Form 10-K Fiscal Year 2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2006
Commission
File No.: 0-12016
Interface,
Inc.
(Exact
name of registrant as specified in its charter)
Georgia
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58-1451243
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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2859
Paces Ferry Road, Suite 2000
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|
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Atlanta,
Georgia
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30339
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(Address
of principal executive offices)
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(zip
code)
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Registrant’s
telephone number, including area code:
(770)
437-6800
Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
Class
A Common Stock, $0.10 Par Value Per Share
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES þ
NO
o
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 o
NO
þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES þ
NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer o
|
Accelerated
Filer þ
|
Non-Accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o
NO
þ
Aggregate
market value of the voting and non-voting stock held by non-affiliates of
the
registrant as of June 30, 2006 (assuming conversion of Class B Common Stock
into
Class A Common Stock): $562,215,335
(49,101,776
shares
valued at the last sales price of $11.45 on June 30, 2006). See Item
12.
Number
of
shares outstanding of each of the registrant’s classes of Common Stock, as of
March 1, 2007:
Class
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|
Number
of Shares
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|
|
|
Class
A Common Stock, $0.10 par value per share
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|
54,365,315
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|
|
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Class
B Common Stock, $0.10 par value per share
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6,754,825
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III.
PART
I
ITEM
1. BUSINESS
Introduction
and General
We
are
the worldwide leader in design, production and sales of modular carpet. Our
global market share of the specified carpet tile segment is approximately
35%,
which we believe is more than double that of our nearest competitor. In recent
years, modular carpet sales growth in the floorcovering industry has
significantly outpaced the growth of the overall industry, as architects,
designers and end users increasingly recognized the unique and superior
attributes of modular carpet, including its dynamic design capabilities, greater
economic value (which includes lower costs as a result of reduced waste in
both
installation and replacement), and installation ease and speed. Our Modular
Carpet segment sales, which do not include modular carpet sales in our Bentley
Prince Street segment, grew from $442 million to $764 million during
the 2002 to 2006 period, representing a 14.6% compound annual growth
rate.
We
are
also a leading manufacturer and marketer of other products for the commercial
interiors industry, including broadloom carpet, panel fabrics and upholstery
fabrics. Our
Bentley Prince Street®
brand is
the leader in the high-end, designer-oriented sector of the broadloom market
segment, where custom design and high quality are the principal specifying
and
purchasing factors. Our Fabrics Group includes the leading
U.S. manufacturer of panel fabrics for use in open plan office furniture
systems, with a market share we believe to be approximately 50%, and the
leading
manufacturer of contract upholstery fabrics sold to office furniture
manufacturers in the United States, with a market share we believe to be
approximately 30%.
As
a
global company with a reputation for high quality, reliability and premium
positioning, we market products in over 100 countries under established brand
names such as
InterfaceFLOR®, Heuga®, Bentley Prince Street
and
FLOR™
in
modular carpet;
Bentley Prince Street
and
Prince Street House and Home™
in
broadloom carpet;
Guilford of Maine®, Chatham®
and
Terratex®
in
interior fabrics and upholstery products; and
Intersept®
in
antimicrobial chemicals. Our principal geographic markets are the Americas,
Europe and Asia-Pacific, where our sales were approximately 63%, 29% and
8%,
respectively, of total net sales for fiscal year 2006.
Capitalizing
on our leadership in modular carpet for the corporate office segment, we
embarked on a segmentation strategy in 2001 to increase our presence and
market
share for modular carpet sales in non-corporate office market segments, such
as
government, healthcare, hospitality, education and retail space, which combined
are almost twice the size of the approximately $1 billion
U.S. corporate office segment. In 2003, we expanded our segmentation
strategy to target the approximately $11 billion U.S. residential
market segment for carpet. As a result, our mix of corporate office versus
non-corporate office modular carpet sales in the Americas shifted to 47%
and
53%, respectively, for 2006 compared to 64% and 36%, respectively, in 2001.
We
believe the appeal and utilization of modular carpet is reaching a tipping
point
of acceptance in each of these non-corporate office segments, and we are
using
our considerable skills and experience with designing, producing and marketing
modular products that make us the market leader in the corporate office segment
to support and facilitate our penetration into these new segments around
the
world.
Our
modular carpet leadership, strong business model and segmentation strategy,
implementation of strategic restructuring initiatives commenced in 2000,
and
sustained strategic investments in innovative product concepts and designs
enabled us to weather successfully the unprecedented downturn, both in severity
and duration, that affected the commercial interiors industry from 2001 to
2003.
As a result, we were well-positioned to capitalize on improved market conditions
when the commercial interiors industry began to recover in 2004. From 2003
to
2006, we increased our net sales from $766.5 million to
$1,075.8 million, a 12.0% compound annual growth rate. Furthermore, our net
sales increased $90.1 million from 2005 to 2006, notwithstanding the April
2006
sale of our European fabrics business, which had net sales of $63.0 million
in 2005. We expect further improvements in net sales and other related value
measurements as we build upon our core strengths and strategies.
Our
Strengths
Our
principal competitive strengths include:
Market
Leader in Attractive Modular Carpet Segment. We
are the world’s leading manufacturer of carpet tile with a market share in the
specified carpet tile segment (the segment where architects and designers
are
heavily involved in “specifying”, or selecting, the carpet) of approximately
35%, which we believe is more than double that of our nearest competitor.
Modular carpet has become more prevalent across all commercial interiors
markets
as designers, architects and end users become more familiar with its unique
attributes. We are driving this trend with our product innovations and designs
discussed below, and we expect this trend will continue. According to the
2006
Floor Focus
interiors industry survey of the top 250 designers in the United States,
carpet
tile was ranked as the number one “hot product” for the eighth consecutive year.
We believe that we are well positioned to lead and capitalize upon the continued
shift to modular carpet, both domestically and around the world.
Established
Brands and Reputation for Quality, Reliability and
Leadership. Our
products are known in the industry for their high quality, reliability and
premium positioning in the marketplace. Our established brand names in carpets
and interior fabrics are leaders in the industry. The 2006
Floor Focus
survey
ranked an Interface
brand
first or second in each of the five survey categories for carpet: design,
quality, service, performance and value. Interface companies also ranked
first
and fourth in the category of “best overall business experience” for carpet
companies in this survey. On the international front,
Heuga
is one
of the well-recognized brand names in carpet tiles for commercial, institutional
and residential use.
Guilford of Maine, Chatham
and
Terratex
are
leading brand names in their respective markets for commercial interior fabrics.
More generally, as the appeal and utilization of modular carpet continues
to
expand into new market segments such as education, hospitality and retail
space,
our reputation as the inventor and pioneer of modular carpet — as well as
our established brands and leading market position for modular carpet in
the
corporate office segment — will enhance our competitive advantage in
marketing to the customers in these new markets.
Innovative
Product Design and Development Capabilities. Our
product design and development capabilities have long given us a significant
competitive advantage, and 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 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 random patterning designs (which allow for mergeable
dye
lots and permit initial installation and replacement without regard to the
directional orientation of the carpet tiles), cost-efficient installation
and
maintenance, interactive flexibility, and recycled and recyclable materials.
Our
i2
line of
products, which now comprises more than 30% of our total U.S. modular carpet
business, represents a differentiated category of smart, environmentally
sensitive and stylish modular carpet, and
Entropy
has
become the fastest growing product in our history. The award-winning design
firm
David Oakey Designs had a pivotal role in developing our
i2
product
line, and our long-standing exclusive relationship with David Oakley Designs
remains vibrant and augments our internal research, development and design
staff. Another recent innovation is our patent-pending
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 resulting in a reduction in installation time and waste
materials.
Make-to-Order
and Global Manufacturing Capabilities. The
success of our modernization and restructuring of operations over the past
several years gives us a distinct competitive advantage in meeting two principal
requirements of the specified products markets we primarily target — that
is, providing custom samples quickly and on-time delivery of customized final
products. We also can generate realistic digital samples that allow us to
create
a virtually unlimited number of new design concepts and distribute them
instantly for customer review, while at the same time reducing sampling waste.
Approximately 85% of our modular carpet products in the United States and
Asia-Pacific markets are now made-to-order and we are increasing our
made-to-order production in Europe as well. Our make-to-order capabilities
not
only enhance our marketing and sales, they significantly improve our inventory
turns. Our global manufacturing capabilities in modular carpet production
are an
important component of this strength, and give us an advantage in serving
the
needs of multinational corporate customers that require products and services
at
various locations around the world. Our manufacturing locations across four
continents enable us to compete effectively with local producers in our
international markets, while giving international customers more favorable
delivery times and freight costs.
Recognized
Global Leadership in Ecological Sustainability. Our
long-standing goal and commitment to be ecologically “sustainable” — that
is, the point at which we are no longer a net “taker” from the earth and do no
harm to the biosphere — has emerged as a competitive strength for our
business and remains a strategic initiative. It now includes
Mission Zero™,
our
recently launched global branding initiative, which represents our mission
to
eliminate any negative impact our companies may have on the environment by
the
year 2020. Our acknowledged leadership position and expertise in this area
resonate deeply with many of our customers and prospects around the globe,
and
provide us a differentiating advantage in competing for business among
architects, designers and end users of our products, who increasingly make
purchase decisions based on “green” factors. The 2006
Floor Focus
survey,
which named us the top company among the “Green Leaders” and gave our carpet
tile the top honors for “Green Kudos”, found that 74% of such designers consider
sustainability an added benefit and 20% consider it a “make or break” issue when
deciding what products to recommend or purchase.
Strong
Operating Leverage Position. Our
operating leverage, which we define as our ability to realize profit on
incremental sales, is strong and allows us to increase earnings at a higher
rate
than our rate of increase in net sales. Our operating leverage position is
primarily a result of (1) the specified, high-end nature and premium
positioning of our principal products in the marketplace, and (2) the mix
of fixed and variable costs in our manufacturing processes that allows us
to
increase production of most of our products without significant incremental
increases in fixed costs. For example, while net sales from our Modular Carpet
segment increased from $442.3 million in 2002 to $763.7 million in
2006, our operating income from that segment increased from $42.0 million
(9.5% of net sales) in 2002 to $98.2 million (12.9% of net sales) in
2006.
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
work force. Our team is highly skilled and dedicated to guiding our overall
growth and expansion into our targeted market segments, while maintaining
our
leadership in traditional markets and our high contribution margins. We utilize
an internal marketing and predominantly commissioned sales force of
approximately 710 experienced personnel, stationed at over 70 locations in
over
30 countries, to market our products and services in person to our customers.
We
have also developed special features for our incentive compensation and our
sales and marketing training programs in order to promote performance and
facilitate leadership by our executives in strategic areas.
Our
Business Strategy and Principal Initiatives
Our
business strategy is (1) to continue to use our leading position in the
modular carpet segment and our product design and global make-to-order
capabilities as a platform from which to drive acceptance of modular carpet
products across industry segments, while maintaining our leadership position
in
the corporate office market segment, and (2) to return to our historical
profit levels in the high-end, designer-oriented sector of the broadloom
carpet
market and in the interior fabrics market. We will seek to increase revenues
and
profitability by capitalizing on the above strengths and pursuing the following
key strategic initiatives:
Continue
to Penetrate Non-Corporate Office Market Segments. In
both our floorcoverings and fabrics businesses, we will continue our focus
on
product design and marketing and sales efforts on non-corporate office market
segments such as government, education, healthcare, hospitality, retail and
residential space. We began this initiative as part of our market segmentation
strategy in 2001 primarily to reduce our exposure to the more severe economic
cyclicality of the corporate office segment, and we have shifted our mix
of
corporate office versus non-corporate office modular carpet sales in the
Americas to 47% and 53%, respectively, in 2006 from 64% and 36%,
respectively, in 2001. To implement this strategy, we:
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introduced
specialized product offerings tailored to the unique demands of
these
segments, including specific designs, functionalities and
prices;
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created
special sales teams dedicated to penetrating these segments at
a high
level, with a focus on specific customer accounts rather than geographic
territories; and
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realigned
incentives for our corporate office segment sales force generally
in order
to encourage their efforts, and where appropriate, to assist our
penetration of these other
segments.
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As
part
of this strategy, we launched our
FLOR
and
Prince Street House and Home
lines of
products in 2003 to focus on the approximately $11 billion
U.S. residential carpet market segment. These products were specifically
created to bring high style modular and broadloom floorcovering to the
U.S. residential market.
FLOR
is
offered in over 1,200 Lowe’s stores, many specialty retailers, over the Internet
and in a number of major retail catalogs. Additionally, in 2006 we received
an
initial stocking order from Target for our "Rug in a Box" product. Through
such
direct and indirect retailing,
FLOR
sales
have grown dramatically, nearly tripling from 2004 to 2006.
Prince Street House and Home
brings
new colors and patterns to the high-end consumer market with a collection
of
broadloom carpet and rugs sold through hundreds of retail stores and interior
designers. Through new agreements between our
FLOR
brand
and both Martha Stewart Living Omnimedia and national homebuilder KB Home,
we
expect to further our penetration of the U.S. residential market with a
line of Martha Stewart-branded carpet tiles that we anticipate offering in
the
second half of 2007. Through our Heuga Home division, we have been marketing
modular carpet to the residential segment in select international markets
since
2003. We plan to increase our focus on such international residential soft
floorcovering markets, the size of which we believe to be approximately
$2.3 billion in Western Europe alone.
In
our
fabrics business, we successfully penetrated the automotive fabrics market
in
the fourth quarter of 2005, receiving our first automotive placement with
Ford
Motor Company for use in the 2008 Ford Escape Hybrid. We believe this new
market
for our fabrics products has significant potential for growth and profitability
for our U.S. fabrics business.
Penetrate
Expanding Geographic Markets for Modular Products. The
popularity of modular carpet continues to increase compared with other
floorcovering products across most markets, internationally as well as in
the
United States. While maintaining our leadership in the corporate office segment,
we will continue to build upon our position as the worldwide leader for modular
carpet in order to promote sales in all market segments globally. A principal
part of our international focus — which utilizes our global marketing
capabilities and sales infrastructure — is the significant opportunities in
several emerging geographic markets for modular carpet. Some of these markets,
such as China, India and Eastern Europe, represent large and growing economies
that are essentially new markets for modular carpet products. Others, such
as
Germany, are established markets that are transitioning to the use of modular
products from historically low levels of penetration by modular carpet. Each
of
these emerging markets represents a significant growth opportunity for our
modular carpet business. Our initiative to penetrate these markets will include
drawing upon our internationally recognized
Heuga
brand.
For example, we successfully introduced a mid-priced
Heuga
brand
into Asia in 2003, and we plan similar products for other regions while also
marketing products based on our
i2
line.
Continue
to Minimize Expenses and Invest Strategically. We
have steadily trimmed costs from our operations for several years through
multiple and sometimes painful initiatives, which have made us leaner today
and
for the future. Our historical supply chain and other cost containment
initiatives have improved our cost structure and yielded the operating
efficiencies we sought. While we still seek to minimize our expenses in order
to
increase profitability, we will also take advantage of strategic opportunities
to invest in systems, processes and personnel that can help us grow our business
and increase profitability and value.
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, especially in the modular carpet
segment, where our
i2
products
and recent
TacTiles
installation system have confirmed our position as an innovation leader.
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
global
branding initiative, which draws upon and promotes our ecological sustainability
commitment, is part of those initiatives and includes placing our
Mission Zero
logo on
many of our marketing and merchandising materials distributed throughout
the
world.
Floorcovering
Products/Services
Products
Interface
is the world’s largest manufacturer and marketer of modular carpet, with a
global specified carpet tile market share that we believe is approximately
35%.
We also manufacture and sell broadloom carpet, which generally consists of
tufted carpet sold primarily in twelve-foot rolls, under the
Bentley Prince Street
brand.
Our broadloom operations focus on the high quality, designer-oriented sector
of
the U.S. broadloom carpet market.
Modular
Carpet. Our
modular carpet system, which is marketed under the established global
brands
InterfaceFLOR
and
Heuga,
and more
recently under the
Bentley Prince Street
brand,
utilizes carpet tiles cut in precise, dimensionally stable squares (usually
50 square centimeters) or rectangles 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 allows tile
to
be installed and remain flat on the floor without the need for general
application of adhesives or use of fasteners. We also make carpet tiles with
a
backing containing post-industrial and/or post-consumer recycled materials,
which we market under the
GlasBac RE
brand.
Our
carpet tile has become popular for a number of reasons. First, carpet tile
incorporating this 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, an increasing percentage of our modular
carpet sales is custom or made-to-order product 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. Through our relationship with David Oakey Designs, we also have
created
modular carpet products (some of which are part of our
i2
product
line) specifically designed for each of the education, hospitality and retail
market segment.
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.
Broadloom
Carpet. We
maintain a significant share of the high-end, designer-oriented broadloom
carpet
segment by combining innovative product design and short production and delivery
times with a marketing strategy aimed at interior designers, architects and
other specifiers. Our
Bentley Prince Street
designs
emphasize the dramatic use of color and multi-dimensional texture. In addition,
we have launched the
Prince Street House and Home
collection of high-style broadloom carpet and area rugs targeted at
design-oriented residential consumers.
Intersept
Antimicrobial. We
sell a proprietary antimicrobial chemical compound under the registered
trademark
Intersept.
We
incorporate
Intersept
in all
of our modular carpet products and have licensed
Intersept
to
another company for use in air filters.
Services
For
several years, we provided or arranged for commercial carpet installation
services, primarily through our
Re:Source®
service
provider network. The network in the United States included owned and affiliated
(or “aligned”) commercial floorcovering contractors at various locations across
the United States. In Australia, we offered these services through the largest
single carpet distributor in that country.
During
the years leading up to 2004, our owned
Re:Source
dealer
businesses experienced decreased sales volume and intense pricing pressure,
primarily due to the economic downturn in the commercial interiors industry.
As
a result, we decided to exit our owned
Re:Source
dealer
businesses, and in 2004 we began to dispose of several of our dealer
subsidiaries. In 2005, we completed the exit activities related to the owned
dealer businesses. The results of our owned
Re:Source
dealer
businesses (as well as the Australian dealer business and residential fabrics
business that we also decided to exit) are included in discontinued operations.
In early 2006, we sold certain assets relating to our aligned (non-owned)
dealer
network, and have since discontinued its operations as well.
Marketing
and Sales
We
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 emphasize sales in other segments, including retail space,
government institutions, schools, healthcare facilities, tenant improvement
space, hospitality centers, residences and home office space. We began this
initiative as part of our segment diversification strategy in 2001 primarily
to
reduce our exposure to the more severe economic cyclicality of the corporate
office segment, and we reduced our mix of corporate office versus non-corporate
office modular carpet sales in the Americas from 64% and 36%, respectively,
in 2001 to 47% and 53%, respectively, in 2006. Our marketing efforts are
enhanced by the established and well-known brand names of our carpet products,
including the
InterfaceFLOR
and
Heuga
brands
in modular carpet and
Bentley Prince Street
brand in
broadloom carpet. Our exclusive consulting agreement with the award-winning,
premier design firm David Oakey Designs enabled us to introduce more than
31 new
carpet designs in the United States in 2006 alone.
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. Our mass customization initiative simplified our carpet
manufacturing operations, which significantly improved our ability to respond
quickly and efficiently to requests for samples. 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 have
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, Ireland, France, Germany, Spain, the Netherlands, Australia,
Japan, Hungary, Italy, Norway, Romania, Russia, Singapore and China. We expect
to open offices in other locations around the world as necessary to capitalize
on emerging marketing opportunities.
Manufacturing
We
manufacture carpet at three locations in the United States and at facilities
in
the Netherlands, the United Kingdom, Canada, Australia and
Thailand.
Having
foreign manufacturing operations enables us to supply our customers with
carpet
from the location offering the most advantageous delivery times, duties and
tariffs, exchange rates, and freight expense, and enhances our ability to
develop a strong local presence in foreign markets. We believe that the ability
to offer consistent products and services on a worldwide basis at attractive
prices is an important competitive advantage in servicing multinational
customers seeking global supply relationships. We will consider additional
locations for manufacturing operations in other parts of the world as necessary
to meet the demands of customers in international markets.
We
are in
the process of further standardizing our worldwide modular carpet manufacturing
procedures. In connection with the implementation of this plan, we are seeking
to establish global standards for our tufting equipment, yarn systems and
product styling. We previously had changed our standard carpet tile size
from
18 square inches to 50 square centimeters, which we believe has
allowed us to reduce operational waste and fossil fuel energy consumption
and to
offer consistent product sizing for our global customers.
We
also
implemented a new, flexible-inputs backing line 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. Nicknamed
“Cool
Blue™”,
the
new process came on line for production of certain carpet styles in late
2005.
The
environmental management systems of our floorcovering manufacturing facilities
in LaGrange, Georgia, West Point, Georgia, City of Industry, California,
Shelf,
England, Northern Ireland, Australia, the Netherlands, Canada and Thailand
are
certified under International Standards Organization (ISO) Standard
No. 14001.
Our
significant international operations are subject to various political, economic
and other uncertainties, including risks of restrictive taxation policies,
foreign exchange restrictions, changing political conditions and governmental
regulations. We also receive a substantial portion of our revenues in currencies
other than U.S. dollars, which makes us subject to the risks inherent in
currency translations. Although our ability to manufacture and ship products
from facilities in several foreign countries reduces the risks of foreign
currency fluctuations we might otherwise experience, we also engage from
time to
time in hedging programs intended to further reduce those risks.
Competition
We
compete, on a global basis, in the sale of our floorcovering products with
other
carpet manufacturers and manufacturers of vinyl and other types of
floorcoverings. 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, possessing a global
market
share that we believe is approximately twice that of our nearest competitor.
However, a number of domestic and foreign competitors manufacture modular
carpet
as one segment of their business, and some of these competitors have financial
resources greater than ours. In addition, some of the competing carpet
manufacturers have the ability to extrude at least some of their requirements
for fiber used in carpet products, which decreases their dependence on third
party suppliers of fiber.
We
believe the principal competitive factors in our primary floorcovering markets
are brand recognition, quality, design, service, broad product lines, product
performance, marketing strategy and pricing. In the corporate office market
segment, modular carpet competes with various floorcoverings, of which broadloom
carpet is the most common. The quality, service, design, better and longer
average product performance, flexibility (design options, selective rotation
or
replacement, use in combination with roll goods) and convenience of our modular
carpet are our principal competitive advantages.
We
believe we have competitive advantages in several other areas as well. First,
our exclusive relationship with David Oakey Designs allows us to introduce
numerous innovative and attractive floorcovering products to our customers.
Additionally, we believe that our global 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 our modular carpet enhances
our
ability to compete successfully with resilient tile in the healthcare
market.
In
addition, we believe that our goal and commitment to be ecologically
“sustainable” by 2020 is a brand-enhancing, competitive strength as well as
a strategic initiative. Increasingly, 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 the related LEED certification
program, resonate deeply with many of our customers and prospects around
the
globe, and these businesses are increasingly making purchase decisions based
on
“green” factors. Our modular carpet products historically have had inherent
installation and maintenance advantages that translated into greater efficiency
and waste reduction. We have further enhanced the “green” quality of our modular
carpet in our highly successful
i2
product
line, and we are using raw materials and production technologies that directly
reduce the adverse impact of those operations on the environment and limit
our
dependence on petrochemicals.
To
further raise awareness of our goal of becoming sustainable, we recently
launched our Mission
Zero global
branding initiative, which represents our mission to eliminate any negative
impact our companies may have on the environment by the year 2020. As part
of
this initiative, our new
Mission Zero
logo
appears on many of our marketing and merchandising materials distributed
throughout the world.
Interior
Fabrics
Products
Our
Fabrics Group designs, manufactures and markets specialty fabrics for open
plan
office furniture systems and commercial interiors. Open plan office furniture
systems are typically panel-enclosed work stations customized to particular
work
environments. The open plan concept offers a number of advantages over
conventional office designs, including more efficient floor space utilization,
reduced energy consumption and greater flexibility to redesign existing
space.
Our
Fabrics Group includes the leading U.S. manufacturer of panel fabrics for
use in open plan office furniture systems, with a market share we believe
is
approximately 50%. (Sales of panel fabrics constituted 63% of the Fabrics
Group’s total North American fabrics sales in fiscal 2006.) We are also the
leading manufacturer of contract upholstery sold to office furniture
manufacturers in the United States with a market share in fiscal 2006 that
we
believe is approximately 30%. In addition, we manufacture other interior
fabrics
products, including wall covering fabrics, fabrics used for window treatments
and fabrics used for cubicle curtains.
We
manufacture fabrics made of 100% polyester (largely recycled content), as
well
as wool-polyester blends and numerous other natural and man-made blends,
which
are either woven or knitted. Our products feature a high degree of color
consistency, natural dimensional stability and fire retardancy, in addition
to
their overall aesthetic appeal. All of our product lines are color and texture
coordinated. We seek to continuously enhance product performance and
attractiveness through experimentation with different fibers, dyes, chemicals
and manufacturing processes. Product innovation in the interior fabrics market
(similar to the floorcoverings market) is important to achieving and maintaining
market share.
We
market
a line of fabrics manufactured from recycled, recyclable or compostable
materials under the
Terratex
brand.
The
Terratex
line
includes both new products and traditional product offerings and includes
products made from 100% post-consumer recycled polyester, 100% post-industrial
recycled polyester and 100% post-consumer recycled wool. The first fabric
to
bear the
Terratex
label
was Guilford of Maine’s
FR-701®
line of
panel fabrics. We market seating fabrics under the
Terratex
label as
well. Over the past few years, we have continued building awareness of
the
Terratex
brand,
which enhances the Interface corporate image and reputation. The
Terratex
products
have been well received and are gaining momentum in the market, and we plan
to
expand our offerings under this label.
Our
TekSolutions®
operations provide the services of laminating fabrics onto substrates for
pre-formed panels, coating fabrics with various treatments, warehousing fabrics
for third parties, and cutting fabrics and other materials. We believe that
significant market opportunities exist for the provision of this and other
ancillary textile sequencing and processing services to OEMs and intend to
participate in these opportunities.
We
anticipate that future growth opportunities will arise from the growing market
for retrofitting services, where fabrics are used to re-cover existing panels.
In addition, the increased importance being placed on the aesthetic design
of
office space should lead to a significant increase in upholstery fabric sales.
Our management also believes that additional growth opportunities exist in
international sales, domestic healthcare markets, automotive, contract
wallcoverings and window treatments.
In
2003,
we placed our Fabrics Group under new senior management, with a mandate to
improve the group’s operating efficiencies and financial performance. We have
consolidated fabrics manufacturing facilities and eliminated underperforming
product offerings, while maintaining the high level of customer awareness
for
our fabrics brands. In 2004, we decided to exit a small residential fabrics
business, the results of which are included in discontinued operations. In
April
2006, we continued these efforts by selling our European fabrics business
for
approximately $28.8 million and closing our East Douglas, Massachusetts
fabrics manufacturing facility and integrating those operations into our
Elkin,
North Carolina manufacturing facility.
Marketing
and Sales
Our
principal interior fabrics customers are OEMs of movable office furniture
systems, and the Fabrics Group sells to essentially all of the major office
furniture manufacturers. The Fabrics Group also sells to smaller office
furniture manufacturers and manufacturers and distributors of wallcoverings,
vertical blinds, cubicle curtains, acoustical wallboards and ceiling tiles.
The
Guilford of Maine, Chatham
and
Terratex
brand
names are well-known in the industry and enhance our fabric marketing
efforts.
The
majority of our interior fabrics sales are made through the Fabrics Group’s own
sales force. The sales team works closely with designers, architects, facility
planners and other specifiers who influence the purchasing decisions of buyers
in the interior fabrics segment. In addition to facilitating sales, the
resulting relationships also provide us with marketing and design ideas that
are
incorporated into the development of new product offerings. The Fabrics Group
maintains a design studio in Grand Rapids, Michigan which facilitates
coordination between its in-house designers and the design staffs of major
customers. Our interior fabrics sales offices and showrooms are located in
New
York City and Elkin, North Carolina. The Fabrics Group also has marketing
and
distribution facilities in Canada and Hong Kong, and sales representatives
in
Mexico, Japan, Hong Kong, Germany, Singapore, Malaysia, Korea, Australia,
the
United Arab Emirates and South Africa. We have sought increasingly, over
the
past several years, to expand our export business and international operations
in the fabrics segment.
Manufacturing
Our
fabrics manufacturing facilities are located in Maine, Michigan and North
Carolina. The production of synthetic and wool-blended fabrics is a relatively
complex, multi-step process. Raw fiber and yarn are placed in pressurized
vats
in which dyes are forced into the fiber. Particular attention is devoted
to this
dyeing process, which requires a high degree of precision and expertise in
order
to achieve color consistency. The principal raw materials used by us are
readily
available from multiple sources. The Fabrics Group also now uses 100% recycled
fiber from materials such as PET soda bottles in some of its manufacturing
processes.
The
environmental management system of two of the Fabrics Group’s facilities located
in Guilford, Maine (one of which is its largest facility there) and Newport,
Maine have been granted ISO 14001 certification.
Our
TekSolutions
textile
processing operations (including fabric lamination, coating, warehousing
and
cutting) are located in Grand Rapids, Michigan, in close proximity to several
large customers of the Fabrics Group. In addition, we are in the process
of
establishing a textile processing and finishing operation near Shanghai,
China,
to service OEM customers throughout Southeast Asia.
Competition
We
compete in the interior fabrics market on the basis of product design, quality,
reliability, price and service. By historically concentrating on the open
plan
office furniture systems segment, the Fabrics Group has been able to specialize
our manufacturing capabilities, product offerings and service functions,
resulting in a leading market position. Management believes we are the largest
U.S. manufacturer of panel fabric for use in open plan office furniture
systems.
We
are
the largest U.S. manufacturer of contract upholstery fabrics for office
furniture manufacturers. We believe our share of the U.S. contract
upholstery market is nearly double that of our closest competitor.
Through
our other strategic acquisitions, we have been successfully diversifying
our
product offerings for the commercial interiors industry to include a variety
of
other fabrics, including three-dimensional knitted upholstery products, cubicle
curtains, wallcoverings, ceiling fabrics and window treatments. The competition
in these segments of the market is highly fragmented and includes both large,
diversified textile companies, several of which have greater financial resources
than us, as well as smaller, non-integrated specialty manufacturers. However,
our capabilities and strong brand names in these segments should enable us
to
continue to compete successfully.
Specialty
Products
Our
small
Specialty Products business segment is comprised of Pandel, Inc., which produces
vinyl carpet tile backing and specialty mat and foam products. In addition,
we
produce and market
Fatigue Fighter™, an
impact-absorbing modular flooring system typically used where people stand
for
extended periods. On March 7, 2007, we sold Pandel to an entity formed by
the
general manager of the business. In 2003, we sold our U.S. raised/access
flooring business and our adhesives and other specialty chemicals production
business, which were part of this business segment. We continue to manufacture
and sell our
Intercell®
brand
raised/access flooring product in Europe.
Through
an agreement with the purchaser of our adhesive and specialty chemicals
production business, we have continued to market a line of adhesives for
carpet
installation, as well as a line of carpet cleaning and maintenance chemicals,
under the
Re:Source
brand.
Product
Design, Research and Development
We
maintain an active research, development and design staff of approximately
120
people and also draw on the research and development efforts of our suppliers,
particularly in the areas of fibers, yarns and modular carpet backing materials.
Our research and development costs were $9.0 million, $9.6 million and
$8.0 million in 2006, 2005 and 2004, respectively.
Our
research and development team provides technical support and advanced materials
research and development for the entire family of Interface companies. It
assisted in the development of our
NexStep®
backing,
which employs moisture-impervious polycarbite precoating technology with
a
chlorine-free urethane foam secondary backing, and also helped develop a
post-consumer recycled, polyvinyl chloride, or PVC, extruded sheet process
that
has been incorporated into our
GlasBac RE
modular
carpet backing. Our post-consumer PVC extruded sheet exemplifies our commitment
to “closing-the-loop” in recycling. With a goal of supporting sustainable
product designs in both floorcoverings and interior fabrics applications,
we
continue to evaluate 100% renewable polymers based on corn-derived polylactic
acid (PLA) for use in our products and the development of post-consumer
recycling technology for nylon face fibers.
Our
research and development team also is the coordinator of our QUEST and EcoSense
initiatives (discussed below) and supports the dissemination, consultancies
and
technical communication of our global sustainability endeavors. Its laboratories
also provide 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. Our carpet design and development
team
is recognized as the industry leader in carpet design and product engineering
for the commercial and institutional markets.
David
Oakey Designs provides carpet design and consulting services to our
floorcovering businesses pursuant to a consulting agreement with Interface,
Inc.
David Oakey Designs’ services under the agreement include creating commercial
carpet designs for use by our floorcovering businesses throughout the world,
and
overseeing product development, design and coloration functions for our modular
carpet business in North America. The current agreement runs through April
2011.
While the agreement is in effect, David Oakey Designs cannot provide similar
services to any other carpet company. Through our relationship with David
Oakey
Designs, we introduced more than 31 new carpet designs in 2006 alone, and
have
enjoyed considerable success in winning U.S. carpet industry
awards.
David
Oakey Designs also contributed to our implementation of the product development
concept — “simple inputs, pretty outputs” — resulting in the ability
to efficiently produce many products from a single yarn system. Our mass
customization production approach evolved, in major part, from this concept.
In
addition to increasing the number and variety of product designs, which enables
us to increase high margin custom sales, the mass customization approach
increases inventory turns and reduces inventory levels (for both raw materials
and standard products) and their related costs because of our more rapid
and
flexible production capabilities.
More
recently, our
i2
product
line — which includes, among others, our patented
Entropy
modular
carpet product and the
Proscenium™,
B&W™ and
Mad
About Plaid™
collections of modular carpet products — represents an innovative
breakthrough in the design of modular carpet. The
i2
line
introduced and features random patterning, mergeable dye lots, cost-efficient
installation and maintenance, interactive flexibility and recycled and
recyclable materials. Most of these products may be installed without regard
to
the directional orientation of the carpet tile or the dye lot in which the
carpet tile was manufactured, and their features also make installation,
maintenance and replacement of modular carpet easier, less expensive and
less
wasteful.
Environmental
Initiatives
In
the
latter part of 1994, we commenced a new industrial ecological sustainability
initiative called EcoSense, inspired in part by the interest of customers
concerned about the environmental implications of how they and their suppliers
do business. EcoSense, which includes our QUEST waste reduction initiative,
is
directed towards the elimination of energy and raw materials waste in our
businesses, and, on a broader and more long-term scale, the practical
reclamation — and ultimate restoration — of shared environmental
resources. The initiative involves a commitment by us:
|
•
|
to
learn to meet our raw material and energy needs through recycling
of
carpet and other petrochemical products and harnessing benign energy
sources; and
|
|
|
|
|
•
|
to
pursue the creation of new processes to help sustain the earth’s
non-renewable natural 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 with Amory Lovins and Hunter Lovins of
Natural Capitalism: Creating the Next Industrial Revolution;
Mr. Lovins, energy consultant and co-founder of the Rocky Mountain
Institute; John Picard, President of E2 Environmental Enterprises; Jonathan
Porritt, director of Forum for the Future; Bill Browning, fellow and former
director of the Rocky Mountain Institute’s Green Development Services;
Dr. Karl-Henrik Robert, founder of The Natural Step; Janine M. Benyus,
author of
Biomimicry;
Walter
Stahel, Swiss businessman and seminal thinker on environmentally responsible
commerce; and Bob Fox, renowned architect.
Our
leadership, knowledge and expertise in this area, especially in the “green
building” movement and the related LEED certification program, resonate deeply
with many of our customers and prospects around the globe, and these businesses
are increasingly making purchase decisions based on “green” factors. As more
customers in our target markets share our view that sustainability is good
business and not just good deeds, our acknowledged leadership position should
strengthen our brands and provide a differentiated advantage in competing
for
business.
Backlog
Our
backlog of unshipped orders (excluding discontinued operations and the divested
European fabrics business) was approximately $123.8 million at February 25,
2007, compared with approximately $104.6 million at February 26, 2006.
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 25, 2007 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 and
raised/access flooring products, on manufacturing processes and on the use
of
our
Intersept
antimicrobial chemical agent in various products. 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. We consider our know-how and technology more important
to our current business than patents, and, accordingly, believe that expiration
of existing patents or nonissuance 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 countries in which we have registered our trademarks
are the
United Kingdom, Germany, Italy, France, Canada, Australia, Japan, and various
countries in Central and South America. Some of our more prominent registered
trademarks include:
Interface®, InterfaceFLOR, Heuga, Intersept, GlasBac, Guilford®, Guilford of
Maine, Bentley Prince Street, Intercell, Chatham, Terratex, Mission
Zero
and
FR-701.
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
countries varies from country to country.
Financial
Information by Operating Segments and Geographic Areas
The
Notes
to Consolidated Financial Statements appearing in Item 8 of this Report set
forth information concerning our sales, income and assets by operating segments,
and our sales and long-lived assets by geographic areas. Additional information
regarding sales by operating segment is set forth in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”.
Employees
At
December 31, 2006, we employed a total of 4,873 employees worldwide. Of such
employees, 2,317 are clerical, sales, supervisory and management personnel
and
2,556 are manufacturing personnel. We also utilized the services of 166
temporary personnel as of December 31, 2006.
Some
of
our production employees in Australia and the United Kingdom are represented
by
unions. In the Netherlands, a Works Council, the members of which are Interface
employees, is required to be consulted by management with respect to certain
matters relating to our operations in that country, such as a change in control
of Interface Europe B.V. (our modular carpet subsidiary based in the
Netherlands), and the approval of the Council is required for some of our
actions, including changes in compensation scales or employee benefits. Our
management believes that its relations with the Works Council, the unions
and
all of its 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, City of Industry, California, Shelf, England, Northern Ireland,
Australia, the Netherlands, Canada and Thailand are certified under ISO 14001.
The environmental management systems of the Fabrics Group’s facilities in
Guilford, Maine and Newport, Maine are also certified under
ISO 14001.
Executive
Officers of the Registrant
Our
executive officers, their ages as of December 31, 2006, and their principal
positions with us are set forth below. Executive officers serve at the pleasure
of the Board of Directors.
Name
|
Age
|
Principal
Position(s)
|
Daniel
T. Hendrix
|
52
|
President
and Chief Executive Officer
|
John
R. Wells
|
45
|
Senior
Vice President
|
Raymond
S. Willoch
|
48
|
Senior
Vice President-Administration, General Counsel and
Secretary
|
D.
McNeely Bradham
|
36
|
Vice
President
|
Robert
A. Coombs
|
48
|
Vice
President
|
Patrick
C. Lynch
|
37
|
Vice
President and Chief Financial Officer
|
Lindsey
K. Parnell
|
49
|
Vice
President
|
Christopher
J. Richard
|
50
|
Vice
President
|
Jeffrey
J. Roman
|
44
|
Vice
President
|
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. Mr. Hendrix has served
as a director of Global Imaging Systems, Inc. since 2003 and as a director
of
American Woodmark Corp. since May 2005.
Mr. Wells
joined
us in February 1994 as Vice President-Sales of InterfaceFLOR, LLC (our principal
U.S. modular carpet subsidiary formerly known as Interface Flooring
Systems, Inc.) and was promoted to Senior Vice President-Sales &
Marketing of IFS in October 1994. He was promoted to Vice President of Interface
and President of IFS in July 1995. In March 1998, Mr. Wells was also named
President of both Prince Street Technologies, Ltd. and Bentley Mills,
Inc., making him President of all three of our U.S. carpet mills. In
November 1999, Mr. Wells was named Senior Vice President of Interface, and
President and CEO of Interface Americas Holdings, Inc. (formerly Interface
Americas, Inc.), thereby assuming operations responsibility for all of our
businesses in the Americas, except for the Fabrics Group.
Mr. Willoch,
who
previously practiced with an Atlanta law firm, joined us in June 1990 as
Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant
Vice President in 1993, Vice President in January 1996, Secretary and General
Counsel in August 1996, and Senior Vice President in February 1998. In July
2001, he was named Senior Vice President-Administration and assumed corporate
responsibility for various staff functions.
Mr. Bradham
joined
us as Director of Corporate Development in 2003 after having previously worked
for a national business consulting firm for four years. He was promoted to
Assistant Vice President in April 2006, and Vice President of Business
Development in July 2006.
Mr. Coombs
originally worked for us from 1988 to 1993 as a marketing manager for
our
Heuga
carpet
tile operations in the United Kingdom and later for all of our European
floorcovering operations. In 1996, Mr. Coombs returned to us as Managing
Director of our Australian operations. He was promoted in 1998 to Vice
President-Sales and Marketing, Asia-Pacific, with responsibility for Australian
operations and sales and marketing in Asia, which was followed by a promotion
to
Senior Vice President, Asia-Pacific. He was promoted to Senior Vice President,
European Sales, in May 1999 and Senior Vice President, European Sales and
Marketing, in April 2000. In February 2001, he was promoted to President
and CEO
of Interface Overseas Holdings, Inc. with responsibility for all of our
floorcoverings operations in both Europe and the Asia-Pacific region, and
he
became a Vice President of Interface. In September 2002, Mr. Coombs
relocated back to Australia, retaining responsibility for our floorcovering
operations in the Asia-Pacific region while Mr. Parnell (see below) assumed
responsibility for floorcovering operations in Europe.
Mr. Lynch
joined
us in 1996 after having previously worked for a national accounting firm.
He
became Assistant Corporate Controller in 1998 and Assistant Vice President
and
Corporate Controller in 2000. Mr. Lynch was promoted to Vice President and
Chief Financial Officer in July 2001
Mr. Parnell
was the
Production Director for Firth Carpets (our former European broadloom operations)
at the time it was acquired by us in 1997. In 1998, Mr. Parnell was
promoted to Vice President, Operations for the United Kingdom, and in 1999
he
was promoted to Senior Vice President, Operations for our entire European
floorcovering division. In September 2002, he was promoted to President and
CEO
of our floorcovering operations in Europe, and became a Vice President of
Interface in October 2002.
Mr. Richard
joined
us in July 2003 as President and CEO of the Interface Fabrics Group (now
known
as InterfaceFABRIC) and Vice President of Interface. From August 2002 through
March 2003, he was a senior vice president of Collins & Aikman, Inc.
with responsibilities in its fabrics business. From January 1997 through
March
2002, Mr. Richard was a senior vice president of Guilford Mills, Inc., a
fabrics company, and served as president of its automotive group.
Mr. Roman
joined
Interface Asia-Pacific in 1995 as General Manager of Interface Modernform
Company Ltd., our modular carpet joint venture in Thailand, and was promoted
to
Vice President of Manufacturing for Asia in 1996. In 1998, he transferred
to
Interface Americas, Inc. with responsibility for implementing Y2K-compliant
manufacturing systems in all North American carpet operations. In 2000,
Mr. Roman was named Vice President of Technical Development for Interface
Americas, Inc., and, in 2001, he was named Vice President of Information
Services and Business Systems for Interface Americas, Inc. In February 2004,
Mr. Roman was promoted to Vice President of Interface and assumed
responsibility for the creation of an information technology shared service
function for the Company.
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.interfaceinc.com.
ITEM
1A. RISK FACTORS
This report on Form 10-K contains “forward-looking statements” within the
meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended by the Private Securities Litigation Reform Act of
1995.
Words such as “believes”, “anticipates”, “plans”, “expects” and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include statements regarding the intent, belief or current
expectations of our management team, as well as the assumptions on which
such
statements are based. Any forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties that could
cause actual results to differ materially from those contemplated by such
forward-looking statements. We undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence
of
unanticipated events or changes to future operating results over time. Important
factors currently known to management that could cause actual results to
differ
materially from those in forward-looking statements include risks and
uncertainties associated with economic conditions in the commercial interiors
industry as well as the risks and uncertainties discussed immediately below.
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.
The
commercial 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. Some of our competitors, including a number of large diversified
domestic and foreign companies who manufacture modular carpet as one segment
of
their business, have greater financial resources than we do.
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. The adverse cycle
during the years 1999 through 2003 significantly lessened the overall demand
for
commercial interiors products, which adversely affected our business during
those years. These effects may recur and could be more pronounced if the
global
economy does not improve or is further weakened.
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.
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 current agreement with
David Oakey Designs extends to April 2011. The loss of any of these key persons
could have an adverse impact on our business.
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 fiscal 2006, approximately 37% 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. We also make a substantial
portion of our net sales in currencies other than U.S. dollars
(approximately 37% of 2006 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.
Large
increases in the cost of petroleum-based raw materials could adversely affect
us
if we are unable to pass these cost increases through to our
customers.
Petroleum-based
products comprise the predominant portion of the cost of raw materials that
we
use in manufacturing. While we attempt to match cost increases with
corresponding price increases, continued large increases 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 could have a material adverse effect
on
us.
Invista
Inc., a subsidiary of Koch Industries, Inc., currently supplies approximately
41% of our requirements for synthetic fiber (nylon), which is the principal
raw
material that we use in our carpet products. In addition, other of our
businesses have a high degree of dependence on their third party suppliers
of
synthetic fiber for certain products or markets. The unanticipated termination
or interruption of any of our supply arrangements with our current suppliers
could have a material adverse effect on us because of the cost and delay
associated with shifting more business to another supplier. We do not have
a
long-term supply agreement with Invista.
We
have a significant amount of indebtedness, which could have important negative
consequences to us.
Our
substantial 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.
|
The
market price of our common stock has been volatile and the value of your
investment may decline.
The
market price of our Class A 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 Class A common stock on the Nasdaq Global 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 Statement of Financial Accounting Standards ("SFAS") No. 142,
"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
($20.7 million in 2006, $29.0 million in 2004 and $55.4 million
in 2002). A future goodwill impairment test may result in a future non-cash
adjustment, which could adversely affect our earnings for any such future
period.
Our
Chairman, together with other insiders, currently has sufficient voting power
to
elect a majority of our Board of Directors.
Our
Chairman, Ray C. Anderson, beneficially owns approximately 50% of our
outstanding Class B common stock. The holders of the Class B common
stock are entitled, as a class, to elect a majority of our Board of Directors.
Therefore, Mr. Anderson, together with other insiders, has sufficient
voting power to elect a majority of the Board of Directors. On all other
matters
submitted to the shareholders for a vote, the holders of the Class B common
stock generally vote together as a single class with the holders of the
Class A common stock. Mr. Anderson’s beneficial ownership of the
outstanding Class A and Class B common stock combined is approximately
6%.
Our
Rights Agreement could discourage tender offers or other transactions for
our
stock that could result in shareholders receiving a premium over the market
price for our stock.
Our
Board
of Directors adopted a Rights Agreement in 1998 pursuant to which holders
of our
common stock will be entitled to purchase from us a fraction of a share of
our
Series B Participating Cumulative Preferred Stock if a third party acquires
beneficial ownership of 15% or more of our common stock without our consent.
In
addition, the holders of our common stock will be entitled to purchase the
stock
of an Acquiring Person (as defined in the Rights Agreement) at a discount
upon
the occurrence of triggering events. These provisions of the Rights Agreement
could have the effect of discouraging tender offers or other transactions
that
could result in shareholders receiving a premium over the market price for
our
common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
maintain our corporate headquarters in Atlanta, Georgia in approximately
20,000 square
feet of leased space. The following table lists our principal manufacturing
facilities and other material physical locations, all of which we own except
as
otherwise noted:
Location
|
Segment
|
Floor
Space(Sq. Ft.)
|
Bangkok,
Thailand(1)
|
Modular
Carpet
|
66,072
|
Craigavon,
N. Ireland
|
Modular
Carpet
|
80,986
|
LaGrange,
Georgia
|
Modular
Carpet
|
375,000
|
LaGrange,
Georgia
|
Modular
Carpet
|
160,545
|
Ontario
(Belleville), Canada
|
Modular
Carpet
|
77,000
|
Picton,
Australia
|
Modular
Carpet
|
96,300
|
Scherpenzeel,
the Netherlands
|
Modular
Carpet
|
229,734
|
Shelf,
England
|
Modular
Carpet
|
206,882
|
West
Point, Georgia
|
Modular
Carpet
|
250,000
|
City
of Industry, California(2)
|
Bentley
Prince Street
|
539,641
|
Elkin,
North Carolina
|
Fabrics
Group
|
1,475,413
|
Grand
Rapids, Michigan(2)
|
Fabrics
Group
|
118,263
|
Guilford,
Maine
|
Fabrics
Group
|
408,511
|
Guilford,
Maine
|
Fabrics
Group
|
96,490
|
Newport,
Maine
|
Fabrics
Group
|
173,973
|
__________
(1) Owned
by
a joint venture in which we have a 70% interest.
(2) Leased.
We
maintain marketing offices in over 70 locations in over 30 countries and
distribution facilities in approximately 40 locations in six countries.
Most of our 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.
ITEM
3. LEGAL PROCEEDINGS
We
are
subject to various legal proceedings in the ordinary course of business,
none of
which is required to be disclosed under this Item 3.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
PART
II
ITEM
5.
|
MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Our
Class
A Common Stock is traded on the Nasdaq Global Market under the symbol IFSIA.
Our
Class B Common Stock is not publicly traded but is convertible into Class
A
Common Stock on a one-for-one basis. The following table sets forth for the
periods indicated the high and low intraday prices of the Company’s Class A
Common Stock on the Nasdaq Global Market (no dividends were paid on Common
Stock
for the periods indicated).
2007
|
|
High
|
|
Low
|
|
First
Quarter (through March 1, 2007)
|
|
$
|
17.10
|
|
$
|
14.26
|
|
2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
14.31
|
|
$
|
8.05
|
|
Second
Quarter
|
|
|
15.70
|
|
|
9.89
|
|
Third
Quarter
|
|
|
13.83
|
|
|
10.12
|
|
Fourth
Quarter
|
|
|
15.59
|
|
|
12.31
|
|
2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
10.04
|
|
$
|
6.35
|
|
Second
Quarter
|
|
|
8.37
|
|
|
5.70
|
|
Third
Quarter
|
|
|
10.65
|
|
|
7.60
|
|
Fourth
Quarter
|
|
|
9.02
|
|
|
7.51
|
|
Our
Board
of Directors recently declared a regular quarterly cash dividend of $0.02
per
share payable March 23, 2007, to shareholders of record as of March 9, 2007.
It
is the first dividend we have paid since July 2002. 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 primary
revolving credit facility and in the indentures for our public indebtedness,
each of which specify 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.
As
of
March 1, 2007, we had 747 holders of record of our Class A Common Stock and
75
holders of record of our Class B Common Stock. We believe that there are
in
excess of 5,900 beneficial holders of our Class A Common Stock.
Stock
Performance
The
following graph and table compare,
for the five-year period ended December 31, 2006, the Company's total return
to
shareholders (stock price plus dividends, divided by beginning stock price)
with
that of (i) all companies listed on the Nasdaq Composite Index, and (ii) a
self-determined peer group comprised primarily of companies in the commercial
interiors industry.
|
12/30/01
|
12/29/02
|
12/28/03
|
1/02/05
|
1/01/06
|
12/31/06
|
Interface,
Inc.
|
$100
|
$55
|
$99
|
$179
|
$148
|
$255
|
NASDAQ
Composite Index
|
$100
|
$72
|
$107
|
$117
|
$121
|
$137
|
Previous
Self-Determined Peer Group (9 Stocks)
|
$100
|
$98
|
$134
|
$173
|
$195
|
$191
|
New
Self-Determined Peer Group (13 Stocks)
|
$100
|
$97
|
$125
|
$170
|
$189
|
$197
|
Notes
to Performance Graph
(1)
|
The
lines represent annual index levels derived from compound daily
returns
that include all dividends.
|
(2)
|
The
indices are re-weighted daily, using the market capitalization
on the
previous trading day.
|
(3)
|
If
the annual interval, based on the fiscal year-end, is not a trading
day,
the preceding trading day is used.
|
(4)
|
The
index level was set to $100 as of 12/30/01 (the last day of fiscal
2001).
|
(5)
|
The
Company’s fiscal year ends on the Sunday nearest December
31.
|
(6)
|
The
following companies are included in the New Self-Determined Peer
Group
depicted above: Actuant Corp.; Acuity Brands, Inc.; Albany International
Corp., BE Aerospace, Inc.; The Dixie Group, Inc.; Herman Miller,
Inc.; HNI
Corp., Inc. (formerly known as Hon Industries, Inc.); Kimball
International, Inc.; Knoll, Inc. (beginning in March, 2005 upon
trading
commencement); Mohawk Industries, Inc.; Steelcase, Inc.; Unifi,
Inc.; and
USG Corp. The New Self-Determined Peer Group differs from the Previous
Self-Determined Peer Group (also graphically depicted above for
comparison) in the following respects: (i) it includes Acuity Brands,
Inc., Albany International Corp., Knoll, Inc., Steelcase, Inc.
and Unifi,
Inc. (peer companies in the floorcoverings, commercial interiors
and/or
related industries with annual revenues similar to that of the
Company),
and (ii) it no longer includes Armstrong Holdings, Inc. and Burlington
Industries, Inc. (which filed Chapter 11 bankruptcy petitions in
2001 and
2002, respectively, and therefore had little or no share trading
activity
during the five-year period of comparison depicted
above).
|
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 the
audited consolidated financial statements and notes thereto contained in Item
8
of this Annual Report on Form 10-K. Amounts for all periods presented have
been
adjusted for discontinued operations.
|
|
Selected
Financial Data(1)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(in
thousands, except share data and ratios)
|
|
Net
sales
|
|
$
|
1,075,842
|
|
$
|
985,766
|
|
$
|
881,658
|
|
$
|
766,494
|
|
$
|
745,317
|
|
Cost
of sales
|
|
|
736,247
|
|
|
681,069
|
|
|
616,297
|
|
|
543,251
|
|
|
522,119
|
|
Operating
income(2)
|
|
|
72,362
|
|
|
82,001
|
|
|
60,742
|
|
|
31,351
|
|
|
24,889
|
|
Income
(loss) from continuing operations
|
|
|
10,023
|
|
|
17,966
|
|
|
6,440
|
|
|
(8,012
|
)
|
|
(10,605
|
)
|
Loss
from discontinued operations
|
|
|
(31
|
)
|
|
(14,791
|
)
|
|
(58,815
|
)
|
|
(16,420
|
)
|
|
(21,679
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
(1,935
|
)
|
|
(3,027
|
)
|
|
(8,825
|
)
|
|
--
|
|
Cumulative
effect of a change in accounting principle(3)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(55,380
|
)
|
Net
income (loss)
|
|
|
9,992
|
|
|
1,240
|
|
|
(55,402
|
)
|
|
(33,257
|
)
|
|
(87,664
|
)
|
Income
(loss) from continuing operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.35
|
|
$
|
0.13
|
|
$
|
(0.16
|
)
|
$
|
(0.21
|
)
|
Diluted
|
|
$
|
0.18
|
|
$
|
0.34
|
|
$
|
0.12
|
|
$
|
(0.16
|
)
|
$
|
(0.21
|
)
|
Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
54,087
|
|
|
51,551
|
|
|
50,682
|
|
|
50,282
|
|
|
50,194
|
|
Diluted
|
|
|
55,713
|
|
|
52,895
|
|
|
52,171
|
|
|
50,282
|
|
|
50,194
|
|
Cash
dividends per common share
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
0.045
|
|
Property
additions(4)
|
|
|
34,036
|
|
|
25,478
|
|
|
15,783
|
|
|
16,203
|
|
|
14,022
|
|
Depreciation
and amortization
|
|
|
31,163
|
|
|
31,455
|
|
|
33,336
|
|
|
34,141
|
|
|
32,684
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
289,353
|
|
$
|
209,512
|
|
$
|
228,842
|
|
$
|
247,725
|
|
$
|
275,075
|
|
Total
assets
|
|
|
928,340
|
|
|
838,990
|
|
|
869,798
|
|
|
879,670
|
|
|
852,048
|
|
Total
long-term debt(5)
|
|
|
411,365
|
|
|
458,000
|
|
|
460,000
|
|
|
445,000
|
|
|
445,000
|
|
Shareholders’
equity
|
|
|
274,394
|
|
|
172,076
|
|
|
194,178
|
|
|
218,733
|
|
|
224,171
|
|
Current
ratio(6)
|
|
|
2.8
|
|
|
2.5
|
|
|
2.6
|
|
|
2.9
|
|
|
3.2
|
|
__________
(1)
|
In
the fourth quarter of 2002, we decided to discontinue the operations
related to our U.S. raised/access flooring business. Substantially
all of
the assets related to these operations were sold in the third quarter
of
2003. In the third quarter of 2004, we also decided to discontinue
the
operations related to our Re:Source dealer businesses (as well
as the
operations of a small Australian dealer business and a small residential
fabrics business). In the second quarter of 2006, we sold our European
fabrics business. In connection with the sale, we recorded a pre-tax
non-cash charge of $20.7 million for the impairment of goodwill
in the
first quarter of 2006, and we recorded a $1.7 million loss on that
divestiture in the second quarter of 2006. The balances have been
adjusted
to reflect the discontinued operations of these businesses (but
not the
European fabrics divestiture). For further analysis, see “Notes to
Consolidated Financial Statements - Discontinued Operations” included in
Item 8 of this Report.
|
(2)
|
In
the first quarter of 2006, we recorded a pre-tax non-cash charge
of $20.7
million for the impairment of goodwill in connection with the sale
of our
European fabrics business, and we recorded a $1.7 million loss
on that
divestiture in the second quarter of 2006. The reported results
also
include restructuring charges of $3.3 million, $6.2 million and
$22.5
million in years 2006, 2003 and 2002, respectively. The 2003 charge
was
recognized with respect to the restructuring plan initiated in
2002. For
further analysis of the 2006 restructuring charge, see “Notes to
Consolidated Financial Statements - Restructuring Charge”, included in
Item 8 of this Report.
|
(3)
|
In
2002, we recognized an impairment charge of $55.4 million (after-tax)
related to our adoption of Statement of Financial Accounting Standard
No.
142, “Goodwill and Other Intangible Assets.” For more information, see
“Notes to Consolidated Financial Statements - Summary of Significant
Accounting Policies” included in Item 8 of this Report.
|
(4)
|
Includes
property and equipment obtained in acquisitions of
businesses.
|
(5)
|
Total
long-term debt does not include debt related to receivables sold
under our
receivables securitization program, which was terminated in June
2003 in
connection with the amendment and restatement of our revolving
credit
facility. As of December 29, 2002, we had sold receivables of $30.0
million.
|
(6)
|
For
purposes of computing our current ratio: (a) current assets include
assets of businesses held for sale of $2.6 million, $5.5 million,
$42.8 million, $97.7 million and $129.5 million in fiscal years
2006,
2005, 2004, 2003 and 2002, respectively, and (b) current liabilities
include liabilities of businesses held for sale of $1.5 million,
$4.2
million, $5.4 million, $11.6 million and $8.0 million in fiscal
years
2006, 2005, 2004, 2003 and 2002,
respectively.
|
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
and
broadloom carpet), interior fabrics and other specialty products. Our commercial
interiors 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 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 businesses.
During
the past several years, we have successfully focused more of our marketing
and
sales efforts on non-corporate office segments to reduce somewhat our exposure
to economic cycles that affect the corporate office market segment more
adversely, as well as to capture additional market share. Our mix of corporate
office versus non-corporate office modular carpet sales in the Americas has
shifted over the past several years to 47% and 53%, respectively, for 2006
compared with 64% and 36%, respectively, in 2001. We expect a further shift
in
the future as we continue to implement our segmentation strategy.
During
the years 1999 through 2003 (except for a modest rebound during the latter
portion of 2000), the commercial interiors industry as a whole, and the
broadloom carpet market in particular, experienced decreased demand levels.
The
general downturn in the domestic and international economy that characterized
most of 2001, 2002 and 2003 further adversely affected the commercial interiors
industry, especially in the U.S. corporate office market segment. These
conditions significantly impaired our growth and operating profitability during
those years. During 2004, and particularly in the second half of the year,
the
commercial interiors industry began recovering from the downturn, which led
to
improved sales and operating profitability for us. That recovery continued
at a
gradual pace throughout 2005 and 2006.
Common
Stock Offering
On
November 10, 2006, we sold 5,750,000 shares of our Class A common stock (which
amount includes the underwriters’ exercise in full of their option to purchase
an additional 750,000 shares to cover over-allotments) at a public offering
price of $14.65 per share pursuant to a common stock offering, resulting in
net
proceeds of approximately $78.9 million after deducting the underwriting
discounts, commissions and estimated offering expenses. We plan to use the
net
proceeds to repay some of our outstanding debt and may use a portion of such
proceeds for general corporate purposes.
Repatriation
of Earnings of Foreign Subsidiaries
Pursuant
to the provisions of the American Jobs Creation Act of 2004, the Company
repatriated an aggregate of $35.9 million of earnings from foreign subsidiaries
during 2005. This action took advantage of an opportunity to repatriate the
funds at a substantially reduced tax rate, provided the transaction occurred
before the end of 2005. Consequently, the Company recorded aggregate tax charges
of $3.4 million, or $0.06 per diluted share, during 2005 related to the
repatriation.
Discontinued
Operations of Re:Source Dealer Businesses
During
the years leading up to 2004, our owned
Re:Source
dealer
businesses, which were part of a broader network comprised of both owned and
aligned dealers that sell and install floorcovering products, experienced
decreased sales volumes and intense pricing pressure, primarily as a result
of
the economic downturn in the commercial interiors industry. As a result, in
2004, we decided to exit our owned
Re:Source
dealer
businesses and began to dispose of several of our dealer subsidiaries. In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” we have reported the results of operations for the
owned
Re:Source
dealer
businesses (as well as the results of operations of a small Australian dealer
business and a small residential fabrics business that we also decided to exit),
for all periods reflected herein, as “discontinued operations”. Consequently,
our discussion of revenues or sales and other results of operations (except
for
net income or loss amounts), including percentages derived from or based on
such
amounts, excludes these discontinued operations unless we indicate
otherwise.
In
the
third quarter of 2005, we completed the last in a series of transactions by
which we sold nine of our owned
Re:Source
dealer
businesses. The nine dealer businesses sold were part of the fifteen
Re:Source
dealer
businesses that we owned at the time our plan to exit the owned dealer
businesses was announced in 2004. Eight of the nine businesses were sold to
either the general managers of the respective businesses or an entity in which
the general manager participated, and the other business was sold to our
“aligned”, but not owned, dealer in the relevant geographic region. The
aggregate net consideration we received in connection with the sales was
$9.7 million plus the purchasers’ assumption of various liabilities and
obligations. Of that dollar amount, an aggregate of $7.5 million was paid
in cash at the closings, with the remainder of $2.2 million payable
pursuant to promissory notes at interest rates ranging from prime to 12% and
with maturities ranging from one to three years. We have terminated all ongoing
operations of the other six owned dealer businesses, and in some cases we are
completing their wind-down through subcontracting arrangements. In the first
quarter of 2006, we sold certain assets relating to our aligned dealer network,
and we are discontinuing its operations as well.
These
discontinued operations represented revenues of $3.4 million, $30.9 million
and
$139.0 million in years 2006, 2005 and 2004, respectively (these results are
included in our statements of operations as part of the “Loss from Discontinued
Operations, Net of Tax”). Loss from operations of these businesses, net of tax,
was $0.0 million, $15.1 million and $12.3 million in years 2006, 2005 and 2004,
respectively. We recorded write-downs, net of taxes, for the impairment of
assets of $3.5 million in 2005 and for the impairment of assets and goodwill
of
$17.5 million and $29.0 million, respectively, in 2004 to adjust the carrying
value of the assets of these businesses to their net realizable value. During
2005 and 2004, we recorded losses of $1.9 million and $3.0 million,
respectively, in connection with the disposal of certain of these
businesses.
Impact
of Strategic Restructuring Initiatives
We
recorded a pre-tax restructuring charge of $3.3 million in the first quarter
of
2006. The charge reflected: (1) the closure of our fabrics manufacturing
facility in East Douglas, Massachusetts, and consolidation of those operations
into our facility in Elkin, North Carolina; (2) workforce reduction at the
East
Douglas, Massachusetts facility; and (3) a reduction in carrying value of
another fabrics facility and other assets. The restructuring charge was
comprised of $0.3 million of cash expenditures for severance benefits and other
similar costs, and $3.0 million of non-cash charges, primarily for the
write-down of carrying value and disposal of assets. These restructuring
activities are expected to reduce excess capacity in our fabrics dyeing and
finishing operations and improve overall manufacturing efficiency. No
restructuring charges were incurred in 2005 or 2004.
Goodwill
Impairment Write-Down
In
April
2006, subsequent to the end of the first quarter of 2006, we sold our European
fabrics business (Camborne Holdings Limited) for approximately
$28.8 million to an entity formed by the business management team. In
connection with the sale, we recorded a pre-tax non-cash charge of
$20.7 million for the impairment of goodwill in the first quarter of 2006,
and we recorded a $1.7 million loss on disposal of the business in the
second quarter of 2006. For the first quarter of 2006, the European fabrics
business generated revenue of $17.3 million and operating loss (after the
$20.7 million goodwill impairment charge) of
$19.6 million.
During
the fourth quarters of each of the years 2003 to 2005, we performed the annual
goodwill impairment tests required by SFAS No. 142. In effecting the
impairment testing, we used an outside consultant to help prepare valuations
of
reporting units in accordance with the applicable standards, and those
valuations were compared with the respective book values of the reporting units
to determine whether any goodwill impairment existed. In preparing the
valuations, past, present and future expectations of performance were
considered. No impairment was indicated in our continuing operations during
these years. However, an after-tax impairment charge of $29.0 million was
recorded in fiscal year 2004 related to our discontinued
Re:Source
dealer
businesses.
Results
of Operations
The
following discussion and analyses reflect the factors and trends discussed
in
the preceding sections. In addition, we believe our performance during 2004
reflects the unprecedented downturn experienced by the commercial interiors
industry in general during that time, which we discuss elsewhere.
Our
net
sales that were denominated in currencies other than the U.S. dollar were
approximately 37% in 2006, approximately 43% in 2005, and approximately 36%
in
2004. Because we have such substantial international operations, we are
impacted, from time to time, by international developments that affect foreign
currency transactions. For example, the performance of the euro against the
U.S.
dollar, for purposes of the translation of European revenues into U.S. dollars,
favorably affected our reported results in 2006 and 2004, when the euro was
strengthening relative to the U.S. dollar. In 2005, however, when the euro
weakened relative to the U.S. dollar, the translation of European revenues
into
U.S. dollars adversely affected our reported results. The following table
presents the amount (in U.S. dollars) by which the exchange rates for converting
euros into U.S. dollars have affected our net sales and operating income during
the past three years:
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
$
|
3.7
|
|
$
|
(0.3
|
)
|
$
|
18.2
|
|
Operating
income
|
|
|
|
|
|
0.4
|
|
|
(0.1
|
)
|
|
1.1
|
|
All
amounts above for all periods exclude our discontinued operations, primarily
comprised of our U.S. raised/access flooring business (which we sold in
September 2003) and our owned Re:Source dealer businesses (which we exited
during 2004-2005).
The
following table presents, as a percentage of net sales, certain items included
in our Consolidated Statements of Operations for the three years ended December
31, 2006:
|
|
|
Fiscal
Year
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
|
68.4
|
|
|
69.1
|
|
|
69.9
|
|
Gross
profit on sales
|
|
|
|
31.6
|
|
|
30.9
|
|
|
30.1
|
|
Selling,
general and administrative expenses
|
|
|
|
22.5
|
|
|
22.6
|
|
|
23.2
|
|
Impairment
of goodwill
|
|
|
|
1.9
|
|
|
--
|
|
|
--
|
|
Loss
on disposal - European fabrics
|
|
|
|
0.2
|
|
|
--
|
|
|
--
|
|
Restructuring
charges
|
|
|
|
0.3
|
|
|
--
|
|
|
--
|
|
Operating
income
|
|
|
|
6.7
|
|
|
8.3
|
|
|
6.9
|
|
Interest/Other
expense
|
|
|
|
4.0
|
|
|
4.7
|
|
|
5.7
|
|
Income
(loss) from continuing operations before tax
|
|
|
|
2.7
|
|
|
3.6
|
|
|
1.2
|
|
Income
tax expense (benefit)
|
|
|
|
1.8
|
|
|
1.8
|
|
|
0.5
|
|
Income
(loss) from continuing operations
|
|
|
|
0.9
|
|
|
1.8
|
|
|
0.7
|
|
Discontinued
operations, net of tax
|
|
|
|
--
|
|
|
(1.5
|
)
|
|
(6.7
|
)
|
Loss
on disposal
|
|
|
|
--
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Net
income (loss)
|
|
|
|
0.9
|
|
|
0.1
|
|
|
(6.3
|
)
|
Below
we
provide information regarding net sales for each of our four operating segments,
and analyze those results for each of the last three fiscal years. Fiscal year
2004 was a 53-week period, while fiscal years 2005 and 2006 were 52-week
periods. The 53 weeks in 2004 versus the 52 weeks in 2005 and 2006 are a factor
in certain of the comparisons reflected below.
Net
Sales by Business Segment
We
currently classify our businesses into the following four operating segments
for
reporting purposes:
|
•
|
Modular
Carpet segment, which includes our InterfaceFLOR,
Heuga
and FLOR
modular carpet businesses, and also includes our Intersept
antimicrobial chemical sales and licensing program;
|
|
•
|
Bentley
Prince Street segment, which includes our Bentley
Prince Street
broadloom, modular carpet and area rug businesses;
|
|
•
|
Fabrics
Group segment, which includes all of our fabrics businesses worldwide;
and
|
|
•
|
Specialty
Products segment, which includes our subsidiary Pandel, Inc., a producer
of vinyl carpet tile backing and specialty mat and foam products.
On March
7, 2007, we sold Pandel to an entity formed by the general manager
of that
business.
|
Net
sales
by operating segment and for our company as a whole were as follows for the
three years ended December 31, 2006:
|
|
Fiscal
Year
Ended
|
|
Percentage
Change
|
|
Net
Sales By Segment
|
|
2006
|
|
2005
|
|
2004
|
|
2006
compared with 2005
|
|
2005
compared with 2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Modular
Carpet
|
|
$
|
763,659
|
|
$
|
646,213
|
|
$
|
563,397
|
|
|
18.2
|
%
|
|
14.7
|
%
|
Bentley
Prince Street
|
|
|
137,920
|
|
|
125,167
|
|
|
119,058
|
|
|
10.1
|
%
|
|
5.1
|
%
|
Fabrics
Group
|
|
|
161,183
|
|
|
198,842
|
|
|
186,408
|
|
|
(18.9
|
%)
|
|
6.7
|
%
|
Specialty
Products
|
|
|
13,080
|
|
|
15,544
|
|
|
12,795
|
|
|
(15.9
|
%)
|
|
21.5
|
%
|
Total
|
|
$
|
1,075,842
|
|
$
|
985,766
|
|
$
|
881,658
|
|
|
9.1
|
%
|
|
11.8
|
%
|
Modular
Carpet Segment. For
2006,
net sales for the Modular Carpet segment increased $117.5 million (18.2%) versus
the comparable period in 2005. The weighted average selling price per square
yard in 2006 was up 2.5% compared with 2005, which was partially due to our
passing through to customers increases in our cost of petroleum-based raw
materials. On a geographic basis, we experienced significant increases in net
sales in the Americas (13% increase), Europe (17% increase) and the Asia-Pacific
region (15% increase). Our increase in the Americas was primarily due to the
continued strength of the corporate office market (16% increase) and the success
of our segmentation strategy, which saw significant increases in the hospitality
(118% increase), residential (30% increase) and healthcare (16% increase)
segments. The increase in Europe was driven by the strong corporate office
market (19% increase) as well as success in non-corporate segments such as
institutional (which includes education and governmental entities) (39%
increase) and hospitality (28% increase). Our success in Asia-Pacific was
primarily due to the continued strength of the corporate office market (22%
increase) and was offset somewhat by declines in the hospitality and retail
segments.
For
2005,
net sales for the worldwide Modular Carpet segment increased $82.8 million
(14.7%) versus 2004. The weighted average selling price per square yard in
2005
was up 4.6% compared with 2004, primarily due to our passing through to
customers increases in our cost of petroleum-based raw materials. On a
geographic basis, we experienced increases in net sales in the Americas, Europe
and Asia-Pacific, which were up 18%, 6% and 21%, respectively. In the Americas,
we saw significant increases in our sales into the hospitality (43% increase),
retail (27% increase), and corporate office (17% increase) market segments.
Sales growth in Europe was attributable primarily to our gaining market share
from competitors in an otherwise down geographic market. Sales growth in
Asia-Pacific was attributable in large part to a relatively good economic
climate in that region.
Bentley
Prince Street Segment. For
2006,
net sales in the Bentley Prince Street segment increased $12.8 million (10.1%)
versus 2005. The weighted average selling price per square yard was up
approximately 4% compared with 2005, which was partially due to our passing
through to our customers increases in our cost of petroleum-based raw materials.
The increase in sales is attributable primarily due to the success of our
segmentation strategy, which led to increases in the hospitality (170%
increase), healthcare (35% increase) and residential (34% increase) segments
during the year.
For
2005,
net sales in the Bentley Prince Street segment increased $6.1 million (5.1%)
versus 2004. The weighted average selling price per square yard in 2005 was
up
8.2% compared with 2004, primarily due to our passing through to customers
increases in our cost of petroleum-based raw materials. The increase in sales
occurred primarily in the improving corporate office market segment, which
was
up 16%. Growth in our non-corporate office market segments was driven by
institutional (16% increase), retail (7% increase) and residential (7% increase)
purchases.
Fabrics
Group Segment. For
2006,
net sales for our Fabrics Group segment decreased $37.7 million (18.9%) versus
2005. This decline was the result of the sale of our European fabrics business
in April 2006. The European fabrics business accounted for $62.8 million in
net sales during 2005. During 2006, the weighted average selling price per
linear yard was up approximately 3% compared with 2005, which was partially
due
to the passing through to customers increases in our cost of petroleum-based
products.
For
2005,
net sales for our Fabrics Group segment increased $12.4 million (6.7%) versus
2004. The weighted average selling price per linear yard in 2005 was up 9.5%
compared with 2004, primarily due to our passing through to customers increases
in our cost of petroleum-based raw materials. The increase in sales occurred
primarily in the improving corporate office market segment (7% increase). Growth
in our non-corporate office market segments was driven by healthcare (9%
increase) and hospitality (6% increase) purchases.
Specialty
Products Segment. For
2006,
net sales for our Specialty Products segment decreased by $2.5 million (15.9%)
compared with the prior year. This decrease was primarily the result of the
loss
of one major customer and the inconsistent order pattern of another major
customer that adversely affected 2006 results.
For
2005,
net sales for our Specialty Products segment increased $2.7 million (11.8%)
versus 2004. The weighted average selling price per square yard in 2005 was
up
11.6% compared with 2004, primarily due to our passing through to customers
increases in the cost of petroleum-based raw materials. The increase in sales
occurred primarily in the corporate office market.
Cost
and Expenses
Company
Consolidated. The
following table presents, on a consolidated basis for our operations, our
overall cost of sales and selling, general and administrative expenses for
the
three years ended December 31, 2006:
|
|
Fiscal
Year Ended
|
|
Percentage Change
|
|
Cost
and Expenses
|
|
2006
|
|
2005
|
|
2004
|
|
2006
compared with
2005
|
|
2005
compared with
2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Cost
of Sales
|
|
$
|
736,247
|
|
$
|
681,069
|
|
$
|
616,297
|
|
|
8.1
|
%
|
|
10.5
|
%
|
Selling,
General and Administrative Expenses
|
|
|
241,538
|
|
|
222,696
|
|
|
204,619
|
|
|
8.5
|
%
|
|
8.8
|
%
|
Total
|
|
$
|
977,785
|
|
$
|
903,765
|
|
$
|
820,916
|
|
|
8.2
|
%
|
|
10.1
|
%
|
For
2006,
our costs of sales increased $55.2 million (8.1%) versus 2005, primarily due
to
increased raw materials costs ($36.5 million) and labor costs ($5.5
million) associated with increased production levels during 2006. Our raw
materials costs in 2006 were up an estimated 1-2% versus 2005, primarily due
to
increased prices for petroleum-based products. As a percentage of net sales,
cost of sales decreased to 68.4% versus 69.1% during 2005. The percentage
decrease is primarily due to the increased absorption of fixed manufacturing
costs associated with increased production levels.
For
2005,
our cost of sales increased $64.8 million (10.5%) versus 2004, primarily due
to
increased raw material costs ($43.0 million) and labor costs ($8.4 million)
associated with increased production levels during 2005. Our raw materials
costs
in 2005 were up an estimated 5-6% versus 2004, primarily due to increased prices
for petroleum-based products. As a percentage of net sales, cost of sales
decreased to 69.1% for 2005, versus 69.9% for 2004. The percentage decrease
was
primarily due to increased absorption of fixed manufacturing costs associated
with increased production levels.
For
2006,
our selling, general and administrative expenses increased $18.9 million (8.5%)
versus 2005. The primary components of this increase were: (1) $13.6 million
in
increased selling costs due to the increased level of sales in 2006, as well
as
planned investments in our segmentation strategy and in the expansion of
our sales force, and (2) $6.6 million of increased administrative expenses,
primarily due to increased information technology costs, investments in our
administration infrastructure related to our residential business, and increased
legal expenses.
For
2005,
our selling, general and administrative expenses increased $18.1 million (8.8%)
versus 2004. The primary components of this increase were (1) $9.5 million
due
to increased investments in global marketing campaigns across our businesses;
(2) $6.7 million of performance bonuses; and (3) $6.5 million in commission
payments due to the increased level of sales in 2005. These increases were
partially offset by reductions in administrative costs of $4.0
million.
Cost
and Expenses by Segment. The
following table presents the combined cost of sales and selling, general and
administrative expenses for each of our operating segments for the three years
ended December 31, 2006:
|
|
Fiscal
Year Ended
|
|
Percentage
Change
|
|
Cost
of Sales and Selling, General and Administrative Expenses
(Combined)
|
|
2006
|
|
2005
|
|
2004
|
|
2006
compared with
2005
|
|
2005
compared with
2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Modular
Carpet
|
|
$
|
665,415
|
|
$
|
568,862
|
|
$
|
499,509
|
|
|
17.0
|
%
|
|
13.9
|
%
|
Bentley
Prince Street
|
|
|
131,989
|
|
|
121,673
|
|
|
118,944
|
|
|
8.5
|
%
|
|
2.3
|
%
|
Fabrics
Group
|
|
|
162,747
|
|
|
194,557
|
|
|
185,584
|
|
|
(16.3
|
%)
|
|
4.8
|
%
|
Specialty
Products
|
|
|
12,716
|
|
|
14,893
|
|
|
13,272
|
|
|
(14.6
|
%)
|
|
12.2
|
%
|
Corporate
Expenses
|
|
|
4,918
|
|
|
3,780
|
|
|
3,607
|
|
|
30.1
|
%
|
|
4.8
|
%
|
Total
|
|
$
|
977,785
|
|
$
|
903,765
|
|
$
|
820,916
|
|
|
8.2
|
%
|
|
10.1
|
%
|
Interest
and Other Expense
For
2006,
interest expense decreased by $3.3 million versus 2005. The decrease was due
primarily to repurchases of approximately $46.6 million of our
7.3% bonds during the year. This decrease in interest was partially offset
by increased borrowings on our revolving credit agreement for the first three
quarters of 2006.
For
2005,
interest expense decreased $0.5 million versus 2004. The decrease was due
primarily to the lower levels of debt outstanding on a daily basis during 2005
versus 2004, and was somewhat offset by an overall increase in interest rates
when compared with 2004.
Tax
Our
effective tax rate in 2006 was 65.2%, compared with an effective tax rate of
49.4% in 2005. This increase in rate is primarily attributable to (1) $22.4
million of non-deductible losses in connection with the disposal of our European
fabrics business, and (2) the repatriation of earnings related to the
disposal of this business.
Our
effective tax rate in 2005 was 49.4%, compared with an effective tax rate of
38.6% in 2004. The increase in rate is primarily attributable to (1) taxes
associated with our repatriation of previously unremitted foreign earnings,
which is discussed above, (2) a reduced state tax benefit attributable to U.S.
operations as a result of lower pre-tax losses in the U.S. in 2005, and (3)
our
provision of a valuation allowance against state net operating loss
carryforwards which we do not expect to utilize. These factors were somewhat
offset by decreases in the tax rate components associated with foreign
operations and non-deductible business expenses.
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 selling, general and administrative expenses, anticipated capital
expenditures, and potential special projects. We generate our cash and other
liquidity requirements from our operations and from borrowings or letters of
credit under our revolving credit facility with a banking syndicate. We believe
that our liquidity position will provide sufficient funds to meet our current
commitments and other cash requirements for the foreseeable future. We also
believe that we will be able to continue to enhance the generation of free
cash
flow (particularly in the short term because we have no significant debt
maturity until April 2008) through the following initiatives:
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•
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Improve
our inventory turns by continuing to implement a make-to-order model
throughout our organization;
|
|
•
|
Reduce
our average days sales outstanding through improved credit and collection
practices; and
|
|
•
|
Limit
the amount of our capital expenditures generally to those projects
that
have a short-term payback period.
|
Historically,
we use more cash in the first half of the fiscal year, as we fund insurance
premiums, tax payments, incentive compensation, and inventory build-up in
preparation for the holiday/vacation season of our international operations.
However, we believe that our liquidity position and cash provided by operations
will provide sufficient funds to meet our current commitments and other cash
requirements for the foreseeable future, primarily because we had over $98
million of additional borrowing capacity under our revolving credit facility
as
of December 31, 2006, and we have no maturities of long term debt until April
2008.
In
addition, we have a high contribution margin business with low capital
expenditure requirements. Contribution margin represents variable gross profit
margin less the variable component of selling, general and administrative
expenses, and for us is an indicator of profit on incremental sales after the
fixed components of cost of goods sold and selling, general and administrative
expenses have been recovered. While contribution margin should not be construed
as a substitute for gross margin, which is determined in accordance with GAAP,
it is included herein to provide additional information with respect to our
potential for profitability. In addition, we believe that investors find
contribution margin to be a useful tool for measuring our profitability on
an
operating basis.
Furthermore,
on November 10, 2006, we sold 5,750,000 shares of our Class A common
stock at a public offering price of $14.65 per share, resulting in net
proceeds of approximately $78.9 million after deducting the underwriting
discounts and commissions and estimated offering expenses. We plan to use the
net proceeds to repay some of our outstanding debt and may use a portion of
such
proceeds for general corporate purposes.
Nevertheless,
our ability to generate cash from operating activities is uncertain because
we
are subject to, and recently have experienced, fluctuations in our level of
net
sales. As a result, we cannot assure you that our business will generate cash
flow from operations in an amount sufficient to enable us to pay the interest
and principal on our debt or to fund our other liquidity needs.
At
December 31, 2006, we had $110.2 million in cash. As of December 31, 2006,
no
borrowings and $9.5 million in letters of credit were outstanding under the
revolving credit facility, and we could have incurred an additional $98.5
million of borrowings thereunder.
We
have
approximately $85.0 million in contractual cash obligations due by the end
of
fiscal year 2007, which includes, among other things, capital expenditure
purchase commitments and interest payments on our debt. We currently estimate
aggregate capital expenditures will be between $35 million and $40 million
for
2007. Based on current interest rate and debt levels, we expect our aggregate
interest expense for 2007 to be between $34 million and $38
million.
In
February 2004, we issued $135 million in 9.5% senior subordinated notes due
2014. Proceeds from the issuance of these notes were used to redeem in full
our
previously outstanding 9.5% senior subordinated notes due 2005, with the
remainder of $7.5 million (after fees and expenses) used to reduce borrowings
under our revolving credit facility.
It
is
important for you to consider that our revolving credit facility matures in
June
2011, and our outstanding senior and senior subordinated notes mature at times
ranging from 2008 to 2014. 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.
Revolving
Credit Facility
We
amended and restated our primary senior revolving credit facility on June 30,
2006. It provides for a maximum aggregate amount of loans and letters of credit
of up to $125 million at any one time, subject to the borrowing base described
below. The key features of the revolving credit facility are as
follows:
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•
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The
revolving credit facility currently matures on June 30,
2011;
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•
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The
revolving credit facility includes a domestic U.S. dollar syndicated
loan and letter of credit facility made available to Interface, Inc.
up to
the lesser of (1) $125 million, or (2) a borrowing base
equal to the sum of specified percentages of eligible accounts receivable,
inventory, equipment and (at our option) real estate in the United
States
(the percentages and eligibility requirements for the borrowing base
are
specified in the credit facility), less certain reserves;
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•
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Advances
under the loan facility are secured by a first-priority lien on
substantially all of Interface, Inc.’s assets and the assets of each of
its material domestic subsidiaries, which have guaranteed the revolving
credit facility; and
|
|
•
|
The
revolving credit facility contains a financial covenant (a fixed
charge
coverage ratio test) that becomes effective in the event that our
excess
borrowing availability falls below $20 million. In such event, we
must comply with the financial covenant for a period commencing on
the
last day of the fiscal quarter immediately preceding such event (unless
such event occurs on the last day of a fiscal quarter, in which case
the
compliance period commences on such date) and ending on the last
day of
the fiscal quarter immediately following the fiscal quarter in which
such
event occurred;
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The
revolving credit facility also includes various reporting, affirmative and
negative covenants, and other provisions that restrict our ability to take
certain actions, including provisions that restrict our ability to repay our
long-term indebtedness unless we meet a specified minimum excess availability
test.
Interest
Rates and Fees. Interest
on borrowings and letters of credit under the revolving credit facility is
charged at varying rates computed by applying a margin (ranging from 0.0% to
0.25%, in the case of advances at a prime interest rate, and 1.25% to 2.25%,
in
the case of advances at LIBOR) over a baseline rate (such as the prime interest
rate or LIBOR), depending on the type of borrowing and our average excess
borrowing availability during the most recently completed fiscal quarter. In
addition, we pay an unused line fee on the facility ranging from 0.25% to 0.375%
depending on our average excess borrowing availability during the most recently
completed fiscal quarter.
Prepayments. Our
revolving credit facility requires prepayment from the proceeds of certain
asset
sales.
Covenants. The
revolving credit facility also limits our ability, among other things,
to:
• incur
indebtedness or contingent obligations;
• make
acquisitions of or investments in businesses (in excess of certain specified
amounts);
• sell
or
dispose of assets (in excess of certain specified amounts);
• create
or
incur liens on assets;
and
• enter
into sale and leaseback transactions.
We
are
presently in compliance with all covenants under the revolving credit facility
and anticipate that we will remain in compliance with the covenants for the
foreseeable future.
Events
of Default. If
Interface, Inc. and certain of its subsidiaries fails to perform or breaches
any
of the affirmative or negative covenants under the revolving credit 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 $10 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’ co-agents 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. The
facility is secured by substantially all of the assets of Interface, Inc. and
its 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 revolving credit facility, the lenders’ collateral
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.
Senior
and Senior Subordinated Notes
The
indentures governing our 7.3% Senior Notes due 2008, 10.375% Senior Notes due
2010, and 9.5% Senior Subordinated Notes due 2014, on a collective basis,
contain covenants that limit or restrict our ability to:
• incur
additional indebtedness;
• make
dividend payments or other restricted payments;
• create
liens on our assets;
• sell
our
assets;
• sell
securities of our subsidiaries;
• enter
into transactions with shareholders and affiliates; and
• enter
into mergers, consolidations, or sales of all or substantially all of our
assets.
In
addition, each of the indentures governing our 10.375% Senior Notes due 2010
and
9.5% Senior Subordinated Notes due 2014 contains a covenant that requires us
to
make an offer to purchase the outstanding notes under such indenture in the
event of a change of control of Interface (as defined in each respective
indenture).
Each
series of notes is guaranteed, fully, unconditionally, and jointly and
severally, on an unsecured basis by each of our material U.S. subsidiaries.
If
we breach or fail to perform any of the affirmative or negative covenants under
one of these indentures, or if other specified events occur (such as a
bankruptcy or similar event), after giving effect to any applicable notice
and
right to cure provisions, an event of default will exist. An event of default
also will exist under each indenture if we breach or fail to perform any
covenant or agreement contained in any other instrument (including without
limitation any other indenture) relating to any of our indebtedness exceeding
$20 million (or $25 million in the case of the indenture governing our 7.3%
Senior Notes due 2008) and such default or failure results in the indebtedness
becoming due and payable. If an event of default exists and is continuing,
the
trustee of the series of notes at issue (or the holders of at least 25% of
the
principal amount of such notes) may declare the principal amount of the notes
and accrued interest thereon immediately due and payable (except in the case
of
bankruptcy, in which case such amounts are immediately due and payable even
in
the absence of such a declaration).
In
2005,
we repurchased $2.0 million of our 7.3% Senior Notes due 2008. In 2006, we
repurchased an additional $46.6 million of the 7.3% Senior Notes.
Analysis
of Cash Flows
Our
primary sources of cash during 2006 were (1) $78.9 million from our sale of
5,750,000 shares of common stock, (2) $28.8 million received from the
sale of our European fabrics business, (3) $30.1 million from continuing
operations, and (4) $7.1 million from the exercise of employee stock
options. The primary uses of cash during 2006 were (1) $46.6 million for
repurchases of the Company’s 7.3% senior notes, (2) $40.4 million for bond
interest payments, and (3) $34.0 million for additions to property and equipment
in our manufacturing locations.
Our
primary sources of cash during 2005 were (1) $49.3 million from continuing
operations, (2) $12.0 million from discontinued operations, and (3) $3.0 million
from the issuance of stock upon the exercise of employee stock options. The
primary uses of cash during 2005 were (1) $25.5 million for additions to
property and equipment at our manufacturing facilities, (2) $2.7 million for
purchases of intellectual property, (3) $2.3 million for deposits on
manufacturing equipment, and (4) $2.0 million for repurchases of Senior
Notes.
Our
primary sources of cash during 2004 were (1) $28.3 million from continuing
operations, (2) $7.5 million of net proceeds (after payment of fees, expenses
and the redemption amount, including accrued interest, of our 9.5% Senior
Subordinated Notes due 2005) from the issuance of our 9.5% Senior Subordinated
Notes due 2014, (3) $4.4 million from the sale of a building, and (4) $4.4
million from the issuance of common stock upon the exercise of employee stock
options. The primary uses of cash during 2004 were (1) $11.7 million in
conjunction with discontinued operations (net of $7.0 million cash received),
(2) $15.8 million for additions to property and equipment in our manufacturing
facilities, (3) $4.2 million of costs associated with the issuance of our 9.5%
senior subordinated notes due 2014, (4) $2.0 million primarily for deposits
on
manufacturing equipment, and (5) $1.4 million related to an increase in notes
receivable.
Management
believes that cash provided by operations and long-term loan commitments will
provide adequate funds for current commitments and other requirements in the
foreseeable future.
Cash
flows from discontinued operations are included in operating cash flows for
all
years presented, as there were no material investing or financing activities
related to these discontinued operations. The absence of cash flows from
discontinued operations is not expected to have any significant impact on future
liquidity and capital resources.
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 (including the contractual obligations of our
discontinued operations) and the periods in which payments are due. The amounts
and time periods are measured from December 31, 2006.
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|
|
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Payments
Due by Period
|
|
|
|
Total
Payments Due
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|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
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More than
5 years
|
|
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(in
thousands)
|
|
Long-Term
Debt Obligations
|
|
$
|
411,365
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|
$
|
--
|
|
$
|
101,365
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|
$
|
175,000
|
|
$
|
135,000
|
|
Operating
Lease Obligations(1)
|
|
|
88,441
|
|
|
24,086
|
|
|
32,112
|
|
|
20,059
|
|
|
12,184
|
|
Expected
Interest Payments(2)
|
|
|
155,319
|
|
|
38,381
|
|
|
63,812
|
|
|
26,407
|
|
|
26,719
|
|
Unconditional
Purchase Obligations(3)
|
|
|
11,836
|
|
|
11,407
|
|
|
390
|
|
|
39
|
|
|
--
|
|
Pension
Cash Obligations(4)
|
|
|
114,919
|
|
|
11,170
|
|
|
23,301
|
|
|
24,448
|
|
|
56,000
|
|
Total
Contractual Cash Obligations
|
|
$
|
781,880
|
|
$
|
85,044
|
|
$
|
220,980
|
|
$
|
245,953
|
|
$
|
229,903
|
|
|
(1)
|
Our
capital lease obligations are
insignificant.
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(2)
|
Expected
interest payments to be made in future periods reflect anticipated
interest payments related to our $175 million of 10.375% Senior
Notes; our $101.4 million
of 7.3% Senior Notes; and our $135 million of 9.5% Senior Subordinated
Notes. We have also assumed in the presentation above that we will
hold
the Senior Notes and the Senior Subordinated Notes until maturity.
We have
excluded from the presentation interest payments and fees related
to our
revolving credit facility (discussed above), because of the variability
and timing of advances and repayments
thereunder.
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(3)
|
Does
not include unconditional purchase obligations that are included
as
liabilities in our Consolidated Balance Sheet. We have capital expenditure
commitments of $5.0 million, all of which are due in less than 1
year.
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(4)
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We
have two foreign defined benefit plans and a domestic salary continuation
plan. We have presented above the estimated cash obligations that
will be
paid under these plans over the next ten years. Such amounts are
based on
several estimates and assumptions and could differ materially should
the
underlying estimates and assumptions change. Our domestic salary
continuation plan is an unfunded plan, and we do not currently have
any
commitments to make contributions to this plan. However, we do use
insurance instruments to hedge our exposure under the salary continuation
plan. Contributions to our other employee benefit plans are at our
discretion.
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Critical
Accounting Policies
High-quality
financial statements require rigorous application of high-quality 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 estimation about the effects of
matters that are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs. For all of these
policies, management cautions that future events may not develop as forecasted,
and the best estimates routinely require adjustment.
Revenue
Recognition. A
portion
of our revenues is derived from long-term contracts that are accounted for
under
the provisions of the American Institute of Certified Public Accountants’
Statement of Position No. 81-1, “Accounting for Performance of Construction-Type
and Certain Production-Type Contracts”. Long-term fixed-price contracts are
recorded on the percentage of completion basis using the ratio of costs incurred
to estimated total costs at completion as the measurement basis for progress
toward completion and revenue recognition. Any losses identified on contracts
are recognized immediately. Contract accounting requires significant judgment
relative to assessing risks, estimating contract costs and making related
assumptions for schedule and technical issues. With respect to contract change
orders, claims or similar items, judgment must be used in estimating related
amounts and assessing the potential for realization. These amounts are only
included in contract value when they can be reliably estimated and realization
is probable.
Impairment
of Long-Lived Assets. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of
the
asset, an impairment is indicated. A loss is then recognized for the difference,
if any, between the fair value of the asset (as estimated by management using
its best judgment) and the carrying value of the asset. If actual market value
is less favorable than that estimated by management, additional write-downs
may
be required.
Deferred
Income Tax Assets and Liabilities. The
carrying values of deferred income tax assets and liabilities reflect the
application of our income tax accounting policies in accordance with SFAS No.
109, “Accounting for Income Taxes,” and are based on management’s assumptions
and estimates regarding future operating results and levels of taxable income,
as well as management’s judgments regarding the interpretation of the provisions
of SFAS No. 109. The carrying values of liabilities for income taxes currently
payable are based on management’s interpretation 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
record
a valuation allowance to reduce our 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.
Goodwill.
Pursuant
to SFAS No. 142, we test goodwill for impairment at least annually. We use
an
outside consultant to help prepare valuations of reporting units, 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, 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.
Inventories.
We
determine the value of inventories using the lower of cost or market. We write
down inventories for the difference between the carrying value of the
inventories and their estimated market value. If actual market conditions are
less favorable than those projected by management, additional write-downs may
be
required.
We
estimate our reserves for inventory obsolescence by continuously examining
our
inventories to determine if there are indicators that carrying values exceed
net
realizable values. Experience has shown that significant indicators that could
require the need for additional inventory write-downs are the age of the
inventory, the length of its product life cycles, anticipated demand for our
products, and current economic conditions. While we believe that adequate
write-downs for inventory obsolescence have been made in the consolidated
financial statements, consumer tastes and preferences will continue to change
and we could experience additional inventory write-downs in the future. Our
inventory reserve on December 31, 2006, and January 1, 2006, was $11.9 million
and $12.0 million, respectively. To the extent that actual obsolescence of
our inventory differs from our estimate by 10%, our net income would be higher
or lower by approximately $0.9 million, on an after-tax basis.
Pension
Benefits. Net
pension expense recorded is based on, among other things, assumptions about
the
discount rate, estimated return on plan assets and salary increases. While
management believes these assumptions are reasonable, changes in these and
other
factors and differences between actual and assumed changes in the present value
of liabilities or assets of our plans above certain thresholds could cause
net
annual expense to increase or decrease materially from year to year. The
actuarial assumptions used in our salary continuation plan and our foreign
defined benefit plans reporting are reviewed periodically and compared with
external benchmarks to ensure that they appropriately account for our future
pension benefit obligation. The expected long-term rate of return on plan assets
assumption is based on weighted-average expected returns for each asset class.
Expected returns reflect a combination of historical performance analysis and
the forward-looking views of the financial markets, and include input from
actuaries, investment service firms and investment managers. A 1% increase
in
the actuarial assumption for discount rate would decrease our projected benefit
obligation by approximately $28.2 million. A 1% decrease in the discount rate
would increase our projected benefit obligation by approximately $52.3
million.
Environmental
Remediation. We
provide for remediation costs and penalties when the responsibility to remediate
is probable and the amount of associated costs is reasonably determinable.
Remediation liabilities are accrued based on estimates of known environmental
exposures and are discounted in certain instances. We regularly monitor the
progress of environmental remediation. Should studies indicate that the cost
of
remediation is to be more than previously estimated, an additional accrual
would
be recorded in the period in which such determination is made.
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 31, 2006, and January 1, 2006, was $7.4 million and $6.2
million, respectively. To the extent the actual collectibility of our accounts
receivable differs from our estimates by 10%, our net income would be higher
or
lower by approximately $0.5 million, on an after-tax basis, depending on whether
the actual collectibility 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. We typically warrant that any services performed
will be free from defects in workmanship for a period of one year following
completion. For our fabrics products, we typically provide a five year limited
warranty against manufacturing defects and nonconformity to specifications.
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 reserve
on December 31, 2006, and January 1, 2006, was $2.2 million and $2.6
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 net income would be higher or lower by
approximately $0.1 million, on an after-tax basis, depending on whether the
actual expense is lower or higher, respectively, than the estimated
provision.
Off-Balance
Sheet Arrangements
We
are
not a party to any material off-balance sheet arrangements.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115.” This standard permits an
entity to choose to measure certain financial assets and liabilities at fair
value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to
available-for-sale and trading securities. This statement is effective for
fiscal years beginning after November 15, 2007. The Company is current
evaluating the effect, if any, that the adoption of this pronouncement will
have
on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of
FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158
requires an employer to recognize a plan’s funded status in its statement of
financial position, measure a plan’s assets and obligations as of the end of the
employer’s fiscal year, and recognize the changes in a defined benefit
post-retirement plan’s funded status in comprehensive income in the year in
which the changes occur. SFAS No. 158’s requirement to recognize the
funded status of a benefit plan and new disclosure requirements became effective
for companies with fiscal years ending after December 15, 2006, on a
prospective basis. As a result of the requirement to recognize the unfunded
status of the plan as a liability, the Company recorded a charge to other
comprehensive income of $19.3 million in the 4th
quarter
of 2006. The impact of this statement on the Company’s consolidated financial
statements is discussed in Item 8 of this Report in the note entitled “Employee
Benefit Plans.”
In
September 2006, the Securities & Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108. SAB No. 108 provides additional guidance on
determining the materiality of cumulative unadjusted misstatements in both
current and future financial statements. SAB No. 108 also provides guidance
on
the proper accounting and reporting for the correction of immaterial unadjusted
misstatements which may become material in subsequent accounting periods. SAB
No. 108 generally requires prior period financial statements to be revised
if
prior misstatements are subsequently discovered; however, for immaterial prior
year revisions, reports filed under the Securities Exchange Act of 1934 are
not
required to be amended. SAB No. 108 became effective as of December 31, 2006.
The Company applied the guidance provided in SAB No. 108 in the fourth quarter
of 2006, and identified three matters in prior reporting periods which were
deemed immaterial to those periods using a consistent evaluation methodology
(the “rollover method”). They were as follows:
|
•
|
In
1998, the Company entered into a sale-leaseback transaction in which
a
gain was recognized at the time of sale as opposed to over the lease
period. In addition, the Company did not use straight-line rental
accounting for the expected lease payments related to this transaction.
To
correct these entries, the Company recorded an entry to increase
liabilities by approximately $3.3 million and decrease retained earnings
by approximately $2.1 million, net of tax;
|
|
•
|
The
Company’s previous methodology for recording legal expenses ensured that
the Company incurred twelve months of expense in each year. However,
the
actual timing and amount of the legal bills received led to an understated
liability on the balance sheet. The Company has recorded a liability
of
approximately $1.2 million and a decrease in retained earnings of
approximately $0.5 million, net of taxes (as the remaining portion
of
these costs were capitalizable), to properly record incurred legal
expenses; and
|
|
•
|
The
Company
previously under-recorded the liability related to restricted stock
by
approximately $0.7 million. There was no impact to consolidated
shareholders' equity as a result of this correction, as the liability
for
restricted stock is recorded in
equity.
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company is currently evaluating the effect, if any,
that
the adoption of this pronouncement will have on its consolidated financial
statements.
On
September 7, 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached
consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). The scope of EITF 06-4 is limited to the
recognition of a liability and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007, and the Company is currently evaluating
the
effect of this standard on its consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes”. In summary, FIN 48 requires that all tax
positions subject to SFAS No. 109, “Accounting for Income Taxes”, be
analyzed using a two-step approach. The first step requires an entity to
determine if a tax position is more-likely-than-not to be sustained upon
examination. In the second step, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48 is
effective for companies with fiscal years beginning after December 15,
2006, with any adjustment in a company’s tax provision being accounted for as a
cumulative effect of accounting change in beginning equity. The Company is
in
the process of determining the effect, if any, the adoption of FIN 48 will
have on its consolidated financial statements.
In
June
2006, the EITF reached a consensus on Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)” (“EITF
06-03”). EITF 06-03 concludes that (a) the scope of this issue includes any
tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer, and (b) that
the
presentation of taxes within the scope on either a gross or a net basis is
an
accounting policy decision that should be disclosed under Opinion 22.
Furthermore, for taxes reported on a gross basis, a company should disclose
the
amounts of those taxes in interim and annual financial statements for each
period for which an income statement is presented. The consensus, which requires
only disclosure changes, is effective for periods beginning after December
15,
2006. This standard is not expected to have a material impact on our results
of
operations or financial position.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections — a replacement of APB Opinion No. 20 and FASB Statement
No. 3”. SFAS No. 154 changes the requirements for the accounting
for and reporting of a change in accounting principle. This statement applies
to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. We adopted SFAS No. 154 on January 2, 2006. The adoption of
SFAS No. 154 did not have a material impact on our consolidated
financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
Amendment of Accounting Research Bulletin No. 43, Chapter 4.”
SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material.
SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We adopted SFAS No. 151 on January 2,
2006. The adoption of SFAS No. 151 did not have a material effect on our
results of operation or financial position.
On
October 13, 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment,” which requires companies to measure compensation cost for all
share-based payments, including employee stock options. SFAS No. 123R was
effective as of the first fiscal year beginning after June 15, 2005. In
March 2005, the SEC issued SAB No. 107 regarding the SEC’s interpretation of
SFAS No. 123R and the valuation of share-based payments for public companies.
The Company adopted SFAS No. 123R on January 2, 2006. See the note entitled
“Shareholders Equity” in Item 8 of this Report for further discussion of this
standard.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 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 has developed
and
implemented a policy to maintain the percentage of fixed and variable rate
debt
within certain parameters. From time to time, we maintain a fixed/variable
rate
mix within these parameters either by borrowing on a fixed rate basis or
entering into interest rate swap transactions. In the interest rate swaps,
we
agree to exchange, at specified levels, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR.
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, Canada, England, Northern Ireland, the Netherlands, Australia and
Thailand, and sell our products in more than 100 countries. As a result, our
financial results could be significantly affected by factors such as changes
in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which we distribute our products. Our operating results are exposed
to changes in exchange rates between the U.S. dollar and many other currencies,
including the euro, British pound sterling, Canadian dollar, Australian dollar,
Thai baht and Japanese yen. When the U.S. dollar strengthens against a foreign
currency, the value of anticipated sales in those currencies decreases, and
vice
versa. Additionally, to the extent our foreign operations with functional
currencies other than the U.S. dollar transact business in countries other
than
the United States, exchange rate changes between two foreign currencies could
ultimately impact us. Finally, because we report in U.S. dollars on a
consolidated basis, foreign currency exchange fluctuations could have a
translation impact on our financial position.
At
December 31, 2006, we recognized a $25.5 million increase in our foreign
currency translation adjustment account compared to January 1, 2006, because
of
the strengthening of certain currencies against the U.S. dollar. The increase
was associated primarily with certain foreign subsidiaries located within the
United Kingdom and continental Europe.
Sensitivity
Analysis
For
purposes of specific risk analysis, we use sensitivity analysis to measure
the
impact that market risk may have on the fair values of our market-sensitive
instruments.
To
perform sensitivity analysis, we assess the risk of loss in fair values
associated with the impact of hypothetical changes in interest rates and foreign
currency exchange rates on market-sensitive instruments. The market value of
instruments affected by interest rate and foreign currency exchange rate risk
is
computed based on the present value of future cash flows as impacted by the
changes in the rates attributable to the market risk being measured. The
discount rates used for the present value computations were selected based
on
market interest and foreign currency exchange rates in effect at December 31,
2006. 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
Based
on
a hypothetical immediate 150 basis point increase in interest rates, with all
other variables held constant, the fair value of our fixed rate long-term debt
would be impacted by a net decrease of $17.8 million. Conversely, a 150 basis
point decrease in interest rates would result in a net increase in the fair
value of our fixed rate long-term debt of $15.7 million.
Foreign
Currency Exchange Rate Risk
As
of
December 31, 2006, a 10% decrease or increase in the levels of foreign currency
exchange rates against the U.S. dollar, with all other variables held constant,
would result in a decrease in the fair value of our financial instruments of
$9.4 million or an increase in the fair value of our financial instruments
of
$7.7 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.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands, except share data)
|
|
Net
sales
|
|
$
|
1,075,842
|
|
$
|
985,766
|
|
$
|
881,658
|
|
Cost
of sales
|
|
|
736,247
|
|
|
681,069
|
|
|
616,297
|
|
Gross
profit on sales
|
|
|
339,595
|
|
|
304,697
|
|
|
265,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
241,538
|
|
|
222,696
|
|
|
204,619
|
|
Impairment
of goodwill
|
|
|
20,712
|
|
|
--
|
|
|
--
|
|
Loss
on disposal - European fabrics
|
|
|
1,723
|
|
|
--
|
|
|
--
|
|
Restructuring
charges
|
|
|
3,260
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
72,362
|
|
|
82,001
|
|
|
60,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
42,204
|
|
|
45,541
|
|
|
46,023
|
|
Bond
offering cost
|
|
|
--
|
|
|
--
|
|
|
1,869
|
|
Other
expense
|
|
|
1,319
|
|
|
933
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before tax expense
|
|
|
28,839
|
|
|
35,527
|
|
|
10,484
|
|
Income
tax expense
|
|
|
18,816
|
|
|
17,561
|
|
|
4,044
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
10,023
|
|
|
17,966
|
|
|
6,440
|
|
Loss
from discontinued operations, net of tax
|
|
|
(31
|
)
|
|
(14,791
|
)
|
|
(58,815
|
)
|
Loss
on disposal of discontinued operations, net of tax
|
|
|
--
|
|
|
(1,935
|
)
|
|
(3,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
9,992
|
|
$
|
1,240
|
|
$
|
(55,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - basic
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.18
|
|
$
|
0.35
|
|
$
|
0.13
|
|
Discontinued
operations
|
|
|
--
|
|
|
(0.29
|
)
|
|
(1.16
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - diluted
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.18
|
|
$
|
0.34
|
|
$
|
0.12
|
|
Discontinued
operations
|
|
|
--
|
|
|
(0.28
|
)
|
|
(1.12
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - diluted
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
54,087
|
|
|
51,551
|
|
|
50,682
|
|
Diluted
weighted average shares outstanding
|
|
|
55,713
|
|
|
52,895
|
|
|
52,171
|
|
See
accompanying notes to consolidated financial statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
Net
income (loss)
|
|
$
|
9,992
|
|
$
|
1,240
|
|
$
|
(55,402
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
25,501
|
|
|
(34,351
|
)
|
|
23,052
|
|
Pension
liability adjustment
|
|
|
(19,392
|
)
|
|
5,986
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
16,101
|
|
$
|
(27,125
|
)
|
$
|
(31,061
|
)
|
See
accompanying notes to consolidated financial statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
Current
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
110,220
|
|
$
|
51,312
|
|
Accounts
receivable, net
|
|
|
159,430
|
|
|
141,408
|
|
Inventories
|
|
|
147,963
|
|
|
130,209
|
|
Prepaid
expenses and other current assets
|
|
|
21,937
|
|
|
16,624
|
|
Deferred
income taxes
|
|
|
6,839
|
|
|
4,540
|
|
Assets
of businesses held for sale
|
|
|
2,570
|
|
|
5,526
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
448,959
|
|
|
349,619
|
|
Property
and equipment, net
|
|
|
188,725
|
|
|
185,643
|
|
Deferred
tax asset
|
|
|
65,841
|
|
|
69,043
|
|
Goodwill
|
|
|
180,107
|
|
|
193,705
|
|
Other
assets
|
|
|
44,708
|
|
|
40,980
|
|
|
|
|
|
|
|
|
|
|
|
$
|
928,340
|
|
$
|
838,990
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
56,601
|
|
$
|
50,312
|
|
Accrued
expenses
|
|
|
101,493
|
|
|
85,581
|
|
Liabilities
of businesses held for sale
|
|
|
1,512
|
|
|
4,214
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
159,606
|
|
|
140,107
|
|
Senior
notes
|
|
|
276,365
|
|
|
323,000
|
|
Senior
subordinated notes
|
|
|
135,000
|
|
|
135,000
|
|
Deferred
income taxes
|
|
|
12,686
|
|
|
23,534
|
|
Other
|
|
|
64,783
|
|
|
40,864
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
648,440
|
|
|
662,505
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
5,506
|
|
|
4,409
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
--
|
|
|
--
|
|
Common
stock
|
|
|
6,066
|
|
|
5,334
|
|
Additional
paid-in capital
|
|
|
323,132
|
|
|
234,314
|
|
Retained
earnings (deficit)
|
|
|
5,217
|
|
|
(1,443
|
)
|
Accumulated
other comprehensive income - foreign currency translation
|
|
|
(12,847
|
)
|
|
(38,347
|
)
|
Accumulated
other comprehensive income - pension liability
|
|
|
(47,174
|
)
|
|
(27,782
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
274,394
|
|
|
172,076
|
|
|
|
|
|
|
|
|
|
|
|
$
|
928,340
|
|
$
|
838,990
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
OPERATING
ACTIVITIES
|
|
|
|
(in
thousands)
|
|
|
|
Net
income (loss)
|
|
|
9,992
|
|
$
|
1,240
|
|
$
|
(55,402
|
)
|
Impairment
of goodwill related to discontinued operations
|
|
|
--
|
|
|
--
|
|
|
29,044
|
|
Impairment
of assets related to discontinued operations
|
|
|
--
|
|
|
3,466
|
|
|
17,521
|
|
Loss
on discontinued operations
|
|
|
31
|
|
|
11,325
|
|
|
12,250
|
|
Loss
from disposal of discontinued operations
|
|
|
--
|
|
|
1,935
|
|
|
3,027
|
|
Income
from continuing operations
|
|
|
10,023
|
|
|
17,966
|
|
|
6,440
|
|
Adjustments
to reconcile income (loss) to cash provided
by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
Impairment
of goodwill
|
|
|
20,712
|
|
|
--
|
|
|
--
|
|
Restructuring
charge
|
|
|
2,708
|
|
|
--
|
|
|
--
|
|
Depreciation
and amortization
|
|
|
31,163
|
|
|
31,455
|
|
|
33,336
|
|
Bad
debt expense
|
|
|
2,694
|
|
|
2,009
|
|
|
1,421
|
|
Deferred
income taxes and other
|
|
|
(11,997
|
)
|
|
(6,243
|
)
|
|
(10,832
|
)
|
Working
capital changes:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(21,315
|
)
|
|
(7,742
|
)
|
|
600
|
|
Inventories
|
|
|
(24,174
|
)
|
|
2,801
|
|
|
(1,876
|
)
|
Prepaid
expenses and other current assets
|
|
|
(5,953
|
)
|
|
(2,716
|
)
|
|
1,027
|
|
Accounts
payable and accrued expenses
|
|
|
26,213
|
|
|
11,753
|
|
|
(1,855
|
)
|
Cash
provided by continuing operations
|
|
|
30,074
|
|
|
49,283
|
|
|
28,261
|
|
Cash
provided by (used in) discontinued operations
|
|
|
--
|
|
|
12,018
|
|
|
(18,720
|
)
|
Cash
provided by operating activities
|
|
|
30,074
|
|
|
61,301
|
|
|
9,541
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(34,036
|
)
|
|
(25,478
|
)
|
|
(15,783
|
)
|
Proceeds
from sale of discontinued operations
|
|
|
--
|
|
|
551
|
|
|
7,003
|
|
Proceeds
from sale of European fabrics
|
|
|
28,837
|
|
|
--
|
|
|
--
|
|
Proceeds
from sale of building
|
|
|
--
|
|
|
--
|
|
|
4,400
|
|
Other
|
|
|
(7,361
|
)
|
|
(5,644
|
)
|
|
(3,393
|
)
|
Cash
used in investing activities
|
|
|
(12,560
|
)
|
|
(30,571
|
)
|
|
(7,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Issuance
of notes
|
|
|
--
|
|
|
--
|
|
|
135,000
|
|
Repurchase
of senior subordinated notes
|
|
|
--
|
|
|
--
|
|
|
(120,000
|
)
|
Debt
issuance costs
|
|
|
(777
|
)
|
|
--
|
|
|
(4,237
|
)
|
Borrowings
on long-term debt
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Repurchase
of senior notes
|
|
|
(46,634
|
)
|
|
(2,000
|
)
|
|
--
|
|
Proceeds
from issuance of common stock
|
|
|
86,413
|
|
|
2,960
|
|
|
4,442
|
|
Cash
provided by financing activities
|
|
|
39,002
|
|
|
960
|
|
|
15,205
|
|
Net
cash provided by operating, investing
and financing activities
|
|
|
56,516
|
|
|
31,690
|
|
|
16,973
|
|
Effect
of exchange rate changes on cash
|
|
|
2,392
|
|
|
(2,542
|
)
|
|
2,301
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
Net
increase
|
|
|
58,908
|
|
|
29,148
|
|
|
19,274
|
|
Balance,
beginning of year
|
|
|
51,312
|
|
|
22,164
|
|
|
2,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$
|
110,220
|
|
$
|
51,312
|
|
$
|
22,164
|
|
See
accompanying notes to consolidated financial statements.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
The
Company is a recognized leader in the worldwide commercial interiors market,
offering modular and broadloom floorcoverings, interior fabrics and specialty
products. The Company manufactures modular and broadloom carpet focusing on
the
high quality, designer-oriented sector of the market, and provides specialized
carpet replacement, installation and maintenance services. The Company also
produces interior fabrics and upholstery products. Additionally, the Company
offers Intersept,
a
proprietary antimicrobial used in a number of interior finishes, and sponsors
the Envirosense Consortium in its mission to address workplace environmental
issues.
In
2004,
the Company committed to a plan to exit its owned Re:Source dealer businesses
(as well as the results of operations of a small Australian dealer business
and
a small residential fabrics business). In the third quarter 2004, the Company
began to dispose of several of the dealer subsidiaries. The Company has now
sold
or terminated ongoing operations at each of its owned dealer businesses. The
results of operations and related disposal costs, gains and losses for these
businesses were classified as discontinued operations for all periods
presented.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions are
eliminated. Investments in which the Company does not have the ability to
exercise significant influence are carried at the lower of cost or estimated
realizable value. The Company monitors investments for other than temporary
declines in value and makes reductions in carrying values when
appropriate.
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, estimates of costs to complete performance contracts,
inventory obsolescence and the length of product life cycles, accruals
associated with restructuring activities, income tax exposures and valuation
allowances, environmental liabilities, carrying value of goodwill and property
and equipment. Actual results could vary from these estimates.
Revenue
Recognition
Revenue
is recognized when the following criteria are met: persuasive evidence of an
agreement exists, delivery has occurred or services have been rendered, price
to
the buyer is fixed and determinable, and collectibility is reasonably assured.
Delivery is not considered to have occurred until the customer takes title
and
assumes the risks and rewards of ownership, which is generally on the date
of
shipment. Provisions for discounts, sales returns and allowances are estimated
using historical experience, current economic trends, and the Company’s quality
performance. The related provision is recorded as a reduction of sales and
cost
of goods sold in the same period that the revenue is recognized. Material
differences may result in the amount and timing of net sales for any period
if
management makes different judgments or uses different estimates.
Revenues
and estimated profits on performance contracts, which are cost-type or fixed-fee
contracts to sell and install the Company’s flooring products, are recognized
under the percentage of completion method of accounting using the cost-to-cost
methodology. This method is used because management considers costs incurred
to
be the best available measure of progress on these contracts. Estimates are
made
of the costs to complete a contract and revenue is recognized based on the
estimated progression to completion. Profit estimates are revised periodically
based upon changes in facts. Any losses identified on contracts are recognized
immediately.
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.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research
and Development
Research
and development costs are expensed as incurred and are included in the selling,
general and administrative expense caption in the consolidated statements of
operations. Research and development expense was $9.0 million, $9.6 million
and
$8.0 million for the years ended 2006, 2005 and 2004,
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.
Cash
payments for interest amounted to approximately $41.9 million, $43.4 million
and
$42.1 million for the years ended 2006, 2005 and 2004, respectively. Income
tax
payments amounted to approximately $17.5 million, $14.3 million and $9.6 million
for the years ended 2006, 2005 and 2004, respectively. During the years ended
2006, 2005 and 2004, the Company received income tax refunds of $2.5 million,
$0.1 million and $0.6 million, respectively.
Cash
flows from discontinued operations are included in operating cash flows for
all
years presented, as there were no significant investing or financing activities
related to these discontinued operations.
Inventories
Inventories
are valued at the lower of cost (standards approximating the first-in, first-out
method) or market. Costs included in inventories are based on invoiced costs
and/or production costs, as applicable. Included in production costs are
material, direct labor and allocated overhead. The
Company writes down inventories for the difference between the carrying value
of
the inventories and their estimated market 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 on 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 on the accompanying consolidated
statements of operations.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets
and Liabilities of Businesses Held for Sale
The
Company considers businesses to be held for sale when management approves and
commits to a formal plan to actively market a business for sale and the sale
is
considered probable. Upon designation as held for sale, the carrying value
of
the assets of the business are recorded at the lower of their carrying value
or
their estimated fair value, less costs to sell. The Company ceases to record
depreciation expense at that time.
Property
and Equipment and Long-Lived Assets
Property
and equipment are carried at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives: buildings and
improvements - ten to forty years; and furniture and equipment - three to twelve
years. Interest costs for the construction/development of certain long-term
assets are capitalized and amortized over the related assets’ estimated useful
lives. The Company capitalized net interest costs of approximately $1.2 million,
$0.9 million, and $0.6 million for the fiscal years ended 2006, 2005 and 2004,
respectively. Depreciation expense amounted to approximately $27.1 million,
$27.4 million and $27.7 million for the years ended 2006, 2005 and 2004,
respectively. These amounts exclude depreciation expense of approximately $2.1
million for 2004, related to the discontinued operations of the Re:Source dealer
businesses and U.S. raised/access flooring business.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of
the
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset. Repair and maintenance costs are charged to
operating expense as incurred.
Goodwill
and Other Intangible Assets
Goodwill
is the excess of the purchase price over the fair value of net assets acquired
in business combinations accounted for as purchases. Prior to the adoption
of
Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other
Intangible Assets” on December 31, 2001, goodwill was amortized on a
straight-line basis over the periods benefited, principally twenty-five to
forty
years. Accumulated amortization amounted to approximately $77.3 million at
both
December 31, 2006, and January 1, 2006, and cumulative impairment losses
recognized were $106.9 million as of December 31, 2006, and $86.2 million as
of
January 1, 2006.
In
June
2001, the Financial Accounting Standards Board (“FASB”) finalized SFAS No. 141,
“Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that
the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001, and to purchase business
combinations completed on or after July 1, 2001. It also requires, following
the
adoption of SFAS No. 142, that the Company reclassify the carrying amounts
of
intangible assets and goodwill based on the criteria in SFAS No.
141.
The
Company’s previous business combinations were accounted for using the purchase
method. As of December 31, 2006, and January 1, 2006, the net carrying amount
of
goodwill was $180.1 million and $193.7 million, respectively. Other intangible
assets were $9.3 million and $6.7 million as of December 31, 2006, and January
1, 2006, respectively. Amortization expense during the years ended 2006, 2005
and 2004 was $0.7 million, $0.6 million and $0.2 million,
respectively.
During
the fourth quarters of 2006 and 2005, the Company performed the annual goodwill
impairment test required by SFAS No. 142. In effecting the impairment
testing, we used an outside consultant to help prepare valuations of reporting
units in accordance with the applicable standards, and those valuations were
compared with the respective book values of the reporting units to determine
whether any goodwill impairment existed. In preparing the valuations, past,
present and future expectations of performance were considered. No additional
impairment was indicated. However, the Company recorded a goodwill impairment
charge of $20.7 million in the first quarter of 2006 in connection with the
sale of its European fabrics operations. In addition, an after-tax goodwill
impairment charge of $29.0 million was recorded in fiscal year 2004 related
to
our discontinued Re:Source dealer businesses.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
changes in the carrying amounts of goodwill for the year ended December 31,
2006, by operating segment are as follows:
|
|
BALANCE
JANUARY 1, 2006
|
|
ACQUISITIONS
|
|
IMPAIRMENT
|
|
FOREIGN
CURRENCY TRANSLATION
|
|
BALANCE
DECEMBER 31, 2006
|
|
|
|
(in
thousands)
|
|
Modular
Carpet
|
|
$
|
67,156
|
|
$
|
--
|
|
$
|
--
|
|
$
|
7,114
|
|
$
|
74,270
|
|
Bentley
Prince Street
|
|
|
61,213
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
61,213
|
|
Fabrics
Group
|
|
|
65,336
|
|
|
--
|
|
|
20,712
|
|
|
--
|
|
|
44,624
|
|
Specialty
Products
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
|
|
$
|
193,705
|
|
$
|
--
|
|
$
|
20,712
|
|
$
|
7,114
|
|
$
|
180,107
|
|
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. The Company typically warrants that services performed
will be free from defects in workmanship for a period of one year following
completion. For fabrics products, the Company typically provides a five year
limited warranty against manufacturing defects and nonconformity to
specifications. In the event of a breach of warranty, the remedy typically
is
limited to repair of the problem or replacement of the affected product.
The
Company records a provision related to warranty costs based on historical
experience and periodically adjusts these provisions to reflect changes in
actual experience. Warranty reserves amounted to $2.2 million and $2.6 million
as of December 31, 2006, and January 1, 2006, respectively, and are included
in
“Accrued Expenses” in the accompanying consolidated balance sheets.
Taxes
on Income
The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences,
the
Company generally considers all expected future events other than enactments
of
changes in tax laws or rates. The effect on deferred tax assets and liabilities
of a change in tax rates will be recognized as income or expense in the period
that includes the enactment date.
The
Company records a valuation allowance to reduce its deferred tax assets when
it
is more likely than not that some portion or all of the deferred tax assets
will
expire before realization of the benefit or that future deductibility is not
probable. The ultimate realization of the deferred tax assets depends on the
ability to generate sufficient taxable income of the appropriate character
in
the future. This requires us to use estimates and make assumptions regarding
significant future events such as the taxability of entities operating in the
various taxing jurisdictions.
The
Company does not record taxes collected from customers and remitted to
governmental authorities on a gross basis.
Fair
Values of Financial Instruments
Fair
values of cash and cash equivalents, short-term investments and short-term
debt
approximate cost due to the short period of time to maturity. Fair values of
debt are based on quoted market prices or pricing models using current market
rates.
Translation
of Foreign Currencies
The
financial position and results of operations of the Company’s foreign
subsidiaries are measured generally using local currencies as the functional
currency. Assets and liabilities of these subsidiaries are translated into
U.S.
dollars at the exchange rate in effect at each year-end. Income and expense
items are translated at average exchange rates for the year. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account. In the event of a divestiture of a foreign subsidiary,
the
related foreign currency translation results are reversed from equity to income.
Foreign currency exchange gains and losses are included in net income (loss).
Foreign exchange translation gains (losses) were $25.5 million, $(34.4) million
and $23.1 million, for the years ended 2006, 2005 and 2004,
respectively.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income
(Loss) Per Share
Basic
income (loss) per share is computed based on the average number of common shares
outstanding. Diluted income (loss) per share reflects the increase in average
common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock
method.
Stock-Based
Compensation
As
of the
fiscal year ended December 31, 2006, the Company has stock-based employee
compensation plans, which are described more fully in the “Shareholders’ Equity”
note below. During 2006, the Company adopted SFAS No. 123R, “Share Based
Payment” and has recorded expenses related to such plans in accordance with the
standard. The Company transitioned to the standard using the modified
prospective application. Prior to 2006, those plans were accounted for using
the
intrinsic value method under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” as allowed under the provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation.” Compensation expenses related to stock option plans
were not material for 2005 and 2004.
The
following table illustrates the effect on net income and earnings per share
(on
a pro forma basis) if the fair value recognition provisions of SFAS No. 123
were applied to stock-based employee compensation:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands, except share data)
|
|
Net
income (loss) as reported
|
|
$
|
9,992
|
|
$
|
1,240
|
|
$
|
(55,402
|
)
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
|
|
|
--
|
|
|
(526
|
)
|
|
(1,499
|
)
|
Add:
Recognized stock-based compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Pro
forma net income (loss)
|
|
$
|
9,992
|
|
$
|
714
|
|
$
|
(56,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.09
|
)
|
Basic
- pro forma
|
|
|
0.18
|
|
|
0.01
|
|
|
(1.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.06
|
)
|
Diluted
- pro forma
|
|
|
0.18
|
|
|
0.01
|
|
|
(1.09
|
)
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for grants issued in fiscal years 2006, 2005 and 2004:
|
Fiscal
Year Ended
|
|
2006
|
2005
|
2004
|
Risk
free interest rate
|
4.71%
|
4.22%
|
4.38%
|
Expected
option life
|
3.18
years
|
2.0
years
|
2.3
years
|
Expected
volatility
|
60%
|
60%
|
57%
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
The
weighted average fair value of stock options (as of grant date) granted during
the years ended 2006, 2005 and 2004 was $5.04, $2.21 and $2.06, respectively,
per share.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative
Financial Instruments
The
Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended, effective January 1, 2001. SFAS No. 133 requires a
company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a fair value hedge, changes in the fair value of the hedged
assets, liabilities or firm commitments are recognized through earnings. If
the
derivative is a cash flow hedge, the effective portion of changes in the fair
value of the derivative are recognized in other comprehensive income until
the
hedged item is recognized in earnings. The ineffective portion of a derivative’s
change in fair value is immediately recognized in earnings.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current year financial
statement presentation.
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 “2006” “2005,” and “2004,” mean the fiscal
years ended December 31, 2006, January 1, 2006, and January 2, 2005,
respectively. Fiscal years 2006, 2005 and 2004 comprised 52, 52, and 53 weeks,
respectively.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to choose to measure certain
financial assets and liabilities at fair value. SFAS No. 159 also revises
provisions of SFAS No. 115 that apply to available-for-sale and trading
securities. This statement is effective for fiscal years beginning after
November 15, 2007. The Company is current evaluating the effect, if any, that
the adoption of this pronouncement will have on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of
FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158
requires an employer to recognize a plan’s funded status in its statement of
financial position, measure a plan’s assets and obligations as of the end of the
employer’s fiscal year, and recognize the changes in a defined benefit
post-retirement plan’s funded status in comprehensive income in the year in
which the changes occur. SFAS No. 158’s requirement to recognize the
funded status of a benefit plan and new disclosure requirements are effective
as
of the end of the fiscal year ending after December 15, 2006 (the 2006
fiscal year-end for the Company) on a prospective basis. As a result of the
requirement to recognize the unfunded status of the plan as a liability, the
Company recorded a charge to other comprehensive income of $19.3 million in
the
fourth quarter of 2006. See further discussion below at the note entitled
“Employee Benefit Plans.”
In
September 2006, the Securities & Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108. SAB No. 108 provides additional guidance on
determining the materiality of cumulative unadjusted misstatements in both
current and future financial statements. SAB No. 108 also provides guidance
on
the proper accounting and reporting for the correction of immaterial unadjusted
misstatements which may become material in subsequent accounting periods. SAB
No. 108 generally requires prior period financial statements to be revised
if
prior misstatements are subsequently discovered; however, for immaterial prior
year revisions, reports filed under the Securities Exchange Act of 1934 are
not
required to be amended. SAB No. 108 became effective as of December 31, 2006.
The Company applied the guidance provided in SAB No. 108 in the fourth quarter
of 2006, and identified three matters in prior reporting periods which were
deemed immaterial to those periods using a consistent evaluation methodology
(the “rollover method”). They were as follows:
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
•
|
In
1998, the Company entered into a sale-leaseback transaction in which
a
gain was recognized at the time of sale as opposed to over the lease
period. In addition, the Company did not use straight-line rental
accounting for the expected lease payments related to this transaction.
To
correct these entries, the Company recorded an entry to increase
liabilities by approximately $3.3 million and decrease retained earnings
by approximately $2.1 million, net of tax;
|
|
•
|
The
Company’s previous methodology for recording legal expenses ensured that
the Company incurred twelve months of expense in each year. However,
the
actual timing and amount of the legal bills received led to an understated
liability on the balance sheet. The Company has recorded a liability
of
approximately $1.2 million and a decrease in retained earnings of
approximately $0.5 million, net of taxes (as the remaining portion of
these costs were capitalizable), to properly record incurred legal
expenses; and
|
|
•
|
The
Company
previously under-recorded the liability related to restricted stock
by
approximately $0.7 million. There was no impact to consolidated
shareholders' equity as a result of this correction, as the liability
for
restricted stock is recorded in
equity.
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is currently evaluating the effect, if any,
that
the adoption of this pronouncement will have on its consolidated financial
statements.
On
September 7, 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached
consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). The scope of EITF 06-4 is limited to the
recognition of a liability and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007, and the Company is currently evaluating
the
effect of this standard on its consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes”. In summary, FIN No. 48 requires that all tax
positions subject to SFAS No. 109, “Accounting for Income Taxes”, be
analyzed using a two-step approach. The first step requires an entity to
determine if a tax position is more-likely-than-not to be sustained upon
examination. In the second step, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, that is
more-likely-than-not to be realized upon ultimate settlement. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006, with any
adjustment in a company’s tax provision being accounted for as a cumulative
effect of accounting change in beginning equity. The Company is in the process
of determining the effect, if any, the adoption of FIN No. 48 will have on
its consolidated financial statements.
In
June
2006, the EITF reached a consensus on Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)” (“EITF
06-03”). EITF 06-03 concludes that (a) the scope of this issue includes any
tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer, and (b) the
presentation of taxes within the scope on either a gross or a net basis is
an
accounting policy decision that should be disclosed pursuant to Opinion 22.
Furthermore, EITF 06-03 states that for taxes reported on a gross basis, a
company should disclose the amounts of those taxes in interim and annual
financial statements for each period for which an income statement is presented.
EITF is effective for periods beginning after December 15, 2006. This standard
is not expected to have a material impact on our results of operations or
financial position.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections — a replacement of APB Opinion No. 20 and FASB Statement
No. 3”. SFAS No. 154 changes the requirements for the accounting
for and reporting of a change in accounting principle. This statement applies
to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. We adopted SFAS No. 154 on January 2, 2006. The adoption of
SFAS No. 154 did not have a material impact on our consolidated
financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
amendment of Accounting Research Bulletin No. 43, Chapter 4.”
SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material.
SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We adopted SFAS No. 151 on January 2,
2006. The adoption of SFAS No. 151 did not have a material effect on our
results of operation or financial position.
In
October 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”
which requires companies to measure compensation cost for all share-based
payments, including employee stock options. SFAS No. 123R was effective as
of
the first fiscal year beginning after June 15, 2005. In March 2005, the SEC
issued SAB No. 107 regarding the SEC’s interpretation of SFAS No. 123R and the
valuation of share-based payments for public companies. The Company adopted
SFAS
No. 123R on January 2, 2006. For further information, see the note below
entitled “Shareholders’ Equity.”
RECEIVABLES
The
Company has adopted credit policies and standards intended to reduce the
inherent risk associated with potential increases in its concentration of credit
risk due to increasing trade receivables from sales to owners and users of
commercial office facilities and with specifiers such as architects, engineers
and contracting firms. Management believes that credit risks are further
moderated by the diversity of its end customers and geographic sales areas.
The
Company performs ongoing credit evaluations of its customers’ financial
condition and requires collateral as deemed necessary. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. If the financial condition
of
its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. As of December 31,
2006, and January 1, 2006, the allowance for bad debts amounted to approximately
$7.4 million and $6.2 million, respectively, for all accounts receivable of
the
Company. Reserves for sales returns and allowances amounted to $2.2 million
and
$2.7 million as of December 31, 2006, and January 1, 2006, respectively.
Balances
billed but not paid by customers under retainage provisions in the Company’s
performance contracts related to the discontinued operations of the Re:Source
dealer businesses amounted to
$0.1
million and $0.6 million
as of the years ended December 31, 2006, and January 1, 2006, respectively,
and generally are paid within one year. Amounts representing the recognized
sales value of performance contracts, which were not billed or
billable,
were
$2.0 million and $2.0 million
as of
December 31, 2006, and January 1, 2006, respectively. These amounts exclude
sales value of $0.1 million and $0.7 million as of December 31, 2006, and
January 1, 2006, respectively, related to the discontinued operations of the
Re:Source dealer businesses. Billings are made periodically, usually weekly
or
monthly, and are based on terms defined in the contracts that govern the related
arrangement, and are usually determined based on the extent of progress of
the
related job.
INVENTORIES
Inventories
are summarized as follows:
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Finished
goods
|
|
$
|
86,123
|
|
$
|
71,893
|
|
Work-in-process
|
|
|
16,740
|
|
|
16,792
|
|
Raw
materials
|
|
|
45,100
|
|
|
41,524
|
|
|
|
|
|
|
|
|
|
|
|
$
|
147,963
|
|
$
|
130,209
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reserves
for inventory obsolescence amounted to $11.9 million and $12.0 million as of
December 31, 2006, and January 1, 2006, respectively, and have been netted
against amounts presented above.
PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Land
|
|
$
|
11,065
|
|
$
|
7,111
|
|
Buildings
|
|
|
131,993
|
|
|
117,810
|
|
Equipment
|
|
|
397,467
|
|
|
403,269
|
|
|
|
|
|
|
|
|
|
|
|
|
540,525
|
|
|
528,190
|
|
Accumulated
depreciation
|
|
|
(351,800
|
)
|
|
(342,547
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
188,725
|
|
$
|
185,643
|
|
The
estimated cost to complete construction-in-progress for which the Company was
committed at December 31, 2006, was approximately $15.9 million.
ACCRUED
EXPENSES
Accrued
expenses are summarized as follows:
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Compensation
|
|
$
|
47,345
|
|
$
|
34,864
|
|
Interest
|
|
|
15,438
|
|
|
16,732
|
|
Restructuring
|
|
|
267
|
|
|
271
|
|
Taxes
|
|
|
9,339
|
|
|
13,356
|
|
Accrued
purchases
|
|
|
9,188
|
|
|
7,127
|
|
Other
|
|
|
19,916
|
|
|
13,231
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,493
|
|
$
|
85,581
|
|
Other
non-current liabilities include pension liability of $50.7 million and $27.8
million as of December 31, 2006, and January 1, 2006, respectively (see the
discussion below in the note entitled “Employee Benefit Plans”).
BORROWINGS
Revolving
Credit Facility
On
June
18, 2003, the Company amended and restated its revolving credit facility. Under
the amended and restated facility at that time, the maximum aggregate amount
of
loans and letters of credit available at any one time was $100 million. Key
features of the revolving credit facility at that time included the
following:
· |
The
amended and restated facility included a domestic U.S. dollar syndicated
loan and letter of credit facility (the “Domestic Loan Facility”) made
available to the Company and Interface Europe B.V. (a foreign subsidiary
of the Company based in the Netherlands), as co-borrowers up to the
lesser
of (i) $100 million, or (ii) a borrowing base equal to the sum of
specified percentages of eligible accounts receivable, finished goods
inventory and raw materials inventory in the United States, less
certain
reserves;
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
· |
Advances
to the Company and Interface Europe B.V. under the Domestic Loan
Facility
and advances to Interface Europe, Ltd. (a foreign subsidiary of the
Company based in the UK) under the Multicurrency Loan Facility (described
below) were secured by a first-priority lien on substantially all
of the
assets of the Company and each of its material domestic subsidiaries,
which guaranteed the amended and restated facility;
|
· |
The
amended and restated facility also included a multicurrency syndicated
loan and letter of credit facility (the “Multicurrency Loan Facility”) in
British pounds and euros made available to Interface Europe, Ltd.,
in an
amount up to the lesser of (i) the equivalent of $15 million, or (ii)
a borrowing base equal to the sum of specified percentages of eligible
accounts receivable and finished goods inventory of Interface Europe,
Ltd.
and certain of its subsidiaries, less certain reserves;
|
· |
Advances
to Interface Europe, Ltd. under the Multicurrency Loan Facility were
secured by a first-priority lien on, security interest in, or floating
or
fixed charge, as applicable, on all of the interest in and to the
accounts
receivable, inventory, and substantially all other property of Interface
Europe, Ltd. and its material subsidiaries, which subsidiaries also
guaranteed the Multicurrency Loan Facility;
|
· |
The
amended and restated facility contained certain financial covenants
(including a senior secured debt coverage ratio test and a fixed
charge
coverage ratio test) that become effective in the event that the
Company’s
excess availability for domestic loans fell below $20 million (excluding
a
specified reserve against the domestic borrowing base);
and
|
· |
Interest
on borrowings and letters of credit under the amended and restated
facility was charged at varying rates computed by applying a margin
(ranging from 0.0% to 3.5%) over a baseline rate (such as the prime
interest rate or LIBOR), depending on the type of borrowing and our
fixed
charge coverage ratio. In addition, the Company was required to pay
an
unused line fee on the facility ranging from 0.375% to 1.0% depending
on
our fixed charge coverage ratio.
|
Compared
with its predecessor, the June 2003 amendment and restatement, among other
things, eased the applicability of financial covenants, secured advances to
Interface Europe, Ltd., reduced the size of the Multicurrency Loan Facility,
substituted certain lenders, and increased pricing on borrowings in certain
circumstances. Prior to the amendment and restatement of its revolving credit
facility in June 2003, the Company was not in compliance with certain covenants
contained in its previous facility, and the Company obtained waivers from its
lenders at that time.
On
March
30, 2004, the Company further amended the amended and restated facility. The
amendment provided that, for purposes of calculating a specified fixed charge
coverage ratio, any interest payments on the Company’s 7.3% senior notes that
were due and payable on April 1 or October 1 of a given fiscal year shall,
when
paid, be deemed to have been paid in the second fiscal quarter and the fourth
fiscal quarter, respectively, of such fiscal year.
On
December 29, 2004, the Company again amended the amended and restated facility.
The December 2004 amendment, among other things, decreased fees and pricing
on
borrowings in certain circumstances, increased the domestic letters of credit
subcommitment for a specified time period, increased the dollar amount threshold
for a money judgment that may constitute an event of default, and waived various
pledge and security requirements otherwise applicable to certain assets of
the
Company’s subsidiaries.
On
September 30, 2005, the Company again amended the amended and restated facility
to allow certain foreign subsidiaries to incur a limited amount of indebtedness
and liens against property without using the general “catch-all” baskets
contained in such covenants.
On
February 21, 2006, the Company again amended the amended and restated facility.
This amendment modified the definition of “Financial Covenant Effective Date” to
remove language that caused certain financial covenants to become effective
in
the event excess availability for U.K. loans fell below $3 million.
On
June
30, 2006, the Company again amended and restated its revolving credit facility.
Under the amended and restated facility (the “Facility”), as under its
predecessor, the Company’s obligations are secured by a first priority lien on
substantially all of the assets of Interface, Inc. and each of its material
domestic subsidiaries, which subsidiaries also guarantee the Facility. However,
the Facility differs from its predecessor in the following material
respects:
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
· |
The
stated maturity date of the Facility has been extended to June 30,
2011;
|
· |
The
borrowing base governing borrowing availability has been modified
to
include certain eligible equipment and (at our option) real estate,
to
change certain existing advance rates and types of eligible inventory
and
to change certain reserve requirements relating to borrowing availability
(in each case subject to certain terms and conditions specified therein);
|
· |
The
maximum aggregate amount of loans and letters of credit available
to us at
any one time has been increased to $125 million, with an option for
us to
further increase that amount to up to a maximum of $150 million subject
to
the satisfaction of certain
conditions;
|
· |
The
applicable interest rates and unused line fees have been reduced.
Interest
is now charged at varying rates computed by applying a margin (ranging
from 0.0% to 0.25%, in the case of advances at a prime interest rate,
and
1.25% to 2.25%, in the case of advances at LIBOR) over a baseline
rate
(such as the prime interest rate or LIBOR), depending on the type
of
borrowing and our average excess borrowing availability during the
most
recently completed fiscal quarter. The unused line fee ranges from
0.25%
to 0.375%, depending on our average excess borrowing availability
during
the most recently completed fiscal
quarter;
|
· |
The
negative covenants have been relaxed in several respects, including
with
respect to the repayment of our other indebtedness and the payment
of
dividends and limiting their application to Interface, Inc. and its
domestic subsidiaries. Additionally, the financial covenants have
been
amended to delete the senior secured debt coverage ratio and to modify
the
terms of the sole remaining financial covenant, a fixed charge coverage
test;
|
· |
The
events of default have been amended to limit their application primarily
to Interface, Inc. and its domestic subsidiaries and to make certain
of
the events of default less restrictive by increasing the applicable
dollar
thresholds thereunder; and
|
· |
The
previously-existing multicurrency loan and letter of credit facility
available to our foreign subsidiary based in the United Kingdom,
as well
as the liens on assets in the United Kingdom securing that facility,
have
been removed from the Facility.
|
The
Facility also includes various reporting, affirmative and negative covenants,
and other provisions that restrict our ability to take certain actions,
including provisions that restrict our ability to: (1) repay our long-term
indebtedness unless we meet a specified minimum excess availability test; (2)
incur
indebtedness of contingent obligations; (3) make acquisitions of or investments
in businesses (in excess of certain specified amounts); (4) sell or dispose
of
assets (in excess of certain specified amounts); (5) create or incur liens
on
assets; and (6) enter into sale and leaseback transactions.
We
are
presently in compliance with all covenants under the Facility and anticipate
that we will remain in compliance with the covenants for the foreseeable
future.
As
under
its predecessor, the Facility is secured by substantially all of the assets
of
Interface, Inc. and its 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’
collateral agent may, upon the request of a specified percentage of lenders,
exercise remedies with respect to the collateral, including, in some instances,
foreclosing mortgages on real estate assets, taking possession of or selling
personal property assets, collecting accounts receivables, or exercising proxies
to take control of the pledged stock of domestic and first-tier material foreign
subsidiaries.
As
of
December 31, 2006, and January 1, 2006, the Company had no borrowings
outstanding under the domestic portion of the revolving credit facility. At
January 1, 2006, the Company had $5.1 million outstanding borrowings under
its
Multicurrency Loan Facility, which was reported in current liabilities in the
accompanying consolidated financial statements. The amended and restated
Facility has no Multicurrency Loan Facility, and therefore no multicurrency
borrowings were outstanding as of December 31, 2006. At December 31, 2006,
the Company had $9.5 million outstanding in letters of credit. As of December
31, 2006, the Company could have incurred $98.5 million of additional borrowings
under the Facility.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.5%
Senior Subordinated Notes
On
February 4, 2004, the Company completed a private offering of $135 million
in
9.5% Senior Subordinated Notes due 2014. Interest on these Notes is payable
semi-annually on February 1 and August 1 beginning August 1, 2004. Proceeds
from
the issuance of these Notes were used to redeem in full the Company’s previously
outstanding 9.5% Senior Subordinated Notes due 2005 and to reduce borrowings
under the Company’s revolving credit facility.
These
notes are guaranteed, fully, unconditionally, and jointly and severally, on
an
unsecured senior subordinated basis by certain of the Company’s domestic
subsidiaries. The notes will become redeemable for cash after February 1, 2009
at the Company’s option, in whole or in part, initially at a redemption price
equal to 104.75% of the principal amount, declining to 100% of the principal
amount on February 1, 2012, plus accrued interest thereon to the date fixed
for
redemption. As of both December 31, 2006, and January 1, 2006, the Company
had
outstanding $135 million of 9.5% Senior Subordinated Notes due 2014. At
December 31, 2006, and January 1, 2006, the estimated fair value these
notes, based on then current market prices, was approximately $141.8 million
and
$133.7 million, respectively.
10.375%
Senior Notes
On
January 17, 2002, the Company completed a private offering of $175 million
in
10.375% Senior Notes due 2010. Interest is payable semi-annually on February
1
and August 1 beginning August 1, 2002. Proceeds from the issuance of these
Notes
were used to pay down the revolving credit facility.
The
notes
are guaranteed, fully, unconditionally, and jointly and severally, on an
unsecured senior basis by certain of the Company’s domestic subsidiaries. As of
both December 31, 2006, and January 1, 2006, the Company had outstanding $175
million in 10.375% Senior Notes. At December 31, 2006, and January 1, 2006,
the
estimated fair value of these notes based on then current market prices was
approximately $193.4 million and $189.0 million, respectively.
7.3%
Senior Notes
As
of
December 31, 2006, and January 1, 2006, the Company had outstanding $101 million
and $148 million in 7.3% Senior Notes due 2008, respectively. Interest is
payable semi-annually on April 1 and October 1 beginning on October 1,
1998.
The
notes
are unsecured and are guaranteed, fully, unconditionally, and jointly and
severally, by certain of the Company’s domestic subsidiaries. The notes are
redeemable, in whole or in part, at the option of the Company, at any time
or
from time to time, at a redemption price equal to the greater of (i) 100% of
the
principal amount of the notes to be redeemed or (ii) the sum of the present
value of the remaining scheduled payments, discounted on a semi-annual basis
at
the treasury rate plus 50 basis points, plus, in the case of each of (i) and
(ii) above, accrued interest to the date of redemption. At December 31, 2006,
and January 1, 2006, the estimated fair value of these notes based on then
current market prices was approximately $103.1 million and $151.5 million,
respectively.
Lines
of Credit
Subsidiaries
of the Company have an aggregate of $10.0 million of lines of credit available
at interest rates ranging from 1.0% to 9.6%. As of December 31, 2006, and
January 1, 2006, $0.0 million and $1.5 million, respectively, was outstanding
under the lines of credit.
Borrowing
Costs
Borrowing
costs, which include underwriting, legal and other direct costs related to
the
issuance of debt, were $6.7 million and $7.7 million as of December 31, 2006,
and January 1, 2006, respectively. The Company amortizes these costs over the
life of the related debt. Expenses related to such costs for the years ended
2006, 2005 and 2004 amounted to $1.9 million, $2.3 million and
$3.6 million, respectively.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future
Maturities
The
aggregate maturities of borrowings for each of the five years subsequent to
December 31, 2006, are as follows:
|
FISCAL
YEAR
|
|
AMOUNT
|
|
|
|
|
(in
thousands)
|
|
|
2007
|
|
$
|
--
|
|
|
2008
|
|
|
101,365
|
|
|
2009
|
|
|
--
|
|
|
2010
|
|
|
175,000
|
|
|
2011
|
|
|
--
|
|
|
Thereafter
|
|
|
135,000
|
|
|
|
|
$
|
411,365
|
|
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. As of December 31, 2006, and January 1, 2006, there were no
shares of preferred stock issued.
In
addition, any issuance of preferred stock could have the effect of delaying,
deferring or preventing a change in control of the Company.
Preferred
Share Purchase Rights
The
Company has previously issued one purchase right (a “Right”) in respect of each
outstanding share of Common Stock. Each Right entitles the registered holder
of
the Common Stock to purchase from the Company one two-hundredth of a share
(a
“Unit”) of Series B Participating Cumulative Preferred Stock (the “Series B
Preferred Stock”).
The
Rights may have certain anti-takeover effects. The Rights will cause substantial
dilution to a person or group that acquires (without the consent of the
Company’s Board of Directors) more than 15% of the outstanding shares of Common
Stock or if other specified events occur without the Rights having been redeemed
or in the event of an exchange of the Rights for Common Stock as permitted
under
the Shareholder Rights Plan.
The
dividend and liquidation rights of the Series B Preferred Stock are designed
so
that the value of one one-hundredth of a share of Series B Preferred Stock
issuable upon exercise of each Right will approximate the same economic value
as
one share of Common Stock, including voting rights. The exercise price per
Right
is $90, subject to adjustment. Shares of Series B Preferred Stock will entitle
the holder to a minimum preferential dividend of $1.00 per share, but will
entitle the holder to an aggregate dividend payment of 200 times the dividend
declared on each share of Common Stock. In the event of liquidation, each share
of Series B Preferred Stock will be entitled to a minimum preferential
liquidation payment of $1.00, plus accrued and unpaid dividends and
distributions thereon, but will be entitled to an aggregate payment of 200
times
the payment made per share of Common Stock. In the event of any merger,
consolidation or other transaction in which Common Stock is exchanged for or
changed into other stock or securities, cash or other property, each share
of
Series B Preferred Stock will be entitled to receive 200 times the amount
received per share of Common Stock. Series B Preferred Stock is not convertible
into Common Stock.
Each
share of Series B Preferred Stock will be entitled to 200 votes on all matters
submitted to a vote of the shareholders of the Company, and shares of Series
B
Preferred Stock will generally vote together as one class with the Common Stock
and any other voting capital stock of the Company on all matters submitted
to a
vote of the Company’s shareholders. While the Company’s Class B Common Stock
remains outstanding, holders of Series B Preferred Stock will vote as a single
class with the Class A Common Stockholders for election of
directors.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Further,
whenever dividends on the Series B Preferred Stock are in arrears in an amount
equal to six quarterly payments, the Series B Preferred Stock, together
with any other shares of preferred stock then entitled to elect directors,
shall
have the right, as a single class, to elect one director until the default
has
been cured. The Rights expire on March 15, 2008, unless extended or unless
the
Rights are earlier redeemed or exchanged by the Company.
SHAREHOLDERS’
EQUITY
The
Company is authorized to issue 80 million shares of $0.10 par value Class A
Common Stock and 40 million shares of $0.10 par value Class B Common Stock.
Class A and Class B Common Stock have identical voting rights except for the
election or removal of directors. Holders of Class B Common Stock are entitled
as a class to elect a majority of the Board of Directors. Under the terms of
the
Class B Common Stock, its special voting rights to elect a majority of the
Board
members would terminate irrevocably if the total outstanding shares of Class
B
Common Stock ever comprises less than ten percent of the Company’s total issued
and outstanding shares of Class A and Class B Common Stock. On December 31,
2006, the outstanding Class B shares constituted approximately 11.1% of the
total outstanding shares of Class A and Class B Common Stock. The Company’s
Class A Common Stock is traded in the over-the-counter market under the symbol
IFSIA and is quoted on Nasdaq. The Company’s Class B Common Stock is not
publicly traded. Class B Common Stock is convertible into Class A Common Stock
on a one-for-one basis. Both classes of Common Stock share in dividends
available to common shareholders. There were no dividends paid in 2006, 2005
and
2004. However, the Company’s Board of Directors recently declared a regular
quarterly cash dividend of $0.02 per share payable March 23, 2007 to
shareholders of record as of March 9, 2007. 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 by its Board at the time of the
Board’s determination. Such
other factors include limitations contained in the agreement for its primary
revolving credit facility and in the indentures for our public indebtedness,
each of which specify 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.
All
treasury stock is accounted for using the cost method.
Common
Stock Offering
On
November 10, 2006, we sold 5,750,000 shares of our Class A common stock (which
amount includes the underwriters’ exercise in full of their option to purchase
an additional 750,000 shares to cover over-allotments) at a public offering
price of $14.65 per share pursuant to a common stock offering, resulting
in net
proceeds of approximately $78.9 million after deducting the underwriting
discounts, commissions and estimated offering expenses. We plan to use the
net
proceeds to repay some of our outstanding debt and may use a portion of such
proceeds for general corporate purposes.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following tables show changes in common shareholders’ equity.
|
|
CLASS
A SHARES
|
|
CLASS
A AMOUNT
|
|
CLASS
B SHARES
|
|
CLASS
B AMOUNT
|
|
ADDITIONAL
PAID-IN CAPITAL
|
|
RETAINED
EARNINGS
(DEFICIT)
|
|
MINIMUM
PENSION LIABILITY
|
|
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
|
|
|
(in
thousands)
|
|
Balance,
at December 28, 2003
|
|
|
44,060
|
|
$
|
4,406
|
|
|
7,291
|
|
$
|
729
|
|
$
|
222,984
|
|
$
|
52,719
|
|
$
|
(35,057
|
)
|
$
|
(27,048
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(55,402
|
)
|
|
--
|
|
|
--
|
|
Conversion
of common stock
|
|
|
588
|
|
|
58
|
|
|
(588
|
)
|
|
(58
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Stock
issuances under employee plans
|
|
|
862
|
|
|
86
|
|
|
--
|
|
|
--
|
|
|
4,356
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Other
issuances of common stock
|
|
|
--
|
|
|
--
|
|
|
207
|
|
|
22
|
|
|
1,123
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Unamortized
stock compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,144
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
Forfeitures
and compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,426
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Tax
benefit from exercise of stock options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
487
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Tax
benefit from vesting of restricted stock
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
150
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Minimum
pension liability adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,289
|
|
|
--
|
|
Foreign
currency translation adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
23,052
|
|
Balance,
at January 2, 2005
|
|
|
45,510
|
|
$
|
4,550
|
|
|
6,910
|
|
$
|
693
|
|
$
|
229,382
|
|
$
|
(2,683
|
)
|
$
|
(33,768
|
)
|
$
|
(3,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
CLASS
A SHARES
|
|
CLASS
A AMOUNT
|
|
CLASS
B SHARES
|
|
CLASS
B AMOUNT
|
|
ADDITIONAL
PAID-IN CAPITAL
|
|
RETAINED
EARNINGS
(DEFICIT)
|
|
MINIMUM
PENSION LIABILITY
|
|
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
|
|
|
Balance,
at January 2, 2005
|
|
|
45,510
|
|
$
|
4,550
|
|
|
6,910
|
|
$
|
693
|
|
$
|
229,382
|
|
$
|
(2,683
|
)
|
$
|
(33,768
|
)
|
$
|
(3,996
|
)
|
Net
income (loss)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,240
|
|
|
--
|
|
|
--
|
|
Conversion
of common stock
|
|
|
280
|
|
|
28
|
|
|
(280
|
)
|
|
(28
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Stock
issuances under employee plans
|
|
|
541
|
|
|
53
|
|
|
--
|
|
|
--
|
|
|
2,903
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Other
issuances of common stock
|
|
|
--
|
|
|
--
|
|
|
386
|
|
|
38
|
|
|
3,078
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Unamortized
stock compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,114
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
Forfeitures
and compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,747
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Tax
benefit from exercise of stock options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
304
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Tax
benefit from vesting of restricted stock
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Minimum
pension liability adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,986
|
|
|
--
|
|
Foreign
currency translation adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(34,351
|
)
|
Balance,
at January 1, 2006
|
|
|
46,331
|
|
$
|
4,631
|
|
|
7,016
|
|
$
|
703
|
|
$
|
234,314
|
|
$
|
(1,443
|
)
|
$
|
(27,782
|
)
|
$
|
(38,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
CLASS
A SHARES
|
|
CLASS
A AMOUNT
|
|
CLASS
B SHARES
|
|
CLASS
B AMOUNT
|
|
ADDITIONAL
PAID-IN CAPITAL
|
|
RETAINED
EARNINGS
(DEFICIT)
|
|
PENSION
LIABILITY
|
|
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
|
|
|
Balance,
at January 1, 2006
|
|
|
46,331
|
|
$
|
4,631
|
|
|
7,016
|
|
$
|
703
|
|
$
|
234,314
|
|
$
|
(1,443
|
)
|
$
|
(27,782
|
)
|
$
|
(38,347
|
)
|
Net
income (loss)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
9,992
|
|
|
--
|
|
|
--
|
|
SAB
108 adjustments
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
701
|
|
|
(3,332
|
)
|
|
--
|
|
|
--
|
|
Conversion
of common stock
|
|
|
662
|
|
|
66
|
|
|
(662
|
)
|
|
(66
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Stock
issuances under employee plans
|
|
|
1,189
|
|
|
119
|
|
|
--
|
|
|
--
|
|
|
6,087
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Other
issuances of common stock
|
|
|
--
|
|
|
--
|
|
|
385
|
|
|
38
|
|
|
3,367
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Unamortized
stock compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,406
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
Equity
offering
|
|
|
5,750
|
|
|
575
|
|
|
--
|
|
|
--
|
|
|
78,771
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Forfeitures
and compensation expense related to restricted stock
awards
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,298
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Pension
liability adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(19,392
|
)
|
|
--
|
|
Foreign
currency translation adjustment
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
25,500
|
|
Balance,
at December 31, 2006
|
|
|
53,932
|
|
$
|
5,391
|
|
|
6,739
|
|
$
|
675
|
|
$
|
323,132
|
|
$
|
5,217
|
|
$
|
(47,174
|
)
|
$
|
(12,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Class A or Class B 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. Initially, an aggregate of 3,600,000 shares of Common
Stock not previously authorized for issuance under any plan, plus the number
of
shares subject to outstanding stock options granted under certain predecessor
plans minus the number of shares issued on or after the effective date pursuant
to the exercise of such outstanding stock options granted under predecessor
plans, were available to be issued under the Omnibus Plan. In May 2001, the
shareholders approved an amendment to the Omnibus Plan which increased by
2,000,000 the number of shares of Common Stock authorized for issuance under
the
Omnibus Plan. In May 2006, the shareholders approved an amendment to the Omnibus
Plan. The amendment extended the term of the Omnibus Plan until February 2016,
and increased the number of shares reserved for issuance or transfer to
4,250,000.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
the
first quarter of 2006, the Company adopted SFAS No. 123R, “Share-Based
Payments,” which revises SFAS No. 123, “Accounting for Stock-Based
Compensation.” This standard requires that the Company measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant date fair market value of the award. That cost will be recognized
over the period in which the employee is required to provide the services -
the
requisite service period (usually the vesting period) - in exchange for the
award. The grant date fair value for options and similar instruments will be
estimated using option pricing models. Under SFAS No. 123R, the Company is
required to select a valuation technique or option pricing model that meets
the
criteria as stated in the standard, which includes a binomial model and the
Black-Scholes model. The Company is continuing to use the Black-Scholes model.
SFAS No. 123R requires that the Company estimate forfeitures for stock options
and reduce compensation expense accordingly. The Company has reduced its 2006
expense by the assumed forfeiture rate and will evaluate actual experience
against the assumed forfeiture rate going forward.
The
Company recognized stock option compensation expense of $0.3 million in 2006.
There was no recognized expense related to stock options in 2005 or 2004. The
remaining unrecognized compensation cost related to unvested awards at December
31, 2006 approximated $0.5 million, and the weighted average period of time
over
which this cost will be recognized is approximately two years.
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for grants issued in fiscal years 2006, 2005 and
2004:
|
Fiscal
Year Ended
|
|
|
2006
|
2005
|
2004
|
|
Risk
free interest rate
|
4.71%
|
4.22%
|
4.38%
|
|
Expected
option life
|
3.18
years
|
2.0
years
|
2.3
years
|
|
Expected
volatility
|
60%
|
60%
|
57%
|
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
|
The
weighted average fair value of stock options (as of grant date) granted during
the years ended 2006, 2005 and 2004 was $5.04, $2.21 and $2.06, respectively,
per share.
The
following table summarizes stock options outstanding as of December 31, 2006,
as
well as activity during the previous fiscal year:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at January 1, 2006
|
|
|
2,925,000
|
|
$
|
5.81
|
|
Granted
|
|
|
110,000
|
|
|
11.12
|
|
Exercised
|
|
|
1,230,000
|
|
|
5.99
|
|
Forfeited
or cancelled
|
|
|
46,000
|
|
|
3.55
|
|
Outstanding
at December 31, 2006 (a)
|
|
|
1,759,000
|
|
$
|
6.07
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006 (b)
|
|
|
1,467,000
|
|
$
|
6.00
|
|
(a)
At
December 31, 2006, the weighted-average remaining contractual life of options
outstanding was 3.8 years.
(b)
At
December 31, 2006, the weighted-average remaining contractual life of options
exercisable was 3.5 years.
At
December 31, 2006, the aggregate intrinsic values of options outstanding and
options exercisable were $14.3 million and $12.2 million, respectively (the
intrinsic value of a stock option is the amount by which the market value of
the
underlying stock exceeds the exercise price of the option).
The
intrinsic value of stock options exercised in 2006, 2005 and 2004 was $7.9
million, $2.0 million and $3.1 million, respectively. The cash proceeds related
to stock options exercised in 2006, 2005 and 2004 were $7.1 million, $3.0
million and $4.4 million, respectively.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Number
Outstanding at December 31, 2006
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable at December 31, 2006
|
|
Weighted
Average Exercise Price
|
|
$
2.64- 3.77
|
|
|
253,000
|
|
|
5.63
|
|
$
|
2.91
|
|
|
131,000
|
|
$
|
3.05
|
|
4.00- 5.99
|
|
|
820,000
|
|
|
3.55
|
|
|
4.98
|
|
|
752,000
|
|
|
4.93
|
|
6.00- 8.88
|
|
|
476,000
|
|
|
3.75
|
|
|
7.63
|
|
|
439,000
|
|
|
7.55
|
|
9.00-13.98
|
|
|
210,000
|
|
|
2.26
|
|
|
10.51
|
|
|
145,000
|
|
|
9.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,759,000
|
|
|
3.80
|
|
$
|
6.07
|
|
|
1,467,000
|
|
$
|
6.00
|
|
Restricted
Stock Awards
During
fiscal years 2006, 2005 and 2004, the Company granted restricted stock awards
totaling 394,000, 386,000, and 207,000 shares, respectively, of Class B common
stock. These awards (or a portion thereof) vest with respect to each recipient
over a three to five year period from the date of grant, provided the individual
remains in the employment or service of the Company as of the vesting date.
Additionally, these shares (or a portion thereof) could vest earlier upon the
attainment of certain performance criteria, in the event of a change in control
of the Company, or upon involuntary termination without cause.
Compensation
expense related to the vesting of restricted stock was $2.9 million, $1.7
million and $1.4 million for 2006, 2005 and 2004, respectively. SFAS No. 123R
requires that the Company estimate forfeitures for restricted stock and reduce
compensation expense accordingly. The Company has reduced its 2006 expense
by
the assumed forfeiture rate and will evaluate actual experience against the
assumed forfeiture rate going forward.
The
following table summarizes restricted stock activity as of December 31, 2006,
and during the previous fiscal year:
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Outstanding
at January 1, 2006
|
|
|
1,471,000
|
|
$
|
7.68
|
|
Granted
|
|
|
394,000
|
|
|
8.64
|
|
Vested
|
|
|
545,000
|
|
|
7.60
|
|
Forfeited
or cancelled
|
|
|
9,000
|
|
|
7.76
|
|
Outstanding
at December 31, 2006
|
|
|
1,311,000
|
|
$
|
8.00
|
|
As
of
December 31, 2006, the unrecognized total compensation cost related to unvested
restricted stock was $5.0 million. That cost is expected to be recognized by
the
end of 2010.
As
stated
above, SFAS No. 123R requires 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.
In
prior years, the Company did not estimate the forfeitures of its restricted
stock as the expense was recorded. In accordance with the standard, the Company
is required to record a cumulative effect of the change in accounting principle
to reduce previously recognized compensation for awards not expected to vest
(i.e., forfeited or cancelled awards). Upon adoption of SFAS No. 123R, the
Company adjusted for this cumulative effect and recognized a reduction in
stock-based compensation, which was recorded within the selling, general and
administrative expense on the Company’s consolidated condensed statement of
operations. The adjustment was not recorded as a cumulative effect adjustment,
net of tax, because the amount was not material to the consolidated condensed
statement of operations.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME
(LOSS) PER SHARE
Basic
income (loss) per share is computed by dividing net income (loss) to common
shareholders by the weighted average number of shares of Class A and Class
B
Common Stock outstanding during each year. Shares issued or reacquired during
the year have been weighted for the portion of the year that they were
outstanding. Diluted income (loss) per share is calculated in a manner
consistent with that of basic income (loss) per share while giving effect to
all
potentially dilutive common shares that were outstanding during the year.
Basic
income (loss) per share has been computed based upon 54,087,000, 51,551,000
and
50,682,000 weighted average shares outstanding for the years 2006, 2005 and
2004, respectively. Diluted income (loss) per share has been computed based
upon
55,713,000, 52,895,000 and 52,171,000 shares outstanding for the years 2006,
2005 and 2004, respectively.
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands, except per share data)
|
|
Basic
and diluted income (loss) available to shareholders
(numerator):
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
10,023
|
|
$
|
17,966
|
|
$
|
6,440
|
|
Loss
from discontinued operations
|
|
|
(31
|
)
|
|
(14,791
|
)
|
|
(58,815
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
(1,935
|
)
|
|
(3,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
9,992
|
|
$
|
1,240
|
|
$
|
(55,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
54,087
|
|
|
51,551
|
|
|
50,682
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
Options
and awards
|
|
|
1,626
|
|
|
1,344
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assuming conversion
|
|
|
55,713
|
|
|
52,895
|
|
|
52,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - basic:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.18
|
|
$
|
0.35
|
|
$
|
0.13
|
|
Loss
from discontinued operations
|
|
|
--
|
|
|
(0.29
|
)
|
|
(1.16
|
)
|
Loss
on sale of discontinued operations
|
|
|
--
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.18
|
|
$
|
0.34
|
|
$
|
0.12
|
|
Loss
from discontinued operations
|
|
|
--
|
|
|
(0.28
|
)
|
|
(1.12
|
)
|
Loss
on sale of discontinued operations
|
|
|
--
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.18
|
|
$
|
0.02
|
|
$
|
(1.06
|
)
|
RESTRUCTURING
CHARGE
During
the first quarter of 2006, the Company recorded a pre-tax restructuring charge
of $3.3 million. The charge reflected: (i) the closure of a fabrics
manufacturing facility in East Douglas, Massachusetts, and consolidation of
those operations into the Company’s Elkin, North Carolina facility; (ii)
workforce reduction at this facility; and (iii) a reduction in carrying value
of
another fabrics facility and other assets. These activities are expected to
reduce excess capacity in the Company’s dyeing and finishing operations and
improve overall manufacturing efficiency.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A
summary
of the restructuring activities is presented below:
|
|
Total
Restructuring Charge
|
|
Costs
Incurred
|
|
Balance
at December 31,
2006
|
|
|
|
(in
thousands)
|
|
Facilities
consolidation
|
|
$
|
1,000
|
|
$
|
818
|
|
$
|
182
|
|
Workforce
reduction
|
|
|
300
|
|
|
215
|
|
|
85
|
|
Other
impaired assets
|
|
|
1,960
|
|
|
1,960
|
|
|
--
|
|
|
|
$
|
3,260
|
|
$
|
2,993
|
|
$
|
267
|
|
Of
the
total restructuring charge, approximately $0.3 million relates to expenditures
for severance benefits and other similar costs, and $3.0 million relates to
non-cash charges, primarily for the write-down of carrying value and disposal
of
certain assets. The total amounts incurred to date for this restructuring plan
are $3.3 million, and there are not expected to be any further expenses related
to this plan. The plan was substantially completed by the end of
2006.
TAXES
ON INCOME
Provisions
for federal, foreign and state income taxes in the consolidated statements
of
operations consisted of the following components:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
Current
expense/(benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(115
|
)
|
$
|
2,079
|
|
$
|
--
|
|
Foreign
|
|
|
16,183
|
|
|
13,081
|
|
|
9,032
|
|
State
|
|
|
(71
|
)
|
|
706
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,997
|
|
|
15,866
|
|
|
9,166
|
|
Deferred
expense/(benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
141
|
|
|
(10,972
|
)
|
|
(16,147
|
)
|
Foreign
|
|
|
2,503
|
|
|
4,225
|
|
|
1,833
|
|
State
|
|
|
156
|
|
|
575
|
|
|
6,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
|
(6,172
|
)
|
|
(7,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,797
|
|
$
|
9,694
|
|
$
|
1,371
|
|
Income
tax expense (benefit) is included in the accompanying consolidated statement
of
operations as follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
Continuing
operations
|
|
$
|
18,816
|
|
$
|
17,561
|
|
$
|
4,044
|
|
Loss
from discontinued operations
|
|
|
(19
|
)
|
|
(7,925
|
)
|
|
(4,373
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
58
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,797
|
|
$
|
9,694
|
|
$
|
1,371
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income
(loss) from continuing operations before taxes on income consisted of the
following:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
U.S.
operations
|
|
$
|
(3,419
|
)
|
$
|
(9,259
|
)
|
$
|
(19,612
|
)
|
Foreign
operations
|
|
|
32,258
|
|
|
44,786
|
|
|
30,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,839
|
|
$
|
35,527
|
|
$
|
10,484
|
|
Deferred
income taxes for the years ended December 31, 2006, and January 1, 2006, 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.
At
December 31, 2006, the Company has approximately $128 million
in federal net operating loss carryforwards from continuing operations with
expiration dates through 2025. In addition, the Company has approximately $5.5
million in federal net operating losses from share-based payment awards for
which it has not recorded a financial statement benefit as per SFAS No. 123R.
The Company’s foreign subsidiaries have approximately $9.2 million in net
operating losses available for an unlimited carryforward period. The Company
expects to utilize all of its federal and foreign carryforwards prior to their
expiration. The Company has approximately $111 million in state net operating
loss carryforwards relating to continuing operations with expiration dates
through 2026. The Company has provided a valuation allowance against $17.4
million of such losses, which the Company does not expect to utilize. In
addition, the Company has approximately $172 million in state net operating
loss
carryforwards relating to discontinued operations against which a valuation
allowance has been provided.
The
sources of the temporary differences and their effect on the net deferred tax
asset are as follows:
|
|
2006
|
|
2005
|
|
|
|
ASSETS
|
|
LIABILITIES
|
|
ASSETS
|
|
LIABILITIES
|
|
|
|
(in
thousands)
|
|
Basis
differences of property and equipment
|
|
$
|
--
|
|
$
|
14,916
|
|
$
|
--
|
|
$
|
14,766
|
|
Basis
difference of intangible assets
|
|
|
--
|
|
|
4,687
|
|
|
--
|
|
|
4,420
|
|
Foreign
currency loss
|
|
|
--
|
|
|
2,731
|
|
|
--
|
|
|
3,134
|
|
Net
operating loss carryforwards, net of valuation allowances
|
|
|
51,803
|
|
|
--
|
|
|
54,084
|
|
|
--
|
|
Deferred
compensation
|
|
|
14,853
|
|
|
--
|
|
|
8,821
|
|
|
--
|
|
Nondeductible
reserves and accruals
|
|
|
5,549
|
|
|
--
|
|
|
3,397
|
|
|
--
|
|
Pensions
|
|
|
10,517
|
|
|
--
|
|
|
6,179
|
|
|
--
|
|
Other
differences in basis of assets and liabilities
|
|
|
--
|
|
|
394
|
|
|
--
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,722
|
|
$
|
22,728
|
|
$
|
72,481
|
|
$
|
22,432
|
|
Deferred
tax assets and liabilities are included in the accompanying balance sheet as
follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Deferred
income taxes (current asset)
|
|
$
|
6,839
|
|
$
|
4,540
|
|
Other
(non-current asset)
|
|
|
65,841
|
|
|
69,043
|
|
Deferred
income taxes (non-current liabilities)
|
|
|
(12,686
|
)
|
|
(23,534
|
)
|
|
|
$
|
59,994
|
|
$
|
50,049
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management
believes, based on the Company’s history of operating expenses and expectations
for the future, that it is more likely than not that future taxable income
will
be sufficient to fully utilize the deferred tax assets at December 31, 2006.
The
Company’s effective tax rate differs from the U.S. federal statutory rate. The
following summary reconciles taxes at the U.S. federal statutory rate with
the
effective rates:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Taxes
on income (benefit) at U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increase(decrease)
in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal benefit
|
|
|
1.0
|
|
|
(0.7
|
)
|
|
(5.9
|
)
|
Non-deductible
business expenses
|
|
|
1.6
|
|
|
1.3
|
|
|
3.7
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
4.2
|
|
|
2.6
|
|
|
4.8
|
|
Nondeductible
loss on sale of foreign subsidiary
|
|
|
27.2
|
|
|
--
|
|
|
--
|
|
America
Jobs Creation Act - Repatriation, including state taxes
|
|
|
--
|
|
|
9.6
|
|
|
--
|
|
Cumulative
effect of change in tax rates
|
|
|
(2.4
|
)
|
|
--
|
|
|
--
|
|
Valuation
Allowance additions (reversals) - State NOL
|
|
|
(0.8
|
)
|
|
2.6
|
|
|
--
|
|
Other
|
|
|
(0.6
|
)
|
|
(1.0
|
)
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income (benefit) at effective rates
|
|
|
65.2
|
%
|
|
49.4
|
%
|
|
38.6
|
%
|
During
2006, Interface Europe, Ltd. (a foreign subsidiary of the Company based in
the
U.K.) sold 100% of the shares of its wholly owned subsidiary Interface Fabrics,
Ltd. to a third party in connection with the Company’s sale of its European
fabrics business. As a result of the sale, the Company recorded a nondeductible
book loss of approximately $22.4 million. This nondeductible loss resulted
in an
increase in the Company’s effective tax rate of approximately
27.2%.
During
the fourth quarter of 2006, the Dutch government enacted a tax rate reduction
from 29.6% to 25.5%, effective January 1, 2007. SFAS No. 109, “Accounting for
Income Taxes,” requires that deferred tax balances be revalued to reflect such
tax rate changes. The revaluation resulted in a decrease in the Company’s
effective tax rate of 2.4%.
The
American Jobs Creation Act of 2004 (the “Act”) was enacted into law in October
2004. The Act provided for a one-time dividend received deduction of 85%, in
excess of the base-period amount, for qualifying foreign earnings repatriated
from controlled foreign corporations. During 2005, the Company repatriated
approximately $35.9 million in previously unremitted foreign earnings and
recorded a provision for taxes on such previously unremitted foreign earnings
of
approximately $3.4 million.
During
2006, in connection with the sale of its European fabrics business, the Company
repatriated approximately $1.4 million in previously unremitted foreign earnings
and recorded a provision for taxes on such previously unremitted foreign
earnings of approximately $0.5 million. This repatriation of foreign earnings
increased the Company’s effective rate by 1.7% which has been reflected as a
component of the “Foreign and U.S. tax effects attributable to foreign
operations” line item of the effective tax rate reconciliation.
Undistributed
earnings of the Company’s foreign subsidiaries amounted to approximately $79
million at December 31, 2006. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the
form
of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable because
of
the complexities associated with its hypothetical calculation. Withholding
taxes
of approximately $3.1 million would be payable upon remittance of all previously
un-remitted earnings at December 31, 2006.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DISCONTINUED
OPERATIONS
During
2004, the Company committed to a plan to exit its owned Re:Source dealer
businesses, and in the third quarter 2004 the Company began to dispose of
several of the dealer subsidiaries. Therefore, the results for the owned
Re:Source dealer businesses, as well as the Company’s small Australian dealer
and small residential fabrics businesses that management also decided to exit,
were reported as discontinued operations. In connection with this action, the
Company also recorded write-downs for the impairment of assets of $3.5 million
in 2005 and for the impairment of assets and goodwill of $17.5 million and
$29.0
million, respectively, in September 2004.
Through
December 31, 2006, the Company had sold nine dealer businesses (eight of which
were sold to the respective general managers of those businesses) and had closed
six others. The cash proceeds from the sales were $7.5 million. The Company
also
received promissory notes in an aggregate amount of $2.2 million at interest
rates ranging from prime to 12% and with maturities ranging from one to three
years. The Company recorded after-tax losses of $1.9 million and $3.0 million
in
2005 and 2004, respectively, related to Re:Source dealer business
dispositions.
Summary
operating results for the Re:Source dealer businesses are as
follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
Net
sales
|
|
$
|
3,363
|
|
$
|
30,916
|
|
$
|
138,954
|
|
Income
(loss) on operations before taxes on income (benefit)
|
|
|
(51
|
)
|
|
(22,304
|
)
|
|
(18,022
|
)
|
Taxes
on income (benefit)
|
|
|
(20
|
)
|
|
(8,098
|
)
|
|
(5,772
|
)
|
Income
(loss) on operations, net of tax
|
|
|
(31
|
)
|
|
(15,137
|
)
|
|
(12,250
|
)
|
Impairment
loss, net of tax
|
|
|
--
|
|
|
(3,466
|
)
|
|
(46,565
|
)
|
Loss
on disposal, net of tax
|
|
|
--
|
|
|
(1,935
|
)
|
|
(3,027
|
)
|
Assets
and liabilities, including reserves, related to Re:Source dealer businesses
that
were held for sale consist of the following:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Current
assets
|
|
$
|
876
|
|
$
|
2,279
|
|
Property
and equipment
|
|
|
--
|
|
|
898
|
|
Other
assets
|
|
|
1,694
|
|
|
2,349
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
1,331
|
|
|
4,162
|
|
Other
liabilities
|
|
|
181
|
|
|
52
|
|
HEDGING
TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The
Company has used derivative financial instruments for the purpose of reducing
its exposure to adverse fluctuations in interest rates. While these hedging
instruments are subject to fluctuations in value, such fluctuations are offset
by the fluctuations in values of the underlying exposures being hedged. The
Company has not held or issued derivative financial instruments for trading
purposes. The Company has historically monitored the use of derivative financial
instruments through the use of objective measurable systems, well-defined market
and credit risk limits, and timely reports to senior management according to
prescribed guidelines. The Company has established strict counter-party credit
guidelines and has entered into transactions only with financial institutions
of
investment grade or better. As a result, the Company has historically considered
the risk of counter-party default to be minimal. As of December 31, 2006,
the Company was not a party to any such transactions.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COMMITMENTS
AND CONTINGENCIES
The
Company leases certain production, distribution and marketing facilities and
equipment. At December 31, 2006, aggregate minimum rent commitments under
operating leases with initial or remaining terms of one year or more consisted
of the following:
|
FISCAL
YEAR
|
|
|
AMOUNT
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
2007
|
|
|
$
|
24,086
|
|
|
|
2008
|
|
|
|
19,377
|
|
|
|
2009
|
|
|
|
12,735
|
|
|
|
2010
|
|
|
|
11,146
|
|
|
|
2011
|
|
|
|
8,913
|
|
|
|
Thereafter
|
|
|
|
12,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,441
|
|
|
The
totals above exclude minimum lease payments of $0.4 million, $0.2 million,
$0.2
million and $0.1 million in 2007, 2008, 2009 and 2010, respectively, related
to
the discontinued operations of the Re:Source dealer business. The totals above
also exclude minimum lease payments of $0.6 million in each of years 2007-2010,
related to the discontinued operations of the U.S. raised/access flooring
business.
Rental
expense amounted to approximately $25.2 million, $25.0 million and $24.9
million, for the years ended 2006, 2005 and 2004, respectively. This excludes
rental expenses of approximately $0.2 million, $2.0 million and $4.6 million
for
2006, 2005 and 2004, respectively, related to the discontinued operations of
Re:Source dealers businesses, and excludes rental expenses of approximately
$0.6
million, $0.6 million and $0.6 million for 2006, 2005 and 2004, respectively,
related to the discontinued operations of the U.S. raised/access flooring
business.
The
Company is from time to time a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all of
such
litigation will have a material adverse effect on the Company’s financial
condition or results of operations.
EMPLOYEE
BENEFIT PLANS
Defined
Contribution and Deferred Compensation Plans
The
Company has a 401(k) retirement investment plan (“401(k) Plan”), which is open
to all otherwise eligible U.S. employees with at least six months of service.
The 401(k) Plan calls for Company matching contributions on a sliding scale
based on the level of the employee’s contribution. The Company may, at its
discretion, make additional contributions to the Plan based on the attainment
of
certain performance targets by its subsidiaries. The Company’s matching
contributions are funded bi-monthly and totaled approximately $2.0 million,
$1.7
million and $1.5 million for the years ended 2006, 2005 and 2004, respectively,
for continuing operations. These totals exclude $0.0 million, $0.1 million
and
$0.4 million of matching contributions for the years ended 2006, 2005 and 2004,
respectively, related to the discontinued Re:Source dealer businesses. No
discretionary contributions were made in 2006, 2005 or 2004.
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
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
$14.9 million, which was invested in cash and marketable securities at
December 31, 2006.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign
Defined Benefit Plans
The
Company has trusteed defined benefit retirement plans (“Plans”) which cover many
of its European employees. The benefits are generally based on years of service
and the employee’s average monthly compensation. Pension expense was $2.9
million, $4.8 million and $6.4 million, for the years ended 2006, 2005 and
2004, respectively. Plan assets are primarily invested in equity and fixed
income securities. The Company uses a measurement date of December 31 for the
Plans. As of December 31, 2006, for the European plans, the Company had a net
liability recorded of $35.7 million, an amount equal to their unfunded status,
and has recorded in Other Comprehensive Income (“OCI”) an amount equal to $43.4
million (net of taxes) related to the future amounts to be recorded in net
post-retirement benefit costs.
The
tables presented below set forth the funded status of the Company’s significant
foreign defined benefit plans and required disclosures in accordance with SFAS
No. 132, as revised.
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
Benefit
obligation, beginning of year
|
|
$
|
206,662
|
|
$
|
214,484
|
|
Service
cost
|
|
|
2,429
|
|
|
2,540
|
|
Interest
cost
|
|
|
9,913
|
|
|
10,089
|
|
Benefits
paid
|
|
|
(7,283
|
)
|
|
(6,175
|
)
|
Actuarial
loss
|
|
|
9,108
|
|
|
10,012
|
|
Member
contributions
|
|
|
792
|
|
|
791
|
|
Currency
translation adjustment
|
|
|
27,353
|
|
|
(25,079
|
)
|
|
|
|
|
|
|
|
|
Benefit
obligation, end of year
|
|
$
|
248,974
|
|
$
|
206,662
|
|
Change
in plan assets
|
|
|
|
|
|
Plan
assets, beginning of year
|
|
$
|
176,999
|
|
$
|
169,612
|
|
Actual
return on assets
|
|
|
12,098
|
|
|
23,188
|
|
Company
contributions
|
|
|
6,943
|
|
|
10,665
|
|
Member
contributions
|
|
|
1,188
|
|
|
542
|
|
Benefits
paid
|
|
|
(7,283
|
)
|
|
(6,175
|
)
|
Currency
translation adjustment
|
|
|
23,303
|
|
|
(20,833
|
)
|
|
|
|
|
|
|
|
|
Plan
assets, end of year
|
|
$
|
213,248
|
|
$
|
176,999
|
|
|
|
|
|
|
|
|
|
Reconciliation
to balance sheet
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
(35,726
|
)
|
$
|
(29,663
|
)
|
Unrecognized
actuarial loss
|
|
|
--
|
|
|
48,046
|
|
Unrecognized
prior service cost
|
|
|
--
|
|
|
384
|
|
Unrecognized
transition adjustment
|
|
|
--
|
|
|
50
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(35,726
|
)
|
$
|
18,817
|
|
Amounts
recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
--
|
|
$
|
18,817
|
|
Accrued
benefit liability
|
|
|
(35,726
|
)
|
|
(27,763
|
)
|
Accumulated
other comprehensive income
|
|
|
--
|
|
|
27,763
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(35,726
|
)
|
$
|
18,817
|
|
|
|
|
|
|
|
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in accumulated other
|
|
|
|
|
|
comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
actuarial loss
|
|
$
|
43,185
|
|
$
|
--
|
|
Unamortized
prior service costs
|
|
|
288
|
|
|
--
|
|
Total
amount recognized
|
|
$
|
43,473
|
|
$
|
--
|
|
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
Components
of net periodic benefit cost
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2,033
|
|
$
|
2,540
|
|
$
|
2,531
|
|
Interest
cost
|
|
|
9,913
|
|
|
10,089
|
|
|
10,042
|
|
Expected
return on plan assets
|
|
|
(11,157
|
)
|
|
(10,457
|
)
|
|
(11,638
|
)
|
Amortization
of prior service cost
|
|
|
39
|
|
|
168
|
|
|
48
|
|
Recognized
net actuarial (gains)/losses
|
|
|
1,979
|
|
|
2,499
|
|
|
5,542
|
|
Amortization
of transition asset
|
|
|
53
|
|
|
--
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
2,860
|
|
$
|
4,839
|
|
$
|
6,357
|
|
For
2007,
it is estimated that approximately $3.4 million of expenses related to the
amortization of unrecognized items will be included in the net periodic benefit
cost.
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted
average assumptions used to determine
net periodic
benefit cost
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
4.7
|
%
|
|
5.0
|
%
|
|
5.2
|
%
|
Expected
return on plan assets
|
|
|
6.2
|
%
|
|
6.4
|
%
|
|
6.6
|
%
|
Rate
of compensation
|
|
|
3.4
|
%
|
|
3.2
|
%
|
|
2.9
|
%
|
Weighted
average assumptions used to determine benefit
obligations
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.0
|
%
|
|
4.5
|
%
|
|
5.1
|
%
|
Rate
of compensation
|
|
|
3.3
|
%
|
|
3.1
|
%
|
|
2.8
|
%
|
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
Company’s foreign defined benefit plans’ accumulated benefit obligations were in
excess of the fair value of the plans’ assets. The projected benefit
obligations, accumulated benefit obligations and fair value of these plan assets
are as follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Projected
benefit obligation
|
|
$
|
248,974
|
|
$
|
206,662
|
|
Accumulated
benefit obligations
|
|
|
243,938
|
|
|
203,807
|
|
Fair
value of plan assets
|
|
|
213,248
|
|
|
176,999
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Company’s actual weighted average asset allocations for 2006 and 2005, and the
targeted asset allocation for 2007 of the foreign defined benefit plans by
asset
category, are as follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Target
Allocation
|
|
Percentage
of Plan Assets at Year End
|
|
Asset
Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Securities
|
|
|
65-69
|
%
|
|
69
|
%
|
|
72
|
%
|
Debt
Securities
|
|
|
25-28
|
%
|
|
25
|
%
|
|
22
|
%
|
Other
|
|
|
3-7
|
%
|
|
6
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The
investment objectives of the foreign defined benefit plans are to maximize
the
return on the investments without exceeding the limits of the prudent pension
fund investment, to ensure that the assets would be sufficient to exceed minimum
funding requirements, and to achieve a favorable return against the performance
expectation based on historic and projected rates of return over the short
term.
The goal is to optimize the long-term return on plan assets at a moderate level
of risk, by balancing higher-returning assets, such as equity securities, with
less volatile assets, such as fixed income securities. The assets are managed
by
professional investment firms and performance is evaluated periodically against
specific benchmarks. The Plans’ net assets did not include the Company’s own
stock at December 31, 2006, or January 1, 2006.
During
2007, the Company expects to contribute $6.8 million to the plan trust and
$8.1
million in the form of direct benefit payments for its foreign defined benefit
plans. It is anticipated that future benefit payments for the foreign defined
benefit plans will be as follows:
|
FISCAL
YEAR ENDED
|
|
|
EXPECTED
PAYMENTS
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$
|
8,143
|
|
|
|
2008
|
|
|
|
8,429
|
|
|
|
2009
|
|
|
|
8,753
|
|
|
|
2010
|
|
|
|
9,020
|
|
|
|
2011
|
|
|
|
9,305
|
|
|
|
2012-2016
|
|
|
|
50,602
|
|
|
Impact
of the Adoption of SFAS No. 158 with Regard to the Above
Plans
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R.” This standard requires employers that sponsor
defined benefit plans to recognize the over-funded or under-funded status of
a
defined benefit postretirement plan as an asset or liability in its balance
sheet, and to recognize changes in that funded status in the year in which
the
changes occur. Unrecognized prior service credits/costs and net actuarial
gains/losses are recognized as a component of accumulated other comprehensive
income/(loss). Additional
minimum pension liabilities and related intangible assets are eliminated upon
adoption of the new standard. SFAS No. 158 requires prospective application
and
is effective for financial statements issued for fiscal years ending after
December 15, 2006. The following table summarizes the initial effect of the
adoption of SFAS No. 158 (in thousands):
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Before
Adoption (under
SFAS No. 87)
|
|
Adjustments
(under SFAS
No. 158)
|
|
As
reported (under SFAS
No. 158)
|
|
|
|
|
|
|
|
|
|
Prepaid
asset
|
|
$
|
7,906
|
|
$
|
(7,906
|
)
|
$
|
--
|
|
Liability
|
|
|
(30,690
|
)
|
|
(5,036
|
)
|
|
(35,726
|
)
|
Accumulated
other comprehensive income (pre-tax)
|
|
|
48,294
|
|
|
12,942
|
|
|
61,236
|
|
Domestic
Defined Benefit Plan
The
Company maintains a domestic nonqualified salary continuation plan (“SCP”),
which is designed to induce selected officers of the Company to remain in the
employ of the Company by providing them with retirement, disability and death
benefits in addition to those which they may receive under the Company’s other
retirement plans and benefit programs. The SCP entitles participants to:
(i) retirement benefits upon retirement at age 65 (or early retirement at
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 pre-retirement total disability; and (iii) death benefits payable
to the designated beneficiary of the participant for a period of up to 10 years
(or, if elected by a surviving spouse that is the designated beneficiary, a
reduced benefit is payable for the remainder of such surviving spouse’s life).
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 measurement date
of
December 31 for the domestic SCP.
The
tables presented below set forth the required disclosures in accordance with
SFAS No. 132, as revised, and amounts recognized in the consolidated financial
statements related to the domestic SCP.
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
|
|
(in
thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
Benefit
obligation, beginning of year
|
|
$
|
15,616
|
|
$
|
13,909
|
|
Service
cost
|
|
|
267
|
|
|
221
|
|
Interest
cost
|
|
|
849
|
|
|
802
|
|
Benefits
paid
|
|
|
(360
|
)
|
|
(343
|
)
|
Actuarial
loss
|
|
|
(302
|
)
|
|
1,027
|
|
|
|
|
|
|
|
|
|
Benefit
obligation, end of year
|
|
$
|
16,070
|
|
$
|
15,616
|
|
As
discussed above, in September 2006 the FASB issued SFAS No. 158. The following
table summarizes the effect of the initial adoption of SFAS No. 158 on the
SCP
(in thousands):
|
|
Before
Adoption (under
SFAS No. 87)
|
|
Adjustments
(under SFAS
No. 158)
|
|
As
reported (under SFAS
No. 158)
|
|
|
|
|
|
|
|
|
|
Intangible
asset
|
|
$
|
1,456
|
|
$
|
(1,456
|
)
|
$
|
--
|
|
Liability
|
|
|
(13,955
|
)
|
|
(2,115
|
)
|
|
(16,070
|
)
|
Accumulated
other comprehensive income (pre-tax)
|
|
|
2,764
|
|
|
3,571
|
|
|
6,335
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
components of the amounts in accumulated other comprehensive income are as
follows (in thousands):
Unrecognized
actuarial loss
|
|
$
|
4,880
|
|
Unrecognized
transition asset
|
|
|
1,094
|
|
Unamortized
prior service cost
|
|
|
361
|
|
|
|
$
|
6,335
|
|
The
accumulated benefit obligation related to the SCP was $14.0 million and $13.4
million as of December 31, 2006, and January 1, 2005, respectively. The SCP
is currently unfunded; as such, the benefit obligations disclosed are also
the
benefit obligations in excess of the plan assets.
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands, except for weighted average assumptions)
|
|
Weighted
average assumptions used to determine net periodic benefit
cost
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.5
|
%
|
|
5.8
|
%
|
|
6.0
|
%
|
Rate
of compensation
|
|
|
4.0
|
%
|
|
4.0
|
%
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.5
|
%
|
|
5.8
|
%
|
Rate
of compensation
|
|
|
4.0
|
%
|
|
4.0
|
%
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
267
|
|
$
|
221
|
|
$
|
182
|
|
Interest
cost
|
|
|
849
|
|
|
802
|
|
|
754
|
|
Amortization
of transition obligation
|
|
|
588
|
|
|
546
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
1,704
|
|
$
|
1,569
|
|
$
|
1,501
|
|
For
2007,
the Company estimates that approximately $0.6 million of expenses related to
the
amortization of unrecognized items will be included in net periodic benefit
cost.
During
2006, the Company contributed $0.4 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 ENDED
|
|
|
EXPECTED
PAYMENTS
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
2007
|
|
|
$
|
1,020
|
|
|
|
2008
|
|
|
|
1,051
|
|
|
|
2009
|
|
|
|
1,051
|
|
|
|
2010
|
|
|
|
1,051
|
|
|
|
2011
|
|
|
|
1,051
|
|
|
|
2012-2016
|
|
|
|
5,398
|
|
|
SALE
OF EUROPEAN FABRICS BUSINESS
In
April
2006, the Company sold its European fabrics business for $28.8 million to an
entity formed by the business’s management team. As discussed below, a first
quarter 2006 impairment charge of $20.7 million was recorded in connection
with
this sale. The major classes of assets and liabilities related to this disposal
group included accounts receivable of $11.9 million, inventory of $11.4 million,
property, plant and equipment of $9.5 million and accounts payable of $7.6
million. In the second quarter of 2006, the transaction resulted in a net loss
on disposal of $1.7 million, which was included in operating income in the
consolidated condensed statement of operations.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
IMPAIRMENT
OF GOODWILL
During
the first quarter of 2006, in connection with the sale of its European fabrics
business, the Company recorded a charge of $20.7 million for the impairment
of
goodwill related to its fabrics reporting unit and those European operations.
This charge was based on a review of the Company’s carrying value of goodwill at
its fabrics facilities as compared to the potential fair value as represented
by
the proposed sale price. When there is an indication that the carrying amount
of
a portion of a reporting unit exceeds its fair value, the Company measures
the
possible goodwill impairment based on an allocation of the estimated fair value
of the reporting unit to its underlying assets and liabilities. The excess
of
the fair value of the reporting unit over the amounts assigned to its assets
and
liabilities is the implied fair value of goodwill. An impairment loss is
recognized to the extent that the reporting unit’s recorded goodwill exceeds the
implied fair value of goodwill. This impairment charge has been included in
income from continuing operations in the consolidated statement of
operations.
SEGMENT
INFORMATION
Based
on
the quantitative thresholds specified in SFAS No. 131, the Company has
determined that it has four reportable segments: (1) the Modular Carpet
segment, which includes its InterfaceFLOR,
Heuga,
and
FLOR
modular
carpet businesses, as well as its Intersept
antimicrobial sales and licensing program, (2) the Bentley Prince Street
segment, which includes its Bentley Prince
Street broadloom,
modular carpet and area rug businesses, (3) the Fabrics Group segment, which
includes all of its fabrics businesses worldwide, and (4) the Specialty
Products segment, which includes Pandel, Inc., a producer of vinyl carpet tile
backing and specialty mat and foam products. The former segment known as the
Re:Source Network, which primarily encompassed the Company’s owned Re:Source
dealers that provided carpet installation and maintenance services in the United
States, is now reported as discontinued operations in the accompanying
consolidated statements of operations.
The
accounting policies of the operating segments are the same as those described
in
Summary of Significant Accounting Policies. Segment amounts disclosed are prior
to any elimination entries made in consolidation, except in the case of net
sales, where intercompany sales have been eliminated. Intersegment sales are
accounted for at fair value as if sales were to third parties. Intersegment
sales are not material. The chief operating decision maker evaluates performance
of the segments based on operating income. Costs excluded from this profit
measure primarily consist of allocated corporate expenses, interest/other
expense and income taxes. Corporate expenses are primarily comprised of
corporate overhead expenses. Thus, operating income includes only the costs
that
are directly attributable to the operations of the individual segment. Assets
not identifiable to an individual segment are corporate assets, which are
primarily comprised of cash and cash equivalents, short-term investments,
intangible assets and intercompany amounts, which are eliminated in
consolidation.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEGMENT
DISCLOSURES
Summary
information by segment follows:
|
|
MODULAR
CARPET
|
|
BENTLEY
PRINCE STREET
|
|
FABRICS
GROUP
|
|
SPECIALTY
PRODUCTS
|
|
TOTAL
|
|
|
|
(in
thousands)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
763,659
|
|
$
|
137,920
|
|
$
|
161,183
|
|
$
|
13,080
|
|
$
|
1,075,842
|
|
Depreciation
and amortization
|
|
|
15,669
|
|
|
1,816
|
|
|
9,413
|
|
|
87
|
|
|
26,985
|
|
Operating
income
|
|
|
98,244
|
|
|
5,931
|
|
|
(27,259
|
)
|
|
364
|
|
|
77,280
|
|
Total
assets
|
|
|
481,346
|
|
|
118,816
|
|
|
155,752
|
|
|
4,045
|
|
|
759,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
646,213
|
|
$
|
125,167
|
|
$
|
198,842
|
|
$
|
15,544
|
|
$
|
985,766
|
|
Depreciation
and amortization
|
|
|
13,644
|
|
|
1,708
|
|
|
11,007
|
|
|
111
|
|
|
26,470
|
|
Operating
income
|
|
|
77,351
|
|
|
3,494
|
|
|
4,285
|
|
|
651
|
|
|
85,781
|
|
Total
assets
|
|
|
425,922
|
|
|
113,320
|
|
|
209,495
|
|
|
3,755
|
|
|
752,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
563,397
|
|
$
|
119,058
|
|
$
|
186,408
|
|
$
|
12,795
|
|
$
|
881,658
|
|
Depreciation
and amortization
|
|
|
13,921
|
|
|
1,682
|
|
|
10,038
|
|
|
167
|
|
|
25,808
|
|
Operating
income (loss)
|
|
|
63,888
|
|
|
114
|
|
|
824
|
|
|
(477
|
)
|
|
64,349
|
|
Total
assets
|
|
|
490,908
|
|
|
112,541
|
|
|
217,554
|
|
|
4,178
|
|
|
825,181
|
|
Due
primarily to the sale of the European fabrics business and the related
impairment of goodwill, the total segment assets of the Fabrics Group decreased
by $53.7 million (from $209.5 million to $155.8 million) during
2006.
A
reconciliation of the Company’s total segment operating income (loss),
depreciation and amortization, and assets to the corresponding consolidated
amounts follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
|
|
|
Total
segment depreciation and amortization
|
|
$
|
26,985
|
|
$
|
26,470
|
|
$
|
25,808
|
|
Corporate
depreciation and amortization
|
|
|
4,178
|
|
|
4,985
|
|
|
7,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
depreciation and amortization
|
|
$
|
31,163
|
|
$
|
31,455
|
|
$
|
33,336
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income
|
|
$
|
77,280
|
|
$
|
85,781
|
|
$
|
64,349
|
|
Corporate
expenses and eliminations
|
|
|
(4,918
|
)
|
|
(3,780
|
)
|
|
(3,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Reported
operating income
|
|
$
|
72,362
|
|
$
|
82,001
|
|
$
|
60,742
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Total
segment assets
|
|
$
|
759,959
|
|
$
|
752,492
|
|
|
|
|
Discontinued
operations
|
|
|
2,570
|
|
|
5,526
|
|
|
|
|
Corporate
assets and eliminations
|
|
|
165,811
|
|
|
80,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
total assets
|
|
$
|
928,340
|
|
$
|
838,990
|
|
|
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring
activities by segment
The
table
below details the restructuring activities undertaken in 2006 by segment. These
charges were all incurred during the first quarter of 2006.
|
|
MODULAR
CARPET
|
|
BENTLEY
PRINCE STREET
|
|
FABRICS
GROUP
|
|
SPECIALITY
PRODUCTS
|
|
TOTAL
|
|
|
|
(in
thousands)
|
|
Total
amounts expected to be incurred
|
|
$
|
--
|
|
$
|
--
|
|
$
|
3,260
|
|
$
|
--
|
|
$
|
3,260
|
|
Cumulative
amounts incurred to date
|
|
|
--
|
|
|
--
|
|
$
|
3,260
|
|
|
--
|
|
$
|
3,260
|
|
Total
amounts incurred in the period
|
|
|
--
|
|
|
--
|
|
$
|
3,260
|
|
|
--
|
|
$
|
3,260
|
|
There
were no restructuring activities in 2005 or 2004.
ENTERPRISE-WIDE
DISCLOSURES
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 three years ended December
31, 2006. Sales in foreign markets in 2006, 2005 and 2004 were 36.9%, 43.3%
and
43.8%, respectively. These sales were primarily to customers in Europe, Canada,
Asia, Australia and Latin America. Revenue and long-lived assets related to
operations in the United States and other countries follows:
|
|
FISCAL
YEAR ENDED
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
SALES
TO UNAFFILIATED CUSTOMERS(1)
|
|
|
|
|
|
|
|
United
States
|
|
$
|
618,295
|
|
$
|
558,464
|
|
$
|
495,836
|
|
United
Kingdom
|
|
|
141,872
|
|
|
163,607
|
|
|
153,936
|
|
Other
foreign countries
|
|
|
315,675
|
|
|
263,695
|
|
|
231,886
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,075,842
|
|
$
|
985,766
|
|
$
|
881,658
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-LIVED
ASSETS(2)
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
118,565
|
|
$
|
115,089
|
|
|
|
|
United
Kingdom
|
|
|
30,260
|
|
|
37,006
|
|
|
|
|
Netherlands
|
|
|
17,626
|
|
|
19,044
|
|
|
|
|
Other
foreign countries
|
|
|
22,274
|
|
|
14,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-lived assets
|
|
$
|
188,725
|
|
$
|
185,643
|
|
|
|
|
(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.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Class A Common Stock. The prices represent the reported high
and low sale prices during the period presented.
|
|
FISCAL
YEAR ENDED 2006
|
|
|
|
FIRST
QUARTER(1)
|
|
SECOND
QUARTER(2)
|
|
THIRD
QUARTER
|
|
FOURTH
QUARTER
|
|
|
|
(in
thousands, except share data)
|
|
Net
sales
|
|
$
|
250,634
|
|
$
|
258,678
|
|
$
|
270,612
|
|
$
|
295,918
|
|
Gross
profit
|
|
|
78,982
|
|
|
81,167
|
|
|
85,334
|
|
|
94,112
|
|
Income
(loss) from continuing operations
|
|
|
(17,082
|
)
|
|
5,906
|
|
|
9,106
|
|
|
12,093
|
|
Loss
from discontinued operation
|
|
|
(6
|
)
|
|
(21
|
)
|
|
--
|
|
|
(4
|
)
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(17,088
|
)
|
|
5,885
|
|
|
9,106
|
|
|
12,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.32
|
)
|
$
|
0.11
|
|
$
|
0.17
|
|
$
|
0.21
|
|
Loss
from discontinued operation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(0.32
|
)
|
|
0.11
|
|
|
0.17
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
(0.32
|
)
|
$
|
0.11
|
|
$
|
0.17
|
|
$
|
0.21
|
|
Loss
from discontinued operation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Loss
on disposal of discontinued operations
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(0.32
|
)
|
|
0.11
|
|
|
0.17
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
14.31
|
|
$
|
15.70
|
|
$
|
13.83
|
|
$
|
15.59
|
|
Low
|
|
|
8.05
|
|
|
9.89
|
|
|
10.12
|
|
|
12.31
|
|
(1)
|
During
the first quarter of 2006, the Company recorded a pre-tax non-cash
charge
of $20.7 million for the impairment of goodwill in connection with
the
sale of its European fabrics
business.
|
(2)
|
During
the second quarter of 2006, the Company recorded a $1.7 million loss
on
the divestiture of its European fabrics
business.
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
FISCAL
YEAR ENDED 2005
|
|
|
|
FIRST
QUARTER(1)
|
|
SECOND
QUARTER(1)
|
|
THIRD
QUARTER
|
|
FOURTH
QUARTER
|
|
|
|
(in
thousands, except share data)
|
|
Net
sales
|
|
$
|
234,715
|
|
$
|
246,545
|
|
$
|
243,898
|
|
$
|
260,608
|
|
Gross
profit
|
|
|
71,139
|
|
|
77,228
|
|
|
76,541
|
|
|
79,789
|
|
Income
from continuing operations
|
|
|
2,923
|
|
|
3,940
|
|
|
5,337
|
|
|
5,766
|
|
Loss
from discontinued operation
|
|
|
(4,762
|
)
|
|
(9,763
|
)
|
|
(216
|
)
|
|
(50
|
)
|
Loss
on disposal of discontinued operations
|
|
|
(337
|
)
|
|
(1,598
|
)
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(2,176
|
)
|
|
(7,421
|
)
|
|
5,121
|
|
|
5,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.06
|
|
$
|
0.08
|
|
$
|
0.10
|
|
$
|
0.11
|
|
Loss
from discontinued operation
|
|
|
(0.09
|
)
|
|
(0.19
|
)
|
|
--
|
|
|
--
|
|
Gain
(loss) on disposal of discontinued operations
|
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(0.04
|
)
|
|
(0.14
|
)
|
|
0.10
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.06
|
|
$
|
0.08
|
|
$
|
0.10
|
|
$
|
0.11
|
|
Loss
from discontinued operation
|
|
|
(0.09
|
)
|
|
(0.19
|
)
|
|
--
|
|
|
--
|
|
Gain
(loss) on disposal of discontinued operations
|
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
(0.04
|
)
|
|
(0.14
|
)
|
|
0.10
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
10.04
|
|
$
|
8.37
|
|
$
|
10.65
|
|
$
|
9.02
|
|
Low
|
|
|
6.35
|
|
|
5.70
|
|
|
7.60
|
|
|
7.51
|
|
(1)
|
During
the first and second quarters of 2005, the Company recorded write-downs
for the impairment of assets of $0.5 million and $3.0 million,
respectively, related to the discontinued Re:Source
dealer business. These amounts are included in loss from discontinued
operations (see the discussion in the above note entitled “Discontinued
Operations”).
|
SUBSEQUENT
EVENTS
Sale
of Pandel, Inc.
On
March
7, 2007, the Company sold its subsidiary Pandel, Inc. for approximately $1.4
million to an entity formed by the general manager of Pandel. Pandel primarily
produces vinyl carpet tile backing and specialty mat and foam products. The
total assets of this business were $3.3 million, comprised primarily of
inventory and accounts receivable. Total liabilities related to this business
were $0.4 million. In 2006, Pandel had net sales of $13.0 million. Prior to
the
sale, certain of Pandel’s production assets were conveyed to another subsidiary
of the Company, where they will continue to be used in its carpet tile backing
process.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit
Agreement with ABN AMRO Bank N.V.
On
March
9, 2007, Interface Europe B.V. (the Company’s modular carpet subsidiary based in
the Netherlands) and certain of its subsidiaries entered into a Credit Agreement
with ABN AMRO Bank N.V. Under the Credit Agreement, ABN AMRO will provide a
credit facility for borrowings and bank guarantees in varying aggregate amounts
over time as follows:
|
Time
Period
|
|
Maximum
Amount
in
Euros
|
|
|
|
|
(in
millions)
|
|
|
January
1, 2007 - April 30, 2007
|
|
20
|
|
|
May
1, 2007 - September 30, 2007
|
|
26
|
|
|
October
1, 2007 - April 30, 2008
|
|
15
|
|
|
May
1, 2008 - September 30, 2008
|
|
21
|
|
|
October
1, 2008 - April 30, 2009
|
|
10
|
|
|
May
1, 2009 - September 30, 2009
|
|
16
|
|
|
From
October 1, 2009
|
|
5
|
|
These
borrowings will be used to refinance, in part, a pre-existing intercompany
loan,
and to finance the general working capital needs of Interface Europe B.V. and
certain of its subsidiaries.
SUPPLEMENTAL
GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The
“guarantor subsidiaries,” which consist of the Company’s principal domestic
subsidiaries, are guarantors of the Company’s 10.375% senior notes due 2010, its
7.3% notes due 2008, and its 9.5% senior subordinated notes due 2014. The
Supplemental Guarantor Financial Statements are presented herein pursuant to
requirements of the Commission.
STATEMENT
OF OPERATIONS FOR YEAR ENDED 2006
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Net
sales
|
|
$
|
950,369
|
|
$
|
466,035
|
|
$
|
--
|
|
$
|
(340,562
|
)
|
$
|
1,075,842
|
|
Cost
of sales
|
|
|
771,966
|
|
|
304,843
|
|
|
--
|
|
|
(340,562
|
)
|
|
736,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on sales
|
|
|
178,403
|
|
|
161,192
|
|
|
--
|
|
|
--
|
|
|
339,595
|
|
Selling,
general and administrative expenses
|
|
|
120,802
|
|
|
96,107
|
|
|
24,629
|
|
|
--
|
|
|
241,538
|
|
Impairment
of goodwill
|
|
|
--
|
|
|
20,712
|
|
|
--
|
|
|
--
|
|
|
20,712
|
|
Restructuring
charge
|
|
|
3,260
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,260
|
|
Loss
on disposal - European fabrics
|
|
|
--
|
|
|
1,723
|
|
|
--
|
|
|
--
|
|
|
1,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
54,341
|
|
|
42,650
|
|
|
(24,629
|
)
|
|
--
|
|
|
72,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest/Other
expense
|
|
|
24,550
|
|
|
9,181
|
|
|
9,792
|
|
|
--
|
|
|
43,523
|
|
Income
(loss) before taxes on income and equity in income of
subsidiaries
|
|
|
29,791
|
|
|
33,469
|
|
|
(34,421
|
)
|
|
--
|
|
|
28,839
|
|
Income
tax expense (benefit)
|
|
|
11,555
|
|
|
18,120
|
|
|
(10,859
|
)
|
|
--
|
|
|
18,816
|
|
Equity
in income (loss) of subsidiaries
|
|
|
--
|
|
|
--
|
|
|
33,554
|
|
|
(33,554
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
18,236
|
|
|
15,349
|
|
|
9,992
|
|
|
(33,554
|
)
|
|
10,023
|
|
Income
(loss) on discontinued operations, net of tax
|
|
|
(31
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net of tax
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
18,205
|
|
$
|
15,349
|
|
$
|
9,992
|
|
$
|
(33,554
|
)
|
$
|
9,992
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT
OF OPERATIONS FOR YEAR ENDED 2005
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Net
sales
|
|
$
|
856,286
|
|
$
|
435,217
|
|
$
|
--
|
|
$
|
(305,737
|
)
|
$
|
985,766
|
|
Cost
of sales
|
|
|
698,690
|
|
|
288,116
|
|
|
--
|
|
|
(305,737
|
)
|
|
681,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on sales
|
|
|
157,596
|
|
|
147,101
|
|
|
--
|
|
|
--
|
|
|
304,697
|
|
Selling,
general and administrative expenses
|
|
|
107,342
|
|
|
92,578
|
|
|
22,776
|
|
|
--
|
|
|
222,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
50,254
|
|
|
54,523
|
|
|
(22,776
|
)
|
|
--
|
|
|
82,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
20,293
|
|
|
2,304
|
|
|
22,944
|
|
|
--
|
|
|
45,541
|
|
Other
|
|
|
9,816
|
|
|
6,286
|
|
|
(15,169
|
)
|
|
--
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
30,109
|
|
|
8,590
|
|
|
7,775
|
|
|
--
|
|
|
46,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income and equity in income of
subsidiaries
|
|
|
20,145
|
|
|
45,933
|
|
|
(30,551
|
)
|
|
--
|
|
|
35,527
|
|
Taxes
on income (benefit)
|
|
|
6,647
|
|
|
16,656
|
|
|
(5,742
|
)
|
|
--
|
|
|
17,561
|
|
Equity
in income (loss) of subsidiaries
|
|
|
--
|
|
|
--
|
|
|
26,049
|
|
|
(26,049
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
13,498
|
|
|
29,277
|
|
|
1,240
|
|
|
(26,049
|
)
|
|
17,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(14,791
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(14,791
|
)
|
Loss
on disposal of discontinued operation, net of tax
|
|
|
(1,935
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,228
|
)
|
$
|
29,277
|
|
$
|
1,240
|
|
$
|
(26,049
|
)
|
$
|
1,240
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT
OF OPERATIONS FOR YEAR ENDED 2004
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Net
sales
|
|
$
|
808,604
|
|
$
|
386,728
|
|
$
|
--
|
|
$
|
(313,674
|
)
|
$
|
881,658
|
|
Cost
of sales
|
|
|
670,307
|
|
|
259,664
|
|
|
--
|
|
|
(313,674
|
)
|
|
616,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on sales
|
|
|
138,297
|
|
|
127,064
|
|
|
--
|
|
|
--
|
|
|
265,361
|
|
Selling,
general and administrative expenses
|
|
|
95,818
|
|
|
86,594
|
|
|
22,207
|
|
|
--
|
|
|
204,619
|
|
Restructuring
charge
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
42,479
|
|
|
40,470
|
|
|
(22,207
|
)
|
|
--
|
|
|
60,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
15,931
|
|
|
3,525
|
|
|
26,567
|
|
|
--
|
|
|
46,023
|
|
Other
|
|
|
(44
|
)
|
|
5,371
|
|
|
(1,092
|
)
|
|
--
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
15,887
|
|
|
8,896
|
|
|
25,475
|
|
|
--
|
|
|
50,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income and equity in income of
subsidiaries
|
|
|
26,592
|
|
|
31,574
|
|
|
(47,682
|
)
|
|
--
|
|
|
10,484
|
|
Taxes
on income (benefit)
|
|
|
(796
|
)
|
|
11,958
|
|
|
(7,118
|
)
|
|
--
|
|
|
4,044
|
|
Equity
in income (loss) of subsidiaries
|
|
|
--
|
|
|
--
|
|
|
(14,838
|
)
|
|
14,838
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
27,388
|
|
|
19,616
|
|
|
(55,402
|
)
|
|
14,838
|
|
|
6,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(57,808
|
)
|
|
(1,007
|
)
|
|
--
|
|
|
--
|
|
|
(58,815
|
)
|
Loss
on disposal of discontinued operation, net of tax
|
|
|
(3,027
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(33,447
|
)
|
$
|
18,609
|
|
$
|
(55,402
|
)
|
$
|
14,838
|
|
$
|
(55,402
|
)
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BALANCE
SHEET AS OF DECEMBER 31, 2006
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,719
|
|
$
|
33,131
|
|
$
|
75,370
|
|
$
|
--
|
|
$
|
110,220
|
|
Accounts
receivable
|
|
|
81,807
|
|
|
74,330
|
|
|
3,293
|
|
|
--
|
|
|
159,430
|
|
Inventories
|
|
|
96,914
|
|
|
51,049
|
|
|
--
|
|
|
--
|
|
|
147,963
|
|
Prepaids
and deferred income taxes
|
|
|
7,740
|
|
|
13,559
|
|
|
7,477
|
|
|
--
|
|
|
28,776
|
|
Assets
of business held for sale
|
|
|
2,464
|
|
|
106
|
|
|
--
|
|
|
--
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
190,644
|
|
|
172,175
|
|
|
86,140
|
|
|
--
|
|
|
448,959
|
|
Property
and equipment, less accumulated depreciation
|
|
|
113,161
|
|
|
69,970
|
|
|
5,594
|
|
|
--
|
|
|
188,725
|
|
Investments
in subsidiaries
|
|
|
204,408
|
|
|
126,229
|
|
|
152,002
|
|
|
(482,639
|
)
|
|
--
|
|
Goodwill
|
|
|
108,075
|
|
|
72,032
|
|
|
--
|
|
|
--
|
|
|
180,107
|
|
Other
assets
|
|
|
14,379
|
|
|
23,811
|
|
|
72,359
|
|
|
--
|
|
|
110,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
630,667
|
|
$
|
464,217
|
|
$
|
316,095
|
|
$
|
(482,639
|
)
|
$
|
928,340
|
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
$
|
59,744
|
|
$
|
68,207
|
|
$
|
31,655
|
|
$
|
--
|
|
$
|
159,606
|
|
Long-term
debt, less current maturities
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Senior
notes and senior subordinated notes
|
|
|
--
|
|
|
--
|
|
|
411,365
|
|
|
--
|
|
|
411,365
|
|
Deferred
income taxes
|
|
|
14,227
|
|
|
7,983
|
|
|
(9,524
|
)
|
|
--
|
|
|
12,686
|
|
Other
|
|
|
14,021
|
|
|
43,414
|
|
|
7,348
|
|
|
--
|
|
|
64,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
87,992
|
|
|
119,604
|
|
|
440,844
|
|
|
--
|
|
|
648,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
--
|
|
|
5,506
|
|
|
--
|
|
|
--
|
|
|
5,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock
|
|
|
57,891
|
|
|
--
|
|
|
--
|
|
|
(57,891
|
)
|
|
--
|
|
Common
stock
|
|
|
94,145
|
|
|
102,199
|
|
|
6,066
|
|
|
(196,344
|
)
|
|
6,066
|
|
Additional
paid-in capital
|
|
|
191,411
|
|
|
12,525
|
|
|
323,132
|
|
|
(203,936
|
)
|
|
323,132
|
|
Retained
earnings
|
|
|
200,366
|
|
|
274,084
|
|
|
(444,765
|
)
|
|
(24,468
|
)
|
|
5,217
|
|
Foreign
currency translation adjustment
|
|
|
(1,138
|
)
|
|
(6,289
|
)
|
|
(5,420
|
)
|
|
--
|
|
|
(12,847
|
)
|
Pension
liability
|
|
|
--
|
|
|
(43,412
|
)
|
|
(3,762
|
)
|
|
--
|
|
|
(47,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
542,675
|
|
|
339,107
|
|
|
(124,749
|
)
|
|
(482,639
|
)
|
|
274,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
630,667
|
|
$
|
464,217
|
|
$
|
316,095
|
|
$
|
(482,639
|
)
|
$
|
928,340
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BALANCE
SHEET AS OF JANUARY 1, 2006
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
572
|
|
$
|
29,578
|
|
$
|
21,162
|
|
$
|
--
|
|
$
|
51,312
|
|
Accounts
receivable
|
|
|
77,086
|
|
|
63,302
|
|
|
1,020
|
|
|
--
|
|
|
141,408
|
|
Inventories
|
|
|
82,421
|
|
|
47,788
|
|
|
--
|
|
|
--
|
|
|
130,209
|
|
Other
|
|
|
7,588
|
|
|
7,905
|
|
|
5,671
|
|
|
--
|
|
|
21,164
|
|
Assets
of business held for sale
|
|
|
4,655
|
|
|
871
|
|
|
--
|
|
|
--
|
|
|
5,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
172,322
|
|
|
149,444
|
|
|
27,853
|
|
|
--
|
|
|
349,619
|
|
Property
and equipment, less accumulated depreciation
|
|
|
110,136
|
|
|
70,385
|
|
|
5,122
|
|
|
--
|
|
|
185,643
|
|
Investments
in subsidiaries
|
|
|
194,143
|
|
|
88,459
|
|
|
159,761
|
|
|
(442,363
|
)
|
|
--
|
|
Other
|
|
|
16,154
|
|
|
26,163
|
|
|
67,706
|
|
|
--
|
|
|
110,023
|
|
Goodwill
|
|
|
108,075
|
|
|
85,630
|
|
|
--
|
|
|
--
|
|
|
193,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
600,830
|
|
$
|
420,081
|
|
$
|
260,442
|
|
$
|
(442,363
|
)
|
$
|
838,990
|
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
53,441
|
|
$
|
62,869
|
|
$
|
23,797
|
|
$
|
--
|
|
$
|
140,107
|
|
Long-term
debt, less current maturities
|
|
|
--
|
|
|
--
|
|
|
458,000
|
|
|
--
|
|
|
458,000
|
|
Deferred
income taxes
|
|
|
14,949
|
|
|
9,801
|
|
|
(1,216
|
)
|
|
--
|
|
|
23,534
|
|
Other
long-term liabilities
|
|
|
10,303
|
|
|
27,784
|
|
|
2,777
|
|
|
--
|
|
|
40,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
78,693
|
|
|
100,454
|
|
|
483,358
|
|
|
--
|
|
|
662,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
--
|
|
|
4,409
|
|
|
--
|
|
|
--
|
|
|
4,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
57,891
|
|
|
--
|
|
|
--
|
|
|
(57,891
|
)
|
|
--
|
|
Common
stock
|
|
|
94,145
|
|
|
102,199
|
|
|
5,335
|
|
|
(196,345
|
)
|
|
5,334
|
|
Additional
paid-in capital
|
|
|
191,411
|
|
|
12,525
|
|
|
234,314
|
|
|
(203,936
|
)
|
|
234,314
|
|
Retained
earnings
|
|
|
182,137
|
|
|
258,735
|
|
|
(458,124
|
)
|
|
15,809
|
|
|
(1,443
|
)
|
Foreign
currency translation adjustment
|
|
|
(3,447
|
)
|
|
(30,459
|
)
|
|
(4,441
|
)
|
|
--
|
|
|
(38,347
|
)
|
Minimum
pension liability
|
|
|
--
|
|
|
(27,782
|
)
|
|
--
|
|
|
--
|
|
|
(27,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
522,137
|
|
|
315,218
|
|
|
(222,916
|
)
|
|
(442,363
|
)
|
|
172,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
600,830
|
|
$
|
420,081
|
|
$
|
260,442
|
|
$
|
(442,363
|
)
|
$
|
838,990
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT
OF CASH FLOWS FOR YEAR ENDED 2006
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Net
cash provided by (used for) operating activities
|
|
$
|
29,980
|
|
$
|
(18,696
|
)
|
$
|
18,790
|
|
$
|
--
|
|
$
|
30,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(23,539
|
)
|
|
(9,025
|
)
|
|
(1,472
|
)
|
|
--
|
|
|
(34,036
|
)
|
Cash
proceeds from sale of European fabrics
|
|
|
--
|
|
|
28,837
|
|
|
--
|
|
|
--
|
|
|
28,837
|
|
Other
|
|
|
(612
|
)
|
|
45
|
|
|
(6,794
|
)
|
|
--
|
|
|
(7,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used for) investing activities
|
|
|
(24,151
|
)
|
|
19,857
|
|
|
(8,266
|
)
|
|
--
|
|
|
(12,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings
|
|
|
--
|
|
|
--
|
|
|
(46,634
|
)
|
|
--
|
|
|
(46,634
|
)
|
Proceeds
from issuance of common stock
|
|
|
--
|
|
|
--
|
|
|
86,413
|
|
|
--
|
|
|
86,413
|
|
Debt
issuance cost
|
|
|
--
|
|
|
--
|
|
|
(777
|
)
|
|
--
|
|
|
(777
|
)
|
Other
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used for) financing activities
|
|
|
--
|
|
|
--
|
|
|
39,002
|
|
|
--
|
|
|
39,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
--
|
|
|
2,392
|
|
|
--
|
|
|
--
|
|
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
5,829
|
|
|
3,553
|
|
|
49,526
|
|
|
--
|
|
|
58,908
|
|
Cash,
at beginning of year
|
|
|
572
|
|
|
29,578
|
|
|
21,162
|
|
|
--
|
|
|
51,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
at end of year
|
|
$
|
6,401
|
|
$
|
33,131
|
|
$
|
70,688
|
|
$
|
--
|
|
$
|
110,220
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT
OF CASH FLOWS FOR YEAR ENDED 2005
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities
|
|
$
|
20,515
|
|
$
|
17,489
|
|
$
|
23,297
|
|
$
|
--
|
|
$
|
61,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(17,370
|
)
|
|
(9,150
|
)
|
|
1,042
|
|
|
--
|
|
|
(25,478
|
)
|
Other
|
|
|
(2,405
|
)
|
|
--
|
|
|
(2,688
|
)
|
|
--
|
|
|
(5,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in investing activities
|
|
|
(19,775
|
)
|
|
(9,150
|
)
|
|
(1,646
|
)
|
|
--
|
|
|
(30,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments)
|
|
|
--
|
|
|
--
|
|
|
(2,000
|
)
|
|
--
|
|
|
(2,000
|
)
|
Issuance
of senior notes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Repurchase
of senior subordinated notes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Debt
issuance cost
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Proceeds
from issuance of common stock
|
|
|
--
|
|
|
--
|
|
|
2,960
|
|
|
--
|
|
|
2,960
|
|
Other
|
|
|
478
|
|
|
(262
|
)
|
|
(216
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities
|
|
|
478
|
|
|
(262
|
)
|
|
744
|
|
|
--
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(646
|
)
|
|
(1,896
|
)
|
|
--
|
|
|
--
|
|
|
(2,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
572
|
|
|
6,181
|
|
|
22,395
|
|
|
--
|
|
|
29,148
|
|
Cash,
at beginning of year
|
|
|
--
|
|
|
23,397
|
|
|
(1,233
|
)
|
|
--
|
|
|
22,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
at end of year
|
|
$
|
572
|
|
$
|
29,578
|
|
$
|
21,162
|
|
$
|
--
|
|
$
|
51,312
|
|
INTERFACE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT
OF CASH FLOWS FOR YEAR ENDED 2004
|
|
GUARANTOR
SUBSIDIARIES
|
|
NONGUARANTOR
SUBSIDIARIES
|
|
INTERFACE,
INC. (PARENT CORPORATION)
|
|
CONSOLIDATION
& ELIMINATION ENTRIES
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities
|
|
$
|
8,967
|
|
$
|
34,465
|
|
$
|
(33,891
|
)
|
$
|
--
|
|
$
|
9,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(11,309
|
)
|
|
(4,574
|
)
|
|
100
|
|
|
--
|
|
|
(15,783
|
)
|
Other
|
|
|
2,547
|
|
|
340
|
|
|
5,123
|
|
|
--
|
|
|
8,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in investing activities
|
|
|
(8,762
|
)
|
|
(4,234
|
)
|
|
5,223
|
|
|
--
|
|
|
(7,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments)
|
|
|
(205
|
)
|
|
(21,834
|
)
|
|
22,039
|
|
|
--
|
|
|
--
|
|
Issuance
of senior notes
|
|
|
--
|
|
|
--
|
|
|
135,000
|
|
|
--
|
|
|
135,000
|
|
Repurchase
of senior subordinated notes
|
|
|
--
|
|
|
--
|
|
|
(120,000
|
)
|
|
--
|
|
|
(120,000
|
)
|
Debt
issuance cost
|
|
|
--
|
|
|
--
|
|
|
(4,237
|
)
|
|
--
|
|
|
(4,237
|
)
|
Proceeds
from issuance of common stock
|
|
|
--
|
|
|
--
|
|
|
4,442
|
|
|
--
|
|
|
4,442
|
|
Other
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities
|
|
|
(205
|
)
|
|
(21,834
|
)
|
|
37,244
|
|
|
--
|
|
|
15,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
--
|
|
|
2,301
|
|
|
--
|
|
|
--
|
|
|
2,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
--
|
|
|
10,698
|
|
|
8,576
|
|
|
--
|
|
|
19,274
|
|
Cash,
at beginning of year
|
|
|
--
|
|
|
12,699
|
|
|
(9,809
|
)
|
|
--
|
|
|
2,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
at end of year
|
|
$
|
--
|
|
$
|
23,397
|
|
$
|
(1,233
|
)
|
$
|
--
|
|
$
|
22,164
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders of Interface, Inc.
Atlanta,
Georgia
We
have
audited the accompanying consolidated balance sheets of Interface, Inc. as
of
December 31, 2006 and January 1, 2006 and the related consolidated statements
of
operations and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2006. These financial statements are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Interface, Inc. at December
31, 2006 and January 1, 2006, and the results of its operations and its cash
flows for each of the three years in the period ended December 31,
2006,
in
conformity with accounting principles generally accepted in the United States
of
America.
As
discussed in the footnote entitled “Employee Benefit Plans”, the Company adopted
the provisions of Statement of Financial Accounting Standard No. 158 during
2006. As discussed in the footnote entitled “Recent Accounting Pronouncements”,
the Company adopted the provisions of Staff Accounting Bulletin No. 108
during 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated March 9, 2007 expressed an unqualified opinion thereon.
/s/
BDO
SEIDMAN, LLP
Atlanta,
Georgia
March
9,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board
of
Directors and Shareholders of Interface, Inc.
Atlanta,
Georgia
We
have
audited management’s assessment, included in Management’s Annual Report on
Internal Control Over Financial Reporting in Item 9A of Form 10-K, that
Interface, Inc. and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
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. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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; and
(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.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the COSO criteria. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the COSO criteria.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Interface,
Inc. and subsidiaries as of December 31, 2006 and January 1, 2006 and the
related consolidated statements of operations and comprehensive income (loss)
and cash flows for each of the three fiscal years in the period ended December
31, 2006 and our report dated March 9, 2007 expressed an unqualified opinion
thereon.
Atlanta,
Georgia
March
9,
2007
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 President and Chief Executive Officer and our Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule
13a-14(c) under the Act. Based on that evaluation, our President and Chief
Executive Officer and our Vice President and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of the end of
the
period covered by this Annual Report.
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, as amended.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect
to
financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006 based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
“Internal Control - Integrated Framework.” Based on that assessment, management
believes that, as of December 31, 2006, the Company’s internal control over
financial reporting was effective based on those criteria. 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.
Our
independent auditors have issued an audit report on our assessment of the
Company’s internal control over financial reporting. This report appears on page
84.
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”, “Meetings and
Committees of the Board of Directors” and “Corporate Governance” in our
definitive Proxy Statement for our 2007 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 2006 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.
The
Company has adopted the “Interface Code of Business Conduct and Ethics,” which
applies to all employees, officers and directors of the Company, including
the
Chief Executive Officer and Chief Financial Officer. The Code may be viewed
on
the Company’s website at www.interfaceinc.com.
Changes
to the Code will be posted on the Company’s website. Any waiver of the Code for
executive officers or directors may be made only by the Company’s Board of
Directors and will be disclosed to the extent required by law or Nasdaq rules
on
the Company’s website or in a filing on Form 8-K.
ITEM
11. EXECUTIVE
COMPENSATION
The
information contained under the caption “Executive Compensation and Related
Items” in our definitive Proxy Statement for our 2007 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 2006 fiscal
year,
is incorporated herein by reference.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information contained under the captions “Principal Shareholders and Management
Stock Ownership” and “Equity Compensation Plan Information” in our definitive
Proxy Statement for our 2007 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 2006 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 of record 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 caption “Executive Compensation and Related
Items — Certain Relationships and Related Transactions, and Director
Independence” in our definitive Proxy Statement for our 2007 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 2006 fiscal
year,
is incorporated herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information contained under the caption “Information Concerning the Company’s
Accountants” in our definitive Proxy Statement for our 2007 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 2006 fiscal
year,
is incorporated herein by reference.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
Financial Statements
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 (Loss) — years ended December
31, 2006, January 1, 2006, and January 2, 2005
Consolidated
Balance Sheets — December 31, 2006, and January 1, 2006
Consolidated
Statements of Cash Flows — years ended December 31, 2006, January 1, 2006, and
January 2, 2005
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 and related Report of Independent Registered Public Accounting
Firm
are included as part of this Report (see pages 92-94):
Report
of
Independent Registered Public Accounting Firm
Schedule
II — Valuation and Qualifying Accounts and Reserves
3.
Exhibits
The
following exhibits are included as part of this Report:
Exhibit
Number
|
|
Description
of Exhibit
|
3.1
|
—
|
Restated
Articles of Incorporation (included as Exhibit 3.1 to the Company’s
quarterly report on Form 10-Q for the quarter ended July 5, 1998
(the
“1998 Second Quarter 10-Q”), previously filed with the Commission and
incorporated herein by reference).
|
3.2
|
—
|
Bylaws,
as amended and restated (included as Exhibit 3.2 to the Company’s
quarterly report on Form 10-Q for the quarter ended April 1, 2001,
previously filed with the Commission and incorporated herein by
reference).
|
4.1
|
—
|
See
Exhibits 3.1 and 3.2 for provisions in the Company’s Articles of
Incorporation and Bylaws defining the rights of holders of Common
Stock of
the Company.
|
4.2
|
—
|
Rights
Agreement between the Company and Wachovia Bank, N.A., dated as of
March
4, 1998,with an effective date of March 16, 1998 (included as Exhibit
10.1A to the Company’s registration statement on Form 8-A/A dated March
12, 1998, previously filed with the Commission and incorporated herein
by
reference).
|
4.3
|
—
|
Form
of Indenture governing the Company’s 7.3% Senior Notes due 2008, among the
Company, certain U.S. subsidiaries of the Company, as Guarantors,
and
First Union National Bank, as Trustee (the “1998 Indenture”) (included as
Exhibit 4.1 to the Company’s registration statement on Form S-3/A, File
No. 333-46611, previously filed with the Commission and incorporated
herein by reference); Supplement No. 1 to the 1998 Indenture, dated
as of
December 31, 2002 (included as Exhibit 4.4 to the Company’s annual report
on Form 10-K for the year ended December 29, 2002 (the “2002 10-K”),
previously filed with the Commission and incorporated herein by
reference); Supplement No. 2 to the 1998 Indenture, dated as of
June 18, 2003 (included as Exhibit 4.2 to the Company’s quarterly
report on Form 10-Q for the quarter ended June 29, 2003 (the “2003 Second
Quarter 10-Q”), previously filed with the Commission and incorporated
herein by reference); and Supplement No. 3 to the 1998 Indenture,
dated as
of January 10, 2005 (included as Exhibit 99.1 to the Company’s current
report on Form 8-K dated February 15, 2005, previously filed with
the
Commission and incorporated herein by reference).
|
4.4
|
—
|
Indenture
governing the Company’s 10.375% Senior Notes due 2010, among the Company,
certain U.S. subsidiaries of the Company, as Guarantors, and First
Union
National Bank, as Trustee (the “2002 Indenture”) (included as Exhibit 4.5
to the Company’s annual report on Form 10-K for the year ended December
30, 2001 (the “2001 10-K”), previously filed with the Commission and
incorporated herein by reference); Supplemental Indenture related
to the
2002 Indenture, dated as of December 31, 2002 (included as Exhibit
4.5 to
the 2002 10-K, previously filed with the Commission and incorporated
herein by reference); Second Supplemental Indenture related to the
2002
Indenture, dated as of June 18, 2003 (included as Exhibit 4.3 to
the 2003
Second Quarter 10-Q, previously filed with the Commission and incorporated
herein by reference); and Third Supplemental Indenture related to
the 2002
Indenture, dated as of January 10, 2005 (included as Exhibit 99.2
to the
Company’s current report on Form 8-K dated February 15, 2005, previously
filed with the Commission and incorporated herein by
reference).
|
4.5
|
—
|
Indenture
governing the Company’s 9.5% Senior Subordinated Notes due 2014, dated as
of February 4, 2004, among the Company, certain U.S. subsidiaries of
the Company, as guarantors, and SunTrust Bank, as Trustee (the “2004
Indenture”) (included as Exhibit 4.6 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 First Supplemental Indenture related to the 2004
Indenture, dated as of January 10, 2005 (included as Exhibit 99.3
to the
Company’s current report on Form 8-K dated February 15, 2005, previously
filed with the Commission and incorporated herein by
reference).
|
10.1
|
—
|
Salary
Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to
the
Company’s registration statement on Form S-1, File No. 2-82188, previously
filed with the Commission and incorporated herein by
reference).*
|
10.2
|
—
|
Form
of Salary Continuation Agreement, dated as of October 1, 2002 (as
used for
Daniel T. Hendrix, Raymond S. Willoch and John R. Wells) (included
as
Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the
quarter ended September 29, 2002 (the “2002 Third Quarter 10-Q”),
previously filed with the Commission and incorporated herein by
reference).*
|
10.3
|
—
|
Salary
Continuation Agreement, dated as of October 1, 2002, between the
Company
and Ray C. Anderson (included as Exhibit 10.3 to the 2002 Third Quarter
10-Q, previously filed with the Commission and incorporated herein
by
reference); and Amendment thereto dated September 29, 2006 (included
as
Exhibit 99.1 to the Company’s current report on Form 8-K dated September
29, 2006, previously filed with the Commission and incorporated herein
by
reference).*
|
10.4
|
—
|
Interface,
Inc. Omnibus Stock Incentive Plan (as amended and restated effective
February 22, 2006) (included as Exhibit 99.1 to the Company’s current
report on Form 8-K dated May 18, 2006, previously filed with the
Commission and incorporated herein by reference; and Forms of Restricted
Stock Agreement, as used for directors, senior officers and other
key
employees/consultants (included as Exhibits 99.1, 99.2 and 99.3,
respectively, to the Company’s current report on Form 8-K dated January
10, 2005, previously filed with the Commission and incorporated herein
by
reference).
|
10.5
|
—
|
Interface,
Inc. Executive Bonus Plan, adopted on February 18, 2004 (included
as
Exhibit 99.1 to the Company’s current report on Form 8-K dated December
15, 2004, previously filed with the Commission and incorporated herein
by
reference).*
|
10.6
|
—
|
Description
of Special Incentive Program for 2005-2006 (included as Exhibit 99.2
to
the Company’s current report on Form 8-K dated December 15, 2004,
previously filed with the Commission and incorporated herein by
reference).*
|
10.7
|
—
|
Interface,
Inc. Nonqualified Savings Plan (as amended and restated effective
January
1, 2002) (included as Exhibit 10.4 to the 2001 10-K, 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
2003 Second Quarter 10-Q, 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 2003 Second Quarter
10-Q, 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 2003 10-K, previously filed with the Commission
and
incorporated herein by reference); and Fourth Amendment thereto,
dated as
of December 31, 2003 (included as Exhibit 10.7 to the 2003 10-K,
previously filed with the Commission and incorporated herein by
reference).*
|
10.8
|
—
|
Interface,
Inc. Nonqualified Savings Plan II, dated as of January 1, 2005 (included
as Exhibit 4 to the Company’s registration statement on Form S-8 dated
November 29, 2004, previously filed with the Commission and incorporated
herein by reference); and First Amendment thereto, dated as of December
28, 2005 (included as Exhibit 10.9 to the Company’s annual report on Form
10-K for the year ended January 1, 2006 (the “2005 10-K”), previously
filed with the Commission and incorporated herein by
reference).*
|
10.9
|
—
|
Sixth
Amended and Restated Credit Agreement, dated as of June 30, 2006,
among
the Company (and certain direct and indirect subsidiaries), the
lenders listed therein, Wachovia Bank, National Association, Bank
of
America, N.A. and General Electric Capital Corporation (included
as
Exhibit 99.1 to the Company’s current report on Form 8-K dated June 30,
2006, previously filed with the Commission and incorporated herein
by
reference).
|
10.10
|
—
|
Employment
Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit
10.1
to the Company’s quarterly report on Form 10-Q for the quarter ended June
29, 1997 (the “1997 Second Quarter 10-Q”), previously filed with the
Commission and incorporated herein by reference); Amendment thereto
dated
January 6, 1998 (included as Exhibit 10.1 to the Company’s quarterly
report on Form 10-Q for the quarter ended April 5, 1998 (the “1998 First
Quarter 10-Q”), previously filed with the Commission and incorporated
herein by reference); Second Amendment thereto dated January 14,
1999 (the
form of which is included as Exhibit 10.20 to the Company’s annual report
on Form 10-K for the year ended January 1, 2000 (the “1999 10-K”),
previously filed with the Commission and incorporated herein by
reference); Third Amendment thereto dated May 7, 1999 (included as
Exhibit
10.6 to the 1999 10-K, previously filed with the Commission and
incorporated herein by reference); Fourth Amendment thereto dated
July 24,
2001 (included as Exhibit 10.4 to the 2001 Third Quarter 10-Q, previously
filed with the Commission and incorporated herein by reference);
and Fifth
Amendment thereto dated July 26, 2006 (included as Exhibit 99.1 to
the
Company’s current report on Form 8-K dated July 26, 2006, previously filed
with the Commission and incorporated herein by
reference).*
|
10.11
|
—
|
Change
in Control Agreement of Ray C. Anderson dated April 1, 1997 (included
as
Exhibit 10.2 to the 1997 Second Quarter 10-Q, previously filed with
the
Commission and incorporated herein by reference); Amendment thereto
dated
January 6, 1998 (included as Exhibit 10.2 to the 1998 First Quarter
10-Q,
previously filed with the Commission and incorporated herein by
reference); Second Amendment thereto dated January 14, 1999 (the
form of
which is included as Exhibit 10.21 to the 1999 10-K, previously filed
with
the Commission and incorporated herein by reference); Third Amendment
thereto dated May 7, 1999 (included as Exhibit 10.7 to the 1999 10-K,
previously filed with the Commission and incorporated herein by
reference); Fourth Amendment thereto dated July 24, 2001 (included
as
Exhibit 10.5 to the 2001 Third Quarter 10-Q, previously filed with
the
Commission and incorporated herein by reference); and Fifth Amendment
thereto dated July 26, 2006 (included as Exhibit 99.2 to the Company’s
current report on Form 8-K dated July 26, 2006, previously filed
with the
Commission and incorporated herein by reference).*
|
10.12
|
—
|
UK
Service Agreement between Interface Europe, Ltd. and Lindsey Kenneth
Parnell dated March 13, 2007.*
|
10.13
|
—
|
Overseas
Service Agreement between Interface Europe, Ltd. and Lindsey Kenneth
Parnell dated March 13, 2007.*
|
10.14
|
—
|
Employment
Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit
10.7 to the 1997 Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference); Amendment thereto dated January
6,
1998 (included as Exhibit 10.7 to the 1998 First Quarter 10-Q, previously
filed with the Commission and incorporated herein by reference);
Second
Amendment thereto dated January 14, 1999 (the form of which is included
as
Exhibit 10.20 to the 1999 10-K, previously filed with the Commission
and
incorporated herein by reference); and Third Amendment thereto dated
January 31, 2003 (included as Exhibit 10.12 to the 2002 10-K previously
filed with the Commission and incorporated herein by
reference).*
|
10.15
|
—
|
Change
in Control Agreement of Daniel T. Hendrix dated April 1, 1997 (included
as
Exhibit 10.8 to the 1997 Second Quarter 10-Q, previously filed with
the
Commission and incorporated herein by reference); Amendment thereto
dated
January 6, 1998 (included as Exhibit 10.8 to the 1998 First Quarter
10-Q,
previously filed with the Commission and incorporated herein by
reference); and Second Amendment thereto dated January 14, 1999 (the
form
of which is included as Exhibit 10.21 to the 1999 10-K, previously
filed
with the Commission and incorporated herein by
reference).*
|
10.16
|
—
|
Employment
Agreement of Raymond S. Willoch dated April 1, 1997 (included as
Exhibit
10.11 to the 1997 Second Quarter 10-Q, previously filed with the
Commission and incorporated herein by reference); Amendment thereto
dated
January 6, 1998 (included as Exhibit 10.11 to the 1998 First Quarter
10-Q,
previously filed with the Commission and incorporated herein by
reference); Second Amendment thereto dated January 14, 1999 (the
form of
which is included as Exhibit 10.20 to the 1999 10-K, previously filed
with
the Commission and incorporated herein by reference); and Third Amendment
thereto dated January 31, 2003 (included as Exhibit 10.14 to the
2002 10-K
previously filed with the Commission and incorporated herein by
reference).*
|
10.17
|
—
|
Change
in Control Agreement of Raymond S. Willoch dated April 1, 1997 (included
as Exhibit 10.12 to the 1997 Second Quarter 10-Q, previously filed
with
the Commission and incorporated herein by reference); Amendment thereto
dated January 6, 1998 (included as Exhibit 10.12 to the 1998 First
Quarter
10-Q, previously filed with the Commission and incorporated herein
by
reference); and Second Amendment thereto dated January 14, 1999 (the
form
of which is included as Exhibit 10.21 to the 1999 10-K, previously
filed
with the Commission and incorporated herein by
reference).*
|
10.18
|
—
|
Employment
Agreement of John R. Wells dated April 1, 1997 (included as Exhibit
10.23
to the 1997 Second Quarter 10-Q, previously filed with the Commission
and
incorporated herein by reference); Amendment thereto dated January
6, 1998
(included as Exhibit 10.23 to the 1998 First Quarter 10-Q, previously
filed with the Commission and incorporated herein by reference);
Second
Amendment thereto dated January 14, 1999 (the form of which is included
as
Exhibit 10.20 to the 1999 10-K, previously filed with the Commission
and
incorporated herein by reference); and Third Amendment thereto dated
January 31, 2003 (included as Exhibit 10.4 to the 2003 Second Quarter
10-Q, previously filed with the Commission and incorporated herein
by
reference).*
|
10.19
|
—
|
Change
in Control Agreement of John R. Wells dated April 1, 1997 (included
as
Exhibit 10.24 to the 1997 Second Quarter 10-Q, previously filed with
the
Commission and incorporated herein by reference); Amendment thereto
dated
January 6, 1998 (included as Exhibit 10.24 to the 1998 First Quarter
10-Q,
previously filed with the Commission and incorporated herein by
reference); and Second Amendment thereto dated January 14, 1999 (the
form
of which is included as Exhibit 10.21 to the 1999 10-K, previously
filed
with the Commission and incorporated herein by
reference).*
|
10.20
|
—
|
Form
of Second Amendment to Employment Agreement, dated January 14, 1999
(amending Exhibits 10.6, 10.8, 10.10, 10.12, 10.16 and 10.18 to the
1999
10-K and included as Exhibit 10.20 to such report, previously filed
with
the Commission and incorporated herein by reference).*
|
10.21
|
—
|
Form
of Second Amendment to Change in Control Agreement, dated January
14, 1999
(amending Exhibits 10.7, 10.9, 10.11, 10.13, 10.17 and 10.19 to the
1999
10-K and included as Exhibit 10.21 to such report, previously filed
with
the Commission and incorporated herein by reference).*
|
10.22
|
—
|
Split
Dollar Agreement, dated September 11, 2006, between the Company,
Ray C.
Anderson and Mary Anne Anderson Lanier, as Trustee of the Ray C.
Anderson
Family Trust (included as Exhibit 99.1 to the Company’s current report on
Form 8-K dated September 11, 2006, previously filed with the Commission
and incorporated herein by reference).*
|
10.23
|
—
|
Split
Dollar Insurance Agreement, dated effective as of 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).*
|
10.24
|
—
|
Employment
Agreement of Christopher J. Richard dated July 30, 2003 (included
as
Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the
quarter ended September 28, 2003, previously filed with the Commission
and
incorporated by reference herein).*
|
10.25
|
—
|
Employment
Agreement of Patrick C. Lynch dated October 6, 2005 (included as
Exhibit
99.1 to the Company’s current report on Form 8-K dated October 6, 2005,
previously filed with the Commission and incorporated herein by
reference).*
|
10.26
|
—
|
Change
in Control Agreement of Patrick C. Lynch dated October 6, 2005 (included
as Exhibit 99.2 to the Company’s current report on Form 8-K dated October
6, 2005, previously filed with the Commission and incorporated herein
by
reference).*
|
10.27
|
—
|
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
dated November 29, 2005, previously filed with the Commission and
incorporated herein by reference).*
|
10.28
|
—
|
Form
of Indemnity Agreement of Officer (as used for certain officers of
the
Company, including Daniel T. Hendrix, John R. Wells, Patrick C. Lynch,
Raymond S. Willoch and Lindsey K. Parnell) (included as Exhibit 99.2
to
the Company’s current report on Form 8-K dated November 29, 2005,
previously filed with the Commission and incorporated herein by
reference).*
|
10.29
|
—
|
Description
of Special Incentive Program for 2007 (included as Exhibit 99.1 to
the
Company’s current report on Form 8-K dated December 14, 2005, previously
filed with the Commission and incorporated herein by
reference).*
|
10.30
|
—
|
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 dated December 14, 2005, previously filed with the
Commission and incorporated herein by reference).*
|
10.31 |
— |
Credit
Agreement, executed on March 9, 2007, among Interfae Europe B.V.
(and
certain of its subsidiaries) and ABN AMRO Bank N.V. (included as
Exhibit
99.1 to the Company's current report on Form 8-K dated March 7, 2007,
previously filed with the Commission and incorporated herein by
reference).
|
21
|
—
|
Subsidiaries
of the Company.
|
23
|
—
|
Consent
of BDO Seidman, LLP.
|
24
|
—
|
Power
of Attorney (see signature page of this Report)
|
31.1
|
—
|
Certification
of Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
31.2
|
—
|
Certification
of Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
32.1
|
—
|
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States
Code
by Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
32.2
|
—
|
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States
Code
by Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31,
2006.
|
__________
*
Management contract or compensatory plan or agreement required to be filed
pursuant to Item 15(b) of this Report.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Interface,
Inc.
Atlanta,
Georgia
The
audits referred to in our report dated March 9, 2007 relating to the
consolidated financial statements of Interface, Inc., which is contained in
Item
8 of this Form 10-K, included the audit of the Financial Statement Schedule
II
(Valuation and Qualifying Accounts and Reserves) set forth in the Form 10-K.
This Financial Statement Schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the Financial
Statement Schedule based upon our audits.
In
our
opinion such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/
BDO
SEIDMAN, LLP
Atlanta,
Georgia
March
9,
2007
INTERFACE,
INC. AND SUBSIDIARIES
SCHEDULE
II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|
|
COLUMN
A
|
|
COLUMN
B
|
|
COLUMN
C
|
|
COLUMN
D
|
|
COLUMN
E
|
|
|
|
BALANCE,
AT BEGINNING OF YEAR
|
|
CHARGED
TO COSTS AND EXPENSES (A)
|
|
CHARGED
TO OTHER ACCOUNTS
|
|
DEDUCTIONS
(DESCRIBE) (B)
|
|
BALANCE,
AT END OF YEAR
|
|
|
|
(in
thousands)
|
|
Allowance
for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
6,192
|
|
$
|
2,694
|
|
$
|
--
|
|
$
|
1,456
|
|
$
|
7,430
|
|
January
1, 2006
|
|
|
6,099
|
|
|
2,009
|
|
|
--
|
|
|
1,916
|
|
|
6,192
|
|
January
2, 2005
|
|
|
4,965
|
|
|
1,421
|
|
|
--
|
|
|
287
|
|
|
6,099
|
|
____________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
Includes changes in foreign currency exchange rates.
(B)
Write
off of bad debt.
|
|
COLUMN
A
|
|
COLUMN
B
|
|
COLUMN
C
|
|
COLUMN
D
|
|
COLUMN
E
|
|
|
|
BALANCE,
AT BEGINNING OF YEAR
|
|
CHARGED
TO COSTS AND EXPENSES (A)
|
|
CHARGED
TO OTHER ACCOUNTS (C)
|
|
DEDUCTIONS
(DESCRIBE) (D)
|
|
BALANCE,
AT END OF YEAR
|
|
|
|
(in
thousands)
|
|
Restructuring
Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
271
|
|
$
|
3,260
|
|
$
|
1,960
|
|
$
|
1,304
|
|
$
|
267
|
|
January
1, 2006
|
|
|
2,863
|
|
|
--
|
|
|
--
|
|
|
2,592
|
|
|
271
|
|
January
2, 2005
|
|
|
4,710
|
|
|
--
|
|
|
--
|
|
|
1,847
|
|
|
2,863
|
|
____________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
Includes changes in foreign currency exchange rates.
(B)
Includes a reallocation of reserves based on changes in the Company’s
estimates.
(C)
Reduction
of asset carrying value.
(D)
Cash
payments.
|
|
COLUMN
A BALANCE,
AT
BEGINNING
OF
YEAR
|
|
COLUMN
B CHARGE TO COSTS AND EXPENSES
(A)
|
|
COLUMN
C
CHARGED
TO OTHER ACCOUNTS
|
|
COLUMN
D
DEDUCTIONS
(DESCRIBE)
(B)
|
|
COLUMN
E
BALANCE
AT
END OF
YEAR
|
|
|
|
(in
thousands)
|
|
Reserves
for Sales Returns and Allowances:
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
2,713
|
|
$
|
1,311
|
|
$
|
--
|
|
$
|
1,815
|
|
$
|
2,209
|
|
January
1, 2006
|
|
|
2,782
|
|
|
3,205
|
|
|
--
|
|
|
3,274
|
|
|
2,713
|
|
January
2, 2005
|
|
|
1,994
|
|
|
3,757
|
|
|
--
|
|
|
2,969
|
|
|
2,782
|
|
(A)
Includes changes in foreign currency exchange rates.
(B)
Represents credits issued and adjustments to reflect actual
exposure.
|
|
COLUMN
A BALANCE, AT BEGINNING OF YEAR
|
|
COLUMN
B CHARGE TO COSTS AND EXPENSES (A)
|
|
COLUMN
C
CHARGED
TO OTHER ACCOUNTS
|
|
COLUMN
D
DEDUCTIONS
(DESCRIBE) (B)
|
|
COLUMN
E
BALANCE
AT END OF YEAR
|
|
|
|
(in
thousands)
|
|
Warranty
Reserves :
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
2,564
|
|
$
|
428
|
|
$
|
--
|
|
$
|
833
|
|
$
|
2,159
|
|
January
1, 2006
|
|
|
2,409
|
|
|
1,445
|
|
|
--
|
|
|
1,290
|
|
|
2,564
|
|
January
2, 2005
|
|
|
2,885
|
|
|
1,357
|
|
|
--
|
|
|
1,833
|
|
|
2,409
|
|
(A)
Includes changes in foreign currency exchange rates.
(B)
Represents costs applied against reserve and adjustments to reflect actual
exposure.
|
|
COLUMN
A BALANCE, AT BEGINNING OF YEAR
|
|
COLUMN
B CHARGE TO COSTS AND EXPENSES (A)
|
|
COLUMN
C
CHARGED
TO OTHER ACCOUNTS
|
|
COLUMN
D
DEDUCTIONS
(DESCRIBE) (B)
|
|
COLUMN
E
BALANCE
AT END OF YEAR
|
|
|
|
(in
thousands)
|
|
Inventory
Reserves :
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
12,011
|
|
$
|
1,622
|
|
$
|
--
|
|
$
|
1,687
|
|
$
|
11,946
|
|
January
1, 2006
|
|
|
10,514
|
|
|
4,193
|
|
|
--
|
|
|
2,696
|
|
|
12,011
|
|
January
2, 2005
|
|
|
6,573
|
|
|
6,087
|
|
|
(743
|
)
|
|
2,889
|
|
|
10,514
|
|
(A)
Includes changes in foreign currency exchange rates.
(B)
Represents 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.)
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:
March 13, 2007
|
|
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.
|
Signature
|
Capacity
|
Date
|
|
|
|
|
|
/s/
RAY C. ANDERSON
|
Chairman
of the Board
|
March
13, 2007
|
|
Ray
C. Anderson
|
|
|
|
|
|
|
|
/s/
DANIEL T. HENDRIX
|
President,
Chief Executive Officer and
|
March
13, 2007
|
|
Daniel
T. Hendrix
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
|
/s/
PATRICK C. LYNCH
|
Vice
President and Chief Financial Officer
|
March
13, 2007
|
|
Patrick
C. Lynch
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
/s/
EDWARD C. CALLAWAY
|
Director
|
March
13, 2007
|
|
Edward
C. Callaway
|
|
|
|
|
|
|
|
/s/
DIANNE DILLON-RIDGLEY
|
Director
|
March
13, 2007
|
|
Dianne
Dillon-Ridgley
|
|
|
|
|
|
|
|
/s/
CARL I. GABLE
|
Director
|
March
13, 2007
|
|
Carl
I. Gable
|
|
|
|
|
|
|
|
/s/
JUNE M. HENTON
|
Director
|
March
13, 2007
|
|
June
M. Henton
|
|
|
|
|
|
|
|
/s/
CHRISTOPHER G. KENNEDY
|
Director
|
March
13, 2007
|
|
Christopher
G. Kennedy
|
|
|
|
|
|
|
|
/s/
K. DAVID KOHLER
|
Director
|
March
13, 2007
|
|
K.
David Kohler
|
|
|
|
|
|
|
|
/s/
JAMES B. MILLER, JR.
|
Director
|
March
13, 2007
|
|
James
B. Miller, Jr.
|
|
|
|
|
|
|
|
/s/
THOMAS R. OLIVER
|
Director
|
March
13, 2007
|
|
Thomas
R. Oliver
|
|
|
|
|
|
|
|
/s/
HAROLD M. PAISNER
|
Director
|
March
13, 2007
|
|
Harold
M. Paisner
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
|
|
|
21
|
Subsidiaries
of the Company.
|
23
|
Consent
of BDO Seidman, LLP.
|
24
|
Power
of Attorney
|
31.1
|
Certification
of Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
31.2
|
Certification
of Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
32.1
|
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States
Code
by Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
|
32.2
|
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States
Code
by Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31,
2006.
|