INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Basis of Presentation

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 Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 29, 2019, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments 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. The December 29, 2019, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

Risks and Uncertainties

The World Health Organization declared the COVID-19 outbreak a pandemic, and many companies have experienced disruptions in their operations. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that, except for the goodwill and intangible asset impairment discussed in Note 10 “Goodwill and Intangible Assets”Assets,” the decline in 2020 revenue, and its consequent impacts on production volume, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at AprilJuly 5, 2020. OurThe Company’s primary credit facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum net debt to EBITDA ratio, as defined by the credit facility agreement. InOn July 15, 2020, the event we believe we are unable to maintain compliance with such covenants in the future, we will take mitigating actions prior to such potential breach.Company amended its Syndicated Credit Facility. See Note 16 entitled “Subsequent Events” for additional information. The full extent of the future impact of COVID-19 on the Company’s operations is uncertain. A prolonged COVID-19 pandemic couldmay continue to have a material adverse impact on our operations, financial condition, our ability to stay in compliance with our debt covenants, our ability to refinance our existing indebtedness and supply chains. It may negatively impact our ability to collect outstanding receivables.receivables, manage inventory, and service customers. The impact of COVID-19 could also result in additional impairment losses related to goodwill, all intangible assets, and property, plant and equipment.

ChangeAs the virus spreads through communities, it could impact the physical health, mental health, and productivity of our workforce as many of them are required to shelter in Accounting Principleplace and work from home for prolonged periods of time, and it could also impact our ability to reach our customers and collaborate with them as they are required to shelter in place and work from home for prolonged periods of time. The COVID-19 pandemic is having broad and negative implications on the global economy, which affects the size and timing of our customers’ capital budgets, and could result in delays or terminations of new and existing renovation projects, remodeling projects, new construction projects, and other projects where our products are used.

Reclassifications

Beginning in the first quarter ofIn fiscal year 2020, the Company made certain classification and presentation changes related to customer service and other costs. Previously, these costs were presented as a component of cost of sales. Beginning in fiscal year 2020, these costs will beare presented as a component of selling, general and administrative (“SG&A.&A”) expense. The Company determined that this change better reflects how management views and operates the business. Reclassifications of the comparative prior year 2019 amounts have been made to conform to the current presentation as follows:

Recently Adopted Accounting Pronouncements

On December 30, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 326, Credit Losses. This standard requires a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of valuation allowances for credit losses. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The Company adopted the new standard using a modified retrospective approach with no cumulative-effect adjustment to retained earnings to recognize expected credit losses on trade accounts receivable. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.

On December 30, 2019, the Company adopted ASUAccounting Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other,” that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. See Note 10 entitled “Goodwill and Intangible Assets” for additional information.

On December 30, 2019, the Company adopted ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740 related to intraperiod tax allocation, the calculation of income taxes in interim periods, and the accounting for outside basis differences of foreign subsidiaries and equity method investments. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740, including franchise or similar taxes partially based on income, the accounting for a step-up in tax basis goodwill, and interim recognition of an enacted change in tax laws or rates, by clarifying and amending existing guidance. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact of adoption of this standard but does not anticipate that the adoption will have a material effect on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting."” This standard addresses the risks from the discontinuation of the London Interbank Offered Rate (LIBOR) and provides optional expedients and exceptions to contracts, hedging relationships and other transactions that reference LIBOR if certain criteria are met. This new guidance is effective and may be applied beginning March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption of this standard.

Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for the threesix months ended AprilJuly 5, 2020. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material.

Disaggregation of Revenue

For the threesix months ended AprilJuly 5, 2020, revenue from the Company’s customers is broken down by geography as follows:

Inventories are summarized as follows:

The Company computes basic earnings or loss per share (“EPS”) by dividing net income or loss by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.

The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in ourthe basic and diluted EPS calculations when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following tables show distributed and undistributed earnings:

The following table presents net income that was attributable to participating securities:

The weighted average shares for basic and diluted EPS were as follows:

For all periods presented,the three and six months ended July 5, 2020, there were 20,000 stock options in each respective period excluded from the computation of diluted EPS because the impact would be anti-dilutive. For the three and six months ended June 30, 2019, there were 0 stock options or participating securities excluded from the computation of diluted EPS.

Syndicated Credit Facility

At AprilJuly 5, 2020, the Company maintained an amended and restated Syndicated Credit Facility (the “Facility”) which provided to the Company and certain of its subsidiaries a multicurrency revolving loan and U.S. denominated and multicurrency term loans. Interest on base rate loans was charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit were charged at varying rates computed by applying a margin over the applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company paid a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.

Debt issuance costs associated with term loans are reflected as a reduction of long-term debt in accordance with applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of AprilJuly 5, 2020 and December 29, 2019, the unamortized debt costs recorded as a reduction of long-term debt were $5.8 million.$5.4 million and $6.3 million, respectively.

As of AprilJuly 5, 2020, the Company had outstanding $570.7$566.8 million of term loan borrowing and $62.4$58.8 million of revolving loan borrowings under the Facility, and had $1.6 million in letters of credit outstanding under the Facility. As of AprilDecember 29, 2019, the Company had outstanding $581.6 million of term loan borrowing and $20.9 million of revolving loan borrowings under the Facility, and had $2.2 million in letters of credit outstanding under the Facility. As of July 5, 2020 and December 29, 2019, the weighted average interest rate on borrowings outstanding under the Facility was 2.91%.2.75% and 3.27%, respectively. As of AprilJuly 5, 2020 and December 29, 2019, the carrying value of the Company’s borrowings under the Facility approximates its fair value as the Facility bears interest rates that are similar to existing market rates.

Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which are due on the last day of the calendar quarter.

The Company is currently in compliance with all covenants under the Facility. On July 15, 2020, the Company amended its Syndicated Credit Facility. See Note 16 entitled “Subsequent Events” for additional information.

Other Lines of Credit

Subsidiaries of the Company have an aggregate of the equivalent of $9.0$9.5 million of other lines of credit available at interest rates ranging from 2.0% to 6.0%. as of both July 5, 2020 and December 29, 2019. As of AprilJuly 5, 2020 and December 29, 2019, there were 0 borrowings outstanding under these lines of credit.

In the third quarter of 2017 and the first quarter of 2019, the Company entered into interest rate swap transactions in notional amounts of $100 million and $150 million, respectively, to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in LIBOR, the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the Company’s debt principal equal to the outstanding swap notional amounts.

Cash Flow Interest Rate SwapSwaps

Both of the interest rate swaps described above are designated and qualify as cash flow hedges of forecasted interest payments. The Company reports the changes in fair value of the swaps as a component of other comprehensive income (or other comprehensive loss). The aggregate notional amount of the interest rate swaps as of AprilJuly 5, 2020 was $250 million.

Forward Contracts

Our European operations, from time to time, are party to currency forward contracts designed to hedge the cash flow risk of intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. As of AprilJuly 5, 2020, there were no active forward currency contracts.

The table below sets forth the fair value of derivative instruments as of AprilJuly 5, 2020 (in thousands):2020:

The table below sets forth the fair value of derivative instruments as of December 29, 2019 (in thousands):2019:

There was no significant impact to net income or loss(loss) from the changes in fair value of derivatives designated as cash flow hedges or from amounts excluded from the assessment of hedge effectiveness during the three and six months ended AprilJuly 5, 2020. We expect that approximately $3.3$5.2 million related to cash flow hedges will be reclassified from accumulated other comprehensive loss as an increase to interest expense in the next 12 months.

Gains and losses from derivatives designated as cash flow hedges reclassified from accumulated other comprehensive income (loss) into net income (loss) are discussed in Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss.”

NOTE 7 – SHAREHOLDERS’ EQUITY

The following tables depict the activity in the accounts which make up shareholders’ equity for the three and six months ended AprilJuly 5, 2020 and March 31,June 30, 2019:

In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange for the award.

All outstanding stock options vested prior to the end of 2013, and therefore there was 0 stock option compensation expense in the first threesix months of 2020 or 2019.

As of AprilJuly 5, 2020, there were 20,000 stock options outstanding and exercisable, at an average exercise price of $12.43 per share. There were 0 stock options granted in the first threesix months of 2020 or 2019. There were 7,500 stock options exercised and 0 stock options forfeited in the first threesix months of 2020. There were 10,000 stock options exercised in the first threesix months of 2019 and 5,000 stock option forfeitures during those threesix months. The aggregate intrinsic value of the outstanding and exercisable stock options was not significanthad no intrinsic value as of AprilJuly 5, 2020.

Restricted Stock Awards

During the threesix months ended AprilJuly 5, 2020 and March 31,June 30, 2019, the Company granted restricted stock awards for 199,600308,100 and 224,000 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause.

Compensation expense (benefit) related to restricted stock grants was $(0.7)$(0.2) million and $0.8$1.5 million for the threesix months ended AprilJuly 5, 2020, and March 31,June 30, 2019, respectively. The Company has reduced its expense for restricted stock forfeited during the period. As a result of the change in the forfeiture recognition methodology described above, compensation expense (benefit) related to restricted stock grants was impacted by $0.6 million for the cumulative effect of this change.

The following table summarizes restricted stock outstanding as of AprilJuly 5, 2020, as well as activity during the threesix months then ended:

As of AprilJuly 5, 2020, the unrecognized total compensation cost related to unvested restricted stock was $5.2$4.7 million. That cost is expected to be recognized by the end of 2022.2023.

During the threesix months ended AprilJuly 5, 2020 and March 31,June 30, 2019, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s continued employment, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

Compensation expense (benefit) related to the performance shares was $(2.2)$(2.0) million and $2.0$3.3 million for the threesix months ended AprilJuly 5, 2020 and March 31,June 30, 2019, respectively. The Company has reduced its expense for performance shares forfeited during the period. As a result of the change in the forfeiture recognition methodology described above, compensation expense (benefit) related to performance shares was impacted by $0.8 million for the cumulative effect of this change. Unrecognized compensation expense related to these performance shares was approximately $7.4$7.0 million as of AprilJuly 5, 2020. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2022.2023.

Tax expense recognized with regard to restricted stock and performance shares was approximately $1.0$0.5 million for the threesix months ended AprilJuly 5, 2020.

We have operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. Our leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option.

We record a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region.

As of AprilJuly 5, 2020, there were no significant right-of-use assets and lease obligations from leases that had not commenced as of the end of the firstsecond quarter.

The table below represents a summary of the balances recorded in the consolidated condensed balance sheetsheets related to our leases as of AprilJuly 5, 2020:2020 and December 29, 2019:

MaturityA maturity analysis of lease payments under non-cancellable leases wereis presented as follows:

We made an accounting policy election not to separate lease and non-lease components for all asset classes, except for data center assets, and will account for the lease payments as a single component. We also made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use asset and lease liability recorded on the consolidated condensed balance sheet.sheets. These leases primarily represent month-to-month operating leases for vehicles and office equipment where we were reasonably certain that we would not elect an option to extend the lease.

On December 31, 2019, a plan amendment was executed to eliminate future service accruals in the Dutch defined benefit plan, resulting in a curtailment of the plan. This plan remains in existence and will continue to pay vested benefits. Active participants will no longer accrue benefits after December 31, 2019, and instead will participate in an industry-wide multi-employer plan beginning in fiscal year 2020. During the three and six months ended AprilJuly 5, 2020, the Company recorded multi-employer pension expense of $0.7 million related to multi-employer contributions.contributions of $0.6 million and $1.3 million, respectively.

The following tables provide the components of net periodic benefit cost for the three-month periodsthree and six months ended AprilJuly 5, 2020 and March 31, 2019, respectively:June 30, 2019:

In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within Operating Income in the consolidated condensed statementstatements of operations, while all other components of net periodic benefit costs are presented within other expense in the consolidated condensed statementstatements of operations.

During the first quarter of 2020, we performed a qualitative assessment of goodwill impairment indicators, considering macroeconomic conditions related to the COVID-19 pandemic and its potential impact to sales and operating income for the remainder of fiscal 2020.income. We expect that the duration of the COVID-19 pandemic and its adverse impacts on the continued impact ofglobal economy, global travel restrictions, COVID-19 related government shutdowns, of non-essential businesses and disruptions to our supply chain, distribution disruption, and distribution channelsdisruption to our customers’ plans to spend capital on projects that use our products and services will result in lower revenue and operating income for the remainder of fiscal 2020.income. As a result, we determined that there were indicators of impairment, and the Company proceeded with a quantitative assessment of goodwill for all reporting units at the end of the first quarter.