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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements.

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 31, 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 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.

Recently Issued Accounting Pronouncements Not Yet Adopted

In January 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.

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 from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for the six months ended June 30, 2019. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material.

Disaggregation of Revenue

For the six months ended June 30, 2019, revenue from the Company’s customers is broken down by geography as follows:

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.

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 table presents net income that was attributable to participating securities:

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

For all periods presented, there were nostock 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 June 30, 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 June 30, 2019, the unamortized debt costs recorded as a reduction of long-term debt were $7.2 million.

As of June 30, 2019, the Company had outstanding $598.9 million of term loan borrowing and $80.5 million of revolving loan borrowings under the Facility, and had $2.5 million in letters of credit outstanding under the Facility. As of June 30, 2019, the weighted average interest rate on borrowings outstanding under the Facility was 3.88%.

Under the amended and restated 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 $9.5 million of other lines of credit available at interest rates ranging from 2.5% to 6.5%. As of June 30, 2019, there were no borrowings outstanding under these lines of credit. 

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 other expense (or other income) 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 June 30, 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). A portion of these forward contracts expire each month, with the final contract expiring in September of 2019.  As of June 30, 2019, the notional value of these forward currency contracts and the future intercompany sales these instruments hedge is approximately $12 million.

The table below sets forth the fair value of derivative instruments as of June 30, 2019 (in thousands):

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

      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 six months ended June 30, 2019. There was no significant impact from the reclassification of hedged items from accumulated other comprehensive income during the three and six months ended June 30, 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 pre-tax 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 six months ended June 30, 2019 (in thousands):

NOTE 7 – SHAREHOLDERS’ EQUITY

The following tables depict the activity in the accounts which make up shareholders’ equity for the three and six months ended June 30, 2019 and July 1, 2018:

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 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 six months of 2019 or 2018.

As of June 30, 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 six months of 2019. There were 10,000 stock options exercised in the first six months of 2018 and no forfeitures during those six months. The aggregate intrinsic value of the outstanding and exercisable stock options was $0.1 million as of June 30, 2019.

Restricted Stock Awards

During the six months ended June 30, 2019 and July 1, 2018, the Company granted restricted stock awards for 224,000 and 192,000 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a 1 to 3-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 $1.5 million and $2.0 million for the six months ended June 30, 2019, and July 1, 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 June 30, 2019, as well as activity during the six months then ended:

As of June 30, 2019, the unrecognized total compensation cost related to unvested restricted stock was $5.7 million. That cost is expected to be recognized by the end of 2022.

Performance Share Awards

During the six months ended June 30, 2019 and July 1, 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 1 to 3 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 June 30, 2019, as well as the activity during the six months then ended:

Compensation expense related to the performance shares was $3.3 million and $3.6 million for the six months ended June 30, 2019, and July 1, 2018, respectively. Unrecognized compensation expense related to these performance shares was approximately $6.0 million as of June 30, 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 $0.9 million for the six months ended June 30, 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. 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 June 30, 2019, there are no significant right-of-use assets and lease obligations from leases that have not commenced as of the end of the second quarter.

The table below represents a summary of the balances recorded in the consolidated condensed balance sheet related to our leases as of June 30, 2019:

Lease Costs

Maturity Analysis

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

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:

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.

NOTE 9 – EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and six-month periods ended June 30, 2019 and July 1, 2018, respectively:

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. As of June 30, 2019, the fair values of the assets acquired and liabilities assumed are final and include all measurement period adjustments.

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

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 periods below represent the pro forma consolidated statement of operations as if nora had been included in the consolidated results of the Company as of January 1, 2018. 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.

       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.

Summary information by operating segment follows:

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

NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $12.0 million and $3.9 million for the six months ended June 30, 2019 and July 1, 2018, respectively. Income tax payments, net of refunds amounted to $16.4 million and $14.9 million for the six months ended June 30, 2019 and July 1, 2018, respectively.

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 six months ended June 30, 2019, the Company’s effective tax rate was 17.6%, as compared to 26.5% in the first six months of 2018.  The effective tax rate decreased due to the favorable impact of discrete items recognized during the second quarter of 2019 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 six months of 2019, the Company decreased its liability for unrecognized tax benefits by $2.5 million. As of June 30, 2019, the Company had accrued approximately $25.6 million for unrecognized tax benefits.  In accordance with applicable accounting standards, the Company’s deferred tax asset as of June 30, 2019 reflects a reduction for $2.8 million of these unrecognized tax benefits.

NOTE 14 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME

During the first six months of 2019, the Company reclassified $0.7 million 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 expenses line item of the Company’s consolidated condensed statement of operations.

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.

A summary of these restructuring activities is presented below:

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 six months ended, or as of, June 30, 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 June 30, 2019, net sales were $357.5 million compared with net sales of $283.6 million in the second quarter last year. During the first six months of fiscal year 2019, net sales were $655.2 million, compared with net sales of $524.2 million in the first six months of last year.  The 2019 periods were both positively impacted by growth in LVT plus the inclusion of revenue from the nora acquisition, which generated net sales of $75.6 million for the second quarter and $135.7 million for the first six months of 2019. Fluctuations in currency exchange rates had a negative impact of approximately $6.1 million for the second quarter of 2019 and a negative impact of $14.1 million for the six-month period of 2019 compared to the three-month and six-month periods of 2018. The 2019 three-month and six-month periods were primarily impacted by the weakening of the Euro, British pound sterling, and the Australian dollar against the U.S. dollar.

During the second quarter of 2019, net income was $29.5 million, or $0.50 per diluted share, compared with $20.6 million, or $0.35 per diluted share, in the second quarter last year. During the six months ended June 30, 2019, we had net income of $36.6 million, or $0.61 per diluted share, compared with net income of $35.7 million, or $0.60 per diluted share, in the first six months of 2018. The second quarter of 2019 and the six-month period ended June 30, 2019 included (i) the results of the acquired nora business, (ii) an income tax benefit of $3.1 million due to the remeasurement of an unrecognized tax position, which contributed to a lower tax rate in the second quarter, and (iii) 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 $3.2 million for the three-month and six-month periods, respectively. The second quarter of 2018 included $5.8 million of pre-tax transaction related expenses for the nora acquisition.

Results of Operations

The following table presents, as a percentage of net sales, certain items included in our consolidated condensed statements of operations for the three-month and six-month periods ended June 30, 2019 and July 1, 2018, respectively:

Net Sales

Below is information regarding net sales, and analysis of those results, for the three-month and six-month periods ended June 30, 2019, and July 1, 2018, respectively.

For the quarter ended June 30, 2019, net sales increased $73.9 million (26.0%) versus the comparable period in 2018. As discussed above, the 2019 period included revenue of $75.6 million from the nora acquisition. Currency fluctuations had an approximately $6.1 million (2.1%) negative impact on second quarter 2019 sales compared to the second quarter of 2018. This currency impact was mostly due to the weakening of the Euro, British pound sterling, and Australian dollar against the U.S. dollar. On a geographic basis, sales increased across all geographies with Americas increasing 18%, Europe increasing 45% and Asia-Pacific increasing 32%. 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 segment. The sales increase in Europe was due primarily to the impact of the nora acquisition, and growth in LVT. In Europe, the sales increase was, as noted, impacted by the weakening of the Euro and British pound. On a segment basis, the sales increase in Europe was most significant in the corporate office segment. The sales increase in Asia-Pacific was due primarily to the impact of the nora acquisition. The sales increase in Asia-Pacific was negatively impacted by the weakening of the Australian dollar. On a segment basis, the sales increase in the Asia-Pacific region was primarily in the retail segment. Second quarter 2019 sales of our rubber flooring products from the acquired nora business were primarily in the healthcare, education, and public buildings segments.

For the six months ended June 30, 2019, net sales increased $131.0 million (25.0%) versus the comparable period in 2018.  As discussed above, the 2019 period included revenue of $135.7 million from the nora acquisition. Currency fluctuations had an approximately $14.1 million (2.7%) negative impact on sales in the first six months of 2019 compared to the first six 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 six-month period increased across all geographies with Americas increasing 18%, Europe increasing 43% and Asia-Pacific increasing 23%. As discussed above, the Americas sales also were favorably impacted by increases in sales of our LVT product. On a segment basis, the six-month period sales increases in the Americas and Europe were most significant in the corporate office segment. As in the three-month period ended June 30, 2019 discussed above, the Asia-Pacific six-month sales increase was primarily in the retail segment.  The six-month period sales for our rubber flooring products were primarily in the same segments discussed above for the second quarter.

Cost and Expenses

The following tables present our overall cost of sales and selling, general and administrative expenses for the three-month and six-month periods ended June 30, 2019, and July 1, 2018, respectively: