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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended January 2, 2011
 
Commission File No.: 001-33994
 
Interface, Inc.
(Exact name of registrant as specified in its charter)
 
     
Georgia
  58-1451243
     
(State of incorporation)   (I.R.S. Employer Identification No.)
     
2859 Paces Ferry Road, Suite 2000
Atlanta, Georgia
  30339
     
(Address of principal executive offices)
  (zip code)
 
Registrant’s telephone number, including area code:
(770) 437-6800
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered:
 
Class A Common Stock, $0.10 Par Value Per Share   Nasdaq Global Select Market
Series B Participating Cumulative Preferred Stock Purchase Rights   Nasdaq Global Select Market
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ     NO o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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
(Do not check if a smaller reporting company)
  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
 
Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of July 2, 2010 (assuming conversion of Class B Common Stock into Class A Common Stock): $607,508,423 (57,747,949 shares valued at the last sales price of $10.52 on July 2, 2010). See Item 12.
 
Number of shares outstanding of each of the registrant’s classes of Common Stock, as of March 1, 2011:
 
         
Class
  Number of Shares
 
Class A Common Stock, $0.10 par value per share
    57,663,035  
Class B Common Stock, $0.10 par value per share
    8,298,433  
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. RESERVED
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2


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PART I
 
ITEM 1.   BUSINESS
 
Introduction and General
 
We are a worldwide leader in design, production and sales of modular carpet, and a manufacturer, marketer and servicer of select other floorcovering products for the commercial, institutional and residential markets. In recent years, modular carpet sales growth in the floorcovering industry has significantly outpaced the growth of the overall industry, as architects, designers and end users increasingly recognized the unique and superior attributes of modular carpet, including its dynamic design capabilities, greater economic value (which includes lower costs as a result of reduced waste in both installation and replacement), and installation ease and speed. Our Modular Carpet segment sales, which do not include modular carpet sales in our Bentley Prince Street segment, grew from $763.7 million to $862.3 million during the 2006 to 2010 period, representing a 3% compound annual growth rate.
 
 
As a global company with a reputation for high quality, reliability and premium positioning, we market modular carpet in over 110 countries under established brand names such as InterfaceFLOR®, Heuga®, Bentley Prince Street® and FLOR®. In broadloom carpet, our Bentley Prince Street brand also is a leader in the high-end, designer-oriented sector of the market, where custom design and high quality are the principal specifying and purchasing factors. Our principal geographic markets are the Americas, Europe and Asia-Pacific, where the percentages of our total net sales were approximately 56%, 28% and 16%, respectively, for fiscal year 2010.
 
Capitalizing on our leadership in modular carpet for the corporate office segment, we are executing a market diversification strategy to increase our presence and market share for modular carpet in non-corporate office market segments, such as government, education, healthcare, hospitality and retail space, which combined are almost twice the size of the approximately $1 billion U.S. corporate office segment. Our diversification strategy also targets the approximately $11 billion U.S. residential market segment for carpet. As a result of our efforts, our mix of corporate office versus non-corporate office modular carpet sales in the Americas was 44% and 56%, respectively, for 2010. Company-wide, our mix of corporate office versus non-corporate office sales was 56% and 44%, respectively, in 2010. We believe the appeal and utilization of modular carpet is growing in each of these non-corporate office segments, and we are using our considerable skills and experience with designing, producing and marketing modular products that make us the market leader in the corporate office segment to support and facilitate our penetration into these segments around the world.
 
In the fourth quarter of 2008, and particularly in November and December, the worldwide financial and credit crisis caused many corporations, governments and other organizations to delay or curtail spending on renovation and construction projects where our carpet is used. This downturn negatively impacted our performance. In the fourth quarter of 2008, we announced a restructuring plan pursuant to which we ceased manufacturing operations at our facility in Canada and reduced our worldwide employee base by a total of approximately 530 employees in the areas of manufacturing, sales and administration. In the first and second quarters of 2009, we announced further restructuring plans to further align our cost structure with market demand for our products, resulting in the reduction of an additional 370 employees worldwide. The employee reductions amounted to about 23% of our worldwide workforce. These plans reduced costs across our worldwide operations, and more closely aligned our operations with the decreased demand levels that we began experiencing in the fourth quarter of 2008. Demand levels substantially recovered in 2010.
 
In the first quarter of 2010, we adopted a new restructuring plan primarily related to workforce reduction in our European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Actions and expenses related to this plan were substantially completed in the first quarter of 2010.


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Our Strengths
 
Our principal competitive strengths include:
 
Market Leader in Attractive Modular Carpet Segment.  We are the world’s leading manufacturer of carpet tile. Modular carpet has become more prevalent across all commercial interiors markets as designers, architects and end users have become more familiar with its unique attributes. We continue to drive this trend with our product innovations and designs discussed below. According to the 2010 Floor Focus interiors industry survey of the top 250 designers in the United States, carpet tile was ranked as the number one “hot product” for the ninth consecutive year. We believe that we are well positioned to lead and capitalize upon the continued shift to modular carpet, both domestically and around the world.
 
Established Brands and Reputation for Quality, Reliability and Leadership.  Our products are known in the industry for their high quality, reliability and premium positioning in the marketplace. Our established brand names in carpets are leaders in the industry and have consistently ranked highly in the annual Floor Focus survey categories of quality, performance, value, service and design. On the international front, InterfaceFLOR and Heuga are well-recognized brand names in carpet tiles for commercial, institutional and residential use. More generally, as the appeal and utilization of modular carpet continues to expand into market segments such as education, hospitality and retail space, our reputation as the pioneer of modular carpet — as well as our established brands and leading market position for modular carpet in the corporate office segment — will enhance our competitive advantage in marketing to the customers in these new markets.
 
Innovative Product Design and Development Capabilities.  Our product design and development capabilities have long given us a significant competitive advantage, and they continue to do so as modular carpet’s appeal and utilization expand across virtually every market segment and around the globe. One of our best design innovations is our i2tm modular product line, which includes our popular Entropy® product for which we received a patent in 2005 on the key elements of its design. The i2 line introduced and features mergeable dye lots, and includes carpet tile products designed to be installed randomly without reference to the orientation of neighboring tiles. The i2 line offers cost-efficient installation and maintenance, interactive flexibility, and recycled and recyclable materials. Our i2 line of products, which now comprises approximately 40% of our total U.S. modular carpet business, represents a differentiated category of smart, environmentally sensitive and stylish modular carpet, and Entropy has been the fastest growing product in our history. The award-winning design firm David Oakey Designs had a pivotal role in developing our i2 product line, and our long-standing exclusive relationship with David Oakey Designs remains vibrant and augments our internal research, development and design staff. Another recent innovation is our patented TacTiles® carpet tile installation system, which uses small squares of adhesive plastic film to connect intersecting carpet tiles, thus eliminating the need for traditional carpet adhesive and resulting in a reduction in installation time and waste materials.
 
Made-to-Order and Global Manufacturing Capabilities.  The success of our modernization and restructuring of operations over the past several years gives us a distinct competitive advantage in meeting two principal requirements of the specified products markets we primarily target — that is, providing custom samples quickly and on-time delivery of customized final products. We also can generate realistic digital samples that allow us to create a virtually unlimited number of new design concepts and distribute them instantly for customer review, while at the same time reducing sampling waste. Approximately 75% to 80% of our modular carpet products in the United States and Asia-Pacific markets are now made-to-order, and we are increasing our made-to-order production in Europe as well. Our made-to-order capabilities not only enhance our marketing and sales, they significantly improve our inventory turns. Our global manufacturing capabilities in modular carpet production are an important component of this strength, and give us an advantage in serving the needs of multinational corporate customers that require products and services at various locations around the world. Our manufacturing locations across four continents enable us to compete effectively with local producers in our international markets, while giving international customers more favorable delivery times and freight costs.
 
Recognized Global Leadership in Ecological Sustainability.  Our long-standing goal and commitment to be ecologically “sustainable” — that is, the point at which we are no longer a net “taker” from the earth and


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do no harm to the biosphere — has emerged as a competitive strength for our business and remains a strategic initiative. It now includes Mission Zero®, our global branding initiative, which represents our mission to eliminate any negative impact our companies may have on the environment by the year 2020. Our acknowledged leadership position and expertise in this area resonate deeply with many of our customers and prospects around the globe, and provide us with a differentiating advantage in competing for business among architects, designers and end users of our products, who increasingly make purchase decisions based on “green” factors. The 2010 Floor Focus survey, which named our InterfaceFLOR business the top among “Green Leaders” and gave us the top honors for “Green Kudos”, found that 62% of the designers surveyed consider sustainability an added benefit and 30% consider it a “make or break” issue when deciding what products to recommend or purchase.
 
Strong Operating Leverage Position.  Our operating leverage, which we define as our ability to realize profit on incremental sales, is strong and allows us to increase earnings at a higher rate than our rate of increase in net sales. Our operating leverage position is primarily a result of (1) the specified, high-end nature and premium positioning of our principal products in the marketplace, and (2) the mix of fixed and variable costs in our manufacturing processes that allow us to increase production of most of our products without significant increases in capital expenditures or fixed costs. For example, while net sales from our Modular Carpet segment increased from $646.2 million in 2005 to $930.7 million in 2007 (a period in which our industry and business were recovering from a prior downturn), our operating income from that segment increased from $77.4 million (12.0% of net sales) in 2005 to $133.7 million (14.4% of net sales) in 2007.
 
Experienced and Motivated Management and Sales Force.  An important component of our competitive position is the quality of our management team and its commitment to developing and maintaining an engaged and accountable workforce. Our team is highly skilled and dedicated to guiding our overall growth and expansion into our targeted market segments, while maintaining our leadership in traditional markets and our high contribution margins. We utilize an internal marketing and predominantly commissioned sales force of approximately 700 experienced personnel, stationed at over 70 locations in over 30 countries, to market our products and services in person to our customers. Our incentive compensation and our sales and marketing training programs are tailored to promote performance and facilitate leadership by our executives both in strategic areas as well as the company as a whole.
 
Our Business Strategy and Principal Initiatives
 
Our business strategy is (1) to continue to use our leading position in the modular carpet market segment and our product design and global made-to-order capabilities as a platform from which to drive acceptance of modular carpet products across several industry segments, while maintaining our leadership position in the corporate office market segment, and (2) to return to our historical profit levels in the high-end, designer-oriented sector of the broadloom carpet market. We will seek to increase revenues and profitability by capitalizing on the above strengths and pursuing the following key strategic initiatives:
 
Continue to Penetrate Non-Corporate Office Market Segments.  We will continue our strategic focus on product design and marketing and sales efforts for non-corporate office market segments such as government, education, healthcare, hospitality, retail and residential space. We began this initiative as part of our market diversification strategy in 2001 (when our initial objective was reducing our exposure to the more severe economic cyclicality of the corporate office segment), and it has become a principal strategy generally for growing our business and enhancing profitability. We have shifted our mix of corporate office versus non-corporate office modular carpet sales in the Americas to 44% and 56%, respectively, for fiscal 2010 from 64% and 36%, respectively, in fiscal 2001. To implement this strategy, we:
 
  •  introduced specialized product offerings tailored to the unique demands of these segments, including specific designs, functionalities and prices;
 
  •  created special sales teams dedicated to penetrating these segments at a high level, with a focus on specific customer accounts rather than geographic territories; and


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  •  realigned incentives for our corporate office segment sales force generally in order to encourage their efforts, and where appropriate, to assist our penetration of these other segments.
 
As part of this strategy, we launched our FLOR and Prince Street House and Home lines of products in 2003 to focus on the approximately $11 billion U.S. residential carpet market segment. These products were specifically created to bring high style modular and broadloom floorcovering to the U.S. residential market. We offer FLOR directly and over the Internet, in a FLOR catalog and in our two FLOR retail stores, and we plan to add at least five more retail stores in the first half of 2011. FLOR is also offered by many specialty retailers and in a number of major retail catalogs. Through such direct and indirect retailing, FLOR sales have grown more than 50% from 2005 to 2010. Prince Street House and Home brings new colors and patterns to the high-end consumer market with a collection of broadloom carpet and rugs sold through hundreds of retail stores and interior designers. Through an agreement between our FLOR brand and Martha Stewart Living Omnimedia, we are further expanding our penetration of the U.S. residential market with a line of Martha Stewart-branded carpet tiles. Through our Heuga Home division, we have been increasing our marketing of modular carpet to the residential segment of international soft floorcovering markets, the size of which we believe to be approximately $2.3 billion in Western Europe alone.
 
Penetrate Expanding Geographic Markets for Modular Products.  The popularity of modular carpet continues to increase compared with other floorcovering products across most markets, internationally as well as in the United States. While maintaining our leadership in the corporate office segment, we will continue to build upon our position as the worldwide leader for modular carpet in order to promote sales in all market segments globally. A principal part of our international focus — which utilizes our global marketing capabilities and sales infrastructure — is the significant opportunities in several emerging geographic markets for modular carpet. Some of these markets, such as China, India and Eastern Europe, represent large and growing economies that are essentially new markets for modular carpet products. Others, such as Germany and Italy, are established markets that are transitioning to the use of modular carpet from historically low levels of penetration. Each of these emerging markets represents a significant growth opportunity for our modular carpet business. Our initiative to penetrate these markets will include drawing upon our internationally recognized InterfaceFLOR and Heuga brands. Construction of our new modular carpet plant in China has been completed, and the plant is now operational.
 
Continue to Minimize Expenses and Invest Strategically.  We have steadily trimmed costs from our operations for several years through multiple initiatives, which have made us leaner today and for the future. Our supply chain and other cost containment initiatives have improved our cost structure and yielded the operating efficiencies we sought. While we still seek to minimize our expenses in order to increase profitability, we will also take advantage of strategic opportunities to invest in systems, processes and personnel that can help us grow our business and increase profitability and value.
 
Sustain Leadership in Product Design and Development.  As discussed above, our leadership position for product design and development is a competitive advantage and key strength, especially in the modular carpet market segment, where our i2 products and TacTiles installation system have confirmed our position as an innovation leader. We will continue initiatives to sustain, augment and capitalize upon that strength to continue to increase our market share in targeted market segments. Our Mission Zero global branding initiative, which draws upon and promotes our ecological sustainability commitment, is part of those initiatives and includes placing our Mission Zero logo on many of our marketing and merchandising materials distributed throughout the world.
 
Use Strong Free Cash Flow Generation to De-leverage Our Balance Sheet.  Our principal businesses have been structured — including through our rationalization and repositioning initiatives over the past nine years — to yield high contribution margins and generate strong free cash flow (by which we mean cash available to apply towards debt service). Our historical investments in global manufacturing capabilities and mass customization techniques and facilities, which we have maintained, also contribute to our ability to generate substantial levels of free cash flow. We will use our strong free cash flow generation capability to continue to repay debt and strengthen our financial position. We will also continue to execute programs to reduce costs further and enhance free cash flow. In addition, our existing capacity to increase production levels


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without significant capital expenditures will further enhance our generation of free cash flow as demand for our products rises.
 
Challenges
 
In order to capitalize on our strengths and to implement successfully our business strategy and the principal initiatives discussed above, we will have to handle successfully several challenges that confront us or that affect our industry in general. As discussed in the Risk Factors in Item 1A of this Report, several factors could make it difficult for us, including:
 
  •  sales of our principal products have been and may continue to be affected by adverse economic cycles in the renovation and construction of commercial and institutional buildings;
 
  •  we compete with a large number of manufacturers in the highly competitive commercial floorcovering products market, and some of these competitors have greater financial resources than we do;
 
  •  our success depends significantly upon the efforts, abilities and continued service of our senior management executives and our principal design consultant, and our loss of any of them could affect us adversely;
 
  •  our substantial international operations are subject to various political, economic and other uncertainties that could adversely affect our business results;
 
  •  large increases in the cost of petroleum-based raw materials could adversely affect us if we are unable to pass these cost increases through to our customers;
 
  •  unanticipated termination or interruption of any of our arrangements with our primary third party suppliers of synthetic fiber could have a material adverse effect on us; and
 
  •  we have a significant amount of indebtedness, which could have important negative consequences to us.
 
We believe our business model is strong enough, and our strategic initiatives are properly calibrated, for us to handle these and other challenges we will encounter in our business.
 
Floorcovering Products and Services
 
Interface is the world’s largest manufacturer and marketer of modular carpet. We also manufacture and sell broadloom carpet, which generally consists of tufted carpet sold primarily in twelve-foot rolls, under the Bentley Prince Street brand. Our broadloom operations focus on the high quality, designer-oriented sector of the U.S. broadloom carpet market and select international markets.
 
Modular Carpet
 
Our modular carpet system, which is marketed under the established global brands InterfaceFLOR and Heuga, and more recently under the Bentley Prince Street brand, utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 cm x 50 cm) or rectangles to produce a floorcovering that combines the appearance and texture of traditional soft floorcovering with the advantages of a modular carpet system. Our GlasBac® technology employs a fiberglass-reinforced polymeric composite backing that provides dimensional stability and reduces the need for adhesives or fasteners. We also make carpet tiles with a backing containing post-industrial and/or post-consumer recycled materials, which we market under the GlasBacRE brand. In 2008, we introduced the Converttm collection of carpet tile designed and manufactured with yarn containing varying degrees of post-consumer nylon, depending on the style and color. We received the 2010 Best of NeoCon Gold Award in the modular carpet category for our Memphistm Collection, which is part of our Convert design platform.
 
Our carpet tile has become popular for a number of reasons. Carpet tile incorporating this reinforced backing may be easily removed and replaced, permitting rearrangement of furniture without the inconvenience and expense associated with removing, replacing or repairing other soft surface flooring products, including broadloom carpeting. Because a relatively small portion of a carpet installation often receives the bulk of


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traffic and wear, the ability to rotate carpet tiles between high traffic and low traffic areas and to selectively replace worn tiles can significantly increase the average life and cost efficiency of the floorcovering. In addition, carpet tile facilitates access to sub-floor air delivery systems and telephone, electrical, computer and other wiring by lessening disruption of operations. It also eliminates the cumulative damage and unsightly appearance commonly associated with frequent cutting of conventional carpet as utility connections and disconnections are made. We believe that, within the overall floorcovering market, the worldwide demand for modular carpet is increasing as more customers recognize these advantages.
 
We use a number of conventional and technologically advanced methods of carpet construction to produce carpet tiles in a wide variety of colors, patterns, textures, pile heights and densities. These varieties are designed to meet both the practical and aesthetic needs of a broad spectrum of commercial interiors — particularly offices, healthcare facilities, airports, educational and other institutions, hospitality spaces, and retail facilities — and residential interiors. Our carpet tile systems permit distinctive styling and patterning that can be used to complement interior designs, to set off areas for particular purposes and to convey graphic information. While we continue to manufacture and sell a substantial portion of our carpet tile in standard styles, an increasing percentage of our modular carpet sales is custom or made-to-order product designed to meet customer specifications.
 
In addition to general uses of our carpet tile, we produce and sell a specially adapted version of our carpet tile for the healthcare facilities market. Our carpet tile possesses characteristics — such as the use of the Intersept antimicrobial, static-controlling nylon yarns, and thermally pigmented, colorfast yarns — which make it suitable for use in these facilities in place of hard surface flooring. Moreover, we launched our FLOR line of products to specifically target modular carpet sales to the residential market segment. Through our relationship with David Oakey Designs, we also have created modular carpet products (some of which are part of our i2 product line) specifically designed for each of the education, hospitality and retail market segments.
 
We also manufacture and sell two-meter roll goods that are structure-backed and offer many of the advantages of both carpet tile and broadloom carpet. These roll goods are often used in conjunction with carpet tiles to create special design effects. Our current principal customers for these products are in the education, healthcare and government market segments.
 
Broadloom Carpet
 
We maintain a significant share of the high-end, designer-oriented broadloom carpet segment by combining innovative product design and short production and delivery times with a marketing strategy aimed at interior designers, architects and other specifiers. Our Bentley Prince Street designs emphasize the dramatic use of color and multi-dimensional texture. In addition, we have launched the Prince Street House and Home collection of high-style broadloom carpet and area rugs targeted at design-oriented residential consumers. We received the 2007 Best of NeoCon Silver Award in the modular category for the Saturniatm Collection, which is made up of carpet tile and broadloom products.
 
Other Products
 
We sell a proprietary antimicrobial chemical compound under the registered trademark Intersept that we incorporate in all of our modular carpet products and have licensed to another company for use in air filters. We also sell our TacTiles carpet tile installation system, along with a variety of traditional adhesives and products for carpet installation and maintenance that are manufactured by a third party. In addition, we continue to manufacture and sell our Intercell® brand raised/access flooring product in Europe.
 
Services
 
For several years, we provided or arranged for commercial carpet installation services, primarily through a service provider network comprised of owned and aligned carpet dealer businesses. We decided to exit our owned dealer businesses, and in 2005 we completed the exit activities related to the owned dealer businesses. In early 2006, we sold certain assets relating to our aligned non-owned dealer network, and have since


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discontinued its operations as well. We continue to provide “turnkey” project management services for national accounts and other large customers through our InterfaceSERVICEStm business.
 
Marketing and Sales
 
We have traditionally focused our carpet marketing strategy on major accounts, seeking to build lasting relationships with national and multinational end-users, and on architects, engineers, interior designers, contracting firms, and other specifiers who often make or significantly influence purchasing decisions. While most of our sales are in the corporate office segment, both new construction and renovation, we also emphasize sales in other segments, including retail space, government institutions, schools, healthcare facilities, tenant improvement space, hospitality centers, residences and home office space. Our marketing efforts are enhanced by the established and well-known brand names of our carpet products, including the InterfaceFLOR, FLOR and Heuga brands in modular carpet and Bentley Prince Street brand in broadloom carpet. Our exclusive consulting agreement with the award-winning, premier design firm David Oakey Designs enabled us to introduce more than 25 new carpet designs in the United States in 2010 alone.
 
An important part of our marketing and sales efforts involves the preparation of custom-made samples of requested carpet designs, in conjunction with the development of innovative product designs and styles to meet the customer’s particular needs. Our mass customization initiative simplified our carpet manufacturing operations, which significantly improved our ability to respond quickly and efficiently to requests for samples. In most cases, we can produce samples to customer specifications in less than five days, which significantly enhances our marketing and sales efforts and has increased our volume of higher margin custom or made-to-order sales. In addition, through our websites, we have made it easy to view and request samples of our products. We also have technology which allows us to provide digital, simulated samples of our products, which helps reduce raw material and energy consumption associated with our samples.
 
We primarily use our internal marketing and sales force to market our carpet products. In order to implement our global marketing efforts, we have product showrooms or design studios in the United States, Canada, Mexico, Brazil, Denmark, England, Northern Ireland, France, Germany, Spain, Belgium, the Netherlands, India, Australia, Japan, Italy, Norway, United Arab Emirates, Russia, Singapore, Hong Kong and China. We expect to open offices in other locations around the world as necessary to capitalize on emerging marketing opportunities.
 
In 2010, we entered into a new distribution arrangement with the Bravo Network, which is comprised of 13 independent flooring distributors that provide distribution logistics throughout the United States. Under this arrangement, the Bravo Network offers an exclusive collection of 10 distinct styles of our carpet tile. The collection sold through the Bravo Network targets the industry’s “main street” sector in the United States, comprised primarily of commercial customers purchasing non-specified products through flooring retail stores.
 
Manufacturing
 
We manufacture carpet at three locations in the United States and at facilities in the Netherlands, the United Kingdom, Australia and Thailand, and at our newest facility in China. Pursuant to our restructuring plan adopted in the fourth quarter of 2008, we have ceased manufacturing operations at our facility in Canada.
 
Having foreign manufacturing operations enables us to supply our customers with carpet from the location offering the most advantageous delivery times, duties and tariffs, exchange rates, and freight expense, and enhances our ability to develop a strong local presence in foreign markets. We believe that the ability to offer consistent products and services on a worldwide basis at attractive prices is an important competitive advantage in servicing multinational customers seeking global supply relationships. We will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the demands of customers in international markets.
 
To the extent practicable, we seek to standardize our worldwide modular carpet manufacturing procedures. In connection with the implementation of this plan, we strive to establish global standards for our tufting equipment, yarn systems and product styling. We previously had changed our standard carpet tile size


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to be 50 cm x 50 cm, which we believe has allowed us to reduce operational waste and fossil fuel energy consumption and to offer consistent product sizing for our global customers.
 
We also implemented a flexible-inputs carpet backing line at our modular carpet manufacturing facility in LaGrange, Georgia. Using next generation thermoplastic technology, the custom-designed backing line dramatically improves our ability to keep reclaimed and waste carpet in the production “technical loop,” and further permits us to explore other plastics and polymers as inputs. This process, which we call “Cool Bluetm”, came on line for production of certain carpet styles in late 2005. In 2007, we implemented additional technology that more cleanly separates the face fiber and backing of reclaimed and waste carpet, thus making it easier to recycle some of its components and providing a purer supply of inputs for the Cool Blue process. This technology, which is part of our ReEntry®2.0 carpet reclamation program, allows us to send some of the reclaimed face fiber back to our fiber supplier to be blended with virgin or other post-industrial materials and extruded into new fiber.
 
The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point, Georgia, City of Industry, California, Shelf, England, Northern Ireland, Australia, the Netherlands and Thailand are certified under International Standards Organization (ISO) Standard No. 14001.
 
Our significant international operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, foreign exchange restrictions, changing political conditions and governmental regulations. We also receive a substantial portion of our revenues in currencies other than U.S. dollars, which makes us subject to the risks inherent in currency translations. Although our ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations we might otherwise experience, we also engage from time to time in hedging programs intended to further reduce those risks.
 
Competition
 
We compete, on a global basis, in the sale of our floorcovering products with other carpet manufacturers and manufacturers of vinyl and other types of floorcoverings. Although the industry has experienced significant consolidation, a large number of manufacturers remain in the industry. We believe we are the largest manufacturer of modular carpet in the world. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and some of these competitors have financial resources greater than ours. In addition, some of the competing carpet manufacturers have the ability to extrude at least some of their requirements for fiber used in carpet products, which decreases their dependence on third party suppliers of fiber.
 
We believe the principal competitive factors in our primary floorcovering markets are brand recognition, quality, design, service, broad product lines, product performance, marketing strategy and pricing. In the corporate office market segment, modular carpet competes with various floorcoverings, of which broadloom carpet is the most common. The quality, service, design, better and longer average product performance, flexibility (design options, selective rotation or replacement, use in combination with roll goods) and convenience of our modular carpet are our principal competitive advantages.
 
We believe we have competitive advantages in several other areas as well. First, our exclusive relationship with David Oakey Designs allows us to introduce numerous innovative and attractive floorcovering products to our customers. Additionally, we believe that our global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers. We believe that the incorporation of the Intersept antimicrobial chemical agent into the backing of our modular carpet enhances our ability to compete successfully across all of our market segments generally, and specifically with resilient tile in the healthcare market.
 
In addition, we believe that our goal and commitment to be ecologically “sustainable” by 2020 is a brand-enhancing, competitive strength as well as a strategic initiative. Increasingly, our customers are concerned about the environmental and broader ecological implications of their operations and the products they use in them. Our leadership, knowledge and expertise in the area, especially in the “green building”


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movement and the related LEED certification program, resonate deeply with many of our customers and prospects around the globe, and these businesses are increasingly making purchase decisions based on “green” factors. Our modular carpet products historically have had inherent installation and maintenance advantages that translated into greater efficiency and waste reduction. We have further enhanced the “green” quality of our modular carpet in our highly successful i2 product line, and we are using raw materials and production technologies, such as our Cool Blue backing line and our ReEntry 2.0 reclaimed carpet separation process, that directly reduce the adverse impact of those operations on the environment and limit our dependence on petrochemicals.
 
To further raise awareness of our goal of becoming sustainable, we launched our Mission Zero global branding initiative, which represents our mission to eliminate any negative impact our companies may have on the environment by the year 2020. As part of this initiative, our Mission Zero logo appears on many of our marketing and merchandising materials distributed throughout the world. To further our Mission Zero goals, we partnered with other like-minded organizations to launch the website missionzero.org in 2008 to facilitate the sharing of ideas, best practices and resources in the area of sustainability.
 
Interior Fabrics
 
In 2007, we sold our Fabrics Group business segment to a third party. This business designs, manufactures and markets specialty fabrics for open plan office furniture systems and other commercial interiors. In 2006, we sold our European fabrics business to an entity formed by the business’s management team. Current and prior periods have been restated to include the results of operations and related disposal costs, gains and losses for these businesses as discontinued operations. In addition, assets and liabilities of these businesses have been reported in assets and liabilities held for sale for all reported periods.
 
Specialty Products
 
In 2007, we sold Pandel, Inc., our subsidiary that historically conducted our Specialty Products business segment. Pandel produces vinyl carpet tile backing and specialty mat and foam products.
 
Product Design, Research and Development
 
We maintain an active research, development and design staff of approximately 65 people and also draw on the research and development efforts of our suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials. Our research and development costs were $13.9 million, $12.7 million and $15.3 million in 2010, 2009, and 2008, respectively.
 
Our research and development team provides technical support and advanced materials research and development for the entire family of Interface companies. The team assisted in the development of our NexStep® backing, which employs moisture-impervious polycarbite precoating technology with a chlorine-free urethane foam secondary backing, and also helped develop a post-consumer recycled content, polyvinyl chloride, or PVC, extruded sheet process that has been incorporated into our GlasBacRE modular carpet backing. Our post-consumer recycled content PVC extruded sheet exemplifies our commitment to “closing-the-loop” in recycling. More recently, this team developed our patented TacTiles carpet tile installation system, which uses small squares of adhesive plastic film to connect intersecting carpet tiles. The team also helped implement our Cool Blue flexible inputs backing line and our ReEntry 2.0 reclaimed carpet separation technology and post-consumer recycling technology for nylon face fibers. With a goal of supporting sustainable product designs in floorcoverings applications, we continue to evaluate renewable polymers for use in our products.
 
Our research and development team also is the coordinator of our QUEST and EcoSense initiatives (discussed below under “Environmental Initiatives”) and supports the dissemination, consultancies and technical communication of our global sustainability endeavors. This team also provides all biochemical and technical support to Intersept antimicrobial chemical product initiatives.


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Innovation and increased customization in product design and styling are the principal focus of our product development efforts. Our carpet design and development team is recognized as an industry leader in carpet design and product engineering for the commercial and institutional markets.
 
David Oakey Designs provides carpet design and consulting services to our floorcovering businesses pursuant to a consulting agreement with us. David Oakey Designs’ services under the agreement include creating commercial carpet designs for use by our floorcovering businesses throughout the world, and overseeing product development, design and coloration functions for our modular carpet business in North America. The current agreement runs through April 2011, and we are in discussions to further extend the term of the agreement. While the agreement is in effect, David Oakey Designs cannot provide similar services to any other carpet company. Through our relationship with David Oakey Designs, we introduced more than 25 new carpet designs in 2010 alone, and have enjoyed considerable success in winning U.S. carpet industry awards.
 
David Oakey Designs also contributed to our ability to efficiently produce many products from a single yarn system. Our mass customization production approach evolved, in major part, from this concept. In addition to increasing the number and variety of product designs, which enables us to increase high margin custom sales, the mass customization approach increases inventory turns and reduces inventory levels (for both raw materials and standard products) and their related costs because of our more rapid and flexible production capabilities.
 
Our i2 product line — which includes, among others, our patented Entropy modular carpet product — represents an innovative breakthrough in the design of modular carpet. The i2 line introduced and features mergeable dye lots, cost-efficient installation and maintenance, interactive flexibility and recycled and recyclable materials. Some of these products may be installed without regard to the directional orientation of the carpet tile, and their features also make installation, maintenance and replacement of modular carpet easier, less expensive and less wasteful.
 
Environmental Initiatives
 
In the latter part of 1994, we commenced a new industrial ecological sustainability initiative called EcoSense, inspired in part by the interest of customers concerned about the environmental implications of how they and their suppliers do business. EcoSense, which includes our QUEST waste reduction initiative, is directed towards the elimination of energy and raw materials waste in our businesses, and, on a broader and more long-term scale, the practical reclamation — and ultimate restoration — of shared environmental resources. The initiative involves a commitment by us:
 
  •  to learn to meet our raw material and energy needs through recycling of carpet and other petrochemical products and harnessing benign energy sources; and
 
  •  to pursue the creation of new processes to help sustain the earth’s non-renewable natural resources.
 
We have engaged some of the world’s leading authorities on global ecology as environmental advisors. The list of advisors includes: Paul Hawken, author of The Ecology of Commerce: A Declaration of Sustainability and The Next Economy, and co-author with Amory Lovins and Hunter Lovins of Natural Capitalism: Creating the Next Industrial Revolution; Mr. Lovins, energy consultant and co-founder of the Rocky Mountain Institute; John Picard, President of E2 Environmental Enterprises; Jonathan Porritt, director of Forum for the Future; Bill Browning, fellow and former director of the Rocky Mountain Institute’s Green Development Services; Dr. Karl-Henrik Robert, founder of The Natural Step; Janine M. Benyus, author of Biomimicry; Walter Stahel, Swiss businessman and seminal thinker on environmentally responsible commerce; and Bob Fox, renowned architect.
 
Our leadership, knowledge and expertise in this area, especially in the “green building” movement and the related LEED certification program, resonate deeply with many of our customers and prospects around the globe, and these businesses are increasingly making purchase decisions based on “green” factors. As more customers in our target markets share our view that sustainability is good business and not just good deeds,


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our acknowledged leadership position should strengthen our brands and provide a differentiated advantage in competing for business.
 
In 2006, we launched InterfaceRAISEtm, our consulting business that helps clients imagine, plan and execute new ways of advancing business goals while responding to the needs of society and the environment. The operations of this business are not a significant percentage of our consolidated operations.
 
Backlog
 
Our backlog of unshipped orders was approximately $137.7 million at February 27, 2011, compared with approximately $112.5 million at February 28, 2010. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects and currency fluctuations. All of the backlog orders at February 27, 2011 are expected to be shipped during the succeeding six to nine months.
 
Patents and Trademarks
 
We own numerous patents in the United States and abroad on floorcovering products and on manufacturing processes. The duration of United States patents is between 14 and 20 years from the date of filing of a patent application or issuance of the patent; the duration of patents issued in other countries varies from country to country. We maintain an active patent and trade secret program in order to protect our proprietary technology, know-how and trade secrets. Although we consider our patents to be very valuable assets, we consider our know-how and technology even more important to our current business than patents, and, accordingly, believe that expiration of existing patents or nonissuance of patents under pending applications would not have a material adverse effect on our operations.
 
We also own many trademarks in the United States and abroad. In addition to the United States, the primary countries in which we have registered our trademarks are the United Kingdom, Germany, Italy, France, Canada, Australia, Japan, and various countries in Central and South America. Some of our more prominent registered trademarks include: Interface®, InterfaceFLOR, Heuga, Intersept, GlasBac, Bentley Prince Street, FLOR, Intercell, and Mission Zero. Trademark registrations in the United States are valid for a period of 10 years and are renewable for additional 10-year periods as long as the mark remains in actual use. The duration of trademarks registered in other countries varies from country to country.
 
Financial Information by Operating Segments and Geographic Areas
 
The Notes to Consolidated Financial Statements appearing in Item 8 of this Report set forth information concerning our sales, income and assets by operating segments, and our sales and long-lived assets by geographic areas. Additional information regarding sales by operating segment is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Employees
 
At January 2, 2011, we employed a total of 3,421 employees worldwide. Of such employees, 1,859 were clerical, staff, sales, supervisory and management personnel and 1,562 were manufacturing personnel. We also utilized the services of 146 temporary personnel as of January 2, 2011.
 
Some of our production employees in Australia and the United Kingdom are represented by unions. In the Netherlands, a Works Council, the members of which are Interface employees, is required to be consulted by management with respect to certain matters relating to our operations in that country, such as a change in control of Interface Europe B.V. (our modular carpet subsidiary based in the Netherlands), and the approval of the Council is required for some of our actions, including changes in compensation scales or employee benefits. Our management believes that its relations with the Works Council, the unions and all of our employees are good.


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Environmental Matters
 
Our operations are subject to laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on our financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point, Georgia, City of Industry, California, Shelf, England, Northern Ireland, Australia, the Netherlands and Thailand are certified under ISO Standard No. 14001.
 
Executive Officers of the Registrant
 
Our executive officers, their ages as of January 2, 2011, and their principal positions with us are set forth below. Executive officers serve at the pleasure of the Board of Directors.
 
             
Name
 
Age
 
Principal Position(s)
 
Daniel T. Hendrix
    56     President and Chief Executive Officer
Robert A. Coombs
    52     Senior Vice President
Patrick C. Lynch
    41     Senior Vice President and Chief Financial Officer
Lindsey K. Parnell
    53     Senior Vice President
John R. Wells
    49     Senior Vice President
Raymond S. Willoch
    52     Senior Vice President-Administration, General Counsel and Secretary
Maria C. Davlantes
    42     Chief Marketing Officer
 
Mr. Hendrix joined us in 1983 after having worked previously for a national accounting firm. He was promoted to Treasurer in 1984, Chief Financial Officer in 1985, Vice President-Finance in 1986, Senior Vice President in October 1995, Executive Vice President in October 2000, and President and Chief Executive Officer in July 2001. He was elected to the Board in October 1996 and has served on the Executive Committee of the Board since July 2001.
 
Mr. Coombs originally worked for us from 1988 to 1993 as a marketing manager for our Heuga carpet tile operations in the United Kingdom and later for all of our European floorcovering operations. In 1996, Mr. Coombs returned to us as Managing Director of our Australian operations. He was promoted in 1998 to Vice President-Sales and Marketing, Asia-Pacific, with responsibility for Australian operations and sales and marketing in Asia, which was followed by a promotion to Senior Vice President, Asia-Pacific. He was promoted to Senior Vice President, European Sales, in May 1999 and Senior Vice President, European Sales and Marketing, in April 2000. In February 2001, he was promoted to President and Chief Executive Officer of Interface Overseas Holdings, Inc. with responsibility for all of our floorcoverings operations in both Europe and the Asia-Pacific region, and he became a Vice President of Interface. In September 2002, Mr. Coombs relocated back to Australia, retaining responsibility for our floorcovering operations in the Asia-Pacific region while Mr. Parnell (see below) assumed responsibility for floorcovering operations in Europe. Mr. Coombs was promoted to Senior Vice President of Interface in July 2008.
 
Mr. Lynch joined us in 1996 after having previously worked for a national accounting firm. He became Assistant Corporate Controller in 1998 and Assistant Vice President and Corporate Controller in 2000. Mr. Lynch was promoted to Vice President and Chief Financial Officer in July 2001. Mr. Lynch was promoted to Senior Vice President in March 2007.
 
Mr. Parnell was the Production Director for Firth Carpets (our former European broadloom operations) at the time it was acquired by us in 1997. In 1998, Mr. Parnell was promoted to Vice President, Operations for the United Kingdom, and in 1999 he was promoted to Senior Vice President, Operations for our entire European floorcovering division. In September 2002, he was promoted to President and Chief Executive Officer of our floorcovering operations in Europe, and became a Vice President of Interface in October 2002. Mr. Parnell was promoted to Senior Vice President of Interface in July 2008.


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Mr. Wells joined us in February 1994 as Vice President-Sales of Interface Flooring Systems, Inc. (now InterfaceFLOR, LLC), our principal U.S. modular carpet subsidiary. Mr. Wells was promoted to Senior Vice President-Sales & Marketing of Interface Flooring Systems in October 1994. He was promoted to Vice President of Interface and President of Interface Flooring Systems in July 1995. In March 1998, Mr. Wells was also named President of both Prince Street Technologies, Ltd. and Bentley Mills, Inc., making him President of all three of our U.S. carpet mills at that time. In November 1999, Mr. Wells was named Senior Vice President of Interface, and President and Chief Executive Officer of Interface Americas Holdings, LLC (formerly Interface Americas, Inc.), thereby assuming operations responsibility for all of our floorcovering businesses in the Americas.
 
Mr. Willoch, who previously practiced with an Atlanta law firm, joined us in June 1990 as Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant Vice President in 1993, Vice President in January 1996, Secretary and General Counsel in August 1996, and Senior Vice President in February 1998. In July 2001, he was named Senior Vice President-Administration and assumed corporate responsibility for various staff functions.
 
Ms. Davlantes joined us in May 2008 as Senior Vice President of Marketing for FLOR, our residential carpet tile business. In November 2009, she was promoted to Chief Marketing Officer of Interface, while still maintaining her responsibilities at FLOR. Prior to joining us, Ms. Davlantes had acquired 17 years of marketing experience with Spiegel, McKinsey & Company, Charcol and BP.
 
Available Information
 
We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet address is http://www.interfaceglobal.com.
 
Forward-Looking Statements
 
This report on Form 10-K contains “forward-looking statements” within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements regarding the intent, belief or current expectations of our management team, as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed in Item 1A, “Risk Factors”.


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ITEM 1A.   RISK FACTORS
 
You should carefully consider the following factors, in addition to the other information included in this Annual Report on Form 10-K and the other documents incorporated herein by reference, before deciding whether to purchase or sell our common stock. Any or all of the following risk factors could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
General Business Risks
 
The ongoing worldwide financial and credit crisis could have a material adverse effect on our business, financial condition and results of operations.
 
The ongoing worldwide financial and credit crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of many business operations worldwide. This shortage of liquidity and credit, combined with recent substantial losses in worldwide equity markets, could lead to an extended worldwide economic recession and result in a material adverse effect on our business, financial condition and results of operations. Specifically, the limited availability of credit and liquidity adversely affects the ability of customers and suppliers to obtain financing for significant purchases and operations. Consequently, customers may defer, delay or cancel renovation and construction projects where our carpet is used, resulting in decreased orders and sales for us, and they also may not be able to pay us for those products and services we already have provided to them. For the same reasons, suppliers may not be able to produce and deliver raw materials and other goods and services that we have ordered from them, thus disrupting our own manufacturing operations. In addition, our ability to obtain funding from capital markets may be severely restricted at a time when we would like, or need, to access those markets. This inability to obtain that funding could prevent us from pursuing important strategic growth plans, from reacting to changing economic and business conditions, and from refinancing existing debt (which in turn could lead to a default on our debt). The financial and credit crisis also could have an impact on the lenders under our credit facilities, causing them to fail to meet their obligations to provide us with loans and letters of credit, which are important sources of liquidity for us.
 
Our domestic revolving credit facility matures in December 2012. We cannot assure you that we will be able to renegotiate or refinance this debt on commercially reasonable terms, or at all, especially given the ongoing worldwide financial and credit crisis.
 
Sales of our principal products have been and may continue to be affected by adverse economic cycles in the renovation and construction of commercial and institutional buildings.
 
Sales of our principal products are related to the renovation and construction of commercial and institutional buildings. This activity is cyclical and has been affected by the strength of a country’s or region’s general economy, prevailing interest rates and other factors that lead to cost control measures by businesses and other users of commercial or institutional space. The effects of cyclicality upon the corporate office segment tend to be more pronounced than the effects upon the institutional segment. Historically, we have generated more sales in the corporate office segment than in any other market. The effects of cyclicality upon the new construction segment of the market also tend to be more pronounced than the effects upon the renovation segment. These effects may recur and could be more pronounced if the current global economic conditions do not improve or are further weakened.
 
We compete with a large number of manufacturers in the highly competitive commercial floorcovering products market, and some of these competitors have greater financial resources than we do.
 
The commercial floorcovering industry is highly competitive. Globally, we compete for sales of floorcovering products with other carpet manufacturers and manufacturers of other types of floorcovering. Although the industry has experienced significant consolidation, a large number of manufacturers remain in the industry. Some of our competitors, including a number of large diversified domestic and foreign companies who manufacture modular carpet as one segment of their business, have greater financial resources than we do.


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Our success depends significantly upon the efforts, abilities and continued service of our senior management executives and our principal design consultant, and our loss of any of them could affect us adversely.
 
We believe that our success depends to a significant extent upon the efforts and abilities of our senior management executives. In addition, we rely significantly on the leadership that David Oakey of David Oakey Designs provides to our internal design staff. Specifically, David Oakey Designs provides product design/production engineering services to us under an exclusive consulting contract that contains non-competition covenants. Our current agreement with David Oakey Designs extends to April 2011. The loss of any of these key persons could have an adverse impact on our business because each has a great deal of knowledge, training and experience in the carpet industry — particularly in the areas of sales, marketing, operations, product design and management — and could not easily or quickly be replaced.
 
Our substantial international operations are subject to various political, economic and other uncertainties that could adversely affect our business results, including by restrictive taxation or other government regulation and by foreign currency fluctuations.
 
We have substantial international operations. In 2010, approximately half of our net sales and a significant portion of our production were outside the United States, primarily in Europe and Asia-Pacific. Our corporate strategy includes the expansion and growth of our international business on a worldwide basis. As a result, our operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, changing political conditions and governmental regulations. We also make a substantial portion of our net sales in currencies other than U.S. dollars (approximately half of 2010 net sales), which subjects us to the risks inherent in currency translations. The scope and volume of our global operations make it impossible to eliminate completely all foreign currency translation risks as an influence on our financial results.
 
Large increases in the cost of petroleum-based raw materials could adversely affect us if we are unable to pass these cost increases through to our customers.
 
Petroleum-based products comprise the predominant portion of the cost of raw materials that we use in manufacturing. While we attempt to match cost increases with corresponding price increases, continued volatility in the cost of petroleum-based raw materials could adversely affect our financial results if we are unable to pass through such price increases to our customers.
 
Unanticipated termination or interruption of any of our arrangements with our primary third party suppliers of synthetic fiber could have a material adverse effect on us.
 
The unanticipated termination or interruption of any of our supply arrangements with our current suppliers of synthetic fiber (nylon), which typically are not pursuant to long-term agreements, could have a material adverse effect on us because we do not have the capability to manufacture our own fiber for use in our carpet products. If any of our supply arrangements with our primary suppliers of synthetic fiber is terminated or interrupted, we likely would incur increased manufacturing costs and experience delays in our manufacturing process (thus resulting in decreased sales and profitability) associated with shifting more of our synthetic fiber purchasing to another synthetic fiber supplier.
 
We have a significant amount of indebtedness, which could have important negative consequences to us.
 
Our significant indebtedness could have important negative consequences to us, including:
 
  •  making it more difficult for us to satisfy our obligations with respect to such indebtedness;
 
  •  increasing our vulnerability to adverse general economic and industry conditions;
 
  •  limiting our ability to obtain additional financing to fund capital expenditures, acquisitions or other growth initiatives, and other general corporate requirements;


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  •  requiring us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, acquisitions or other growth initiatives, and other general corporate requirements;
 
  •  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  placing us at a competitive disadvantage compared to our less leveraged competitors; and
 
  •  limiting our ability to refinance our existing indebtedness as it matures.
 
As a consequence of our level of indebtedness, a substantial portion of our cash flow from operations must be dedicated to debt service requirements. In addition, the terms of our primary revolving credit facility in the U.S. and the indenture governing our 75/8% Senior Notes due 2018 limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments or investments in certain situations, consummate certain asset sales, enter into certain transactions with affiliates, create liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. They also require us to comply with certain other reporting, affirmative and negative covenants and, at times, meet certain financial tests. If we fail to satisfy these tests or comply with these covenants, a default may occur, in which case the lenders could accelerate the debt as well as any other debt to which cross-acceleration or cross-default provisions apply. We cannot assure you that we would be able to renegotiate, refinance or otherwise obtain the necessary funds to satisfy these obligations.
 
The market price of our common stock has been volatile and the value of your investment may decline.
 
The market price of our Class A common stock has been volatile in the past and may continue to be volatile going forward. Such volatility may cause precipitous drops in the price of our Class A common stock on the Nasdaq Global Select Market and may cause your investment in our common stock to lose significant value. As a general matter, market price volatility has had a significant effect on the market values of securities issued by many companies for reasons unrelated to their operating performance. We thus cannot predict the market price for our common stock going forward.
 
Our earnings in a future period could be adversely affected by non-cash adjustments to goodwill, if a future test of goodwill assets indicates a material impairment of those assets.
 
As prescribed by accounting standards governing goodwill and other intangible assets, we undertake an annual review of the goodwill asset balance reflected in our financial statements. Our review is conducted during the fourth quarter of the year, unless there has been a triggering event prescribed by applicable accounting rules that warrants an earlier interim testing for possible goodwill impairment. In the past, we have had non-cash adjustments for goodwill impairment as a result of such testings ($61.2 million in 2008, $44.5 million in 2007, and $20.7 million in 2006). A future goodwill impairment test may result in a future non-cash adjustment, which could adversely affect our earnings for any such future period.
 
Our Chairman, together with other insiders, currently has sufficient voting power to elect a majority of our Board of Directors.
 
Our Chairman, Ray C. Anderson, beneficially owns approximately 47% of our outstanding Class B common stock. The holders of the Class B common stock are entitled, as a class, to elect a majority of our Board of Directors. Therefore, Mr. Anderson, together with other insiders, has sufficient voting power to elect a majority of the Board of Directors. On all other matters submitted to the shareholders for a vote, the holders of the Class B common stock generally vote together as a single class with the holders of the Class A common stock. Mr. Anderson’s beneficial ownership of the outstanding Class A and Class B common stock combined is approximately 6%.


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Our Rights Agreement could discourage tender offers or other transactions for our stock that could result in shareholders receiving a premium over the market price for our stock.
 
Our Board of Directors has adopted a Rights Agreement pursuant to which holders of our common stock will be entitled to purchase from us a fraction of a share of our Series B Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of our common stock without our consent. In addition, the holders of our common stock will be entitled to purchase the stock of an Acquiring Person (as defined in the Rights Agreement) at a discount upon the occurrence of triggering events. These provisions of the Rights Agreements could have the effect of discouraging tender offers or other transactions that could result in shareholders receiving a premium over the market price for our common stock.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
We maintain our corporate headquarters in Atlanta, Georgia in approximately 20,000 square feet of leased space. The following table lists our principal manufacturing facilities and other material physical locations (some locations are comprised of multiple buildings), all of which we own except as otherwise noted:
 
             
        Floor Space
Location
 
Segment
  (Sq. Ft.)
 
Bangkok, Thailand
  Modular Carpet     275,946  
Craigavon, N. Ireland(1)
  Modular Carpet     80,986  
LaGrange, Georgia
  Modular Carpet     539,545  
LaGrange, Georgia(1)
  Modular Carpet     209,337  
Picton, Australia
  Modular Carpet     98,774  
Scherpenzeel, the Netherlands
  Modular Carpet     245,420  
Scherpenzeel, the Netherlands(1)
  Modular Carpet     121,515  
Shelf, England
  Modular Carpet     206,882  
West Point, Georgia
  Modular Carpet     250,000  
Taicang, China(1)
  Modular Carpet     71,375  
City of Industry, California(1)
  Bentley Prince Street     558,596  
 
 
(1) Leased.
 
We maintain marketing offices in over 70 locations in over 30 countries and distribution facilities in approximately 40 locations in six countries. Most of our marketing locations and many of our distribution facilities are leased.
 
We believe that our manufacturing and distribution facilities and our marketing offices are sufficient for our present operations. We will continue, however, to consider the desirability of establishing additional facilities and offices in other locations around the world as part of our business strategy to meet expanding global market demands. Substantially all of our owned properties in the United States, Europe and Australia are subject to mortgages, which secure borrowings under our debt instruments.
 
ITEM 3.   LEGAL PROCEEDINGS
 
We are subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 3.
 
ITEM 4.   RESERVED


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PART II
 
ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Class A Common Stock is traded on the Nasdaq Global Select Market under the symbol IFSIA. Our Class B Common Stock is not publicly traded but is convertible into Class A Common Stock on a one-for-one basis. As of March 1, 2011, we had 643 holders of record of our Class A Common Stock and 89 holders of record of our Class B Common Stock. We estimate that there are in excess of 7,700 beneficial holders of our Class A Common Stock. The following table sets forth, for the periods indicated, the high and low intraday prices of the Company’s Class A Common Stock on the Nasdaq Global Select Market as well as dividends paid during such periods.
 
                         
            Dividends
    High   Low   per Share
 
2011
                       
First Quarter (through March 1, 2011)
  $ 17.95     $ 15.20        
2010
                       
Fourth Quarter
  $ 17.15     $ 13.90     $ 0.02  
Third Quarter
    14.65       10.34       0.01  
Second Quarter
    14.42       10.08       0.01  
First Quarter
    11.90       7.05       0.0025  
2009
                       
Fourth Quarter
  $ 8.99     $ 6.90     $ 0.0025  
Third Quarter
    9.01       5.22       0.0025  
Second Quarter
    7.02       3.08       0.0025  
First Quarter
    5.12       1.45       0.0025  
 
Future declaration and payment of dividends is at the discretion of our Board, and depends upon, among other things, our investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board at the time of its determination. Such other factors include limitations contained in the agreement for our primary revolving credit facility and in an indenture for our public indebtedness, each of which specify conditions as to when any dividend payments may be made. As such, we may discontinue our dividend payments in the future if our Board determines that a cessation of dividend payments is proper in light of the factors indicated above.


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Stock Performance
 
The following graph and table compare, for the five-year period ended January 2, 2011, the Company’s total returns to shareholders (stock price plus dividends, divided by beginning stock price) with that of (i) all companies listed on the Nasdaq Composite Index, and (ii) a self-determined peer group comprised primarily of companies in the commercial interiors industry, assuming an initial investment of $100 in each on January 1, 2006.
 
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
 
(PERFORMANCE GRAPH)
 
                                                             
      1/1/06     12/31/06     12/30/07     12/28/08     1/3/10     1/2/11
Interface, Inc. 
    $ 100       $ 173       $ 201       $ 63       $ 104       $ 197  
NASDAQ Composite Index
    $ 100       $ 110       $ 123       $ 71       $ 107       $ 126  
Self-Determined Peer Group (13 Stocks)
    $ 100       $ 104       $ 101       $ 40       $ 58       $ 80  
                                                             
 
Notes to Performance Graph
 
(1) The lines represent annual index levels derived from compound daily returns that include all dividends.
 
(2) The indices are re-weighted daily, using the market capitalization on the previous trading day.
 
(3) If the annual interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
 
(4) The index level was set to $100 as of 1/1/06 (the last day of fiscal 2005).
 
(5) The Company’s fiscal year ends on the Sunday nearest December 31.
 
(6) The following companies are included in the Self-Determined Peer Group depicted above: Actuant Corp.; Acuity Brands, Inc.; Albany International Corp., BE Aerospace, Inc.; The Dixie Group, Inc.; Herman Miller, Inc.; HNI Corporation (formerly known as Hon Industries, Inc.); Kimball International, Inc.; Knoll, Inc. (beginning in March, 2005 upon trading commencement); Mohawk Industries, Inc.; Steelcase, Inc.; Unifi, Inc.; and USG Corp.


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ITEM 6.   SELECTED FINANCIAL DATA
 
We derived the summary consolidated financial data presented below from our audited consolidated financial statements and the notes thereto for the years indicated. You should read the summary financial data presented below together with the audited consolidated financial statements and notes thereto included within this document. Amounts for all periods presented have been adjusted for discontinued operations.
 
                                         
    Selected Financial Data(1)  
    2010     2009     2008     2007     2006  
    (In thousands, except per share data and ratios)  
 
Net sales
  $ 961,827     $ 859,888     $ 1,082,344     $ 1,081,273     $ 914,659  
Cost of sales
    625,066       576,871       710,299       703,751       603,551  
Operating income(2)
    92,729       62,994       41,659       129,391       99,621  
Income (loss) from continuing operations(3)(4)
    10,070       12,673       (34,513 )     58,972       36,235  
Loss from discontinued operations, net of tax(5)
    (736 )     (909 )     (5,154 )     (68,660 )     (24,092 )
Loss on disposal of discontinued operations
                            (1,723 )
Net income (loss) attributable to Interface, Inc. 
    8,283       10,918       (40,873 )     (10,812 )     9,992  
 
 
Income (loss) from continuing operations per common share attributable to Interface, Inc.(6)
                                       
Basic
  $ 0.14     $ 0.19     $ (0.58 )   $ 0.94     $ 0.65  
Diluted
  $ 0.14     $ 0.19     $ (0.58 )   $ 0.93     $ 0.64  
Average Shares Outstanding(6)
                                       
Basic
    63,794       63,213       61,439       61,425       55,398  
Diluted
    64,262       63,308       61,439       61,938       56,374  
Cash dividends per common share
  $ 0.0425     $ 0.01     $ 0.12     $ 0.08     $  
Property additions
    31,715       8,753       29,300       40,592       28,540  
Depreciation and amortization
    27,927       25,189       23,664       22,487       21,750  
 
 
Working capital
  $ 224,573     $ 236,630     $ 221,323     $ 238,578     $ 380,253  
Total assets
    755,433       727,239       706,035       835,232       928,340  
Total long-term debt
    294,428       280,184       287,588       310,000       411,365  
Shareholders’ equity(4)
    248,872       246,181       217,437       301,116       279,900  
Current ratio(7)
    2.3       2.6       2.4       2.3       3.2  
 
 
(1) In the third quarter of 2007, we sold substantially all of the assets related to our Fabrics Group business segment. The balances have been adjusted to reflect the discontinued operations of this business. For further analysis, see “Notes to Consolidated Financial Statements — Discontinued Operations” included in Item 8 of this Report.
 
(2) In the first quarter of 2010, we recorded a restructuring charge of $3.1 million. In the first quarter of 2009, we recorded a restructuring charge of $5.7 million. In the second quarter of 2009, we recorded a restructuring charge of $1.9 million. In the second quarter of 2009, we recorded income from litigation settlements of $5.9 million. In the fourth quarter of 2008, we recorded a restructuring charge of $11.0 million. Also in the fourth quarter of 2008, we recorded an impairment charge of $61.2 million related to the goodwill of our Bentley Prince Street business segment. In the first quarter of 2007, we disposed of our Pandel business, which comprised our Specialty Products business segment, and recognized a loss of $1.9 million on this disposition.
 
(3) Included in the 2010 income from continuing operations are pre-tax expenses of $44.4 million related to bond retirement. For further information, see “Notes to Consolidated Financial Statements — Borrowings” included in Item 8 of this Report. Included in the 2008 loss from continuing operations is tax expense of $13.3 million related to the anticipated repatriation in 2009 of foreign earnings. For further analysis, see “Notes to Consolidated Financial Statements — Taxes on Income” included in Item 8 of this Report.


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(4) Amounts for all periods presented have been adjusted to reflect the adoption of a new accounting standard that governs the treatment of non-controlling interests in subsidiaries. This standard was adopted by us in the first quarter of 2009.
 
(5) Included in loss from discontinued operations, net of tax, are goodwill and other intangible asset impairment charges of $48.3 million in 2007 and $20.7 million in 2006. Also included in loss from discontinued operations, net of tax, are charges for write-offs and impairments of other assets of $5.2 million in 2008 and $8.8 million in 2007.
 
(6) Amounts for all periods presented have been adjusted to reflect the adoption of a new accounting standard regarding the treatment of unvested restricted shares which have the right to receive dividends. This standard was adopted by us in the first quarter of 2009.
 
(7) For purposes of computing our current ratio: (a) current assets include assets of businesses held for sale of $1.2 million, $1.5 million, $3.2 million, $4.8 million and $158.3 million in fiscal years 2010, 2009, 2008, 2007 and 2006, respectively, and (b) current liabilities include liabilities of businesses held for sale of $0.2 million and $22.9 million in fiscal years 2007 and 2006, respectively.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
General
 
Our revenues are derived from sales of floorcovering products, primarily modular and broadloom carpet. Our business, as well as the commercial interiors industry in general, is cyclical in nature and is impacted by economic conditions and trends that affect the markets for commercial and institutional business space. The commercial interiors industry, including the market for floorcovering products, is largely driven by reinvestment by corporations into their existing businesses in the form of new fixtures and furnishings for their workplaces. In significant part, the timing and amount of such reinvestments are impacted by the profitability of those corporations. As a result, macroeconomic factors such as employment rates, office vacancy rates, capital spending, productivity and efficiency gains that impact corporate profitability in general, also affect our business.
 
During the past several years, we have successfully focused more of our marketing and sales efforts on non-corporate office segments to reduce somewhat our exposure to economic cycles that affect the corporate office market segment more adversely, as well as to capture additional market share. Our mix of corporate office versus non-corporate office modular carpet sales in the Americas has shifted over the past several years to 44% and 56%, respectively, for 2010 compared with 64% and 36%, respectively, in 2001. Company-wide, our mix of corporate office versus non-corporate office sales was 56% and 44%, respectively, in 2010. We expect a further shift in the future as we continue to implement our market diversification strategy.
 
From 2005 through the first half of 2008, the commercial interiors industry experienced growth at a gradual pace, which led to improved sales and operating profitability for us during that period. In the fourth quarter of 2008, and particularly in November and December, the worldwide financial and credit crisis caused many corporations, governments and other organizations to delay or curtail spending on renovation and construction projects where our carpet is used. This downturn, which continued throughout 2009, negatively impacted our performance and led to the goodwill impairment and restructuring charges, discussed below, that we incurred in the fourth quarter of 2008 and the first half of 2009. Demand levels substantially recovered in 2010.
 
During 2010, we had net sales of $961.8 million, compared with $859.9 million in 2009. Operating income for 2010 was $92.7 million, compared with operating income of $63.0 million in 2009. Income from continuing operations in 2010 was $10.1 million, or $0.14 per diluted share, compared with income from continuing operations of $12.7 million, or $0.19 per diluted share, in 2009. Net income attributable to Interface, Inc. was $8.3 million, or $0.13 per diluted share, in 2010, compared with net income attributable to Interface, Inc. of $10.9 million, or $0.17 per diluted share, in 2009.


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Included in our results for 2010 are $44.4 million of bond retirement expenses related to our repurchases of our 113/8% Senior Secured Notes and 9.5% Senior Subordinated Notes, as well as restructuring charges of $3.1 million. Each of these is discussed below. Included in our results for 2009 are $7.6 million of restructuring charges and $6.1 million of bond retirement expenses related to the tender offer we conducted for our 10.375% Senior Notes, each of which is discussed below. In addition, our results for 2009 include income of $5.9 million related to settlements of patent litigation, which is a net amount after deducting all legal fees and related expenses. (We received $16.0 million of gross proceeds from these settlements.) Included in our results for 2008 are a goodwill impairment charge of $61.2 million, restructuring charges of $11.0 million, and a repatriation charge of $13.3 million, each of which is discussed below.
 
Restructuring Charges
 
2010 Restructuring Plan
 
In the first quarter of 2010, we adopted a restructuring plan primarily related to workforce reduction in our 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, we 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.
 
2009 Restructuring Plan
 
In the first quarter of 2009, we adopted a restructuring plan, primarily comprised of a further reduction in our worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for our products on a global level. In connection with the plan, we 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, we recorded an additional $1.9 million restructuring charge as a continuation of this plan. The charge in the second quarter of 2009 is due to approximately 80 additional employee reductions, and relates entirely to employee severance expense.
 
2008 Restructuring Plan
 
In the fourth quarter of 2008, we committed to a restructuring plan intended to reduce costs across our worldwide operations, and more closely align our operations with demand levels. The reduction of the demand levels was primarily a result of the worldwide recession and the associated delays and reductions in the number of construction projects where our carpet products are used. The plan primarily consisted of ceasing manufacturing operations at our facility in Belleville, Canada, and reducing our worldwide employee base by a total of approximately 530 employees in the areas of manufacturing, sales and administration. In connection with the restructuring plan, we recorded a pre-tax restructuring charge in the fourth quarter of 2008 of $11.0 million. We record our restructuring accruals under the provisions of the applicable accounting standards. The restructuring charge was comprised of employee severance expense of $7.8 million, impairment of assets of $2.6 million, and other exit costs of $0.7 million (primarily related to lease exit costs and other closure activities). Approximately $8.3 million of the restructuring charge involved cash expenditures, primarily severance expense. Actions and expenses related to this plan were substantially completed in the first quarter of 2009.
 
75/8% Senior Notes
 
On December 3, 2010, we completed a private offering of $275 million aggregate principal amount of 75/8% Senior Notes due 2018 (the “75/8% Senior Notes”). Interest on the 75/8% Senior Notes is payable semi-


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annually on June 1 and December 1 beginning June 1, 2011. We used the net proceeds from the sale of the 75/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of our 113/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes, pursuant to a tender offer we conducted in 2010. We incurred $43.3 million of bond retirement expenses in connection with these repurchases pursuant to the tender offer.
 
113/8% Senior Secured Notes
 
On June 5, 2009, we completed a private offering of $150 million aggregate principal amount of 113/8% Senior Secured Notes due 2013 (the “113/8% Senior Secured Notes”). Interest on the 113/8% Senior Secured Notes is payable semi-annually on May 1 and November 1 (the first interest payment was on November 1, 2009). The 113/8% Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of our domestic subsidiaries. The 113/8% Senior Secured Notes are secured by a second-priority lien on substantially all of our and certain of our domestic subsidiaries’ assets that secure our domestic revolving credit facility (discussed below) on a first-priority basis.
 
The 113/8% 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, although substantially all of this discount was accelerated and charged in 2010 as a result of our repurchases in the tender offer we conducted for these notes in connection with the issuance of our 75/8% Senior Notes. After deducting the initial purchasers’ discount and other fees and expenses associated with the sale, net proceeds from the issuance of the 113/8% Senior Secured Notes were $139.5 million. We used $137.4 million of those net proceeds to repurchase $127.2 million aggregate principal amount of our 10.375% Senior Notes due 2010 (the “10.375% Senior Notes”) pursuant to a tender offer we conducted in 2009. (Included in the $137.4 million used to repurchase the $127.2 million aggregate principal amount of 10.375% Senior Notes were a purchase price premium of $5.7 million and accrued interest of $4.5 million). We incurred $6.1 million of bond retirement expenses in connection with these repurchases. The remaining $2.1 million of the net proceeds was used to repay a portion of the $14.6 million of 10.375% Senior Notes that remained outstanding following the tender offer. (The balance of the 10.375% Senior Notes was then repaid at maturity on February 1, 2010.)
 
Partial Redemption of 9.5% Senior Subordinated Notes due 2014
 
In the first quarter of 2010, we redeemed $25 million aggregate principal amount of our 9.5% Senior Subordinated Notes (the “9.5% Senior Subordinated Notes”) at a price equal to 103.167% of the face value of the notes, plus accrued interest to the redemption date. We incurred $1.1 million of bond retirement expenses in connection with these repurchases.
 
2008 Goodwill Impairment Write-Down
 
During the fourth quarters of 2010, 2009 and 2008, we performed the annual goodwill impairment test required by accounting standards. We perform this test at the reporting unit level, which is one level below the segment level for the Modular Carpet segment and at the level of the Bentley Prince Street segment. In effecting the impairment testing, we prepared valuations of reporting units on both a market comparable methodology and an income methodology in accordance with the applicable standards, and those valuations were compared with the respective book values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past, present and future expectations of performance were considered. The results of the tests indicated no impairment of goodwill in 2010 or 2009. In the fourth quarter of 2008, a goodwill impairment of $61.2 million related to our Bentley Prince Street reporting unit was identified due largely to the following factors:
 
  •  There was a significant decline in Bentley Prince Street’s performance, primarily in the last three months of 2008.  This decline also was reflected in the forward projections of Bentley Prince Street’s budgeting process. The projections showed a decline in both sales and operating income over Bentley


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  Prince Street’s three-year budgeting process. These declines impacted the value of the business from an income valuation approach. The declines in projections were primarily related to the global economic crisis and its impact on the broadloom carpet market.
 
  •  There was an increase in the discount rate used to create the present value of future expected cash flows.  This increase from approximately 12% to 16% was more reflective of our market capitalization and risk premiums on a reporting unit level, which impacted the value of the business using an income valuation approach.
 
  •  There was a decrease in the market multiple factors used for a market valuation approach.  This decrease was reflective of the general market conditions regarding current market activities and market valuation guidelines.
 
Repatriation of Earnings of Foreign Subsidiaries
 
In the fourth quarter of 2008, we recorded a tax charge of approximately $13.3 million for the anticipated future repatriation of approximately $37 million of earnings from our Canadian and European subsidiaries. We anticipated repatriating most of these earnings in 2009 to accumulate cash in the United States in light of the then pending maturity of our 10.375% Senior Notes. As a result, we determined that those earnings were no longer indefinitely reinvested outside of the U.S. and recorded the appropriate charge, in accordance with the provisions of applicable accounting standards. For additional information on this tax charge, see the Note entitled “Taxes on Income” in Item 8 of this Report.
 
Discontinued Operations
 
In 2007, we sold our Fabrics Group business segment to a third party. Following working capital and other adjustments provided for in the agreement, we received $60.7 million in cash at the closing of the transaction. We initially recognized a $6.5 million receivable related to additional purchase price under the sale agreement pursuant to an earn-out arrangement focused on the performance of that business segment, as owned and operated by the purchaser, during the 18-month period following the closing. However, in 2008, we determined that the receipt of this deferred amount was less than probable and therefore reserved for the full amount of this deferred purchase price. As discussed in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, in the first quarter of 2007, we recorded charges for impairment of goodwill of $44.5 million and impairment of other intangible assets of $3.8 million related to the Fabrics Group business segment. In addition, as a result of the agreed-upon purchase price for the segment, we recorded an additional impairment of assets of $13.6 million in the second quarter of 2007.
 
In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics Group business segment for all periods reflected herein, as “discontinued operations.” Consequently, our discussion of revenues or sales, taxes and other results of operations (except for net income or loss amounts), including percentages derived from or based on such amounts, excludes these discontinued operations unless we indicate otherwise.
 
Our discontinued operations had no net sales in 2010, 2009 and 2008. Loss from operations of these businesses, inclusive of goodwill impairments and other asset impairments as well as costs to sell these businesses, net of tax, was $0.7 million, $0.9 million and $5.2 million in 2010, 2009 and 2008, respectively (these results are included in our Consolidated Statements of Operations as part of the “Loss from Discontinued Operations, Net of Tax”). For additional information on discontinued operations, see the Notes entitled “Discontinued Operations,” “Sale of Fabrics Business” and “Taxes on Income” in Item 8 of this Report.


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Analysis of Results of Operations
 
The following discussion and analyses reflect the factors and trends discussed in the preceding sections.
 
Our net sales that were denominated in currencies other than the U.S. dollar were approximately 50% in 2010, 47% in 2009, and 50% in 2008. Because we have such substantial international operations, we are impacted, from time to time, by international developments that affect foreign currency transactions. For example, the performance of the euro against the U.S. dollar, for purposes of the translation of European revenues into U.S. dollars, favorably affected our reported results during 2008, when the euro was strengthening relative to the U.S. dollar. During the years 2009 and 2010, the dollar strengthened versus the euro, having the opposite effect on our reported results. The following table presents the amount (in U.S. dollars) by which the exchange rates for converting euros into U.S. dollars have affected our net sales and operating income during the past three years:
 
                         
    2010   2009   2008
    (In millions)
 
Net sales
  $ (14.4 )   $ (13.8 )   $ 24.5  
Operating income
    (2.1 )     (1.0 )     3.0  
 
The following table presents, as a percentage of net sales, certain items included in our Consolidated Statements of Operations during the past three years:
 
                         
    Fiscal Year  
    2010     2009     2008  
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    65.0       67.1       65.6  
                         
Gross profit on sales
    35.0       32.9       34.4  
Selling, general and administrative expenses
    25.0       25.4       23.9  
Impairment of goodwill
                5.7  
Restructuring charge
    0.3       0.9       1.0  
Income from litigation settlements
          (0.7 )      
                         
Operating income
    9.6       7.3       3.8  
Interest/Other expense
    3.5       4.1       3.1  
Bond retirement expenses
    4.6       0.7        
                         
Income from continuing operations before tax
    1.5       2.6       0.8  
Income tax expense
    0.5       1.1       4.0  
                         
Income (loss) from continuing operations
    1.0       1.5       (3.2 )
Discontinued operations, net of tax
    (0.1 )     (0.1 )     (0.5 )
                         
Net income (loss)
    1.0       1.4       (3.7 )
                         
Net income (loss) attributable to Interface, Inc. 
    0.9       1.3       (3.8 )
                         
 
Below we provide information regarding net sales for each of our two operating segments, and analyze those results for each of the last three fiscal years. Fiscal year 2009 was a 53-week period, while fiscal years 2010 and 2008 were 52-week periods. The 53 weeks in 2009 versus the 52 weeks in 2010 and 2008 are a factor in certain of the comparisons reflected below.
 
Net Sales by Business Segment
 
We currently classify our businesses into the following two operating segments for reporting purposes:
 
  •  Modular Carpet segment, which includes our InterfaceFLOR, Heuga and FLOR modular carpet businesses, and also includes our Intersept antimicrobial chemical sales and licensing program; and


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  •  Bentley Prince Street segment, which includes our Bentley Prince Street broadloom, modular carpet and area rug businesses.
 
Net sales by operating segment were as follows during the past three years:
 
                                         
                      Percentage Change  
    Fiscal Year     2010 Compared
    2009 Compared
 
Net Sales By Segment
  2010     2009     2008     with 2009     with 2008  
    (In thousands)              
 
Modular Carpet
  $ 862,314     $ 765,264     $ 946,816       12.7 %     (19.2 )%
Bentley Prince Street
    99,513       94,624       135,528       5.2 %     (30.2 )%
                                         
Total
  $ 961,827     $ 859,888     $ 1,082,344       11.9 %     (20.6 )%
                                         
 
Modular Carpet Segment.  For 2010, net sales for the Modular Carpet segment increased $97.0 million (12.7%) versus 2009. The weighted average selling price per square yard in 2010 showed a slight increase (approximately 1%) versus 2009. On a geographic basis, we experienced increases in net sales in the Americas, Europe, and Asia-Pacific (up 11%, 3% and 46%, respectively) in 2010 versus 2009. (The sales increase in Europe in local currency was 8%.) These increases are primarily attributable to the improving economic climates in those regions. Sales growth in the Americas is due to the continued recovery in the corporate office market segment (up 21%) as well the education (up 6%), hospitality (up 37%), residential (up 10%) and governmental (up 3%) market segments. Only one market segment (retail, down 3%) showed a decline in the Americas. The sales increase in Europe was led by the corporate office (up 5% in U.S. dollars and 11% in local currency), retail (up 16% in U.S. dollars and 22% in local currency) and education (up 6% in U.S. dollars and 13% in local currency) market segments. These increases were offset somewhat by declines in the residential (down 15% in U.S. dollars and 11% in local currency) and healthcare (down 41% in U.S. dollars and 37% in local currency) market segments. The Asia-Pacific region saw sales increase across all market segments, with corporate office (up 31%) and education (up over 100%) showing the most significant increases.
 
For 2009, net sales for the Modular Carpet segment decreased $181.5 million (19.2%) versus 2008. This decline was primarily attributable to the reduced order activity for renovation and construction projects as a result of the worldwide financial and credit crisis. The weighted average selling price per square yard in 2009 was down 2.1% compared with 2008 as a result of the enhanced price sensitivity of our customers due to the financial and credit crisis. On a geographic basis, our net sales in the Americas were down 12%, primarily driven by the decline in the corporate office segment (23% decrease) as well as decreases in the hospitality (45% decrease) and healthcare (18% decrease) segments. These decreases were somewhat mitigated, however, by increases in the institutional (which includes education and government facilities, a 15% increase) and retail (7% increase) segments. Net sales in Europe were down 25% in local currency and 29% as reported in U.S. dollars, with this difference due to the strengthening of the U.S. dollar versus the euro and British Pound Sterling on a year-over-year basis. The sales decline in Europe occurred across most markets (and particularly the corporate office market, down 31% in local currency), with the exception of the healthcare and government markets which saw increases (in local currency) of 7% and 3%, respectively. Net sales in Asia-Pacific were down 18%, due primarily to the decrease in the corporate office segment (23% decrease), which comprises the majority of that division’s sales. This decrease was somewhat mitigated, however, by increases in the education (43% increase) and hospitality (13% increase) segments.
 
Bentley Prince Street Segment.  For 2010, net sales in our Bentley Prince Street Segment increased $4.9 million (5.2%) versus 2009. The increase was due to the strength of the corporate office market segment (up 13%) as well as an increase in sales into the government market segment (up 44%). These increases were somewhat offset by decreases in the healthcare (down 33%), hospitality (down 27%), residential (down 56%) and education (down 8%) market segments. The weighted average selling price per square yard in 2010 showed an improvement of approximately 6% due to both the improving economic climate as well as a shift towards higher priced modular carpet sold at Bentley Prince Street.
 
For 2009, net sales in our Bentley Prince Street segment decreased $40.9 million (30.2%) versus 2008. This decrease was primarily attributable to the reduced order activity for renovation and construction projects


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as a result of the worldwide financial and credit crisis, as well as the general market movement away from broadloom carpet and toward carpet tile. This decrease was somewhat offset by a 2.4% increase in weighted average selling price per square yard, a result of the increase in modular carpet as a percentage of its sales (modular carpet represented 29% of its sales in 2009 versus 25% in 2008). With the exception of a 4% increase in the government segment, the sales decrease occurred across all markets, with the most significant declines being in the corporate (23% decrease), hospitality (72% decrease) and residential (68% decrease) segments.
 
Cost and Expenses
 
Company Consolidated.  The following table presents, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses during the past three years:
 
                                         
                      Percentage Change  
    Fiscal Year     2010 Compared
    2009 Compared
 
Cost and Expenses
  2010     2009     2008     with 2009     with 2008  
    (In thousands)              
 
Cost of Sales
  $ 625,066     $ 576,871     $ 710,299       8.4 %     (18.8 )%
Selling, General and Administrative Expenses
    240,901       218,322       258,198       10.3 %     (15.4 )%
                                         
Total
  $ 865,967     $ 795,193     $ 968,497       8.9 %     (17.9 )%
                                         
 
For 2010, our cost of sales increased $48.2 million (8.4%) versus 2009. Fluctuations in currency exchange rates accounted for approximately $7 million (1%) of the increase. The primary components of the $48.2 million increase in cost of sales were increases in raw material costs (approximately $32.1 million) and labor costs (approximately $4.8 million) associated with higher production and sales volumes during 2010 versus 2009. Our raw material prices in 2010 were approximately 4-5% higher than raw material prices in 2009. As a percentage of net sales, cost of sales decreased to 65.0% for 2010, versus 67.1% in 2009. The percentage decrease was primarily due to improved manufacturing efficiencies in both our Modular Carpet and Bentley Prince Street business segments. The improved manufacturing efficiencies are largely a result of the increase in sales volume, coupled with the full realization of our restructuring plans implemented during early 2009.
 
For 2009, our costs of sales decreased $133.4 million (18.8%) versus 2008. Fluctuations in currency exchange rates accounted for approximately 4% ($23 million) of this decrease. The primary components of the $133.4 million decrease in costs of sales were reductions in raw materials costs ($89 million) and labor costs ($13 million) associated with decreased production levels in 2009, largely a result of the worldwide financial and credit crisis that began in the fourth quarter of 2008. Our raw material prices in 2009 were approximately 4-6% lower than raw material prices in 2008. As a percentage of net sales, cost of sales increased to 67.1% during 2009 versus 65.6% during 2008. This percentage increase was due to under-absorption of fixed overhead costs associated with the lower production volumes.
 
For 2010, our selling, general and administrative expenses increased $22.6 million (10.3%) versus 2009. Fluctuations in currency exchange rates accounted for approximately $1 million (1%) of the increase. The primary components of the $22.6 million increase in selling, general and administrative expenses were (1) an $11.8 million increase in incentive compensation due to the attainment of performance goals in 2010, (2) a $10.1 million increase in marketing expenses, particularly in our Modular Carpet segment where we continue to invest in our end market diversification strategy as well as corporate office segment marketing programs, and (3) an $8.4 million increase in selling expenses particularly in our Modular Carpet operations commensurate with the increase in sales volume. These increases were somewhat mitigated, however, by a decrease of approximately $7.9 million in general administrative expenses across our business, a direct result of the full year benefit of restructuring plans implemented in 2009. Despite the overall increases, due to increased sales volume, as a percentage of net sales, selling, general and administrative expenses decreased to 25.0% for 2010, versus 25.4% for 2009.


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For 2009, our selling, general and administrative expenses decreased $39.9 million (15.4%) versus 2008. Fluctuations in currency exchange rates accounted for approximately 6% ($12 million) of this decrease. The primary components of the $39.9 million decrease were (1) a $19.7 million decrease in selling costs associated with the lower sales volume in 2009; (2) a $15.0 million decrease in marketing expenses as programs were cut or reduced in 2009 to better match anticipated demand; and (3) a $3.9 million decrease in general administrative costs, directly related to our 2008 and 2009 restructuring plans discussed above. Due to our lower sales volume in 2009, as a percentage of net sales, selling, general and administrative expenses increased to 25.4%, versus 23.9% in 2008.
 
Cost and Expenses by Segment.  The following table presents the combined cost of sales and selling, general and administrative expenses for each of our operating segments during the past three years:
 
                                         
Cost of Sales and Selling, General
  Fiscal Year     Percentage Change  
and Administrative Expenses
                    2010 Compared
    2009 Compared
 
(Combined)
  2010     2009     2008     with 2009     with 2008  
    (In thousands)              
 
Modular Carpet
  $ 757,191     $ 690,265     $ 826,807       9.7 %     (16.5 )%
Bentley Prince Street
    102,530       101,580       135,574       0.9 %     (25.1 )%
Corporate Expenses
    6,246       3,348       6,116       86.6 %     (45.3 )%
                                         
Total
  $ 865,967     $ 795,193     $ 968,497       8.9 %     (17.9 )%
                                         
 
Interest and Other Expense
 
For 2010, interest expense decreased by $1.2 million versus 2009, primarily due to the redemption of $25 million of our 9.5% Senior Subordinated Notes in the first quarter of 2010. The savings from the redemption were somewhat offset by the higher interest rate paid on our 113/8% Senior Secured Notes, which were outstanding during the full year of 2010 versus only seven months outstanding in 2009 (approximately $141.9 million of these 113/8% Senior Secured Notes were repurchased in December 2010).
 
For 2009, interest expense increased by $2.8 million versus 2008, primarily due to the issuance of our $150 million aggregate principal amount of 113/8% Senior Secured Notes in June of 2009. These notes, which were issued at a discount to their face value, carry a higher principal balance and rate of interest than the $127.2 million aggregate principal amount of 10.375% Senior Notes that were repaid with the issuance net proceeds. Other factors in the increase were the amortization of deferred debt costs related to the 113/8% Senior Secured Notes, and the fees we pay for our lines of credit.
 
Tax
 
Our effective tax rate in 2010 was 30.9%, compared with an effective rate of 42.5% in 2009. This decrease in effective rate is primarily attributable to (1) an effective foreign tax rate that is lower than the federal statutory rate coupled with a 50% increase of foreign earnings from 2009 to 2010, (2) a decrease in unrecognized tax benefits related to a settlement of the Canadian tax authorities’ transfer pricing reassessment for tax years 2001 and 2002, and (3) an increase in state tax benefits due to greater state net operating losses realized in 2010 compared to 2009. The decrease in effective rate was partially offset by an increase in valuation allowances related to state net operating loss carryforwards and an increase in the U.S. tax effects attributable to foreign operations related to Subpart F income. For additional information on taxes and a reconciliation of effective tax rates to statutory tax rates, see the Note entitled “Taxes on Income” in Item 8 of this Report.
 
Our effective tax rate in 2009 was 42.5%, compared with an effective rate of 504.7% in 2008. This difference in effective rate was primarily attributable to (1) a non-deductible goodwill impairment charge in 2008 related to our Bentley Prince Street business, (2) a 2008 provision for taxes related to undistributed earnings from foreign subsidiaries no longer deemed to be indefinitely reinvested outside of the U.S., and (3) an increase in 2008 non-deductible business expenses related to a decrease in the cash surrender value of life insurance policies associated with the funding of our nonqualified savings plans and salary continuation


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plan. For additional information on taxes and a reconciliation of effective tax rates to statutory tax rates, see the Note entitled “Taxes on Income” in Item 8 of this Report.
 
Liquidity and Capital Resources
 
General
 
In our business, we require cash and other liquid assets primarily to purchase raw materials and to pay other manufacturing costs, in addition to funding normal course selling, general and administrative expenses, anticipated capital expenditures, interest expense and potential special projects. We generate our cash and other liquidity requirements primarily from our operations and from borrowings or letters of credit under our domestic revolving credit facility with a banking syndicate. We believe that we will be able to continue to enhance the generation of free cash flow through the following initiatives:
 
  •  Improving our inventory turns by continuing to implement a made-to-order model throughout our organization;
 
  •  Reducing our average days sales outstanding through improved credit and collection practices; and
 
  •  Limiting the amount of our capital expenditures generally to those projects that have a short-term payback period.
 
Historically, we use more cash in the first half of the fiscal year, as we fund insurance premiums, tax payments, incentive compensation and inventory build-up in preparation for the holiday/vacation season of our international operations.
 
In addition, we have a high contribution margin business with low capital expenditure requirements. Contribution margin represents variable gross profit margin less the variable component of selling, general and administrative expenses, and for us is an indicator of profit on incremental sales after the fixed components of cost of goods sold and selling, general and administrative expenses have been recovered. While contribution margin should not be construed as a substitute for gross margin, which is determined in accordance with GAAP, it is included herein to provide additional information with respect to our potential for profitability. In addition, we believe that investors find contribution margin to be a useful tool for measuring our profitability on an operating basis.
 
Our ability to generate cash from operating activities is somewhat uncertain because we are subject to, and in the past have experienced, fluctuations in our level of net sales. In this regard, the worldwide financial and credit crisis that developed in the latter part of 2008 resulted in a reduction in our net sales, as customers delayed or reduced the number of renovation and construction projects where our carpet products are used. Demand levels substantially recovered in 2010.
 
At January 2, 2011, we had $69.2 million in cash. At that date, we had no borrowings and $5.4 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of January 2, 2011, we could have incurred $65.6 million of additional borrowings under our domestic revolving credit facility and €20 million (approximately $26.6 million) of additional borrowings under our European credit facility. In addition, we could have incurred the equivalent of $11.9 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.
 
We have approximately $55.0 million in contractual cash obligations due by the end of fiscal year 2011, which includes, among other things, pension cash contributions, interest payments on our debt and capital expenditure commitments. Based on current interest rate and debt levels, we expect our aggregate interest expense for 2011 to be between $22 million and $24 million. We estimate aggregate capital expenditures in 2011 to be between $35 million and $40 million, although we are not committed to these amounts.
 
On December 3, 2010, we completed a private offering of $275 million aggregate principal amount of 75/8% Senior Notes due 2018 (the “75/8% Senior Notes”). Interest on the 75/8% Senior Notes is payable semi-annually on June 1 and December 1 beginning June 1, 2011. We used the net proceeds from the sale of the 75/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million


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aggregate principal amount of our 113/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes, pursuant to a tender offer we conducted.
 
In June 2009, we issued $150 million aggregate principal amount of our 113/8% Senior Secured Notes. After deducting the initial purchasers’ discount and other fees and expenses associated with the sale, net proceeds were $139.5 million. We used $137.4 million of those net proceeds to repurchase $127.2 million aggregate principal amount of our 10.375% Senior Notes pursuant to a tender offer we conducted. (Included in the $137.4 million used to repurchase the $127.2 million aggregate principal amount of 10.375% Senior Notes were a purchase price premium of $5.7 million and accrued interest of $4.5 million). The remaining $2.1 million of the net proceeds was used to repay a portion of the $14.6 million of 10.375% Senior Notes that remained outstanding following the tender offer. (The balance of the 10.375% Senior Notes was then repaid at maturity on February 1, 2010.)
 
It is important for you to consider that we have a significant amount of indebtedness. Our domestic revolving credit facility matures in December 2012, our outstanding $8.1 million of 113/8% Senior Secured Notes mature in November 2013, our outstanding $11.5 million of 9.5% Senior Subordinated Notes mature in February 2014, and our outstanding $275 million of 75/8% Senior Notes mature in 2018. We cannot assure you that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms, or at all. If we are unable to refinance our debt or obtain new financing, we would have to consider other options, such as selling assets to meet our debt service obligations and other liquidity needs, or using cash, if available, that would have been used for other business purposes.
 
Domestic Revolving Credit Facility
 
We have a domestic revolving credit facility that provides for a maximum aggregate amount of loans and letters of credit of up to $100 million (with the option to increase it to a maximum of $150 million upon the satisfaction of certain conditions) at any one time, subject to the borrowing base described below. The key features of the domestic revolving credit facility are as follows:
 
  •  The revolving credit facility currently matures on December 31, 2012;
 
  •  The revolving credit facility includes a domestic U.S. dollar syndicated loan and letter of credit facility made available to Interface, Inc. up to the lesser of (1) $100 million, or (2) a borrowing base equal to the sum of specified percentages of eligible accounts receivable and inventory in the United States (the percentages and eligibility requirements for the borrowing base are specified in the credit facility), less certain reserves;
 
  •  Advances under the facility are secured by a first-priority lien on substantially all of Interface, Inc.’s assets and the assets of each of its material domestic subsidiaries, which have guaranteed the revolving credit facility; and
 
  •  The revolving credit facility contains a financial covenant (a fixed charge coverage ratio test) that becomes effective in the event that our excess borrowing availability falls below $20 million. In such event, we must comply with the financial covenant for a period commencing on the last day of the fiscal quarter immediately preceding such event (unless such event occurs on the last day of a fiscal quarter, in which case the compliance period commences on such date) and ending on the last day of the fiscal quarter immediately following the fiscal quarter in which such event occurred.
 
The revolving credit facility also includes various reporting, affirmative and negative covenants, and other provisions that restrict our ability to take certain actions, including provisions that restrict our ability to repay our long-term indebtedness unless we meet a specified minimum excess availability test.
 
Interest Rates and Fees.  Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 1.75% to 2.50% 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 the one-month LIBOR rate), depending on our average excess borrowing availability during 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


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from 3.25% to 4.00% over the applicable LIBOR rate (but in no event less than the three-month LIBOR rate), depending on our average excess borrowing availability during the most recently completed fiscal quarter. In addition, we pay an unused line fee of 0.75% per annum on the facility.
 
Prepayments.  The revolving credit facility requires prepayment from the proceeds of certain asset sales.
 
Covenants.  The revolving credit facility also limits our ability, among other things, to:
 
  •  repay our other indebtedness prior to maturity unless we meet a specified minimum excess availability test;
 
  •  incur indebtedness or contingent obligations;
 
  •  make acquisitions of or investments in businesses (in excess of certain specified amounts);
 
  •  sell or dispose of assets (in excess of certain specified amounts);
 
  •  create or incur liens on assets; and
 
  •  enter into sale and leaseback transactions.
 
We are presently in compliance with all covenants under the revolving credit facility and anticipate that we will remain in compliance with the covenants for the foreseeable future.
 
Events of Default.  If we breach or fail to perform any of the affirmative or negative covenants under the revolving credit 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 we breach or fail to perform any covenant or agreement contained in any instrument relating to any of our other indebtedness exceeding $10 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’ 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.  The facility is secured by substantially all of the assets of Interface, Inc. and its domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of our domestic subsidiaries and up to 65% of the stock of our first-tier material foreign subsidiaries. If an event of default occurs under the revolving credit facility, the lenders’ collateral 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.
 
Foreign Credit Facilities
 
Our European subsidiary Interface Europe B.V. and certain of Interface Europe B.V.’s subsidiaries have a Credit Agreement with ABN AMRO Bank N.V. Under the Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time as follows:
 
         
    Maximum Amount
Period
  in Euros
    (In millions)
 
October 1, 2010 — September 30, 2011
    20  
October 1, 2011 — September 30, 2012
    14  
From October 1, 2012
    8  


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Interest on borrowings under the facility is charged at varying rates computed by applying a margin of 1% over ABN AMRO’s euro base rate (consisting of the leading refinancing rate as determined from time to time by the European Central Bank plus a debit interest surcharge), which base rate is subject to a minimum of 3.5% per annum. Fees on bank guarantees and documentary letters of credit are charged at a rate of 1% per annum or part thereof on the maximum amount and for the maximum duration of each guarantee or documentary letter of credit issued. A facility fee of 0.5% per annum is payable with respect to the facility amount. The facility is secured by liens on certain real property, personal property and other assets of our principal European subsidiaries. The facility also includes certain financial covenants (which require the borrowers and their subsidiaries to maintain a minimum interest coverage ratio, total debt/EBITDA ratio and tangible net worth/total assets) and affirmative and negative covenants, and other provisions that restrict the borrowers’ ability (and the ability of certain of the borrowers’ subsidiaries) to take certain actions. As of January 2, 2011, there were no borrowings outstanding under this facility.
 
Some of our other non-U.S. subsidiaries have an aggregate of the equivalent of $11.9 million of lines of credit available. As of January 2, 2011, there were no borrowings outstanding under these lines of credit.
 
We are presently in compliance with all covenants under these foreign credit facilities and anticipate that we will remain in compliance with the covenants for the foreseeable future.
 
Senior and Senior Subordinated Notes
 
As of January 2, 2011, we had outstanding $275 million of our 75/8% Senior Notes, $11.5 million of our 9.5% Senior Subordinated Notes, and $8.1 million of our 113/8% Senior Secured Notes. The indentures governing these notes, on a collective basis, contain covenants that limit or restrict our ability to:
 
  •  incur additional indebtedness;
 
  •  make dividend payments or other restricted payments;
 
  •  create liens on our assets;
 
  •  sell our assets;
 
  •  sell securities of our subsidiaries;
 
  •  enter into transactions with shareholders and affiliates; and
 
  •  enter into mergers, consolidations or sales of all or substantially all of our assets.
 
In addition, the indentures governing each series of notes contains a covenant that requires us to make an offer to purchase the outstanding notes under such indenture in the event of a change of control of Interface, Inc. (as defined in each respective indenture).
 
Each series of notes is guaranteed, fully, unconditionally, and jointly and severally, on an unsecured basis by each of our material U.S. subsidiaries. In addition, the 113/8% Senior Secured Notes (but not the 75/8% Senior Notes or 9.5% Senior Subordinated Notes) are secured by a second-priority lien on substantially all of our and certain of our domestic subsidiaries’ assets that secure our domestic revolving credit facility (discussed above) on a first-priority basis.
 
If we breach or fail to perform any of the affirmative or negative covenants under one of these indentures, or if other specified events occur (such as a bankruptcy or similar event), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. An event of default also will exist under the 75/8% Senior Notes indenture if we breach or fail to perform any covenant or agreement contained in any other instrument (including without limitation any other indenture) relating to any of our indebtedness exceeding $20 million and such default or failure results in the indebtedness becoming due and payable. If an event of default exists and is continuing, the trustee of the notes (or the holders of at least 25% of the principal amount of such notes) may declare the principal amount of the notes and accrued interest thereon immediately due and payable (except in the case of bankruptcy, in which case such amounts are immediately due and payable even in the absence of such a declaration). Also, the collateral agent for the 113/8% Senior Secured Notes may


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(subject to the rights of the first priority lien holders under the domestic revolving credit facility) exercise remedies with respect to the collateral securing those notes.
 
Analysis of Cash Flows
 
Our primary sources of cash during 2010 were: (1) $275.0 million of gross proceeds from the issuance of our 75/8% Senior Notes; (2) $28.2 million due to an increase of accounts payable and accrued expenses; and (3) $3.1 million from the exercise of employee stock options. Our primary uses of cash during 2010 were: (1) $280.0 million used to repurchase a portion of our 113/8% Senior Secured Notes and 9.5% Senior Subordinated Notes; (2) $36.4 million for premiums paid in connection with the repurchase of these senior and senior subordinated notes; (3) $31.7 million for capital expenditures; and (4) $23.1 million due to an increase in inventory.
 
Our primary sources of cash during 2009 were: (1) $144.5 million from the issuance of our $150 million aggregate principal amount of 113/8% Senior Secured Notes; (2) $21.0 million from a reduction of accounts receivable; (3) $20.8 million from a reduction of inventory; and (4) $16.0 million from settlements of litigation. The primary uses of cash during 2009 were (1) $138.0 million used to repurchase a portion of our 10.375% Senior Notes; (2) $27.1 million as a reduction in accounts payable and accruals; (3) $8.8 million for capital expenditures, (4) $6.3 million for debt issuance costs in connection with the 113/8% Senior Secured Notes; and (5) $5.3 million for premiums paid in connection with the repurchase of our 10.375% Senior Notes.
 
Our primary sources of cash during 2008 were: (1) $11.9 million from cash received as a reduction of accounts receivable; (2) $5.1 million associated with a reduction in other assets; and (3) $1.5 million from the exercise of employee stock options. The primary uses of cash during 2008 were: (1) $32.9 million of cash paid for interest; (2) $29.3 million for additions to property, plant and equipment, primarily at our manufacturing locations; (3) $22.4 million for repurchases of our 10.375% Senior Notes; and (4) $7.6 million for the payment of dividends.
 
We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future.
 
Funding Obligations
 
We have various contractual obligations that we must fund as part of our normal operations. The following table discloses aggregate information about our contractual obligations (including the remaining contractual obligations related to our discontinued operations) and the periods in which payments are due. The amounts and time periods are measured from January 2, 2011.
 
                                         
    Total
    Payments Due by Period  
    Payments
    Less than
    1-3
    3-5
    More than
 
    Due     1 Year     Years     Years     5 Years  
    (In thousands)  
 
Long-Term Debt Obligations
  $ 294,620     $     $ 8,143     $ 11,477     $ 275,000  
Operating Lease Obligations(1)
    60,139       17,938       27,933       11,158       3,110  
Expected Interest Payments(2)
    116,990       22,985       45,816       42,029       6,160  
Unconditional Purchase Obligations(3)
    2,592       2,434       158              
Pension Cash Obligations(4)
    122,122       11,679       17,187       24,854       68,402  
                                         
Total Contractual Cash Obligations(5)
  $ 596,463     $ 55,036     $ 99,237     $ 89,518     $ 352,672  
                                         
 
 
(1) Our capital lease obligations are insignificant.
 
(2) Expected Interest Payments to be made in future periods reflect anticipated interest payments related to the $275.0 million of our 75/8% Senior Notes, $8.1 million of outstanding 113/8% Senior Secured Notes, and the $11.5 million of our outstanding 9.5% Senior Subordinated Notes. We have also assumed in the presentation above that these notes will remain outstanding until maturity. We have excluded from the


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presentation interest payments and fees related to our revolving credit facilities (discussed above), because of the variability and timing of advances and repayments thereunder.
 
(3) Unconditional Purchase Obligations do not include unconditional purchase obligations that are included as liabilities in our Consolidated Balance Sheet. Our capital expenditure commitments are not significant.
 
(4) We have two foreign defined benefit plans and a domestic salary continuation plan. We have presented above the estimated cash obligations that will be paid under these plans over the next ten years. Such amounts are based on several estimates and assumptions and could differ materially should the underlying estimates and assumptions change. Our domestic salary continuation plan is an unfunded plan, and we do not currently have any commitments to make contributions to this plan. However, we do use insurance instruments to hedge our exposure under the salary continuation plan. Contributions to our other employee benefit plans are at our discretion.
 
(5) The above table does not reflect unrecognized tax benefits of $8.2 million, the timing of which payments are uncertain. See the Note entitled “Taxes on Income” in Item 8 of this Report for further information.
 
Critical Accounting Policies
 
The policies discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimations about the effects of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events may not develop as forecasted, and the best estimates routinely require adjustment.
 
Revenue Recognition.  Revenue is recognized when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are estimated using historical experience, current economic trends, and the company’s quality performance. The related provision is recorded as a reduction of sales and cost of sales in the same period that the revenue is recognized. Material differences may result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates.
 
Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.
 
Impairment of Long-Lived Assets.  Long-lived assets are reviewed for impairment at the asset group level whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment is indicated. A loss is then recognized for the difference, if any, between the fair value of the asset (as estimated by management using its best judgment) and the carrying value of the asset. If actual market value is less favorable than that estimated by management, additional write-downs may be required.
 
Deferred Income Tax Assets and Liabilities.  The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies in accordance with applicable accounting standards, and are based on management’s assumptions and estimates regarding future operating results and levels of taxable income, as well as management’s judgment regarding the interpretation of the provisions of applicable accounting standards. The carrying values of liabilities for income taxes currently payable are based on management’s interpretations of applicable tax laws, and incorporate management’s assumptions and judgments regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes may result in materially different carrying values of income tax assets and liabilities and results of operations.


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We evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-term business forecasts to provide insight. Further, our global business portfolio gives us the opportunity to employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of January 2, 2011, and January 3, 2010, we had approximately $112.2 million and $99.3 million of U.S. federal net operating loss carryforwards, respectively. In addition, as of January 2, 2011 and January 3, 2010, we had state net operating loss carryforwards of $137.5 million and $95.0 million, respectively. Certain of these carryforwards are reserved with a valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future. The remaining year-end 2010 amounts are expected to be fully recoverable within the applicable statutory expiration periods. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.
 
Goodwill.  Pursuant to applicable accounting standards, we test goodwill for impairment at least annually using a two step approach. In the first step of this approach, we prepare valuations of reporting units, using both a market comparable approach and an income approach, and those valuations are compared with the respective book values of the reporting units to determine whether any goodwill impairment exists. In preparing the valuations, past, present and expected future performance is considered. If impairment is indicated in this first step of the test, a step two valuation approach is performed. The step two valuation approach compares the implied fair value of goodwill to the book value of goodwill. The implied fair value of goodwill is determined by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit, including both recognized and unrecognized intangible assets, in the same manner as goodwill is determined in a business combination under applicable accounting standards. After completion of this step two test, a loss is recognized for the difference, if any, between the fair value of the goodwill associated with the reporting unit and the book value of that goodwill. If the actual fair value of the goodwill is determined to be less than that estimated, an additional write-down may be required.
 
During the fourth quarters of 2010, 2009 and 2008, we performed the annual goodwill impairment test. We perform this test at the reporting unit level, which is one level below the segment level for the Modular Carpet segment and at the level of the Bentley Prince Street segment. For our reporting units which carried a goodwill balance as of January 2, 2011, no impairment of goodwill was indicated. As of January 2, 2011, if our estimates of the fair value of our reporting units were 10% lower, we believe no additional goodwill impairment would have existed.
 
In the fourth quarter of 2008, a goodwill impairment of $61.2 million related to the Bentley Prince Street reporting unit was identified due largely to the following factors:
 
  •  There was a significant decline in Bentley Prince Street’s performance, primarily in the last three months of 2008.  This decline also was reflected in the forward projections of Bentley Prince Street’s budgeting process. The projections showed a decline in both sales and operating income over Bentley Prince Street’s three-year budgeting process. These declines impacted the value of the business from an income valuation approach. The declines in projections were primarily related to the global economic crisis and its impact on the broadloom carpet market.
 
  •  There was an increase in the discount rate used to create the present value of future expected cash flows.  This increase from approximately 12% to 16% was more reflective of our market capitalization and risk premiums on a reporting unit level, which impacted the value of the business using an income valuation approach.
 
  •  There was a decrease in the market multiple factors used for the market valuation approach.  This decrease was reflective of the general market conditions regarding current market activities and market valuation guidelines.


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Inventories.  We determine the value of inventories using the lower of cost or market value. We write down inventories for the difference between the carrying value of the inventories and their estimated market value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
 
We estimate our reserves for inventory obsolescence by continuously examining our inventories to determine if there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for our products and current economic conditions. While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and we could experience additional inventory write-downs in the future. Our inventory reserve on January 2, 2011, and January 3, 2010, was $15.7 million and $17.1 million, respectively. To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our 2010 net income would be higher or lower by approximately $1.0 million, on an after-tax basis.
 
Pension Benefits.  Net pension expense recorded is based on, among other things, assumptions about the discount rate, estimated return on plan assets and salary increases. While management believes these assumptions are reasonable, changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of our plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The actuarial assumptions used in our salary continuation plan and our foreign defined benefit plans reporting are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for our future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers. The table below represents the changes to the projected benefit obligation as a result of changes in discount rates assumptions:
 
         
    Increase (Decrease) in
 
Foreign Defined Benefit Plans
  Projected Benefit Obligation  
    (In millions)  
 
1% increase in actuarial assumption for discount rate
  $ (36.4 )
1% decrease in actuarial assumption for discount rate
  $ 45.6  
 
         
    Increase (Decrease) in
 
Domestic Salary Continuation Plan
  Projected Benefit Obligation  
    (In millions)  
 
1% increase in actuarial assumption for discount rate
  $ (2.1 )
1% decrease in actuarial assumption for discount rate
  $ 2.5  
 
Environmental Remediation.  We provide for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known environmental exposures and are discounted in certain instances. We regularly monitor the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination is made. As of January 2, 2011, and January 3, 2010, no significant amounts were provided for remediation liabilities.
 
Allowances for Doubtful Accounts.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Estimating this amount requires us to analyze the financial strengths of our customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated. Our allowance for doubtful accounts on January 2, 2011, and January 3, 2010, was $9.6 million and $12.3 million, respectively. To the extent the


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actual collectability of our accounts receivable differs from our estimates by 10%, our 2010 net income would be higher or lower by approximately $0.7 million, on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance.
 
Product Warranties.  We typically provide limited warranties with respect to certain attributes of our carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty years, depending on the particular carpet product and the environment in which the product is to be installed. We typically warrant that any services performed will be free from defects in workmanship for a period of one year following completion. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product. We record a provision related to warranty costs based on historical experience and periodically adjust these provisions to reflect changes in actual experience. Our warranty reserve on January 2, 2011, and January 3, 2010, was $1.6 million and $1.3 million, respectively. Actual warranty expense incurred could vary significantly from amounts that we estimate. To the extent the actual warranty expense differs from our estimates by 10%, our 2010 net income would be higher or lower by approximately $0.1 million, on an after-tax basis, depending on whether the actual expense is lower or higher, respectively, than the estimated provision.
 
Off-Balance Sheet Arrangements
 
We are not a party to any material off-balance sheet arrangements.
 
Recent Accounting Pronouncements
 
In December 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We do not believe the adoption of this standard will have any significant impact on our consolidated financial statements.
 
In January 2010, the 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 our 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. We do not believe the adoption of this standard will have any significant impact on our consolidated financial statements.
 
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 entity (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 VIE. We adopted this standard in the first quarter of 2010 and the adoption did not have any significant impact on our consolidated financial statements.


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ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
As a result of the scope of our global operations, we are exposed to an element of market risk from changes in interest rates and foreign currency exchange rates. Our results of operations and financial condition could be impacted by this risk. We manage our exposure to market risk through our regular operating and financial activities and, to the extent we deem appropriate, through the use of derivative financial instruments.
 
We employ derivative financial instruments as risk management tools and not for speculative or trading purposes. We monitor the use of derivative financial instruments through objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. We have established strict counter-party credit guidelines and enter into transactions only with financial institutions with a rating of investment grade or better. As a result, we consider the risk of counter-party default to be minimal.
 
Interest Rate Market Risk Exposure
 
Changes in interest rates affect the interest paid on certain of our debt. To mitigate the impact of fluctuations in interest rates, our management has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. In the past, we have maintained a fixed/variable rate mix within these parameters either by borrowing on a fixed rate basis or entering into interest rate swap transactions. In the interest rate swaps, we agree to exchange, at specified levels, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. As of January 2, 2011, and January 3, 2010, no such interest rate swaps were in place.
 
Foreign Currency Exchange Market Risk Exposure
 
A significant portion of our operations consists of manufacturing and sales activities in foreign jurisdictions. We manufacture our products in the United States, England, Northern Ireland, the Netherlands, Australia, China and Thailand, and sell our products in more than 100 countries. (In 2009, we ceased manufacturing operations at our facility in Canada.) As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and many other currencies, including the euro, British pound sterling, Canadian dollar, Australian dollar, Thai baht and Japanese yen. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and vice versa. Additionally, to the extent our foreign operations with functional currencies other than the U.S. dollar transact business in countries other than the United States, exchange rate changes between two foreign currencies could ultimately impact us. Finally, because we report in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations could have a translation impact on our financial position.
 
At January 2, 2011, we recognized a $2.2 million decrease in our foreign currency translation adjustment account compared with January 3, 2010, because of the strengthening of the U.S. dollar against certain foreign currencies as of year-end 2010. The decrease was associated primarily with certain foreign subsidiaries located within the United Kingdom and Europe.
 
Sensitivity Analysis
 
For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market-sensitive instruments.
 
To perform sensitivity analysis, we assess the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market-sensitive instruments. The market value of instruments affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the


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market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at January 2, 2011. The values that result from these computations are then compared with the market values of the financial instruments. The differences are the hypothetical gains or losses associated with each type of risk.
 
Interest Rate Risk
 
Based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the fair value of our fixed rate long-term debt would be impacted by a net decrease of $22.0 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $20.6 million.
 
Foreign Currency Exchange Rate Risk
 
As of January 2, 2011, a 10% decrease or increase in the levels of foreign currency exchange rates against the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of our short-term financial instruments (primarily cash, accounts receivable and accounts payable) of $9.5 million or an increase in the fair value of our financial instruments of $7.8 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands, except per share data)  
 
Net sales
  $ 961,827     $ 859,888     $ 1,082,344  
Cost of sales
    625,066       576,871       710,299  
                         
Gross profit on sales
    336,761       283,017       372,045  
Selling, general and administrative expenses
    240,901       218,322       258,198  
Impairment of goodwill
                61,213  
Restructuring charges
    3,131       7,627       10,975  
Income from litigation settlements
          (5,926 )      
                         
Operating income
    92,729       62,994       41,659  
                         
Interest expense
    33,129       34,297       31,480  
Bond retirement expenses
    44,379       6,096        
Other expense
    657       576       1,652  
                         
Income from continuing operations before tax expense
    14,564       22,025       8,527  
Income tax expense
    4,494       9,352       43,040  
                         
Income (loss) from continuing operations
    10,070       12,673       (34,513 )
Loss from discontinued operations, net of tax
    (736 )     (909 )     (5,154 )
                         
Net income (loss)
    9,334       11,764       (39,667 )
Net income attributable to noncontrolling interest in subsidiary
    (1,051 )     (846 )     (1,206 )
                         
Net income (loss) attributable to Interface, Inc. 
  $ 8,283     $ 10,918     $ (40,873 )
                         
Income (loss) per share attributable to Interface, Inc. common shareholders — basic
                       
Continuing operations
  $ 0.14     $ 0.19     $ (0.58 )
Discontinued operations
    (0.01 )     (0.01 )     (0.08 )
                         
Net income (loss) per share attributable to Interface, Inc. common shareholders — basic
  $ 0.13     $ 0.17     $ (0.67 )
                         
Income (loss) per share attributable to Interface, Inc. common shareholders — diluted
                       
Continuing operations
  $ 0.14     $ 0.19     $ (0.58 )
Discontinued operations
    (0.01 )     (0.01 )     (0.08 )
                         
Net income (loss) per share attributable to Interface, Inc. common shareholders — diluted
  $ 0.13     $ 0.17     $ (0.67 )
                         
Basic weighted average shares outstanding
    63,794       63,213       61,439  
Diluted weighted average shares outstanding
    64,262       63,308       61,439  
 
See accompanying notes to consolidated financial statements.


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INTERFACE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Net income (loss)
  $ 9,334     $ 11,764     $ (39,667 )
Other comprehensive income (loss)
                       
Foreign currency translation adjustment
    (1,754 )     18,446       (43,719 )
Pension liability adjustment
    1,990       (4,416 )     2,033  
                         
Comprehensive income (loss)
    9,570       25,794       (81,353 )
Comprehensive income attributable to noncontrolling interest
    (1,509 )     (1,139 )     (967 )
                         
Comprehensive income (loss) attributable to Interface, Inc. 
  $ 8,061     $ 24,655     $ (82,320 )
                         
 
See accompanying notes to consolidated financial statements.


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INTERFACE, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    2010     2009  
    (In thousands)  
 
ASSETS
Current
               
Cash and cash equivalents
  $ 69,236     $ 115,363  
Accounts receivable, net
    151,463       129,833  
Inventories
    136,766       112,249  
Prepaid expenses and other current assets
    24,362       19,649  
Deferred income taxes
    10,062       9,379  
Assets of businesses held for sale
    1,200       1,500  
                 
Total current assets
    393,089       387,973  
Property and equipment, net
    177,792       162,269  
Deferred tax asset
    53,022       44,210  
Goodwill
    75,239       80,519  
Other assets
    56,291       52,268  
                 
    $ 755,433     $ 727,239  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Accounts payable
  $ 55,859     $ 35,614  
Accrued expenses
    112,657       101,143  
Current portion of long-term debt
          14,586  
                 
Total current liabilities
    168,516       151,343  
Senior notes
    282,951       145,184  
Senior subordinated notes
    11,477       135,000  
Deferred income taxes
    7,563       7,029  
Other
    36,054       42,502  
                 
Total liabilities
    506,561       481,058  
                 
Commitments and contingencies
               
Shareholders’ equity
               
Preferred stock
           
Common stock
    6,445       6,328  
Additional paid-in capital
    349,662       343,348  
Retained deficit
    (49,770 )     (55,332 )
Accumulated other comprehensive loss — foreign currency translation
    (26,269 )     (24,057 )
Accumulated other comprehensive loss — pension liability
    (31,196 )     (33,186 )
                 
Total shareholders’ equity — Interface, Inc. 
    248,872       237,101  
                 
Noncontrolling interest in subsidiary
          9,080  
                 
Total shareholders’ equity
    248,872       246,181  
                 
    $ 755,433     $ 727,239  
                 
 
See accompanying notes to consolidated financial statements.


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INTERFACE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 9,334     $ 11,764     $ (39,667 )
Loss on discontinued operations
    736       909       5,154  
                         
Income (loss) from continuing operations
    10,070       12,673       (34,513 )
Adjustments to reconcile income (loss) to cash provided by operating activities
                       
Impairment of goodwill
                61,213  
Depreciation and amortization
    27,927       25,189       23,664  
Premium paid to repurchase senior and senior subordinated notes
    36,374       5,264        
Bad debt expense
    2,031       2,214       4,180  
Deferred income taxes and other
    (6,772 )     (5,634 )     13,480  
Working capital changes:
                       
Accounts receivable
    (21,418 )     20,978       11,891  
Inventories
    (23,103 )     20,831       (11,351 )
Prepaid expenses and other current assets
    (5,970 )     78       5,072  
Accounts payable and accrued expenses
    28,241       (27,143 )     (18,540 )
                         
Cash provided by operating activities
    47,380       54,450       55,096  
                         
INVESTING ACTIVITIES:
                       
Capital expenditures
    (31,715 )     (8,753 )     (29,300 )
Other
    (5,328 )     1,399       (4,158 )
                         
Cash used in investing activities
    (37,043 )     (7,354 )     (33,458 )
                         
FINANCING ACTIVITIES:
                       
Borrowing of long-term debt
    275,000       144,452        
Dividends paid
    (2,721 )     (634 )     (7,562 )
Debt issuance costs
    (5,930 )     (6,301 )      
Repurchase of senior and senior subordinated notes
    (279,966 )     (138,002 )     (22,412 )
Premium paid to repurchase senior and senior subordinated notes
    (36,374 )     (5,264 )      
Purchase of noncontrolling interest
    (11,488 )            
Proceeds from issuance of common stock
    3,103       499       1,479  
                         
Cash used in financing activities
    (58,376 )     (5,250 )     (28,495 )
                         
Net cash provided by (used in) operating, investing and financing activities
    (48,039 )     41,846       (6,857 )
Effect of exchange rate changes on cash
    1,912       1,760       (3,761 )
                         
CASH AND CASH EQUIVALENTS:
                       
Net increase (decrease)
    (46,127 )     43,606       (10,618 )
Balance, beginning of year
    115,363       71,757       82,375  
                         
Balance, end of year
  $ 69,236     $ 115,363     $ 71,757  
                         
 
See accompanying notes to consolidated financial statements.


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
The Company is a recognized leader in the worldwide commercial interiors market, offering modular and broadloom floorcoverings. The Company manufactures modular and broadloom carpet focusing on the high quality, designer-oriented sector of the market, and provides specialized carpet replacement, installation and maintenance services. Additionally, the Company offers Intersept, a proprietary antimicrobial used in a number of interior finishes.
 
In 2007, the Company sold its Fabrics Group business segment to a third party. The Fabrics Group designed, manufactured and marketed fabrics for open plan office furniture systems and commercial interiors. The results of operations and related disposal costs, gains and losses for the Fabrics Group segment are classified as discontinued operations for all periods presented.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. Investments in which the Company does not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. The Company monitors investments for other than temporary declines in value and makes reductions in carrying values when appropriate. As of January 2, 2011, and January 3, 2010, the Company does not hold significant instruments of this nature.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Examples include provisions for returns, bad debts, product claims reserves, rebates, inventory obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures and valuation allowances, environmental liabilities, and the carrying value of goodwill and property and equipment. Actual results could vary from these estimates.
 
Revenue Recognition
 
Revenue is recognized when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are estimated using historical experience, current economic trends, and the Company’s quality performance. The related provision is recorded as a reduction of sales and cost of sales in the same period that the revenue is recognized. Material differences may result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates.
 
Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Research and Development
 
Research and development costs are expensed as incurred and are included in the selling, general and administrative expense caption in the consolidated statements of operations. Research and development expense was $13.9 million, $12.7 million and $15.3 million for the years 2010, 2009 and 2008, respectively.
 
Cash, Cash Equivalents and Short-Term Investments
 
Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. The Company did not hold any significant amounts of short-term investments at January 2, 2011, or January 3, 2010.
 
Cash payments for interest amounted to approximately $34.3 million, $35.1 million and $32.9 million for the years 2010, 2009 and 2008, respectively. Income tax payments amounted to approximately $13.9 million, $18.6 million and $23.1 million for the years 2010, 2009 and 2008, respectively. During the years 2010, 2009 and 2008, the Company received income tax refunds of $0.8 million, $0.5 million and $0.1 million, respectively.
 
Inventories
 
Inventories are valued at the lower of cost (standards approximating the first-in, first-out method) or market. Costs included in inventories are based on invoiced costs and/or production costs, as applicable. Included in production costs are material, direct labor and allocated overhead. The Company writes down inventories for the difference between the carrying value of the inventories and their estimated net realizable value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
 
Management estimates its reserves for inventory obsolescence by continuously examining its inventories to determine if there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for the Company’s products, and current economic conditions. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and the Company could experience additional inventory write-downs in the future.
 
Rebates
 
The Company has agreements to receive cash consideration from certain of its vendors, including rebates and cooperative marketing reimbursements. The amounts received from its vendors are generally presumed to be a reduction of the prices the Company pays for their products and, therefore, such amounts are reflected as either a reduction of cost of sales on the accompanying consolidated statements of operations, or, if the product inventory is still on hand at the reporting date, it is reflected as a reduction of “Inventories” on the accompanying consolidated balance sheets. Vendor rebates are typically dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated and receipt becomes probable, the Company records a portion of the rebate as the Company makes progress towards the purchase threshold.
 
When the Company receives direct reimbursements for costs incurred in marketing the vendor’s product or service, the amount received is recorded as an offset to selling, general and administrative expenses on the accompanying consolidated statements of operations.


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Assets and Liabilities of Businesses Held for Sale
 
The Company considers businesses to be held for sale when management approves and commits to a formal plan to actively market a business for sale and the sale is considered probable. Upon designation as held for sale, the carrying value of the assets of the business are recorded at the lower of their carrying value or their estimated fair value, less costs to sell. The Company ceases to record depreciation expense at that time.
 
Property and Equipment and Long-Lived Assets
 
Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements — ten to forty years; and furniture and equipment — three to twelve years. Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related assets’ estimated useful lives. The Company capitalized net interest costs of approximately $0.6 million, $0.3 million and $1.0 million for the fiscal years 2010, 2009 and 2008, respectively. Depreciation expense amounted to approximately $20.4 million, $20.2 million and $18.8 million for the years 2010, 2009 and 2008, respectively.
 
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance costs are charged to operating expense as incurred.
 
Goodwill and Other Intangible Assets
 
Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Prior to the adoption of the applicable goodwill accounting standards in December 2001, goodwill was amortized on a straight-line basis over the periods benefited, principally twenty-five to forty years. Accumulated amortization amounted to approximately $77.3 million at both January 2, 2011 and January 3, 2010, and cumulative impairment losses recognized were $212.6 million as of both January 2, 2011, and January 3, 2010.
 
As of January 2, 2011, and January 3, 2010, the net carrying amount of goodwill was $75.2 million and $80.5 million, respectively. Other intangible assets were $2.4 million and $2.8 million as of January 2, 2011, and January 3, 2010, respectively. The Company capitalizes patent defense costs when it determines that a successful defense is probable. The Company capitalized $1.7 million of such costs in 2008. In 2009, the Company received settlements related to patent litigation, and as a result has reduced the carrying value of these patents by the settlement amounts. Any patent defense costs are amortized over the remaining useful life of the patent. Amortization expense related to intangible assets during the years 2010, 2009 and 2008 was $0.4 million, $0.6 million, and $0.9 million, respectively.
 
During the fourth quarters of 2010, 2009 and 2008, the Company performed the annual goodwill impairment test required by certain accounting standards. The Company performs this test at the reporting unit level, which is one level below the segment level for the Modular Carpet segment and at the level of the Bentley Prince Street segment. In effecting the impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology in accordance with the applicable standards, and those valuations were compared with the respective book values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past, present and future expectations of performance were considered. The annual testing indicated no potential of goodwill impairment in 2010 and 2009. In the fourth quarter of 2008, a goodwill impairment of $61.2 million related to the Bentley Prince Street reporting unit was identified due largely to the following factors:
 
  •  The significant decline in the reporting unit’s performance, primarily in the last three months of 2008.  This decline also was reflected in the forward projections of the reporting unit’s budgeting process. The


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
  projections showed a decline in both sales and operating income over the reporting unit’s three-year budgeting process. These declines impacted the value of the reporting unit from an income valuation approach. The declines in projections were primarily related to the global economic crisis and its impact on the broadloom carpet market.
 
  •  An increase in the discount rate used to create the present value of future expected cash flows.  This increase from approximately 12% to 16% was more reflective of the Company’s market capitalization and risk premiums on a reporting unit level, which impacted the value of the reporting unit using an income valuation approach.
 
  •  A decrease in the market multiple factors used for the market valuation approach.  This decrease was reflective of the general market conditions regarding merger and acquisition activities.
 
Each of the Company’s reporting units maintained fair values in excess of their respective carrying values as of the fourth quarter of 2010, and therefore no impairment was indicated during the impairment testing. As of January 2, 2011, if the Company’s estimates of the fair values of its reporting units which carry a goodwill balance were 10% lower, the Company still believes no goodwill impairment would have existed.
 
The changes in the carrying amounts of goodwill for the year ended January 2, 2011, by operating segment are as follows:
 
                                         
    Balance
                Foreign
    Balance
 
    January 3,
                Currency
    January 2,
 
    2010     Acquisitions     Impairment     Translation     2011  
    (In thousands)  
 
Modular Carpet
  $ 80,519     $     $     $ (5,280 )   $ 75,239  
Bentley Prince Street
                             
                                         
Total
  $ 80,519     $     $     $ (5,280 )   $ 75,239  
                                         
 
Product Warranties
 
The Company typically provides limited warranties with respect to certain attributes of its carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty years, depending on the particular carpet product and the environment in which it is to be installed. The Company typically warrants that services performed will be free from defects in workmanship for a period of one year following completion. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product.
 
The Company records a provision related to warranty costs based on historical experience and periodically adjusts these provisions to reflect changes in actual experience. Warranty reserves amounted to $1.6 million and $1.3 million as of January 2, 2011, and January 3, 2010, respectively, and are included in “Accrued Expenses” in the accompanying consolidated balance sheets.
 
Taxes on Income
 
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date.
 
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions.
 
The Company does not record taxes collected from customers and remitted to governmental authorities on a gross basis.
 
For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. For further information see the Note entitled “Taxes on Income.”
 
Fair Values of Financial Instruments
 
Fair values of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of debt are based on quoted market prices or pricing models using current market rates.
 
Translation of Foreign Currencies
 
The financial position and results of operations of the Company’s foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in net income (loss). Foreign exchange translation gains (losses) were ($2.2 million), $18.2 million and ($43.5 million) for the years 2010, 2009 and 2008, respectively.
 
Income (Loss) Per Share
 
Basic income (loss) per share is computed based on the average number of common shares outstanding. Diluted income (loss) per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method.
 
Stock-Based Compensation
 
As of fiscal year 2010, the Company has stock-based employee compensation plans, which are described more fully in the “Shareholders’ Equity” Note below.
 
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 fiscal years 2010, 2009 and 2008:
 
                         
    Fiscal Year
    2010   2009   2008
 
Risk free interest rate
    2.1 %     1.6 %     3.9 %
Expected option life
    5.75 years       5.5 years       3.25 years  
Expected volatility
    61 %     61 %     61 %
Expected dividend yield
    0.37 %     2.6 %     0.57 %


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The weighted average fair value of stock options (as of grant date) granted during the years 2010, 2009 and 2008 was $6.86, $1.91 and $6.21, respectively, per share.
 
Derivative Financial Instruments
 
Accounting standards require a company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a fair value hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings. If the derivative is a cash flow hedge, the effective portion of changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. As of January 2, 2011, and January 3, 2010, the Company was not party to any significant derivative instruments.
 
Pension Benefits
 
Net pension expense recorded is based on, among other things, assumptions about the discount rate, estimated return on plan assets and salary increases. While the Company believes these assumptions are reasonable, changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of the Company’s plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The actuarial assumptions used in our salary continuation plan and the Company’s foreign defined benefit plans reporting are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for our future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers.
 
Environmental Remediation
 
The Company provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known environmental exposures and are discounted in certain instances. The Company regularly monitors the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination is made. As of January 2, 2011, and January 3, 2010, no significant amounts were provided for remediation liabilities.
 
Allowances for Doubtful Accounts
 
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Estimating this amount requires the Company to analyze the financial strengths of its customers. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that the Company is unable to collect may be different than the amount initially estimated. The Company’s allowance for doubtful accounts on January 2, 2011, and January 3, 2010, was $9.6 million and $12.3 million, respectively.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to current year financial statement presentation.


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Year
 
The Company’s fiscal year is the 52 or 53 week period ending on the Sunday nearest December 31. All references herein to “2010,” “2009,” and “2008,” mean the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively. Fiscal year 2009 was comprised of 53 weeks. Fiscal years 2010 and 2008 were each comprised of 52 weeks.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In December 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this standard is not expected to have any significant impact on the Company’s consolidated financial statements.
 
In January 2010, the 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. The Company does not believe the adoption of this standard will have a significant impact on its consolidated financial statements.
 
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 entity (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 VIE. The Company adopted this standard in the first quarter of 2010 and the adoption did not have any significant impact on its consolidated financial statements.
 
RECEIVABLES
 
The Company has adopted credit policies and standards intended to reduce the inherent risk associated with potential increases in its concentration of credit risk due to increasing trade receivables from sales to owners and users of commercial office facilities and with specifiers such as architects, engineers and contracting firms. Management believes that credit risks are further moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of January 2, 2011, and January 3, 2010, the allowance for bad debts amounted to approximately $9.6 million and $12.3 million, respectively, for all accounts


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
receivable of the Company. Reserves for sales returns and allowances amounted to $4.5 million and $3.3 million as of January 2, 2011, and January 3, 2010, respectively.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company does not have significant assets and liabilities measured at fair value on a recurring basis under applicable accounting standards as of the end of 2010. The Company does have approximately $19.4 million of Company-owned life insurance which is measured on readily determinable cash surrender value on a recurring basis. Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The fair value of long term debt represented by the Company’s 75/8% Senior Notes, 113/8% Senior Secured Notes and 9.5% Senior Subordinated Notes, based on quoted market prices, was $281.5 million, $8.1 million and $11.5 million, respectively, at January 2, 2011.
 
INVENTORIES
 
Inventories are summarized as follows:
 
                 
    2010     2009  
    (In thousands)  
 
Finished goods
  $ 78,303     $ 65,478  
Work-in-process
    16,731       15,764  
Raw materials
    41,732       31,007  
                 
    $ 136,766     $ 112,249  
                 
 
Reserves for inventory obsolescence amounted to $15.7 million and $17.1 million as of January 2, 2011, and January 3, 2010, respectively, and have been netted against amounts presented above.
 
PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following:
 
                 
    2010     2009  
    (In thousands)  
 
Land
  $ 7,364     $ 7,636  
Buildings
    104,803       110,984  
Equipment
    335,533       310,134  
                 
      447,700       428,754  
Accumulated depreciation
    (269,908 )     (266,485 )
                 
    $ 177,792     $ 162,269  
                 
 
The estimated cost to complete construction-in-progress for which the Company was committed at January 2, 2011, was approximately $14.4 million.


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INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
ACCRUED EXPENSES
 
Accrued expenses are summarized as follows:
 
                 
    2010     2009  
    (In thousands)  
 
Compensation
  $ 57,625     $ 44,385  
Interest
    2,751       9,169  
Restructuring
    521       1,953  
Taxes
    6,315       4,096  
Accrued purchases
    8,800       6,594  
Other
    36,645       34,946  
                 
    $ 112,657     $ 101,143  
                 
 
Other non-current liabilities include pension liability of $24.6 million and $28.5 million as of January 2, 2011, and January 3, 2010, respectively (see the discussion below in the Note entitled “Employee Benefit Plans”).
 
BORROWINGS
 
Domestic Revolving Credit Facility
 
The Company has a domestic revolving credit facility that provides for a maximum aggregate amount of loans and letters of credit of up to $100 million (with the option to increase it to a maximum of $150 million upon the satisfaction of certain conditions) at any one time, subject to the borrowing base described below. The key features of the domestic revolving credit facility are as follows:
 
  •  The revolving credit facility currently matures on December 31, 2012;
 
  •  The revolving credit facility includes a domestic U.S. dollar syndicated loan and letter of credit facility made available to Interface, Inc. up to the lesser of (1) $100 million, or (2) a borrowing base equal to the sum of specified percentages of eligible accounts receivable and inventory in the United States (the percentages and eligibility requirements for the borrowing base are specified in the credit facility), less certain reserves;
 
  •  Advances under the facility are secured by a first-priority lien on substantially all of Interface, Inc.’s assets and the assets of each of its material domestic subsidiaries, which have guaranteed the revolving credit facility; and
 
  •  The revolving credit facility contains a financial covenant (a fixed charge coverage ratio test) that becomes effective in the event that the Company’s excess borrowing availability falls below $20 million. In such event, the Company must comply with the financial covenant for a period commencing on the last day of the fiscal quarter immediately preceding such event (unless such event occurs on the last day of a fiscal quarter, in which case the compliance period commences on such date) and ending on the last day of the fiscal quarter immediately following the fiscal quarter in which such event occurred.
 
The revolving credit facility also includes various reporting, affirmative and negative covenants, and other provisions that restrict the Company’s ability to take certain actions, including provisions that restrict the Company’s ability to repay its long-term indebtedness unless it meets a specified minimum excess availability test.
 
Interest Rates and Fees.  Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 1.75% to 2.50% 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 the one-month LIBOR rate), depending on the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Company’s average excess borrowing availability during 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 3.25% to 4.00% over the applicable LIBOR rate (but in no event less than the three-month LIBOR rate), depending on the Company’s average excess borrowing availability during the most recently completed fiscal quarter. In addition, the Company pays an unused line fee of 0.75% per annum on the facility.
 
Prepayments.  The revolving credit facility requires prepayment from the proceeds of certain asset sales.
 
Covenants.  The revolving credit facility also limits the Company’s ability, among other things, to:
 
  •  repay the Company’s other indebtedness prior to maturity unless the Company meets a specified minimum excess availability test;
 
  •  incur indebtedness or contingent obligations;
 
  •  make acquisitions of or investments in businesses (in excess of certain specified amounts);
 
  •  sell or dispose of assets (in excess of certain specified amounts);
 
  •  create or incur liens on assets; and
 
  •  enter into sale and leaseback transactions.
 
The Company is presently in compliance with all covenants under the domestic revolving credit facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
 
Events of Default.  If the Company breaches or fails to perform any of the affirmative or negative covenants under the revolving credit 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 $10 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’ 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.  The facility is secured by substantially all of the assets of Interface, Inc. 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 revolving credit facility, the lenders’ collateral 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.
 
As of January 2, 2011, the Company had no borrowings outstanding under this facility. At January 2, 2011, the Company had $5.4 million outstanding in letters of credit under this facility. As of January 2, 2011, the Company could have incurred $65.6 million of additional borrowings under this facility.
 
Credit Agreement with ABN AMRO Bank N.V.
 
The Company’s European subsidiary Interface Europe B.V. and certain of Interface Europe B.V.’s subsidiaries have a Credit Agreement with ABN AMRO Bank N.V. Under the Credit Agreement, ABN AMRO


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time as follows:
 
         
    Maximum Amount
Period
  in Euros
    (In millions)
 
October 1, 2010 — September 30, 2011
    20  
October 1, 2011 — September 30, 2012
    14  
From October 1, 2012
    8  
 
Interest on borrowings under the facility is charged at varying rates computed by applying a margin of 1% over ABN AMRO’s euro base rate (consisting of the leading refinancing rate as determined from time to time by the European Central Bank plus a debit interest surcharge), which base rate is subject to a minimum of 3.5% per annum. Fees on bank guarantees and documentary letters of credit are charged at a rate of 1% per annum or part thereof on the maximum amount and for the maximum duration of each guarantee or documentary letter of credit issued. A facility fee of 0.5% per annum is payable with respect to the facility amount. The facility is secured by liens on certain real property, personal property and other assets of the Company’s principal European subsidiaries. The facility also includes certain financial covenants (which require the borrowers and their subsidiaries to maintain a minimum interest coverage ratio, total debt/EBITDA ratio and tangible net worth/total assets) and affirmative and negative covenants, and other provisions that restrict the borrowers’ ability (and the ability of certain of the borrowers’ subsidiaries) to take certain actions. As of January 2, 2011, there were no borrowings outstanding under this facility.
 
The Company is presently in compliance with all covenants under this facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
 
75/8% Senior Notes
 
On December 3, 2010, the Company completed a private offering of $275 million aggregate principal amount of 75/8% Senior Notes due 2018 (the “75/8% Senior Notes”). Interest on the 75/8% Senior Notes is payable semi-annually on June 1 and December 1 beginning June 1, 2011. The Company used the net proceeds from the sale of the 75/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of the 11.375% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes, pursuant to a tender offer the Company conducted.
 
The Company may redeem some or all of the 75/8% Senior Notes at any time prior to December 1, 2014, at a redemption price equal to 100% of the principal amount plus a make-whole premium. Prior to December 1, 2014, the Company may redeem up to 10% of the aggregate principal amount of the 75/8% Senior Notes per 12-month period at a redemption price equal to 103% of the principal amount of the notes redeemed, plus accrued and unpaid interest. In addition, at any time prior to December 1, 2013, the Company may redeem up to 35% of the 75/8% Senior Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.625% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption. In addition, the notes will become redeemable for cash after December 1, 2014 at the Company’s option, in whole or in part, initially at a redemption price equal to 103.813% of the principal amount, declining to 100% of the principal amount on December 1, 2016, plus accrued interest thereon to the date fixed for redemption. As of January 2, 2011, the balance of the 75/8% Senior Notes outstanding was $275 million. The estimated fair value of the 75/8% Senior Notes as of January 2, 2011, based on then current market prices, was $281.5 million.
 
113/8% Senior Secured Notes
 
On June 5, 2009, the Company completed a private offering of $150 million aggregate principal amount of 113/8% Senior Secured Notes due 2013. Interest on the 113/8% Senior Secured Notes is payable semi-annually on May 1 and November 1 beginning November 1, 2009. The 113/8% Senior Secured Notes are


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries. The 113/8% 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 on a first-priority basis.
 
The 113/8% 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 will be amortized over the life of the notes through interest expense. After deducting the initial purchasers’ discount and other fees and expenses associated with the sale, net proceeds were $139.5 million. The Company used $137.4 million of those net proceeds to repurchase $127.2 million aggregate principal amount of its 10.375% Senior Notes pursuant to a tender offer conducted by the Company in 2009. (Included in the $137.4 million used to repurchase the $127.2 million aggregate principal amount of 10.375% Senior Notes were a purchase price premium of $5.7 million and accrued interest of $4.5 million). The remaining $2.1 million of the net proceeds was subsequently used to repay a portion of the $14.6 million of the 10.375% Senior Notes that remained outstanding following the tender offer. (The balance of the 10.375% Senior Notes was repaid at maturity on February 1, 2010.)
 
The Company may redeem all or a part of the 113/8% 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 113/8% 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 January 2, 2011, and January 3, 2010, the balance of the 113/8% Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $8.0 million and $145.2 million, respectively. The estimated fair value of the 113/8% Senior Secured Notes as of January 2, 2011, and January 3, 2010, based on then current market prices, was $8.1 million and $167.1 million, respectively.
 
10.375% Senior Notes
 
On January 17, 2002, the Company completed a private offering of $175 million in 10.375% Senior Notes due 2010. Interest is payable semi-annually on February 1 and August 1 beginning August 1, 2002. Proceeds from the issuance of these Notes were used to pay down the revolving credit facility.
 
The 10.375% Senior Notes (which have now been repaid, as described below) were guaranteed, fully, unconditionally, and jointly and severally, on an unsecured senior basis by certain of the Company’s domestic subsidiaries. During 2009, the Company repurchased $138.0 million aggregate principal amount of these notes. As of January 3, 2010 (the end of fiscal year 2009), the Company had outstanding $14.6 million in 10.375% Senior Notes. At January 3, 2010, the estimated fair value of these notes based on then current market prices was approximately $14.5 million. On February 1, 2010, the Company repaid the remaining balance of these notes.
 
9.5% Senior Subordinated Notes
 
On February 4, 2004, the Company completed a private offering of $135 million in 9.5% Senior Subordinated Notes due 2014. Interest on these notes is payable semi-annually on February 1 and August 1 beginning August 1, 2004. Proceeds from the issuance of these notes were used to redeem in full the Company’s previously outstanding 9.5% Senior Subordinated Notes due 2005 and to reduce borrowings under the Company’s revolving credit facility.
 
These notes are guaranteed, fully, unconditionally, and jointly and severally, on an unsecured senior subordinated basis by certain of the Company’s domestic subsidiaries. The notes are redeemable for cash after February 1, 2009, at the Company’s option, in whole or in part, initially at a redemption price equal to 104.75% of the principal amount, declining to 100% of the principal amount on February 1, 2012, plus accrued interest thereon to the date fixed for redemption. As of January 2, 2011, and January 3, 2010, the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Company had outstanding $11.5 million and $135 million, respectively, of 9.5% Senior Subordinated Notes due 2014. At January 2, 2011, and January 3, 2010, the estimated fair value of these notes, based on then current market prices, was approximately $11.5 million and $132.3 million, respectively.
 
Other Lines of Credit
 
Subsidiaries of the Company have an aggregate of the equivalent of $11.9 million of other lines of credit available at interest rates ranging from 1% to 9%. As of January 2, 2011, and January 3, 2010, there were no borrowings outstanding under these lines of credit.
 
Borrowing Costs
 
Deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of debt, were $7.1 million and $7.9 million, as of January 2, 2011, and January 3, 2010, respectively. The Company amortizes these costs over the life of the related debt. Expenses related to such costs for the years 2010, 2009 and 2008 amounted to $2.2 million, $1.7 million and $1.4 million, respectively. In addition to these expenses, the years 2010 and 2009 include $4.5 million and $0.2 million, respectively, of expense related to the write-down of debt costs associated with note repurchases.
 
Future Maturities
 
The aggregate maturities of borrowings for each of the five fiscal years subsequent to 2010, are as follows:
 
         
Fiscal Year
  Amount  
    (In thousands)  
 
2011
  $  
2012
     
2013
    8,143  
2014
    11,477  
2015
     
Thereafter
    275,000  
         
    $ 294,620  
         
 
PREFERRED STOCK
 
The Company is authorized to designate and issue up to 5,000,000 shares of $1.00 par value preferred stock in one or more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation, and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock and could decrease the amount of earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. As of January 2, 2011, and January 3, 2010, there were no shares of preferred stock issued.
 
Preferred Share Purchase Rights
 
The Company has previously issued one purchase right (a “Right”) in respect of each outstanding share of Common Stock pursuant to a Rights Agreement it entered into in March 2008. Each Right entitles the registered holder of the Common Stock to purchase from the Company one one-hundredth of a share (a “Unit”) of Series B Participating Cumulative Preferred Stock (the “Series B Preferred Stock”).


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires (without the consent of the Company’s Board of Directors) 15% or more of the outstanding shares of Common Stock or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the Rights for Common Stock as permitted under the Shareholder Rights Plan.
 
The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one Unit of Series B Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common Stock, including voting rights. The exercise price per Right is $90, subject to adjustment. Shares of Series B Preferred Stock will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate dividend payment of 100 times the dividend declared on each share of Common Stock. In the event of liquidation, each share of Series B Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid dividends and distributions thereon, but will be entitled to an aggregate payment of 100 times the payment made per share of Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or changed into other stock or securities, cash or other property, each share of Series B Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. Series B Preferred Stock is not convertible into Common Stock.
 
Each share of Series B Preferred Stock will be entitled to 100 votes on all matters submitted to a vote of the shareholders of the Company, and shares of Series B Preferred Stock will generally vote together as one class with the Common Stock and any other voting capital stock of the Company on all matters submitted to a vote of the Company’s shareholders. While the Company’s Class B Common Stock remains outstanding, holders of Series B Preferred Stock will vote as a single class with the Class A Common Stockholders for election of directors.
 
Further, whenever dividends on the Series B Preferred Stock are in arrears in an amount equal to six quarterly payments, the Series B Preferred Stock, together with any other shares of preferred stock then entitled to elect directors, shall have the right, as a single class, to elect one director until the default has been cured.
 
Prior to entering into the March 2008 Rights Agreement, the Company maintained a substantially similar Rights Agreement that was entered into in 1998.
 
SHAREHOLDERS’ EQUITY
 
The Company is authorized to issue 80 million shares of $0.10 par value Class A Common Stock and 40 million shares of $0.10 par value Class B Common Stock. Class A and Class B Common Stock have identical voting rights except for the election or removal of directors. Holders of Class B Common Stock are entitled as a class to elect a majority of the Board of Directors. Under the terms of the Class B Common Stock, its special voting rights to elect a majority of the Board members would terminate irrevocably if the total outstanding shares of Class B Common Stock ever comprises less than ten percent of the Company’s total issued and outstanding shares of Class A and Class B Common Stock. On January 2, 2011, the outstanding Class B shares constituted approximately 11.1% of the total outstanding shares of Class A and Class B Common Stock.
 
The Company’s Class A Common Stock is traded on the Nasdaq Global Select Market under the symbol IFSIA. The Company’s Class B Common Stock is not publicly traded. Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis.
 
Both classes of Common Stock share equally in dividends available to common shareholders. The Company paid dividends totaling $0.0425 per share during 2010, $0.01 per share during 2009 and $0.12 per share during 2008 to each class of Common Stock. The future declaration and payment of dividends is at the discretion of the Company’s Board, and depends upon, among other things, the Company’s investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant at the time of the Board’s determination. Such other factors include


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
limitations contained in the agreement for its primary revolving credit facility and in the indentures for our public indebtedness, each of which specify conditions as to when any dividend payments may be made. As such, the Company may discontinue its dividend payments in the future if its Board determines that a cessation of dividend payments is proper in light of the factors indicated above.
 
All treasury stock is accounted for using the cost method.
 
                                                                         
                                              Foreign
    Non-
 
                            Additional
    Retained
          Currency
    Controlling
 
    Class A
    Class A
    Class B
    Class B
    Paid-in
    Earnings
    Pension
    Translation
    Interest in
 
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Liability     Adjustment     Subsidiary  
    (In thousands)  
 
Balance, at December 30, 2007
    55,369     $ 5,534       6,482     $ 650     $ 332,650     $ (15,159 )   $ (30,803 )   $ 1,270     $ 6,974  
Net income (loss)
                                  (40,873 )                 1,206  
Adoption of new accounting standard
                                  (2,022 )                  
Conversion of common stock
    777       78       (777 )     (78 )                              
Stock issuances under employee plans
    233       23                   1,413                          
Other issuances of common stock
                1,090       109       15,251                          
Unamortized stock compensation expense related to restricted stock awards
                            (15,289 )                        
Forfeitures and compensation expense related to stock awards
                            5,751                          
Dividends paid
                                  (7,562 )                  
Pension liability adjustment
                                        2,033              
Foreign currency translation adjustment
                                              (43,480 )     (239 )
                                                                         
Balance, at December 28, 2008
    56,379     $ 5,635       6,795     $ 681     $ 339,776     $ (65,616 )   $ (28,770 )   $ (42,210 )   $ 7,941  
                                                                         
 
                                                                         
                                              Foreign
    Non-
 
                            Additional
    Retained
          Currency
    Controlling
 
    Class A
    Class A
    Class B
    Class B
    Paid-in
    Earnings
    Pension
    Translation
    Interest in
 
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Liability     Adjustment     Subsidiary  
    (In thousands)  
 
Balance, at December 28, 2008
    56,379     $ 5,635       6,795     $ 681     $ 339,776     $ (65,616 )   $ (28,770 )   $ (42,210 )   $ 7,941  
Net income (loss)
                                  10,918                   846  
Conversion of common stock
    29       3       (29 )     (3 )                              
Stock issuances under employee plans
    113       11                   490                          
Other issuances of common stock
                8       1       114                          
Unamortized stock compensation expense related to restricted stock awards
                            (116 )                        
Cash dividends paid
                                  (634 )                  
Forfeitures and compensation expense related to stock awards
                            3,084                          
Pension liability adjustment
                                        (4,416 )            
Foreign currency translation adjustment
                                              18,153       293  
                                                                         
Balance, at January 3, 2010
    56,521     $ 5,649       6,774     $ 679     $ 343,348     $ (55,332 )   $ (33,186 )   $ (24,057 )   $ 9,080  
                                                                         
 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                                         
                                              Foreign
    Non-
 
                            Additional
    Retained
          Currency
    Controlling
 
    Class A
    Class A
    Class B
    Class B
    Paid-in
    Earnings
    Pension
    Translation
    Interest in
 
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Liability     Adjustment     Subsidiary  
    (In thousands)  
 
Balance, at January 3, 2010
    56,521     $ 5,649       6,774     $ 679     $ 343,348     $ (55,332 )   $ (33,186 )   $ (24,057 )   $ 9,080  
Net income (loss)
                                  8,283                   1,051  
Conversion of common stock
    159       16       (159 )     (16 )                              
Stock issuances under employee plans
    631       64                   2,726                          
Other issuances of common stock
                530       53       6,418                          
Unamortized stock compensation expense related to restricted stock awards
                            (6,471 )                        
Cash dividends paid
                                  (2,721 )                  
Forfeitures and compensation expense related to stock awards
                            4,540                          
Pension liability adjustment
                                        1,990              
Foreign currency translation adjustment
                                              (2,212 )     458  
Dividend to Noncontrolling Interest Partner
                                                    (7,444 )
Repurchase of Minority Interest
                            (899 )                       (3,145 )
                                                                         
Balance, at January 2, 2011
    57,311     $ 5,729       7,145     $ 716     $ 349,662     $ (49,770 )   $ (31,196 )   $ (26,269 )   $  
                                                                         
 
Stock Options
 
The Company has an Omnibus Stock Incentive Plan (“Omnibus Plan”) under which a committee of independent directors is authorized to grant directors and key employees, including officers, options to purchase the Company’s Common Stock. Options are exercisable for shares of Class A or Class B Common Stock at a price not less than 100% of the fair market value on the date of grant. The options become exercisable either immediately upon the grant date or ratably over a time period ranging from one to five years from the date of the grant. The Company’s options expire at the end of time periods ranging from three to ten years from the date of the grant. In May 2006, the shareholders approved an amendment and restatement of the Omnibus Plan. The amendment extended the term of the Omnibus Plan until February 2016, and set the number of shares authorized for issuance or transfer on or after the effective date of the amendment and restatement at 4,250,000 shares, except that each share issued pursuant to an award other than a stock option reduced the number of such authorized shares by two shares. In May 2010, the shareholders approved another amendment and restatement of the Omnibus Plan. This amendment and restatement extended the term of the Omnibus Plan until February 2020, and set the number of shares authorized for issuance or transfer on or after the effective date of the amendment and restatement at 6,558,263 shares, except that each share issued pursuant to an award other than a stock option reduces the number of such authorized shares by 1.33 shares.
 
Accounting standards require that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair market 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. 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 expense by the assumed forfeiture

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
rate and will evaluate actual experience against the assumed forfeiture rate going forward. This expense reduction is not significant to the Company.
 
The Company recognized stock option compensation expense of $1.2 million in 2010, $1.4 million in 2009, and $0.6 million in 2008. The remaining unrecognized compensation cost related to unvested awards at January 2, 2011, approximated $1.3 million, and the weighted average period of time over which this cost will be recognized is approximately two years. The expense for stock options is included in selling, general and administrative expense on the Company’s consolidated statements of operations, as none of these stock options have been issued to production personnel.
 
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 past three fiscal years:
 
                         
    Fiscal Year  
    2010     2009     2008  
 
Risk free interest rate
    2.1 %     1.6 %     3.9 %
Expected option life
    5.75 years       5.5 years       3.25 years  
Expected volatility
    61 %     61 %     61 %
Expected dividend yield
    0.37 %     2.6 %     0.57 %
 
The weighted average fair value of stock options (as of grant date) granted during the years 2010, 2009 and 2008 was $6.86, $1.91 and $6.21, respectively, per share.
 
The following table summarizes stock options outstanding as of January 2, 2011, as well as activity during the previous fiscal year:
 
                         
          Weighted Average
       
    Shares     Exercise Price        
 
Outstanding at January 3, 2010
    1,576,000     $ 5.75          
Granted
    239,000       12.59          
Exercised
    631,000       4.97          
Forfeited or cancelled
    35,500       6.29          
                         
Outstanding at January 2, 2011(a)
    1,148,500     $ 7.51          
                         
Exercisable at January 2, 2011(b)
    395,000     $ 8.94          
                         
 
 
(a) At January 2, 2011, the weighted-average remaining contractual life of options outstanding was 6.7 years.
 
(b) At January 2, 2011, the weighted-average remaining contractual life of options exercisable was 3.4 years.
 
At January 2, 2011, the aggregate intrinsic values of in-the-money options outstanding and options exercisable were $9.4 million and $2.7 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).
 
The intrinsic value of stock options exercised in 2010, 2009 and 2008 was $5.5 million, $0.4 million and $1.7 million, respectively. The cash proceeds related to stock options exercised in 2010, 2009 and 2008 were $3.1 million, $0.5 million and $1.5 million, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The tax benefit recognized with respect to stock options during the years 2010, 2009 and 2008 was $0.2 million, $0.2 million and $0.1 million, respectively.
 
                                         
    Options Outstanding     Options Exercisable  
          Weighted Average
          Number
       
    Number
    Remaining
    Weighted
    Exercisable at
    Weighted
 
    Outstanding at
    Contractual Life
    Average
    January 2,
    Average
 
Range of Exercise Prices
  January 2, 2011     (Years)     Exercise Price     2011     Exercise Price  
 
$1.49 - 3.99
    62,000       3.32     $ 2.55       52,000     $ 2.71  
 4.00 - 5.99
    655,000       7.55       4.31       151,000       4.39  
 6.00 - 8.99
    25,000       7.05       7.95       5,000       8.64  
 9.00 - 13.99
    229,000       8.82       12.51       30,000       13.01  
14.00 - 16.42
    177,500       2.76       14.56       157,000       14.61  
                                         
      1,148,500       6.74     $ 7.51       395,000     $ 8.94  
                                         
 
Restricted Stock Awards
 
During fiscal years 2010, 2009 and 2008, the Company granted restricted stock awards totaling 529,000, 27,000 and 1,087,000 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 the vesting of restricted stock was $2.9 million, $1.8 million and $5.8 million for 2010, 2009 and 2008, respectively. These grants are made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized. 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 actual experience against the assumed forfeiture rate going forward. The forfeiture rate has been developed using historical data regarding actual forfeitures as well as an estimate of future expected forfeitures under our restricted stock grants.
 
The following table summarizes restricted stock activity as of January 2, 2011, and during the previous fiscal year:
 
                 
          Weighted Average
 
          Grant Date
 
    Shares     Fair Value  
 
Outstanding at January 3, 2010
    1,394,000     $ 13.04  
Granted
    529,000       12.22  
Vested
    183,000       7.67  
Forfeited or cancelled
           
                 
Outstanding at January 2, 2011
    1,740,000     $ 13.04  
                 
 
As of January 2, 2011, the unrecognized total compensation cost related to unvested restricted stock was $11.8 million. That cost is expected to be recognized by the end of 2013.
 
As stated above, accounting standards require the Company to estimate forfeitures in calculating the expense related to stock-based compensation, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The tax benefit recognized with respect to restricted stock during the years 2010, 2009 and 2008 was $0.7 million, $0.2 million and $1.4 million, respectively.
 
INCOME (LOSS) PER SHARE
 
The Company computes basic earnings (loss) per share (“EPS”) attributable to Interface, Inc. common shareholders by dividing income (loss) from continuing operations attributable to Interface, Inc. common shareholders, income (loss) from discontinued operations attributable to Interface, Inc. common shareholders and net income (loss) attributable to Interface, Inc. common shareholders, by the weighted average common shares outstanding, including participating securities outstanding, during the period as depicted 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.
 
In the first quarter of 2009, the Company adopted an 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 awards of restricted stock are paid dividends equally with all other shares of common stock. The following tables show distributed and undistributed earnings:
 
                         
    Fiscal Year  
    2010     2009     2008  
 
Earnings (loss) per share from continuing operations:
                       
Basic earnings (loss) per share attributable to Interface, Inc. common shareholders
                       
Distributed earnings
  $ 0.04     $ 0.01     $ (0.12 )
Undistributed earnings
    0.10       0.18       (0.46 )
                         
    $ 0.14     $ 0.19     $ (0.58 )
                         
Diluted earnings (loss) per share attributable to Interface, Inc. common shareholders
                       
Distributed earnings
  $ 0.04     $ 0.01     $ (0.12 )
Undistributed earnings
    0.10       0.18       (0.46 )
                         
    $ 0.14     $ 0.19     $ (0.58 )
                         


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Fiscal Year  
    2010     2009     2008  
 
Loss per share from discontinued operations:
                       
Basic earnings (loss) per share attributable to Interface, Inc. common shareholders
                       
Distributed earnings
  $     $     $  
Undistributed earnings
    (0.01 )     (0.01 )     (0.08 )
Diluted earnings (loss) per share attributable to Interface, Inc. common shareholders
                       
Distributed earnings
  $     $     $  
Undistributed earnings
    (0.01 )     (0.01 )     (0.08 )
Basic earnings (loss) per share attributable to Interface, Inc. common shareholders
  $ 0.13     $ 0.17     $ (0.67 )
Diluted earnings (loss) per share attributable to Interface, Inc. common shareholders
  $ 0.13     $ 0.17     $ (0.67 )
 
The following table presents income (loss) from continuing operations and net income (loss) attributable to Interface, Inc. that was attributable to participating securities:
 
                         
    Fiscal Year
    2010   2009   2008
    (In millions)
 
Income (Loss) from Continuing Operations
  $ 0.3     $ 0.3     $ (0.9 )
Net Income (Loss) Attributable to Interface, Inc. 
    0.2       0.2       (1.0 )
 
As discussed above, participating securities were not included in the determination of EPS for 2008, as their inclusion would be anti-dilutive.
 
The weighted average shares for basic and diluted EPS were as follows:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Weighted Average Shares Outstanding
    62,054       61,819       61,439  
Participating Securities
    1,740       1,394        
                         
Shares for Basic Earnings (Loss) Per Share
    63,794       63,213       61,439  
Dilutive Effect of Stock Options
    468       95        
                         
Shares for Diluted Earnings (Loss) Per Share
    64,262       63,308       61,439  
                         
 
In 2008, the Company was in a loss from continuing operations, and as a result, any potential common shares would have been anti-dilutive and therefore are not included in the calculation. In 2010 and 2009, certain outstanding stock options were not included in the determination of diluted earnings per share as their impact would be anti-dilutive. The following table shows the shares excluded from the dilutive EPS calculation for all periods presented.
 
                         
    Fiscal Year
    2010   2009   2008
    (In thousands)
 
Participating securities excluded
                1,550  
Options excluded
    357       302       679  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
RESTRUCTURING CHARGES
 
2010 Restructuring Plan
 
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.
 
A summary of these restructuring activities is presented below:
 
                         
    Total
  Costs
   
    Restructuring
  Incurred
  Balance at
    Charge   In 2010   January 2, 2011
    (In thousands)
 
Workforce reduction
  $ 3,131     $ 2,674     $ 457  
 
The table below details these restructuring activities by segment:
 
                                 
    Modular
  Bentley
       
    Carpet   Prince Street   Corporate   Total
    (In thousands)
 
Total amounts expected to be incurred
  $ 2,951     $ 180     $     $ 3,131  
Cumulative amounts incurred to date
    2,494       180             2,674  
Total amounts incurred in 2010
    2,494       180             2,674  
 
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 including 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 is due to approximately 80 additional employee reductions, and relates entirely to employee severance expense.
 
A summary of these restructuring activities is presented below:
 
                                 
    Total
    Costs
    Costs
       
    Restructuring
    Incurred
    Incurred
    Balance at
 
    Charges     in 2009     in 2010     Jan. 2, 2011  
    (In thousands)  
 
Facilities consolidation
  $ 970     $ 970     $     $  
Workforce reduction
    5,873       3,920       1,889       64  
Other charges
    784       784              
                                 
    $ 7,627     $ 5,674     $ 1,889     $ 64  
                                 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The table below details these restructuring activities by segment:
 
                                 
    Modular
  Bentley
       
    Carpet   Prince Street   Corporate   Total
    (In thousands)
 
Total amounts expected to be incurred
  $ 6,865     $ 762     $     $ 7,627  
Cumulative amounts incurred to date
    6,801       762             7,563  
Total amounts incurred in 2010
    1,889                   1,889  
 
2008 Restructuring Plan
 
In the fourth quarter of 2008, the Company committed to a restructuring plan intended to reduce costs across its worldwide operations, and more closely align the Company’s operations with demand levels. The reduction of the demand levels was primarily a result of the worldwide recession and the associated delays and reductions in the number of construction projects where the Company’s carpet products are used. The plan primarily consisted of ceasing manufacturing operations at its facility in Belleville, Canada, and reducing its worldwide employee base by a total of approximately 530 employees in the areas of manufacturing, sales and administration. In connection with the restructuring plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2008 of $11.0 million. The Company records its restructuring accruals under the provisions of applicable accounting standards. The restructuring charge was comprised of employee severance expense of $7.8 million, impairment of assets of $2.6 million, and other exit costs of $0.7 million (primarily related to lease exit costs and other closure activities). Approximately $8.3 million of the restructuring charge resulted in cash expenditures, primarily severance expense.
 
A summary of these restructuring activities is presented below:
 
                                 
    Total
    Costs
    Costs
       
    Restructuring
    Incurred
    Incurred
    Balance at 01/3/10
 
    Charge     During 2008     During 2009     and 1/2/11  
    (In thousands)  
 
Facilities consolidation
  $ 2,559     $ 2,559     $     $  
Workforce reduction
    7,751       1,464       6,287        
Other charges
    665             665        
                                 
    $ 10,975     $ 4,023     $ 6,952     $  
                                 
 
The table below details these restructuring activities by segment:
 
                                 
    Modular
  Bentley
       
    Carpet   Prince Street   Corporate   Total
    (In thousands)
 
Total amounts expected to be incurred
  $ 10,710     $ 120     $ 145     $ 10,975  
Cumulative amounts incurred to date
    10,710       120       145       10,975  
Total amounts incurred in 2010
                       


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
TAXES ON INCOME
 
Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Current expense/(benefit):
                       
Federal
  $ (62 )   $ 394     $ 100  
Foreign
    12,617       11,890       20,844  
State
    530       542       456  
                         
      13,085       12,826       21,400  
                         
Deferred expense/(benefit):
                       
Federal
    (9,510 )     (3,403 )     15,732  
Foreign
    994       (875 )     1,820  
State
    (533 )     315       1,386  
                         
      (9,049 )     (3,963 )     18,938  
                         
    $ 4,036     $ 8,863     $ 40,338  
                         
 
Income tax expense (benefit) is included in the accompanying consolidated statements of operations as follows:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Continuing operations
  $ 4,494     $ 9,352     $ 43,040  
Loss from discontinued operations
    (458 )     (489 )     (2,702 )
                         
    $ 4,036     $ 8,863     $ 40,338  
                         
 
Income (loss) from continuing operations before taxes on income consisted of the following:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
U.S. operations
  $ (32,270 )   $ (8,809 )   $ (59,400 )
Foreign operations
    46,834       30,834       67,927  
                         
    $ 14,564     $ 22,025     $ 8,527  
                         
 
Deferred income taxes for the years ended January 2, 2011, and January 3, 2010, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
At January 2, 2011, the Company had approximately $131.1 million in federal net operating loss carryforwards from continuing operations, with expiration dates through 2030, of which $18.9 million is from share-based payment awards. In accordance with applicable accounting standards, a financial statement benefit has not been recorded for the net operating loss related to the share-based payment awards. The Company’s foreign subsidiaries had approximately $3 million in net operating losses available for an unlimited carryforward period. The Company expects to utilize all of its federal and foreign carryforwards prior to their


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
expiration. The Company had approximately $137.5 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2030. The Company had provided a valuation allowance against $77.7 million of such losses, which the Company does not expect to utilize. In addition, the Company has approximately $165 million in state net operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided.
 
The sources of the temporary differences and their effect on the net deferred tax asset are as follows:
 
                                 
    2010     2009  
    Assets     Liabilities     Assets     Liabilities  
    (In thousands)  
 
Basis differences of property and equipment
  $     $ 9,113     $     $ 9,089  
Basis difference of intangible assets
          411             568  
Foreign currency loss
          2,672             2,671  
Net operating loss carryforwards
    47,850             41,332        
Valuation allowances on net operating loss carryforwards
    (5,403 )           (2,758 )      
Deferred compensation
    17,068             15,978        
Basis difference of prepaids, accruals and reserves
    9,979             8,187        
Pensions
    1,896             3,498        
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested
          3,714             7,388  
Basis difference of other assets and liabilities
    41             39        
                                 
    $ 71,431     $ 15,910     $ 66,276     $ 19,716  
                                 
 
Deferred tax assets and liabilities are included in the accompanying balance sheets as follows:
 
                 
    Fiscal Year
    2010   2009
    (In thousands)
 
Deferred income taxes (current asset)
  $ 10,062     $ 9,379  
Deferred tax asset (non-current asset)
    53,022       44,210  
Deferred income taxes (non-current liabilities)
    (7,563 )     (7,029 )
                 
    $ 55,521     $ 46,560  
                 
 
Management believes, based on the Company’s history of taxable income and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the deferred tax assets at January 2, 2011.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s effective tax rate from continuing operations was 30.9%, 42.5% and 504.7% for fiscal years 2010, 2009 and 2008, respectively. The following summary reconciles income taxes at the U.S. federal statutory rate of 35% to the Company’s actual income tax expense:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Income taxes at U.S. federal statutory rate
  $ 5,097     $ 7,709     $ 2,984  
Increase (decrease) in taxes resulting from:
                       
State income taxes, net of federal tax benefit
    (1,713 )     438       194  
Non-deductible goodwill impairment
                21,415  
Non-deductible business expenses
    354       315       385  
Non-deductible employee compensation
    399       399       763  
Tax effects of Company owned life insurance
    (1,281 )     (1,380 )     1,982  
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested
    960       1,075       13,262  
Foreign and U.S. tax effects attributable to foreign operations
    (491 )     1,058       1,318  
Nondeductible loss on sale of subsidiary
                82  
Valuation allowance additions — State NOL
    1,717       109       942  
Income attributable to noncontrolling interest in subsidiary
    (368 )     (296 )     (422 )
Other
    (180 )     (75 )     135  
                         
Income tax expense
  $ 4,494     $ 9,352     $ 43,040  
                         
 
The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. as determination of the amount of unrecognized deferred U.S. income tax liability related to the indefinitely reinvested earnings is not practicable because of the complexities associated with its hypothetical calculation. Beginning in 2008, the Company has provided for approximately $14.3 million in U.S. federal and state income taxes and approximately $1.0 million in foreign withholding taxes on approximately $41.6 million of undistributed earnings from foreign subsidiaries that were no longer deemed to be indefinitely reinvested outside of the U.S. During 2009 and 2010, the Company repatriated $20.2 million and $12.2 million, respectively, of these undistributed earnings on which the Company had provided $11 million in U.S. federal and state income taxes and $0.8 million in foreign withholding taxes. At January 2, 2011, the Company has provided for approximately $3.3 million in U.S. federal and state income taxes and approximately $0.2 million in foreign withholding taxes on approximately $9.2 million of the remaining undistributed earnings that it anticipates repatriating in the foreseeable future. At January 2, 2011, approximately $200 million of undistributed earnings of the Company’s foreign subsidiaries are deemed to be indefinitely reinvested outside of the U.S., on which withholding taxes of approximately $4.2 million would be payable upon remittance.
 
As of January 2, 2011 and January 3, 2010, the Company had $8.2 million and $9.6 million, respectively, of unrecognized tax benefits. The reduction of unrecognized tax benefits in 2010 was primarily attributable to a decrease of approximately $2.1 million related to its foreign tax positions taken in prior years which was partially offset by an increase of approximately $0.7 million related to its foreign tax positions taken in the current year. If the $8.2 million of unrecognized tax benefits as of January 2, 2011 are recognized, there would be a favorable impact on the Company’s effective tax rate in future periods. If the unrecognized tax benefits are not favorably settled, $7.9 million of the total amount of unrecognized tax benefits would require the use of cash in future periods.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense. As of January 2, 2011, the Company had accrued interest and penalties of $1.1 million, which is included in the total unrecognized tax benefit noted above.
 
The Company’s federal income tax returns are subject to examination for the years 2003 to the present. The Company files returns in numerous state and local jurisdictions and in general it is subject to examination by the state tax authorities for the years 2005 to the present. The Company files returns in numerous foreign jurisdictions and in general it is subject to examination by the foreign tax authorities for the years 2003 to the present.
 
In August 2006, the Canadian tax authorities (“CRA”) proposed a reassessment of taxable income for transfer pricing related adjustments for the years 2001 and 2002. In November 2006, the Company filed a submission with the CRA to set aside the reassessment of taxable income. In September 2008, the CRA issued a final notice of reassessment of tax, including interest, of approximately $0.9 million for the years 2001 and 2002. In December 2008, the Company filed an objection to the notice of reassessment of tax with the CRA. In May 2009, the Company filed a Joint Request for Competent Authority Assistance Pursuant to the Mutual Agreement Procedure (“MAP”) under the Canada-U.S. 1980 Tax Convention. In November 2010, the Company received notice from the Canadian Competent Authority Services Division that an agreement had been reached between the U.S. and Canadian Competent Authorities to reverse in its entirety the CRA audit initiated adjustments with respect to the transfer pricing related adjustments for the years 2001 and 2002. As a result, during 2010, the Company reduced its liability for unrecognized tax benefits relating to this reassessment.
 
In late February 2008, the Company filed with the CRA and the Internal Revenue Service (“IRS”) an application for a Canada — U.S. bilateral advanced pricing agreement (“BAPA”) with respect to certain intercompany transactions (“Covered Transactions”) between Interface, Inc. (including its U.S. subsidiaries) and its Canadian subsidiary. The BAPA request covers, at minimum, tax years 2006 through 2010, with a possibility of appending additional prospective years or qualifying rollback years for earlier periods. During 2008, the Company was accepted into the BAPA program by both the CRA and the IRS. In late December 2008, the Company made the decision to discontinue manufacturing at its facility in Canada, thus affecting the majority of the Covered Transactions. During 2009, the CRA and the IRS substantially completed their due diligence and the Company is anticipating a negotiated resolution from those agencies in the near future. The Company has included in its liability for unrecognized tax benefits an amount it estimates will more likely than not result from the conclusion of the BAPA. However, due to the nature of the BAPA process, the timing and outcome of the BAPA is subject to considerable variation and the ultimate outcome of this process could result in an amount significantly different from the Company’s estimate.
 
Management believes changes to our unrecognized tax benefits that are reasonably possible in the next 12 months, other than the conclusion of the Canada — U.S. BAPA noted above, will not have a significant impact on our financial positions or results of operations. The timing of the ultimate resolution of the Company’s tax matters and the payment and receipt of related cash is dependent on a number of factors, many of which are outside the Company’s control.


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Table of Contents

INTERFACE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Balance at beginning of year
  $ 9,551     $ 7,455     $ 7,713  
Increases related to tax positions taken during the current year
    718       1,685       595  
Increases related to tax positions taken during the prior years
    538       1,118       1,106  
Decreases related to tax positions taken during the prior years
          (157 )     (1,479 )
Decreases related to settlements with taxing authorities
    (1,778 )            
Decreases related to lapse of applicable statute of limitations
    (712 )     (892 )      
Changes due to foreign currency translation
    (158 )     342       (480 )
                         
Balance at end of year
  $ 8,159     $ 9,551     $ 7,455  
                         
 
DISCONTINUED OPERATIONS
 
As discussed below in the Note entitled “Sale of Fabrics Business,” in 2007, the Company sold its Fabrics Group business segment. Therefore, the results for the Fabrics Group business segment have been reported as discontinued operations. The expenses of discontinued operations during the years 2010 and 2009 related to the settlement of liabilities in those years that were in existence as of the date of the sale of the Company’s discontinued operations. The expenses in 2008 related primarily to application of a full reserve to a deferred purchase price receivable from the sale of the Company’s Fabrics Group business segment that was determined to be uncollectable. See the Note below entitled “Sale of Fabrics Business” for further information on this charge.
 
Summary operating results for the discontinued operations are as follows:
 
                         
    Fiscal Year  
    2010     2009     2008  
    (In thousands)  
 
Net sales
  $     $     $