form10-q.htm
 
 



 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended October 3, 2010

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 þ    No o

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 o  No o

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 o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).           Yes o     No þ

         
Shares outstanding of each of the registrant’s classes of common stock at November 5, 2010:

 
Class
 
Number of Shares
 
 
Class A Common Stock, $.10 par value per share
    57,034,132  
 
Class B Common Stock, $.10 par value per share
    7,244,052  



 
 

 
                      



INTERFACE, INC.

INDEX
 
 
 
PAGE 
PART I.
FINANCIAL INFORMATION
 
     
 
Item 1.
Financial Statements
3
   
Consolidated Condensed Balance Sheets – October 3, 2010 and January 3, 2010
 
3
   
Consolidated Condensed Statements of Operations – Three Months and Nine Months Ended October 3, 2010 and October 4, 2009
 
4
   
Consolidated Statements of Comprehensive Income – Three Months and Nine Months Ended October 3, 2010 and October 4, 2009
 
5
   
Consolidated Condensed Statements of Cash Flows – Nine Months Ended October 3, 2010 and October 4, 2009
 
6
   
Notes to Consolidated Condensed Financial Statements
 
7
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26
       
 
Item 4.
Controls and Procedures
27
     
PART II.
OTHER INFORMATION
 
       
 
Item 1.
Legal Proceedings
27
       
 
Item 1A.
Risk Factors
27
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
       
 
Item 3.
Defaults Upon Senior Securities
28
       
 
Item 4.
Removed and Reserved
28
       
 
Item 5.
Other Information
28
       
 
Item 6.
Exhibits
28



 
 

 
                      


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 (IN THOUSANDS)
   
OCT. 3, 2010
   
JAN. 3, 2010
 
   
(UNAUDITED)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and Cash Equivalents
  $ 80,854     $ 115,363  
Accounts Receivable, Net
    140,759       129,833  
Inventories
    133,774       112,249  
Prepaid Expenses and Other Current Assets
    24,727       19,649  
Deferred Income Taxes
    9,175       9,379  
Assets of Business Held for Sale
    1,500       1,500  
TOTAL CURRENT ASSETS
    390,789       387,973  
                 
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation 
    166,093       162,269  
DEFERRED TAX ASSET
    42,295       44,210  
GOODWILL
    76,951       80,519  
OTHER ASSETS
    54,801       52,268  
TOTAL ASSETS
  $ 730,929     $ 727,239  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts Payable
  $ 48,962     $ 35,614  
Accrued Expenses
    111,249       101,143  
Current Portion of Long-Term Debt
    --       14,586  
TOTAL CURRENT LIABILITIES
    160,211       151,343  
                 
SENIOR NOTES
    146,127       145,184  
SENIOR SUBORDINATED NOTES
    110,000       135,000  
DEFERRED INCOME TAXES
    7,079       7,029  
OTHER
    41,102       42,502  
TOTAL LIABILITIES
    464,519       481,058  
                 
Commitments and Contingencies
               
                 
SHAREHOLDERS’ EQUITY:
               
Preferred Stock
    --       --  
Common Stock
    6,423       6,328  
Additional Paid-In Capital
    348,580       343,348  
Retained Earnings (Deficit)
    (35,187 )     (55,332 )
Accumulated Other Comprehensive Income – Foreign Currency Translation Adjustment
    (24,307 )     (24,057 )
Accumulated Other Comprehensive Income – Pension Liability
    (32,231 )     (33,186 )
TOTAL SHAREHOLDERS' EQUITY – Interface, Inc.
    263,278       237,101  
Non-Controlling Interest in Subsidiary
    3,132       9,080  
TOTAL SHAREHOLDERS' EQUITY
    266,410       246,181  
    $ 730,929     $ 727,239  

See accompanying notes to consolidated condensed financial statements.

 
- 3 -

 
                      


INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 
 
 
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
                         
 
 
 
OCT. 3, 2010
   
OCT. 4, 2009
   
OCT. 3, 2010
   
OCT. 4, 2009
 
                         
NET SALES
  $ 252,724     $ 218,364     $ 696,502     $ 628,969  
Cost of Sales
     163,244        145,952        453,514        424,282  
GROSS PROFIT ON SALES
    89,480       72,412       242,988       204,687  
                                 
Selling, General and Administrative Expenses
    61,441       53,487       176,597       160,122  
Income from Litigation Settlements
    --       --       --       (5,926 )
Restructuring Charge
    --       --       3,131       7,627  
OPERATING INCOME
    28,039       18,925       63,260       42,864  
                                 
Interest Expense
    8,409       9,537       25,346       24,936  
Bond Retirement Expenses
    --       --       1,085       6,096  
Other Expense
    463       156       1,008       56  
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
    19,167       9,232       35,821       11,776  
Income Tax Expense
    6,825       3,542       13,365       5,661  
                                 
Income from Continuing Operations
    12,342       5,690       22,456       6,115  
Loss from Discontinued Operations, Net of Tax
    --       --        --       (650 )
NET INCOME
    12,342       5,690       22,456       5,465  
                                 
Income Attributable to Non-Controlling Interest in Subsidiary
    (264 )     (233 )     (876 )     (495 )
NET INCOME ATTRIBUTABLE TO INTERFACE, INC.
  $ 12,078     $ 5,457     $ 21,580     $ 4,970  
                                 
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic
                               
Continuing Operations
  $ 0.19     $ 0.09     $ 0.34     $ 0.09  
Discontinued Operations
    --       --       --       (0.01 )
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic
  $ 0.19     $ 0.09     $ 0.34     $ 0.08  
                                 
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted
                               
Continuing Operations
  $ 0.19     $ 0.09     $ 0.34     $ 0.09  
Discontinued Operations
    --       --        --       (0.01 )
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted
  $ 0.19     $ 0.09     $ 0.34     $ 0.08  
                                 
Common Shares Outstanding – Basic
    64,025       63,190       63,623       63,197  
Common Shares Outstanding – Diluted
    64,578       63,487       64,106       63,258  

See accompanying notes to consolidated condensed financial statements.

 
- 4 -

 
                      



INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

(IN THOUSANDS)

 
 
 
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
             
 
 
 
OCT. 3, 2010
   
OCT. 4, 2009
   
OCT. 3, 2010
   
OCT. 4, 2009
 
                         
Net Income
  $ 12,342     $ 5,690     $ 22,456     $ 5,465  
Other Comprehensive Income, Foreign
                               
Currency Translation Adjustment and Pension Liability Adjustment
    23,247       6,832       1,786       18,353  
Comprehensive Income
  $ 35,589     $ 12,522     $ 24,242     $ 23,818  
                                 
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary
    (1,081 )     (353 )     (1,957 )     (739 )
Comprehensive Income Attributable to Interface, Inc.
  $ 34,508     $ 12,169     $ 22,285     $ 23,079  


See accompanying notes to consolidated condensed financial statements.

 
- 5 -

 
                      



INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(IN THOUSANDS)

   
NINE MONTHS ENDED
 
   
OCT. 3, 2010
   
OCT. 4, 2009
 
OPERATING ACTIVITIES:
           
Net Income
  $ 22,456     $ 5,465  
Loss from Discontinued Operations
    --       650  
Income from Continuing Operations
    22,456       6,115  
Adjustments to Reconcile Income to Cash Provided by Operating Activities:
               
Premiums Paid to Repurchase Senior Notes
    792       5,264  
Depreciation and Amortization
    19,253       18,856  
Deferred Income Taxes and Other
    (167 )     (3,863 )
Working Capital Changes:
               
Accounts Receivable
    (10,069 )     27,535  
Inventories
    (20,453 )     13,457  
Prepaid Expenses
    (7,404 )     (1,104 )
Accounts Payable and Accrued Expenses
    27,196       (20,399 )
                 
CASH PROVIDED BY OPERATING ACTIVITIES:
    31,604       45,861  
                 
INVESTING ACTIVITIES:
               
Capital Expenditures
    (18,443 )     (9,897 )
Other
    (1,816 )     1,370  
                 
CASH USED IN INVESTING ACTIVITIES:
    (20,259 )     (8,527 )
                 
FINANCING ACTIVITIES:
               
Borrowing of Long-Term Debt
    --       144,452  
Repurchase of Senior and Senior Subordinated Notes
    (39,586 )     (138,002 )
Debt Issuance Costs
    --       (6,161 )
Premiums Paid to Repurchase Senior and Senior Subordinated Notes
    (792 )     (5,264 )
Proceeds from Issuance of Common Stock
    1,803       58  
Dividends Paid to Interface, Inc. Shareholders
    (1,435 )     (478 )
Dividends Paid to Joint Venture Partner
    (7,904 )     --  
                 
CASH USED IN FINANCING ACTIVITIES:
    (47,914 )     (5,395 )
                 
Net Cash Provided by (Used in) Operating, Investing and
               
Financing Activities
    (36,569 )     31,939  
Effect of Exchange Rate Changes on Cash
    2,060       2,242  
                 
CASH AND CASH EQUIVALENTS:
               
Net Change During the Period
    (34,509 )     34,181  
Balance at Beginning of Period
    115,363       71,757  
                 
Balance at End of Period
  $ 80,854     $ 105,938  


See accompanying notes to consolidated condensed financial statements.


 
- 6 -

 
                      


INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 – CONDENSED FOOTNOTES

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 3, 2010, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year.  The January 3, 2010, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

As described below in Note 9, the Company has sold its Fabrics Group business segment.  The results of operations and related disposal costs, gains and losses for this business are classified as discontinued operations for all periods presented.

Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 – INVENTORIES

Inventories are summarized as follows:

   
Oct. 3, 2010
   
Jan. 3, 2010
 
   
(In thousands)
 
Finished Goods
  $ 77,593     $ 65,478  
Work in Process
    18,776       15,764  
Raw Materials
    37,405       31,007  
    $ 133,774     $ 112,249  

NOTE 3 – EARNINGS (LOSS) PER SHARE

 
The Company computes basic earnings (loss) per share (“EPS”) attributable to common shareholders by dividing income from continuing operations attributable to common shareholders, income from discontinued operations attributable to common shareholders and net income attributable to Interface, Inc. common shareholders, 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.  Income attributable to non-controlling interest in subsidiary is included in the calculation of basic and diluted EPS from continuing operations.
 
In the first quarter of 2009, the Company adopted a newly issued accounting standard, which requires the Company to include 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 basic and diluted EPS calculations when the inclusion of these shares would be dilutive.  As a result, the Company has included all of its outstanding restricted stock awards in the calculation of basic and diluted EPS for all periods presented.  This accounting standard also requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings. Distributed earnings represent 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.  Unvested share-based amounts of restricted stock are paid dividends equally with all other shares of common stock.  The following table shows distributed and undistributed earnings:

 
- 7 -

 
                      



   
Three Months Ended
   
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
                         
Earnings Per Share from Continuing Operations
                       
                         
Basic Earnings Per Share Attributable to
                       
Common Shareholders:
                       
Distributed Earnings
  $ 0.01     $ 0.01     $ 0.02     $ 0.01  
Undistributed Earnings
    0.18       0.08       0.32       0.08  
Total
  $ 0.19     $ 0.09     $ 0.34     $ 0.09  
                                 
Diluted Earnings Per Share Attributable to
                               
Common Shareholders:
                               
Distributed Earnings
  $ 0.01     $ 0.01     $ 0.02     $ 0.01  
Undistributed Earnings
    0.18       0.08       0.32       0.08  
Total
  $ 0.19     $ 0.09     $ 0.34     $ 0.09  
                                 
Earnings (Loss) Per Share from Discontinued Operations
                               
                                 
Basic and Diluted Earnings (Loss) Per Share Attributable to
                               
Common Shareholders:
                               
Distributed Earnings
  $ --     $ --     $ --     $ --  
Undistributed Earnings (Loss)
     --        --        --       (0.01 )
Total
  $ --     $ --     $ --     $ (0.01 )
                                 
Basic Earnings Per Share
  $ 0.19     $ 0.09     $ 0.34     $ 0.08  
Diluted Earnings Per Share
  $ 0.19     $ 0.09     $ 0.34     $ 0.08  

The following table presents income from continuing operations and net income attributable to Interface, Inc. that was attributable to participating securities:

   
Three Months Ended
   
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
         
(In millions)
       
Income from Continuing Operations
  $ 0.3     $ 0.1     $ 0.6     $ 0.1  
Net Income Attributable to Interface, Inc.
    0.3       0.1       0.6       0.1  

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

   
Three Months Ended
   
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
         
(In thousands)
       
Weighted Average Shares Outstanding
    62,284       61,796       61,882       61,803  
Participating Securities
    1,741       1,394       1,741       1,394  
Shares for Basic Earnings Per Share
    64,025       63,190       63,623       63,197  
Dilutive Effect of Stock Options
    553       297       483       61  
Shares for Diluted Earnings Per Share
    64,578       63,487       64,106       63,258  

For the quarters ended October 3, 2010, and October 4, 2009, options to purchase 389,000 and 292,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share as their impact would be anti-dilutive.  For the nine-month periods ended October 3, 2010 and October 4, 2009, options to purchase 404,000 and 1,358,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share as their impact would be anti-dilutive.


 
- 8 -

 
                      


NOTE 4 – SEGMENT INFORMATION

Based on the quantitative thresholds specified in applicable accounting standards, the Company has determined that it has two reportable segments: (1) the Modular Carpet segment, which includes its InterfaceFLOR, Heuga and FLOR modular carpet businesses, as well as its Intersept antimicrobial sales and licensing program, and (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses.  In 2007, the Company sold its former Fabrics Group business segment (see Note 9 for further information).  Accordingly, the Company has included the operations of the former Fabrics Group business segment in discontinued operations.

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision-maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses.  Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment.  The nine-month period ended October 4, 2009 includes $5.9 million of income at the corporate level from litigation settlements.  Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.

Segment Disclosures

Summary information by segment follows:

   
Modular Carpet
   
Bentley Prince Street
   
Total
 
   
(In thousands)
 
Three Months Ended October 3, 2010
                 
Net Sales
  $ 226,513     $ 26,211     $ 252,724  
Depreciation and Amortization
    4,251       538       4,789  
Operating Income
    29,450       45       29,495  
                         
Three Months Ended October 4, 2009
                       
Net Sales
  $ 194,107     $ 24,257     $ 218,364  
Depreciation and Amortization
    4,534       586       5,120  
Operating Income (Loss)
    20,292       (1,024 )     19,268  

   
Modular
Carpet
   
Bentley
Prince Street
   
Total
 
   
(In thousands)
 
Nine Months Ended October 3, 2010
                 
Net Sales
  $ 623,215     $ 73,287     $ 696,502  
Depreciation and Amortization
    12,668       1,660       14,328  
Operating Income (Loss)
    72,004       (2,511 )     69,493  
                         
Nine Months Ended October 4, 2009
                       
Net Sales
  $ 557,127     $ 71,842     $ 628,969  
Depreciation and Amortization
    13,153       1,847       15,000  
Operating Income (Loss)
    44,442       (5,981 )     38,461  


 
- 9 -

 
                      


A reconciliation of the Company’s total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows:

   
Three Months Ended
   
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
   
(In thousands)
   
(In thousands)
 
DEPRECIATION AND AMORTIZATION
                       
Total segment depreciation and amortization
  $ 4,789     $ 5,120     $ 14,328     $ 15,000  
Corporate depreciation and amortization
    1,562       1,691       4,925       3,856  
Reported depreciation and amortization
  $ 6,351     $ 6,811     $ 19,253     $ 18,856  
                                 
OPERATING INCOME
                               
Total segment operating income
  $ 29,495     $ 19,268     $ 69,493     $ 38,461  
Corporate income, expenses and other reconciling amounts
    (1,456 )     (343 )     (6,233 )     4,403  
Reported operating income
  $ 28,039     $ 18,925     $ 63,260     $ 42,864  

   
Oct. 3, 2010
   
Jan. 3, 2010
 
ASSETS
 
(In thousands)
 
Total segment assets
  $ 605,210     $ 561,948  
Discontinued operations
    1,500       1,500  
Corporate assets and eliminations
    124,219       163,791  
Reported total assets
  $ 730,929     $ 727,239  


NOTE 5 – LONG-TERM DEBT

11 3/8% Senior Secured Notes

On June 5, 2009, the Company completed an offering of $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013 (the “Senior Secured Notes”).  Interest on the Senior Secured Notes is payable semi-annually on May 1 and November 1.  The Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries.  The Senior Secured Notes are secured by a second-priority lien on substantially all of the Company’s and certain of the Company’s domestic subsidiaries’ assets that secure the Company’s domestic revolving credit facility (discussed below) on a first-priority basis.

The Senior Secured Notes were sold at a price of 96.301% of their face value, resulting in $144.5 million of gross proceeds.  The $5.5 million original issue discount is being amortized over the life of the notes through interest expense.

The Company may redeem all or a part of the Senior Secured Notes from time to time at a price equal to 100% of the principal amount plus a make-whole premium.  Prior to May 1, 2012, the Company may redeem up to 35% of the Senior Secured Notes with cash proceeds from specified equity offerings at a price equal to 111.375% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption.  As of October 3, 2010, the balance of the Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $146.1 million.  The estimated fair value of the Senior Secured Notes as of October 3, 2010, based on then current market prices, was $171.8 million.

10.375% Senior Notes

On February 1, 2010, the Company repaid the remaining balance of $14.6 million of these notes at maturity.

9.5% Senior Subordinated Notes

As of October 3, 2010, the Company had outstanding $110.0 million in 9.5% Senior Subordinated Notes due 2014.  The estimated fair value of the 9.5% Senior Subordinated Notes as of October 3, 2010, based on then current market prices, was $113.3 million.  During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of these notes at a price equal to 103.167% of the face value of the notes.  Accordingly, the premium paid in connection with this redemption was approximately $0.8 million.  In addition, the Company wrote off the portion of the unamortized debt issuance costs related to the redeemed bonds, an amount equal to $0.3 million.  These expenses are contained in the “Bond Retirement Expenses” line item in our consolidated condensed statements of operations.

 
- 10 -

 
                      



Tender Offer

On November 3, 2010, the Company announced the commencement of a tender offer relating to all of its outstanding Senior Secured Notes and Senior Subordinated Notes and a solicitation of consents from the holders of the notes to amend the indentures governing the notes.  The tender offer is scheduled to expire at 11:59 P.M., Eastern Time, on December 2, 2010, unless extended or earlier terminated, and the consent solicitation is scheduled to expire at 5:00 P.M., Eastern Time, on November 17, 2010, unless extended or earlier terminated.

Credit Facilities

The Company maintains a domestic revolving credit agreement (the “Facility”) that provides a maximum aggregate amount of $100 million of loans and letters of credit available to us at any one time (subject to a borrowing base) with an option for us to increase that maximum aggregate amount to $150 million (upon the satisfaction of certain conditions, and subject to a borrowing base).  The Company is presently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.  As of October 3, 2010, there were zero borrowings and $8.1 million in letters of credit outstanding under the Facility.  As of October 3, 2010, the Company could have incurred $62.6 million of additional borrowings under the Facility.

Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank N.V.  Under this Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time.  As of October 3, 2010, there were no borrowings outstanding under this facility, and the Company could have incurred 20 million (approximately $27.3 million) of additional borrowings under the facility.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $11.4 million of lines of credit available.  As of October 3, 2010, 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 applicable accounting standards, the Company is required to select a valuation technique or option pricing model.  The Company uses the Black-Scholes model.  Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

During the first nine months of 2010 and 2009, the Company recognized stock option compensation costs of $1.1 million and $1.0 million, respectively.  In the third quarters of 2010 and 2009, the Company recognized stock option compensation costs of $0.4 million and $0.4 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at October 3, 2010, approximated $1.6 million, and the weighted average period of time over which this cost will be recognized is approximately two years.


 
- 11 -

 
                      


The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first nine months of fiscal years 2010 and 2009:

   
Nine Months Ended
Oct. 3, 2010
 
Nine Months Ended
Oct. 4, 2009
Risk free interest rate
    2.09 %     1.6 %
Expected life
 
5.5 years
   
5.5 years
 
Expected volatility
    61 %     61 %
Expected dividend yield
    0.3 %     2.6 %

The weighted average grant date fair value of stock options granted during the first nine months of fiscal 2010 was $6.79 per share.

The following table summarizes stock options outstanding as of October 3, 2010, as well as activity during the nine months then ended:
 
   
Shares
   
Weighted Average
Exercise Price
 
Outstanding at January 3, 2010
    1,576,000     $ 5.75  
Granted
    239,000       12.43  
Exercised
    437,000       4.43  
Forfeited or canceled
    32,500       6.29  
Outstanding at October 3, 2010
    1,345,500     $ 7.19  
                 
Exercisable at October 3, 2010
    592,000     $ 7.95  

At October 3, 2010, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $10.0 million and $4.0 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 2010 and 2009 are provided in the following table:
 
   
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
 
   
(In millions)
 
Proceeds from stock options exercised
  $ 1.8     $ 0.1  
Intrinsic value of stock options exercised
  $ 3.9     $ 0.2  

For the nine months ended October 3, 2010 and October 4, 2009, the Company recognized a tax benefit with regard to stock options of $0.2 million and $0.2 million, respectively.

Restricted Stock Awards

During the nine months ended October 3, 2010, and October 4, 2009, the Company granted restricted stock awards for 529,000 and 27,000 shares, respectively, of Class B 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, these shares (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 $1.9 million and $1.5 million for the nine months ended October 3, 2010, and October 4, 2009, 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.


 
- 12 -

 
                      


The following table summarizes restricted stock activity as of October 3, 2010, and during the nine months then ended:

   
Shares
   
Weighted Average
Grant Date Fair Value
 
Outstanding at January 3, 2010
    1,394,000     $ 13.04  
Granted
    529,000       12.22  
Vested
    183,000       7.67  
Forfeited or canceled
    --       --  
Outstanding at October 3, 2010
    1,740,000     $ 12.22  

As of October 3, 2010, the unrecognized total compensation cost related to unvested restricted stock was $13.8 million.  That cost is expected to be recognized by the end of 2015.

For the nine months ended October 3, 2010 and October 4, 2009, the Company recognized a tax benefit with regard to restricted stock of $0.5 million and $0.1 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 October 3, 2010, and October 4, 2009, respectively:

   
Three Months Ended 
   
Nine Months Ended
 
Defined Benefit Retirement Plan (Europe)
 
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $ 88     $ 584     $ 266     $ 1,655  
Interest cost
    2,715       2,786       8,094       7,921  
Expected return on assets
    (2,772 )     (2,685 )     (8,264 )     (7,642 )
Amortization of prior service costs
    22       22       66       62  
Recognized net actuarial (gains)/losses
    413       466       1,226       1,326  
Net periodic benefit cost
  $ 466     $ 1,173     $ 1,388     $ 3,322  

   
Three Months Ended 
   
Nine Months Ended
 
Salary Continuation Plan (SCP)
 
Oct. 3, 2010
   
Oct. 4, 2009
   
Oct. 3, 2010
   
Oct. 4, 2009
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $ 86     $ 81     $ 257     $ 243  
Interest cost
    280       271       841       812  
Amortization of transition obligation
    55       55       164       164  
Amortization of prior service cost
    12       12       36       36  
Amortization of loss
    68       70       205       209  
Net periodic benefit cost
  $ 501     $ 489     $ 1,503     $ 1,464  


NOTE 8 – RESTRUCTURING CHARGES

2010 Restructuring Charge

In the first quarter of 2010, the Company adopted a restructuring plan primarily related to workforce reduction in its European modular carpet operations.  This reduction was in response to the continued challenging economic climate in that region.  Smaller amounts were incurred in connection with restructuring activities in the Americas.  A total of approximately 50 employees were affected by this restructuring plan.  In connection with this plan, the Company recorded a pre-tax restructuring charge of $3.1 million.  Substantially all of this charge involves cash expenditures, primarily severance expenses.  It is anticipated that this restructuring plan will generate annual savings of approximately $3.2 million.  Actions and expenses related to this plan were substantially completed in the first quarter of 2010.


 
- 13 -

 
                      


A summary of these restructuring activities is presented below:

   
Total
Restructuring
Charge
   
Costs Incurred
 in 2010
   
Balance at
Oct. 3, 2010
 
   
(In thousands)
 
Workforce reduction
  $ 3,131     $ 1,859     $ 1,272  

The table below details these restructuring activities by segment:

   
Modular
Carpet
   
Bentley
Prince Street
   
Corporate
   
Total
 
   
(In thousands)
 
                         
Total amounts expected to be incurred
  $ 2,951     $ 180     $ --     $ 3,131  
Cumulative amounts incurred to date
    1,679       180       --       1,859  
Total amounts incurred in the nine-month period ended October 3, 2010
    1,679       180       --       1,859  

2009 Restructuring Plan

In the first quarter of 2009, the Company adopted a restructuring plan, primarily comprised of a further reduction in the Company’s worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for its products on a global level.  In connection with the plan, the Company recorded a pre-tax restructuring charge of $5.7 million, comprised of $4.0 million of employee severance expense and $1.7 million of other exit costs (primarily costs to exit the Canadian manufacturing facilities, lease exit costs and other costs).  Approximately $5.2 million of the restructuring charge involves cash expenditures, primarily severance expense.  In the second quarter of 2009, the Company recorded an additional $1.9 million restructuring charge as a continuation of this plan.  The charge in the second quarter of 2009 was due to approximately 80 additional employee reductions, and related entirely to employee severance expense.

A summary of these restructuring activities is presented below:

   
Total
Restructuring
Charges
   
Costs Incurred
 in 2009
   
Costs Incurred
 In 2010
   
Balance at
Oct. 3, 2010
 
   
(In thousands)
 
Facilities consolidation
  $ 970     $ 970     $ --     $ --  
Workforce reduction
    5,873       3,920       1,671       282  
Other charges
    784       784       --       --  
    $ 7,627     $ 5,674     $ 1,671     $ 282  

The table below details these restructuring activities by segment:

   
Modular
Carpet
   
Bentley
Prince Street
   
Corporate
   
Total
 
   
(In thousands)
 
Total amounts expected to be incurred
  $ 6,865     $ 762     $ --     $ 7,627  
Cumulative amounts incurred to date
    6,583       762       --       7,345  
Total amounts incurred in the nine-month period ended October 3, 2010
    1,671       --       --       1,671  



 
- 14 -

 
                      


NOTE 9 – DISCONTINUED OPERATIONS

In 2007, the Company sold its Fabrics Group business segment.  All activity related to this business has been included in discontinued operations.  Assets and liabilities of this business segment have been reported in assets and liabilities held for sale for all reported periods.

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

   
Three Months Ended
 
Nine Months Ended
 
   
Oct. 3, 2010
   
Oct. 4, 2009
 
Oct. 3, 2010
 
Oct. 4, 2009
 
   
(In thousands)
 
(In thousands)
 
Net sales
  $ --     $ --   $                           --   $ --  
Loss on operations before taxes on income
    --       --     --     (1,000 )
Tax benefit
    --       --     --     350  
Loss on operations, net of tax
    --       --     --     (650 )

The loss on operations for the nine months ended October 4, 2009 reflects charges taken to reduce the carrying value of long-lived assets to their approximate fair market value.

Assets and liabilities, including reserves, related to the above-described discontinued operations that were held for sale consist of the following:

   
Oct. 3, 2010
   
Jan. 3, 2010
 
   
(In thousands)
 
Current assets
  $ --     $  --  
Property and equipment
    1,500       1,500  
Other assets
    --       --  
Current liabilities
    --       --  
Other liabilities
    --       --  


NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $21.2 million and $27.9 million for the nine months ended October 3, 2010, and October 4, 2009, respectively.  Income tax payments amounted to $10.8 million and $14.4 million for the nine months ended October 3, 2010, and October 4, 2009, respectively.


NOTE 11 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to require additional fair value related disclosures.  It also clarified existing fair value disclosure guidance about the level of disaggregation and about inputs and valuation techniques.  This new guidance was effective for the first reporting period beginning after December 15, 2009 except for certain disclosure requirements effective for the first reporting period beginning after December 15, 2010.  The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables.  Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices.  In the absence of vendor-specific objective evidence or third party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices.  In addition, the new standard eliminates the use of the residual method of allocation.  The standard will be effective for the Company in the first quarter of 2011.  Early adoption is permitted.  The Company is currently evaluating the impact, if any, that the adoption of this standard may have on its consolidated financial statements.


 
- 15 -

 
                      


In June 2009, the FASB issued a new standard which changes the consolidation model for variable interest entities.  This standard requires companies to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the company (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the company.  The standard was effective for the Company as of January 4, 2010.  The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.


NOTE 12 – INCOME TAXES

Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement.  In the first nine months of 2010, the Company increased its liability for unrecognized tax benefits by $0.3 million.  As of October 3, 2010, the Company had approximately $9.9 million accrued for unrecognized tax benefits.


NOTE 13 – DIVIDEND TO NON-CONTROLLING INTEREST PARTNER

In the third quarter of 2010, the Company’s Thailand manufacturing joint venture paid dividends on a pro rata basis to its shareholders, including a dividend to the non-controlling interest partner in the joint venture.  All operations, assets and liabilities of this joint venture are currently and have been previously consolidated by the Company.  The dividend paid to the non-controlling interest partner was $7.9 million and had the effect of lowering the non-controlling interest in subsidiary balance as presented in the Company’s balance sheet.

On November 3, 2010, the Company purchased the shares of the Thailand manufacturing joint venture that were held by the non-controlling interest partner for approximately $4.3 million.  After this purchase, the Company now owns all of the shares of the Thailand venture.


NOTE 14 – SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013 and its 9.5% Senior Subordinated Notes due 2014.  These guarantees are full and unconditional.  The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.


 
- 16 -

 
                      



INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 2010


   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
       
Net sales
  $ 448,398     $ 351,527     $ --     $ (103,423 )   $ 696,502  
Cost of sales
      332,637       224,300       --       (103,423 )     453,514  
Gross profit on sales
    115,761       127,227       --       --       242,988  
Selling, general and administrative expenses
    74,812       82,795       18,990       --       176,597  
Restructuring charges
    418       2,713       --        --       3,131  
Operating income (loss)
    40,531       41,719       (18,990 )     --       63,260  
Interest/Other expense
    18,726       8,059       (431 )     --       26,354  
Bond retirement expenses
    --       --       1,085        --       1,085  
Income (loss) before taxes on income and equity in income of subsidiaries
    21,805       33,660       (19,644 )     --       35,821  
Income tax expense (benefit)
    8,559       13,069       (8,263 )     --       13,365  
Equity in income (loss) of subsidiaries
    --        --       32,961        (32,961 )        --  
Income (loss) from continuing operations
    13,246       20,591       21,580       (32,961 )     22,456  
Loss on discontinued operations, net of tax
    --       --       --        --        --  
Net income (loss)
    13,246       20,591       21,580       (32,961 )     22,456  
Income attributable to non-controlling interest in subsidiary
    --       (876 )     --       --       (876 )
Net income (loss) attributable to Interface, Inc.
  $ 13,246     $ 19,715     $ 21,580     $ (32,961 )   $ 21,580  



 
- 17 -

 
                      



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 2010

   
GUARANTOR
SUBSIDIARIES
   
NON-
GUARANTOR
SUBSIDIARIES
   
INTERFACE, INC.
(PARENT
CORPORATION)
   
CONSOLIDATION
AND
ELIMINATION
ENTRIES
   
CONSOLIDATED
TOTALS
 
   
(IN THOUSANDS)
 
       
Net sales
  $ 174,146     $ 120,587     $ --     $ (42,009 )   $ 252,724  
Cost of sales
    128,177       77,076       --       (42,009 )     163,244  
Gross profit on sales
    45,969       43,511       --       --       89,480  
Selling, general and administrative expenses
    26,707       28,926       5,808       --       61,441  
Restructuring charges
    --       --       --       --       --  
Operating income (loss)
    19,262       14,585       (5,808 )     --       28,039  
Interest/Other expense
    7,186       3,572       (1,886 )     --       8,872  
Income (loss) before taxes on income and equity in income of subsidiaries
    12,076       11,013       (3,922 )     --       19,167  
Income tax expense (benefit)
    4,360       3,881       (1,416 )     --       6,825  
Equity in income (loss) of subsidiaries
    --       --       14,584       (14,584 )     --  
Income (loss) from continuing operations
    7,716       7,132       12,078       (14,584 )     12,342  
Loss on discontinued operations, net of tax
      --        --        --        --        --  
Net income (loss)
    7,716       7,132       12,078       (14,584 )     12,342  
Income attributable to non-controlling interest in subsidiary
    --       (264 )     --       --       (264 )
Net income (loss) attributable to Interface, Inc.
  $ 7,716     $ 6,868     $ 12,078     $ (14,584 )   $ 12,078  


 
- 18 -

 
                      


CONDENSED CONSOLIDATING BALANCE SHEET

OCTOBER 3, 2010

   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
ASSETS
                             
Current Assets:
                             
Cash and cash equivalents
  $ 234     $ 48,489     $ 32,131     $ --     $ 80,854  
Accounts receivable
    63,900       75,537       1,322       --       140,759  
Inventories
    66,816       66,958       --       --       133,774  
Prepaids and deferred income taxes
    8,695       17,304       7,903       --       33,902  
Assets of business held for sale
    --        1,500       --       --        1,500  
Total current assets
    139,645       209,788       41,356       --       390,789  
Property and equipment less accumulated depreciation
    75,169       85,645       5,279       --       166,093  
Investment in subsidiaries
    289,057       195,828       46,657       (531,542 )     --  
Goodwill
    6,954       69,997       --       --       76,951  
Other assets
     8,576       13,145       75,375       --       97,096  
    $ 519,401     $ 574,403     $ 168,667     $ (531,542 )   $ 730,929  
                                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Current Liabilities:
  $ 53,200     $ 88,358     $ 18,653     $ --     $ 160,211  
Senior secured notes and senior subordinated notes
    --       --       256,127       --       256,127  
Deferred income taxes
    1,615       10,455       (4,991 )     --       7,079  
Other
    2,204       10,558       28,340       --       41,102  
Total liabilities
    57,019       109,371       298,129       --       464,519  
                                         
Common stock
    94,145       102,199       6,423       (196,344 )     6,423  
Additional paid-in capital
    249,302       12,525       348,580       (261,827 )     348,580  
Retained earnings (deficit)
    120,396       392,613       (475,933 )     (72,263 )     (35,187 )
Foreign currency translation adjustment
    (1,461 )     (16,161 )     (5,577 )     (1,108 )     (24,307 )
Pension liability
    --       (29,276 )     (2,955 )     --       (32,231 )
Non-controlling interest in subsidiary
    --       3,132        --       --       3,132  
    $ 519,401     $ 574,403     $ 168,667     $ (531,542 )   $ 730,929  


 
- 19 -

 
                      


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS
ENDED OCTOBER 3, 2010

   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
Net cash provided by (used in) operating activities
  $ 20,008     $ 17,322     $ (9,290 )   $ 3,564     $ 31,604  
Cash flows from investing activities:
                                       
Purchase of plant and equipment
    (7,950 )     (8,808 )     (1,685 )     --       (18,443 )
Other
     (98 )       (61 )     (1,657 )     --       (1,816 )
Net cash used for  investing activities
    (8,048 )     (8,869 )     (3,342 )     --       (20,259 )
Cash flows from financing activities:
                                       
Repurchase of Senior and Senior Subordinated Notes
    --       --       (39,586 )     --       (39,586 )
Other
    (12,275 )     4,812       11,027       (3,564 )     --  
Proceeds from issuance of  common stock
    --       --       1,803       --       1,803  
Premiums paid to repurchase Senior and Senior Subordinated Notes
    --       --       (792 )     --       (792 )
Dividends paid to Interface, Inc. shareholders
    --       --       (1,435 )     --       (1,435 )
Dividends paid to joint venture partner
    --        (7,904 )     --       --       (7,904 )
Net cash used in financing activities
    (12,275 )     (3,092 )     (28,983 )     (3,564 )     (47,914 )
Effect of exchange rate change on cash
    4        2,056       --       --       2,060  
Net increase (decrease) in cash