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 April 2, 2000
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 4,
2000:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 45,170,760
Class B Common Stock, $.10 par value per share 6,644,441
1
INTERFACE, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements 3
Balance Sheets - April 2, 2000 and January 2, 2000 3
Statements of Income - Three Months Ended 4
April 2, 2000 and April 4, 1999
Statements of Comprehensive Income - Three Months 4
Ended April 2, 2000 and April 4, 1999
Statements of Cash Flows - Three Months 5
Ended April 2, 2000 and April 4, 1999
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
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 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS APRIL 2, JANUARY 2,
- ------ 2000 2000
---- ----
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,186 $ 2,548
Accounts Receivable 194,279 203,550
Inventories 176,219 176,918
Prepaid Expenses 23,081 27,845
Deferred Tax Asset 9,793 9,917
----------- -----------
TOTAL CURRENT ASSETS 407,558 420,778
PROPERTY AND EQUIPMENT, less
accumulated depreciation 249,508 253,436
EXCESS OF COST OVER NET ASSETS ACQUIRED 277,096 278,772
OTHER ASSETS 60,094 75,509
----------- -----------
$ 994,256 $ 1,028,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 370 $ 4,173
Accounts Payable 85,239 90,318
Accrued Expenses 76,460 107,287
Current Maturities of Long-Term Debt 1,955 1,974
----------- -----------
TOTAL CURRENT LIABILITIES 164,024 203,752
LONG-TERM DEBT, less current maturities 138,823 125,144
SENIOR NOTES 150,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES and OTHER 41,860 33,395
----------- -----------
TOTAL LIABILITIES 619,707 637,291
----------- -----------
Minority Interest 2,100 2,012
Common Stock 5,902 5,902
Additional Paid-In Capital 222,640 222,373
Retained Earnings 222,210 233,322
Accumulated Other Comprehensive Income - Foreign Currency
Translation (58,926) (53,671)
Treasury Stock, 7,426 and 7,300 shares, respectively, at cost (19,377) (18,734)
----------- -----------
$ 994,256 $ 1,028,495
=========== ===========
See accompanying notes to consolidated condensed financial statements.
3
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-------------------------
APRIL 2, APRIL 4,
2000 1999
---- ----
NET SALES $ 293,218 $ 307,866
Cost of Sales 204,552 211,258
--------- ---------
GROSS PROFIT ON SALES 88,666 96,608
Selling, General and Administrative Expenses 70,443 76,702
Restructuring Charge 20,095 --
--------- ---------
OPERATING INCOME (1,872) 19,906
Other (Expense) Income - Net (10,029) (10,715)
--------- ---------
INCOME BEFORE TAXES ON INCOME (11,901) 9,191
Income Tax (Benefit) Expense (3,097) 3,585
--------- ---------
NET INCOME $ (8,804) $ 5,606
========= =========
Basic Earnings Per Share $ (.17) $ .11
========= =========
DILUTED EARNINGS PER SHARE $ (.17) $ .11
========= =========
Average Shares Outstanding -- Basic 51,826 52,603
--------- ---------
Average Shares Outstanding -- Diluted 51,826 52,792
--------- ---------
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
-------------------------
APRIL 2, APRIL 4,
2000 1999
---- ----
Net Income $ (8,804) $ 5,606
Other Comprehensive Income, Foreign
Currency Translation Adjustment (5,225) (7,380)
------ ------
Comprehensive Income $(14,029) $ (1,774)
======== ========
See accompanying notes to consolidated condensed financial statements.
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
APRIL 2, APRIL 4,
2000 1999
---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: $ (1,934) $(50,724)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (5,548) (9,128)
Acquisitions/Divestiture of businesses -- 8,700
Other 1,894 (1,576)
-------- --------
(3,654) (2,004)
-------- --------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 10,376 55,041
Issuance/Repurchase of common stock (643) (6,708)
Dividends paid (2,332) (2,418)
-------- --------
7,401 45,915
-------- --------
Net cash provided by (used for) operating,
investing and financing activities 1,813 (6,813)
Effect of exchange rate changes on cash (175) (149)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period 1,638 (6,962)
Balance at beginning of period 2,548 9,910
-------- --------
Balance at end of period $ 4,186 $ 2,948
======== ========
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 to
Shareholders for the fiscal year ended January 2, 2000, 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)
April 2, January 2,
2000 2000
-------- ---------
Finished Goods $103,298 $100,967
Work in Process 30,531 29,057
Raw Materials 42,390 46,894
-------- --------
$176,219 $176,918
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Subsequent to period end, the Company acquired the furniture fabric
assets of the Chatham Manufacturing division of CMI Industries, Inc. for a
purchase price of $25 million in cash. The transaction will be accounted for as
a purchase and, accordingly the results of operations will be included within
the consolidated financial statements as of the acquisition date.
During 1999, the Company sold two operating entities which had been
acquired as part of the December 1997 Readicut International plc ("Readicut")
acquisition transaction. Joseph Hamilton & Seaton, Ltd., a distributor of
private label carpet, was sold for approximately $11.2 million in cash during
February. In November the Company also sold its 40% interest in Vebe
Floorcoverings BV, a manufacturer of needlepunch carpet, for $8 million in the
form of a promissory note. The Company recognized the related immaterial loss
and gain, respectively, associated with these divestiture within other expense.
During 1999, the Company purchased six service companies, all located
in the U.S. As consideration for the acquisitions, the Company issued common
stock valued at approximately $.8 million and paid $2.0 million in cash. All
transactions have been accounted for as purchases and, accordingly, the results
of operations of the acquired companies since their acquisition dates have been
included within the consolidated financial statements. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$1.2 million and is being amortized over 25 years.
NOTE 4 - RESTRUCTURING CHARGE
In the first quarter of 2000, the Company recorded a pre-tax
restructuring charge of $20.1 million. The charge reflects: (i) the
consolidation of certain administrative and back-office functions; (ii) the
divestiture of certain non-strategic Re:Source Americas operations; and (iii)
the abandonment of manufacturing equipment utilized in the production of an
abandoned product lines.
6
A summary of the restructuring activities as of April 2, 2000 is as
follows:
(IN THOUSANDS) U.S. EUROPE GRAND TOTAL
- -----------------------------------------------------------------------------------------------------------------
Termination Benefits $ 4,637 $ 3,732 $ 8,369
Property, Plant & Equipment 1,750 -- 1,750
Intangible Assets 2,000 -- 2,000
Facilities Consolidation 2,358 -- 2,358
Divestiture of Non-Strategic
Re:Source Operations 5,618 -- 5,618
------- ------- -------
$16,363 $ 3,732 $20,095
======= ======= =======
The restructuring charge is comprised of $8.4 million of cash
expenditures for severance benefits and other costs and $11.7 million of
non-cash charges, primarily for the write-down of impaired assets.
The termination benefits of $8.4 million, primarily related to
severance costs, are a result of aggregate reductions of 175 employees. The
staff reductions are expected to be as follows:
U.S. EUROPE TOTAL
---- ------ -----
Manufacturing 63 21 84
Selling and Administrative 59 32 91
--- --- ---
122 53 175
--- --- ---
The Company anticipates that the restructuring will be completed by the
end of the third quarter 2000. The restructuring is expected to yield annual
cost savings of approximately $15 million.
NOTE 5 - STOCK REPURCHASE PROGRAM
During 1998, the Company adopted a share repurchase program, pursuant
to which it was authorized to repurchase up to 2,000,000 shares of Class A
Common Stock in the open market through May 19, 2000 (since extended to May 19,
2002). This amount was increased to 4,000,000 shares subsequent to January 2,
2000. During the first quarter of 2000, the Company repurchased 125,813 shares
of Class A Common Stock under this program, at prices ranging from $4.44 to
$4.50 per share. This is compared to the repurchase of 1,442,500 shares of Class
A Common Stock at prices ranging from $4.50 to $9.94 during 1999. All treasury
stock is accounted for using the cost method.
NOTE 6 - EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares of Class A and
Class B Common Stock outstanding during the period. Shares issued or reacquired
during the period have been weighted for the portion of the period that they
were outstanding. Basic earnings per share has been computed based upon
51,826,000 shares and 48,558,000 shares outstanding for the periods ended April
2, 2000 and April 4, 1999, 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
51,826,000 shares and 50,778,000 shares outstanding for the periods ended April
2, 2000 and April 4, 1999, respectively. There were 9,000 potential common
shares outstanding during the first quarter of 2000 related to stock options.
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)
Average
For the Three-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
- ---------------------------------------------------------------------------------------------------------------
April 2, 2000 $(8,804) 51,826 $ (.17)
Effect of Dilution:
Options -- --
------- ------ -------
Diluted $(8,804) 51,826 $ (.17)
======= ====== =======
April 4, 1999 $ 5,606 52,603 $ .11
Effect of Dilution:
Options -- 189
------- ------ -------
Diluted $ 5,606 52,792 $ .11
======= ====== =======
- ---------------------------------------------------------------------------------------------------------------
NOTE 7 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131 which establishes
standards for the way that public business enterprises report information about
operating segments in their financial statements. The standard defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker aggregates operating
segments based on the type of products produced by the segment. Based on the
quantitative thresholds specified in SFAS 131, the Company has determined that
it has two reportable segments. The two reportable segments are Floorcovering
Products/Services and Interior Fabrics. The Floorcovering Products/Services
segment manufactures, installs and services commercial modular and broadloom
carpet, while the Interior Fabrics segment manufactures panel and upholstery
fabrics.
The accounting policies of the operating segments are the same as
those described in Summary of Significant Accounting Policies. Segment amounts
disclosed are prior to any elimination entries made in consolidation. The chief
operating decision maker evaluates performance of the segments based on
operating income. Costs excluded from this profit measure primarily consist of
allocated corporate expenses, interest expense and income taxes. Corporate
expenses are primarily comprised of corporate overhead expenses. Thus, operating
income includes only the costs that are directly attributable to the operations
of the individual segment. Assets not identifiable to any individual segment are
corporate assets, which are primarily comprised of cash and cash equivalents,
short-term investments, intangible assets and intercompany amounts, which are
eliminated in consolidation.
8
SEGMENT DISCLOSURES Summary information by segment follows:
Floorcovering Interior
(IN THOUSANDS) products/services fabrics Other Total
- -------------------------------------------------------------------------------------------------------------------
April 2, 2000
Net sales $ 230,570 $ 51,378 $ 11,270 $ 293,218
Depreciation and amortization 6,812 2,261 294 9,367
Operating income (4,415) 5,225 (208) 602
Total assets 789,442 218,577 49,069 1,057,088
- --------------------------------------------------------------------------------------------------------------------
April 4, 1999
Net sales $ 245,062 $ 49,256 $ 13,548 $ 307,866
Depreciation and amortization 7,989 2,323 513 10,825
Operating income 18,520 4,514 363 23,397
Total assets 935,446 216,442 46,904 1,198,792
- --------------------------------------------------------------------------------------------------------------------
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
Period Ended
---------------------------------
(IN THOUSANDS) April 2, 2000 April 4, 1999
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 9,367 $ 10,825
Corporate depreciation and amortization 1,350 155
----------- -----------
Reported depreciation and amortization $ 10,717 $ 10,980
- -------------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 602 $ 23,397
Corporate expenses and other reconciling amounts (2,474) (3,491)
----------- -----------
Reported operating income $ (1,872) $ 19,906
- -------------------------------------------------------------------------------------------
ASSETS
Total segment assets $ 1,057,088 $ 1,198,792
Corporate assets and eliminations (62,832) (153,374)
----------- -----------
Reported total assets $ 994,256 $ 1,045,418
- -------------------------------------------------------------------------------------------
9
NOTE 8 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 7.3% senior notes due
2008 and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor
Financial Statements are presented herein pursuant to requirements of the
Commission.
INTERFACE, INC. AND SUBSIDIARIES
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED APRIL 2, 2000
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Net sales $ 224,669 $ 93,585 $ -- $ (25,036) $ 293,218
Cost of sales 166,656 62,932 -- (25,036) 204,552
------- ------ ------- ------- -------
Gross profit on sales 58,013 30,653 -- -- 88,666
Selling, general and administrative
expenses 41,260 22,968 6,215 -- 70,443
Restructuring Charge 16,363 3,732 -- -- 20,095
------- ------ ------- ------- -------
Operating Income 390 3,953 (6,215) -- (1,872)
Other (expense) income (4,985) (1,373) (3,671) -- (10,029)
------- ------ ------- ------- -------
Income before taxes on income
and Equity in income of subsidiaries (4,595) 2,580 (9,886) -- (11,901)
Taxes on income (1,196) 670 (2,571) -- (3,097)
Equity in income of subsidiaries -- -- (1,489) (1,489) --
------- ------ ------- ------- -------
Net income applicable to
common shareholders $ (3,399) $ 1,910 $ (8,804) $ (1,489) $ (8,804)
========= ========= ========= ========= =========
10
BALANCE SHEET
April 2, 2000
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,238 $ 6,087 $ (7,139) $ -- $ 4,186
Accounts receivable 155,240 77,713 (38,674) -- 194,279
Inventories 109,000 67,219 -- -- 176,219
Miscellaneous 10,370 28,501 (5,997) -- 32,874
--------- --------- --------- --------- ---------
Total current assets 279,848 179,520 (51,810) -- 407,558
Property and equipment
less accumulated depreciation 151,155 78,271 20,082 -- 249,508
Investment in subsidiaries 42,167 967 866,427 (909,561) 0
Other assets 6,678 7,446 45,970 -- 60,094
Excess of cost over net assets acquired 180,848 92,681 3,567 -- 277,096
--------- --------- --------- --------- ---------
$ 660,696 $ 358,885 $ 884,236 $(909,561) $ 994,256
========= ========= ========= ========= =========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 370 $ -- $ -- $ -- $ 370
Accounts payable 37,517 47,502 220 -- 85,239
Accrued expenses 31,496 18,784 26,180 -- 76,460
Current maturities of long-term debt 1,234 721 0 -- 1,955
--------- --------- --------- --------- ---------
Total current liabilities 70,617 67,007 26,400 -- 164,024
Long-term debt, less
current maturities 6,515 40,563 91,745 -- 138,823
Senior notes and senior subordinated
notes -- -- 275,000 -- 275,000
Deferred income taxes/other 15,024 14,558 12,278 -- 41,860
Minority interests -- 2,100 -- -- 2,100
--------- --------- --------- --------- ---------
Total liabilities 92,156 124,228 405,423 -- 621,807
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,902 (196,344) 5,902
Additional paid-in capital 191,411 12,525 222,373 (203,669) 222,640
Retained earnings 225,818 154,597 256,837 (415,042) 222,210
Foreign currency translation adjustment
income (725) (34,664) (6,299) (17,238) (58,926)
Treasury stock, 7,426,000 Class A
shares, at cost -- -- -- (19,377) (19,377)
--------- --------- --------- --------- ---------
$ 660,696 $ 358,885 $ 884,236 $(909,561) $ 994,256
========= ========= ========= ========= =========
11
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
ENDED APRIL 2, 2000
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Net cash provided by operating activities $ 1,168 $ (7,167) $ 4,065 $ -- $ (1,934)
Cash flows from operating activities:
Cash flows from investing activities:
Purchase of plant and equipment (4,320) (920) (308) -- (5,548)
Acquisitions, net of cash acquired -- -- -- -- --
Other assets 4,267 8,592 (10,965) -- 1,894
-------- -------- -------- ---------- --------
Net cash provided by (used in) investing
activities (53) 7,672 (11,273) -- (3,654)
-------- -------- -------- ---------- --------
Cash flows from financing activities:
Net borrowings (repayments) (14) (655) 11,045 -- 10,376
Proceeds from issuance/repurchase of
common stock -- -- (643) -- (643)
Cash dividends paid -- -- (2,332) -- (2,332)
-------- -------- -------- ---------- --------
Net cash provided by (used in) financing
activities (14) (655) 8,070 -- 7,401
-------- -------- -------- ---------- --------
Effect of exchange rate change on cash -- (175) -- -- (175)
-------- -------- -------- ---------- --------
Net increase (decrease) in cash 1,101 (325) 862 -- 1,638
Cash at beginning of year 4,137 6,412 (8,001) -- 2,548
-------- -------- -------- ---------- --------
Cash at end of year $ 5,238 $ 6,087 $ (7,139) $ -- $ 4,186
======== ======== ======== ====== ========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This report contains statements which may constitute "forward-looking
statements" under applicable securities laws, including statements regarding the
intent, belief or current expectations of the Company and members of its
management team, as well as the assumptions on which such statements are based.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the Safe
Harbor Compliance Statement for Forward-Looking Statements included as Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000, and are hereby incorporated by reference. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics and specialty products. During the quarter ended
April 2, 2000, the Company had revenues and net loss of $293.2 million and $8.8
million, respectively.
The Company's business, as well as the commercial interiors market in
general, is somewhat cyclical in nature. In recent years, the Company has
benefited from a recovery in the U.S. commercial office market which began in
the mid-1990's. However, many of the Company's business segments have
experienced decreased demand levels over recent quarters. As a result, the
Company's results of operations, and its prospects for the balance of 2000, have
been adversely affected. A significant sustained downturn in the market would
materially impair the Company's revenues and earnings prospects.
In the first quarter of 2000, the Company recorded a pre-tax
restructuring charge of $20.1 million. The charge reflects: (i) the
consolidation of certain administrative and back-office functions; (ii) the
divestiture of certain non-strategic Re:Source Americas operations; (iii) the
abandonment of manufacturing equipment utilized in the production of an
abandoned product lines. The foregoing resulted in an aggregate headcount
reduction in the U.S. and Europe of approximately 175 people. The restructuring
charge is comprised of $8.4 million of cash expenditures for severance benefits
and relocation costs and $11.7 million of non-cash charges, primarily for the
write-down of impaired assets. The Company anticipates that the restructuring
will be completed by the end of the third quarter 2000. The restructuring is
expected to yield annual cost savings of approximately $15 million.
Results of Operations
For the three month period ended April 2, 2000, the Company's net sales
decreased $14.6 million (4.8%) compared with the same period in 1999. The
decrease was primarily attributable to (i) a decline in sales of broadloom
carpet in the U.S. by the Company's Bentley Mills subsidiary, (ii) a decline in
sales of broadloom carpet in the United Kingdom, as Firth rebuilt its sales
force and repositioned itself in that market by shifting its focus to corporate
accounts and reducing its emphasis on the hospitality and transportation market
segments, (iii) the selectivity of more profitable sales opportunities in
Re:Source Americas, and (iv) the continued decline of the Euro against the U.S.
dollar. The decrease was offset somewhat by increased sales volume (i) in the
Company's Asia- Pacific division, which continues to show improvement as the
economies in that region recover, (ii) in the Company's architectural products
division driven in part by the 1998 acquisition of Atlantic Access Flooring and
its line of steel panel products, (iii) in the U.S. Fabrics operations as the
industry recovers from the Y2K hangover, and (iv) in the U.S. tile operations
which are up 23% over the comparable period in the prior year.
Cost of sales, as a percentage of net sales, increased to 69.8% for the
three month period ended April 2, 2000, compared to 68.6% for the same period in
2000. The increase was primarily attributable to (i) the failure to fully absorb
overhead expenses, as a result of the decline in sales, (ii) the shift in the
relative mix of sales towards service revenues, which historically have had
lower gross profit margins than product sales, and (iii) off-quality problems in
our broadloom operations.
Selling, general and administrative expenses, as a percentage of net
sales, declined to 24.0% in the quarter ended April 2, 2000, compared to 24.9%
in the same period in 1999, primarily as a result of the Company's recent
restructuring activities, as well as the consolidation of certain of its
operations in the Americas through a "shared services" approach.
13
For the three month period ended April 2, 2000, other expenses
decreased $.7 million compared to the same period in 1999, due primarily to
lower overall levels of bank debt resulting from the reduction of inventory and
receivables levels from the comparable period in 1999.
Liquidity and Capital Resources
The Company's primary source of cash during the three months ended
April 2, 2000 was $10.4 million from long-term financing. The primary uses of
cash during the three months ended April 2, 2000 were (i) the reduction of
accounts payables and other accrued expenses; (ii) $5.5 million for additions to
property and equipment in the Company's manufacturing facilities, and (iii) $2.3
million for the payment of dividends. Management believes that cash provided by
operations and long-term loan commitments will provide adequate funds for
current commitments and other requirements in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the scope and volume of its global operations, the
Company is exposed to an element of market risk from changes in interest rates
and foreign currency exchange rates. The Company's results of operations and
financial condition could be impacted by this risk. The Company manages its
exposure to market risk through its regular operating and financial activities
and, to the extent appropriate, through the use of derivative financial
instruments.
The Company employs derivative financial instruments as risk management
tools and not for speculative or trading purposes. The Company monitors the use
of derivative financial instruments through the use of objective measurable
systems, well-defined market and credit risk limits, and timely reports to
senior management according to prescribed guidelines. The Company has
established strict counterparty credit guidelines and only enters into
transactions with financial institutions with a rating of investment grade or
better. As a result, the Company considers the risk of counterparty default to
be minimal.
INTEREST RATE MARKET RISK EXPOSURE. Changes in interest rates affect
the interest paid on certain of the Company's debt. To mitigate the impact of
fluctuations in interest rates, management of the Company has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. The Company maintains the fixed/variable rate mix
within these parameters either by borrowing on a fixed-rate basis or entering
into interest rate swap transactions. In the interest rate swaps, the Company
agrees to exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR. The interest rate swap agreements generally have
maturity dates ranging from fifteen to twenty-four months.
At April 2, 2000, the Company had utilized interest rate swap
agreements to effectively convert approximately $43.7 million of variable rate
debt to fixed rate debt. The Company anticipates that for the balance of fiscal
2000 it will utilize swap agreements or other derivative financial instruments
to convert comparable amounts of variable rate to fixed rate debt.
FOREIGN CURRENCY EXCHANGE MARKET RISK EXPOSURE. A significant portion
of the Company's operations consists of manufacturing and sales activities in
foreign jurisdictions. The Company manufactures its products in the U.S.,
Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and
sells its products in more than 100 countries. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between the U.S. dollar and
many other currencies, including the Dutch guilder, British pound sterling,
German mark, French franc, Canadian dollar, Australian dollar, Thai baht,
Japanese yen, and, since the beginning of 1999, the euro. When the U.S. dollar
strengthens against a foreign currency, the value of anticipated sales in those
currencies decreases, and vice-versa. Additionally, to the extent the Company's
foreign operations with functional currencies other than the U.S. dollar
transact business in countries other than the U.S., exchange rate changes
between two foreign currencies could ultimately impact the Company. Finally,
because the Company reports in U.S. dollars on a consolidated basis, foreign
currency exchange fluctuations can have a translation impact on the Company's
financial position.
To mitigate the short-term effect of changes in currency exchange rates
on the Company's sales denominated in foreign currencies, the Company regularly
hedges by entering into currency swap contracts to hedge certain firm sales
commitments denominated in foreign currencies. In these currency swap
agreements, the Company and a counterparty financial institution exchange equal
initial principal amounts of two currencies at the spot exchange rate. Over the
term of the swap contract, the Company and the counterparty exchange interest
payments in their swapped currencies. At maturity, the principal amount is
reswapped, at the contractual exchange rate. At April 2, 2000, the contracts
14
served to hedge firmly committed sales in Dutch guilders and Japanese yen. The
contracts generally have maturity dates of fifteen to twenty-four months.
At April 2, 2000, the Company had approximately $10.5 million (notional
amount) of foreign currency hedge contracts outstanding. The Company expects to
hedge a comparable notional amount for the balance of fiscal 2000. The Company,
as of April 2, 2000, recognized a $5.3 million increase in its foreign currency
translation adjustment account compared to January 2, 2000 because of the
weakening of certain currencies against the U.S. dollar and the transition to
the euro as the local reporting currency in Europe.
SENSITIVITY ANALYSIS. For purposes of specific risk analysis, the
Company uses sensitivity analysis to measure the impact that market risk may
have on the fair values of the Company's market sensitive instruments.
To perform sensitivity analysis, the Company assesses the risk of loss
in fair values associated with the impact of hypothetical changes in interest
rates and foreign currency exchange rates on market sensitive instruments. The
market value of instruments affected by interest rate and foreign currency
exchange rate risk is computed based on the present value of future cash flows
as impacted by the changes in the rates attributable to the market risk being
measured. The discount rates used for the present value computations were
selected based on market interest and foreign currency exchange rates in effect
at April 2, 2000. The market values that result from these computations are
compared with the market values of these financial instruments at April 2, 2000.
The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
As of April 2, 2000, based on a hypothetical immediate 150 basis point
increase in interest rates, with all other variables held constant, the market
value of the Company's fixed rate long-term debt would be impacted by a net
decrease of $15.7 million. Conversely, a 150 basis point decrease in interest
rates would result in a net increase in the market value of the Company's fixed
rate long-term debt of $25.9 million. At January 2, 2000, a 150 basis point
movement would have resulted in the same approximate changes.
As of April 2, 2000, a 10% movement in the levels of foreign currency
exchange rates against the U.S. dollar, with all other variables held constant,
would result in a decrease in the fair value of the Company's financial
instruments of $1.3 million or an increase in the fair value of the Company's
financial instruments of $1.1 million. At January 2, 2000, 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
On July 28, 1998, Collins & Aikman Floorcoverings, Inc. ("CAF") -- in
the wake of receiving "cease and desist" letters from the Company demanding that
CAF cease manufacturing certain carpet products that the Company believes
infringe upon certain of its copyrighted product designs -- filed a lawsuit
against the Company asserting that certain of the Company's products, primarily
its Caribbean(TM) design product line, infringed on certain of CAF's alleged
copyrighted product designs. The lawsuit, which is pending in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:98-CV-2069, seeks injunctive relief and unspecified monetary
damages. The lawsuit also asserts other claims against the Company and certain
other parties, including for alleged tortious interference by the Company with
CAF's contractual relationship with the Roman Oakey Designs firm.
On September 28, 1998, the Company filed its answer denying all the
claims asserted by CAF, and also asserting counterclaims against CAF for
copyright infringement. The Company believes the claims asserted by CAF are
unfounded and subject to meritorious defenses, and it is defending vigorously
all the claims. Until recently (see below), discovery had been limited by Court
order to matters relating to CAF's motion for preliminary injunction. Both the
Company and CAF have filed motions for summary judgment. A Court-ordered
mediation did not lead to a resolution of the disputes between the parties.
On March 21, 2000, the Court granted partial summary judgment to the
Company and Roman Oakey Designs on all but one of CAF's copyright claims,
holding that David Oakey, not CAF, owned the designs that were the basis of
those claims. On the remaining copyright claim, which involves the Company's
very successful Caribbean product, the Court denied both the Company's and CAF's
motions for partial summary judgment, and also denied, without a hearing, CAF's
motion for preliminary injunction on this claim.
15
Discovery is resuming on the remaining claims in this case, including CAF's tort
claims and the Company's copyright infringement claims against CAF.
The Company's insurers have denied coverage under the Company's
insurance policies, which annually would otherwise provide up to $100 million of
coverage. On June 8, 1999, the Company filed suit against the insurers to
challenge that denial. That lawsuit is pending in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
1:99-CV- 1485, and is in the early stages of its proceedings. On January 20,
2000, the Company filed a motion for partial summary judgment to enforce the
insurer's obligation to defend the Company against the claims by CAF, which
motion is pending.
Both the CAF infringement lawsuit and the Company's insurance coverage
lawsuit involve complex legal and factual issues, and while the Company believes
strongly in the merits of its legal positions, it is impossible to predict with
accuracy the outcome of either such litigation matter at this stage. The Company
intends to continue its aggressive pursuit of its positions in both actions.
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
Not applicable.
ITEM 5. OTHER INFORMATION
As previously announced by the Company, on February 25, 2000 the Board
of Directors authorized an increase in the size of its share repurchase program
from 2,000,000 shares to 4,000,000 shares, and on May 1, 2000 the Board extended
the time period of the repurchase program through May 19, 2002.
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 July
5, 1998, previously filed with the Commission and incorporated
herein by reference).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1, 1990,
previously filed with the Commission and incorporated herein by
reference).
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of
Incorporation and Bylaws defining the rights of holders of Common
Stock of the Company.
16
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).
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended April 2,
2000.
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 17, 2000 By: /s/ Daniel T. Hendrix
--------------------------
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -------- ----------------------
27.1 Financial Data Schedule.
19