ITEM2. 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 3, 2016,1, 2017, 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 3, 2016,April 2, 2017, and the comparable periodsperiod of 20152016 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 3, 2016,1, 2017, 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 3, 2016, we hadApril 2, 2017, net sales of $248.2were $221.1 million compared with net sales of $263.6 million in the second quarter last year. During the first six months of fiscal year 2016, we had net sales of $470.8 million, compared with net sales of $500.5$222.6 million in the first six months ofquarter last year. Fluctuations in currency exchange rates had smalla negative impactsimpact of approximately $2.3 million on our sales and operating income infor the 2016 reported periods,2017 first quarter 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 3, 2016.period.

During the secondfirst quarter of 2016, we had2017, net income of $20.7was $8.5 million, or $0.32$0.13 per diluted share, compared with net income of $21.7$12.9 million, or $0.33 per diluted share, in the second quarter of 2015. During the six months ended July 3, 2016, we had net income of $33.6 million, or $0.51 per diluted share, compared with net income of $34.0 million, or $0.51$0.20 per diluted share, in the first six months of 2015.

quarter last year. The first six months of 2016 were comprised of 26 weeks, while the first six months of 2015 were comprised of 27 weeks. (The additional week was in the first quarter of 2015.) This is2017 includes $7.3 million of restructuring and asset impairment charges as a factor in certaincontinuation of the comparisons discussed in this Item 2.plans announced for the fourth quarter of 2016, primarily relating to our closing of the majority of our FLOR retail stores.

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 JulyApril 2, 2017 and April 3, 2016, and July 5, 2015, respectively:

Net Sales

Below we provideis information regarding net sales, and analyzeanalysis of those results, for the three-month and six-month periods ended JulyApril 2, 2017, and April 3, 2016, and July 5, 2015, respectively.

For the quarter ended July 3, 2016,April 2, 2017, net sales decreased $15.4declined $1.5 million (5.9%(0.7%) versus the comparable period in 2015.2016. Currency fluctuations did not have a significanthad an approximately $2.3 million (1.1%) negative impact on first quarter 2017 sales compared to the comparison,first quarter of 2016. This negative impact was felt in Europe due to the weakness of the British Pound and Euro as compared to the prior year period, somewhat offset by a strengthening of the Euro versus the U.S. dollar was offset by the weakening of the Australian dollar versus the U.S. dollar. On a geographic basis, we experienced sales declinesincreased in the Americas (down 6%(up 1%),. Due to the currency impacts described above, sales in Europe (down 8% as reportedwere down 3% (in local currencies, however, sales in U.S. dollars and 9% in local currency) andEurope were up nearly 3%). In Asia-Pacific, (down 2%)sales were down 2.5%. In the Americas, the declinesales increase was largely attributable to our InterfaceServices business, where its largest retail customer delayed many projects untilin non-corporate office markets, with government and hospitality having the second half of 2016, alongside deferred purchasesmost significant advances, partially offset 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 in the second quarter of 2016 compared with the prior year period. In Europe, thea decline 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. We also experienced a small increase in sales in the Americas as a result of our entry into the modular resilient flooring market, segments,with a luxury vinyl tile (LVT) offering in the first quarter of 2017. Our FLOR residential business experienced a 7% increase, due to higher web-based sales in the quarter. In Europe, in local currencies, corporate office sales experienced a small increase, partially offset by increasesdeclines in all other market segmentsnon-office markets, with the retail segment (up 34%)showing the largest decline. Sales in Asia-Pacific were down as a result of softer conditions in Asia, which experienced an 11% decrease, with China being the most significant. Insignificant decline. This was partially offset by an increase in Australia (5% increase in U.S. dollars). The increase in Australia was aided by currency, as in local currency the increase in Australia was approximately 1%. Within the Asia-Pacific region, the decline was largely a function of softer sales performance in Australia (down 9% as reported in U.S. dollars and 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 region experienced an increase of 5%, with India and China having the most significant growth. Within the Asia-Pacific division, sales in the corporate office market segment were up 6%, but this was more than offset by a 25% decline in non-office segments, with education (down 39%) and hospitality (down 63%) representing the largest areas of decline.

For the six months ended July 3, 2016, net sales decreased $29.8 million (5.9%) versus the comparable period in 2015. Currency fluctuations had a negative impact on the comparison of approximately $4.3 million, or just under 1%. On a geographic basis, we experienced a decline of 6% in the Americas and 9% in Europe (in both U.S. dollars and local currency), while our sales in Asia-Pacific were up less than 1% in the first six months of 2016 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 exception of 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, the 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 decline in Australia of 6% as reported in U.S. dollars. 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 the corporate office segment, which comprises the majority of 8% forthe region’s sales. The decline was tempered by increased sales in non-office markets, with education showing the largest improvement versus the first six monthsquarter of 2016 was offset almost entirely by declines in the retail (down 54%), education (down 27%) and hospitality (down 49%) segments.2016.

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 JulyApril 2, 2017, and April 3, 2016, and July 5, 2015, respectively:

For the three monthsquarter ended July 3, 2016, ourApril 2, 2017, cost of sales decreased $13.3declined $2.6 million (8.2%(1.9%) versusas compared to the comparable periodfirst quarter of 2016. Currency rate changes had less than 1% impact on the comparison. The decrease in 2015. As a percentage of sales, our costs of sales decreasedwas partially due to 60.1%lower sales of 0.7% for the second quarterquarter. The remainder of 2016 versus 61.6%the decline in cost of sales for the second quarterperiod was a result 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 (forcompared to the secondfirst quarter of 2016, our per-unit input costs are 3-5% lower on average thanparticularly yarn prices, which comprise 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 aslargest percentage of sales, despite a 7% decline in production volumeour raw material input, and (2) productivity enhancements related to both our restructuring actions as well as process improvement centered around our manufacturing initiatives, particularly 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 fluctuations had a favorable impact of less than 1% on the comparison; if currency rates had remained the same year over year, our cost of sales would have been approximately $3.0 million higher versus the first six months of 2015.Americas and Europe. As a percentageresult of sales, ourthese factors, cost of sales declined to 60.5% for the first six months of 2016, versus 62.7% for the same period last year. The improvement60.3% as a percentage of sales took place across all of our geographic regions, with Asia-Pacific having the largest increase followed by Europe and the Americas. Our decrease in cost of sales in absolute dollars was due to the following factors: (1) lower raw materials costs, as our per-unit input costs were down 4-6% duringfor the first six monthsquarter of 20162017, compared with 61.1% for the prior yearcomparable 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 average selling prices in the Americas region; and (4) introduction of margin accretive products such as additional skinny plank designs. These factors led to decreased2016. We do, however, expect that cost of sales as a percentage of sales notwithstanding a 9% decline in production volumewill increase for the first six monthsbalance of 2016 compared2017 as (1) raw material prices are expected to increase beginning in the second quarter, and (2) with the prior year period.closure of the majority of FLOR retail stores, our cost of sales as a percentage of sales will increase as the FLOR retail sales typically generated higher gross margin compared to our commercial carpet business.

For the three monthsquarter ended July 3, 2016, ourApril 2, 2017, selling, general and administrative (“SG&A”) expenses decreased $0.7 million (1.0%) versus the comparable period in 2015. The decline in SG&A expenses was primarily due to savings of approximately $3.0 million in administrative costs, primarily as a result of lower performance-based incentive compensation this year. This decrease was somewhat mitigated by (1) $0.9 million of higher selling expenses, primarily associated with new sales staff additions in the Americas division to continue targeting growth markets, and (2) $1.5 million of higher marketing expenses for 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 of the increase. Despite the lower SG&A expenses in absolute dollars, the decline in net sales led to an increase in SG&A expenses as a percentage of sales to 27.1% for the three months ended July 3, 2016, compared with 25.8% in the comparable period of 2015. Our SG&A expenses as a percentage of sales are down sequentially, however, as compared to 29.5% in the first quarter of 2016.

For the six months ended July 3, 2016, our SG&A expenses increased $0.9declined $0.4 million (0.7%) versus the comparable period in 2015.2016. Fluctuations in currency exchange rates haddid not have a slight (less than 1%) negativesignificant impact on this comparison between periods. While the comparison. As noted above, ouroverall change in SG&A expenses during the second quarter of 2016 declinedwas not significant as compared to the second quarter of 2015, so the overall increase for the current year six-month period related entirely to the first quarter of 2016. The2016, there was an approximately $2 million total increase was due to $4.3 million of increased marketing expenses as we continue to roll out global marketing, brandingin incentive compensation 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 $1.4 million in selling expenses, almost entirely withinparticularly related to the Americas region, for personnel additions in key markets.rollout of our new LVT product offerings. These increases were entirely offset by lower administrative costs of $4.8 million, primarily as a result of lower performance-based incentive compensation this year. Duesavings from our transition to the overall increase in SG&A expenses,certain centralized functions, as well as a declinesavings from our restructuring actions in sales, our SG&A expenses asthe fourth quarter of 2016. As a percentage of sales, increased to 28.2%SG&A expenses remained consistent at 29.5% of sales for each of the six months ended July 3, 2016, as compared to 26.4% for the six months ended July 5, 2015.first quarters of 2017 and 2016.

Interest Expense

For the three monththree-month period ended July 3, 2016, ourApril 2, 2017, interest expense decreased $0.2increased by $0.1 million to $1.6 million, from $1.8versus $1.5 million infor the second quarter of 2015. For the six monththree-month period ended JulyApril 3, 2016, our interest expense decreased $0.6 million to $3.1 million, from $3.7 million in2016. The reason for the comparable period last year. The decreases were due to lowerincrease was higher daily average outstanding borrowings under our Syndicated Credit Facility during the secondfirst quarter and first six months of 2016 as2017 compared to the corresponding periodsfirst quarter of 2015.2016.

Liquidity and Capital Resources

General

At July 3, 2016,April 2, 2017, we had $88.4$80.0 million in cash and cash equivalents.cash. At that date, we had $192.5$181.3 million in term loan borrowings, $31.8$41.8 million of revolving loan borrowings and $4.0$2.6 million in letters of credit outstanding under the Syndicated Credit Facility. As of July 3, 2016,April 2, 2017, we could have incurred $214.2$205.6 million of additional borrowings under ourthe Syndicated Credit Facility.InFacility. In addition, we could have incurred an additional $14.7$9.8 million of borrowings under our other lines of credit facilities in place at other non-U.S. subsidiaries.

It is also important for you to consider that borrowings under our Syndicated Credit Facility comprise essentially all of our indebtedness, and that these borrowings are based on variable interest rates (as described above) that expose the Company to the risk that short-term interest rates may increase. For information regarding the current variable interest rates of these borrowings and the potential impact on our interest expense from hypothetical increases in short term interest rates, please see Note 4 in Part I, Item 1 of this report and the discussion under the heading “Interest Rate Risk” in Item 7A of our Annual Report on Form 10-K for the year ended January 3, 2016.

Analysis of Cash Flows

Apart fromWe exited the quarter ended April 2, 2017, with $80.0 million in cash, provided by operating activities, our primary sourcea decrease of $85.6 million during the first three months of the year. The decrease in cash was primarily a result of cash duringoutflows for financing activities, with the six months ended July 3, 2016 was $20.2most significant factors being (1) $50.5 million of revolving loancash used to repay borrowings under ourthe Syndicated Credit Facility. MostFacility including a required amortization payment of the revolving loan borrowings were made by our Australian subsidiary in Australian dollars and then converted into U.S. dollars, to take advantage of a strong Australian dollar and lock in a favorable exchange rate into U.S. dollars, which are used by that business for certain raw material purchases. Our primary uses$3.8 million, (2) $31.1 million of cash during the period were (1) $20.4used to repurchase and retire 1.6 million for a reductionshares of accounts payable and accrued expenses, (2) $12.8our outstanding common stock, (3) $8.5 million for capital expenditures, (3) $10.4and (4) $3.8 million for stock repurchases,the payment of dividends. These uses were partially offset by $7.4 million of cash generated by operating activities. The factors driving the cash from operations were (1) $8.5 million of net income for the period, and (4) $10.0(2) $11.7 of cash received due to a reduction in accounts receivable. These inflows were partially offset by operating cash outflows of $18.6 million used to purchase inventory and $3.3 million used for repayments of borrowings under our Syndicated Credit Facility.an increase in prepaid expenses and other assets.

IITEMTEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

OurThe 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 3, 20161, 2017, under Item 7A of that Form 10-K. OurThe discussion here focuses on the periodquarter ended July 3, 2016,April 2, 2017, 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 3, 2016,April 2, 2017, we recognized a $1.1an $11.0 million increase in our foreign currency translation adjustment account compared to January 3, 2016,1, 2017, primarily because of the weakeningstrengthening of the U.S. dollar against certain foreign currencies, particularly the Euro and Australian dollar.dollar against the U.S. dollar as of the end of the first quarter of 2017 compared to the end of 2016.

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.

Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Item 7A of our Annual Report on Form 10-K for the year ended January 3, 2016.1, 2017.

As of July 3, 2016,April 2, 2017, 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 $11.7$8.5 million or an increase in the fair value of our financial instruments of $14.3$10.4 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.

ITITEMEM 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 ChairmanPresident 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 ChairmanPresident 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.

PARTIIPART II - OTHER INFORMATION

ITEM 1.ITEM1. LEGAL PROCEEDINGSPROCEEDINGS

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.