SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For Quarterly Period Ended July 5, 20153, 2016

Commission File Number 001-33994

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

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 ☑    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 ☑ 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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☑

Shares outstanding of each of the registrant’s classes of common stock at August 4, 2015:2016:

INTERFACE, INC.

INDEX

PARTI - FINANCIAL INFORMATION

ITEMITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATEDCONSOLIDATED CONDENSEDBALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATEDCONSOLIDATED CONDENSEDSTATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATEDCONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATEDCONSOLIDATED CONDENSED STATEMENTS OFCASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following tables present net income that was attributable to participating securities:

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

For all periods presented, there were no options or participating securities excluded from the computation of diluted EPS.

As of July 5, 2015,3, 2016, the unrecognized total compensation cost related to unvested restricted stock was approximately $14.3$6.4 million. That cost is expected to be recognized by the end of 2019.

ForPerformance Share Awards

In 2016, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s continued employment through the last date of the performance period, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

The following table summarizes the performance shares outstanding as of July 3, 2016, as well as the activity during the six months then ended:

The weighted average grant date fair value of the performance shares awarded in the first six month of 2016 was $17.23 per share. Compensation expense related to the performance shares for the six months ended July 5, 2015, and June 29, 2014, the Company recognized tax benefits with regard3, 2016 was $0.6 million. Unrecognized compensation expense related to restricted stockthese performance shares was approximately $6.9 million as of $3.5 million and $0.7 million, respectively.July 3, 2016. No performance shares were granted or outstanding during 2015.

ITEM 2.2. 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 December 28, 2014,January 3, 2016, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and six months ended, or as of, July 5, 2015,3, 2016, and the comparable periods of 20142015 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 December 28, 2014,January 3, 2016, 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.

General

During the quarter ended July 5, 2015,3, 2016, we had net sales of $263.6$248.2 million, compared with net sales of $260.6$263.6 million in the second quarter last year. During the first six months of fiscal year 2015,2016, we had net sales of $500.5$470.8 million, compared with net sales of $479.6$500.5 million in the first six months of last year. Fluctuations in currency exchange rates had small negative impacts on our sales and operating income in the 20152016 reported periods, compared with the prior year periods. The following table presents the amounts (in U.S. dollars) by which the exchange rates for converting foreign currencies into U.S. dollars have negatively affected our net sales and operating income for the three months and six months ended July 5, 2015.3, 2016.

During the second quarter of 2015,2016, we had net income of $20.7 million, or $0.32 per diluted share, compared with net income of $21.7 million, or $0.33 per diluted share, compared with net income of $13.1 million, or $0.20 per diluted share, in the second quarter of 2014.2015. During the six months ended July 5, 2015,3, 2016, we had net income of $34.0$33.6 million, or $0.51 per diluted share, compared with net income of $17.1$34.0 million, or $0.26$0.51 per diluted share, in the first six months of 2014.2015.

The first six months of 2016 were comprised of 26 weeks, while the first six months of 2015 were comprised of 27 weeks, while the first six months of 2014 were comprised of 26 weeks. (The additional week was in the first quarter of 2015.) This is a factor in certain of the comparisons discussed in this Item 2.

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-month periods ended July 3, 2016, and July 5, 2015, and June 29, 2014, respectively:

Net Sales

Below we provide information regarding net sales and analyze those results for the three-month and six-month periods ended July 3, 2016, and July 5, 2015, and June 29, 2014, respectively.

For the quarter ended July 5, 2015,3, 2016, net sales increased $3.0decreased $15.4 million (1.2%(5.9%) versus the comparable period in 2014. As discussed above,2015. Currency fluctuations did not have a significant impact on the comparison, as a strengthening of the Euro versus the U.S. dollar versus certain foreign currencies (primarily,was offset by the Euro,weakening of the Australian dollar versus the U.S. dollar. On a geographic basis, we experienced sales declines in the Americas (down 6%), Europe (down 8% as reported in U.S. dollars and Canadian dollar) had a negative impact9% in local currency) and Asia-Pacific (down 2%). In the Americas, the decline was largely attributable to our InterfaceServices business, where its largest retail customer delayed many projects until the second half of approximately $24 million on 2015 second quarter2016, alongside deferred purchases by customers in the weakened oil and gas sector. With the exception of the hospitality (up 27%) and healthcare (up 15%) segments, all other market segments in the Americas region experienced declining sales as compared toin the second quarter of 2014.2016 compared with the prior year period. In Europe, the Americas, we increased sales 7%, whichdecline was largely due to customer uncertainty and hesitation leading up to the June 23, 2016 Brexit referendum vote. The decline in Europe occurred in the corporate office (down 9%) and education (down 46%) market segments, partially offset by declinesincreases in all other market segments with the retail segment (up 34%) being the most significant. In Asia-Pacific, the decline was largely a function of 7%softer sales performance in Europe (asAustralia (down 9% as reported in U.S. dollars)dollars and 6%5% in local currency) due primarily to large project shipments in June 2015 that did not reoccur this year. The remainder of the Asia-Pacific (as reportedregion experienced an increase of 5%, with India and China having the most significant growth. Within the Asia-Pacific division, sales in U.S. dollars) due to the negative currency impacts discussed above. In the Americas, the corporate office market segment led the way with a 12% increase, as the rebound in this market continued and we gained market share in the U.S. Non-office segments were up 3%6%, but this was more than offset by a 25% decline in the aggregate,non-office segments, with increases in the hospitality (up 55%education (down 39%) and education (up 10%hospitality (down 63%) segments being partially offset by declines in the retail (down 12%), healthcare (down 9%) and residential (down 4%) segments. The decline in the residential segment was primarily in the multi-family sector, as our FLOR residential consumer business posted a 4% sales increase for the 2015 second quarter, primarily due to stronger web-based sales. In Europe, the sales increase in local currency was approximately 16%, due to the strength of the corporate office market segment (up 21%) which comprises the bulk of the sales in the region. Non-office segments in Europe were down 3% in the aggregate in local currency, with the government segment showingrepresenting the largest decline (down 48%) due to the continued austerity programs in place through the region. In Asia-Pacific, the sales increase in local currency was 4%, which was almost entirely due to the strengthareas of the corporate office market, primarily in Australia.decline.

For the six months ended July 5, 2015,3, 2016, net sales increased $20.9decreased $29.8 million (4.4%(5.9%) versus the comparable period in 2014. The strengthening of the U.S. dollar versus certain foreign currencies2015. Currency fluctuations had a negative impact on the comparison of approximately $43$4.3 million, on 2015 first half sales as compared to the first half of 2014.or just under 1%. On a geographic basis, we experienced sales increasesa decline of 6% in the Americas (up 11%) and 9% in Europe (in both U.S. dollars and local currency), while our sales in Asia-Pacific (up 2%) versuswere up less than 1% in the first six months of 2014. Due2016 compared with the same period last year. The decline in the Americas region was, again, largely a result of delayed projects at our InterfaceServices business until the second half of 2016, along with softer sales to oil and gas customers. With the impactexception of currency fluctuations,the hospitality (up 13%) and healthcare (up 7%) market segments, all other market segments in the Americas had lower sales compared with the first six months of 2015. In Europe, experiencedthe uncertainty and hesitation surrounding the Brexit vote as well as other political and economic issues led to lower sales, particularly in the corporate office (down 10%) and education (down 38%) market segments. Small increases in the retail (up 32%) and hospitality (up 23%) market segments slightly mitigated the decline. In Asia-Pacific, an increase of 8% in Asia was nullified by a sales decline in Australia of 7%6% as reported in U.S. dollars, butdollars. In local currency, however, sales in Australia were even in the first six months of 2016 compared with the same period in 2015. On a market segment basis within the Asia-Pacific region, an increase in local currency of 14%. In the Americas, the sales increase was almost evenly balanced between the corporate office and non-office segments, with corporate office sales increasing 12% and non-office segments increasing 10%. All non-office market segments showed an increasesegment of 8% for the first six months of 2015, with the exception of2016 was offset almost entirely by declines in the retail (down 5%54%), education (down 27%) and healthcare (essentially flat)hospitality (down 49%) segments. Hospitality (up 74%) and education (up 11%) market segments represented the most significant increases over the first six months of 2014. In local currency, the increase in Europe was mostly in the corporate office market, which grew 21%. Non-office segments in Europe in the aggregate were down 9% in local currency, with the most significant decline coming in the government segment due to the continued austerity measures in place throughout the region. In Asia-Pacific, the sales growth of 2% came as a result of the corporate office market. (up 9%) primarily due to increased new construction and refurbishment projects in Australia. With the exception of the hospitality segment (up 17%), all non-office segments in Asia-Pacific showed declines for the period, with the most significant being in retail (down 35%) and healthcare (down 24%).

Cost and Expenses

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-month periods ended July 3, 2016, and July 5, 2015, and June 29, 2014, respectively:

For the three months ended July 5, 2015,3, 2016, our cost of sales decreased $7.9$13.3 million (4.6%(8.2%) versus the comparable period in 2014.2015. As a percentage of sales, our costs of sales decreased to 60.1% for the second quarter of 2016 versus 61.6% for the second quarter of 2015. This improvement in gross profit margin occurred across all three of our geographic regions, with Asia-Pacific showing the largest percentage increase, followed by Europe and the Americas. The key factors in the gross margin improvement were (1) lower raw materials input costs (for the second quarter of 2016, our per-unit input costs are 3-5% lower on average than the comparable period in 2015 due to lower prices on petroleum-based raw materials), (2) a shift in product mix towards margin accretive products such as our skinny plank designs, and (3) better material usage and improved production efficiencies as we continue to implement and refine our lean manufacturing practices. These factors drove the decrease in cost of sales as percentage of sales, despite a 7% decline in production volume in the second quarter of 2016 compared with the second quarter last year.

For the six months ended July 3, 2016, our cost of sales decreased $28.9 million (9.2%) versus the comparable period in 2015. Currency fluctuationfluctuations had a favorable impact of less than 1% on cost of sales;the comparison; if currency rates had remained the same for the second quarter of 2015 versus that of the second quarter of 2014,year over year, our cost of sales would have been approximately $13$3.0 million higher.higher versus the first six months of 2015. As a percentage of sales, our cost of sales declined significantly to 61.6% for the second quarter of 2015 versus 65.3% for the second quarter of 2014. Gross profit margin improved across all three of our primary geographic regions, with the Americas showing the largest improvement versus 2014. The key factors in the improvement were (1) reduced raw material costs of 5-7% on a global level due to lower input prices and usage, (2) better absorption of fixed costs associated with higher production volumes, particularly in the Americas and Europe, (3) the normalization of operations in Australia and rebalancing of production in the Asia-Pacific region compared with the inefficiencies associated with the startup of the new facility in Australia in 2014, (4) continued implementation of lean manufacturing practices in our Americas business, and (5) the cost savings associated with our restructuring activities in the third quarter of 2014.

For the six months ended July 5, 2015, our cost of sales decreased $0.7 million (0.2%) versus the comparable period of 2014. Currency fluctuation had a favorable impact on cost of sales; if currency rates had remained the same for the first half of 2015 versus that of the first half of 2014, our cost of sales would have been approximately $23 million higher. As a percentage of sales, our costs of sales60.5% for the first six months of 2015 experienced a significant decline to2016, versus 62.7%, as compared to 65.6% for the comparablesame period last year. The improvement as a percentage of 2014. The reasons forsales took place across all of our geographic regions, with Asia-Pacific having the decline forlargest increase followed by Europe and the six month period are similarAmericas. Our decrease in cost of sales in absolute dollars was due to the reasons addressed above for the three month period:following factors: (1) reducedlower raw materials costs, as our per-unit input costs were down 4-6% during the first six months of 5-7%,2016 compared with the prior year period, primarily as a result of lower petroleum-based and related feedstock costs; (2) better material usage and improved production efficiencies as we continue to implement and refine lean manufacturing practices; (3) higher production volumes whichaverage selling prices in the Americas region; and (4) introduction of margin accretive products such as additional skinny plank designs. These factors led to greater absorptiondecreased cost of fixed costs, (3)sales as a percentage of sales, notwithstanding a 9% decline in production volume for the continued stabilizationfirst six months of 2016 compared with the supply chain and manufacturing footprint in the Asia-Pacific region, (4) improvements in manufacturing efficiencies, and (5) the impacts of our restructuring activities in 2014. The gross margin improvements accelerated during 2015, and as such, the improvement is more significant inprior year period.

For the three months ended July 5, 2015 versus the six month period ended July 5, 2015.

For the three month period ended July 5, 2015,3, 2016, our selling, general and administrative (“SG&A”) expenses increased $2.0decreased $0.7 million (3.0%(1.0%) versus the comparable period in 2015. Currency fluctuation hadThe decline in SG&A expenses was primarily due to savings of approximately $3.0 million in administrative costs, primarily as a favorable impact on selling, general and administrative expense; if currency rates had remained the same for the second quarterresult of 2015 versus that of the second quarter of 2014, our selling, general and administrative expenses would have been approximately $5 million higher. The largest driver of the increase in selling, general and administrative expenses versus the 2014 period is approximately $5.2lower performance-based incentive compensation this year. This decrease was somewhat mitigated by (1) $0.9 million of higher administrativeselling expenses, largely comprisedprimarily associated with new sales staff additions in the Americas division to continue targeting growth markets, and (2) $1.5 million of share-based payment expenses and incentive compensation amounts, as our projected performance is better in 2015 versus 2014. This increase was offset by lower selling andhigher marketing expenses down $1.4for planned initiatives to promote growth, including global branding, market development and new product introductions. The marketing expenses were higher globally, with the Americas region having the largest increase ($0.8 million) and Europe and Asia-Pacific each responsible for approximately $0.3 million and $1.7 million, respectively. These declines, however, were largely dueof the increase. Despite the lower SG&A expenses in absolute dollars, the decline in net sales led to the currency translation effects discussed above,an increase in SG&A expenses as in local currencies these expenditures remained relatively consistent year over year. Duea percentage of sales to the increased administrative expenses discussed above, our selling, general and administrative expenses increased to 25.8% of sales27.1% for the three months ended July 5, 2015, versus 25.3% of sales3, 2016, compared with 25.8% in the correspondingcomparable period in 2014. On a sequential basis, however, selling general and administrativeof 2015. Our SG&A expenses as a percentage of sales is lower,are down sequentially, however, as compared with 27.0%to 29.5% in the first quarter of 2015.2016.

For the six month periodmonths ended July 5, 2015,3, 2016, our selling, general and administrativeSG&A expenses increased $3.4$0.9 million (2.6%(0.7%) versus the comparable period in 2014. Currency fluctuation2015. Fluctuations in currency exchange rates had a positiveslight (less than 1%) negative impact on selling, general and administrative expenses; if currency rates had remained the samecomparison. As noted above, our SG&A expenses during the second quarter of 2016 declined as compared to the second quarter of 2015, so the overall increase for the first six months of 2015 versuscurrent year six-month period related entirely to the first six monthsquarter of 2014, our selling, general and administrative expenses would have been approximately $9 million higher.2016. The increase was largely due to higher administrative$4.3 million of increased marketing expenses as we continue to roll out global marketing, branding and product introduction platforms. Marketing expenses were up across all regions, with the Americas (up $2.1 million) followed by Europe (up $1.2 million) and Asia-Pacific (up $1.0 million). We also had an increase of $8.9$1.4 million largely comprised of share-based paymentin selling expenses, and incentive compensation amounts, as our projected performance is betteralmost entirely within the Americas region, for personnel additions in 2015 versus 2014.Thesekey markets. These increases were partially offset by lower marketing (down $3.3 million) and selling (down $1.7 million) costs. While currency impacts wereadministrative costs of $4.8 million, primarily as a result of lower performance-based incentive compensation this year. Due to the primary factoroverall increase in these declines, across all regions selling and marketingSG&A expenses, were downas well as a decline in sales, our SG&A expenses as a percentage of sales versusincreased to 28.2% for the first six months of 2014, dueended July 3, 2016, as compared to both higher sales as well as cost savings as a result of our restructuring actions which took place in the third quarter of 2014. Due to these initiatives, as a percentage of sales, selling, general and administrative expenses26.4% for the first six months of 2015 declined to 26.4%, versus 26.8% in the first six months of 2014.ended July 5, 2015.

Interest Expense

For the three month period ended July 5, 2015,3, 2016, our interest expense decreased $3.6$0.2 million to $1.8$1.6 million, from $5.4$1.8 million in the second quarter of 2014.2015. For the six month period ended July 5, 2015,3, 2016, our interest expense decreased $7.2$0.6 million to $3.7$3.1 million, from $10.9$3.7 million in the comparable period last year. The reason for the decreases was the debt refinancing activities we completed in the fourth quarter of 2014, in which we redeemed all of our $247.5 million ofwere due to lower daily average outstanding 7.625% Senior Notes and replaced them with borrowings under our Syndicated Credit Facility. This facility is comprisedFacility during the second quarter and first six months of a term loan2016 as well as a multi-currency revolving debt facility and incurs interest at a significantly lower rate thancompared to the 7.625% Senior Notes.corresponding periods of 2015.