838
employees; and (v) the consolidation of certain non-strategic Re:Source
Americas operations. The Company initially recorded a charge of $62.2 million
during the third quarter of 2001, and in the fourth quarter of 2001 recorded an
additional $2.9 million charge related to pension benefits for terminated
European employees.
Specific elements of the restructuring activities, the related costs
and current status of the plan are discussed below.
U.S.
Recent economic developments have caused a decline in demand for
raised/access flooring, panel fabric and certain of the Company's other
products. In order to better match the cost structure to the expected revenue
base, the Company closed two raised/access flooring plants and one panel fabric
plant, eliminated certain product lines, consolidated certain under-performing
distribution locations and made other head-count reductions. A charge of
approximately $28.8 million was recorded representing the reduction of carrying
value of the related property and equipment, impairment of intangible assets
and other costs to close these operations. Additionally, the Company recorded
approximately $5.3 million of termination benefits associated with the facility
closures and other head-count reductions.
Europe
For the past several years the Company's European broadloom operations
have had negative returns. The softening global economy during 2001, and the
events of September 11, 2001 (which severely impacted consumers of broadloom
carpet in the hospitality, leisure and airline businesses) led management to
conclude that positive returns from this operation were unlikely for the near
future. As a result, the Company elected to divest of this operation. The
Company also elected to consolidate certain production and administrative
facilities throughout Europe. A charge of approximately $19.0 million was
recorded representing the reduction of carrying value of the related property
and equipment, impairment of intangible assets and other costs to close or
dispose of these operations. Additionally, the Company recorded approximately
$12.0 million of termination benefits associated with the facility closures.
-6-
A summary of the restructuring activities is presented below:
U.S. EUROPE TOTAL
------- ------- -------
(IN THOUSANDS)
Facilities consolidation $ 5,889 $ 8,685 $14,574
Workforce reduction 5,266 12,049 17,315
Product rationalization 15,735 1,070 16,805
Other impaired assets 6,997 9,394 16,391
------- ------- -------
$33,887 $31,198 $65,085
======= ======= =======
The restructuring charge was comprised of $24.0 million of cash
expenditures for severance benefits and other costs and $41.1 million of
non-cash charges, primarily for the write-down of carrying value and disposal
of certain assets.
The termination benefits of $17.3 million, primarily related to
severance costs, are a result of aggregate reductions of approximately 838
employees. The staff reductions as originally planned were expected to be as
follows:
U.S. EUROPE TOTAL
---- ------ ------
Manufacturing....................... 243 436 679
Selling and administrative.......... 62 97 159
--- --- ---
305 533 838
=== === ===
As a result of the restructuring, approximately 800 employees were
terminated through March 31, 2002. The charge for termination benefits and
other costs to exit activities incurred during 2001 was reflected as a
separately stated charge against operating income. The Company believes the
remaining provisions are adequate to complete the plan.
The following table displays the activity within the accrued
restructuring liability for the period ended March 31, 2002:
Termination Benefits
U.S. EUROPE TOTAL
------- ------- --------
(IN THOUSANDS)
Balance, at December 30, 2001 ... $ 1,971 $ 9,352 $ 11,323
Cash payments ................... (800) (4,715) (5,515)
------- ------- --------
Balance, at March 31, 2002 ...... $ 1,171 $ 4,637 $ 5,808
======= ======= ========
Other Costs to Exit Activities
U.S. EUROPE TOTAL
------- ------- -------
(IN THOUSANDS)
Balance, at December 30, 2001 ... $ 1,199 $ 6,114 $ 7,313
Costs incurred .................. (600) (1,176) (1,776)
------- ------- -------
Balance, at March 31, 2002 ...... $ 599 $ 4,938 $ 5,537
======= ======= =======
NOTE 4 - EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is computed by dividing net income (or loss)
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
50,017,000 shares and 49,972,000 shares outstanding for the three-month periods
ended March 31, 2002 and April 1, 2001, 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 50,017,000 shares and 50,945,000 shares outstanding for the three
month period ended March 31, 2002 and April 1, 2001, respectively. During the
first three months of 2002, there were vested, unexercised, in the money stock
options for 2,100,000 shares. These shares were not included in the computation
of the diluted per share amount because the Company was in a net loss position
and, thus, any potential common shares were anti-dilutive.
-7-
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 Amounts)
For the Three-Month Average Shares Earnings
Period Ended Net Income Outstanding Per Share
---------- -------------- ---------
March 31, 2002 $ (106) 50,017 $0.00
Effect of Dilution:
Options -- -- --
------- ------ -----
Diluted $ (106) 50,017 $0.00
======= ====== =====
April 1, 2001 $ 4,430 49,972 $0.09
Effect of Dilution:
Options -- 973 --
------- ------ -----
Diluted $ 4,430 50,945 $0.09
======= ====== =====
NOTE 5 - SEGMENT INFORMATION
Based on the quantitative thresholds specified in SFAS 131, the
Company has determined that it has two reportable segments: Floorcovering
Products/Services and Interior Fabrics. The Floorcovering Products/Services
segment manufactures, installs and services commercial modular and broadloom
carpet, and the Interior Fabrics segment manufactures panel and upholstery
fabrics.
The accounting policies of the operating segments are the same as
those described in the Summary of Significant Accounting Policies contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December 30,
2001, as filed with the Commission. 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 interest expense and income
taxes. Corporate expenses are primarily comprised of corporate overhead
expenses. 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.
-8-
Segment Disclosures
Summary information by segment follows:
Floorcovering Interior Other (Includes
(in thousands) Products/Services Fabrics Architectural Products) Total
----------------- -------- ----------------------- ----------
Three Months Ended
March 31, 2002
Net Sales $174,277 $ 52,394 $ 7,754 $ 234,425
Depreciation and amortization 4,412 2,932 241 7,585
Operating Income 8,926 1,564 (106) 10,384
Total Assets $674,240 $252,323 $ 34,866 $ 961,429
Three Months Ended
April 1, 2001
Net Sales $230,237 $ 58,991 $ 17,283 $ 306,511
Depreciation and amortization 7,817 2,988 285 11,100
Operating Income 11,638 3,843 (129) 15,352
Total Assets $785,224 $233,466 $ 42,207 $1,060,897
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
Three Months Ended
------------------------------------
(in thousands) March 31, 2002 April 1, 2001
--------------- -------------
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 7,585 $ 11,100
Corporate depreciation and amortization 1,618 1,410
--------- -----------
Reported depreciation and amortization $ 9,203 $ 12,510
OPERATING INCOME (LOSS)
Total segment operating income (loss) $ 10,384 $ 15,352
Corporate expenses and other reconciling amounts 92 1,753
--------- -----------
Reported operating income $ 10,476 $ 17,105
ASSETS
Total segment assets $ 961,429 $ 1,060,897
Corporate assets and eliminations (3,089) (22,937)
--------- -----------
Reported total assets $ 958,340 $ 1,037,960
-9-
NOTE 6 - LONG-TERM DEBT
On January 17, 2002, the Company amended and restated its revolving
credit facility. The amendment and restatement, among other things, substituted
certain lenders, changed certain covenants, and reduced the maximum borrowing
amount to $100 million. In connection with the amendment and restatement of the
facility, the Company issued the 10.375% Senior Notes discussed below. The
amended facility matures May 15, 2005, subject to a possible extension of that
maturity date to January 17, 2007 if the Company meets certain conditions
relating to the repayment of long-term debt. Interest is charged at varying
rates based on the Company's ability to meet certain performance criteria.
On January 17, 2002, the Company also completed a private offering of
$175 million in 10.375% Senior Notes due 2010. Interest is payable
semi-annually on February 1st and August 1st beginning August 1st, 2002.
Proceeds from the issuance of these Notes were used to pay down the revolving
credit facility. The Notes are guaranteed, jointly and severally, on an
unsecured senior basis by certain of the Company's domestic subsidiaries. The
Notes are redeemable up to 35% at any time prior to February 1, 2005 with the
proceeds of one or more equity offerings at a price of 110 3/8% of the
principal amount.
NOTE 7 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 10.375% senior notes due
2010, its 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
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------- ------------ --------------- -------------- ------------
(IN THOUSANDS)
Net sales $183,271 $68,903 $ -- $(17,749) $ 234,425
Cost of sales 139,968 45,865 -- (17,749) 168,084
-------- ------- -------- -------- ---------
Gross profit on sales 43,303 23,038 -- -- 66,341
Selling, general and administrative
Expenses 34,018 16,451 5,396 -- 55,865
Operating income (loss) 9,285 6,587 (5,396) 10,476
Other expense 4,122 815 5,747 -- 10,684
-------- ------- -------- -------- ---------
Income (loss) before taxes on income
and equity in income of subsidiaries 5,163 5,772 (11,143) -- (208)
Income tax (benefit) expense 1,889 1,584 (3,575) -- (102)
Equity in income of subsidiaries -- -- 7,462 (7,462) --
-------- ------- -------- -------- ---------
Net income (loss) $ 3,274 $ 4,188 $ (106) $ (7,462) $ (106)
======== ======= ======== ======== =========
-10-
BALANCE SHEET
MARCH 31, 2002
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS
------------ ------------ --------------- ------------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,347 $ 8,455 $ (12,691) $ -- $ 2,111
Accounts receivable 116,771 65,874 (25,578) -- 157,067
Inventories 120,086 50,647 -- -- 170,733
Miscellaneous 8,519 18,225 28,002 -- 54,746
--------- --------- --------- --------- ---------
Total current assets 251,723 143,201 (10,267) -- 384,657
Property and equipment
less accumulated depreciation 168,961 68,122 14,304 -- 251,387
Investment in subsidiaries 120,092 (31,496) 828,828 (917,424) --
Goodwill 167,170 82,749 1,211 -- 251,130
Other assets 53,656 36,567 (19,057) -- 71,166
--------- --------- --------- --------- ---------
$ 761,602 $ 299,143 $ 815,019 $(917,424) $ 958,340
========= ========= ========= ========= =========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,101 $ 34,133 $ 260 $ -- $ 68,494
Accrued expenses 76,699 83,775 (65,716) -- 94,758
--------- --------- --------- --------- ---------
Total current liabilities 110,800 117,908 (65,456) -- 163,252
Long-term debt, less
current maturities 6,587 55 6,546 -- 13,188
Senior notes and senior subordinated
notes -- -- 450,000 -- 450,000
Deferred income taxes/other 15,343 (6,773) 17,946 -- 26,516
--------- --------- --------- --------- ---------
Total liabilities 132,730 111,190 409,036 -- 652,956
Minority interests -- 4,546 -- -- 4,546
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,082 (196,327) 5,099
Additional paid-in capital 191,411 12,525 219,818 (203,936) 219,818
Retained earnings 286,459 157,465 189,530 (458,376) 175,078
Foreign currency translation adjustment (1,034) (77,721) (8,447) (894) (88,096)
Minimum pension liability -- (11,061) -- -- (11,061)
--------- --------- --------- --------- ---------
$ 761,602 $ 299,143 $ 815,019 $(917,424) $ 958,340
========= ========= ========= ========= =========
-11-
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2002
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ --------------- ------------- ------------
(IN THOUSANDS)
Net cash provided by (used for)
operating activities $ 1,377 $ 6,849 $ (4,442) $ -- $ 3,784
Cash flows from investing activities:
Purchase of plant and equipment (2,591) 1,312 (1,165) -- (2,444)
Other assets (622) 156 (5,364) -- (5,830)
------- ------- --------- -------- ---------
Net cash provided by (used for)
investing activities (3, 213) 1,468 (6,529) -- (8,274)
------- ------- --------- -------- ---------
Cash flows from financing activities:
Net borrowings (repayments) 2,500 (4,527) (166,386) -- (168,413)
Proceeds from issuance of bonds -- -- 175,000 -- 175,000
Proceeds from issuance/
repurchase of common stock -- -- 77 -- 77
Cash dividends paid -- -- (762) -- (762)
------- ------- --------- -------- ---------
Net cash provided by (used for)
financing activities 2,500 (4,527) 7,929 -- 5,902
------- ------- --------- -------- ---------
Effect of exchange rate change
on cash (163) 69 -- -- (94)
------- ------- --------- -------- ---------
Net increase (decrease) in cash 501 3,859 (3,042) -- 1,318
Cash at beginning of period 5,846 4,596 (9,649) -- 793
------- ------- --------- -------- ---------
Cash at end of period $ 6,347 $ 8,455 $ (12,691) $ -- $ 2,111
======= ======= ========= ======== =========
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
141 requires the use of the purchase method of accounting and prohibits the use
of the pooling-of-interests method of accounting for business combinations.
SFAS 141 also requires the recognition of acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001, and to
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, the reclassification of the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires companies to identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires a transitional goodwill impairment test
six months from the date of adoption. We also reassessed the useful lives of
other intangible assets within the first quarter of 2002.
-12-
The Company adopted the new standards on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002. The
Company will complete the first step of the transitional goodwill impairment
test in connection with the adoption of SFAS 142 during the second quarter of
2002, and is currently evaluating the effect that the impairment review may
have on its consolidated results of operations and financial position. If an
impairment is indicated, such amount will be recorded as a cumulative effect of
accounting change effective December 30, 2001.
In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS
143 establishes accounting standards for the recognition and measurement of
legal obligations associated with the retirement of tangible long-lived assets
and requires recognition of a liability for an asset retirement obligation in
the period in which it is incurred. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after June
15, 2002. We are in the process of evaluating the impact this standard will
have on our financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
144 addresses financial accounting for the impairment or disposal of long-lived
assets. The provisions of this satement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. We are in the
process of evaluating the impact this standard will have on our financial
statements.
In April 2002, the Financial Accounting Standards Board issued SFAS
No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and
Technical Corrections." SFAS 4, which was amended by SFAS 64, required all
gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to classify
those gains and losses. SFAS 13 was amended to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. The adoption of SFAS 145 will
not have a current impact on the Company's consolidated financial statements.
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" 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. Those statements include 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 forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties that could cause actual results to
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 include risks and
uncertainties associated with economic conditions in the commercial interiors
industry as well as the risks and uncertainties discussed under the heading
"Safe Harbor Compliance Statement for Forward-Looking Statements" included in
Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 2001, which discussion is hereby incorporated by reference,
including but not limited to the discussion of specific risks and uncertainties
under the headings "We compete with a large number of manufacturers in the
highly competitive commercial floorcovering products market, and some of these
competitors have greater financial resources than we do," "Sales of our
principal products may be affected by cycles in the construction and renovation
of commercial and institutional buildings," "Our continued success depends
significantly upon the efforts, abilities and continued service of our senior
management executives and our design consultants," "Our substantial
international operations are subject to various political, economic and other
uncertainties," "Our Chairman, together with other insiders, currently has
sufficient voting power to elect a majority of our Board of Directors," "Large
increases in the cost of petroleum-based raw materials, which we are unable to
pass through to our customers, could adversely affect us," "Unanticipated
termination or interruption of our arrangement with our primary third-party
supplier of synthetic fiber could have a material adverse effect on us," "Our
Rights Agreement, which is triggered if a third party acquires beneficial
ownership of 15% or more of our common stock without our consent, could
discourage tender offers or other transactions that could result in
shareholders receiving a premium over the market price for our stock." 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.
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General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics, architectural products and other specialty
products. During the three month period ended March 31, 2002, the Company had
revenues of $234.4 million and net loss of $106,000, or $0.00 per diluted
share, compared with revenues of $306.5 million and net income of $4.4 million,
or $0.09 per diluted share, in the comparable period last year.
Results of Operations
For the three-month period ended March 31, 2002, the Company's net
sales decreased $72.1 million (23.5%) compared with the same period in 2001.
The decrease was primarily attributable to (i) the decline of panel fabric
sales to certain OEM furniture manufacturers as a result of reduced demand in
the commercial interiors market, (ii) poor macroeconomic conditions, and (iii)
reduced demand for steel panel products made by our raised/access flooring
division.
Cost of sales, as a percentage of net sales, increased slightly to
71.7% for the three-month period ended March 31, 2002, compared with 71.0% in
the comparable period in 2001. The percentage increase was primarily
attributable to (i) the under-absorption of fixed manufacturing costs due to
lower volume levels, (ii) a shift in our relative sales mix from products which
have traditionally higher margins to those with traditionally lower margins,
and (iii) other manufacturing costs associated with scaling production to meet
current demand levels.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 23.8% for the three month period ended March 31, 2002,
compared with 23.4% in the same period in 2001. Despite the slight increase in
selling, general and administrative expenses as a percentage of sales, those
expenses in absolute dollars have declined as a result of cost-cutting
initiatives and other restructuring activities.
For the three-month period ended March 31, 2002, interest expense
increased $0.1 million compared to the same period in 2001, due primarily to
higher interest rates on our debt.
Liquidity and Capital Resources
On January 17, 2002, the Company amended and restated its revolving
credit facility. The amendment and restatement, among other things, substituted
certain lenders, changed certain covenants, and reduced the maximum borrowing
amount to $100 million. In connection with the amendment and restatement of the
facility, the Company issued the 10.375% Senior Notes discussed below. The
amended facility matures May 15, 2005, subject to a possible extension of that
maturity date to January 17, 2007 if the Company meets certain conditions
relating to the repayment of long-term debt. Interest is charged at varying
rates based on the Company's ability to meet certain performance criteria.
On January 17, 2002, the Company also completed a private offering of
$175 million in 10.375% Senior Notes due 2010. Interest is payable
semi-annually on February 1st and August 1st beginning August 1st, 2002.
Proceeds from the issuance of these Notes were used to pay down the revolving
credit facility.
The Company's primary source of cash during the three months ended
March 31, 2002 was $6.9 million from long-term financing. The primary uses of
cash during the three month period ended March 31, 2002 were (i) costs
associated with the aforementioned private offering of Senior Notes, (ii) an
increase in prepaid expenses, (iii) $2.4 million for additions to property and
equipment in the Company's manufacturing facilities, and (iv) $0.8 million for
the payment of stock dividends. Management believes that cash provided by
operations and long-term loan commitments (including the issue of senior notes)
will provide adequate funds for current commitments and other requirements in
the foreseeable future; however, certain factors could affect our free cash
flow, including, but not limited to, the following factors discussed under the
heading "Safe Harbor Compliance Statement for Forward-Looking Statements" in
Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 2001: "Sales of our principal products may be affected by cycles
in the construction and renovation of commercial and institutional buildings,"
"Our substantial international operations are subject to various political,
economic and other uncertainties," "Large increases in the cost of
petroleum-based raw materials, which we are unable to pass through to our
customers, could adversely affect us," and "Unanticipated termination or
interruption of our arrangement with our primary third-party supplier of
synthetic fiber could have a material adverse effect on us."
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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.
At March 31, 2002, the Company had utilized interest rate swap
agreements to effectively convert approximately $125 million of fixed rate debt
into variable rate debt. The Company anticipates that for the remainder of
fiscal 2002 it will not utilize swap agreements or other derivative financial
instruments to convert variable rate to fixed rate debt, or vice versa.
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 euro, British pound sterling, Canadian
dollar, Australian dollar, Thai bath, and Japanese yen. 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.
The Company, as of March 31, 2002, recognized a $1.1 million decrease
in its foreign currency translation adjustment account compared to December 30,
2001 because of the weakening of certain currencies against the U.S. dollar.
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 March 31, 2002. The market values that result from
-15-
these computations are compared with the market values of these financial
instruments at March 31, 2002. The differences in this comparison are the
hypothetical gains or losses associated with each type of risk.
As of March 31, 2002, 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 $8.3 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 $9.2 million. At December 30, 2001, a
150 basis point movement would have resulted in the same approximate changes.
As of March 31, 2002, 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 $6.7 million or an increase in the fair value of the Company's
financial instruments of $6.7 million. At December 30, 2001, 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
Tate Litigation. On August 24, 2000, Tate Access Floors, Inc. ("Tate")
filed suit in the United States District Court for the District of Maryland,
Civil Action No. JFM-00-2543, against the Company's raised/access flooring
subsidiary, Interface Architectural Resources, Inc. ("IAR"), alleging that a
feature of IAR's Bevel Edge flooring panel infringes a patent held by Tate. The
case has settled on confidential terms. The settlement had no material adverse
impact on the Company. In addition, the United States Patent and Trademark
Office has granted IAR's request for re-examination of the Tate patent, which
is continuing.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
-16-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
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 April 5,
1998, previously filed with the Commission and incorporated herein by
reference).
3.2 Bylaws, as amended and restated (included as Exhibit 3.2 to the
Company's quarterly report on Form 10-Q for the quarter ended April 1,
2001, previously filed with the Commission and incorporated hereby 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 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).
4.5 Indenture governing the Company's 10.375% Senior Notes due 2010, among
the Company, certain U.S. subsidiaries of the Company, as Guarantors,
and First Union National Bank, as Trustee (included as Exhibit 4.5 to
the Company's Annual Report on Form 10-K for the year ended December
30, 2001 (the "2001 10-K"), previously filed with the Commission and
incorporated herein by reference).
4.6 Registration Rights Agreement, dated as of January 17, 2002, among the
Company, certain U.S. subsidiaries of the Company, as Guarantors,
Salomon Smith Barney, Inc. and First Union Securities, Inc. (included
as Exhibit 4.6 to the 2001 10-K, previously filed with the Commission
and incorporated herein by reference).
(b) The following reports on Form 8-K were filed during the quarter ended March
31, 2002:
Date Filed Items Reported Financial Statements Filed
---------------- -------------------------------- --------------------------
January 15, 2002 Commencement of Private Offering None
January 24, 2002 Closing of Private Offering None
-17-
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: May 14, 2002 By: /s/ Patrick C. Lynch
--------------------------------------------
Patrick C. Lynch
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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