UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended July 1,September 30, 2012
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. Yes x No ¨
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 (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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).
Yes ¨ No x
Shares outstanding of each of the registrant’s classes of common stock at AugustNovember 1, 2012:
Class | Number of Shares | |
Common Stock, $.10 par value per share |
INTERFACE, INC.
PAGE | ||||||||
FINANCIAL INFORMATION | ||||||||
3 | ||||||||
Consolidated Condensed Balance Sheets – | 3 | |||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
OTHER INFORMATION | ||||||||
26 |
PART I – I—FINANCIAL INFORMATION
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JULY 1, 2012 | JANUARY 1, 2012 | SEPT. 30, 2012 | JANUARY 1, 2012 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and Cash Equivalents | $ | 36,878 | $ | 50,635 | $ | 91,651 | $ | 50,624 | ||||||||
Accounts Receivable, net | 141,132 | 156,170 | 128,441 | 140,800 | ||||||||||||
Inventories | 173,684 | 166,073 | 147,762 | 140,485 | ||||||||||||
Prepaid Expenses and Other Current Assets | 25,578 | 23,407 | 31,091 | 20,522 | ||||||||||||
Deferred Income Taxes | 10,442 | 9,699 | 10,523 | 9,699 | ||||||||||||
Assets Held for Sale | 0 | 60,683 | ||||||||||||||
|
|
|
| |||||||||||||
TOTAL CURRENT ASSETS | 387,714 | 405,984 | 409,468 | 422,813 | ||||||||||||
PROPERTY AND EQUIPMENT, less accumulated depreciation | 190,652 | 190,119 | 172,867 | 177,925 | ||||||||||||
DEFERRED TAX ASSET | 46,419 | 47,290 | 51,899 | 47,290 | ||||||||||||
GOODWILL | 72,132 | 74,557 | 73,794 | 74,557 | ||||||||||||
OTHER ASSETS | 54,653 | 54,322 | 53,381 | 49,687 | ||||||||||||
|
|
|
| |||||||||||||
TOTAL ASSETS | $ | 751,570 | $ | 772,272 | $ | 761,409 | $ | 772,272 | ||||||||
|
|
|
| |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Accounts Payable | $ | 56,891 | $ | 55,289 | $ | 54,488 | $ | 52,226 | ||||||||
Accrued Expenses | 85,072 | 93,884 | 96,930 | 90,693 | ||||||||||||
Liabilities Held for Sale | 0 | 8,269 | ||||||||||||||
|
|
|
| |||||||||||||
TOTAL CURRENT LIABILITIES | 141,963 | 149,173 | 151,418 | 151,188 | ||||||||||||
SENIOR NOTES | 283,070 | 283,030 | 283,090 | 283,030 | ||||||||||||
SENIOR SUBORDINATED NOTES | — | 11,477 | 0 | 11,477 | ||||||||||||
DEFERRED INCOME TAXES | 8,485 | 8,391 | 8,872 | 8,391 | ||||||||||||
OTHER | 37,188 | 39,162 | 35,879 | 37,147 | ||||||||||||
|
|
|
| |||||||||||||
TOTAL LIABILITIES | 470,706 | 491,233 | 479,259 | 491,233 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Preferred Stock | — | — | 0 | 0 | ||||||||||||
Common Stock | 6,596 | 6,548 | 6,594 | 6,548 | ||||||||||||
Additional Paid-In Capital | 364,376 | 361,400 | 365,038 | 361,400 | ||||||||||||
Retained Earnings (Deficit) | (15,067 | ) | (16,764 | ) | (22,612 | ) | (16,764 | ) | ||||||||
Accumulated Other Comprehensive Loss – Foreign Currency Translation Adjustment | (38,745 | ) | (33,883 | ) | (29,334 | ) | (33,883 | ) | ||||||||
Accumulated Other Comprehensive Loss – Pension Liability | (36,296 | ) | (36,262 | ) | (37,536 | ) | (36,262 | ) | ||||||||
|
|
|
| |||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 280,864 | 281,039 | 282,150 | 281,039 | ||||||||||||
|
|
|
| |||||||||||||
$ | 751,570 | $ | 772,272 | $ | 761,409 | $ | 772,272 | |||||||||
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
-3-- 3 -
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED | SIX MONTHS ENDED | THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||||||||||||||
JULY 1, 2012 | JULY 3, 2011 | JULY 1, 2012 | JULY 3, 2011 | SEPT. 30, 2012 | OCT. 2, 2011 | SEPT. 30, 2012 | OCT. 2, 2011 | |||||||||||||||||||||||||
NET SALES | $ | 254,607 | $ | 267,640 | $ | 487,367 | $ | 513,042 | $ | 242,863 | $ | 248,721 | $ | 682,425 | $ | 708,567 | ||||||||||||||||
Cost of Sales | 170,012 | 172,865 | 326,569 | 331,339 | 160,002 | 161,536 | 450,344 | 453,700 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
GROSS PROFIT ON SALES | 84,595 | 94,775 | 160,798 | 181,703 | 82,861 | 87,185 | 232,081 | 254,867 | ||||||||||||||||||||||||
Selling, General and Administrative Expenses | 62,562 | 68,638 | 121,930 | 134,038 | 58,014 | 62,574 | 168,134 | 184,110 | ||||||||||||||||||||||||
Restructuring and Asset Impairment Charge | — | — | 16,316 | — | 770 | 0 | 17,086 | 0 | ||||||||||||||||||||||||
Losses Related to Australia Fire | 980 | 0 | 980 | 0 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
OPERATING INCOME | 22,033 | 26,137 | 22,552 | 47,665 | 23,097 | 24,611 | 45,881 | 70,757 | ||||||||||||||||||||||||
Interest Expense | 6,139 | 6,783 | 12,792 | 13,439 | 6,330 | 6,434 | 19,132 | 19,972 | ||||||||||||||||||||||||
Other Expense | 274 | 171 | 711 | 49 | 136 | (176 | ) | 824 | (97 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 15,620 | 19,183 | 9,049 | 34,177 | 16,631 | 18,353 | 25,925 | 50,882 | ||||||||||||||||||||||||
Income Tax Expense | 5,362 | 6,369 | 4,725 | 11,539 | 5,564 | 6,661 | 10,418 | 17,623 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
NET INCOME | $ | 10,258 | $ | 12,814 | $ | 4,324 | $ | 22,638 | ||||||||||||||||||||||||
Income from Continuing Operations | 11,067 | 11,692 | 15,507 | 33,259 | ||||||||||||||||||||||||||||
Income (Loss) from Discontinued Operations, Net of Tax | (16,840 | ) | 476 | (16,956 | ) | 1,547 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Earnings Per Share – Basic | $ | 0.16 | $ | 0.20 | $ | 0.07 | $ | 0.35 | ||||||||||||||||||||||||
NET INCOME (LOSS) | $ | (5,773 | ) | $ | 12,168 | $ | (1,449 | ) | $ | 34,806 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Earnings Per Share – Diluted | $ | 0.16 | $ | 0.20 | $ | 0.07 | $ | 0.35 | ||||||||||||||||||||||||
Earnings (Loss) Per Share – Basic | ||||||||||||||||||||||||||||||||
Continuing Operations | $ | 0.17 | $ | 0.18 | $ | 0.24 | $ | 0.51 | ||||||||||||||||||||||||
Discontinued Operations | (0.26 | ) | 0.01 | (0.26 | ) | 0.02 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings (Loss) Per Share – Basic | $ | (0.09 | ) | $ | 0.19 | $ | (0.02 | ) | $ | 0.53 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings (Loss) Per Share – Diluted | ||||||||||||||||||||||||||||||||
Continuing Operations | $ | 0.17 | $ | 0.18 | $ | 0.24 | $ | 0.51 | ||||||||||||||||||||||||
Discontinued Operations | (0.26 | ) | 0.01 | (0.26 | ) | 0.02 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings (Loss) Per Share – Diluted | $ | (0.09 | ) | $ | 0.19 | $ | (0.02 | ) | $ | 0.53 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Common Shares Outstanding – Basic | 65,952 | 65,398 | 65,701 | 65,108 | 65,957 | 65,469 | 65,703 | 65,228 | ||||||||||||||||||||||||
Common Shares Outstanding – Diluted | 66,128 | 65,677 | 65,868 | 65,363 | 66,129 | 65,676 | 65,802 | 65,457 |
See accompanying notes to consolidated condensed financial statements.
-4-- 4 -
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED | SIX MONTHS ENDED | THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||||||||||||||
JULY 1, 2012 | JULY 3, 2011 | JULY 1, 2012 | JULY 3, 2011 | SEPT. 30, 2012 | OCT. 2, 2011 | SEPT. 30, 2012 | OCT. 2, 2011 | |||||||||||||||||||||||||
Net Income | $ | 10,258 | $ | 12,814 | $ | 4,324 | $ | 22,638 | ||||||||||||||||||||||||
Net Income (Loss) | $ | (5,773 | ) | $ | 12,168 | $ | (1,449 | ) | $ | 34,806 | ||||||||||||||||||||||
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment | (11,879 | ) | 4,092 | (4,896 | ) | 12,358 | 8,171 | (13,723 | ) | 3,275 | (1,365 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Comprehensive Income (Loss) | $ | (1,621 | ) | $ | 16,906 | $ | (572 | ) | $ | 34,996 | $ | 2,398 | $ | (1,555 | ) | $ | 1,826 | $ | 33,441 | |||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
-5-- 5 -
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
JULY 1, 2012 | JULY 3, 2011 | SEPT. 30, 2012 | OCT. 2, 2011 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net Income | $ | 4,324 | $ | 22,638 | ||||||||||||
Adjustments to Reconcile Net Income to Cash Provided by (Used in) Operating Activities: | ||||||||||||||||
Net Income (Loss) | $ | (1,449 | ) | $ | 34,806 | |||||||||||
Income (Loss) from Discontinued Operations, Net of Tax | (16,956 | ) | 1,547 | |||||||||||||
|
| |||||||||||||||
Income from Continuing Operations | 15,507 | 33,259 | ||||||||||||||
Adjustments to Reconcile Net Income (Loss) to Cash Provided by Operating Activities: | ||||||||||||||||
Depreciation and Amortization | 12,650 | 13,112 | 19,173 | 19,900 | ||||||||||||
Stock Compensation Amortization Expense | 2,164 | 8,120 | 3,193 | 8,558 | ||||||||||||
Deferred Income Taxes and Other | (2,356 | ) | 3,276 | (9,975 | ) | 9,791 | ||||||||||
Working Capital Changes: | ||||||||||||||||
Accounts Receivable | 14,751 | (7,995 | ) | 29,633 | (6,808 | ) | ||||||||||
Inventories | (9,606 | ) | (30,010 | ) | (6,737 | ) | (34,862 | ) | ||||||||
Prepaid Expenses and Other Current Assets | (2,524 | ) | (4,083 | ) | (7,544 | ) | (3,850 | ) | ||||||||
Accounts Payable and Accrued Expenses | 4,026 | (26,442 | ) | 654 | (16,001 | ) | ||||||||||
|
|
|
| |||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | 23,429 | (21,384 | ) | |||||||||||||
CASH PROVIDED BY OPERATING ACTIVITIES: | 43,904 | 9,987 | ||||||||||||||
|
|
|
| |||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Capital Expenditures | (21,747 | ) | (18,814 | ) | (28,817 | ) | (30,759 | ) | ||||||||
Net Proceeds from Sale of Bentley Prince Street | 32,174 | 0 | ||||||||||||||
Cash Received from Insurance Company | 10,000 | 0 | ||||||||||||||
Other | (1,137 | ) | (1,995 | ) | (1,527 | ) | (1,624 | ) | ||||||||
|
|
|
| |||||||||||||
CASH USED IN INVESTING ACTIVITIES: | (22,884 | ) | (20,809 | ) | ||||||||||||
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: | 11,830 | (32,383 | ) | |||||||||||||
|
|
|
| |||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Repurchase of Senior Subordinated Notes | (11,477 | ) | — | (11,477 | ) | 0 | ||||||||||
Other | — | (505 | ) | 0 | (509 | ) | ||||||||||
Proceeds from Issuance of Common Stock | 131 | 2,579 | 293 | 2,610 | ||||||||||||
Dividends Paid | (2,627 | ) | (2,612 | ) | (4,276 | ) | (3,921 | ) | ||||||||
|
|
|
| |||||||||||||
CASH USED IN FINANCING ACTIVITIES: | (13,973 | ) | (538 | ) | (15,460 | ) | (1,820 | ) | ||||||||
|
|
|
| |||||||||||||
Net Cash Used in Operating, Investing and Financing Activities | (13,428 | ) | (42,731 | ) | ||||||||||||
Net Cash Provided By (Used in) Operating, Investing and Financing Activities | 40,274 | (24,216 | ) | |||||||||||||
Effect of Exchange Rate Changes on Cash | (329 | ) | 794 | 753 | (634 | ) | ||||||||||
|
|
|
| |||||||||||||
CASH AND CASH EQUIVALENTS: | ||||||||||||||||
Net Change During the Period | (13,757 | ) | (41,937 | ) | 41,027 | (24,850 | ) | |||||||||
Balance at Beginning of Period | 50,635 | 69,236 | 50,624 | 69,236 | ||||||||||||
|
|
|
| |||||||||||||
Balance at End of Period | $ | 36,878 | $ | 27,299 | $ | 91,651 | $ | 44,386 | ||||||||
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
-6-- 6 -
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 – CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the 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 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 1, 2012, 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.
As described below in Note 9,10, the Company has sold its Fabrics GroupBentley Prince Street business segment. The results of operations and related disposal costs, gains and losses for this business are classified as discontinued operations, where applicable.
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 – INVENTORIES
Inventories are summarized as follows:
July 1, 2012 | January 1, 2012 | Sept. 30, 2012 | January 1, 2012 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Finished Goods | $ | 101,867 | $ | 98,894 | $ | 87,399 | $ | 86,970 | ||||||||
Work in Process | 21,201 | 17,606 | 11,562 | 8,920 | ||||||||||||
Raw Materials | 50,616 | 49,573 | 48,801 | 44,595 | ||||||||||||
|
|
|
| |||||||||||||
$ | 173,684 | $ | 166,073 | $ | 147,762 | $ | 140,485 | |||||||||
|
|
|
|
NOTE 3 – EARNINGS PER SHARE
The Company computes basic earnings per share (“EPS”) by dividing net income 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.
- 7 -
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 our 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:
-7-
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||||||||||||||
Earnings Per Share | ||||||||||||||||||||||||||||||||
Basic Earnings Per Share: | ||||||||||||||||||||||||||||||||
Basic Earnings Per Share from Continuing Operations: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.04 | $ | 0.03 | $ | 0.02 | $ | 0.07 | $ | 0.06 | ||||||||||||||||
Undistributed Earnings | 0.14 | 0.18 | 0.03 | 0.31 | 0.14 | 0.16 | 0.17 | 0.45 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 0.16 | $ | 0.20 | $ | 0.07 | $ | 0.35 | $ | 0.17 | $ | 0.18 | $ | 0.24 | $ | 0.51 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Diluted Earnings Per Share: | ||||||||||||||||||||||||||||||||
Diluted Earnings Per Share from Continuing Operations: | ||||||||||||||||||||||||||||||||
Distributed Earnings | $ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.04 | $ | 0.03 | $ | 0.02 | $ | 0.07 | $ | 0.06 | ||||||||||||||||
Undistributed Earnings | 0.14 | 0.18 | 0.03 | 0.31 | 0.14 | 0.16 | 0.17 | 0.45 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 0.16 | $ | 0.20 | $ | 0.07 | $ | 0.35 | $ | 0.17 | $ | 0.18 | $ | 0.24 | $ | 0.51 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Earnings (Loss) Per Share | ||||||||||||||||||||||||||||||||
Continuing Operations | $ | 0.17 | $ | 0.18 | $ | 0.24 | $ | 0.51 | ||||||||||||||||||||||||
Discontinued Operations | (0.26 | ) | 0.01 | (0.26 | ) | 0.02 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings (Loss) Per Share | $ | (0.09 | ) | $ | 0.19 | $ | (0.02 | ) | $ | 0.53 | ||||||||||||||||||||||
|
|
|
|
The following tables present net income that was attributable to participating securities:
Three Months Ended | Six Months Ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income | $ | 0.3 | $ | 0.3 | $ | 0.1 | $ | 0.6 |
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Net Income | $ | 0.0 | $ | 0.3 | $ | (0.5 | ) | $ | 0.9 |
The weighted average shares outstanding for basic and diluted EPS were as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Weighted Average Shares Outstanding | 63,927 | 63,623 | 63,676 | 63,333 | 63,983 | 63,703 | 63,729 | 63,462 | ||||||||||||||||||||||||
Participating Securities | 2,025 | 1,775 | 2,025 | 1,775 | 1,974 | 1,766 | 1,974 | 1,766 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Shares for Basic Earnings Per Share | 65,952 | 65,398 | 65,701 | 65,108 | 65,957 | 65,469 | 65,703 | 65,228 | ||||||||||||||||||||||||
Dilutive Effect of Stock Options | 176 | 279 | 167 | 255 | 172 | 207 | 99 | 229 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Shares for Diluted Earnings Per Share | 66,128 | 65,677 | 65,868 | 65,363 | �� | 66,129 | 65,676 | 65,802 | 65,457 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
For the three-month periods ended July 1, 2012, and July 3, 2011,The following chart depicts options to purchase 274,000 and 20,000 shares of common stock respectively,that were not included inexcluded from the computationcalculation of diluted EPS as their impactinclusion would be anti-dilutive. For the six-month periods ended July 1, 2012, and July 3, 2011, options to purchase 274,000 and 20,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive.anti-dilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Shares Excluded | 83 | 249 | 264 | 20 |
NOTE 4 – SEGMENT INFORMATION
Based on the quantitative thresholds specified by accounting standards, the Company has determined that it has twoone reportable segments: (1)segment: the Modular Carpet segment, which includes its Interface, InterfaceFLOR, Heuga and FLOR modular carpet businesses, and (2)businesses. In August 2012, the Bentley Prince Street segment, which includesCompany sold its Bentley Prince Street broadloom, modular carpet and area rug businesses. In 2007, the Company sold its former Fabrics Group business segment (see Note 910 for further information). Accordingly, the Company has included the operations of the former Fabrics GroupBentley Prince Street segment in discontinued operations, where applicable.
-8-- 8 -
The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2012, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision-maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.
Segment Disclosures
Summary information by segment follows:
Modular Carpet | Bentley Prince Street | Total | ||||||||||
(In thousands) | ||||||||||||
Three Months Ended July 1, 2012 | ||||||||||||
Net Sales | $ | 229,546 | $ | 25,061 | $ | 254,607 | ||||||
Depreciation and Amortization | 6,010 | 562 | 6,572 | |||||||||
Operating Income (Loss) | 24,034 | (1,232 | ) | 22,802 | ||||||||
Three Months Ended July 3, 2011 | ||||||||||||
Net Sales | $ | 240,566 | $ | 27,074 | $ | 267,640 | ||||||
Depreciation and Amortization | 6,700 | 565 | 7,265 | |||||||||
Operating Income | 26,937 | 96 | 27,033 |
Modular Carpet | Bentley Prince Street | Total | ||||||||||
(In thousands) | ||||||||||||
Six Months Ended July 1, 2012 | ||||||||||||
Net Sales | $ | 439,562 | $ | 47,805 | $ | 487,367 | ||||||
Depreciation and Amortization | 12,371 | 1,099 | 13,470 | |||||||||
Operating Income (Loss) | 25,086 | (1,796 | ) | 23,290 | ||||||||
Six Months Ended July 3, 2011 | ||||||||||||
Net Sales | $ | 459,846 | $ | 53,196 | $ | 513,042 | ||||||
Depreciation and Amortization | 14,803 | 1,123 | 15,926 | |||||||||
Operating Income (Loss) | 52,271 | (61 | ) | 52,210 |
A reconciliation of the Company’s total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows:
Three Months Ended | Six Months Ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
DEPRECIATION AND AMORTIZATION | ||||||||||||||||
Total segment depreciation and amortization | $ | 6,572 | $ | 7,265 | $ | 13,470 | $ | 15,926 | ||||||||
Corporate depreciation and amortization | 698 | 1,385 | 1,344 | 5,306 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Reported depreciation and amortization | $ | 7,270 | $ | 8,650 | $ | 14,814 | $ | 21,232 | ||||||||
|
|
|
|
|
|
|
| |||||||||
OPERATING INCOME | ||||||||||||||||
Total segment operating income | $ | 22,802 | $ | 27,033 | $ | 23,290 | $ | 52,210 | ||||||||
Corporate income, expenses and other reconciling amounts | (769 | ) | (896 | ) | (738 | ) | (4,545 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Reported operating income | $ | 22,033 | $ | 26,137 | $ | 22,552 | $ | 47,665 | ||||||||
|
|
|
|
|
|
|
|
-9-
July 1, 2012 | January 1, 2012 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Total segment assets | $ | 644,061 | $ | 658,190 | ||||
Corporate assets and eliminations | 107,509 | 114,082 | ||||||
|
|
|
| |||||
Reported total assets | $ | 751,570 | $ | 772,272 | ||||
|
|
|
|
NOTE 5 – LONG-TERM DEBT
7 5/8% Senior Notes
As of both July 1,September 30, 2012, and July 3,October 2, 2011, the Company had outstanding $275 million in 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). The estimated fair value of the 7 5/8% Senior Notes as of July 1,September 30, 2012, and July 3,October 2, 2011, based on then current market prices, was $292.2$299.8 million and $288.1$279.1 million, respectively.
11 3/8% Senior Secured Notes
As of July 1,September 30, 2012, and July 3,October 2, 2011, the Company had outstanding $8.1 million and $8.0 million, respectively, in 11 3/8% Senior Secured Notes due 2013 (the “11 3/8% Senior Secured Notes”). The estimated fair value of the 11 3/8% Senior Secured Notes as of July 1,September 30, 2012, and July 3,October 2, 2011, based on then current market prices, was $8.8$8.1 million and $8.1 million, respectively.
9.5% Senior Subordinated Notes
On April 9, 2012, the Company redeemed all of the remaining $11.5 million of its outstanding 9.5% Senior Subordinated Notes due 2014 at a price equal to 100% of the principal amount of the notes, plus accrued interest through the redemption date.
Credit Facilities
The Company maintains a domestic revolving credit agreement (the “Facility”) that provides a maximum aggregate amount of $100 million of loans and letters of credit available to us at any one time (subject to a borrowing base) with an option for us to increase that maximum aggregate amount to $150 million (upon the satisfaction of certain conditions, and subject to a borrowing base). The Company is presently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future. As of July 1,September 30, 2012, there were zero borrowings and $3.9 million in letters of credit outstanding under the Facility. As of July 1,September 30, 2012, the Company could have incurred $84.3$60.5 million of additional borrowings under the Facility.
Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with The Royal Bank of Scotland N.V. (“RBS”). Under this Credit Agreement, RBS provides a credit facility, until further notice, for borrowings and bank guarantees of €20 million. As of July 1,September 30, 2012, there were no borrowings outstanding under this facility, and the Company could have incurred €20 million (approximately $24.9$25.7 million) of additional borrowings under the facility.
Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $18.5$18.9 million of lines of credit available. As of July 1,September 30, 2012, there were no borrowings outstanding under these lines of credit.
NOTE 6 – STOCK-BASED COMPENSATION
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 accounting standards, the Company is required to select a valuation technique or option pricing model that meets the criteria 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.
-10-- 9 -
During the first sixnine months of 2012 and 2011, the Company recognized stock option compensation costs of $0.4 $0.5��million and $0.6$0.7 million, respectively. In the secondthird quarters of 2012 and 2011, the Company recognized stock option compensation costs of $0.2$0.1 million and $0.3$0.2 million, respectively. The remaining unrecognized compensation cost related to unvested awards at July 1,September 30, 2012, approximated $0.2$0.1 million, and the weighted average period of time over which this cost will be recognized is approximately one year.
The following table summarizes stock options outstanding as of July 1,September 30, 2012, as well as activity during the sixnine months then ended:
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding at January 1, 2012 | 592,500 | $ | 9.12 | 592,500 | $ | 9.12 | ||||||||||
Granted | — | — | 0 | 0 | ||||||||||||
Exercised | 23,500 | $ | 5.59 | 45,000 | 6.52 | |||||||||||
Forfeited or canceled | 34,000 | $ | 11.72 | 34,000 | 15.79 | |||||||||||
|
|
|
| |||||||||||||
Outstanding at July 1, 2012 | 535,000 | $ | 8.85 | |||||||||||||
Outstanding at September 30, 2012 | 513,500 | $ | 8.94 | |||||||||||||
|
|
|
| |||||||||||||
Exercisable at July 1, 2012 | 419,200 | $ | 7.80 | |||||||||||||
Exercisable at September 30, 2012 | 498,500 | $ | 8.75 | |||||||||||||
|
|
|
|
At July 1,September 30, 2012, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $2.6$2.3 million and $2.5$2.3 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).
Cash proceeds and intrinsic value related to total stock options exercised during the first sixnine months of fiscal years 2012 and 2011 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period presented.
Six Months Ended | Nine Months Ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||
(In thousands) | (In millions) | |||||||||||||||
Proceeds from stock options exercised | $ | 131 | $ | 2,579 | $ | 0.3 | $ | 2.6 | ||||||||
Intrinsic value of stock options exercised | 179 | 5,819 | 0.3 | 5.9 |
Restricted Stock Awards
During the sixnine months ended July 1,September 30, 2012, and July 3,October 2, 2011, the Company granted restricted stock awards for 573,500 and 668,000 shares, respectively, of common stock. These awards (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, awards (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 $2.2$3.2 million and $8.1$8.6 million for the sixnine months ended July 1,September 30, 2012, and July 3,October 2, 2011, 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 July 1,September 30, 2012, and during the sixnine months then ended:
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at January 1, 2012 | 1,749,000 | $ | 15.08 | 1,749,000 | $ | 15.08 | ||||||||||
Granted | 573,500 | 13.25 | 573,000 | 13.25 | ||||||||||||
Vested | 241,500 | 13.20 | 264,000 | 13.37 | ||||||||||||
Forfeited or canceled | 56,000 | 15.11 | 84,500 | 14.87 | ||||||||||||
|
|
|
| |||||||||||||
Outstanding at July 1, 2012 | 2,025,000 | $ | 14.79 | |||||||||||||
Outstanding at September 30, 2012 | 1,973,500 | $ | 14.79 | |||||||||||||
|
|
|
|
-11-- 10 -
As of July 1,September 30, 2012, the unrecognized total compensation cost related to unvested restricted stock was approximately $13.9$11.8 million. That cost is expected to be recognized by the end of 2015.
For the sixnine months ended July 1,September 30, 2012, and July 3,October 2, 2011, the Company recognized tax benefits with regard to restricted stock of $0.3$0.5 million and $2.1$2.4 million, respectively.
NOTE 7 – EMPLOYEE BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for the three-month and six-monthnine-month periods ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
Defined Benefit Retirement Plan (Europe) | July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 113 | $ | 74 | $ | 229 | $ | 145 | $ | 110 | $ | 72 | $ | 339 | $ | 217 | ||||||||||||||||
Interest cost | 2,542 | 2,932 | 5,086 | 5,770 | 2,525 | 2,835 | 7,611 | 8,605 | ||||||||||||||||||||||||
Expected return on assets | (2,817 | ) | (3,041 | ) | (5,638 | ) | (5,975 | ) | (2,797 | ) | (2,935 | ) | (8,435 | ) | (8,910 | ) | ||||||||||||||||
Amortization of prior service costs | 13 | 21 | 26 | 42 | 12 | 21 | 38 | 63 | ||||||||||||||||||||||||
Recognized net actuarial losses | 231 | 155 | 460 | 305 | 230 | 149 | 690 | 454 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net periodic benefit cost | $ | 82 | $ | 141 | $ | 163 | $ | 287 | $ | 80 | $ | 142 | $ | 243 | $ | 429 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
Salary Continuation Plan (SCP) | July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | ||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
Service cost | $ | 113 | $ | 98 | $ | 226 | $ | 196 | $ | 113 | $ | 98 | $ | 339 | $ | 295 | ||||||||||||||||
Interest cost | 254 | 284 | 507 | 568 | 254 | 284 | 761 | 853 | ||||||||||||||||||||||||
Amortization of transition obligation | — | 55 | — | 110 | 0 | 55 | 0 | 164 | ||||||||||||||||||||||||
Amortization of prior service cost | 12 | 12 | 24 | 24 | 12 | 12 | 36 | 36 | ||||||||||||||||||||||||
Amortization of loss | 67 | 95 | 134 | 185 | 67 | 93 | 201 | 277 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net periodic benefit cost | $ | 446 | $ | 544 | $ | 891 | $ | 1,083 | $ | 446 | $ | 542 | $ | 1,337 | $ | 1,625 | ||||||||||||||||
|
|
|
|
|
|
|
|
NOTE 8 – 2012 RESTRUCTURING CHARGES
2012 Restructuring Charge
In the first quarter 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 consistsconsisted 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 2012 in an amount of $16.3 million. The charge iswas 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 cash expenditures, primarily severance expense. Actions andIn the third quarter of 2012, the Company recorded an additional charge of $0.8 million of cash severance expenses related to the finalization of this plan were substantially completed by the end of the second quarter of 2012.for its European operations.
A summary of these restructuring activities is presented below:
Total Restructuring Charge | Costs Incurred in 2012 | Balance at July 1, 2012 | Total Restructuring Charge | Costs Incurred in 2012 | Balance at Sept. 30, 2012 | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Workforce Reduction | 5,356 | 1,843 | 3,513 | 6,126 | 4,351 | 1,775 | ||||||||||||||||||
Fixed Asset Impairment | 9,364 | 9,364 | — | 9,364 | 9,364 | 0 | ||||||||||||||||||
Other Related Exit Costs | 1,596 | — | 1,596 | 1,596 | 902 | 694 |
-12-- 11 -
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 | 11,207 | — | — | 11,207 | ||||||||||||
Total amounts incurred in 2012 | 11,207 | — | — | 11,207 |
NOTE 9 – 2011 Restructuring ChargeRESTRUCTURING CHARGE
In the fourth quarter of 2011, the Company committed to a restructuring plan intended to reduce costs across its worldwide operations and more closely align its operations with reduced demand in certain markets. As a result of this plan, the Company incurred pre-tax restructuring and asset impairment charges of $6.2$5.8 million in the fourth quarter of 2011. The majority of this charge ($5.45.0 million) relatesrelated to the severance of approximately 11090 employees in Europe, Asia and the United States. The remainder of the charge ($0.8 million) relatesrelated to contract termination and fixed asset impairment costs. Approximately $5.4$5.0 million of this charge will result in cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed by the end of 2011.
A summary of these restructuring activities is presented below:
Restructuring Charge | Costs Incurred in 2011 | Costs Incurred in 2012 | Balance at July 1, 2012 | |||||||||||||
(In thousands) | ||||||||||||||||
Workforce Reduction | 5,401 | 1,147 | 2,572 | 1,682 | ||||||||||||
Fixed Asset Impairment | 776 | 776 | — | — |
The table below details these restructuring activities by segment:
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 | 4,073 | 422 | — | 4,495 | ||||||||||||
Total amounts incurred in 2012 | 2,430 | 142 | — | 2,572 |
Restructuring Charge | Costs Incurred in 2011 | Costs Incurred in 2012 | Balance at Sept. 30, 2012 | |||||||||||||
(In thousands) | ||||||||||||||||
Workforce Reduction | 4,979 | 867 | 2,683 | 1,429 | ||||||||||||
Fixed Asset Impairment | 776 | 776 | 0 | 0 |
NOTE 910 – DISCONTINUED OPERATIONS
In 2007,July of 2012, the Company soldentered into an agreement to sell its Fabrics GroupBentley Prince Street business segment to a third party. The sale was completed in the third quarter of 2012. The purchase price for the business segment was $33.4 million, after working capital and certain other adjustments. In the third quarter, the Company incurred approximately $10.0 million of direct costs to sell the business segment. All activity related to this business has been included in discontinued operations, where applicable. Assets and liabilitiesThe major classes of this business segment have been reported in assets and liabilities related to the business segment at disposition were accounts receivable of $10.1 million, inventory of $29.0 million, property, plant and equipment of $11.8 million, and accounts payable and accruals of $7.6 million.
Summary operating results for the above-described discontinued operations are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net sales | $ | 9,210 | $ | 24,385 | $ | 57,017 | $ | 77,581 | ||||||||
Income (Loss) on operations before taxes on income | (25,875 | ) | 732 | (26,062 | ) | 2,380 | ||||||||||
Tax expense (benefit) | (9,035 | ) | 256 | (9,106 | ) | 833 | ||||||||||
Income (Loss) on operations, net of tax | (16,840 | ) | 476 | (16,956 | ) | 1,547 |
Asset and liabilities, including reserves, related to the above-described discontinued operations that were held for sale where applicable.
Discontinued operations had no net sales and no net income or loss in eitherconsist of the three-month or six-month periods ended July 1, 2012 and July 3, 2011.following:
September 30, 2012 | January 1, 2012 | |||||||
(In thousands) | ||||||||
Current assets | $ | 0 | $ | 43,843 | ||||
Property and equipment | 0 | 12,194 | ||||||
Other assets | 0 | 4,646 | ||||||
Current liabilities | 0 | 6,254 | ||||||
Other liabilities | 0 | 2,015 |
NOTE 1011 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $12.0$12.8 million and $11.2$12.0 million for the sixnine months ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively. Income tax payments amounted to $6.0$9.1 million and $11.1$15.2 million for the sixnine months ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively.
-13-- 12 -
NOTE 1112 – 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 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. The adoption of this standard did not have any significant impact on the Company’s 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, was 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 affects presentation, there is not expected to be any impact on the Company’s consolidated financial statements.
NOTE 1213 – 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 sixnine months of 2012, the Company increased its liability for unrecognized tax benefits by $0.1$0.4 million. As of July 1,September 30, 2012, the Company had accrued approximately $7.8$8.1 million for unrecognized tax benefits.
NOTE 1314 – SHARE CONVERSION
On March 5, 2012, the number of issued and outstanding shares of Class B Common Stock constituted less than 10% of the aggregate number of issued and outstanding shares of the Company’s Class A Common Stock and Class B Common Stock (that is, on that date, 6,459,556 shares of an aggregate of 65,372,375 shares), as the cumulative result of varied transactions that caused the conversion of shares of Class B Common Stock into shares of Class A Common Stock. Accordingly, in accordance with the respective terms for the Class B Common Stock and the Class A Common Stock in Article V of the Company’s Articles of Incorporation, (the “Articles”), the Class A Common Stock and Class B Common Stock are now, irrevocably from March 5, 2012, a single class of Common Stock in all respects, with no distinction whatsoever between the voting rights or any other rights and privileges of the holders of Class A Common Stock and the holders of Class B Common Stock. The Company intends to eliminate future uses of (or references to) the terms “Class A” and “Class B” in connection with the Common Stock, except for historical purposes or to facilitate transition by certain stock listing or administrative services organizations who are accustomed to the old designations for the Common Stock.
NOTE 14 – SUBSEQUENT EVENT15 – FIRE AT AUSTRALIAN MANUFACTURING FACILITY
On July 20, 2012, subsequent to the end of the second quarter of 2012, a fire occurred at the Company’s manufacturing facility in Picton, Australia. The facility’s carpet production line, primarily comprised of tufting and backing machinery, sustained substantialextensive damage and will be inoperable for an undetermined period of time.was rendered inoperable. Other areas of the Company’s Picton site relating to yarn preparation and warehousing were undamaged by the fire. The finished goods inventory and some raw materials for the business are kept at a separate offsite locationslocation and were not affected by this incident.
The Picton facility serves the Company’s customers throughout Australia and New Zealand. It represents approximately 7% of the Company’s total annual production, 10% of its net sales, and 13% of its operating income. The Company will utilize adequate production capacity at its manufacturing facilities in Thailand, China and Chinaelsewhere to meet customer demand typically serviced from Picton. The Company does not expect any significant inconvenience to customers. The Company has business interruption and property damage insurance.
-14-- 13 -
NOTE 15 – SUBSEQUENT EVENT – PENDING SALE OF BENTLEY PRINCE STREET
On July 25, 2012,The Company has recorded a charge of approximately $9.8 million for impairment of fixed assets related to the fire. In addition, the Company entered into a Stock Purchase Agreement with an affiliatehas incurred approximately $9.5 million of Dominus Capital, L.P., a private equity investment firm, forexcess production costs related to the sale offire as it has utilized other facilities to service customers in the Company’s Bentley Prince Street business segment. The aggregate purchase price under the Agreement would be $35.0 million paid in cash at the closing of the transaction, subject to possible working capital and/or other similar adjustments. The Company expects the closing of the transaction to occur in August of 2012.Australia market. As of the end of the secondthird quarter, the Company has determined that the receipt of 2012, Bentley Prince Street had netreimbursement of these expenses from its insurer is probable in accordance with its insurance policies and has therefore recorded a receivable for these items. To date, the Company has received $10 million of reimbursement from the insurance company related to the destruction of fixed assets at the Picton facility. The table below details the nature of expenses as well as insurance receivables and amounts already received related to the fire (in millions):
Impairment of fixed assets at the Picton Facility | $ | 9.8 | ||
Incremental payroll costs | 1.8 | |||
Incremental shipping costs | 5.9 | |||
Other incremental costs | 1.8 | |||
|
| |||
Total incurred costs through September 30, 2012 | $ | 19.3 | ||
|
| |||
Insurance recovery receivable | $ | 9.3 | ||
Insurance recoveries already received | $ | 10.0 |
In addition to these additional production costs, the Company has incurred approximately $49 million. The Company expects to record exit$1.0 million of costs related to the divestiturefire that are non-production related and at this time are not considered probable of approximately $7-$9 million. The final loss on disposal will be calculated basedrecovery from the insurance company. As a result, these amounts are included in the determination of operating income as shown on the ending balance sheetline item “Losses Related to Australia Fire” on the consolidated condensed statement of Bentley Prince Streetoperations.
The Company is gathering information related to an insurance claim for lost profits as a result of the fire. As of the end of the third quarter, the Company has not recorded any receivables or amounts for lost profits, but expects to do so at a later date of closing.as information and analysis become more complete and recovery becomes probable.
NOTE 16 – SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS
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 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.
-15-- 14 -
INTERFACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1,SEPTEMBER 30, 2012
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Net sales | $ | 167,714 | $ | 117,526 | $ | — | $ | (30,633 | ) | $ | 254,607 | $ | 165,391 | $ | 120,383 | $ | 0 | $ | (42,911 | ) | $ | 242,863 | ||||||||||||||||||
Cost of sales | 121,595 | 79,050 | — | (30,633 | ) | 170,012 | 122,447 | 80,466 | 0 | (42,911 | ) | 160,002 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Gross profit on sales | 46,119 | 38,476 | — | — | 84,595 | 42,944 | 39,917 | 0 | 0 | 82,861 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 29,477 | 27,063 | 6,022 | — | 62,562 | 23,966 | 28,260 | 5,788 | 0 | 58,014 | ||||||||||||||||||||||||||||||
Losses related to Australia fire | 0 | 980 | 0 | 0 | 980 | |||||||||||||||||||||||||||||||||||
Restructuring and asset impairment charge | 0 | 770 | 0 | 0 | 770 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Operating income (loss) | 16,642 | 11,413 | (6,022 | ) | — | 22,033 | 18,978 | 9,907 | (5,788 | ) | 0 | 23,097 | ||||||||||||||||||||||||||||
Interest/Other expense | 11,007 | 2,870 | (7,464 | ) | — | 6,413 | ||||||||||||||||||||||||||||||||||
Interest/other expense | 3,598 | 3,410 | (542 | ) | 0 | 6,466 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income before taxes on income and equity in income of subsidiaries | 5,635 | 8,543 | 1,442 | — | 15,620 | 15,380 | 6,497 | (5,246 | ) | 0 | 16,631 | |||||||||||||||||||||||||||||
Income tax expense | 1,934 | 2,933 | 495 | — | 5,362 | 5,145 | 2,174 | (1,755 | ) | 0 | 5,564 | |||||||||||||||||||||||||||||
Equity in income (loss) of subsidiaries | — | — | 9,311 | (9,311 | ) | — | 0 | 0 | (2,282 | ) | 2,282 | 0 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations | 10,235 | 4,323 | (5,773 | ) | 2,282 | 11,067 | ||||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations (net of tax) | (16,840 | ) | 0 | 0 | 0 | (16,840 | ) | |||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 3,701 | $ | 5,610 | $ | 10,258 | $ | (9,311 | ) | $ | 10,258 | $ | (6,605 | ) | $ | 4,323 | $ | (5,773 | ) | $ | 2,282 | $ | (5,773 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
-16-- 15 -
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIXNINE MONTHS ENDED JULY 1,SEPTEMBER 30, 2012
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Net sales | $ | 310,498 | $ | 238,181 | $ | — | $ | (61,312 | ) | $ | 487,367 | $ | 428,084 | $ | 358,564 | $ | 0 | $ | (104,223 | ) | $ | 682,425 | ||||||||||||||||||
Cost of sales | 227,938 | 159,943 | — | (61,312 | ) | 326,569 | 314,158 | 240,409 | 0 | (104,223 | ) | 450,344 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Gross profit on sales | 82,560 | 78,238 | — | — | 160,798 | 113,926 | 118,155 | 0 | 0 | 232,081 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 56,296 | 54,668 | 10,966 | — | 121,930 | 68,452 | 82,928 | 16,754 | 0 | 168,134 | ||||||||||||||||||||||||||||||
Losses related to Australia fire | 0 | 980 | 0 | 0 | 980 | |||||||||||||||||||||||||||||||||||
Restructuring and asset impairment charge | 1,143 | 15,173 | — | — | 16,316 | 1,143 | 15,943 | 0 | 0 | 17,086 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Operating income (loss) | 25,121 | 8,397 | (10,966 | ) | — | 22,552 | 44,331 | 18,304 | (16,754 | ) | 0 | 45,881 | ||||||||||||||||||||||||||||
Interest/Other expense | 18,242 | 6,603 | (11,342 | ) | — | 13,503 | ||||||||||||||||||||||||||||||||||
Interest/other expense | 21,827 | 10,013 | (11,884 | ) | 0 | 19,956 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) before taxes on income and equity in income of subsidiaries | 6,879 | 1,794 | 376 | — | 9,049 | 22,504 | 8,291 | (4,870 | ) | 0 | 25,925 | |||||||||||||||||||||||||||||
Income tax expense | 2,055 | 2,278 | 392 | — | 4,725 | 7,329 | 4,452 | (1,363 | ) | 0 | 10,418 | |||||||||||||||||||||||||||||
Equity in income (loss) of subsidiaries | — | — | 4,340 | (4,340 | ) | — | 0 | 0 | 2,058 | (2,058 | ) | 0 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations | 15,175 | 3,839 | (1,449 | ) | (2,058 | ) | 15,507 | |||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations (net of tax) | (16,956 | ) | 0 | 0 | 0 | (16,956 | ) | |||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 4,824 | $ | (484 | ) | $ | 4,324 | $ | (4,340 | ) | $ | 4,324 | $ | (1,781 | ) | $ | 3,839 | $ | (1,449 | ) | $ | (2,058 | ) | $ | (1,449 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
-17-- 16 -
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 1,SEPTEMBER 30, 2012
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,446 | $ | 26,419 | $ | 9,013 | $ | — | $ | 36,878 | $ | 2,529 | $ | 38,250 | $ | 50,872 | $ | 0 | $ | 91,651 | ||||||||||||||||||||
Accounts receivable | 66,614 | 73,936 | 582 | — | 141,132 | 53,733 | 74,122 | 586 | 0 | 128,441 | ||||||||||||||||||||||||||||||
Inventories | 98,789 | 74,895 | — | — | 173,684 | 69,258 | 78,504 | 0 | 0 | 147,762 | ||||||||||||||||||||||||||||||
Prepaids and deferred income taxes | 8,993 | 17,926 | 9,101 | — | 36,020 | 5,272 | 27,002 | 9,340 | 0 | 41,614 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total current assets | 175,842 | 193,176 | 18,696 | — | 387,714 | 130,792 | 217,878 | 60,798 | 0 | 409,468 | ||||||||||||||||||||||||||||||
Property and equipment less accumulated depreciation | 83,319 | 103,735 | 3,598 | — | 190,652 | 72,076 | 97,388 | 3,403 | 0 | 172,867 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 267,400 | 198,892 | 124,800 | (591,092 | ) | — | 361,233 | 195,361 | (18,453 | ) | (538,141 | ) | 0 | |||||||||||||||||||||||||||
Goodwill | 6,955 | 65,177 | — | — | 72,132 | 6,542 | 67,252 | 0 | 0 | 73,794 | ||||||||||||||||||||||||||||||
Other assets | 5,680 | 10,552 | 84,840 | — | 101,072 | 1,585 | 10,846 | 92,849 | 0 | 105,280 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
$ | 539,196 | $ | 571,532 | $ | 231,934 | $ | (591,092 | ) | $ | 751,570 | $ | 572,228 | $ | 588,725 | $ | 138,597 | $ | (538,141 | ) | $ | 761,409 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
Current liabilities | $ | 47,794 | $ | 75,227 | $ | 18,942 | $ | — | $ | 141,963 | $ | 53,943 | $ | 79,966 | $ | 17,509 | $ | 0 | $ | 151,418 | ||||||||||||||||||||
Senior notes | — | — | 283,070 | — | 283,070 | 0 | 0 | 283,090 | 0 | 283,090 | ||||||||||||||||||||||||||||||
Deferred income taxes | 188 | 11,302 | (3,005 | ) | — | 8,485 | 0 | 11,655 | (2,783 | ) | 0 | 8,872 | ||||||||||||||||||||||||||||
Other | 1,406 | 8,565 | 27,217 | — | 37,188 | 0 | 8,199 | 27,680 | 0 | 35,879 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities | 49,388 | 95,094 | 326,224 | — | 470,706 | 53,943 | 99,820 | 325,496 | 0 | 479,259 | ||||||||||||||||||||||||||||||
Common stock | 94,145 | 102,199 | 6,596 | (196,344 | ) | 6,596 | 81,844 | 102,199 | 6,594 | (184,043 | ) | 6,594 | ||||||||||||||||||||||||||||
Additional paid-in capital | 249,302 | 12,525 | 364,376 | (261,827 | ) | 364,376 | 191,411 | 12,525 | 365,038 | (203,936 | ) | 365,038 | ||||||||||||||||||||||||||||
Retained earnings (deficit) | 148,441 | 425,226 | (455,813 | ) | (132,921 | ) | (15,067 | ) | 246,979 | 429,549 | (548,978 | ) | (150,162 | ) | (22,612 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustment | (2,080 | ) | (29,647 | ) | (7,018 | ) | — | (38,745 | ) | (1,949 | ) | (20,331 | ) | (7,054 | ) | 0 | (29,334 | ) | ||||||||||||||||||||||
Pension liability | — | (33,865 | ) | (2,431 | ) | — | (36,296 | ) | 0 | (35,037 | ) | (2,499 | ) | 0 | (37,536 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
$ | 539,196 | $ | 571,532 | $ | 231,934 | $ | (591,092 | ) | $ | 751,570 | $ | 572,228 | $ | 588,725 | $ | 138,597 | $ | (538,141 | ) | $ | 761,409 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
-18-- 17 -
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXNINE MONTHS
ENDED JULY 1,SEPTEMBER 30, 2012
GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | GUARANTOR SUBSIDIARIES | NON- GUARANTOR SUBSIDIARIES | INTERFACE, INC. (PARENT CORPORATION) | CONSOLIDATION AND ELIMINATION ENTRIES | CONSOLIDATED TOTALS | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | $ | 6,532 | $ | 2,812 | $ | 10,667 | $ | 3,418 | $ | 23,429 | $ | 36,070 | $ | 4,652 | $ | (12,466 | ) | $ | 15,648 | $ | 43,904 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Purchase of plant and equipment | (7,292 | ) | (14,443 | ) | (12 | ) | — | (21,747 | ) | (11,284 | ) | (17,492 | ) | (41 | ) | 0 | (28,817 | ) | ||||||||||||||||||||||
Other | 390 | (31 | ) | (1,496 | ) | — | (1,137 | ) | 465 | (39 | ) | (1,953 | ) | 0 | (1,527 | ) | ||||||||||||||||||||||||
Net proceeds from sale of Bentley Prince Street | 0 | 0 | 32,174 | 0 | 32,174 | |||||||||||||||||||||||||||||||||||
Cash received from insurance company | 0 | 10,000 | 0 | 0 | 10,000 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net cash used for investing activities | (6,902 | ) | (14,474 | ) | (1,508 | ) | — | (22,884 | ) | (10,819 | ) | (7,531 | ) | 30,180 | 0 | 11,830 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Repurchase of senior subordinated notes | — | — | (11,477 | ) | — | (11,477 | ) | 0 | 0 | (11,477 | ) | 0 | (11,477 | ) | ||||||||||||||||||||||||||
Other | 715 | 2,536 | 167 | (3,418 | ) | — | (24,015 | ) | 4,705 | 34,958 | (15,648 | ) | 0 | |||||||||||||||||||||||||||
Proceeds from issuance of common stock | — | — | 131 | — | 131 | 0 | 0 | 293 | 0 | 293 | ||||||||||||||||||||||||||||||
Dividends paid | — | — | (2,627 | ) | — | (2,627 | ) | 0 | 0 | (4,276 | ) | 0 | (4,276 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net cash provided by (used for) financing activities | 715 | 2,536 | (13,806 | ) | (3,418 | ) | (13,973 | ) | (24,015 | ) | 4,705 | 19,498 | (15,648 | ) | (15,460 | ) | ||||||||||||||||||||||||
Effect of exchange rate change on cash | — | (329 | ) | — | — | (329 | ) | 192 | 561 | 0 | 0 | 753 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net increase (decrease) in cash | 345 | (9,455 | ) | (4,647 | ) | — | (13,757 | ) | 1,428 | 2,387 | 37,212 | 0 | 41,027 | |||||||||||||||||||||||||||
Cash at beginning of period | 1,101 | 35,874 | 13,660 | — | 50,635 | 1,101 | 35,863 | 13,660 | 0 | 50,624 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Cash at end of period | $ | 1,446 | $ | 26,419 | $ | 9,013 | $ | — | $ | 36,878 | $ | 2,529 | $ | 38,250 | $ | 50,872 | $ | 0 | $ | 91,651 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
-19-- 18 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and sixnine months ended, or as of, July 1,September 30, 2012, and the comparable periods of 2011 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.
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 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 ChargeCharges
In the first quarter of 2012, we committed to a new restructuring plan in our continuing efforts to reduce costs across our worldwide operations and more closely align our operations with reduced demand levels in certain markets. The plan primarily consistsconsisted of ceasing manufacturing and warehousing operations at our facility in Shelf, England. In connection with this restructuring plan, we incurred a pre-tax restructuring and asset impairment charge in the first quarter of 2012 in an amount of $16.3 million. Themillion, as well as an additional related charge isof $0.8 million in the third quarter of 2012. These charges are comprised of employee severance expenses of $5.4$6.2 million, other related exit costs of $1.6 million, and a charge for impairment of assets of approximately $9.3 million. Approximately $7$8 million of the charge will result in cash expenditures, primarily severance expense. The restructuring plan was substantially completed in the second quarter of 2012, and is expected to yield annualized cost savings of approximately $9 million.
2011 Restructuring Charge
In the 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 in certain markets. As a result of this plan, we incurred pre-tax restructuring and asset impairment charges of $6.2$5.8 million in the fourth quarter of 2011. The majority of this charge ($5.45.0 million) relatesrelated to the severance of approximately 11090 employees in Europe, Asia and the United States. The remainder of the charge ($0.8 million) relatesrelated to contract termination and fixed asset impairment costs. Approximately $5.4$5.0 million of this charge will result in cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed by the end of 2011.
Discontinued Operations – Sale of Bentley Prince Street
In 2007,the third quarter of 2012, we sold our Fabrics GroupBentley Prince Street business segment. In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics GroupBentley Prince Street business segment as “discontinued operations,” where applicable. Consequently, our discussion of sales and other results of operations (except for net income or loss amounts), including percentages derived from or based on such amounts, excludes these discontinued operations unless we indicate otherwise.
Our discontinued operations had no net sales of $9.2 million and no$24.4 million in the three-month periods ended September 30, 2012 and October 2, 2011, respectively, and had net income or losssales of $57.0 million and $77.6 million in eitherthe nine-month periods ended September 30, 2012 and October 2, 2011, respectively (these results are included in our statements of operations as part of the three-month or six-month periods ended July 1, 2012 and July 3, 2011.
Recent Events
In July 2012, a fire occurred at“Loss from Discontinued Operations, Net of Taxes”). Loss from discontinued operations, inclusive of the Company’s facility in Picton, Australia, and the Company entered into an agreementloss on disposal as well as costs to sell its Bentley Prince Streetthe business, segment. Please see Notes 14 and 15net of tax, was $16.8 million in the notesthree-month period ended September 30, 2012, compared with income from discontinued operations of $0.5 million in the three-month period ended October 2, 2011. During the nine-month period ended September 30, 2012, inclusive of the loss on disposal as well as costs to consolidated financial statementssell the business, net of tax, the loss from discontinued operations was $17.0 million, compared with income of $1.5 million in the nine-month period ended October 2, 2011.
- 19 -
For additional information on these discontinued operations, please see Note 10 in the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Fire at Australia Facility
In July 2012, a fire occurred at our manufacturing facility in Picton, Australia. The fire caused extensive damage to the facility, as well as disruption to business activity in the region. We have taken steps towards re-adapting our supply chain with product from our facilities in China, Thailand, the U.S. and Europe. While this is being executed with success, there were, as expected, delays in shipments that affected sales for the third quarter. At this time, it is difficult to quantify the financial impacts of the fire, but we believe it negatively affected net sales by approximately $7-8 million during the third quarter. For additional information on the fire, please see Note 15 in the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
-20-
General
During the quarter ended July 1,September 30, 2012, we had net sales of $254.6$242.9 million, compared with net sales of $267.6$248.7 million in the secondthird quarter last year. Fluctuations in currency exchange rates negatively impacted 2012 secondthird quarter sales by 3%2% (approximately $7$6 million), compared with the prior year period. During the first sixnine months of fiscal year 2012, we had net sales of $487.4$682.4 million, compared with net sales of $513.0$708.6 million in the first sixnine months of last year. Fluctuations in currency exchange rates negatively impacted sales in the first sixnine months of 2012 by 2% (approximately $10$16 million), compared with the prior year period.
Included in our results for the six months ended July 1,third quarter of 2012 isare a restructuring charge of $16.3$0.8 million and losses related to the Australia fire of $1.0 million. Included in our results for the nine months ended September 30, 2012 are restructuring charges of $17.1 million, as well as the same losses related to the Australia fire. The restructuring charges and Australia fire are described above.
During the secondthird quarter of 2012, after the restructuring charge and fire losses described above, we had income from continuing operations of $11.1 million, or $0.17 per diluted share, compared with income from continuing operations of $11.7 million, or $0.18 per diluted share, in the third quarter of 2011. During the nine months ended September 30, 2012, after the restructuring charges and fire losses described above, we had income from continuing operations of $15.5 million, or $0.24 per diluted share, compared with income from continuing operations of $33.3 million, or $0.51 per diluted share, in the first nine months of 2011.
After the loss from discontinued operations discussed above, we had a net loss of $5.8 million, or $0.09 per diluted share, in the third quarter of 2012, compared with net income of $10.3$12.2 million, or $0.16$0.19 per diluted share, in the third quarter last year. For the nine-month period ended September 30, 2012, after the loss from discontinued operations, we had a net loss of $1.5 million, or $0.02 per diluted share, compared with net income of $12.8$34.8 million, or $0.20$0.53 per diluted share, in the second quarter of 2011. During the six months ended July 1, 2012, including the $16.3 million restructuring charge described above, we had net income of $4.3 million, or $0.07 per diluted share, compared with net income of $22.6 million, or $0.35 per diluted share, in the first six months of 2011.prior year period.
- 20 -
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 six-monthnine-month periods ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | Sept. 30, 2012 | Oct. 2, 2011 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 66.8 | 64.6 | 67.0 | 64.6 | 65.9 | 64.9 | 66.0 | 64.0 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Gross profit on sales | 33.2 | 35.4 | 33.0 | 35.4 | 34.1 | 35.1 | 34.0 | 36.0 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 24.6 | 25.6 | 25.0 | 26.1 | 23.9 | 25.2 | 24.6 | 26.0 | ||||||||||||||||||||||||
Restructuring and asset impairment charge | — | — | 3.3 | — | ||||||||||||||||||||||||||||
Restructuring and asset impairment charges | 0.3 | 0.0 | 2.5 | 0.0 | ||||||||||||||||||||||||||||
Losses related to Australia fire | 0.4 | 0.0 | 0.1 | 0.0 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Operating income | 8.7 | 9.8 | 4.6 | 9.3 | 9.5 | 9.9 | 6.7 | 10.0 | ||||||||||||||||||||||||
Interest/Other expenses | 2.5 | 2.6 | 2.8 | 2.6 | 2.7 | 2.5 | 2.9 | 2.8 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Income before tax expense | 6.1 | 7.2 | 1.9 | 6.7 | 6.8 | 7.4 | 3.8 | 7.2 | ||||||||||||||||||||||||
Income tax expense | 2.1 | 2.4 | 1.0 | 2.2 | 2.3 | 2.7 | 1.5 | 2.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net income | 4.0 | 4.8 | 0.9 | 4.4 | ||||||||||||||||||||||||||||
Income from continuing operations | 4.6 | 4.7 | 2.3 | 4.7 | ||||||||||||||||||||||||||||
Discontinued operations | (6.9 | ) | 0.2 | (2.5 | ) | 0.2 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net income (loss) | (2.4 | ) | 4.9 | (0.2 | ) | 4.9 | ||||||||||||||||||||||||||
|
|
|
|
Net Sales
Below we provide information regarding net sales, for each of our operating segments, and analyze those results for the three-month and six-monthnine-month periods ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively.
Net Sales by Business Segment
Net sales by operating segment and for our Company as a whole were as follows for the three-month and six-month periods ended July 1, 2012, and July 3, 2011, respectively:
Three Months Ended | Percentage | |||||||||||
Sept. 30, 2012 | Oct. 2, 2011 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 242,863 | $ | 248,721 | (2.4 | %) |
Three Months Ended | Percentage | |||||||||||
Net Sales By Segment | July 1, 2012 | July 3, 2011 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 229,546 | $ | 240,566 | (4.6 | )% | ||||||
Bentley Prince Street | 25,061 | 27,074 | (7.4 | )% | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 254,607 | $ | 267,640 | (4.9 | )% | ||||||
|
|
|
|
|
|
Nine Months Ended | Percentage | |||||||||||
Sept. 30, 2012 | Oct. 2, 2011 | Change | ||||||||||
(In thousands) | ||||||||||||
Net Sales | $ | 682,425 | $ | 708,567 | (3.7 | )% |
-21-
Six Months Ended | Percentage | |||||||||||
Net Sales By Segment | July 1, 2012 | July 3, 2011 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 439,562 | $ | 459,846 | (4.4 | )% | ||||||
Bentley Prince Street | 47,805 | 53,196 | (10.1 | )% | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 487,367 | $ | 513,042 | (5.0 | )% | ||||||
|
|
|
|
|
|
Modular Carpet Segment. For the quarter ended July 1,September 30, 2012, net sales for the Modular Carpet segment declined $11.0$5.9 million (4.6%(2.4%) versus the comparable period in the prior year. On a geographic basis, the Americas was the only region to see an increase (up 6%) versus the prior year. Although sales in Europe were up versus the third quarter of 2011 on a local currency basis (up 3%), currency fluctuations led to a decrease of 8% as reported in U.S. dollars. Largely due to the impact of the fire in our Australia facility, Asia-Pacific sales declined 19% versus the comparable period of the prior year. In the Americas, we experienced sales increases in most market segments, with retail (up 33%), corporate office (up 5%) and residential (up 10%) leading the Americas (up 6%) were offset bygrowth. The improvement in residential sales was due to the continued roll-out of our FLOR store locations. The only sales declines in the Europe (down 13% in U.S. dollars and 2% in local currencies) and Asia-Pacific (down 18%) regions. Sales growthAmericas during the third quarter of 2012 were in the Americas was due to increasesgovernment (down 12%) and education (down 4%) market segments. These decreases were a result of curtailment of government spending programs versus last year. In local currency, Europe experienced an increase in both the corporate office market segment (up 7%) and essentially flat sales in most other market segments. As reported in U.S. dollars, the sales decrease in Europe was due largely to currency fluctuations, as in U.S. dollars almost all market segments showed a decline, with the largest being in the corporate office (down 5%) and non-office markets. The strongest performing non-office market segments were residential (up 18%), retail (up 15%) and education (up 13%). The increase in the residential segment was due to new FLOR store openings as well as same store growth. These increases in the Americas were somewhat offset by declines in the government (down 25%) and healthcare (down 4%16%) market segments. In Europe, the sales decline was due primarily to negative currency translation impacts, as most market segments were flat in local currencies, with the exception of the retail (down 25% in local currencies and 33% in U.S. dollars) and government (down 10% in local currencies and 20% in U.S. dollars) market segments. Asia-Pacific, in the face of strong prior year comparable sales in the second quarter, saw declines in almostnearly all market segments with education (down 55%) showingdeclined. As noted above, the mostdelay in shipments caused by the fire in our Australian facility was a significant decline due to the curtailment of government stimulus programs that had beenfactor in place in 2011 – particularly in Australia.this sales decline.
- 21 -
For the sixnine months ended July 1,September 30, 2012, net sales for the Modular Carpet segment declined $20.3$26.1 million (4.4%(3.7%) versus the comparable period in the prior year. OnThe Americas region experienced sales growth of 4%, which was offset by sales decreases in Europe (down 8%) and Asia-Pacific (down 18%). In local currency, Europe experienced a geographicsales increase of 1%. In the Americas, the sales increase was led by the retail (up 16%), corporate office (up 3%) and residential (up 25%) market segments. As in the third quarter comparison set forth above, the residential segment growth is largely attributable to the continued FLOR store roll-out. In Europe, we experienced sales decreases in all market segments as reported on a U.S. dollar basis, but in local currency we experienced increases in the Americascorporate office (up 5% in local currency) and residential (up 3%) offset in local currency) market segments. These local currency increases were somewhat mitigated by declines in Europethe government (down 2%12% in local currenciescurrency) and 8% in U.S. dollars) and Asia-Pacificretail (down 17%). In the Americas, the residential market segment made the largest gain (up 34%), particularly due to the opening of seven FLOR retail stores compared with the number of stores at the end of the second quarter of 2011. The education (up 9%), retail (up 6%) and corporate office (up 3%) market segments also experienced increases during the period. These gains were somewhat offset by a decline in the government market segment (down 22%) during the first six months of 2012 versus the prior year period. In Europe, all market segments declined as reported in U.S. dollars for the six months ended July 2, 2012, versus the comparable period in 2011, due to adverse currency translation impacts. However, in local currencies,currency) market segments. In Asia-Pacific, sales were negatively impacted by the corporate office market segment in Europe experienced an increase of 4%. Asia-Pacific saw the largest decline in the education segment (down 59%), primarily as a result of the curtailment of government stimulus programs that had been in place in 2011 – particularly in Australia. The corporate office (down 6%) and hospitality (down 45%) market segments also experienced declines in Asia-Pacific compared with the first six months of 2012.
Bentley Prince Street Segment. Infire at our Bentley Prince Street segment, net sales for the quarter ended July 1, 2012 declined $2.0 million (7.4%) versus the comparable period in 2011. The primary driver of the decrease in sales was the decline in the corporate office market segment (down 21%). This decrease was partially offset by increases in the government (up 58%) and hospitality (up over 100%) market segments.
For the six months ended July 1, 2012, net sales for the Bentley Prince Street segment declined $5.4 million (10.1%) versus the comparable period in 2011. The decrease was primarily attributable to the corporate office market segment (down 17%)Australia facility, as well as a decline in the government marketeducation segment (down 4%55%). due to curtailed stimulus spending versus the comparable period in prior year, particularly in Australia. Other declines in the Asia-Pacific region were seen in the corporate office (down 8%) and hospitality (down 51%) market segments. These declines were partially mitigatedoffset to as small extent by increases in the healthcaregovernment (up 22%8%) and hospitalityresidential (up 13%over 100%) market segments.
-22-
Cost 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 six-monthnine-month periods ended July 1,September 30, 2012, and July 3,October 2, 2011, respectively:
Three Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||||||||
Cost and Expenses | July 1, 2012 | July 3, 2011 | Change | Sept. 30, 2012 | Oct. 2, 2011 | Change | ||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Cost of sales | $ | 170,012 | $ | 172,865 | (1.7 | )% | $ | 160,002 | $ | 161,536 | (0.9 | )% | ||||||||||||
Selling, general and administrative expenses | 62,562 | 68,638 | (8.9 | )% | 58,014 | 62,574 | (7.3 | )% | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 232,574 | $ | 241,503 | (3.7 | )% | $ | 218,016 | $ | 224,110 | (2.7 | )% | ||||||||||||
|
|
|
|
| ||||||||||||||||||||
Six Months Ended | Percentage | |||||||||||||||||||||||
Cost and Expenses | July 1, 2012 | July 3, 2011 | Change | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Cost of sales | $ | 326,569 | $ | 331,339 | (1.4 | )% | ||||||||||||||||||
Selling, general and administrative expenses | 121,930 | 134,038 | (9.0 | )% | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total | $ | 448,499 | $ | 465,377 | (3.6 | )% | ||||||||||||||||||
|
|
|
Nine Months Ended | Percentage | |||||||||||
Cost and Expenses | Sept. 30, 2012 | Oct. 2, 2011 | Change | |||||||||
(In thousands) | ||||||||||||
Cost of sales | $ | 450,344 | $ | 453,700 | (0.7 | )% | ||||||
Selling, general and administrative expenses | 168,134 | 184,110 | (8.7 | )% | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 618,478 | $ | 637,810 | (3.0 | )% | ||||||
|
|
|
|
|
|
For the quarterthree months ended July 1,September 30, 2012, our cost of sales decreased $2.9$1.5 million (1.7%(0.9%) versus the comparable period in 2011. This decrease is the result of a $4 million benefit from currency translation compared with the prior year. Almost all of the decrease was attributable to fluctuationsyear period, partially offset by (1) a 2-3% increase in currency rates in the second quarter of 2012raw material prices versus the second quarter of 2011. Our raw materials prices in the second quarter of 2012 were approximately 1-2% higher than in the comparable period of 2012. Due toin 2011, and (2) lower absorption of fixed costs associated withdue to lower production volumes, particularly as a result of the fire at our Australia facility in the third quarter of 2012. Due to these factors, as a percentage of sales, cost of sales increased to 66.8% for the three months ended July 1, 2012,65.9% versus 64.6%64.9% in the comparable prior year period. On a sequential basis versusperiod in 2011. With the first quarterimprovements in our supply chain to Australia going forward, as well as the realization of 2012, we saw an improvement in cost of sales as a percentage of sales. We believe that as thefurther savings related to our first quarter 2012 restructuring plan are fully realizedinitiatives in the later part of 2012, cost of salesprior periods, we believe we will further decrease as a percentage of sales.begin to see an increase in gross margin.
For the sixnine months ended July 1,September 30, 2012, our cost of sales decreased $4.8$3.4 million (1.4%(0.7%) versus the comparable period in 2011. This decrease is the result of a $10 million benefit from currency translation compared with the prior year. Currency fluctuation accounted for the majority of the declineyear period, partially offset by (1) a 2-3% increase in raw material prices versus the comparable period in 2011, period. Our raw materials prices were approximately 2-3% higher for the first six months of 2012 versus the first six months of 2011. Due to this cost increase, coupled withand (2) lower absorption of fixed manufacturing costs associated with lower production volumes cost of sales as a percentage of sales increased to 67.0% forversus the 2012nine-month period versus 64.6% for the 2011 period.last year. As noted above, we believe that as the savings related to our first quarter 2012 restructuring plan are fully realized in the later part of 2012, cost of salesplans will further decrease as a percentage of sales.enhance gross margin going forward.
For the quarterthree months ended July 1,September 30, 2012, our selling, general and administrative expenseexpenses decreased $6.1approximately $4.6 million (8.9%(7.3%) versus the comparable period in 2011. Fluctuations in currency exchange rates accounted for approximately $2$1.5 million of thisthe decrease. The primaryA significant component of thethis decrease in selling, general and administrative expenses was lowera $1.7 million reduction in selling and marketing expenses of approximately $3.0 million. This decrease was primarily due to our continued focus on costs controls and the realizationimpacts of savings fromour previously-enacted restructuring plans, and a portion was due to lower sales volumes versus the third quarter of 2011. Administrative expenses also experienced a decline in the third quarter of 2012 (down $2.1 million) versus the prior year period, as the effects of our restructuring plans which were put in placeprograms in late 2011 and early 2012 as well as lower selling costs associated with lower sales volume in the second quarter of 2012 versus the comparable period in 2011. Administrative expenses also declined approximately $2.0 million in the period versus the prior year, alsobecame more apparent. As a result of our restructuring programs. Due to these items, as a percentage of sales, our selling, general and administrative expenses decreaseddeclined to 24.6% for23.9%, versus 25.2% in the second quarter of 2012 versus 25.6% for the second quarter of 2011.three months ended October 1, 2012.
For the sixnine months ended July 1,September 30, 2012, our selling, general and administrative expenses decreased $12.1approximately $16.0 million (9.0%(8.7%) versus the comparable period in 2011. Fluctuations in currency exchange rates accounted for approximately $4 million of the prior year. As noted above, thisdecrease. The overall decrease was largelyis due to the impactlower administrative costs of our restructuring plans put in place in late 2011 and early 2012. Selling and marketing expenses decreased by approximately $3.0$13 million during the first six monthsas a result of 2012 versus 2011 due to the savings from these plans, although this decrease was slightly offset by increased marketing costs due to trade show and similar expenses, primarily in the first three months of 2012. Administrative expenses declined by approximately $8.0 million during the 2012 six-month period, due to savings from our restructuring plans, as well asboth lower levels of non-cash incentive compensation in the first six months of 2012 versus 2011.
-23-
Cost2011 as well as savings from the above-mentioned restructuring plans in late 2011 and Expensesearly 2012. In addition, selling and marketing expenses declined by Segment.The following table presentsapproximately $2.0 million for the combined costnine months ended September 30, 2012, versus the comparable period in prior year, also as a result of our restructuring plans. Due to these factors, as a percentage of sales, and selling, general and administrative expenses for eachdecreased to 24.6%, versus 26.0% in the first nine months of our operating segments:2011.
Cost of Sales and Selling, General and | Three Months Ended | Percentage | ||||||||||
Administrative Expenses (Combined) | July 1, 2012 | July 3, 2011 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 205,512 | $ | 213,630 | (3.8 | )% | ||||||
Bentley Prince Street | 26,293 | 26,978 | (2.5 | )% | ||||||||
Corporate Expenses and Eliminations | 769 | 895 | (14.1 | )% | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 232,574 | $ | 241,503 | (3.7 | )% | ||||||
|
|
|
|
|
| |||||||
Cost of Sales and Selling, General and | Six Months Ended | Percentage | ||||||||||
Administrative Expenses (Combined) | July 1, 2012 | July 3, 2011 | Change | |||||||||
(In thousands) | ||||||||||||
Modular Carpet | $ | 398,129 | $ | 407,025 | (2.2 | )% | ||||||
Bentley Prince Street | 49,601 | 53,257 | (6.9 | )% | ||||||||
Corporate Expenses and Eliminations | 769 | 5,095 | (84.9 | )% | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 448,499 | $ | 465,377 | (3.6 | )% | ||||||
|
|
|
|
|
|
- 22 -
Interest Expense
For the three-month period ended July 1,September 30, 2012, our interest expense decreased $0.7$0.1 million to $6.1$6.3 million, versus $6.8$6.4 million in the comparable period of 2011. The primary reason for this decrease was the redemption of the remaining $11.5 million of our 9.5% Senior Subordinated Notes early in the second quarter of 2012, leading to lower interest expense for the balance of the quarter. The decrease was also due in part to lower amounts of bank fees for the second quarter of 2012 versus 2011. For the sixnine months ended July 1,September 30, 2012, our interest expense decreased by approximately $0.6$0.8 million to $12.8$19.1 million, versus $13.4$20.0 million in the comparable period of 2011. This decrease was due to the same factors described for the three-month period ended July 1, 2012.
Liquidity and Capital Resources
General
At July 1,September 30, 2012, we had $36.9$91.7 million in cash. At that date, we had no borrowings and $3.9 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of July 1,September 30, 2012, we could have incurred $84.3$60.5 million of additional borrowings under our domestic revolving credit facility and €20.0 million (approximately $24.9$25.7 million) of additional borrowings under our European credit facility. In addition, weWe also could have incurred an additional $18.5$18.9 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.
Analysis of Cash Flows
Our primary sources of cash during the sixnine months ended July 1,September 30, 2012 were (1) $14.8$32.7 million of net proceeds from the sale of our Bentley Prince Street business segment, (2) $29.6 million due to a reductiondecreases in accounts receivable, and (2) $4.0(3) $10.0 million dueof funds received from our insurer related to an increasethe fire at our facility in accounts payable and accrued expenses.Picton Australia. Our primary uses of cash during this period were (1) $21.7$28.8 million for capital expenditures, (2) $11.5 million for the redemption of the remainder of our remainingformer 9.5% Senior Subordinated Notes, and (3) $9.6$6.7 million for increased inventory levels.due to an increase in inventory.
-24-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 1, 2012, under Item 7A of that Form 10-K. Our discussion here focuses on the period ended July 1,September 30, 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 July 1,September 30, 2012, we recognized a $4.9$4.5 million decreaseincrease in our foreign currency translation adjustment account compared to January 1, 2012, primarily because of the strengtheningweakening of the U.S. dollar against certain foreign currencies, particularlyincluding the Euro.British Pound and the Australian dollar.
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 July 1,September 30, 2012. The values that result from these computations are compared with the market values of these financial instruments at July 1,September 30, 2012. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.
As of July 1,September 30, 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 by a net decrease of approximately $15.8$12.4 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 $6.4$9.1 million.
As of July 1,September 30, 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 $8.4$9.2 million or an increase in the fair value of our financial instruments of $6.8$7.5 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.
- 23 -
ITEM 4. CONTROLS AND PROCEDURES
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.
-25-
PART II - II—OTHER INFORMATION
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 Part I, Item IA in our Annual Report on Form 10-K for fiscal year 2011, is no longer applicable. For a discussion of risk factors, see that Item in our 2011 Form 10-K.
- 24 -
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NoneThe 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 third quarter ended September 30, 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) | ||||||||||||
July 2 – July 31, 2012 | 0 | 0 | 0 | 0 | ||||||||||||
August 1 – August 31, 2012 | 8,189 | $ | 13.90 | 0 | 0 | |||||||||||
September 1 – September 30, 2012 | 0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 8,189 | $ | 13.90 | 0 | 0 | |||||||||||
|
|
|
|
|
|
|
|
(1) | The monthly periods identified above correspond to the Company’s fiscal third quarter of 2012, which commenced July 2, 2012 and ended September 30, 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 August 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 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. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
None
- 25 -
The following exhibits are filed with this report:
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | |
10.1 | Stock Purchase Agreement, dated as of July 25, 2012, among Interface Americas Holdings, LLC, Bentley Prince Street, Inc. and Bentley Prince Street Holdings, Inc. | |
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. | |
101.INS | XBRL Instance Document (furnished electronically herewith)* | |
101.SCH | XBRL Taxonomy Extension Schema Document (furnished electronically herewith)* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith)* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (furnished electronically herewith)* | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document (furnished electronically herewith)* | |
101.DEF | XBRL Taxonomy Definition Linkbase Document (furnished electronically herewith)* |
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not |
-26-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERFACE, INC. | ||||||
Date: | By: | /s/ Patrick C. Lynch | ||||
Patrick C. Lynch | ||||||
Senior Vice President | ||||||
(Principal Financial Officer) |
-27-- 26 -
EXHIBIT INDEX
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | |
10.1 | Stock Purchase Agreement, dated as of July 25, 2012, among Interface Americas Holdings, LLC, Bentley Prince Street, Inc. and Bentley Prince Street Holdings, Inc. | |
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 | |
101.INS | XBRL Instance Document (furnished electronically herewith)* | |
101.SCH | XBRL Taxonomy Extension Schema Document (furnished electronically herewith)* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith)* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (furnished electronically herewith)* | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document (furnished electronically herewith)* | |
101.DEF | XBRL Taxonomy Definition Linkbase Document (furnished electronically herewith)* |
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not |
-28-- 27 -