1
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 The Quarterly Period Ended March 31, 1996
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
May 3, 1996:
Class Number of Shares
---------------------------------------------- ----------------
Class A Common Stock, $.10 par value per share 20,047,539
Class B Common Stock, $.10 par value per share 2,980,694
Page 1 of 16 Pages
The Exhibit Index appears at page 15.
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INTERFACE, INC.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheets - March 31, 1996 and December 31, 1995 3
Statements of Income - Three Months
Ended March 31, 1996 and April 2, 1995 4
Statements of Cash Flows - Three Months
Ended March 31, 1996 and April 2, 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in the Rights of the Company's Security
Holders 13
Item 3. Defaults by the Company on Its Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
(In thousands) March 31, December 31,
Assets 1996 1995
----------- ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,228 $ 8,750
Accounts Receivable 137,709 111,386
Inventories 143,335 134,504
Deferred Tax Asset 4,218 3,998
Prepaid Expenses 19,814 15,748
----------- -----------
TOTAL CURRENT ASSETS 310,304 274,386
PROPERTY AND EQUIPMENT, less
accumulated depreciation 195,850 183,299
EXCESS OF COST OVER NET ASSETS ACQUIRED 232,239 218,825
OTHER ASSETS 42,790 37,841
----------- -----------
$ 781,183 $ 714,351
=========== ===========
Liabilities and Common Shareholders' Equity
CURRENT LIABILITIES:
Notes Payable $ 10,300 $ 8,546
Accounts Payable 77,705 55,101
Accrued Expenses 47,174 50,148
Current Maturities of Long-Term Debt 1,965 1,560
----------- -----------
TOTAL CURRENT LIABILITIES 137,144 115,355
LONG-TERM DEBT, less current maturities 235,116 199,022
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 21,013 18,060
----------- -----------
TOTAL LIABILITIES 518,273 457,437
----------- -----------
Redeemable Preferred Stock 25,000 25,000
Common Stock:
Class A 1,977 1,903
Class B 298 300
Additional Paid-In Capital 106,282 96,863
Retained Earnings 149,200 147,039
Foreign Currency Translation Adjustment (2,101) 3,555
Treasury Stock, 3,600
Class A Shares, at Cost (17,746) (17,746)
----------- -----------
$ 781,183 $ 714,351
=========== ===========
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
-------------------------
March 31, April 2,
1996 1995
--------- ---------
Net Sales $ 205,017 $ 191,327
Cost of Sales 142,104 132,972
--------- ---------
Gross Profit on Sales 62,913 58,355
Selling, General and Administrative Expenses 49,342 44,962
--------- ---------
Operating Income 13,571 13,393
Other (Expense) Income - Net (7,591) (6,917)
--------- ---------
Income before Taxes on Income 5,980 6,476
Taxes on Income 2,272 2,460
--------- ---------
Net Income 3,708 4,016
Less: Preferred Dividends 437 437
--------- ---------
Net Income Applicable to Common Shareholders $ 3,271 $ 3,579
========= =========
Earnings Per Common Share $ 0.18 $ 0.20
========= =========
Weighted Average Common Shares Outstanding 18,475 18,191
========= =========
See accompanying notes to consolidated condensed financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------
March 31, April 2,
(In thousands) 1996 1995
---------- --------
OPERATING ACTIVITIES:
Net income $ 3,708 $ 4,016
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 8,247 7,401
Deferred income taxes 14 2,532
Cash provided by (used for):
Accounts receivable (10,576) 2,161
Inventories (6,569) 522
Prepaid and other (3,669) (2,777)
Accounts payable and accrued expenses 6,264 (14,712)
--------- --------
(2,581) (857)
--------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,111) (5,238)
Acquisitions of businesses (18,969) 0
Other (4,978) (1,336)
--------- --------
(34,058) (6,574)
--------- --------
FINANCING ACTIVITIES:
Net borrowing of long-term debt 34,176 5,641
Issuance of common stock 490 421
Dividends paid (1,547) (1,531)
--------- --------
33,119 4,531
--------- --------
Net cash provided by operating,
investing and financing activities (3,520) (2,900)
Effect of exchange rate changes on cash (2) 293
--------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (3,522) (2,607)
Balance at beginning of period 8,750 4,389
--------- --------
Balance at end of period $ 5,228 $ 1,782
========= ========
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 December 31, 1995, as filed with the Securities and Exchange
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:
March 31, December 31,
1995 1995
-------- --------
Finished Goods $ 70,507 $ 76,407
Work-in-Process 29,745 26,168
Raw Materials 43,083 31,929
-------- --------
$143,335 $134,504
======== ========
NOTE 3 - BUSINESS ACQUISITIONS
In March 1996, the Company acquired, through merger, the outstanding
common stock of three commercial floorcovering contractors -- Earl W. Bentley
Operating Co., Inc., based in Oklahoma, Quaker City International, Inc., based
in Pennsylvania, and Superior Holding Inc., based in Texas -- for approximately
$14,219,000, in the aggregate (comprised of $5,219,000 in cash and $9,000,000
in Interface Class A Common Stock). The acquisitions were accounted for as
purchases and, accordingly, the results of operations are included in the
Company's consolidated financial statements from the date of the acquisitions.
The excess of the purchase price over the fair value of net assets was
approximately $10.6 million, and is being amortized over 30 years.
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INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In February 1996, the Company acquired the outstanding common stock of
Renovisions, Inc., a nationwide installation services firm (based in Georgia)
that has pioneered a new method of carpet replacement, for approximately
$5,000,000 in cash. 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. The excess of
the purchase price over the fair value of net assets was approximately $3.2
million, and is being amortized over 30 years
In February 1996, the Company acquired the outstanding common stock of
C-Tec, Inc., a Michigan based producer of raised/access flooring systems,
for approximately $8,750,000 (comprised of $4,500,000 in cash and $4,250,000
in 6% subordinated notes). The acquisition was accounted for as a purchase
and, accordingly, the results of operations for C-Tec are included in the
Company's consolidated financial statements from the date of acquisition. The
excess of the purchase price over the fair value of net assets was
approximately $3.2 million, and is being amortized over 30 years
NOTE 4 - 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 earnings computation does not give effect to a negligible dilutive impact
of outstanding stock options. The Series A Cumulative Convertible Preferred
Stock issued in June 1993 is not considered to be common stock equivalents. In
computing primary earnings per share, the preferred stock dividend of 7% per
annum 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).
NOTE 5 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 9.5% senior subordinated
notes due 2005. The Supplemental Guarantor Financial Statements are presented
herein pursuant to requirements of the Securities and Exchange Commission.
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INTERFACE, INC. AND SUBSIDIARIES
NOTE 5 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
--------------------------------------------------------------------------
(in thousands)
Net sales $130,099 $87,581 - $(12,663) $205,017
Cost of sales 92,113 62,653 - (12,663) 142,103
-------- ------- ------- -------- --------
Gross profit on sales 37,986 24,928 - - 62,914
Selling, general and administrative expenses 28,881 17,069 3,392 - 49,342
-------- ------- ------- -------- --------
Operating income 9,105 7,859 (3,392) - 13,572
-------- ------- ------- -------- --------
Other expense (income)
Interest expense 1,840 2,079 4,397 - 8,316
Other 781 (570) (935) - (724)
-------- ------- ------- -------- --------
Total other expense 2,621 1,509 3,462 _ 7,592
-------- ------- ------- -------- --------
Income before taxes on income and equity
in income of subsidiaries 6,484 6,350 (6,854) - 5,980
Taxes on income 2,772 2,272 (2,772) - 2,272
Equity in income of subsidiaries - - 7,790 (7,790) -
-------- ------- ------- -------- --------
Net income 3,712 4,078 3,708 (7,790) 3,708
Preferred stock dividends - - 437 - 437
-------- ------- ------- -------- --------
Net income applicable to common shareholders $ 3,712 $ 4,078 $ 3,271 ($7,790) $ 3,271
======== ======= ======= ======== ========
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INTERFACE, INC. AND SUBSIDIARIES
NOTE 5 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
March 31, 1996
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
---------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,945 $ 2,283 - - $ 5,228
Accounts receivable 88,851 66,630 (17,772) - 137,709
Inventories 88,691 54,644 - - 143,335
Miscellaneous 10,734 12,299 999 - 24,032
-------- -------- --------- --------- ---------
Total current assets 191,221 135,856 (16,773) - 310,304
Property and equipment, less accumulated
depreciation 140,526 54,125 1,199 - 195,850
Investment in subsidiaries 112,820 17,746 335,954 (466,520) 0
Miscellaneous 60,700 27,333 354,620 (399,863) 42,790
Excess of cost over net assets acquired 153,664 78,575 - - 232,239
-------- -------- --------- --------- ---------
$658,931 $313,635 $ 675,000 ($866,383) $ 781,183
======== ======== ========= ========= =========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 2,747 $ 7,553 - - $ 10,300
Accounts Payable 48,253 27,253 2,199 - 77,705
Accrued expenses 25,032 17,948 4,194 - 47,174
Current maturities of long-term debt 1,965 - - - 1,965
Total current liabilities 77,997 52,754 6,393 - 137,144
-------- -------- --------- --------- ---------
Long-term debt, less current maturities 153,096 54,420 246,325 (218,725) 235,116
Senior subordinated notes 0 0 125,000 - 125,000
Deferred income taxes 17,351 565 3,097 - 21,013
-------- -------- --------- --------- ---------
Total liabilities 248,444 107,739 380,815 (218,725) 518,273
Redeemable preferred stock 57,891 - 25,000 (57,891) 25,000
Common stock 93,833 98,515 2,275 (192,348) 2,275
Additional paid-in capital 160,556 11,030 106,282 (171,586) 106,282
Retained earnings 101,533 91,696 163,591 (207,620) 149,200
Foreign currency translation adjustment (3,326) 4,655 (2,963) (467) (2,101)
Treasury stock - - - (17,746) (17,746)
-------- -------- --------- --------- ---------
$658,931 $313,635 $ 675,000 ($866,383) $ 781,183
======== ======== ========= ========= =========
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INTERFACE, INC. AND SUBSIDIARIES
NOTE 5 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
----------------------------------------------------------------------
(in thousands)
Cash flows from operating activities ($4,456) $ 5,254 ($3,379) - ($2,581)
-------- -------- ------- ---------- ---------
Cash flows from investing activities:
Purchase of plant and equipment (6,348) (3,763) - - (10,111)
Acquisitions, net of cash acquired (18,969) - - - (18,969)
Other 6,494 64,773 (76,245) - (4,978)
-------- -------- ------- ---------- ---------
Net cash provided by (used in) investing
activities (18,823) 61,010 (76,245) - (34,058)
-------- -------- ------- ---------- ---------
Cash flows from financing activities:
Net borrowings (repayments) 6,865 (48,014) 75,325 - 34,176
Proceeds from issuance of common stock - - 490 - 490
Cash dividends paid - - (1,547) - (1,547)
Other 16,375 (21,103) 4,728 - -
-------- -------- ------- ---------- ---------
Net cash provided by (used in) financing
activities 23,240 (69,117) 78,996 - 33,119
-------- -------- ------- ---------- ---------
Effect of exchange rate change on cash - (2) - - (2)
-------- -------- ------- ---------- ---------
Net increase (decrease) in cash (39) (2,855) (628) - (3,522)
Cash at beginning of year 2,984 5,138 628 - 8,750
-------- -------- ------- ---------- ---------
Cash at end of year $ 2,945 $ 2,283 - - $ 5,228
======== ======== ======= ========== =========
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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 period ended March 31, 1996,
the Company's net sales increased $13.7 million (7.2%) compared with the same
period in 1995. The increase was primarily attributable to (i) increased sales
volume in the Company's carpet tile operations in the United States,
Continental Europe and Australia; (ii) increased sales volume in the Company's
interior fabrics operations associated with the acquisitions of Toltec Fabrics,
Inc. in June 1995, and the Intek division of Springs Industries in December
1995, and (iii) increased sales volume in the Company's specialty resources
division associated with the acquisition of C-Tec, Inc. in February 1996. These
increases were offset somewhat by a decrease in sales volume in the Company's
broadloom carpet businesses, coupled with the weakening of the currencies of
certain key markets (particularly the British pound sterling, Dutch guilder and
Japanese yen) against the U.S. dollar, the Company's reporting currency.
Cost of sales remained constant as a percentage of sales for the three
months ended March 31, 1996 when compared with the same period in 1995. The
Company recognized a decrease in manufacturing costs in its floorcovering
operations due to continued implementation of its make-to-order production
strategy and the "war-on-waste" program, which created manufacturing
efficiencies as well as a shift to higher margin products. These benefits were
somewhat offset by the acquisitions of Toltec, Intek and C-Tec, which,
historically, had higher cost of sales ratios than the Company.
Selling, general and administrative expenses as a percentage of sales
increased to 24.1% for the three months ended March 31, 1996, compared to 23.5%
for the same period in 1995. The increase was attributable to (i) start-up and
administrative expenses associated with Re:Source Americas, the Company's new
U.S. network of commercial floorcovering distributors, (ii) increased marketing
and sampling expenses associated with the introduction of new products as the
Company moves to implement a mass customization strategy in its European carpet
tile and U.S. broadloom operations, (iii) the acquisitions of Toltec Fabrics
and Intek which, historically, had higher SG&A expense ratios than the Company.
For the three months ended March 31, 1996, the Company's other expense
increased $0.7 million compared to the same period in 1995, primarily due to an
increase in bank debt incurred as a result of the Company's acquisitions, and
increased interest rates resulting from the issuance of the Company's Senior
Subordinated notes in November 1995 and subsequent redemption of the Company's
convertible subordinated debentures.
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As a result of the aforementioned factors, the Company's net income (after
adjustment for preferred dividends) decreased 8.6% to $3.3 million for the
three months ended March 31, 1996, compared to $3.6 million for the same
period in 1995.
LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the
three months ended March 31, 1996 have been (i) $19.0 million associated with
acquisitions, (ii) $10.1 million for additions to property and equipment in the
Company's manufacturing facilities, (iii) $5.0 million related to various
deposits and long-term note receivables, and (iv) $2.6 million for operating
activities. These uses were funded by $34.5 million from long-term financing.
The Company, as of March 31, 1996, recognized a $5.6 million decrease in
foreign currency translation adjustment compared to that of December 31, 1995.
The decrease was associated primarily with the Company's investments in
subsidiaries located in the United Kingdom and Continental Europe. The
translation adjustment to shareholders' equity was converted by the guidelines
of the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 52.
The Company employs a variety of off-balance sheet financial instruments,
including foreign currency swap agreements and foreign currency exchange
contracts, to reduce its exposure to adverse fluctuations in interest and
foreign currency exchange rates. At March 31, 1996, the Company had
approximately $65.3 million (notional amount) of foreign currency hedge
contracts outstanding, consisting principally of currency swap contracts to
hedge firmly committed Dutch guilder and Japanese yen currency revenues. At
March 31, 1996, the Company utilized interest rate swap agreements to
effectively convert approximately $73 million of variable rate debt to fixed
rate debt. At March 31, 1996, the weighted average rate on borrowings was
6.9%. The interest rate swap agreements, have maturity dates ranging from nine
to twenty-four 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 currently anticipate nonperformance by
the counterparties.
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
------ ----------------------
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
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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: May 13, 1996 By: /s/ Daniel T. Hendrix
-----------------------------
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
27 Financial Data Schedule 16
(for SEC use only)
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