SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | ||
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended October 2, 2011
Commission File Number 001-33994
INTERFACE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA | ||
58-1451243 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (oror for such shorter period that the registrant was required to submit and post such files). Yesþx Noo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
Shares outstanding of each of the registrant’s classes of common stock at November 4, 2011:
Class | ||
Number of Shares | ||
PAGE | ||||||||
FINANCIAL INFORMATION | ||||||||
Item 1. | 3 | |||||||
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Item 2. | ||||||||
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Item 3. | 21 | |||||||
Item 4. | 22 | |||||||
PART II. | OTHER INFORMATION | |||||||
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Item 1A. | 22 | |||||||
Item 2. | ||||||||
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Item 4. | 23 | |||||||
Item 5. | 23 | |||||||
Item 6. | 23 |
(IN THOUSANDS)
OCT. 2, 2011 | JAN. 2, 2011 | |||||||
(UNAUDITED) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and Cash Equivalents | $ | 44,386 | $ | 69,236 | ||||
Accounts Receivable, Net | 158,009 | 151,463 | ||||||
Inventories | 171,116 | 136,766 | ||||||
Prepaid Expenses and Other Current Assets | 28,365 | 24,362 | ||||||
Deferred Income Taxes | 9,110 | 10,062 | ||||||
Assets of Business Held for Sale | 1,200 | 1,200 | ||||||
TOTAL CURRENT ASSETS | 412,186 | 393,089 | ||||||
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation | 188,070 | 177,792 | ||||||
DEFERRED TAX ASSET | 46,997 | 53,022 | ||||||
GOODWILL | 76,566 | 75,239 | ||||||
OTHER ASSETS | 55,486 | 56,291 | ||||||
TOTAL ASSETS | $ | 779,305 | $ | 755,433 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts Payable | $ | 57,481 | $ | 55,859 | ||||
Accrued Expenses | 96,261 | 112,657 | ||||||
TOTAL CURRENT LIABILITIES | 153,742 | 168,516 | ||||||
SENIOR NOTES | 283,010 | 282,951 | ||||||
SENIOR SUBORDINATED NOTES | 11,477 | 11,477 | ||||||
DEFERRED INCOME TAXES | 8,471 | 7,563 | ||||||
OTHER | 34,074 | 36,054 | ||||||
TOTAL LIABILITIES | 490,774 | 506,561 | ||||||
Commitments and Contingencies | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred Stock | — | — | ||||||
Common Stock | 6,546 | 6,445 | ||||||
Additional Paid-In Capital | 360,184 | 349,662 | ||||||
Retained Earnings (Deficit) | (19,369 | ) | (49,770 | ) | ||||
Accumulated Other Comprehensive Loss — Foreign Currency Translation Adjustment | (27,601 | ) | (26,269 | ) | ||||
Accumulated Other Comprehensive Loss — Pension Liability | (31,229 | ) | (31,196 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 288,531 | 248,872 | ||||||
$ | 779,305 | $ | 755,433 | |||||
APRIL 1, 2012 | JANUARY 1, 2012 | |||||||
(UNAUDITED) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and Cash Equivalents | 63,083 | 50,635 | ||||||
Accounts Receivable, net | 126,649 | 156,170 | ||||||
Inventories | 171,902 | 166,073 | ||||||
Prepaid Expenses and Other Current Assets | 27,663 | 23,407 | ||||||
Deferred Income Taxes | 12,336 | 9,699 | ||||||
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TOTAL CURRENT ASSETS | 401,633 | 405,984 | ||||||
PROPERTY AND EQUIPMENT, less accumulated depreciation | 196,845 | 190,119 | ||||||
DEFERRED TAX ASSET | 49,027 | 47,290 | ||||||
GOODWILL | 76,497 | 74,557 | ||||||
OTHER ASSETS | 55,768 | 54,322 | ||||||
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TOTAL ASSETS | 779,770 | 772,272 | ||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts Payable | 50,618 | 55,289 | ||||||
Accrued Expenses | 104,277 | 93,884 | ||||||
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TOTAL CURRENT LIABILITIES | 154,895 | 149,173 | ||||||
SENIOR NOTES | 283,050 | 283,030 | ||||||
SENIOR SUBORDINATED NOTES | 11,477 | 11,477 | ||||||
DEFERRED INCOME TAXES | 8,734 | 8,391 | ||||||
OTHER | 38,346 | 39,162 | ||||||
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TOTAL LIABILITIES | 496,502 | 491,233 | ||||||
Commitments and Contingencies | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred Stock | — | — | ||||||
Common Stock | 6,594 | 6,548 | ||||||
Additional Paid-In Capital | 363,841 | 361,400 | ||||||
Accumulated Deficit | (24,005 | ) | (16,764 | ) | ||||
Accumulated Other Comprehensive Income – Foreign Currency Translation Adjustment | (26,009 | ) | (33,883 | ) | ||||
Accumulated Other Comprehensive Income – Pension Liability | (37,153 | ) | (36,262 | ) | ||||
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TOTAL SHAREHOLDERS’ EQUITY | 283,268 | 281,039 | ||||||
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779,770 | 772,272 | |||||||
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See accompanying notes to consolidated condensed financial statements.
-3-
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
OCT. 2, 2011 | OCT. 3, 2010 | OCT. 2, 2011 | OCT. 3, 2010 | |||||||||||||
NET SALES | $ | 273,106 | $ | 252,724 | $ | 786,148 | $ | 696,502 | ||||||||
Cost of Sales | 178,681 | 163,244 | 510,020 | 453,514 | ||||||||||||
GROSS PROFIT ON SALES | 94,425 | 89,480 | 276,128 | 242,988 | ||||||||||||
Selling, General and Administrative Expenses | 69,087 | 61,441 | 203,125 | 176,597 | ||||||||||||
Restructuring Charge | — | — | — | 3,131 | ||||||||||||
OPERATING INCOME | 25,338 | 28,039 | 73,003 | 63,260 | ||||||||||||
Interest Expense | 6,428 | 8,409 | 19,867 | 25,346 | ||||||||||||
Bond Retirement Expenses | — | — | — | 1,085 | ||||||||||||
Other Expense (Income) | (175 | ) | 463 | (126 | ) | 1,008 | ||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 19,085 | 19,167 | 53,262 | 35,821 | ||||||||||||
Income Tax Expense | 6,917 | 6,825 | 18,456 | 13,365 | ||||||||||||
NET INCOME | 12,168 | 12,342 | 34,806 | 22,456 | ||||||||||||
Income Attributable to Non-Controlling Interest in Subsidiary | — | (264 | ) | — | (876 | ) | ||||||||||
NET INCOME ATTRIBUTABLE TO INTERFACE, INC. | $ | 12,168 | $ | 12,078 | $ | 34,806 | $ | 21,580 | ||||||||
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Basic | $ | 0.19 | $ | 0.19 | $ | 0.53 | $ | 0.34 | ||||||||
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Diluted | $ | 0.19 | $ | 0.19 | $ | 0.53 | $ | 0.34 | ||||||||
Common Shares Outstanding — Basic | 65,469 | 64,025 | 65,228 | 63,623 | ||||||||||||
Common Shares Outstanding — Diluted | 65,676 | 64,578 | 65,457 | 64,106 |
THREE MONTHS ENDED | ||||||||
APRIL 1, 2012 | APRIL 3, 2011 | |||||||
NET SALES | $ | 232,760 | $ | 245,402 | ||||
Cost of Sales | 156,557 | 158,474 | ||||||
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GROSS PROFIT ON SALES | 76,203 | 86,928 | ||||||
Selling, General and Administrative Expenses | 59,368 | 65,400 | ||||||
Restructuring and Asset Impairment Charge | 16,316 | — | ||||||
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OPERATING INCOME | 519 | 21,528 | ||||||
Interest Expense | 6,653 | 6,656 | ||||||
Other Expense (Income) | 437 | (122 | ) | |||||
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INCOME (LOSS) BEFORE INCOME TAX EXPENSE | (6,571 | ) | 14,994 | |||||
Income Tax Expense (Benefit) | (637 | ) | 5,170 | |||||
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NET INCOME (LOSS) | $ | (5,934 | ) | $ | 9,824 | |||
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Earnings (Loss) Per Share– Basic | $ | (0.09 | ) | $ | 0.15 | |||
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Earnings (Loss) Per Share– Diluted | $ | (0.09 | ) | $ | 0.15 | |||
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Common Shares Outstanding – Basic | 63,443 | 64,822 | ||||||
Common Shares Outstanding – Diluted | 63,443 | 65,190 |
See accompanying notes to consolidated condensed financial statements.
-4-
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
OCT. 2, 2011 | OCT. 3, 2010 | OCT. 2, 2011 | OCT. 3, 2010 | |||||||||||||
Net Income | $ | 12,168 | $ | 12,342 | $ | 34,806 | $ | 22,456 | ||||||||
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment | (13,723 | ) | 23,247 | (1,365 | ) | 1,786 | ||||||||||
Comprehensive Income (Loss) | $ | (1,555 | ) | $ | 35,589 | $ | 33,441 | $ | 24,242 | |||||||
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary | — | (1,081 | ) | — | (1,957 | ) | ||||||||||
Comprehensive Income (Loss) Attributable to Interface, Inc. | $ | (1,555 | ) | $ | 34,508 | $ | 33,441 | $ | 22,285 | |||||||
THREE MONTHS ENDED | ||||||||
APRIL 1, 2012 | APRIL 3, 2011 | |||||||
Net Income (Loss) | $ | (5,934 | ) | $ | 9,824 | |||
Other Comprehensive Income, Foreign Currency Translation | ||||||||
Adjustment and Pension Liability Adjustment | 6,983 | 8,266 | ||||||
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Comprehensive Income | $ | 1,049 | $ | 18,090 | ||||
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See accompanying notes to consolidated condensed financial statements.
-5-
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED | ||||||||
OCT. 2, 2011 | OCT. 3, 2010 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 34,806 | $ | 22,456 | ||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: | ||||||||
Premiums Paid to Repurchase Senior Subordinated Notes | — | 792 | ||||||
Depreciation and Amortization | 19,900 | 17,352 | ||||||
Stock Compensation Amortization Expense | 8,558 | 1,901 | ||||||
Deferred Income Taxes and Other | 8,244 | (167 | ) | |||||
Working Capital Changes: | ||||||||
Accounts Receivable | (6,808 | ) | (10,069 | ) | ||||
Inventories | (34,862 | ) | (20,453 | ) | ||||
Prepaid Expenses | (3,850 | ) | (7,404 | ) | ||||
Accounts Payable and Accrued Expenses | (16,001 | ) | 27,196 | |||||
CASH PROVIDED BY OPERATING ACTIVITIES: | 9,987 | 31,604 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital Expenditures | (30,759 | ) | (18,443 | ) | ||||
Other | (1,624 | ) | (1,816 | ) | ||||
CASH USED IN INVESTING ACTIVITIES: | (32,383 | ) | (20,259 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Repurchase of Senior and Senior Subordinated Notes | — | (39,586 | ) | |||||
Premiums Paid to Repurchase Senior Subordinated Notes | — | (792 | ) | |||||
Proceeds from Issuance of Common Stock | 2,610 | 1,803 | ||||||
Dividends Paid to Interface, Inc. Shareholders | (3,921 | ) | (1,435 | ) | ||||
Other | (509 | ) | — | |||||
Dividends Paid to Joint Venture Partner | — | (7,904 | ) | |||||
CASH USED IN FINANCING ACTIVITIES: | (1,820 | ) | (47,914 | ) | ||||
Net Cash Used in Operating, Investing and Financing Activities | (24,216 | ) | (36,569 | ) | ||||
Effect of Exchange Rate Changes on Cash | (634 | ) | 2,060 | |||||
CASH AND CASH EQUIVALENTS: | ||||||||
Net Change During the Period | (24,850 | ) | (34,509 | ) | ||||
Balance at Beginning of Period | 69,236 | 115,363 | ||||||
Balance at End of Period | $ | 44,386 | $ | 80,854 | ||||
THREE MONTHS ENDED | ||||||||
APRIL 1, 2012 | APRIL 3, 2011 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (5,934 | ) | $ | 9,824 | |||
Adjustments to reconcile income to cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 6,246 | 5,321 | ||||||
Stock compensation amortization expense | 1,298 | 7,261 | ||||||
Deferred income taxes and other | (3,276 | ) | 766 | |||||
Working capital changes: | ||||||||
Accounts receivable | 31,890 | 6,583 | ||||||
Inventories | (3,766 | ) | (20,295 | ) | ||||
Prepaid expenses | (4,263 | ) | (5,404 | ) | ||||
Accounts payable and accrued expenses | 2,131 | (22,260 | ) | |||||
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 24,326 | (18,204 | ) | |||||
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INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (10,354 | ) | (10,307 | ) | ||||
Other | (1,035 | ) | (1,450 | ) | ||||
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CASH USED IN INVESTING ACTIVITIES | (11,389 | ) | (11,757 | ) | ||||
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FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 131 | 1,468 | ||||||
Dividends paid | (1,307 | ) | (1,299 | ) | ||||
Other | — | (107 | ) | |||||
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CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: | (1,176 | ) | 62 | |||||
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Net cash provided by (used in) operating, investing and financing activities | 11,761 | (29,899 | ) | |||||
Effect of exchange rate changes on cash | 687 | 348 | ||||||
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CASH AND CASH EQUIVALENTS: | ||||||||
Net change during the period | 12,448 | (29,551 | ) | |||||
Balance at beginning of period | 50,635 | 69,236 | ||||||
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Balance at end of period | $ | 63,083 | $ | 39,685 | ||||
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See accompanying notes to consolidated condensed financial statements.
-6-
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 Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 2, 2011,1, 2012, 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 (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. The January 2, 2011,1, 2012 consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
As described below in Note 9, the Company has sold its Fabrics Group business segment. The results of operations and related disposal costs, gains and losses for this business are classified as discontinued operations, for all periods presented.
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 —– INVENTORIES
Inventories are summarized as follows:
Oct. 2, 2011 | Jan. 2, 2011 | |||||||
(In thousands) | ||||||||
Finished Goods | $ | 103,157 | $ | 78,303 | ||||
Work in Process | 20,114 | 16,731 | ||||||
Raw Materials | 47,845 | 41,732 | ||||||
$ | 171,116 | $ | 136,766 | |||||
April 1, 2012 | January 1, 2012 | |||||||
(In thousands) | ||||||||
Finished Goods | $ | 101,993 | $ | 98,894 | ||||
Work in Process | 19,267 | 17,606 | ||||||
Raw Materials | 50,642 | 49,573 | ||||||
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$ | 171,902 | $ | 166,073 | |||||
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NOTE 3 —– EARNINGS PER SHARE
The Company computes basic earnings per share (“EPS”) attributable to common shareholders by dividing net income attributable to common shareholders(loss), by the weighted averageweighted-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. Income attributable to non-controlling interest in subsidiary is included in the calculation of basic and diluted EPS, where applicable.
-7-
Three Months Ended | Nine Months Ended | |||||||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | |||||||||||||
Basic Earnings Per Share Attributable to Common Shareholders: | ||||||||||||||||
Distributed Earnings | $ | 0.02 | $ | 0.01 | $ | 0.06 | $ | 0.02 | ||||||||
Undistributed Earnings | 0.17 | 0.18 | 0.47 | 0.32 | ||||||||||||
Total | $ | 0.19 | $ | 0.19 | $ | 0.53 | $ | 0.34 | ||||||||
Diluted Earnings Per Share Attributable to Common Shareholders: | ||||||||||||||||
Distributed Earnings | $ | 0.02 | $ | 0.01 | $ | 0.06 | $ | 0.02 | ||||||||
Undistributed Earnings | 0.17 | 0.18 | 0.47 | 0.32 | ||||||||||||
Total | $ | 0.19 | $ | 0.19 | $ | 0.53 | $ | 0.34 | ||||||||
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
Earnings Per Share | ||||||||
Basic Earnings (Loss) Per Share Attributable to Common Stockholders: | ||||||||
Distributed Earnings | $ | (0.02 | ) | $ | 0.02 | |||
Undistributed Earnings | (0.07 | ) | 0.13 | |||||
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Total | $ | (0.09 | ) | $ | 0.15 | |||
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Diluted Earnings (Loss) Per Share Attributable to Common Stockholders: | ||||||||
Distributed Earnings | $ | (0.02 | ) | $ | 0.02 | |||
Undistributed Earnings | (0.07 | ) | 0.13 | |||||
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Total | $ | (0.09 | ) | $ | 0.15 | |||
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The following table presents net income and net income attributable to Interface, Inc.(loss) that was attributable to participating securities:
Three Months Ended | Nine Months Ended | |||||||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income | $ | 0.3 | $ | 0.3 | $ | 0.9 | $ | 0.6 | ||||||||
Net Income Attributable to Interface, Inc. | $ | 0.3 | $ | 0.3 | $ | 0.9 | $ | 0.6 |
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
(In millions) | ||||||||
Net Income (Loss) | — | 0.2 |
The weighted average shares for basic and diluted EPS were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Weighted Average Shares Outstanding | 63,703 | 62,284 | 63,462 | 61,882 | ||||||||||||
Participating Securities | 1,766 | 1,741 | 1,766 | 1,741 | ||||||||||||
Shares for Basic Earnings Per Share | 65,469 | 64,025 | 65,228 | 63,623 | ||||||||||||
Dilutive Effect of Stock Options | 207 | 553 | 229 | 483 | ||||||||||||
Shares for Diluted Earnings Per Share | 65,676 | 64,578 | 65,457 | 64,106 | ||||||||||||
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
(In thousands) | ||||||||
Weighted Average Shares Outstanding | 63,443 | 63,246 | ||||||
Participating Securities | — | 1,576 | ||||||
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Shares for Basic Earnings Per Share | 63,443 | 64,822 | ||||||
Dilutive Effect of Stock Options | — | 368 | ||||||
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Shares for Diluted Earnings Per Share | 63,443 | 65,190 | ||||||
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For the quartersthree months ended October 2,April 1, 2012 and April 3, 2011, and October 3, 2010, options to purchase 249,000535,000 shares and 389,000219,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive. For the nine-month periodsthree months ended October 2, 2011, and October 3, 2010, options to purchase 20,000 and 404,000April 1, 2012, 2,009,000 shares of common stock, respectively,participating securities were not included inexcluded from the computation of diluted EPS as their impact would be anti-dilutive.
-8-
NOTE 4 —– SEGMENT INFORMATION
Based on the quantitative thresholds specified in applicable accounting standards, the Company has determined that it has two reportable segments: (1) the Modular Carpet segment, which includes its InterfaceFLOR, Heuga and FLOR modular carpet businesses, as well as its Intersept antimicrobial sales and licensing program, and (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses. In 2007, the Company sold its former Fabrics Group business segment (see Note 9 for further information). Accordingly, the Company has included the operations of the former Fabrics Group business segment in discontinued operations.
operations, where applicable.
-8-
Segment Disclosures
Summary information by segment follows:
Modular | Bentley | |||||||||||
Carpet | Prince Street | Total | ||||||||||
(In thousands) | ||||||||||||
Three Months Ended October 2, 2011 | ||||||||||||
Net Sales | $ | 248,721 | $ | 24,385 | $ | 273,106 | ||||||
Depreciation and Amortization | 5,493 | 554 | 6,047 | |||||||||
Operating Income (Loss) | 26,333 | (63 | ) | 26,270 | ||||||||
Three Months Ended October 3, 2010 | ||||||||||||
Net Sales | $ | 226,513 | $ | 26,211 | $ | 252,724 | ||||||
Depreciation and Amortization | 4,251 | 538 | 4,789 | |||||||||
Operating Income | 29,450 | 45 | 29,495 |
Modular | Bentley | |||||||||||
Carpet | Prince Street | Total | ||||||||||
(In thousands) | ||||||||||||
Nine Months Ended October 2, 2011 | ||||||||||||
Net Sales | $ | 708,567 | $ | 77,581 | $ | 786,148 | ||||||
Depreciation and Amortization | 20,296 | 1,677 | 21,973 | |||||||||
Operating Income (Loss) | 78,604 | (124 | ) | 78,480 | ||||||||
Nine Months Ended October 3, 2010 | ||||||||||||
Net Sales | $ | 623,215 | $ | 73,287 | $ | 696,502 | ||||||
Depreciation and Amortization | 12,668 | 1,660 | 14,328 | |||||||||
Operating Income (Loss) | 72,004 | (2,511 | ) | 69,493 |
Modular Carpet | Bentley Prince Street | Total | ||||||||||
(In thousands) | ||||||||||||
Three Months Ended April 1, 2012 | ||||||||||||
Net sales | $ | 210,016 | $ | 22,744 | $ | 232,760 | ||||||
Depreciation and amortization | 6,361 | 537 | 6,898 | |||||||||
Operating income (loss) | 1,052 | (564 | ) | 488 | ||||||||
Three Months Ended April 3, 2011 | ||||||||||||
Net sales | $ | 219,280 | $ | 26,122 | $ | 245,402 | ||||||
Depreciation and amortization | 8,103 | 558 | 8,661 | |||||||||
Operating income (loss) | 25,334 | (157 | ) | 25,177 |
-9-
Three Months Ended | Nine Months Ended | |||||||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
DEPRECIATION AND AMORTIZATION | ||||||||||||||||
Total segment depreciation and amortization | $ | 6,047 | $ | 4,789 | $ | 21,973 | $ | 14,328 | ||||||||
Corporate depreciation and amortization | 1,179 | 1,562 | 6,485 | 4,925 | ||||||||||||
Reported depreciation and amortization | $ | 7,226 | $ | 6,351 | $ | 28,458 | $ | 19,253 | ||||||||
OPERATING INCOME | ||||||||||||||||
Total segment operating income | $ | 26,270 | $ | 29,495 | $ | 78,480 | $ | 69,493 | ||||||||
Corporate income, expenses and other reconciling amounts | (932 | ) | (1,456 | ) | (5,477 | ) | (6,233 | ) | ||||||||
Reported operating income | $ | 25,338 | $ | 28,039 | $ | 73,003 | $ | 63,260 | ||||||||
Oct. 2, 2011 | Jan. 2, 2011 | |||||||
ASSETS | (In thousands) | |||||||
Total segment assets | $ | 664,457 | $ | 610,024 | ||||
Discontinued operations | 1,200 | 1,200 | ||||||
Corporate assets and eliminations | 113,648 | 144,209 | ||||||
Reported total assets | $ | 779,305 | $ | 755,433 | ||||
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
(In thousands) | ||||||||
DEPRECIATION AND AMORTIZATION | ||||||||
Total segment depreciation and amortization | $ | 6,898 | $ | 8,661 | ||||
Corporate depreciation and amortization | 646 | 3,921 | ||||||
|
|
|
| |||||
Reported depreciation and amortization | $ | 7,544 | $ | 12,582 | ||||
|
|
|
| |||||
OPERATING INCOME | ||||||||
Total segment operating income | $ | 488 | $ | 25,177 | ||||
Corporate expenses and other reconciling amounts | 31 | (3,649 | ) | |||||
|
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| |||||
Reported operating income | $ | 519 | $ | 21,528 | ||||
|
|
|
|
April 1, 2012 | January 1, 2012 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Total segment assets | $ | 654,177 | $ | 658,190 | ||||
Corporate assets and eliminations | 125,593 | �� | 114,082 | |||||
|
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| |||||
Reported total assets | $ | 779,770 | $ | 772,272 | ||||
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|
-9-
NOTE 5 —– LONG-TERM DEBT
7 5/8% Senior Notes
As of both April 1, 2012, and April 3, 2010,2011, the Company completed a private offering ofhad outstanding $275 million aggregate principal amount ofin 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. The Company used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of the 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes pursuant to a Company tender offer.
11 3/8% Senior Secured Notes
As of April 1, 2012, and April 3, 2011, the Company completed a private offering of $150had outstanding $8.0 million aggregate principal amount ofin 11 3/8% Senior Secured Notes due 2013 (the “11 3/8% Senior Secured Notes”). Interest on the 11 3/8% Senior Secured Notes is payable semi-annually on May 1 and November 1, beginning November 1, 2009. The 11 3/8% Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries. The Senior Secured Notes are secured by a second-priority lien on substantially all of the Company’s and certain of the Company’s domestic subsidiaries’ assets that secure the Company’s domestic revolving credit facility on a first-priority basis.
9.5% Senior Subordinated Notes
As of October 2,both April 1, 2012 and April 3, 2011, the Company had outstanding $11.5 million in 9.5% Senior Subordinated Notes due 2014 (the “9.5% Senior Subordinated Notes”). The estimated fair value of the 9.5% Senior Subordinated Notes as of October 2,both April 1, 2012 and April 3, 2011, based on then current market prices, was $11.5 million.
-10-
Credit Facilities
The Company amended and restated its primarymaintains a domestic revolving credit facility. Under the amended and restated facilityagreement (the “Facility”), as under its predecessor, the Company’s obligations are secured by that provides a first priority lien on substantially all of the assets of Interface, Inc. and each of its material domestic subsidiaries, which subsidiaries also guarantee the Facility. The maximum aggregate amount of $100 million of loans and letters of credit available to the Companyus at any one time remains $100 million (with the(subject to a borrowing base) with an option for us to further increase that maximum aggregate amount to up to a maximum of $150 million — the same option amount as in its predecessor — subject to(upon the satisfaction of certain conditions),conditions, and subject to a borrowing base describedbase). The Company is presently in compliance with all covenants under the Facility. The Facility differs from its predecessorand anticipates that it will remain in compliance with the following key respects:
Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMROThe Royal Bank of Scotland N.V. (“RBS”). Under this Credit Agreement, ABN AMRORBS provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time.of €20 million. As of October 2, 2011,April 1, 2012, there were no borrowings outstanding under this facility, and the Company could have incurred €14.0€20 million (approximately $19.0$26.6 million) of additional borrowings under the facility.
Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $18.2$18.9 million of lines of credit available. As of October 2, 2011,April 1, 2012 there were no borrowings outstanding under these lines of credit.
-11-
Stock Option Awards
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. The grant date fair value for options and similar instruments will be estimated using option pricing models. Under applicable accounting standards, the Company is required to select a valuation technique or option pricing model.model that meets the criteria as stated in the standard. The Company uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.
During the first ninethree months of 20112012 and 2010, the Company recognized stock option compensation costs of $0.7 million and $1.1 million, respectively. In the third quarters of 2011, and 2010, the Company recognized stock option compensation costs of $0.2 million and $0.4$0.3 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at October 2, 2011,April 1, 2012, approximated $0.7$0.4 million, and the weighted average period of time over which this cost will be recognized is approximately one year.
-10-
There were no stock options granted in 2011.
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at January 2, 2011 | 1,148,500 | $ | 7.51 | |||||
Granted | — | — | ||||||
Exercised | 487,000 | 4.43 | ||||||
Forfeited or canceled | 23,500 | 6.29 | ||||||
Outstanding at October 2, 2011 | 638,000 | $ | 7.19 | |||||
Exercisable at October 2, 2011 | 498,000 | $ | 7.95 | |||||
Shares | Weighted Average Exercise Price | |||||||
Outstanding at January 1, 2012 | 592,500 | $ | 9.12 | |||||
Granted | — | — | ||||||
Exercised | 23,500 | 5.59 | ||||||
Forfeited or canceled | 34,000 | 11.72 | ||||||
|
|
|
| |||||
Outstanding at April 1, 2012 | 535,000 | $ | 8.85 | |||||
|
|
|
| |||||
Exercisable at April 1, 2012 | 419,200 | $ | 7.80 | |||||
|
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|
|
At October 2, 2011,April 1, 2012, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $2.3$2.7 million and $2.3$2.6 million, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).
-12-
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
(In thousands) | ||||||||
Proceeds from stock options exercised | $ | 131 | $ | 1,468 | ||||
Intrinsic value of stock options exercised | $ | 179 | $ | 2,744 |
The Company did not recognize any significant tax benefit with regard to stock options in either period.
Nine Months Ended | ||||||||
Oct. 2, 2011 | Oct. 3, 2010 | |||||||
(In millions) | ||||||||
Proceeds from stock options exercised | $ | 2.6 | $ | 1.8 | ||||
Intrinsic value of stock options exercised | $ | 5.9 | $ | 3.9 |
Restricted Stock Awards
During the ninethree months ended October 2,April 1, 2012 and April 3, 2011, and October 3, 2010, the Company granted restricted stock awards for 668,000557,500 and 529,000468,000 shares respectively, of Class B common stock. These awardsAwards of restricted stock (or a portion thereof) vest with respect to each recipient over a two to five-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, these sharesawards (or a portion thereof) could vest earlier upon the attainment of certain performance criteria, in the event of a change in control of the Company, or upon involuntary termination without cause.
Compensation expense related to restricted stock grants was $8.6$1.3 million and $1.9$7.3 million for the ninethree months ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively. Accounting standards require that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.
The following table summarizes restricted stock activity as of October 2, 2011,April 1, 2012, and during the ninethree months then ended:
Weighted Average | ||||||||
Shares | Grant Date Fair Value | |||||||
Outstanding at January 2, 2011 | 1,740,000 | $ | 13.04 | |||||
Granted | 668,000 | 17.08 | ||||||
Vested | 600,000 | 12.23 | ||||||
Forfeited or canceled | 42,000 | 14.21 | ||||||
Outstanding at October 2, 2011 | 1,766,000 | $ | 15.03 | |||||
Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding at January 1, 2012 | 1,749,000 | $ | 15.08 | |||||
Granted | 557,500 | 13.25 | ||||||
Vested | 241,500 | 13.20 | ||||||
Forfeited or canceled | 56,000 | 15.11 | ||||||
|
|
|
| |||||
Outstanding at April 1, 2012 | 2,009,000 | $ | 14.80 | |||||
|
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|
|
As of October 2, 2011,April 1, 2012, the unrecognized total compensation cost related to unvested restricted stock was $13.3$15.7 million. That cost is expected to be recognized by the end of 2015.
During the nine monthsquarters ended October 2,April 1, 2012 and April 3, 2011, and October 3, 2010, the Company recognized tax benefits of $2.4$0.2 million and $0.5$1.8 million, respectively, with regard to restricted stock.
-13-
The following tables provide the components of net periodic benefit cost for the three-month and nine-month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively:
Three Months Ended | Nine Months Ended | |||||||||||||||
Defined Benefit Retirement Plan (Europe) | Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | ||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Service cost | $ | 72 | $ | 88 | $ | 217 | $ | 266 | ||||||||
Interest cost | 2,835 | 2,715 | 8,605 | 8,094 | ||||||||||||
Expected return on assets | (2,935 | ) | (2,772 | ) | (8,910 | ) | (8,264 | ) | ||||||||
Amortization of prior service costs | 21 | 22 | 63 | 66 | ||||||||||||
Recognized net actuarial (gains)/losses | 149 | 413 | 454 | 1,226 | ||||||||||||
Net periodic benefit cost | $ | 142 | $ | 466 | $ | 429 | $ | 1,388 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Salary Continuation Plan (SCP) | Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | ||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Service cost | $ | 98 | $ | 86 | $ | 295 | $ | 257 | ||||||||
Interest cost | 284 | 280 | 853 | 841 | ||||||||||||
Amortization of transition obligation | 55 | 55 | 164 | 164 | ||||||||||||
Amortization of prior service cost | 12 | 12 | 36 | 36 | ||||||||||||
Amortization of loss | 93 | 68 | 277 | 205 | ||||||||||||
Net periodic benefit cost | $ | 542 | $ | 501 | $ | 1,625 | $ | 1,503 | ||||||||
Three Months Ended | ||||||||
Defined Benefit Retirement Plan (Europe) | April 1, 2012 | April 3, 2011 | ||||||
(In thousands) | ||||||||
Service cost | $ | 116 | $ | 71 | ||||
Interest cost | 2,544 | 2,838 | ||||||
Expected return on assets | (2,821 | ) | (2,934 | ) | ||||
Amortization of prior service costs | 13 | 21 | ||||||
Recognized net actuarial (gains)/losses | 229 | 150 | ||||||
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|
|
| |||||
Net periodic benefit cost | $ | 81 | $ | 146 | ||||
|
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|
|
Three Months Ended | ||||||||
Salary Continuation Plan (SCP) | April 1, 2012 | April 3, 2011 | ||||||
(In thousands) | ||||||||
Service cost | $ | 113 | $ | 98 | ||||
Interest cost | 254 | 284 | ||||||
Amortization of transition obligation | — | 55 | ||||||
Amortization of prior service cost | 12 | 12 | ||||||
Amortization of (gain)/loss | 67 | 93 | ||||||
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| |||||
Net periodic benefit cost | $ | 446 | $ | 542 | ||||
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NOTE 8 — 2010– RESTRUCTURING CHARGE
2012 Restructuring Charge
In March of 2012, the Company committed to a new restructuring plan in its continuing efforts to reduce costs across its worldwide operations and more closely align its operations with reduced demand levels in certain markets. The plan primarily consists of ceasing manufacturing and warehousing operations at its facility in Shelf, England. In connection with this restructuring plan, the Company incurred a pre-tax restructuring and asset impairment charge in the first quarter of 2010,2012 in an amount of $16.3 million. The expected charge is comprised of employee severance expenses of $5.4 million, other related exit costs of $1.6 million, and a charge for impairment of assets of approximately $9.3 million. Approximately $7 million of the charge will result in future cash expenditures, primarily severance expense. The restructuring plan is expected to be substantially completed in the second quarter of 2012.
A summary of these restructuring activities is presented below:
Total Restructuring Charge | Costs Incurred in 2012 | Balance at April 1, 2012 | ||||||||||
(In thousands) | ||||||||||||
Workforce Reduction | 5,356 | 377 | 4,979 | |||||||||
Fixed Asset Impairment | 9,364 | 9,364 | — | |||||||||
Other Related Exit Costs | 1,596 | — | 1,596 |
-12-
The table below details these restructuring activities by segment:
Modular Carpet | Bentley Prince Street | Corporate | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Total amounts expected to be incurred | $ | 16,316 | $ | — | $ | — | $ | 16,316 | ||||||||
Cumulative amounts incurred to date | 9,741 | — | — | 9,741 | ||||||||||||
Total amounts incurred in the three-month period ended April 1, 2012 | 9,741 | — | — | 9,741 |
2011 Restructuring Charge
In the fourth quarter of 2011, the Company adoptedcommitted to a restructuring plan primarily relatedintended to workforce reductionreduce costs across its worldwide operations and more closely align its operations with reduced demand in its European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A totalcertain markets. As a result of approximately 50 employees were affected by this restructuring plan. In connection with this plan, the Company recorded aincurred pre-tax restructuring chargeand asset impairment charges of $3.1 million. Substantially all$6.2 million in the fourth quarter of 2011. The majority of this charge involves($5.4 million) relates to the severance of approximately 110 employees in Europe, Asia and the United States. The remainder of the charge ($0.8 million) relates to contract termination and fixed asset impairment costs. Approximately $5.4 million of this charge will result in cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed inby the first quarterend of 2010.
A summary of these restructuring activities is presented below:
Total | ||||||||||||||||
Restructuring | Costs Incurred | Costs Incurred | Balance at | |||||||||||||
Charge | in 2010 | in 2011 | Oct. 2, 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Workforce reduction | $ | 3,131 | $ | 2,674 | $ | 457 | $ | — |
Restructuring Charge | Costs Incurred in 2011 | Costs Incurred in 2012 | Balance at April 1, 2012 | |||||||||||||
(In thousands) | ||||||||||||||||
Workforce Reduction | 5,401 | 1,147 | 2,202 | 2,052 | ||||||||||||
Fixed Asset Impairment | 776 | 776 | — | — |
The table below details these restructuring activities by segment:
Modular | Bentley | |||||||||||||||
Carpet | Prince Street | Corporate | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Total amounts expected to be incurred | $ | 2,951 | $ | 180 | $ | — | $ | 3,131 | ||||||||
Cumulative amounts incurred to date | 2,951 | 180 | — | 3,131 | ||||||||||||
Total amounts incurred in the nine-month period ended October 2, 2011 | 457 | — | — | 457 |
Modular Carpet | Bentley Prince Street | Corporate | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Total amounts expected to be incurred | $ | 5,755 | $ | 422 | $ | — | $ | 6,177 | ||||||||
Cumulative amounts incurred to date | 3,786 | 339 | — | 4,125 | ||||||||||||
Total amounts incurred in 2012 | 2,143 | 59 | — | 2,202 |
-14-
In 2007, the Company sold its Fabrics Group business segment. All activity related to this business has been included in discontinued operations.operations, where applicable. Assets and liabilities of this business segment have been reported in assets and liabilities held for sale, for all periods presented. where applicable.
Discontinued operations had no net sales and no net income or loss in either of the three-month or nine-month periods ended October 2, 2011,April 1, 2012 and OctoberApril 3, 2010.
NOTE 10 —– SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $12.0$0.8 million and $21.2$0.9 million for the nine monthsthree month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively. Income tax payments amounted to $15.2$3.0 million and $10.8$5.4 million for the nine monthsthree month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively.
-13-
NOTE 11 —– RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding the performance of a company’s annual goodwill impairment evaluation. This standard allows companies to assess qualitative factors to determine if it is more-likely-than-notmore likely than not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. This standard is effective for fiscal years beginning after December 31, 2011. At this time, the Company doeswe do not expect adoption of this standard willto have any significant impact on itsour consolidated financial statements.
In June 2011, the FASB amended an accounting standard regarding the presentation of comprehensive income. This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amended guidance, which must be applied retroactively, iswas to be effective for interim and annual periods ending after December 31, 2012, with earlier adoption permitted. In December of 2011, the FASB issued an amendment to this statement which defers the requirements of this standard. As this amendment only effects presentation, there is not expected to be any impact on the Company’s consolidated financial statements.
NOTE 12 —– INCOME TAXES
Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first ninethree months of 2011,2012, the Company increased its liability for unrecognized tax benefits by $0.1$0.2 million. As of October 2, 2011,April 1, 2012, the Company had accrued approximately $8.2$7.9 million accrued for unrecognized tax benefits.
-15-
On March 5, 2012, the third quarternumber of 2010,issued and outstanding shares of Class B Common Stock constituted less than 10% of the Company’s Thailand manufacturing joint venture paid dividends on a pro rata basis to its shareholders, including a dividend to the non-controlling interest partner in the joint venture. All operations, assetsaggregate number of issued and liabilities of this joint venture are currently and have been previously consolidated by the Company. The dividend paid to the non-controlling interest partner was $7.9 million and had the effect of lowering the non-controlling interest in subsidiary balance as presented in the Company’s balance sheet.
NOTE 14 — SUBSEQUENT EVENT
The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013, its 9.5% Senior Subordinated Notes due 2014, and its 7 5/8% Senior Notes due 2018. These guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.
-16-
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 2011
INTERFACE, | CONSOLIDATION | |||||||||||||||||||
NON- | INC. | AND | ||||||||||||||||||
GUARANTOR | GUARANTOR | (PARENT | ELIMINATION | CONSOLIDATED | ||||||||||||||||
SUBSIDIARIES | SUBSIDIARIES | CORPORATION) | ENTRIES | TOTALS | ||||||||||||||||
(IN THOUSANDS) | ||||||||||||||||||||
Net sales | $ | 182,658 | $ | 134,854 | $ | — | $ | (44,406 | ) | $ | 273,106 | |||||||||
Cost of sales | 134,448 | 88,639 | — | (44,406 | ) | 178,681 | ||||||||||||||
Gross profit on sales | 48,210 | 46,215 | — | — | 94,425 | |||||||||||||||
Selling, general and administrative expenses | 30,972 | 32,062 | 6,053 | — | 69,087 | |||||||||||||||
Operating income (loss) | 17,238 | 14,153 | (6,053 | ) | — | 25,338 | ||||||||||||||
Interest/Other expense | 7,823 | 2,763 | (4,333 | ) | — | 6,253 | ||||||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 9,415 | 11,390 | (1,720 | ) | — | 19,085 | ||||||||||||||
Income tax expense (benefit) | 3,412 | 4,128 | (623 | ) | — | 6,917 | ||||||||||||||
Equity in income (loss) of subsidiaries | — | — | 13,265 | (13,265 | ) | — | ||||||||||||||
Net income (loss) | 6,003 | 7,262 | 12,168 | (13,265 | ) | 12,168 | ||||||||||||||
Income attributable to non-controlling interest in subsidiary | — | — | — | — | — | |||||||||||||||
Net income (loss) attributable to Interface, Inc. | $ | 6,003 | $ | 7,262 | $ | 12,168 | $ | (13,265 | ) | $ | 12,168 | |||||||||
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales | $ | 142,784 | $ | 120,655 | $ | — | $ | (30,679 | ) | $ | 232,760 | |||||||||
Cost of sales | 106,343 | 80,893 | — | (30,679 | ) | 156,557 | ||||||||||||||
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|
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|
|
| |||||||||||
Gross profit on sales | 36,441 | 39,762 | — | — | 76,203 | |||||||||||||||
Selling, general and administrative expenses | 26,819 | 27,605 | 4,944 | — | 59,368 | |||||||||||||||
Restructuring and asset impairment | 1,143 | 15,173 | — | — | 16,316 | |||||||||||||||
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|
|
|
|
|
| |||||||||||
Operating income (loss) | 8,479 | (3,016 | ) | (4,944 | ) | — | 519 | |||||||||||||
Interest/Other expense | 7,235 | 3,733 | (3,878 | ) | — | 7,090 | ||||||||||||||
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|
|
|
|
| |||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 1,244 | (6,749 | ) | (1,066 | ) | — | (6,571 | ) | ||||||||||||
Income tax (benefit) expense | 121 | (655 | ) | (103 | ) | — | (637 | ) | ||||||||||||
Equity in income (loss) of subsidiaries | — | — | (4,971 | ) | 4,971 | — | ||||||||||||||
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|
| |||||||||||
Net income (loss) | $ | 1,123 | $ | (6,094 | ) | $ | (5,934 | ) | $ | 4,971 | $ | (5,934 | ) | |||||||
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-17-
NON- | INTERFACE, INC. | CONSOLIDATION AND | ||||||||||||||||||
GUARANTOR | GUARANTOR | (PARENT | ELIMINATION | CONSOLIDATED | ||||||||||||||||
SUBSIDIARIES | SUBSIDIARIES | CORPORATION) | ENTRIES | TOTALS | ||||||||||||||||
(IN THOUSANDS) | ||||||||||||||||||||
Net sales | $ | 512,183 | $ | 405,303 | $ | — | $ | (131,338 | ) | $ | 786,148 | |||||||||
Cost of sales | 378,571 | 262,787 | — | (131,338 | ) | 510,020 | ||||||||||||||
Gross profit on sales | 133,612 | 142,516 | — | — | 276,128 | |||||||||||||||
Selling, general and administrative expenses | 86,872 | 94,901 | 21,352 | — | 203,125 | |||||||||||||||
Operating income (loss) | 46,740 | 47,615 | (21,352 | ) | — | 73,003 | ||||||||||||||
Interest/Other expense | 20,654 | 9,689 | (10,602 | ) | — | 19,741 | ||||||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 26,086 | 37,926 | (10,750 | ) | — | 53,262 | ||||||||||||||
Income tax expense (benefit) | 9,110 | 13,118 | (3,772 | ) | — | 18,456 | ||||||||||||||
Equity in income (loss) of subsidiaries | — | — | 41,784 | (41,784 | ) | — | ||||||||||||||
Net income (loss) | 16,976 | 24,808 | 34,806 | (41,784 | ) | 34,806 | ||||||||||||||
Income attributable to non-controlling interest in subsidiary | — | — | — | — | — | |||||||||||||||
Net income (loss) attributable to Interface, Inc. | $ | 16,976 | $ | 24,808 | $ | 34,806 | $ | (41,784 | ) | $ | 34,806 | |||||||||
-18-
NON- | INTERFACE, INC. | CONSOLIDATION | ||||||||||||||||||
GUARANTOR | GUARANTOR | (PARENT | AND ELIMINATION | CONSOLIDATED | ||||||||||||||||
SUBSIDIARIES | SUBSIDIARIES | CORPORATION) | ENTRIES | TOTALS | ||||||||||||||||
(IN THOUSANDS) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,813 | $ | 30,456 | $ | 12,117 | $ | — | $ | 44,386 | ||||||||||
Accounts receivable | 67,456 | 89,877 | 676 | — | 158,009 | |||||||||||||||
Inventories | 96,980 | 74,136 | — | — | 171,116 | |||||||||||||||
Prepaids and deferred income taxes | 9,071 | 17,598 | 10,806 | — | 37,475 | |||||||||||||||
Assets of business held for sale | — | 1,200 | — | — | 1,200 | |||||||||||||||
Total current assets | 175,320 | 213,267 | 23,599 | — | 412,186 | |||||||||||||||
Property and equipment less accumulated depreciation | 83,806 | 99,589 | 4,675 | — | 188,070 | |||||||||||||||
Investment in subsidiaries | 241,113 | 153,434 | 189,892 | (584,439 | ) | — | ||||||||||||||
Goodwill | 6,954 | 69,612 | — | — | 76,566 | |||||||||||||||
Other assets | 6,545 | 12,138 | 83,800 | — | 102,483 | |||||||||||||||
$ | 513,738 | $ | 548,040 | $ | 301,966 | $ | (584,439 | ) | $ | 779,305 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current Liabilities | $ | 15,340 | $ | 52,044 | $ | 86,358 | $ | — | $ | 153,742 | ||||||||||
Senior notes and senior subordinated notes | — | — | 294,487 | — | 294,487 | |||||||||||||||
Deferred income taxes | 11,124 | 1,615 | (4,268 | ) | — | 8,471 | ||||||||||||||
Other | 4,242 | 1,902 | 27,930 | — | 34,074 | |||||||||||||||
Total liabilities | 30,706 | 55,561 | 404,507 | — | 490,774 | |||||||||||||||
Common stock | 94,145 | 102,199 | 6,546 | (196,344 | ) | 6,546 | ||||||||||||||
Additional paid-in capital | 249,302 | 12,525 | 360,184 | (261,827 | ) | 360,184 | ||||||||||||||
Retained earnings (deficit) | 141,184 | 424,722 | (460,115 | ) | (125,160 | ) | (19,369 | ) | ||||||||||||
Foreign currency translation adjustment | (1,599 | ) | (19,119 | ) | (5,775 | ) | (1,108 | ) | (27,601 | ) | ||||||||||
Pension liability | — | (27,848 | ) | (3,381 | ) | — | (31,229 | ) | ||||||||||||
$ | 513,738 | $ | 548,040 | $ | 301,966 | $ | (584,439 | ) | $ | 779,305 | ||||||||||
APRIL 1, 2012
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,210 | $ | 37,652 | $ | 23,221 | $ | — | $ | 63,083 | ||||||||||
Accounts receivable | 50,728 | 75,356 | 565 | — | 126,649 | |||||||||||||||
Inventories | 93,243 | 78,659 | — | — | 171,902 | |||||||||||||||
Prepaids and deferred income taxes | 10,735 | 19,812 | 9,452 | — | 39,999 | |||||||||||||||
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|
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|
|
|
|
|
| |||||||||||
Total current assets | 156,916 | 211,479 | 33,238 | — | 401,633 | |||||||||||||||
Property and equipment less accumulated depreciation | 82,631 | 110,385 | 3,829 | — | 196,845 | |||||||||||||||
Investment in subsidiaries | 278,561 | 185,088 | 118,132 | (581,781 | ) | — | ||||||||||||||
Goodwill | 6,954 | 69,543 | — | — | 76,497 | |||||||||||||||
Other assets | 5,691 | 10,952 | 88,152 | — | 104,795 | |||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||
$ | 530,753 | $ | 587,447 | $ | 243,351 | $ | (581,781 | ) | $ | 779,770 | ||||||||||
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| |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities | $ | 35,563 | $ | 91,973 | $ | 27,359 | $ | — | $ | 154,895 | ||||||||||
Senior notes and senior subordinated notes | — | — | 294,527 | — | 294,527 | |||||||||||||||
Deferred income taxes | 188 | 11,413 | (2,867 | ) | — | 8,734 | ||||||||||||||
Other | 8,514 | 1,902 | 27,930 | — | 38,346 | |||||||||||||||
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|
|
| |||||||||||
Total liabilities | 44,265 | 105,288 | 346,949 | — | 496,502 | |||||||||||||||
Redeemable preferred stock | — | — | — | — | — | |||||||||||||||
Common stock | 94,145 | 102,199 | 6,594 | (196,344 | ) | 6,594 | ||||||||||||||
Additional paid-in capital | 249,302 | 12,525 | 363,841 | (261,827 | ) | 363,841 | ||||||||||||||
Retained earnings (deficit) | 144,740 | 419,616 | (464,751 | ) | (123,610 | ) | (24,005 | ) | ||||||||||||
AOCI - Foreign currency translation adjustment | (1,699 | ) | (17,507 | ) | (6,803 | ) | — | (26,009 | ) | |||||||||||
AOCI - Pension liability | — | (34,674 | ) | (2,479 | ) | — | (37,153 | ) | ||||||||||||
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| |||||||||||
$ | 530,753 | $ | 587,447 | $ | 243,351 | $ | (581,781 | ) | $ | 779,770 | ||||||||||
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-19-
FOR THE NINETHREE MONTHS
ENDED OCTOBER 2, 2011
NON- | INTERFACE, INC. | CONSOLIDATION | ||||||||||||||||||
GUARANTOR | GUARANTOR | (PARENT | AND ELIMINATION | CONSOLIDATED | ||||||||||||||||
SUBSIDIARIES | SUBSIDIARIES | CORPORATION) | ENTRIES | TOTALS | ||||||||||||||||
(IN THOUSANDS) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (7,940 | ) | $ | 11,306 | $ | 5,694 | $ | 927 | $ | 9,987 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of plant and equipment | (15,048 | ) | (15,343 | ) | (368 | ) | — | (30,759 | ) | |||||||||||
Other | (399 | ) | (1,083 | ) | (142 | ) | — | (1,624 | ) | |||||||||||
Net cash used for investing activities | (15,447 | ) | (16,426 | ) | (510 | ) | — | (32,383 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Other | 24,114 | 3,609 | (27,305 | ) | ( 927 | ) | (509 | ) | ||||||||||||
Proceeds from issuance of common stock | — | — | 2,610 | — | 2,610 | |||||||||||||||
Dividends paid to Interface, Inc. shareholders | — | — | (3,921 | ) | — | (3,921 | ) | |||||||||||||
Net cash used in financing activities | 24,114 | 3,609 | (28,616 | ) | (927 | ) | (1,820 | ) | ||||||||||||
Effect of exchange rate change on cash | — | (634 | ) | — | — | (634 | ) | |||||||||||||
Net increase (decrease) in cash | 727 | (2,145 | ) | (23,432 | ) | — | (24,850 | ) | ||||||||||||
Cash at beginning of period | 1,086 | 32,601 | 35,549 | — | 69,236 | |||||||||||||||
Cash at end of period | $ | 1,813 | $ | 30,456 | $ | 12,117 | $ | — | $ | 44,386 | ||||||||||
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash provided by (used for) operating activities | $ | 7,438 | $ | (609 | ) | $ | 14,460 | $ | 3,037 | $ | 24,326 | |||||||||
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| |||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of plant and equipment | (3,447 | ) | (6,905 | ) | (2 | ) | — | (10,354 | ) | |||||||||||
Other | 338 | (2 | ) | (1,371 | ) | — | (1,035 | ) | ||||||||||||
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| |||||||||||
Net cash used for investing activities | (3,109 | ) | (6,907 | ) | (1,373 | ) | — | (11,389 | ) | |||||||||||
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Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from issuance of common stock | — | — | 131 | — | 131 | |||||||||||||||
Other | (3,220 | ) | 8,607 | (2,350 | ) | (3,037 | ) | — | ||||||||||||
Dividends paid | — | — | (1,307 | ) | — | (1,307 | ) | |||||||||||||
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Net cash provided by (used for) financing activities | (3,220 | ) | 8,607 | (3,526 | ) | (3,037 | ) | (1,176 | ) | |||||||||||
Effect of exchange rate change on cash | — | 687 | — �� | — | 687 | |||||||||||||||
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| |||||||||||
Net increase in cash | 1,109 | 1,778 | 9,561 | — | 12,448 | |||||||||||||||
Cash at beginning of period | 1,101 | 35,874 | 13,660 | — | 50,635 | |||||||||||||||
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Cash at end of period | $ | 2,210 | $ | 37,652 | $ | 23,221 | $ | — | $ | 63,083 | ||||||||||
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-20-
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” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011,1, 2012, which discussion is 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.
2012 Restructuring Charge
In March of 2012, we completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. We used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of our 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes pursuantcommitted to a Company tender offer.
2011 Restructuring Charge
In Octoberthe fourth quarter of 2011, we committed to a restructuring plan intended to reduce costs across our worldwide operations and more closely align our operations with reduced demand levels in certain markets. As a result of this plan, we expect to incurincurred pre-tax restructuring and asset impairment charges of approximately $6.5$6.2 million to $8.0 million duringin the fourth quarter of 2011. The majority of this charge ($5.4 million) relates to the severance of approximately 110 employees in Europe, Asia and the United States. The remainder of the charge will relate($0.8 million) relates to reductions of approximately 100 employees (approximately $5-6 million) as well as smaller amounts for contract termination costs (approximately $0.5-1.0 million) and fixed asset impairment of assets (approximately $0.8-1.0 million). We anticipate that approximately $5.5-6.5costs. Approximately $5.4 million of this charge will result in future cash expenditures, primarily severance expense.expenses. Actions and expenses related to this restructuring plan are expected to bewere substantially completed by the end of the fourth quarter of 2011, and we expect to generate annual savings of approximately $11.0 million as a result thereof.
Discontinued Operations
In 2007, we sold our Fabrics Group business segment. In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics Group business segment for all periods reflected herein, as “discontinued operations.operations,”
Our discontinued operations had no net sales and no net income or loss in either of the three-month or nine-month periods ended October 2, 2011April 1, 2012 and OctoberApril 3, 2010.
-21-
General
During the first nine monthsquarter of fiscal year 2011,2012, including the $16.3 million restructuring charge described above, we had a net salesloss of $768.1 million, compared with net sales of $696.5 million in the first nine months of last year. Fluctuations in currency exchange rates positively impacted sales in the first nine months of 2011 by 4% (approximately $26 million), compared with the prior year period.
Results of Operations
The following table presents, as a percentage of net sales, certain items included in our Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively:
Three Months Ended | Nine Months Ended | |||||||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Oct. 2, 2011 | Oct. 3, 2010 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 65.4 | 64.6 | 64.9 | 65.1 | ||||||||||||
Gross profit on sales | 34.6 | 35.4 | 35.1 | 34.9 | ||||||||||||
Selling, general and administrative expenses | 25.3 | 24.3 | 25.8 | 25.4 | ||||||||||||
Restructuring charge | — | — | — | 0.4 | ||||||||||||
Operating income | 9.3 | 11.1 | 9.3 | 9.1 | ||||||||||||
Bond retirement expenses | — | — | — | 0.2 | ||||||||||||
Interest/Other expenses | 2.3 | 3.5 | 2.5 | 3.8 | ||||||||||||
Income before tax expense | 7.0 | 7.6 | 6.8 | 5.1 | ||||||||||||
Income tax expense | 2.5 | 2.7 | 2.3 | 1.9 | ||||||||||||
Net income | 4.5 | 4.9 | 4.4 | 3.2 | ||||||||||||
Net income attributable to Interface, Inc. | 4.5 | 4.8 | 4.4 | 3.1 | ||||||||||||
Three Months Ended | ||||||||
April 1, 2012 | April 3, 2011 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of sales | 67.3 | 64.6 | ||||||
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Gross profit on sales | 32.7 | 35.4 | ||||||
Selling, general and administrative expenses | 25.5 | 26.7 | ||||||
Restructuring charge | 7.0 | — | ||||||
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Operating income | 0.2 | 8.8 | ||||||
Interest/Other expense | 3.0 | 2.7 | ||||||
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Income (loss) before tax expense | (2.8 | ) | 6.1 | |||||
Income tax expense (benefit) | (0.3 | ) | 2.1 | |||||
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Net income (loss) | (2.5 | ) | 4.0 | |||||
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Below we provide information regarding net sales for each of our operating segments, and analyze those results for the three-month and nine-month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively.
-22-
Net sales by operating segment and for our Company as a whole were as follows for the three-month and nine-month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively:
Three Months Ended | Percentage | |||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Change | ||||||||||
Net Sales By Segment | (In thousands) | |||||||||||
Modular Carpet | $ | 248,721 | $ | 226,513 | 9.8 | % | ||||||
Bentley Prince Street | 24,385 | 26,211 | (7.0 | )% | ||||||||
Total | $ | 273,106 | $ | 252,724 | 8.1 | % | ||||||
Nine Months Ended | Percentage | |||||||||||
Oct. 2, 2011 | Oct. 3, 2010 | Change | ||||||||||
Net Sales By Segment | (In thousands) | |||||||||||
Modular Carpet | $ | 708,567 | $ | 623,215 | 13.7 | % | ||||||
Bentley Prince Street | 77,581 | 73,287 | 5.9 | % | ||||||||
Total | $ | 786,148 | $ | 696,502 | 12.9 | % | ||||||
Three Months Ended | Percentage Change | |||||||||||
Net Sales By Segment | 04/01/12 | 04/03/11 | ||||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 210,016 | $ | 219,280 | (4.2 | %) | ||||||
Bentley Prince Street | 22,744 | 26,122 | (12.9 | %) | ||||||||
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| |||||||
Total | $ | 232,760 | $ | 245,402 | (5.2 | %) | ||||||
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|
Modular Carpet Segment.For the quarter ended October 2, 2011,April 1, 2012, net sales for the Modular Carpet segment increased $22.2decreased $9.3 million (9.8%(4.2%) versus the comparable period in 2010.2011. On a geographic basis, we experienced increases in net salesbasic, in the Americas, (up 8%) andsales were essentially level with the prior year period. Europe (up 19%sales declined slightly in U.S. dollars, 9%Dollars (down 3%) but were up 2% in local currency).currencies. Asia-Pacific also saw a sales increase as compared to the third quarter of 2010 (up less than 1%)declined 17%. Worldwide, the increases were due to continued success in the corporate office market segment, success in certain non-office commercial market segments, and continuing strong demand in emerging markets. Sales growth in the Americas was driven primarily by the improving corporate office market segment (up 16%) as well as growth in the residential (up 38%) and education (up 13%) market segments. These increases were moderated by declines in the retail (down 13%) and hospitality (down 41%) market segments. Sales growth in Europe was due to the corporate office market segment (up 25% in U.S. dollars, 15% in local currency) as well as smaller increases in the education (up 25% in U.S. dollars, 14% in local currency) and hospitality (up 31% in U.S. dollars, 20% in local currency) market segments. Mitigating these increases were declines in the residential (down 53% in U.S. dollars, 57% in local currency) and retail (down 11% in U.S. dollars, 18% in local currency). Asia-Pacific saw increases in the corporate office (up 9%) and hospitality (up over 100%) market segments. These increases were primarily offset by a decline in the education market segment (down 43%).
-19-
Bentley Prince Street Segment.Street.In our Bentley Prince Street segment,For the quarter ended April 1, 2012, net sales for the quarter ended October 2, 2011,this segment decreased $1.8$3.4 million (7.0%(12.9%) versus the comparable period in 2011. This decrease was led by a decline in the prior year. The corporate office market remained strong as comparedof 13%, primarily due to the third quarterpremium nature of 2010, showing an increase inBentley Prince Street’s products vis-à-vis the uncertain macroeconomic environment. The government market segment (down 34%) as well as the hospitality market segment (down 47%) also contributed to the sales of 17%. This increase wasdecline. These declines were somewhat offset by decreasesgains in the education (down 49%) and government (down 35%) market segments, as a result of spending reductions by federal, state and local governments.
-23-
CostsCost and Expenses
Company Consolidated.The following table presents, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three-month and nine-month periods ended October 2,April 1, 2012, and April 3, 2011, and October 3, 2010, respectively:
Three Months Ended | Percentage | |||||||||||
Cost and Expenses | Oct. 2, 2011 | Oct. 3, 2010 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 178,681 | $ | 163,244 | 9.5 | % | ||||||
Selling, general and administrative expenses | 69,087 | 61,441 | 12.4 | % | ||||||||
Total | $ | 247,768 | $ | 224,685 | 10.3 | % | ||||||
Nine Months Ended | Percentage | |||||||||||
Cost and Expenses | Oct. 2, 2011 | Oct. 3, 2010 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 510,020 | $ | 453,514 | 12.5 | % | ||||||
Selling, general and administrative expenses | 203,125 | 176,597 | 15.0 | % | ||||||||
Total | $ | 713,145 | $ | 630,111 | 13.2 | % | ||||||
Three Months Ended | Percentage Change | |||||||||||
Cost and Expenses | 04/01/12 | 04/03/11 | ||||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 156,557 | $ | 158,474 | (1.2 | %) | ||||||
Selling, general and administrative expenses | 59,368 | 65,400 | (9.2 | %) | ||||||||
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Total | $ | 215,925 | $ | 223,874 | (3.6 | %) | ||||||
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For the quarter ended October 2, 2011,April 1, 2012, our costcosts of sales increased $15.4decreased by $1.9 million (9.5%(1.2%) versus the comparable period in 2010.the prior year. Currency negatively impacted cost of sales by approximately $2 million (1%) in the 2012 first quarter. Given this currency impact, the cost of sales in the first quarter of 2012 is essentially level with that of the 2011 first quarter. On a percentage of sales basis, however, cost of sales increased to 67.3% in the first three months of 2012 versus 64.6% in the corresponding period of 2011. The increase was due to (1) a 5-6% increase in raw materials prices for the first quarter of 2012 versus that of 2011, as well as (2) lower absorption of fixed manufacturing costs associated with lower production volumes. We expect improvement in costs of sales on a percentage of sales basis as the benefits of our recent restructuring actions (discussed above) are realized.
For the quarter ended April 1, 2012, our selling, general, and administrative expenses decreased $6.0 million (9.2%) versus the comparable period in 2011. Fluctuations in currency exchange rates accounted for approximately $6.0$1.0 million (4%(1%) of the increase. An increase in raw material costs (up 10-12% year-over-year) was the most significant factor in the increase. Due to the increase in raw material costs, as well as lower absorption of fixed overhead costs due to lower production volumes versus the third quarter of 2010, as a percentage of sales, cost of sales increased to 65.4% for the third quarter of 2011 versus 64.6% for the third quarter of 2011. As raw materials costs moderate, we expect to see cost of sales decrease as a percentage of sales going forward.
-24-
Cost and Expenses by Segment.The following table presents the combined cost of sales and selling, general and administrative expenses for each of our operating segments:
Three Months Ended | Percentage | |||||||||||
Cost of Sales and Selling, General and Administrative Expenses (Combined) | Oct. 2, 2011 | Oct. 3, 2010 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 222,388 | $ | 197,063 | 12.9 | % | ||||||
Bentley Prince Street | 24,448 | 26,166 | (6.6 | )% | ||||||||
Corporate Expenses and Eliminations | 932 | 1,456 | (36.0 | )% | ||||||||
Total | $ | 247,768 | $ | 224,685 | 10.3 | % | ||||||
Nine Months Ended | Percentage | |||||||||||
Cost of Sales and Selling, General and Administrative Expenses (Combined) | Oct. 2, 2011 | Oct. 3, 2010 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 629,413 | $ | 548,278 | 14.8 | % | ||||||
Bentley Prince Street | 77,705 | 75,600 | 2.8 | % | ||||||||
Corporate Expenses and Eliminations | 6,027 | 6,233 | (3.3 | )% | ||||||||
Total | $ | 713,145 | $ | 630,111 | 13.2 | % | ||||||
Cost of Sales and Selling, General and Administrative Expenses (Combined) | Three Months Ended | Percentage Change | ||||||||||
04/01/12 | 04/03/11 | |||||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 192,617 | $ | 193,395 | (0.4 | %) | ||||||
Bentley Prince Street | 23,308 | 26,279 | (11.3 | %) | ||||||||
Corporate Expenses and Eliminations | — | 4,200 | (100.0 | %) | ||||||||
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Total | $ | 215,925 | $ | 223,874 | (3.6 | %) | ||||||
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Interest ExpensesExpense
For the three-month period ended October 2, 2011,April 1, 2012, interest expense decreased $2.0 million to $6.4 million versus $8.4 million inremained level with the comparable period in 2010. This decrease was due to the issuance of our 7 5/8% Senior Notes in the fourth quarter of 2010, the proceeds of which we used to complete the previously discussed tender offer for substantially all of our 11 3/8% Senior Secured Notes, as well as a portion of our outstanding 9.5% Senior Subordinated Notes. Our use of the proceeds from our 7 5/8% Senior Notes to retire higher interest debt led to a significant reduction in our quarterly interest expense, as compared to the third quarter of 2010. For the nine-monththree-month period ended October 2,April 3, 2011 interest expense decreased by $5.5 million to $19.9 million versus $25.3 millionat $6.7 million. There were no significant changes in the comparable period in 2010 due to the factors identified above, as well as the repayment or redemption of $39.6 million of bonds inborrowings between the first quarter of 2010.
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Liquidity and Capital Resources
General
At October 2, 2011,April 1, 2012, we had $44.4$63.1 million in cash. At that date, we had no borrowings and $5.2$4.1 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of October 2, 2011,April 1, 2012, we could have incurred $80.6$69.7 million of additional borrowings under our domestic revolving credit facility, and €14.0€20 million (approximately $19.0$26.6 million) of additional borrowings under our European credit facility. In addition, we could have incurred an additional $18.2$18.9 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.
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Our primary sourcesources of cash during the ninethree months ended October 2, 2011 was $2.6April 1, 2012 were (1) $31.9 million due to a reduction of cash received as a resultaccounts receivable, and (2) $2.1 million due to an increase of exercises of employee stock options.accounts payable and accruals. Our primary uses of cash during this period were (1) $34.9$10.4 million for capital expenditures, (2) $4.3 million for increases in prepaids and other current assets, and (3) $3.8 million due to increased inventory levels as we produced to meet anticipated demand for the second half of 2011, (2) $30.8 million for capital expenditures, and (3) $16.0 million due to decreases in accounts payable and accruals.
Our discussion below in this Item 3 is based upon the more detailed discussions of our market risk and related matters included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011,1, 2012, under Item 7A of that Form 10-K. Our discussion here focuses on the periodquarter ended October 2, 2011,April 1, 2012, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.
At October 2, 2011,April 1, 2012, we recognized a $1.3$7.9 million decreaseincrease in our foreign currency translation adjustment account compared withto January 2, 2011,1, 2012, primarily because of the strengtheningweakening of the U.S.U.S dollar against certain foreign currencies over the nine-month period.
Sensitivity Analysis.For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market sensitive instruments.
To perform sensitivity analysis, we assess 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 October 2, 2011.April 1, 2012. The values that result from these computations are compared with the market values of these financial instruments at October 2, 2011.April 1, 2012. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.
As of October 2, 2011,April 1, 2012, based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the market value of our fixed rate long-term debt would be impacted byexperience a net decrease of approximately $20.5$16.5 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of our fixed rate long-term debt of approximately $25.4$31.5 million.
As of October 2, 2011,April 1, 2012, a 10% decrease or increase 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 our financial instruments of $10.2$9.8 million or an increase in the fair value of our financial instruments of $8.3$8.0 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 1.
The specific risk factor under the heading “The estate of our former Chairman currently has sufficient voting power to elect a majority of our Board of Directors,” set forth in risk factors in the third quarter of 2011. For a discussion of risk factors, see Part I, Item 1A, “Risk Factors,”IA in our Annual Report on Form 10-K for fiscal year 2010.
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The following table contains information with respect to purchases made by or on behalf of the Company, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during our first quarter ended April 1, 2012:
Period(1) | Total Number of Shares Purchased(2) | Average Price Paid Per Share(3) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(4) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(4) | ||||||||||||
January 2 – January 31, 2012 | 15,490 | $ | 11.54 | — | — | |||||||||||
February 1 – February 29, 2012 | 44,774 | $ | 12.61 | — | — | |||||||||||
March 1 – March 31, 2012 | — | — | — | — | ||||||||||||
April 1, 2012 | — | — | — | — | ||||||||||||
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Total | 60,264 | $ | 12.33 | — | — | |||||||||||
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(1) | ||
The monthly periods identified above correspond to the Company’s fiscal first quarter of 2012, which commenced January 2, 2012 and ended April 1, 2012. |
(2) | ||
The referenced shares were acquired by the Company from certain of our employees to satisfy income tax withholding obligations in connection with the vesting, in January and February 2012, of certain previous grants of restricted stock shares. |
(3) | ||
The referenced price paid per share represents the fair market value of all shares acquired from employees on the date the shares vested, which is equal to the closing price of the Company’s Class A Common stock on the NASDAQ stock exchange on the day preceding the vesting date. The total represents the weighted average price paid per share. |
(4) | ||
We do not currently have a publicly announced stock repurchase program in place. |
None
None
The following exhibits are filed with this report:
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | |||
3.1 | Restated Articles of Incorporation | |||
31.1 | Section 302 Certification of Chief Executive Officer. | |||
31.2 | Section 302 Certification of Chief Financial Officer. | |||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. | |||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. | |||
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SIGNATURE
INTERFACE, INC. | |||||
Date: | By: | /s/ Patrick C. Lynch | |||
Patrick C. Lynch | |||||
Senior Vice President | |||||
(Principal Financial Officer) |
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EXHIBIT INDEX
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | |
3.1 |
Restated Articles of Incorporation | ||||
31.1 | Section 302 Certification of Chief Executive Officer. | |||
31.2 | Section 302 Certification of Chief Financial Officer. | |||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. | |||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. | |||
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