tile-20220403

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 3, 2022

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33994

INTERFACE INC

(Exact name of registrant as specified in its charter)


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


1280 West Peachtree Street	Atlanta	Georgia	30309
(Address of principal executive offices)			(zip code)

Registrant’s telephone number, including area code: (770) 437-6800

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

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

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 þ

Number of shares outstanding of each of the registrant’s classes of common stock, as of May 5, 2022:


Class			Number of Shares
Common Stock, $0.10 par value per share			59,467,426

TABLE OF CONTENTS


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Condensed Balance Sheets – April 3, 2022 and January 2, 2022	3

		Consolidated Condensed Statements of Operations – Three Months Ended April 3, 2022 and April 4, 2021	4

		Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended April 3, 2022 and April 4, 2021	5

		Consolidated Condensed Statements of Cash Flows – Three Months Ended April 3, 2022 and April 4, 2021	6

		Notes to Consolidated Condensed Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

	Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	35

	Item 1A.	Risk Factors	35

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

	Item 3.	Defaults Upon Senior Securities	37

	Item 4.	Mine Safety Disclosures	37

	Item 5.	Other Information	37

	Item 6.	Exhibits	38

SIGNATURE			39

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except par values)


	APRIL 3, 2022		JANUARY 2, 2022
	(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents	$	76,088	$	97,252
Accounts receivable, net	144,994		171,676
Inventories, net	319,367		265,092
Prepaid expenses and other current assets	43,330		38,320
Total current assets	583,779		572,340
Property, plant and equipment, net	320,778		329,801
Operating lease right-of-use assets	85,323		90,561
Deferred tax asset	23,096		23,994
Goodwill and intangibles, net	212,437		223,204
Other assets	84,372		90,157

Total assets	$	1,309,785	$	1,330,057

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	86,975	$	85,924
Accrued expenses	130,047		146,298
Current portion of operating lease liabilities	13,906		14,588
Current portion of long-term debt	14,939		15,002
Total current liabilities	245,867		261,812
Long-term debt	506,803		503,056
Operating lease liabilities	73,454		77,905
Deferred income taxes	35,585		36,723
Other long-term liabilities	81,196		87,163

Total liabilities	942,905		966,659

Commitments and contingencies

Shareholders’ equity
Preferred stock, par value $1.00 per share; 5,000 shares authorized; none issued or outstanding at April 3, 2022 and January 2, 2022	—		—
Common stock, par value $0.10 per share; 120,000 shares authorized; 59,328 and 59,055 shares issued and outstanding at April 3, 2022 and January 2, 2022, respectively	5,933		5,905
Additional paid-in capital	254,867		253,110
Retained earnings	274,135		261,434
Accumulated other comprehensive loss – foreign currency translation	(113,625)		(100,441)
Accumulated other comprehensive loss – cash flow hedge	(2,081)		(2,722)
Accumulated other comprehensive loss – pension liability	(52,349)		(53,888)

Total shareholders’ equity	366,880		363,398

Total liabilities and shareholders’ equity	$	1,309,785	$	1,330,057

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)


	THREE MONTHS ENDED
	APRIL 3, 2022		APRIL 4, 2021
Net sales	$	288,002	$	253,260
Cost of sales	181,203		157,222
Gross profit on sales	106,799		96,038

Selling, general and administrative expenses	78,492		79,302
Restructuring and asset impairment charges	887		(130)
Operating income	27,420		16,866

Interest expense	6,850		7,256
Other expense, net	170		715

Income before income tax expense	20,400		8,895
Income tax expense	7,107		1,957

Net income	$	13,293	$	6,938

Earnings per share – basic	$	0.22	$	0.12
Earnings per share – diluted	$	0.22	$	0.12

Common shares outstanding – basic	59,248		58,730
Common shares outstanding – diluted	59,248		58,730

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)


	THREE MONTHS ENDED
	APRIL 3, 2022		APRIL 4, 2021
Net income	$	13,293	$	6,938
Other comprehensive loss, after tax:
Foreign currency translation adjustment	(13,184)		(19,597)
Reclassification from accumulated other comprehensive loss - discontinued cash flow hedge	641		749
Pension liability adjustment	1,539		89
Other comprehensive loss	(11,004)		(18,759)

Comprehensive income (loss)	$	2,289	$	(11,821)

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	THREE MONTHS ENDED
	APRIL 3, 2022		APRIL 4, 2021
OPERATING ACTIVITIES:
Net income	$	13,293	$	6,938
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization	10,670		11,934
Stock compensation amortization expense	2,182		924
Deferred income taxes and other	4,196		230
Amortization of acquired intangible assets	1,342		1,421
Working capital changes:
Accounts receivable	26,135		9,794
Inventories	(56,464)		(19,046)
Prepaid expenses and other current assets	(5,252)		(15,852)
Accounts payable and accrued expenses	(13,798)		28,512

Cash (used in) provided by operating activities	(17,696)		24,855

INVESTING ACTIVITIES:
Capital expenditures	(4,781)		(5,214)

Cash used in investing activities	(4,781)		(5,214)

FINANCING ACTIVITIES:
Repayments of long-term debt	(44,729)		(30,239)
Borrowing of long-term debt	48,500		18,000
Tax withholding payments for share-based compensation	(398)		(179)
Debt issuance costs	—		(36)
Finance lease payments	(479)		(527)

Cash provided by (used in) financing activities	2,894		(12,981)

Net cash (used in) provided by operating, investing and financing activities	(19,583)		6,660
Effect of exchange rate changes on cash	(1,581)		(2,790)

CASH AND CASH EQUIVALENTS:
Net (decrease) increase	(21,164)		3,870
Balance, beginning of period	97,252		103,053

Balance, end of period	$	76,088	$	106,923

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

References in this Quarterly Report on Form 10-Q to “Interface,” “the Company,” “we,” “our,” “ours” and “us” refer to Interface, Inc. and its subsidiaries or any of them, unless the context requires otherwise.

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 January 2, 2022, 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. All such adjustments are of a normal recurring nature unless otherwise disclosed. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 2, 2022, 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 (“GAAP”).

The three-month periods ended April 3, 2022 and April 4, 2021 both include 13 weeks.

Risks and Uncertainties

Global economic challenges, including the impact of the COVID-19 pandemic, the war in Ukraine, rising inflation and supply chain disruptions could cause economic uncertainty and volatility. The Company considered these impacts and subsequent general uncertainties and volatility in the global economy on the assumptions and estimates used herein. The Company determined that except for the continued impacts to our global supply chain, production volume, raw material shortages, raw material cost increases, higher freight costs, shipping delays and labor shortages, gross profit margins, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at April 3, 2022. The Company’s primary credit facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum secured net debt to EBITDA ratio, as defined by the credit facility agreement. The Company is currently in compliance with all covenants under the credit facility agreement and anticipates that it will remain in compliance with the covenants for the foreseeable future.

COVID-19 Impact

We continue to monitor our operations and have implemented various programs to mitigate the effects of COVID-19 on our business. Our global supply chain and manufacturing operations continue to experience increased impacts of COVID-19 including raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages. During the first quarter of 2022, new government imposed COVID-19 lockdowns in parts of China adversely impacted sales in that region.

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NOTE 2 – REVENUE RECOGNITION

Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 99% of total revenue for both three-month periods ended April 3, 2022 and April 4, 2021. The remaining 1% of revenue was generated from the installation of carpet and other flooring-related material for both three-month periods.

Disaggregation of Revenue

For the three months ended April 3, 2022 and April 4, 2021, revenue from the Company’s customers is broken down by geography as follows:


	Three Months Ended
Geography	April 3, 2022	April 4, 2021
Americas	54.4%	50.1%
Europe	32.6%	35.1%
Asia-Pacific	13.0%	14.8%

Revenue from the Company’s customers in the Americas corresponds to the AMS operating segment, and the EAAA operating segment includes revenue from the Europe and Asia-Pacific geographies. See Note 11 entitled “Segment Information” for additional information.

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NOTE 3 – INVENTORIES

Inventories are summarized as follows:


	April 3, 2022		January 2, 2022
	(in thousands)
Finished goods	$	227,257	$	182,896
Work-in-process	18,505		15,185
Raw materials	73,605		67,011
Inventories, net	$	319,367	$	265,092

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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 the 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 table shows the computation of basic and diluted EPS:


	Three Months Ended
	April 3, 2022		April 4, 2021
	(in thousands, except per share data)
Numerator:
Net income	$	13,293	$	6,938
Less: distributed and undistributed earnings available to participating securities	(190)		(89)
Distributed and undistributed earnings available to common shareholders	$	13,103	$	6,849

Denominator:
Weighted average shares outstanding	58,403		57,979
Participating securities	845		751
Shares for basic EPS	59,248		58,730
Dilutive effect of stock options	—		—
Shares for diluted EPS	59,248		58,730

Basic EPS	$	0.22	$	0.12
Diluted EPS	$	0.22	$	0.12

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NOTE 5 – LONG-TERM DEBT

Long-term debt consisted of the following:


	April 3, 2022				January 2, 2022
	Outstanding Principal		Interest Rate(1)		Outstanding Principal		Interest Rate(1)
	(in thousands)				(in thousands)
Syndicated Credit Facility:
Revolving loan borrowings	$	15,000	1.89	%	$	7,500	4.00	%
Term loan borrowings	213,498		1.88	%	217,631		1.84	%
Total borrowings under Syndicated Credit Facility	228,498		1.88	%	225,131		1.91	%

5.50% Senior Notes due 2028	300,000		5.50	%	300,000		5.50	%

Total debt	528,498				525,131
Less: Unamortized debt issuance costs	(6,756)				(7,073)

Total debt, net	521,742				518,058
Less: Current portion of long-term debt	(14,939)				(15,002)

Total long-term debt, net	$	506,803			$	503,056

(1) Represents the stated rate of interest, without the effect of debt issuance costs.

Syndicated Credit Facility

The Company’s Syndicated Credit Facility (the “Facility”) provides to the Company U.S. denominated and multicurrency term loans and provides to the Company and certain of its subsidiaries a multicurrency revolving credit facility. Interest on base rate loans is 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 Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.

As of both April 3, 2022 and January 2, 2022, the Company had $1.6 million in letters of credit outstanding under the Facility.

As of both April 3, 2022 and January 2, 2022, the carrying value of the Company’s borrowings under the Facility approximated its fair value as the Facility bears interest rates that are similar to existing market rates.

Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which 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.

5.50% Senior Notes due 2028

The 5.50% Senior Notes due 2028 (the “Senior Notes”) bear an interest rate at 5.50% per annum and mature on December 1, 2028. Interest is paid semi-annually on June 1 and December 1 of each year. The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility.

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As of April 3, 2022, the estimated fair value of the Senior Notes was $289.5 million, compared with a carrying value recorded in the Company’s consolidated condensed balance sheet of $300.0 million, excluding unamortized debt issuance costs. The fair value of the Senior Notes is derived using quoted prices for similar instruments and is considered Level 2 within the fair value hierarchy.

Other Lines of Credit

Subsidiaries of the Company had an aggregate of the equivalent of $4.0 million of other lines of credit available at interest rates ranging from 3.5% to 4.5% as of April 3, 2022, and $6.0 million of other lines of credit available at interest rates ranging from 3.5% to 6.0% as of January 2, 2022. As of April 3, 2022 and January 2, 2022, there were no borrowings outstanding under these lines of credit.

Borrowing Costs

Debt issuance costs associated with the Company’s Senior Notes and term loans under the Facility 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 April 3, 2022 and January 2, 2022, the unamortized debt issuance costs recorded as a reduction of long-term debt were $6.8 million and $7.1 million, respectively.

Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of revolving debt, net of accumulated amortization, were $1.5 million and $1.6 million as of April 3, 2022 and January 2, 2022, respectively. These amounts are included in other assets in the Company’s consolidated condensed balance sheets. The Company amortizes these costs over the life of the related debt.

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NOTE 6 – DERIVATIVE INSTRUMENTS

Interest Rate Risk Management

From time to time, the Company enters into interest rate swap transactions 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.

Cash Flow Interest Rate Swaps

In the fourth quarter of 2020, the Company terminated its designated interest rate swap transactions with a total notional value of $250 million. Hedge accounting was also discontinued at that time. Losses recorded in accumulated other comprehensive loss for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statements of operations to the extent it is probable that a portion of the original forecasted transactions related to the portion of the hedged debt repaid will not occur by the end of the originally specified time period. See Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss” for additional information.

As of April 3, 2022 and January 2, 2022, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $2.9 million and $3.8 million, respectively, and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination. We expect that approximately $2.3 million, before tax, related to the terminated interest rate swaps will be reclassified from accumulated other comprehensive loss as an increase to interest expense in the next 12 months.

Derivative Transactions Not Designated as Hedging Instruments

Our EAAA segment, from time to time, purchases foreign currency options to economically hedge inventory purchases denominated in foreign currencies other than their functional currency. The Company’s objective with respect to these foreign currency options is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to payment on inventory purchases. These options are classified as non-designated derivative instruments. Gains and losses on the changes in fair value of these foreign currency options are recognized in earnings each period. As of April 3, 2022 and January 2, 2022, the Company had no outstanding foreign currency options.

The following table summarizes gains on derivatives not designated as hedging instruments within the consolidated condensed statements of operations for the three months ended April 4, 2021:


		Three Months Ended
	Statement of Operations Location	April 4, 2021
		(in thousands)
Foreign currency options gain	Other expense, net	$	185

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NOTE 7 – SHAREHOLDERS’ EQUITY

The following tables depict the activity in the accounts which make up shareholders’ equity for the three months ended April 3, 2022 and April 4, 2021:


	SHARES	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		PENSION LIABILITY		FOREIGN CURRENCY TRANSLATION ADJUSTMENT		CASH FLOW HEDGE
	(in thousands)
Balance, at January 2, 2022	59,055	$	5,905	$	253,110	$	261,434	$	(53,888)	$	(100,441)	$	(2,722)
Net income	—	—		—		13,293		—		—		—
Restricted stock issuances	303	30		3,966		—		—		—		—
Unamortized compensation expense related to restricted stock awards	—	—		(3,996)		—		—

SEC Form 10-Q filed by Interface Inc.