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

tile20190331_10q.htm
 

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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 March 31, 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

 

(I.R.S. Employer

incorporation or organization)

 

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)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 ☑  No ☐

 

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

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

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 ☑

 

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

 

 

Shares outstanding of each of the registrant's classes of common stock at May 1, 2019:

 

 

Class

 

Number of Shares

 
 

Common Stock, $.10 par value per share

 

59,987,513

 

 

 

 

INTERFACE, INC.

 

INDEX

 

 

PAGE

PART I.

FINANCIAL INFORMATION

   
         
 

Item 1.

Financial Statements

3

 
         
   

Consolidated Condensed Balance Sheets – March 31, 2019 and December 30, 2018

3

 
         
   

Consolidated Condensed Statements of Operations - Three Months Ended March 31, 2019 and April 1, 2018

4

 
         
   

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2019 and April 1, 2018

5

 
         
   

Consolidated Condensed Statements of Cash Flows – Three Months Ended March 31, 2019 and April 1, 2018

6

 
         
   

Notes to Consolidated Condensed Financial Statements

7

 
         
 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 
         
 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

 
         
 

Item 4.

Controls and Procedures

22

 
       

PART II.

OTHER INFORMATION

   
         
 

Item 1.

Legal Proceedings

23

 
         
 

Item 1A.

Risk Factors

23

 
         
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 
         
 

Item 3.

Defaults Upon Senior Securities

24

 
         
 

Item 4.

Mine Safety Disclosures

24

 
         
 

Item 5.

Other Information

24

 
         
 

Item 6.

Exhibits

24

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

 

   

MARCH 31, 2019

   

DECEMBER 30, 2018

 
   

(UNAUDITED)

         

ASSETS

               

Current Assets

               

Cash and cash equivalents

  $ 66,972     $ 80,989  

Accounts receivable, net

    164,976       179,004  

Inventories, net

    285,738       258,657  

Prepaid expenses and other current assets

    46,799       40,229  

Total current assets

    564,485       558,879  

Property and equipment, net

    300,405       292,888  

Operating lease right-of-use assets

    113,640       0  

Deferred tax asset

    16,000       15,601  

Goodwill and intangibles, net

    334,059       343,542  

Other assets

    76,478       73,734  
                 

Total assets

  $ 1,405,067     $ 1,284,644  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Current liabilities

               

Accounts payable

  $ 72,994     $ 66,301  

Accrued expenses

    112,409       125,971  

Current portion of operating lease liabilities

    16,014       0  

Current portion of long-term debt

    31,105       31,315  

Total current liabilities

    232,522       223,587  

Long-term debt

    610,895       587,266  

Operating lease liabilities

    97,316       0  

Deferred income taxes

    25,341       26,488  

Other long-term liabilities

    89,334       92,640  
                 

Total liabilities

    1,055,408       929,981  
                 

Commitments and contingencies

               
                 

Shareholders’ equity

               

Preferred stock

    0       0  

Common stock

    6,002       5,951  

Additional paid-in capital

    270,655       270,269  

Retained earnings

    225,373       222,214  

Accumulated other comprehensive loss – foreign currency translation

    (106,690 )     (101,487 )

Accumulated other comprehensive (loss) income – cash flow hedge

    (1,980 )     1,326  

Accumulated other comprehensive loss – pension liability

    (43,701 )     (43,610 )
                 

Total shareholders’ equity

    349,659       354,663  
                 

Total liabilities and shareholders’ equity

  $ 1,405,067     $ 1,284,644  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 

   

THREE MONTHS ENDED

 
                 
   

MARCH 31, 2019

   

APRIL 1, 2018

 
                 

NET SALES

  $ 297,688     $ 240,563  

Cost of Sales

    182,290       146,981  
                 

GROSS PROFIT ON SALES

    115,398       93,582  

Selling, General and Administrative Expenses

    99,011       70,594  

OPERATING INCOME

    16,387       22,988  
                 

Interest Expense

    6,793       2,094  

Other Expense

    1,014       519  
                 

INCOME BEFORE INCOME TAX EXPENSE

    8,580       20,375  

Income Tax Expense

    1,521       5,291  
                 

Net Income

  $ 7,059     $ 15,084  
                 

Earnings Per Share – Basic

  $ 0.12     $ 0.25  
                 

Earnings Per Share – Diluted

  $ 0.12     $ 0.25  
                 

Common Shares Outstanding – Basic

    59,632       59,671  

Common Shares Outstanding – Diluted

    59,642       59,717  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

(IN THOUSANDS)

 

 

   

THREE MONTHS ENDED

 
       
   

MARCH 31, 2019

   

APRIL 1, 2018

 
                 

Net Income

  $ 7,059     $ 15,084  

Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment

    (5,203 )     8,830  

Other Comprehensive (Loss) Income, Cash Flow Hedge

    (3,306 )     1,632  

Other Comprehensive Loss, Pension Liability Adjustment

    (91 )     (2,216 )

Comprehensive Income (Loss)

  $ (1,541 )   $ 23,330  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

(IN THOUSANDS)

 

   

THREE MONTHS ENDED

 
       
   

MARCH 31, 2019

   

APRIL 1, 2018

 

OPERATING ACTIVITIES:

               

Net income

  $ 7,059     $ 15,084  

Adjustments to reconcile net income to cash used in operating activities:

               

Depreciation and amortization

    11,344       8,731  

Stock compensation amortization expense

    2,817       2,858  

Deferred income taxes and other

    (6,088 )     1,800  

Amortization of acquired intangible assets

    1,909       0  

Working capital changes:

               

Accounts receivable

    13,729       6,338  

Inventories

    (28,855 )     (17,240 )

Prepaid expenses and current assets

    (5,692 )     (16,273 )

Accounts payable and accrued expenses

    (7,924 )     (7,077 )
                 

CASH USED IN OPERATING ACTIVITIES

    (11,701 )     (5,779 )
                 

INVESTING ACTIVITIES:

               

Capital expenditures

    (19,968 )     (7,431 )

Other

    (44 )     264  
                 

CASH USED IN INVESTING ACTIVITIES

    (20,012 )     (7,167 )
                 

FINANCING ACTIVITIES:

               

Repayments of long-term debt

    (8,893 )     (3,750 )

Borrowing of long-term debt

    33,000       17,210  

Tax withholding payments for share-based compensation

    (2,627 )     (987 )

Proceeds from issuance of common stock

    60       124  

Dividends paid

    (3,900 )     (3,868 )

Repurchase of common stock

    0       (14,485 )
                 

CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES:

    17,640       (5,756 )
                 

Net cash used in operating, investing and financing activities

    (14,073 )     (18,702 )

Effect of exchange rate changes on cash

    56       (478 )
                 

CASH AND CASH EQUIVALENTS:

               

Net change during the period

    (14,017 )     (19,180 )

Balance at beginning of period

    80,989       87,037  
                 

Balance at end of period

  $ 66,972     $ 67,857  

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

 

NOTE 1 – CONDENSED FOOTNOTES

 

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end 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. Each of the first quarters of 2019 and 2018 were comprised of 13 weeks.

 

 

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 first quarter of 2019. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material.

 

Disaggregation of Revenue

 

For the first quarter of 2019, revenue from the Company’s customers is broken down by geography as follows:

 

Geography   Percentage of Net Sales  
Americas     54.0%  
Europe     31.2%  

Asia-Pacific

    14.8%  

                  

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:

 

   

March 31, 2019

   

December 30, 2018

 
   

(In thousands)

 

Finished Goods

  $ 212,661     $ 180,847  

Work in Process

    13,551       17,762  

Raw Materials

    59,526       60,048  

Inventories, net

  $ 285,738     $ 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

 
   

March 31, 2019

   

April 1, 2018

 

Earnings Per Share:

               

Basic Earnings Per Share:

               

Distributed Earnings

  $ 0.07     $ 0.06  

Undistributed Earnings

    0.05       0.19  

Total

  $ 0.12     $ 0.25  
                 

Diluted Earnings Per Share:

               

Distributed Earnings

  $ 0.07     $ 0.06  

Undistributed Earnings

    0.05       0.19  

Total

  $ 0.12     $ 0.25  
                 
                 

Basic earnings per share

  $ 0.12     $ 0.25  

Diluted earnings per share

  $ 0.12     $ 0.25  

 

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

 

   

Three Months Ended

 
   

March 31, 2019

   

April 1, 2018

 
   

(In millions)

 

Net Income Attributable to Participating Securities

  $ 0.1     $ 0.2  

 

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

 

   

Three Months Ended

 
   

March 31, 2019

   

April 1, 2018

 
   

(In thousands)

 

Weighted Average Shares Outstanding

    59,065       59,069  

Participating Securities

    567       602  

Shares for Basic Earnings Per Share

    59,632       59,671  

Dilutive Effect of Stock Options

    10       46  

Shares for Diluted Earnings Per Share

    59,642       59,717  

 

For the three months ended March 31, 2019, and April 1, 2018, 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 March 31, 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 March 31, 2019, the unamortized debt costs recorded as a reduction of long-term debt were $7.6 million.

 

As of March 31, 2019, the Company had outstanding $606.0 million of term loan borrowing and $43.6 million of revolving loan borrowings under the Facility, and had $2.5 million in letters of credit outstanding under the Facility. As of March 31, 2019, the weighted average interest rate on borrowings outstanding under the Facility was 3.87%.

 

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 March 31, 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 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 March 31, 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. These contracts cover approximately 70% of the expected intercompany sales activity between the nora European manufacturing facility and the U.S. subsidiary and at this time the Company believes these are probable transactions given historical performance as well as budget projections. As of March 31, 2019, the notional value of these forward currency contracts and the future intercompany sales these instruments hedge is approximately $24 million.

 

The table below sets forth the fair value of derivative instruments as of March 31, 2019 (in thousands):

 

  Asset Derivatives as of  

Liability Derivatives as of

 
  March 31, 2019  

March 31, 2019

 
 

Balance Sheet

       

Balance Sheet

       
 

Location

 

Fair Value

 

Location

  Fair Value  

Derivative instruments designated as hedging instruments:

                   

Foreign currency contracts

Other current assets

  $ 0   Accrued expenses   $ 115  

Interest rate swap contracts

Other current assets

    828   Accrued expenses     1,977  
      $ 828       $ 2,092  

 

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

 

 

Asset Derivatives as of

 

Liability Derivatives as of

 
 

December 30, 2018

 

December 30, 2018

 
 

Balance Sheet

       

Balance Sheet

       
 

Location

 

Fair Value

 

Location

 

Fair Value

 

Derivative instruments designated as hedging instruments:

                   

Foreign currency contracts

Other current assets

  $ 651  

Other current liabilities

    -  

Interest rate swap contracts

Other current assets

  $ 1,794  

Other current liabilities

    -  
      $ 2,445         -  


      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 months ended March 31, 2019. There was no significant impact from the reclassification of hedged items from accumulated other comprehensive income during the three months ended March 31, 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 months ended March 31, 2019 (in thousands):

 

    Loss Recognized in Accumulated  
Three months ended March 31, 2019   Other Comprehensive Income  
Foreign currency contracts   $ 363  
Interest rate swap contracts     2,943  
    $ 3,306  

 

 

NOTE 7 – SHAREHOLDERS’ EQUITY

 

The following tables depict the activity in the accounts which make up shareholders equity for the three months ended March 31, 2019 and April 1, 2018:

 

   

SHARES

   

AMOUNT

   

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

    0       0       0       7,059       0       0       0  

Stock issuances under employee plans

    509       51       379       0       0       0       0  

Other issuances of common stock

    224       22       3,900       0       0       0       0  

Unamortized stock compensation expense related to restricted stock awards

    0       0       (3,922 )     0       0       0       0  

Cash dividends paid

    0       0       0       (3,900 )     0       0       0  

Forfeitures and compensation expense related to stock awards

    (225 )     (22 )     29       0       0       0       0  

Share Repurchases

    0       0       0       0       0       0       0  

Pension liability adjustment

    0       0       0       0       (91 )     0       0  

Foreign currency translation adjustment

    0       0       0       0       0       (5,203 )     0  

Cash flow hedge unrealized loss

    0       0       0       0       0       0       (3,306 )

Balance, at March 31, 2019

    60,016     $ 6,002     $ 270,655     $ 225,373     $ (43,701 )   $ (106,690 )   $ (1,980 )

 

   

SHARES

   

AMOUNT

   

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

    0       0       0       15,084       0       0       0  

Stock issuances under employee plans

    175       17       102       0       0       0       0  

Other issuances of common stock

    187       19       4,769       0       0       0       0  

Unamortized stock compensation expense related to restricted stock awards

    0       0       (4,788 )     0       0       0       0  

Cash dividends paid

    0       0       0       (3,868 )     0       0       0  

Forfeitures and compensation expense related to stock awards

    (55 )     (6 )     3,185       0       0       0       0  

Share Repurchases

    (615 )     (61 )     (14,424 )     0       0       0       0  

Pension liability adjustment

    0       0       0       0       (2,216 )     0       0  

Foreign currency translation adjustment

    0       0       0       0       0       8,830       0  

Cash flow hedge unrealized gain

    0       0       0       0       0       0       1,632  

Balance, at April 1, 2018

    59,498     $ 5,950     $ 260,115     $ 198,649     $ (58,770 )   $ (70,113 )   $ 2,536  

 

 

Repurchase of Common Stock

 

In the second quarter of 2017, the Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $100 million of its outstanding shares of common stock. The program has no specific expiration date. As of the end of the first quarter of 2019, approximately $25.1 million of shares remained authorized for repurchase under the program.

 

During the first quarter of 2019, the Company did not repurchase or retire any shares of common stock pursuant to this share repurchase 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 quarter of 2019 or 2018.

 

As of March 31, 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 quarter of 2019. There were 10,000 stock options exercised in the first quarter of 2018 and no forfeitures in the first quarter of 2018. The aggregate intrinsic value of the outstanding and exercisable stock options was $0.1 million as of March 31, 2019.

 

Restricted Stock Awards

 

During the three months ended March 31, 2019 and April 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 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 $0.8 million and $1.1 million for the three months ended March 31, 2019, and April 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 March 31, 2019, as well as activity during the three 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

    188,000       18.24  

Forfeited or canceled

    18,000       21.16  

Outstanding at March 31, 2019

    567,000     $ 26.98  

 

As of March 31, 2019, the unrecognized total compensation cost related to unvested restricted stock was $6.9 million. That cost is expected to be recognized by the end of 2022.

 

Performance Share Awards

 

During the three months ended March 31, 2019 and April 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 one to three years, subject to the employee’s continued employment through the last date of the performance period, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

 

 

The following table summarizes the performance shares outstanding as of March 31, 2019, as well as the activity during the three 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

    470,500       18.84  

Forfeited or canceled

    34,500       20.59  

Outstanding at March 31, 2019

    599,000     $ 19.67  

 

Compensation expense related to the performance shares was $2.0 million and $1.8 million for the three months ended March 31, 2019, and April 1, 2018, respectively. Unrecognized compensation expense related to these performance shares was approximately $7.6 million as of March 31, 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 $0.6 million in the first quarter of 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 March 31, 2019, there are no significant right-of-use assets and lease obligations from leases that have not commenced as of the end of the first quarter.

 

The table below represents a summary of the balances recorded in the consolidated condensed balance sheet related to our leases as of March 31, 2019:

   

    March 31, 2019  
   

(In thousands)

 
                 
Balance Sheet Location  

Operating Leases

   

Finance Leases

 
                 

Operating lease right-of-use assets

  $ 113,640          
                 

Current portion of operating lease liabilities

  $ 16,014          

Operating lease liabilities

    97,316          

Total operating lease liabilities

  $ 113,330          
                 

Property and equipment

          $ 3,512  
                 

Accrued expenses

          $ 986  

Other long-term liabilities

            977  

Total finance lease liabilities

          $ 1,963  

 

 

 

Lease Costs

   

Three Months Ended

 
   

March 31, 2019

 

Lease cost

 

(In thousands)

 

Finance lease cost:

       

Amortization of right-of-use assets

  $ 146  

Interest on lease liabilities

    8  

Operating lease cost

    5,671  

Short-term lease cost

    738  

Variable lease cost

    145  

Total lease cost

  $ 6,708  
         

Other supplemental information

       
         

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from finance leases

    8  

Operating cash flows from operating leases

    5,110  

Financing cash flows from finance leases

    246  

Right-of-use assets obtained in exchange for new finance lease liabilities

    0  

Right-of-use assets obtained in exchange for new operating lease liabilities

    2,467  

Weighted-average remaining lease term – finance leases (in years)

    2.04  

Weighted-average remaining lease term – operating leases (in years)

    10.94  

Weighted-average discount rate – finance leases

    1.50 %

Weighted-average discount rate – operating leases

    5.79 %

 

Maturity Analysis

 

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

 

FISCAL YEAR

 

OPERATING LEASES

   

FINANCE LEASES

 
   

(In thousands)

 

2019 (excluding first quarter of 2019)

  $ 16,482     $ 756  

2020

    20,239       942  

2021

    15,854       294  

2022

    12,748       0  

2023

    10,833       0  

Thereafter

    82,454       0  

Total future minimum lease payments (undiscounted)

    158,610       1,992  

Less: Present value discount

    (45,280 )     (29 )

Total lease liability

  $ 113,330     $ 1,963  

 

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  

 

 

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 carryforward 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 periods ended March 31, 2019 and April 1, 2018, respectively:

 

   

Three Months Ended

 

Defined Benefit Retirement Plans (Europe)

 

March 31, 2019

   

April 1, 2018

 
   

(In thousands)

 

Service cost

  $ 185     $ 187  

Interest cost

    1,281       1,353  

Expected return on assets

    (1,445 )     (1,602 )

Amortization of prior service cost

    16       7  

Amortization of net actuarial (gains)/losses

    253       288  

Net periodic benefit cost

  $ 290     $ 233  

 

   

Three Months Ended

 

Salary Continuation Plan (SCP)

 

March 31, 2019

   

April 1, 2018

 
   

(In thousands)

 

Service cost

  $ 0     $ 0  

Interest cost

    288       270  

Amortization of prior service cost

    0       0  

Amortization of net actuarial (gains)/losses

    94       116  

Net periodic benefit cost

  $ 382     $ 386  

 

   

Three Months Ended

 

Nora Defined Benefit Plan

 

March 31, 2019

 
   

(In thousands)

 

Service cost

  $ 217  

Interest cost

    174  

Net periodic benefit cost

  $ 391  

 

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

 

 

NOTE 10 – ACQUISITION OF NORA

 

   On August 7, 2018, the Company completed the acquisition of nora Holdings GmbH (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. As of March 31, 2019, the estimated fair values of the assets acquired and liabilities assumed are not final. The provisional amount for assumed tax liabilities is subject to revision.

 

       The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The amounts represent a provisional measurement of the fair values, and are therefore subject to change:

 

   

As of August 7th, 2018

 
   

(In thousands)

 
         

Assets acquired (excluding goodwill)

  $ 359,335  

Liabilities assumed

    (96,868 )

Net assets acquired

    262,467  

Purchase price

    447,192  

Goodwill, excess of purchase price

  $ 184,725  

     

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 six 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 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 Consolidated Statement of Operations  
    Three months ended  
    April 1, 2018  
    (In thousands)  
Revenue   $ 297,098  
Net income       14,272  

 

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:

 

   

AMERICAS

   

 

EUROPE

   

ASIA-

PACIFIC

   

TOTAL

 
   

(in thousands)

 

Three Months Ended March 31, 2019:

                               
                                 

Net Sales

  $ 160,626     $ 93,050     $ 44,012     $ 297,688  

Depreciation and amortization

    3,251       4,680       2,132       10,063  

Total assets

    507,577       544,598       197,330       1,249,505  
                                 

Three Months Ended April 1, 2018:

                               
                                 

Net Sales

  $ 135,225     $ 66,556     $ 38,782     $ 240,563  

Depreciation and amortization

    3,611       2,254       2,208       8,073  

 

 

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

 

   

Three Months Ended

 

DEPRECIATION AND AMORTIZATION

 

March 31, 2019

   

April 1, 2018

 
   

(In thousands)

 

Total segment depreciation and amortization

  $ 10,063     $ 8,073  

Corporate depreciation and amortization

    1,281       658  

Reported depreciation and amortization

  $ 11,344     $ 8,731  

 

ASSETS

 

March 31, 2019

 
   

(In thousands)

 

Total segment assets

  $ 1,249,505  

Corporate assets and eliminations

    155,562  

Reported total assets

  $ 1,405,067  

 

 

NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash payments for interest amounted to $1.1 million and $1.9 million for the quarters ended March 31, 2019 and April 1, 2018, respectively. Income tax payments amounted to $11.3 million and $9.8 million for the three month periods ended March 31, 2019 and April 1, 2018, respectively.

 

 

NOTE 13 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard regarding leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  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 January 2017, the FASB issued a new accounting standard that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. The new guidance is effective for any annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance will have a material effect on its consolidated financial statements.

 

In February 2018, the FASB issued a new accounting standard to address a narrow-scope financial reporting issue that arose as a consequence of the U.S. Tax Cuts and Jobs Act. Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The new guidance allows for a reclassification of these amounts to retained earnings, thereby eliminating these stranded tax effects. The new guidance is effective for interim and annual periods beginning after December 15, 2018. The adoption of this guidance 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 a new accounting standard to address non-employee share-based payments. This standard will require that the accounting treatment for non-employee share-based payments for goods or services be consistent with current GAAP for employee share-based payments, including measurement of awards at grant-date fair value and the application of probability to evaluate performance conditions. This standard will also eliminate the current GAAP requirement to reassess the classification of non-employee share-based payments awards upon vesting. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued a new accounting standard that modifies disclosure requirements related to fair value measurements. 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 a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. This standard 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 14 – INCOME TAXES

 

The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records discrete tax items in the period in which they occur. In the first quarter of 2019, the Company’s effective tax rate was 17.7%, as compared to 26.0% in the first quarter of 2018.  For the first quarter of 2019, the effective tax rate decreased due to the favorable impact of discrete items recognized during the period related to company-owned life insurance and 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 three months of 2019, the Company decreased its liability for unrecognized tax benefits by $0.2 million. As of March 31, 2019, the Company had accrued approximately $27.9 million for unrecognized tax benefits.  In accordance with applicable accounting standards, the Company’s deferred tax asset as of March 31, 2019 reflects a reduction for $2.8 million of these unrecognized tax benefits.

 

 

NOTE 15 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME

 

During the first quarter of 2019, the Company did not reclassify any significant amounts out of accumulated other comprehensive income. The reclassifications that occurred in that period were primarily comprised of $0.4 million related to the Company’s defined benefit retirement plan and salary continuation plan. These reclassifications were included in the other expenses line item of the Company’s consolidated condensed statement of operations.

 

 

NOTE 16 – 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 in the first half of 2019, and is expected to yield gross annual savings of approximately $12 million beginning 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 2018 restructuring activities is presented below:

 

   

Total

Restructuring

Charge

   

 

Costs Incurred

in 2018

   

 

Costs Incurred

in 2019

   

 

Balance at

March 31, 2019

 
   

(in thousands)

 

Workforce Reduction

  $ 10,816     $ 53     $ 1,813     $ 8,950  

Asset Impairment

    8,569       8,569       0       0  

Other Exit Costs

    1,144       0       18       1,126  

 

 

 

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 Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter ended, or as of, March 31, 2019, and the comparable period 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 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 Item 1A of Part II of this Quarterly Report, 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 Holdings GmbH (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). Nora is an industry leader in the rubber flooring market, and this acquisition is expected to advance the Company’s growth strategy in expanding market segments, particularly in the healthcare, life sciences and education market segments.

 

General

 

During the quarter ended March 31, 2019, net sales were $297.7 million compared with net sales of $240.6 million in the first quarter last year.  The 2019 period was positively impacted by growth in LVT plus the inclusion of revenue from the nora acquisition, which generated net sales of $60.1 million for the 2019 first quarter. Fluctuations in currency exchange rates had a negative impact of approximately $8.0 million on sales for the 2019 first quarter compared with the prior year period.  This impact was primarily a result of the weakening of the Euro, British pound sterling, and Australian dollar against the U.S. dollar. 

 

 

During the first quarter of 2019, net income was $7.1 million, or $0.12 per diluted share, compared with $15.1 million, or $0.25 per diluted share, in the first quarter last year. The first quarter of 2019 included the results of the acquired nora business and non-recurring expenses to bring 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. First quarter 2019 results also included amortization of acquired intangible assets of $1.9 million.

 

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 periods ended March 31, 2019 and April 1, 2018, respectively:

 

   

Three Months Ended

 
   

March 31, 2019

   

April 1, 2018

 

Net sales

    100.0 %     100.0 %

Cost of sales

    61.2       61.1  

Gross profit on sales

    38.8       38.9  

Selling, general and administrative expenses

    33.3       29.3  

Restructuring and asset impairment charge

    0.0       0.0  

Operating income

    5.5       9.6  

Interest/Other expense

    2.6       1.1  

Income before tax expense

    2.9       8.5  

Income tax expense

    0.5       2.2  

Net income

    2.4       6.3  

 

Net Sales

 

Below is information regarding net sales, and analysis of those results, for the three-month periods ended March 31, 2019, and April 1, 2018, respectively.

 

   

Three Months Ended

   

Percentage

 
   

March 31, 2019

   

April 1, 2018

   

Change

 
   

(In thousands)

         

Net Sales

  $ 297,688     $ 240,563       23.7 %

 

For the quarter ended March 31, 2019, net sales increased $57.1 million (23.7%) versus the comparable period in 2018.  Currency fluctuations had an approximately $8.0 million (3.4%) negative impact on first quarter 2019 sales compared to the first 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 19%, Europe increasing 40% (52% in local currency) and Asia-Pacific increasing 14%. Sales increases in the Americas was due primarily to the impact of the nora acquisition, and growth in LVT and modular carpet. The modular carpet and LVT sales increase in the Americas was most pronounced in the corporate office segment, although healthcare, retail and education also showed growth for the period. Sales of our rubber flooring products from the acquired nora business was primarily 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.  In Europe, the growth in local currency of 52% was primarily due to sales from our rubber flooring products and growth in LVT. 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 impacted by the weakening of the Australian dollar. On a segment basis, the sales increase in the Asia-Pacific region was primarily in the corporate office segment.

 

 

Cost and Expenses

 

The following table presents our overall cost of sales and selling, general and administrative expenses for the three-month periods ended March 31, 2019, and April 1, 2018, respectively:

 

   

Three Months Ended

   

Percentage

 

Cost and Expenses

 

March 31, 2019

   

April 1, 2018

   

Change

 
   

(In thousands)

         

Cost of sales

  $ 182,290     $ 146,981       24.0 %

Selling, general and administrative expenses

    99,011       70,594       40.3 %

Total

  $ 281,301     $ 217,575       29.3 %

 

For the quarter ended March 31, 2019, cost of sales increased $35.3 million (24.0%) compared to the first quarter of 2018.  Included in the 2019 period were cost of sales of $39.5 million for the acquired nora business, which included amortization related to acquired intangible assets of $1.9 million. Currency fluctuations had an approximately $5.0 million (3.4%) positive impact on the comparison.  Apart from the nora acquisition impacts, the increase in cost of sales was largely attributable to the increase in sales for the first quarter of 2019, as described above.  As a percentage of sales, our cost of sales increased to 61.2% for the first quarter of 2019 versus 61.1% for the first quarter of 2018, primarily due to the impact of the acquired nora business.

 

For the quarter ended March 31, 2019, selling, general and administrative (“SG&A”) expenses increased $28.4 million (40.3%) versus the comparable period in 2018.  Included in the 2019 period are SG&A expenses of $21.6 million for the acquired nora business. Fluctuations in currency rates had a $1.9 million (2.7%) positive impact on the comparison.  The increase in SG&A expense was also due to higher selling expenses related to bringing the Company’s global sales organization together for a meeting to accelerate the nora integration, advancing our selling system transformation, and engaging the sales force in the Company’s sustainability mission. As a percentage of sales, SG&A expenses increased to 33.3% for the first quarter of 2019 versus 29.3% for the first quarter of 2018. 

 

Interest Expense

 

For the three-month period ended March 31, 2019, interest expense increased by $4.7 million to $6.8 million, versus $2.1 million for the three-month period ended April 1, 2018. This increase was a result of (1) additional debt incurred to complete the nora acquisition, and (2) higher average interest rates on our borrowings in the first quarter of 2019 as compared to the first quarter of 2018.

 

Liquidity and Capital Resources

 

General

 

At March 31, 2019, we had $67.0 million in cash. At that date, we had $606.0 million in term loan borrowing, $43.6 million of revolving loan borrowings and $2.5 million in letters of credit outstanding under the Syndicated Credit Facility. As of March 31, 2019, we could have incurred $253.9 million of additional borrowings under the Syndicated Credit Facility. In addition, we could have incurred an additional $9.5 million of borrowings under other credit facilities in place at other non-U.S. subsidiaries.

 

Analysis of Cash Flows

 

We exited the quarter ended March 31, 2019 with $67.0 million in cash, a decrease of $14.0 million during the first three months of the year. The most significant factors in the decrease were cash outflows for investing activities as we used $20.0 million for capital expenditures during the first three months of 2019. Cash used for financing activities included (1) $8.9 million of cash used for the required amortization payment under our amended Syndicated Credit Facility, and (2) dividends paid on our common stock of $3.9 million. These financing outflows were offset by borrowings of $33.0 million under our Syndicated Credit Facility. Cash flows from operations in the first three months of 2019 required a use of $11.7 million, with net income of $7.1 million offset by working capital uses of cash of (1) $28.9 million for increases in inventories, (2) increases in prepaid expense and other current assts of $5.7 million, and (3) a decrease in accounts payable and accrued expense of $7.9 million. These working capital uses of cash were partially offset by a decrease in account receivable of $13.7 million.

 

 

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 Item 7A of that Form 10-K. The discussion here focuses on the quarter ended March 31, 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.

 

At March 31, 2019, we recognized a $5.2 million decrease in our foreign currency translation adjustment account compared to December 30, 2018, primarily because of the weakening of the Euro, Australian dollar and British pound against the U.S. dollar as of the end of the first quarter of 2019 compared to the end of 2018.

 

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 Item 7A of our Annual Report on Form 10-K for the year ended December 30, 2018.

 

As of March 31, 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 $9.9 million or an increase in the fair value of our financial instruments of $12.1 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 March 31, 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 asset and liability values of $0.3 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.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company received a letter in November 2017 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. In the fourth quarter of 2018, the Company conducted at the SEC’s request an internal investigation into these and other related issues for seven quarters in 2015, 2016 and 2017.

 

On April 23, 2019, Gregory J. Bauer, the Company’s Vice President and Chief Accounting Officer, went on paid administrative leave from the Company after it was learned that in 2018 in the process of collecting materials from 2015, 2016 and 2017 for production to the SEC, he added certain notes to those materials that were then produced to the SEC. The Company believes at this time, however, that the after-the-fact inclusion of these notes had no impact on the EPS calculations that are the subject of the above-described investigation or on subsequent EPS calculations.

 

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 Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 30, 2018, as well as the following new risk factor, which updates the risk factors set forth in our annual report:

 

The SEC’s investigation into our earnings per share (“EPS”) calculations and rounding practices could result in potential sanctions or penalties, distraction to our management and result in litigation from third parties, each of which could adversely affect or cause variability in our results of operations and financial condition.

 

In November 2017, the SEC began an investigation into our EPS calculations and rounding practices. The investigation is ongoing and there can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action that could result in significant costs and expenses including potential sanctions or penalties as well as distraction to management. In addition, the Company may be subject to litigation from third parties related to the matters under review by the SEC. Accordingly, the ongoing SEC investigation and/or any related litigation give rise to risks and uncertainties that could adversely affect or cause variability in our results of operations and financial condition. Such risks and uncertainties include, but are not limited to, uncertainty as to the scope, timing and ultimate findings of the matters under review by the SEC (collectively, the “investigation”); adverse effects of the investigation, including the potential financial impact on the Company in the event of an adverse outcome and on the market price of the Company’s common stock; the costs and expenses of the investigation, including legal fees and possible monetary penalties in the event of an adverse outcome; the risk of potential litigation or regulatory action arising from these matters; the timing of the review by, and the conclusions of, the Company’s auditor regarding these matters; the potential identification of deficiencies in internal control over financial reporting or disclosure controls and procedures and the impact of the same; and potential reputational damage that the Company may suffer as a result of the matters under investigation.

 

 

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 first quarter ended March 31, 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

 
                                 

December 31, 2018

    0     $ 0       0       25,109,272  

January 1-31, 2019(2)

    48,639       15.51       0       25,109,272  

February 1-28, 2019

    0       0       0       25,109,272  

March 1-31, 2019

    0       0       0       25,109,272  

Total

    48,639     $ 15.51       0       25,109,272  

 

(1) The monthly periods identified above correspond to the Company’s fiscal first quarter of 2019, which commenced December 31, 2018 and ended March 31, 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

 

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.

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.

 

 

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: May 10, 2019

By:

/s/  Bruce A. Hausmann                            

   

Bruce A. Hausmann

   

Vice President

   

(Principal Financial Officer)

 

 

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