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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 1, 1995
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.)
2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
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(Address of principal executive offices and zip code)
(770) 437-6800
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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
--- ---
Shares outstanding of each of the registrant's classes of common stock at
October 18, 1995:
Class Number of Shares
- ---------------------------------------------- ----------------
Class A Common Stock, $.10 par value per share 15,274,659
Class B Common Stock, $.10 par value per share 2,994,694
Page 1 of _______ Pages
The Exhibit Index appears at page _____.
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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 1, 1995 and January 1, 1995 3
Statements of Income - Three Months and Nine Months
Ended October 1, 1995 and October 2, 1994 4
Statements of Cash Flows -
Nine Months Ended October 1, 1995 and October 2, 1994 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
- ------------------------------------------------ October 1, January 1,
ASSETS 1995 1995
- ------------------------------------------------ ---------- ----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,034 $ 4,389
Escrowed and Restricted Funds 2,413 2,663
Accounts Receivable 113,145 133,536
Inventories 138,801 132,650
Deferred Tax Asset 4,485 3,767
Prepaid Expenses 18,055 15,110
-------- --------
TOTAL CURRENT ASSETS 279,933 292,115
PROPERTY AND EQUIPMENT, less
accumulated depreciation 170,218 152,874
EXCESS OF COST OVER NET ASSETS ACQUIRED 212,446 202,852
OTHER ASSETS 43,155 40,093
-------- --------
$705,752 $687,934
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LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
- -----------------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 54,673 $ 59,702
Accrued Expenses 55,892 56,940
Current Maturities of Long-Term Debt 1,550 853
-------- --------
TOTAL CURRENT LIABILITIES 112,115 117,495
LONG-TERM DEBT, less current maturities 207,979 209,663
CONVERTIBLE SUBORDINATED DEBENTURES 103,925 103,925
DEFERRED INCOME TAXES 19,635 17,761
-------- --------
TOTAL LIABILITIES 443,654 448,844
-------- --------
Redeemable Preferred Stock 25,000 25,000
Common Stock:
Class A 1,887 1,871
Class B 300 308
Additional Paid-In Capital 94,186 93,450
Retained Earnings 146,160 136,343
Foreign Currency Translation Adjustment 12,311 (136)
Treasury Stock, 3,600,000
Class A Shares, at Cost (17,746) (17,746)
-------- --------
$705,752 $687,934
======== ========
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 1, October 2, October 1, October 2,
1995 1994 1995 1994
--------------------- ----------------------
Net Sales $203,269 $184,959 $597,414 $527,343
Cost of Sales 139,574 129,149 412,636 367,641
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Gross Profit on Sales 63,695 55,810 184,778 159,702
Selling, General and Administrative Expenses 47,373 42,246 139,613 123,559
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Operating Income 16,322 13,564 45,165 36,143
Other Expense - Net 7,730 6,930 21,909 19,316
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Income before Taxes on Income 8,592 6,634 23,256 16,827
Taxes on Income 3,265 2,387 8,838 6,057
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Net Income 5,327 4,247 14,418 10,770
Less: Preferred Dividends 438 438 1,312 1,313
--------------------- ----------------------
Net Income Applicable to Common Shareholders $ 4,889 $ 3,809 $ 13,106 $ 9,457
===================== ======================
Earnings Per Share
Primary $ 0.27 $ 0.21 $ 0.72 $ 0.53
===================== ======================
Fully Diluted* $ 0.26 $ 0.21 * $ 0.71 $ 0.53 *
===================== ======================
Weighted Average Common Shares Outstanding
Primary 18,252 18,191 18,237 17,953
===================== ======================
Fully Diluted 26,087 26,027 26,072 25,786
===================== ======================
* For the three month and nine month periods ended October 2, 1994, earnings
per share on a fully dilutive basis were antidilutive.
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
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October 1, October 2,
(In thousands) 1995 1994
- -------------- ---------- ----------
OPERATING ACTIVITIES:
Net income $ 14,418 $ 10,770
Adjustment to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 21,285 22,047
Deferred income taxes 1,815 1,337
Cash provided by (used for):
Accounts receivable 23,528 2,552
Inventories 647 (12,989)
Prepaid and other (2,057) (647)
Accounts payable and accrued expenses (3,818) (16,325)
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55,818 6,745
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INVESTING ACTIVITIES:
Capital expenditures (26,186) (14,071)
Acquisitions of businesses (15,203) (643)
Other (2,798) 1,547
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(44,187) (13,167)
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FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt (9,114) 9,490
Issuance of common stock 744 453
Dividends paid (4,597) (4,544)
-------- --------
(12,967) 5,399
-------- --------
Net cash provided by operating,
investing and financing activities (1,336) (1,023)
Effect of exchange rate changes on cash (19) 406
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (1,355) (617)
Balance at beginning of period 4,389 4,674
-------- --------
Balance at end of period $ 3,034 $ 4,057
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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 1, 1995, as filed with the Securities and Exchange
Commission.
NOTE 2 - RECEIVABLES
During August 1995, the Company entered into an agreement with a
financial institution to sell up to $65 million of certain domestic accounts
receivable under a continuous sale program. Under this agreement, undivided
interests in designated receivable pools are sold to the purchaser with
recourse limited to the receivables purchased. Fees paid by the Company under
this agreement are based on certain variable rate indices and are recorded as
Other Expense. As of October 1, 1995 the Company had sold accounts receivable
under this agreement for which net proceeds of approximately $37.9 million were
received.
NOTE 3 - INVENTORIES
Inventories are summarized as follows:
October 1, January 1,
1995 1995
---------- ----------
Finished Goods $ 72,746 $ 74,542
Work-in-Process 28,561 20,250
Raw Materials 37,494 37,858
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$138,801 $132,650
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NOTE 4 - BUSINESS ACQUISITIONS
In June 1995, the Company acquired substantially all of the assets of
Toltec Fabrics, Inc., a North Carolina based company, for approximately
$13,280,000 (comprised of $7,530,000 in cash and $5,750,000 in notes). The
acquisition was accounted for as a purchase and, accordingly, the results of
operations are included in the Company's consolidated financial statements from
the date of acquisition.
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INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - 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 the particular reporting period.
The computation does not include a negligible dilutive effect of outstanding
stock options. Neither the Convertible Subordinated Debentures issued in
September 1988 nor the Series A Cumulative Convertible Preferred Stock issued
during 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 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).
__________________________________________
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.
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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 1, 1995, the Company's net sales increased $18.3 million (9.9%) and
$70.1 million (13.3%), respectively, compared with the same periods in 1994.
The increase was primarily attributable to (i) increased sales volume in the
Company's floorcoverings operations in the United States, United Kingdom,
Southeast Asia and Greater China, (ii) continued improvement in unit volume in
the Company's interior fabrics and chemical operations, (iii) sales generated
by Toltec Fabrics, Inc., which was acquired in June 1995, and, (iv) the
strengthening of certain key currencies (particularly the British pound
sterling, Dutch guilder and Japanese yen) against the U.S. dollar, the
Company's reporting currency. These increases were offset somewhat by a
decrease in floorcoverings sales volume in Japan, Australia and certain markets
within Continental Europe.
Cost of sales decreased as a percentage of sales for the three and nine
month periods ended October 1, 1995, compared with the same periods in 1994.
The decrease was due primarily to (i) a reduction of manufacturing costs in the
Company's carpet tile operations (particularly the U.S manufacturing facility)
as the Company implemented a make-to-order ("mass customization") production
strategy and "war-on-waste" initiative, leading to increased manufacturing
efficiencies, and an attendant shift in product mix to higher margin products,
(ii) the weakening of the U.S. dollar against certain key currencies which
lowered the cost of U.S. produced goods sold in export markets, and (iii)
decreased manufacturing costs in the Company's interior fabrics business as a
result of improved manufacturing efficiencies. These benefits were somewhat
offset by raw material price increases in the interior fabrics and chemical
operations, and the acquisitions of Prince Street Technologies, Ltd. and Toltec
Fabrics, which, historically, had higher cost of sales ratios than the Company.
Selling, general and administrative expenses as a percentage of sales
increased to 23.3% for the three month period, and remained flat at 23.4% for
the nine month period, ended October 1, 1995, compared to 22.8% and 23.4% for
the same periods in 1994. The increase for the three month period was
attributable to an increase in design, marketing and sampling costs for the
Company's floorcovering operations (principally the U.S. carpet tile
operation), and the acquisition of Toltec Fabrics which, historically, had a
higher S G & A ratio than the Company.
For the three month and nine month periods ended October 1, 1995, the
Company's other expense increased $0.8 million and $2.6 million, respectively,
compared to the same periods in 1994, primarily due to an increase in bank debt
and increased interest rates.
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As a result of the aforementioned factors, the Company's net income
(after adjustment for preferred dividends) increased 28.4% to $4.9 million and
38.6% to $13.1 million, respectively, for the three month and nine month
periods ended October 1, 1995, compared to the same periods in 1994.
LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the
nine months ended October 1, 1995 have been (i) $ 26.2 million for additions to
property and equipment in the Company's manufacturing facilities, including the
new carpet tile facility in Thailand (scheduled to become operational in early
1996) and new broadloom carpet facility for Prince Street in Atlanta (scheduled
to be operational in November 1995), (ii) $14.0 million associated with the
acquisition of Toltec Fabrics, (iii) $9.1 million for reduction of long-term
debt, (iv) $1.2 million for business acquisitions in the Company's
architectural resources unit, and (v) $4.6 million for dividends paid. These
uses were funded by $55.8 million in operating activities which includes $37.9
million from the sale of domestic receivables under the securitization program.
The Company, as of October 1, 1995, recognized a $12.4 million decrease
in foreign currency translation adjustment compared to that of January 1, 1995.
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 foreign currency swap agreements and foreign currency
exchange contracts. At October 1, 1995, the Company had approximately $45.0
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 1, 1995, 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
1, 1995, the weighted average fixed rate on the Dutch guilder and Japanese yen
borrowings was 7.43%. The interest rate and currency swap agreements have
maturity dates ranging from nine to twelve months.
The Company continually monitors its position with, and the credit
quality of, the financial institutions which are counterparties to its
off-balance sheet financial instruments and does not anticipate nonperformance
by the counterparties.
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In August 1995, the Company and certain of its domestic subsidiaries
entered into a continuous sale program (account receivable securitization
facility) with a financial institution that provides for the sale of up to $65
million of trade receivables. Under this agreement, undivided interests in
designated receivable pools are sold to the purchaser with recourse limited to
the receivables purchased. Fees paid by the Company under this agreement are
based on certain variable market rate indices and are recorded as Other
Expense. The Company had received approximately $37.9 million under the
arrangement as of October 1, 1995.
In January 1995, the Company amended its existing revolving credit and
term loan facilities. The amendment provided for, among other things, (i) an
increase in the revolving credit facility from $125 million to $200 million
(including a letter of credit facility of up to $40 million), (ii) a decrease
in the secured term loans from approximately $135 million to $50 million, and
(iii) a new accounts receivable securitization facility of up to $100 million.
Additionally, the term of the agreement has been extended to June 30, 1999 for
the revolving credit facilities, and December 31, 2001 for the term loans.
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
The Company is actively seeking financing to fund a call for the
redemption of all its outstanding 8% Convertible Subordinated
Debentures Due 2013 (the "Convertible Debentures"). Under their
terms, the Convertible Debentures may be called for redemption at
any time upon 30 days' notice at a price of 102.4% of their
principal amount, plus accrued and unpaid interest. In the event
of a call, debenture holders would be entitled to convert all or a
portion of the principal amount into shares of Interface Class A
Common Stock, at a price of $16.9125 per share, at any time up to
two business days before the redemption date. Interface will not
call the Convertible Debentures unless and until it has obtained
financing that would cover the aggregate redemption price if 100%
of the Convertible Debentures are redeemed, as opposed to being
converted by their respective holders. An aggregate of
approximately $106.5 million will be required to redeem 100% of the
Convertible Debentures into shares of Interface Class A Common
Stock.
The Company has considered several options for obtaining the
financing necessary to redeem the Convertible Debentures, and has
commenced a private offering of senior subordinated notes to raise
$125 million. There is no assurance that the private offering will
be completed or that the financing necessary for a redemption of
the Convertible Debentures will be available from any source on
acceptable terms. Under applicable securities law requirements,
certain terms about the private offering that the Company has
commenced cannot be publicly disclosed unless and until the
transaction is consummated.
On October 31, 1995, the closing price of the Class A Common Stock
on the Nasdaq National Market was $15.125 per share. The closing
price of the Convertible Debentures on that date was $103.75.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Agreement of Brian L. DeMoura (Change in Control)
10.2 Amendment No. 1 to the Employment Agreement of Brian L. DeMoura
10.3 Agreement of Charles R. Eitel (Change in Control)
10.4 Amendment No. 1 to the Employment Agreement of Charles R. Eitel
10.5 Agreement of F. Colville Harrell (Change in Control)
10.6 Employment Agreement of F. Colville Harrell
10.7 Agreement of Daniel T. Hendrix (Change in Control)
10.8 Employment Agreement of Daniel T. Hendrix
10.9 Agreement of David W. Porter (Change in Control)
10.10 Employment Agreement of David W. Porter
10.11 Agreement of Donald E. Russell (Change in Control)
10.12 Amendment No. 1 to the Employment Agreement of Donald E. Russell
10.13 Agreement of Gordon D. Whitener (Change in Control)
27 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended
October 1, 1995.
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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 1, 1995 By: /s/Daniel T. Hendrix
--------------------------------
Daniel T. Hendrix
Vice President
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
10.1 Agreement of Brian L. DeMoura
(Change in Control)
10.2 Amendment No. 1 to the Employment
Agreement of Brian L. DeMoura
10.3 Agreement of Charles R. Eitel
(Change in Control)
10.4 Amendment No. 1 to the Employment
Agreement of Charles R. Eitel
10.5 Agreement of F. Colville Harrell
(Change in Control)
10.6 Employment Agreement of F. Colville Harrell
10.7 Agreement of Daniel T. Hendrix
(Change in Control)
10.8 Employment Agreement of Daniel T. Hendrix
10.9 Agreement of David W. Porter
(Change in Control)
10.10 Employment Agreement of David W. Porter
10.11 Agreement of Donald E. Russell
(Change in Control)
10.12 Amendment No. 1 to the Employment
Agreement of Donald E. Russell
10.13 Agreement of Gordon D. Whitener
(Change in Control)
27 Financial Data Schedule
(for SEC use only)
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