tile20131002_10q.htm

 

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 September 29, 2013

 

Commission File Number 001-33994

 

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

 

GEORGIA

 

58-1451243

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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 ☑    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):

 

Large accelerated filer ☑

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 ☑

 

Shares outstanding of each of the registrant’s classes of common stock at November 1, 2013:

 

 

Class

 

Number of Shares

 
 

Common Stock, $.10 par value per share

 

66,286,726

 

 

 
 

 

 

INTERFACE, INC.

 

INDEX

 

 

 

PAGE

PART I.

FINANCIAL INFORMATION

 
 

Item 1.

Financial Statements

3

       
   

Consolidated Condensed Balance Sheets – September 29, 2013 and December 30, 2012

3

       
   

Consolidated Condensed Statements of Operations – Three Months and NineMonths Ended September 29, 2013 and September 30, 2012

4

       
   

Consolidated Statements of Comprehensive Income (Loss) – Three Months and Nine Months Ended September 29, 2013 and September 30, 2012

5

       
   

Consolidated Condensed Statements of Cash Flows – Nine Months Ended September 29, 2013 and September 30, 2012

6

       
   

Notes to Consolidated Condensed Financial Statements

7

       
 

Item 2.

Management’s Discussion and Analysis of Financial Conditionand Results of Operations

22

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

 

Item 4.

Controls and Procedures

27

     

PART II.

OTHER INFORMATION

 
 

Item 1.

Legal Proceedings

28

 

Item 1A.

Risk Factors

28

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

Item 3.

Defaults Upon Senior Securities

28

 

Item 4.

Mine Safety Disclosures

28

 

Item 5.

Other Information

28

 

Item 6.

Exhibits

29

  

 
 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

 

   

Sept. 29, 2013

   

December 30, 2012

 
   

(UNAUDITED)

         

ASSETS

               

CURRENT ASSETS:

               

Cash and Cash Equivalents

  $ 89,382     $ 90,533  

Accounts Receivable, net

    141,101       137,313  

Inventories

    162,845       141,176  

Prepaid Expenses and Other Current Assets

    30,121       51,358  

Deferred Income Taxes

    9,276       10,271  

TOTAL CURRENT ASSETS

    432,725       430,651  
                 

PROPERTY AND EQUIPMENT, less accumulated depreciation

    194,488       165,725  

DEFERRED TAX ASSET

    56,619       62,856  

GOODWILL

    77,147       75,672  

OTHER ASSETS

    57,410       54,463  

TOTAL ASSETS

  $ 818,389     $ 789,367  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

CURRENT LIABILITIES:

               

Accounts Payable

  $ 54,196     $ 56,292  

Accrued Expenses

    105,176       97,424  

Current Portion of Long Term Debt

    8,140       8,110  

TOTAL CURRENT LIABILITIES

    167,512       161,826  
                 

SENIOR NOTES

    275,000       275,000  

DEFERRED INCOME TAXES

    7,748       7,339  

OTHER

    44,960       49,500  

TOTAL LIABILITIES

    495,220       493,665  
                 

Commitments and Contingencies

               
                 

SHAREHOLDERS’ EQUITY:

               

Preferred Stock

    0       0  

Common Stock

    6,627       6,606  

Additional Paid-In Capital

    371,757       366,677  

Retained Earnings (Deficit)

    10,879       (16,746 )

Accumulated Other Comprehensive Loss – Foreign Currency Translation Adjustment

    (30,766 )     (25,344 )

Accumulated Other Comprehensive Loss – Pension Liability

    (35,328 )     (35,491 )

TOTAL SHAREHOLDERS’ EQUITY

    323,169       295,702  
    $ 818,389     $ 789,367  

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 

   

THREE MONTHS ENDED

   

NINE MONTHS ENDED

 
                                 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
                                 

NET SALES

  $ 254,448     $ 242,863     $ 708,300     $ 682,425  

Cost of Sales

    162,695       160,002       459,062       450,344  
                                 

GROSS PROFIT ON SALES

    91,753       82,861       249,238       232,081  

Selling, General and Administrative Expenses

    63,918       58,014       185,606       168,134  

Restructuring and Asset Impairment Charge

    0       770       0       17,086  

Losses Related to Australia Fire

    0       980       0       980  

OPERATING INCOME

    27,835       23,097       63,632       45,881  
                                 

Interest Expense

    6,303       6,330       18,368       19,132  

Other Expense

    114       136       519       824  
                                 

INCOME BEFORE INCOME TAX EXPENSE

    21,418       16,631       44,745       25,925  

Income Tax Expense

    6,461       5,564       11,826       10,418  
                                 

Income from Continuing Operations

    14,957       11,067       32,919       15,507  
                                 

Income (Loss) from Discontinued Operations, Net of Tax

    0       (16,840 )     0       (16,956 )
                                 

NET INCOME (LOSS)

  $ 14,957     $ (5,773 )   $ 32,919     $ (1,449 )
                                 

Earnings (Loss) Per Share – Basic

                               

Continuing Operations

  $ 0.23     $ 0.17     $ 0.50     $ 0.24  

Discontinued Operations

    0.00       (0.26 )     0.00       (0.26 )

Earnings (Loss) Per Share – Basic

  $ 0.23     $ (0.09 )   $ 0.50     $ (0.02 )
                                 

Earnings (Loss) Per Share – Diluted

                               

Continuing Operations

  $ 0.23     $ 0.17     $ 0.50     $ 0.24  

Discontinued Operations

    0.00       (0.26 )     0.00       (0.26 )

Earnings (Loss) Per Share – Diluted

  $ 0.23     $ (0.09 )   $ 0.50     $ (0.02 )
                                 

Common Shares Outstanding – Basic

    66,183       65,957       66,160       65,703  

Common Shares Outstanding – Diluted

    66,317       66,129       66,289       65,802  

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

(IN THOUSANDS)

 

   

THREE MONTHS ENDED

   

NINE MONTHS ENDED

 
                                 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
                                 

Net Income (Loss)

  $ 14,957     $ (5,773 )   $ 32,919     $ (1,449 )

Other Comprehensive Income (Loss), Foreign

                               

Currency Translation Adjustment

    7,503       9,411       (5,422 )     4,549  

Other Comprehensive Income (Loss), Pension Liability Adjustment

    (1,404 )     (1,240 )     163       (1,274 )

Comprehensive Income

  $ 21,056     $ 2,398     $ 27,660     $ 1,826  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

(IN THOUSANDS)

 

   

NINE MONTHS ENDED

 
   

Sept. 29, 2013

   

Sept. 30, 2012

 

OPERATING ACTIVITIES:

               

Net Income (Loss)

  $ 32,919     $ (1,449 )

Income (Loss) from Discontinued Operations, Net of Tax

    0       (16,956 )

Income from Continuing Operations

    32,919       15,507  

Adjustments to Reconcile Net Income (Loss) to Cash Provided by Operating Activities:

               

Depreciation and Amortization

    18,625       19,173  

Stock Compensation Amortization Expense

    5,071       3,193  

Deferred Income Taxes and Other

    5,032       (9,975 )

Cash Received from Insurance Company

    10,648       0  

Working Capital Changes:

               

Accounts Receivable

    (4,220 )     29,633  

Inventories

    (22,842 )     (6,737 )

Prepaid Expenses and Other Current Assets

    (14,481 )     (7,544 )

Accounts Payable and Accrued Expenses

    (3,513 )     654  
                 

CASH PROVIDED BY OPERATING ACTIVITIES:

    27,239       43,904  
                 

INVESTING ACTIVITIES:

               

Capital Expenditures

    (47,939 )     (28,817 )

Net Proceeds from Sale of Bentley Prince Street

    0       32,174  

Cash Received from Insurance Company

    23,024       10,000  

Other

    1,875       (1,527 )
                 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:

    (23,040 )     11,830  
                 

FINANCING ACTIVITIES:

               

Repurchase of Senior Subordinated Notes

    0       (11,477 )

Proceeds from Issuance of Common Stock

    1,163       293  

Dividends Paid

    (5,294 )     (4,276 )
                 

CASH USED IN FINANCING ACTIVITIES:

    (4,131 )     (15,460 )
                 

Net Cash Provided By Operating, Investing and Financing Activities

    68       40,274  

Effect of Exchange Rate Changes on Cash

    (1,219 )     753  
                 

CASH AND CASH EQUIVALENTS:

               

Net Change During the Period

    (1,151 )     41,027  

Balance at Beginning of Period

    90,533       50,624  
                 

Balance at End of Period

  $ 89,382     $ 91,651  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

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 December 30, 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 December 30, 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 10, the Company has sold its Bentley 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:

 

   

Sept. 29, 2013

   

December 30, 2012

 
   

(In thousands)

 

Finished Goods

  $ 104,968     $ 87,094  

Work in Process

    10,513       7,030  

Raw Materials

    47,364       47,052  
    $ 162,845     $ 141,176  

 

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.

 

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:

 

 

 

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 

Earnings Per Share

                               
                                 

Basic Earnings Per Share from Continuing Operations:

                               

Distributed Earnings

  $ 0.03     $ 0.03     $ 0.08     $ 0.07  

Undistributed Earnings

    0.20       0.14       0.42       0.17  

Total

  $ 0.23     $ 0.17     $ 0.50     $ 0.24  
                                 

Diluted Earnings Per Share from Continuing Operations:

                               

Distributed Earnings

  $ 0.03     $ 0.03     $ 0.08     $ 0.07  

Undistributed Earnings

    0.20       0.14       0.42       0.17  

Total

  $ 0.23     $ 0.17     $ 0.50     $ 0.24  
                                 

Earnings (Loss) Per Share

                               

Continuing Operations

  $ 0.23     $ 0.17     $ 0.50     $ 0.24  

Discontinued Operations

    0.00       (0.26 )     0.00       (0.26 )

Earnings (Loss) Per Share

  $ 0.23     $ (0.09 )   $ 0.50     $ (0.02 )

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
           

(In millions)

         

Net Income (Loss)

  $ 0.4     $ (0.2 )   $ 0.9     $ (0.1 )

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
           

(In thousands)

         

Weighted Average Shares Outstanding

    64,446       63,983       64,423       63,729  

Participating Securities

    1,737       1,974       1,737       1,974  

Shares for Basic Earnings Per Share

    66,183       65,957       66,160       65,703  

Dilutive Effect of Stock Options

    134       172       129       99  

Shares for Diluted Earnings Per Share

    66,317       66,129       66,289       65,802  

 

The following chart depicts options to purchase shares of common stock that were excluded from the calculation of diluted EPS as their inclusion would be anti-dilutive:

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
           

(In thousands)

         

Shares Excluded

    0       83       0       264  

 

NOTE 4 – SEGMENT INFORMATION

 

Based on applicable accounting standards, the Company has determined that it has three operating segments – namely, the Americas, Europe and Asia-Pacific geographic regions. Pursuant to accounting standards, the Company has aggregated the three operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment. In August 2012, the Company sold its Bentley Prince Street business segment (see note 10 for further information). Accordingly the Company has included the operations of the former Bentley Prince Street segment in discontinued operations, where applicable.

 

 

 

  

NOTE 5 – LONG-TERM DEBT

 

7.625% Senior Notes

 

As of both September 29, 2013, and September 30, 2012, the Company had outstanding $275 million in 7.625% Senior Notes due 2018 (the “7.625% Senior Notes”). The estimated fair value of the 7.625% Senior Notes as of September 29, 2013, and September 30, 2012, based on then current market prices, was $298.4 million and $299.8 million, respectively.

 

On October 10, 2013, subsequent to the end of the third quarter, the Company elected to redeem $27.5 million in aggregate principal amount outstanding of these notes at a price equal to 103% of the principal amount of the notes redeemed, plus accrued interest to the redemption date. The redemption date will be November 27, 2013.

 

11.375% Senior Secured Notes

 

As of both September 29, 2013, and September 30, 2012, the Company had outstanding $8.1 million in 11.375% Senior Secured Notes due 2013 (the “11.375% Senior Secured Notes”). The estimated fair value of the 11.375% Senior Secured Notes as of both September 29, 2013, and September 30, 2012, based on then current market prices, was $8.1 million. Subsequent to the end of the third quarter, the Company repaid these remaining notes in full at maturity.

 

Credit Facilities

 

On October 22, 2013, the Company entered into a new Syndicated Facility Agreement among the Company, certain wholly-owned foreign subsidiaries of the Company as borrowers, certain subsidiaries of the Company as guarantors, Bank of America, N.A. as Administrative Agent, The Royal Bank of Scotland, as Syndication Agent, SunTrust Bank and Regions Bank, as Co-Documentation Agents, and the other lenders party thereto. Pursuant to the Syndicated Facility Agreement, the lenders provide to the Company and certain of its subsidiaries a multicurrency revolving credit facility (the “Facility”) of up to $200 million at any one time. The key features of the Facility are as follows:

 

 

The Facility matures on October 22, 2018.

 

 

The Facility includes (i) a multicurrency revolving loan facility made available to the Company and its principal subsidiaries in Europe and Australia not to exceed $190 million in the aggregate at any one time outstanding, and (ii) a revolving loan facility made available to the Company’s principal subsidiary in Thailand not to exceed the equivalent of $10 million in the aggregate at any one time outstanding. A sublimit of $40 million exists for the issuance of letters of credit under the Facility.

 

 

Advances under the Facility are secured by a first-priority lien on substantially all of the Company’s assets and the assets of each of its material domestic subsidiaries, which have guaranteed the Facility.

 

 

The Facility contains financial covenants (specifically, a consolidated net leverage ratio and a consolidated interest coverage ratio) that must be met as of the end of each fiscal quarter.

 

 

The Company has the option to increase the multicurrency loan facility by up to $150 million (or $250 million if the proceeds of the increase are used to pay off all remaining 7.625% Senior Notes), subject to the receipt of lender commitments for the increase and the satisfaction of certain other conditions.

 

Interest Rates and Fees. Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 1.50% over the applicable base interest rate (which is defined as the greatest of the prime rate, a specified federal funds rate plus 0.50%, or a specified LIBOR rate), depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 2.50% over the applicable LIBOR rate. In addition, the Company pays a commitment fee ranging from 0.20% to 0.35% per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.

 

 

 

  

Covenants. The Facility contains standard and customary covenants for agreements of this type that, among other things, limit the Company’s and its subsidiaries’ ability to:

 

 

create or incur liens on assets;

 

make acquisitions of or investments in businesses (in excess of certain specified amounts);

 

incur indebtedness or contingent obligations;

 

sell or dispose of assets (in excess of certain specified amounts);

 

pay dividends or repurchase the Company’s stock (in excess of certain specified amounts);

 

repay other indebtedness prior to maturity unless the Company meets certain conditions; and

 

enter into sale and leaseback transactions.

 

The Facility also requires the Company to remain in compliance with the following financial covenants as of the end of each fiscal quarter, based on the Company’s consolidated results for the year then ended:

 

 

Consolidated Net Leverage Ratio: Must be no greater than (i) 4.50:1.00 through and including the fiscal quarter ending December 28, 2014, (ii) 4.00:1.00 from and including the fiscal quarter ending April 5, 2015 through and including the fiscal quarter ending January 3, 2016, and (iii) 3.75:1.00 for each fiscal quarter thereafter.

 

Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00 as of the end of any fiscal quarter.

 

The revolving credit facility also includes various reporting, affirmative and negative covenants, and other provisions that restrict the Company’s and its subsidiaries’ ability to take certain actions.

 

Events of Default. If the Company breaches or fails to perform any of the affirmative or negative covenants under the Facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc. or certain subsidiaries, or if the Company breaches or fails to perform any covenant or agreement contained in any instrument relating to any of the Company’s other indebtedness exceeding $20 million), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the lenders’ Administrative Agent may, and upon the written request of a specified percentage of the lender group shall:

 

 

declare all commitments of the lenders under the facility terminated;

 

declare all amounts outstanding or accrued thereunder immediately due and payable; and

 

exercise other rights and remedies available to them under the agreement and applicable law.

 

Collateral. Pursuant to a Security and Pledge Agreement executed on the same date, the Facility is secured by substantially all of the assets of the Company and its domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of the Company’s domestic subsidiaries and up to 65% of the stock of its first-tier material foreign subsidiaries. If an event of default occurs under the Facility, the lenders’ Administrative Agent may, upon the request of a specified percentage of lenders, exercise remedies with respect to the collateral, including, in some instances, foreclosing mortgages on real estate assets, taking possession of or selling personal property assets, collecting accounts receivables, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries.

 

In connection with the execution of the Syndicated Facility Agreement, the Company terminated (i) the Seventh Amended and Restated Credit Agreement, dated as of June 24, 2011, among the Company (and certain direct and indirect subsidiaries), the lenders listed therein, Wells Fargo Bank, National Association and Bank of America, N.A., which provided a $100 million domestic revolving credit facility; and (ii) the Credit Agreement, executed on April 24, 2009, among Interface Europe B.V. (and certain of its subsidiaries) and the Royal Bank of Scotland N.V. (as successor to ABN AMRO Bank N.V.), as amended, which provided a credit facility for borrowings and bank guarantees of up to €20.0 million. As of September 29, 2013, there were zero borrowings and $3.6 million in letters of credit outstanding under the then-existing domestic revolving credit facility, and the Company could have incurred $71.4 million of additional borrowings under that facility. As of September 29, 2013, there were zero borrowings under the then-existing European credit facility, and the Company could have incurred €20 million (approximately $27.1 million) of additional borrowings under that facility.

 

 

At closing, the Company had no borrowings outstanding under the Facility, and had $7.6 million in letters of credit outstanding under the Facility.

 

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $17.9 million of lines of credit available. As of September 29, 2013, 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 
 

 

  

During the first nine months of 2013 and 2012, the Company recognized stock option compensation costs of $0.1 million and $0.5 million, respectively. In the third quarters of 2013 and 2012, the Company recognized stock option compensation costs of $0.1 million and $0.1 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at September 29, 2013, approximated $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 September 29, 2013, as well as activity during the nine months then ended:

 

   

Shares

   

Weighted Average

Exercise Price

 

Outstanding at December 30, 2012

    393,500     $ 9.12  

Granted

    0       0  

Exercised

    129,000       8.65  

Forfeited or canceled

    8,500       2.71  

Outstanding at September 29, 2013

    256,000     $ 8.64  
                 

Exercisable at September 29, 2013

    251,000     $ 8.56  

 

At September 29, 2013, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $2.8 million and $2.8 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 nine months of fiscal years 2013 and 2012 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period presented.

 

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

 
   

(In millions)

 

Proceeds from stock options exercised

  $ 1.2     $ 0.3  

Intrinsic value of stock options exercised

    1.2       0.3  

 

Restricted Stock Awards

 

During the nine months ended September 29, 2013, and September 30, 2012, the Company granted restricted stock awards for 670,000 and 573,500 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 $5.0 million and $3.2 million for the nine months ended September 29, 2013, and September 30, 2012, 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.

 

 
11 

 

  

The following table summarizes restricted stock activity as of September 29, 2013, and during the nine months then ended:

 

   

Shares

   

Weighted Average

Grant Date

Fair Value

 

Outstanding at December 30, 2012

    1,973,500     $ 14.79  

Granted

    670,000       16.23  

Vested

    405,000       14.65  

Forfeited or canceled

    501,500       14.05  

Outstanding at September 29, 2013

    1,737,000     $ 15.57  

 

As of September 29, 2013, the unrecognized total compensation cost related to unvested restricted stock was approximately $13.7 million. That cost is expected to be recognized by the end of 2015.

 

For the nine months ended September 29, 2013, and September 30, 2012, the Company recognized tax benefits with regard to restricted stock of $2.0 million and $0.5 million, respectively.

 

 

NOTE 7 – EMPLOYEE BENEFIT PLANS

 

The following tables provide the components of net periodic benefit cost for the three-month and nine-month periods ended September 29, 2013, and September 30, 2012, respectively:

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 

Defined Benefit Retirement Plan (Europe) 

 

(In thousands)

   

(In thousands)

 
             

Service cost

  $ 212     $ 110     $ 632     $ 339  

Interest cost

    2,391       2,525       7,147       7,611  

Expected return on assets

    (2,488 )     (2,797 )     (7,438 )     (8,435 )

Amortization of prior service costs

    22       12       66       38  

Recognized net actuarial losses

    243       230       727       690  

Net periodic benefit cost

  $ 380     $ 80     $ 1,134     $ 243  

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 

Salary Continuation Plan (SCP) 

 

(In thousands)

   

(In thousands)

 
             

Service cost

  $ 134     $ 113     $ 401     $ 339  

Interest cost

    249       254       748       761  

Amortization of prior service cost

    12       12       36       36  

Amortization of loss

    110       67       331       201  

Net periodic benefit cost

  $ 505     $ 446     $ 1,516     $ 1,337  

 

 

NOTE 8 – 2012 RESTRUCTURING CHARGES

 

In the first quarter of 2012, the Company committed to a 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 consisted 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 was 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. In the third and fourth quarters of 2012, the Company recorded additional charges of $0.8 million and $2.3 million, respectively, of cash severance expenses related to the finalization of this plan for its European operations. As a result of these restructuring charges, a reduction of approximately 145 employees occurred.

 

 
12 

 

  

A summary of these restructuring activities is presented below:

 

   

Total

Restructuring

Charge

   

Costs Incurred

in 2012

   

Costs Incurred

in 2013

   

Balance at

Sept. 29, 2013

 
   

(In thousands)

 

Workforce Reduction

  $ 8,465     $ 5,205     $ 3,134     $ 126  

Fixed Asset Impairment

    9,364       9,364       0       0  

Other Related Exit Costs

    1,596       1,034       198       364  

 

 

NOTE 9 – 2011 RESTRUCTURING 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 $5.8 million in the fourth quarter of 2011. The majority of this charge ($5.0 million) related to the severance of approximately 90 employees in Europe, Asia and the United States. The remainder of the charge ($0.8 million) related to contract termination and fixed asset impairment costs. Approximately $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

   

Costs Incurred

in 2013

   

Balance at

Sept. 29, 2013

 
   

(In thousands)

 

Workforce Reduction

  $ 4,979     $ 867     $ 3,450     $ 133     $ 529  

Fixed Asset Impairment

    776       776       0       0       0  

 

 

NOTE 10 – DISCONTINUED OPERATIONS

 

In July of 2012, the Company entered into an agreement to sell its Bentley 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 $33.7 million, after working capital and certain other adjustments. The major classes of 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.

 

Loss from discontinued operations, net of tax, for the third quarter of 2012 was comprised of the following after-tax amounts: (1) $8.6 million of loss on disposal; (2) $5.9 million of costs to sell the operations; and (3) $2.3 million of non-disposal loss from the discontinued operations.

 

Loss from discontinued operations, net of tax, for the nine months ended September 30, 2012 was comprised of the following after-tax amounts: (1) $8.6 million of loss on disposal; (2) $5.9 million of costs to sell the operations; and (3) $2.5 million of non-disposal loss from the discontinued operations.

 

Summary operating results for the above-described discontinued operations were as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 29, 2013

   

Sept. 30, 2012

   

Sept. 29, 2013

   

Sept. 30, 2012

 
   

(In thousands)

   

(In thousands)

 

Net sales

  $ 0     $ 9,210     $ 0     $ 57,017  

Income (loss) on operations before taxes on income

    0       (25,875 )     0       (26,062 )

Tax expense (benefit)

    0       (9,035 )     0       (9,106 )

Income (loss) on operations, net of tax

    0       (16,840 )     0       (16,956 )

 

 

 
13 

 

  

As of September 29, 2013 and December 30, 2012, there were no assets or liabilities related to the above-described discontinued operations that were held for sale.

 

 

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash payments for interest amounted to $11.6 million and $12.8 million for the nine months ended September 29, 2013, and September 30, 2012, respectively. Income tax payments amounted to $7.1 million and $9.1 million for the nine months ended September 29, 2013, and September 30, 2012, respectively.

 

 

NOTE 12 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, or similar tax credit carryforward, exists. This standard clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax benefit is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be netted with the deferred tax asset. The amendments in this standard are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the impact that adoption of this standard will have on the determination or reporting of its financial results.

 

 

NOTE 13 – INCOME TAXES

 

In the first quarter of 2013, the Company executed advance pricing agreements for tax years 2006 through 2011 with the Canada Revenue Agency and the U.S. Internal Revenue Service in relation to the U.S. bilateral advanced pricing agreement filed in 2008. As a result of executing the advance pricing agreements, the Company was able to reduce its liability for unrecognized tax benefits in the first quarter of 2013 by $1.9 million. This benefit has been included in the “Income Tax Expense (Benefit)” line of the Company’s consolidated condensed statement of operations for the nine months ended September 29, 2013.

 

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 nine months of 2013, due largely to the resolution of the bilateral advanced pricing agreement discussed above, the Company decreased its liability for unrecognized tax benefits by $1.9 million. As of September 29, 2013, the Company had accrued approximately $23.3 million for unrecognized tax benefits.

 

 

 
14 

 

  

NOTE 14 – FIRE AT AUSTRALIAN MANUFACTURING FACILITY

 

 

On July 20, 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 extensive damage and was rendered inoperable. The Picton facility served the Company’s customers throughout Australia and New Zealand. Since the fire, the Company has utilized adequate production capacity at its manufacturing facilities in Thailand, China and elsewhere to meet customer demand typically serviced from Picton. The Company has business interruption and property damage insurance. The Company is in the process of building a new manufacturing facility in Minto, Australia and expects it to become operational in January 2014.

 

Since the fire, the Company has recorded charges of approximately $25.0 million ($2.6 million in 2013) for impairment of fixed assets related to the fire, and has incurred approximately $31.8 million of excess production costs related to the fire, as it has utilized other facilities to service customers in the Australia and New Zealand markets. As of September 29, 2013, the Company has determined that the receipt of reimbursement of these expenses from its insurer is probable in accordance with its insurance policies and has therefore recorded a receivable for these items. As of September 29, 2013, the Company had received $54.9 million of reimbursement from the insurance company related to the fire 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

  $ 25.0  

Incremental payroll costs

    17.9  

Incremental shipping costs

    7.6  

Other incremental costs

    6.3  

Total incurred costs through September 29, 2013

  $ 56.8  
         

Insurance recovery receivable

  $ 1.9  

Insurance recoveries already received

  $ 54.9  

 

The receivable related to this claim is included in prepaid expenses and other current assets in our consolidated condensed balance sheet.

 

The Company also has made an additional claim for loss of profits related to the fire. The amount of this claim is approximately $7.0 million and relates to loss of profits from the date of the fire through the second quarter of 2013. The Company continues to gather information related to additional insurance claims for loss of profits as a result of the fire. As of September 29, 2013, the Company had not recorded any receivables or amounts for loss of profits, but expects to do so at a later date as information and analysis become more complete and recovery becomes probable.

 

 

NOTE 15 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME

 

During the first nine months of 2013, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $1.1 million related to the Company’s defined retirement benefit plan and salary continuation plan. These reclassifications were included in the selling, general and administrative expenses line item of the Company’s consolidated condensed statement of operations.

 

 

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 11.375% Senior Secured Notes due 2013 and its 7.625% Senior Notes due 2018. These guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission. The Guarantor Subsidiaries are 100% owned by the Company.

  

 
15 

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2013

 

 

   

GUARANTOR

SUBSIDIARIES

   

NON-

GUARANTOR

SUBSIDIARIES

   

INTERFACE, INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND  ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTALS

 
   

(In thousands)

 

Net sales

  $ 174,237     $ 122,538     $ 0     $ (42,327 )   $ 254,448  

Cost of sales

    125,400       79,622       0       (42,327 )     162,695  

Gross profit on sales

    48,837       42,916       0       0       91,753  

Selling, general and administrative expenses

    26,646       29,227       8,045       0       63,918  

Operating income (loss)

    22,191       13,689       (8,045 )     0       27,835  

Interest/other expense

    7,456       2,655       (3,694 )     0       6,417  

Income before taxes on income and equity in income of subsidiaries

    14,735       11,034       (4,351 )     0       21,418  

Income tax expense

    4,445       3,329       (1,313 )     0       6,461  

Equity in income (loss) of subsidiaries

    0       0       17,995       (17,995 )     0  

Income (loss) from continuing operations

    10,290       7,705       14,957       (17,995 )     14,957  

Income (loss) from discontinued operations (net of tax)

    0       0       0       0       0  

Net income (loss)

  $ 10,290     $ 7,705     $ 14,957     $ (17,995 )   $ 14,957  

 

 

 
16 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2013

 

   

GUARANTOR

SUBSIDIARIES

   

NON-

GUARANTOR

SUBSIDIARIES

   

INTERFACE,

INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND

ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTALS

 
   

(In thousands)

 

Net sales

  $ 470,391     $ 351,167     $ 0     $ (113,258 )   $ 708,300  

Cost of sales

    339,192       233,128       0       (113,258 )     459,062  

Gross profit on sales

    131,199       118,039       0       0       249,238  

Selling, general and administrative expenses

    77,095       84,461       24,050       0       185,606  

Operating income (loss)

    54,104       33,578       (24,050 )     0       63,632  

Interest/other expense

    21,310       7,585       (10,008 )     0       18,887  

Income (loss) before taxes on income and equity in income of subsidiaries

    32,794       25,993       (14,042 )     0       44,745  

Income tax expense

    8,452       6,151       (2,777 )     0       11,826  

Equity in income (loss) of subsidiaries

    0       0       44,184       (44,184 )     0  

Income (loss) from continuing operations

    24,342       19,842       32,919       (44,184 )     32,919  

Net income (loss)

  $ 24,342     $ 19,842     $ 32,919     $ (44,184 )   $ 32,919  

 

 

 
17 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE

INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2013

 

 

   

GUARANTOR

SUBSIDIARIES

   

NON-

GUARANTOR

SUBSIDIARIES

   

INTERFACE, INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTAL

 
   

(In thousands)

 

Net Income (loss)

  $ 10,290     $ 7,705     $ 14,957     $ (17,995 )   $ 14,957  

Currency Translation Adjustment

    (98 )     7,360       241       0       7,503  

Pension Liability Adjustment

    0       (1,478 )     74       0       (1,404 )

Comprehensive Income (Loss)

  $ 10,192     $ 13,587     $ 15,272     $ (17,995 )   $ 21,056  

 

 
18 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE

INCOME FOR THE NINE MONTHS ENDED SEPT 29, 2013

 

 

   

GUARANTOR

SUBSIDIARIES

   

NON- GUARANTOR

SUBSIDIARIES

   

INTERFACE, INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTAL

 
   

(In thousands)

 

Net Income (loss)

  $ 24,342     $ 19,842     $ 32,919     $ (44,184 )   $ 32,919  

Currency Translation Adjustment

    (313 )     (5,564 )     455       0       (5,422 )

Pension Liability Adjustment

    0       (57 )     220       0       163  

Comprehensive Income (Loss)

  $ 24,029     $ 14,221     $ 33,594     $ (44,184 )   $ 27,660  

 

19 
 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

SEPTEMBER 29, 2013

 

   

GUARANTOR SUBSIDIARIES

   

NON-

GUARANTOR

SUBSIDIARIES

   

INTERFACE, INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTALS

 
   

(In thousands)

 

ASSETS

                                       

Current assets:

                                       

Cash and cash equivalents

  $ 2,556     $ 43,783     $ 43,043     $ 0     $ 89,382  

Accounts receivable

    55,596       84,880       625       0       141,101  

Inventories

    79,210       83,635       0       0       162,845  

Prepaids and deferred income taxes

    5,323       19,681       14,393       0       39,397  

Total current assets

    142,685       231,979       58,061       0       432,725  

Property and equipment less accumulated depreciation

    81,129       110,413       2,946       0       194,488  

Investment in subsidiaries

    576,326       185,033       (102,133 )     (659,226 )     0  

Goodwill

    6,542       70,605       0       0       77,147  

Other assets

    1,588       9,323       103,118       0       114,029  
    $ 808,270     $ 607,353     $ 61,992     $ (659,226 )   $ 818,389  
                                         

LIABILITIES AND SHAREHOLDERS’ EQUITY

                                       

Current liabilities

  $ 53,865     $ 84,537     $ 29,110     $ 0     $ 167,512  

Senior notes

    0       0       275,000       0       275,000  

Deferred income taxes

    0       11,171       (3,423 )     0       7,748  

Other

    15       (465 )     45,410       0       44,960  

Total liabilities

    53,880       95,243       346,097       0       495,220  
                                         

Common stock

    94,145       102,199       6,627       (196,344 )     6,627  

Additional paid-in capital

    249,302       12,525       371,757       (261,827 )     371,757  

Retained earnings (deficit)

    413,199       451,183       (652,448 )     (201,055 )     10,879  

Foreign currency translation adjustment

    (2,256 )     (22,255 )     (6,255 )     0       (30,766 )

Pension liability

    0       (31,542 )     (3,786 )     0       (35,328 )
    $ 808,270     $ 607,353     $ 61,992     $ (659,226 )   $ 818,389  

 

 

 20
 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS

ENDED SEPTEMBER 29, 2013

 

   

GUARANTOR

SUBSIDIARIES

   

NON-

GUARANTOR

SUBSIDIARIES

   

INTERFACE,

INC.

(PARENT

CORPORATION)

   

CONSOLIDATION

AND ELIMINATION

ENTRIES

   

CONSOLIDATED

TOTALS