INTERFACE INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For Quarterly Period Ended September 29, 2019

Commission File Number 001-33994

INTERFACE INC

(Exact name of registrant as specified in its charter)



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

1280 West Peachtree Street, Atlanta, Georgia 30309

(Address of principal executive offices and zip code)

(770) 437-6800

(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.10 Par Value Per Share	TILE	Nasdaq Global Select Market

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 ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted 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 such files). Yes þ 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	þ	Accelerated filer	¨	Non-accelerated filer	¨	Smaller reporting company	☐

Emerging growth 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 þ

Shares outstanding of each of the registrant's classes of common stock at October 25, 2019:



Class	Number of Shares
Common Stock, $.10 par value per share	58,418,844

Table of Contents

INTERFACE, INC.

INDEX



			PAGE
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Condensed Balance Sheets – September 29, 2019 and December 30, 2018	3

		Consolidated Condensed Statements of Operations - Three Months and Nine Months Ended September 29, 2019 and September 30, 2018	4

		Consolidated Statements of Comprehensive Income – Three Months and Nine Months Ended September 29, 2019 and September 30, 2018	5

		Consolidated Condensed Statements of Cash Flows – Nine Months Ended September 29, 2019 and September 30, 2018	6

		Notes to Consolidated Condensed Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

	Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	28

	Item 1A.	Risk Factors	28

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 3.	Defaults Upon Senior Securities	28

	Item 4.	Mine Safety Disclosures	28

	Item 5.	Other Information	28

	Item 6.	Exhibits	29

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)



	SEPTEMBER 29, 2019			DECEMBER 30, 2018
	(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents	$	85,212		$	80,989
Accounts receivable, net	176,705			179,004
Inventories, net	265,101			258,657
Prepaid expenses and other current assets	37,771			40,229
Total current assets	564,789			558,879
Property and equipment, net	309,972			292,888
Operating lease right-of-use assets	110,051			—
Deferred tax asset	16,805			15,601
Goodwill and intangibles, net	343,073			343,542
Other assets	79,847			73,734

Total assets	$	1,424,537		$	1,284,644

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	72,505		$	66,301
Accrued expenses	134,930			125,971
Current portion of operating lease liabilities	15,780			—
Current portion of long-term debt	31,757			31,315
Total current liabilities	254,972			223,587
Long-term debt	594,581			587,266
Operating lease liabilities	91,480			—
Deferred income taxes	38,976			26,488
Other long-term liabilities	87,150			92,640

Total liabilities	1,067,159			929,981

Commitments and contingencies

Shareholders’ equity
Preferred stock	—			—
Common stock	5,843			5,951
Additional paid-in capital	248,524			270,269
Retained earnings	273,421			222,214
Accumulated other comprehensive loss – foreign currency translation	(121,026		)	(101,487		)
Accumulated other comprehensive (loss) income – cash flow hedge	(7,588		)	1,326
Accumulated other comprehensive loss – pension liability	(41,796		)	(43,610		)

Total shareholders’ equity	357,378			354,663

Total liabilities and shareholders’ equity	$	1,424,537		$	1,284,644

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)



	THREE MONTHS ENDED				NINE MONTHS ENDED
	SEPTEMBER 29, 2019		SEPTEMBER 30, 2018		SEPTEMBER 29, 2019		SEPTEMBER 30, 2018
NET SALES	$	348,352	$	318,325	$	1,003,547	$	842,514
Cost of Sales	212,590		218,380		613,797		539,839

GROSS PROFIT ON SALES	135,762		99,945		389,750		302,675
Selling, General and Administrative Expenses	91,414		84,160		286,123		230,199
Restructuring Charges	672		—		672		—
OPERATING INCOME	43,676		15,785		102,955		72,476

Interest Expense	6,577		4,852		20,180		9,207
Other Expense	1,015		1,570		2,333		5,350

INCOME BEFORE INCOME TAX EXPENSE	36,084		9,363		80,442		57,919
Income Tax Expense	9,874		1,191		17,674		14,061

NET INCOME	$	26,210	$	8,172	$	62,768	$	43,858

Earnings Per Share – Basic	$	0.45	$	0.14	$	1.06	$	0.74

Earnings Per Share – Diluted	$	0.45	$	0.14	$	1.06	$	0.74

Common Shares Outstanding – Basic	58,433		59,496		59,117		59,553
Common Shares Outstanding – Diluted	58,434		59,536		59,122		59,594

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)



	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 29, 2019			SEPTEMBER 30, 2018			SEPTEMBER 29, 2019			SEPTEMBER 30, 2018
Net Income	$	26,210		$	8,172		$	62,768		$	43,858
Other Comprehensive (Loss) Income, Foreign Currency Translation Adjustment	(18,585		)	4,964			(19,539		)	(6,979		)
Other Comprehensive (Loss) Income, Cash Flow Hedge	(941		)	286			(8,914		)	2,565
Other Comprehensive Income (Loss), Pension Liability Adjustment	1,076			(196		)	1,814			1,047
Comprehensive Income	$	7,760		$	13,226		$	36,129		$	40,491

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)



	NINE MONTHS ENDED
	SEPTEMBER 29, 2019			SEPTEMBER 30, 2018
OPERATING ACTIVITIES:
Net income	$	62,768		$	43,858
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	33,578			27,067
Stock compensation amortization expense	6,494			9,181
Deferred income taxes and other	(11,806		)	(10,705		)
Amortization of acquired intangible assets	4,581			2,414
Amortization of acquired inventory step-up	—			17,849
Working capital changes:
Accounts receivable	(928		)	(5,540		)
Inventories	(11,809		)	(27,037		)
Prepaid expenses and current assets	(4,481		)	(9,398		)
Accounts payable and accrued expenses	11,507			10,987

CASH PROVIDED BY OPERATING ACTIVITIES	89,904			58,676

INVESTING ACTIVITIES:
Capital expenditures	(53,881		)	(28,853		)
Cash paid for business, net of cash acquired	—			(400,697		)
Other	85			531

CASH USED IN INVESTING ACTIVITIES	(53,796		)	(429,019		)

FINANCING ACTIVITIES:
Repayments of long-term debt	(65,416		)	(51,403		)
Borrowing of long-term debt	76,000			479,837
Tax withholding payments for share-based compensation	(3,278		)	(1,056		)
Proceeds from issuance of common stock	60			207
Debt issuance costs	—			(8,757		)
Dividends paid	(11,561		)	(11,602		)
Repurchase of common stock	(25,154		)	(14,485		)
Other	(808		)	—

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES:	(30,157		)	392,741

Net cash provided by operating, investing and financing activities	5,951			22,398
Effect of exchange rate changes on cash	(1,728		)	(2,104		)

CASH AND CASH EQUIVALENTS:
Net change during the period	4,223			20,294
Balance at beginning of period	80,989			87,037

Balance at end of period	$	85,212		$	107,331

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 30, 2018, 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 necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 30, 2018, 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.

Recently Adopted 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. The Company adopted the new lease standard on December 30, 2018, using the modified retrospective approach and recorded operating lease right-of-use assets and operating lease liabilities for approximately $115 million respectively, with no cumulative-effect adjustment to retained earnings. The Company elected to apply the practical expedients allowed by the standard, which resulted in the Company not having to reassess whether expired or existing contracts contained a lease as well as retaining the historical classification of our leases. The Company also elected the hindsight practical expedient in evaluating lessee options and elected to combine lease and non-lease components in calculating the right-of-use asset and lease liability for all leases, except data center assets. See Note 8 entitled “Leases” for additional information.

In February 2018, the FASB issued Accounting Standard Update (“ASU”) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” 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 adoption of this standard did not have a material effect on the Company’s consolidated financial statements as the Company did not elect to reclassify stranded tax effects into retained earnings.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” This standard will require that the accounting treatment for non-employee share-based payments for goods or services be consistent with current Generally Accepted Accounting Principles (“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. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other,” 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 standard will have a material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. The ASU also requires that the costs for implementation activities during the application development phase be capitalized in a hosting arrangement service contract, and costs during the preliminary and post implementation phase are expensed. The new guidance is effective for interim and annual periods beginning after December 15, 2019. 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 June 2016, the FASB issued ASU 2016-13 “Financial Instruments -- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of valuation allowances for credit losses. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The new standard provides both a modified retrospective or prospective adoption method. The Company is currently evaluating the impact of adoption of this update, but does not anticipate that the adoption will have a material effect on its consolidated financial statements.

NOTE 2 – REVENUE RECOGNITION

Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for the nine months ended September 29, 2019. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material.

Disaggregation of Revenue

For the nine months ended September 29, 2019, revenue from the Company’s customers is broken down by geography as follows:



Geography		Percentage of Net Sales
Americas		56.2%
Europe		29.4%
Asia-Pacific		14.4%

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.

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NOTE 3 – INVENTORIES

Inventories are summarized as follows:



	September 29, 2019		December 30, 2018
	(In thousands)
Finished Goods	$	189,919	$	180,847
Work in Process	16,949		17,762
Raw Materials	58,233		60,048
Inventories, net	$	265,101	$	258,657

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:



	Three Months Ended				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Earnings Per Share:

Basic Earnings Per Share:
Distributed Earnings	$	0.07	$	0.07	$	0.19	$	0.20
Undistributed Earnings	0.38		0.07		0.87		0.54
Total	$	0.45	$	0.14	$	1.06	$	0.74

Diluted Earnings Per Share:
Distributed Earnings	$	0.07	$	0.07	$	0.19	$	0.20
Undistributed Earnings	0.38		0.07		0.87		0.54
Total	$	0.45	$	0.14	$	1.06	$	0.74

Basic earnings per share	$	0.45	$	0.14	$	1.06	$	0.74
Diluted earnings per share	$	0.45	$	0.14	$	1.06	$	0.74

The following table presents net income that was attributable to participating securities:



	Three Months Ended				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
			(In millions)
Net Income Attributable to Participating Securities	$	0.2	$	0.1	$	0.6	$	0.4

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



	Three Months Ended		Nine Months Ended
	September 29, 2019	September 30, 2018	September 29, 2019	September 30, 2018
		(In thousands)
Weighted Average Shares Outstanding	57,915	58,917	58,599	58,974
Participating Securities	518	579	518	579
Shares for Basic Earnings Per Share	58,433	59,496	59,117	59,553
Dilutive Effect of Stock Options	1	40	5	41
Shares for Diluted Earnings Per Share	58,434	59,536	59,122	59,594

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

NOTE 5 – LONG-TERM DEBT

Syndicated Credit Facility

On August 7, 2018, the Company amended and restated its syndicated credit facility (the “Facility”) in connection with the nora Holding GmbH (“nora”) acquisition. The purpose of the amended and restated Facility was to fund the nora purchase price and related fees and expenses of the 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. At September 29, 2019, the amended and restated Facility provided to the Company and certain of its subsidiaries a multicurrency revolving loan and U.S. denominated and multicurrency term loans. 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.

In connection with the amended and restated Facility as discussed above, the Company recorded $8.8 million of debt issuance costs in the third quarter of 2018 associated with the new term loans that are reflected as a reduction of long-term debt in accordance with applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of September 29, 2019, the unamortized debt costs recorded as a reduction of long-term debt were $6.8 million.

As of September 29, 2019, the Company had outstanding $588.0 million of term loan borrowing and $45.1 million of revolving loan borrowings under the Facility, and had $2.5 million in letters of credit outstanding under the Facility. As of September 29, 2019, the weighted average interest rate on borrowings outstanding under the Facility was 3.62%.

Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which commenced in the fourth quarter of 2018. The amortization payments are due on the last day of the calendar quarter.

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.

Other Lines of Credit

Subsidiaries of the Company have an aggregate of the equivalent of $9.4 million of other lines of credit available at interest rates ranging from 2.0% to 6.0%. As of September 29, 2019, there were no borrowings outstanding under these lines of credit.

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NOTE 6 – DERIVATIVE INSTRUMENTS

Interest Rate Risk Management

In the third quarter of 2017 and the first quarter of 2019, the Company entered into interest rate swap transactions in notional amounts of $100 million and $150 million, respectively, 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 these interest rate swaps 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 amounts.

Cash Flow Interest Rate Swap

Both of the interest rate swaps described above are designated and qualify as cash flow hedges of forecasted interest payments. The Company reports the effective portion of the fair value gain or loss on the swaps 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 interest expense in the consolidated condensed statement of operations and as a component of operating activities in the consolidated condensed statement of cash flows. The aggregate notional amount of the interest rate swaps as of September 29, 2019 was $250 million.

Forward Contracts

Our nora operations are party to currency forward contracts designed to hedge the cash flow risk of intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. The Company is meeting its objective by hedging the risk of changes in its cash flows (intercompany payments for inventory) attributable to changes in the U.S. dollar/Euro exchange rate (the “hedged risk”). Changes in fair value attributable to components other than exchange rates will be excluded from the assessment of effectiveness and amortized to earnings on a straight-line basis. Changes in fair value related to the effective portion of these contracts will be reflected as a component of other comprehensive income (or other comprehensive loss). As of September 29, 2019, all foreign currency forward contracts have expired.

The table below sets forth the fair value of derivative instruments as of September 29, 2019 (in thousands):



	Asset Derivatives as of September 29, 2019			Liability Derivatives as of September 29, 2019
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivative instruments designated as hedging instruments:
Foreign currency contracts	Other current assets	$	—	Accrued expenses	$	—
Interest rate swap contracts	Other current assets	—		Accrued expenses	7,588
		$	—		$	7,588

The table below sets forth the fair value of derivative instruments as of December 30, 2018 (in thousands):



	Asset Derivatives as of December 30, 2018			Liability Derivatives as of December 30, 2018
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivative instruments designated as hedging instruments:
Foreign currency contracts	Other current assets	$	651	Other current liabilities	$	—
Interest rate swap contract	Other current assets	$	1,794	Other current liabilities	—
		$	2,445		—

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There was no significant impact to earnings from the changes in fair value of derivatives designated as cash flow hedges or from amounts excluded from the assessment of hedge effectiveness during the three and nine months ended September 29, 2019. The amount of hedged items expected to be reclassified from accumulated other comprehensive income in the next 12 months is not significant.

The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges and included in the assessment of hedge effectiveness had on accumulated other comprehensive income during the three and nine months ended September 29, 2019, and September 30, 2018 (in thousands):



	Three Months Ended						Nine Months Ended
	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
				(In thousands)
Foreign currency contracts gain (loss)	$	627		$	(167	)	$	468		$	(167	)
Interest rate swap contracts (loss) gain	(1,568		)	453			(9,382		)	2,732
(Loss) gain recognized in accumulated other comprehensive income	$	(941	)	$	286		$	(8,914	)	$	2,565

The following table summarizes the losses reclassified from accumulated other comprehensive income during the three and nine months ended September 29, 2019 (in thousands):



		Three Months Ended		Nine Months Ended
	Statement of Operations Location	September 29, 2019		September 29, 2019
		(In thousands)
Foreign currency contracts	Cost of sales	$	450	$	450

NOTE 7 – SHAREHOLDERS’ EQUITY

The following tables depict the activity in the accounts which make up shareholders’ equity for the three and nine months ended September 29, 2019 and September 30, 2018:

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	SHARES		COMMON STOCK			ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS			PENSION LIABILITY			FOREIGN CURRENCY TRANSLATION ADJUSTMENT			CASH FLOW HEDGE
	(In thousands)
Balance at December 30, 2018	59,508		$	5,951		$	270,269		$	222,214		$	(43,610	)	$	(101,487	)	$	1,326
Net income	—		—			—			7,059			—			—			—
Stock issuances under employee plans	509		51			379			—			—			—			—
Other issuances of common stock	224		22			3,900			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			(3,922		)	—			—			—			—
Cash dividends paid	—		—			—			(3,900		)	—			—			—
Forfeitures and compensation expense related to stock awards	(225	)	(22		)	29			—			—			—			—
Share repurchases	—		—			—			—			—			—			—
Pension liability adjustment	—		—			—			—			(91		)	—			—
Foreign currency translation adjustment	—		—			—			—			—			(5,203		)	—
Cash flow hedge unrealized loss	—		—			—			—			—			—			(3,306		)
Balance, at March 31, 2019	60,016		$	6,002		$	270,655		$	225,373		$	(43,701	)	$	(106,690	)	$	(1,980	)
Net income	—		—			—			29,499			—			—			—
Stock issuances under employee plans	2		—			6			—			—			—			—
Other issuances of common stock	(1	)	—			—			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			52			—			—			—			—
Cash dividends paid	—		—			—			(3,863		)	—			—			—
Forfeitures and compensation expense related to stock awards	(28	)	(3		)	1,506			—			—			—			—
Share repurchases	(1,556	)	(156		)	(24,998		)	—			—			—			—
Pension liability adjustment	—		—			—			—			829			—			—
Foreign currency translation adjustment	—		—			—			—			—			4,249			—
Cash flow hedge unrealized loss	—		—			—			—			—			—			(4,667		)
Balance, at June 30, 2019	58,433		$	5,843		$	247,221		$	251,009		$	(42,872	)	$	(102,441	)	$	(6,647	)
Net income	—		—			—			26,210			—			—			—
Stock issuances under employee plans	—		—			—			—			—			—			—
Other issuances of common stock	—		—			—			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			—			—			—			—			—
Cash dividends paid	—		—			—			(3,798		)	—			—			—
Forfeitures and compensation expense related to stock awards	—		—			1,303			—			—			—			—
Share repurchases	—		—			—			—			—			—			—
Pension liability adjustment	—		—			—			—			1,076			—			—
Foreign currency translation adjustment	—		—			—			—			—			(18,585		)	—
Cash flow hedge unrealized loss	—		—			—			—			—			—			(941		)
Balance at September 29, 2019	58,433		$	5,843		$	248,524		$	273,421		$	(41,796	)	$	(121,026	)	$	(7,588	)

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	SHARES		COMMON STOCK			ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS			PENSION LIABILITY			FOREIGN CURRENCY TRANSLATION ADJUSTMENT			CASH FLOW HEDGE
	(In thousands)
Balance, at December 31, 2017	59,806		$	5,981		$	271,271		$	187,433		$	(56,554	)	$	(78,943	)	$	904
Net income	—		—			—			15,084			—			—			—
Stock issuances under employee plans	175		17			102			—			—			—			—
Other issuances of common stock	187		19			4,769			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			(4,788		)	—			—			—			—
Cash dividends paid	—		—			—			(3,868		)	—			—			—
Forfeitures and compensation expense related to stock awards	(55	)	(6		)	3,185			—			—			—			—
Share repurchases	(615	)	(61		)	(14,424		)	—			—			—			—
Pension liability adjustment	—		—			—			—			(2,216		)	—			—
Foreign currency translation adjustment	—		—			—			—			—			8,830			—
Cash flow hedge unrealized gain	—		—			—			—			—			—			1,632
Balance, at April 1, 2018	59,498		$	5,950		$	260,115		$	198,649		$	(58,770	)	$	(70,113	)	$	2,536
Net income	—		—			—			20,602			—			—			—
Stock issuances under employee plans	4		—			35			—			—			—			—
Other issuances of common stock	—		—			—			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			—			—			—			—			—
Cash dividends paid	—		—			—			(3,868		)	—			—			—
Forfeitures and compensation expense related to stock awards	(9	)	(1		)	2,135			—			—			—			—
Share repurchases	—		—			—			—			—			—			—
Pension liability adjustment	—		—			—			—			3,459			—			—
Foreign currency translation adjustment	—		—			—			—			—			(20,773		)	—
Cash flow hedge unrealized gain	—		—			—			—			—			—			647
Balance, at July 1, 2018	59,493		$	5,949		$	262,285		$	215,383		$	(55,311	)	$	(90,886	)	$	3,183
Net income	—		—			—			8,172			—			—			—
Stock issuances under employee plans	10		1			86			—			—			—			—
Other issuances of common stock	2		1			40			—			—			—			—
Unamortized stock compensation expense related to restricted stock awards	—		—			(40		)	—			—			—			—
Cash dividends paid	—		—			—			(3,866		)	—			—			—
Forfeitures and compensation expense related to stock awards	—		—			2,929			—			—			—			—
Share repurchases	—		—			—			—			—			—			—
Pension liability adjustment	—		—			—			—			(196		)	—			—
Foreign currency translation adjustment	—		—			—			—			—			4,964			—
Cash flow hedge unrealized gain	—		—			—			—			—			—			286
Balance, at September 30, 2018	59,505		$	5,951		$	265,300		$	219,689		$	(55,507	)	$	(85,922	)	$	3,469

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Repurchase of Common Stock

In the second quarter of 2017, the Company adopted a share repurchase program in which the Company was authorized to repurchase up to $100.0 million of its outstanding shares of common stock. During the second quarter of 2019, the Company repurchased the remaining $25.2 million of its outstanding shares of common stock authorized pursuant to this share repurchase program, thus completing the program.

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 nine months of 2019 or 2018.

As of September 29, 2019, there were 27,500 stock options outstanding and exercisable, at an average exercise price of $12.43 per share. There were no stock options granted in 2019 or 2018. There were 10,000 stock options exercised and 5,000 stock options forfeited in the first nine months of 2019. There were 20,000 stock options exercised in the first nine months of 2018 and no forfeitures during those nine months. The aggregate intrinsic value of the outstanding and exercisable stock options was not significant as of September 29, 2019.

Restricted Stock Awards

During the nine months ended September 29, 2019 and September 30, 2018, the Company granted restricted stock awards for 224,000 and 194,000 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 $2.5 million and $2.9 million for the nine months ended September 29, 2019, and September 30, 2018, respectively. The Company estimates forfeitures for restricted stock and reduces 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 following table summarizes restricted stock outstanding as of September 29, 2019, as well as activity during the nine months then ended:



	Restricted Shares		Weighted Average Grant Date Fair Value
Outstanding at December 30, 2018	549,000		$	27.65
Granted	224,000		17.54
Vested	(218,000	)	18.27
Forfeited or canceled	(37,000	)	20.88
Outstanding at September 29, 2019	518,000		$	27.71

As of September 29, 2019, the unrecognized total compensation cost related to unvested restricted stock was $4.7 million. That cost is expected to be recognized by the end of 2022.

Performance Share Awards

During the nine months ended September 29, 2019 and September 30, 2018, 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.

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The following table summarizes the performance shares outstanding as of September 29, 2019, as well as the activity during the nine months then ended:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at December 30, 2018	759,500		$	20.17
Granted	344,500		17.54
Vested	(472,000	)	18.85
Forfeited or canceled	(57,000	)	20.42
Outstanding at September 29, 2019	575,000		$	19.65

Compensation expense related to the performance shares was $4.0 million and $6.3 million for the nine months ended September 29, 2019, and September 30, 2018, respectively. Unrecognized compensation expense related to these performance shares was approximately $4.8 million as of September 29, 2019. That cost is expected to be recognized by the end of 2022.

The tax benefits recognized with regard to restricted stock and performance shares were approximately $1.1 million for the nine months ended September 29, 2019.

NOTE 8 – LEASES

General

On December 31, 2018, the Company adopted the new lease standard using the transition methodology allowed by the standard to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The comparative prior year periods presented in these financial statements continue to be in accordance with previous GAAP. We have operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. Our leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease terms may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option.

We record a right-of-use asset and lease liability for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region.

As of September 29, 2019, there were no significant right-of-use assets and lease obligations from leases that had not commenced as of the end of the third quarter.

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The table below represents a summary of the balances recorded in the consolidated condensed balance sheet related to our leases as of September 29, 2019:



	September 29, 2019
	(In thousands)
Balance Sheet Location	Operating Leases		Finance Leases
Operating lease right-of-use assets	$	110,051

Current portion of operating lease liabilities	$	15,780
Operating lease liabilities	91,480
Total operating lease liabilities	$	107,260

Property and equipment			$	3,951

Accrued expenses			$	1,150
Other long-term liabilities			972
Total finance lease liabilities			$	2,122

Lease Costs



	Three Months Ended		Nine Months Ended
	September 29, 2019		September 29, 2019
Lease cost	(In thousands)
Finance lease cost:
Amortization of right-of-use assets	$	112	$	536
Interest on lease liabilities	12		31
Operating lease cost	6,023		17,624
Short-term lease cost	363		1,509
Variable lease cost	561		1,319
Total lease cost	$	7,071	$	21,019

Other supplemental information

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	12	$	31
Operating cash flows from operating leases	5,653		16,158
Financing cash flows from finance leases	291		808
Right-of-use assets obtained in exchange for new finance lease liabilities	252		803
Right-of-use assets obtained in exchange for new operating lease liabilities	1,437		7,973



	September 29, 2019

Weighted-average remaining lease term – finance leases (in years)	2.25
Weighted-average remaining lease term – operating leases (in years)	10.75
Weighted-average discount rate – finance leases	2.25	%
Weighted-average discount rate – operating leases	5.85	%

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Maturity Analysis

Maturity analysis of lease payments under non-cancellable leases were as follows:



Fiscal Year	Operating Leases			Finance Leases
	(In thousands)
2019 (excluding the nine months ended September 29, 2019)	$	5,690		$	304
2020	20,432			1,141
2021	16,257			469
2022	13,007			174
2023	10,924			84
Thereafter	83,263			14
Total future minimum lease payments (undiscounted)	149,573			2,186
Less: Present value discount	(42,313		)	(64		)
Total lease liability	$	107,260		$	2,122

At December 30, 2018, aggregate minimum rent commitments under operating leases with initial or remaining terms of one year or more consisted of the following:



Fiscal Year	Amount
	(In thousands)
2019	$	26,113
2020	22,066
2021	16,453
2022	8,692
2023	5,186
Thereafter	15,237
Total minimum rent commitments	$	93,747

Practical Expedients and Policy Elections

The Company elected the package of practical expedients permitted under the transition guidance of the new lease standard, which, among other things, allows us to carry forward the historical lease classification and not reassess any initial direct costs for existing leases. In addition, we elected the hindsight practical expedient to determine the lease term, which allows us to use hindsight when considering the impact of options to extend or terminate a lease as well as the option to purchase the underlying asset. We also made an accounting policy election not to separate lease and non-lease components for all asset classes, except for data center assets, and will account for the lease payments as a single component.

We made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use asset and lease liability recorded on the consolidated condensed balance sheet. These leases primarily represent month-to-month operating leases for vehicles and office equipment where we were reasonably certain that we would not elect an option to extend the lease.

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NOTE 9 – EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and nine-month periods ended September 29, 2019 and September 30, 2018, respectively:



	Three Months Ended						Nine Months Ended
Defined Benefit Retirement Plans (Europe)	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
	(In thousands)						(In thousands)
Service cost	$	181		$	178		$	550		$	547
Interest cost	1,223			1,270			3,770			3,941
Expected return on assets	(1,378		)	(1,503		)	(4,251		)	(4,667		)
Amortization of prior service cost	16			(11		)	48			4
Amortization of net actuarial losses	240			270			742			839
Net periodic benefit cost	$	282		$	204		$	859		$	664



	Three Months Ended				Nine Months Ended
Salary Continuation Plan	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
	(In thousands)				(In thousands)
Service cost	$	—	$	—	$	—	$	—
Interest cost	288		271		865		812
Amortization of net actuarial losses	94		116		281		348
Net periodic benefit cost	$	382	$	387	$	1,146	$	1,160



	Three Months Ended				Nine Months Ended
Nora Defined Benefit Plan	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
	(In thousands)				(In thousands)
Service cost	$	213	$	134	$	646	$	134
Interest cost	170		99		515		99
Net periodic benefit cost	$	383	$	233	$	1,161	$	233

In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within Operating Income in the consolidated condensed statement of operations, while all other components of net periodic benefit costs are presented within other expense in the consolidated condensed statement of operations.

NOTE 10 – ACQUISITION OF NORA

On August 7, 2018, the Company completed the acquisition of nora for a purchase price of €385.1 million, or $447.2 million at the exchange rate as of the transaction date, including acquired cash of €40.0 million ($46.5 million) for a net purchase price of €345.1 million ($400.7 million).

The transaction was 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 results of operations for this acquisition have been consolidated with those of the Company from the acquisition date forward. Tangible assets and liabilities of nora systems GmbH were valued as of the acquisition date using a market analysis, and intangible assets were valued using a discounted cash flow analysis. During the second quarter of 2019, the Company recognized a measurement period adjustment to adjust provisional amounts initially recorded for assumed deferred tax liabilities. This measurement period adjustment resulted in an increase to assumed deferred tax liabilities of $17.2 million and a corresponding increase to goodwill. The fair values of the assets acquired and liabilities assumed are final and include all measurement period adjustments.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, including all measurement period adjustments.



	As of August 7, 2018
	(In thousands)

Assets acquired (excluding goodwill)	$	359,335
Liabilities assumed	(114,049		)
Net assets acquired	245,286
Purchase price	447,192
Goodwill, excess of purchase price	$	201,906

On August 7, 2018, acquired intangible assets of $103.3 million include $60.8 million of trademarks and tradenames that are not subject to amortization and will instead be subject to annual impairment testing, or more frequent testing should there be a significant change in business conditions. The remaining intangible assets include developed technology of $39.1 million that will be amortized on a straight-line basis over the estimated useful life of 7 years and backlog of $3.4 million that will be amortized on a straight-line basis over the estimated useful life of 6 months. The acquired inventory includes a step-up of inventory to fair value of approximately $26.6 million which will be recognized in earnings over the expected turns of the inventory. This step-up of inventory to fair value was fully amortized by the end of 2018.

The 2018 period below represents the pro forma consolidated statement of operations as if nora had been included in the consolidated results of the Company beginning January 1, 2018 to the acquisition date. These are estimated for pro forma purposes only and do not necessarily reflect what the consolidated results of the Company would have been had the Company owned nora as of the first day of 2018.



	Nine Months Ended
	September 30, 2018
	(In thousands)
Revenue	$	1,001,919
Net income	74,390

Pro forma net income for 2018 excludes any transaction related costs as these are non-recurring costs for the combined Company.

NOTE 11 – 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.

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Summary information by operating segment follows:



	AMERICAS		EUROPE		ASIA- PACIFIC		TOTAL
	(In thousands)
Three Months Ended September 29, 2019:

Net Sales	$	195,900	$	106,115	$	46,337	$	348,352
Depreciation and amortization	3,238		4,255		2,035		9,528
Total assets	704,088		619,307		196,921		1,520,316

Three Months Ended September 30, 2018:

Net Sales	$	182,660	$	88,223	$	47,442	$	318,325
Depreciation and amortization	3,373		3,181		2,144		8,698

Nine Months Ended September 29, 2019:

Net Sales	$	563,776	$	294,830	$	144,941	$	1,003,547
Depreciation and amortization	9,789		13,586		6,275		29,650

Nine Months Ended September 30, 2018:

Net Sales	$	494,265	$	220,645	$	127,604	$	842,514
Depreciation and amortization	10,464		7,483		6,564		24,511

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



	Three Months Ended				Nine Months Ended
DEPRECIATION AND AMORTIZATION	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
	(In thousands)
Total segment depreciation and amortization	$	9,528	$	8,698	$	29,650	$	24,511
Corporate depreciation and amortization	1,352		1,179		3,928		2,556

Reported depreciation and amortization	$	10,880	$	9,877	$	33,578	$	27,067



ASSETS	September 29, 2019
	(In thousands)
Total segment assets	$	1,520,316
Corporate assets	141,286
Eliminations	(237,065		)

Reported total assets	$	1,424,537

NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $18.1 million and $7.4 million for the nine months ended September 29, 2019 and September 30, 2018, respectively. Income tax payments, net of refunds amounted to $26.5 million and $21.2 million for the nine months ended September 29, 2019 and September 30, 2018, respectively.

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NOTE 13 – INCOME TAXES

The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items.

For the nine months ended September 29, 2019, the Company’s effective tax rate was 22.0%, as compared to 24.3% in the first nine months of 2018. The effective tax rate decreased due to the favorable impact of discrete items recognized during the period related to company-owned life insurance and the remeasurement of unrecognized tax benefits.

Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first nine months of 2019, the Company decreased its liability for unrecognized tax benefits by $2.2 million. As of September 29, 2019, the Company had accrued approximately $25.9 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of September 29, 2019 reflected a reduction of $2.8 million related to these unrecognized tax benefits.

NOTE 14 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME

During the first nine months of 2019 and 2018, the Company reclassified $1.1 million and $1.2 million, respectively, out of accumulated other comprehensive income related to the Company’s defined benefit retirement plans and salary continuation plan. These reclassifications were included in the other expense line item of the Company’s consolidated condensed statement of operations. Other reclassifications out of accumulated other comprehensive income related to currency forward contracts are discussed in Note 6 entitled "Derivative Instruments".

NOTE 15 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

On December 29, 2018, 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 restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of certain underutilized and impaired assets that include information technology assets and obsolete manufacturing equipment.

As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter of 2018 of approximately $20.5 million. The charge was comprised of severance expenses (approximately $10.8 million), impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million). The charge was expected to result in future cash expenditures of $12.0 million, primarily for severance payments (approximately $10.8 million). The restructuring plan is expected to be substantially completed during 2019, and is expected to yield gross annual savings of approximately $12 million in fiscal 2019. The Company expects to redeploy in 2019 essentially all of the anticipated savings toward the funding of sales and strategic growth initiatives, yielding negligible net savings on the Company’s income statement.

In the third quarter of 2019 the Company recorded $0.7 million of restructuring charges related to additional lease exit costs in connection with the restructuring plan announced on December 29, 2018.

A summary of these restructuring activities is presented below:



	Balance at Beginning of Year		Deductions 2019		Charged to Expenses 2019		Balance at September 29, 2019
	(in thousands)
Workforce Reduction	$	10,763	$	5,892	$	—	$	4,871
Other Exit Costs	1,144		370		672		1,446
Total	$	11,907	$	6,262	$	672	$	6,317

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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 December 30, 2018, under Part II, Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, September 29, 2019, and the comparable periods of 2018 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 Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2018, as updated by the additional risk factor included in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, which discussions are 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.

Acquisition of Nora Systems

On August 7, 2018, the Company completed the acquisition of nora Holding GmbH (“nora”) for a purchase price of €385.1 million, ($447.2 million at the exchange rate as of the transaction date), including acquired cash of €40.0 million ($46.5 million) for a net purchase price of €345.1 million ($400.7 million). Nora is an industry leader in the rubber flooring market, and this acquisition is expected to advance the Company’s growth strategy through a new product line and by expanding penetration into market segments outside of the office segment, particularly in healthcare, life sciences and education.

General

During the quarter ended September 29, 2019, net sales were $348.4 million compared with net sales of $318.3 million in the third quarter last year. During the first nine months of fiscal year 2019, net sales were $1,003.5 million, compared with net sales of $842.5 million in the first nine months of last year. The 2019 periods were both positively impacted by growth in LVT plus the inclusion of revenue from the nora acquisition. 2018 included revenue from the acquired nora business as of the acquisition date on August 7, 2018 through the end of the 2018 third quarter. Fluctuations in currency exchange rates had a negative impact of approximately $7.0 million for the third quarter of 2019 and a negative impact of $21.1 million for the nine-month period of 2019 compared to the three-month and nine-month periods of 2018. The 2019 three-month and nine-month periods were impacted by the weakening of the Euro, British Pound sterling and the Australian dollar against the U.S. dollar.

During the third quarter of 2019, net income was $26.2 million, or $0.45 per diluted share, compared with $8.2 million, or $0.14 per diluted share, in the third quarter last year. During the nine months ended September 29, 2019, we had net income of $62.8 million, or $1.06 per diluted share, compared with net income of $43.9 million, or $0.74 per diluted share, in the first nine months of 2018. The third quarter of 2019 and the nine-month period ended September 29, 2019 included (i) the results of the acquired nora business, and (ii) higher legal expenses related to the SEC matter discussed in Part II, Item 1 of our first quarter 2019 Form 10-Q. The 2019 periods also included amortization of acquired intangible assets of $1.3 million and $4.5 million for the three-month and nine-month periods, respectively. The 2019 nine-month period also included an income tax benefit of $3.1 million due to the remeasurement of an unrecognized tax position, which contributed to a lower tax rate for 2019. The 2018 period included the results of the acquired nora business from the acquisition date to the end of the third quarter, and related transaction expenses of $2.4 million and $8.2 million for the three-month and nine-month periods, respectively. 2018 also included $20.3 million for amortization of acquired inventory step up and intangible assets.

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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 nine-month periods ended September 29, 2019 and September 30, 2018, respectively:



	Three Months Ended				Nine Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Net sales	100	%	100	%	100	%	100	%
Cost of sales	61.0		68.6		61.2		64.1
Gross profit on sales	39.0		31.4		38.8		35.9
Selling, general and administrative expenses	26.2		26.4		28.5		27.3
Restructuring charges	0.2		0.0		0.1		0.0
Operating income	12.6		5.0		10.2		8.6
Interest/Other expenses	2.2		2.0		2.2		1.7
Income before tax expense	10.4		2.9		8.0		6.9
Income tax expense	2.8		0.4		1.8		1.7
Net income	7.6		2.6		6.2		5.2

Net Sales

Below is information regarding net sales, and analysis of those results, for the three-month and nine-month periods ended September 29, 2019, and September 30, 2018, respectively.



	Three Months Ended				Percentage Change
	September 29, 2019		September 30, 2018		Percentage Change
	(In thousands)
Net Sales	$	348,352	$	318,325	9.4	%



	Nine Months Ended				Percentage Change
	September 29, 2019		September 30, 2018		Percentage Change
	(In thousands)
Net Sales	$	1,003,547	$	842,514	19.1	%

For the quarter ended September 29, 2019, net sales increased $30.0 million (9.4%) versus the comparable period in 2018. Included in the 2019 period were net sales from the acquired nora business. Currency fluctuations had an approximately $7.0 million (2.2)% negative impact on third quarter 2019 sales compared to the third quarter of 2018. This currency impact was mostly due to the weakening of the Euro and Australian dollar against the U.S. dollar. On a geographic basis, sales in the Americas increased 7%, Europe increased 20% and Asia-Pacific decreased 2%. The sales increase in the Americas was due primarily to the impact of the nora acquisition and growth in LVT. The sales increase in the Americas was most pronounced in the corporate office, education, and healthcare segments. The sales increase in Europe was due primarily to the impact of the nora acquisition plus growth in LVT and carpet tile. In Europe, the sales increase was, as noted, impacted by the weakening of the Euro. On a segment basis, the sales increase in Europe was most significant in the corporate office segment. The sales decrease in Asia-Pacific was primarily due to the weakening of the Australian dollar, which offset increased sales in the retail segment.

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For the nine months ended September 29, 2019, net sales increased $161.0 million (19.1%) versus the comparable period in 2018. Included in the 2019 period were net sales from the acquired nora business. Currency fluctuations had an approximately $21.1 million (2.5)% negative impact on sales in the first nine months of 2019 compared to the first nine months of 2018. This currency impact was most pronounced in our European and Asia-Pacific operations, due to the weakening of the Euro, British Pound, and Australian dollar against the U.S. dollar. On a geographic basis, including the impact of the nora acquisition, sales for the nine-month period increased across all geographies with Americas increasing 14%, Europe increasing 34% and Asia-Pacific increasing 14%. As discussed above, the Americas sales were favorably impacted by increases in sales of our LVT product. On a segment basis, the nine-month period sales increases in the Americas were most significant in the corporate office, education, and healthcare segments, while sales in Europe were most significant in corporate office. The Asia-Pacific nine-month period sales increase was primarily in the retail segment, which was partially offset by the weakening of the Australian dollar.

Cost and Expenses

The following tables present our overall cost of sales and selling, general and administrative expenses for the three-month and nine-month periods ended September 29, 2019, and September 30, 2018, respectively:



	Three Months Ended				Percentage Change
Cost and Expenses	September 29, 2019		September 30, 2018		Percentage Change
	(In thousands)
Cost of sales	$	212,590	$	218,380	(2.7	)%
Selling, general and administrative expenses	91,414		84,160		8.6	%



	Nine Months Ended				Percentage Change
Cost and Expenses	September 29, 2019		September 30, 2018		Percentage Change
	(In thousands)
Cost of sales	$	613,797	$	539,839	13.7	%
Selling, general and administrative expenses	286,123		230,199		24.3	%

For the quarter ended September 29, 2019, cost of sales decreased $5.8 million (2.7%) compared to the third quarter of 2018. Included in the 2019 period were cost of sales for the acquired nora business and $1.3 million for the amortization of acquired intangible assets. The 2018 period included amortization of inventory step-up and intangible assets of $20.3 million related to the acquired nora business. Currency fluctuations had an approximately $1.7 million (0.8%) positive impact on the year-over-year comparison. As a percentage of sales, our cost of sales decreased to 61.0% for the third quarter of 2019 versus 68.6% for the third quarter of 2018, primarily due to the nora non-recurring inventory step-up amortization which occurred in 2018 and did not repeat in 2019.

For the nine months ended September 29, 2019, cost of sales increased $74.0 million (13.7%) versus the comparable period in 2018. Included in the first nine months of 2019 were cost of sales for the acquired nora business. Currency fluctuations had an approximately $10.5 million (2.0%) positive impact on the year-over-year comparison. Apart from the nora acquisition impacts, the increase in cost of sales for the 2019 nine-month period was due to the same factors as the nine-month period sales increase, as discussed above. As a percentage of sales, our cost of sales decreased to 61.2% for the 2019 nine-month period versus 64.1% for the comparable 2018 period, primarily due to the timing of completion of the nora acquisition and productivity initiatives.

For the quarter ended September 29, 2019, selling, general and administrative (“SG&A”) expenses increased $7.3 million (8.6%) versus the comparable period in 2018. Fluctuations in currency rates had a $0.4 million (0.5%) positive impact on the year-over-year comparison. SG&A expenses were higher for the third quarter of 2019 as the period included three months of SG&A expenses for the nora acquisition compared to 2018, which included SG&A expenses from the acquisition date on August 7, 2018 to the end of the third quarter. The higher SG&A expenses for the third quarter of 2019 were also partially due to a $1.4 million year-over-year increase in legal costs related to the SEC matter discussed in Part II, Item 1 of our first quarter 2019 Form 10-Q. These increases in SG&A expenses were partially offset by lower stock compensation expense of $1.9 million. As a percentage of sales, SG&A expenses decreased to 26.2% for the third quarter of 2019 versus 26.4% for the third quarter of 2018.

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For the nine months ended September 29, 2019, SG&A expenses increased $55.9 million (24.3%) versus the comparable period in 2018. Included in the 2019 period were SG&A expenses for the acquired nora business. Fluctuations in currency rates had a $3.8 million (1.6%) positive impact on the year-over-year SG&A expense comparison. As discussed above, SG&A expenses are higher in the 2019 nine-month period compared to 2018 as the nora acquisition was completed during the third quarter of last year resulting in much lower SG&A expenses in the comparable 2018 period. The increase in SG&A expense was also due to higher selling expenses in the first quarter of 2019 related to bringing the Company’s global sales organization together for a meeting to accelerate the nora integration, advance our selling system transformation, and engage the sales force in the Company’s sustainability mission. The higher SG&A expenses for the nine-month period of 2019 were also partially due to a $3.7 million year-over-year increase in legal costs related to the SEC matter discussed in Part II, Item 1 of our first quarter 2019 Form 10-Q. As a percentage of sales, SG&A expenses increased to 28.5% for the nine months ended September 29, 2019, versus 27.3% for the same period in 2018.

Interest Expense

For the three-month period ended September 29, 2019, interest expense increased $1.7 million, from $4.9 million in the comparable period last year to $6.6 million. For the nine-month period ended September 29, 2019, interest expense increased $11.0 million, from $9.2 million in the comparable period last year to $20.2 million. These increases were a result of (1) additional debt incurred to complete the nora acquisition, and (2) higher average interest rates on our borrowings in the first nine months of 2019 as compared to 2018.

Liquidity and Capital Resources

General

At September 29, 2019, we had $85.2 million in cash. At that date, we had $588.0 million in term loan borrowing, $45.1 million of revolving loan borrowings and $2.5 million in letters of credit outstanding under the Syndicated Credit Facility. As of September 29, 2019, we had additional borrowing capacity of $252.4 million under the Syndicated Credit Facility and $9.4 million of borrowing capacity under other credit facilities in place at other non-U.S. subsidiaries.

Analysis of Cash Flows

We exited the quarter ended September 29, 2019 with $85.2 million in cash, an increase of $4.2 million during the first nine months of the year. The most significant factors in the increase were cash inflows from financing activities of $76.0 million from borrowings under our Syndicated Credit Facility. These inflows were partially offset by financing outflows, which included (1) $65.4 million used for repayments under our Syndicated Credit Facility, (2) $25.2 million to repurchase 1.6 million shares of the Company’s outstanding common stock, and (3) dividends paid on our common stock of $11.6 million. Cash outflows for investing activities included $53.9 million used for capital expenditures during the first nine months of 2019. Cash flows from operations in the first nine months of 2019 provided $89.9 million with net income of $62.8 million partially offset by working capital uses of cash of (1) $11.8 million for increases in inventories, (2) $4.5 million due to increases in prepaid expense and other current assets, and (3) $0.9 million due to an increase in accounts receivable. These uses of cash were partially offset by a source of cash of $11.5 million from an increase in accounts payable and accrued expenses.

Purchase Obligations

We have outstanding purchase obligations of $14.5 million related to expanding our manufacturing capabilities, which we expect to fund during the remainder of 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The discussion below in this Item 3 is based upon the more detailed discussions of our market risk and related matters included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, under Part II, Item 7A of that Form 10-K. The discussion here focuses on the quarter ended September 29, 2019, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.

For the nine months ended September 29, 2019, we recognized a $19.5 million decrease in our foreign currency translation adjustment account primarily due to the weakening of the Euro, Australian dollar and British pound against the U.S. dollar as of the end of the third quarter of 2019 compared to the end of 2018.

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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.

Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 30, 2018.

As of September 29, 2019, 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 financial instruments of $12.3 million or an increase in the fair value of our financial instruments of $15.1 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.

As of September 29, 2019, a 10% decrease or increase in the fair market value of the Company’s cash flow interest rate swaps would lead to a decrease or increase in the recorded liability values of $0.8 million.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act.

No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Based on the evaluation, our President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously disclosed, in November 2017 the Company received a letter from the Securities & Exchange Commission (the “SEC”) requesting that the Company voluntarily provide information and documents in connection with an investigation into the Company’s historical quarterly earnings per share (“EPS”) calculations and rounding practices during the period 2014-2017. The Company subsequently received subpoenas from the SEC in February 2018, July 2018 and April 2019 requesting additional documents and information. The Company received an additional subpoena from the SEC in August 2019 requesting additional documents and information.

Since the inception of the investigation, the Company has cooperated and continues to cooperate with the SEC’s investigation.

We are subject to various other legal proceedings in the ordinary course of business, none of which the Company believes are required to be disclosed under this Item 1.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 30, 2018, as supplemented by Part II, Item 1A of our quarterly report on Form 10-Q for the quarter ended March 31, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information with respect to purchases made by or on behalf of the Company, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during our third quarter ended September 29, 2019:



Period⁽¹⁾	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2019⁽²⁾	651	$	14.47	—	$	—
August 1 - 31, 2019⁽²⁾	502	10.59		—	—
September 1-29, 2019	—	—		—	—
Total	1,153	$	12.78	—	$	—

⁽¹⁾ The monthly periods identified above correspond to the Company’s fiscal third quarter of 2019, which commenced July 1, 2019 and ended September 29, 2019.

⁽²⁾ Includes shares acquired by the Company from employees to satisfy income tax withholding obligations in connection with the vesting of previous equity awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

The following exhibits are filed with this report:



EXHIBIT NUMBER	DESCRIPTION OF EXHIBIT

31.1	Section 302 Certification of Chief Executive Officer.
31.2	Section 302 Certification of Chief Financial Officer.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350.
101.INS	XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Definition Linkbase Document.
104	The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 29, 2019, formatted in Inline XBRL

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	INTERFACE, INC.

Date: November 7, 2019	By:	/s/ Bruce A. Hausmann
		Bruce A. Hausmann Chief Financial Officer (Principal Financial Officer)

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