INTERFACE INC - Quarter Report: 2011 July (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

		For Quarterly Period Ended July 3, 2011

Commission File Number 001-33994

INTERFACE, INC.

GEORGIA		58-1451243
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

(Address of principal executive offices and zip code)

(770) 437-6800

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Shares outstanding of each of the registrant’s classes of common stock at August 5, 2011:

Class		Number of Shares
Class A Common Stock, $.10 par value per share			58,579,758
Class B Common Stock, $.10 par value per share			6,895,457

 

 

INTERFACE, INC.

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Condensed Balance Sheets — July 3, 2011 and January 2, 2011			3
Consolidated Condensed Statements of Operations — Three Months and Six Months Ended July 3, 2011 and July 4, 2010			4
Consolidated Statements of Comprehensive Income (Loss) — Three Months and Six Months Ended July 3, 2011 and July 4, 2010			5
Consolidated Condensed Statements of Cash Flows — Six Months Ended July 3, 2011 and July 4, 2010			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			25
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Removed and Reserved			26
Item 5. Other Information			26
Item 6. Exhibits			26
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)

		JULY 3, 2011				JANUARY 2, 2011
		(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents		$	27,299			$	69,236
Accounts Receivable, net			163,173				151,463
Inventories			170,517				136,766
Prepaid Expenses and Other Current Assets			29,354				24,362
Deferred Income Taxes			9,780				10,062
Assets of Business Held for Sale			1,200				1,200
TOTAL CURRENT ASSETS			401,323				393,089
PROPERTY AND EQUIPMENT, less accumulated depreciation			188,290				177,792
DEFERRED TAX ASSET			50,798				53,022
GOODWILL			81,148				75,239
OTHER ASSETS			57,678				56,291
TOTAL ASSETS		$	779,237			$	755,433
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable		$	50,195			$	55,859
Accrued Expenses			100,680				112,657
TOTAL CURRENT LIABILITIES			150,875				168,516
SENIOR NOTES			282,990				282,951
SENIOR SUBORDINATED NOTES			11,477				11,477
DEFERRED INCOME TAXES			8,498				7,563
OTHER			35,079				36,054
TOTAL LIABILITIES			488,919				506,561
Commitments and Contingencies
SHAREHOLDERS’ EQUITY:
Preferred Stock			—				—
Common Stock			6,546				6,445
Additional Paid-In Capital			359,107				349,662
Retained Earnings (Deficit)			(30,228	)			(49,770	)
Accumulated Other Comprehensive Loss — Foreign Currency Translation Adjustment			(12,742	)			(26,269	)
Accumulated Other Comprehensive Loss — Pension Liability			(32,365	)			(31,196	)
TOTAL SHAREHOLDERS’ EQUITY			290,318				248,872
		$	779,237			$	755,433

See accompanying notes to consolidated condensed financial statements.

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

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

		THREE MONTHS ENDED								SIX MONTHS ENDED
		JULY 3, 2011				JULY 4, 2010				JULY 3, 2011				JULY 4, 2010
NET SALES		$	267,640			$	226,587			$	513,042			$	443,778
Cost of Sales			172,865				146,453				331,339				290,270
GROSS PROFIT ON SALES			94,775				80,134				181,703				153,508
Selling, General and Administrative Expenses			68,638				58,668				134,038				115,156
Restructuring Charge			—				—				—				3,131
OPERATING INCOME			26,137				21,466				47,665				35,221
Interest Expense			6,783				8,115				13,439				16,937
Bond Retirement Expense			—				—				—				1,085
Other Expense			171				447				49				545
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE			19,183				12,904				34,177				16,654
Income Tax Expense			6,369				4,896				11,539				6,540
NET INCOME			12,814				8,008				22,638				10,114
Income Attributable to Non-Controlling Interest in Subsidiary			—				(376	)			—				(612	)
NET INCOME ATTRIBUTABLE TO INTERFACE, INC.		$	12,814			$	7,632			$	22,638			$	9,502
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Basic		$	0.20			$	0.12			$	0.35			$	0.15
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Diluted		$	0.20			$	0.12			$	0.35			$	0.15
Common Shares Outstanding — Basic			65,398				63,515				65,108				63,423
Common Shares Outstanding — Diluted			65,677				64,118				65,363				63,917

See accompanying notes to consolidated condensed financial statements.

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

(IN THOUSANDS)

		THREE MONTHS ENDED								SIX MONTHS ENDED
		JULY 3, 2011				JULY 4, 2010				JULY 3, 2011				JULY 4, 2010
Net Income		$	12,814			$	8,008			$	22,638			$	10,114
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment			4,092				(14,149	)			12,358				(21,462	)
Comprehensive Income (Loss)			16,906				(6,141	)			34,996				(11,348	)
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary			—				(358	)			—				(874	)
Comprehensive Income (Loss) Attributable to Interface, Inc.		$	16,906			$	(6,499	)		$	34,996			$	(12,222	)

See accompanying notes to consolidated condensed financial statements.

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

(IN THOUSANDS)

		SIX MONTHS ENDED
		JULY 3, 2011				JULY 4, 2010
OPERATING ACTIVITIES:
Net Income		$	22,638			$	10,114
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Premiums Paid to Repurchase Senior Notes			—				792
Depreciation and Amortization			13,112				11,415
Stock Compensation Amortization Expense			8,120				1,488
Deferred Income Taxes and Other			3,276				(929	)
Working Capital Changes:
Accounts Receivable			(7,995	)			(7,077	)
Inventories			(30,010	)			(14,024	)
Prepaid Expenses			(4,083	)			(7,412	)
Accounts Payable and Accrued Expenses			(26,442	)			18,277
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:			(21,384	)			12,644
INVESTING ACTIVITIES:
Capital Expenditures			(18,814	)			(11,312	)
Other			(1,995	)			(628	)
CASH USED IN INVESTING ACTIVITIES:			(20,809	)			(11,940	)
FINANCING ACTIVITIES:
Repurchase of Senior Notes			—				(39,586	)
Other			(505	)			—
Premiums Paid to Repurchase Senior Notes			—				(792	)
Proceeds from Issuance of Common Stock			2,579				1,174
Dividends Paid			(2,612	)			(794	)
CASH USED IN FINANCING ACTIVITIES:			(538	)			(39,998	)
Net Cash Used in Operating, Investing and Financing Activities			(42,731	)			(39,294	)
Effect of Exchange Rate Changes on Cash			794				(2,901	)
CASH AND CASH EQUIVALENTS:
Net Change During the Period			(41,937	)			(42,195	)
Balance at Beginning of Period			69,236				115,363
Balance at End of Period		$	27,299			$	73,168

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — CONDENSED FOOTNOTES

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 2, 2011, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 2, 2011, consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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

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

NOTE 2 — INVENTORIES

Inventories are summarized as follows:

		July 3, 2011				January 2, 2011
		(In thousands)
Finished Goods		$	109,170			$	78,303
Work in Process			18,979				16,731
Raw Materials			42,368				41,732
		$	170,517			$	136,766

NOTE 3 — EARNINGS PER SHARE

The Company computes basic earnings per share (“EPS”) attributable to common shareholders by dividing income from continuing operations attributable to common shareholders, income from discontinued operations attributable to common shareholders and net income attributable to common shareholders, by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings. Income attributable to non-controlling interest in subsidiary is included in the calculation of basic and diluted EPS from continuing operations, where applicable.

The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations when the inclusion of these shares would be dilutive. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. 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:

		Three Months Ended								Six Months Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
Earnings Per Share
Basic Earnings Per Share Attributable to Common Shareholders:
Distributed Earnings		$	0.02			$	0.01			$	0.04			$	0.01
Undistributed Earnings			0.18				0.11				0.31				0.14
Total		$	0.20			$	0.12			$	0.35			$	0.15
Diluted Earnings Per Share Attributable to Common Shareholders:
Distributed Earnings		$	0.02			$	0.01			$	0.04			$	0.01
Undistributed Earnings			0.18				0.11				0.31				0.14
Total		$	0.20			$	0.12			$	0.35			$	0.15

The following tables present net income and net income attributable to Interface, Inc. that was attributable to participating securities:

		Three Months Ended								Six Months Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(In millions)
Net Income		$	0.3			$	0.2			$	0.6			$	0.2
Net Income Attributable to Interface, Inc.		$	0.3			$	0.1			$	0.6			$	0.2

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

		Three Months Ended								Six Months Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(In thousands)
Weighted Average Shares Outstanding			63,623				62,277				63,333				62,185
Participating Securities			1,775				1,238				1,775				1,238
Shares for Basic Earnings Per Share			65,398				63,515				65,108				63,423
Dilutive Effect of Stock Options			279				603				255				494
Shares for Diluted Earnings Per Share			65,677				64,118				65,363				63,917

For the three-month periods ended July 3, 2011, and July 4, 2010, options to purchase 20,000 and 205,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive. For the six-month periods ended July 3, 2011, and July 4, 2010, options to purchase 20,000 and 245,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive.

NOTE 4 — SEGMENT INFORMATION

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

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision-maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, intangible assets and intercompany amounts, which are eliminated in consolidation.

Segment Disclosures

Summary information by segment follows:

		Modular				Bentley
		Carpet				Prince Street				Total
		(In thousands)
Three Months Ended July 3, 2011
Net Sales		$	240,566			$	27,074			$	267,640
Depreciation and Amortization			6,700				565				7,265
Operating Income			26,937				96				27,033
Three Months Ended July 4, 2010
Net Sales		$	202,695			$	23,892			$	226,587
Depreciation and Amortization			4,752				563				5,315
Operating Income (Loss)			25,374				(1,145	)			24,229

		Modular				Bentley
		Carpet				Prince Street				Total
		(In thousands)
Six Months Ended July 3, 2011
Net Sales		$	459,846			$	53,196			$	513,042
Depreciation and Amortization			14,803				1,123				15,926
Operating Income (Loss)			52,271				(61	)			52,210
Six Months Ended July 4, 2010
Net Sales		$	396,702			$	47,076			$	443,778
Depreciation and Amortization			8,417				1,122				9,539
Operating Income (Loss)			42,554				(2,556	)			39,998

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

		Three Months Ended								Six Months Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(In thousands)								(In thousands)
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization		$	7,265			$	5,315			$	15,926			$	9,539
Corporate depreciation and amortization			1,385				1,464				5,306				3,364
Reported depreciation and amortization		$	8,650			$	6,779			$	21,232			$	12,903
OPERATING INCOME
Total segment operating income		$	27,033			$	24,229			$	52,210			$	39,998
Corporate income, expenses and other reconciling amounts			(896	)			(2,763	)			(4,545	)			(4,777	)
Reported operating income		$	26,137			$	21,466			$	47,665			$	35,221

		July 3, 2011				January 2, 2011
		(In thousands)
ASSETS
Total segment assets		$	667,659			$	610,024
Discontinued operations			1,200				1,200
Corporate assets and eliminations			110,378				144,209
Reported total assets		$	779,237			$	755,433

NOTE 5 — LONG-TERM DEBT

7 5/8% Senior Notes

On December 3, 2010, the Company completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% 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 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of the 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes pursuant to a Company tender offer.

As of July 3, 2011, the balance of the 7 5/8% Senior Notes outstanding was $275 million. The estimated fair value of the 7 5/8% Senior Notes as of July 3, 2011, based on then current market prices, was $288.1 million.

11 3/8% Senior Secured Notes

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

As of July 3, 2011, the balance of the 11 3/8% Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $8.0 million. The estimated fair value of the Senior Secured Notes as of July 3, 2011, based on then current market prices, was $8.1 million.

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. As of July 3, 2011, the Company had outstanding $11.5 million in 9.5% Senior Subordinated Notes due 2014 (the “9.5% Senior Subordinated Notes”). The estimated fair value of the 9.5% Senior Subordinated Notes as of July 3, 2011, based on then current market prices, was $11.5 million. During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of these notes at a price equal to 103.167% of the face value of the notes. Accordingly, the premium paid in connection with this redemption was approximately $0.8 million. In addition, the Company wrote off the portion of the unamortized debt issuance costs related to the redeemed bonds, an amount equal to $0.3 million. These expenses are contained in the “Bond Retirement Expense” line item in the Company’s consolidated condensed statements of operations.

Credit Facilities

On June 24, 2011, the Company amended and restated its primary revolving credit facility. Under the amended and restated facility (the “Facility”), as under its predecessor, the Company’s obligations are secured by a first priority lien on substantially all of the assets of Interface, Inc. and each of its material domestic subsidiaries, which subsidiaries also guarantee the Facility. The maximum aggregate amount of loans and letters of credit available to the Company at any one time remains $100 million (with the option to further increase that amount to up to a maximum of $150 million — the same option amount as in its predecessor — subject to the satisfaction of certain conditions), subject to a borrowing base described in the Facility. The Facility differs from its predecessor in the following key respects:

•

The stated maturity date of the Facility has been extended to June 24, 2016.

•

The borrowing base governing borrowing availability has been expanded in certain respects.

•

The applicable interest rates and unused line fees have been reduced. Interest is now charged at varying rates computed by applying a margin ranging from 0.75% to 2.25% (reduced from the range of 1.75% to 4.00%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and the average excess borrowing availability during the most recently completed fiscal quarter. The unused line fee was reduced to 0.375% per annum from 0.75% per annum.

•

The negative covenants have been relaxed in certain respects, including with respect to the amount of other indebtedness and liens the Company may incur or allow to exist.

•

The dollar threshold to trigger the applicability of the Facility’s only financial covenant, a fixed charge coverage test, and the assertion of cash dominion by the lender group has been reduced.

•

The events of default have been amended to make certain of the events of default less restrictive by increasing the applicable dollar thresholds thereunder.

•

The lender group has been changed in certain respects, and the lending commitments have been reallocated among the lenders. In addition, the threshold of “Required Lenders” for purposes of certain amendments and consents under the Facility has been lowered to more than 50% of the aggregate amount of the lending commitments from more than 66 2/3% of the aggregate amount of the lending commitments.

As of July 3, 2011, there were zero borrowings and $5.2 million in letters of credit outstanding under the Facility. As of July 3, 2011, the Company could have incurred $83.2 million of additional borrowings under the Facility.

Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank N.V. Under this Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time. As of July 3, 2011, there were no borrowings outstanding under this facility, and the Company could have incurred €20 million (approximately $28.9 million) of additional borrowings under the facility.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $17.8 million of lines of credit available. As of July 3, 2011, there were no borrowings outstanding under these lines of credit.

NOTE 6 — STOCK-BASED COMPENSATION

Stock Option Awards

In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services — the requisite service period (usually the vesting period) — in exchange for the award. The grant date fair value for options and similar instruments will be estimated using option pricing models. Under accounting standards, the Company is required to select a valuation technique or option pricing model. The Company uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

During the first six months of 2011 and 2010, the Company recognized stock option compensation costs of $0.6 million and $0.6 million, respectively. In the second quarters of 2011 and 2010, the Company recognized stock option compensation costs of $0.3 million and $0.3 million, respectively. The remaining unrecognized compensation cost related to unvested awards at July 3, 2011, approximated $0.9 million, and the weighted average period of time over which this cost will be recognized is approximately one year.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first six months of fiscal year 2010. There were no stock options granted in the first six months of 2011.

		Six Months Ended
		July 4, 2010
Risk free interest rate			2.3	%
Expected life		5.5 years
Expected volatility			61	%
Expected dividend yield			0.5	%

The weighted average grant date fair value of stock options granted during the first six months of fiscal 2010 was $4.14 per share.

The following table summarizes stock options outstanding as of July 3, 2011, as well as activity during the six months then ended:

						Weighted Average
		Shares				Exercise Price
Outstanding at January 2, 2011			1,148,500			$	5.75
Granted			—				—
Exercised			484,500				5.55
Forfeited or canceled			7,000				11.47
Outstanding at July 3, 2011			657,000			$	8.92
Exercisable at July 3, 2011			418,000			$	7.05

At July 3, 2011, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $7.2 million and $5.4 million, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).

Cash proceeds and intrinsic value related to total stock options exercised during the first six months of fiscal years 2011 and 2010 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period presented.

		Six Months Ended
		July 3, 2011				July 4, 2010
		(In thousands)
Proceeds from stock options exercised		$	2,579			$	1,174
Intrinsic value of stock options exercised			5,819				2,660

Restricted Stock Awards

During the six months ended July 3, 2011, and July 4, 2010, the Company granted restricted stock awards for 668,000 and 27,000 shares, respectively, of Class B common stock. These awards (or a portion thereof) vest with respect to each recipient over a two to five year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date.

Compensation expense related to outstanding restricted stock grants was $8.1 million and $1.5 million for the six months ended July 3, 2011, and July 4, 2010, respectively. Accounting standards require that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

The following table summarizes restricted stock activity as of July 3, 2011, and during the six months then ended:

						Weighted Average
		Shares				Grant Date Fair Value
Outstanding at January 2, 2011			1,740,000			$	13.04
Granted			668,000				17.08
Vested			600,000				12.23
Forfeited or canceled			33,000				14.13
Outstanding at July 3, 2011			1,775,000			$	15.03

As of July 3, 2011, the unrecognized total compensation cost related to unvested restricted stock was approximately $15.0 million. That cost is expected to be recognized by the end of 2014.

For the six months ended July 3, 2011, and July 4, 2010, the Company recognized tax benefits with regard to restricted stock of $2.1 million and $0.3 million, respectively.

NOTE 7 — EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and six-month periods ended July 3, 2011, and July 4, 2010, respectively:

		Three Months Ended								Six Months Ended
Defined Benefit Retirement Plan (Europe)		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(In thousands)								(In thousands)
Service cost		$	74			$	86			$	145			$	178
Interest cost			2,932				2,616				5,770				5,379
Expected return on assets			(3,041	)			(2,670	)			(5,975	)			(5,492	)
Amortization of prior service costs			21				21				42				44
Recognized net actuarial (gains)/losses			155				397				305				813
Net periodic benefit cost		$	141			$	450			$	287			$	922

		Three Months Ended								Six Months Ended
Salary Continuation Plan (SCP)		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(In thousands)								(In thousands)
Service cost		$	98			$	86			$	196			$	171
Interest cost			284				280				568				561
Amortization of transition obligation			55				55				110				110
Amortization of prior service cost			12				12				24				24
Amortization of loss			95				68				185				137
Net periodic benefit cost		$	544			$	501			$	1,083			$	1,003

NOTE 8 — 2010 RESTRUCTURING CHARGE

In the first quarter of 2010, the Company adopted a restructuring plan primarily related to workforce reduction in its European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A total of approximately 50 employees were affected by this restructuring plan. In connection with this plan, the Company recorded a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involved cash expenditures, primarily severance expenses. 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
		Restructuring				Costs Incurred				Costs Incurred				Balance at
		Charge				in 2010				in 2011				July 3, 2011
		(In thousands)
Workforce reduction		$	3,131			$	2,674			$	391			$	66

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			2,885				180				—				3,065
Total amounts incurred in the six-month period ended July 3, 2011			391				—				—				391

NOTE 9 — DISCONTINUED OPERATIONS

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

Discontinued operations had no net sales and no net income or loss in either of the three-month or six-month periods ended July 3, 2011 and July 4, 2010.

NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $11.2 million and $15.7 million for the six months ended July 3, 2011, and July 4, 2010, respectively. Income tax payments amounted to $11.1 million and $7.5 million for the six months ended July 3, 2011, and July 4, 2010, respectively.

NOTE 11 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) amended an accounting standard regarding the presentation of comprehensive income. This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods ending after December 31, 2012, with earlier adoption permitted. As this amendment only effects presentation, there is not expected to be any impact on the Company’s consolidated financial statements.

In December 2010, the 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. Such criteria now require performing Step 2 if qualitative factors indicate that it is more likely than not that an impairment to goodwill exists. This recent guidance is effective for fiscal years beginning after December 15, 2010, as well as for interim periods within such years. The adoption of this standard did not have any significant impact on the Company’s consolidated condensed 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 became effective for the Company in the first quarter of 2011. The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.

NOTE 12 — INCOME TAXES

Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first six months of 2011, the Company increased its liability for unrecognized tax benefits by $0.5 million. As of July 3, 2011, the Company had accrued approximately $8.7 million for unrecognized tax benefits.

NOTE 13 — SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013, its 9.5% Senior Subordinated Notes due 2014 and its 7 5/8% Senior Notes due 2018. These guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.

INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 3, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION
		GUARANTOR				GUARANTOR				(PARENT				AND ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(In thousands)
Net sales		$	172,328			$	138,845			$	—			$	(43,533	)		$	267,640
Cost of sales			126,770				89,628				—				(43,533	)			172,865
Gross profit on sales			45,558				49,217				—				—				94,775
Selling, general and administrative expenses			29,577				33,341				5,720				—				68,638
Operating income			15,981				15,876				(5,720	)			—				26,137
Interest/Other expense			12,031				3,418				(8,495	)			—				6,954
Income (loss) before taxes on income and equity in income of subsidiaries			3,950				12,458				2,775				—				19,183
Income tax expense (benefit)			1,311				4,136				922				—				6,369
Equity in income (loss) of subsidiaries			—				—				10,961				(10,961	)			—
Net income (loss)			2,639				8,322				12,814				(10,961	)			12,814
Net income (loss) attributable to Interface, Inc.		$	2,639			$	8,322			$	12,814			$	(10,961	)		$	12,814

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 3, 2011

														CONSOLIDATION
						NON-				INTERFACE, INC.				AND
		GUARANTOR				GUARANTOR				(PARENT				ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(In thousands)
Net sales		$	329,525			$	270,449			$	—			$	(86,932	)		$	513,042
Cost of sales			244,123				174,148				—				(86,932	)			331,339
Gross profit on sales			85,402				96,301				—				—				181,703
Selling, general and administrative expenses			55,900				62,839				15,299				—				134,038
Operating income (loss)			29,502				33,462				(15,299	)			—				47,665
Interest/Other expense			12,831				6,926				(6,269	)			—				13,488
Income (loss) before taxes on income and equity in income of subsidiaries			16,671				26,536				(9,030	)			—				34,177
Income tax expense (benefit)			5,697				8,990				(3,148	)			—				11,539
Equity in income (loss) of subsidiaries			—				—				28,520				(28,520	)			—
Net income (loss)			10,974				17,546				22,638				(28,520	)			22,638
Net income (loss) attributable to Interface, Inc.		$	10,974			$	17,546			$	22,638			$	(28,520	)		$	22,638

CONDENSED CONSOLIDATING BALANCE SHEET

JULY 3, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION
		GUARANTOR				GUARANTOR				(PARENT				AND ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,210			$	23,039			$	3,050			$	—			$	27,299
Accounts receivable			67,981				94,571				621				—				163,173
Inventories			92,450				78,067				—				—				170,517
Prepaids and deferred income taxes			9,745				18,576				10,813				—				39,134
Assets of business held for sale			—				1,200				—				—				1,200
Total current assets			171,386				215,453				14,484				—				401,323
Property and equipment less accumulated depreciation			83,598				99,756				4,936				—				188,290
Investment in subsidiaries			264,098				222,470				84,607				(571,175	)			—
Goodwill			6,954				74,194				—				—				81,148
Other assets			6,232				12,859				89,385				—				108,476
		$	532,268			$	624,732			$	193,412			$	(571,175	)		$	779,237
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities		$	51,454			$	109,689			$	(10,268	)		$	—			$	150,875
Senior notes and senior subordinated notes			—				—				294,467				—				294,467
Deferred income taxes			1,614				11,175				(4,291	)			—				8,498
Other			1,978				5,083				28,018				—				35,079
Total liabilities			55,046				125,947				307,926				—				488,919
Common stock			94,145				102,199				6,546				(196,344	)			6,546
Additional paid-in capital			249,302				12,525				359,107				(261,827	)			359,107
Retained earnings (deficit)			135,182				417,460				(470,974	)			(111,896	)			(30,228	)
Foreign currency translation adjustment			(1,407	)			(4,510	)			(5,717	)			(1,108	)			(12,742	)
Pension liability			—				(28,889	)			(3,476	)			—				(32,365	)
		$	532,268			$	624,732			$	193,412			$	(571,175	)		$	779,237

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 3, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION AND
		GUARANTOR				GUARANTOR				(PARENT				ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(In thousands)
Net cash provided by (used for) operating activities		$	(21,126	)		$	(152	)		$	2,804			$	(2,910	)		$	(21,384	)
Cash flows from investing activities:
Purchase of plant and equipment			(10,006	)			(8,456	)			(352	)			—				(18,814	)
Other			(79	)			(24	)			(1,892	)			—				(1,995	)
Net cash used for investing activities			(10,085	)			(8,480	)			(2,244	)			—				(20,809	)
Cash flows from financing activities:
Other			31,335				(1,724	)			(33,026	)			2,910				(505	)
Proceeds from issuance of common stock			—				—				2,579				—				2,579
Dividends paid			—				—				(2,612	)			—				(2,612	)
Net cash provided by (used for) financing activities			31,335				(1,724	)			(33,059	)			2,910				(538	)
Effect of exchange rate change on cash			—				794				—				—				794
Net increase (decrease) in cash			124				(9,562	)			(32,499	)			—				(41,937	)
Cash at beginning of period			1,086				32,601				35,549				—				69,236
Cash at end of period		$	1,210			$	23,039			$	3,050			$	—			$	27,299

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and six months ended, or as of, July 3, 2011, and the comparable periods of 2010 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.

Forward-Looking Statements

This report contains statements which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011, which discussion is hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

7 5/8% Senior Notes

On December 3, 2010, we completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% 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 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of our 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes pursuant to a Company tender offer.

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 involved cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed in the first quarter of 2010.

Discontinued Operations

In 2007, we sold our Fabrics Group business segment. 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.”

Our discontinued operations had no net sales and no net income or loss in either of the three-month or six-month periods ended July 3, 2011 and July 4, 2010.

General

During the quarter ended July 3, 2011, we had net sales of $267.6 million, compared with net sales of $226.6 million in the second quarter last year. Fluctuations in currency exchange rates positively impacted 2011 second quarter sales by 6% (approximately $13 million), compared with the prior year period. During the first six months of fiscal year 2011, we had net sales of $513.0 million, compared with net sales of $443.8 million in the first six months of last year. Fluctuations in currency exchange rates positively impacted sales in the first six months of 2011 by 4% (approximately $17.0 million), compared with the prior year period.

Included in our results for the six months ended July 4, 2010 is $1.1 million of bond retirement expenses (comprised of $0.8 million of premiums and $0.3 million of write-offs of unamortized debt issuance costs) related to the partial redemption of our 9.5% Senior Subordinated Notes discussed in the Note entitled “Long-Term Debt” in Item 1. Also included in the six-month period ended July 4, 2010 is $3.1 million of restructuring charges, as described above.

During the second quarter of 2011, we had net income attributable to Interface, Inc. of $12.8 million, or $0.20 per diluted share, compared with net income attributable to Interface, Inc. of $7.6 million, or $0.12 per diluted share, in the second quarter of 2010. Net income in the second quarter of 2011 was $12.8 million, or $0.20 per diluted share, compared with net income of $8.0 million, or $0.12 per diluted share, in the second quarter of 2010.

During the six months ended July 3, 2011, we had net income attributable to Interface, Inc. of $22.6 million, or $0.35 per diluted share, compared with net income attributable to Interface, Inc. of $9.5 million, or $0.15 per diluted share, in the first six months of 2010. Net income was $22.6 million, or $0.35 per diluted share, in the six months ended July 3, 2011, compared with net income of $10.1 million, or $0.15 per diluted share, in the first six months of 2010.

Results of Operations

The following table presents, as a percentage of net sales, certain items included in our Consolidated Condensed Statements of Operations for the three-month and six-month periods ended July 3, 2011, and July 4, 2010, respectively:

		Three Months Ended								Six Months Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			64.6				64.6				64.6				65.4
Gross profit on sales			35.4				35.4				35.4				34.6
Selling, general and administrative expenses			25.6				25.9				26.1				25.9
Restructuring charge			—				—				—				0.7
Operating income			9.8				9.5				9.3				7.9
Bond retirement expense			—				—				—				0.2
Interest/Other expenses			2.6				3.8				2.6				3.9
Income from operations before tax expense			7.2				5.7				6.7				3.8
Income tax expense			2.4				2.2				2.2				1.5
Net income			4.8				3.5				4.4				2.3
Net income attributable to Interface, Inc.			4.8				3.4				4.4				2.1

Below we provide information regarding net sales for each of our operating segments, and analyze those results for the three-month and six-month periods ended July 3, 2011, and July 4, 2010, respectively.

Net Sales by Business Segment

Net sales by operating segment and for our Company as a whole were as follows for the three-month and six-month periods ended July 3, 2011, and July 4, 2010, respectively:

		Three Months Ended								Percentage
Net Sales By Segment		July 3, 2011				July 4, 2010				Change
		(In thousands)
Modular Carpet		$	240,566			$	202,695				18.7	%
Bentley Prince Street			27,074				23,892				13.3	%
Total		$	267,640			$	226,587				18.1	%