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We continue to lead change through our actions. In June we
previewed the world’s first carbon-negative carpet tile prototype,
Proof Positive™. We are making the necessary investments to
move from prototype phase to full production within the next
two years. Recognizing that we need to change not just our
company or industry but the broader systems of commerce,
we supported new recycling legislation in the state of California,
breaking ties with the carpet industry to support a new policy.
Governor Brown signed it into law in October. We are optimistic
that this will accelerate a circular economy, through more
recycling in the state and nationally.
Looking Forward
Our company remains focused on value creation for our key
stakeholders. In 2018 we will strive to, once again, demonstrate
that value creation and ecological restoration can work together.
We enter 2018 as a stronger company operating in a healthier
global economy. Building and renovation activity remain robust.
Capital spending appears strong. Our product portfolio is fresh
with great offerings across price points. And, our innovation
pipeline is the strongest in our history.
We are investing in the capabilities to win in an increasingly
competitive market. We have the most global manufacturing
footprint in our industry. We believe we have the strongest
brand in the industry. We have a highly productive sales and
marketing team focused on the specified commercial market.
And, we have an engaged, customer-centric culture focused on
performance and galvanized around sustainability.
Thank you once again for your continued support, trust and
investment in Interface.
Yours very truly,
Jay D. Gould
Dear Fellow Shareowners,
Our company made significant progress in 2017 toward our
ambition to become the world’s most valuable interior products
and services company. While not the largest company in our
space, we do aspire to create superior value for our key
stakeholders: our customers, shareowners, employees and
the environment.
In 2017, we delivered strong profitability and earnings per share
growth based on solid execution against our key strategic
pillars.
First, we delivered 3.9% net sales growth which was at the top
end of our 3 to 4% range discussed on each of our quarterly
earnings calls. Our core carpet tile and newly-introduced luxury
vinyl tile (LVT) contributed equally to that growth. Exiting the
FLOR® specialty retail business negatively impacted growth
by 1.6%. Importantly, revenue and order growth improved
sequentially throughout the year.
Secondly, we delivered 38.7% gross margin which exceeded
our target of 38.0 to 38.5%. Savings from our investments in
our LaGrange, Georgia manufacturing assets exceeded our
expectations. LVT margins continue to be accretive. Exiting
the FLOR specialty retail business negatively impacted gross
margin by 70 basis points.
Thirdly, we held SG&A expenses to 27.0% of net sales, a 50
basis point improvement from last year. That said, our $269
million in SG&A exceeded our target of $260-$265 million,
driven by currency inflation with the Euro, increased performance-
based compensation and a $3 million investment into our
selling system.
Lastly, we returned $91 million back to shareowners via our
authorized share repurchase program. We also reduced total
debt by $40 million.
Sustainability Progress
Our company continues to be recognized as a global leader
in sustainability. We’ve made tremendous progress in the past
year to meet our Mission Zero® commitments and to build
momentum on our new sustainability mission, Climate Take
Back™. The data from our manufacturing sites are remarkable:
· 88% of the energy used is from renewable sources
· Greenhouse gas (GHG) emissions from energy use is down
96% since 1996
· Water use is down 88% since 1996
· Waste sent to landfill is down 91% since 1996
· 58% of the materials in the products we sell are from
recycled or bio-based sources
· The average carbon footprint of our carpet is down 66%
since 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
Commission File No.: 001-33994
Interface, Inc.
(Exact name of registrant as specified in its charter)
Georgia
(State of incorporation)
2859 Paces Ferry Road, Suite 2000
Atlanta, Georgia
(Address of principal executive offices)
58-1451243
(I.R.S. Employer Identification No.)
30339
(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
Common Stock, $0.10 Par Value Per Share
Series B Participating Cumulative Preferred Stock Purchase Rights
Name of Each Exchange on Which Registered:
Nasdaq Global Select Market
Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☑ NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted 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 and post such files). YES ☑ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☑
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 Securities Exchange Act of 1934. (Check one)
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2017: $1,215,708,813
(61,868,133 shares valued at the closing sale price of $19.65 on June 30, 2017). See Item 12.
Number of shares outstanding of each of the registrant’s classes of Common Stock, as of February 18, 2018:
Class
Common Stock, $0.10 par value per share
Number of Shares
59,337,559
Portions of the Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
1
PART I .................................................................................................................................................................................
ITEM 1. BUSINESS .........................................................................................................................................................
1
ITEM 1A. RISK FACTORS ............................................................................................................................................. 11
ITEM 1B. UNRESOLVED STAFF COMMENTS .......................................................................................................... 16
ITEM 2. PROPERTIES .................................................................................................................................................... 16
ITEM 3. LEGAL PROCEEDINGS .................................................................................................................................. 17
ITEM 4. MINE SAFETY DISCLOSURES ..................................................................................................................... 17
PART II ................................................................................................................................................................................ 17
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES ........................................................................................... 17
ITEM 6. SELECTED FINANCIAL DATA ..................................................................................................................... 20
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ......................................................................................................................................................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................ 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................................................... 34
CONSOLIDATED STATEMENTS OF OPERATIONS ................................................................................................. 34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ........................................................................ 35
CONSOLIDATED BALANCE SHEETS ........................................................................................................................ 36
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................................................................................ 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................................................................................... 38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .......................................................... 70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .......................................................... 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ......................................................................................................................................... 72
ITEM 9A. CONTROLS AND PROCEDURES ............................................................................................................... 72
ITEM 9B. OTHER INFORMATION ............................................................................................................................... 72
PART III .............................................................................................................................................................................. 72
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ......................................... 72
ITEM 11. EXECUTIVE COMPENSATION ................................................................................................................... 73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS .................................................................................................................... 73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ......................................................................................................................................................... 73
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................................................................. 73
PART IV .............................................................................................................................................................................. 73
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ....................................................................... 73
ITEM 16. FORM 10-K SUMMARY ............................................................................................................................... 76
SIGNATURES ................................................................................................................................................................. 79
EXHIBIT INDEX ............................................................................................................................................................. 80
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ITEM 1. BUSINESS
Introduction and General
PART I
References in this Annual Report on Form 10-K 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.
We are a worldwide leader in design, production and sales of modular carpet, also known as carpet tile. For the past
several years, modular carpet sales growth in the floorcovering industry has outpaced the growth of the overall industry, as
architects, designers and end users increasingly recognized the unique and superior attributes of modular carpet, including
its dynamic design capabilities, greater economic value (which includes lower costs as a result of reduced waste in both
installation and replacement), and installation ease and speed.
As a global company with a reputation for high quality, reliability and premium positioning, we market modular carpet
in over 110 countries under the established brand names Interface® and FLOR®. Our principal geographic markets are the
Americas, Europe and Asia-Pacific, where the percentages of our total net sales were approximately 59%, 25% and 16%,
respectively, for fiscal year 2017.
Capitalizing on our leadership in modular carpet for the corporate office market segment, we are executing a market
diversification strategy to increase our presence and market share for modular carpet in non-corporate office market segments,
such as government, education, healthcare, hospitality and retail space. Our diversification strategy also targets the
U.S. residential market segment for carpet. As a result of our efforts, our mix of corporate office versus non-corporate office
modular carpet sales in the Americas was 44% and 56%, respectively, for 2017. Company-wide, our mix of corporate office
versus non-corporate office sales was 59% and 41%, respectively, in 2017. We believe the appeal and utilization of modular
carpet is growing in non-corporate office market segments, and we are using our considerable skills and experience with
designing, producing and marketing modular products that make us the market leader in the corporate office segment to
support and facilitate our penetration into these segments around the world.
In 2017, we globally launched a line of luxury vinyl tile (“LVT”) products, which represents our first introduction into a
category of products that we call “modular resilient flooring”. Our LVT products accounted for more than half of our sales
growth in 2017 compared with the prior year.
Our Strengths
Our principal competitive strengths include:
Market Leader in Attractive Modular Carpet Segment. We are the world’s leading manufacturer of carpet tile. Modular
carpet has become more prevalent across all commercial interiors markets as designers, architects and end users have become
more familiar with its unique attributes. We continue to drive this trend with our product innovations and designs discussed
below. According to the annual Floor Focus interiors industry survey of the top 250 designers in the United States, carpet
tile was ranked as the number one “hot product” for each of the years 2002 through 2012, and was ranked number two for
each of the years 2013 through 2017. We believe that we are well positioned to lead and capitalize upon the continued shift
to modular carpet, both domestically and around the world.
Established Brands and Reputation for Quality, Reliability and Leadership. Our products are known in the industry for
their high quality, reliability and premium positioning in the marketplace, and our established brand names are leaders in the
industry. The 2017 Floor Focus survey ranked Interface second in “Best Overall Business Experience” among carpet
companies, and it ranked our Interface brand first or second in the survey categories of service, quality, design, performance
and value. In the North American residential market segment, our FLOR brand is known for its high style carpet design
squares that consumers assemble to create custom rugs, runners or wall-to-wall designs in the home. On the international
front, Interface is a well-recognized brand name in carpet tiles for commercial and institutional use. More generally, we
believe that as the appeal and utilization of modular carpet continues to expand into market segments such as government,
healthcare, education, hospitality, retail and residential space, our reputation as the pioneer of modular carpet — as well as
our established brands and leading market position for modular carpet in the corporate office segment — will enhance our
competitive advantage in marketing to the customers in these new markets.
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Innovative Product Design and Development Capabilities. Our product design and development capabilities have long
given us a significant competitive advantage, and we believe they continue to do so as modular carpet’s appeal and utilization
expand across virtually every market segment and around the globe. One of our recent design innovations is the introduction
of long and narrow rectangular carpet tiles in the shape of planks, and even more narrow versions known as Skinny Planks™.
The use of planks and Skinny Planks increases the design versatility of our carpet tile, as these products can create aesthetics
(such as a herringbone pattern) that are different from, or enhance, that of our traditional square carpet tiles.
The award-winning design firm David Oakey Designs has had a pivotal role in developing our plank and Skinny Plank
products, as well as many of our other innovative product designs, and our long-standing exclusive relationship with David
Oakey Designs remains vibrant and augments our internal research, development and design staff. As another example, David
Oakey Designs has developed products that are manufactured using state-of-the-art tufting technology which allows us to
pinpoint tufts of different colored yarns in virtually any arrangement within a carpet tile. These unique designs are best
exemplified by our Urban Retreat®, Net Effect®, Human Nature® and World Woven® collections, which are sold throughout
our international operations.
Historically, one of our best design innovations is our i2™ modular product line, which includes our popular Entropy®
product for which we received a patent in 2005 on the key elements of its design. The i2 line introduced and features
mergeable dye lots, and includes a number of carpet tile products that are designed to be installed randomly without reference
to the orientation of neighboring tiles. The i2 line offers cost-efficient installation and maintenance, interactive flexibility,
and recycled and recyclable materials. Another innovation is our TacTiles® carpet tile installation system, which uses small
squares of adhesive plastic film to connect intersecting carpet tiles, thus eliminating the need for traditional carpet adhesive
and resulting in a reduction in installation time and material waste.
Made-to-Order and Global Manufacturing Capabilities. We have a distinct competitive advantage in meeting two
principal requirements of the specified products markets we primarily target — that is, providing custom samples quickly
and on-time delivery of customized final products. We also can generate realistic digital samples that allow us to create a
virtually unlimited number of new design concepts and distribute them instantly for customer review, while at the same time
reducing sampling waste. About half of our modular carpet products worldwide are made-to-order. Our made-to-order
capabilities not only enhance our marketing and sales, they significantly improve our inventory turns. Our global
manufacturing capabilities in modular carpet production are an important component of this strength, and give us an
advantage in serving the needs of multinational corporate customers that require products and services at various locations
around the world. Our manufacturing locations across four continents enable us to compete effectively with local producers
in our international markets, while giving international customers more favorable delivery times and freight costs.
Recognized Global Leadership in Ecological Sustainability. Our long-standing goal and commitment to be ecologically
“sustainable” — that is, the point at which we are no longer a net “taker” from the earth and do no harm to the biosphere —
have emerged as a competitive strength for our business and remain a strategic initiative. It includes Mission Zero®, our
global branding initiative, which represents our mission to eliminate any negative impact our companies may have on the
environment by the year 2020. It also includes a bold new mission called Climate Take Back™, in which we seek to lead the
industry in designing and making products in ways that will maintain a climate fit for life. Our acknowledged leadership
position and expertise in this area resonate deeply with many of our customers and prospects around the globe, and provide
us with a differentiating advantage in competing for business among architects, designers and end users of our products, who
often make purchase decisions based on “green” factors. The 2017 Floor Focus survey named our Interface business the top
among “Green Leaders,” and gave us the top “Green Kudos” honors for our Net Effect collection of recycled content products.
Experienced and Motivated Management and Sales Force. An important component of our competitive position is the
quality of our management team and its commitment to developing and maintaining an engaged and accountable workforce.
Our team is highly skilled and dedicated to guiding our overall growth and expansion into our targeted market segments,
while maintaining our leadership in traditional markets and our high contribution margins. We utilize an internal marketing
and predominantly commissioned sales force of more than 650 experienced personnel, stationed at over 70 locations in over
30 countries, to market our products and services in person to our customers. Our incentive compensation and our sales and
marketing training programs are tailored to promote performance and facilitate leadership by our executives both in strategic
areas as well as the Company as a whole.
Our Business Strategy and Principal Initiatives
Our business strategy is to continue to use our leading position in modular carpet and our product design and global made-
to-order capabilities as a platform from which to drive acceptance of our modular carpet and new LVT products across several
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industry segments, while maintaining our leadership position for modular carpet in the corporate office market segment.
These efforts generally are described in the following strategic pillars:
•
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Grow our core carpet tile business;
Develop a substantial modular resilient flooring business;
Execute supply chain productivity;
Control selling, general and administrative ("SG&A") spending; and
Lead a world-changing sustainability movement centered around Mission Zero and Climate Take Back.
We will seek to increase revenues and profitability by capitalizing on the above strengths and pursuing the following key
initiatives.
Penetrate Expanding Geographic Markets for Modular Products. The popularity of modular carpet continues to increase
compared with other floorcovering products across most markets, internationally as well as in the United States. While
maintaining our leadership in the corporate office segment, we will continue to build upon our position as the worldwide
leader for modular carpet in order to promote sales in all market segments globally. A principal part of our international
focus – which utilizes our global marketing capabilities and sales infrastructure – is the significant opportunities in several
emerging geographic markets for modular carpet. These emerging markets, such as China, India and Eastern Europe,
represent large and growing economies and opportunities for Interface to leverage its brand, experience and skills. Other
expanding geographic markets, such as Germany and Italy, are established markets that are transitioning to the use of modular
carpet from historically low levels of penetration. Each of these geographic markets represents a significant growth
opportunity for our modular carpet business.
Continue to Penetrate Non-Corporate Office Market Segments. We will continue our strategic focus on product design
and marketing and sales efforts for non-corporate office market segments such as government, education, healthcare,
hospitality, retail and residential space. We began this initiative as part of a market diversification strategy to reduce our
exposure to the economic cyclicality of the corporate office segment, and it has become a principal strategy generally for
growing our business and enhancing profitability. To implement this strategy, we introduced specialized product offerings
tailored to the unique demands of these segments and created targeted selling techniques dedicated to penetrating certain
segments.
As part of this strategy, our FLOR line of products focuses on the U.S. residential carpet and rugs market segment. These
products were specifically created to bring high style modular carpet and rugs to the North American residential market.
Historically, we offered FLOR in three primary sales channels – catalogs, the Internet, and in our FLOR retail stores. In the
fourth quarter of 2016, we adopted a restructuring plan that included the closure of FLOR’s headquarters office and most
retail FLOR stores. In 2017, we completed our restructuring plan and now FLOR focuses on internet sales as well as crossover
sales by our commercial sales force.
Develop a Substantial Modular Resilient Flooring Business. Building upon the success of our initial introduction of
products into the high growth LVT market, we plan to expand our LVT product offering while also seeking to introduce new
products in the modular resilient flooring category. We believe our ability to offer and sell our soft and hard surfaces in an
integrated flooring design helps meet the needs of our customers by complementing and enhancing our carpet tile portfolio
with true modular installation, no transition strips between surfaces, same sizes of carpet tile and LVT products, and favorable
acoustic properties.
Continue to Minimize Expenses and Invest Strategically. We have steadily trimmed costs from our operations for several
years through multiple initiatives, which have made our cost structure more efficient today and for the future. Our supply
chain and other cost containment initiatives have improved our cost structure and yielded operating efficiencies. While we
still seek to minimize our expenses in order to increase profitability, we will also take advantage of strategic opportunities to
invest in systems, processes and personnel that can help us grow our business and increase profitability and value.
Use Strong Free Cash Flow Generation to Strengthen Our Balance Sheet. Our principal business has been structured to
yield contribution margins that generate strong free cash flow (by which we mean cash available to apply towards servicing
debt, potential stock repurchases, strategic acquisitions and the like). Our historical investments in global manufacturing
capabilities, facilities and product customization techniques, which we have maintained, also contribute to our ability to
generate strong levels of free cash flow. We expect to use our strong free cash flow generation capability to potentially
repurchase shares and strengthen our financial position, or re-invest in our operations. We will also continue to execute
programs to reduce costs further and enhance free cash flow. In addition, our existing capacity to increase production levels
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without significant capital expenditures will further enhance our generation of free cash flow as demand for our products
rises.
Sustain Leadership in Product Design and Development. As discussed above, our leadership position for product design
and development is a competitive advantage and key strength. Our plank, Skinny Plank, and i2 products and TacTiles
installation system have confirmed our position as an innovation leader in modular carpet. We will continue initiatives to
sustain, augment and capitalize upon that strength to continue to increase our market share in targeted market segments. Our
Mission Zero and Climate Take Back initiatives, which draw upon and promote our ecological sustainability commitment,
are part of those initiatives and include placing our Mission Zero and Climate Take Back logos on many of our marketing
and merchandising materials distributed throughout the world.
Challenges
In order to capitalize on our strengths and to implement successfully our business strategy and the principal initiatives
discussed above, we will have to handle successfully several challenges that confront us or that affect our industry in general.
As discussed in the Risk Factors in Item 1A of this Report, several factors could make it difficult for us, including:
•
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•
sales of our principal products have been and may continue to be affected by adverse economic cycles in the
renovation and construction of commercial and institutional buildings;
we compete with a large number of manufacturers in the highly competitive commercial floorcovering products
market, and some of these competitors have greater financial resources than we do;
our success depends significantly upon the efforts, abilities and continued service of our senior management
executives and our principal design consultant, and our loss of any of them could affect us adversely;
our substantial international operations are subject to various political, economic and other uncertainties that could
adversely affect our business results;
large increases in the cost of petroleum-based raw materials could adversely affect us if we are unable to pass these
cost increases through to our customers;
unanticipated termination or interruption of any of our arrangements with our primary third party suppliers of
synthetic fiber or our sole third party supplier for LVT could have a material adverse effect on us;
we have a significant amount of indebtedness, which could have important negative consequences to us; and
Some of our competitors who have greater financial resources than we do are adding manufacturing capacity into
the industry throughout the world, which could increase the amount of supply in the market, adversely affect pricing
in the market, and generate other competitive factors which could adversely impact our sales and profitability.
We believe our business model is strong enough, and our strategic initiatives are properly calibrated, for us to handle
these and other challenges we will encounter in our business.
Seasonality
Historically, our first quarter has typically been our slowest quarter while our fourth quarter has typically been our best
quarter, with sales generally increasing throughout the course of the fiscal year. However, in recent years, as our sales efforts
and results in the education market segment (which has a heavy buying season in the summer months) have increased and
currency fluctuations have impacted us, our third quarter sales have sometimes been the highest.
Our Products and Services
Modular Carpet
Interface is the world’s largest manufacturer and marketer of modular carpet. Our modular carpet system, which is
marketed under the established global brands Interface and FLOR, utilizes carpet tiles cut in precise, dimensionally stable
squares (usually 50 cm x 50 cm) or rectangles (such as planks and Skinny Planks) to produce a floorcovering that combines
4
the appearance and texture of traditional soft floorcovering with the advantages of a modular carpet system. Our GlasBac®
technology employs a fiberglass-reinforced polymeric composite backing that provides dimensional stability and reduces the
need for adhesives or fasteners. We also make carpet tiles with a backing containing post-industrial and/or post-consumer
recycled materials, which we market under the GlasBacRE brand. In addition, we make carpet tile with yarn containing
varying degrees of post-consumer nylon, depending on the style and color.
Our carpet tile has become popular for a number of reasons. Carpet tile incorporating our reinforced backing may be
easily removed and replaced, permitting rearrangement of furniture without the inconvenience and expense associated with
removing, replacing or repairing other soft surface flooring products, including broadloom carpeting. Because a relatively
small portion of a carpet installation often receives the bulk of traffic and wear, the ability to rotate carpet tiles between high
traffic and low traffic areas and to selectively replace worn tiles can significantly increase the average life and cost efficiency
of the floorcovering. In addition, carpet tile facilitates access to sub-floor air delivery systems and telephone, electrical,
computer and other wiring by lessening disruption of operations. It also eliminates the cumulative damage and unsightly
appearance commonly associated with frequent cutting of conventional carpet as utility connections and disconnections are
made. We believe that, within the overall floorcovering market, the worldwide demand for modular carpet is increasing as
more customers recognize these advantages.
We use a number of conventional and technologically advanced methods of carpet construction to produce carpet tiles in
a wide variety of colors, patterns, textures, pile heights and densities. These varieties are designed to meet both the practical
and aesthetic needs of a broad spectrum of commercial interiors – particularly offices, healthcare facilities, airports,
educational and other institutions, hospitality spaces, and retail facilities – and residential interiors. Our carpet tile systems
permit distinctive styling and patterning that can be used to complement interior designs, to set off areas for particular
purposes and to convey graphic information. While we continue to manufacture and sell a substantial portion of our carpet
tile in standard styles, most of our modular carpet sales in the Americas and Asia-Pacific are custom or made-to-order
products designed to meet customer specifications.
In addition to general uses of our carpet tile, we produce and sell a specially adapted version of our carpet tile for the
healthcare facilities market. Our carpet tile possesses characteristics — such as the use of the Intersept® antimicrobial, static-
controlling nylon yarns, and thermally pigmented, colorfast yarns — which make it suitable for use in these facilities in place
of hard surface flooring. Moreover, we launched our FLOR line of products to specifically target modular carpet sales to the
residential market segment. We also have created modular carpet products specifically designed for each of the education,
hospitality and retail market segments.
We also manufacture and sell two-meter roll goods that are structure-backed and offer many of the advantages of both
carpet tile and broadloom carpet. These roll goods are often used in conjunction with carpet tiles to create special design
effects. Our current principal customers for these products are in the education, healthcare and government market segments.
Modular Resilient Flooring
In 2016, we began offering a category of products we call modular resilient flooring, and our first product introductions
into this category were LVT products in a four-city test market in the U.S. We recognize that our customers are buying
multiple flooring types to service individual projects, while also looking to partner with fewer suppliers that can offer more
products and services. In the annual Floor Focus survey described above, LVT has been ranked as the number one “hot
product” each of the past five years. Expanding our product portfolio to include modular resilient flooring, and specifically
LVT, allows us to meet this growing demand and pursue new or incremental sales opportunities. LVT also shares many of
the same attributes and benefits with carpet tile, and we were able to leverage our experience in modular carpet tile in
designing a product specification to meet our aesthetic and performance standards. We also selected a reputable third party
to manufacture the products to our specifications, thus allowing us to enter the product category with minimal capital
commitments.
In 2017, we launched our LVT products globally, beginning with the Level Set™ Collection which includes 41 styles of
tiles with printed top layers in a variety of aesthetic looks, including natural woodgrains and stones, textured woodgrains,
and patterns. These products are modular and come in sizes that match certain of our modular carpet planks and squares.
They also are engineered to the same height as our modular carpet, which means better coverage of irregularities in the sub-
floor, lower sound transference from floor to floor, and the ability to install our LVT and modular carpet products side by
side without transition strips or layering. In addition, the Level Set Collection is constructed with the same type of backing
as our carpet tiles.
5
Other Products and Services
We sell a proprietary antimicrobial chemical compound under the registered trademark Intersept that we incorporate in
all of our modular carpet products and have licensed to another company for use in air filters. We also sell our TacTiles carpet
tile installation system, along with a variety of traditional adhesives and products for carpet installation and maintenance that
are manufactured by a third party. In addition, we continue to manufacture and sell our Intercell® brand raised/access flooring
product in Europe. We also continue to provide “turnkey” project management services for national accounts and other large
customers through our InterfaceSERVICES™ business.
Marketing and Sales
We have traditionally focused our carpet marketing strategy on major accounts, seeking to build lasting relationships with
national and multinational end-users, and on architects, engineers, interior designers, contracting firms, and other specifiers
who often make or significantly influence purchasing decisions. While most of our sales are in the corporate office segment,
both new construction and renovation, we also emphasize sales in other segments, including retail space, government
institutions, schools, healthcare facilities, tenant improvement space, hospitality centers, residences and home office space.
Our marketing efforts are enhanced by the established and well-known brand names of our carpet products, including
Interface and FLOR.
An important part of our marketing and sales efforts involves the preparation of custom-made samples of requested carpet
designs, in conjunction with the development of innovative product designs and styles to meet the customer’s particular
needs. In most cases, we can produce samples to customer specifications in less than five days, which significantly enhances
our marketing and sales efforts and has increased our volume of higher margin custom or made-to-order sales. In addition,
through our websites, we have made it easy to view and request samples of our products. We also use technology which
allows us to provide digital, simulated samples of our products, which helps reduce raw material and energy consumption
associated with our samples.
We primarily use our internal marketing and sales force to market our carpet products. In order to implement our global
marketing efforts, we have product showrooms or design studios in the United States, Canada, Mexico, Brazil, Denmark,
England, France, Germany, Spain, the Netherlands, India, Australia, Norway, United Arab Emirates, Russia, Singapore,
Hong Kong, Thailand, China and elsewhere. We expect to open offices in other locations around the world as necessary to
capitalize on emerging marketing opportunities.
We distribute our products through two primary channels: (1) direct sales to end users; and (2) indirect sales through
independent contractors or distributors. In each case, we may also call upon architects, engineers, interior designers,
contracting firms and other specifiers who often make or substantially influence purchasing decisions.
Manufacturing
We manufacture carpet at two locations in the United States and at facilities in the Netherlands, the United Kingdom,
Thailand, China and Australia.
Having foreign manufacturing operations enables us to supply our customers with carpet from the location offering the
most advantageous delivery times, duties and tariffs, exchange rates, and freight expense, and enhances our ability to develop
a strong local presence in foreign markets. We believe that the ability to offer consistent products and services on a worldwide
basis at attractive prices is an important competitive advantage in servicing multinational customers seeking global supply
relationships. We will consider additional locations for manufacturing operations in other parts of the world as necessary to
meet the demands of customers in international markets.
Our raw materials are generally available from multiple sources – both regionally and globally – with the exception of
synthetic fiber (nylon yarn). For yarn, we principally rely upon two major global suppliers, but we also have significant
relationships with at least two other suppliers. Although our number of principal yarn suppliers is limited, we do have the
capability to manufacture carpet using face fiber produced from two separate polymer feedstocks – nylon 6 and nylon 6,6 –
which provides additional flexibility with respect to yarn supply inputs, if needed. Our global sourcing strategy, including
with respect to our principal yarn suppliers and dual polymer manufacturing capability, allows us to help guard against any
potential shortages of raw materials or raw material suppliers in a specific polymer supply chain.
We have a flexible-inputs carpet backing line, which we call “Cool Blue™”, at our modular carpet manufacturing facility
in LaGrange, Georgia. Using next generation thermoplastic technology, the custom-designed backing line dramatically
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improves our ability to keep reclaimed and waste carpet in the production “technical loop,” and further permits us to explore
other plastics and polymers as inputs. We also have technology that more cleanly separates the face fiber and backing of
reclaimed and waste carpet, thus making it easier to recycle some of its components and providing a purer supply of inputs
for the Cool Blue process. This technology, which is part of our ReEntry®2.0 carpet reclamation program, allows us to send
some of the reclaimed face fiber back to our fiber supplier to be blended with virgin or other post-industrial materials and
extruded into new fiber.
The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point,
Georgia, Northern Ireland, the Netherlands, Thailand, China and Australia are certified under International Standards
Organization (ISO) Standard No. 14001.
Our significant international operations are subject to various political, economic and other uncertainties, including risks
of restrictive taxation policies, foreign exchange restrictions, changing political conditions and governmental regulations. We
also receive a substantial portion of our revenues in currencies other than U.S. dollars, which makes us subject to the risks
inherent in currency translations. Although our ability to manufacture and ship products from facilities in several foreign
countries reduces the risks of foreign currency fluctuations we might otherwise experience, we also engage from time to time
in hedging programs intended to further reduce those risks.
Competition
We compete, on a global basis, in the sale of our modular carpet products with other carpet manufacturers and
manufacturers of vinyl and other types of floorcoverings, including broadloom carpet. Although the industry has experienced
significant consolidation, a large number of manufacturers remain in the industry. We believe we are the largest manufacturer
of modular carpet in the world. However, a number of domestic and foreign competitors manufacture modular carpet as one
segment of their business, and some of these competitors have financial resources greater than ours. In addition, some of the
competing carpet manufacturers have the ability to extrude at least some of their requirements for fiber used in carpet
products, which decreases their dependence on third party suppliers of fiber.
We believe the principal competitive factors in our primary floorcovering markets are brand recognition, quality, design,
service, broad product lines, product performance, marketing strategy and pricing. In the corporate office market segment,
modular carpet competes with various floorcoverings, of which broadloom carpet is the most common. We believe the
quality, service, design, better and longer average product performance, flexibility (design options, selective rotation or
replacement, use in combination with our LVT or roll goods) and convenience of our modular carpet are our principal
competitive advantages.
We believe we have competitive advantages in several other areas as well. First, having both an internal design staff as
well as our relationship with David Oakey Designs allows us to introduce numerous innovative and attractive carpet tile and
LVT products to our customers. Additionally, we believe that our global carpet tile manufacturing capabilities are an
important competitive advantage in serving the needs of multinational corporate customers. We believe that the incorporation
of the Intersept antimicrobial chemical agent into the backing of some modular carpet products enhances our ability to
compete successfully across all of our market segments generally, and specifically with resilient tile in the healthcare market.
In addition, we believe that our environmental sustainability goals and commitment to eliminate our negative impact on
the environment by 2020 is a brand-enhancing, competitive strength as well as a strategic initiative. Our customers are
concerned about the environmental and broader ecological implications of their operations and the products they use in them.
Our leadership, knowledge and expertise in the area, especially in the “green building” movement and related environmental
certification programs, resonate deeply with many of our customers and prospects around the globe. Our modular carpet
products historically have had inherent installation and maintenance advantages that translated into greater efficiency and
waste reduction. We are using raw materials and production technologies, such as our Cool Blue backing line and our ReEntry
2.0 reclaimed carpet separation process, that directly reduce the adverse impact of those operations on the environment and
limit our dependence on petrochemicals.
Product Design, Research and Development
We maintain an active research, development and design staff of approximately 80 people and also draw on the research
and development efforts of our suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials. Our
research and development costs were $14.0 million, $14.3 million, and $14.5 million in 2017, 2016, and 2015, respectively.
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Our research and development team provides technical support and advanced materials research and development for us.
The team assisted in the development of our post-consumer recycled content, polyvinyl chloride, or PVC, extruded sheet
process that has been incorporated into our GlasBacRE modular carpet backing. Our post-consumer recycled content PVC
extruded sheet exemplifies our commitment to “closing-the-loop” in recycling. More recently, this team developed our
TacTiles carpet tile installation system, which uses small squares of adhesive plastic film to connect intersecting carpet tiles.
The team also helped implement our Cool Blue flexible inputs backing line and our ReEntry 2.0 reclaimed carpet separation
technology and post-consumer recycling technology for nylon face fibers. With a goal of supporting sustainable product
designs in floorcoverings applications, we continue to evaluate bio-based and renewable polymers for use in our products.
Our research and development team also supports the dissemination, consultancies and technical communication of our global
sustainability endeavors. This team also provides all biochemical and technical support to Intersept antimicrobial chemical
product initiatives.
Innovation and increased customization in product design and styling are the principal focus of our product development
efforts, and this focus has led to several design breakthroughs such as our plank and Skinny Plank products, as well as our i2
product line. Our carpet design and development team is recognized as an industry leader in carpet design and product
engineering for the commercial and institutional markets.
David Oakey Designs provides carpet design and consulting services to us pursuant to a consulting agreement, and this
firm augments our internal research, development and design staff. David Oakey Designs’ services under the agreement
include creating commercial carpet designs for use by our modular carpet businesses throughout the world, and overseeing
product development, design and coloration functions for our modular carpet business in North America. The agreement can
be terminated by either party upon six months prior written notice to the other party. David Oakey Designs also contributed
to our ability to efficiently produce many products from a single yarn system. Our mass customization production approach
evolved, in major part, from this concept and increases the number and variety of product designs, which in turn enables us
to offer products with competitive margins.
Environmental Initiatives
In the latter part of 1994, we commenced a sustainability strategy within our business that we now call Mission Zero,
aimed at reducing waste, environmental footprint and costs. Mission Zero, which includes our QUEST waste reduction
initiative, is directed towards the elimination of energy and raw materials waste in our businesses, and, on a broader and more
long-term scale, the practical reclamation — and ultimate restoration — of shared environmental resources. The initiative
involves a commitment by us:
We have engaged some of the world’s leading authorities on global ecology as environmental advisors. The list of advisors
includes: Paul Hawken, author of The Ecology of Commerce: A Declaration of Sustainability and The Next Economy, and
co-author of Natural Capitalism: Creating the Next Industrial Revolution; Amory Lovins, energy consultant and co-founder
of the Rocky Mountain Institute; Bill Browning, fellow and former director of the Rocky Mountain Institute’s Green
Development Services; Janine M. Benyus, author of Biomimicry; and Bob Fox, renowned architect.
As more customers in our target markets share our view that sustainability is an important factor in making purchasing
and design decisions, and not just good deeds, our acknowledged leadership position should strengthen our brands and
provide a differentiated advantage in competing for business. To further raise awareness of our goal of becoming sustainable,
we launched our Mission Zero global branding initiative, which represents our mission to eliminate any negative impact our
companies may have on the environment by the year 2020. In 2016, we launched the Climate Take Back initiative, in which
we seek to lead industry in designing and making products in ways that will maintain a climate fit for life. Our Mission Zero
and Climate Take Back logos appear on many of our marketing and merchandising materials distributed throughout the world.
A high point in our pursuit of sustainability has been our creation with the Zoological Society of London of a program
called Net-Works® in which we’ve worked with communities in the Philippines to collect discarded fishing nets that are
damaging a large coral reef, and divert them to our yarn supplier where they are recycled into new carpet fiber. Net-Works
provides a source of income for members of these communities in the Philippines, while also cleaning up the beaches and
waters where they live and work. Our Net Effect Collection of carpet tile products, among others, contains yarn that is partly
made from the recycled fishing nets collected through the Net-Works program. Through 2017, this program has collected
more than 142 tons of discarded fishing nets. Net-Works is a big step in redesigning our supply chain from a linear take-
make-waste process toward a closed loop system, and it advances our ultimate goal of becoming a restorative enterprise.
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Backlog
Our backlog of unshipped orders was approximately $122.9 million at February 11, 2018, compared with approximately
$107.8 million at February 12, 2017. Historically, backlog is subject to significant fluctuations due to the timing of orders
for individual large projects and currency fluctuations. All of the backlog orders at February 11, 2018 are expected to be
shipped during the succeeding six to nine months.
Patents and Trademarks
We own numerous patents in the United States and abroad on floorcovering products and on manufacturing processes.
The duration of United States patents is between 14 and 20 years from the date of filing of a patent application or issuance
of the patent; the duration of patents issued in other countries varies from country to country. We maintain an active patent
and trade secret program in order to protect our proprietary technology, know-how and trade secrets. Although we consider
our patents to be very valuable assets, we consider our know-how and technology even more important to our current business
than patents, and, accordingly, believe that expiration of existing patents or non-issuance of patents under pending
applications would not have a material adverse effect on our operations.
We also own many trademarks in the United States and abroad. In addition to the United States, the primary jurisdictions
in which we have registered our trademarks are the European Union, Canada, Australia, New Zealand, Japan, and various
countries in Central America, South America and Asia. Some of our more prominent registered trademarks include: Interface,
FLOR, Intersept, GlasBac, Mission Zero, and Net-Works. Trademark registrations in the United States are valid for a period
of 10 years and are renewable for additional 10-year periods as long as the mark remains in actual use. The duration of
trademarks registered in other jurisdictions varies.
Financial Information by Operating Segments and Geographic Areas
The Notes to Consolidated Financial Statements appearing in Item 8 of this Report set forth information concerning our
sales and long-lived assets by geographic areas, which are also our operating segments. We have only one reporting segment.
Employees
At December 31, 2017, we employed a total of 3,092 employees worldwide. Of such employees, 1,781 were clerical,
staff, sales, supervisory and management personnel and 1,311 were manufacturing personnel. We also utilized the services
of 227 temporary personnel as of December 31, 2017.
Some of our production employees in Australia and the United Kingdom are represented by unions. In the Netherlands, a
Works Council, the members of which are Interface employees, is required to be consulted by management with respect to
certain matters relating to our operations in that country, such as a change in control of Interface Europe B.V. (our modular
carpet subsidiary based in the Netherlands), and the approval of the Council is required for some of our actions, including
changes in compensation scales or employee benefits. Our management believes that its relations with the Works Council,
the unions and all of our employees are good.
Environmental Matters
Our operations are subject to laws and regulations relating to the generation, storage, handling, emission, transportation
and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations
have not had a material adverse impact on our financial condition or results of operations in the past and are not expected to
have a material adverse impact in the future. The environmental management systems of our floorcovering manufacturing
facilities in LaGrange, Georgia, West Point, Georgia, Northern Ireland, the Netherlands, Thailand, China and Australia are
certified under ISO Standard No. 14001.
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Executive Officers of the Registrant
Our executive officers, their ages as of December 31, 2017, and their principal positions with us are set forth below.
Executive officers serve at the pleasure of the Board of Directors.
Age
Name
Jay D. Gould .......................... 58
Robert A. Coombs ................. 59
David B. Foshee ..................... 47
Bruce A. Hausmann ............... 48
Matthew J. Miller ................... 49
Kathleen R. Owen .................. 54
J. Chadwick Scales................. 54
Nigel Stansfield ...................... 50
Principal Position(s)
President and Chief Executive Officer
Senior Vice President (President - Asia-Pacific)
Vice President, General Counsel and Secretary
Vice President and Chief Financial Officer
Vice President (President - Americas)
Vice President and Chief Human Resources Officer
Vice President and Chief Marketing, Innovation & Design Officer
Vice President (President - Europe)
Mr. Gould joined us as Executive Vice President and Chief Operating Officer in January 2015, was promoted to President
and Chief Operating Officer in January 2016, and was promoted to Chief Executive Officer effective March 3, 2017. From
2012 to January 2015, Mr. Gould was the Chief Executive Officer of American Standard Brands, a kitchen and bath products
company. Prior to his employment with American Standard Brands, Mr. Gould held senior executive roles at Newell
Rubbermaid Inc., a global marketer of consumer and commercial products, serving as President of its Home & Family
business group from 2008 to 2012 and President of its Parenting Essentials business group from 2006 to 2008. He also
previously held executive level positions at The Campbell Soup Company (2002-2006) and The Coca-Cola Company (1995-
2002).
Mr. Coombs originally worked for us from 1988 to 1993 as a marketing manager for our Heuga carpet tile operations in
the United Kingdom and later for all of our European floorcovering operations. In 1996, Mr. Coombs returned to us as
Managing Director of our Australian operations. He was promoted in 1998 to Vice President-Sales and Marketing, Asia-
Pacific, with responsibility for Australian operations and sales and marketing in Asia, which was followed by a promotion to
Senior Vice President, Asia-Pacific. He was promoted to Senior Vice President, European Sales, in May 1999 and Senior
Vice President, European Sales and Marketing, in April 2000. In February 2001, he was promoted to President of Interface
Overseas Holdings, Inc. with responsibility for all of our floorcoverings operations in both Europe and the Asia-Pacific
region, and he became a Vice President of Interface. In September 2002, Mr. Coombs relocated back to Australia, retaining
responsibility for our floorcovering operations in the Asia-Pacific region while another executive assumed responsibility for
floorcovering operations in Europe. Mr. Coombs was promoted to Senior Vice President of Interface in July 2008.
Mr. Foshee, who previously practiced with an Atlanta-based international law firm, joined us in October 1999 as
Associate Counsel. He was promoted to Assistant Secretary in April 2002, Senior Counsel in April 2006, Assistant Vice
President in April 2007, Vice President in July 2012, Associate General Counsel in May 2014, and Secretary and General
Counsel in January 2017.
Mr. Hausmann joined us in April 2017 as Vice President and Chief Financial Officer. He came to us from the food,
facilities and uniform services supplier Aramark Corporation, where he served as Senior Vice President and Chief Financial
Officer for Aramark’s Uniform business unit since 2009, and for Aramark’s Refreshment Services business unit since
2014. Prior to joining Aramark, he served as Vice President and Segment Controller for the Interactive Media Group of The
Walt Disney Company, which he joined in 2002. He has also previously held finance and controller positions with several
software and internet companies.
Mr. Miller joined us in June 2015 as Vice President and Chief Strategy Officer, and became President of our Americas
business in June 2016. He came to Interface from American Standard Brands, where he was Senior Vice President of
Innovation and Strategy from April 2013 to May 2015. Mr. Miller also was an independent consultant to American Standard
Brands from February 2012 to April 2013. Previously, he served as Global Vice President-Finance of the Juvenile Products
Segment of Newell Rubbermaid Inc. from 2008 to 2011, and as Director of Strategy and Corporate Development for Newell
Rubbermaid from 2006-2008. He also has worked with a number of other global organizations, including Kraft Foods and
Zyman Group.
Ms. Owen joined us in June 2015 as Vice President and Chief Human Resources Officer. Ms. Owen is responsible for the
development and oversight of human resources strategies and initiatives for talent management, organization development,
learning, compensation, culture and diversity for Interface associates, globally. She came to Interface from Taylor Morrison
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Home Corporation, a publicly traded North American real estate developer and home builder, where she served as Vice
President of Human Resources from June 2005 to December 2014. Prior to that, she held several human resources positions
with experience across the U.S. and Europe with companies including McKesson Technology Solutions, Check-Free
Corporation and Lanier Worldwide.
Mr. Scales joined us in April 2016 as Vice President and Chief Innovation Officer with responsibility for the Company’s
innovation strategy and platforms globally. In August 2016, he also became responsible for the Company’s marketing and
design strategy, and was named Chief Marketing, Innovation and Design Officer. Prior to Interface, Mr. Scales served as
Senior Vice President and General Manager for the Consumer Packaged Goods division of FOCUS Brands Inc. Prior to
joining FOCUS Brands, Mr. Scales was Global Vice President of Marketing and Innovation for The Coca-Cola Company,
and before that held a number of leadership positions with Unilever PLC.
Mr. Stansfield was the Operations Manager for Firth Carpets (our former European broadloom operations) at the time it
was acquired by us in 1997. For two years following that acquisition, Mr. Stansfield served as Manufacturing Systems
Manager, part of a global project team that designed and implemented MRP manufacturing software systems at seven of our
manufacturing plants. In 1999, he returned to Firth Carpets as Operations Director. In 2002, he became a member of our
European research and development team focusing on our sustainability initiatives, and in 2004, he became Product and
Innovations Director for all of our European Operations. In 2010, he joined our European management team as Senior Vice
President of Product, Design and Innovation, before being named Vice President and Chief Innovations Officer for the
Company in March 2012. In December 2016, he became President of our business serving Europe, the Middle East and
Africa.
Available Information
We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. Our Internet address is http://www.interface.com. The SEC maintains a website that contains annual,
quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically
with the SEC. The SEC’s website is http://www.sec.gov.
Interface, Inc. was incorporated in 1973 as a Georgia corporation.
Forward-Looking Statements
This report on Form 10-K contains “forward-looking statements” within the meaning of the Securities Act of 1933, the
Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Words such as “believes,”
“anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-
looking statements include statements regarding the intent, belief or current expectations of our management team, as well
as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements. We undertake 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. Important factors currently known to management that could cause actual results to differ materially from those in
forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors
industry as well as the risks and uncertainties discussed below in Item 1A, “Risk Factors”.
ITEM 1A. RISK FACTORS
You should carefully consider the following factors, in addition to the other information included in this Annual Report
on Form 10-K and the other documents incorporated herein by reference, before deciding whether to purchase or sell our
common stock. Any or all of the following risk factors could have a material adverse effect on our business, financial
condition, results of operations and prospects.
Sales of our principal products have been and may continue to be affected by adverse economic cycles in the renovation
and construction of commercial and institutional buildings.
Sales of our principal products are related to the renovation and construction of commercial and institutional buildings.
This activity is cyclical and has been affected by the strength of a country’s or region’s general economy, prevailing interest
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rates and other factors that lead to cost control measures by businesses and other users of commercial or institutional space.
The effects of cyclicality upon the corporate office segment tend to be more pronounced than the effects upon the institutional
segment. Historically, we have generated more sales in the corporate office segment than in any other market. The effects of
cyclicality upon the new construction segment of the market also tend to be more pronounced than the effects upon the
renovation segment. These effects may recur and could be more pronounced if global economic conditions do not improve
or are weakened.
We compete with a large number of manufacturers in the highly competitive floorcovering products market, and some of
these competitors have greater financial resources than we do. We may face challenges competing on price, making
investments in our business or on product design.
The floorcovering industry is highly competitive. Globally, we compete for sales of floorcovering products with other
carpet manufacturers and manufacturers of other types of floorcovering. Although the industry has experienced significant
consolidation, a large number of manufacturers remain in the industry. Moreover, some of our competitors are adding
manufacturing capacity into the industry throughout the globe which could increase the amount of supply in the
market. Increased capacity at our competitors could result in pricing pressure on our products (including products, like LVT,
which may currently carry attractive margins) and less demand for our products, thus adversely affecting both revenues and
profitability.
Some of our competitors, including a number of large diversified domestic and foreign companies who manufacture
modular carpet as one segment of their business, have greater financial resources than we do. Competing effectively may
require us to make additional investments in our product development efforts, manufacturing facilities, distribution network
and sales and marketing activities.
In addition, we often compete on design preferences. Our customers’ design preferences may evolve or change before
we adapt quickly enough to those changes or before we recognize those changes have happened in the marketplace. If this
occurs, it could negatively affect our sales as our customers choose other product offerings.
Our success depends significantly upon the efforts, abilities and continued service of our senior management executives,
our principal design consultant and other key personnel (including sales personnel), and our loss of any of them could
affect us adversely.
We believe that our success depends to a significant extent upon the efforts and abilities of our senior management
executives. In addition, we rely significantly on the leadership that David Oakey of David Oakey Designs provides to our
internal design staff. Specifically, David Oakey Designs provides product design/production engineering services to us under
an exclusive consulting contract that contains non-competition covenants. Our agreement with David Oakey Designs can be
terminated by either party upon six months prior written notice to the other party. Our business also depends on the
recruitment and retention of other key personnel, including strong sales leaders.
We may lose the services of key personnel for a variety of reasons, including if our compensation programs become
uncompetitive in the relevant markets for our employees and service providers, or if the Company undergoes significant
disruptive change (including not only economic downturns, but potentially changes management believes are positive in the
long term). The loss of key personnel with a great deal of knowledge, training and experience in the carpet industry –
particularly in the areas of sales, marketing, operations, product design and management – could have an adverse impact on
our business. We may not be able to easily replace such personnel, particularly if the underlying reasons for the loss make
the Company relatively unattractive as an employer.
We are implementing a multi-year transformation of our sales organization, including the implementation of standardized
processes in which our sales force goes to market, interacts with customers, works with the architect and design community
and, in general, operates day-to-day. We are also implementing technology tools that the sales force will be required to use
as part of their day-to-day jobs, and new management positions to actively manage and coach the sales force. All of these
changes are disruptive, which may create challenges for our sales force to adapt, particularly for long tenured employees,
which comprise a large portion of our sales force. There are no guarantees that these efforts will increase sales or improve
profitability of the business, or that they will not instead adversely disrupt the business, decrease sales, and decrease overall
profitability.
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Our substantial international operations are subject to various political, economic and other uncertainties that could
adversely affect our business results, including by restrictive taxation or other government regulation and by foreign
currency fluctuations.
We have substantial international operations. In 2017, approximately half of our net sales and a significant portion of our
production were outside the United States, primarily in Europe and Asia-Pacific. Our corporate strategy includes the
expansion and growth of our international business on a worldwide basis. As a result, our operations are subject to various
political, economic and other uncertainties, including risks of restrictive taxation policies, changing political conditions and
governmental regulations. This includes, for example, the uncertainty surrounding the implementation and effect of the
United Kingdom’s June 2016 referendum in which voters approved the United Kingdom’s exit from the European Union,
including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the
European Union. We also make a substantial portion of our net sales in currencies other than U.S. dollars (approximately
half of 2017 net sales), which subjects us to the risks inherent in currency translations. The scope and volume of our global
operations make it impossible to eliminate completely all foreign currency translation risks as an influence on our financial
results. In addition, political unrest, terrorist acts, military conflict and disease outbreaks have increased the risks of doing
business abroad generally.
Concerns regarding European sovereign debt and market perceptions about the instability of the euro, the potential re-
introduction of individual currencies within the Eurozone, the potential dissolution of the euro entirely, or the U.K. exiting
the European Union, could adversely affect our business, results of operations or financial condition.
Following the European sovereign debt crisis that began in 2011, concerns still persist regarding the debt burden of certain
countries using the euro as their currency (the “Eurozone”) and their ability to meet future financial obligations, the overall
stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances
in individual Eurozone countries. Despite remedial efforts undertaken by the European Commission and others, these
concerns have caused instability in the euro and could lead to the re-introduction of individual currencies in one or more
Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the
euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be
determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related
issues, could adversely affect the value of our euro-denominated assets and obligations or increase the risks of foreign
currency fluctuations or cause the failure of hedging programs intended to reduce those risks. In addition, concerns over these
effects on financial institutions in Europe and globally could have an adverse impact on the capital markets generally, and
more specifically on our ability and the ability of our customers, suppliers and lenders to finance our and their respective
businesses, to access liquidity at acceptable financing costs, if at all, on the availability of supplies and materials, and on the
demand for our products.
In addition, the results of a June 2016 referendum vote in the U.K. were in favor of the U.K. exiting the European Union
(the “Brexit Vote”). On March 29, 2017, the U.K. notified the European Union of its intention to withdraw pursuant to
Article 50 of the Lisbon Treaty. The terms of the withdrawal are subject to a negotiation period that could last at least two
years from the withdrawal notification date. The uncertainty leading up to and following the Brexit Vote has had a negative
impact on our business and demand for our products in Europe, and particularly in the U.K. In addition, the Brexit Vote has
had a detrimental effect, and could have further detrimental effects, on the value of either or both of the euro and the British
Pound Sterling, which could negatively impact our business (principally from the translation of sales and earnings in those
foreign currencies into our reporting currency of U.S. dollars). Such a development could have other unpredictable adverse
effects, including a material adverse effect on demand for office space and our carpet products in the U.K. and in Europe if
a U.K. exit leads to economic difficulties in Europe.
Large increases in the cost of petroleum-based raw materials could adversely affect us if we are unable to pass these cost
increases through to our customers.
Petroleum-based products comprise the predominant portion of the cost of raw materials that we use in manufacturing.
While we attempt to match cost increases with corresponding price increases, continued volatility in the cost of petroleum-
based raw materials could adversely affect our financial results if we are unable to pass through such price increases to our
customers.
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Unanticipated termination or interruption of any of our arrangements with our primary third party suppliers of synthetic
fiber or our sole third party supplier for luxury vinyl tile (“LVT”) could have a material adverse effect on us.
We depend on a small number of third party suppliers of synthetic fiber and a single supplier for our LVT products. The
unanticipated termination or interruption of any of our supply arrangements with our current suppliers of synthetic fiber
(nylon) or sole supplier of LVT, including failure by any third party supplier to meet our product specifications, could have
a material adverse effect on us because we do not have the capability to manufacture our own fiber for use in our carpet
products or our own LVT. Our suppliers may not be able to meet our demand for a variety of reasons, including our inability
to forecast our future needs accurately or a shortfall in production by the supplier for reasons unrelated to us, such as work
stoppages, acts of war, terrorism, fire, earthquake, energy shortages, flooding or other natural disasters. If any of our supply
arrangements with our primary suppliers of synthetic fiber or our sole supplier of LVT is terminated or interrupted, we likely
would incur increased manufacturing costs and experience delays in our manufacturing process (thus resulting in decreased
sales and profitability) associated with shifting more of our synthetic fiber purchasing to another synthetic fiber supplier or
developing new supply chain sources for LVT. A prolonged inability on our part to source synthetic fiber included in our
products or LVT on a cost-effective basis could adversely impact our ability to deliver products on a timely basis, which
could harm our sales and customer relationships.
We have a significant amount of indebtedness, which could have important negative consequences to us.
Our significant indebtedness could have important negative consequences to us, including:
• making it more difficult for us to satisfy our obligations with respect to such indebtedness;
•
increasing our vulnerability to adverse general economic and industry conditions;
•
•
limiting our ability to obtain additional financing to fund capital expenditures, acquisitions or other growth initiatives,
and other general corporate requirements;
requiring us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our
indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, acquisitions or other
growth initiatives, and other general corporate requirements;
•
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• placing us at a competitive disadvantage compared to our less leveraged competitors; and
•
limiting our ability to refinance our existing indebtedness as it matures.
As a consequence of our level of indebtedness, a substantial portion of our cash flow from operations must be dedicated
to debt service requirements. In addition, borrowings under our Syndicated Credit Facility have variable interest rates, and
therefore our interest expenses will increase if the underlying market rates (upon which the variable interest rates are based)
increase. The terms of our Syndicated Credit Facility also limit our ability and the ability of our subsidiaries to, among other
things, incur additional indebtedness, pay dividends or make certain other restricted payments or investments in certain
situations, consummate certain asset sales, enter into certain transactions with affiliates, create liens, merge or consolidate
with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. They
also require us to comply with certain other reporting, affirmative and negative covenants and meet certain financial tests. If
we fail to satisfy these tests or comply with these covenants, a default may occur, in which case the lenders could accelerate
the debt as well as any other debt to which cross-acceleration or cross-default provisions apply. Our Syndicated Credit Facility
matures in August 2022. We cannot assure you that we would be able to renegotiate, refinance or otherwise obtain the
necessary funds to satisfy these obligations.
It is important for you to consider that we have a significant amount of indebtedness. We cannot assure you that we will
be able to renegotiate or refinance any of our debt on commercially reasonable terms, or at all. If we are unable to refinance
our debt or obtain new financing, we would have to consider other options, such as selling assets to meet our debt service
obligations and other liquidity needs, or using cash, if available, that would have been used for other business purposes.
14
The market price of our common stock has been volatile and the value of your investment may decline.
The market price of our common stock has been volatile in the past and may continue to be volatile going forward. Such
volatility may cause precipitous drops in the price of our common stock on the Nasdaq Global Select Market and may cause
your investment in our common stock to lose significant value. As a general matter, market price volatility has had a
significant effect on the market values of securities issued by many companies for reasons unrelated to their operating
performance. We thus cannot predict the market price for our common stock going forward.
Our earnings in a future period could be adversely affected by non-cash adjustments to goodwill, if a future test of goodwill
assets indicates a material impairment of those assets.
As prescribed by accounting standards governing goodwill and other intangible assets, we undertake an annual review of
the goodwill asset balance reflected in our financial statements. Our review is conducted during the fourth quarter of the year,
unless there has been a triggering event prescribed by applicable accounting rules that warrants an earlier interim testing for
possible goodwill impairment. In the past, we have had non-cash adjustments for goodwill impairment as a result of such
testings ($61.2 million in 2008 and $44.5 million in 2007). A future goodwill impairment test may result in a future non-cash
adjustment, which could adversely affect our earnings for any such future period.
Changes to our facilities could disrupt our operations.
From time to time, we make improvements to our physical facilities, or move operations to new ones. Large scale changes
or moves could disrupt our normal operations, leading to possible loss of productivity, which may adversely affect our results.
The company will be moving its corporate headquarters in 2018. The transition and relocation of the company’s
headquarters could be disruptive and could create a distraction to management in running day-to-day operations which could
adversely affect the business.
We are also making significant investments and modifications to our manufacturing facilities in LaGrange Georgia. At
times this process can be disruptive, and there is no guarantee that these efforts will yield the financial returns and
improvements in the business that we hope to achieve from them. In addition, while these changes are intended to yield
stronger financial results, they could potentially adversely affect financial results due to project delays, business disruption
as new facilities and equipment come online, and general disruption as we make changes and modifications to our
manufacturing facilities and processes.
Our business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected
events.
While we manufacture our products in several facilities and maintain insurance covering our facilities, including business
interruption insurance, our manufacturing facilities could be materially damaged by natural disasters, such as floods,
tornadoes, hurricanes and earthquakes, or by fire or other unexpected events such as adverse weather conditions or other
disruptions to our facilities, supply chain or our customers’ facilities. For example, in July 2012, a fire occurred at our
manufacturing facility in Picton, Australia, causing extensive damage and rendering the facility inoperable. In January 2014,
we commenced operations at a new manufacturing facility in Minto, Australia. We could incur uninsured losses and
liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity,
which could have a material adverse impact on our business, financial condition and results of operations.
Disruptions to or failures of our information technology systems could adversely effect on our business.
We rely heavily on information technology systems—both software and computer hardware—to operate our business.
We rely on these systems to, among other things:
facilitate and plan the purchase, management and distribution of, and payment for, inventory and raw materials;
•
• Control our production processes;
• manage and monitor our distribution network and logistics;
•
• manage billing, collections and payables;
• manage financial reporting; and
• manage payroll and human resources information.
receive, process and ship orders;
15
Our IT systems may be disrupted or fail for a number of reasons, including:
•
•
•
•
natural disasters, like fires;
power loss;
software “bugs”, hardware defects or human error; or
hacking, computer viruses, malware, ransomware or other cyber attacks.
Any of these events which deny us use of vital IT systems may seriously disrupt our normal business operations. These
disruptions may lead to production or shipping stoppages, which may in turn lead to material revenue loss and reputational
harm. There is no guarantee that our backup systems or disaster recovery procedures will be adequate to mitigate losses due
to IT system disruptions in a timely fashion, and we may incur significant expense in correcting IT system emergencies.
To the extent our IT systems store sensitive data, including about our employees, security breaches may expose us to
other serious liabilities and reputational harm if such data is misappropriated. In addition, as cybercriminals continue to
become more sophisticated, the costs to defend and insure against cyberattacks can be expected to rise.
Our Rights Agreement could discourage tender offers or other transactions for our stock that could result in shareholders
receiving a premium over the market price for our stock.
Our Board of Directors has adopted a Rights Agreement pursuant to which holders of our common stock will be entitled
to purchase from us a fraction of a share of our Series B Participating Cumulative Preferred Stock if a third party acquires
beneficial ownership of 15% or more of our common stock without our consent. In addition, the holders of our common stock
will be entitled to purchase the stock of an Acquiring Person (as defined in the Rights Agreement) at a discount upon the
occurrence of triggering events. These provisions of the Rights Agreement could have the effect of discouraging tender offers
or other transactions that could result in shareholders receiving a premium over the market price for our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Atlanta, Georgia in approximately 20,000 square feet of leased space. The
following table lists our principal manufacturing facilities and other material physical locations (some locations are comprised
of multiple buildings), all of which we own except as otherwise noted:
Location
Bangkok, Thailand ......................................................................................................................................
Craigavon, N. Ireland(1) ...............................................................................................................................
LaGrange, Georgia ......................................................................................................................................
LaGrange, Georgia(1) ...................................................................................................................................
Union City, Georgia(1) .................................................................................................................................
Valley, Alabama(1) .......................................................................................................................................
Minto, Australia ...........................................................................................................................................
Scherpenzeel, the Netherlands .....................................................................................................................
West Point, Georgia .....................................................................................................................................
Taicang, China(1) ..........................................................................................................................................
__________
(1) Leased.
Floor
Space
(Sq. Ft.)
275,946
80,986
539,545
322,096
370,000
338,086
259,356
360,800
299,600
142,500
We maintain sales or marketing offices in over 70 locations in over 30 countries and a number of other distribution
facilities in several countries. Most of our sales and marketing locations and many of our distribution facilities are leased.
We believe that our manufacturing and distribution facilities and our marketing offices are sufficient for our present
operations. We will continue, however, to consider the desirability of establishing additional facilities and offices in other
16
locations around the world as part of our business strategy to meet expanding global market demands. Substantially all of our
owned properties in the United States are subject to mortgages, which secure borrowings under our Syndicated Credit Facility.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings in the ordinary course of business, none of which we believe are required to
be disclosed under this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the Nasdaq Global Select Market under the symbol TILE. As of February 18, 2018, we
had 624 holders of record of our Common Stock. We estimate that there are in excess of 10,000 beneficial holders of our
Common Stock. The following table sets forth, for the periods indicated, the high and low sale prices of the Company’s
Common Stock on the Nasdaq Global Select Market as well as dividends paid during such periods.
2018
First Quarter (through February 16, 2018) ...................... $
26.25 $
22.10 $
0.00
High
Low
Dividends
Per Share
2017
Fourth Quarter ................................................................. $
Third Quarter ..................................................................
Second Quarter ................................................................
First Quarter ....................................................................
2016
Fourth Quarter ................................................................. $
Third Quarter ..................................................................
Second Quarter ................................................................
First Quarter ....................................................................
25.70 $
22.60
21.05
19.93
19.10 $
18.45
18.71
18.99
21.21 $
18.30
18.15
17.18
14.59 $
15.02
14.56
13.70
0.065
0.065
0.06
0.06
0.06
0.06
0.05
0.05
On February 21, 2018, our Board also declared a regular quarterly cash dividend of $0.065 per share, payable March 23,
2018 to shareholders of record as of March 9, 2018. Future declaration and payment of dividends is at the discretion of our
Board, and depends upon, among other things, our investment policy and opportunities, results of operations, financial
condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board at the time of
its determination. Such other factors include limitations contained in the agreement for our Syndicated Credit Facility, which
specifies conditions as to when any dividend payments may be made. As such, we may discontinue our dividend payments
in the future if our Board determines that a cessation of dividend payments is proper in light of the factors indicated above.
17
Stock Performance
The following graph and table compare, for the five-year period ended December 31, 2017, the Company’s total returns
to shareholders (stock price plus dividends, divided by beginning stock price) with that of (i) all companies listed on the
Nasdaq Composite Index, and (ii) a self-determined peer group comprised primarily of companies in the commercial interiors
industry, assuming an initial investment of $100 in each on December 30, 2012 (the last day of the fiscal year 2012).
Interface, Inc.
NASDAQ Composite Index
Self-Determined Peer Group (14 Stocks)
Notes to Performance Graph
12/30/12
$100
$100
$100
12/29/13
$137
$142
$150
12/28/14
$107
$166
$166
1/3/16
$124
$175
$178
1/1/17
$122
$191
$205
12/31/17
$167
$248
$229
(1)
(2)
(3)
(4)
(5)
(6)
The lines represent annual index levels derived from compound daily returns that include all dividends.
The indices are re-weighted daily, using the market capitalization on the previous trading day.
If the annual interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
The index level was set to $100 as of December 30, 2012 (the last day of fiscal year 2012).
The Company’s fiscal year ends on the Sunday nearest December 31.
The following companies are included in the Self-Determined Peer Group depicted above: Acuity Brands, Inc.;
Albany International Corp.; Apogee Enterprises, Inc.; Armstrong World Industries, Inc.; BE Aerospace, Inc.; The
Dixie Group, Inc.; Herman Miller, Inc.; HNI Corporation; Kimball International, Inc.; Knoll, Inc.; Mohawk
Industries, Inc.; Steelcase, Inc.; Unifi, Inc.; and USG Corp.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this Annual Report on Form 10-K.
18
Issuer Purchases of Equity Securities
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 fourth quarter ended December 31, 2017:
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs(2)
Approximate
Dollar
Value of Shares
that May Yet
Be Purchased
Under the
Plans or
Programs(2)
Total
Number
of Shares
Purchased
Average
Price Paid
Per Share
Period(1)
October 2 - 31, 2017 ....................................................
November 1 – 30, 2017 (3) ...........................................
December 1 – 31, 2017 ..............................................
Total ............................................................................
0 $
436,399
15,201
451,600 $
0.00
23.28
23.99
23.30
0 $
435,399
15,201
450,600 $
50,077,293
39,940,933
39,576,216
39,576,216
(1) The monthly periods identified above correspond to the Company’s fiscal fourth quarter of 2017, which commenced
October 2, 2017 and ended December 31, 2017.
(2) In April 2017, the Company announced a new share purchase program authorizing the repurchase of up to $100 million
of common stock. This program has no specific expiration date.
(3) Includes 1,000 shares acquired by the Company from an employee at a price of $22.75 per share to satisfy income tax
withholding obligations in connection with the vesting of a previous grant of an equity award.
19
ITEM 6. SELECTED FINANCIAL DATA
We derived the summary consolidated financial data presented below from our audited consolidated financial statements
and the notes thereto for the years indicated. You should read the summary financial data presented below together with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated
financial statements and notes thereto included within this document. Amounts for all periods presented have been adjusted
for discontinued operations.
2017
2016
2015
2014
2013
Net sales ......................................................................... $ 996,443 $ 958,617 $1,001,863 $ 1,003,903 $ 959,989
Cost of sales ................................................................... 610,422 589,973 618,974 663,876 618,880
Operating income(1) ........................................................ 109,844
95,630
Net income(2) .................................................................
48,255
53,246
Income from continuing operations per common share
84,937 113,593
72,418
54,162
70,295
24,808
attributable to Interface, Inc.
Basic ........................................................................... $
Diluted ........................................................................ $
Average Shares Outstanding
0.86 $
0.86 $
0.83 $
0.83 $
1.10 $
1.10 $
0.37 $
0.37 $
0.73
0.73
66,194
Basic ...........................................................................
66,297
Diluted ........................................................................
0.11
Cash dividends per common share ................................. $
91,851
Property additions ..........................................................
Depreciation and amortization(3) ....................................
32,605
Working capital .............................................................. $ 254,221 $ 311,799 $ 245,391 $ 240,881 $ 257,918
Total assets ..................................................................... 800,600 835,439 756,549 774,914 796,335
Total long-term debt ....................................................... 229,928 270,347 213,531 263,338 273,826
Shareholders’ equity ....................................................... 330,091 340,729 342,366 306,639 340,787
Current ratio(4) ................................................................
3.0
__________
66,389
66,448
0.14 $
38,922
34,675
66,027
66,075
0.18 $
27,188
44,751
61,996
62,040
0.25 $
30,474
37,508
65,098
65,136
0.22 $
28,071
36,505
2.7
3.0
2.6
2.4
(1) The following charges and items are included in our operating income. In 2017, we recorded restructuring and asset
impairment charges of $7.3 million. In 2016, we recorded restructuring and asset impairment charges of $19.8 million.
In 2014, we recorded restructuring and asset impairment charges of $12.4 million. In 2013, we recorded a gain of
approximately $7.0 million related to the final settlement of our insurance claim relating to the Australia fire.
(2) Included in 2017 net income are provisional tax charges of $15.2 million due to the recently enacted U.S. Tax Cuts and
Jobs Act. Please see Item 8, Note 13 “Taxes on Income” for further discussion of these charges. Included in 2014 net
income is $9.2 million of pre-tax expenses related to the premium paid to redeem senior note debt as well as $2.8 million
related to the unamortized debt cost that related to these notes at redemption. Included in the 2013 net income are $1.7
million of expenses related to the retirement of debt, and a one-time tax dispute resolution benefit of $1.9 million.
(3) Includes stock compensation amortization.
(4) Current ratio is the ratio of current assets to current liabilities.
20
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Our revenues are derived from sales of floorcovering products, primarily modular carpet and luxury vinyl tile (“LVT”).
Our business, as well as the commercial interiors industry in general, is cyclical in nature and is impacted by economic
conditions and trends that affect the markets for commercial and institutional business space. The commercial interiors
industry, including the market for floorcovering products, is largely driven by reinvestment by corporations into their existing
businesses in the form of new fixtures and furnishings for their workplaces. In significant part, the timing and amount of such
reinvestments are impacted by the profitability of those corporations. As a result, macroeconomic factors such as employment
rates, office vacancy rates, capital spending, productivity and efficiency gains that impact corporate profitability in general,
also affect our business.
Most of our sales are to customers in the corporate office market segment, but we also focus our marketing and sales
efforts on non-corporate office segments to reduce somewhat our exposure to economic cycles that affect the corporate office
market segment more adversely, as well as to capture additional market share. Our mix of corporate office versus non-
corporate office modular carpet sales in the Americas was 44% and 56%, respectively, for 2017. Company-wide, our mix of
corporate office versus non-corporate office sales was 59% and 41%, respectively, in 2017.
During 2017, we had net sales of $996.4 million, up 3.9% compared to $958.6 million in 2016. Operating income for
2017 was $109.8 million as compared to $84.9 million in 2016. Net income for 2017 was $53.2 million, or $0.86 per share,
compared with $54.2 million, or $0.83 per share, in 2016. Included in our results for 2017 were $7.3 million of restructuring
and asset impairment charges as well as $15.2 million of tax charges related to the recently enacted U.S. Tax Cuts and Jobs
Act. Please see Item 8, Note 13 “Taxes on Income” for further discussion of these tax charges.
During 2016, we had net sales of $958.6 million, down 4.3% compared to $1.0 billion in 2015. Operating income for
2016 was $84.9 million as compared to $113.6 million for 2015. Net income for 2016 was $54.2 million, or $0.83 per share,
compared with $72.4 million, or $1.10 per share, in 2015. Included in our results for 2016 was a restructuring and asset
impairment charge of $19.8 million, as discussed below.
2016 Restructuring Plan
In the fourth quarter of 2016, we committed to a new restructuring plan in our continuing efforts to improve efficiencies
and decrease costs across our worldwide operations, and more closely align our operating structure with our business strategy.
The plan involved (i) a substantial restructuring of the FLOR business model that included closure of its headquarters office
and most retail FLOR stores, (ii) a reduction of approximately 70 FLOR employees and a number of employees in the
commercial carpet tile business, primarily in the Americas and Europe regions, and (iii) the write-down of certain
underutilized and impaired assets that included information technology assets, intellectual property assets, and obsolete
manufacturing, office and retail store equipment.
As a result of this plan, we incurred a pre-tax restructuring and asset impairment charge in the fourth quarter of 2016 of
$19.8 million. In connection with this plan, in the first quarter of 2017, the Company recorded an additional charge of $7.3
million, primarily related to exit costs associated with the closure of most FLOR retail stores in the first quarter of 2017. The
charge in the fourth quarter of 2016 was comprised of $10.1 million of severance charges, $8.0 million of asset impairment
charges and lease exit costs of $1.7 million. The charge in the first quarter of 2017 was comprised of lease exit costs of $3.4
million, asset impairment charges of $3.3 million and severance charges of $0.6 million.
Approximately $16 million of the charges were expected to result in cash expenditures, primarily for severance payments
(approximately $11 million) and lease exit costs (approximately $5 million). This restructuring plan was substantially
completed in 2017.
21
Analysis of Results of Operations
The following discussion and analyses reflect the factors and trends discussed in the preceding sections.
Our net sales that were denominated in currencies other than the U.S. dollar were approximately 46% in 2017, and 48%
in 2016 and 2015. Because we have such substantial international operations, we are impacted, from time to time, by
international developments that affect foreign currency transactions. In 2017, the strengthening of the euro, Australian dollar
and Canadian dollar had a small positive impact on our net sales and operating income. During 2016, our sales and operating
income were negatively impacted by the strengthening of the U.S. dollar and euro against the British Pound Sterling, with
smaller impacts due to weakening of the Australian dollar and Canadian dollar against the U.S. dollar. In 2015, the
strengthening of the U.S. dollar led to a significant impact on our consolidated operations. In particular, the euro, Australian
dollar and Canadian dollar were translated at lower rates compared to prior years. The following table presents the amounts
(in U.S. dollars) by which the exchange rates for converting euros, Australian dollars and Canadian dollars into U.S. dollars
have affected our net sales and operating income during the past three years:
2017
2016
(in millions)
2015
Impact of changes in foreign currency on net sales .......................... $
Impact of changes in foreign currency on operating income ...........
5.5 $
1.0
(10.9 ) $
(1.0 )
(79.5)
(9.8)
The following table presents, as a percentage of net sales, certain items included in our Consolidated Statements of
Operations during the past three years:
2017
Fiscal Year
2016
2015
Net sales ............................................................................................
Cost of sales ......................................................................................
Gross profit on sales ..........................................................................
Selling, general and administrative expenses ....................................
Restructuring and asset impairment charges .....................................
Operating income ..............................................................................
Interest/Other expense .......................................................................
Income before income tax expense ...................................................
Income tax expense ...........................................................................
Net income ........................................................................................
100.0%
61.3
38.7
27.0
0.7
11.0
0.9
10.1
4.7
5.3
100.0%
61.5
38.5
27.5
2.1
8.9
0.6
8.3
2.6
5.7
100.0%
61.8
38.2
26.9
0.0
11.3
0.7
10.6
3.3
7.2
Net Sales
Below we provide information regarding our net sales and analyze those results for each of the last three fiscal years.
Fiscal year 2015 was a 53-week period. Fiscal years 2017 and 2016 were 52-week periods.
Fiscal Year
2017
2016
(in thousands)
2015
Percentage Change
2017
2016
compared
compared
with 2016
with 2015
Net Sales ........................................................
996,443 $ 958,617 1,001,863
3.9%
(4.3%)
Net sales for 2017 compared with 2016
For 2017, our net sales increased $37.8 million (3.9%) as compared to 2016. Fluctuations in currency exchange rates had
a positive impact on the comparison of approximately $5.5 million, meaning that if currency levels had remained constant
year over year our 2017 sales would have been lower by this amount. On a geographic basis, we experienced sales growth
across all our regions. Sales in the Americas were up 3.5%, sales in Europe were up 2.0% in U.S. dollars (1.5% increase in
local currencies), and sales in Asia-Pacific were up 8.7%.
22
In the Americas, our weighted average selling price per square yard for our modular carpet decreased 1% in 2017 as
compared to 2016. The sales increase in the Americas was due primarily to the introduction of our LVT products in early
2017, as our modular carpet sales in the Americas declined versus 2016. This decline in modular carpet sales was due entirely
to the closure of our FLOR specialty retail stores in the first quarter of 2017, as our commercial modular business was up
approximately 1% in 2017 as compared to 2016. The corporate office market segment increased 2% for the year. Other
market segments showing growth were the government (up 19%), retail (up 5%) and education (up 4%) market
segments. The increase in the government market segment was seen across most government customers, with sales to state
and municipal governments representing the most significant increase. The increase in retail was due to the performance of
our Interface SERVICES™ business, which has a larger percentage of its sales to the retail segment. These increases were
offset by declines in the hospitality (down 7%) and healthcare (down 6%) market segments.
In Europe, our weighted average selling price per square meter increased 3% in 2017 compared with 2016. Sales in the
region were up in both U.S. dollars (2%) and local currency (1.5%). Within the region, the weakening of the British Pound
versus the euro had a negative impact on sales, however this was offset by the strengthening of the euro versus the U.S. dollar
during 2017 as compared to 2016. The United Kingdom, which has historically been our third largest market, experienced a
sales increase in local currency of 3% for the year, but a decline of 2% when translated into U.S. dollars. We also experienced
growth in Germany in 2017, but this was partially offset by other declines in central Europe. The increase in sales was
entirely within the corporate office market segment (up 3%) as no other market segment had a significant increase in
sales. The corporate office market comprises the majority of sales in the Europe region. This increase was partially offset
by declines in the retail (down 17%), education (down 12%), and residential (down 52%) market segments.
In Asia-Pacific, our weighted average selling price increased 5.6% for the year, with the appreciation of the Australian
dollar having a positive impact on this increase. Within the region, Asia sales increased 5% while Australia sales increased
12% as translated into U.S. dollars. As noted, the appreciation of the Australian dollar had a positive impact on the sales
increase, as in local currency sales in Australia increased 9%. The increase in sales for the region was primarily due to the
strength of the corporate office market (which comprises the bulk of the region’s sales and was up 8%). Other non-office
market segments showing growth for the year were education (up 16%) and healthcare (up 36%). The increase in the
education segment was due to our success in the Australian education market, a result of increased government education
spending in the market, as well as growth of student accommodation projects at the university level. These increases were
only slightly offset by declines in the retail, government and residential market segments.
Net sales for 2016 compared with 2015
For 2016, our net sales declined $43.3 million (4.3%) as compared to 2015. Fluctuations in currency exchange rates had
a negative impact on the comparison of approximately $10.9 million, meaning that if currency levels had remained constant
year over year, our 2016 sales would have been higher by this amount. On a geographic basis, we experienced sales declines
in the Americas (down 4.2%) and Europe (down 8.1%), partially offset by an increase of 2% in Asia-Pacific.
In the Americas, our weighted average selling price per square yard increased approximately 1% in 2016 compared with
2015. The sales decline in the Americas was experienced across the majority of our customer segments, with the most
significant decline occurring in the corporate office segment (down 5%), which is the largest single customer segment in the
Americas. We saw lower levels of customer orders during the first three quarters of the year, although this trend somewhat
reversed during the fourth quarter, as sales in the corporate segment were effectively flat for the quarter. We also experienced
a decline in the residential market segment of 15%, due largely to the performance of our FLOR consumer business. Other
declines were seen in the government (down 19%) and retail (down 5%) market segments. The decline in government
segment sales in the region was primarily a result of reduced order activity in light of the election cycle. The hospitality
market segment in the region increased 11% versus 2015, as we continued to convert customers to modular carpet.
In Europe, our weighted average selling price per square meter declined approximately 3% in 2016 compared with 2015.
The largest single factor impacting our performance in this region was the turmoil surrounding the decision of the United
Kingdom to exit the European Union. This had a significant negative impact on our sales performance in the United Kingdom,
which has historically been our third largest market. Not only were sales impacted by the uncertainty around the exit vote,
the significant decline in the British Pound led to a translation effect on sales in the U.K. as reported in U.S. dollars. In local
currency, the sales decline in the U.K. was 13%, but when translated into U.S. dollars the decline was over 25%. This decrease
was partially offset by double digit increases in other countries, notably Germany, Spain and Italy. On a market segment
basis, the decline was most significant in the corporate office market (down 6%), which represents the majority of sales
within Europe. With the exception of the hospitality (up 19%) and healthcare (up 17%) market segments, all other non-office
market segments in the region were down year over year, with the most significant declines occurring in the education (down
29%) and government (down 13%) market segments.
23
In the Asia-Pacific region, our weighted average selling price per square meter declined approximately 1% in 2016
compared with 2015. The 2% sales increase in the region was evenly split between Australia and Asia, with both geographic
markets seeing a 2% increase in revenue. In local currency, the increase in Australia was approximately 3%. The increase in
sales in the Asia-Pacific region was experienced in the corporate office market segment (up 5%), which represents the
majority of sales within the region. This increase was a result of large development projects that led to increases in the first
half of the year, particularly in Australia. The only other market segment in the region that experienced an increase of
significance was the hospitality segment (up 24%), due to investment in additional selling resources in the region which led
to greater market share. Within the region, the sales increases in corporate and hospitality segments were offset by declines
in the retail (down 31%) and education (down 11%) market segments.
Cost and Expenses
The following table presents our overall cost of sales and selling, general and administrative expenses during the past
three years:
Cost and Expenses
Fiscal Year
2017
2016
(in thousands)
2015
Percentage Change
2017
2016
compared
compared
with 2015
with 2016
Cost of Sales ...................................................... $ 610,422 $ 589,973 $ 618,974
Selling, General and Administrative Expenses . 268,878 263,919
269,296
Total .................................................................. $ 879,300 $ 853,892 $ 888,270
3.5%
1.9%
3.0%
(4.7 %)
(2.0 %)
(3.9 %)
For 2017, our costs of sales increased $20.4 million (3.5%) compared with 2016. Fluctuations in currency exchange rates
did not have a significant impact (less than 1%) on the comparison. In absolute dollars, the increase in costs of sales was a
result of the higher sales for 2017 as compared to 2016. As noted above, sales increased 3.9% in 2017. As a percentage of
sales, our costs of sales improved to 61.3% in 2017 versus 61.5% in 2016. This improvement was a result of (1) productivity
initiatives, including our investment in our manufacturing facilities in LaGrange Georgia, (2) lower cost of sales as a
percentage of sales due to the introduction of our LVT product offerings, which commanded margins in 2017 that were
accretive to our modular carpet products, and (3) non-recurring charges in 2016 related to the transition to a centralized
warehouse and distribution center in our Americas business. These benefits were partially offset by (1) higher raw materials
costs due to input cost inflation, particularly in our European business, and (2) negative gross margin impacts due to the exit
of our FLOR specialty retail business. Our FLOR business delivers higher gross margins than our commercial business, and
with the closure of the specialty retail stores the decline in sales had a negative impact on our cost of sales as a percentage of
sales.
For 2016, our cost of sales decreased $29.0 million (4.7%) compared with 2015. Fluctuations in currency exchange rates
did not have a significant impact (less than 1%) on the comparison. In absolute dollars, the decrease in cost of sales was due
to lower sales and production versus the prior year, as production for 2016 was down 11% in Americas, 3% in Europe and
3% in Asia-Pacific versus 2015. As a percentage of sales, our cost of sales declined to 61.5% in 2016 versus 61.8% in 2015.
The most significant reason for this decline was lower raw materials costs during the year as a result of lower feedstock prices
for our raw materials, primarily yarn. These lower prices produced a benefit in cost of sales of approximately $12 million,
meaning that our raw materials costs for 2016 were lower by this amount. We also experienced more favorable production
and utilization efficiencies in 2016 versus 2015. Our cost of sales was, however, negatively impacted by approximately $5
million in the second half of 2016, as there were additional costs within our Americas business as a result of the transition to
a new centralized warehouse and distribution center operated by a third party for the region.
For 2017, our SG&A expenses increased $5.0 million (1.9%) versus 2016. Currency fluctuations had only a slight (less
than 1%) unfavorable impact on SG&A expenses. The increase in SG&A expenses during the year was due to (1) higher
incentive-based compensation (approximately $6 million) and performance-based stock compensation (approximately $1.5
million) as performance targets were met to a higher degree in 2017 as comparted to 2016, and (2) higher administrative
expenses of $5 million as we centralize certain support functions. These increases were partially offset by (1) lower marketing
expenses of $3.9 million, a result of our restructuring efforts as well as global consolidation of costs for marketing
expenditures leading to lower levels of total spend, and (2) lower selling costs of $4.2 million due primarily to exiting our
FLOR specialty retail business in 2017. Despite the higher SG&A expense in absolute dollars, due to the increase in sales
noted above, SG&A expenses declined as a percentage of sales in 2017 to 27.0% versus 27.5% in 2016.
24
For 2016, our SG&A expenses decreased $5.4 million (2.0%) versus 2015. Currency fluctuations had only a slight (less
than 1%) favorable impact on SG&A expenses. On an absolute dollar basis, the decrease was almost entirely related to lower
administrative expenses of $9.4 million resulting from lower incentive-based compensation, including share-based
compensation, due to performance targets not being met in 2016 to the same degree as in 2015. These declines were primarily
at the corporate and Americas level. Other declines were lower selling expenses of $1.2 million due to reduced commissions
on lower sales volumes. These decreases were partially offset by higher marketing expenses in 2016 of approximately $5.2
million, as we continued to expand our marketing efforts related to the early rollout of our modular resilient flooring (“MRF”)
products as well as other initiatives to drive product adoption. These marketing increases were most significant in the
Americas region (up $1.7 million) due to the MRF rollout and in the Asia-Pacific region (up $1.9 million), primarily in Asia
related to additional customer events, product rollout support and increased marketing management. Despite the overall
decline in SG&A expenses in absolute dollars, due to the lower sales in 2016 versus 2015 our SG&A expenses increased as
a percentage of sales to 27.5% in 2016 versus 26.9% in 2015, as the decline in SG&A expenses was less than the decline in
net sales.
Interest Expense
For 2017, our interest expense increased $1.0 million to $7.1 million, versus $6.1 million in 2016. This increase was a
result of (1) higher average interest rates under our Syndicated Credit Facility during 2017 (the average interest rate for 2016
was 2.5% as compared to 2.9% for 2017), and (2) in 2017 we fixed the variable interest rate on $100 million of our term loan
borrowings under the Syndicated Credit Facility by entering into an interest rate swap transaction. The effect of this interest
rate swap was to increase the interest rate on the $100 million notional amount of the swap above the variable rate in effect
for our other term loan borrowings under the Syndicated Credit Facility.
For 2016, our interest expense decreased $0.3 million to $6.1 million, versus $6.4 million in 2015. This decrease was due
to lower average outstanding debt balances in 2016 versus 2015. During 2016, we repaid a net amount of $6.2 million under
our Syndicated Credit Facility, and this lower level of debt led to lower interest expense during 2016. We did incur additional
Syndicated Credit Facility borrowings of approximately $63.5 million in December of 2016, but this debt was outstanding
for only the final month of 2016 and did not have a significant impact on interest expense (less than $0.1 million).
Tax
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Among the significant
changes resulting from the law, the Tax Act reduces the U.S. federal income tax rate from 35% to 21% effective January 1,
2018 and creates a modified territorial tax system with a one-time mandatory “transition tax” on previously unrepatriated
foreign earnings.
Due to the tax legislation, the Company has recorded a provisional tax expense of $3.5 million related to the
remeasurement of its net deferred tax assets. The Company also recorded a provisional tax expense of $11.7 million related
to the one-time transition toll tax. These amounts are considered provisional because they use reasonable estimates of which
tax returns have not been filed and because estimated amounts may be impacted by future regulatory and accounting guidance
if and when issued. The Company will adjust these provisional amounts as further information becomes available and as we
refine our calculations. Please see Item 8, Note 13 entitled “Taxes on Income” for further information on the financial
statement impact of the Tax Act.
Our effective tax rate in 2017 was 47.0%, compared with an effective tax rate of 31.6% in 2016. The increase in our
effective tax rate in 2017 compared to 2016 was primarily due to a $15.2 million tax charge for the impacts of the Tax Act
as discussed above and an increase in U.S. earnings resulting in more U.S. state tax expense.
Our effective tax rate in 2016 was 31.6%, compared with an effective tax rate of 31.5% in 2015. The 2016 effective tax
rate was favorably impacted by a higher portion of income earned in foreign jurisdictions which are taxed at lower tax rates
than the U.S federal tax rate. The favorable impact to the 2016 effective tax rate was offset by a decrease in the release of
valuation allowances related to state net operating loss carryforwards utilized in 2016 compared to 2015. For additional
information on taxes and a reconciliation of effective tax rates to statutory tax rates, see the Note 13 entitled “Taxes on
Income” in Item 8 of this Report.
25
Liquidity and Capital Resources
General
In our business, we require cash and other liquid assets primarily to purchase raw materials and to pay other manufacturing
costs, in addition to funding normal course SG&A expenses, anticipated capital expenditures, interest expense and potential
special projects. We generate our cash and other liquidity requirements primarily from our operations and from borrowings
or letters of credit under our Syndicated Credit Facility discussed below.
Historically, we use more cash in the first half of the fiscal year, as we pay insurance premiums, taxes and incentive
compensation and build up inventory in preparation for the holiday/vacation season of our international operations.
In December 2016, one of the Company’s foreign subsidiaries borrowed 61 million euros (approximately $63.5 million)
under the Syndicated Credit Facility. The funds were distributed to its U.S. parent company to fund then-current and projected
U.S. cash needs. A significant portion of these borrowings were repaid in the first quarter of 2017.
At December 31, 2017, we had $87.0 million in cash. Approximately $14.1 million of this cash was located in the U.S.,
and the remaining $72.9 million was located outside of the U.S. The cash located outside of the U.S. is indefinitely reinvested
in the respective jurisdictions (except as identified below). We believe that our strategic plans and business needs, particularly
for working capital needs and capital expenditure requirements in Europe, Asia, Canada, and Australia, support our assertion
that a portion of our cash in foreign locations will be reinvested and remittance will be postponed indefinitely. Of the $72.9
million of cash in foreign jurisdictions, approximately $43.0 million represents earnings which we have determined are not
permanently reinvested, and as such we have provided for foreign withholding and U.S. state income taxes on these amounts
in accordance with applicable accounting standards.
As of December 31, 2017, we had $229.9 million of borrowings and $6.0 million in letters of credit outstanding under
our Syndicated Credit Facility. Of those borrowings outstanding, $170.0 million were Term Loan A borrowings and $59.9
million were revolving loan borrowings. As of December 31, 2017, we could have incurred $184.1 million of additional
revolving loan borrowings under our Syndicated Credit Facility. In addition, we could have incurred the equivalent of $9.8
million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.
We have approximately $95.0 million in contractual cash obligations due by the end of fiscal year 2018, which includes,
among other things, pension cash contributions, interest payments on our debt and lease commitments. Based on current
interest rate and debt levels, we expect our aggregate interest expense for 2018 to be between $8 million and $11 million. We
estimate aggregate capital expenditures in 2018 to be between $50 million and $60 million, although we are not committed
to these amounts.
It is important for you to consider that we have a significant amount of indebtedness. Our Syndicated Credit Facility
matures in August of 2022. We cannot assure you that we will be able to renegotiate or refinance any of our debt on
commercially reasonable terms, or at all. If we are unable to refinance our debt or obtain new financing, we would have to
consider other options, such as selling assets to meet our debt service obligations and other liquidity needs, or using cash, if
available, that would have been used for other business purposes.
It is also important for you to consider that borrowings under our Syndicated Credit Facility comprise the substantial
majority of our indebtedness, and that these borrowings are based on variable interest rates (as described below) that expose
the Company to the risk that short-term interest may increase. We have, however, entered into an interest rate swap transaction
to fix the variable interest rate with respect to $100 million of the term loan borrowings under the Syndicated Credit Facility.
For information regarding the current variable interest rates of these borrowings, the potential impact on our interest expense
from hypothetical increases in short term interest rates, and the interest rate swap transaction, please see the discussion in
Item 7A of this Report.
Syndicated Credit Facility
We have a syndicated credit facility (the “Syndicated Credit Facility” or “Facility”, most recently amended and restated
in August 2017) pursuant to which the lenders provide to us and certain of our subsidiaries a multicurrency revolving credit
facility and provide to us a term loan. The key features of the Facility are as follows:
• The Facility matures in August of 2022.
26
• The Facility includes a multicurrency revolving loan facility made available to the Company and our principal
subsidiaries in Europe and Australia not to exceed $250 million in the aggregate at any one time outstanding. A
sublimit of $40 million exists for the issuance of letters of credit under the Facility.
• The Facility includes a Term Loan A borrowing that had an original principal amount of $177.5 million.
• The Facility provides for required amortization payments of the Term Loan A borrowing, as well as mandatory
prepayments of the Term Loan A borrowing (and any term loans made available pursuant to any future multicurrency
loan facility increase) from certain asset sales, casualty events and debt issuances, subject to certain qualifications
and exceptions as provided for therein.
• Advances under the Facility are secured by a first-priority lien on substantially all of Interface, Inc.’s assets and the
assets of each of our material domestic subsidiaries, which have guaranteed the Facility.
• The Facility contains financial covenants (specifically, a consolidated net leverage ratio and a consolidated interest
coverage ratio) that must be met as of the end of each fiscal quarter.
• We have the option to increase the borrowing availability under the Facility, either for revolving loans or term loans,
by up to $150 million, subject to the receipt of lender commitments for the increase and the satisfaction of certain
other conditions.
Interest Rates and Fees. Interest on base rate loans is charged at varying rates computed by applying a margin ranging
from 0.25% to 1.50% over the applicable base interest rate (which is defined as the greatest of the prime rate, a specified
federal funds rate plus 0.50%, or a specified Eurocurrency rate), depending on our 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 ranging from 1.25% to 2.50% over the applicable Eurocurrency rate, depending
on our consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, we pay a commitment fee
ranging from 0.20% to 0.35% per annum (depending on our consolidated net leverage ratio as of the most recently completed
fiscal quarter) on the unused portion of the Facility.
Amortization Prepayments. We are required to make quarterly amortization payments of $3.75 million of the Term Loan
A borrowing.
Covenants. The Facility contains standard and customary covenants for agreements of this type, including various
reporting, affirmative and negative covenants. Among other things, these covenants limit our ability to:
create or incur liens on assets;
•
• make acquisitions of or investments in businesses (in excess of certain specified amounts);
•
•
•
•
•
incur indebtedness or contingent obligations;
sell or dispose of assets (in excess of certain specified amounts);
pay dividends or repurchase our stock (in excess of certain specified amounts);
repay other indebtedness prior to maturity unless we meet certain conditions; and
enter into sale and leaseback transactions.
The Facility also requires us to remain in compliance with the following financial covenants as of the end of each fiscal
quarter, based on our consolidated results for the year then ended:
• Consolidated Net Leverage Ratio: Must be no greater than 3.75:1.00.
• Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
Events of Default. If we breach or fail to perform any of the affirmative or negative covenants under the Facility, or if
other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc. or certain
subsidiaries, or if we breach or fail to perform any covenant or agreement contained in any instrument relating to any of our
other indebtedness exceeding $20 million), after giving effect to any applicable notice and right to cure provisions, an event
of default will exist. If an event of default exists and is continuing, the lenders’ Administrative Agent may, and upon the
written request of a specified percentage of the lender group shall:
•
•
•
declare all commitments of the lenders under the facility terminated;
declare all amounts outstanding or accrued thereunder immediately due and payable; and
exercise other rights and remedies available to them under the agreement and applicable law.
27
Collateral. Pursuant to an Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially
all of the assets of Interface, Inc. and our domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries),
including all of the stock of our domestic subsidiaries and up to 65% of the stock of our first-tier material foreign subsidiaries.
If an event of default occurs under the Facility, the lenders’ Administrative Agent may, upon the request of a specified
percentage of lenders, exercise remedies with respect to the collateral, including, in some instances, foreclosing mortgages
on real estate assets, taking possession of or selling personal property assets, collecting accounts receivables, or exercising
proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries.
As of December 31, 2017, we had $170.0 million of Term Loan A borrowings and $59.9 million of revolving loan
borrowings outstanding under the Facility, and had $6.0 million in letters of credit outstanding under the Facility.
We are presently in compliance with all covenants under the Syndicated Credit Facility and anticipate that we will remain
in compliance with the covenants for the foreseeable future.
In the third quarter of 2017, we entered into an interest rate swap transaction that fixed the variable interest rate with
respect to $100 million of the term loan borrowings under the Syndicated Credit Facility. For additional information, please
see Item 7A and Note 8 entitled “Borrowings” in Item 8 of this Report.
Analysis of Cash Flows
We ended 2017 with $87.0 million in cash, a decrease of $78.6 million during the year. The most significant decrease in
cash was due to our share repurchase program which used $91.6 million of cash to repurchase and retire 4.6 million shares
of our outstanding common stock, pursuant to our established share repurchase plans. We also used $72.0 million of cash to
repay outstanding borrowings under our Syndicated Credit Facility (including $15.0 million of required amortization
payments under our term loan), as well as $15.5 million for the payment of dividends. We borrowed $25.0 million during
2017 under our Syndicated Credit Facility. Outside of these financing activities, we also used cash of $30.5 million for
capital expenditures during 2017. These uses of cash were partially offset by cash flow from operations of $103.4
million. The significant components of cash flow from operations were (1) net income of $53.2 million, and (2) a $12.0
million increase in accruals and accounts payable. Cash flow from operations was partially offset by (1) an increase of
accounts receivable of $10.3 million, and (2) an increase in inventory of $13.6 million. Included in cash flow from operations
is a $15.2 million add-back to net income related to the non-cash charge recorded in 2017 in connection with the Tax Act. A
portion of this impact (an estimated $9.8 million) will result in cash expenditures over the next eight years as is allowed by
the Tax Act. However, this estimated amount could change as the Company completes its analysis of the Tax Act over the
course of 2018.
We exited 2016 with $165.7 million in cash, an increase of $90.0 million during the year. The most significant increase
in cash was a result of borrowings under our Syndicated Credit Facility, the largest portion of which was borrowings of $63.5
million in the December 2016 borrowing transaction discussed above. We also borrowed an additional $23.9 million under
our Syndicated Credit Facility during 2016. Outside of these borrowings, our cash flow from operating activities of $98.1
million was the most significant factor in our cash generation. The significant components of this cash flow from operations
were (1) net income of $54.2 million, (2) a $12.2 million increase in accounts payable and accruals, and (3) a $2.7 million
decrease in inventory. These increases were partially offset by a $7.7 million increase in prepaid expenses and other
assets. Other primary uses of cash during 2016 were (1) capital expenditures of $28.1 million, (2) $18.5 million used to
repurchase and retire 1.2 million shares of our outstanding common stock pursuant to our established share repurchase plan,
(3) $17.6 million of repayments under our Syndicated Credit Facility, (4) $14.3 million for the payment of dividends, and (5)
$12.5 million for repayment of term loan borrowings under our Syndicated Credit Facility as required by the applicable
amortization schedule.
We exited 2015 with $75.7 million in cash, an increase of $20.8 million during the year. The increase in cash was
primarily due to improved cash flow from operating activities of $126.5 million in 2015, compared with $46.4 million in
2014. The factors driving the increase in cash flow from operating activities were (1) higher net income in 2015 due to
improved operational performance, (2) a $16.2 million reduction in cash paid for interest, (3) an $18.7 million reduction in
accounts receivable, and (4) a $15.5 million increase in accounts payable and accrued expenses. The increase in cash from
operating activities was partially offset by an increase in inventories of $26.5 million and an increase in prepaid expenses
and other assets of $8.3 million. Our other primary uses of cash during 2015 were (1) $45.3 million of repayments of
revolving loan borrowings under our Syndicated Credit Facility, (2) $27.2 million of capital expenditures, primary related to
our manufacturing locations, (3) $13.3 million used to repurchase and retire 650,000 shares of our outstanding common stock,
pursuant to our established share repurchase plan, (4) $11.9 million for the payment of dividends, and (5) $2.5 million for
repayment of term loan borrowings under our Syndicated Credit Facility as required by the applicable amortization schedule.
28
We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash
requirements for the foreseeable future.
Funding Obligations
We have various contractual obligations that we must fund as part of our normal operations. The following table discloses
aggregate information about our contractual obligations and the periods in which payments are due. The amounts and time
periods are measured from December 31, 2017.
Total
Payments
Due
Less than
1 year
Payments Due by Period
1-3 years
3-5 years
(in thousands)
More than
5 years
Long-Term Debt Obligations .................... $
Operating Lease Obligations(1) ..................
Expected Interest Payments(2) ...................
Unconditional Purchase Obligations(3) ......
Pension Cash Obligations(4) .......................
Total Contractual Cash Obligations(5) (6) .... $
______________________
229,928 $
62,439
28,842
49,383
123,169
493,761 $
15,000 $
16,719
7,013
45,091
11,145
94,968 $
30,000 $
21,789
12,589
3,709
23,044
91,131 $
184,928 $
8,431
9,240
583
24,329
227,511 $
0
15,500
0
0
64,651
80,151
(1) Our capital lease obligations are insignificant.
(2) Expected interest payments to be made in future periods reflect anticipated interest payments related to the
$170.0 million of Term Loan A borrowings outstanding and the $59.9 million of revolving loan borrowings
outstanding under our Syndicated Credit Facility as of December 31, 2017. We have also assumed in the
presentation above that these borrowings will remain outstanding until maturity with the exception of the required
amortization payments for our Term Loan A borrowings.
(3) Unconditional purchase obligations do not include unconditional purchase obligations that are included as liabilities
in our Consolidated Balance Sheet. Our capital expenditure commitments are not significant.
(4) We have two foreign defined benefit plans and a domestic salary continuation plan. We have presented above the
estimated cash obligations that will be paid under these plans over the next ten years. Such amounts are based on
several estimates and assumptions and could differ materially should the underlying estimates and assumptions
change. Our domestic salary continuation plan is an unfunded plan, and we do not currently have any commitments
to make contributions to this plan. However, we do use insurance instruments to hedge our exposure under the
salary continuation plan. Contributions to our other employee benefit plans are at our discretion.
(5) The above table does not reflect unrecognized tax benefits of $29.2 million, the timing of which payments are
uncertain. See Note 13 entitled “Taxes on Income” in Item 8 of this Report for further information.
(6) The above table does not reflect any provisional payments under the U.S. Tax Cuts and Jobs Act enacted December
2017. At this time, the Company estimates it will be required to pay $9.8 million for transition toll taxes over a
maximum of eight years. The Company is still analyzing the impact of the U.S. Tax Cuts and Jobs Act and will
determine during 2018 the ultimate amount and timing of these payments. The $9.8 million amount is currently
included as an accrued liability in our consolidated financial statements. As these amounts and timing are still under
review and may increase or decrease during 2018, the Company has not included them in the above table. See Note
13 entitled “Taxes on Income” in Item 8 of this Report for further information.
Critical Accounting Policies
The policies discussed below are considered by management to be critical to an understanding of our consolidated
financial statements because their application places the most significant demands on management’s judgment, with financial
reporting results relying on estimations about the effects of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that
future events may not develop as forecasted, and the best estimates routinely require adjustment.
29
Revenue Recognition. The vast majority of our revenue is recognized at the date of shipment when the following criteria
are met: persuasive evidence of an agreement exists, price to the buyer is fixed and determinable, and collectability is
reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and
rewards of ownership, which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are
estimated using historical experience, current economic trends, and the Company’s quality performance. The related
provision is recorded as a reduction of sales and cost of sales in the same period that the revenue is recognized. Accordingly,
our estimates and assumptions regarding revenue recognition primarily relate to sales returns and allowances, which
historically have been in the range of 2.5-3.0% of gross sales. Over the last several years, we have not experienced any
significant fluctuation in sales returns and allowances, our estimates and assumptions related thereto have not changed
significantly, and we believe our estimates and assumptions to be reasonably accurate. Management also believes this past
experience can be relied upon for such estimates and assumptions in future periods, as our business model and customer mix
have not changed significantly.
A small percentage (approximately 5%) of our revenue relates to flooring installation projects, which generally involve
short time periods (typically less than two weeks) and therefore present little risk of material difference due to changes in
experience.
Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations.
Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment at the asset group level whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future
undiscounted cash flow is less than the carrying amount of the asset, an impairment is indicated. A loss is then recognized
for the difference, if any, between the fair value of the asset (as estimated by management using its best judgment) and the
carrying value of the asset. If actual market value is less favorable than that estimated by management, additional write-
downs may be required.
Deferred Income Tax Assets and Liabilities. The carrying values of deferred income tax assets and liabilities reflect the
application of our income tax accounting policies in accordance with applicable accounting standards and are based on
management’s assumptions and estimates regarding future operating results and levels of taxable income, as well as
management’s judgment regarding the interpretation of the provisions of applicable accounting standards. The carrying
values of liabilities for income taxes currently payable are based on management’s interpretations of applicable tax laws and
incorporate management’s assumptions and judgments regarding the use of tax planning strategies in various taxing
jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes may
result in materially different carrying values of income tax assets and liabilities and results of operations.
We evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income
from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning
strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and
long-term business forecasts to provide insight. Further, our global business portfolio gives us the opportunity to employ
various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent we do
not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of
December 31, 2017, and January 1, 2017, we had state net operating loss carryforwards of $108.6 million and $108.9 million,
respectively. As of January 1, 2017, we had $3.8 million of foreign net operating loss carryforwards. Certain of these state
net operating loss carryforwards are reserved with a valuation allowance because, based on the available evidence, we believe
it is more likely than not that we would not be able to utilize those deferred tax assets in the future. The remaining year-end
2017 amounts are expected to be fully recoverable within the applicable statutory expiration periods. If the actual amounts
of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted
Goodwill. Pursuant to applicable accounting standards, we test goodwill for impairment at least annually using a two step
approach. In the first step of this approach, we prepare valuations of reporting units, using both a market comparable approach
and an income approach, and those valuations are compared with the respective book values of the reporting units to
determine whether any goodwill impairment exists. In preparing the valuations, past, present and expected future performance
is considered. If impairment is indicated in this first step of the test, a step two valuation approach is performed. The step two
valuation approach compares the implied fair value of goodwill to the book value of goodwill. The implied fair value of
goodwill is determined by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting
unit, including both recognized and unrecognized intangible assets, in the same manner as goodwill is determined in a
business combination under applicable accounting standards. After completion of this step two test, a loss is recognized for
the difference, if any, between the fair value of the goodwill associated with the reporting unit and the book value of that
30
goodwill. If the actual fair value of the goodwill is determined to be less than that estimated, an additional write-down may
be required.
During the fourth quarters of 2017, 2016 and 2015, we performed the annual goodwill impairment test. We perform this
test at the reporting unit level. For our reporting units which carried a goodwill balance as of December 31, 2017, no
impairment of goodwill was indicated. As of December 31, 2017, if our estimates of the fair value of our reporting units were
10% lower, we believe no additional goodwill impairment would have existed.
Inventories. We determine the value of inventories using the lower of cost or net realizable value. We write down
inventories for the difference between the carrying value of the inventories and their net realizable value. If actual market
conditions are less favorable than those projected by management, additional write-downs may be required.
We estimate our reserves for inventory obsolescence by continuously examining our inventories to determine if there are
indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could
require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles,
anticipated demand for our products and current economic conditions. While we believe that adequate write-downs for
inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will
continue to change and we could experience additional inventory write-downs in the future. Our inventory reserve on
December 31, 2017 and January 1, 2017, was $20.4 million and $17.6 million, respectively. To the extent that actual
obsolescence of our inventory differs from our estimate by 10%, our 2017 net income would be higher or lower by
approximately $1.5 million, on an after-tax basis.
Pension Benefits. Net pension expense recorded is based on, among other things, assumptions about the discount rate,
estimated return on plan assets and salary increases. While management believes these assumptions are reasonable, changes
in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of
our plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The
actuarial assumptions used in our salary continuation plan and our foreign defined benefit plans reporting are reviewed
periodically and compared with external benchmarks to ensure that they appropriately account for our future pension benefit
obligation. The expected long-term rate of return on plan assets assumption is based on weighted average expected returns
for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views
of the financial markets, and include input from actuaries, investment service firms and investment managers. The table
below represents the changes to the projected benefit obligation as a result of changes in discount rate assumptions:
Foreign Defined Benefit Plans
Increase
(Decrease) in
Projected Benefit
Obligation
(in millions)
1% increase in actuarial assumption for discount rate ........................................................................ $
1% decrease in actuarial assumption for discount rate ........................................................................ $
(60.1)
61.5
Domestic Salary Continuation Plan
Increase
(Decrease) in
Projected Benefit
Obligation
(in millions)
1% increase in actuarial assumption for discount rate ........................................................................ $
1% decrease in actuarial assumption for discount rate ........................................................................ $
(3.3)
4.0
Environmental Remediation. We provide for environmental remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued
based on estimates of known environmental exposures and are discounted in certain instances. We regularly monitor the
progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously
estimated, an additional accrual would be recorded in the period in which such determination is made. As of December 31,
2017, no significant amounts were provided for remediation liabilities.
Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. Estimating this amount requires us to analyze the financial strengths of
our customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to
31
make payments, additional allowances may be required. By its nature, such an estimate is highly subjective, and it is possible
that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated. Our
allowance for doubtful accounts on December 31, 2017 and January 1, 2017, was $3.5 million and $3.8 million, respectively.
To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2017 net income
would be higher or lower by approximately $0.3 million, on an after-tax basis, depending on whether the actual collectability
was better or worse, respectively, than the estimated allowance.
Product Warranties. We typically provide limited warranties with respect to certain attributes of our carpet products (for
example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty
years, depending on the particular carpet product and the environment in which the product is to be installed. Similar limited
warranties are provided on certain attributes of our LVT products, typically for a period of 15 years. We typically warrant
that any services performed will be free from defects in workmanship for a period of one year following completion. In the
event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product.
We record a provision related to warranty costs based on historical experience and periodically adjust these provisions to
reflect changes in actual experience. Our warranty and sales allowance reserve on December 31, 2017 and January 1, 2017,
was $4.1 million and $5.5 million, respectively. Actual warranty expense incurred could vary significantly from amounts that
we estimate. To the extent the actual warranty expense differs from our estimates by 10%, our 2017 net income would be
higher or lower by approximately $0.3 million, on an after-tax basis, depending on whether the actual expense is lower or
higher, respectively, than the estimated provision.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements.
Recent Accounting Pronouncements
Please see Item 8, Note 2 entitled “Recent Accounting Pronouncements” for discussion of these items.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
As a result of the scope of our global operations, we are exposed to an element of market risk from changes in interest
rates and foreign currency exchange rates. Our results of operations and financial condition could be impacted by this risk.
We manage our exposure to market risk through our regular operating and financial activities and, to the extent we deem
appropriate, through the use of derivative financial instruments.
We employ derivative financial instruments as risk management tools and not for speculative or trading purposes. We
monitor the use of derivative financial instruments through objective measurable systems, well-defined market and credit
risk limits, and timely reports to senior management according to prescribed guidelines. We have established strict counter-
party credit guidelines and enter into transactions only with financial institutions with a rating of investment grade or better.
As a result, we consider the risk of counter-party default to be minimal.
Interest Rate Market Risk Exposure
Changes in interest rates affect the interest paid on certain of our debt. To mitigate the impact of fluctuations in interest
rates, our management monitors interest rates and has developed and implemented a policy to maintain the percentage of
fixed and variable rate debt within certain parameters, subject to approval by our Board of Directors. In 2017, the Company
entered into an interest rate swap transaction with regard to a portion of its term loan debt. The Company’s interest rate swap
is designated and qualifies as a cash flow hedge of forecasted interest payments. The Company reports the effective portion
of the fair value gain or loss on the swap as a component of other comprehensive income (or other comprehensive loss).
Gains or losses (if any) on any ineffective portion of derivative instruments in cash flow hedging relationships are recorded
in the period in which they occur as a component of other expense (or other income) in the Consolidated Condensed Statement
of Operations. There were no such gains or losses in 2017. The aggregate notional amount of the swap as of December 31,
2017 was $100 million.
32
Foreign Currency Exchange Market Risk Exposure
A significant portion of our operations consists of manufacturing and sales activities in foreign jurisdictions. We
manufacture our products in the United States, Northern Ireland, the Netherlands, China, Thailand and Australia, and sell our
products in more than 100 countries. As a result, our financial results have been, and could be, significantly affected by
factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we
distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and many
other currencies, including the euro, British pound sterling, Canadian dollar, Australian dollar, Thai baht and Japanese yen.
When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and
vice versa. Additionally, to the extent our foreign operations with functional currencies other than the U.S. dollar transact
business in countries other than the United States, exchange rate changes between two foreign currencies could ultimately
impact us. Finally, because we report in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations could
have a translation impact on our financial position.
At December 31, 2017, we recognized a $31.6 million increase in our foreign currency translation adjustment account
compared with January 1, 2017, because of the weakening of the U.S. dollar against certain foreign currencies during 2017,
particularly the euro and the Australian dollar.
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. The market value of instruments
affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows
as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present
value computations were selected based on market interest and foreign currency exchange rates in effect at December 31,
2017. The values that result from these computations are then compared with the market values of the financial instruments.
The differences are the hypothetical gains or losses associated with each type of risk.
Interest Rate Risk
Our weighted average interest rate for our outstanding borrowings in 2017 and 2016 was 3.0% and 2.1%, respectively.
As discussed above, our Syndicated Credit Facility is comprised of a combination of term loan and revolving loan
borrowings. The following table summarizes our market risks associated with our debt obligations as of December 31, 2017.
For debt obligations, the table presents principal cash flows and related weighted average interest rates by year of maturity.
Variable interest rates presented for variable-rate debt represent the weighted average interest rate on our Syndicated Credit
Facility borrowings as of December 31, 2017.
2018
2019
2020
2021
Thereafter Total
Fair Value
(in thousands)
Rate-Sensitive Liabilities
Long-term Debt:
Variable Rate ...................... $ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 169,928 $ 229,928 $ 229,928
Variable Interest Rate .........
3.0%
3.0%
3.0%
3.0%
3.0%
An increase in our effective interest rate of 1% would increase annual interest expense by approximately $2.3 million.
We will continue to review our exposure to interest rate fluctuations and evaluate whether we should continue to manage
such exposures through our current and any future interest rate swap transactions.
Foreign Currency Exchange Rate Risk
As of December 31, 2017, 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 short-term financial instruments
(primarily cash, accounts receivable and accounts payable) of $10.1 million or an increase in the fair value of our financial
instruments of $12.3 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.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales ............................................................................................. $
Cost of sales .......................................................................................
Gross profit on sales ...........................................................................
2017
FISCAL YEAR
2016
(in thousands, except per share data)
996,443 $
610,422
386,021
958,617 $
589,973
368,644
2015
1,001,863
618,974
382,889
Selling, general and administrative expenses .....................................
Restructuring and asset impairment charges ......................................
268,878
7,299
263,919
19,788
269,296
0
Operating income ...............................................................................
109,844
84,937
113,593
Interest expense ..............................................................................
Other expense (income) ..................................................................
7,128
2,177
6,130
(329)
6,401
1,426
Income before income tax expense ....................................................
Income tax expense ............................................................................
100,539
47,293
79,136
24,974
105,766
33,348
Net income ......................................................................................... $
53,246 $
54,162 $
72,418
Net income per share – basic .............................................................. $
0.86 $
0.83 $
Net income per share – diluted ........................................................... $
0.86 $
0.83 $
1.10
1.10
Basic weighted average common shares outstanding .........................
Diluted weighted average common shares outstanding ......................
61,996
62,040
65,098
65,136
66,027
66,075
See accompanying notes to consolidated financial statements.
34
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income ........................................................................................ $
Other comprehensive income (loss), after tax
Foreign currency translation adjustment .........................................
Cash flow hedge change in net unrealized gains (losses) ...............
Pension liability adjustment ............................................................
2017
FISCAL YEAR
2016
(in thousands)
2015
53,246 $
54,162 $
72,418
31,579
904
(1,692)
(19,011)
0
(11,572)
(32,575 )
0
6,072
Comprehensive income ..................................................................... $
84,037 $
23,579 $
45,915
See accompanying notes to consolidated financial statements.
35
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
END OF FISCAL YEAR
2016
2017
(in thousands)
ASSETS
Current
Cash and cash equivalents ........................................................................................... $
Accounts receivable, net ..............................................................................................
Inventories, net ............................................................................................................
Prepaid expenses and other current assets ...................................................................
Total current assets ..........................................................................................................
Property and equipment, net ............................................................................................
Deferred tax asset ............................................................................................................
Goodwill, net ...................................................................................................................
Other assets .....................................................................................................................
87,037 $
142,808
177,935
23,087
430,867
212,645
18,003
68,754
70,331
165,672
126,004
156,083
23,123
470,882
204,508
33,117
61,218
65,714
Total assets ...................................................................................................................... $
800,600 $
835,439
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable ......................................................................................................... $
Accrued expenses ........................................................................................................
Current portion of long-term debt ................................................................................
Total current liabilities ....................................................................................................
Long term debt ................................................................................................................
Deferred income taxes .....................................................................................................
Other ................................................................................................................................
50,672 $
110,974
15,000
176,646
214,928
6,935
72,000
45,380
98,703
15,000
159,083
255,347
4,728
75,552
Total liabilities.................................................................................................................
470,509
494,710
Commitments and contingencies
Shareholders’ equity
Preferred stock .............................................................................................................
Common stock .............................................................................................................
Additional paid-in capital ............................................................................................
Retained earnings ........................................................................................................
Accumulated other comprehensive loss – foreign currency translation .......................
Accumulated other comprehensive income – cash flow hedge ...................................
Accumulated other comprehensive loss – pension liability .........................................
0
5,981
271,271
187,432
(78,943 )
904
(56,554 )
0
6,424
359,451
140,238
(110,522)
0
(54,862)
Total shareholders’ equity ...............................................................................................
330,091
340,729
Total liabilities and shareholders’ equity......................................................................... $
800,600 $
835,439
See accompanying notes to consolidated financial statements.
36
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2017
FISCAL YEAR
2016
(in thousands)
2015
OPERATING ACTIVITIES:
Net income .................................................................................. $
53,246 $
54,162 $
72,418
Adjustments to reconcile income to cash provided by operating
activities
Depreciation and amortization ....................................................
Stock compensation amortization expense ..................................
Enactment of U.S. Tax Cuts and Jobs Act expenses ..................
Bad debt expense .........................................................................
Deferred income taxes and other .................................................
Working capital changes:
Accounts receivable .............................................................
Inventories............................................................................
Prepaid expenses and other current assets ............................
Accounts payable and accrued expenses ..............................
Cash provided by operating activities .........................................
30,261
7,247
15,174
219
8,154
(10,313)
(13,629)
1,019
11,975
103,353
30,632
5,873
0
145
468
(372)
2,686
(7,720)
12,184
98,058
INVESTING ACTIVITIES:
Capital expenditures ....................................................................
Other ...........................................................................................
Cash used in investing activities .................................................
(30,474)
(614)
(31,088)
(28,071)
1,642
(26,429)
FINANCING ACTIVITIES:
Credit facility borrowing .............................................................
Credit facility repayments ...........................................................
Term loan repayments .................................................................
Repurchase of common stock .....................................................
Dividends paid ............................................................................
Tax Withholding Payments for Share-Based Compensation ......
Debt issuance costs .....................................................................
Proceeds from issuance of common stock...................................
Cash provided by (used in) financing activities ..........................
25,000
(57,014)
(15,000)
(91,576)
(15,487)
(1,479)
(1,427)
0
(156,983)
87,400
(17,575)
(12,500)
(18,496)
(14,285)
(4,895)
0
0
19,649
30,803
13,948
0
763
9,052
18,738
(26,452 )
(8,332 )
15,512
126,450
(27,188 )
731
(26,457 )
0
(45,267 )
(2,500 )
(13,306 )
(11,885 )
(1,015 )
0
359
(73,614 )
Net cash provided by (used in) operating, investing and
financing activities ..................................................................
Effect of exchange rate changes on cash .....................................
(84,718)
6,083
91,278
(1,302)
26,379
(5,579 )
CASH AND CASH EQUIVALENTS:
Net increase (decrease) ...............................................................
Balance, beginning of year ..........................................................
(78,635)
165,672
89,976
75,696
20,800
54,896
Balance, end of year .................................................................... $
87,037 $
165,672 $
75,696
See accompanying notes to consolidated financial statements.
37
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a recognized leader in the worldwide commercial interiors market, offering modular carpet and luxury
vinyl tile (“LVT”). The Company manufactures modular carpet focusing on the high quality, designer-oriented sector of the
market, sources LVT from a third party and focuses on the same sector of the market, and provides specialized carpet
replacement, installation and maintenance services. Additionally, the Company offers Intersept, a proprietary antimicrobial
used in a number of interior finishes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All of our subsidiaries
are wholly-owned, and we are not a party to any joint venture, partnership or other variable interest entity that would
potentially qualify for consolidation. All material intercompany accounts and transactions are eliminated. Investments in
which the Company does not have the ability to exercise significant influence are carried at fair value. The Company monitors
investments for other than temporary declines in value and makes reductions in carrying values when appropriate. As of
December 31, 2017 and January 1, 2017, the Company did not hold significant investments of this nature.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Examples include provisions for returns, bad debts, product claims reserves, rebates, inventory
obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures and
valuation allowances, environmental liabilities, and the carrying value of goodwill and property and equipment. Actual results
could vary from these estimates.
Revenue Recognition
Revenue is recognized when the following criteria are met: persuasive evidence of an agreement exists, delivery has
occurred or services have been rendered, price to the buyer is fixed and determinable, and collectability is reasonably assured.
Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership,
which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are estimated using
historical experience, current economic trends, and the Company’s quality performance. The related provision is recorded as
a reduction of sales and cost of sales in the same period that the revenue is recognized. Material differences may result in the
amount and timing of net sales for any period if management makes different judgments or uses different estimates.
Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations.
Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.
Research and Development
Research and development costs are expensed as incurred and are included in the selling, general and administrative
expense caption in the consolidated statements of operations. Research and development expense was $14.0 million, $14.3
million, and $14.5 million for the years 2017, 2016 and 2015, respectively.
38
Cash, Cash Equivalents and Short-Term Investments
Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are
classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are
classified as short-term investments. The Company did not hold any significant amounts of cash equivalents and short-term
investments at December 31, 2017 and January 1, 2017.
Cash payments for interest amounted to approximately $6.3 million, $5.5 million, and $4.8 million for the years 2017,
2016, and 2015, respectively. Income tax payments amounted to approximately $19.1 million, $12.8 million and $7.2 million
for the years 2017, 2016 and 2015, respectively. During the years 2017, 2016 and 2015, the Company received income tax
refunds of $0.1 million, $0.2 million and $3.1 million, respectively.
Inventories
Inventories are carried at the lower of cost (standards approximating the first-in, first-out method) or market. Costs
included in inventories are based on invoiced costs and/or production costs, as applicable. Included in production costs are
material, direct labor and allocated overhead. The Company writes down inventories for the difference between the carrying
value of the inventories and their estimated net realizable value. If actual market conditions are less favorable than those
projected by management, additional write-downs may be required.
Management estimates its reserves for inventory obsolescence by continuously examining its inventories to determine if
there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that
could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles,
anticipated demand for the Company’s products, and current economic conditions. While management believes that adequate
write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and
preferences will continue to change and the Company could experience additional inventory write-downs in the future.
Rebates
The Company has agreements to receive cash consideration from certain of its vendors, including rebates and cooperative
marketing reimbursements. The amounts received from its vendors are generally presumed to be a reduction of the prices the
Company pays for their products and, therefore, such amounts are reflected as either a reduction of cost of sales in the
accompanying consolidated statements of operations, or, if the product inventory is still on hand at the reporting date, it is
reflected as a reduction of “Inventories” on the accompanying consolidated balance sheets. Vendor rebates are typically
dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase
thresholds using past experience and current year forecasts. When rebates can be reasonably estimated and receipt becomes
probable, the Company records a portion of the rebate as the Company makes progress towards the purchase threshold.
When the Company receives direct reimbursements for costs incurred in marketing the vendor’s product or service, the
amount received is recorded as an offset to selling, general and administrative expenses in the accompanying consolidated
statements of operations.
Assets and Liabilities of Businesses Held for Sale
The Company considers businesses to be held for sale when the Board or management, having the relevant authority to
do so, approves and commits to a formal plan to actively market a business for sale and the sale is considered probable. Upon
designation as held for sale, the carrying value of the assets of the business are recorded at the lower of their carrying value
or their estimated fair value, less costs to sell. The Company ceases to record depreciation expense at that time.
39
Property and Equipment and Long-Lived Assets
Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following
estimated useful lives: buildings and improvements – ten to forty years; and furniture and equipment – three to twelve years.
Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related
assets’ estimated useful lives. The Company capitalized net interest costs on qualifying expenditures of approximately $0.6
million, $0.5 million, and $0.3 million for the fiscal years 2017, 2016 and 2015, respectively. Depreciation expense amounted
to approximately $29.5 million, $30.1 million, and $30.4 million for the years 2017, 2016, and 2015 respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of
the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance
costs are charged to operating expense as incurred.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted
for as acquisitions. Accumulated amortization amounted to approximately $77.3 million at both December 31, 2017 and
January 1, 2017, and cumulative impairment losses recognized were $212.6 million as of both December 31, 2017 and
January 1, 2017.
As of December 31, 2017, and January 1, 2017, the net carrying amount of goodwill was $68.8 million and $61.2 million,
respectively. Other intangible assets were $0.6 million and $1.0 million as of December 31, 2017 and January 1, 2017,
respectively. Amortization expense related to intangible assets during the years 2017, 2016 and 2015 was $0.7 million, $0.5
million and $0.3 million, respectively
The Company capitalizes patent defense costs when it determines that a successful defense is probable. Any patent defense
costs are amortized over the remaining useful life of the patent. During 2016, the Company determined that approximately
$3.4 million of patent defense costs related to our TacTiles® carpet tile installation system should be impaired as a successful
defense was deemed no longer probable. This impairment is included in “Restructuring and Asset Impairment Charges” in
our consolidated statement of operations.
During the fourth quarters of 2017, 2016 and 2015, as of the last day of the third quarter of each year, the Company
performed the annual goodwill impairment test required by applicable accounting standards. The Company performs this test
at the reporting unit level, which is one level below the segment level for the Modular Carpet segment. In effecting the
impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an
income methodology in accordance with the applicable standards, and those valuations were compared with the respective
book values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past,
present and future expectations of performance were considered. The annual testing indicated no potential of goodwill
impairment in any of the years presented.
Each of the Company’s reporting units maintained fair values in excess of their respective carrying values as of the
measurement date, and therefore no impairment was indicated during the impairment testing. As of December 31, 2017, if
the Company’s estimates of the fair values of its reporting units which carry a goodwill balance were 10% lower, the Company
still believes no goodwill impairment would have existed.
The changes in the carrying amounts of goodwill for the year ended December 31, 2017 are as follows:
BALANCE
JANUARY 1,
2017
ACQUISITIONS
IMPAIRMENT
(in thousands)
FOREIGN
CURRENCY
TRANSLATION
BALANCE
DECEMBER 31,
2017
$
61,218 $
0 $
0
7,536 $
68,754
40
Product Warranties
The Company typically provides limited warranties with respect to certain attributes of its carpet products (for example,
warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty years,
depending on the particular carpet product and the environment in which it is to be installed. Similar limited warranties are
provided on certain attributes of its LVT products, typically for a period of 15 years. The Company typically warrants that
services performed will be free from defects in workmanship for a period of one year following completion. In the event of
a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product.
The Company records a provision related to warranty costs based on historical experience and periodically adjusts these
provisions to reflect changes in actual experience. Warranty and sales allowance reserves amounted to $4.1 million and $5.5
million as of December 31, 2017 and January 1, 2017, respectively, and are included in “Accrued Expenses” in the
accompanying consolidated balance sheets.
Taxes on Income
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected
future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change
in tax rates will be recognized as income or expense in the period that includes the enactment date.
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable.
The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the
appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events
such as the taxability of entities operating in the various taxing jurisdictions.
The Company does not record taxes collected from customers and remitted to governmental authorities on a gross basis.
For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires
application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s
ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require
significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. For
further information, see Note 13 entitled “Taxes on Income.”
Fair Values of Financial Instruments
Fair values of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity.
Fair values of debt are based on quoted market prices or pricing models using current market rates.
Translation of Foreign Currencies
The financial position and results of operations of the Company’s foreign subsidiaries are measured generally using local
currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange
rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting
translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a
foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency
exchange gains and losses are included in net income (loss). Foreign exchange translation gains (losses) were $31.6 million,
($19.0) million, and ($32.6) million for the years 2017, 2016 and 2015, respectively.
Income (Loss) Per Share
Basic income (loss) per share is computed based on the average number of common shares outstanding. Diluted income
(loss) per share reflects the increase in average common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock method.
41
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 10 entitled
“Shareholders’ Equity”.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model.
However, there were no stock options granted in 2017, 2016 or 2015.
The Company recognizes expense related to its restricted stock and performance share grants based on the grant date fair
value of the shares awarded, as determined by its market price at date of grant.
Derivative Financial Instruments
Accounting standards require a company to recognize all derivatives on the balance sheet at fair value. Derivatives that
do not meet the criteria of an accounting hedge must be adjusted to fair value through income. If the derivative is a fair value
hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings. If the
derivative is a cash flow hedge, the effective portion of changes in the fair value of the derivative are recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in
fair value is immediately recognized in earnings. In 2017, the Company entered in to an interest rate swap instrument that it
has designated as a derivative instrument. See further discussion of this instrument below in Note 8 entitled “Borrowings”.
Pension Benefits
Net pension expense recorded is based on, among other things, assumptions about the discount rate, estimated return on
plan assets and salary increases. While the Company believes these assumptions are reasonable, changes in these and other
factors and differences between actual and assumed changes in the present value of liabilities or assets of the Company’s
plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The
actuarial assumptions used in the Company’s salary continuation plan and foreign defined benefit plans reporting are
reviewed periodically and compared with external benchmarks to ensure that they appropriately account for our future
pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on weighted average
expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the
forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment
managers.
Environmental Remediation
The Company provides for remediation costs and penalties when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known
environmental exposures and are discounted in certain instances. The Company regularly monitors the progress of
environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an
additional accrual would be recorded in the period in which such determination is made. As of December 31, 2017, and
January 1, 2017, no significant amounts were provided for remediation liabilities.
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers
to make required payments. Estimating this amount requires the Company to analyze the financial strengths of its customers.
If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. By its nature, such an estimate is highly subjective, and it is possible that
the amount of accounts receivable that the Company is unable to collect may be different than the amount initially estimated.
42
Reclassifications
Certain prior period amounts have been reclassified to conform to current year financial statement presentation. These
reclassifications had no effect on reported income, comprehensive income, cash flows, or shareholders’ equity as previously
reported. Total assets as previously reported was impacted by the adoption of an accounting standard addressing the treatment
of deferred taxes as discussed below.
Fiscal Year
The Company’s fiscal year is the 52 or 53 week period ending on the Sunday nearest December 31. All references herein
to “2017,” “2016,” and “2015,” mean the fiscal years ended December 31, 2017, January 1, 2017, and January 3, 2016
respectively. Fiscal year 2015 was comprised of 53 weeks, while fiscal years 2017 and 2016 were each comprised of 52
weeks.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding recognition
of revenue from contracts with customers that will supersede the existing revenue recognition under U.S. GAAP. In summary,
the core principle of this standard, along with various subsequent amendments, is that an entity recognizes revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. Additionally, the new standard requires enhanced disclosures about
the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue
recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract,
and significant judgments in measurements and recognition. The standard, as amended, will be effective for annual periods
beginning after December 15, 2017, including interim periods within that reporting period. Nearly 95% of the Company’s
current revenue is produced from the sale of carpet, hard surface flooring and related products (TacTiles installation system,
etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases upon delivery to the
customer. There does not exist any performance or any other obligation after the sale of these products outside of the product
warranty, which has not historically been of significance compared to total product sales. There is a small portion of the
Company’s revenues (approximately 5%) that is for the sale and installation of carpet and related products. Of these projects,
the overwhelming majority are completed in less than two weeks and therefore the Company does not expect a significant
shift in the timing of revenue recognition for these sales either. Upon adoption of this standard, the company will change the
accounting for these projects to recognize the major components of revenue over time. However, it is not expected that this
change will have a significant impact upon our results of operations given the generally short period of time of these projects.
As of the end of 2017, the amount of revenue that would have been recognized under the new standard versus previous
guidance was not significant. The standard offers practical expedients to help with adoption. The Company will apply the
portfolio approach expedient, which is applicable as its sales contracts share similar characteristics. The Company will apply
the practical expedient regarding the accounting for costs to obtain contracts, as its costs for such contracts are primarily sales
commissions which are recognized within a year of the sale of product. The Company will use the modified retrospective
method of adoption, but as noted the impact as of year-end was insignificant. Given the nature of the Company’s sales, it
currently believes that revenue recognition under the new standard will be mostly consistent under both the current and new
standards, with performance obligations being satisfied under the majority of contracts with customers upon shipment or
delivery of product. Given the nature of the Company’s revenue there is not expected to be significant changes to the
Company’s information systems as a result of this adoption.
In November 2015, the FASB issued an accounting standard which requires deferred tax assets and liabilities, as well as
any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will only have
one net noncurrent deferred tax asset or liability. This standard does not change the existing requirement that only permits
offsetting within a jurisdiction. The amendments in the standard may be applied either prospectively or retrospectively to all
prior periods presented. The new guidance is effective for annual periods beginning after December 15, 2016, and interim
periods within those annual periods, with early adoption permitted. The Company adopted this standard in the first quarter of
2017 and applied this standard retrospectively by recording a reduction of current assets of $10.0 million and a corresponding
increase in long term assets of $5.9 million as well as a reduction of long term liabilities of $4.1 million.
43
In March 2016, the FASB issued an accounting standard update to simplify several aspects of accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the
classification on the statement of cash flows. In addition, an entity can make an entity-wide accounting policy election to
either estimate the number of awards that are expected to vest, which is the current U.S. GAAP practice, or account for
forfeitures when they occur. This update is effective for fiscal periods beginning after December 15, 2016, including interim
periods within that reporting period. The element of the new standard having the most impact on the Company’s financial
statements is income tax consequences. Excess tax benefits and tax deficiencies on stock-based compensation awards are
now included in the tax provision within the consolidated statement of operations as discrete items in the reporting period in
which they occur, rather than the previous accounting of recording them in additional paid-in capital on the consolidated
balance sheet. The adoption of this standard resulted in an increase in deferred tax assets of approximately $9.4 million, with
a corresponding increase to equity accounts, in 2017. See further discussion of this amount in Note 13 “Taxes on
Income.” There was an impact of this standard on the consolidated statement of cash flows upon adoption, as under the
standard when an employer withholds shares for tax withholding purposes those related tax payments are treated as financing
activities, not as operating activities. Upon adoption in the first quarter of 2017, this resulted in a reclassification of $4.6
million of such tax payments in 2016 from operating activities to financing activities, and $1.0 million of such tax payments
in 2015 from operating activities to financing activities. The Company has elected to continue its current policy of estimating
forfeitures of stock-based compensation awards at the time of grant and revising in subsequent periods to reflect actual
forfeitures, which is allowable under the new standard.
In February 2016, the FASB issued a new accounting standard regarding leases. The new standard establishes a right-of-
use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the
financial statements, with certain practical expedients available. The Company is currently evaluating the impact of our
pending adoption of the new standard on our consolidated financial statements, but the standard will result in the Company
recording both assets and liabilities for leases currently classified as operating leases.
In January 2017, the FASB issued a new accounting standard that provides for the elimination of Step 2 from the goodwill
impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting
unit exceeds its fair value with certain limitations. The new guidance is effective for any annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not
anticipate that the adoption of the new guidance will have a material effect on its consolidated financial statements.
In March 2017, the FASB issued a new accounting standard regarding the treatment of net periodic benefit costs. This
standard will require segregation of these net benefit costs between operating and non-operating expenses. Currently, the
Company reports the net benefit costs associated with its defined benefit plans as a component of operating income. The new
standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
When the new standard is implemented, only the service cost component of defined benefit plan costs will be reported within
operating income, while all other components of net benefit cost will be presented within the “Other Expense (income)” line
item on the consolidated statements of operations. The standard requires retrospective application, and as such upon adoption
this standard will result in offsetting changes in operating income and “Other Expense (income)” on the consolidated
statements of operations for all periods presented, with no impact on net income. Upon adoption in 2018 the Company will
reclassify $1.9 million and $2.2 million for 2017 and 2016, respectively, from operating expenses to other expense.
In February 2018, the FASB issued a new accounting standard to address a narrow-scope financial reporting issue that
arose as a consequence of the Tax Act. Existing guidance requires that deferred tax liabilities and assets be adjusted for a
change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes
the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in
accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net
income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated
other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The
new guidance allows for a reclassification of these amounts to retained earnings thereby eliminating these stranded tax effects.
The new guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently
evaluating the impact of adoption of this standard on its consolidated financial statements.
44
NOTE 3 – RECEIVABLES
The Company has adopted credit policies and standards intended to reduce the inherent risk associated with potential
increases in its concentration of credit risk due to increasing trade receivables from sales to owners and users of commercial
office facilities and with specifiers such as architects, engineers and contracting firms. Management believes that credit risks
are further moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit
evaluations of its customers’ financial condition and requires collateral as deemed necessary. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.
If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. As of December 31, 2017, and January 1, 2017, the allowance for bad debts amounted
to $3.5 million and $3.8 million, respectively, for all accounts receivable of the Company. Reserves for warranty and returns
allowances amounted to $4.1 million and $5.5 million as of December 31, 2017 and January 1, 2017, respectively.
NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not have significant assets and liabilities measured at fair value on a recurring basis under applicable
accounting standards as of the end of 2017. The Company does have approximately $23.7 million of Company-owned life
insurance which is measured on readily determinable cash surrender value on a recurring basis. Due to the short maturity of
cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate
fair value. As of December 31, 2017, the carrying value of the Company’s borrowings under its Syndicated Credit Facility
approximates fair value as the Facility bears interest rates that are similar to existing market rates. The Company does hedge
its interest rate exposure on $100 million of borrowings on the Syndicated Credit Facility and this cash flow hedge is measured
at fair value. See discussion of this instrument below in Note 8 entitled “Borrowings”.
NOTE 5 – INVENTORIES
Inventories are summarized as follows:
END OF FISCAL YEAR
2016
2017
(in thousands)
Finished goods..................................................................................................... $
Work-in-process ..................................................................................................
Raw materials ......................................................................................................
115,512 $
13,022
49,401
104,742
8,711
42,630
Inventory, Net...................................................................................................... $
177,935 $
156,083
Reserves for inventory obsolescence amounted to $20.4 million and $17.6 million as of December 31, 2017 and January
1, 2017, respectively, and have been netted against amounts presented above.
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Land..................................................................................................................... $
Buildings .............................................................................................................
Equipment ...........................................................................................................
Accumulated depreciation ...................................................................................
END OF FISCAL YEAR
2017
2016
(in thousands)
17,743 $
130,919
371,300
519,962
(307,317 )
16,063
121,216
350,539
487,818
(283,310)
Property and Equipment ...................................................................................... $
212,645 $
204,508
The estimated cost to complete construction-in-progress at December 31, 2017, was approximately $61.5 million.
45
NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
END OF FISCAL YEAR
2017
2016
Compensation ...................................................................................................... $
Interest .................................................................................................................
Restructuring .......................................................................................................
Taxes ...................................................................................................................
Accrued purchases ...............................................................................................
Warranty and sales allowances ............................................................................
Other ....................................................................................................................
(in thousands)
71,760 $
362
2,568
19,948
4,569
4,111
7,656
Accrued Expenses ............................................................................................... $
110,974 $
58,927
114
10,291
11,467
3,101
5,529
9,274
98,703
Other non-current liabilities include pension liability of $43.3 million and $47.3 million as of December 31, 2017 and
January 1, 2017, respectively (see the discussion below in Note 15 entitled “Employee Benefit Plans”).
NOTE 8 – BORROWINGS
Syndicated Credit Facility
Pursuant to an Amended and Restated Facility Agreement entered into on August 8, 2017, the Company has a syndicated
credit facility (the “Facility”) pursuant to which the lenders provide to the Company and certain of its subsidiaries a
multicurrency revolving credit facility and provide to the Company a term loan. The key features of the Facility are as follows:
• The Facility matures on August 8, 2022.
• The Facility includes a multicurrency revolving loan facility made available to the Company and its principal
subsidiaries in Europe and Australia not to exceed $250 million in the aggregate at any one time outstanding. A
sublimit of $40 million exists for the issuance of letters of credit under the Facility.
• The Facility includes a Term Loan A borrowing principal that had an original principal amount of $177.5 million.
• The Facility provides for required amortization payments of the Term Loan A borrowing, as well as mandatory
prepayments of the Term Loan A borrowing (and any term loans made available pursuant to any future multicurrency
loan facility increase) from certain asset sales, casualty events and debt issuances, subject to certain qualifications
and exceptions as provided for therein.
• Advances under the Facility are secured by a first-priority lien on substantially all of the Company’s assets and the
assets of each of its material domestic subsidiaries, which have guaranteed the Facility.
• The Facility contains financial covenants (specifically, a consolidated net leverage ratio and a consolidated interest
coverage ratio) that must be met as of the end of each fiscal quarter.
• The Company has the option to increase the borrowing availability under the Facility, either for revolving loans or
term loans, by up to $150 million, subject to the receipt of lender commitments for the increase and the satisfaction
of certain other conditions.
Interest Rates and Fees. Interest on base rate loans is charged at varying rates computed by applying a margin ranging
from 0.25% to 1.50% over the applicable base interest rate (which is defined as the greatest of the prime rate, a specified
federal funds rate plus 0.50%, or a specified Eurocurrency rate), 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 ranging from 1.25% to 2.50% 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 ranging from 0.20% to 0.35% 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.
Amortization Payments. The Company is required to make quarterly amortization payments of $3.75 million of the Term
Loan A borrowing.
46
Covenants. The Facility contains standard and customary covenants for agreements of this type, including various
reporting, affirmative and negative covenants. Among other things, these covenants limit the Company’s and its subsidiaries’
ability to:
create or incur liens on assets;
•
• make acquisitions of or investments in businesses (in excess of certain specified amounts);
•
•
•
•
•
incur indebtedness or contingent obligations;
sell or dispose of assets (in excess of certain specified amounts);
pay dividends or repurchase the Company’s stock (in excess of certain specified amounts);
repay other indebtedness prior to maturity unless the Company meets certain conditions; and
enter into sale and leaseback transactions.
The Facility also requires the Company to remain in compliance with the following financial covenants as of the end of
each fiscal quarter, based on the Company’s consolidated results for the year then ended:
• Consolidated Net Leverage Ratio: Must be no greater than 3.75:1.00.
• Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
Events of Default. If the Company breaches or fails to perform any of the affirmative or negative covenants under the
Facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc. or
certain subsidiaries, or if the Company breaches or fails to perform any covenant or agreement contained in any instrument
relating to any of the Company’s other indebtedness exceeding $20 million), after giving effect to any applicable notice and
right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the lenders’
Administrative Agent may, and upon the written request of a specified percentage of the lender group shall:
•
•
•
declare all commitments of the lenders under the facility terminated;
declare all amounts outstanding or accrued thereunder immediately due and payable; and
exercise other rights and remedies available to them under the agreement and applicable law.
Collateral. Pursuant to an Amended and Restated Security and Pledge Agreement executed on the same date, the Facility
is secured by substantially all of the assets of the Company and its domestic subsidiaries (subject to exceptions for certain
immaterial subsidiaries), including all of the stock of the Company’s domestic subsidiaries and up to 65% of the stock of its
first-tier material foreign subsidiaries. If an event of default occurs under the Facility, the lenders’ Administrative Agent may,
upon the request of a specified percentage of lenders, exercise remedies with respect to the collateral, including, in some
instances, foreclosing mortgages on real estate assets, taking possession of or selling personal property assets, collecting
accounts receivables, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign
subsidiaries.
In December 2016, one of the Company’s foreign subsidiaries borrowed 61 million euros (approximately $63.5 million)
under the Syndicated Credit Facility. The funds were distributed to its U.S. parent company to fund then-current and projected
U.S. cash needs. A significant portion of these borrowings were repaid in 2017.
As of December 31, 2017, the Company had outstanding $170.0 million of Term Loan A borrowing and $59.9 million of
revolving loan borrowings outstanding under the Facility, and had $6.0 million in letters of credit outstanding under the
Facility. As of December 31, 2017, the weighted average interest rate on borrowings outstanding under the Facility was 3.0%.
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.
Interest Rate Risk Management
Shortly after entering into the Amended and Restated Facility Agreement, the Company entered into an interest rate swap
transaction to fix the variable interest rate on a portion of its term loan borrowings in order to manage a portion of its exposure
to interest rate fluctuations. The Company’s objective and strategy with respect to this interest rate swap is to protect the
Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest
payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its
47
cash flows (interest payments) attributable to changes in LIBOR, the designated benchmark interest rate being hedged (the
“hedged risk”), on an amount of the Company’s debt principal equal to the outstanding swap notional amount.
Cash Flow Interest Rate Swap
The Company’s interest rate swap is designated and qualifies as a cash flow hedge of forecasted interest payments. The
Company reports the effective portion of the fair value gain or loss on the swap as a component of other comprehensive
income (or other comprehensive loss). Gains or losses (if any) on any ineffective portion of derivative instruments in cash
flow hedging relationships are recorded in the period in which they occur as a component of other expense (or other income)
in the consolidated condensed statement of operations. There were no such gains or losses in 2017. The aggregate notional
amount of the swap as of December 31, 2017 was $100 million.
As of December 31, 2017, the fair value of the cash flow interest rate swap asset was $0.9 million and was recorded in
other assets and accumulated other comprehensive income.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $9.8 million of other lines of credit available at
interest rates ranging from 2.5% to 6.5%. As of December 31, 2017, and January 1, 2017, there were no borrowings
outstanding under these lines of credit.
Borrowing Costs
Deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of debt, net of
accumulated amortization, were $2.3 million and $1.4 million, as of December 31, 2017 and January 1, 2017,
respectively. These amounts are included in other long term assets in the Company’s consolidated balance sheets. The
Company amortizes these costs over the life of the related debt. Expenses related to such costs for the years 2017, 2016, and
2015 amounted to $0.5 million for each of those years.
Future Maturities
The aggregate maturities of borrowings for each of the five fiscal years subsequent to 2017 are as follows:
FISCAL YEAR
2018 ....................................................................................................................................................... $
2019 .......................................................................................................................................................
2020 .......................................................................................................................................................
2021 .......................................................................................................................................................
2022 .......................................................................................................................................................
Thereafter ..............................................................................................................................................
Total Debt ............................................................................................................................................. $
NOTE 9 – PREFERRED STOCK
AMOUNT
(in thousands)
15,000
15,000
15,000
15,000
169,928
0
229,928
The Company is authorized to designate and issue up to 5,000,000 shares of $1.00 par value preferred stock in one or
more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation,
and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of
preferred stock may have an adverse effect on the rights of holders of common stock and could decrease the amount of
earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of the Company. As of December 31, 2017, and
January 1, 2017, there were no shares of preferred stock issued.
Preferred Share Purchase Rights
The Company has previously issued one purchase right (a “Right”) in respect of each outstanding share of Common Stock
pursuant to a Rights Agreement it entered into in March 2008. Each Right entitles the registered holder of the Common Stock
to purchase from the Company one one-hundredth of a share (a “Unit”) of Series B Participating Cumulative Preferred Stock
(the “Series B Preferred Stock”).
48
The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that
acquires (without the consent of the Company’s Board of Directors) 15% or more of the outstanding shares of Common Stock
or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the Rights for
Common Stock as permitted under the Shareholder Rights Plan.
The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one Unit of Series B
Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common
Stock, including voting rights. The exercise price per Right is $90, subject to adjustment. Shares of Series B Preferred Stock
will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate
dividend payment of 100 times the dividend declared on each share of Common Stock. In the event of liquidation, each share
of Series B Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid
dividends and distributions thereon, but will be entitled to an aggregate payment of 100 times the payment made per share of
Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or
changed into other stock or securities, cash or other property, each share of Series B Preferred Stock will be entitled to receive
100 times the amount received per share of Common Stock. Series B Preferred Stock is not convertible into Common Stock.
Each share of Series B Preferred Stock will be entitled to 100 votes on all matters submitted to a vote of the shareholders
of the Company, and shares of Series B Preferred Stock will generally vote together as one class with the Common Stock
and any other voting capital stock of the Company on all matters submitted to a vote of the Company’s shareholders.
Further, whenever dividends on the Series B Preferred Stock are in arrears in an amount equal to six quarterly payments,
the Series B Preferred Stock, together with any other shares of preferred stock then entitled to elect directors, shall have the
right, as a single class, to elect one director until the default has been cured.
Prior to entering into the March 2008 Rights Agreement, which expires on March 16, 2018, the Company maintained a
substantially similar Rights Agreement that was entered into in 1998.
NOTE 10 – SHAREHOLDERS’ EQUITY
Prior to March 5, 2012, the Company had two classes of common stock – Class A Common Stock and Class B Common
Stock. On March 5, 2012, the number of issued and outstanding shares of Class B Common Stock constituted less than 10%
of the aggregate number of issued and outstanding shares of the Company’s Class A Common Stock and Class B Common
Stock, as the cumulative result of varied transactions that caused the conversion of shares of Class B Common Stock into
shares of Class A Common Stock. Accordingly, the Class A Common Stock and Class B Common Stock are now, irrevocably
from March 5, 2012, a single class of Common Stock in all respects. Following the March 5, 2012 event, the Company is
authorized to issue 120 million shares of $0.10 par value Common Stock.
The Company’s Common Stock is traded on the Nasdaq Global Select Market under the symbol TILE.
The Company paid cash dividends totaling $0.25 per share in 2017, $0.22 per share in 2016, and $0.18 per share in 2015,
to each share of Common Stock. The future declaration and payment of dividends is at the discretion of the Company’s
Board, and depends upon, among other things, the Company’s investment policy and opportunities, results of operations,
financial condition, cash requirements, future prospects, and other factors that may be considered relevant at the time of the
Board’s determination. Such other factors include limitations contained in the agreement for its syndicated credit facility,
which specifies conditions as to when any dividend payments may be made. As such, the Company may discontinue its
dividend payments in the future if its Board determines that a cessation of dividend payments is proper in light of the factors
indicated above.
On October 7, 2014, the Company announced a program to repurchase up to 500,000 shares of common stock per fiscal
year, commencing with the 2014 fiscal year. On November 19, 2015, the Board of Directors amended the program to provide
that the 500,000 shares of common stock previously approved for repurchases for the 2016 fiscal year may be repurchased
by the Company, in management’s discretion, during the period commencing on November 19, 2015 and ending at the
conclusion of fiscal year 2016. In the second quarter of 2016, the Company amended the share purchase program to authorize
the repurchase of up to $50 million of common stock. This amended program had no specific expiration date. During the first
three months of 2017, the Company completed the $50 million repurchase program. In the second quarter of 2017, the
Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $100 million of
its outstanding shares of common stock. The program has no specific expiration date.
49
Pursuant to the above-described programs, the Company has repurchased shares in the past three years as follows. During
2015, the Company repurchased and retired 650,000 shares of common stock at an average purchase price of $20.47 per
share. During 2016, the Company repurchased and retired 1,177,600 shares of common stock at a weighted average purchase
price of $15.68 per share. During 2017, the Company repurchased and retired a combined total of 4,628,300 shares under
these plans, at an average purchase price of $19.76 per share. As of December 31, 2017, the Company had approximately
$39.5 million of availability remaining to purchase shares under the repurchase program put in place in 2017.
All treasury stock is accounted for using the cost method.
The following tables depict the activity in the accounts which make up shareholders equity for the years 2015-2017.
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
Balance, at December 28, 2014 ..................... 65,968 $
0
Net income ................................................
Stock issuances under employee option
plans ......................................................
Other issuances of common stock .............
Unamortized stock compensation expense
related to restricted stock awards ..........
Cash dividends paid ..................................
Forfeitures and compensation expense
39
597
0
0
(in thousands)
6,597 $
0
368,603 $
0
39,737 $
72,418
(49,362) $
0
(58,936)
0
4
59
0
0
355
9,746
0
0
(9,806)
0
0
(11,885)
0
0
0
0
(253)
related to stock awards ..........................
(650)
Share repurchases ......................................
0
Pension liability adjustment ......................
0
Foreign currency translation adjustment ...
Other .........................................................
0
Balance, at January 3, 2016 ....................... 65,701 $
(25)
(65)
0
0
0
6,570 $
14,670
(13,241)
0
0
0
370,327 $
0
0
0
0
0
100,270 $
0
0
6,072
0
0
(43,290) $
0
0
0
0
0
0
0
(32,575)
0
(91,511)
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
Balance, at January 3, 2016 ........................... 65,701 $
0
17
277
Net income ................................................
Stock issuances under employee plans ......
Other issuances of common stock .............
Unamortized stock compensation expense
related to restricted stock awards ..........
Cash dividends paid ..................................
Forfeitures and compensation expense
related to stock awards ..........................
Share Repurchases ....................................
Pension liability adjustment ......................
Foreign currency translation adjustment ...
Windfall tax benefit - share-based
0
0
(579)
(1,178)
0
0
6,570 $
0
2
28
0
0
(58)
(118)
0
0
(in thousands)
370,327 $
0
251
4,726
100,270 $
54,162
0
0
(43,290) $
0
0
0
(4,754)
0
0
(14,285)
0
0
979
(18,378)
0
0
0
0
0
0
0
0
(11,572)
0
0
payment awards .....................................
Other .........................................................
0
Balance, at January 1, 2017 ....................... 64,238 $
0
0
6,424 $
6,300
0
359,451 $
0
91
140,238 $
0
0
(54,862) $
(91,511)
0
0
0
0
0
0
0
0
(19,011)
0
0
(110,522)
50
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
Balance, at January 1, 2017 ............. 64,238 $
0
Net income ..................................
Stock issuances under employee
(in thousands)
6,424 $
0
359,451 $
0
140,238 $
53,246
(54,862) $
0
(110,522 ) $
0
plans ........................................
36
4
508
Other issuances of common
stock ........................................
253
25
4,507
0
0
0
0
0
0
Unamortized stock compensation
expense related to restricted
stock awards ............................
Cash dividends paid ....................
Forfeitures and compensation
expense related to stock
awards .....................................
Share Repurchases ......................
Pension liability adjustment ........
Foreign currency translation
adjustment ...............................
Cash flow hedge unrealized gain
(loss) ........................................
Windfall tax benefit - share-
based payment awards .............
0
0
0
0
(4,532)
0
0
(15,487)
(93 )
(4,628 )
0
(9)
(463)
0
5,574
(91,113)
0
0
0
0
0
0
0
0
0
(3,124)
0
0
0
0
0
0
0
0
(1,692)
0
0
0
CASH
FLOW
HEDGE
0
0
0
0
0
0
0
0
0
0
904
0
0
904
0
0
0
0
0
0
0
31,579
0
0
Adoption of new accounting
standard - share-based
payment awards .......................
0
Balance, at December 31, 2017 ... 59,806 $
Stock Options
0
5,981 $
0
271,271 $
9,435
187,432 $
0
(56,554) $
0
(78,943 ) $
The Company has an Omnibus Stock Incentive Plan (“Omnibus Plan”) under which a committee of independent directors
is authorized to grant directors and key employees, including officers, options to purchase the Company’s Common Stock.
Options are exercisable for shares of Common Stock at a price not less than 100% of the fair market value on the date of
grant. The options become exercisable either immediately upon the grant date or ratably over a time period ranging from one
to five years from the date of the grant. The Company’s options expire at the end of time periods ranging from three to ten
years from the date of the grant.
In May 2015, the shareholders approved an amendment and restatement of the Omnibus Plan. This amendment and
restatement extended the term of the Omnibus Plan until February 2025, and set the number of shares authorized for issuance
or transfer on or after the effective date of the amendment and restatement at 5,161,020 shares, except that each share issued
pursuant to an award other than a stock option reduces the number of such authorized shares by 1.33 shares.
Accounting standards require that the Company measure the cost of employee services received in exchange for an award
of equity instruments based on the grant date fair market value of the award. That cost will be recognized over the period in
which the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange
for the award. The grant date fair value for options and similar instruments will be estimated using option pricing models.
Under accounting standards, the Company is required to select a valuation technique or option pricing model. The Company
uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and
reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will
evaluate actual experience against the assumed forfeiture rate going forward. This expense reduction is not significant to the
Company.
All outstanding stock options vested prior to 2015 and therefore there were no stock option compensation expenses during
2017, 2016 or 2015.
51
The following table summarizes stock options outstanding as of December 31, 2017, as well as activity during the previous
fiscal year:
Outstanding at January 1, 2017 ...............................................................................
Granted ....................................................................................................................
Exercised .................................................................................................................
Forfeited or cancelled ..............................................................................................
Outstanding at December 31, 2017 (a) .....................................................................
Shares
87,500 $
0
5,000
0
82,500 $
Weighted
Average
Exercise Price
8.75
0
12.43
0
8.53
Exercisable at December 31, 2017 (b) ......................................................................
82,500 $
8.53
(a) At December 31, 2017, the weighted-average remaining contractual life of options outstanding was 2.0 years.
(b) At December 31, 2017, the weighted-average remaining contractual life of options exercisable was 2.0 years.
At December 31, 2017, the aggregate intrinsic values of in-the-money options outstanding and options exercisable were
$1.4 million and $1.4 million, respectively (the intrinsic value of a stock option is the amount by which the market value of
the underlying stock exceeds the exercise price of the option).
The range of exercise prices of the remaining stock options is from $4.31 to $13.04 per option.
Restricted Stock Awards
During fiscal years 2017, 2016 and 2015, the Company granted restricted stock awards totaling 253,000, 277,000, and
597,000 shares, respectively, of Common Stock. These awards (or a portion thereof) vest with respect to each recipient over
a two to five 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, these shares (or a portion thereof) could vest earlier upon the attainment of certain
performance criteria, in the event of a change in control of the Company, or upon involuntary termination without cause.
Compensation expense related to awards of restricted stock was $2.8 million, $4.7 million and $13.9 million for 2017,
2016 and 2015, respectively. These grants are made primarily to executive-level personnel at the Company and, as a result,
no compensation costs have been capitalized. Accounting standards require that the Company estimate forfeitures for
restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed
forfeiture rate and will evaluate actual experience against the assumed forfeiture rate going forward. The forfeiture rate has
been developed using historical data regarding actual forfeitures as well as an estimate of future expected forfeitures under
our restricted stock grants.
The following table summarizes restricted stock outstanding as of December 31, 2017, as well as activity during the
previous fiscal year:
Outstanding at January 1, 2017 ................................................................................
Granted .....................................................................................................................
Vested .......................................................................................................................
Forfeited or cancelled ...............................................................................................
Outstanding at December 31, 2017 ..........................................................................
Weighted
Average
Grant Date
Fair Value
17.05
17.91
16.61
16.99
17.79
Shares
505,000 $
253,000
284,000
6,000
468,000 $
As of December 31, 2017, the unrecognized total compensation cost related to unvested restricted stock was $4.1 million.
That cost is expected to be recognized by the end of 2020.
52
As stated above, accounting standards require the Company to estimate forfeitures in calculating the expense related to
stock-based compensation, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as
they occur.
Performance Share Awards
In 2016 and 2017, the Company issued awards of performance shares to certain employees. These awards vest based on
the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s
continued employment through the last date of the performance period, and will be settled in shares of our common stock or
in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the
award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance
achieved as compared to the performance targets set forth in the awards. The expense related to these performance shares is
captured in selling, general and administrative expense on the consolidated statement of operations.
The following table summarizes the performance shares outstanding as of December 31, 2017, as well as the activity
during the year:
Performance
Shares
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2017 ................................................................................
Granted .....................................................................................................................
Vested .......................................................................................................................
Forfeited or canceled ................................................................................................
Outstanding at December 31, 2017 ..........................................................................
368,500 $
354,000
31,000
22,000
669,500 $
17.20
17.80
17.22
17.29
17.51
Compensation expense related to the performance shares for 2017 and 2016 was $4.5 million and $1.2 million,
respectively. Unrecognized compensation expense related to these performance shares was approximately $6.1 million as of
December 31, 2017. No performance shares were granted or outstanding during 2015.
The tax benefit recognized with respect to restricted stock and performance shares was $2.6 million and $2.0 million in
2017 and 2016, respectively.
NOTE 11 – INCOME (LOSS) PER SHARE
The Company computes basic earnings (loss) per share (“EPS”) by dividing net income (loss), by the weighted average
common shares outstanding, including participating securities outstanding, during the period as depicted 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. Income attributable to non-controlling interest is included in the computation of basic and diluted
earnings per share, where applicable.
53
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 common shares outstanding in our basic and diluted EPS calculations
when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends
equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in
the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on
unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were
not distributed. The following tables show distributed and undistributed earnings:
2017
Fiscal Year
2016
2015
Earnings per share:
Basic earnings per share
Distributed earnings ...................................................... $
Undistributed earnings ..................................................
$
Diluted earnings per share
Distributed earnings ...................................................... $
Undistributed earnings ..................................................
$
0.25 $
0.61
0.86 $
0.25 $
0.61
0.86 $
0.22 $
0.61
0.83 $
0.22 $
0.61
0.83 $
0.18
0.92
1.10
0.18
0.92
1.10
The following table presents net income that was attributable to participating securities:
Net income attributable to participating securities ....................... $
0.4 $
0.4 $
1.6
The weighted average shares for basic and diluted EPS were as follows:
2017
Fiscal Year
2016
(in millions)
2015
2017
Fiscal Year
2016
(in thousands)
2015
Weighted Average Shares Outstanding ........................................
Participating Securities .................................................................
Shares for Basic Earnings Per Share ............................................
Dilutive Effect of Stock Options ..................................................
Shares for Diluted Earnings Per Share .........................................
61,528
468
61,996
44
62,040
64,593
505
65,098
38
65,136
64,557
1,470
66,027
48
66,075
For all periods presented, there were no stock options excluded from the determination of diluted EPS.
NOTE 12 – RESTRUCTURING CHARGES
In the fourth quarter of 2016, the Company committed to a new restructuring plan in its continuing efforts to improve
efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business
strategy. The plan involved (i) a substantial restructuring of the FLOR business model that included closure of its headquarters
office and most retail FLOR stores, (ii) a reduction of approximately 70 FLOR employees and a number of employees in the
commercial carpet tile business, primarily in the Americas and Europe regions, and (iii) the write-down of certain
underutilized and impaired assets that included information technology assets, intellectual property assets, and obsolete
manufacturing, office and retail store equipment.
As a result of this plan, the Company incurred pre-tax restructuring and asset impairment charges of $19.8 million in the
fourth quarter of 2016 and $7.3 million in the first quarter of 2017.
54
A summary of these restructuring activities is presented below:
Total
Restructuring
Charge
Costs
Incurred
in 2016
Costs
Incurred
in 2017
Balance at
Dec. 31,
2017
Workforce Reduction ........................................................... $
Asset Impairment .................................................................
Lease Exit Costs ...................................................................
10,652 $
11,319
5,116
(in thousands)
1,451 $
8,019
27
6,633 $
3,300
5,089
2,568
0
0
NOTE 13 – TAXES ON INCOME
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Among the significant changes
resulting from the law, the Tax Act reduces the U.S. federal income tax rate from 35% to 21% effective for the year beginning
January 1, 2018 and creates a modified territorial tax system with a one-time mandatory “transition tax” on previously
unrepatriated foreign earnings. It also applies restrictions on the deductibility of interest expense, allows for immediate capital
expensing of certain qualified property, eliminates the domestic manufacturing deduction, applies a broader application of
compensation limitations and creates a new minimum tax on earnings of foreign subsidiaries. The Company is continuing to
evaluate the Tax Act and its requirements, as well as its application to its business and its impact on the effective tax rate.
In accordance with GAAP as determined by ASC 740, “Income Taxes,” the Company is required to record the effects of
tax law changes in the period enacted. On December 22, 2017, the SEC staff issued guidance to companies to address the
application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or
analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax
Act.
As further discussed below, the Company’s results for the year ended December 31, 2017 contain provisional estimates
of the impact of the Tax Act. These amounts are considered provisional because they use reasonable estimates of which tax
returns have not been filed and because estimated amounts may be impacted by future regulatory and accounting guidance if
and when issued. The Company will adjust these provisional amounts as further information becomes available and as we
refine our calculations. As permitted by recent guidance issued by the SEC, these adjustments will occur during a reasonable
“measurement period” not to exceed twelve months from the date of enactment. The two material items that impacted the
Company in 2017 were the U.S. statutory rate reduction and the one-time transition tax.
Impacts of Deemed Repatriation: The Tax Act imposed a one-time transition tax on unrepatriated post-1986 accumulated
earnings and profits of certain foreign subsidiaries (“E&P”). The Company has recorded a provisional tax expense of $11.7
million related to the one-time transition tax. To calculate this tax, the Company must determine the cumulative amount of
E&P, as well as the amount of foreign taxes paid on such earnings, among other components of the calculation. The Company
computed the amount based on information available to us; however, the Company's calculation of this amount might change
with further analysis and further guidance from the U.S. federal and state tax authorities about the application of these new
rules. Additionally, the Company may revise this balance during the one-year remeasurement period as a result of amending
certain U.S. federal income tax returns; however, the outcome of this is currently unknown, and the Company has made its
best estimate of expected, future tax liability as of December 31, 2017. The Company will continue to evaluate the impact
of the tax law change as it relates to the accounting for the outside basis difference of its foreign entities. The Company will
elect to pay the liability for the deemed repatriation of foreign earnings in installments, as specified by the Tax Act.
Remeasurement of Deferred Tax Assets and Liabilities: The Tax Act reduces the U.S. statutory rate from 35% to 21% for
years after 2017. Accordingly, U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the
date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company has recorded
a provisional tax expense of $3.5 million related to the remeasurement of its net deferred tax asset. The Company remeasured
certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is
generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could
potentially affect the measurement of these balances or give rise to new deferred tax amounts.
While the Tax Act provides for a modified territorial tax system, beginning in 2018, it includes two new U.S. tax base
erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax
(“BEAT”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary
55
earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company does not expect that the
GILTI income inclusion will result in significant U.S. tax beginning in 2018. The BEAT provisions in the Tax Act eliminates
the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater
than regular tax. The Company does not expect that the BEAT provision will result in significant U.S. tax beginning in 2018.
In addition, the Company intends to account for the GILTI tax in the period in which it is incurred, and therefore has not
provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the
following components:
2017
FISCAL YEAR
2016
(in thousands)
2015
Current expense/(benefit):
Federal ............................................................................. $
Foreign ............................................................................
State .................................................................................
10,245 $
11,923
1,414
6,886 $
12,934
1,633
1,524
9,279
1,403
Current expense ......................................................................
Deferred expense/(benefit):
Federal .............................................................................
Foreign ............................................................................
State .................................................................................
23,582
21,453
12,206
20,467
1,214
2,030
6,186
(1,937 )
(728 )
19,971
3,795
(2,624)
Deferred expense ....................................................................
23,711
3,521
21,142
Total income tax expense ....................................................... $
47,293 $
24,974 $
33,348
Income before taxes on income consisted of the following:
2017
FISCAL YEAR
2016
(in thousands)
2015
U.S. operations ....................................................................... $
Foreign operations ..................................................................
53,407 $
47,132
38,357 $
40,779
58,318
47,448
Income before taxes ............................................................... $
100,539 $
79,136 $
105,766
Deferred income taxes for the years ended December 31, 2017, and January 1, 2017, reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
The Company expects to utilize in its 2017 U.S. federal tax return the remaining portion of its federal net operating loss
carryforwards which are all from share-based payment awards of $23.2 million and has recorded a related tax benefit of $8.1
million to retained earnings in accordance with applicable accounting standards. Also, the Company utilized $9.0 million of
its federal net operating loss carryforwards in its 2016 U.S. federal tax return which were all from share-based payment
awards and recorded a related tax benefit of $3.2 million to additional paid-in capital in accordance with applicable accounting
standards. This amount decreased by $3.1 million compared to the amount recorded in 2016 due to less taxable income
realized in its 2016 U.S. federal tax return that was filed in 2017.
The Company expects to utilize in its 2017 foreign tax returns the remaining portion of its foreign net operating loss
carryforwards of $3.8 million.
The Company had approximately $108.6 million in state net operating loss carryforwards relating to continuing operations
with expiration dates through 2035. The Company has provided a valuation allowance against $18.5 million of such losses,
which the Company does not expect to utilize. During 2017, the Company recorded a tax benefit of $1.3 million to retained
earnings related to $21.4 million of the state net operating losses carryforwards that were from share-based payment awards,
56
in accordance with applicable accounting standards. In addition, the Company has approximately $57.3 million in state net
operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided.
The sources of the temporary differences and their effect on the net deferred tax asset are as follows:
ASSETS
2017
LIABILITIES ASSETS
2016
LIABILITIES
Basis differences of property and equipment ....................... $
Basis difference of intangible assets .....................................
Foreign currency ..................................................................
Net operating loss carryforwards..........................................
Valuation allowances on net operating loss carryforwards ..
Federal tax credits ................................................................
Deferred compensation .........................................................
Basis difference of inventory ...............................................
Basis difference of prepaids, accruals and reserves ..............
Pensions ................................................................................
Foreign withholding taxes on unremitted earnings ..............
Undistributed earnings from foreign subsidiaries not
deemed to be indefinitely reinvested ................................
Basis difference of other assets and liabilities ......................
0 $
0
0
2,468
(1,186)
3,227
20,220
634
1,777
2,408
0
(in thousands)
13,281 $
1,157
2,597
0
0
0
0
0
0
0
909
0 $
978
0
3,627
(2,500)
5,711
26,546
4,009
6,273
3,435
0
0
0
0
536
0
0
14,419
0
3,216
0
0
0
0
0
0
0
223
1,481
351
$
29,548 $
18,480 $
48,079 $
19,690
Deferred tax assets and liabilities are included in the accompanying balance sheets as follows:
FISCAL YEAR
2017
2016
(in thousands)
Deferred tax asset (non-current asset) .................................................................. $
Deferred income taxes (non-current liabilities) ....................................................
Total net deferred taxes ........................................................................................ $
18,003 $
(6,935 )
11,068 $
33,117
(4,728 )
28,389
Management believes, based on the Company’s history of taxable income and expectations for the future, that it is more
likely than not that future taxable income will be sufficient to fully utilize the federal deferred tax assets at December 31,
2017.
As of December 31, 2017, and January 1, 2017, non-current deferred tax assets were reduced by approximately $3.3
million and $5.0 million, respectively, of unrecognized tax benefits.
57
The Company’s effective tax rate was 47.0%, 31.6% and 31.5% for fiscal years 2017, 2016 and 2015, respectively. The
following summary reconciles income taxes at the U.S. federal statutory rate of 35% to the Company’s actual income tax
expense:
Income taxes at U.S. federal statutory rate ......................................... $
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax effect ...................................
Non-deductible business expenses ..................................................
Non-deductible employee compensation ........................................
Tax effects of Company owned life insurance ................................
Tax effects of Tax Act:
One-time transition tax on foreign earnings .........................
Remeasurement of net Deferred Tax Asset ..........................
Tax effects of undistributed earnings from foreign subsidiaries
not deemed to be indefinitely reinvested .....................................
Foreign and U.S. tax effects attributable to foreign operations ......
Valuation allowance effect – State NOL ........................................
Federal tax credits ...........................................................................
Other ...............................................................................................
Income tax expense ............................................................................ $
2017
FISCAL YEAR
2016
(in thousands)
2015
35,189 $
27,698 $
37,018
2,677
695
80
(1,295)
11,707
3,467
523
(4,537)
(858)
(442)
87
47,293 $
1,861
538
361
(199)
0
0
463
(3,963)
(1,272)
(494)
(19)
24,974 $
3,003
614
168
128
0
0
458
(3,347 )
(3,797 )
(352 )
(545 )
33,348
The Company previously considered the earnings in its non-U.S. subsidiaries, excluding subsidiaries within Canada, to
be indefinitely reinvested and, accordingly, recorded no deferred income taxes. Prior to the transition tax, the Company had
approximately $350 million of foreign undistributed earnings which was the largest component of the Company’s overall
outside basis difference in its foreign subsidiaries. While the transition tax eliminated this portion of the overall outside basis
difference in its foreign subsidiaries, an actual repatriation from its non-U.S. subsidiaries could still be subject to additional
foreign withholding and U.S. state taxes.
The Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable
to a repatriation, and has determined that it will be repatriating approximately $37 million which was previously deemed
indefinitely reinvested. The Company was able to make a reasonable estimate of the tax effects of such repatriation and has
recorded a provisional estimate for foreign withholding and U.S. state taxes of $0.6 million.
The Company currently does not intend to repatriate approximately $307 million taxed under the Tax Act and has not
recorded any deferred taxes relating to such amounts. The Company considers this portion of its undistributed foreign
earnings to be indefinitely reinvested outside of the U.S. and determination of any deferred taxes on this amount is not
practicable.
The Company’s undistributed earnings from foreign subsidiaries within Canada are not deemed to be indefinitely
reinvested. At December 31, 2017, the Company’s Canadian subsidiaries had approximately $6 million of undistributed
earnings from which approximately $2 million in deferred income taxes and approximately $0.3 million in foreign
withholding taxes had been provided. As these earnings are taxed under the transition tax, the Company reversed the $2
million deferred income tax provision. However, the Company retained the $0.3 million provision for withholding taxes as
it expects to incur these taxes upon repatriation.
The Company’s federal income tax returns are subject to examination for the years 2003 to the present. The Company
files returns in numerous state and local jurisdictions and in general it is subject to examination by the state tax authorities
for the years 2012 to the present. The Company files returns in numerous foreign jurisdictions and in general it is subject to
examination by the foreign tax authorities for the years 2006 to the present.
As of December 31, 2017, and January 1, 2017, the Company had $29.2 million and $27.9 million, respectively, of
unrecognized tax benefits. If the $29.2 million of unrecognized tax benefits as of December 31, 2017 are recognized, there
would be a favorable impact on the Company’s effective tax rate in future periods. If the unrecognized tax benefits are not
favorably settled, $25.9 million of the total amount of unrecognized tax benefits would require the use of cash in future
periods. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a
58
component of income tax expense. As of December 31, 2017, the Company had accrued interest and penalties of $1.6 million,
which is included in the total unrecognized tax benefit noted above.
Management believes changes to our unrecognized tax benefits that are reasonably possible in the next 12 months will
not have a significant impact on our financial position or results of operations. The timing of the ultimate resolution of the
Company’s tax matters and the payment and receipt of related cash is dependent on a number of factors, many of which are
outside the Company’s control.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
Balance at beginning of year ............................................................. $
Increases related to tax positions taken during the current year ......
Increases related to tax positions taken during the prior years ........
Decreases related to tax positions taken during the prior years ......
Decreases related to settlements with taxing authorities .................
Decreases related to lapse of applicable statute of limitations ........
Changes due to foreign currency translation ...................................
Balance at end of year ....................................................................... $
NOTE 14 – COMMITMENTS AND CONTINGENCIES
2017
FISCAL YEAR
2016
(in thousands)
2015
27,888 $
627
709
0
0
(462)
459
29,221 $
28,271 $
690
148
(695)
0
(403)
(123)
27,888 $
27,301
641
1,230
(194 )
0
(367 )
( 340 )
28,271
The Company leases certain production, distribution and marketing facilities and equipment. At December 31, 2017,
aggregate minimum rent commitments under operating leases with initial or remaining terms of one year or more consisted
of the following:
FISCAL YEAR
AMOUNT
(in thousands)
2018 ....................................................................................................................................................... $
2019 .......................................................................................................................................................
2020 .......................................................................................................................................................
2021 .......................................................................................................................................................
2022 .......................................................................................................................................................
Thereafter ..............................................................................................................................................
16,719
13,300
8,489
5,314
3,117
15,500
Rental expense amounted to approximately $22.0 million, $24.5 million, and $24.4 million for the years 2017, 2016, and
2015, respectively.
The Company is from time to time a party to routine litigation incidental to its business. Management does not believe
that the resolution of any or all of such litigation will have a material adverse effect on the Company’s financial condition or
results of operations.
NOTE 15 – EMPLOYEE BENEFIT PLANS
Defined Contribution and Deferred Compensation Plans
The Company has a 401(k) retirement investment plan (“401(k) Plan”), which is open to all otherwise eligible U.S.
employees with at least six months of service. The 401(k) Plan calls for Company matching contributions on a sliding scale
based on the level of the employee’s contribution. The Company may, at its discretion, make additional contributions to the
401(k) Plan based on the attainment of certain performance targets by its subsidiaries. The Company’s matching contributions
are funded bi-monthly and totaled approximately $3.0 million, $3.1 million, and $2.9 million for the years 2017, 2016, and
2015, respectively. No discretionary contributions were made in 2017, 2016, or 2015.
Under the Company’s nonqualified savings plans (“NSPs”), the Company provides eligible employees the opportunity to
enter into agreements for the deferral of a specified percentage of their compensation, as defined in the NSPs. The NSPs call
for Company matching contributions on a sliding scale based on the level of the employee’s contribution. The obligations of
the Company under such agreements to pay the deferred compensation in the future in accordance with the terms of the NSPs
59
are unsecured general obligations of the Company. Participants have no right, interest or claim in the assets of the Company,
except as unsecured general creditors. The Company has established a rabbi trust to hold, invest and reinvest deferrals and
contributions under the NSPs. If a change in control of the Company occurs, as defined in the NSPs, the Company will
contribute an amount to the rabbi trust sufficient to pay the obligation owed to each participant. Deferred compensation in
connection with the NSPs totaled $31.9 million at December 31, 2017. The Company invests the deferrals in insurance
instruments with readily determinable cash surrender values. The value of the insurance instruments was $28.0 million as of
December 31, 2017.
Foreign Defined Benefit Plans
The Company has trusteed defined benefit retirement plans which cover many of its European employees. The benefits
are generally based on years of service and the employee’s average monthly compensation. Pension expense was $1.9 million,
$1.2 million, and $2.1 million for the years 2017, 2016 and 2015, respectively. Plan assets are primarily invested in insurance
contracts and equity and fixed income securities. The Company uses a year-end measurement date for the plans. As of
December 31, 2017, for the European plans, the Company had a net liability recorded of $13.4 million, an amount equal to
their underfunded status, and has recorded in Other Comprehensive Income an amount equal to $48.0 million (net of taxes
of approximately $15 million) related to the future amounts to be recorded in net post-retirement benefit costs.
The tables presented below set forth the funded status of the Company’s significant foreign defined benefit plans and
required disclosures in accordance with applicable accounting standards
FISCAL YEAR
2017
2016
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year .................................................................. $
Service cost ..........................................................................................................
Interest cost ..........................................................................................................
Benefits and expenses paid ..................................................................................
Actuarial loss (gain) .............................................................................................
Member contributions ..........................................................................................
Currency translation adjustment ..........................................................................
277,813 $
1,628
5,559
(10,267 )
13,351
262
32,202
243,717
1,032
6,580
(8,551)
73,600
225
(38,790)
Benefit obligation, end of year ................................................................................ $
320,548 $
277,813
60
FISCAL YEAR
2017
2016
(in thousands)
Change in plan assets
Plan assets, beginning of year ............................................................................... $
Actual return on assets ..........................................................................................
Company contributions .........................................................................................
Benefits paid .........................................................................................................
Currency translation adjustment ...........................................................................
258,365 $
25,691
2,812
(10,267)
30,565
239,281
59,364
4,991
(8,552)
(36,719)
Plan assets, end of year ............................................................................................. $
307,166 $
258,365
Reconciliation to balance sheet
Funded status benefit asset/(liability) ................................................................... $
(13,382) $
(19,448)
Net amount recognized ............................................................................................. $
(13,382) $
(19,448)
Amounts recognized in accumulated other comprehensive income (after tax)
Unrecognized actuarial loss .............................................................................. $
Unamortized prior service costs ........................................................................
Total amount recognized ................................................................................... $
48,443 $
(471)
47,972 $
49,547
(311)
49,236
Accumulated Benefit Obligation .......................................................................... $
313,257 $
274,414
The above disclosure represents the aggregation of information related to the Company’s two defined benefit plans which
cover many of its European employees. As of December 31, 2017, and January 1, 2017, one of these plans, which primarily
covers certain employees in the United Kingdom (the “UK Plan”), had an accumulated benefit obligation in excess of the
plan assets. The other plan, which covers certain employees in the Netherlands (the “Dutch Plan”), had assets in excess of
the accumulated benefit obligation. The following table summarizes this information as of December 31, 2017 and January
1, 2017.
END OF FISCAL YEAR
2016
2017
(in thousands)
UK Plan
Projected Benefit Obligation ...................................................................................... $
Accumulated Benefit Obligation ................................................................................
Plan Assets .................................................................................................................
190,992 $
190,992
179,322
171,172
171,172
153,132
Dutch Plan
Projected Benefit Obligation ...................................................................................... $
Accumulated Benefit Obligation ................................................................................
Plan Assets .................................................................................................................
129,554 $
122,265
127,844
106,641
103,242
105,233
2017
FISCAL YEAR
2016
(in thousands)
2015
Components of net periodic benefit cost
Service cost ................................................................................... $
Interest cost ...................................................................................
Expected return on plan assets ......................................................
Amortization of prior service cost .................................................
Recognized net actuarial (gains)/losses .........................................
1,628 $
5,559
(6,496 )
(34 )
1,287
1,032 $
6,580
(7,553 )
33
1076
1,061
8,384
(8,764 )
33
1,359
Net periodic benefit cost ............................................................... $
1,944 $
1,168 $
2,073
61
The Company reconciles the components of net periodic pension expense by comparing the beginning balance of assets
and the beginning projected obligation against the assumptions of asset return and interest costs. Any significant differences
will be explained. There were no such differences in 2017.
For 2018, it is estimated that approximately $1.2 million of expenses related to the amortization of unrecognized items
will be included in the net periodic benefit cost. During 2017, other comprehensive income was impacted by approximately
$7.0 million comprised of actuarial gain of approximately $5.8 million and amortization of $1.2 million. This decrease was
offset by the strengthening of the euro and British Pound against the dollar during 2017.
Weighted average assumptions used to determine net periodic
benefit cost
Discount rate ........................................................................
Expected return on plan assets .............................................
Rate of compensation ...........................................................
Weighted average assumptions used to determine benefit
obligations
Discount rate ........................................................................
Rate of compensation ...........................................................
2017
FISCAL YEAR
2016
2015
2.0%
2.3%
1.75%
2.2%
1.75%
2.7%
3.1%
2.0%
2.3%
2.0%
3.0%
4.0%
2.0%
3.4%
2.0%
The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each
asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the
financial markets, and include input from actuaries, investment service firms and investment managers.
The investment objectives of the foreign defined benefit plans are to maximize the return on the investments without
exceeding the limits of the prudent pension fund investment, to ensure that the assets would be sufficient to exceed minimum
funding requirements, and to achieve a favorable return against the performance expectation based on historic and projected
rates of return over the short term. The goal is to optimize the long-term return on plan assets at a moderate level of risk, by
balancing higher-returning assets, such as equity securities, with less volatile assets, such as fixed income securities. The
assets are managed by professional investment firms and performance is evaluated periodically against specific benchmarks.
The plans’ net assets did not include the Company’s own stock at December 31, 2017 or January 1, 2017.
Dutch Plan Assets and Indexation Benefit
As is common in Dutch pension plans, the Dutch Plan includes a provision for discretionary benefit increases termed
“indexation.” The indexation benefit is meant to adjust pension benefits for cost-of-living increases, similar to U.S. consumer
price index-based cost-of-living adjustments for U.S. retirement plans. The indexation benefit is not guaranteed, and is only
provided for and paid out if sufficient assets are available due to favorable asset returns.
Both the vested benefit amounts as well as amounts related to the discretionary indexation benefits under the Dutch Plan
are paid pursuant to an insurance contract with a private insurer (the “Contract”). The Plan itself is financed by investment
assets held within the Contract. The Contract guarantees payment of vested amounts, regardless of whether Plan assets held
through the Contract are ultimately sufficient to pay vested amounts, and also provides for payment of the indexation amount
on a contingent basis if the actual return on Dutch Plan assets is sufficient to pay it. This type of insurance arrangement is
common in The Netherlands, although not necessarily common in other jurisdictions.
Because the prior actual and future projected returns on Dutch Plan assets have been determined to be sufficient to provide
for the indexation benefit, the Company and the insurer agreed that it was appropriate to provide the indexation benefit under
the Contract. The indexation benefit thus becomes an amount payable by the insurer under the Contract, and consequently is
recorded as a Plan asset. The corresponding obligation to pay the indexation amount to pensioners thus became a pension
liability. As of December 31, 2017, and January 1, 2017, this indexation liability and corresponding asset was $32.7 million
and $32.2 million, respectively. The inclusion of this amount does not have any impact on the funded status of the plan, as
both the indexation asset and liability are recorded at the same amount. This indexation asset, along with the remainder of
the assets under the Dutch Plan, are identified as Level Three assets under the fair value hierarchy.
Under the express terms of the Contract, contract value is the greater of (i) the value of the discounted vested benefits of
the Dutch Plan (i.e., the benefit amount guaranteed by the insurance company), and (ii) the fair value of the underlying
investment assets held by the insurance company under the Contract. As between those two values, the former was the greater
62
for 2017 and 2016 and this represents the plan assets as shown above for the Dutch Plan. However, as explained above, the
Contract also will pay the indexation benefit if sufficient assets are available, which the Company believes to be probable
based on recent returns. Therefore, in addition to the value of the discounted vested benefits of the Dutch Plan, in determining
the fair value of the Contract, the Company believed that it was appropriate to include the value of the indexation payments
that are being added to the vested benefit amounts. As explained above, these indexation benefits will be paid out of the
Contract if asset returns continue to exceed expectations. If the asset returns are not of an expected amount to allow for
indexation, the Company can, at any time, remove this indexation benefit.
The Company’s actual weighted average asset allocations for 2017 and 2016, and the targeted asset allocation for 2018,
of the foreign defined benefit plans by asset category, are as follows:
2018
FISCAL YEAR
2017
2016
Target Allocation Percentage of Plan Assets at Year End
Asset Category:
Equity Securities .................................................
Debt and Debt Securities ....................................
Other ...................................................................
15% - 20%
35% - 45%
40% - 50%
16 %
32 %
52 %
15 %
36 %
49 %
100%
100 %
100 %
Fair Value Measurements of Plan Assets
Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
estimated fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels
of the fair value hierarchy under applicable accounting standards are described below:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2
Inputs to the valuation methodology include:
• quoted prices for similar assets in active markets;
• quoted prices for identical or similar assets in inactive markets;
• inputs other than quoted prices that are observable for the asset; and
• inputs that are derived principally or corroborated by observable data by correlation or other means.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement.
63
The following table sets forth by level within the fair value hierarchy the foreign defined benefit plans’ assets at fair value,
as of December 31, 2017 and January 1, 2017. As required by accounting standards, assets are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement. As noted above the Dutch pension plan
assets as represented by the insurance contact are classified as a Level 3 asset and included in the “Other” asset category.
Pension Plan Assets by Category as of December 31, 2017
UK Plan
(in thousands)
Dutch Plan
Total
Level 1 ............................................................................. $
Level 2 .............................................................................
Level 3 .............................................................................
Total ................................................................................ $
0 $
0
127,844
127,844 $
87,521 $
68,668
23,133
179,322 $
87,521
68,668
150,977
307,166
Pension Plan Assets by Category as of January 1, 2017
UK Plan
Dutch Plan
(in thousands)
Total
Level 1 ............................................................................. $
Level 2 .............................................................................
Level 3 .............................................................................
Total ................................................................................ $
0 $
0
105,233
105,233 $
80,048 $
50,364
22,720
153,132 $
80,048
50,364
127,953
258,365
The tables below detail the foreign defined benefit plans’ assets by asset allocation and fair value hierarchy:
Level 1
2017
Level 2
(in thousands)
Level 3
Asset Class
Equity Securities .............................................................. $
Debt and Debt Securities ..................................................
Other (including cash) ......................................................
$
48,285 $
36,780
2,456
87,521 $
0 $
41,381
27,287
68,668 $
0
19,883
131,094
150,977
Level 1
2016
Level 2
(in thousands)
Level 3
Asset Class
Equity Securities .............................................................. $
Debt and Debt Securities ..................................................
Other (including cash) ......................................................
$
37,696 $
37,175
5,177
80,048 $
0 $
36,378
13,986
50,364 $
0
19,224
108,729
127,953
64
With the exception of the Dutch Plan assets as discussed above, the assets identified as level 3 above in 2017 and 2016
relate to insured annuities and direct lending assets held by the UK Plan. The fair value of these assets was calculated using
the present value of the future cash flows due under the insurance annuities and for the direct lending assets the value is based
on the asset value from the latest available valuation with adjustments for any drawdowns and distribution payments made
between the valuation date and the reporting date. The table below indicates the change in value related to these level 3 assets
during 2017:
2017
(in thousands)
Balance of level 3 assets, beginning of year ..................................................................................... $
Interest cost .........................................................................................................................................
Benefits paid .......................................................................................................................................
Assets transferred in to (out of) Level 3 ..............................................................................................
Actuarial gain (loss) ............................................................................................................................
Translation adjustment ........................................................................................................................
Ending Balance of level 3 assets ....................................................................................................... $
127,953
2,633
(3,728 )
(2,089 )
8,753
17,455
150,977
During 2018, the Company expects to contribute $3.3 million to the plans. It is anticipated that future benefit payments
for the foreign defined benefit plans will be as follows:
FISCAL YEAR
EXPECTED
PAYMENTS
(in thousands)
2018
2019
2020
2021
2022
2023
................................................................................................................................... $
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
- 2027 ........................................................................................................................
9,115
9,334
9,650
10,011
10,257
54,661
Domestic Defined Benefit Plan
The Company maintains a domestic nonqualified salary continuation plan (“SCP”), which is designed to induce selected
officers of the Company to remain in the employ of the Company by providing them with retirement, disability and death
benefits in addition to those which they may receive under the Company’s other retirement plans and benefit programs. The
SCP entitles participants to: (i) retirement benefits upon normal retirement at age 65 (or early retirement as early as age 55)
after completing at least 15 years of service with the Company (unless otherwise provided in the SCP), payable for the
remainder of their lives (or, if elected by a participant, a reduced benefit is payable for the remainder of the participant’s life
and any surviving spouse’s life) and in no event less than 10 years under the death benefit feature; (ii) disability benefits
payable for the period of any total disability; and (iii) death benefits payable to the designated beneficiary of the participant
for a period of up to 10 years. Benefits are determined according to one of three formulas contained in the SCP, and the SCP
is administered by the Compensation Committee of the Company’s Board of Directors, which has full discretion in choosing
participants and the benefit formula applicable to each. The Company’s obligations under the SCP are currently unfunded
(although the Company uses insurance instruments to hedge its exposure thereunder). The Company is required to contribute
the present value of its obligations thereunder to an irrevocable grantor trust in the event of a change in control as defined in
the SCP. The Company uses a year-end measurement date for the domestic SCP.
65
The tables presented below set forth the required disclosures in accordance with applicable accounting standards, and
amounts recognized in the consolidated financial statements related to the domestic SCP. There is no service cost component
of the change in benefit obligation in 2017 as there are no longer any active participants in the plan.
FISCAL YEAR
2017
2016
(in thousands)
Change in benefit obligation
Benefit obligation, begining of year ................................................................ $
Service cost .....................................................................................................
Interest cost .....................................................................................................
Benefits paid ....................................................................................................
Actuarial loss (gain) ........................................................................................
29,700 $
0
1,256
(1,943 )
2,906
25,860
440
1,269
(1,012 )
3,143
Benefit obligation, end of year ........................................................................ $
31,919 $
29,700
The amounts recognized in the consolidated balance sheets are as follows:
Current liabilities ................................................................................................. $
Non-current liabilities .........................................................................................
Total benefit obligation ....................................................................................... $
2017
2016
(in thousands)
2,030 $
29,889
31,919 $
1,890
27,810
29,700
The components of the amounts in accumulated other comprehensive income, after tax, are as follows:
Unrecognized actuarial loss ..................................................................................
2017
2016
(in thousands)
8,582 $
5,626
The accumulated benefit obligation related to the SCP was $31.9 million and $29.7 million as of December 31, 2017 and
January 1, 2017, respectively. The SCP is currently unfunded; as such, the benefit obligations disclosed are also the benefit
obligations in excess of the plan assets. The Company uses insurance instruments to help limit its exposure under the SCP.
2017
2016
(in thousands, except for assumptions)
2015
Assumptions used to determine net periodic benefit cost
Discount rate ................................................................
Rate of compensation ...................................................
Assumptions used to determine benefit obligations
Discount rate ................................................................
Rate of compensation ...................................................
3.85 %
-
3.5 %
-
4.25%
4.0%
3.85%
4.0%
Components of net periodic benefit cost
Service cost .................................................................. $
Interest cost ..................................................................
Amortizations ...............................................................
0 $
1,256
364
440 $
1,269
811
Net periodic benefit cost ...................................................... $
1,620 $
2,520 $
4.0%
4.0%
4.25%
4.0%
594
1,113
522
2,229
The changes in other comprehensive income during 2017 related to the SCP as a result of plan activity and valuation were
approximately $1.7 million, after tax, primarily comprised of a net loss during the period of $2.0 million and amortization of
loss of $0.3 million. In addition to these items, as a result of the recently enacted U.S. Tax Cuts and Jobs Act changes, the
Company increased its minimum pension liability which resides in accumulated other comprehensive income by $1.3 million
to record the liability net of the new lower U.S. federal tax rate.
66
For 2018, the Company estimates that approximately $0.5 million of expenses related to the amortization of unrecognized
items will be included in net periodic benefit cost for the SCP.
During 2017, the Company contributed $1.9 million in the form of direct benefit payments for its domestic SCP. It is
anticipated that future benefit payments for the SCP will be as follows:
FISCAL YEAR
EXPECTED
PAYMENTS
(in thousands)
................................................................................................................................................. $
2018
.................................................................................................................................................
2019
.................................................................................................................................................
2020
.................................................................................................................................................
2021
2022
.................................................................................................................................................
2023 - 2027 .....................................................................................................................................
2,030
2,030
2,030
2,030
2,030
9,990
NOTE 16 – ENTERPRISE-WIDE DISCLOSURES
Based on applicable accounting standards, the Company has determined that it has three operating segments – namely,
the Americas, Europe and Asia-Pacific geographic regions. Pursuant to accounting standards, the Company has aggregated
the three operating segments into one reporting segment because they have similar economic characteristics, and the operating
segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production
processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products
or provide their services; and (e) the nature of the regulatory environment.
While the Company operates as one reporting segment for the reasons discussed, included below is selected information
on our operating segments.
Summary information by operating segment follows:
AMERICAS
EUROPE
ASIA-
PACIFIC
TOTAL
(in thousands)
2017
Net Sales ............................................................................... $
Depreciation and amortization .............................................
Total assets ...........................................................................
2016
Net Sales ............................................................................... $
Depreciation and amortization .............................................
Total assets ...........................................................................
588,052 $
13,548
272,883
246,399 $
6,049
253,519
161,992 $
8,662
193,555
996,443
28,259
719,957
568,138 $
14,639
237,900
241,463 $
5,698
261,182
149,016 $
8,729
238,317
958,617
29,066
737,399
2015
Net Sales ............................................................................... $
Depreciation and amortization .............................................
593,163 $
15,390
262,671 $
5,007
146,029 $ 1,001,863
29,564
9,167
67
A reconciliation of the Company’s total operating segment depreciation and amortization, and assets to the corresponding
consolidated amounts follows:
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization ............................... $
Corporate depreciation and amortization .....................................
28,259 $
2,002
29,066 $
1,566
29,564
1,239
Reported depreciation and amortization ....................................... $
30,261 $
30,632 $
30,803
2017
FISCAL YEAR ENDED
2016
(in thousands)
2015
ASSETS
Total segment assets ..................................................................... $
Corporate assets and eliminations ................................................
719,957 $
80,643
737,399
98,040
Reported total assets ..................................................................... $
800,600 $
835,439
The Company has a large and diverse customer base, which includes numerous customers located in foreign countries.
No single unaffiliated customer accounted for more than 10% of total sales in any year during the past three years. Sales to
customers in foreign markets in 2017, 2016 and 2015 were approximately 48%, 48% and 48%, respectively, of total net sales.
These sales were primarily to customers in Europe, Canada, Asia, Australia and Latin America. With the exception of the
United States, no one country represented more than 10% of the Company’s net sales. Revenue and long-lived assets related
to operations in the United States and other countries are as follows:
2017
FISCAL YEAR
2016
(in thousands)
2015
SALES TO UNAFFILIATED CUSTOMERS(1)
United States ................................................................................ $
United Kingdom ...........................................................................
Australia .......................................................................................
Other foreign countries .................................................................
514,783 $
57,391
87,591
336,678
501,206 $
58,266
78,141
321,004
520,375
72,445
76,600
332,443
Net sales ....................................................................................... $
996,443 $
958,617 $
1,001,863
LONG-LIVED ASSETS(2)
United States ................................................................................ $
United Kingdom ...........................................................................
Netherlands ..................................................................................
Australia .......................................................................................
Thailand ........................................................................................
China ............................................................................................
Other foreign countries .................................................................
76,557 $
7,902
55,132
45,067
16,543
8,361
3,083
79,365
8,122
43,907
44,209
16,645
9,675
2,585
Total long-lived assets .................................................................. $
212,645 $
204,508
(1) Revenue attributed to geographic areas is based on the location of the customer.
(2) Long-lived assets include tangible assets physically located in foreign countries.
68
NOTE 17 – QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
The following tables set forth, for the fiscal periods indicated, selected consolidated financial data and information
regarding the market price per share of the Company’s Common Stock. The prices represent the reported high and low sale
prices during the period presented.
FIRST
QUARTER(1)
SECOND
QUARTER
QUARTER
FOURTH
QUARTER(2)
FISCAL YEAR 2017
THIRD
Net sales ............................................................................... $
Gross profit ...........................................................................
Net income ...........................................................................
(in thousands, except per share data)
257,431 $
98,544
19,439
251,700 $
97,897
20,938
221,102 $
87,802
8,547
266,210
101,778
4,322
Basic income per share ......................................................... $
0.13 $
0.33 $
0.32 $
0.07
Diluted income per share ...................................................... $
0.13 $
0.33 $
0.32 $
0.07
Share prices
High .................................................................................. $
Low ................................................................................... $
19.93 $
17.18 $
21.05 $
18.15 $
22.60 $
18.30 $
25.70
21.21
(1) Results for the first quarter of 2017 include restructuring and asset impairment charges of $7.3 million.
(2) Results for the fourth quarter of 2017 include tax charges of $15.2 million as a result of the recently enacted U.S. Tax
Cuts and Jobs Act.
FIRST
QUARTER
SECOND
QUARTER
QUARTER
FOURTH
QUARTER(1)
FISCAL YEAR 2016
THIRD
Net sales ............................................................................... $
Gross profit ..........................................................................
Net income ...........................................................................
(in thousands, except per share data)
248,349 $
92,918
15,904
248,207 $
99,126
20,657
222,554 $
86,632
12,894
239,507
89,968
4,707
Basic income per share ......................................................... $
0.20 $
0.32 $
0.25 $
0.07
Diluted income per share ...................................................... $
0.20 $
0.32 $
0.25 $
0.07
Share prices
High .................................................................................. $
Low ................................................................................... $
18.99 $
13.70 $
18.71 $
14.56 $
18.45 $
15.02 $
19.10
14.59
(1) Results for the fourth quarter of 2016 include restructuring and asset impairment charges of $19.8 million.
NOTE 18 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During 2017, the Company did not reclassify any significant amounts out of accumulated other comprehensive income.
The only reclassifications that occurred in that period were comprised of $1.6 million related to the Company’s defined
retirement benefit plans and salary continuation plan. These reclassifications were included in the selling, general and
administrative expenses line item of the Company’s consolidated statement of operations.
69
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Interface, Inc. and Subsidiaries
Atlanta, Georgia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Interface, Inc. and Subsidiaries (the “Company”) as of
December 31, 2017 and January 1, 2017 and the related consolidated statements of operations, comprehensive income and
cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement
schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company and
subsidiaries at December 31, 2017 and January 1, 2017, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ BDO USA, LLP
We are uncertain as to the year we began serving consecutively as the auditor of the Company's financial statements; however,
we are aware that we have been the Company's auditor consecutively since at least 1981.
Atlanta, Georgia
March 1, 2018
70
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Interface, Inc. and Subsidiaries
Atlanta, Georgia
Opinion on Internal Control over Financial Reporting
We have audited Interface, Inc. and Subsidiaries’ (the “Company’s”) internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and January 1, 2017, and the related
consolidated statements of operations, comprehensive income, and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and schedule, and our report dated March 1, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Atlanta, Georgia
March 1, 2018
71
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, an
evaluation was performed under the supervision and with the participation of our management, including our principal
executive officer and our principal 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, pursuant to Rule 13a-14(c) under
the Act. Based on that evaluation, our principal executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
Changes in Internal Control over Financial Reporting. 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.
Management’s Annual Report on Internal Control over Financial Reporting. The management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
or 15d-15(f) promulgated under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 based
on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control – Integrated Framework (2013).” Based on that assessment, management concluded that, as of December 31, 2017,
our internal control over financial reporting was effective based on those criteria.
Our independent auditors have issued an audit report on the effectiveness of our internal control over financial reporting.
This report immediately precedes Item 9 of this Report.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the captions “Nomination and Election of Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Meetings and Committees of the Board of Directors” in our definitive Proxy
Statement for our 2018 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of our 2017 fiscal year, is incorporated herein by reference. Pursuant
to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to our executive officers is included in
Item 1 of this Report.
We have adopted the “Interface Code of Business Conduct and Ethics” (the “Code”) which applies to all of our employees,
officers and directors, including the Chief Executive Officer and Chief Financial Officer. The Code may be viewed on our
website at www.interface.com. Changes to the Code will be posted on our website. Any waiver of the Code for executive
officers or directors may be made only by our Board of Directors and will be disclosed to the extent required by law or
Nasdaq rules on our website or in a filing on Form 8-K.
72
ITEM 11.
EXECUTIVE COMPENSATION
The information contained under the captions “Executive Compensation and Related Items,” “Compensation Discussion
and Analysis,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” and
“Potential Payments upon Termination or Change in Control” in our definitive Proxy Statement for our 2018 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the end of our 2017 fiscal year, is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the captions “Principal Shareholders and Management Stock Ownership” and “Equity
Compensation Plan Information” in our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2017
fiscal year, is incorporated herein by reference.
For purposes of determining the aggregate market value of our voting and non-voting stock held by non-affiliates, shares
held by our directors and executive officers have been excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be “affiliates” as that term is defined under federal
securities laws.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained under the captions “Certain Relationships and Related Transactions” and “Director
Independence” in our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2017 fiscal year, is
incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the captions “Audit and Non-Audit Fees” and “Policy on Audit Committee Pre-
Approval of Audit and Permissible Non-Audit Services of Independent Auditors” in our definitive Proxy Statement for our
2018 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of our 2017 fiscal year, is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
PART IV
The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Reports
of Independent Registered Public Accounting Firm are contained in Item 8 of this Report:
Consolidated Statements of Operations and Comprehensive Income — fiscal years ended December 31, 2017, January 1,
2017 and January 3, 2016.
Consolidated Balance Sheets — December 31, 2017 and January 1, 2017.
Consolidated Statements of Cash Flows — fiscal years ended December 31, 2017, January 1, 2017 and January 3, 2016.
73
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
2. Financial Statement Schedule
The following Consolidated Financial Statement Schedule of Interface, Inc. and subsidiaries are included as part of this
Report (see the pages immediately preceding the signatures in this Report).
Schedule II — Valuation and Qualifying Accounts and Reserves
3. Exhibits
The following exhibits are included as part of this Report:
Exhibit
Number
3.1
3.2
4.1
4.2
10.1
10.2
10.3
Description of Exhibit
— Restated Articles of Incorporation and accompanying Clarification Certificate (included as Exhibit 3.1 to
the Company’s quarterly report on Form 10-Q filed on May 10, 2012, previously filed with the
Commission and incorporated herein by reference).
— Bylaws, as amended and restated February 22, 2017 (included as Exhibit 3.1 to the Company’s current
report on Form 8-K filed on February 27, 2017, previously filed with the Commission and incorporated
herein by reference).
— See Exhibits 3.1 and 3.2 for provisions in the Company’s Articles of Incorporation and Bylaws defining
the rights of holders of Common Stock of the Company.
— Amended and Restated Rights Agreement dated May 8, 2017 between the Company and Computershare
Trust Company, N.A. (included as Exhibit 4.1 to the Company’s current report on Form 8-K filed on May
9, 2017, previously filed with the Commission and incorporated herein by reference).
— Salary Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the Company’s registration
statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein
by reference).*
— Form of Salary Continuation Agreement, dated as of January 1, 2008 (as used for Daniel T. Hendrix)
(included as Exhibit 99.5 to the Company’s current report on Form 8-K filed on January 7, 2008, previously
filed with the Commission and incorporated herein by reference).*
— Interface, Inc. Omnibus Stock Incentive Plan (as amended and restated effective February 18, 2015)
(included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 20, 2015, previously
filed with the Commission and incorporated herein by reference); Form of Restricted Stock Agreement, as
used for executive officers (included as Exhibit 10.5 to the Company’s annual report on Form 10-K for the
year ended December 30, 2007, previously filed with the Commission and incorporated herein by
reference); Form of Performance Share Agreement (included as Exhibit 99.1 to the Company’s current
report on Form 8-K filed on January 20, 2016, previously filed with the Commission and incorporated
herein by reference); Form of Restricted Stock Agreement, as used for executive officers (included as
Exhibit 10.1 to the Company’s quarterly report on Form 10-Q filed on May 11, 2017, previously filed with
the Commission and incorporated herein by reference); Form of Performance Share Agreement for
executive officers (included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q filed on May
11, 2017, previously filed with the Commission and incorporated herein by reference); and Form of
Restricted Stock Agreement, as used for directors (included as Exhibit 10.2 to the Company’s quarterly
report on Form 10-Q filed on May 11, 2017, previously filed with the Commission and incorporated herein
by reference).*
10.4
— Interface, Inc. Executive Bonus Plan, as amended October 28, 2015 (included as Exhibit 99.2 to the
Company’s current report on Form 8-K filed on October 28, 2015, previously filed with the Commission
and incorporated herein by reference).*
74
10.5 — Interface, Inc. Nonqualified Savings Plan (as amended and restated effective January 1, 2002) (included
as Exhibit 10.4 to the Company’s annual report on Form 10-K for the year ended December 30, 2001,
previously filed with the Commission and incorporated herein by reference); First Amendment thereto,
dated as of December 20, 2002 (included as Exhibit 10.2 to the Company’s quarterly report on Form 10-
Q for the quarter ended June 29, 2003, previously filed with the Commission and incorporated herein by
reference); Second Amendment thereto, dated as of December 30, 2002 (included as Exhibit 10.3 to the
Company’s quarterly report on Form 10-Q for the quarter ended June 29, 2003, previously filed with the
Commission and incorporated herein by reference); Third Amendment thereto, dated as of May 8, 2003
(included as Exhibit 10.6 to the Company’s annual report on Form 10-K for the year ended December 28,
2003 (the “2003 10-K”), previously filed with the Commission and incorporated herein by reference); and
Fourth Amendment thereto, dated as of December 31, 2003 (included as Exhibit 10.7 to the 2003 10-K,
previously filed with the Commission and incorporated herein by reference).*
10.6
10.7
10.8
10.9
— Employment Agreement of Daniel T. Hendrix dated as of March 3, 2017 (included as Exhibit 99.1 to the
Company’s current report on Form 8-K filed on April 6, 2017, previously filed with the Commission and
incorporated herein by reference).*
— Amended and Restated Employment and Change in Control Agreement of Jay D. Gould dated as of March
3, 2017 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on April 14, 2017,
previously filed with the Commission and incorporated herein by reference).*
— Split Dollar Insurance Agreement, dated February 21, 1997, between the Company and Daniel T. Hendrix
(included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October
4, 1998, previously filed with the Commission and incorporated herein by reference); and Amendment
thereto, dated December 29, 2008 (included as Exhibit 99.1 to the Company’s current report on Form 8-K
filed on January 2, 2009, previously filed with the Commission and incorporated herein by reference).*
— Form of Indemnity Agreement of Director (as used for directors of the Company) (included as Exhibit
99.1 to the Company’s current report on Form 8-K filed on November 30, 2005, previously filed with the
Commission and incorporated herein by reference).*
10.10 — Form of Indemnity Agreement of Officer (as used for certain officers of the Company, including Daniel
T. Hendrix and Jay D. Gould) (included as Exhibit 99.2 to the Company’s current report on Form 8-K filed
on November 30, 2005, previously filed with the Commission and incorporated herein by reference).*
10.11 — Interface, Inc. Long-Term Care Insurance Plan and related Summary Plan Description (included as Exhibit
99.2 to the Company’s current report on Form 8-K filed on December 20, 2005, previously filed with the
Commission and incorporated herein by reference).*
10.12 — Interface, Inc. Nonqualified Savings Plan II, as amended and restated effective January 1, 2009 (included
as Exhibit 10.18 to the Company’s annual report on Form 10-K for the year ended December 30, 2012 (the
“2012 10-K”), previously filed with the Commission and incorporated herein by reference; First
Amendment thereto, dated February 26, 2009 (included as Exhibit 10.19 to the 2012 10-K, previously filed
with the Commission and incorporated herein by reference); Second Amendment thereto, dated December
9, 2009 (included as Exhibit 10.20 to the 2012 10-K, previously filed with the Commission and
incorporated herein by reference); Third Amendment thereto, dated April 15, 2010 (included as Exhibit
10.21 to the 2012 10-K, previously filed with the Commission and incorporated herein by reference); and
Fourth Amendment thereto, dated August 9, 2012 (included as Exhibit 10.22 to the 2012 10-K, previously
filed with the Commission and incorporated herein by reference).*
10.13 — Amended and Restated Syndicated Facility Agreement, dated as of August 8, 2017, among Interface, Inc.,
certain subsidiaries of the Company as borrowers, certain subsidiaries of the Company as guarantors, Bank
of America, N.A. as Administrative Agent, and the other lenders party thereto (included as Exhibit 99.1 to
the Company’s current report on Form 8-K filed on August 9, 2017, previously filed with the Commission
and incorporated herein by reference).
10.14 — Amended and Restated Security and Pledge Agreement, dated as of August 8, 2017, among Interface, Inc.,
certain subsidiaries of the Company as obligors, and Bank of America, N.A. as Administrative Agent
(included as Exhibit 99.2 to the Company’s current report on Form 8-K filed on August 9, 2017, previously
filed with the Commission and incorporated herein by reference).
10.15 — Severance Protection Arrangement for Bruce A. Hausmann (included in Item 5.02 of the Company’s
current report on Form 8-K filed on March 13, 2017, previously filed with the Commission and
incorporated herein by reference.)
21
23
— Subsidiaries of the Company.
— Consent of BDO USA, LLP.
75
24
31.1
— Power of Attorney (see signature page of this Report).
— Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.
31.2
— Certification of Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.
32.1 — Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Executive
Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2017.
32.2 — Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Financial
Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2017.
101.INS — XBRL Instance Document
101.SCH — XBRL Taxonomy Extension Schema Document
101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB — XBRL Taxonomy Extension Label Linkbase Document
101.PRE — XBRL Taxonomy Presentation Linkbase Document
101.DEF — XBRL Taxonomy Definition Linkbase Document
__________
* Management contract or compensatory plan or agreement required to be filed pursuant to Item 15(b) of this Report.
ITEM 16. FORM 10-K SUMMARY
None.
76
INTERFACE, INC. AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A
BALANCE,
AT
BEGINNING
OF YEAR
COLUMN B
CHARGED TO
COSTS AND
EXPENSES
(A)
Allowance for Doubtful
Accounts:
Year Ended:
COLUMN C
CHARGED TO
OTHER
ACCOUNTS
(in thousands)
COLUMN D
DEDUCTIONS
(DESCRIBE)
(B)
COLUMN E
BALANCE,
AT END OF
YEAR
December 31, 2017 .............. $
January 1, 2017 ....................
January 3, 2016 ....................
3,780 $
4,479
5,896
635 $
(243)
212
0 $
0
0
922 $
456
1,629
3,493
3,780
4,479
______________
(A) Includes changes in foreign currency exchange rates.
(B) Write off of bad debt, and recovering of previously provided for amounts.
COLUMN A
BALANCE,
AT
BEGINNING
OF YEAR
COLUMN B
CHARGED TO
COSTS AND
EXPENSES
(A)
COLUMN C
CHARGED TO
OTHER
ACCOUNTS(B)
(in thousands)
COLUMN D
DEDUCTIONS
(DESCRIBE)
(C)
COLUMN E
BALANCE,
AT END OF
YEAR
Restructuring Reserve:
Year Ended:
December 31, 2017 .............. $
January 1, 2017 ....................
January 3, 2016 ....................
10,291 $
104
7,179
3,999 $
11,769
(481)
3,300 $
8,019
0
3,724 $
1,582
6,594
2,568
10,291
104
______________
(A) Includes changes in foreign currency exchange rates.
(B) Direct reduction of asset carrying value, not included in restructuring reserve.
(C) Cash payments.
77
COLUMN A
BALANCE,
AT
BEGINNING
OF YEAR
COLUMN B
CHARGED TO
COSTS AND
EXPENSES
(A)
COLUMN C
CHARGED TO
OTHER
ACCOUNTS
(in thousands)
COLUMN D
DEDUCTIONS
(DESCRIBE)
(B)
COLUMN E
BALANCE, AT
END OF YEAR
Warranty and Sales
Allowances Reserves :
Year ended:
December 31, 2017 .............. $
January 1, 2017 ....................
January 3, 2016 ....................
5,529 $
4,759
3,954
2,071 $
3,149
2,584
0 $
0
0
3,489 $
2,379
1,779
4,111
5,529
4,759
______________
(A) Includes changes in foreign currency exchange rates.
(B) Represents credits and costs applied against reserve and adjustments to reflect actual exposure.
(All other Schedules for which provision is made in the applicable accounting requirements of the Securities and Exchange
Commission are omitted because they are either not applicable or the required information is shown in the Company's
Consolidated Financial Statements or the Notes thereto.)
78
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 1, 2018
INTERFACE, INC.
By: /s/ JAY D. GOULD
Jay D. Gould
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Daniel T. Hendrix as attorney-in-fact, with power of substitution, for him or her in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ DANIEL T. HENDRIX
Daniel T. Hendrix
/s/ JAY D. GOULD
Jay D. Gould
/s/ BRUCE A. HAUSMANN
Bruce A. Hausmann
/s/ GREGORY J. BAUER
Gregory J. Bauer
/s/ JOHN P. BURKE
John P. Burke
/s/ ANDREW B. COGAN
Andrew B. Cogan
/s/ CARL I. GABLE
Carl I. Gable
/s/ CHRISTOPHER G. KENNEDY
Christopher G. Kennedy
/s/ K. DAVID KOHLER
K. David Kohler
/s/ ERIN A. MATTS
Erin A. Matts
/s/ JAMES B. MILLER, JR.
James B. Miller, Jr.
/s/ SHERYL D. PALMER
Sheryl D. Palmer
Chairman of the Board and Director
March 1, 2018
President, Chief Executive Officer and Director
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
79
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Exhibit
Number
21
23
24
31.1
31.2
32.1
32.2
EXHIBIT INDEX
Description of Exhibit
Subsidiaries of the Company.
Consent of BDO USA, LLP.
Power of Attorney.
Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2017.
Certification of Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2017.
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Executive
Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2017.
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Financial Officer
with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
80
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Board of Directors
Daniel T. Hendrix
Chairman of the Board and
Former Chief Executive Officer
Interface, Inc.
John P. Burke
Chief Executive Officer
Trek Bicycle Corporation
Andrew B. Cogan
Chief Executive Officer
Knoll, Inc.
Carl I. Gable
Private Investor
Jay D. Gould
President and Chief
Executive Officer
Interface, Inc.
Christopher G. Kennedy
Chairman
Joseph P. Kennedy Enterprises, Inc.
Executive Officers
Jay D. Gould
President and
Chief Executive Officer
Robert A. Coombs
Senior Vice President
(President - Asia-Pacific)
David B. Foshee
Vice President, General Counsel
and Secretary
Bruce A. Hausmann
Vice President and
Chief Financial Officer
Matthew J. Miller
Vice President
(President – Americas)
Kathleen R. Owen
Vice President and
Chief Human Resources Officer
J. Chadwick Scales
Vice President and Chief
Marketing, Innovation & Design Officer
K. David Kohler
President and Chief Executive Officer
Kohler Co.
Nigel W. Stansfield
Vice President
(President – Europe)
Shareholder Information
Form 10-K
A copy of the Company’s Annual Report on
Form 10-K, filed each year with the Securities
and Exchange Commission, may be obtained by
shareholders without charge by writing to:
Mr. Bruce A. Hausmann
Chief Financial Officer
Interface, Inc.
2859 Paces Ferry Road, Suite 2000
Atlanta, Georgia 30339
Erin A. Matts
North America Chief
Executive Officer
Annalect, Inc.
James B. Miller, Jr.
Chairman and Chief Executive Officer
Fidelity Southern Corporation
Sheryl D. Palmer
President and Chief Executive Officer
Taylor Morrison Home Corporation
Lead Independent Director
Executive Committee Member
Audit Committee Member
Compensation Committee Member
Nominating & Governance Committee Member
Annual Meeting:
The annual meeting of shareholders will
be at 3:00 pm EDT on May15, 2018 at:
Overlook III Conference Center
2859 Paces Ferry Road
Atlanta, Georgia 30339
Transfer Agent and Dividend
Disbursing Agent:
Computershare
211 Quality Circle, Suite 210
College Station, Texas 77845
1 800 254 5196 (U.S. & Canada)
1 781 575 2879 (Foreign)
Number of shareholders of record
at March 9, 2018: 643
Change of Address:
Please direct all changes of address
or inquiries as to how your account
is listed to:
Computershare
211 Quality Circle, Suite 210
College Station, Texas 77845
1 800 254 5196 (U.S. & Canada)
1 781 575 2879 (Foreign)
Independent Registered
Public Accounting Firm:
BDO USA, LLP
Atlanta, Georgia
Principal Legal Counsel:
Kilpatrick Townsend & Stockton LLP
Atlanta, Georgia
Corporate Address:
Interface, Inc.
2859 Paces Ferry Road
Suite 2000
Atlanta, Georgia 30339
tel (770) 437 6800
fax (770) 319 6270
www.interface.com
Ticker Symbol:
TILE (Nasdaq)
Forward-Looking Statements:
This report contains statements which may constitute “forward-looking statements” under applicable securities laws, including statements regarding
the intent, belief, or current expectations of Interface, Inc. (the “Company”) and members of its management team, as well as assumptions on which
such statements are based. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and
actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management
that could cause actual results to differ materially from those in forward-looking statements are set forth in Item 1A (“Risk Factors”) of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and are hereby incorporated by reference. The Company undertakes no
obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to
future operating results over time.
Interface®, Mission Zero® and the Mission Zero logo are registered trademarks of Interface, Inc. and its subsidiaries. Climate Take Back™ and Proof Positive™
are trademarks of Interface, Inc. and its subsidiaries. All rights are reserved.
2859 Paces Ferry Road
Suite 2000
Atlanta, GA 30339
www.interface.com