Interface Inc 10-Q for FY2022 Q1
Interface Inc (TILE)
10-Q
2022-05-10
For: 2022-04-03
View Original
Added on
April 08, 2026
About this 10-Q
Interface Inc filed this 10-Q on May 10, 2022, covering the quarter ended April 3, 2022 (FY2022 Q1).
Headline figures
Quarter ended April 3, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $288M
- up 13.7% from $253.26M a year earlier
- Net income
- $13.29M
- up 91.6% from net income of $6.94M a year earlier
- Diluted EPS
- $0.22
- up 83.3% from $0.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-Q
For the Quarterly Period Ended April 3, 2022
Commission File Number 001-33994
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (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 | ||||||
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.
| þ | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
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 | |||||
TABLE OF CONTENTS
| Page | |||||||||||
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 | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred tax asset | |||||||||||
| Goodwill and intangibles, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity | |||||||||||
Preferred stock, par value $ | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss – foreign currency translation | ( | ( | |||||||||
| Accumulated other comprehensive loss – cash flow hedge | ( | ( | |||||||||
| Accumulated other comprehensive loss – pension liability | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to consolidated condensed financial statements.
3
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 | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit on sales | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Restructuring and asset impairment charges | ( | ||||||||||
| Operating income | |||||||||||
| Interest expense | |||||||||||
| Other expense, net | |||||||||||
| Income before income tax expense | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share – basic | $ | $ | |||||||||
| Earnings per share – diluted | $ | $ | |||||||||
| Common shares outstanding – basic | |||||||||||
| Common shares outstanding – diluted | |||||||||||
See accompanying notes to consolidated condensed financial statements.
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
| THREE MONTHS ENDED | |||||||||||
| APRIL 3, 2022 | APRIL 4, 2021 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive loss, after tax: | |||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||
| Reclassification from accumulated other comprehensive loss - discontinued cash flow hedge | |||||||||||
| Pension liability adjustment | |||||||||||
| Other comprehensive loss | ( | ( | |||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||
See accompanying notes to consolidated condensed financial statements.
5
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 | $ | $ | |||||||||
| Adjustments to reconcile net income to cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock compensation amortization expense | |||||||||||
| Deferred income taxes and other | |||||||||||
| Amortization of acquired intangible assets | |||||||||||
| Working capital changes: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Cash (used in) provided by operating activities | ( | ||||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Cash used in investing activities | ( | ( | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Borrowing of long-term debt | |||||||||||
| Tax withholding payments for share-based compensation | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Finance lease payments | ( | ( | |||||||||
| Cash provided by (used in) financing activities | ( | ||||||||||
| Net cash (used in) provided by operating, investing and financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS: | |||||||||||
| Net (decrease) increase | ( | ||||||||||
| Balance, beginning of period | |||||||||||
| Balance, end of period | $ | $ | |||||||||
See accompanying notes to consolidated condensed financial statements.
6
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.
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.
7
NOTE 2 – REVENUE RECOGNITION
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 99 1
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 | |||||||||||
| Europe | |||||||||||
| Asia-Pacific | |||||||||||
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.
8
NOTE 3 – INVENTORIES
Inventories are summarized as follows:
| April 3, 2022 | January 2, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Inventories, net | $ | $ | |||||||||
9
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 | $ | $ | |||||||||
| Less: distributed and undistributed earnings available to participating securities | ( | ( | |||||||||
| Distributed and undistributed earnings available to common shareholders | $ | $ | |||||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding | |||||||||||
| Participating securities | |||||||||||
| Shares for basic EPS | |||||||||||
| Dilutive effect of stock options | |||||||||||
| Shares for diluted EPS | |||||||||||
| Basic EPS | $ | $ | |||||||||
| Diluted EPS | $ | $ | |||||||||
10
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 | $ | % | $ | % | |||||||||||||||||||
| Term loan borrowings | % | % | |||||||||||||||||||||
| Total borrowings under Syndicated Credit Facility | % | % | |||||||||||||||||||||
| 5.50% Senior Notes due 2028 | % | % | |||||||||||||||||||||
| Total debt | |||||||||||||||||||||||
| Less: Unamortized debt issuance costs | ( | ( | |||||||||||||||||||||
| Total debt, net | |||||||||||||||||||||||
| Less: Current portion of long-term debt | ( | ( | |||||||||||||||||||||
| Total long-term debt, net | $ | $ | |||||||||||||||||||||
(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
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.
11
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
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.
12
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
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 | $ | |||||||||
13
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 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Restricted stock issuances | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Unamortized compensation expense related to restricted stock awards | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||
Cash dividends declared, $ | — | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||
| Compensation expense related to stock awards, net of shares received for tax withholdings | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Pension liability adjustment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance, at April 3, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| SHARES | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | RETAINED EARNINGS | PENSION LIABILITY | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | CASH FLOW HEDGE | |||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Balance, at January 3, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Restricted stock issuances | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Unamortized compensation expense related to restricted stock awards | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||
Cash dividends declared, $ | — | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||
| Compensation expense related to stock awards, net of forfeitures and shares received for tax withholdings | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Pension liability adjustment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance, at April 4, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
14
Restricted Stock Awards
During the three months ended April 3, 2022 and April 4, 2021, the Company granted restricted stock awards for 302,600 and 375,600 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a 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 $1.2 million and $0.7 million for the three months ended April 3, 2022, and April 4, 2021, respectively. The Company has reduced its expense for any restricted stock forfeited during the period.
The following table summarizes restricted stock outstanding as of April 3, 2022, as well as activity during the three months then ended:
| Restricted Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding at January 2, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited or canceled | |||||||||||
| Outstanding at April 3, 2022 | $ | ||||||||||
As of April 3, 2022, the unrecognized total compensation cost related to unvested restricted stock was $7.9 million. That cost is expected to be recognized by the end of 2025.
Performance Share Awards
During the three months ended April 3, 2022 and April 4, 2021, 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 to three years , subject to (among other things) 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 Company evaluates the probability of achieving the performance-based goals as of the end of each reporting period and adjusts compensation expense based on this assessment.
The following table summarizes the performance shares outstanding as of April 3, 2022, as well as the activity during the three months then ended:
| Performance Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding at January 2, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | |||||||||||
| Forfeited or canceled | ( | ||||||||||
| Outstanding at April 3, 2022 | $ | ||||||||||
Compensation expense related to the performance shares was $1.0 million and $0.2 million for the three months ended April 3, 2022 and April 4, 2021, respectively. The Company has reduced its expense for performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $8.6 million as of April 3, 2022. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2025.
The tax benefit recognized with regard to restricted stock and performance shares was approximately $0.3 million for the three months ended April 3, 2022.
15
NOTE 8 – LEASES
General
The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s 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 accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option.
The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region.
As of April 3, 2022, there were no significant leases that had not commenced.
The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to the Company’s leases as of April 3, 2022 and January 2, 2022:
| April 3, 2022 | January 2, 2022 | ||||||||||||||||||||||
| Balance Sheet Location | Operating Leases | Finance Leases | Operating Leases | Finance Leases | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||||||||||||||
| Current portion of operating lease liabilities | $ | $ | |||||||||||||||||||||
| Operating lease liabilities | |||||||||||||||||||||||
| Total operating lease liabilities | $ | $ | |||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Total finance lease liabilities | $ | $ | |||||||||||||||||||||
Lease Costs
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | $ | |||||||||
| Interest on lease liabilities | |||||||||||
| Operating lease cost | |||||||||||
| Short-term lease cost | |||||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
16
Other Supplemental Information
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from finance leases | $ | $ | |||||||||
| Operating cash flows from operating leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | |||||||||||
Lease Term and Discount Rate
The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of April 3, 2022 and January 2, 2022:
| April 3, 2022 | January 2, 2022 | ||||||||||
| Weighted-average remaining lease term – finance leases (in years) | |||||||||||
| Weighted-average remaining lease term – operating leases (in years) | |||||||||||
| Weighted-average discount rate – finance leases | % | % | |||||||||
| Weighted-average discount rate – operating leases | % | % | |||||||||
Maturity Analysis
A maturity analysis of lease payments under non-cancellable leases is presented as follows:
| Fiscal Year | Operating Leases | Finance Leases | |||||||||
| (in thousands) | |||||||||||
2022 (excluding the three months ended April 3, 2022) | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total future minimum lease payments (undiscounted) | |||||||||||
| Less: Present value discount | ( | ( | |||||||||
| Total lease liability | $ | $ | |||||||||
17
NOTE 9 – EMPLOYEE BENEFIT PLANS
During both three-month periods ended April 3, 2022 and April 4, 2021, the Company recorded multi-employer pension expense related to multi-employer contributions of $0.7
The following tables provide the components of net periodic benefit cost for the three months ended April 3, 2022 and April 4, 2021:
| Three Months Ended | |||||||||||
Defined Benefit Retirement Plans (Europe) | April 3, 2022 | April 4, 2021 | |||||||||
| (in thousands) | |||||||||||
| Interest cost | $ | $ | |||||||||
| Expected return on plan assets | ( | ( | |||||||||
| Amortization of prior service cost | |||||||||||
| Amortization of net actuarial losses | |||||||||||
| Net periodic benefit cost | $ | $ | |||||||||
| Three Months Ended | |||||||||||
| Salary Continuation Plan | April 3, 2022 | April 4, 2021 | |||||||||
| (in thousands) | |||||||||||
| Interest cost | $ | $ | |||||||||
| Amortization of net actuarial losses | |||||||||||
| Net periodic benefit cost | $ | $ | |||||||||
| Three Months Ended | |||||||||||
nora Defined Benefit Plan | April 3, 2022 | April 4, 2021 | |||||||||
| (in thousands) | |||||||||||
| Service cost | $ | $ | |||||||||
| Interest cost | |||||||||||
| Amortization of net actuarial losses | |||||||||||
| Net periodic benefit cost | $ | $ | |||||||||
In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense, net, in the consolidated condensed statements of operations.
18
NOTE 10 – GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amounts of goodwill attributable to each reportable segment for the three months ended April 3, 2022 are as follows:
| AMS | EAAA | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance, at January 2, 2022 | $ | $ | $ | ||||||||||||||
| Foreign currency translation | ( | ( | ( | ||||||||||||||
| Balance, at April 3, 2022 | $ | $ | $ | ||||||||||||||
19
NOTE 11 – SEGMENT INFORMATION
The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. The Company determined that it has two operating segments organized by geographical area – namely (a) Americas (“AMS”) and (b) Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment includes the United States, Canada and Latin America geographic areas.
Pursuant to the management approach discussed above, the Company’s CODM, our chief executive officer, evaluates performance at the AMS and EAAA operating segment levels and makes operating and resource allocation decisions based on segment adjusted operating income (“AOI”), which includes allocations of corporate selling, general and administrative expenses. AOI excludes nora purchase accounting amortization, Thailand plant closure inventory write-down, and restructuring charges, asset impairment, severance and other charges. Intersegment revenues for the three months ended April 3, 2022 and April 4, 2021 were $17.3 million and $15.7 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM.
The Company has determined that it has two reportable segments – AMS and EAAA, as each operating segment meets the quantitative thresholds defined in the accounting guidance.
Segment information for the three months ended April 3, 2022 and April 4, 2021 is presented in the following table:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net sales | |||||||||||
| AMS | $ | $ | |||||||||
| EAAA | |||||||||||
| Total net sales | $ | $ | |||||||||
| Segment AOI | |||||||||||
| AMS | $ | $ | |||||||||
| EAAA | |||||||||||
| Depreciation and amortization | |||||||||||
| AMS | $ | $ | |||||||||
| EAAA | |||||||||||
| Total depreciation and amortization | $ | $ | |||||||||
20
A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows:
| April 3, 2022 | January 2, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| AMS | $ | $ | |||||||||
| EAAA | |||||||||||
| Total segment assets | |||||||||||
| Corporate assets | |||||||||||
| Eliminations | ( | ( | |||||||||
| Total reported assets | $ | $ | |||||||||
Reconciliations of operating income to income before income tax expense and segment AOI are presented as follows:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| AMS operating income | $ | $ | |||||||||
| EAAA operating income | |||||||||||
| Consolidated operating income | |||||||||||
| Interest expense | |||||||||||
| Other expense, net | |||||||||||
| Income before income tax expense | $ | $ | |||||||||
| Three Months Ended April 3, 2022 | Three Months Ended April 4, 2021 | ||||||||||||||||||||||
| AMS | EAAA | AMS | EAAA | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||
| Purchase accounting amortization | |||||||||||||||||||||||
| Thailand plant closure inventory write-down | |||||||||||||||||||||||
| Restructuring, asset impairment, severance and other charges | ( | ||||||||||||||||||||||
| AOI | $ | $ | $ | $ | |||||||||||||||||||
21
NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $1.3 million and $1.6 million for the three months ended April 3, 2022 and April 4, 2021, respectively. Income tax payments, net of refunds, amounted to $2.8 million and $3.2 million for the three months ended April 3, 2022 and April 4, 2021, respectively.
Non-Cash Financing Activities
On March 15, 2022, the Company declared cash dividends on its common stock of $0.6 million, which were paid during the second quarter of 2022 to shareholders of record as of April 1, 2022. At April 3, 2022, the dividends were recorded within accrued expenses in the consolidated condensed balance sheet.
See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases.
22
NOTE 13 – INCOME TAXES
The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items.
During the three months ended April 3, 2022, the Company recorded a total income tax provision of $7.1 million on pre-tax income of $20.4 million resulting in an effective tax rate of 34.8 %, as compared to a total income tax provision of $2.0 million on pre-tax income of $8.9 million resulting in an effective tax rate of 22.0 % during the three months ended April 4, 2021. The increase in the effective tax rate for the period ended April 3, 2022 as compared to the period ended April 4, 2021 was primarily due to a non-recurring favorable change to unrecognized tax benefits in the period ended April 4, 2021, unfavorable changes related to company-owned life insurance, an increase in non-deductible executive compensation, and non-deductible charges related to the closure of the Company’s manufacturing facility in Thailand in the first quarter of 2022.
In the first three months of 2022, the Company increased its liability for unrecognized tax benefits by $0.3 million. As of April 3, 2022, the Company had accrued approximately $8.5 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of April 3, 2022 reflects a reduction for $2.8 million of these unrecognized tax benefits.
23
NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three months ended April 3, 2022 and April 4, 2021 are reflected in the table below:
| Three Months Ended | |||||||||||||||||
| Statement of Operations Location | April 3, 2022 | April 4, 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Interest rate swap contracts loss | Interest expense | $ | ( | $ | ( | ||||||||||||
| Amortization of benefit plan net actuarial losses and prior service cost | Other expense, net | ( | ( | ||||||||||||||
| Total loss reclassified from AOCI | $ | ( | $ | ( | |||||||||||||
24
NOTE 15 – RESTRUCTURING AND OTHER CHARGES
Restructuring and asset impairment charges by reportable segment are presented as follows:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| AMS | $ | $ | |||||||||
| EAAA | ( | ||||||||||
| Total restructuring and asset impairment charges | $ | $ | ( | ||||||||
A summary of the restructuring reserve balance, recorded within accrued expenses in the consolidated condensed balance sheets, for the 2021 and 2019 restructuring plans is presented below:
| Workforce Reduction | Asset Impairment | ||||||||||||||||||||||
| 2021 Plan | 2019 Plan | 2021 Plan | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Balance, at January 2, 2022 | $ | $ | $ | — | $ | ||||||||||||||||||
| Charged to expenses | |||||||||||||||||||||||
| Deductions | ( | ( | — | ( | |||||||||||||||||||
| Charged to other accounts | — | — | ( | ( | |||||||||||||||||||
| Balance, at April 3, 2022 | $ | $ | $ | — | $ | ||||||||||||||||||
Below is a discussion of the restructuring plan activities under the 2021 and 2019 restructuring plans.
2021 Restructuring Plan
On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involves a reduction of approximately 188 employees and the closure of the Company’s manufacturing facility in Thailand at the end of the first quarter of 2022.
Expected charges and cumulative charges incurred to date under the 2021 restructuring plan are as follows:
| Workforce Reduction | Retention Bonuses(2) | Asset Impairment | Total | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
Estimated expected charges(1) | $ | $ | $ | $ | — | $ | |||||||||||||||||||||||
Cumulative charges incurred to date(1) | |||||||||||||||||||||||||||||
(1) Charges are attributable to the EAAA reportable segment.
(2) The retention bonuses will be recognized through the end of fiscal year 2022 as earned over the requisite service periods.
In addition, during the three months ended April 3, 2022, in conjunction with the closure of its Thailand Facility, the Company recorded a write-down of inventory of $1.1 million within cost of sales in the consolidated condensed statements of operations.
The restructuring plan is expected to result in cash expenditures of approximately $3 million to $4 million for payment of the employee severance, employee retention bonuses and other costs of the shutdown of the Thailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately $1.7 million. A portion of the annualized savings is expected to be realized on the consolidated condensed statement of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023.
2019 Restructuring Plan
25
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 January 2, 2022, under Part II, Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter ended April 3, 2022, or as of, April 3, 2022, and the comparable periods of 2021, 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. The three-month periods ended April 3, 2022 and April 4, 2021 both include 13 weeks.
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 the ongoing COVID-19 pandemic and the economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022, as supplemented in Part II, Item 1A of this report. 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.
26
Executive Overview
During the quarter ended April 3, 2022, we had consolidated net sales of $288.0 million, up 13.7% compared to $253.3 million in the first quarter last year, primarily due to the continued rebound in economic activity in certain countries following the impacts of COVID-19. Higher sales were primarily in the corporate office, education and healthcare market segments. Consolidated operating income was $27.4 million for the first quarter of 2022 compared to $16.9 million in the first quarter last year primarily due to higher sales in the current year period. Consolidated net income for the quarter ended April 3, 2022 was $13.3 million or $0.22 per share compared to $6.9 million or $0.12 per share in the first quarter last year.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to impact areas where we operate and sell our products and services. The COVID-19 pandemic has had material adverse effects on our business, results of operations, and financial condition. The duration of the pandemic will ultimately determine the extent to which our operations are impacted.
During the first quarter of 2022, the COVID-19 pandemic continued to impact our global supply chain and manufacturing operations, which resulted in raw material shortages, raw material cost increases, higher freight costs, higher labor costs and shipping delays. These global supply chain and manufacturing challenges increased our costs and adversely affected our gross profit margin–particularly in our EAAA segment. New government imposed COVID-19 lockdowns in parts of China during the first quarter of 2022 adversely impacted sales in China by approximately 14% compared with the first quarter last year.
27
Analysis of Results of Operations
Consolidated Results
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 April 3, 2022 and April 4, 2021:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 62.9 | 62.1 | |||||||||
| Gross profit on sales | 37.1 | 37.9 | |||||||||
| Selling, general and administrative expenses | 27.3 | 31.3 | |||||||||
| Restructuring and asset impairment charges | 0.3 | (0.1) | |||||||||
| Operating income | 9.5 | 6.7 | |||||||||
| Interest/Other expense, net | 2.4 | 3.1 | |||||||||
| Income before income tax expense | 7.1 | 3.6 | |||||||||
| Income tax expense | 2.5 | 0.8 | |||||||||
| Net income | 4.6 | % | 2.8 | % | |||||||
Consolidated Net Sales
Below is information regarding our consolidated net sales, and analysis of those results, for the three-month periods ended April 3, 2022, and April 4, 2021:
| Three Months Ended | Percentage Change | ||||||||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Consolidated net sales | $ | 288,002 | $ | 253,260 | 13.7 | % | |||||||||||
For the quarter ended April 3, 2022, consolidated net sales increased $34.7 million (13.7%) versus the comparable period in 2021, primarily due to higher sales volume and prices. Currency fluctuations had a negative impact on consolidated net sales of approximately $7.9 million (3.1%) for the first quarter of 2022, due primarily to the weakening of the Euro, Australian dollar and British Pound sterling against the U.S. dollar. On a market segment basis, the sales increase was primarily in the corporate office, education and healthcare market segments as a result of higher corporate reinvestment and government spending on school renovation projects.
Consolidated Cost and Expenses
The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three-month periods ended April 3, 2022, and April 4, 2021:
| Three Months Ended | Percentage Change | ||||||||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Cost of sales | $ | 181,203 | $ | 157,222 | 15.3 | % | |||||||||||
| Selling, general and administrative expenses | 78,492 | 79,302 | (1.0) | % | |||||||||||||
For the quarter ended April 3, 2022, consolidated cost of sales increased $24.0 million (15.3%) compared to the first quarter of 2021, primarily due to higher sales and continuing inflationary pressures on raw materials, freight and labor costs. Currency translation had a positive impact on consolidated cost of sales in the first quarter of 2022 and partially reduced our costs by approximately $5.2 million (3.3%) compared to the same period last year. As a percentage of net sales, our cost of sales increased to 62.9% for the first quarter of 2022 versus 62.1% for the first quarter of 2021.
28
For the quarter ended April 3, 2022, consolidated selling, general and administrative (“SG&A”) expenses decreased $0.8 million (1.0%) versus the comparable period in 2021. Currency translation had a positive impact on consolidated SG&A expenses in the first quarter of 2022 and partially reduced our costs by approximately $1.9 million (2.7%) compared to the same period last year. SG&A expenses were also lower for the first quarter of 2022 due to lower severance costs and lower labor costs of approximately $2.6 million driven by employee headcount reduction initiatives in response to the impacts of COVID-19. These lower costs were partially offset by higher selling expenses of approximately $1.8 million during the first quarter of 2022 due to higher sales. As a percentage of sales, SG&A expenses decreased to 27.3% for the first quarter of 2022 versus 31.3% for the first quarter of 2021.
Restructuring Activities
On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, involving the closure of the Company’s manufacturing facility in Thailand at the end of the first quarter of 2022. In the first quarter of 2022, we recognized restructuring charges of approximately $0.9 million under this plan primarily related to the impairment of property, plant and equipment at the Thailand facility.
In addition, in conjunction with the closure of its Thailand Facility, the Company recorded a write-down of inventory of $1.1 million in the first quarter of 2022 within cost of sales in the consolidated condensed statements of operations.
See Note 15 entitled “Restructuring and Other Charges” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Interest Expense
During the quarter ended April 3, 2022, interest expense was $6.9 million, a decrease of $0.4 million from the comparable period in 2021, primarily due to lower outstanding term loan borrowings under the Facility.
29
Segment Operating Results
AMS Segment - Net Sales and Adjusted Operating Income (“AOI”)
The following table presents AMS segment net sales and AOI for the three-month periods ended April 3, 2022, and April 4, 2021:
| Three Months Ended | Percentage Change | ||||||||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| AMS segment net sales | $ | 156,509 | $ | 126,967 | 23.3 | % | |||||||||||
AMS segment AOI(1) | 21,138 | 11,913 | 77.4 | % | |||||||||||||
(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to restructuring, asset impairment, severance and other costs. See Note 11 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
During the first quarter of 2022, net sales in AMS increased 23.3% versus the comparable period in 2021 primarily due to higher sales volume and prices in the corporate office, education and healthcare market segments.
AOI in AMS increased 77.4% during the first quarter of 2022 compared to the prior year period primarily due to higher sales. The increase in AOI was also due to higher pricing and favorable fixed cost absorption, partially offset by higher raw material costs, higher freight costs, and higher labor costs as a result of continuing inflationary pressures.
EAAA Segment - Net Sales and AOI
The following table presents EAAA segment net sales and AOI for the three-month periods ended April 3, 2022, and April 4, 2021:
| Three Months Ended | Percentage Change | ||||||||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| EAAA segment net sales | $ | 131,493 | $ | 126,293 | 4.1 | % | |||||||||||
EAAA segment AOI(1) | 9,504 | 8,011 | 18.6 | % | |||||||||||||
(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to purchase accounting amortization, Thailand plant closure inventory write-down, and restructuring, asset impairment, severance and other costs. See Note 11 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
During the first quarter of 2022, net sales in EAAA increased 4.1% versus the comparable period in 2021. Currency fluctuations had a negative impact on EAAA sales of approximately $7.9 million (6.3%) for the first quarter 2022 compared to the same period last year due to the weakening of the Euro, British Pound sterling, and Australian dollar against the U.S. dollar. During the first quarter of 2022, EAAA sales were adversely impacted by new government imposed COVID-19 lockdowns in parts of China. On a market segment basis, the EAAA sales increase was most significant in the corporate office and healthcare market segments, partially offset by decreases in the public buildings market segment.
AOI in EAAA increased 18.6% during the first quarter of 2022 versus the comparable period in 2021 primarily due to the impact of higher sales. Currency fluctuations had a negative impact on AOI of approximately $1.0 million (6.8%) for the first quarter of 2022 compared to the first quarter last year. EAAA SG&A expenses as a percentage of net sales in the first quarter of 2022 decreased approximately 3% compared to the first quarter of 2021, which contributed to the increase in AOI for the first quarter of 2022. AOI in the first quarter of 2022 was adversely impacted by higher raw material costs, higher freight costs, and higher labor costs as a result of continuing inflationary pressures.
30
Liquidity and Capital Resources
General
At April 3, 2022, the Company had $76.1 million in cash. At that date, the Company had $213.5 million in term loan borrowings, $15.0 million in revolving loan borrowings, and $1.6 million in letters of credit outstanding under our Facility, and we had $300.0 million of Senior Notes outstanding. As of April 3, 2022, we had additional borrowing capacity of $283.4 million under the Facility and $4.0 million of borrowing capacity under other credit facilities in place at other non-U.S. subsidiaries. We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months.
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. The Company’s foreign subsidiaries and certain non-material domestic subsidiaries are considered non-guarantors. Net sales for the non-guarantor subsidiaries were approximately $144 million and $136 million for the three-month periods ended April 3, 2022 and April 4, 2021, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $43 million and $45 million as of April 3, 2022 and January 2, 2022, respectively.
Analysis of Cash Flows
The following table presents a summary of cash flows for the three-month periods ended April 3, 2022 and April 4, 2021, respectively:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | (17,696) | $ | 24,855 | |||||||
| Investing activities | (4,781) | (5,214) | |||||||||
| Financing activities | 2,894 | (12,981) | |||||||||
| Effect of exchange rate changes on cash | (1,581) | (2,790) | |||||||||
| Net change in cash and cash equivalents | (21,164) | 3,870 | |||||||||
| Cash and cash equivalents at beginning of period | 97,252 | 103,053 | |||||||||
| Cash and cash equivalents at end of period | $ | 76,088 | $ | 106,923 | |||||||
Cash used in operating activities was $17.7 million for the three months ended April 3, 2022, which represents a decrease of $42.6 million compared with cash provided by operating activities in the prior year comparable period. The decrease was primarily due to a greater use of cash for working capital during the first three months of 2022. Specifically, higher inventories as a result of increased customer demand, raw material costs and input costs contributed to the greater use of cash for working capital compared to last year. Accrued bonus payments during the first quarter of 2022 also contributed to the increased use of cash. These uses of cash were partially offset by higher accounts receivable collections during the first quarter of 2022.
Cash used in investing activities was $4.8 million for the three months ended April 3, 2022, which represents a decrease of $0.4 million from the prior year comparable period. The decrease from the comparable period was primarily due to a decrease in capital expenditures due to reduced capital investment.
Cash provided by financing activities was $2.9 million for the three months ended April 3, 2022, which represents an increase of $15.9 million compared with cash used in financing activities in the prior year comparable period. The year-over-year increase was primarily due to higher revolving loan borrowings in 2022 to fund operating activities as described above.
Purchase Obligations
In March of 2022, we entered into a purchase obligations commitment to procure fiberglass raw materials through the end of 2026 for approximately $22.5 million. We expect that approximately $4.5 million will be purchased within the next 12 months.
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Forward-Looking Statement on Impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full fiscal year 2022 results and beyond are uncertain. We believe the most significant elements of uncertainty are (1) the intensity and duration of the impact on construction, renovation, and remodeling; (2) corporate, government, and consumer spending levels and sentiment; (3) the ability of our sales channels, supply chain, manufacturing, and distribution partners to continue operating through disruptions; and (4) the severity of global supply chain disruptions and their effects on inflation, labor shortages, raw material shortages, and other factors that disrupt our supply chain and manufacturing facilities. Any or all of these factors could negatively impact our financial position, results of operations, cash flows, and outlook. As the impact of the COVID-19 pandemic continues to affect companies with global operations, specifically as it relates to the global supply chain, we anticipate that, at a minimum, our business and results in the first half of 2022 will continue to be affected, and the timeline and pace of recovery is uncertain.
We anticipate revenue growth in the second quarter of fiscal year 2022 compared with the first quarter of 2022. We are also anticipating continued impacts to our global supply chain and manufacturing operations. These impacts are expected to include significant cost increases in our raw materials globally and continued labor shortages and cost increases. The impacts may also potentially include raw material shortages, higher freight costs, shipping delays, and other disruption. These impacts to our supply chain and manufacturing will increase our costs and adversely affect our gross margins, they may inhibit our ability to manufacture and ship product timely, and at times they may inhibit our ability to meet customer demands and expectations.
We also plan to continue evaluating our cost structure and global manufacturing footprint to identify and activate opportunities to decrease costs and optimize our global cost structure.
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company’s cash flows from operations can be affected by numerous factors including the uncertainty of COVID-19 and its impact on global operations, raw material availability and cost, and demand for our products.
Backlog
As of April 24, 2022, the consolidated backlog of orders was approximately $266.6 million. As disclosed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, backlog was approximately $215.6 million as of February 6, 2022. Disruptions in supply and distribution chains, global travel restrictions and government imposed lockdowns due to the impact of COVID-19 have resulted in delays of construction projects and flooring installations in many regions worldwide.
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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 January 2, 2022, under Part II, Item 7A of that Form 10-K. The discussion here focuses on the three months ended April 3, 2022, 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.
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 Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate (or alternative successor benchmark 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 (or alternative successor benchmark rate) would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 2, 2022.
As of April 3, 2022, based on a hypothetical immediate 100 basis point increase in interest rates, with all other variables held constant, the fair value of our fixed rate long-term debt would be impacted by a net decrease of $15.3 million. Conversely, a 100 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $14.0 million.
As of April 3, 2022, 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 $8.6 million or an increase in the fair value of our financial instruments of $10.5 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.
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ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Based on the evaluation, our President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to legal proceedings, whether arising in the ordinary course of business or otherwise. The disclosure under the headings “Lawsuit by Former CEO in Connection with Termination” and “Putative Class Action Lawsuit” set forth in Note 18 to the consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended January 2, 2022 is incorporated by reference herein.
In the lawsuit by the former CEO, Mr. Gould’s defamation claims (two counts) were dismissed with prejudice by stipulation of the parties. The Company filed a motion for summary judgment on Mr. Gould’s remaining claims, and on March 31, 2022, the Court entered an order granting the Company’s motion for summary judgment on all of those remaining claims. (The order is subject to a possible appeal by Mr. Gould to the U.S. Court of Appeals for the 11th Circuit.) The Company believes the lawsuit (and any appeal therefrom) is without merit and intends to defend vigorously against it.
In the putative class action lawsuit, the Court has appointed a lead plaintiff, which filed an Amended Complaint that, among other things, added the Company’s former chief financial officer as a defendant. As in the original complaint, the allegations in the Amended Complaint relate to the subject matter of the concluded SEC investigation described in Note 18 to the consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended January 2, 2022. The Company has filed a motion to dismiss the Amended Complaint in its entirety, and that motion is pending with the Court. The Company believes the putative class action is without merit and that the Company has good defenses to it. The Company intends to defend itself vigorously against the action.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended January 2, 2022, as well as the following new risk factor which updates the risk factors set forth in our Annual Report:
The conflict between Russia and Ukraine could adversely affect our business, results of operations and financial position.
Given the nature of our business and our global operations, political, economic, and other conditions in foreign countries and regions, including geopolitical risks arising from the conflict between Russia and Ukraine, may adversely affect our business, results of operations and financial position. While our business activities within the countries of Russia and Ukraine are not material, the broader consequences of this conflict and the extent of its effects on us as well as the global economy cannot be predicted. These consequences include or may include government sanctions, embargoes, regional instability, geopolitical shifts, potential retaliatory action by the Russian government against companies or other countries, and increased tensions between Russia and the United States or other countries in which we operate.
Russia is a key supplier of natural gas, oil, and other raw materials to European countries. We have substantial manufacturing operations in Europe (including Germany, the Netherlands, and the United Kingdom), and we have key suppliers in Europe, which rely upon natural gas, oil, and other raw materials to operate. Our sole rubber flooring plant is in Germany, and our primary European carpet tile plant is in the Netherlands. Any disruption in the supply of natural gas, oil, or other raw materials from Russia to Europe could adversely affect our ability to operate our business, our results of operations and our financial position, or adversely affect the ability of our key suppliers to meet our raw material requirements. Our customers’ businesses, results of operations and financial positions also could be adversely impacted by the conflict in Ukraine, which could reduce their spending on our products.
The conflict between Russia and Ukraine is ongoing and its duration is uncertain. We cannot predict the outcome of the conflict or its impact on the broader region, as the conflict and related government actions are evolving and are beyond our control. To the extent the conflict between Russia and Ukraine adversely affects our business, it may also have the effect of heightening other risks disclosed in our Annual Report, any of which could materially and adversely affect our business, results of operations and financial condition. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including inflation and corporate and consumer spending; disruptions to our global technology infrastructure, including through cyberattack, ransom attack, or cyber-intrusion; adverse changes in international trade policies and relations; our ability to maintain or increase our prices, including fuel surcharges in response to rising fuel costs; further disruptions in global supply chains; terrorist activities targeting business infrastructure; our exposure to foreign currency fluctuations; and constraints, volatility, or disruption in the capital markets.
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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 April 3, 2022:
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 | ||||||||||||||||||||||
| January 3 - January 30, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
January 31 - February 27, 2022 (2) | 29,258 | 13.61 | — | — | ||||||||||||||||||||||
| February 28 - April 3, 2022 | — | — | — | — | ||||||||||||||||||||||
| Total | 29,258 | $ | 13.61 | — | $ | — | ||||||||||||||||||||
(1) The monthly periods identified above correspond to the Company’s fiscal first quarter of 2022, which commenced January 3, 2022 and ended April 3, 2022.
(2) Comprised of shares acquired by the Company from employees to satisfy income tax withholding obligations in connection with the vesting of previous equity awards.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
The following exhibits are filed or furnished with this report:
| Exhibit Number | Description of Exhibit | ||||
| 10.1 | |||||
| 10.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. | ||||
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. | ||||
| 104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended April 3, 2022, formatted in Inline XBRL | ||||
* Management contract or compensatory plan or agreement
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| INTERFACE, INC. | ||||||||
| Date: May 10, 2022 | By: | /s/ Bruce A. Hausmann | ||||||
| Bruce A. Hausmann Chief Financial Officer (Principal Financial Officer) | ||||||||
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Exhibit 31.1
CERTIFICATION
I, Laurel M. Hurd, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Interface, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: 5/10/2022 | |||||
| /s/ Laurel M. Hurd | |||||
| Laurel M. Hurd Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION
I, Bruce A. Hausmann, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Interface, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: 5/10/2022 | |||||
| /s/ Bruce A. Hausmann | |||||
| Bruce A. Hausmann | |||||
| Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
I, Laurel M. Hurd, Chief Executive Officer of Interface, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350 as adopted by § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)the Quarterly Report on Form 10-Q of the Company for the quarterly period ended April 3, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: 5/10/2022 | |||||
| /s/ Laurel M. Hurd | |||||
| Laurel M. Hurd | |||||
| Chief Executive Officer | |||||
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
I, Bruce A. Hausmann, Chief Financial Officer of Interface, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350 as adopted by § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)the Quarterly Report on Form 10-Q of the Company for the quarterly period ended April 3, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: 5/10/2022 | |||||
| /s/ Bruce A. Hausmann | |||||
| Bruce A. Hausmann | |||||
| Chief Financial Officer | |||||