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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 October 2, 1994
Commission File Number 0-12016
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INTERFACE, INC.
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(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.)
ORCHARD HILL ROAD, P.O. BOX 1503, LAGRANGE, GEORGIA 30241
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(Address of principal executive offices and zip code)
(706) 882-1891
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(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
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Shares outstanding of each of the registrant's classes of common stock at
November 11, 1994:
Class Number of Shares
- - ---------------------------------------------- ----------------
Class A Common Stock, $.10 par value per share 15,111,228
Class B Common Stock, $.10 par value per share 3,080,125
Page 1 of 22 Pages
The Exhibit Index appears at page 13.
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INTERFACE, INC.
Index
Page
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheets - October 2, 1994 and January 2, 1994 3
Statements of Income - Three Months and Nine Months
Ended October 2, 1994 and October 3, 1993 4
Statements of Cash Flows -
Nine Months Ended October 2, 1994 and October 3, 1993 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in the Rights of the Company's Security
Holders 11
Item 3. Defaults by the Company on its Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
(In thousands)
- - ------------------------------------------ October 2, January 2,
ASSETS 1994 1994
- - ------------------------------------------ ---------- ----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,057 $ 4,674
Escrowed and Restricted Funds 2,548 4,015
Accounts Receivable 128,442 124,170
Inventories 139,941 116,041
Deferred Tax Asset 2,539 2,539
Prepaid Expenses 16,965 15,078
-------- --------
TOTAL CURRENT ASSETS 294,492 266,517
PROPERTY AND EQUIPMENT, less
accumulated depreciation 152,760 145,125
EXCESS OF COST OVER NET ASSETS ACQUIRED 203,183 195,143
OTHER ASSETS 34,624 35,534
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$685,059 $642,319
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LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 56,894 56,043
Accrued Expenses 43,328 52,744
Current Maturities of Long-Term Debt 17,400 17,155
-------- --------
TOTAL CURRENT LIABILITIES 117,622 125,942
LONG-TERM DEBT, less current maturities 204,025 187,712
CONVERTIBLE SUBORDINATED DEBENTURES 103,925 103,925
DEFERRED INCOME TAXES 19,730 17,856
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TOTAL LIABILITIES 445,302 435,435
-------- --------
Redeemable Preferred Stock 25,000 25,000
Common Stock:
Class A 1,871 1,793
Class B 308 311
Additional Paid-In Capital 94,240 83,989
Retained Earnings 132,285 125,960
Foreign Currency Translation Adjustment 3,799 (12,423)
Treasury Stock, 3,600
Class A Shares, at Cost (17,746) (17,746)
-------- --------
$685,059 $642,319
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See accompanying notes to consolidated condensed financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
1994 1993 1994 1993
---------- ---------- ---------- ----------
Net Sales $184,959 $167,586 $527,343 $452,672
Cost of Sales 129,149 113,030 367,641 309,437
-------- -------- -------- --------
Gross Profit on Sales 55,810 54,556 159,702 143,235
Selling, General and Administrative Expenses 42,246 41,669 123,559 110,927
-------- -------- -------- --------
Operating Income 13,564 12,887 36,143 32,308
Other (Expense) Income - Net (6,930) (6,934) (19,316) (18,656)
-------- -------- -------- --------
Income before Taxes on Income 6,634 5,953 16,827 13,652
Taxes on Income 2,387 2,083 6,057 4,781
-------- -------- -------- --------
Net Income 4,247 3,870 10,770 8,871
Less: Preferred Dividends 438 423 1,313 476
-------- -------- -------- --------
Net Income Applicable to Common Shareholders $ 3,809 $ 3,447 $ 9,457 $ 8,395
======== -------- ======== ========
Primary Earnings Per Common Share $ 0.21 $ 0.20 $ 0.53 $ 0.49
======== ======== ======== ========
Weighted Average Common Shares Outstanding 18,191 17,309 17,953 17,280
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
October 2, October 3,
(In thousands) 1994 1993
- - -------------- ---------- ----------
OPERATING ACTIVITIES:
Net Income $ 10,770 $ 8,871
Adjustment to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 22,047 20,520
Deferred income taxes 1,337 (87)
Cash provided by (used for):
Accounts receivable 2,552 (1,705)
Inventories (12,989) 870
Prepaid and other (647) (3,743)
Accounts payable and accrued expenses (16,325) (6,165)
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6,745 18,561
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INVESTING ACTIVITIES:
Capital expenditures (14,071) (11,225)
Acquisitions of businesses (643) (16,503)
Other 1,547 (2,726)
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(13,167) (30,454)
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FINANCING ACTIVITIES:
Net borrowing of long-term debt 9,490 12,953
Issuance of common stock 453 550
Dividends paid (4,544) (3,586)
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5,399 9,917
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Net cash provided by operating,
investing and financing activities (1,023) (1,976)
Effect of exchange rate changes on cash 406 8
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CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (617) (1,968)
Balance at beginning of period 4,674 5,824
-------- --------
Balance at end of period $ 4,057 $ 3,856
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See accompanying notes to consolidated condensed financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
NOTE 1 - CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange 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 2, 1994, as filed with the Securities and Exchange
Commission.
NOTE 2 - TRANSLATION OF FOREIGN CURRENCIES AND HEDGING TRANSACTIONS
The Company employs a variety of off-balance sheet financial
instruments to reduce its exposure to adverse fluctuations in interest and
foreign currency exchange rates, including interest rate and currency swap
agreements and foreign currency forward exchange contracts. At October 2,
1994, the Company had approximately $43 million (notional amount) of foreign
currency hedge contracts outstanding, consisting principally of forward
exchange contracts. These contracts serve to hedge firmly committed Dutch
guilder, German mark, Japanese yen, French franc, British pound sterling and
other foreign currency revenues.
At October 2, 1994, interest rate and currency swap agreements related
to certain foreign currency denominated promissory notes effectively converted
approximately $29 million of variable debt to fixed rate debt. At October 2,
1994, the weighted average fixed rate on the Dutch guilder and Japanese yen
borrowings was 8.83%. The interest rate and currency swaps have maturity dates
ranging from six to nine months.
The Company continually monitors its position with, and the credit
quality of, the financial institutions which are counter-parties to its
off-balance sheet financial instruments and does not anticipate nonperformance
by the counter-parties.
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INTERFACE, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
NOTE 3 - INVENTORIES
Inventories are summarized as follows:
October 2, January 2,
1994 1994
---------- ----------
Finished Goods $ 75,224 $ 64,497
Work-in-Process 25,836 20,010
Raw Materials 38,881 31,534
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$139,941 $116,041
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NOTE 4 - BUSINESS ACQUISITIONS
On March 29, 1994, the Company acquired 100% of the outstanding shares
of Prince Street Technologies, Ltd. ("PST"), a broadloom carpet producer
located in Atlanta, Georgia. The Company issued 674,953 shares of Class A
Common Stock in exchange for 100% of the outstanding shares of PST. The
transaction has been accounted for as a purchase, and the operations of PST are
included in the consolidated results of the Company from the date of the
acquisition.
The following table summarizes the unaudited pro forma consolidated
results of operations of the Company as though the PST acquisition had occurred
at the beginning of each of the fiscal periods presented, and does not purport
to be indicative of what would have occurred had the acquisition actually been
consummated as of those dates or of results that may occur in the future. The
pro forma amounts give effect to appropriate adjustments for the fair value of
the net assets acquired, amortization of the excess of the cost over net assets
acquired, interest expense, intercompany transactions, and the issuance of
common stock.
Nine Months Ended
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October 2, 1994 October 3, 1993
--------------- ---------------
Net Sales $534,115 $476,678
Net Income 8,682 9,374
Income Applicable to Common Shareholders 7,369 8,898
Earnings per Common Share $ .41 $ .50
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INTERFACE, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
NOTE 5 - EXCESS COST OVER NET ASSETS ACQUIRED
The Company's operational policy for the assessment and measurement of
any impairment in the value of excess cost over net assets acquired which is
other than temporary is to evaluate the recoverability and remaining life of
its goodwill and determine whether the goodwill should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize an impairment of goodwill if undiscounted estimated future operating
cash flows of the acquired business are determined to be less than the carrying
amount of goodwill. If the Company determines that goodwill has been impaired,
the measurement of the impairment will be equal to the excess of the carrying
amount of the goodwill over the amount of the undiscounted estimated operating
cash flows. If an impairment of goodwill were to occur, the Company would
reflect the impairment through a reduction in the carrying value of goodwill.
NOTE 6 - EARNINGS PER SHARE AND DIVIDENDS
Earnings per share are computed by dividing net income applicable to
common shareholders by the combined weighted average number of shares of Class
A and Class B common stock outstanding during each year. The computation does
not include a negligible dilutive effect of stock options. Neither the
Convertible Debentures issued in September 1988 nor the Preferred Stock issued
in June 1993 were determined to be common stock equivalents. In computing
primary earnings per share, the preferred stock dividend reduces income
applicable to common shareholders. For the periods ended October 2, 1994 and
October 3, 1993, fully diluted earnings per common share were antidilutive.
For the purposes of computing earnings per share and dividends paid per share,
the Company is treating as treasury stock (and therefore not outstanding) the
shares that are owned by a wholly-owned subsidiary (3,600,000 Class A shares,
recorded at cost).
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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 year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS. For the three month and nine month periods
ended October 2, 1994, the Company's net sales increased $17.4 million (10.4%)
and $74.6 million (16.5%), respectively, compared with the same periods in
1993. The increase was primarily attributable to (i) sales generated by
Bentley Mills, Inc., which was acquired during June 1993, (ii) sales generated
by Prince Street Technologies, Ltd., which was acquired during March 1994,
(iii) increased sales volume in the Company's carpet operations in Europe and
Southeast Asia, and (iv) continued improvement in unit volume in the Company's
interior fabric and chemical operations. These increases were offset somewhat
by a decrease in the Company's modular carpet sales volume in the United
Stated and in Japan, which has continued to experience a recessionary economic
climate.
Cost of sales increased as a percentage of sales for the three and
nine month periods ended October 2, 1994, compared with the same periods in
1993. The increase was due primarily to (i) increased manufacturing costs in
the Company's interior fabrics division, and (ii) the acquisitions of Bentley
Mills and Prince Street Technologies, which, historically, had higher cost of
sales than the Company.
Selling, general and administrative expenses as a percentage of sales
decreased to 22.8% and 23.4%, respectively, for the three month and nine month
periods ended October 2, 1994, compared to 24.9% and 24.5% for the same periods
in 1993, primarily as a result of (i) the acquisition of Bentley Mills, which
had lower selling, general and administrative costs than the Company, and (ii)
the continuation of cost controls measures initiated in prior years, which
reduced discretionary marketing cost and fixed overhead expenditures.
For the three month and nine month periods ended October 2, 1994, the
Company's other expense remained flat and increased $.7 million, respectively,
compared to the same periods in 1993, primarily due to an increase in bank debt
coupled with the increase in U.S. interest rates.
Due, by and large, to the aforementioned factors, coupled with the
dividends paid on the Series A Preferred Shares, the Company's net income
increased 10.5% to $3.8 million and 12.7% to $9.5 million, respectively, for
the three months and nine months ended October 2, 1994, compared to the same
periods in 1993.
LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the
period have been (i) $9.2 for additions to property and equipment in the
Company's manufacturing facilities, (ii) $.6 associated with the acquisition
of Prince Street Technologies, and (iii) $4.5 million for dividends paid.
These uses were funded, in
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part, by $9.5 million from long-term financing, $6.7 million from operations
and $1.5 million from a reduction in escrowed and restricted funds requirements.
The Company, as of October 2, 1994, recognized a $16.2 million
decrease in foreign currency translation adjustment compared to that of January
2, 1994. This improvement in translation adjustment was largely due to a
significant quarter end strengthening of the British pound sterling and the
Dutch guilder compared to the U.S. dollar. The adjustment to shareholders'
equity was converted by the guidelines of the Financial Accounting Standards
Board (FASB) 52.
The Company employs a variety of off-balance sheet financial
instruments to reduce its exposure to adverse fluctuations in interest and
foreign currency exchange rates, including interest rate and currency swap
agreements and foreign currency forward exchange contracts. At October 2,
1994, the Company had approximately $43 million (notional amount) of foreign
currency hedge contracts outstanding, consisting principally of forward
exchange contracts. The contracts serve to hedge firmly committed Dutch
guilder, German mark, Japanese yen, French franc, British pound sterling and
other foreign currency revenues.
At October 2, 1994, interest rate and currency swap agreements related
to certain foreign currency denominated promissory notes effectively converted
approximately $29 million of variable rate debt to fixed rate debt. At October
2, 1994 the weighted average fixed rate on the Dutch guilder and Japanese yen
borrowings was 8.83%. The interest rate and currency swaps have maturity dates
ranging from six to nine months.
The Company continually monitors its position with, and the credit
quality of, the financial institutions which are counter-parties to its
off-balance sheet financial instruments and does not anticipate nonperformance
by the counter-parties.
In June 1994, the Company amended its existing revolving credit and
term loan facilities. The amendment increased the revolving credit facilities
by $20.0 million, reduced the interest calculation from LIBOR plus 1.5% to
LIBOR plus 1.0%, reduced the commitment fees payable by the Company, and
amended certain financial covenants.
Management believes that the cash provided by operations and available
under long-term loan commitments will provide adequate funds for current
commitments and other requirements in the foreseeable future.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings
involving it or any of its property.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
Exhibit
Number Description of Exhibit
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10.1 Fourth Amendment to Revolving Credit Loan Agreement,
dated as of August 5, 1994, between Interface
Flooring Systems, Inc. and Trust Company Bank.
27 Financial Data Schedule (for the SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
October 2, 1994.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERFACE, INC.
Date: November 15, 1994 By: /s/Daniel T. Hendrix
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Daniel T. Hendrix
Vice President
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Sequential
Number Description of Exhibit Page No.
10.1 Fourth Amendment to Revolving Credit Loan Agreement,
dated as of August 5, 1994, between Interface Flooring
Systems, Inc. and Trust Company Bank.
27 Financial Data Schedule (for the SEC use only)
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