2
0
1
9
A
n
n
u
a
l
R
e
p
o
r
t
The productivity investments at our Troup County manufacturing
operations have not only improved efficiency, they have also
helped lay the foundation for our new backings system. We
expect to introduce new manufacturing innovations later this year
that will significantly reduce the carbon footprint of our products
and help us deliver on our sustainability goals, while increasing
our addressable market with additional bio-based and non-PVC
products.
And we continue to receive acknowledgement for these
advancements around the world. Just recently, Fast Company
recognized Interface as one of the world’s most innovative
companies for meeting Mission Zero a year early and our work
with Carbon Neutral Floors. Additionally, we won awards in 2019
in India and France for our sustainability efforts. We maintained
our position as the #1 Green Leader in the 2019 Floor Focus Top
250 Design Leaders survey, and we continue to be recognized as
one of the top leaders among household consumer brands in the
annual GlobeScan Sustainability Leaders Report. This recognition
shows that our mission resonates with both customers and
sustainability influencers.
2020 and Beyond
I am excited to be steering this great organization again as CEO
and remain optimistic about where we are going as a business,
despite the shared challenges we all face with the global
COVID-19 pandemic and macroeconomic environment.
We remain focused on driving our strategic agenda and are
energized by key building blocks for growth:
• We have a robust pipeline of new product design and innovations
in both the hard and soft flooring categories.
• New cutting-edge tufting technology allows us to design
products reminiscent of hand-woven and flat-weave rugs that will
continue to set us apart from the competition.
• We have renewed focus on key strategic growth opportunities,
including segment penetration, particularly in healthcare and
education, and we have a diversified pricing strategy to address
needs at varying price points.
• We are accelerating cross-selling opportunities across our
product portfolio and across market segments, and we remain
focused on driving productivity in the selling system.
Our immediate priorities for 2020 focus on supporting the health
and welfare of our employees, customers, and partners while
maintaining the strength of our business operations and our ability
to serve our customers until the COVID-19 situation is behind us.
The long-term fundamentals of our business are solid, and our
balance sheet is strong. I’m confident that the entrepreneurial spirit
of our steadfast team will help us navigate the challenges ahead
and drive meaningful growth over the long-term.
As always, I thank you for your continued support, trust, and
investment in Interface.
Daniel T. Hendrix
Dear Fellow Shareowners,
In the past, these annual reflections have come easily to me,
but not this year. As I write this on March 30, 2020, the world is
changing dramatically, almost daily. By the time this gets to you, it
will have changed even more. It’s almost impossible to reflect on
2019 in the context of the stark differences of the here and now,
so I want to acknowledge a few things about our business that
have become even more clear to me as we manage through the
COVID-19 pandemic.
We’ve been students of adaptation and resilience for a long time
due to our sustainability journey. We’re leaning heavily into our
capacity for both as we continue to make and sell our flooring
for our customers who are providing essential services – the
number one pharmacy chain in the United States, hospitals and
other healthcare facilities, senior living, banks, the transportation
companies and the IT companies that help us perform our jobs
remotely, and so many more. What we do matters to the people
and companies who matter the most right now.
Adaptability is coming into play as we flex our global capacity for
carpet tile manufacturing. We envision rolling production across
areas of recovery around the globe so that we can continue to
serve our customers. Our supply chain is flexible enough to work
with us as business ebbs and flows. We are doubling down on cost
reduction measures which include a contraction of our employee
base, which is undoubtedly the most painful part. Along with all
of you reading this, we are hoping to minimize the impacts while
looking at both best- and worst-case scenarios.
That said, as I reflect on 2019, I am pleased to report that Interface
delivered a successful year and made substantial progress toward
our goal to become the world’s most valuable interior products
and services company. We didn’t understand how important the
hard work we’ve done over the past five years would be – it has
strengthened and diversified our business, positioning us to better
weather this storm. I am proud to be back at the helm, and I am
committed to partnering with our talented leadership team to help
prove to you that we are built to last.
In 2019, we delivered net sales of $1.3 billion and adjusted
earnings per share of $1.59, the best in Interface’s history.
Sales were up 14% for the year, demonstrating the value of the
2018 nora® acquisition. Organic sales were up 2%, with carpet
tile remaining a strong foundation for the company and resilient
flooring a key driver of growth. Our LVT products continue to
expand our market reach and meet customer needs in all of the
industries we serve including office, education, healthcare, multi-
family and tenant improvement segments. And while currency
headwinds produced a $4 million negative translation impact on
our operating income for the year, we saw positive growth in local
currencies in both EMEA and APAC last year.
We also continue to realize savings from our productivity initiatives,
reaching adjusted gross profit margin of 40.4% in the fourth
quarter of 2019. In addition, we reduced total debt by $30 million
in the fourth quarter and remain committed to our deleveraging
strategy.
Sustainability Progress
I want to thank our employees around the globe for helping us
meet our 2020 Mission Zero® goals a year early. Our employees
are invigorated and committed to our Climate Take Back™ mission
and our goal to become a carbon negative enterprise by 2040.
We expanded our Carbon Neutral Floors™ program to include
nora products in 2019. With all of the flooring products that we
sell now a part of this program, our customers can further reduce
the carbon footprint of their own projects, helping us advance our
Climate Take Back mission.
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 29, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 001-33994
Interface, Inc.
(Exact name of registrant as specified in its charter)
Georgia
(State of incorporation)
58-1451243
(I.R.S. Employer Identification No.)
1280 West Peachtree Street
Atlanta
Georgia
(Address of principal executive offices)
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
Trading Symbol(s)
TILE
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 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 28, 2019: $879,270,883
(57,356,222 shares valued at the closing sale price of $15.33 on June 28, 2019). See Item 12.
Number of shares outstanding of each of the registrant’s classes of Common Stock, as of February 18, 2020:
Class
Common Stock, $0.10 par value per share
Number of Shares
58,299,201
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS
1
PART I ...............................................................................................................................................................................
ITEM 1. BUSINESS ..................................................................................................................................................
1
ITEM 1A. RISK FACTORS ...................................................................................................................................... 11
ITEM 1B. UNRESOLVED STAFF COMMENTS ................................................................................................... 17
ITEM 2. PROPERTIES ............................................................................................................................................. 18
ITEM 3. LEGAL PROCEEDINGS ........................................................................................................................... 18
ITEM 4. MINE SAFETY DISCLOSURES ............................................................................................................... 18
PART II ............................................................................................................................................................................. 19
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ................................................................. 19
ITEM 6. SELECTED FINANCIAL DATA .............................................................................................................. 21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .................................................................................................................................................. 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......................... 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................................ 35
CONSOLIDATED STATEMENTS OF OPERATIONS .......................................................................................... 35
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ................................................................. 36
CONSOLIDATED BALANCE SHEETS ................................................................................................................. 37
CONSOLIDATED STATEMENTS OF CASH FLOWS .......................................................................................... 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................................................................... 39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................................................... 78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................................................... 80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .................................................................................................................................. 81
ITEM 9A. CONTROLS AND PROCEDURES ........................................................................................................ 81
ITEM 9B. OTHER INFORMATION ........................................................................................................................ 81
PART III ............................................................................................................................................................................ 81
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .................................. 81
ITEM 11. EXECUTIVE COMPENSATION ............................................................................................................ 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ............................................................................................................. 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ................................................................................................................................................... 82
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES .......................................................................... 82
PART IV ............................................................................................................................................................................ 82
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ................................................................ 82
ITEM 16. FORM 10-K SUMMARY ......................................................................................................................... 86
SIGNATURES .................................................................................................................................................................. 88
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®. 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.
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 penetration 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 47% and 53%, respectively, for 2019. Company-wide, our mix of corporate office versus non-corporate office modular
carpet and LVT sales was 61% and 39%, respectively, in 2019. 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 a market leader in the corporate office segment to support and
facilitate our penetration into these segments around the world. Rubber flooring also is an attractive product for non-corporate
applications and the acquisition of nora will continue to allow for growth of non-corporate office markets.
Our principal geographic markets are the Americas, Europe and Asia-Pacific, where the percentages of our total net sales
were approximately 57%, 29% and 14%, respectively, for fiscal year 2019.
Our Strengths
Our principal competitive strengths include:
Market Leader in Attractive Modular Carpet Segment. We are a global manufacturer and global leader in the commercial
carpet tile industry. Modular carpet has become more prevalent across all commercial interior 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. Interface is a well-recognized brand name in carpet tile 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 multi-tenant 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 markets. Our acquisition of nora, which is a global
leader in rubber 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 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 design
capabilities and a wide variety of color palate options which provide attractive and resilient flooring options to our customers.
The award-winning design firm David Oakey Designs has had a pivotal role in developing many of our 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 company may have on the
environment. 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 sustainability 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 strong contribution margins. We utilize an internal marketing
and predominantly commissioned sales force of more than 1,100 experienced personnel, stationed at over 70 locations in
over 30 countries, to market our products and services in person to our customers. Our incentive compensation and our sales
and marketing training programs are tailored to promote performance and facilitate leadership by our executives both in
strategic areas as well as the Company as a whole.
2
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, LVT products and 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. 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
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 multi-tenant 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 area rug 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 also a key component of our strategy in this area.
Continue to Drive Productivity and Invest Strategically. Our supply chain and other productivity initiatives in recent
years have improved our cost structure and yielded operating efficiencies. We plan to continue our productivity initiatives to
increase profitability by taking 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
business, apply toward 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 pay down debt, 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
3
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 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 Company’s legacy business 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 and other market segments have increased and currency fluctuations have impacted us; our second
and third quarter sales have sometimes been the highest.
4
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
5
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 the rubber flooring category under the established noraplan® and norament® brands. Nora
enhances the Company’s fast-growing resilient flooring portfolio. The acquisition is expected to continue advancing 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. 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 global 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
noraplan® and norament®.
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 several 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.
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
6
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 rubber 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 risk, 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. In some markets, we also purchase raw materials in one currency (such as the U.S. dollar or Euro)
and sell our products in a local currency which can affect our margins due to foreign currency transaction risk. 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, from time to time we engage in hedging programs intended to 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, pricing and sustainability. In the corporate office
market segment, modular carpet competes with various floorcoverings including broadloom carpet, polished concrete and
LVT. 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), sustainability 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 sustainability goals are a brand-enhancing, competitive strength as well as a strategic
initiative. Our customers are concerned about the environmental and broader ecological implications of their operations and
the products they use in them. Our leadership, knowledge and expertise in the area, especially in the “green building”
movement and related environmental certification programs, resonate deeply with many of our customers and prospects
around the globe. Our modular carpet products historically have had inherent installation and maintenance advantages that
7
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 90 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. This team also 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 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 toward 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
companies may have on the environment. In 2016, we launched the Climate Take Back initiative, in which we seek to lead
8
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 was 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 $177.8 million at February 9, 2020, compared with approximately
$190.4 million at February 10, 2019. 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 9, 2020 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.
Employees
At December 29, 2019, we employed a total of 4,110 employees worldwide. Of such total, 1,682 were clerical, staff,
sales, supervisory and management personnel and 2,428 were manufacturing personnel. We also utilized the services of 225
temporary personnel as of December 29, 2019.
Some of our employees in Australia, the United Kingdom and China 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.
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.
9
Information About Our Executive Officers
Our executive officers, their ages as of December 29, 2019, and their principal positions with us are set forth below.
Executive officers serve at the pleasure of the Board of Directors.
Name
Daniel T. Hendrix ..........................
David B. Foshee ............................
Bruce A. Hausmann .......................
Nigel Stansfield .............................
Age
65
49
50
52
Principal Position(s)
President and Chief Executive Officer
Vice President, General Counsel and Secretary
Vice President and Chief Financial Officer
Vice President (President - Europe, Africa, Australia, and Asia)
Mr. Hendrix joined us in 1983 after having worked previously for a national accounting firm. He was promoted to
Treasurer in 1984, Chief Financial Officer in 1985, Vice President-Finance in 1986, Senior Vice President in October 1995,
Executive Vice President in October 2000, and President and Chief Executive Officer in July 2001. He was elected to the
Board in October 1996 and has served on the Executive Committee of the Board since July 2001. In October 2011, Mr.
Hendrix was elected as Chairman of the Board of Directors. Mr. Hendrix retired from the positions of President and Chief
Executive Officer in March 2017 (while remaining Chairman of the Board), and subsequently was re-elected as President
and Chief Executive Officer in January 2020.
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. 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 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
10
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
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.
11
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 2019, 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 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 2019 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.
The uncertainty surrounding the implementation and effect of the U.K.’s exit from the European Union, and related
negative developments in the European Union could adversely affect our business, results of operations or financial
condition.
In 2016, voters in the U.K. approved an exit from the European Union via a referendum (commonly referred to as
“Brexit”). In 2017, the U.K. notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon
Treaty, and the U.K. exited the European Union on January 31, 2020. A complex and uncertain process of negotiation is
taking place to determine trade agreements as well as other aspects of the U.K.’s relationship with the European Union. The
uncertainty leading up to and following Brexit 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 as to when any 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 the U.K. exit leads to economic difficulties in Europe.
Our manufacturing and supply chain abilities may be adversely impacted by an extended shutdown of our operations in
China due to the recent coronavirus outbreak.
In December 2019, a novel strain of coronavirus began to impact the population of China, and it began to spread globally. In
late January 2020, in an effort to contain the spread of the virus, maintain the wellbeing of our employees and in accordance
with governmental requirements, we temporarily closed our manufacturing facility in China through February 9, 2020. While
12
the closure and limitations on movement in the region are expected to be temporary, the duration of the production and supply
chain disruption, and related financial impact, cannot be estimated at this time. Should the production facility closure reoccur,
or such disruption continue for an extended period of time, the impact on our supply chain in China and globally could have
a material adverse effect on our results of operations and cash flows.
The SEC’s investigation into our earnings per share (“EPS”) calculations and rounding practices could result in potential
sanctions or penalties, distraction to our management and result in litigation from third parties, each of which could
adversely affect or cause variability in our results of operations and financial condition.
In November 2017, the SEC began an investigation into our EPS calculations and rounding practices. The investigation
is ongoing and there can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries
or pursue further action that could result in significant costs and expenses including potential sanctions or penalties as well
as distraction to management. In addition, the Company may be subject to litigation from third parties related to the matters
under review by the SEC. Accordingly, the ongoing SEC investigation and/or any related litigation may give rise to risks and
uncertainties that could adversely affect or cause variability in our results of operations and financial condition. Such risks
and uncertainties include, but are not limited to, uncertainty as to the scope, timing and ultimate findings of the matters under
review by the SEC (collectively, the “investigation”); adverse effects of the investigation, including the potential financial
impact on the Company in the event of an adverse outcome and on the market price of the Company’s common stock; the
costs and expenses of the investigation, including legal fees and possible monetary penalties in the event of an adverse
outcome; the risk of potential litigation or regulatory action arising from these matters; the timing of the review by the
Company regarding these matters; the potential identification of deficiencies in internal control over financial reporting or
disclosure controls and procedures and the impact of the same; and potential reputational damage that the Company may
suffer as a result of the matters under investigation.
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, pandemics, fire, earthquake, energy shortages, flooding or other natural disasters. The
primary manufacturing facility of our sole supplier of LVT is located in South Korea, which recently reported an outbreak of
the novel coronavirus described above. 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 Company’s legacy business 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;
13
•
•
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.
If we are not able to successfully combine the businesses 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 integration process that takes longer than originally anticipated.
We will be required to devote significant management attention and resources to integrating the Company’s legacy
operations 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.
14
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
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, pandemics 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, pandemics
or other public health crises (such as the recent outbreak of the novel coronavirus described above), or other disruptions to
our facilities, supply chain or our customers’ facilities. 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 affect 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;
•
receive, process and ship orders;
15
• manage billing, collections and payables;
• manage financial reporting; and
• manage payroll and human resources information.
Our IT systems may be disrupted or fail for a number of reasons, including:
•
•
•
•
natural disasters, like fires;
power loss;
software “bugs”, hardware defects or human error; or
hacking, computer viruses, malware, ransomware or other cyber attacks.
Any of these events which deny us use of vital IT systems may seriously disrupt our normal business operations. These
disruptions may lead to production or shipping stoppages, which may in turn lead to material revenue loss and reputational
harm. There is no guarantee that our backup systems or disaster recovery procedures will be adequate to mitigate losses due
to IT system disruptions in a timely fashion, and we may incur significant expense in correcting IT system emergencies.
To the extent our IT systems store sensitive data, including about our employees 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.
16
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
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
72,200
669,145
351,205
370,000
338,086
240,000
1,250,960
250,000
109,129
831,113
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
From time to time, we are a party to legal proceedings, whether arising in the ordinary course of business or otherwise.
The disclosure set forth in Note 17 to the consolidated financial statements included in Item 8 of this Annual Report on Form
10-K is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
18
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, 2020, we
had 635 holders of record of our Common Stock. We estimate that there are in excess of 10,000 beneficial holders of our
Common Stock.
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 29, 2019, the Company’s total returns
to shareholders (stock price plus dividends, divided by beginning stock price) with that of (i) all companies listed on the
Nasdaq Composite Index and (ii) our self-determined peer group, assuming an initial investment of $100 in each on December
28, 2014 (the last day of the fiscal year 2014). In determining its peer group companies, the Company considered various
factors, including the potential peer’s industry, business model, size and complexity. The Company chose a 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.
12/28/14
1/3/16
1/1/17
12/31/17
12/30/18
12/29/19
Interface, Inc.
NASDAQ Composite Index
Self-Determined Peer Group (20 Stocks)
$100
$100
$100
$115
$104
$91
$112
$112
$110
$152
$144
$115
$86
$137
$94
$100
$187
$123
19
Notes to Performance Graph
(1)
(2)
(3)
(4)
(5)
(6)
The lines represent annual index levels derived from compound daily returns that include all dividends.
The indices are re-weighted daily, using the market capitalization on the previous trading day.
If the annual interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
The index level was set to $100 as of December 28, 2014 (the last day of fiscal year 2014).
The Company’s fiscal year ends on the Sunday nearest December 31.
The following companies are included in the Self-Determined Peer Group depicted above: Acuity Brands, Inc.;
Albany International Corp.; Apogee Enterprises, Inc.; Armstrong 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 29, 2019:
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs
Average
Price Paid
Per Share
Total Number
of Shares
Purchased
— $
502
902
1,404 $
—
16.77
14.47
15.29
— $
—
—
— $
—
—
—
—
Period(1)
September 30 - October 31, 2019 ...........
November 1 – 30, 2019 (2) ......................
December 1 – 29, 2019 (2) .......................
Total .......................................................
(1) The monthly periods identified above correspond to the Company’s fiscal fourth quarter of 2019, which commenced
September 30, 2019 and ended December 29, 2019.
(2) Includes shares acquired by the Company from employees to satisfy income tax withholding obligations in connection
with the vesting of previous equity awards.
20
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.
Net sales ............................................................... $ 1,343,029 $ 1,179,573 $
755,216
Cost of sales .........................................................
Operating income(1) ..............................................
76,379
Net income(2) ........................................................
50,253
Income from continuing operations per common
817,575
130,903
79,200
2019
2018
2017
996,443 $
610,422
111,571
53,246
2015
2016
958,617 $ 1,001,863
618,974
589,973
113,593
87,153
72,418
54,162
share attributable to Interface, Inc.
Basic ................................................................. $
Diluted .............................................................. $
Average Shares Outstanding
1.34 $
1.34 $
0.84 $
0.84 $
0.86 $
0.86 $
0.83 $
0.83 $
1.10
1.10
59,544
58,943
Basic .................................................................
59,566
58,948
Diluted ..............................................................
0.26 $
0.26 $
Cash dividends per common share ....................... $
54,857
74,647
Property additions ................................................
53,580 (3)
53,623 (3)
Depreciation and amortization .............................
Working capital .................................................... $ 284,860 $
335,292 $
Total assets ........................................................... 1,423,049 1,284,644
618,581
Total long-term debt .............................................
354,663
Shareholders’ equity .............................................
Current ratio(4) ......................................................
2.5
596,200
368,202
2.1
61,996
62,040
0.25 $
30,474
37,508
254,221 $
800,600
229,928
330,091
2.4
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
(1)
(2)
(3)
(4)
The following charges and items are included in our operating income. In 2019 we recorded restructuring and other
charges of $12.9 million and purchase accounting amortization of $5.9 million. In 2018, we recorded restructuring
and asset impairment charges of $20.5 million, purchase accounting amortization of $32.1 million 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.
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 16 “Income Taxes” for further discussion of these charges. Also included
in 2018 net income is $4.2 million in other expense for nora transaction costs.
2019 includes stock compensation amortization of $8.7 million and excludes purchase accounting amortization of
$5.9 million. 2018 includes stock compensation amortization of $14.5 million and excludes purchase accounting
amortization of $32.1 million.
Current ratio is the ratio of current assets to current liabilities.
21
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. In the Americas, our mix of corporate office
versus non-corporate office modular carpet and LVT sales was 47% and 53%, respectively, for 2019. Company-wide, our
mix of corporate office versus non-corporate office modular carpet and LVT sales was 61% and 39%, respectively, in 2019.
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 fiscal 2019, the Company continued to
expand into these market segments as the sales of rubber flooring products were primarily in the healthcare, education and
transportation market segments.
During 2019, we had net sales of $1,343.0 million, up 13.9% compared to $1,179.6 million in 2018. Operating income
for 2019 was $130.9 million compared to $76.4 million in 2018. Net income for 2019 was $79.2 million, or $1.34 per share,
compared to $50.3 million, or $0.84 per share, in 2018. The 2019 period included the results of the acquired nora business
for the full fiscal year, $5.9 million of purchase accounting amortization in connection with the nora acquisition, and $12.9
million of restructuring and other charges. The 2018 period included the results on the nora acquisition from August 7, 2018
to the end of the 2018 fiscal year.
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 included 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 16 “Income Taxes”
for further discussion of these tax benefits.
22
Restructuring Plans
On December 23, 2019, the Company committed to a new restructuring plan that continues to focus on 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 a reduction of approximately 105 employees and early termination of two office leases. As a
result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0
million. The charge is comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million). The restructuring
plan is expected to result in future cash expenditures of approximately $9.0 million for payment of the employee severance
and lease exit costs, as described above. The Company expects to complete the restructuring plan in fiscal year 2020, and
expects the plan to yield annualized savings of approximately $6.0 million. A portion of the annualized savings is expected
to be realized on the income statement in fiscal year 2020, with the remaining portion of the annualized savings expected to
be realized in fiscal year 2021.
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 involved (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 included information technology assets and obsolete manufacturing equipment.
As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter of
2018 of approximately $20.5 million. The charge was comprised of severance expenses (approximately $10.8 million),
impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million). The charge was expected to
result in future cash expenditures of $12 million, primarily for severance payments (approximately $10.8 million). The
restructuring plan was substantially complete at the end of fiscal 2019. The Company redeployed the savings toward the
funding of sales and strategic growth initiatives in 2019, yielding negligible net savings on the Company’s income statement.
In connection with the 2018 restructuring plan, the Company recorded $0.7 million of additional lease exit costs in the third
quarter of 2019, and in the fourth quarter of 2019 the Company adjusted its expected severance expenses and recognized a
decrease in restructuring costs of $1.7 million.
In the first quarter of 2017, the Company recorded a restructuring charge of $7.3 million, which was related to a previous
restructuring plan announced in 2016, primarily related to exit costs associated with the closure of various FLOR retail stores.
The 2017 charge was comprised of lease exit costs of $3.4 million, asset impairment charges of $3.3 million and severance
charges of $0.6 million. The 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.
Net sales denominated in currencies other than the U.S. dollar were approximately 49% in 2019, 49% in 2018, and 46%
in 2017. Because we have such substantial international operations, we are impacted, from time to time, by international
developments that affect foreign currency transactions. In 2019, the weakening of the Euro, British pound, Australian dollar,
Canadian dollar and Chinese renminbi against the U.S. dollar had a negative impact on our net sales and operating income.
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 positive impact on our
net sales and operating income.
The following table presents the amounts (in U.S. dollars) by which the exchange rates for translating 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:
Impact of changes in foreign currency on net sales ............................ $
(26.2 ) $
Impact of changes in foreign currency on operating income ..............
(3.9 )
8.4 $
1.2
5.5
1.0
2019
2018
(in millions)
2017
23
The following table presents, as a percentage of net sales, certain items included in our Consolidated Statements of
Operations during the past three years:
2019
Fiscal Year
2018
2017
Net sales ............................................................................................
Cost of sales ......................................................................................
Gross profit on sales ..........................................................................
Selling, general and administrative expenses ....................................
Restructuring, asset impairment and other charges ...........................
Operating income ..............................................................................
Interest/Other expense .......................................................................
Income before income tax expense ...................................................
Income tax expense ...........................................................................
Net income ........................................................................................
100.0%
60.9
39.1
28.4
1.0
9.7
2.2
7.5
1.7
5.8
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
Net Sales
Below we provide information regarding our net sales and analyze those results for each of the last three fiscal years.
Fiscal years 2019, 2018, and 2017 were 52-week periods.
Fiscal Year
Percentage Change
2019
2018
(in thousands)
2017
2019
compared
with 2018
2018
compared
with 2017
Net Sales ..................................... $ 1,343,029 $ 1,179,573 $
996,443
13.9%
18.4%
Net sales for 2019 compared with 2018
For 2019, our net sales increased $163.5 million (13.9%) as compared to 2018. As discussed above, the 2019 period
included revenue from the nora acquisition for the full fiscal year. The 2018 period included nora revenue only from the
acquisition date on August 7, 2018 to the end of the 2018 fiscal year of $112.6 million during that stub period. The increase
in net sales was primarily volume related and not materially impacted by changing prices. Fluctuations in currency exchange
rates had a negative impact on our year-over-year sales comparison of approximately $26.2 million, meaning that if currency
levels had remained constant year over year our 2019 sales would have been higher by this amount. On a geographic basis,
including the impact of the nora acquisition, we experienced sales growth across all our regions. Sales in the Americas were
up 11.0%, sales in Europe were up 23.0% as reported in U.S. dollars, and sales in Asia-Pacific were up 8.5%.
The sales increase of 11.0% in the Americas in 2019 was due primarily to the impact of the nora acquisition and growth
from our luxury vinyl tile (“LVT”) products. The legacy Americas carpet and LVT business grew approximately 3.6% for
the year. This increase in the legacy business was due to increased sales in the corporate office market segment (up 8.6%) as
well as increases in the healthcare (up 18.2%) and education (up 7.6%) market segments. These legacy sales increases were
partially offset by a decline in the retail market segment (down 24.6%).
In Europe, sales in the region were up in both U.S. dollars (23.0%) and local currency (29.1%). This increase was due
primarily to the impact of the nora acquisition and growth from our LVT products offset by weakening of the Euro and British
pound against the U.S. dollar. The legacy European carpet and LVT business declined 2.7% on a U.S. dollar basis, but grew
2.6% in local currency. The sales growth in local currency in the legacy European business was most pronounced in the
corporate office segment (up 6.9%). The decline in legacy sales on a U.S. dollars basis was primarily due to the weakening
of the Euro and British pound against the U.S. dollar.
In Asia-Pacific, sales increased 8.5% 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. The legacy
Asia-Pacific carpet and LVT business declined 3.9% on a U.S. dollar basis, but increased 0.1% in local currency. The sales
decline in the legacy Asia-Pacific business was primarily in the corporate (down 5.7%) and government (down 17.9%) market
segments, partially offset by increases in the retail market segment (up 12.0%).
24
Net sales for 2018 compared with 2017
For 2018, our net sales increased $183.1 million (18.4%) 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. 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 of 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. 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
had 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.
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. The legacy Interface European carpet and LVT business grew 9% on a U.S. dollar basis, and
5% in local currency. 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.
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. 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.
Cost and Expenses
The following table presents our overall cost of sales and selling, general and administrative (“SG&A”) expenses during
the past three years:
Cost and Expenses
Fiscal Year
2019
2018
(in thousands)
2017
Percentage Change
2019
2018
compared
compared
with 2018
with 2017
Cost of Sales ......................................................... $ 817,575 $
381,604
Selling, General and Administrative Expenses ....
755,216 $ 610,422
267,151
327,449
8.3 %
16.5 %
23.7%
22.6%
For 2019, our costs of sales increased $62.4 million (8.3%) compared to 2018. Included in 2019 are costs of sales for the
acquired nora business for the full year, which includes purchase accounting amortization of $5.9 million related to acquired
intangible assets. Fluctuations in currency exchange rates had a 1.8% positive impact on the year-over-year comparison. In
absolute dollars, the increase in costs of sales was a result of higher sales for 2019 as compared to 2018, as well as the full
year impact of the acquired nora business. As a percentage of sales, our costs of sales decreased to 60.9% in 2019 versus
64.0% in 2018. This decrease was primarily due to productivity initiatives and the nora non-recurring inventory step-up
amortization which occurred in 2018, but did not recur in 2019.
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 nora business, 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 Interface Services business,
which typically generates a lower gross margin compared to the rest of our operations.
25
For 2019, our SG&A expenses increased $54.2 million (16.5%) versus 2018. Included in the 2019 period were a full
year of SG&A expenses for the acquired nora business versus only a stub period of approximately five months in 2018.
Fluctuations in currency rates had a 1.5% favorable impact on SG&A expenses. The increase in SG&A expenses during the
year was primarily due to (1) higher selling expenses for the full year impact in 2019 of the acquired nora business, (2) higher
year-over-year legal expenses of $3.5 million related to the SEC matter discussed in Note 17 – “Commitments and
Contingencies”, and (3) higher selling expenses related to bringing the Company’s global sales organization together for a
meeting to accelerate the nora integration, advance our selling system transformation, and engage the sales force in the
Company’s sustainability mission. These increases were partially offset by lower stock compensation expense of $5.8 million
compared to prior year. As a percentage of sales, SG&A expenses increased to 28.4% in 2019 versus 27.8% in 2018.
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.
Interest Expense
For 2019, our interest expense increased $10.2 million to $25.6 million, versus $15.4 million in 2018. This increase was
a result of higher outstanding borrowings incurred in August 2018 to complete the nora acquisition offset slightly by lower
average interest rates on our borrowings (our average borrowing rate for 2019 was 3.27% as compared to 3.50% for 2018).
Our interest rate swaps, entered into in 2017 and 2019, had approximately $0.2 million impact on interest expense for 2019.
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.
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 16 – “Income Taxes”
to the consolidated financial statements in Item 8 for further information on the financial statement impact of the Tax Act.
Our effective tax rate in 2019 was 22.2%, compared with an effective tax rate of 8.6% in 2018. The increase in our
effective tax rate in 2019 compared to 2018 was primarily due to the nonrecurring $6.7 million tax benefit realized in 2018
related to the impacts of the Tax Act as discussed above. In addition, there was a net increase in our effective tax rate in 2019
due to less U.S. federal and foreign tax credits which was partially offset by a reduction in non-deductible expenses, favorable
change in unrecognized tax benefits and a higher portion of income earned in foreign jurisdictions not subject to U.S. state
income taxes.
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.
26
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 – “Long-Term Debt” and Note 19 – “Acquisition of Nora” in Item 8 for additional information.
At December 29, 2019, we had $81.3 million in cash. Approximately $2.9 million of this cash was located in the U.S.,
and the remaining $78.4 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, 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 $78.4 million
of cash in foreign jurisdictions, approximately $3.6 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 29, 2019, we had $602.5 million of borrowings and $2.2 million in letters of credit outstanding under
our amended and restated Syndicated Credit Facility. Of those borrowings outstanding, $581.6 million were term loan
borrowings and $20.9 million were revolving loan borrowings. As of December 29, 2019, we had additional borrowing
capacity of $276.9 million under our amended and restated Syndicated Credit Facility and $9.5 million of borrowings under
our other credit facilities in place at other non-U.S. subsidiaries.
We have approximately $162.8 million in contractual cash obligations due by the end of fiscal year 2020, 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 2020 to be between $24 million and $25 million.
We estimate aggregate capital expenditures in 2020 to be between $50 million and $60 million, although we are not
committed to these amounts.
It is important for you to consider that we have a significant amount of indebtedness. Our 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 interest rate swap transactions
to fix the variable interest rate with respect to $250 million of the term loan borrowings under the Syndicated Credit Facility.
For information regarding the current variable interest rates of these borrowings, the potential impact on our interest expense
from hypothetical increases in short term interest rates, and the interest rate swap transaction, please see the discussion in
Item 7A of this Report.
Syndicated Credit Facility
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 29, 2019, 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.
27
On December 18, 2019, the Company amended its Facility, with certain of its wholly-owned foreign subsidiaries as co-
borrowers. The primary purpose of this amendment was to allow the Company to make various intercompany transactions.
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. As of December 29, 2019 outstanding debt issuance costs are $6.3 million.
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;
•
• make acquisitions of or investments in businesses (in excess of certain specified amounts);
•
•
•
•
•
•
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);
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 4.25:1.00, subject to a step-down as described in the
Facility Agreement.
• Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
Events of Default
If we breach or fail to perform any of the affirmative or negative covenants under the Facility, or if other specified events
occur (such as a bankruptcy or similar event or a change of control of Interface, Inc. or certain subsidiaries, or if we breach
or fail to perform any covenant or agreement contained in any instrument relating to any of our other indebtedness exceeding
$20 million), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event
of default exists and is continuing, the lenders’ Administrative Agent may, and upon the written request of a specified
percentage of the lender group shall:
•
•
•
declare all commitments of the lenders under the facility terminated;
declare all amounts outstanding or accrued thereunder immediately due and payable; and
exercise other rights and remedies available to them under the agreement and applicable law.
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
28
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 29, 2019, we had outstanding $581.6 million of term loan borrowing and $20.9 million of revolving
loan borrowings under the Facility, and had $2.2 million in letters of credit outstanding under the Facility. As of December 29,
2019, the weighted average interest rate on borrowings outstanding under the Facility was 3.27%.
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 and first quarter of 2019, we entered into interest rate swap transactions that fixed the variable
interest rate with respect to $100 million and $150 million, respectively, of the term loan borrowings under the Syndicated
Credit Facility. For additional information, please see Item 7A and Note 9 entitled “Long-Term Debt” in Item 8 of this Report.
Analysis of Cash Flows
We ended 2019 with $81.3 million in cash, an increase of $0.3 million during the year. The most significant uses of cash
in 2019 were (1) repayments on our Syndicated Credit Facility of $111.7 million offset by borrowings of $90 million, (2)
capital expenditures of $74.6 million, (3) $25.2 million to repurchase 1.6 million shares of the Company’s outstanding
common stock, and (3) dividend payments of $15.4 million These uses were offset by cash flow from operations of $141.8
million, primarily generated from (1) net income of $79.2 million, (2) $19.4 million for increases in accounts payable and
accrued expenses, and (3) $2.6 million due to a decrease in inventories. These sources of cash were reduced by working
capital uses of (1) $9.7 million due to increases in prepaid expenses and (2) $0.9 million due to increases in accounts
receivable.
We ended 2018 with $81.0 million in cash, a decrease of $6.0 million during the year. During 2018, we borrowed $462.8
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 used 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 $18.8 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 for increases 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
$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.
We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash
requirements for the foreseeable future.
29
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 29, 2019.
Total
Payments
Due
Less than
1 year
Payments Due by Period
1-3 years 3-5 years
(in thousands)
More than
5 years
602,516 $
31,022 $
62,044 $
509,450 $
—
152,828
87,142
70,071
139,413
1,051,970 $
23,202
23,876
65,514
19,146
162,760 $
32,425
43,034
4,518
25,667
167,688 $
21,841
20,232
37
26,420
577,980 $
75,360
—
2
68,180
143,542
Long-Term Debt Obligations (1) ................. $
Operating and Finance Lease Obligations
(2) ...............................................................
Expected Interest Payments (3) ....................
Unconditional Purchase Obligations (4) ......
Pension Cash Obligations (5) .......................
Total Contractual Cash Obligations (6) ....... $
______________________
(1) Total long-term debt in the consolidated balance sheet includes a reduction for unamortized debt issuance costs of
$6.3 million which are excluded from the long-term debt obligations in the table above.
(2) Operating and finance lease obligations represent undiscounted future lease payments.
(3) Expected interest payments to be made in future periods reflect anticipated interest payments related to the $581.6
million of Term Loan borrowings outstanding and the $20.9 million of revolving loan borrowings outstanding
under our Syndicated Credit Facility as of December 29, 2019. 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.
(4) Unconditional purchase obligations do not include unconditional purchase obligations that are included as
liabilities in our Consolidated Balance Sheet. Our capital expenditure commitments of approximately $63.3 million
are included in the table above.
(5) 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.
(6) The above table does not reflect unrecognized tax benefits of $25.5 million, the timing of which payments are
uncertain. See Note 16 entitled “Income Taxes” in Item 8 of this Report for further information.
Critical Accounting Policies
The policies discussed below are considered by management to be critical to an understanding of our consolidated
financial statements because their application places the most significant demands on management’s judgment, with financial
reporting results relying on estimations about the effects of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that
future events may not develop as forecasted, and the best estimates routinely require adjustment.
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. The management estimate of fair value considers undiscounted cash flows, market conditions and
30
trends, and other industry specific metrics. 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 29, 2019, and December 30, 2018, we had state net operating loss carryforwards of $87.6 million and $96.1
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 2019 amounts are expected to be fully recoverable within the applicable statutory
expiration periods. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance
could be materially impacted.
Goodwill. 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 2019, 2018 and 2017, 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 29, 2019, no
impairment of goodwill was indicated. As of December 29, 2019, if our estimates of the fair value of our reporting units were
10% lower, we believe no additional goodwill impairment would have existed. However, the Company has experienced
significant competitive pressure in fiscal 2019 along with volatility in the company stock price. As such, it is reasonably
possible that such circumstances along with a recent acquisition may together warrant the need to write down the value of
goodwill in the near term.
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 29, 2019
and December 30, 2018, was $28.3 million and $28.1 million, respectively. To the extent that actual obsolescence of our
inventory differs from our estimate by 10%, our 2019 net income would be higher or lower by approximately $2.2 million,
on an after-tax basis.
31
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 ............................................................................ $
(46.8)
60.4
Domestic Salary Continuation Plan
Increase (Decrease) in
Projected Benefit
Obligation
(in millions)
1% increase in actuarial assumption for discount rate ............................................................................. $
1% decrease in actuarial assumption for discount rate ............................................................................ $
(3.2)
3.9
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 29, 2019 and December 30, 2018, was $3.8 million and $3.5 million,
respectively. To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2019
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 29, 2019 and
December 30, 2018, was $3.9 million and $3.5 million, respectively. Actual warranty expense incurred could vary
significantly from amounts that we estimate. To the extent the actual warranty expense differs from our estimates by 10%,
our 2019 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 acquired $103.3 million of 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
32
of the business, and the appropriate risk-adjusted discount rate used to discount the projected cash flows. At December 29,
2019 intangible assets, net of amortization, were approximately $89.1 million. The final residual value assigned to goodwill
related to the nora acquisition was $201.9 million, at the acquisition date exchange rate. We completed our final valuation of
the assets acquired and liabilities assumed at the acquisition date in the second 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.
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 and 2019, the
Company entered into interest rate swap transactions with regard to a portion of its term loan debt. The Company’s interest
rate swaps are designated and qualify as cash flow hedges of forecasted interest payments. The Company reports the effective
portion of the fair value gain or loss on the swaps as a component of other comprehensive income (or other comprehensive
loss). The aggregate notional amount of the swaps as of December 29, 2019 was $250 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 29, 2019, we recognized an $11.7 million decrease in our foreign currency translation adjustment account
compared with December 30, 2018, because of the weakening of the Euro, British pound and Australian dollar against the
U.S. dollar in 2019.
33
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 29,
2019. The values that result from these computations are then compared with the market values of the financial instruments.
The differences are the hypothetical gains or losses associated with each type of risk.
Interest Rate Risk
Our weighted average interest rate for our outstanding borrowings in 2019 and 2018 was 3.27% and 3.50%, 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 29, 2019.
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 29, 2019.
2020
2021
2022
2023
Thereafter Total
(in thousands)
Fair
Value
Rate-Sensitive Liabilities
Long-term Debt:
Variable Rate ....................... $ 31,022 $ 31,022 $
31,022 $ 509,450 $
— $ 602,516 $ 602,516
An increase in our effective interest rate of 1% would increase annual interest expense by approximately $3.3 million.
We will continue to review our exposure to interest rate fluctuations and evaluate whether we should continue to manage
such exposures through our current and any future interest rate swap transactions.
As of December 29, 2019, a 100 bps decrease or increase in interest rates would result in a decrease or increase in the
fair value of our interest rate swaps of approximately $7.3 million.
Foreign Currency Exchange Rate Risk
As of December 29, 2019, a 10% decrease or increase in the levels of foreign currency exchange rates against the U.S.
dollar, with all other variables held constant, would result in a decrease in the fair value of our short-term financial instruments
(primarily cash, accounts receivable and accounts payable) of $12.4 million or an increase in the fair value of our financial
instruments of $15.1 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign
investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency
exchange risk.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2019
FISCAL YEAR
2018
(in thousands, except per share data)
2017
Net sales ............................................................................................. $
Gross profit on sales ...........................................................................
1,343,029 $
817,575
525,454
1,179,573 $
755,216
424,357
Selling, general and administrative expenses .....................................
Restructuring, asset impairment and other charges ............................
381,604
12,947
327,449
20,529
996,443
610,422
386,021
267,151
7,299
Operating income ...............................................................................
130,903
76,379
111,571
Interest expense ..................................................................................
Other expense .....................................................................................
25,656
3,431
15,436
5,952
7,128
3,904
Income before income tax expense ....................................................
Income tax expense ............................................................................
101,816
22,616
54,991
4,738
100,539
47,293
Net income ......................................................................................... $
79,200 $
50,253 $
53,246
Net income per share – basic .............................................................. $
1.34 $
0.84 $
Net income per share – diluted ........................................................... $
1.34 $
0.84 $
0.86
0.86
Basic weighted average common shares outstanding .........................
Diluted weighted average common shares outstanding ......................
58,943
58,948
59,544
59,566
61,996
62,040
See accompanying notes to consolidated financial statements.
35
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income ........................................................................................ $
Other comprehensive income (loss), after tax
Foreign currency translation adjustment ........................................
Cash flow hedge (losses) gains ......................................................
Pension liability adjustment ...........................................................
2019
FISCAL YEAR
2018
(in thousands)
2017
79,200 $
50,253 $
53,246
(11,652)
(5,489)
(13,090)
(22,544)
422
12,944
31,579
904
(1,692 )
Comprehensive income ..................................................................... $
48,969 $
41,075 $
84,037
See accompanying notes to consolidated financial statements.
36
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
END OF FISCAL YEAR
2018
2019
(in thousands)
ASSETS
Current assets
Cash and cash equivalents ........................................................................................... $
Accounts receivable, net ..............................................................................................
Inventories, net ............................................................................................................
Prepaid expenses and other current assets ...................................................................
Total current assets ..........................................................................................................
Property, plant and equipment, net ..................................................................................
Operating lease right-of-use assets ..................................................................................
Deferred tax asset ............................................................................................................
Goodwill and intangibles, net ..........................................................................................
Other assets .....................................................................................................................
81,301 $
177,482
253,584
35,768
548,135
324,585
107,044
19,683
346,474
77,128
80,989
179,004
258,657
40,229
558,879
292,888
—
15,601
343,542
73,734
Total assets ...................................................................................................................... $
1,423,049 $
1,284,644
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable ......................................................................................................... $
Accrued expenses ........................................................................................................
Current portion of operating lease liabilities ................................................................
Current portion of long-term debt ................................................................................
Total current liabilities ....................................................................................................
Long-term debt ................................................................................................................
Operating lease liabilities ................................................................................................
Deferred income taxes .....................................................................................................
Other long-term liabilities ...............................................................................................
75,687 $
140,652
15,914
31,022
263,275
565,178
91,829
35,550
99,015
66,301
125,971
—
31,315
223,587
587,266
—
26,488
92,640
Total liabilities.................................................................................................................
1,054,847
929,981
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 .........................................
—
5,842
250,306
286,056
(113,139)
(4,163)
(56,700)
—
5,951
270,269
222,214
(101,487 )
1,326
(43,610 )
Total shareholders’ equity ...............................................................................................
368,202
354,663
Total liabilities and shareholders’ equity......................................................................... $
1,423,049 $
1,284,644
See accompanying notes to consolidated financial statements.
37
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 .........................................
2019
FISCAL YEAR
2018
(in thousands)
50,253 $
79,200 $
44,932
8,691
—
—
1,206
(9,497)
5,903
—
(930)
2,573
(9,691)
19,381
141,768
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 .................................................
(74,647)
—
425
(74,222)
(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...................................
Other ...........................................................................................
Cash (used in) provided by financing activities ..........................
90,000
(87,664)
—
(24,028)
(25,154)
(15,358)
(3,278)
—
60
(1,255)
(66,677)
17,000
(64,504)
462,847
(14,162)
(14,485)
(15,471)
(1,187)
(8,806)
294
—
361,526
2017
53,246
30,261
7,247
—
15,174
219
8,154
—
—
(10,313 )
(13,629 )
1,019
11,975
103,353
(30,474 )
—
(614 )
(31,088 )
25,000
(57,014 )
—
(15,000 )
(91,576 )
(15,487 )
(1,479 )
(1,427 )
—
—
(156,983 )
Net cash provided by (used in) operating, investing and
financing activities ...................................................................
Effect of exchange rate changes on cash .....................................
869
(557)
(2,392)
(3,656)
(84,718 )
6,083
CASH AND CASH EQUIVALENTS:
Net increase (decrease) ...............................................................
Balance, beginning of year ..........................................................
312
80,989
(6,048)
87,037
(78,635 )
165,672
Balance, end of year .................................................................... $
81,301 $
80,989 $
87,037
See accompanying notes to consolidated financial statements.
38
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 of 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
Contracts with customers 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 the customer’s control. During 2019 and 2018, approximately 98% and 97% of the Company’s total revenue, respectively,
was 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 for 2019 and 2018 of 2% and
3%, respectively, was generated from the installation of carpet and other flooring-related material.
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.
39
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.
The Company does not record taxes collected from customers and remitted to governmental authorities on a gross basis.
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 0.5% 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. Prior to the adoption of the new accounting standard, the Company historically had not separated these
obligations and had 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 2019.
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 and are 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. There
are no other material costs the Company incurs as part of obtaining the sales contract.
Shipping and Handling
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 selling, general and administrative
expenses and cost of sales in the consolidated statements of operations. Research and development expense was $17.8 million,
$16.4 million, and $14.0 million for the years 2019, 2018 and 2017, 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. Significant concentrations of credit risk may arise from the Company’s cash maintained
at various banks, as from time to time cash balances may exceed the FDIC limits. The Company did not hold any significant
amounts of cash equivalents and short-term investments at December 29, 2019 and December 30, 2018.
Cash payments for interest amounted to approximately $22.7 million, $13.8 million, and $6.3 million for the years 2019,
2018, and 2017, respectively. 2019 includes cash payments for interest related to the Company’s finance lease liabilities.
Income tax payments amounted to approximately $34.8 million, $29.5 million and $19.1 million for the years 2019, 2018
and 2017, respectively. During the years 2019, 2018 and 2017, the Company received income tax refunds of $1.9 million,
$0.8 million and $0.1 million, respectively.
40
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.
Leases
We record a right-of-use asset and lease liability for operating and finance leases once a contract that contains a lease is
executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value
of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s
incremental borrowing rate, which is based on the estimated rate for a fully collateralized borrowing that fully amortizes over
a similar lease term at the commencement date and for the applicable geographical region.
We made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation
of the right-of-use asset and lease liability recorded on the consolidated condensed balance sheet. These leases primarily
represent month-to-month operating leases for vehicles and office equipment where we were reasonably certain that we would
not elect an option to extend the lease. 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.
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 $2.1
million, $0.7 million, and $0.6 million for the fiscal years 2019, 2018 and 2017, respectively. Depreciation expense amounted
to approximately $41.5 million, $37.6 million, and $29.5 million for the years 2019, 2018, and 2017 respectively.
Depreciation expense recorded to costs of sales in the consolidated statements of operations was $26.3 million, $21.8 million,
and $14.8 million for the years 2019, 2018, and 2017, respectively. Depreciation expense recorded in SG&A expenses in the
consolidated statements of operations was $15.2 million, $15.8 million, and $14.7 million, for the years 2019, 2018, and
2017, 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
41
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
In connection with the nora acquisition on August 7, 2018, the Company recognized goodwill of $201.9 million and
acquired intangible assets of $103.3 million. Goodwill includes all purchase price accounting adjustments of approximately
$18.6 million related to additional liabilities that existed at the acquisition date. Goodwill and intangible 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 29, 2019, and December 30, 2018, the net carrying amount of goodwill was $257.4 million and $245.8
million, respectively. Other intangible assets were $89.1 million and $97.7 million as of December 29, 2019 and
December 30, 2018, respectively. Amortization expense related to intangible assets during the years 2019, 2018 and 2017
was $5.9 million, $5.4 million and $0.7 million, respectively and are recorded in cost of sales in the consolidated statements
of operations.
During the fourth quarters of 2019, 2018 and 2017, as of the last day of the third quarter of each year, the Company
performed the annual goodwill impairment test. The Company performs this test at the reporting unit level, which is one level
below the segment level for the Flooring segment. In performing the impairment testing, the Company prepared valuations
of reporting units on both a market comparable methodology and an income methodology, and those valuations were
compared with the respective carrying 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 as a result of the impairment testing. As of December 29, 2019,
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. However, the Company has experienced significant
competitive pressure in fiscal 2019 along with volatility in the company stock price. As such, it is reasonably possible that
such circumstances along with a recent acquisition may together warrant the need to write down the value of goodwill in the
near term.
The changes in the carrying amounts of goodwill for the years ended December 29, 2019 and December 30, 2018 are as
follows (in thousands):
BALANCE
DECEMBER 31,
2018
ACQUISITIONS
PURCHASE
PRICE
ACCOUNTING
ADJUSTMENTS
FOREIGN
CURRENCY
TRANSLATION
BALANCE
DECEMBER 29,
2019
IMPAIRMENT
(in thousands)
$
245,815 $
— $
17,181 $
— $
(5,557) $
257,439
BALANCE
JANUARY 1,
2018
ACQUISITIONS
PURCHASE
PRICE
ACCOUNTING
ADJUSTMENTS
FOREIGN
CURRENCY
TRANSLATION
BALANCE
DECEMBER 30,
2018
IMPAIRMENT
(in thousands)
$
68,754 $
183,348 $
1,377
— $
(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
42
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 $3.9 million and $3.5
million as of December 29, 2019 and December 30, 2018, respectively, and are included in “Accrued Expenses” in the
accompanying consolidated balance sheets.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected
future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change
in tax rates will be recognized as income or expense in the period that includes the enactment date.
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable.
The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the
appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events
such as the taxability of entities operating in the various taxing jurisdictions.
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 16 entitled “Income Taxes.”
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 exchange
translation gains (losses) were ($11.7) million, ($22.5) million, and $31.6 million for the years 2019, 2018 and 2017,
respectively.
Earnings per Share
Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings 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 13 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 2019, 2018 or 2017.
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.
43
Derivative Financial Instruments
Derivatives are recognized on the balance sheet at fair value. For derivatives that meet the criteria as designated cash
flow hedges, 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. Derivative liabilities are recorded in accrued expenses and derivative assets
are recorded in other current assets in the consolidated balance sheet.
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.
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.
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 “2019,” “2018,” and “2017,” mean the fiscal years ended December 29, 2019, December 30, 2018, and December 31,
2017, respectively. Fiscal years 2019, 2018 and 2017 were each comprised of 52 weeks.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
On December 31, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, “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 Company adopted the new lease
standard using the modified retrospective approach and recorded operating lease right-of-use assets and operating lease
liabilities for approximately $115.0 million respectively, with no cumulative-effect adjustment to retained earnings. The
Company elected to apply the practical expedients allowed by the standard, which resulted in the Company not having to
reassess whether expired or existing contracts contained a lease as well as retaining the historical classification of our leases.
The Company also elected the hindsight practical expedient in evaluating lessee options and elected to combine lease and
non-lease components in calculating the right-of-use asset and lease liability for all leases, except data center assets. See Note
11 entitled “Leases” for additional information.
On December 31, 208 the Company adopted, Accounting Standards Update (“ASU”) 2018-02, “Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income,” which addresses a narrow-scope financial reporting
issue that arose as a consequence of the U.S. Tax Cuts and Jobs Act. The former guidance required 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
44
reporting period that includes the enactment date. That guidance was 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 adoption of this standard did not have a material effect on the Company’s consolidated
financial statements as the Company did not elect to reclassify stranded tax effects into retained earnings.
On December 31, 2018, the Company adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment
Accounting.” This standard requires that the accounting treatment for non-employee share-based payments for goods or
services be consistent with current accounting 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 also eliminates the
current GAAP requirement to reassess the classification of non-employee share-based payments awards upon vesting. The
adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” The amendments
in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic
740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by
clarifying and amending existing guidance. This new guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2020. 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 ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.”
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. 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 ASU 2018-15, “Internal-Use Software – Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement.” This ASU aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use
software. The ASU also 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. 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 December 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other,” 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. The Company does not
anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments -- Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” This ASU requires a financial asset (including trade receivables) to be presented at
the net amount expected to be collected through the use of valuation allowances for credit losses. The income statement will
reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases
of expected credit losses that have taken place during the period. This standard is effective for annual reporting periods
beginning after December 15, 2019, including interim periods within that reporting period. The new standard provides both
a modified retrospective or prospective adoption method. The Company does not expect the adoption of this ASU to have a
significant impact on its consolidated financial statements, due to the short-term nature of its trade accounts receivable.
45
NOTE 3 – REVENUE RECOGNITION
Effective January 1, 2018, the Company adopted a new accounting standard regarding revenue recognition from contracts
with customers. The Company elected the modified retrospective approach for adoption of this new standard. The Company
did not have any significant impact from this standard as of the date of the adoption.
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was
approximately 98% of total revenue for 2019. The remaining 2% of revenue was generated from the installation of carpet and
other flooring-related material.
Disaggregation of Revenue
For 2019, revenue from the Company’s customers is broken down by geography as follows:
Geography
Americas .....................................................................................................
Europe .........................................................................................................
Asia-Pacific ................................................................................................
Percentage of Net Sales
56.4%
29.3%
14.3%
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 29, 2019 and December 30, 2018, the allowance for bad debts
amounted to $3.8 million and $3.5 million, respectively, for all accounts receivable of the Company. Reserves for warranty
and returns allowances amounted to $3.9 million and $3.5 million as of December 29, 2019 and December 30, 2018,
respectively.
NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
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
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.
As of December 29, 2019 and December 30, 2018, the Company had approximately $23.3 million and $24.3 million,
respectively, of Company-owned life insurance, which is measured on a readily determinable cash surrender value on a
46
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 29, 2019, 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 fair value of the Company’s derivative instruments is determined using discounted cash flow valuation models. The
significant inputs used in these models are readily available in public markets, or can be derived from other observable market
transactions, and therefore are classified as Level 2 within the fair value hierarchy.
NOTE 6 – INVENTORIES
Inventories are summarized as follows:
END OF FISCAL YEAR
2018
2019
(in thousands)
Finished goods................................................................................................................. $
Work-in-process ..............................................................................................................
Raw materials ..................................................................................................................
184,336 $
13,152
56,096
180,847
17,762
60,048
Inventory, Net.................................................................................................................. $
253,584 $
258,657
Reserves for inventory obsolescence amounted to $28.3 million and $28.1 million as of December 29, 2019 and
December 30, 2018, respectively, and have been netted against amounts presented above.
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Land................................................................................................................................. $
Buildings .........................................................................................................................
Equipment (1) ...................................................................................................................
Accumulated depreciation and amortization (2) ...............................................................
END OF FISCAL YEAR
2018
2019
(in thousands)
17,777 $
148,833
615,149
16,870
143,725
565,251
781,759
(457,174)
725,846
(432,958 )
Property, plant and equipment ......................................................................................... $
324,585 $
292,888
(1) 2019 includes $5.9 million of leased equipment.
(2) 2019 includes $0.9 million of accumulated amortization on leased equipment.
The estimated cost to complete construction-in-progress at December 29, 2019, was approximately $57.2 million.
47
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
2019
(in thousands)
86,696 $
1,485
11,445
16,809
4,910
3,853
15,454
80,877
374
11,907
14,539
5,329
3,495
9,450
Accrued Expenses ........................................................................................................... $
140,652 $
125,971
NOTE 9 – LONG-TERM DEBT
Syndicated Credit Facility
On August 7, 2018, the Company amended and restated its Syndicated Credit Facility (the “Facility”) in connection with
the nora 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 29, 2019, the amended and restated Facility provided to
the Company and certain of its subsidiaries a multicurrency revolving loan facility up to $300.0 million, as well as other U.S.
denominated and multicurrency term loans.
On December 18, 2019, the Company amended its Facility, with certain of its wholly-owned foreign subsidiaries as co-
borrowers. The purpose of this amendment was to provide for certain provisions, including but not limited to the following:
•
•
the amendment of certain covenants in the Facility to add new exceptions which will allow the Company
and its subsidiaries to accomplish certain intercompany investments and other intercompany transactions
desired to be made by the Company and its subsidiaries, and
amendments to add provisions relating to treatment of certain qualified financial contracts, to modify
certain existing provisions dealing with the replacement of LIBOR as a benchmark interest rate with an
alternative benchmark rate in the event that LIBOR in the future ceases to be available as a bench mark
rate.
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;
•
• make acquisitions of or investments in businesses (in excess of certain specified amounts);
48
•
•
•
•
•
•
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);
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 4.25:1.00, subject to a step-down 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.
Collateral
Pursuant to an Amended and Restated Security and Pledge Agreement, 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 29, 2019, the Company had outstanding $581.6 million of term loan borrowing and $20.9 million of
revolving loan borrowings under the Facility, and had $2.2 million in letters of credit outstanding under the Facility. As of
December 29, 2019, the weighted average interest rate on borrowings outstanding under the Facility was 3.27%.
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
In the third quarter of 2017 and the first quarter of 2019, the Company entered into interest rate swap transactions 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 these interest rate swaps is to protect the Company against
adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a
portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest
payments) attributable to changes in LIBOR, the designated benchmark interest rate being hedged (the “hedged risk”), on an
amount of the Company’s debt principal equal to the outstanding swap notional amounts.
49
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 2.0% to 6.0%. As of December 29, 2019 and December 30, 2018, there were no borrowings
outstanding under these lines of credit.
Borrowing Costs
In connection with the amended and restated Facility on August 7, 2018, as discussed above, the Company recorded $8.8
million of debt issuance costs associated with the new term loans, which are reflected as a reduction of long-term debt in
accordance with applicable accounting standards. These fees are amortized straight-line, which approximates the effective
interest method, over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that
are amortized. As of December 29, 2019, the unamortized debt costs recorded as a reduction of long-term debt was $6.3
million.
Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of
revolving debt, net of accumulated amortization, were $1.3 million and $1.8 million, as of December 29, 2019 and
December 30, 2018, 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 2019, 2018, and 2017 amounted to $0.4 million, $0.5 million, and $0.5 million, respectively for each of those years.
Future Maturities
The aggregate maturities of borrowings for each of the five fiscal years subsequent to 2019 are as follows:
FISCAL YEAR
2020 ............................................................................................................................................................... $
2021 ...............................................................................................................................................................
2022 ...............................................................................................................................................................
2023 ...............................................................................................................................................................
2024 ...............................................................................................................................................................
Thereafter ......................................................................................................................................................
Total Debt ...................................................................................................................................................... $
AMOUNT
(in thousands)
31,022
31,022
31,022
509,450
—
—
602,516
Total long-term debt in the consolidated balance sheet includes a reduction for unamortized debt issuance costs of $6.3 million
which are excluded from the maturities table above.
NOTE 10 – DERIVATIVE INSTRUMENTS
Interest Rate Risk Management
In the third quarter of 2017 and the first quarter of 2019, the Company entered into interest rate swap transactions in
notional amounts of $100 million and $150 million, respectively, to fix the variable interest rate on a portion of its term loan
borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy
with respect to 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 amounts.
Cash Flow Interest Rate Swap
Both of the interest rate swaps described above are designated and qualify as cash flow hedges of forecasted interest
payments. The Company reports the changes in fair value of the swaps as a component of other comprehensive income (or
other comprehensive loss). The aggregate notional amount of the swaps as of December 29, 2019 was $250 million.
50
Forward Contracts
Our nora operations, from time to time, 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). As of December 29, 2019, all foreign currency forward contracts have
expired.
The table below sets forth the fair value of derivative instruments as of December 29, 2019 (in thousands):
Asset Derivatives as of
December 29, 2019
Liability Derivatives as of
December 29, 2019
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
$
— Accrued expenses
— Accrued expenses
—
$
$
—
5,801
5,801
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
—
—
—
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 2019. We expect that approximately $1.6
million related to cash flow hedges will be reclassified from accumulated other comprehensive income as an increase to
interest expense in the next 12 months.
The following table summarizes the 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, net of tax (in
thousands):
Foreign currency contracts gain (loss) ............................................. $
Interest rate swap contracts (loss) gain .............................................
(Loss) gain recognized in accumulated other comprehensive
468 $
(5,957)
(468) $
890
income .......................................................................................... $
(5,489) $
422 $
—
904
904
Fiscal Year
2019
Fiscal Year
2018
(in thousands)
Fiscal Year
2017
51
The following table summarizes the gains and losses reclassified from accumulated other comprehensive income into
earnings during 2019 (in thousands):
Foreign currency contracts (loss) .......................................
Interest rate swap contracts gain .........................................
Total ..................................................................................................................................................... $
Cost of sales
Interest expense
$
Statement of Operations Location
Fiscal Year
2019
(in thousands)
(450)
151
(299)
NOTE 11 – LEASES
General
On December 31, 2018, the Company adopted the new lease standard using the transition methodology allowed by the
standard to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. The comparative prior year periods presented in these financial
statements continue to be in accordance with previous GAAP. We have operating and finance leases for manufacturing
equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment.
Our leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5
years, and certain leases may include an option to terminate the lease. Our lease terms may include these options to extend
or terminate a lease when it is reasonably certain that we will exercise that option.
As of December 29, 2019, there were no significant right-of-use assets and lease obligations from leases that had not
commenced as of the end of fiscal 2019.
The table below represents a summary of the balances recorded in the consolidated balance sheet related to our leases as
of December 29, 2019:
December 29, 2019
(In thousands)
Balance Sheet Location
Operating lease right-of-use assets ................................................................... $
Operating Leases
Finance Leases
107,044
Current portion of operating lease liabilities .................................................... $
Operating lease liabilities .................................................................................
Total operating lease liabilities ..................................................................... $
15,914
91,829
107,743
Property and equipment....................................................................................
Accrued expenses .............................................................................................
Other long-term liabilities ................................................................................
Total finance lease liabilities ........................................................................
$
$
$
5,007
1,489
1,673
3,162
52
Lease Costs
Lease cost
Finance lease cost:
Fiscal Year
2019
(In thousands)
Amortization of right-of-use assets ........................................................................................................ $
Interest on lease liabilities ......................................................................................................................
Operating lease cost ...................................................................................................................................
Short-term lease cost ..................................................................................................................................
Variable lease cost .....................................................................................................................................
Total lease cost .............................................................................................................................................. $
Other supplemental information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases .................................................................................................. $
Operating cash flows from operating leases ..............................................................................................
Financing cash flows from finance leases ..................................................................................................
Right-of-use assets obtained in exchange for new finance lease liabilities ...................................................
Right-of-use assets obtained in exchange for new operating lease liabilities ................................................
890
51
24,246
2,057
3,665
30,909
51
22,597
1,255
2,240
12,655
Rental expense amounted to approximately $28.5 million and $22.0 million for the years 2018 and 2017, respectively.
December 29,
2019
Weighted-average remaining lease term – finance leases (in years) .............................................................
Weighted-average remaining lease term – operating leases (in years) ..........................................................
Weighted-average discount rate – finance leases ..........................................................................................
Weighted-average discount rate – operating leases .......................................................................................
2.76
10.60
2.06%
5.86%
Maturity Analysis
Maturity analysis of lease payments under non-cancellable leases were as follows:
Fiscal Year
2020 ............................................................................................................................. $
2021 .............................................................................................................................
2022 .............................................................................................................................
2023 .............................................................................................................................
2024 .............................................................................................................................
Thereafter ....................................................................................................................
Total future minimum lease payments (undiscounted) ...............................................
Less: Present value discount ........................................................................................
Total lease liability ...................................................................................................... $
Operating Leases Finance Leases
(In thousands)
21,659 $
17,264
13,825
11,504
9,959
75,360
149,571
(41,828)
107,743 $
1,543
861
475
290
88
—
3,257
(95 )
3,162
Practical Expedients and Policy Elections
The Company elected the package of practical expedients permitted under the transition guidance of the new lease
standard, which, among other things, allows us to carry forward the historical lease classification and not reassess any initial
direct costs for existing leases. In addition, we elected the hindsight practical expedient to determine the lease term, which
allows us to use hindsight when considering the impact of options to extend or terminate a lease as well as the option to
purchase the underlying asset.
53
NOTE 12 – 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 29, 2019 and
December 30, 2018, there were no shares of preferred stock issued.
NOTE 13 – SHAREHOLDERS’ EQUITY
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 2019, $0.26 per share in 2018, and $0.25 per share in 2017,
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.
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 was authorized to repurchase up to $100 million of its outstanding shares of common stock. The program had
no specific expiration date.
Pursuant to the above-described programs, the Company has repurchased shares in the past three years as follows. During
2017, the Company repurchased and retired 4,628,300 shares of common stock at a weighted 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. During 2019, the Company repurchased and retired a combined total of
1,556,000 shares under these plans, at an average purchase price of $16.13 per share. As of December 29, 2019, the Company
had completed the authorized share repurchase program.
All treasury stock is accounted for using the cost method.
54
The following tables depict the activity in the accounts which make up shareholders equity for the years 2019, 2018, and
2017.
SHARES
COMMON
STOCK
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
PENSION
LIABILITY
(in thousands)
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
CASH
FLOW
HEDGE
common stock ...............
223
Balance, at December 30,
2018 ..................................
Net income .......................
Stock issuances under
employee plans .............
Other issuances of
Unamortized stock
compensation expense
related to 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 29,
59,508 $
—
5,951 $
—
270,269 $
—
222,214 $
79,200
(43,610) $
—
(101,487) $ 1,326
— —
511
—
—
51
22
—
—
636
3,900
—
—
(4,139)
—
—
(15,358)
(270)
(26)
4,638
(1,556)
(156)
(24,998)
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
(13,090)
— —
—
—
—
—
(11,652) —
— (5,489)
2019 ..............................
58,416 $
5,842 $
250,306 $
286,056 $
(56,700) $
(113,139) $ (4,163)
55
SHARES
COMMON
STOCK
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
PENSION
LIABILITY
(in thousands)
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
CASH
FLOW
HEDGE
Balance, at December 31,
2017 ..................................
Net income .......................
Stock issuances under
59,806 $
—
5,981 $
—
271,271 $
—
187,432 $
50,253
(56,554) $
—
(78,943 ) $
904
— —
employee plans .............
224
Other issuances of
common stock ...............
182
Unamortized stock
compensation expense
related to 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) ....
Balance, at December 30,
—
—
(89)
(615)
—
—
—
22
18
—
—
(9 )
(61 )
—
—
—
476
4,809
—
—
(4,710)
—
—
(15,471)
12,847
(14,424)
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
—
—
—
—
12,944
— —
—
—
—
—
(22,544 ) —
—
422
2018 ..............................
59,508 $
5,951 $
270,269 $
222,214 $
(43,610) $
(101,487 ) $ 1,326
56
SHARES
COMMON
STOCK
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
PENSION
LIABILITY
(in thousands)
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
CASH
FLOW
HEDGE
Balance, at January 1, 2017 ..
Net income .......................
Stock issuances under
64,238 $
—
6,424 $
—
359,451 $
—
140,238 $
53,246
(54,862) $
—
(110,522) $ —
— —
employee plans .............
36
4
508
Other issuances of
common stock ...............
253
25
4,507
—
—
—
—
—
—
(4,532)
—
—
(15,487)
(93)
(4,628)
(9)
(463)
5,574
(91,113)
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
(1,692)
— —
—
—
—
—
31,579 —
—
904
—
—
(3,124)
—
—
— —
—
—
—
9,435
—
— —
Unamortized stock
compensation expense
related to 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 31,
2017 ..............................
59,806 $
5,981 $
271,271 $
187,432 $
(56,554) $
(78,943) $
904
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 expense will be recognized over the period
that 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.
57
All outstanding stock options vested prior to 2015 and therefore there were no stock option compensation expenses
during 2019, 2018 or 2017.
The following table summarizes stock options outstanding as of December 29, 2019, as well as activity during the
previous fiscal year:
Shares
Weighted Average
Exercise Price
Outstanding at December 30, 2018 .........................................................................
Granted ....................................................................................................................
Exercised .................................................................................................................
Forfeited or canceled ...............................................................................................
Outstanding at December 29, 2019 (a) ....................................................................
42,500 $
—
(10,000)
(5,000)
27,500 $
Exercisable at December 29, 2019 (b).....................................................................
27,500 $
9.56
—
4.31
4.31
12.43
12.43
(a) At December 29, 2019, the weighted-average remaining contractual life of options outstanding was less than 1 year.
(b) At December 29, 2019, the weighted-average remaining contractual life of options exercisable was less than 1 year.
At December 29, 2019, the aggregate intrinsic values of in-the-money options outstanding and options exercisable were
$0.1 million and $0.1 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).
Restricted Stock Awards
During fiscal years 2019, 2018 and 2017, the Company granted restricted stock awards totaling 223,500, 194,000, and
253,000 shares, respectively, of Common Stock. These awards (or a portion thereof) vest with respect to each recipient over
a one 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 $3.3 million, $4.1 million and $2.8 million for 2019,
2018 and 2017, 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 29, 2019, as well as activity during the
previous fiscal year:
Weighted Average
Grant Date
Fair Value
Shares
Outstanding at December 30, 2018 .........................................................................
Granted ....................................................................................................................
Vested ......................................................................................................................
Forfeited or canceled ...............................................................................................
Outstanding at December 29, 2019 .........................................................................
549,000 $
223,500
(241,200)
(63,100)
468,200 $
27.65
17.54
18.41
19.88
28.63
As of December 29, 2019, the unrecognized total compensation cost related to unvested restricted stock was $3.4 million.
That cost is expected to be recognized by the end of 2022.
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.
58
Performance Share Awards
In each of the years 2017-2019, 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 29, 2019, as well as the activity
during the year:
Weighted
Average Grant
Date Fair Value
Shares
Outstanding at December 30, 2018 .........................................................................
Granted ....................................................................................................................
Vested ......................................................................................................................
Forfeited or canceled ...............................................................................................
Outstanding at December 29, 2019 .........................................................................
759,500 $
344,500
(360,000)
(232,000)
512,000 $
20.17
17.54
19.63
18.10
19.71
Compensation expense related to the performance shares for 2019, 2018, and 2017 was $5.4 million, $10.4 million and
$4.5 million, respectively. Unrecognized compensation expense related to these performance shares was approximately $3.1
million as of December 29, 2019. That cost is expected to be recognized by the end of 2022.
The tax benefit recognized with respect to restricted stock and performance shares was $1.4 million, $2.4 million, and
$2.6 million in 2019, 2018, and 2017, respectively.
NOTE 14 – EARNINGS PER SHARE
The Company calculates basic and diluted earnings per common share using the two-class method. Basic earnings (loss)
per share (“EPS”) is calculated 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.
The Company includes all unvested stock awards that 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:
Earnings per share:
Basic earnings per share
Distributed earnings ............................................................. $
Undistributed earnings .........................................................
$
Diluted earnings per share
Distributed earnings ............................................................. $
Undistributed earnings .........................................................
$
59
2019
Fiscal Year
2018
2017
0.26 $
1.08
1.34 $
0.26 $
1.08
1.34 $
0.26 $
0.58
0.84 $
0.26 $
0.58
0.84 $
0.25
0.61
0.86
0.25
0.61
0.86
The following table presents net income that was attributable to participating securities:
Net income attributable to participating securities ............................. $
0.6 $
0.5 $
0.4
The weighted average shares for basic and diluted EPS were as follows:
2019
Fiscal Year
2018
(in millions)
2017
2019
Fiscal Year
2018
(in thousands)
2017
Weighted Average Shares Outstanding ..............................................
Participating Securities .......................................................................
Shares for Basic Earnings Per Share ..................................................
Dilutive Effect of Stock Options ........................................................
Shares for Diluted Earnings Per Share ...............................................
58,475
468
58,943
5
58,948
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 15 – RESTRUCTURING AND OTHER CHARGES
For fiscal years 2019, 2018, and 2017 the Company recorded restructuring, asset impairment, and other charges of
$12.9 million, $20.5 million, and $7.3 million, respectively, in the consolidated statements of operations. The 2019 charge of
$12.9 million includes $5.0 million of other non-cash charges unrelated to the 2019 exit activity and a net $1.0 million
reduction in restructuring costs related to the 2018 restructuring plan. As of December 29, 2019 the total restructuring reserve
was $11.4 million for both the 2019 and 2018 restructuring plans. Below is a discussion of restructuring activities by year.
2019 Restructuring Plan
On December 23, 2019, the Company committed to a new restructuring plan that continues to focus on efforts to improve
efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business
strategy. The plan involved a reduction of approximately 105 employees and early termination of two office leases. As a
result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0
million. The charge is comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million.)
The restructuring plan is expected to result in future cash expenditures of approximately $9.0 million for payment of the
employee severance and lease exit costs, as described above. The Company expects to complete the restructuring plan in
fiscal year 2020, and expects the plan to yield annualized savings of approximately $6.0 million. A portion of the annualized
savings is expected to be realized on the income statement in fiscal year 2020, with the remaining portion of the annualized
savings expected to be realized in fiscal year 2021.
A summary of the 2019 restructuring activities is presented below:
Charged to
Expenses 2019 Deductions 2019
Charged to Other
Accounts 2019
Balance at
December 29,
2019
Workforce Reduction ...................... $
Other Exit Costs ..............................
Total ................................................ $
8,827 $
188
9,015 $
193 $
—
193 $
— $
49
49 $
8,634
139
8,773
Other Non-Cash Charges
On December 23, 2019, unrelated to the restructuring activity discussed above, the Company recorded other non-cash charges
of approximately $5.0 million primarily related to adjusting the carrying value of certain insurance related assets. These
charges are recorded in restructuring and other charges in the 2019 consolidated statement of operations.
60
2018 Restructuring Plan
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 involved (i) a restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction
of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of
certain underutilized and impaired assets that include information technology assets and obsolete manufacturing equipment.
As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter
of 2018 of approximately $20.5 million. The charge was comprised of severance expenses (approximately $10.8 million),
impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million). The charge was expected to
result in future cash expenditures of $12.0 million, primarily for severance payments (approximately $10.8 million). The
restructuring plan was substantially completed at the end of fiscal 2019. The Company redeployed 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.
In the third quarter of 2019, the Company recorded $0.7 million of restructuring charges related to additional lease exit
costs in connection with the restructuring plan announced on December 29, 2018. In the fourth quarter of 2019, the Company
adjusted its previously recorded severance expenses in connection with the 2018 restructuring plan and recognized a reduction
in restructuring costs of $1.7 million in 2019.
A summary of these 2018 restructuring activities is presented below:
Balance at
Beginning of Year Deductions 2019
Charged to
Expenses 2019
Balance at
December 29, 2019
Workforce Reduction .......... $
Other Exit Costs ..................
Total .................................... $
10,763 $
1,144
11,907 $
2016 Restructuring Plan and 2017 Charge
(in thousands)
7,122 $
1,042
8,164 $
(1,743) $
672
(1,071) $
1,898
774
2,672
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. This plan was completed at the end of fiscal year 2018.
NOTE 16 – INCOME TAXES
Income before taxes on income consisted of the following:
U.S. operations ................................................................................... $
Foreign operations ..............................................................................
46,463 $
55,353
35,728 $
19,263
53,407
47,132
Income before taxes ........................................................................... $
101,816 $
54,991 $
100,539
2019
FISCAL YEAR
2018
(in thousands)
2017
61
Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the
following components:
2019
FISCAL YEAR
2018
(in thousands)
2017
Current expense/(benefit):
Federal ......................................................................................... $
Foreign ........................................................................................
State .............................................................................................
Current expense ..................................................................................
8,414 $
14,513
2,312
25,239
(3,549) $
14,548
2,628
13,627
Deferred expense/(benefit):
Federal .........................................................................................
Foreign ........................................................................................
State .............................................................................................
Deferred expense/(benefit) .................................................................
(625)
(2,198)
200
(2,623)
2,145
(11,228)
194
(8,889)
10,245
11,923
1,414
23,582
20,467
1,214
2,030
23,711
Total income tax expense ................................................................... $
22,616 $
4,738 $
47,293
The Company’s effective tax rate was 22.2%, 8.6% and 47.0% for fiscal years 2019, 2018 and 2017, respectively. The
following summary reconciles income taxes at the U.S. federal statutory rate of 21% applicable for 2019 and 2018 and 35%
applicable for 2017 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 – NOL ................................................
Federal tax credits ..........................................................................
Changes in unrecognized tax benefits ............................................
Other ..............................................................................................
Income tax expense ........................................................................... $
2019
FISCAL YEAR
2018
(in thousands)
2017
21,381 $
11,548 $
35,189
2,321
933
1,453
(636)
—
—
(183)
783
133
(700)
(3,324)
455
22,616 $
2,228
1,352
2,566
235
(5,000)
(1,739)
61
(2,226)
(79)
(2,863)
(1,010)
(335)
4,738 $
2,055
695
80
(1,295 )
11,707
3,467
523
(4,575 )
(858 )
(632 )
874
63
47,293
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.
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.
62
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 had completed
its assessment of the one-time transition tax which resulted in a $5.0 million decrease to the previously recorded provisional
amount.
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 had completed the accounting of remeasuring its net deferred
tax asset which resulted in a $1.7 million decrease to the previously recorded provisional amount.
Deferred income taxes for the years ended December 29, 2019 and December 30, 2018, 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 temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
Deferred tax assets
Lease liability .............................................................................................................. $
Net operating loss carryforwards .................................................................................
Derivative instruments .................................................................................................
Deferred compensation ................................................................................................
Inventory ......................................................................................................................
Prepaids, accruals and reserves ....................................................................................
Pensions .......................................................................................................................
Other ............................................................................................................................
Deferred tax asset (gross) ................................................................................................
Valuation allowance on net operating loss carryforwards ...........................................
Deferred tax asset (net) .................................................................................................... $
Deferred tax liabilities
Property and equipment ............................................................................................... $
Intangible assets ...........................................................................................................
Lease asset ...................................................................................................................
Foreign currency ..........................................................................................................
Foreign withholding taxes on unremitted earnings ......................................................
Other ............................................................................................................................
Deferred tax liabilities .....................................................................................................
FISCAL YEAR
2019
2018
(in thousands)
29,782 $
3,090
1,638
20,194
3,200
7,935
9,229
71
75,139
(971)
74,168 $
23,770 $
33,760
29,301
3,026
178
—
90,035
—
2,349
—
18,945
4,712
6,473
4,290
—
36,769
(1,067 )
35,702
24,871
18,699
—
2,357
348
314
46,589
Net deferred tax liabilities ............................................................................................... $
15,867 $
10,887
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 29,
2019.
During the year ended December 29, 2019, significant changes to the Company’s deferred tax balances included a $17.2
million increase in intangible deferred liability primarily related to its acquisition of nora.
Beginning in 2018, the Tax Act included 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.
The Company had approximately $7.5 million in foreign net operating losses for which the Company applied a valuation
allowance against $0.9 million of such losses. The Company had approximately $87.6 million in state net operating loss
63
carryforwards relating to continuing operations with expiration dates through 2035. The Company has provided a valuation
allowance against $14.6 million of such losses, which the Company does not expect to utilize. In addition, the Company has
approximately $36.0 million in state net operating loss carryforwards relating to discontinued operations against which a full
valuation allowance has been provided.
As of December 29, 2019, and December 30, 2018, non-current deferred tax assets were reduced by approximately $2.8
million and $2.8 million, respectively, of unrecognized tax benefits.
Historically, the Company has not provided for U.S. federal and state income taxes on the undistributed accumulated
earnings of its foreign subsidiaries, with the exception of its Canada subsidiaries, because such earnings were deemed to be
permanently reinvested. Due to the passage of the Tax Act on December 22, 2017, the Company was required to recognize
U.S. taxes as a result of the one-time transition tax on the higher of its accumulated earnings as of November 2, 2017, or
December 31, 2017.
Although the one-time transition tax on unrepatriated post-1986 accumulated earnings and profits of certain non-U.S.
subsidiaries, the GILTI provisions and the dividends received deduction created as a result of the Tax Act generally eliminates
additional U.S. federal income taxes on dividends from our foreign subsidiaries, the Company continues to assert that all of
its undistributed earnings in its non-U.S. subsidiaries, excluding subsidiaries within Canada, are indefinitely reinvested
outside of the U.S. The Company expects that domestic cash resources will be sufficient to fund its domestic operations and
cash commitments in the future. 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 2016 to the present. In addition,
certain federal tax attribute carryovers established since 2001 could be adjusted as these amounts are still subject to
examination.
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 2014 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 2008 to the present.
During a check of the 2015 tax return of the Company’s UK subsidiary, Her Majesty’s Revenue & Customs (“HMRC”)
issued a discovery assessment for the years 2012 through 2014 related to its intra-group financing arrangement. The discovery
assessment is currently under appeal. HMRC has extended its check to tax year 2016, however, it has not issued an assessment
beyond the 2014 tax year. Management believes it is reasonably possible HMRC may propose additional assessments for tax
years 2015 & 2016; but does not anticipate the adjustments related to its intra-group financing arrangement would result in a
material change to its financial position. The Company will continue to evaluate the recognition criteria for unrecognized
tax benefits as it relates to the HMRC review; however, as of December 29, 2019, recognition thresholds had not been met.
As of December 29, 2019, and December 30, 2018, the Company had $25.5 million and $28.1 million, respectively, of
unrecognized tax benefits. It is reasonably possible that approximately $10.5 million of unrecognized tax benefits may be
recognized within the next 12 months due to a lapse of statute of limitations.
If any of the $25.5 million of unrecognized tax benefits as of December 29, 2019 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, $22.7 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 29, 2019, the Company had accrued interest and penalties of $2.9 million, which is included in
the total unrecognized tax benefit noted above. 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.
64
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
2019
FISCAL YEAR
2018
(in thousands)
2017
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 ........................................................................ $
28,143 $
318
1,093
(2,809)
—
(1,266)
7
25,486 $
29,221 $
671
180
—
—
(1,861)
(68)
28,143 $
27,888
627
709
—
—
(462 )
459
29,221
NOTE 17 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to legal proceedings, whether arising in the ordinary course of business or
otherwise. Some of the proceedings the Company is involved in are summarized below.
SEC Investigation
The Company received a letter in November 2017 from the Securities & Exchange Commission (the “SEC”) requesting
that the Company voluntarily provide information and documents in connection with an investigation into the Company’s
historical quarterly earnings per share (“EPS”) calculations and rounding practices during the period 2014-2017. The
Company subsequently received several subpoenas from the SEC requesting additional documents and information. In the
fourth quarter of 2018, the Company conducted at the SEC’s request an internal investigation into these and other related
issues for seven quarters in 2015, 2016 and 2017.
On April 23, 2019, Gregory J. Bauer, the Company’s Vice President and Chief Accounting Officer, went on paid
administrative leave from the Company after it was learned that in 2018 in the process of collecting materials from 2015,
2016 and 2017 for production to the SEC, he added certain notes to those materials that were then produced to the SEC. The
Company believes at this time, however, that the after-the-fact inclusion of these notes had no impact on the EPS calculations
that are the subject of the above-described investigation or on subsequent EPS calculations.
Since the inception of the investigation, the Company has cooperated and continues to cooperate with the SEC’s
investigation.
Lawsuit by Former CEO in Connection with Termination
On January 19, 2020, the Company’s Board of Directors voted to terminate for cause the employment of Jay D. Gould,
then President and Chief Executive Officer, effective immediately, for violations of the Company’s working environment
policies. He remains a member of the Board of Directors of the Company.
On February 14, 2020, Mr. Gould filed a lawsuit against the Company in the United States District Court of the Northern
District of Georgia, Gould v. Interface, Inc., Case No. 1:20-cv-00695. In his lawsuit, Mr. Gould asserts several claims against
the Company in connection with his termination, including that the termination was a wrongful retaliation against Mr. Gould
and breached his employment contract with the Company, that public statements made by the Company in connection with
his termination defamed Mr. Gould (two counts) and that the Company’s investigation into Mr. Gould’s conduct that preceded
the termination was negligently performed. Among other unspecified relief, Mr. Gould seeks $10 million in damages for the
breach contract claim and $100 million for each of the other four claims, as well as attorneys’ fees.
The Company believes the lawsuit is without merit and intends to defend vigorously against it.
65
NOTE 18 – 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 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 $3.3 million, $3.2 million, and $3.0 million for the years 2019, 2018, and 2017,
respectively. No discretionary contributions were made in 2019, 2018, or 2017.
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 $31.9 million and $28.7 million at December 29, 2019 and December 30,
2018, respectively. The Company invests the deferrals in insurance instruments with readily determinable cash surrender
values. The value of the insurance instruments was $30.1 million and $26.4 million as of December 29, 2019 and
December 30, 2018, respectively.
Foreign Defined Benefit Plans
The Company has trusteed defined benefit retirement plans which cover many of its European employees. The benefits
under these defined benefit retirement plans are generally based on years of service and the employee’s average monthly
compensation. In connection with the nora acquisition on August 7, 2018, the Company acquired an additional defined benefit
plan, which covers certain employees in Germany (the “nora Plan”). The nora plan has no plan assets. The Company uses a
year-end measurement date for the plans, which is the closest practical date to the Company’s fiscal year end.
On December 31, 2019, a plan amendment was executed to eliminate future service accruals in the Dutch defined benefit
plan. The Dutch plan will remain in existence and continue to pay vested benefits. The reduction in future benefit accruals
resulted in a curtailment of the plan. Participants in the Dutch plan will no longer accrue benefits under the plan after
December 31, 2019, and will participate in an industry-wide multi-employer plan beginning in fiscal year 2020. Although
the Dutch plan is frozen to new participants, vested benefits prior to the curtailment will continue to be accounted for in
accordance with applicable accounting standards for defined benefit plans. The Dutch plan is financed by assets held in an
insurance contract. The guarantee provision included in the insurance contract, that existed to fund any shortfall between the
fair value of plan investments and the benefit obligation, expired on December 31, 2019. The Company will fund the cost to
guarantee vested benefits and this amount will be recorded as an obligation on the Company’s Consolidated Balance Sheet.
The curtailment of the Dutch plan resulted in a decrease to the projected benefit obligation with an offsetting actuarial
gain recognized in accumulated other comprehensive income of approximately $2.4 million in fiscal 2019. The accumulated
net actuarial loss for the Dutch plan, after the impact of the curtailment, was $16.7 million at December 29, 2019. This amount
will be reclassified out of accumulated other comprehensive income and increase pension expense over the life expectancy
of vested participants when the actuarial loss exceeds the 10% corridor. The curtailment also resulted in a $0.5 million
reclassification of prior service cost from accumulated other comprehensive income, which was recognized as a reduction of
pension expense in fiscal 2019.
As discussed above, the Company still has an obligation to pay vested benefits in the frozen Dutch plan. As of
December 29, 2019, the under-funded status of the Dutch plan, after the impact of the curtailment, of $8.7 million is recorded
on the Consolidated Balance Sheet in other long-term liabilities.
Pension expense was $2.3 million, $1.7 million, and $1.9 million for the years 2019, 2018 and 2017, respectively. Plan
assets are primarily invested in insurance contracts and equity and fixed income securities. As of December 29, 2019, for the
European plans, the Company had a net liability recorded of $48.4 million, an amount equal to their underfunded status, and
had recorded in Other Comprehensive Income an amount equal to $47.6 million (net of taxes of approximately $16.6 million)
related to the future amounts to be recorded in net post-retirement benefit costs.
66
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
2019
2018
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year ........................................................................ $
Service cost ...............................................................................................................
Interest cost ...............................................................................................................
Benefits and expenses paid .......................................................................................
Business combinations ..............................................................................................
Actuarial loss (gain) ..................................................................................................
Curtailment gain ........................................................................................................
Member contributions ...............................................................................................
Currency translation adjustment ................................................................................
285,508 $
1,589
5,676
(13,034)
—
37,409
(2,421)
221
(107)
320,548
1,112
5,467
(11,850 )
36,903
(53,753 )
—
233
(13,152 )
Benefit obligation, end of year ......................................................................................... $
314,841 $
285,508
Change in plan assets
Plan assets, beginning of year ................................................................................... $
Actual return on assets ..............................................................................................
Company contributions .............................................................................................
Benefits paid .............................................................................................................
Currency translation adjustment ................................................................................
249,313 $
24,999
3,954
(13,034)
1,218
307,166
(37,495 )
4,095
(11,850 )
(12,603 )
Plan assets, end of year ..................................................................................................... $
266,450 $
249,313
Reconciliation to balance sheet
Funded status benefit asset/(liability) ........................................................................ $
(48,391) $
(36,195 )
Amounts recognized in accumulated other comprehensive income (after tax)
Unrecognized actuarial loss ...................................................................................... $
Unamortized prior service credits .............................................................................
Total amount recognized ........................................................................................... $
47,561 $
—
47,561 $
37,141
(437 )
36,704
Accumulated Benefit Obligation ...................................................................................... $
314,841 $
284,581
The pension liability above includes non-current liabilities of $48.4 million and $35.3 million as of December 29, 2019
and December 30, 2018, respectively.
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 29, 2019 and 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.
The following table summarizes this information as of December 29, 2019 and December 30, 2018.
67
END OF FISCAL YEAR
2018
2019
(in thousands)
UK Plan
Projected Benefit Obligation ........................................................................................... $
Accumulated Benefit Obligation .....................................................................................
Plan Assets ......................................................................................................................
170,958 $
170,958
174,156
157,351
157,351
158,990
Dutch Plan
Projected Benefit Obligation ........................................................................................... $
Accumulated Benefit Obligation .....................................................................................
Plan Assets ......................................................................................................................
100,996 $
100,996
92,294
91,837
90,910
90,323
Nora Plan
Projected Benefit Obligation ........................................................................................... $
Accumulated Benefit Obligation .....................................................................................
Plan Assets ......................................................................................................................
42,887 $
42,887
—
36,320
36,320
—
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 .......................................
Curtailment gain .................................................................................
2019
FISCAL YEAR
2018
(in thousands)
2017
1,589 $
5,676
(5,561)
63
991
(453)
1,112 $
5,467
(6,234)
(27)
1,394
—
1,628
5,559
(6,496 )
(34 )
1,287
—
Net periodic benefit cost ..................................................................... $
2,305 $
1,712 $
1,944
During 2019, other comprehensive income was impacted after tax by approximately $10.9 million comprised of actuarial
loss of approximately $11.4 million and amortization of $0.5 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 .................................................................
2019
FISCAL YEAR
2018
2017
1.9%
2.1%
1.75%
1.7%
1.75%
1.9%
1.8%
1.75%
2.5%
1.75%
2.0%
2.3%
1.75%
2.2%
1.75%
The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each
asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the
financial markets, and include input from actuaries, investment service firms and investment managers.
The investment objectives of the foreign defined benefit plans are to maximize the return on the investments without
exceeding the limits of the prudent pension fund investment, to ensure that the assets would be sufficient to exceed minimum
funding requirements, and to achieve a favorable return against the performance expectation based on historic and projected
rates of return over the short term. The goal is to optimize the long-term return on plan assets at a moderate level of risk, by
balancing higher-returning assets, such as equity securities, with less volatile assets, such as fixed income securities. The
assets are managed by professional investment firms and performance is evaluated periodically against specific benchmarks.
The plans’ net assets did not include the Company’s own stock at December 29, 2019 or December 30, 2018.
68
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. Prior to December 31, 2019, the Contract guaranteed payment of vested benefits, regardless
of whether Plan assets held through the Contract were ultimately sufficient to pay vested amounts, and also provided for
payment of the indexation amount on a contingent basis if the actual return on Dutch Plan assets were sufficient to pay it.
This type of insurance arrangement is common in The Netherlands, although not necessarily common in other jurisdictions.
After the plan curtailment on December 31, 2019, as discussed above, any shortfall in plan assets to pay vested benefits will
be funded by the Company.
As it relates to the indexation benefit for 2017 and 2016, prior actual and future projected returns on Dutch Plan assets
had been determined to be sufficient to provide for the indexation benefit for these years, therefore the Company and the
insurer agreed that it was appropriate to provide the indexation benefit under the Contract. The indexation benefit became
payable by the insurer under the Contract, and consequently was 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 2019 and 2018 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 2019 based on recent returns. This indexation was considered probable as of the end of 2018, 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 were 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 indexation benefit for 2019 is not significant.
The Company’s actual weighted average asset allocations for 2019 and 2018, and the targeted asset allocation for 2020,
of the foreign defined benefit plans by asset category, are as follows:
2020
Target Allocation
FISCAL YEAR
2019
2018
Percentage of Plan Assets at Year End
Asset Category:
20%
Equity Securities ...................................................... 15% —
Debt and Debt Securities .......................................... 35% —
45%
Short-term investments ............................................ —% — —%
50%
Other investments .................................................... 40% —
100%
69
3%
61%
1%
35%
100%
16%
44%
3%
37%
100%
The following table sets forth by level within the fair value hierarchy the foreign defined benefit plans’ assets at fair
value, as of December 29, 2019 and December 30, 2018. 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 contract are classified as a Level
3 asset and included in the “Other” asset category.
Pension Plan Assets by Category as of December 29, 2019
UK Plan
Dutch Plan
(in thousands)
Total
Level 1 ........................................................................ $
Level 2 ........................................................................
Level 3 ........................................................................
Total ........................................................................... $
— $
—
92,294
92,294 $
64,151 $
87,047
22,958
174,156 $
64,151
87,047
115,252
266,450
Pension Plan Assets by Category as of December 30, 2018
UK Plan
Dutch Plan
(in thousands)
Total
Level 1 ........................................................................ $
Level 2 ........................................................................
Level 3 ........................................................................
Total ........................................................................... $
— $
—
90,323
90,323 $
79,146 $
60,913
18,931
158,990 $
79,146
60,913
109,254
249,313
The tables below detail the foreign defined benefit plans’ assets by asset allocation and fair value hierarchy:
Asset Class
Equity Securities ........................................................ $
Debt and Debt Securities ............................................
Short-term investments (1)...........................................
Other investments (2) ...................................................
$
Asset Class
Equity Securities ........................................................ $
Debt and Debt Securities ............................................
Short-term Investments (1) ..........................................
Other Investments (2) ..................................................
$
Level 1
FISCAL YEAR 2019
Level 2
(in thousands)
Level 3
8,143 $
54,686
1,322
—
64,151 $
— $
87,047
—
—
87,047 $
—
19,996
—
95,256
115,252
Level 1
FISCAL YEAR 2018
Level 2
(in thousands)
Level 3
39,392 $
33,134
6,620
—
79,146 $
— $
60,913
—
—
60,913 $
—
16,012
—
93,242
109,254
(1) Short-term investments are generally invested in interest-bearing accounts.
(2) Other investments is comprised of insurance contracts.
70
With the exception of the Dutch Plan assets as discussed above, the assets identified as level 3 above in 2019 and 2018
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 2019 and 2018:
FISCAL YEAR
2019
2018
(in thousands)
Balance of level 3 assets, beginning of year ................................................................. $
Actual return on plan assets .............................................................................................
Purchases, sales and settlements, net ...............................................................................
Assets transferred into level 3 .........................................................................................
Translation adjustment ....................................................................................................
Ending Balance of level 3 assets ................................................................................... $
109,254 $
5,463
663
2,101
(2,229)
115,252 $
150,977
(37,610 )
—
696
(4,809 )
109,254
During 2020, the Company expects to contribute $4.4 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)
2020 .................................................................................. $
2021 ..................................................................................
2022 ..................................................................................
2023 ..................................................................................
2024 ..................................................................................
2025-2029 ........................................................................
Domestic Defined Benefit Plan
10,671
10,772
10,836
11,068
11,292
58,556
The Company maintains a domestic non-qualified 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.
71
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 2019 and 2018 as there are no longer any active participants in the plan.
FISCAL YEAR
2019
2018
(in thousands)
Change in benefit obligation
Benefit obligation, beginning of year .......................................................................... $
Interest cost ..................................................................................................................
Benefits paid ................................................................................................................
Actuarial loss (gain) .....................................................................................................
29,142 $
1,154
(2,030)
3,474
31,919
1,082
(2,030 )
(1,829 )
Benefit obligation, end of year..................................................................................... $
31,740 $
29,142
The amounts recognized in the consolidated balance sheets are as follows:
Current liabilities ............................................................................................................. $
Non-current liabilities .....................................................................................................
Total benefit obligation ................................................................................................... $
2019
2018
(in thousands)
2,030 $
29,710
31,740 $
2,030
27,112
29,142
The components of the amounts in accumulated other comprehensive income, after tax, are as follows:
Unrecognized actuarial loss ............................................................................................. $
2019
2018
(in thousands)
9,139 $
6,906
The accumulated benefit obligation related to the SCP was $31.7 million and $29.1 million as of December 29, 2019 and
December 30, 2018, 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.
2019
2018
(in thousands, except for assumptions)
2017
Assumptions used to determine net periodic benefit cost
Discount rate ..............................................................................
Rate of compensation .................................................................
Assumptions used to determine benefit obligations
Discount rate ..............................................................................
Rate of compensation .................................................................
4.10%
—
3.05%
—
3.50%
—
4.10%
—
3.85%
—
3.50%
—
Components of net periodic benefit cost
Service cost ................................................................................ $
Interest cost ................................................................................
Amortizations .............................................................................
— $
1,154
375
— $
1,082
464
—
1,256
364
Net periodic benefit cost .................................................................... $
1,529 $
1,546 $
1,620
The changes in other comprehensive income during 2019 related to the SCP as a result of plan activity and valuation
were approximately $2.2 million, after tax, primarily comprised of a net loss during the period of $2.5 million and
amortization of loss of $0.3 million.
72
During 2019, 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
2020 ............................................................................................... $
2021 ...............................................................................................
2022 ...............................................................................................
2023 ...............................................................................................
2024 ...............................................................................................
2025-2029 .....................................................................................
NOTE 19 – ACQUISITION OF NORA
EXPECTED PAYMENTS
(in thousands)
2,030
2,030
2,030
2,030
2,030
9,624
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.
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. During the second quarter of 2019, the
Company recognized a measurement period adjustment to adjust provisional amounts initially recorded for assumed deferred
tax liabilities. This measurement period adjustment resulted in an increase to assumed deferred tax liabilities of $17.2 million
and a corresponding increase to goodwill. The fair values of the assets acquired and liabilities assumed are now final and
include all measurement period adjustments.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date. These amounts were finalized during the second quarter 2019.
As of August 7, 2018
(In thousands)
Assets acquired (excluding goodwill) ................................................................................................... $
Liabilities assumed ................................................................................................................................
Net assets acquired ................................................................................................................................
Purchase price .......................................................................................................................................
Goodwill, excess of purchase price ....................................................................................................... $
359,335
(114,049)
245,286
447,192
201,906
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
73
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 29, 2019, recognized goodwill of $192.7 million and net intangible assets of $89.1 million were assigned
pro-rata to the Company’s three operating segments. None of the goodwill is expected to be deductible for income tax
purposes.
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 at year end 2018.
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 2017.
Pro Forma Consolidated Statement of Operations
(In thousands)
2018
2017
Revenue .................................................................................................................. $
Net income .............................................................................................................
1,340,449 $
96,909
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 20 – SEGMENT INFORMATION
The Company has determined that it has three operating segments – namely, the Americas, Europe and Asia-Pacific
geographic regions. 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)
2019
Net Sales .................................................................. $
Depreciation and amortization .................................
Total assets ...............................................................
2018
Net Sales .................................................................. $
Depreciation and amortization .................................
Total assets ...............................................................
2017
Net Sales .................................................................. $
Depreciation and amortization .................................
757,112 $
12,917
728,683
393,194 $
18,452
618,375
192,723 $
8,302
200,251
1,343,029
39,671
1,547,309
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
246,399 $
6,049
161,992 $
8,662
996,443
28,259
74
A reconciliation of the Company’s total operating segment depreciation and amortization, and assets to the corresponding
consolidated amounts follows:
2019
FISCAL YEAR ENDED
2018
(in thousands)
2017
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization .................. $
Corporate depreciation and amortization ........................
39,671 $
5,261
35,161 $
3,923
Reported depreciation and amortization .......................... $
44,932 $
39,084 $
28,259
2,002
30,261
ASSETS
Total segment assets ........................................................ $
Corporate assets ..............................................................
Eliminations ....................................................................
1,547,309 $
141,942
(266,202)
1,229,952
123,100
(68,408)
Reported total assets ........................................................ $
1,423,049 $
1,284,644
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 2019, 2018 and 2017 were approximately 49%, 49% 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:
SALES TO UNAFFILIATED CUSTOMERS(1)
United States ........................................................................................... $
Foreign countries .....................................................................................
681,868 $
661,161
600,093 $
579,480
514,783
481,660
Net sales .................................................................................................. $
1,343,029 $
1,179,573 $
996,443
2019
FISCAL YEAR
2018
(in thousands)
2017
LONG-LIVED ASSETS(2)
United States ........................................................................................... $
Foreign countries .....................................................................................
Total long-lived assets ............................................................................. $
_____________________
132,390 $
192,195
88,336
204,552
324,585 $
292,888
(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.
75
NOTE 21 – 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 2019
FIRST
QUARTER(1)
SECOND
QUARTER(2)
THIRD
QUARTER(3)
(in thousands, except per share data)
FOURTH
QUARTER(4)
Net sales ............................................................... $
Gross profit ...........................................................
Net income ...........................................................
297,688 $
115,398
7,059
357,507 $
138,590
29,499
348,352 $
135,762
26,210
339,482
135,704
16,432
Basic income per share ......................................... $
0.12 $
0.50 $
0.45 $
Diluted income per share ...................................... $
0.12 $
0.50 $
0.45 $
0.28
0.28
Share prices
High .................................................................. $
Low ................................................................... $
19.40 $
13.87 $
17.22 $
14.30 $
15.84 $
10.37 $
17.68
13.32
__________________________
(1) Results for the first quarter of 2019 include purchase accounting amortization of $1.9 million.
(2) Results for the second quarter of 2019 include purchase accounting amortization of $1.3 million.
(3) Results for the third quarter of 2019 include purchase accounting amortization of $1.3 million and restructuring and
other charges of $0.7 million.
(4) Results for the fourth quarter of 2019 include purchase accounting amortization of $1.3 million and restructuring and
other charges of $12.3 million.
FISCAL YEAR 2018
FIRST
QUARTER
SECOND
QUARTER(1)
THIRD
QUARTER(2)
(in thousands, except per share data)
FOURTH
QUARTER(3)
Net sales ............................................................... $
Gross profit ...........................................................
Net income ...........................................................
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 $
Diluted income per share ...................................... $
0.25 $
0.35 $
0.14 $
0.11
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 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 accounting amortization of $11.8 million and transaction related
expense of $1.2 million.
76
NOTE 22 – ITEMS RECLASSIFIED FROM OTHER COMPREHENSIVE INCOME
During 2019, 2018, and 2017, the Company reclassified $1.0 million, $1.8 million, and $1.6 million, respectively, out of
accumulated other comprehensive income related to the Company’s defined benefit retirement 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. Other reclassifications out of accumulated other comprehensive income related to
currency forward contracts are discussed in Note 10 entitled “Derivative Instruments”.
NOTE 23 – SUBSEQUENT EVENTS
On January 19, 2020, the Company’s Board of Directors voted to terminate for cause the employment of then President
and Chief Executive Officer, Jay Gould. As of December 29, 2019, the Company had accrued compensation expense for
bonuses and equity awards to this individual. Because the termination was for cause, the Company is not obligated to pay
these amounts, and the Company consequently expects to reverse $4.4 million in accrued expenses related to these obligations
in the first quarter of 2020.
As disclosed in Note 17, subsequent to his termination, the former officer filed a lawsuit against the Company alleging,
among other things, that the termination was unlawfully retaliatory and constituted a breach of his employment contract, and
that the Company defamed him in connection with the termination.
77
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 29, 2019 and December 30, 2018, the related consolidated statements of operations, comprehensive income, and
cash flows for each of the three years in the period ended December 29, 2019, 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 at
December 29, 2019 and December 30, 2018, and the results of its operations and its cash flows for each of the three years in
the period ended December 29, 2019, 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 29, 2019, 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 26, 2020 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases
during the year ended December 29, 2019 due to the adoption of the Accounting Standards Codification (“ASC”) Topic 842,
Leases (“ASC 842”).
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 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or disclosures to which it relates.
78
Goodwill Impairment Assessment
As described in Note 1, the Company’s net consolidated goodwill was $257.4 million as of December 29, 2019, which is
tested for impairment annually or when impairment indicators exist. The Company prepared valuations of its reporting units
using both a market approach and an income approach. The determination of the fair value of the reporting units requires
management to make significant estimates and assumptions related to forecasts of future revenue, operating margins, and
discount rates.
We identified the valuation of certain reporting units during the annual impairment assessment of goodwill as a critical audit
matter. The principal considerations for our determination are: (i) certain of the Company’s reporting units had relatively
lower excess fair value over book value and, as such, are more sensitive to management’s estimates, (ii) inherent uncertainties
exist related to the Company’s forecasts and how various political, economic and other uncertainties could affect the
Company’s forecasted assumptions of revenue, gross margin, and earnings included in the income approach, and (iii) the
general downward trend in certain market multiples of guideline public companies as of the 2019 impairment testing date
which resulted in a lower valuation based on the market approach analysis. Auditing these elements involved especially
challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the
extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
•
•
Testing the design and operating effectiveness of controls related to management’s forecasting process,
including controls over the data, inputs, and assumptions utilized to determine the fair value of the
Company’s reporting units, including revenue growth rates, gross margin, and earnings.
Evaluating the reasonableness of assumptions used in management’s income approach analysis by
comparing the forecasts to: (i) historical results, and (ii) Company’s internal communications to
management and the Board of Directors.
Reconciling the estimated fair value of the Company’s reporting units, as determined using the market and
the income approaches, to the indicated market capitalization of the Company as a whole.
Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) testing the underlying
source information utilized in the market approach, (ii) assessing the appropriateness and relative weighting
of valuation methods, (iii) testing the mathematical accuracy of the Company’s calculations, (iv) evaluating
the reasonableness of the discount rate used in the income approach, and (v) evaluating the reasonableness
of certain assumptions used in the market approach.
/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 26, 2020
79
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
29, 2019, 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 29, 2019, 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 29, 2019 and December 30, 2018, the related
consolidated statements of operations, comprehensive income, and cash flows for each of the three years in the period ended
December 29, 2019, and the related notes and schedules and our report dated February 26, 2020 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Atlanta, Georgia
February 26, 2020
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, an
evaluation was performed under the supervision and with the participation of our management, including our principal
executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, pursuant to Rule 13a-14(c) under
the Act. Based on that evaluation, our principal executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting. The management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
or 15d-15(f) promulgated under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 29, 2019
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
29, 2019, our internal control over financial reporting was effective based on those criteria.
Our independent auditors have issued an audit report on the effectiveness of our internal control over financial reporting.
This report immediately precedes Item 9 of this Report.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the captions “Nomination and Election of Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Meetings and Committees of the Board” in our definitive Proxy Statement for our
2020 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 2019 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 2020 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 2019 fiscal year, is incorporated herein by reference.
81
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 2020 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 2019
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 2020 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 2019 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
2020 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 2019 fiscal year, is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
PART IV
The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Reports
of Independent Registered Public Accounting Firm are contained in Item 8 of this Report:
Consolidated Statements of Operations and Comprehensive Income — fiscal years ended December 29, 2019, December
30, 2018 and December 31, 2017.
Consolidated Balance Sheets — December 29, 2019 and December 30, 2018.
Consolidated Statements of Cash Flows — fiscal years ended December 29, 2019, December 30, 2018 and December
31, 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).
Schedule II — Valuation and Qualifying Accounts and Reserves
82
3. Exhibits
The following exhibits are included as part of this Report:
Exhibit
Number
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
Description of Exhibit
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).
Restated Articles of Incorporation and accompanying Clarification Certificate (included as Exhibit 3.1 to the
Company’s quarterly report on Form 10-Q filed on May 10, 2012, previously filed with the Commission and
incorporated herein by reference).
Bylaws, as amended and restated February 22, 2017 (included as Exhibit 3.1 to the Company’s current report
on Form 8-K filed on February 27, 2017, previously filed with the Commission and incorporated herein by
reference).
Description of the Company’s Securities.
Salary Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the Company’s registration
statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein by
reference).*
Form of Salary Continuation Agreement, dated as of January 1, 2008 (as used for Daniel T. Hendrix)
(included as Exhibit 99.5 to the Company’s current report on Form 8-K filed on January 7, 2008, previously
filed with the Commission and incorporated herein by reference).*
Interface, Inc. Omnibus Stock Incentive Plan (as amended and restated effective February 18, 2015)
(included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 20, 2015, previously
filed with the Commission and incorporated herein by reference); Form of Restricted Stock Agreement, as
used for executive officers (included as Exhibit 10.5 to the Company’s annual report on Form 10-K for the
year ended December 30, 2007, previously filed with the Commission and incorporated herein by reference);
Form of Performance Share Agreement (included as Exhibit 99.1 to the Company’s current report on Form
8-K filed on January 20, 2016, previously filed with the Commission and incorporated herein by reference);
Form of Restricted Stock Agreement, as used for executive officers (included as Exhibit 10.1 to the
Company’s quarterly report on Form 10-Q filed on May 11, 2017, previously filed with the Commission and
incorporated herein by reference); Form of Performance Share Agreement for executive officers (included
as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q filed on May 11, 2017, previously filed
with the Commission and incorporated herein by reference); and Form of Restricted Stock Agreement, as
used for directors (included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q filed on May
11, 2017, previously filed with the Commission and incorporated herein by reference).*
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).*
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).*
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).*
83
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Amended and Restated Employment and Change in Control Agreement of Jay D. Gould dated as of March
3, 2017 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on April 14, 2017,
previously filed with the Commission and incorporated herein by reference).*
Split Dollar Insurance Agreement, dated February 21, 1997, between the Company and Daniel T. Hendrix
(included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 4,
1998, previously filed with the Commission and incorporated herein by reference); and Amendment thereto,
dated December 29, 2008 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on
January 2, 2009, previously filed with the Commission and incorporated herein by reference).*
Form of Indemnity Agreement of Director (as used for directors of the Company) (included as Exhibit 99.1
to the Company’s current report on Form 8-K filed on November 30, 2005, previously filed with the
Commission and incorporated herein by reference).*
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).*
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).*
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).*
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).
Second Amended and Restated Security and Pledge Agreement, dated as of August 7, 2018, among Interface,
Inc., certain subsidiaries of the Company as obligors, and Bank of America, N.A. as Administrative Agent.
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.)*
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).*
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).*
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).*
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).*
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).*
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.)
84
10.22
21
23
24
31.1
31.2
32.1
32.2
First Amendment to Second Amended and Restated Syndicated Facility Agreement, dated as of December
18, 2019 (included as Exhibit 99.1 to the Company’s current report on Form 8-K filed on December 23,
2019, previously filed with the Commission and incorporated herein by reference.)
Subsidiaries of the Company.
Consent of BDO USA, LLP.
Power of Attorney (see signature page of this Report).
Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 29, 2019.
Certification of Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 29, 2019.
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 29,
2019.
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 29,
2019.
101.INS XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because
its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
104
The cover page from this Annual Report on Form 10-K for the year ended December 29, 2019, formatted in
Inline XBRL
* Management contract or compensatory plan or agreement required to be filed pursuant to Item 15(b) of this Report.
85
ITEM 16. FORM 10-K SUMMARY
None.
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 29, 2019 .............. $
December 30, 2018 ..............
December 31, 2017 ..............
3,540 $
3,493
3,780
881 $
1,848
635
— $
—
—
628 $
1,801
922
3,793
3,540
3,493
______________________
(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 29, 2019 .............. $
December 30, 2018 ..............
December 31, 2017 ..............
11,907 $
2,568
10,291
7,944 $
11,961
3,999
49 $
8,569
3,300
8,357 $
2,622
3,724
11,445
11,907
2,568
______________________
(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.
86
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 29, 2019 .............. $
December 30, 2018 ..............
December 31, 2017 ..............
3,495 $
4,111
5,529
1,519 $
1,074
2,071
— $
—
—
1,161 $
1,690
3,489
3,853
3,495
4,111
______________________
(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.)
87
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 26, 2020
INTERFACE, INC.
By:
/s/ DANIEL T. HENDRIX
Daniel T. Hendrix
President and 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.
88
Signature
Capacity
Date
/s/ DANIEL T. HENDRIX
Daniel T. Hendrix
President, Chief Executive Officer and
Chairman of the Board and Director
/s/ BRUCE A. HAUSMANN
Bruce A. Hausmann
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ JOHN P. BURKE
John P. Burke
/s/ ANDREW B. COGAN
Andrew B. Cogan
/s/ DWIGHT GIBSON
Dwight Gibson
Jay D. Gould
Director
Director
Director
Director
/s/ CHRISTOPHER G. KENNEDY
Christopher G. Kennedy
Director
/s/ JOSEPH KEOUGH
Joseph Keough
Director
/s/ CATHERINE M. KILBANE
Catherine M. Kilbane
Director
/s/ DAVID KOHLER
K. David Kohler
/s/ JAMES B. MILLER, JR.
James B. Miller, Jr.
/s/ SHERYL D. PALMER
Sheryl D. Palmer
Director
Director
Director
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
89
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 adjustment (1)
Organic Sales
Gross Profit as Reported (GAAP)
Purchase Accounting Amortization
Adjusted Gross Profit
2018
2019
$1,180
-
-
$1,180
$1,343
26
(166)
$1,204
ADJUSTED GROSS PROFIT
Q4 2018 Q4 2019 2018
2019
$122
12
$134
$136
1
$137
$424
32
$457
$526
6
$531
ADJUSTED DILUTED EPS
Diluted Earnings per Share as Reported (GAAP)
Purchase Accounting Amortization
Transaction Related Expenses
Tax Act Expense (Benefit)
Restructuring, Asset Impairment and Other Charges
Adjusted Diluted Earnings per Share
2018
2019
$0.84
0.38
0.12
(0.11)
0.26
$1.49
$1.34
0.08
-
-
0.17
$1.59
(1) Nora net sales adjustment to exclude sales in 2019 as the 2018 comparative period excluded nora activity
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.
Board of Directors
Daniel T. Hendrix
Chairman of the Board and
Chief Executive Officer
Interface, Inc.
John P. Burke
Chief Executive Officer
Trek Bicycle Corporation
Dwight Gibson
President, Food & Beverage
and Industrial Segments
SPX FLOW, Inc.
Jay D. Gould
Former President and
Chief Executive Officer
Interface, Inc.
Christopher G. Kennedy
Chairman
Joseph P. Kennedy Enterprises, Inc.
Joseph Keough
Chairman and Chief Executive Officer
Wood Partners
Catherine M. Kilbane
Retired Senior VIce President
and General Counsel
The Sherwin-Williams Company
K. David Kohler
President and Chief Executive Officer
Kohler Co.
James B. Miller, Jr.
Executive Chairman
Ameris Bancorp
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
Executive Officers
Daniel T. Hendrix
President and
Chief Executive Officer
David B. Foshee
Vice President, General Counsel
and Secretary
Bruce A. Hausmann
Vice President and
Chief Financial Officer
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
Annual Meeting:
The annual meeting of shareholders will
be at 11:00 am EDT on May 22, 2020 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 13, 2020: 634
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 29, 2019, 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.
Combine the Unexpected.
1280 West Peachtree Street NW
Atlanta, GA 30309
www.interface.com