INTERFACE INC - Quarter Report: 2018 July (Form 10-Q)

 

 

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q 

 

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

 

For Quarterly Period Ended July 1, 2018

 

Commission File Number 001-33994

 

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

 

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

 

 

2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339

(Address of principal executive offices and zip code)

 

(770) 437-6800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

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

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐   Emerging Growth Company ☐

Smaller reporting company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No ☑

 

Shares outstanding of each of the registrant’s classes of common stock at August 1, 2018:

 

Class	Number of Shares
Common Stock, $.10 par value per share	59,494,146

 

 

 

INTERFACE, INC.

 

INDEX

 

			PAGE
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Condensed Balance Sheets – July 1, 2018 and December 31, 2017	3
		Consolidated Condensed Statements of Operations – Three Months and Six Months Ended July 1, 2018 and July 2, 2017	4
		Consolidated Statements of Comprehensive Income – Three Months and Six Months Ended July 1, 2018 and July 2, 2017	5
		Consolidated Condensed Statements of Cash Flows – Six Months Ended July 1, 2018 and July 2, 2017	6
		Notes to Consolidated Condensed Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Mine Safety Disclosures	23
	Item 5.	Other Information	23
	Item 6.	Exhibits	24

 

 

 

		JULY 1, 2018				DECEMBER 31, 2017
		(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents		$	66,983			$	87,037
Accounts receivable, net			156,602				142,808
Inventories, net			199,127				177,935
Prepaid expenses and other current assets			38,082				23,087
Total current assets			460,794				430,867
Property and equipment, net			207,994				212,645
Deferred tax asset			17,904				18,003
Goodwill, net			67,042				68,754
Other assets			70,893				70,331
Total assets		$	824,627			$	800,600
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	61,542			$	50,672
Accrued expenses			102,953				110,974
Current portion of long-term debt			15,000				15,000
Total current liabilities			179,495				176,646
Long-term debt			228,531				214,928
Deferred income taxes			6,750				6,935
Other			69,248				72,000
Total liabilities			484,024				470,509
Commitments and Contingencies
Shareholders’ equity
Preferred stock			0				0
Common stock			5,949				5,981
Additional paid-in capital			262,285				271,271
Retained Earnings			215,383				187,432
Accumulated other comprehensive loss – foreign currency translation			(90,886	)			(78,943	)
Accumulated other comprehensive income – cash flow hedge			3,183				904
Accumulated other comprehensive loss – pension liability			(55,311	)			(56,554	)
Total shareholders’ equity			340,603				330,091
Total liabilities and shareholders’ equity		$	824,627			$	800,600

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		THREE MONTHS ENDED								SIX MONTHS ENDED
		JULY 1, 2018				JULY 2, 2017				JULY 1, 2018				JULY 2, 2017
NET SALES		$	283,626			$	251,700			$	524,189			$	472,802
Cost of Sales			174,478				153,803				321,459				287,103
GROSS PROFIT ON SALES			109,148				97,897				202,730				185,699
Selling, General and Administrative Expenses			75,445				64,386				146,039				129,100
Restructuring and Asset Impairment Charges			0				0				0				7,299
OPERATING INCOME			33,703				33,511				56,691				49,300
Interest Expense			2,261				1,682				4,355				3,299
Other Expense			3,261				698				3,780				2,092
INCOME BEFORE INCOME TAX EXPENSE			28,181				31,131				48,556				43,909
Income Tax Expense			7,579				10,193				12,870				14,424
NET INCOME		$	20,602			$	20,938			$	35,686			$	29,485
Earnings Per Share – Basic		$	0.35			$	0.33			$	0.60			$	0.46
Earnings Per Share – Diluted		$	0.35			$	0.33			$	0.60			$	0.46
Common Shares Outstanding – Basic			59,493				62,789				59,582				63,432
Common Shares Outstanding – Diluted			59,538				62,832				59,627				63,474

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		THREE MONTHS ENDED								SIX MONTHS ENDED
		JULY 1, 2018				JULY 2, 2017				JULY 1, 2018				JULY 2, 2017
Net Income		$	20,602			$	20,938			$	35,686			$	29,485
Other Comprehensive Income / (Loss), Foreign Currency Translation Adjustment			(20,773	)			9,800				(11,943	)			20,830
Other Comprehensive Income, Cash Flow Hedge			647				0				2,279				0
Other Comprehensive Income / (Loss), Pension Liability Adjustment			3,459				(2,048	)			1,243				(2,980	)
Comprehensive Income		$	3,935			$	28,690			$	27,265			$	47,335

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		SIX MONTHS ENDED
		JULY 1, 2018				JULY 2, 2017
OPERATING ACTIVITIES:
Net Income		$	35,686			$	29,485
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			17,190				14,422
Stock compensation amortization expense			5,616				1,821
Deferred income taxes and other			(729	)			2,870
Working capital changes:
Accounts receivable			(16,410	)			(6,288	)
Inventories			(24,281	)			(21,087	)
Prepaid expenses and current assets			(17,974	)			(667	)
Accounts payable and accrued expenses			5,890				1,389
CASH PROVIDED BY OPERATING ACTIVITIES:			4,988				21,945
INVESTING ACTIVITIES:
Capital expenditures			(16,363	)			(15,352	)
Other			533				306
CASH USED IN INVESTING ACTIVITIES:			(15,830	)			(15,046	)
FINANCING ACTIVITIES:
Repayments of long-term debt			(7,500	)			(54,675	)
Borrowing of long-term debt			23,210				10,000
Tax withholding payments for share-based compensation			(1,052	)			(1,406	)
Proceeds from issuance of common stock			124				0
Dividends paid			(7,735	)			(7,575	)
Repurchase of common stock			(14,485	)			(55,667	)
CASH USED IN FINANCING ACTIVITIES:			(7,438	)			(109,323	)
Net cash used in operating, investing and financing activities			(18,280	)			(102,424	)
Effect of exchange rate changes on cash			(1,774	)			3,535
CASH AND CASH EQUIVALENTS:
Net change during the period			(20,054	)			(98,889	)
Balance at beginning of period			87,037				165,672
Balance at end of period		$	66,983			$	66,783

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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 consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Commission.

 

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 31, 2017, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

Certain prior period amounts have been reclassified to conform to the current period presentation. There was no change to consolidated assets, liabilities, cash flows or net income as a result of these reclassifications.

 

 

NOTE 2 – REVENUE RECOGNITION

 

Effective January 1, 2018, the Company adopted a new accounting standard with regard to revenue from customers. The Company elected the modified retrospective approach for adoption of this new standard, as is allowed by the standard. The Company did not have any significant impact from this standard as of the date of the adoption.

 

Revenue Recognized from Contracts with Customers

 

100% of the Company’s revenue is due to contracts with its customers. These contracts typically take the form of invoices for purchase of materials from the Company. The performance obligation is the delivery of these materials to customer control. Nearly 97% of the Company’s current revenue is produced from the sale of carpet, modular resilient flooring and related products (TacTiles installation materials, etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases upon delivery to the customer.  The transaction price for these sales is readily identifiable.

 

The remaining revenue generated by the Company is for contracts to sell and install carpet and related products at customer locations. For projects underway, the Company recognized installation revenue over time as the customer simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a separate performance obligation from the sale of carpet. The majority of these projects are completed within 5 days of the start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring material and installation services and is specifically identified in the contract with the customer.

 

The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have similar characteristics and it is reasonable to expect that the effects from applying this approach are not materially different from applying the accounting standard to individual contracts.

 

The Company does not have any other significant revenue streams outside of these sales of flooring material, and the sale and installation of flooring material, as described above.

 

Impairment Losses

 

The Company does not recognize any impairment losses related to its revenue contracts due primarily to the short-term and straightforward nature of these contracts.

 

 

Disaggregation of Revenue

 

For the first six months ended July 1, 2018, revenue from the Company’s customers is broken down by geography as follows:

 

 

Revenue from sales of carpet, modular resilient flooring, and other flooring-related material was approximately 97% of total revenue for the six months ended July 1, 2018. The remaining 3% of revenue was generated from the installation of carpet and other flooring-related material.

 

Performance Obligations

 

As noted above, the Company primarily generates revenue through the sale of flooring material to end users either upon shipment or upon arrival of the product at its destination. In these instances, there typically is no other obligation to the customers other than the delivery of flooring material with the exception of warranty. The Company does offer a warranty to its customers which guarantees certain on-floor performance characteristics and warrants against manufacturing defects. The warranty is not a service warranty, and there is no ability to separate the warranty obligation from the sale of the carpet or purchase them separately. The Company’s incidence of warranty claims is extremely low, with approximately 0.2% of revenue in claims on an annual basis for the last three fiscal years. Given the nature of the warranty as well as the financial impact, the Company has determined that there is no need to identify this warranty as a separate performance obligation and the Company will continue to account for warranty on an accrual basis.

 

For the Company’s installation business, the sales of carpet and other flooring materials and installation services are separate deliverables which under the revenue recognition requirements should be characterized as separate performance obligations. The Company historically has not separated these obligations and has accounted for these installation projects on a completed contract basis. The nature of the installation projects is such that the vast majority – an amount in excess of 90% of these installation projects – are completed in less than 5 days. The Company’s largest installation customers are retail and corporate customers, and these are on a project-by-project basis and are short term installations. The impact of bifurcating the carpet sale from the installation sale is not considered to be material to the total Company. The Company has, however, evaluated these projects at the end of the reporting period and recorded revenue in accordance with the accounting standards for projects which were underway as of the end of the second quarter of 2018.   

 

Costs to Obtain Contracts

 

The Company pays sales commissions to many of its sales personnel based upon their selling activity. These are direct costs associated with obtaining the contracts.  Under the accounting standard, these costs should be expensed as the revenue is earned.  As these commissions become payable upon shipment (or in certain cases delivery) of product, the commission is earned as the revenue is recognized.  Due to this fact pattern, there is no change to the Company’s accounting for these selling commissions.  There are no other material costs the Company incurs as part of obtaining the sales contract.

 

 

NOTE 3– INVENTORIES

 

Inventories are summarized as follows:

 

 

 

 

NOTE 4 – EARNINGS PER SHARE

 

The Company computes basic earnings per share (“EPS”) by dividing net income by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below.  Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.

 

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

 

 

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

 

 

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

 

 

For all periods presented, there were no options or participating securities excluded from the computation of diluted EPS.

 

 

 

NOTE 5 – LONG-TERM DEBT

 

Syndicated Credit Facility

 

At July 1, 2018, the Company had a syndicated credit facility (the “Facility”) pursuant to which the lenders provided to the Company and certain of its subsidiaries a multicurrency revolving credit facility and provided to the Company a term loan.   Interest on base rate loans was charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on LIBOR-based loans and fees for letters of credit were charged at varying rates computed by applying a margin over the applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company paid a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.

 

As of July 1, 2018, the Company had outstanding $162.5 million of term loan borrowing and $81.0 million of revolving loan borrowings under the Facility, and had $5.7 million in letters of credit outstanding under the Facility. As of July 1, 2018, the weighted average interest rate on borrowings outstanding under the Facility was 3.4%.

 

The Company is required to make quarterly amortization payments of the term loan borrowing. The amortization payments are due on the last day of the calendar quarter. The quarterly amortization payment amount was $3.75 million for the second quarter of 2018.

 

On August 7, 2018, subsequent to the end of the second quarter, the Facility was amended and restated in connection with the acquisition of nora Holding GmbH. Please see Notes 8 and 16 for additional information.

 

The Company is currently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.

 

Interest Rate Risk Management

 

In the third quarter of 2017, the Company entered into an interest rate swap transaction to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to this interest rate swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in LIBOR, the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the Company’s debt principal equal to the outstanding swap notional amount.

 

Cash Flow Interest Rate Swap

 

The Company’s interest rate swap is designated and qualifies as a cash flow hedge of forecasted interest payments. The Company reports the effective portion of the fair value gain or loss on the swap as a component of other comprehensive income (or other comprehensive loss). Gains or losses (if any) on any ineffective portion of derivative instruments in cash flow hedging relationships are recorded in the period in which they occur as a component of other expense (or other income) in the Consolidated Condensed Statement of Operations. There were no such gains or losses in the first six months of 2018. The aggregate notional amount of the swap as of July 1, 2018 was $100 million.

 

As of July 1, 2018, the fair value of the cash flow interest rate swap asset was $3.2 million and was recorded in other assets.

 

Other Lines of Credit

 

Subsidiaries of the Company have an aggregate of the equivalent of $9.8 million of other lines of credit available at interest rates ranging from 2.5% to 6.5%. As of July 1, 2018, 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.

 

 

All outstanding stock options vested prior to the end of 2013, and therefore there was no stock option compensation expense in the first six months of 2018 or 2017.

 

As of July 1, 2018, there were 72,500 stock options outstanding and exercisable, at an average exercise price of $7.99 per share. There were no stock options granted in 2018 or 2017. There were 10,000 stock options exercised in the first six months of 2018 and no forfeitures during those six months. There were no exercises or forfeitures of stock options in the first six months of 2017. The aggregate intrinsic value of the outstanding and exercisable stock options was $1.1 million as of July 1, 2018.

 

Restricted Stock Awards

 

During the six months ended July 1, 2018 and July 2, 2017, the Company granted restricted stock awards for 192,000 and 244,000 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-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, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause.

 

Compensation expense related to restricted stock grants was $2.0 million and $1.3 million for the six months ended July 1, 2018 and July 2, 2017, respectively. Accounting standards allow 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 outstanding as of July 1, 2018, as well as activity during the six months then ended:

 

 

As of July 1, 2018, the unrecognized total compensation cost related to unvested restricted stock was $6.6 million. That cost is expected to be recognized by the end of 2021.

 

 

Performance Share Awards

 

During the six months ended July 1, 2018 and July 2, 2017, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s continued employment through the last date of the performance period, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

 

The following table summarizes the performance shares outstanding as of July 1, 2018, as well as the activity during the six months then ended:

 

 

 

Compensation expense related to performance shares was $3.6 million and $0.5 million for the six months ended July 1, 2018, and July 2, 2017, respectively. Unrecognized compensation expense related to these performance shares was approximately $7.7 million as of July 1, 2018. That cost is expected to be recognized by the end of 2021.

 

The tax benefits recognized with regard to restricted stock and performance shares were approximately $1.3 million for the six months ended July 1, 2018.

 

 

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 1, 2018 and July 2, 2017, respectively:

 

 

 

 

 

 

NOTE 8 – ACQUISITION OF NORA

 

On June 14, 2018, the Company entered into a share purchase and transfer agreement to acquire the issued and outstanding shares of nora Holding GmbH (“nora”), nora’s outstanding third party debt, and receivables related to nora’s shareholder loans. Nora is the holding company for a Germany-based manufacturer and multinational marketer of resilient floor coverings, including rubber flooring. The second quarter of 2018 includes $5.8 million of transaction related expenses related to the nora acquisition. Approximately $3.0 million of these expenses are included in selling, general and administrative expenses in the consolidated condensed statement of operations.  The remainder is included in other expenses as described below. 

 

On June 14, 2018, in connection with the signing of the nora share purchase and transfer agreement, the Company entered into a derivative instrument to address the foreign currency risk associated with a portion of the nora purchase price. This option instrument does not qualify for hedge accounting, and the mark-to-market expense of $2.8 million to record the instrument at fair value at the end of the second quarter of 2018 was recorded in other expense in our consolidated condensed statement of operations during the second quarter. The option instrument has a notional value of €315 million (or approximately $364 million as of July 1, 2018) and an initial maturity of 120 days.

 

As of July 1, 2018, the fair value of the option instrument was $1.9 million and was recorded in other current assets.

 

On August 7, 2018, subsequent to the end of the second quarter, the Company completed the acquisition of nora. On this date the option instrument discussed above was terminated.  Please see Note 16 for additional information.

 

 

 

NOTE 9 – SEGMENT INFORMATION

 

Based on applicable accounting standards, the Company has determined that it has three operating segments – namely, the Americas, Europe and Asia-Pacific geographic regions. Pursuant to accounting standards, the Company has aggregated the three operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment.

 

While the Company operates as one reporting segment for the reasons discussed, included below is selected information on our operating segments.

 

 

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

 

 

 

 

 

 

NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash payments for interest amounted to $3.9 million and $3.2 million for the six months ended July 1, 2018 and July 2, 2017, respectively. Income tax payments amounted to $14.9 million and $11.5 million for the six months ended July 1, 2018 and July 2, 2017, respectively.

 

 

NOTE 11 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard regarding leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, but the standard will result in the Company recording both assets and liabilities for leases currently classified as operating leases.

 

In January 2017, the FASB issued a new accounting standard that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. The new guidance is effective for any annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance will have a material effect on its consolidated financial statements.

 

In March 2017, the FASB issued a new accounting standard regarding the treatment of net periodic benefit costs. This standard will require segregation of these net benefit costs between operating and non-operating expenses. Currently, the Company reports the net benefit costs associated with its defined benefit plans as a component of operating income. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption, only the service cost component of defined benefit plan costs will be reported within operating income, while all other components of net benefit cost will be presented within the “Other Expense (income)” line item on the consolidated statements of operations. The standard requires retrospective application, and as such upon adoption this standard will result in offsetting changes in operating income and “Other Expense (income)” on the consolidated statements of operations for all periods presented, with no impact on net income. The Company adopted this standard in the first quarter of 2018. As is required, the Company adjusted its previously reported 2017 financial statements for this adoption, with a reclassification of expense of approximately $0.5 million for each of the first two quarters of 2017 from the “Selling, General and Administrative Expenses” line item of the consolidated condensed statement of operations to the “Other Expenses” line item of the consolidated condensed statement of operations. There was no change to consolidated net income or earnings per share from the adoption of this standard.

 

In August 2017, the FASB issued a new accounting standard to improve the accounting for hedging activities. This standard will eliminate the requirement to separately measure and report hedge ineffectiveness and requires companies to recognize all elements of hedge accounting that impact earnings in the same line item in the statement of income where the hedged item is reported. The amendments ease the requirements for effectiveness testing and permit an entity to perform qualitative hedge effectiveness assessments. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard, but does not anticipate that the adoption will have a material effect on its consolidated financial statements.

 

In February 2018, the FASB issued a new accounting standard to address a narrow-scope financial reporting issue that arose as a consequence of the U.S. Tax Cuts and Jobs Act. Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The new guidance allows for a reclassification of these amounts to retained earnings, thereby eliminating these stranded tax effects. The new guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

 

 

In June 2018, the FASB issued a new accounting standard to address non-employee share-based payments. This standard will require that the accounting treatment for non-employee share-based payments for goods or services be consistent with current GAAP for employee share-based payments, including measurement of awards at grant-date fair value and the application of probability to evaluate performance conditions. This standard will also eliminate the current GAAP requirement to reassess the classification of non-employee share-based payments awards upon vesting. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard, but does not anticipate that the adoption will have a material effect on its consolidated financial statements.

 

 

NOTE 12– INCOME TAXES

 

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Company is continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our effective tax rate.

 

The Company is applying the guidance to address the accounting for income taxes under accounting standards in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.  Accounting standards provide a reasonable “measurement period” not to exceed twelve months from the date of enactment to complete the accounting of these provisional estimates.  As disclosed in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2017, two material provisional estimates that impacted the Company were the U.S. statutory rate reduction and the one-time transition tax. These amounts are considered provisional because they use reasonable estimates for taxes with respect to which tax returns have not been filed and because estimated amounts may be impacted by future regulatory and accounting guidance if and when issued. 

 

For the six months ended July 1, 2018, there were no significant changes to the Company’s provisional estimates of the income tax effects reflected in 2017 for the changes in tax law and tax rate from the enactment of the Tax Act. The impact of tax law changes on the Company’s financial statements could differ from its reasonable estimates due to further analysis of the new law, regulatory guidance, technical corrections, legislation, or guidance under U.S. generally accepted accounting principles. If significant changes occur, the Company will provide updated information in connection with future regulatory filings or the Company will adjust these provisional amounts as further information becomes available and as we refine our calculations.

 

During the six months ended July 1, 2018, the Company’s effective tax rate was favorably impacted by the reduction in the U.S. statutory tax rate due to the enactment of the Tax Act. This favorable impact was partially offset by certain base broadening provisions of the Tax Act. For the six months ended July 1, 2018, our effective tax rate was 27%, as compared to 33% for the first six month of 2017.

 

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 2018, the Company decreased its liability for unrecognized tax benefits by $0.3 million. As of July 1, 2018, the Company had accrued approximately $28.9 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 1, 2018 reflects a reduction for $3.3 million of these unrecognized tax benefits.

 

 

NOTE 13 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME

 

During the first six months of 2018, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $0.8 million related to the Company’s defined benefit retirement plan and salary continuation plan. These reclassifications were included in the other expense line item of the Company’s consolidated condensed statement of operations.

 

 

NOTE 14 – REPURCHASE OF COMMON STOCK

 

In 2017, the Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $100 million of its outstanding shares of common stock. The program has no specific expiration date.

 

During the first six months of 2018, the Company repurchased and retired 615,000 shares of common stock at a weighted average price of $23.54 per share pursuant to this share repurchase program.

 

 

 

NOTE 15 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

 

In the fourth quarter of 2016, the Company committed to a new restructuring plan in its continuing efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involves (i) a substantial restructuring of the FLOR business model that included closure of its headquarters office and most retail FLOR stores, (ii) a reduction of approximately 70 FLOR employees and a number of employees in the commercial carpet tile business, primarily in the Americas and Europe regions, and (iii) the write-down of certain underutilized and impaired assets that included information technology assets, intellectual property assets, and obsolete manufacturing, office and retail store equipment.

 

As a result of this plan, the Company incurred a pre-tax restructuring and asset impairment charge in the fourth quarter of 2016 of $19.8 million. In the first quarter of 2017, the Company recorded an additional charge of $7.3 million, primarily related to exit costs associated with the closure of most FLOR retail stores in the first quarter of 2017. The charge in the first quarter of 2017 was comprised of lease exit costs of $3.4 million, asset impairment charges of $3.3 million and severance charges of $0.6 million.

 

A summary of these restructuring activities is presented below:

 

 

 

 

Note 16 – SUBSEQUENT EVENTS

 

On August 7, 2018, subsequent to the end of the second quarter, the Company completed the acquisition of nora for a purchase price of €385 million, or approximately $447 million at the exchange rate as of the transaction date, including acquired cash of approximately €41 million (approximately $47 million) for a net purchase price of approximately €344 million (approximately $400 million). The transaction will be accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition date. The determination of the fair values of the liabilities assumed and assets acquired as well as pro forma results of operations and financial position are incomplete due to the recent date of the acquisition. The results of operations for this acquisition will be consolidated with those of the Company from the acquisition date forward. 

 

In connection with the acquisition of nora, the Company amended and restated its Syndicated Credit Facility as described in Item 1.01 of the Form 8-K the Company filed on July 26, 2018. The purpose of the amended and restated facility is to fund the purchase price and related fees and expenses of the nora acquisition, and to increase the credit available to the Company and its subsidiaries following the closing of the nora acquisition in view of the larger enterprise that will result from such transaction.

 

 

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