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Interface, Inc.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
www.interface.com
Fellow Shareowners…
2018 was an historic year for Interface. Not only will it be remembered
as one of our most impressive years financially, but also as a significant
year in which we built on our legacy of superior design, innovation
and sustainability.
It is an important point of differentiation. But we are not stopping
there. In 2016, we announced our intent to go from doing no harm
to having a positive impact with Climate Take Back, bringing a voice
of aspiration and optimism to global warming.
In 2018, we launched an industry first: every product that we sell
globally is carbon neutral across the entire product lifecycle. We call
this program Carbon Neutral Floors. Having worked diligently since
1994 to reduce the carbon footprint of our products, we negated the
remaining carbon impact through the purchase of carbon offsets.
It is an important step for us as we build our innovation pipeline and
work to bring climate positive products to market. As of Jan. 1, 2019,
this also includes all nora® products.
We intend to continue to make sustainability matter, even more.
Interface will lead industry in creating a climate fit for life, providing
our customers with products and services that will make a difference.
We will continue to be an example for other companies, showing
that business can be prosperous and purpose-driven.
FY 2018 Results
By executing on our strategy and expanding our product portfolio
with the nora acquisition, we outperformed our full year outlook for
2018. Net sales increased 18 percent to $1.2 billion, including $113
million of sales from nora. We also delivered organic sales growth
at the top end of our projected range, at 7 percent. Adjusted gross
margin landed in our anticipated range with full year adjusted gross
margin of 38.7 percent, and our adjusted SG&A expenses were
consistent with our expectations at $322 million or 27.3 percent of
sales. These results brought our full year adjusted EPS to $1.49,
up 26 percent over the prior year.
Looking Ahead
As we look toward 2019, we enter the year with momentum and a
highly engaged global team. Our strategy is working in the marketplace
and we anticipate further success in the coming year. We also remain
fully committed to our sustainability goals. I am excited about our
talented team and the energy and passion we all share to outperform
our industry. We will continue to invest in our people, our products,
and the earth. Thank you for allowing us to serve you, our customers,
our employees and the environment.
Sincerely,
Jay D. Gould
President and Chief Executive Officer
Interface, Inc.
Our work in 2018 was essential to pursuing our vision of becoming
the world’s most valuable interior products and services company.
We’re working to fulfill this vision through a consistent and clear,
five-pillared value creation strategy:
· Grow our core carpet tile business
· Build a resilient flooring business
· Execute supply chain productivity
· Optimize SG&A resources
· And do all of this while leading a world-changing
sustainability movement.
Our strategy is working in the marketplace. We have been gaining
market share in carpet tile. With our launch of LVT and acquisition
of nora systems, we are successfully building a scalable resilient
flooring business that is profitable, has a strong margin structure,
and moves the dial. In fact, as we expanded participation from solely
carpet tile to two resilient flooring categories, we have increased
our served market from approximately $4.2 billion in 2016 to an
estimated $8.5 billion today. We are pleased with the progress of
our supply chain initiatives that are delivering on the P&L. We have
also improved the efficiency and effectiveness of our SG&A spend.
And, through our Climate Take Back™ sustainability mission, we
are driving industry to consider carbon as a resource, urging our
customers to participate by specifying our Carbon Neutral Floors™,
and doing our part to reverse global warming.
Our strategic decisions and investments have already proven their
significance, and we believe these investments will continue to drive
value for years to come.
nora Acquisition
Our acquisition of nora systems in August 2018 was the largest
acquisition in Interface history, expanding our presence in resilient
flooring. Nora is a globally-recognized brand and the market share
leader in the rubber flooring category. Nora expands the Interface
portfolio and increases our presence in healthcare and education,
providing unique opportunities for us to meet our customers’
diverse needs.
We have made great progress integrating the nora team into the
Interface family and to accelerate our cross-selling processes. The
integration work will continue in 2019, and I am pleased with the
team’s commitment and the positive momentum in our business.
Sustainability Progress
Over the past 25 years we have been on a mission to eliminate
the negative impact that producing flooring products has on the
Earth. A simple question from a customer 25 years ago sparked our
ambitious sustainability journey. We have since created a movement
that has transformed the industrial world—from manufacturing
practices to material choices and supply chain management.
We have increased our renewable energy use to 88 percent globally,
reduced greenhouse gas emissions by 96 percent and reduced the
carbon footprint of our products by 60 percent. Mission Zero® is a
core part of Interface and a promise we have made to our customers.
Joseph P. Kennedy Enterprises, Inc.
(President – Europe, Africa, Asia and Australia)
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
Chairman and Chief Executive Officer
Knoll, Inc.
Jay D. Gould
President and Chief
Executive Officer
Interface, Inc.
Christopher G. Kennedy
Chairman
Catherine M. Kilbane
Retired Senior VIce President
and General Counsel
The Sherwin-Williams Company
K. David Kohler
Kohler Co.
President and Chief Executive Officer
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
Chairman and Chief Executive Officer
Taylor Morrison Home Corporation
Lead Independent Director
Executive Committee Member
Audit Committee Member
Compensation Committee Member
Nominating & Governance Committee Member
Forward-Looking Statements:
Executive Officers
Jay D. Gould
President and
Chief Executive Officer
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
Nigel W. Stansfield
Vice President
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.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
Annual Meeting:
The annual meeting of shareholders will
be at 11:00 am EDT on May 13, 2019 at:
Interface, Inc.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
Transfer Agent and Dividend
Disbursing Agent:
Computershare
462 S. 4th Street, Suite 1600
Louisville, KY 40202
1 800 254 5196 (U.S. & Canada)
1 781 575 2879 (Foreign)
Number of shareholders of record
at March 8, 2019: 645
Change of Address:
Please direct all changes of address
or inquiries as to how your account
is listed to:
Computershare
462 S. 4th Street, Suite 1600
Louisville, KY 40202
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.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
tel (770) 437 6800
fax (770) 319 6270
www.interface.com
Ticker Symbol:
TILE (Nasdaq)
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 30, 2018, 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®, the Mission Zero logo and nora® are registered trademarks of Interface, Inc. and its subsidiaries. Climate Take Back™ and Carbon
Neutral Floors™ are trademarks of Interface, Inc. and its subsidiaries. All rights are reserved.
Financial Highlights
NET SALES
($ in millions)
$996
$1,180
18%
GROWTH
ORGANIC SALES
($ in millions)
$992
$1,059
7%
GROWTH
2017
2018
2017
2018
ADJUSTED EBITDA
($ in millions)
ADJUSTED EARNINGS PER SHARE
(Diluted)
$152
$186
22%
GROWTH
$1.18
$1.49
26%
GROWTH
2017
2018
2017
2018
Note: Please see the end of this Annual Report for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.
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 30, 2018
Commission File No.: 001-33994
Interface, Inc.
(Exact name of registrant as specified in its charter)
Georgia
(State of incorporation)
1280 West Peachtree Street
Atlanta, Georgia
(Address of principal executive offices)
58-1451243
(I.R.S. Employer Identification No.)
30309
(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
Name of Each Exchange on Which Registered:
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 every Interactive Date File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit 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 or a smaller
reporting 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 29, 2018:
$1,343,752,725 (58,551,317 shares valued at the closing sale price of $22.95 on June 29, 2018). See Item 12.
Number of shares outstanding of each of the registrant’s classes of Common Stock, as of February 18, 2019:
Class
Common Stock, $0.10 par value per share
Number of Shares
59,453,784
Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I ..............................................................................................................................................................................
ITEM 1. BUSINESS ..................................................................................................................................................
ITEM 1A. RISK FACTORS ......................................................................................................................................
ITEM 1B. UNRESOLVED STAFF COMMENTS ...................................................................................................
ITEM 2. PROPERTIES .............................................................................................................................................
ITEM 3. LEGAL PROCEEDINGS ...........................................................................................................................
ITEM 4. MINE SAFETY DISCLOSURES ...............................................................................................................
PART II .............................................................................................................................................................................
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ................................................................
ITEM 6. SELECTED FINANCIAL DATA ..............................................................................................................
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...............................................................................................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................................
CONSOLIDATED STATEMENTS OF OPERATIONS ..........................................................................................
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME .................................................................
CONSOLIDATED BALANCE SHEETS .................................................................................................................
CONSOLIDATED STATEMENTS OF CASH FLOWS ..........................................................................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...............................................................................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ...................................................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ...................................................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .................................................................................................................................
ITEM 9A. CONTROLS AND PROCEDURES ........................................................................................................
ITEM 9B. OTHER INFORMATION ........................................................................................................................
PART III ...........................................................................................................................................................................
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ..................................
ITEM 11. EXECUTIVE COMPENSATION ............................................................................................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
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RELATED STOCKHOLDER MATTERS ............................................................................................................
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ..................................................................................................................................................
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ..........................................................................
PART IV ...........................................................................................................................................................................
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ................................................................
ITEM 16. FORM 10-K SUMMARY .........................................................................................................................
SIGNATURES ..................................................................................................................................................................
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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.
Interface is a global flooring company specializing in carpet tile and resilient flooring, including luxury vinyl tile (“LVT”)
and rubber flooring. We help our customers create high-performance interior spaces that support well-being, productivity,
and creativity, as well as the sustainability of the planet.
We are a worldwide leader in design, production and sales of modular carpet, also known as carpet tile. 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 58%, 27% and 15%, respectively,
for fiscal year 2018.
In 2017, we globally launched a line of LVT products, which represented our first introduction into a category of products
that we call resilient flooring.
On August 7, 2018, the Company acquired nora Holding GmbH (“nora”) a global leader in performance flooring and
worldwide leader in the rubber flooring category under the established nora brands norament® and noraplan®. The nora
acquisition is expected to advance the Company’s growth strategy in expanding market segments, particularly in the
healthcare, life sciences and education market segments. Similar to Interface, nora operates on an international footprint and
the Company expects the acquisition will also allow for geographic sales synergies as well. The results of operations for this
acquisition have been consolidated with those of the Company from the acquisition date forward. Due to the nora acquisition,
our resilient rubber flooring products accounted for approximately 10% of our sales in 2018.
Capitalizing on our acquisition of nora, as well as 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. As a result of
our efforts, our mix of corporate office versus non-corporate office modular carpet and LVT sales in the Americas was 45%
and 55%, respectively, for 2018. Company-wide, our mix of corporate office versus non-corporate office modular carpet and
LVT sales was 60% and 40%, respectively, in 2018. 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. Rubber is already an attractive product for non-corporate applications and
the acquisition of nora will continue to allow for growth of non-corporate office markets.
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, 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. We continue
to drive this trend with our product innovations and designs discussed below. We believe that we are well positioned to lead
and capitalize upon the market for 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. 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. Our acquisition of nora, which
is a global leader in performance flooring, further strengthens our strong global brand reputation.
1
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. Nora also offers
strong design capabilities and tremendous color palate options to offer attractive and resilient flooring options to our
customers.
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 Custom Products; 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 made-to-order
and custom samples quickly and on-time delivery of made-to-order or 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 sales, which are not custom products, but are
instead standard styles which can be produced once ordered. Our made-to-order capabilities not only enhance our marketing
and sales, they significantly improve our inventory turns. Our customized products, which are both custom colors of
established styles, as well as limited amounts of true custom carpet designs or configurations, are less than 10% of our global
sales. The remainder of our modular carpet sales are serviced from off-the-shelf inventory. The salient terms of our contracts
for made-to-order and custom modular carpet tile do not differ materially from those for off-the-shelf inventory.
Our global manufacturing capabilities in modular carpet production are an important component of our strength in these
areas, 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.
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 950 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
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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, new LVT products and new
rubber flooring products across several 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:
● Grow our core carpet tile business;
● Develop a substantial resilient flooring business, which includes our nora rubber products;
● Execute supply chain productivity;
● Optimize 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 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 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. Our acquisition of nora, with its rubber flooring business, is a key component of our strategy in this area.
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 invest back into the
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business, 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 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:
● 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;
● success of the nora acquisition will depend substantially on our ability to realize the expected synergies and other
benefits from combining the businesses of the Company and nora, and nora may not contribute to the revenue and
profitability of the combined business as much as we expect;
● 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.
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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
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. 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
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without transition strips or layering. In addition, the Level Set Collection is constructed with the same type of backing as our
carpet tiles.
Rubber Flooring
Nora is a global leader in performance flooring and worldwide share leader in the rubber flooring category under the
established norament® and noraplan® brands. Nora enhances the Company’s fast growing resilient flooring portfolio. The
acquisition is expected to advance the Company’s growth strategy in expanding market segments, particularly in the
healthcare, life sciences and education market segments. Rubber flooring is ideal for applications that require hygienic, safe
flooring with strong chemical resistance. Rubber flooring is extremely durable compared to other flooring alternatives.
Other Products and Services
We sell a proprietary antimicrobial chemical compound under the registered trademark Intersept that we incorporate in
some 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. We also continue to provide “turnkey” project management services for
national accounts and other large customers through our InterfaceSERVICES™ business.
Marketing and Sales
We distribute our products through two primary channels: (1) direct sales to end users; and (2) indirect sales through
independent contractors or distributors. 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, as well as the strength of the nora rubber flooring brands of
norament® and noraplan®.
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.
Manufacturing
We manufacture carpet at two locations in the United States and at facilities in the Netherlands, the United Kingdom,
Thailand, China and Australia. We manufacture rubber flooring in Germany.
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. For our rubber production we have one manufacturing facility, but
we have regional warehouses to achieve advantageous delivery times and optimal freight costs.
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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. For rubber flooring, the key
polymer raw materials are available from multiple sources and we can source both synthetic and natural rubbers depending
on product specification and material availability.
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
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. Nora’s manufacturing facility, which is located in Weinheim, Germany, is
ISO14001 certified as well and sells the majority of its products with the Blauer Engel label. Blauer Engel is the leading
German institute that recognizes products that have environmentally friendly aspects.
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
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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 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.
For nora rubber flooring, the innovation focus is on performance and design. A recent revolutionary innovation is the
fast growing self-adhesive nTx solution for nora tiles and sheet goods. Recent step changes in design are noraplan Iona
introducing a rubber on rubber print, noraplan valua introducing natural woodlike colors and embossing, and noraplan unita
that incorporates real granite parts in a rubber floor. The combination of performance and design makes nora the recognized
market leader in rubber flooring.
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.
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
8
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. 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.
Backlog
Our backlog of unshipped orders was approximately $190.4 million at February 10, 2019, compared with approximately
$122.9 million at February 11, 2018. The 2019 backlog includes backlog for our acquired nora business. 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 10, 2019 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, norament, noraplan, nTX solution, noraplan unita, noraplan valua 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 30, 2018, we employed a total of 4,094 employees worldwide, of such total 1,688 were clerical, staff, sales,
supervisory and management personnel and 2,406 were manufacturing personnel. The worldwide employee total includes
1,066 from the nora acquisition. We also utilized the services of 415 temporary personnel as of December 30, 2018.
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. The majority of our employees in Germany are members of a Works
Council as well. Our management believes that its relations with the Works Councils, the unions and all of our employees
are good.
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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, Germany and
Australia are certified under ISO Standard No. 14001.
Executive Officers of the Registrant
Our executive officers, their ages as of December 30, 2018, and their principal positions with us are set forth below.
Executive officers serve at the pleasure of the Board of Directors.
Name
Age
Jay D. Gould ................................... 59
David B. Foshee ............................. 48
Bruce A. Hausmann ....................... 49
Matthew J. Miller ........................... 50
Kathleen R. Owen .......................... 55
Nigel Stansfield .............................. 51
Principal Position(s)
President and Chief Executive Officer
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 (President - Europe, Africa, Australia, and Asia)
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. 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 Direct Store Delivery segment 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 and is a certified public accountant (inactive status) in the State of California.
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 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.
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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, and in January 2019 he assumed responsibility for the Asia-Pacific region as well.
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
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 competing 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
11
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 and resilient flooring 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 other 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 flooring 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.
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 2018, 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 2018 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.
12
The uncertainty surrounding the implementation and effect of the U.K. exiting the European Union, and related negative
developments in the European Union could adversely affect our business, results of operations or financial condition.
The results of a June 2016 referendum vote in the U.K. were in favor of the U.K. exiting the European Union (commonly
referred to as “Brexit”). On March 29, 2017, the U.K. notified the European Union of its intention to withdraw pursuant to
Article 50 of the Lisbon Treaty. As a result of this notification, a complex and uncertain process of negotiation is now taking
place to determine the future terms of the U.K.’s relationship with the European Union, with the U.K. currently due to exit
the European Union on March 29, 2019. The uncertainty leading up to and following the Brexit referendum has had, and the
implementation of Brexit may continue to have, a negative impact on our business and demand for our products in Europe,
and particularly in the U.K. The long-term nature of the U.K.’s relationship with the European Union is unclear and there is
considerable uncertainty when, or if, any withdrawal agreement or long-term relationship strategy, including trade deals, will
be agreed to and implemented by the U.K. and the European Union. Brexit could adversely affect European or worldwide
political, regulatory, economic or market conditions and could contribute to instability in political institutions and regulatory
agencies. Brexit could also have the effect of disrupting the free movement of goods, services, and people between the U.K.,
the European Union and elsewhere. In addition, Brexit 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 flooring 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
carpet. Synthetic rubber uses petroleum based products as feedstock as well. 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.
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.
If we fail to realize the expected synergies and other benefits of the nora acquisition, our results of operations and stock
price may be negatively affected.
We recently completed the acquisition of nora, a manufacturer and multinational marketer of resilient rubber floor
coverings. The success of the acquisition will depend substantially on our ability to realize the expected synergies and other
benefits from combining the businesses of the Company and nora. Our ability to realize these anticipated benefits and cost
savings is subject to various risks and uncertainties, including the risks that:
● we may not be able to successfully combine and integrate the businesses on a timely basis, or at all;
●
the integration process could divert management’s attention, cause employee or customer attrition or cause other
disruption;
● nora may not contribute to the revenues and profitability of the combined business as much as we currently expect;
or
● we may not be able to manage the increased indebtedness we have incurred in connection with the acquisition.
13
If we are not able to successfully combine the businesses of the Company and nora within the anticipated time frame, or
at all, the expected synergies and other benefits of the transaction may not be realized fully or at all, or may take longer to
realize than expected, the combined businesses may not perform as expected and the results of our operations or value of our
common stock may be adversely affected.
It is also possible that the integration process could result in the loss of key employees or customers of the Company or
nora, the disruption of the companies’ ongoing businesses or in unexpected integration issues, higher than expected
integration costs and an overall post-closing integration process that takes longer than originally anticipated.
We will be required to devote significant management attention and resources to integrating the operations of the
Company and nora. It is possible that the integration process could result in:
● diversion of management’s attention;
●
●
the lack of personnel or other resources to pursue other potential business opportunities; and
the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards,
controls, procedures and policies.
Any of these consequences could adversely affect each company’s ability to maintain relationships with customers,
suppliers, employees and other constituencies or their ability to achieve the anticipated benefits of the transaction, or could
reduce each company’s earnings or otherwise adversely affect the business and financial results of the combined company
and the value of our common stock.
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.
It is important for you to consider that we have a significant amount of indebtedness. 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
2023. We cannot assure you that we will be able to renegotiate, refinance or otherwise obtain the necessary funds to satisfy
these obligations. 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.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates the London interbank offered rate
(“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR
after 2021. This announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021,
and LIBOR may be discontinued or modified by 2021. The Federal Reserve Bank of New York began publishing the Secured
Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR. SOFR is a broad measure of the cost of
borrowing cash overnight collateralized by U.S. Treasury securities. A transition away from the widespread use of LIBOR to
14
SOFR or another benchmark rate may occur over the course of the next few years. We have exposure to LIBOR-based
financial instruments, namely our floating rate Syndicated Credit Facility. This facility allows for the use of an alternative
benchmark rate if LIBOR is no longer available. At this time, we cannot predict the overall effect of the modification or
discontinuation of LIBOR or the establishment of alternative benchmark rates.
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.
We are also making significant investments and modifications to our manufacturing facilities, particularly 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;
●
● hacking, computer viruses, malware, ransomware or other cyber attacks.
software “bugs”, hardware defects or human error; or
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 or other individuals, 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Atlanta, Georgia in approximately 42,000 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 ......................................................................................................................................
Salem, New Hampshire(1) ............................................................................................................................
Weinheim, Germany(1) .................................................................................................................................
Taicang, China(1) ..........................................................................................................................................
__________
(1) Leased.
Floor Space
(Sq. Ft.)
275,946
80,986
416,545
186,205
370,000
338,086
259,356
360,800
250,000
100,000
764,524
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
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.
16
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, 2019, we
had 630 holders of record of our Common Stock. We estimate that there are in excess of 10,000 beneficial holders of our
Common Stock.
On February 19, 2019, our Board declared a regular quarterly cash dividend of $0.065 per share, payable March 22, 2019
to shareholders of record as of March 8, 2019. 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.
Stock Performance
The following graph and table compare, for the five-year period ended December 30, 2018, 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, (ii) our previous self-determined peer group, and (iii) our new self-determined peer group,
assuming an initial investment of $100 in each on December 29, 2013 (the last day of the fiscal year 2013). In 2018, the
Company reviewed and updated the peer group it uses for compensation purposes. In its analysis of possible new peer group
companies, the Company considered various factors, including the potential peer's industry, business model, size and
complexity. The Company chose a new peer group that it believes provides a robust sample size with minimal revenue
dispersion, with companies in similar industries or lines of business or subject to similar economic and business cycles,
including companies with a significant international presence that are also focused on sustainability.
Interface, Inc.
NASDAQ Composite Index
Previous Self-Determined Peer Group (14 Stocks)
New Self-Determined Peer Group (20 Stocks)
Notes to Performance Graph
12/29/13 12/28/14
$100
$100
$100
$100
$78
$117
$111
$109
1/3/16
$90
$123
$119
$109
1/1/17
$89
$134
$137
$125
12/31/17 12/30/18
$122
$174
$152
$128
$70
$168
$103
$102
(1)
(2)
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.
17
(3)
(4)
(5)
(6)
(7)
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 29, 2013 (the last day of fiscal year 2013).
The Company’s fiscal year ends on the Sunday nearest December 31.
The following companies are included in the Previous 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.
The following companies are included in the New Self-Determined Peer Group depicted above: Acuity
Brands, Inc.; Albany International Corp.; Apogee Enterprises, Inc.; Armstrong Flooring, Inc.; Armstrong
World Industries, Inc.; Caesarstone Ltd.; FLIR Systems, Inc.; Gentherm Incorporated; H. B. Fuller
Company; Harsco Corporation; Herman Miller, Inc.; HNI Corporation; Kimball International, Inc.; Knoll,
Inc.; Masonite International Corporation; Materion Corporation; P. H. Glatfelter Company; Steelcase Inc.;
Unifi, Inc.; and Welbilt, Inc.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this Annual Report on Form 10-K.
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 30, 2018:
Period(1)
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs(2)
Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs(2)
October 1 - 31, 2018 (3) ..................
November 1 – 30, 2018 (3) .............
December 1 – 30, 2018 ..................
Total ..............................................
2,559 $
8,022
0
10,581 $
23.50
16.29
0.00
18.03
0 $
0
0
0 $
25,109,272
25,109,272
25,109,272
25,109,272
(1) The monthly periods identified above correspond to the Company’s fiscal fourth quarter of 2018, which commenced
October 1, 2018 and ended December 30, 2018.
(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 shares acquired by the Company from an employee to satisfy income tax withholding obligations in connection
with the vesting of previous equity awards.
18
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.
2018
2017
2016
2015
2014
Net sales ................................................................. $ 1,179,573 $ 996,443 $
610,422
Cost of sales ...........................................................
Operating income(1) ................................................
111,571
Net income(2) ..........................................................
53,246
Income from continuing operations per common
755,216
76,379
50,253
958,617 $ 1,001,863 $ 1,003,903
663,876
589,973
70,295
87,153
24,808
54,162
618,974
113,593
72,418
share attributable to Interface, Inc.
Basic ................................................................... $
Diluted ................................................................ $
Average Shares Outstanding
0.84 $
0.84 $
0.86 $
0.86 $
0.83 $
0.83 $
1.10 $
1.10 $
0.37
0.37
61,996
Basic ...................................................................
62,040
Diluted ................................................................
0.25 $
Cash dividends per common share ......................... $
30,474
Property additions ..................................................
Depreciation and amortization ...............................
37,508
Working capital ...................................................... $ 335,292 $ 254,221 $
800,600
Total assets ............................................................. 1,284,644
229,928
618,581
Total long-term debt ...............................................
330,091
354,663
Shareholders’ equity ...............................................
Current ratio(4) ........................................................
2.4
2.5
__________
59,544
59,566
0.26 $
54,857
53,580(3)
65,098
65,136
0.22 $
28,071
36,505
311,799 $
835,439
270,347
340,729
3.0
66,027
66,075
0.18 $
27,188
44,751
245,391 $
756,549
213,531
342,366
2.6
66,389
66,448
0.14
38,922
34,675
240,881
774,914
263,338
306,639
2.7
(2)
(1) The following charges and items are included in our operating income. In 2018, we recorded restructuring and asset
impairment charges of $20.5 million, $32.1 million of purchase price accounting amortization in connection with the
nora acquisition, and nora transaction costs of $5.3 million. 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.
Included in 2018 net income are tax benefits of $6.7 million due to the finalization of our analysis of the U.S. Tax Cuts
and Jobs Act. Included in 2017 net income are provisional tax charges of $15.2 million due to the U.S. Tax Cuts and
Jobs Act. Please see Item 8, Note 15 “Taxes on Income” for further discussion of these charges. Also included in 2018
net income is $4.2 million in other expense for nora transaction costs. 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.
Includes stock compensation amortization of $14.5 million and excludes purchase price accounting amortization of
$32.1 million.
(3)
(4) Current ratio is the ratio of current assets to current liabilities.
19
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, luxury vinyl tile (“LVT”) and
starting in August 2018, rubber flooring products. 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 and LVT sales in the Americas was 45% and 55%, respectively, for 2018. Company-wide,
our mix of corporate office versus non-corporate office modular carpet and LVT sales was 60% and 40%, respectively, in
2018.
On August 7, 2018, the Company completed the acquisition of nora for a purchase price of €385.1 million, or $447.2
million at the exchange rate as of the transaction date, including acquired cash of €40.0 million ($46.5 million) for a net
purchase price of €345.1 million ($400.7 million). Nora is an industry leader in the rubber flooring market, and this acquisition
is expected to advance the Company’s growth strategy in expanding market segments, particularly in the healthcare, life
sciences and education market segments. Similar to Interface, nora operates on an international footprint and the Company
expects the acquisition will also allow for geographic sales synergies as well.
During 2018, we had net sales of $1,179.6 million, up 18.4% compared to $996.4 million in 2017. Operating income for
2018 was $76.4 million as compared to $111.6 million in 2017. Net income for 2018 was $50.3 million, or $0.84 per share,
compared with $53.2 million, or $0.86 per share, in 2017. The 2018 period includes the results of the acquired nora business
from August 7 through the end of the year, including nora net sales of $112.6 million during that stub period. These results
included amortization related to the fair value of inventory acquired of $26.7 million, and amortization of acquired intangible
assets of $5.4 million. 2018 also includes $9.5 million related to nora transaction expenses. Also included in our results for
2018 were $20.5 million of restructuring and asset impairment charges as well as $6.7 million of tax benefits related to the
finalization of our analysis of the U.S. Tax Cuts and Jobs Act enacted in 2017. Please see Item 8, Note 15 “Taxes on Income”
for further discussion of these tax benefits.
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 U.S. Tax Cuts and Jobs Act enacted in
2017. Please see Item 8, Note 15 “Taxes on Income” for further discussion of these tax charges.
Restructuring Plans
On December 29, 2018, the Company committed to a new restructuring plan in its continuing efforts to improve
efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business
strategy. The plan involves (i) a restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction
of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of
certain underutilized and impaired assets that include information technology assets and obsolete manufacturing equipment.
As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter
of 2018 of approximately $20.5 million. The charge is comprised of severance expenses (approximately $10.8 million),
impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million). The charge is expected to
result in future cash expenditures of $12 million, primarily for severance payments (approximately $10.8 million). The
restructuring plan is expected to be substantially completed in the first half of 2019, and is expected to yield gross annual
savings of approximately $12 million beginning in fiscal 2019. The Company expects to redeploy in 2019 essentially all of
the anticipated savings toward the funding of sales and strategic growth initiatives, yielding negligible net savings on the
Company’s income statement.
20
In the fourth quarter of 2016, we committed to a separate restructuring plan. 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 the 2016 restructuring 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. This 2016 restructuring
plan was substantially completed in 2017.
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 49% in 2018, 46% in
2017, and 48% in 2016. Because we have such substantial international operations, we are impacted, from time to time, by
international developments that affect foreign currency transactions. In 2018, the strengthening of the Euro and British pound
against the U.S. dollar had a positive impact on our net sales and operating income. 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.
The following table presents the amounts (in U.S. dollars) by which the exchange rates for converting Euros, British pounds,
Australian dollars and Canadian dollars into U.S. dollars have affected our net sales and operating income during the past
three years:
2018
2017
(in millions)
2016
Impact of changes in foreign currency on net sales ....................... $
Impact of changes in foreign currency on operating income .........
8.4 $
1.2
5.5 $
1.0
(10.9)
(1.0)
The following table presents, as a percentage of net sales, certain items included in our Consolidated Statements of
Operations during the past three years:
2018
Fiscal Year
2017
2016
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%
64.0
36.0
27.8
1.7
6.5
1.8
4.7
0.4
4.3
100.0%
61.3
38.7
26.8
0.7
11.2
1.1
10.1
4.7
5.3
100.0%
61.5
38.5
27.3
2.1
9.1
0.8
8.3
2.6
5.7
21
Net Sales
Below we provide information regarding our net sales and analyze those results for each of the last three fiscal years.
Fiscal years 2018, 2017, and 2016 were 52-week periods.
Fiscal Year
2018
2017
(in thousands)
2016
Percentage Change
2017
compared
with 2016
2018
compared
with 2017
Net Sales ................................................. $ 1,179,573
996,443 $
958,617
18.4 %
3.9 %
Net sales for 2018 compared with 2017
For 2018, our net sales increased $183.1 million (18.4%) as compared to 2017. As discussed above, the 2018 period
included revenue of $112.6 million from the nora acquisition that was not present in 2017. This nora revenue was broken
down by region as follows: the Americas $47.6 million, Europe $51.2 million, and Asia-Pacific $13.7 million. Fluctuations
in currency exchange rates had a positive impact on our year-over-year sales comparison of approximately $8.4 million,
meaning that if currency levels had remained constant year over year our 2018 sales would have been lower by this amount.
On a geographic basis, including the impact of nora, we experienced sales growth across all our regions. Sales in the Americas
were up 16.0%, sales in Europe were up 29.7% as reported in U.S. dollars, and sales in Asia-Pacific were up 9.7%.
The sales increase of 16.0% in the Americas in 2018 was due primarily to the impact of the nora acquisition, growth
from our luxury vinyl tile (“LVT”) products, which were introduced in early 2017, but offset by a slight decrease of 2% in
our weighted average selling price per square yard for our modular carpet and a decrease of 5% in our weighted average
selling price per square feet for LVT compared to 2017. The legacy Interface Americas carpet and LVT business grew
approximately 8% for the year. This increase in the legacy business was due to an increase in the corporate office market
segment (up 9%) as well as increases in the retail (up 18%) and hospitality (up 7%) market segments. The increase in retail
was due to the performance of our Interface SERVICES™ business, which has a larger percentage of its sales in the retail
segment. These legacy sales increases were partially offset by a decline in the government (down 10%) market segment. The
acquired nora business generated approximately 42% of its revenue in the Americas region, which was primarily in the
healthcare, education, and transportation market segments.
In Europe, sales in the region were up in both U.S. dollars (29.7%) and local currency (25.0%). This sales increase was
due primarily to the impact of the nora acquisition, growth in our LVT products and the strengthening of the Euro and British
pound against the U.S. dollar. In Europe, our weighted average selling price per square yard for modular carpet tile increased
3% and our weighted average selling price per square feet for LVT decreased 6% in 2018 compared with 2017. The legacy
Interface European carpet and LVT business grew 9% on a U.S. dollar basis, and 5% in local currency. Our legacy business
in the United Kingdom, which has historically been our third largest market, experienced a sales decrease in local currency
of 7% for the year, but a decline of 4% when translated into U.S. dollars. The sales growth in the legacy Interface European
business was most pronounced in the corporate office (up 9%), retail (up 11%), healthcare (up 15%), and hospitality (up
34%) market segments. The acquired nora business generated approximately 46% of its revenue in the Europe region, which
was primarily in the healthcare, education, and transportation market segments.
In Asia-Pacific, sales increased 9.7% primarily due to the impact of the nora acquisition and growth in our LVT products.
This sales increase was partially offset by the weakening of the Australian dollar and lower sales in Australia. Our weighted
average selling price per square yard for modular carpet and our weighted average selling price per square feet for LVT
decreased 5% in 2018 compared to 2017. The legacy Interface Asia-Pacific carpet and LVT business grew 1% on a U.S.
dollar basis and 2% in local currency. Within the region on a legacy Interface basis, Asia sales increased 8% while Australia
sales decreased 5% as translated into U.S. dollars. The sales growth in the legacy Asia-Pacific business was primarily in the
hospitality (up 5%) and healthcare (up 6%) market segments, partially offset by decreases in government (down 32%) and
retail (down 3%) market segments. The acquired nora business generated approximately 12% of its revenue in the Asia-
Pacific region, which was primarily in the healthcare and education market segments.
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
22
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%.
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.
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
2018
2017
(in thousands)
2016
Percentage Change
2017
2018
compared
compared
with 2016
with 2017
Cost of Sales ............................................... $
Selling, General and Administrative
755,216 $
610,422 $
589,973
23.7%
Expenses .................................................
327,449
Total ........................................................... $ 1,082,665 $
267,151
877,573 $
261,703
851,676
22.6%
23.4%
3.5%
2.1%
3.0%
For 2018, our costs of sales increased $144.8 million (23.7%) compared with 2017. Included in the 2018 period are cost
of sales of $96.6 million for the acquired business nora, which includes amortization related to acquired inventory and
intangible assets of $32.1 million. Fluctuations in currency exchange rates did not have a significant impact (less than 1%)
on the year-over-year comparison. In absolute dollars, the increase in costs of sales was a result of higher sales for 2018 as
compared to 2017. As a percentage of sales, our costs of sales increased to 64.0% in 2018 versus 61.3% in 2017. This increase
was a result of (1) higher costs of sales related to the acquired nora business, including purchase accounting amortization of
$32.1 million for acquired inventory and intangible assets, (2) delayed productivity initiatives due to increased sales and
production volumes, as well as (3) a change in the sales mix weighted more heavily toward the InterfaceServices business.
These service sales typically generate a lower gross margin compared to the rest of our operations.
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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 2018, our SG&A expenses increased $60.3 million (22.6%) versus 2017. SG&A expenses for the acquired nora
business were $34.9 million from August 7 through the end of the 2018 year. 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) transaction
costs in connection with the nora acquisition of $5.3 million, (2) higher performance-based stock compensation of
approximately $7.0 million as performance targets were met to a higher degree in 2018 as compared to 2017, (3) higher
selling expenses of $24.0 million related to the acquired nora business, (4) higher selling expense of $7.5 million due to
higher sales volumes in the legacy Interface business, and (5) higher administrative expenses of $15.8 million primarily due
to the acquired nora business as noted above. As a percentage of sales, SG&A expenses increased to 27.8% in 2018 versus
26.8% in 2017.
For 2017, our SG&A expenses increased $5.4 million (2.1%) 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 compared 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 26.8% versus 27.3% in 2016.
Interest Expense
For 2018, our interest expense increased $8.3 million to $15.4 million, versus $7.1 million in 2017. This increase was a
result of (1) additional debt incurred to complete the nora acquisition and (2) higher average interest rates on our borrowings
(our average borrowing rate for 2018 was 3.5% as compared to 2.9% for 2017). Our interest rate swap entered into in 2017
did not have any significant impact on interest expense for 2018.
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.
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 reduced the U.S. federal income tax rate from 35% to 21% effective January 1,
2018 and created a modified territorial tax system with a one-time mandatory “transition toll tax” on previously unrepatriated
foreign earnings.
As of December 31, 2017, the Company recorded a provisional tax expense of $3.5 million related to the remeasurement
of its net deferred tax asset and a provisional tax expense of $11.7 million related to the one-time transition toll tax. As of
December 30, 2018, the Company completed the accounting of remeasuring its net deferred tax asset which resulted in a $1.7
million decrease to the previously recorded provisional amount and completed its assessment of the one-time transition toll
tax which resulted in a $5.0 million decrease to the previously recorded provisional amount. See “Note 15 – Taxes on Income”
to the consolidated financial statements for further information on the financial statement impact of the Tax Act.
24
Our effective tax rate in 2018 was 8.6%, compared with an effective tax rate of 47.0% in 2017. The decrease in our
effective tax rate in 2018 compared to 2017 was primarily due to a $6.7 million tax benefit related to the impacts of the Tax
Act as discussed above, the reduction in the U.S. federal income tax rate from 35% to 21%, and an increase in U.S. federal
and foreign tax credits.
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 the $15.2 million provisional 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. For additional
information on taxes and a reconciliation of effective tax rates to statutory tax rates, see the Note 15 entitled “Taxes on
Income” in Item 8 of this Report.
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.
On August 7, 2018, our Syndicated Credit Facility was amended and restated in connection with our acquisition of nora.
Please see Note 9 and Note 18 in Item 8 for additional information.
At December 30, 2018, we had $81.0 million in cash. Approximately $11.6 million of this cash was located in the U.S.,
and the remaining $69.4 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 $69.4
million of cash in foreign jurisdictions, approximately $7.5 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 30, 2018, we had $626.7 million of borrowings and $3.6 million in letters of credit outstanding under
our amended and restated Syndicated Credit Facility. Of those borrowings outstanding, $616.1 million were term loan
borrowings and $10.6 million were revolving loan borrowings. As of December 30, 2018, we could have incurred $285.9
million of additional revolving loan borrowings under our amended and restated Syndicated Credit Facility. In addition, we
could have incurred the equivalent of $9.5 million of borrowings under our other credit facilities in place at other non-U.S.
subsidiaries.
We have approximately $105.4 million in contractual cash obligations due by the end of fiscal year 2019, which includes,
among other things, pension cash contributions, interest payments on our debt and lease commitments. Based on current
interest rates and debt levels, we expect our aggregate interest expense for 2019 to be between $24 million and $26 million.
We estimate aggregate capital expenditures in 2019 to be between $65 million and $75 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 amended and restated
Syndicated Credit Facility matures in August of 2023. 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
25
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
On August 7, 2018, we amended and restated our Syndicated Credit Facility (the “Facility”) in connection with the nora
Holding GmbH (“nora”) acquisition. The purpose of the amended and restated Facility was to fund the nora purchase price
and related fees and expenses of the acquisition, and to increase the credit available to us and our subsidiaries following the
closing of the nora acquisition in view of the larger enterprise. At December 30, 2018, the amended and restated Facility
provided to us and certain of our subsidiaries a multicurrency revolving loan facility up to $300 million, as well as other U.S.
denominated and multicurrency term loans.
In connection with the amended and restated Facility as discussed above, we recorded $8.8 million of debt issuance costs
associated with the new term loans that are reflected as a reduction of long-term debt in accordance with applicable accounting
standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same
amount as the fees that are expensed.
Interest Rates and Fees
Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 1.25%,
depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on
LIBOR-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the
applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal
quarter. Interest on multi-currency-based loans and fees for letters of credit are charged at varying rates computed by applying
a margin ranging from 1.25% to 2.25% 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.
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;
engage in any material line of business substantially different from the Company’s current lines of business;
incur indebtedness or contingent obligations;
sell or dispose of assets (in excess of certain specified amounts);
●
● make acquisitions of or investments in businesses (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 4.50:1.00, subject to certain step-downs as described in
the Facility agreement.
● Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
26
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.
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 30, 2018, we had outstanding $616.1 million of term loan borrowing and $10.6 million of revolving
loan borrowings under the Facility, and had $3.6 million in letters of credit outstanding under the Facility. As of December
30, 2018, the weighted average interest rate on borrowings outstanding under the Facility was 3.50%.
Under the amended and restated Facility, we are required to make quarterly amortization payments of the Term Loan A
borrowings, which commenced in the fourth quarter of 2018. The amortization payments are due on the last day of the
calendar quarter.
We are currently in compliance with all covenants under the 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 9 entitled “Borrowings” in Item 8 of this Report.
Analysis of Cash Flows
We ended 2018 with $81.0 million in cash, a decrease of $6.0 million during the year. During 2018, we borrowed $463
million of new term loan debt to finance the acquisition of nora. The cash purchase price for nora, net of cash acquired, was
$400.7 million. Other than the nora purchase transaction, the most significant uses of cash in 2018 were (1) repayments on
our Syndicated Credit Facility of $64.5 million, (2) capital expenditures of $54.9 million, (3) dividend payments of $15.5
million and (4) $14.5 million of cash use to repurchase our common stock. These uses were offset by cash flow generated by
operations of $91.8 million. Our cash flow from operations was primarily generated by net income of $50.3 million. This net
income was offset by working capital uses, primarily $18.7 million for an increase in inventory and $15.5 million due to
increases in prepaid and other current assets. The Company generated cash of $9.9 million during 2018 due to an increase in
accounts payable and accrued expenses. In addition to working capital generation of cash, the Company also borrowed $17
million under its Syndicated Credit Facility during 2018.
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
27
$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 $87.4 million of borrowings under our Syndicated Credit Facility. 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 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 30, 2018.
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) ...... $
______________________
618,581 $
93,747
113,531
6,725
130,325
962,909 $
31,315 $
26,113
26,907
5,144
15,952
105,431 $
62,630 $
38,519
49,178
1,545
24,300
176,172 $
524,636 $
13,878
37,446
36
25,051
601,047 $
0
15,237
0
0
65,022
80,259
(1) Our capital lease obligations are insignificant.
(2)
Expected interest payments to be made in future periods reflect anticipated interest payments related to the
$616.1 million of Term Loan A borrowings outstanding and the $10.6 million of revolving loan borrowings
outstanding under our Syndicated Credit Facility as of December 30, 2018. 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 three 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 and the nora plan are unfunded plans, and we do not currently have
any commitments to make contributions to these plans. 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 $28.1 million, the timing of which payments are
uncertain. See Note 15 entitled “Taxes on Income” in Item 8 of this Report for further information.
28
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.
Revenue Recognition. 100% of the Company’s revenue is due to contracts with its customers. These contracts typically
take the form of invoices for purchase of materials from the Company. The performance obligation is the delivery of these
materials to customer control. Nearly 97% of the Company’s current revenue is produced from the sale of carpet, resilient
flooring and related products (TacTiles installation materials, etc.) and the revenue from sales of these products is recognized
upon shipment, or in certain cases upon delivery to the customer. The transaction price for these sales is readily identifiable.
The remaining revenue generated by the Company is for contracts to sell and install carpet and related products at
customer locations. For projects underway, the Company recognized installation revenue over time as the customer
simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a
separate performance obligation from the sale of carpet. The majority of these projects are completed within 5 days of the
start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring
material and installation services and is specifically identified in the contract with the customer.
The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have
similar characteristics and it is reasonable to expect that the effects from applying this approach are not materially different
from applying the accounting standard to individual contracts.
The Company does not have any other significant revenue streams outside of these sales of flooring material, and the
sale and installation of flooring material, as described above.
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 30, 2018 and December 31, 2017, we had state net operating loss carryforwards of $96.1 million and $108.6
million, respectively. 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 2018 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.
29
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
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 2018, 2017 and 2016, 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 30, 2018, no
impairment of goodwill was indicated. As of December 30, 2018, 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 30, 2018
and December 31, 2017, was $28.1 million and $20.4 million, respectively. To the extent that actual obsolescence of our
inventory differs from our estimate by 10%, our 2018 net income would be higher or lower by approximately $1.9 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 .......................................................................... $
(43.7)
47.3
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 .......................................................................... $
(2.8)
3.4
30
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 30,
2018, 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
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 30, 2018 and December 31, 2017, was $3.5 million and $3.5 million,
respectively. To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2018
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 rubber and LVT products, typically for a period of 5 to 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 30, 2018 and
December 31, 2017, was $3.5 million and $4.1 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 2018 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.
nora Acquisition. We are required to estimate the fair value of the assets acquired and liabilities assumed in business
combinations as of the acquisition date, including identified intangible assets. The amount of purchase price paid in excess
of the net assets acquired is recorded as goodwill. The fair values are estimated in accordance with accounting standards
which define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs
that are unobservable to the marketplace participant).
The most significant of the fair value estimates is related to intangible assets not subject to amortization and intangible
assets subject to amortization. We have $103.3 million of acquired intangible assets in connection with the nora acquisition.
This amount of intangible assets was determined based primarily on nora’s projected cash flows. The projected cash flows
include various assumptions, including the timing of projects embedded in backlog, success in securing future business,
profitability of the business, and the appropriate risk-adjusted discount rate used to discount the projected cash flows. The
preliminary residual value assigned to goodwill was $184.7 million.
We completed our preliminary valuation of the assets acquired and liabilities assumed at the acquisition date, and our
estimate of these values remained preliminary on December 30, 2018. Therefore, these provisional amounts are subject to
change as we continue to evaluate information required to complete the valuations throughout the measurement period, which
will extend into the third quarter of 2019.
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.
31
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 Statement of
Operations. There were no such gains or losses in 2018. The aggregate notional amount of the swap as of December 30, 2018
was $100 million.
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, Germany, 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 30, 2018, we recognized a $22.5 million decrease in our foreign currency translation adjustment account
compared with December 31, 2017, because of the strengthening of the U.S. dollar against certain foreign currencies during
2018, 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 30,
2018. 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.
32
Interest Rate Risk
Our weighted average interest rate for our outstanding borrowings in 2018 and 2017 was 3.50% and 3.0%, 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 30, 2018.
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 30, 2018.
2019
2020
2021
2022
(in thousands)
Thereafter Total
Fair
Value
Rate-Sensitive Liabilities
Long-term Debt:
Variable Rate ........................... $ 31,315 $ 31,315 $ 31,315 $ 31,315 $ 493,321 $ 618,581 $ 618,581
Variable Interest Rate ..............
3.5%
3.5%
3.5%
3.5%
3.5%
An increase in our effective interest rate of 1% would increase annual interest expense by approximately $6.2 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.
As of December 30, 2018, a 10% decrease or increase in the fair market value of the Company’s cash flow interest rate
swap would lead to a decrease or increase in the recorded asset value of $0.2 million.
Foreign Currency Exchange Rate Risk
As of December 30, 2018, 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 $12.9 million or an increase in the fair value of our financial
instruments of $15.8 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
2018
FISCAL YEAR
2017
(in thousands, except per share data)
2016
Net sales ................................................................................. $
Cost of sales ...........................................................................
Gross profit on sales ...............................................................
1,179,573 $
755,216
424,357
Selling, general and administrative expenses .........................
Restructuring and asset impairment charges ..........................
327,449
20,529
996,443 $
610,422
386,021
267,151
7,299
958,617
589,973
368,644
261,703
19,788
Operating income ...................................................................
76,379
111,571
87,153
Interest expense ..................................................................
Other expense .....................................................................
Income before income tax expense ........................................
Income tax expense ................................................................
15,436
5,952
54,991
4,738
7,128
3,904
100,539
47,293
6,130
1,887
79,136
24,974
Net income ............................................................................. $
50,253 $
53,246 $
54,162
Net income per share – basic .................................................. $
0.84 $
0.86 $
Net income per share – diluted ............................................... $
0.84 $
0.86 $
Basic weighted average common shares outstanding .............
Diluted weighted average common shares outstanding ..........
59,544
59,566
61,996
62,040
0.83
0.83
65,098
65,136
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 ............................................................
2018
FISCAL YEAR
2017
(in thousands)
2016
50,253 $
53,246 $
54,162
(22,544)
422
12,944
31,579
904
(1,692)
(19,011 )
0
(11,572 )
Comprehensive income ...................................................................... $
41,075 $
84,037 $
23,579
See accompanying notes to consolidated financial statements.
35
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
END OF FISCAL YEAR
2017
2018
(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 and intangibles, net ......................................................................................
Other assets .................................................................................................................
80,989 $
179,004
258,657
40,229
558,879
292,888
15,601
343,542
73,734
87,037
142,808
177,935
23,087
430,867
212,645
18,003
68,754
70,331
Total assets .................................................................................................................. $
1,284,644 $
800,600
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 ............................................................................................................................
66,301 $
125,971
31,315
223,587
587,266
26,488
92,640
50,672
110,974
15,000
176,646
214,928
6,935
72,000
Total liabilities.............................................................................................................
929,981
470,509
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
5,951
270,269
222,214
(101,487)
1,326
(43,610)
0
5,981
271,271
187,432
(78,943)
904
(56,554)
Total shareholders’ equity ...........................................................................................
354,663
330,091
Total liabilities and shareholders’ equity..................................................................... $
1,284,644 $
800,600
See accompanying notes to consolidated financial statements.
36
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018
FISCAL YEAR
2017
(in thousands)
53,246 $
50,253 $
OPERATING ACTIVITIES:
Net income .................................................................................. $
Adjustments to reconcile income to cash provided by operating
activities
Depreciation and amortization ....................................................
Stock compensation amortization expense ..................................
Loss on disposal of impaired assets ............................................
Enactment of U.S. Tax Cuts and Jobs Act expenses (benefit) ....
Bad debt expense .........................................................................
Deferred income taxes and other .................................................
Amortization of acquired intangible assets .................................
Amortization of acquired inventory step-up ................................
Working capital changes:
Accounts receivable .............................................................
Inventories............................................................................
Prepaid expenses and other current assets ............................
Accounts payable and accrued expenses ..............................
Cash provided by operating activities .........................................
39,084
14,496
8,569
(6,739)
222
(11,709)
5,387
26,666
(10,113)
(18,784)
(15,501)
9,936
91,767
INVESTING ACTIVITIES:
Capital expenditures ....................................................................
Cash paid for business, net of cash acquired ...............................
Other ...........................................................................................
Cash used in investing activities .................................................
(54,857)
(400,697)
(131)
(455,685)
FINANCING ACTIVITIES:
Revolving loan borrowing ...........................................................
Revolving loan repayments .........................................................
Term loan borrowing ...................................................................
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 ..........................
17,000
(64,504)
462,847
(14,162)
(14,485)
(15,471)
(1,187)
(8,806)
294
361,526
2016
54,162
30,632
5,873
0
0
145
468
0
0
(372 )
2,686
(7,720 )
12,184
98,058
(28,071 )
0
1,642
(26,429 )
87,400
(17,575 )
0
(12,500 )
(18,496 )
(14,285 )
(4,895 )
0
0
19,649
30,261
7,247
0
15,174
219
8,154
0
0
(10,313)
(13,629)
1,019
11,975
103,353
(30,474)
0
(614)
(31,088)
25,000
(57,014)
0
(15,000)
(91,576)
(15,487)
(1,479)
(1,427)
0
(156,983)
Net cash provided by (used in) operating, investing and
financing activities ...................................................................
Effect of exchange rate changes on cash .....................................
(2,392)
(3,656)
(84,718)
6,083
91,278
(1,302 )
CASH AND CASH EQUIVALENTS:
Net increase (decrease) ...............................................................
Balance, beginning of year ..........................................................
(6,048)
87,037
(78,635)
165,672
89,976
75,696
Balance, end of year .................................................................... $
80,989 $
87,037 $
165,672
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, luxury vinyl
tile (“LVT”) and rubber flooring products. 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. The Company also offers resilient rubber flooring since its
acquisition of nora Holding GmbH on August 7, 2018.
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.
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
Effective January 1, 2018, the Company adopted a new accounting standard with regard to revenue from customers. The
core principle this standard is that an entity should recognize revenue to depict the transfer of 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.
To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the
contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity
satisfies a performance obligation. The Company elected the modified retrospective approach for adoption of this new
standard, as is allowed by the standard. The Company did not have any significant impact from this standard as of the date
of the adoption.
Revenue Recognized from Contracts with Customers
100% of the Company’s revenue is due to contracts with its customers. These contracts typically take the form of invoices
for purchase of materials from the Company. Customer payment terms vary by region and are typically less than 60 days.
The performance obligation is the delivery of these materials to customer control. Nearly 97% of the Company’s current
revenue is produced from the sale of carpet, resilient flooring, rubber flooring, and related products (TacTiles installation
materials, etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases upon delivery
to the customer. The transaction price for these sales is readily identifiable.
The remaining revenue generated by the Company is for contracts to sell and install carpet and related products at
customer locations. For projects underway, the Company recognized installation revenue over time as the customer
simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a
separate performance obligation from the sale of carpet. The majority of these projects are completed within 5 days of the
start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring
material and installation services and is specifically identified in the contract with the customer.
The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have
similar characteristics and it is reasonable to expect that the effects from applying this approach are not materially different
from applying the accounting standard to individual contracts.
38
The Company does not have any other significant revenue streams outside of these sales of flooring material, and the
sale and installation of flooring material, as described above.
Performance Obligations
As noted above, the Company primarily generates revenue through the sale of flooring material to end users either upon
shipment or upon arrival of the product at its destination. In these instances, there typically is no other obligation to the
customers other than the delivery of flooring material with the exception of warranty. The Company does offer a warranty to
its customers which guarantees certain on-floor performance characteristics and warrants against manufacturing defects. The
warranty is not a service warranty, and there is no ability to separate the warranty obligation from the sale of the flooring or
purchase them separately. The Company’s incidence of warranty claims is extremely low, with less than 0.3% of revenue in
claims on an annual basis for the last three fiscal years. Given the nature of the warranty as well as the financial impact, the
Company has determined that there is no need to identify this warranty as a separate performance obligation and the Company
will continue to account for warranty on an accrual basis.
For the Company’s installation business, the sales of carpet and other flooring materials and installation services are
separate deliverables which under the revenue recognition requirements should be characterized as separate performance
obligations. The Company historically has not separated these obligations and has accounted for these installation projects
on a completed contract basis. The nature of the installation projects is such that the vast majority – an amount in excess of
90% of these installation projects – are completed in less than 5 days. The Company’s largest installation customers are retail
and corporate customers, and these are on a project-by-project basis and are short term installations. The Company has
evaluated these projects at the end of the reporting period and recorded revenue in accordance with the accounting standards
for projects which were underway as of the end of 2018.
Costs to Obtain Contracts
The Company pays sales commissions to many of its sales personnel based upon their selling activity. These are direct
costs associated with obtaining the contracts. Under the accounting standard, these costs should be expensed as the revenue
is earned. As these commissions become payable upon shipment (or in certain cases delivery) of product, the commission is
earned as the revenue is recognized. Due to this fact pattern, there is no change to the Company’s accounting for these selling
commissions. There are no other material costs the Company incurs as part of obtaining the sales contract.
Prior to the adoption of the new revenue recognition model, the Company recognized revenue when the following criteria
were 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 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 $16.4 million, $14.0
million, and $14.3 million for the years 2018, 2017 and 2016, respectively.
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 30, 2018 and December 31, 2017.
Cash payments for interest amounted to approximately $13.8 million, $6.3 million, and $5.5 million for the years 2018,
2017, and 2016, respectively. Income tax payments amounted to approximately $29.5 million, $19.1 million and $12.8
39
million for the years 2018, 2017 and 2016, respectively. During the years 2018, 2017 and 2016, the Company received income
tax refunds of $0.8 million, $0.1 million and $0.2 million, respectively.
Inventories
Inventories are carried at the lower of cost (standards approximating the first-in, first-out method) or net realizable value.
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.
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 $0.7
million, $0.6 million, and $0.5 million for the fiscal years 2018, 2017 and 2016, respectively. Depreciation expense amounted
to approximately $37.6 million, $29.5 million, and $30.1 million for the years 2018, 2017, and 2016 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 30, 2018 and
December 31, 2017, and cumulative impairment losses recognized were $212.6 million as of both December 30, 2018 and
December 31, 2017.
40
In connection with the nora acquisition on August 7, 2018, the Company recognized goodwill of $184.7 million and
acquired intangible assets of $103.3 million. Goodwill includes subsequent purchase price accounting adjustments of
approximately $1.4 million related to additional liabilities that existed at the acquisition date. These assets were assigned pro-
rata to the Company’s three operating segments. None of the goodwill is expected to be deductible for income tax purposes.
As of December 30, 2018, and December 31, 2017, the net carrying amount of goodwill was $245.8 million and $68.8
million, respectively. Other intangible assets were $97.7 million and $0.6 million as of December 30, 2018 and December
31, 2017, respectively. Amortization expense related to intangible assets during the years 2018, 2017 and 2016 was $5.4
million, $0.7 million and $0.5 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 2018, 2017 and 2016, 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 Flooring 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 30, 2018, 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 30, 2018 are as follows (in thousands):
BALANCE
JANUARY 1,
2018
ACQUISITIONS
PURCHASE
PRICE
ACCOUNTING
ADJUSTMENTS IMPAIRMENT
(in thousands)
FOREIGN
CURRENCY
TRANSLATION
BALANCE
DECEMBER 30,
2018
$
68,754 $
183,348 $
1,377 $
0 $
(7,664) $
245,815
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 rubber and LVT products, typically for a period of 5 to 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 $3.5 million and $4.1
million as of December 30, 2018 and December 31, 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
41
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 15 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 and classified as level 2
within the fair value hierarchy.
Translation of Foreign Currencies
The financial position and results of operations of the Company’s foreign subsidiaries are measured 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 ($22.5) million,
$31.6 million, and ($19.0) million for the years 2018, 2017 and 2016, 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.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 12 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 2018, 2017 or 2016.
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 into an interest rate swap instrument that is
a designated cash flow hedge. See further discussion of this instrument below in Note 10 entitled “Derivative Instruments”.
The recently acquired nora operations are party to currency forward contracts designed to hedge the cash flow risk of
42
intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with
respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by
reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. See further discussion
of this instrument below in Note 10 entitled “Derivative Instruments”.
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 30, 2018, and
December 31, 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.
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 “2018,” “2017,” and “2016,” mean the fiscal years ended December 30, 2018, December 31, 2017, and January 1, 2017,
respectively. Fiscal years 2018, 2017 and 2016 were each comprised of 52 weeks.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard regarding
leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease
liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Prior to the
issuance of additional guidance on the adoption methodology by the FASB in July 2018, a modified retrospective transition
approach was required for lessees with capital and operating leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, with certain practical expedients available. The additional
guidance issued by the FASB in July 2018, provides entities with the option to initially apply the new lease standard at the
adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of
43
adoption. Consequently, the comparative periods presented in the financial statements would continue to be in accordance
with current GAAP. The Company adopted the new lease standard on December 31, 2018, using this methodology and will
provide the required disclosures in its first quarterly report on form 10-Q of 2019.
Upon adoption, the Company elected the package of practical expedients permitted under the transition guidance of the
new lease standard, which among other things, allows us to carryforward the historical lease classification. In addition, we
elected the hindsight practical expedient to determine the lease term, which allows us to use hindsight when considering the
impact of options to extend or terminate the lease as well as the option to purchase the underlying asset. We made an
accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use
asset and lease liability recorded on the Balance Sheet. We will recognize lease costs related to short-term leases in the
Consolidated Statements of Operations on a straight-line basis over the lease term. We also made an accounting policy
election not to separate lease and non-lease components for all asset classes and will account for the lease payments as a
single component.
We have operating and finance leases for manufacturing equipment, distribution facilities, corporate offices, design
centers, showrooms, as well as computer and office equipment. Our leases have remaining lease terms ranging from 1 to 12
years. The Company is finalizing the evaluation of the December 31, 2018 impact and estimates a material increase of lease-
related assets and liabilities, ranging from $80 million to $100 million in the consolidated balance sheet. The impact to the
Company’s consolidated statements of income, consolidated statements of cash flows and debt covenants is not expected to
be material.
In January 2017, the FASB issued a new accounting standard that provides for the elimination of Step 2 from the goodwill
impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting
unit exceeds its fair value with certain limitations. The new guidance is effective for any annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not
anticipate that the adoption of the new guidance will have a material effect on its consolidated financial statements.
In February 2018, the FASB issued a new accounting standard to address a narrow-scope financial reporting issue that
arose as a consequence of the U.S. Tax Cuts and Jobs Act. Existing guidance requires that deferred tax liabilities and assets
be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting
period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects
of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than
in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within
accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax
effects). The new guidance allows for a reclassification of these amounts to retained earnings, thereby eliminating these
stranded tax effects. The new guidance is effective for interim and annual periods beginning after December 15, 2018. The
Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
In June 2018, the FASB issued a new accounting standard to address non-employee share-based payments. This standard
will require that the accounting treatment for non-employee share-based payments for goods or services be consistent with
current GAAP for employee share-based payments, including measurement of awards at grant-date fair value and the
application of probability to evaluate performance conditions. This standard will also eliminate the current GAAP
requirement to reassess the classification of non-employee share-based payments awards upon vesting. The new guidance is
effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is
currently evaluating the impact of adoption of this standard, but does not anticipate that the adoption will have a material
effect on its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard that modifies disclosure requirements related to fair value
measurements. This standard eliminates the current requirement to disclose the amount or reason for transfers between level
1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value
measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the
requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and
permits the disclosure of other relevant quantitative information for certain unobservable inputs. The new guidance is
effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company does
not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard that changes the disclosure requirements for defined benefit
retirement plans. This standard eliminates the current requirement to disclose amounts in accumulated other comprehensive
income that are expected to be recognized in net periodic benefit expense in the next fiscal year. The standard requires
additional disclosures for an entity to explain the reasons for significant gains and losses related to changes in the benefit
44
obligation for the period and clarifies current guidance for disclosures where projected benefit obligations or accumulated
benefit obligations exceed the fair value of plan assets. The new guidance is effective for annual periods ending after
December 15, 2020. Early adoption is permitted. The Company has elected to early adopt this standard in the fourth quarter
of 2018 and there was no material effect on its consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation
costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use
software. This standard requires that the costs for implementation activities during the application development phase be
capitalized in a hosting arrangement service contract, and costs during the preliminary and post implementation phase are
expensed. The new guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption
is permitted. The Company is currently evaluating the impact of adoption of this standard, but does not anticipate that the
adoption will have a material effect on its consolidated financial statements.
NOTE 3 – REVENUE RECOGNITION
Effective January 1, 2018, the Company adopted a new accounting standard with regard to revenue from customers. The
Company elected the modified retrospective approach for adoption of this new standard, as is allowed by the standard. The
Company did not have any significant impact from this standard as of the date of the adoption.
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was
approximately 97% of total revenue for 2018. The remaining 3% of revenue was generated from the installation of carpet and
other flooring-related material.
Disaggregation of Revenue
For 2018, revenue from the Company’s customers is broken down by geography as follows:
Geography
Americas ...................................................................
Europe ......................................................................
Asia-Pacific ..............................................................
Percentage of Net Sales
57.80%
27.10%
15.10%
Impairment Losses
The Company does not recognize any impairment losses related to its revenue contracts due primarily to the short-term
and straightforward nature of these contracts.
NOTE 4 – 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 30, 2018, and December 31, 2017, the allowance for bad debts
amounted to $3.5 million and $3.5 million, respectively, for all accounts receivable of the Company. Reserves for warranty
and returns allowances amounted to $3.5 million and $4.1 million as of December 30, 2018 and December 31, 2017,
respectively.
NOTE 5 – 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 2018. The Company does have approximately $24.3 million of Company-owned life
insurance which is measured on readily determinable cash surrender value on a recurring basis. This Company-owned life
insurance is classified as a level 2 asset within the fair value hierarchy. 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
30, 2018, 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
45
$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 10 entitled “Derivative Instruments”.
NOTE 6 – INVENTORIES
Inventories are summarized as follows:
END OF FISCAL YEAR
2018
2017
(in thousands)
Finished goods ................................................................ $
Work-in-process .............................................................
Raw materials .................................................................
180,847 $
17,762
60,048
115,512
13,022
49,401
Inventory, Net ................................................................. $
258,657 $
177,935
Reserves for inventory obsolescence amounted to $28.1 million and $20.4 million as of December 30, 2018 and
December 31, 2017, respectively, and have been netted against amounts presented above.
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
END OF FISCAL YEAR
2018
2017
(in thousands)
Land ................................................................................ $
Buildings ........................................................................
Equipment ......................................................................
16,870 $
143,725
565,251
17,743
130,919
371,300
Accumulated depreciation ..............................................
725,846
(432,958)
519,962
(307,317)
Property and Equipment ................................................. $
292,888 $
212,645
The estimated cost to complete construction-in-progress at December 30, 2018, was approximately $92.2 million.
NOTE 8 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
Compensation ................................................................. $
Interest ............................................................................
Restructuring ..................................................................
Taxes ..............................................................................
Accrued purchases ..........................................................
Warranty and sales allowances .......................................
Other ...............................................................................
END OF FISCAL YEAR
2018
2017
(in thousands)
80,877 $
374
11,907
14,539
5,329
3,495
9,450
71,760
362
2,568
19,948
4,569
4,111
7,656
Accrued Expenses .......................................................... $
125,971 $
110,974
Other non-current liabilities include pension liability of $62.4 million and $43.3 million as of December 30, 2018 and
December 31, 2017, respectively (see the discussion below in Note 17 entitled “Employee Benefit Plans”).
46
NOTE 9 – BORROWINGS
Syndicated Credit Facility
On August 7, 2018, the Company amended and restated its Syndicated Credit Facility (the “Facility”) in connection with
the nora acquisition. The purpose of the amended and restated Facility was to fund the nora purchase price and related fees
and expenses of the acquisition, and to increase the credit available to the Company and its subsidiaries following the closing
of the nora acquisition in view of the larger enterprise. At December 30, 2018, the amended and restated Facility provided to
the Company and certain of its subsidiaries a multicurrency revolving loan facility up to $300 million, as well as other U.S.
denominated and multicurrency term loans.
Interest Rates and Fees
Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 1.25%,
depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on
LIBOR-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the
applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal
quarter. Interest on multi-currency-based loans and fees for letters of credit are charged at varying rates computed by applying
a margin ranging from 1.25% to 2.25% 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.
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;
engage in any material line of business substantially different from the Company’s current lines of business;
incur indebtedness or contingent obligations;
sell or dispose of assets (in excess of certain specified amounts);
●
● make acquisitions of or investments in businesses (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 4.50:1.00, subject to certain step-downs as described in
the Facility agreement.
● 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.
47
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.
As of December 30, 2018, the Company had outstanding $616.1 million of term loan borrowing and $10.6 million of
revolving loan borrowings under the Facility, and had $3.6 million in letters of credit outstanding under the Facility. As of
December 30, 2018, the weighted average interest rate on borrowings outstanding under the Facility was 3.50%.
Under the amended and restated Facility, the Company is required to make quarterly amortization payments of the term
loan borrowings, which commenced in the fourth quarter of 2018. The amortization payments are due on the last day of the
calendar quarter.
The Company is currently in compliance with all covenants under the Facility and anticipates that it will remain in
compliance with the covenants for the foreseeable future.
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
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 statement of operations. There were no such gains or losses in 2018. The aggregate notional amount of
the swap as of December 30, 2018 was $100 million.
As of December 30, 2018, the fair value of the cash flow interest rate swap asset was $1.8 million and was recorded in
other assets in the Company’s consolidated balance sheet. Gains and losses on the interest rate swap are not significant and
are included in the operating activities section in the Company’s consolidated statement of cash flows.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $9.5 million of other lines of credit available at
interest rates ranging from 2.5% to 6.5%. As of December 30, 2018, and December 31, 2017, there were no borrowings
outstanding under these lines of credit.
Borrowing Costs
In connection with the amended and restated Facility as discussed above, the Company recorded $8.8 million of debt
issuance costs associated with the new term loans that are reflected as a reduction of long-term debt in accordance with
applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will
increase by the same amount as the fees that are expensed. As of December 30, 2018, the unamortized debt costs recorded as
a reduction of long-term debt was $8.1 million.
48
Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of
revolving debt, net of accumulated amortization, were $1.8 million and $2.3 million, as of December 30, 2018 and December
31, 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 2018, 2017,
and 2016 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 2018 are as follows:
FISCAL YEAR
2019 ........................................................................................................... $
2020 ...........................................................................................................
2021 ...........................................................................................................
2022 ...........................................................................................................
2023 ...........................................................................................................
Thereafter ..................................................................................................
Total Debt .................................................................................................. $
AMOUNT
(in thousands)
31,315
31,315
31,315
31,315
493,321
0
618,581
NOTE 10 – DERIVATIVE INSTRUMENTS
Interest Rate Risk Management
In the third quarter of 2017, the Company entered into an interest rate swap transaction to fix the variable interest rate
on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The
Company’s objective and strategy with respect to 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 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 Statement of Operations and as a component of operating activities in the Consolidated Statement of
Cash Flows. The aggregate notional amount of the swap as of December 30, 2018 was $100 million.
Forward Contracts
The recently acquired nora operations are party to currency forward contracts designed to hedge the cash flow risk of
intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with
respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by
reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. The Company is
meeting its objective by hedging the risk of changes in its cash flows (intercompany payments for inventory) attributable to
changes in the U.S. dollar/Euro exchange rate (the “hedged risk”). Changes in fair value attributable to components other
than exchange rates will be excluded from the assessment of effectiveness and amortized to earnings on a straight-line basis.
Changes in fair value related to the effective portion of these contracts will be reflected as a component of other
comprehensive income (or other comprehensive loss). A portion of these forward contracts expire each month, with the final
contract expiring in September of 2019. These contracts cover approximately 70% of the expected intercompany sales activity
between the nora European manufacturing facility and the U.S. subsidiary and at this time the Company believes these are
probable transactions given historical performance as well as budget projections. As of December 30, 2018, the notional
value of these forward currency contracts and the future intercompany sales these instruments hedge was approximately $36
million.
49
The table below sets forth the fair value of derivative instruments as of December 30, 2018 (in thousands):
Asset Derivatives as of
December 30, 2018
Liability Derivatives as of
December 30, 2018
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivative instruments designated as
hedging instruments:
Foreign currency contracts ................... Other current assets
Interest rate swap contract .................... Other current assets
$
$
651 Other current liabilities
1,794 Other current liabilities
2,445
--
--
--
The table below sets forth the fair value of derivative instruments as of December 31, 2017 (in thousands):
Asset Derivatives as of
December 31, 2017
Liability Derivatives as of
December 31, 2017
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivative instruments designated as
hedging instruments:
Interest rate swap contract .................... Other current assets
$
904 Other current liabilities
--
There was no significant impact to earnings from the changes in fair value of derivatives designated as cash flow hedges
or from amounts excluded from the assessment of hedge effectiveness during 2018. There was no significant impact from the
reclassification of hedged items from accumulated other comprehensive income during 2018. The amount of hedged items
expected to be reclassified from accumulated other comprehensive income in the next 12 months is approximately $0.6
million.
The following table summarizes the pre-tax impact that changes in the fair value of derivatives designated as cash flow
hedges and included in the assessment of hedge effectiveness had on accumulated other comprehensive income during 2018
(in thousands):
2018
Foreign currency contracts ..................... $
Interest rate swap contract ...................... $
Gain (Loss)
Recognized in
Accumulated Other
Comprehensive
Income
(468)
890
NOTE 11 – PREFERRED STOCK
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 30, 2018 and
December 31, 2017, there were no shares of preferred stock issued.
NOTE 12 – 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
50
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 $0.26 per share in 2018, $0.25 per share in 2017, and $0.22 per share in 2016,
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 2016, the Company adopted a share purchase program to authorize the repurchase of up to
$50 million of common stock. This 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.
Pursuant to the above-described programs, the Company has repurchased shares in the past three years as follows. 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. During 2018, the Company repurchased and retired a combined total of
615,000 shares under these plans, at an average purchase price of $23.54 per share. As of December 30, 2018, the Company
had approximately $25.1 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.
51
The following tables depict the activity in the accounts which make up shareholders equity for the years 2016-2018.
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
Balance, at January 3, 2016 .........
Net income ...............................
Stock issuances under
65,701 $
0
6,570 $
0
370,327 $
0
100,270 $
54,162
(43,290) $
0
(91,511)
0
(in thousands)
employee plans .....................
17
2
251
Other issuances of common
stock .....................................
277
28
4,726
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 ............................
Windfall tax benefit - share-
0
0
0
0
(4,754)
0
0
(14,285)
(579)
(1,178)
0
(58)
(118)
0
979
(18,378)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(11,572)
0
0
0
0
0
0
0
0
(19,011)
based payment awards ..........
Other ........................................
Balance, at January 1, 2017 .....
0
0
64,238 $
0
0
6,424 $
6,300
0
359,451 $
0
91
140,238 $
0
0
(54,862) $
0
0
(110,522)
52
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
CASH
FLOW
HEDGE
(in thousands)
Balance, at January 1,
2017 .............................. 64,238 $
Net income ....................
0
Stock issuances under
employee plans ..........
36
Other issuances of
common stock ...........
253
25
4,507
4
508
0
0
6,424 $
0
359,451 $
0
140,238 $
53,246
(54,862) $
0
(110,522) $
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
31,579
0
904
0
0
0
0
0
0
(4,532)
0
0
(15,487)
(93 )
(4,628 )
(9)
(463)
5,574
(91,113)
0
0
0
0
0
0
0
0
0
0
0
0
0
(3,124)
0
(1,692)
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 .......................
Adoption of new
accounting standard -
share-based payment
awards .......................
Balance, at December
0
0
0
9,435
0
0
0
31, 2017 ..................... 59,806 $
5,981 $
271,271 $
187,432 $
(56,554) $
(78,943) $
904
53
SHARES AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
(DEFICIT)
PENSION
LIABILITY
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
CASH
FLOW
HEDGE
(in thousands)
5,981 $
0
271,271 $
0
187,432 $
50,253
(56,554) $
0
(78,943) $
0
904
0
Balance, at December 31,
2017 .............................. 59,806 $
Net income ....................
0
Stock issuances under
employee plans ..........
224
Other issuances of
common stock ...........
182
22
18
476
4,809
0
0
0
0
0
0
(4,710)
0
0
(15,471)
(89 )
(615 )
(9)
(61)
12,847
(14,424)
0
0
0
0
0
0
0
0
0
0
0
0
12,944
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(22,544)
0
0
0
0
0
0
0
0
0
422
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 ..........
Balance, at December
30, 2018 ..................... 59,508 $
5,951 $
270,269 $
222,214 $
(43,610) $
(101,487) $ 1,326
Stock Options
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.
54
All outstanding stock options vested prior to 2015 and therefore there were no stock option compensation expenses
during 2018, 2017 or 2016.
The following table summarizes stock options outstanding as of December 30, 2018, as well as activity during the
previous fiscal year:
Shares
Weighted Average
Exercise Price
Outstanding at December 31, 2017 ....................................................................
Granted ...............................................................................................................
Exercised ............................................................................................................
Forfeited or cancelled .........................................................................................
Outstanding at December 30, 2018 (a) ...............................................................
82,500 $
0
40,000
0
42,500 $
Exercisable at December 30, 2018 (b) ...............................................................
42,500 $
8.53
0
7.43
0
9.56
9.56
(a) At December 30, 2018, the weighted-average remaining contractual life of options outstanding was 1.0 years.
(b) At December 30, 2018, the weighted-average remaining contractual life of options exercisable was 1.0 years.
At December 30, 2018, the aggregate intrinsic values of in-the-money options outstanding and options exercisable were
$0.2 million and $0.2 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 $12.43 per option.
Restricted Stock Awards
During fiscal years 2018, 2017 and 2016, the Company granted restricted stock awards totaling 194,000, 253,000, and
277,000 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 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 $4.1 million, $2.8 million and $4.7 million for 2018,
2017 and 2016, respectively. These grants are made primarily to executive-level personnel at the Company and, as a result,
no compensation costs have been capitalized. The Company estimates forfeitures for restricted stock and reduces
compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate
actual experience against the assumed forfeiture rate going forward. The 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 30, 2018, as well as activity during the
previous fiscal year:
Shares
Weighted Average
Grant Date
Fair Value
Outstanding at January 1, 2018 ......................................................................
Granted ...........................................................................................................
Vested ............................................................................................................
Forfeited or cancelled .....................................................................................
Outstanding at December 30, 2018 ................................................................
463,000 $
194,000
83,500
24,500
549,000 $
17.79
25.57
17.75
20.41
27.65
As of December 30, 2018, the unrecognized total compensation cost related to unvested restricted stock was $4.2 million.
That cost is expected to be recognized by the end of 2021.
55
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 each of the years 2016-2018, the Company issued awards of performance shares to certain employees. These awards
vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject
to the employee’s continued employment through the last date of the performance period, and will be settled in shares of our
common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance
shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual
performance achieved as compared to the performance targets set forth in the awards. The 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 30, 2018, as well as the activity
during the year:
Performance
Shares
Weighted
Average Grant
Date Fair Value
Outstanding at January 1, 2018 ...................................................................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited or canceled ...................................................................................................
Outstanding at December 30, 2018 .............................................................................
669,500 $
261,000
134,000
37,000
759,500 $
17.51
25.69
17.72
19.93
20.17
Compensation expense related to the performance shares for 2018, 2017, and 2016 was $10.4 million, $4.5 million and
$1.2 million, respectively. Unrecognized compensation expense related to these performance shares was approximately $4.0
million as of December 30, 2018.
The tax benefit recognized with respect to restricted stock and performance shares was $2.4 million, $2.6 million, and
$2.0 million in 2018, 2017, and 2016, respectively.
NOTE 13 – 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.
56
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:
2018
Fiscal Year
2017
2016
Earnings per share:
Basic earnings per share
Distributed earnings ................................................... $
Undistributed earnings ...............................................
$
Diluted earnings per share
Distributed earnings ................................................... $
Undistributed earnings ...............................................
$
0.26 $
0.58
0.84 $
0.26 $
0.58
0.84 $
0.25 $
0.61
0.86 $
0.25 $
0.61
0.86 $
0.22
0.61
0.83
0.22
0.61
0.83
The following table presents net income that was attributable to participating securities:
2018
Fiscal Year
2017
(in millions)
2016
Net income attributable to participating securities ................. $
0.5 $
0.4 $
0.4
The weighted average shares for basic and diluted EPS were as follows:
2018
Fiscal Year
2017
(in thousands)
Weighted Average Shares Outstanding ..................................
Participating Securities ...........................................................
Shares for Basic Earnings Per Share ......................................
Dilutive Effect of Stock Options ............................................
Shares for Diluted Earnings Per Share ...................................
58,995
549
59,544
22
59,566
61,528
468
61,996
44
62,040
For all periods presented, there were no stock options excluded from the determination of diluted EPS.
NOTE 14 – RESTRUCTURING CHARGES
2016
64,593
505
65,098
38
65,136
On December 29, 2018, the Company committed to a new restructuring plan in its continuing efforts to improve
efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business
strategy. The plan involves (i) a restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction
of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of
certain underutilized and impaired assets that include information technology assets and obsolete manufacturing equipment.
As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter
of 2018 of approximately $20.5 million. The charge is comprised of severance expenses (approximately $10.8 million),
impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million). The charge is expected to
result in future cash expenditures of $12.0 million, primarily for severance payments (approximately $10.8 million). The
restructuring plan is expected to be substantially completed in the first half of 2019, and is expected to yield gross annual
savings of approximately $12 million beginning in fiscal 2019. The Company expects to redeploy in 2019 essentially all of
57
the anticipated savings toward the funding of sales and strategic growth initiatives, yielding negligible net savings on the
Company’s income statement.
A summary of these 2018 restructuring activities is presented below:
Total
Restructuring
Charge
Costs Incurred
in 2018
(in thousands)
Balance at
Dec. 30, 2018
Workforce Reduction ...................................... $
Asset Impairment ............................................
Other Exit Costs ..............................................
10,816 $
8,569
1,144
53 $
8,569
0
10,763
0
1,144
In the fourth quarter of 2016, the Company committed to a separate restructuring plan. 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.
A summary of these 2016 and 2017 restructuring activities is presented below:
Total
Restructuring
Charge
Costs
Incurred
in 2016
Costs
Incurred
in 2017
(in thousands)
Costs
Incurred
in 2018
Balance at
Dec. 30,
2018
Workforce Reduction ................................. $
Asset Impairment .......................................
Lease Exit Costs .........................................
10,652 $
11,319
5,116
1,451 $
8,019
27
6,633 $
3,300
5,089
2,568 $
0
0
0
0
0
NOTE 15 – 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 reduced the U.S. federal income tax rate from 35% to 21% effective for the year beginning
January 1, 2018 and created a modified territorial tax system with a one-time mandatory “transition toll 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.
In accordance with SEC Staff Bulletin No. 118 (“SAB 118”), the Company recorded certain provisional estimates for
the impact of the Tax Act as of December 31, 2017. Under the transitional provisions of SAB 118, the Company had a one-
year measurement period to complete the accounting for the initial tax effects of the Tax Act. During the year ended December
30, 2018, the Company completed its accounting for the provisional estimates of the Tax Act and finalized its measurement
period adjustments related to the one-time transition tax and remeasurement of its net deferred tax asset, as further discussed
below. While the Company’s accounting for the recorded impact of the Tax Act is deemed complete, these amounts are based
on prevailing regulations and currently available information, and any additional guidance issued by the IRS could impact
the amounts in future periods.
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”). As of December 31, 2017, the Company recorded
a provisional tax expense of $11.7 million related to the one-time transition tax. As of December 30, 2018, the Company
has completed its assessment of the one-time transition tax which resulted in a $5.0 million decrease to the previously
recorded provisional amount. The Company elected to pay its transition tax over the eight-year period provided in the Tax
Act.
58
Remeasurement of Deferred Tax Assets and Liabilities: As of December 31, 2017, the Company recorded a provisional
tax expense of $3.5 million related to the remeasurement of its net deferred tax asset to reflect the change in corporate tax
rate from 35% to 21%. As of December 30, 2018, the Company has completed the accounting of remeasuring its net deferred
tax asset which resulted in a $1.7 million decrease to the previously recorded provisional amount.
Beginning in 2018, the Tax Act 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 Company has elected to
account for tax effects of GILTI in the period when incurred, and therefore has not provided any deferred tax impacts of
GILTI in its consolidated financial statements.
Income before taxes on income consisted of the following:
2018
FISCAL YEAR
2017
(in thousands)
2016
U.S. operations ................................................ $
Foreign operations ..........................................
35,728 $
19,263
53,407 $
47,132
38,357
40,779
Income before taxes ........................................ $
54,991 $
100,539 $
79,136
Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the
following components:
Current expense/(benefit):
Federal ..................................................... $
Foreign .....................................................
State .........................................................
Current expense ..............................................
Deferred expense/(benefit):
Federal .....................................................
Foreign .....................................................
State .........................................................
Deferred expense.............................................
2018
FISCAL YEAR
2017
(in thousands)
2016
(3,549) $
14,548
2,628
13,627
2,145
(11,228)
194
(8,889)
10,245 $
11,923
1,414
23,582
20,467
1,214
2,030
23,711
6,886
12,934
1,633
21,453
6,186
(1,937 )
(728 )
3,521
Total income tax expense ................................ $
4,738 $
47,293 $
24,974
59
The Company’s effective tax rate was 8.6%, 47.0% and 31.6% for fiscal years 2018, 2017 and 2016, respectively. The
following summary reconciles income taxes at the U.S. federal statutory rate of 21% applicable for 2018 and 35% applicable
for 2017 and 2016 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 ............................................................................ $
2018
FISCAL YEAR
2017
(in thousands)
2016
11,548 $
35,189 $
27,698
2,304
1,352
2,566
235
(5,000)
(1,739)
61
(3,756)
(79)
(2,439)
(315)
4,738 $
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
Deferred tax assets and liabilities are included in the accompanying balance sheets as follows:
Deferred tax asset (non-current asset) .............................................. $
Deferred income taxes (non-current liabilities) ...............................
Total net deferred taxes .................................................................... $
FISCAL YEAR
2018
2017
(in thousands)
15,601 $
(26,488)
(10,887) $
18,003
(6,935)
11,068
Deferred income taxes for the years ended December 30, 2018 and December 31, 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 sources of the temporary differences and their effect on the net deferred tax asset are as follows:
2018
2017
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 ................
Basis difference of other assets and liabilities ........................
$
ASSETS LIABILITIES ASSETS LIABILITIES
(in thousands)
24,871 $
18,699
2,357
0
0
0
0
0
0
0
348
314
46,589 $
0 $
0
0
2,349
(1,067)
0
18,945
4,712
6,473
4,290
0
0
35,702 $
0 $
0
0
2,468
(1,186)
3,227
20,220
634
1,777
2,408
0
0
29,548 $
13,281
1,157
2,597
0
0
0
0
0
0
0
909
536
18,480
60
During the year ended December 30, 2018, significant changes to the Company’s deferred tax balances included an $18.0
million increase in intangible deferred liability primarily related to its acquisition of nora.
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 30,
2018.
The Company had approximately $96.1 million in state net operating loss carryforwards relating to continuing operations
with expiration dates through 2035. The Company has provided a valuation allowance against $16.3 million of such losses,
which the Company does not expect to utilize. In addition, the Company has approximately $43.0 million in state net
operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided.
As of December 30, 2018, and December 31, 2017, non-current deferred tax assets were reduced by approximately $2.8
million and $3.3 million, respectively, of unrecognized tax benefits.
Although the one-time transition tax on unrepatriated post-1986 accumulated earnings and profits of certain non-U.S.
subsidiaries and the territorial tax system created as a result of the Tax Act generally eliminates U.S. federal income taxes on
dividends from foreign subsidiaries, the Company continues to assert that all of its undistributed earnings of $376 million in
its non-U.S. subsidiaries, excluding subsidiaries within Canada, is indefinitely reinvested outside of the U.S.
In the event the Company determines not to continue to assert that all or part of its undistributed earnings in its non-U.S.
subsidiaries are permanently reinvested, an actual repatriation from its non-U.S. subsidiaries could still be subject to
additional foreign withholding and U.S. state taxes, the determination of which is not practicable.
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 2013 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 2007 to the present.
As of December 30, 2018, and December 31, 2017, the Company had $28.1 million and $29.2 million, respectively, of
unrecognized tax benefits. If the $28.1 million of unrecognized tax benefits as of December 30, 2018 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, $25.4 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
component of income tax expense. As of December 30, 2018, the Company had accrued interest and penalties of $1.3 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:
2018
FISCAL YEAR
2017
(in thousands)
2016
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 ............................................................................ $
29,221 $
671
180
0
0
(1,861)
(68)
28,143 $
27,888 $
627
709
0
0
(462)
459
29,221 $
28,271
690
148
(695 )
0
(403 )
(123 )
27,888
61
NOTE 16 – COMMITMENTS AND CONTINGENCIES
The Company leases certain production, distribution and marketing facilities and equipment. At December 30, 2018,
aggregate minimum rent commitments under operating leases with initial or remaining terms of one year or more consisted
of the following:
FISCAL YEAR
AMOUNT
(in thousands)
2019 ..................................................................................................... $
2020 .....................................................................................................
2021 .....................................................................................................
2022 .....................................................................................................
2023 .....................................................................................................
Thereafter .............................................................................................
26,113
22,066
16,453
8,692
5,186
15,237
Rental expense amounted to approximately $28.5 million, $22.0 million, and $24.5 million for the years 2018, 2017, and
2016, 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 17 – 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 $3.2 million, $3.0 million, and $3.1 million for the years 2018, 2017, and
2016, respectively. No discretionary contributions were made in 2018, 2017, or 2016.
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 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 $28.7 million and $31.9 million at December 30, 2018 and December 31,
2017, respectively. The Company invests the deferrals in insurance instruments with readily determinable cash surrender
values. The value of the insurance instruments was $26.4 million and $28.0 million as of December 30, 2018 and December
31, 2017, respectively.
Foreign Defined Benefit Plans
The Company has trusteed defined benefit retirement plans which cover many of its European employees. In connection
with the nora acquisition on August 7, 2018, we acquired an additional defined benefit plan, which covers certain employees
in Germany (the “nora Plan”). The benefits under all defined benefit retirement plans are generally based on years of service
and the employee’s average monthly compensation. Pension expense was $1.7 million, $1.9 million, and $1.2 million for the
years 2018, 2017 and 2016, respectively. Plan assets are primarily invested in insurance contracts and equity and fixed income
securities. The nora plan has no plan assets. The Company uses a year-end measurement date for the plans. As of December
30, 2018, for the European plans, the Company had a net liability recorded of $36.2 million, an amount equal to their
underfunded status, and has recorded in Other Comprehensive Income an amount equal to $36.7 million (net of taxes of
approximately $12 million) related to the future amounts to be recorded in net post-retirement benefit costs.
62
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
2018
2017
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year .................................................................. $
Service cost ..........................................................................................................
Interest cost ..........................................................................................................
Benefits and expenses paid ..................................................................................
Business combinations .........................................................................................
Actuarial loss (gain) .............................................................................................
Member contributions ..........................................................................................
Currency translation adjustment ..........................................................................
320,548 $
1,112
5,467
(11,850)
36,903
(53,753)
233
(13,152)
277,813
1,628
5,559
(10,267)
0
13,351
262
32,202
Benefit obligation, end of year ................................................................................ $
285,508 $
320,548
Change in plan assets
Plan assets, beginning of year .............................................................................. $
Actual return on assets .........................................................................................
Company contributions ........................................................................................
Benefits paid ........................................................................................................
Currency translation adjustment ..........................................................................
307,166 $
(37,495)
4,095
(11,850)
(12,603)
258,365
25,691
2,812
(10,267)
30,565
Plan assets, end of year ............................................................................................ $
249,313 $
307,166
Reconciliation to balance sheet
Funded status benefit asset/(liability) .................................................................. $
(36,195) $
(13,382)
Net amount recognized ............................................................................................ $
(36,195) $
(13,382)
Amounts recognized in accumulated other comprehensive income (after tax)
Unrecognized actuarial loss ............................................................................. $
Unamortized prior service costs .......................................................................
Total amount recognized .................................................................................. $
37,141 $
(437)
36,704 $
48,443
(471)
47,972
Accumulated Benefit Obligation ............................................................................. $
284,581 $
313,257
63
The above disclosure represents the aggregation of information related to the Company’s three defined benefit plans
which cover many of its European employees. As of December 30, 2018, one of these plans, which primarily covers certain
employees in the United Kingdom (the “UK Plan”), had assets in excess of the accumulated benefit obligation. The nora Plan
is an unfunded defined benefit plan and the accumulated benefit obligation exceeded plan assets. As of December 31, 2017,
the UK Plan had an accumulated benefit obligation in excess of the plan assets and the Dutch Plan had assets in excess of the
accumulated benefit obligation. The following table summarizes this information as of December 30, 2018 and December
31, 2017.
END OF FISCAL YEAR
2018
2017
(in thousands)
UK Plan
Projected Benefit Obligation ......................................... $
Accumulated Benefit Obligation ...................................
Plan Assets .....................................................................
157,351 $
157,351
158,990
190,992
190,992
179,322
Dutch Plan
Projected Benefit Obligation ......................................... $
Accumulated Benefit Obligation ...................................
Plan Assets .....................................................................
91,837 $
90,910
90,323
129,554
122,265
127,844
Nora Plan
Projected Benefit Obligation ......................................... $
Accumulated Benefit Obligation ...................................
Plan Assets .....................................................................
36,320
36,320
0
0
0
0
2018
FISCAL YEAR
2017
(in thousands)
2016
Components of net periodic benefit cost
Service cost .................................................................................. $
Interest cost ..................................................................................
Expected return on plan assets .....................................................
Amortization of prior service cost ................................................
Amortization of net actuarial (gains)/losses .................................
1,112 $
5,467
(6,234)
(27)
1,394
1,628 $
5,559
(6,496)
(34)
1,287
1,032
6,580
(7,553)
33
1,076
Net periodic benefit cost ............................................................... $
1,712 $
1,944 $
1,168
During 2018, other comprehensive income was impacted pre-tax by approximately $11.3 million comprised of actuarial
gain of approximately $9.9 million and amortization of $1.4 million.
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 ...........................................................
2018
FISCAL YEAR
2017
2016
1.9%
1.8%
1.75%
2.5%
1.75%
2.0%
2.3%
1.75%
2.2%
1.75%
2.7%
3.1%
2.0%
2.3%
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.
64
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 30, 2018 or December 31, 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 had been determined to be sufficient to provide
for the indexation benefit, in 2017 and 2016, 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. During 2018, the Company and the insurer, based on the expected future returns
under the investment assets included in the insurance contract, determined that the indexation was not probable and was not
included as an asset and liability as of the end of 2018. As of December 31, 2017, this indexation liability and corresponding
asset was $32.7 million. The inclusion or exclusion 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
for 2018 and 2017 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 not to be probable
as of the end of 2018 based on recent returns. This indexation was considered probable as of the end of 2017, and the Company
believed that it was appropriate to include the value of the indexation payments, that were 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.
At December 30, 2018, the asset returns are not of an expected amount to allow for indexation and the Company can, at any
time, remove this indexation benefit. The removal of the indexation asset is presented as a negative return on assets, and the
removal of the indexation liability is represented by a change in actuarial assumptions in the company’s presentation of 2018
projected benefit obligation.
The Company’s actual weighted average asset allocations for 2018 and 2017, and the targeted asset allocation for 2019,
of the foreign defined benefit plans by asset category, are as follows:
2019
Target Allocation
FISCAL YEAR
2018
2017
Percentage of Plan Assets at Year End
Asset Category:
Equity Securities ......................................................
Debt and Debt Securities ..........................................
Other ........................................................................
15% - 20%
35% - 45%
40% - 50%
100%
65
16%
35%
49%
100%
16%
32%
52%
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.
The following table sets forth by level within the fair value hierarchy the foreign defined benefit plans’ assets at fair
value, as of December 30, 2018 and December 31, 2017. The nora plan is currently unfunded. 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 30, 2018
UK Plan
Total
Dutch Plan
Level 1 ....................................................... $
Level 2 .......................................................
Level 3 .......................................................
Total .......................................................... $
(in thousands)
0 $
0
90,323
90,323 $
79,146 $
60,913
18,931
158,990 $
79,146
60,913
109,254
249,313
Level 1 ....................................................... $
Level 2 .......................................................
Level 3 .......................................................
Total .......................................................... $
Dutch Plan
Pension Plan Assets by Category as of
December 31, 2017
UK Plan
(in thousands)
87,521 $
0 $
68,668
0
23,133
127,844
179,322 $
127,844 $
Total
87,521
68,668
150,977
307,166
66
The tables below detail the foreign defined benefit plans’ assets by asset allocation and fair value hierarchy:
Level 1
2018
Level 2
(in thousands)
Level 3
Asset Class
Equity Securities ........................................................ $
Debt and Debt Securities ............................................
Other (including cash) ................................................
$
39,392 $
33,134
6,620
79,146 $
0 $
38,619
22,294
60,913 $
0
16,012
93,242
109,254
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
With the exception of the Dutch Plan assets as discussed above, the assets identified as level 3 above in 2018 and 2017
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 2018 and 2017:
2018
(in thousands)
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 .......................................................................... $
150,977 $
1,682
(4,090 )
696
(35,202 )
(4,809 )
109,254 $
127,953
2,633
(3,728 )
(2,089 )
8,753
17,455
150,977
During 2019, the Company expects to contribute $4.2 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)
2019 .......................................................................... $
2020 ..........................................................................
2021 ..........................................................................
2022 ..........................................................................
2023 ..........................................................................
2024-2028 .................................................................
9,762
9,989
10,251
10,356
10,635
55,231
67
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.
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 2018 and 2017 as there are no longer any active participants in the plan.
FISCAL YEAR
2018
2017
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year .......................... $
Interest cost .................................................................
Benefits paid ...............................................................
Actuarial loss (gain) ....................................................
31,919 $
1,082
(2,030)
(1,829)
29,700
1,256
(1,943)
2,906
Benefit obligation, end of year .................................... $
29,142 $
31,919
The amounts recognized in the consolidated balance sheets are as follows:
Current liabilities ............................................................ $
Non-current liabilities .....................................................
Total benefit obligation .................................................. $
2018
2017
(in thousands)
2,030 $
27,112
29,142 $
2,030
29,889
31,919
The components of the amounts in accumulated other comprehensive income, after tax, are as follows:
Unrecognized actuarial loss ............................................ $
2018
2017
(in thousands)
6,906 $
8,582
The accumulated benefit obligation related to the SCP was $29.1 million and $31.9 million as of December 30, 2018 and
December 31, 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.
68
2018
2017
(in thousands, except for assumptions)
2016
Assumptions used to determine net periodic benefit cost
Discount rate ..............................................................................
Rate of compensation .................................................................
3.50%
-
3.85%
-
Assumptions used to determine benefit obligations
Discount rate ..............................................................................
Rate of compensation .................................................................
4.1%
-
3.5%
-
4.25%
4.0%
3.85%
4.0%
Components of net periodic benefit cost
Service cost ................................................................................ $
Interest cost ................................................................................
Amortizations .............................................................................
$
0
1,082
464
$
0
1,256
364
440
1,269
811
Net periodic benefit cost .................................................................... $
1,546
$
1,620
$
2,520
The changes in other comprehensive income during 2018 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 $1.4 million and
amortization of loss of $0.3 million.
During 2018, the Company contributed $2.0 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
2019 ........................................................................
2020 ........................................................................
2021 ........................................................................
2022 ........................................................................
2023 ........................................................................
2024-2028 ...............................................................
EXPECTED PAYMENTS
(in thousands)
$ 2,030
2,030
2,030
2,030
2,030
9,791
NOTE 18 – ACQUISITION OF NORA
On June 14, 2018, the Company entered into a share purchase and transfer agreement to acquire the issued and
outstanding shares of nora, nora’s outstanding third-party debt, and receivables related to nora’s shareholder loans. Nora is
the holding company for a Germany-based manufacturer and multinational marketer of resilient floor coverings, including
rubber flooring. In connection with the signing of the nora share purchase and transfer agreement, the Company entered into
a derivative instrument to address the foreign currency risk associated with a portion of the nora purchase price. This option
instrument did not qualify for hedge accounting, and the mark-to-market expense of $2.8 million to record the instrument at
fair value at the end of the second quarter of 2018 was recorded in other expense in our consolidated statement of operations
during the second quarter. The option instrument had a notional value of €315 million (or approximately $364 million as of
the end of the second quarter of 2018) and an initial maturity of 120 days. Upon completion of the nora acquisition as
discussed below, the option instrument was terminated and the Company recognized a loss of approximately $1.4 million
upon termination, which was recorded in other expense in our Consolidated Condensed Statement of Operations during the
third quarter of 2018.
On August 7, 2018, the Company completed the acquisition of nora for a purchase price of €385.1 million, or $447.2
million at the exchange rate as of the transaction date, including acquired cash of €40.0 million ($46.5 million) for a net
purchase price of €345.1 million ($400.7 million).
Nora is an industry leader in the rubber flooring market, and this acquisition is expected to advance the Company’s
growth strategy in expanding market segments, particularly in the healthcare, life sciences and education market segments.
Similar to Interface, nora operates on an international footprint and the Company expects the acquisition will also allow for
geographic sales synergies as well.
69
The transaction was accounted for as a business combination using the acquisition method of accounting, which requires,
among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition
date. The results of operations for this acquisition have been consolidated with those of the Company from the acquisition
date forward. Tangible assets and liabilities of nora systems GmbH were valued as of the acquisition date using a market
analysis, and intangible assets were valued using a discounted cash flow analysis. As of December 30, 2018, the estimated
fair values of the assets acquired and liabilities assumed are not final. The provisional amount for assumed tax liabilities are
subject to revision.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date. The amounts represent a provisional measurement of the fair values, and is therefore subject to change:
As of
August 7th, 2018
(In thousands)
Assets acquired (excluding goodwill) ..................................................... $
Liabilities assumed ..................................................................................
Net assets acquired ..................................................................................
Purchase price .........................................................................................
Goodwill, excess of purchase price ......................................................... $
359,335
(96,868)
262,467
447,192
184,725
Acquired intangible assets of $103.3 million include $60.8 million of trademarks and tradenames that are not subject to
amortization and will instead be subject to annual impairment testing, or more frequent testing should there be a significant
change in business conditions. The remaining intangible assets include developed technology of $39.1 million that will be
amortized on a straight-line basis over the estimated useful life of 7 years and backlog of $3.4 million that will be amortized
on a straight-line basis over the estimated useful life of six months. The acquired inventory includes a step-up of inventory
to fair value of approximately $26.6 million which will be recognized in earnings over the expected turns of the
inventory. This step-up of inventory to fair value was fully amortized by the end of 2018.
As of December 30, 2018, recognized goodwill of $184.7 million and net intangible assets of $97.7 million were assigned
pro-rata to the Company’s three operating segments. Goodwill includes subsequent purchase price accounting adjustments
of approximately $1.4 million related to additional liabilities that existed at the acquisition date. None of the goodwill is
expected to be deductible for income tax purposes.
The fair value of acquired accounts receivable was $31.0 million with the gross value being $32.8 million. The Company
expects approximately $1.8 million to be uncollectible.
The Company recognized $9.5 million of transaction costs related to the nora acquisition for 2018. Approximately $5.3
million of these expenses are included in selling, general and administrative expenses in the consolidated statement of
operations and $4.2 million are included in other expenses related to the derivative instrument the Company used to address
the foreign currency risk associated with a portion of the nora purchase price. The Company also recognized $8.8 million of
debt issuance costs in connection with the amended and restated Syndicated Credit Facility, which were recorded as a
reduction of long-term debt in the consolidated balance sheet.
The amounts of revenue and net loss of nora included in the Company’s consolidated statements of operations from the
acquisition date to December 30, 2018 are as follows (in thousands):
Revenue ..................................................................... $
Net loss ......................................................................
112,563
(20,030)
70
The following represents the pro forma consolidated statement of operations as if nora had been included in the
consolidated results of the Company as of January 1, 2017. These are estimated for pro forma purposes only and do not
necessarily reflect the results had nora been included as of the beginning of 2018 and 2017.
Pro Forma Consolidated Statement of Operations
(In thousands)
Revenue ................................................................. $
Net income ............................................................
1,340,449 $
96,909
2018
2017
1,229,766
48,655
Pro forma net income for 2018 excludes any transaction related costs as these are non-recurring costs for the combined
Company.
NOTE 19 – 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. Nora results are included in the 2018 figures as of
the date of acquisition through the end of 2018, and are included in our operating segments based on the geographic split of
the operations.
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)
2018
Net Sales ........................................................ $
Depreciation and amortization ......................
Total assets ....................................................
2017
Net Sales ........................................................ $
Depreciation and amortization ......................
Total assets ....................................................
2016
Net Sales ........................................................ $
Depreciation and amortization ......................
682,261 $
13,732
482,510
319,677 $
12,862
546,758
177,635 $
8,567
200,684
1,179,573
35,161
1,229,952
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
241,463 $
5,698
149,016 $
8,729
958,617
29,066
71
A reconciliation of the Company’s total operating segment depreciation and amortization, and assets to the corresponding
consolidated amounts follows:
2018
FISCAL YEAR ENDED
2017
(in thousands)
2016
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization .......................... $
Corporate depreciation and amortization .................................
35,161 $
3,923
28,259 $
2,002
29,066
1,566
Reported depreciation and amortization .................................. $
39,084 $
30,261 $
30,632
ASSETS
Total segment assets................................................................. $
Corporate assets and eliminations ............................................
1,229,952 $
54,692
719,957
80,643
Reported total assets................................................................. $
1,284,644 $
800,600
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 2018, 2017 and 2016 were approximately 49%, 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:
2018
FISCAL YEAR
2017
(in thousands)
2016
SALES TO UNAFFILIATED CUSTOMERS(1)
United States ............................................................................ $
United Kingdom .......................................................................
Australia ...................................................................................
Germany ...................................................................................
China ........................................................................................
Other foreign countries ............................................................
600,093 $
65,406
83,034
75,958
43,708
311,374
514,783 $
57,391
87,591
36,696
28,279
271,703
501,206
58,266
78,141
30,968
31,340
258,696
Net sales ................................................................................... $
1,179,573 $
996,443 $
958,617
LONG-LIVED ASSETS(2)
United States ............................................................................ $
United Kingdom .......................................................................
Netherlands ..............................................................................
Germany ...................................................................................
Australia ...................................................................................
Thailand ...................................................................................
China ........................................................................................
Other foreign countries ............................................................
88,336 $
6,288
49,935
83,874
38,928
15,124
6,703
3,700
76,557
7,902
55,132
0
45,067
16,543
8,361
3,083
Total long-lived assets ............................................................. $
292,888 $
212,645
(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.
72
NOTE 20 – 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.
FISCAL YEAR 2018
FIRST
SECOND
THIRD
QUARTER
QUARTER(1)
QUARTER(2)
(in thousands, except per share data)
FOURTH
QUARTER(3)
Net sales ................................................................ $
Gross profit ............................................................
Net income (loss) ..................................................
240,563 $
93,582
15,084
283,626 $
109,148
20,602
318,325 $
99,945
8,172
337,059
121,682
6,395
Basic income per share .......................................... $
0.25 $
0.35 $
0.14 $
0.11
Diluted income per share ....................................... $
0.25 $
0.35 $
0.14 $
0.11
Share prices
High ................................................................... $
Low .................................................................... $
26.25 $
22.10 $
26.10 $
21.25 $
24.50 $
21.70 $
23.50
13.45
(1) Results for the second quarter of 2018 include transaction related expenses of $5.8 million.
(2) Results for the third quarter of 2018 include purchase price accounting amortization of $20.3 million and
transaction related expenses of $2.4 million.
(3) Results for the fourth quarter of 2018 include tax benefit of $6.7 million as a result of the finalization of the
Company’s analysis of the U.S. Tax Cuts and Jobs Act, as well as restructuring and asset impairment charges
of $20.5 million. Results for the fourth quarter of 2018 include purchase price accounting amortization of $11.8
million and transaction related expense of $1.2 million.
FISCAL YEAR 2017
FIRST
QUARTER(1)
SECOND
QUARTER
QUARTER
(in thousands, except per share data)
THIRD
FOURTH
QUARTER(2)
Net sales ................................................................ $
Gross profit ............................................................
Net income ............................................................
221,102 $
87,802
8,547
251,700 $
97,897
20,938
257,431 $
98,544
19,439
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 U.S. Tax Cuts and Jobs
Act.
73
NOTE 21 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During 2018, the Company did not reclassify any significant amounts out of accumulated other comprehensive income.
The only significant reclassifications that occurred in that period were comprised of $1.8 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.
74
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 30, 2018 and December 31, 2017, the related consolidated statements of operations, comprehensive income, and
cash flows for each of the three years in the period ended December 30, 2018, 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 30, 2018 and December 31, 2017, and the results of their operations and their cash flows for each
of the three years in the period ended December 30, 2018, 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 30, 2018, 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 February 28, 2019 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
February 28, 2019
75
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
30, 2018, 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 30, 2018, 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 30, 2018 and December 31, 2017, the related
consolidated statements of operations, comprehensive income, and cash flows for each of the three years in the period ended
December 30, 2018, and the related notes and schedule, and our report dated February 28, 2019 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 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.
As indicated in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include
the internal controls of nora Holding GmbH (nora), which was acquired on August 7, 2018, and which is included in the
consolidated balance sheet of the Company as of December 30, 2018, and the related consolidated statements of operations,
comprehensive income, and cash flows for the year then ended. Nora constituted 23% of consolidated total assets as of
December 30, 2018, and 9% of consolidated revenues for the year ended December 30, 2018. Management did not assess the
effectiveness of internal control over financial reporting of nora because of the timing of the acquisition, which was completed
on August 7, 2018. Our audit of internal control over financial reporting of the Company also did not include an evaluation
of the internal control over financial reporting of nora.
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.
76
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
February 28, 2019
77
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.
U.S. Securities and Exchange Commission guidance allows companies to exclude acquisitions from management’s
report on internal control over financial reporting for the first year after the acquisition when it is not possible to conduct an
assessment. In August 2018, Interface, Inc. completed the acquisition of nora Holding GmbH (nora). Nora is a wholly owned
subsidiary. Due to nora’s global operations, management has excluded nora from the annual assessment of the effectiveness
of internal control over financial reporting as of December 30, 2018. Nora represents 23 percent of consolidated total assets
and 9 percent of consolidated revenues of Interface, Inc. as of and for the year ended December 30, 2018.
Our management assessed the effectiveness of our internal control over financial reporting as of December 30, 2018
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
30, 2018, 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
78
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” in our definitive Proxy Statement for our
2019 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 2018 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.
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 2019 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 2018 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 2019 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 2018
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 2019 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 2018 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
2019 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 2018 fiscal year, is incorporated herein by reference.
79
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 30, 2018, December
31, 2017 and January 1, 2017.
Consolidated Balance Sheets — December 30, 2018 and December 31, 2017.
Consolidated Statements of Cash Flows — fiscal years ended December 30, 2018, December 31, 2017 and January 1,
2017.
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 is included as part of this
Report (see the pages immediately preceding the signatures in this Report).
80
Schedule II — Valuation and Qualifying Accounts and Reserves
3. Exhibits
The following exhibits are included as part of this Report:
Exhibit
Number
Description of Exhibit
2.1 — Share Purchase and Transfer Agreement dated June 14, 2018 by and among the Company, Interface BV,
DealCo Luxembourg II S.à r.l. and nora Management III Beteiligungs GmbH & Co. KG (included as Exhibit
2.1 to the Company’s current report on Form 8-K filed on June 14, 2018, previously filed with the Commission
and incorporated herein by reference).
3.1 — 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).
3.2 — 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).
4.1 — 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.
10.1 — 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).*
10.2 — 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).*
10.3 — 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).*
81
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 — 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).*
10.7 — 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).*
10.8 — 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).*
10.9 — 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.)*
82
10.16 — Form of 2018 Restricted Stock Agreement for executive officers (included as Exhibit 10.1 to the Company’s
quarterly report on Form 10-Q filed on May 11, 2018, previously filed with the Commission and incorporated
herein by reference).*
10.17 — Form of 2018 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, 2018, previously filed with the Commission and incorporated
herein by reference).*
10.18 — Employment Offer Letter to Bruce A. Hausmann (included as Exhibit 10.3 to the Company’s quarterly report
on Form 10-Q filed on May 11, 2018, previously filed with the Commission and incorporated herein by
reference).*
10.19 — Employment Offer Letter to J. Chadwick Scales (included as Exhibit 10.4 to the Company’s quarterly report
on Form 10-Q filed on May 11, 2018, previously filed with the Commission and incorporated herein by
reference).*
10.20 — Employment and Change in Control Agreement of Robert A. Coombs dated May 15, 2015 (included as Exhibit
99.1 to the Company’s current report on Form 8-K filed on May 19, 2015, previously filed with the Commission
and incorporated herein by reference).*
10.21 — Severance Protection and Change in Control Agreement of Matthew J. Miller dated as of April 3, 2018
(included as Exhibit 99.2 to the Company’s current report on Form 8-K filed on April 25, 2018, previously
filed with the Commission and incorporated herein by reference).*
10.22 — Commitment Letter dated June 14, 2018 by Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated in favor of Interface, Inc. (included as Exhibit 10.1 to the Company’s current report on Form 8-K
filed on June 14, 2018, previously filed with the Commission and incorporated herein by reference.)
10.23 — Amended and Restated Commitment Letter dated June 20, 2018 by Bank of America, N.A., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A. in favor of Interface, Inc. (included as
Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 21, 2018, previously filed with the
Commission and incorporated herein by reference.)
10.24 — First Restatement Agreement, dated as of July 20, 2018, 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 10.1 to the Company’s current
report on Form 8-K filed on July 26, 2018, previously filed with the Commission and incorporated herein by
reference.)
21 — Subsidiaries of the Company.
23 — Consent of BDO USA, LLP.
24 — Power of Attorney (see signature page of this Report).
31.1 — Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 30, 2018.
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 30, 2018.
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 30,
2018.
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 30,
2018.
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.
83
ITEM 16. FORM 10-K SUMMARY
None.
84
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)
COLUMN C
CHARGED
TO OTHER
ACCOUNTS
(in thousands)
COLUMN D
DEDUCTIONS
(DESCRIBE) (B)
COLUMN E
BALANCE,
AT
END OF
YEAR
Allowance for Doubtful Accounts:
Year Ended:
December 30, 2018 ............................ $
December 31, 2017 ............................
January 1, 2017 ..................................
3,493 $
3,780
4,479
1,848 $
635
(243)
0 $
0
0
1,801 $
922
456
3,540
3,493
3,780
______________
(A) Includes changes in foreign currency exchange rates as well as the addition of the nora reserves since the acquisition date.
(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 30, 2018 ............................ $
December 31, 2017 ............................
January 1, 2017 ..................................
2,568 $
10,291
104
11,961 $
3,999
11,769
8,569 $
3,300
8,019
2,622 $
3,724
1,582
11,907
2,568
10,291
______________
(A) Includes changes in foreign currency exchange rates as well as the nora reserves since the acquisition date.
(B) Direct reduction of asset carrying value, not included in restructuring reserve.
(C) Cash payments.
85
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 30, 2018 .............................. $
December 31, 2017 ..............................
January 1, 2017 ....................................
4,111 $
5,529
4,759
1,074 $
2,071
3,149
0 $
0
0
1,690 $
3,489
2,379
3,495
4,111
5,529
______________
(A) Includes changes in foreign currency exchange rates as well as the nora reserves since the acquisition date.
(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.)
86
SIGNATURES
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.
Date: February 28, 2019
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
Chairman of the Board and Director
February 28, 2019
/s/ JAY D. GOULD
Jay D. Gould
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 28, 2019
/s/ BRUCE A. HAUSMANN
Bruce A. Hausmann
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ GREGORY J. BAUER
Gregory J. Bauer
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ JOHN P. BURKE
John P. Burke
/s/ ANDREW B. COGAN
Andrew B. Cogan
Director
Director
/s/ CHRISTOPHER G. KENNEDY
Christopher G. Kennedy
Director
/s/ CATHERINE M. KILBANE
Catherine M. Kilbane
/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
Director
Director
Director
Director
Director
87
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February 28, 2019
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
($ in millions, except per share amounts)
ORGANIC SALES
Net Sales as Reported (GAAP)
Impact of Changes in Currency
nora net sales
Specialty Retail Sales
Organic Sales
Gross Profit as Reported (GAAP)
Purchase Accounting Amortization
Adjusted Gross Profit
SG&A Expense as Reported (GAAP)
Less: Transaction Related Expenses
Adjusted SG&A Expense
Net Income as Reported (GAAP)
Income Tax Expense
Transaction Costs in Other Expense
Interest Expense
Depreciation and Amortization
Stock Compensation Amortization
Transaction Related Expenses
Purchase Accounting Amortization
Restructuring and Asset Impairment Charges
Adjusted EBITDA
ADJUSTED GROSS PROFIT
ADJUSTED SG&A EXPENSE
ADJUSTED EBITDA
ADJUSTED DILUTED EPS
Diluted Earnings per Share as Reported (GAAP)
Purchase Accounting Amortization (after tax impact of $9.3 million in 2018)
Transaction Related Expenses (after tax impact of $2.1 million in 2018)
Tax Act Expense (Benefit)
Restructuring and Asset Impairment Charges (after tax impact of $2.6 million in 2017 and $5.2 million in 2018)
Adjusted Diluted Earnings per Share
2017
$996
-
-
(5)
$992
2018
$1,180
(8)
(113)
-
$1,059
2017
2018
$386
-
$386
$424
32
$456
2017
2018
$267
-
$267
$328
(5)
$322
2017
2018
$53
47
-
7
30
7
-
-
7
$152
$50
5
4
15
39
15
5
32
21
$186
2017
2018
$0.86
-
-
0.25
0.08
$1.18
$0.84
0.38
0.12
(0.11)
0.26
$1.49
The non-GAAP measures included in this annual report may be different from similarly titled non-GAAP measures used
by other companies, and should not be used as a substitute for, or considered superior to, GAAP measures.
Reconciliations to the most directly comparable GAAP measures appears above.
Fellow Shareowners…
2018 was an historic year for Interface. Not only will it be remembered
It is an important point of differentiation. But we are not stopping
as one of our most impressive years financially, but also as a significant
there. In 2016, we announced our intent to go from doing no harm
year in which we built on our legacy of superior design, innovation
to having a positive impact with Climate Take Back, bringing a voice
and sustainability.
of aspiration and optimism to global warming.
Our work in 2018 was essential to pursuing our vision of becoming
In 2018, we launched an industry first: every product that we sell
the world’s most valuable interior products and services company.
globally is carbon neutral across the entire product lifecycle. We call
We’re working to fulfill this vision through a consistent and clear,
this program Carbon Neutral Floors. Having worked diligently since
1994 to reduce the carbon footprint of our products, we negated the
remaining carbon impact through the purchase of carbon offsets.
It is an important step for us as we build our innovation pipeline and
work to bring climate positive products to market. As of Jan. 1, 2019,
this also includes all nora® products.
We intend to continue to make sustainability matter, even more.
Interface will lead industry in creating a climate fit for life, providing
our customers with products and services that will make a difference.
We will continue to be an example for other companies, showing
that business can be prosperous and purpose-driven.
FY 2018 Results
By executing on our strategy and expanding our product portfolio
with the nora acquisition, we outperformed our full year outlook for
2018. Net sales increased 18 percent to $1.2 billion, including $113
million of sales from nora. We also delivered organic sales growth
at the top end of our projected range, at 7 percent. Adjusted gross
margin landed in our anticipated range with full year adjusted gross
margin of 38.7 percent, and our adjusted SG&A expenses were
consistent with our expectations at $322 million or 27.3 percent of
sales. These results brought our full year adjusted EPS to $1.49,
up 26 percent over the prior year.
Looking Ahead
As we look toward 2019, we enter the year with momentum and a
highly engaged global team. Our strategy is working in the marketplace
and we anticipate further success in the coming year. We also remain
fully committed to our sustainability goals. I am excited about our
talented team and the energy and passion we all share to outperform
our industry. We will continue to invest in our people, our products,
and the earth. Thank you for allowing us to serve you, our customers,
our employees and the environment.
Sincerely,
Jay D. Gould
Interface, Inc.
President and Chief Executive Officer
five-pillared value creation strategy:
· Grow our core carpet tile business
· Build a resilient flooring business
· Execute supply chain productivity
· Optimize SG&A resources
· And do all of this while leading a world-changing
sustainability movement.
Our strategy is working in the marketplace. We have been gaining
market share in carpet tile. With our launch of LVT and acquisition
of nora systems, we are successfully building a scalable resilient
flooring business that is profitable, has a strong margin structure,
and moves the dial. In fact, as we expanded participation from solely
carpet tile to two resilient flooring categories, we have increased
our served market from approximately $4.2 billion in 2016 to an
estimated $8.5 billion today. We are pleased with the progress of
our supply chain initiatives that are delivering on the P&L. We have
also improved the efficiency and effectiveness of our SG&A spend.
And, through our Climate Take Back™ sustainability mission, we
are driving industry to consider carbon as a resource, urging our
customers to participate by specifying our Carbon Neutral Floors™,
and doing our part to reverse global warming.
Our strategic decisions and investments have already proven their
significance, and we believe these investments will continue to drive
value for years to come.
nora Acquisition
Our acquisition of nora systems in August 2018 was the largest
acquisition in Interface history, expanding our presence in resilient
flooring. Nora is a globally-recognized brand and the market share
leader in the rubber flooring category. Nora expands the Interface
portfolio and increases our presence in healthcare and education,
providing unique opportunities for us to meet our customers’
diverse needs.
We have made great progress integrating the nora team into the
Interface family and to accelerate our cross-selling processes. The
integration work will continue in 2019, and I am pleased with the
team’s commitment and the positive momentum in our business.
Sustainability Progress
Over the past 25 years we have been on a mission to eliminate
the negative impact that producing flooring products has on the
Earth. A simple question from a customer 25 years ago sparked our
ambitious sustainability journey. We have since created a movement
that has transformed the industrial world—from manufacturing
practices to material choices and supply chain management.
We have increased our renewable energy use to 88 percent globally,
reduced greenhouse gas emissions by 96 percent and reduced the
carbon footprint of our products by 60 percent. Mission Zero® is a
core part of Interface and a promise we have made to our customers.
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
Chairman and Chief Executive Officer
Knoll, Inc.
Jay D. Gould
President and Chief
Executive Officer
Interface, Inc.
Executive Officers
Jay D. Gould
President and
Chief Executive Officer
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
Christopher G. Kennedy
Chairman
Joseph P. Kennedy Enterprises, Inc.
Nigel W. Stansfield
Vice President
(President – Europe, Africa, Asia and Australia)
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.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
Catherine M. Kilbane
Retired Senior VIce President
and General Counsel
The Sherwin-Williams Company
K. David Kohler
President and Chief Executive Officer
Kohler Co.
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
Chairman 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 11:00 am EDT on May 13, 2019 at:
Interface, Inc.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
Transfer Agent and Dividend
Disbursing Agent:
Computershare
462 S. 4th Street, Suite 1600
Louisville, KY 40202
1 800 254 5196 (U.S. & Canada)
1 781 575 2879 (Foreign)
Number of shareholders of record
at March 8, 2019: 645
Change of Address:
Please direct all changes of address
or inquiries as to how your account
is listed to:
Computershare
462 S. 4th Street, Suite 1600
Louisville, KY 40202
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.
1280 West Peachtree Street NW
Atlanta, Georgia 30309
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 30, 2018, 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®, the Mission Zero logo and nora® are registered trademarks of Interface, Inc. and its subsidiaries. Climate Take Back™ and Carbon
Neutral Floors™ are trademarks of Interface, Inc. and its subsidiaries. All rights are reserved.
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1280 West Peachtree Street NW
Atlanta, Georgia 30309
www.interface.com