form10-q.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
þ
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
Quarterly Period Ended September 28, 2008
Commission File Number
0-12016
INTERFACE,
INC.
(Exact
name of registrant as specified in its charter)
GEORGIA
|
|
58-1451243
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
2859 PACES FERRY ROAD, SUITE
2000, ATLANTA, GEORGIA 30339
(Address
of principal executive offices and zip code)
(770)
437-6800
(Registrant’s
telephone number, including area code)
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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company 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
Shares
outstanding of each of the registrant’s classes of common stock at October 31,
2008:
Class
|
|
Number of Shares
|
|
Class
A Common Stock, $.10 par value per share
|
|
|
56,374,393 |
|
Class
B Common Stock, $.10 par value per share
|
|
|
6,720,051 |
|
INTERFACE,
INC.
INDEX
|
|
PAGE
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Financial
Statements
|
3
|
|
|
Consolidated
Condensed Balance Sheets – September 28, 2008 and
December
30, 2007
|
3
|
|
|
Consolidated
Condensed Statements of Operations – Three Months and Nine Months
Ended
September 28, 2008 and September 30, 2007
|
4
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) – Three Months and Nine Months
Ended
September 28, 2008 and September 30, 2007
|
5
|
|
|
Consolidated
Condensed Statements of Cash Flows – Nine Months Ended September 28, 2008
and
September 30, 2007
|
6
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
|
20
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
25
|
|
Item
4.
|
Controls
and Procedures
|
25
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
26
|
|
Item
1A.
|
Risk
Factors
|
26
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
26
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
26
|
|
Item
5.
|
Other
Information
|
26
|
|
Item
6.
|
Exhibits
|
26
|
PART I -
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(IN
THOUSANDS)
|
|
SEPTEMBER 28, 2008
|
|
|
DECEMBER 30, 2007
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
85,521 |
|
|
$ |
82,375 |
|
Accounts
Receivable, net
|
|
|
165,350 |
|
|
|
178,625 |
|
Inventories
|
|
|
145,494 |
|
|
|
125,789 |
|
Prepaid
and Other Expenses
|
|
|
20,462 |
|
|
|
18,985 |
|
Deferred
Income Taxes
|
|
|
5,304 |
|
|
|
5,863 |
|
Assets
of Business Held for Sale
|
|
|
3,180 |
|
|
|
4,792 |
|
TOTAL
CURRENT ASSETS
|
|
|
425,311 |
|
|
|
416,429 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, less
accumulated depreciation
|
|
|
166,891 |
|
|
|
161,874 |
|
DEFERRED
TAX ASSET
|
|
|
57,928 |
|
|
|
60,942 |
|
GOODWILL
|
|
|
143,153 |
|
|
|
142,471 |
|
OTHER
ASSETS
|
|
|
50,662 |
|
|
|
53,516 |
|
TOTAL
ASSETS
|
|
$ |
843,945 |
|
|
$ |
835,232 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
60,501 |
|
|
$ |
57,243 |
|
Accrued
Expenses
|
|
|
97,366 |
|
|
|
120,388 |
|
Current
Portion of Long-Term Debt
|
|
|
-- |
|
|
|
-- |
|
Liabilities
of Business Held for Sale
|
|
|
27 |
|
|
|
220 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
157,894 |
|
|
|
177,851 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
-- |
|
|
|
-- |
|
SENIOR
NOTES
|
|
|
175,000 |
|
|
|
175,000 |
|
SENIOR
SUBORDINATED NOTES
|
|
|
135,000 |
|
|
|
135,000 |
|
DEFERRED
INCOME TAXES
|
|
|
7,389 |
|
|
|
7,413 |
|
OTHER
|
|
|
37,791 |
|
|
|
38,852 |
|
TOTAL
LIABILITIES
|
|
|
513,074 |
|
|
|
534,116 |
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
7,732 |
|
|
|
6,974 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
-- |
|
|
|
-- |
|
Common
Stock
|
|
|
6,306 |
|
|
|
6,184 |
|
Additional
Paid-In Capital
|
|
|
338,960 |
|
|
|
332,650 |
|
Retained
Earnings (Deficit)
|
|
|
15,579 |
|
|
|
(15,159 |
) |
Accumulated
Other Comprehensive Income – Foreign Currency Translation
Adjustment
|
|
|
(7,338 |
) |
|
|
1,270 |
|
Accumulated
Other Comprehensive Income – Pension Liability
|
|
|
(30,368 |
) |
|
|
(30,803 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
323,139 |
|
|
|
294,142 |
|
|
|
$ |
843,945 |
|
|
$ |
835,232 |
|
See
accompanying notes to consolidated condensed financial
statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN
THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
|
THREE MONTHS ENDED
|
|
|
NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPT. 28, 2008
|
|
|
SEPT. 30, 2007
|
|
|
SEPT. 28, 2008
|
|
|
SEPT. 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$ |
278,423 |
|
|
$ |
279,471 |
|
|
$ |
835,164 |
|
|
$ |
787,925 |
|
Cost
of Sales
|
|
|
183,506 |
|
|
|
181,542 |
|
|
|
540,688 |
|
|
|
514,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT ON SALES
|
|
|
94,917 |
|
|
|
97,929 |
|
|
|
294,476 |
|
|
|
273,382 |
|
Selling,
General and Administrative Expenses
|
|
|
63,895 |
|
|
|
63,179 |
|
|
|
199,047 |
|
|
|
181,558 |
|
Loss
on Disposition – Specialty Products
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,873 |
|
OPERATING
INCOME
|
|
|
31,022 |
|
|
|
34,750 |
|
|
|
95,429 |
|
|
|
89,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
8,173 |
|
|
|
8,643 |
|
|
|
24,109 |
|
|
|
26,924 |
|
Other
Expense
|
|
|
804 |
|
|
|
1,281 |
|
|
|
1,415 |
|
|
|
2,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE
|
|
|
22,045 |
|
|
|
24,826 |
|
|
|
69,905 |
|
|
|
60,711 |
|
Income
Tax Expense
|
|
|
8,461 |
|
|
|
9,620 |
|
|
|
26,323 |
|
|
|
23,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
13,584 |
|
|
|
15,206 |
|
|
|
43,582 |
|
|
|
37,598 |
|
Loss
from Discontinued Operations, Net of Tax
|
|
|
(5,154 |
) |
|
|
(6,650 |
) |
|
|
(5,154 |
) |
|
|
(68,660 |
) |
Loss
on Disposal of Discontinued Operations, Net of Tax
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
NET
INCOME (LOSS)
|
|
$ |
8,430 |
|
|
$ |
8,556 |
|
|
$ |
38,428 |
|
|
$ |
(31,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.71 |
|
|
$ |
0.62 |
|
Discontinued
Operations
|
|
|
(0.08 |
) |
|
|
(0.11 |
) |
|
|
(0.08 |
) |
|
|
(1.13 |
) |
Loss
on Disposal of Discontinued Operations
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Earnings
(Loss) Per Share – Basic
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.63 |
|
|
$ |
(0.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.70 |
|
|
$ |
0.61 |
|
Discontinued
Operations
|
|
|
(0.08 |
) |
|
|
(0.11 |
) |
|
|
(0.08 |
) |
|
|
(1.11 |
) |
Loss
on Disposal of Discontinued Operations
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Earnings
(Loss) Per Share – Diluted
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.62 |
|
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares Outstanding – Basic
|
|
|
61,576 |
|
|
|
60,711 |
|
|
|
61,475 |
|
|
|
60,448 |
|
Common
Shares Outstanding – Diluted
|
|
|
62,070 |
|
|
|
61,860 |
|
|
|
61,988 |
|
|
|
61,590 |
|
See
accompanying notes to consolidated condensed financial
statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN
THOUSANDS)
|
|
THREE MONTHS ENDED
|
|
|
NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
|
SEPT. 28, 2008
|
|
|
SEPT. 30, 2007
|
|
|
SEPT. 28, 2008
|
|
|
SEPT. 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
8,430 |
|
|
$ |
8,556 |
|
|
$ |
38,428 |
|
|
$ |
(31,062 |
) |
Other
Comprehensive Income (Loss), Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation Adjustment and Pension Liability Adjustment
|
|
|
(19,024 |
) |
|
|
5,817 |
|
|
|
(8,173 |
) |
|
|
12,285 |
|
Comprehensive
Income (Loss)
|
|
$ |
(10,594 |
) |
|
$ |
14,373 |
|
|
$ |
30,255 |
|
|
$ |
(18,777 |
) |
See
accompanying notes to consolidated condensed financial
statements.
INTERFACE,
INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN
THOUSANDS)
|
|
NINE MONTHS ENDED
|
|
|
|
SEPT. 28, 2008
|
|
|
SEPT. 30, 2007
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
38,428 |
|
|
$ |
(31,062 |
) |
Loss
from Discontinued Operations
|
|
|
5,154 |
|
|
|
68,660 |
|
Income
from Continuing Operations
|
|
|
43,582 |
|
|
|
37,598 |
|
Adjustments
to Reconcile Income to Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
Loss
on Disposition of Assets – Specialty Products
|
|
|
-- |
|
|
|
1,873 |
|
Depreciation
and Amortization
|
|
|
17,656 |
|
|
|
17,089 |
|
Deferred
Income Taxes and Other
|
|
|
4,161 |
|
|
|
-- |
|
Working
Capital Changes:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
10,286 |
|
|
|
(19,943 |
) |
Inventories
|
|
|
(21,781 |
) |
|
|
(10,821 |
) |
Prepaid
Expenses
|
|
|
(549 |
) |
|
|
5,217 |
|
Accounts
Payable and Accrued Expenses
|
|
|
(17,761 |
) |
|
|
12,479 |
|
|
|
|
|
|
|
|
|
|
Cash
Provided by Continuing Operations
|
|
|
35,594 |
|
|
|
43,942 |
|
Cash
Used in Discontinued Operations
|
|
|
-- |
|
|
|
(1,884 |
) |
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY OPERATING ACTIVITIES:
|
|
|
35,594 |
|
|
|
42,058 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(20,741 |
) |
|
|
(27,523 |
) |
Other
|
|
|
(5,636 |
) |
|
|
(8,404 |
) |
Proceeds
from Sale of Fabrics Business
|
|
|
-- |
|
|
|
60,732 |
|
Cash
Provided by (Used in) Investing Activities of Continuing
Operations
|
|
|
(26,377 |
) |
|
|
24,805 |
|
Cash
Used in Discontinued Operations
|
|
|
-- |
|
|
|
(6,950 |
) |
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
|
|
(26,377 |
) |
|
|
17,855 |
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
Borrowing of Long-Term Debt
|
|
|
-- |
|
|
|
7,169 |
|
Repurchase
of Senior Notes
|
|
|
-- |
|
|
|
(101,365 |
) |
Proceeds
from Issuance of Common Stock
|
|
|
1,393 |
|
|
|
3,621 |
|
Dividends
Paid
|
|
|
(5,669 |
) |
|
|
(3,683 |
) |
|
|
|
|
|
|
|
|
|
CASH
USED IN FINANCING ACTIVITIES:
|
|
|
(4,276 |
) |
|
|
(94,258 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating, Investing and
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
4,941 |
|
|
|
(34,345 |
) |
Effect
of Exchange Rate Changes on Cash
|
|
|
(1,795 |
) |
|
|
2,718 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
Net
Change During the Period
|
|
|
3,146 |
|
|
|
(31,627 |
) |
Balance
at Beginning of Period
|
|
|
82,375 |
|
|
|
109,157 |
|
|
|
|
|
|
|
|
|
|
Balance
at End of Period
|
|
$ |
85,521 |
|
|
$ |
77,530 |
|
See
accompanying notes to consolidated condensed financial statements.
INTERFACE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 –
CONDENSED FOOTNOTES
As
contemplated by the Securities and Exchange Commission (the "Commission")
instructions to Form 10-Q, the following footnotes have been condensed and,
therefore, do not contain all disclosures required in connection with annual
financial statements. Reference should be made to the Company’s year-end
financial statements and notes thereto contained in its Annual Report on Form
10-K for the fiscal year ended December 30, 2007, as filed with the
Commission.
The
financial information included in this report has been prepared by the Company,
without audit. In the opinion of management, the financial information included
in this report contains all adjustments (all of which are normal and recurring)
necessary for a fair presentation of the results for the interim periods.
Nevertheless, the results shown for interim periods are not necessarily
indicative of results to be expected for the full year. The December
30, 2007, consolidated condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States.
In 2004,
the Company committed to a plan to exit its owned Re:Source dealer businesses
(as well as a small Australian dealer business and a small residential fabrics
business) and began to dispose of several of the dealer subsidiaries. In
addition, as described below in Note 2, the Company has sold its Fabrics Group
business segment. The results of operations and related disposal
costs, gains and losses for these businesses are classified as discontinued
operations for all periods presented.
Additionally,
certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 2 –
SALE OF FABRICS GROUP BUSINESS SEGMENT
In the
second quarter of 2007, the Company entered into an agreement to sell its
Fabrics Group business segment to a third party. The sale was completed in the
third quarter of 2007. The purchase price for the business segment
was $67.2 million, after working capital and certain other adjustments. Of this
$67.2 million, $6.5 million represents deferred compensation which would be
remitted to the Company upon the achievement of certain performance criteria by
the disposed segment over the 18 months following the sale. During
the third quarter of 2008, the Company determined that the receipt of this
deferred amount is less than probable and therefore incurred an after-tax charge
of $4.2 million related to a full reserve against the deferred
amount. As described below in Notes 9 and 10, the Company incurred
impairment charges of approximately $61.9 million during the first nine months
of 2007 (none of which was incurred in the third quarter of 2007) to reduce the
carrying value of the business segment to fair value as represented by the
purchase price. In the second and third quarters of 2007, the Company
incurred approximately $12.4 million of direct costs to sell the business
segment ($8.8 million of which was incurred in the third quarter of
2007). The major classes of assets and liabilities related to the
business segment at disposition were accounts receivable of $15.2 million,
inventory of $32.7 million, property, plant and equipment of $36.5 million, and
accounts payable and accruals of $11.4 million. In the third quarter
of 2008, the Company recorded a charge of $0.9 million, after tax, to reduce the
carrying value of certain assets remaining from the segment that are held for
sale to their realizable values.
Prior
periods have been restated to include the results of operations and related
disposal costs, gains and losses for this business segment as discontinued
operations. In addition, assets and liabilities of this business
segment have been reported in assets and liabilities held for sale for all
reported periods.
NOTE 3 –
INVENTORIES
Inventories
are summarized as follows:
|
|
September 28, 2008
|
|
|
December 30, 2007
|
|
|
|
(In
thousands)
|
|
Finished
Goods
|
|
$ |
87,100 |
|
|
$ |
77,036 |
|
Work
in Process
|
|
|
22,820 |
|
|
|
17,347 |
|
Raw
Materials
|
|
|
35,574 |
|
|
|
31,406 |
|
|
|
$ |
145,494 |
|
|
$ |
125,789 |
|
NOTE 4 –
EARNINGS (LOSS) PER SHARE
Basic
earnings (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 the period. Shares issued or reacquired during
the period have been weighted for the portion of the period that they were
outstanding. Diluted earnings (loss) per share is calculated in a
manner consistent with that of basic earnings (loss) per share while giving
effect to all potentially dilutive common shares that were outstanding during
the period. The computation of diluted earnings (loss) per share does not assume
conversion or exercise of securities that would have an anti-dilutive effect on
earnings (loss) per share. For the quarters ended September 28, 2008,
and September 30, 2007, outstanding options to purchase 220,000 and 30,000
shares of common stock, respectively, were not included in the computation of
diluted earnings per share as their impact would be
anti-dilutive. For the nine months ended September 28, 2008 and
September 30, 2007, outstanding options to purchase 195,000 and 50,000 shares of
common stock, respectively, were not included in the computation of diluted
earnings per share as their impact would be anti-dilutive.
For
the Three-Month
Period
Ended
|
|
Net
Income
|
|
|
Average
Shares
Outstanding
|
|
|
Earnings
Per
Share
|
|
|
|
(In
Thousands Except Per Share Amounts)
|
|
September
28, 2008
|
|
$ |
8,430 |
|
|
|
61,576 |
|
|
$ |
0.14 |
|
Effect
of Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Restricted Stock
|
|
|
-- |
|
|
|
494 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
8,430 |
|
|
|
62,070 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
8,556 |
|
|
|
60,711 |
|
|
$ |
0.14 |
|
Effect
of Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Restricted Stock
|
|
|
-- |
|
|
|
1,149 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
8,556 |
|
|
|
61,860 |
|
|
$ |
0.14 |
|
|
|
|
|
For
the Nine-Month
Period
Ended
|
|
Net
Income (Loss)
|
|
|
Average
Shares
Outstanding
|
|
|
Earnings
(Loss)
Per
Share
|
|
|
|
(In
Thousands Except Per Share Amounts)
|
|
September
28, 2008
|
|
$ |
38,428 |
|
|
|
61,475 |
|
|
$ |
0.63 |
|
Effect
of Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Restricted Stock
|
|
|
-- |
|
|
|
513 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
38,428 |
|
|
|
61,988 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
(31,062 |
) |
|
|
60,448 |
|
|
$ |
(0.51 |
) |
Effect
of Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Restricted Stock
|
|
|
-- |
|
|
|
1,142 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(31,062 |
) |
|
|
61,590 |
|
|
$ |
(0.50 |
) |
NOTE 5 –
SEGMENT INFORMATION
Based on
the quantitative thresholds specified in Statement of Financial Accounting
Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” the Company has determined that it has three 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, and (3) the Specialty Products segment, which includes Pandel, Inc.,
a producer of vinyl carpet tile backing and specialty mat and foam
products. The majority of the operations of the Specialty Products
segment were sold on March 7, 2007 (see Note 11 for further
information). In June of 2007, the Company entered into an agreement
to sell its former Fabrics Group business segment, and the sale was completed in
the third quarter of 2007 (see Note 2 for further
information). Accordingly, the Company has included the operations of
the former Fabrics Group business segment in discontinued operations. 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 also reported as discontinued
operations in the accompanying consolidated condensed statements of
operations.
The
accounting policies of the operating segments are the same as those described in
the Summary of Significant Accounting Policies contained in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 30, 2007, as filed with
the Commission. 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. 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 any 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.
Segment
Disclosures
Summary
information by segment follows:
|
|
Modular
Carpet
|
|
|
Bentley
Prince Street
|
|
|
Specialty
Products
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Three
Months Ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
242,986 |
|
|
$ |
35,437 |
|
|
|
-- |
|
|
$ |
278,423 |
|
Depreciation
and Amortization
|
|
|
3,917 |
|
|
|
622 |
|
|
|
-- |
|
|
|
4,539 |
|
Operating
Income
|
|
|
30,297 |
|
|
|
725 |
|
|
|
-- |
|
|
|
31,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
242,889 |
|
|
$ |
36,582 |
|
|
|
-- |
|
|
$ |
279,471 |
|
Depreciation
and Amortization
|
|
|
3,546 |
|
|
|
473 |
|
|
|
-- |
|
|
|
4,019 |
|
Operating
Income
|
|
|
35,187 |
|
|
|
1,259 |
|
|
|
-- |
|
|
|
36,446 |
|
|
|
Modular
Carpet
|
|
|
Bentley
Prince
Street
|
|
|
Specialty
Products
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Nine
Months Ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
728,372 |
|
|
$ |
106,792 |
|
|
|
-- |
|
|
$ |
835,164 |
|
Depreciation
and Amortization
|
|
|
11,277 |
|
|
|
1,762 |
|
|
|
-- |
|
|
|
13,039 |
|
Operating
Income
|
|
|
96,530 |
|
|
|
2,514 |
|
|
|
-- |
|
|
|
99,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
673,666 |
|
|
$ |
112,067 |
|
|
$ |
2,192 |
|
|
$ |
787,925 |
|
Depreciation
and Amortization
|
|
|
10,725 |
|
|
|
1,406 |
|
|
|
12 |
|
|
|
12,143 |
|
Operating
Income (Loss)
|
|
|
93,568 |
|
|
|
4,226 |
|
|
|
(1,733 |
) |
|
|
96,061 |
|
A
reconciliation of the Company’s total segment operating income, depreciation and
amortization, and assets to the corresponding consolidated amounts
follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment depreciation and amortization
|
|
$ |
4,539 |
|
|
$ |
4,019 |
|
|
$ |
13,039 |
|
|
$ |
12,143 |
|
Corporate
depreciation and amortization
|
|
|
1,134 |
|
|
|
1,110 |
|
|
|
4,617 |
|
|
|
4,946 |
|
Reported
depreciation and amortization
|
|
$ |
5,673 |
|
|
$ |
5,129 |
|
|
$ |
17,656 |
|
|
$ |
17,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income
|
|
$ |
31,022 |
|
|
$ |
36,446 |
|
|
$ |
99,044 |
|
|
$ |
96,061 |
|
Corporate
expenses and other reconciling amounts
|
|
|
-- |
|
|
|
(1,696 |
) |
|
|
(3,615 |
) |
|
|
(6,110 |
) |
Reported
operating income
|
|
$ |
31,022 |
|
|
$ |
34,750 |
|
|
$ |
95,429 |
|
|
$ |
89,951 |
|
|
|
September 28, 2008
|
|
|
December 30, 2007
|
|
ASSETS
|
|
(In
thousands)
|
|
Total
segment assets
|
|
$ |
705,906 |
|
|
$ |
670,515 |
|
Discontinued
operations
|
|
|
3,180 |
|
|
|
4,792 |
|
Corporate
assets and eliminations
|
|
|
134,859 |
|
|
|
159,925 |
|
Reported
total assets
|
|
$ |
843,945 |
|
|
$ |
835,232 |
|
NOTE 6 –
LONG-TERM DEBT
On January 1, 2008, the Company amended its domestic revolving
credit agreement (the “Facility”). The amendment (the “First
Amendment”) extended the stated maturity date of the Facility to December 31,
2012. In addition, the applicable interest rates for LIBOR-based loans
were reduced. Interest on those loans is now charged at varying rates
computed by applying a margin ranging from 1.00% to 2.00% (reduced from the
range of 1.25% to 2.25%) over the applicable LIBOR rate, depending on the
Company’s average excess borrowing availability during the most recently
completed fiscal quarter. The Company also is no longer required to
deliver monthly financial statements to the lenders. In light of our
recent borrowing levels and in an effort to reduce unused line fees, the Company
reduced the maximum aggregate amount of loans and letters of credit available to
the Company at any one time from $125 million to $100 million (subject to a
borrowing base, as existed prior to the First Amendment), with an option to
increase that maximum aggregate amount to $150 million (the same option level
that existed prior to the First Amendment) upon the satisfaction of certain
conditions. The lender group was reduced from 5 lenders to
4 lenders, and the lending commitments were reallocated among the remaining
lenders. In connection with the reduction in the number of lenders and the
reallocation of lending commitments, the threshold of “Required Lenders” for
purposes of certain amendments and consents under the Facility was increased
from more than 50% of the aggregate amount of the lending commitments to more
than 66⅔% of the aggregate amount of the lending commitments.
The
Company is presently in compliance with all covenants under the Facility and
anticipates that it will remain in compliance with the covenants for the
foreseeable future.
As of
September 28, 2008, there were zero borrowings and $9.9 million in letters of
credit outstanding under the Facility. As of September 28, 2008, the
Company could have incurred $65.6 million of additional borrowings under the
Facility.
Interface
Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands)
and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank
N.V. Under this Credit Agreement, ABN AMRO provides a credit facility for
borrowings and bank guarantees in varying aggregate amounts over
time. As of September 28, 2008, there were no borrowings outstanding
under this facility, and the Company could have incurred €21.0 million
(approximately $30.7 million) of additional borrowings under the
facility.
Other
non-U.S. subsidiaries of the Company have an aggregate of the equivalent of
$16.1 million of lines of credit available. No amounts were
outstanding under these lines of credit as of September 28, 2008.
As of
September 28, 2008, the estimated fair values (based on then-current market
prices) of the 9.5% Senior Subordinated Notes due 2014 and the 10.375% Senior
Notes due 2010 were $136.4 million and $178.3 million,
respectively.
Subsequent
to the end of the third quarter of 2008, the Company has repurchased
approximately $19.4 million of its 10.375% Senior Notes due 2010.
NOTE 7 –
STOCK-BASED COMPENSATION
Stock Option
Awards
In the
first quarter of fiscal 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 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 has elected to use the Black-Scholes model. The adoption of SFAS No.
123R, applying the “modified prospective method,” as elected by the Company,
requires the Company to value stock options prior to its adoption of SFAS No.
123R under the fair value method and expense these amounts over the remaining
vesting period of the stock options. SFAS No. 123R requires that the Company
estimate forfeitures for stock options and reduce compensation expense
accordingly. The Company has reduced its stock compensation expense by the
assumed forfeiture rate and will evaluate experience against this forfeiture
rate going forward.
During
the first nine months of 2008 and 2007, the Company recognized stock option
compensation costs of $0.5 million and $0.3 million, respectively. In
the third quarters of fiscal years 2008 and 2007, the Company recognized stock
option compensation costs of $0.2 million and $0.1 million, respectively.
The remaining unrecognized stock option compensation cost related to unvested
awards at September 28, 2008, approximated $0.7 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 the first nine months of fiscal years 2008
and 2007:
|
Nine
Months Ended
September 28,
2008
|
Nine
Months Ended
September 30,
2007
|
Risk
free interest rate
|
3.9%
|
4.73%
|
Expected
life
|
3.25
years
|
3.25 years
|
Expected
volatility
|
61%
|
60%
|
Expected
dividend yield
|
0.57%
|
0.51%
|
The
weighted average grant date fair value of stock options granted during the first
nine months of fiscal year 2008 was $6.21 per share.
The
following table summarizes stock options outstanding as of September 28, 2008,
as well as activity during the nine months then ended:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 30, 2007
|
|
|
805,000 |
|
|
$ |
6.22 |
|
Granted
|
|
|
145,000 |
|
|
|
14.18 |
|
Exercised
|
|
|
191,500 |
|
|
|
6.32 |
|
Forfeited
or canceled
|
|
|
54,500 |
|
|
|
6.03 |
|
Outstanding
at September 28, 2008 (a)
|
|
|
704,000 |
|
|
$ |
7.86 |
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 28, 2008 (b)
|
|
|
529,000 |
|
|
$ |
5.80 |
|
(a) At
September 28, 2008, the weighted average remaining contractual life of options
outstanding was 3.0 years.
(b) At
September 28, 2008, the weighted average remaining contractual life of options
exercisable was 2.6 years.
At
September 28, 2008, the aggregate intrinsic value of options outstanding and
options exercisable was $2.3 million and $2.8 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).
Cash
proceeds and intrinsic value related to total stock options exercised during the
first nine months of fiscal years 2008 and 2007 are provided in the following
table:
|
|
Nine Months Ended
|
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
(In
thousands)
|
|
Proceeds
from stock options exercised
|
|
$ |
1,393 |
|
|
$ |
3,621 |
|
Intrinsic
value of stock options exercised
|
|
$ |
1,734 |
|
|
$ |
7,038 |
|
Restricted
Stock Awards
During
the nine months ended September 28, 2008, and September 30, 2007, the Company
granted restricted stock awards for 1,012,000 and 327,000 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 restricted stock grants was $4.6 million and $5.1 million for
the nine months ended September 28, 2008, and September 30, 2007,
respectively. SFAS No. 123R requires that the Company estimate
forfeitures for restricted stock and reduce compensation expense
accordingly. The Company has reduced its expense by the assumed
forfeiture rate and will evaluate experience against this forfeiture rate going
forward.
The
following table summarizes restricted stock awards outstanding as of September
28, 2008, and activity during the nine months then ended:
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Outstanding
at December 30, 2007
|
|
|
852,000 |
|
|
$ |
9.90 |
|
Granted
|
|
|
1,012,000 |
|
|
$ |
14.13 |
|
Vested
|
|
|
389,000 |
|
|
$ |
10.16 |
|
Forfeited
or canceled
|
|
|
-- |
|
|
|
-- |
|
Outstanding
at September 28, 2008
|
|
|
1,475,000 |
|
|
$ |
11.87 |
|
As of
September 28, 2008, the unrecognized total compensation cost related to unvested
restricted stock was $12.5 million. That cost is expected to be
recognized by the end of 2012.
NOTE 8 –
EMPLOYEE BENEFIT PLANS
The
following tables provide the components of net periodic benefit cost for the
three-month and nine-month periods ended September 28, 2008, and September 30,
2007, respectively:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Defined Benefit Retirement Plan
(Europe)
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$ |
687 |
|
|
$ |
724 |
|
|
$ |
2,080 |
|
|
$ |
2,154 |
|
Interest
cost
|
|
|
3,287 |
|
|
|
3,102 |
|
|
|
9,925 |
|
|
|
9,220 |
|
Expected
return on assets
|
|
|
(3,830 |
) |
|
|
(3,290 |
) |
|
|
(11,569 |
) |
|
|
(9,779 |
) |
Amortization
of prior service costs
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Recognized
net actuarial (gains)/losses
|
|
|
359 |
|
|
|
702 |
|
|
|
1,087 |
|
|
|
2,087 |
|
Amortization
of transition obligation
|
|
|
-- |
|
|
|
29 |
|
|
|
-- |
|
|
|
86 |
|
Net
periodic benefit cost
|
|
$ |
503 |
|
|
$ |
1,267 |
|
|
$ |
1,523 |
|
|
$ |
3,768 |
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Salary Continuation Plan
(SCP)
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$ |
67 |
|
|
$ |
66 |
|
|
$ |
201 |
|
|
$ |
197 |
|
Interest
cost
|
|
|
237 |
|
|
|
224 |
|
|
|
712 |
|
|
|
672 |
|
Amortization
of transition obligation
|
|
|
55 |
|
|
|
55 |
|
|
|
164 |
|
|
|
164 |
|
Amortization
of prior service cost
|
|
|
12 |
|
|
|
12 |
|
|
|
36 |
|
|
|
36 |
|
Amortization
of loss
|
|
|
74 |
|
|
|
72 |
|
|
|
221 |
|
|
|
215 |
|
Net
periodic benefit cost
|
|
$ |
445 |
|
|
$ |
429 |
|
|
$ |
1,334 |
|
|
$ |
1,284 |
|
NOTE 9 –
DISCONTINUED OPERATIONS
As
discussed above in Note 2, in the second quarter of 2007, the Company committed
to a plan to exit its Fabrics Group business segment, and in the third quarter
of 2007, the Company completed the sale. Therefore, the results for the Fabrics
Group business segment have been reported as discontinued
operations. In connection with this action, the Company also recorded
write-downs for the impairment of assets and goodwill of $17.4 million and $44.5
million, respectively, in the first nine months of 2007. In
connection with the sale, the Company recorded the aforementioned impairments to
reduce the carrying value of the business segment to its fair
value. As discussed in Note 2, in the third quarter of 2008, the
Company incurred an after-tax charge of $4.2 million related to a reserve placed
on the receipt of the contingent additional purchase price from the sale of its
Fabrics Group business segment. Also in the third quarter of 2008,
the Company recorded a charge of $0.9 million, after tax, to reduce the carrying
value of certain assets remaining from the segment that are held for sale to
their realizable values.
In 2004,
the Company committed to a plan to exit its owned Re:Source dealer businesses
and 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 at that
time, are reported as discontinued operations.
Summary
operating results for the above-described discontinued operations are as
follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
Net
sales
|
|
|
-- |
|
|
$ |
10,271 |
|
|
|
-- |
|
|
$ |
82,003 |
|
Loss
on operations before taxes on income
|
|
|
(7,856 |
) |
|
|
(10,230 |
) |
|
|
(7,856 |
) |
|
|
(79,610 |
) |
Tax
benefit
|
|
|
2,702 |
|
|
|
3,580 |
|
|
|
2,702 |
|
|
|
10,950 |
|
Loss
on operations, net of tax
|
|
|
(5,154 |
) |
|
|
(6,650 |
) |
|
|
(5,154 |
) |
|
|
(68,660 |
) |
Assets
and liabilities, including reserves, related to the above-described discontinued
operations that were held for sale consist of the following:
|
September 28, 2008
|
|
|
December 30, 2007
|
|
|
|
(In
thousands)
|
|
Current
assets
|
|
$ |
24 |
|
|
$ |
79 |
|
Property
and equipment
|
|
|
3,156 |
|
|
|
4,706 |
|
Other
assets
|
|
|
-- |
|
|
|
7 |
|
Current
liabilities
|
|
|
27 |
|
|
|
220 |
|
Other
liabilities
|
|
|
-- |
|
|
|
-- |
|
NOTE 10 –
IMPAIRMENT OF GOODWILL AND OTHER ASSETS
In the
first quarter of 2007, the Company recorded charges for impairment of goodwill
of $44.5 million and impairment of other intangible assets of $3.8 million
related to its Fabrics Group business segment. The Company was
exploring possible strategic options with respect to its fabrics business, and
its analyses indicated that the carrying value of the assets of the fabrics
business exceeded their fair value. When such an indication is
present, the Company measures potential goodwill and other asset impairments
based on an allocation of the estimated fair value of the reporting unit to its
underlying assets and liabilities. An impairment loss is recognized
to the extent that the reporting unit’s recorded goodwill exceeds the implied
fair value of goodwill. In addition to the impairment of goodwill,
the Company determined that the other intangible assets of the business unit
were impaired as well. As discussed above in Note 2, in the second
quarter of 2007, the Company entered into an agreement to sell its fabrics
business unit for approximately $67.2 million (after working capital and certain
other adjustments). Of this $67.2 million, $6.5 million represents
deferred purchase price which would be remitted to the Company upon the
achievement of certain performance criteria by the disposed segment over the 18
months following the sale. As a result of the agreed-upon purchase
price, the Company recorded an impairment of assets of approximately $13.6
million in the second quarter of 2007. These impairment charges have
been included in discontinued operations in the consolidated condensed statement
of operations for the first nine months of 2007. During the third
quarter of 2008, the Company determined that the receipt of the deferred
purchase price amount is less than probable and therefore incurred an after-tax
charge of $4.2 million related to a full reserve against the deferred
amount. Also in the third quarter of 2008, the Company recorded a
charge of $0.9 million, after tax, to reduce the carrying value of certain
assets remaining from the segment that are held for sale to their realizable
values.
NOTE 11 –
SALE OF PANDEL, INC.
In the
first quarter of 2007, the Company sold its subsidiary Pandel, Inc. for $1.4
million to an entity formed by the general manager of Pandel. The operations of
Pandel represent the Company’s Specialty Products segment. Pandel
primarily produces vinyl carpet tile backing and specialty mat and foam
products. As a result of this sale, the Company recorded a loss on disposition
of $1.9 million in the first quarter of 2007. 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 the first quarter of 2007, Pandel had net sales of $2.2
million. Prior to the sale, certain of Pandel’s production assets
were conveyed to another subsidiary of the Company.
NOTE 12 –
SUPPLEMENTAL CASH FLOW INFORMATION
Cash
payments for interest amounted to $32.3 million and $38.2 million for the nine
months ended September 28, 2008, and September 30, 2007,
respectively. Income tax payments amounted to $19.3 million and $11.9
million for the nine months ended September 28, 2008, and September 30, 2007,
respectively.
NOTE 13 –
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment to ARB No. 51.” SFAS No. 160 establishes standards of
accounting and reporting of noncontrolling interests in subsidiaries, currently
known as minority interests, in consolidated financial statements, provides
guidance on accounting for changes in the parent’s ownership interest in a
subsidiary and establishes standards of accounting of the deconsolidation of a
subsidiary due to the loss of control. SFAS No. 160 requires an
entity to present minority interest as a component of
equity. Additionally, SFAS No. 160 requires an entity to present net
income and consolidated comprehensive income attributable to the parent and the
minority interest separately on the face of the consolidated financial
statements. This standard is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the
effect, if any, that the adoption of this pronouncement will have on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141R requires the acquiring entity to
recognize and measure at an acquisition date fair value all identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the
acquiree. The statement requires an entity to recognize and measure
the goodwill acquired in a business combination or a gain from a bargain
purchase. SFAS No. 141R requires disclosures about the nature and
financial effect of the business combination and also changes the accounting for
certain income tax assets recorded in purchase accounting. This
standard is effective for fiscal years beginning after December 15,
2008. The Company currently does not believe that the adoption of
this pronouncement will have any effect on its consolidated financial
statements.
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
adoption of this pronouncement did not have any impact on the Company’s
consolidated financial statements.
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. For financial
assets subject to fair value measurements, SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. In November 2007, the FASB
granted a deferral for the application of SFAS No. 157 with regard to
non-financial assets until fiscal years beginning after November 15,
2008. The adoption of the pronouncement for financial assets did not
have a material impact on the Company’s consolidated financial
statements. The Company is currently assessing the effect, if any,
that the adoption of this pronouncement with regard to non-financial assets will
have on its consolidated financial statements.
In
September 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached
consensus on EITF Issue No. 06-04, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-04”). The scope of EITF 06-04 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. The Company adopted this
standard on December 31, 2007, the first day of the 2008 fiscal
year. The Company provides an endorsement split-dollar policy to one
individual. In accordance with the standard, the Company recorded the
present value of the expected future policy premiums for this insurance policy,
an amount of approximately $2.0 million, as an adjustment to retained
earnings.
NOTE 14 –
INCOME TAXES
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 was
effective as of January 1, 2007, with any adjustment in a company’s tax
provision being accounted for as a cumulative effect of accounting change in
beginning equity. On January 1, 2007, the Company adopted the
provisions of FIN 48. As required by FIN 48, the cumulative
effect of applying the provisions of the Interpretation have been reported as an
adjustment to the Company’s retained earnings balance as of January 1,
2007. The Company recognized a $4.6 million increase in its liability
for unrecognized tax benefits with a corresponding decrease to the fiscal year
2007 opening balance of retained earnings. There have been no
material changes to the Company’s unrecognized tax benefits during the three and
nine months ended September 28, 2008. As of September 28, 2008, the
Company had approximately $7.9 million accrued for unrecognized tax
benefits.
NOTE 15 –
SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR 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 and
its 9.5% Senior Subordinated Notes due 2014. These guarantees are
full and unconditional. The Supplemental Guarantor Financial
Statements are presented herein pursuant to requirements of the
Commission.
INTERFACE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
THREE MONTHS ENDED SEPTEMBER 28, 2008
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-GUARANTOR
SUBSIDIARIES
|
|
|
INTERFACE,
INC.
(PARENT
CORPORATION)
|
|
|
CONSOLIDATION
AND ELIMINATION ENTRIES
|
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(IN
THOUSANDS)
|
|
Net
sales
|
|
$ |
178,179 |
|
|
$ |
129,669 |
|
|
$ |
-- |
|
|
$ |
(29,425 |
) |
|
$ |
278,423 |
|
Cost
of sales
|
|
|
133,639 |
|
|
|
79,292 |
|
|
|
-- |
|
|
|
(29,425 |
) |
|
|
183,506 |
|
Gross
profit on sales
|
|
|
44,540 |
|
|
|
50,377 |
|
|
|
-- |
|
|
|
-- |
|
|
|
94,917 |
|
Selling,
general and administrative expenses
|
|
|
28,307 |
|
|
|
30,031 |
|
|
|
5,557 |
|
|
|
-- |
|
|
|
63,895 |
|
Operating
income (loss)
|
|
|
16,233 |
|
|
|
20,346 |
|
|
|
(5,557 |
) |
|
|
-- |
|
|
|
31,022 |
|
Interest/Other
expense
|
|
|
(6,121 |
) |
|
|
2,879 |
|
|
|
12,219 |
|
|
|
-- |
|
|
|
8,977 |
|
Income
(loss) before taxes on income and equity in income of
subsidiaries
|
|
|
22,354 |
|
|
|
17,467 |
|
|
|
(17,776 |
) |
|
|
-- |
|
|
|
22,045 |
|
Income
tax (benefit) expense
|
|
|
8,302 |
|
|
|
5,801 |
|
|
|
(5,642 |
) |
|
|
-- |
|
|
|
8,461 |
|
Equity
in income (loss) of subsidiaries
|
|
|
-- |
|
|
|
-- |
|
|
|
20,564 |
|
|
|
(20,564 |
) |
|
|
-- |
|
Income
(loss) from continuing operations
|
|
|
14,052 |
|
|
|
11,666 |
|
|
|
8,430 |
|
|
|
(20,564 |
) |
|
|
13,584 |
|
Loss
on discontinued operations, net of tax
|
|
|
(5,154 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(5,154 |
) |
Net
income (loss)
|
|
$ |
8,898 |
|
|
$ |
11,666 |
|
|
$ |
8,430 |
|
|
$ |
(20,564 |
) |
|
$ |
8,430 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
NINE MONTHS ENDED SEPTEMBER 28, 2008
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
INTERFACE,
INC.
(PARENT
CORPORATION)
|
|
|
CONSOLIDATION
AND
ELIMINATION
ENTRIES
|
|
|
CONSOLIDATED
TOTALS
|
|
|
(IN
THOUSANDS)
|
|
Net
sales
|
|
$ |
482,177 |
|
|
$ |
436,522 |
|
|
$ |
-- |
|
|
$ |
(83,535 |
) |
|
$ |
835,164 |
|
Cost
of sales
|
|
|
351,540 |
|
|
|
272,683 |
|
|
|
-- |
|
|
|
(83,535 |
) |
|
|
540,688 |
|
Gross
profit on sales
|
|
|
130,637 |
|
|
|
163,839 |
|
|
|
-- |
|
|
|
-- |
|
|
|
294,476 |
|
Selling,
general and administrative expenses
|
|
|
83,640 |
|
|
|
93,804 |
|
|
|
21,603 |
|
|
|
-- |
|
|
|
199,047 |
|
Loss
on disposal – Specialty Products
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Operating
income (loss)
|
|
|
46,997 |
|
|
|
70,035 |
|
|
|
(21,603 |
) |
|
|
-- |
|
|
|
95,429 |
|
Interest/Other
expense
|
|
|
(3,356 |
) |
|
|
9,284 |
|
|
|
19,596 |
|
|
|
-- |
|
|
|
25,524 |
|
Income
(loss) before taxes on income and equity in income of
subsidiaries
|
|
50,353 |
|
|
|
60,751 |
|
|
|
(41,199 |
) |
|
|
-- |
|
|
|
69,905 |
|
Income
tax (benefit) expense
|
|
|
19,082 |
|
|
|
19,511 |
|
|
|
(12,270 |
) |
|
|
-- |
|
|
|
26,323 |
|
Equity
in income (loss) of subsidiaries
|
|
|
-- |
|
|
|
-- |
|
|
|
67,357 |
|
|
|
(67,357 |
) |
|
|
-- |
|
Income
(loss) from continuing operations
|
|
|
31,271 |
|
|
|
41,240 |
|
|
|
38,428 |
|
|
|
(67,357 |
) |
|
|
43,582 |
|
Income
(loss) on discontinued operations, net of tax
|
|
|
(5,154 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(5,154 |
) |
Net
income (loss)
|
|
$ |
26,117 |
|
|
$ |
41,240 |
|
|
$ |
38,428 |
|
|
$ |
(67,357 |
) |
|
$ |
38,428 |
|
CONDENSED
CONSOLIDATING BALANCE SHEET
SEPTEMBER
28, 2008
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-GUARANTOR
SUBSIDIARIES
|
|
|
INTERFACE,
INC.
(PARENT
CORPORATION)
|
|
|
CONSOLIDATION
AND ELIMINATION ENTRIES
|
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(IN
THOUSANDS)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
-- |
|
|
$ |
56,009 |
|
|
$ |
29,512 |
|
|
$ |
-- |
|
|
$ |
85,521 |
|
Accounts
receivable
|
|
|
71,699 |
|
|
|
93,651 |
|
|
|
-- |
|
|
|
-- |
|
|
|
165,350 |
|
Inventories
|
|
|
77,114 |
|
|
|
68,380 |
|
|
|
-- |
|
|
|
-- |
|
|
|
145,494 |
|
Prepaids
and deferred income taxes
|
|
|
5,948 |
|
|
|
12,091 |
|
|
|
7,727 |
|
|
|
-- |
|
|
|
25,766 |
|
Assets
of business held for sale
|
|
|
30 |
|
|
|
3,150 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,180 |
|
Total
current assets
|
|
|
154,791 |
|
|
|
233,281 |
|
|
|
37,239 |
|
|
|
-- |
|
|
|
425,311 |
|
Property
and equipment less accumulated depreciation
|
|
|
80,088 |
|
|
|
81,400 |
|
|
|
5,403 |
|
|
|
-- |
|
|
|
166,891 |
|
Investment
in subsidiaries
|
|
|
267,393 |
|
|
|
160,624 |
|
|
|
107,298 |
|
|
|
(535,315 |
) |
|
|
-- |
|
Goodwill
|
|
|
68,167 |
|
|
|
74,986 |
|
|
|
-- |
|
|
|
-- |
|
|
|
143,153 |
|
Other
assets
|
|
|
7,748 |
|
|
|
12,879 |
|
|
|
87,963 |
|
|
|
-- |
|
|
|
108,590 |
|
|
|
$ |
578,187 |
|
|
$ |
563,170 |
|
|
$ |
237,903 |
|
|
$ |
(535,315 |
) |
|
$ |
843,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
$ |
65,609 |
|
|
$ |
92,069 |
|
|
$ |
216 |
|
|
$ |
-- |
|
|
$ |
157,894 |
|
Long-term
debt, less current maturities
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Senior
notes and senior subordinated notes
|
|
|
-- |
|
|
|
-- |
|
|
|
310,000 |
|
|
|
-- |
|
|
|
310,000 |
|
Deferred
income taxes
|
|
|
1,614 |
|
|
|
11,323 |
|
|
|
(5,548 |
) |
|
|
-- |
|
|
|
7,389 |
|
Other
|
|
|
2,980 |
|
|
|
7,987 |
|
|
|
26,824 |
|
|
|
-- |
|
|
|
37,791 |
|
Total
liabilities
|
|
|
70,203 |
|
|
|
111,379 |
|
|
|
331,492 |
|
|
|
-- |
|
|
|
513,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-- |
|
|
|
7,732 |
|
|
|
-- |
|
|
|
-- |
|
|
|
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock
|
|
|
57,891 |
|
|
|
-- |
|
|
|
-- |
|
|
|
(57,891 |
) |
|
|
-- |
|
Common
stock
|
|
|
94,145 |
|
|
|
102,199 |
|
|
|
6,306 |
|
|
|
(196,344 |
) |
|
|
6,306 |
|
Additional
paid-in capital
|
|
|
191,411 |
|
|
|
12,525 |
|
|
|
338,960 |
|
|
|
(203,936 |
) |
|
|
338,960 |
|
Retained
earnings (deficit)
|
|
|
165,497 |
|
|
|
357,064 |
|
|
|
(429,838 |
) |
|
|
(77,144 |
) |
|
|
15,579 |
|
Foreign
currency translation adjustment
|
|
|
(960 |
) |
|
|
(138 |
) |
|
|
(6,240 |
) |
|
|
-- |
|
|
|
(7,338 |
) |
Pension
liability
|
|
|
-- |
|
|
|
(27,591 |
) |
|
|
(2,777 |
) |
|
|
-- |
|
|
|
(30,368 |
) |
|
|
$ |
578,187 |
|
|
$ |
563,170 |
|
|
$ |
237,903 |
|
|
$ |
(535,315 |
) |
|
$ |
843,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE
NINE MONTHS
ENDED
SEPTEMBER 28, 2008
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-GUARANTOR
SUBSIDIARIES
|
|
|
INTERFACE,
INC.
(PARENT
CORPORATION)
|
|
|
CONSOLIDATION
AND ELIMINATION ENTRIES
|
|
|
CONSOLIDATED
TOTALS
|
|
|
|
(IN
THOUSANDS)
|
|
Net
cash provided by (used for) operating activities
|
|
$ |
20,235 |
|
|
$ |
47,053 |
|
|
$ |
(31,694 |
) |
|
$ |
-- |
|
|
$ |
35,594 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(9,678 |
) |
|
|
(10,883 |
) |
|
|
(180 |
) |
|
|
-- |
|
|
|
(20,741 |
) |
Investing
cash flow from discontinued operations
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other
|
|
|
(1,359 |
) |
|
|
(69 |
) |
|
|
(4,208 |
) |
|
|
-- |
|
|
|
(5,636 |
) |
Net
cash used for investing activities
|
|
|
(11,037 |
) |
|
|
(10,952 |
) |
|
|
(4,388 |
) |
|
|
-- |
|
|
|
(26,377 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other
|
|
|
(10,392 |
) |
|
|
(13,296 |
) |
|
|
23,688 |
|
|
|
-- |
|
|
|
-- |
|
Proceeds
from issuance of common stock
|
|
|
-- |
|
|
|
-- |
|
|
|
1,393 |
|
|
|
-- |
|
|
|
1,393 |
|
Dividends
paid
|
|
|
-- |
|
|
|
-- |
|
|
|
(5,669 |
) |
|
|
-- |
|
|
|
(5,669 |
) |
Net
cash provided by (used for) financing activities
|
|
|
(10,392 |
) |
|
|
(13,296 |
) |
|
|
19,412 |
|
|
|
-- |
|
|
|
(4,276 |
) |
Effect
of exchange rate change on cash
|
|
|
-- |
|
|
|
(1,795 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(1,795 |
) |
Net
increase (decrease) in cash
|
|
|
(1,194 |
) |
|
|
21,010 |
|
|
|
(16,670 |
) |
|
|
-- |
|
|
|
3,146 |
|
Cash
at beginning of period
|
|
|
1,194 |
|
|
|
34,998 |
|
|
|
46,183 |
|
|
|
-- |
|
|
|
82,375 |
|
Cash
at end of period
|
|
$ |
-- |
|
|
$ |
56,008 |
|
|
$ |
29,513 |
|
|
$ |
-- |
|
|
$ |
85,521 |
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our
discussions below in this Item 2 are based upon the more detailed discussions
about our business, operations and financial condition included in our Annual
Report on Form 10-K for the fiscal year ended December 30, 2007, under Item 7 of
that Form 10-K. Our discussions here focus on our results during
the quarter ended, or as of, September 28, 2008, and the comparable period of
2007 for comparison purposes, and, to the extent applicable, any material
changes from the information discussed in that Form 10-K or other important
intervening developments or information since that time. These
discussions should be read in conjunction with that Form 10-K for more detailed
and background information.
Forward-Looking
Statements
This
report contains statements which may constitute “forward-looking statements”
within the meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act
of 1995. Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements include
risks and uncertainties associated with economic conditions in the commercial
interiors industry as well as the risks and uncertainties discussed under the
heading “Risk Factors” included in Item 1A of the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007, which discussion is
hereby incorporated by reference. The Company undertakes no obligation to update
or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Sale of
Fabrics Group Business Segment
In July
2007, we completed the sale of our Fabrics Group business segment to a third
party pursuant to an agreement we entered into in the second quarter of
2007. Following working capital and other adjustments provided for in
the agreement, we received $60.7 million in cash at the closing of the
transaction. Under the terms of the purchase agreement, we are
eligible to receive up to $6.5 million of additional purchase price pursuant to
an earn-out agreement focused on the performance of the business segment, as
owned and operated by the purchaser, during the 18-month period following the
closing. In the third quarter of 2008, we determined that the receipt
of this additional purchase price is less than probable and therefore incurred
an after-tax charge of $4.2 million related to a full reserve against the
deferred amount. Also in the third quarter of 2008, we recorded a
charge of $0.9 million, after tax, to reduce the carrying value of certain
assets remaining from the segment that are held for sale to their realizable
values. As discussed in the Notes to Consolidated Condensed Financial
Statements in Item 1 of Part 1, in the first nine months of 2007, we recorded
charges for impairment of goodwill of $44.5 million (none of which was incurred
in the third quarter of 2007) and impairment of other assets of $17.4 million
(none of which was incurred in the third quarter of 2007) related to the Fabrics
Group business segment.
As
described below, the results of operations of the former Fabrics Group business
segment, including the European component as well as the related impairment
charges discussed above, are included as part of our discontinued
operations.
Discontinued
Operations
As
described above, in the second quarter of 2007, we entered into an agreement to
sell our Fabrics Group business segment to a third party, and we completed the
sale in the third quarter of 2007. In addition, in 2004, we decided
to exit 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, and began to dispose of several of our dealer
subsidiaries. We now have sold or terminated all ongoing operations
of our dealer businesses, and in some cases we are completing their wind-down
through subcontracting arrangements.
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 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 at that time), and the results of operations for the former Fabrics Group
business segment 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.
Our
discontinued operations had no net sales in the three-month and nine-month
periods ended September 28, 2008. Loss from operations of these
businesses, net of tax, was $5.2 million in each of the three-month and
nine-month periods ended September 28, 2008. Included in this loss
from discontinued operations are after-tax charges of $4.2 million and $0.9
million related to a reserve placed on the additional contingent purchase price
from the sales of the Fabrics Group business segment and the impairment of
certain assets remaining from the segment, respectively, as discussed
above. Our discontinued operations had net sales of $35.9 million and
$71.7 million in the three-month and nine-month periods ended September 30,
2007, 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, inclusive of goodwill and other asset
impairments as well as costs to sell the businesses, net of tax, was $6.7
million and $68.7 million in the three-month and nine-month periods ended
September 30, 2007, respectively.
General
During
the quarter ended September 28, 2008, we had net sales of $278.4 million,
compared with net sales of $279.5 million in the third quarter last
year. Fluctuations in currency exchange rates positively impacted
2008 third quarter sales by 3% (approximately $7.7 million), compared with
the prior year period. During the first nine months of fiscal 2008,
we had net sales of $835.2 million, compared with net sales of $787.9 million in
the first nine months of last year. Fluctuations in currency exchange
rates positively impacted sales in the first nine months of 2008 by 3%
(approximately $26.7 million), compared with the prior year
period.
Including
the losses from discontinued operations discussed above, we had net income of
$8.4 million, or $0.14 per diluted share, during the third quarter of
2008, compared with net income of $8.6 million or $0.14 per diluted share,
during the third quarter last year.
For the
first nine months of 2008, including the impact of the loss from discontinued
operations, we had net income of $38.4 million, or $0.62 per diluted
share. In the first quarter of 2007, we sold our Pandel, Inc.
business for $1.4 million and recorded a loss of $1.9 million on this
sale. (Pandel comprised the Company’s Specialty Products
segment.) The impairment of assets and other costs related to the
sale of the Fabrics Group business segment and the loss on disposal of Pandel,
Inc. led to our net loss of $31.1 million, or $0.50 per diluted share,
during the first nine months of 2007.
Results
of Operations
The
following table presents, as a percentage of net sales, certain items included
in our Consolidated Condensed Statements of Operations for the three-month and
nine-month periods ended September 28, 2008, and September 30, 2007,
respectively:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
65.9 |
|
|
|
65.0 |
|
|
|
64.7 |
|
|
|
65.3 |
|
Gross
profit on sales
|
|
|
34.1 |
|
|
|
35.0 |
|
|
|
35.3 |
|
|
|
34.7 |
|
Selling,
general and administrative expenses
|
|
|
22.9 |
|
|
|
22.6 |
|
|
|
23.8 |
|
|
|
23.0 |
|
Loss
on disposal of Specialty Products
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.2 |
|
Operating
income
|
|
|
11.1 |
|
|
|
12.4 |
|
|
|
11.4 |
|
|
|
11.4 |
|
Interest/Other
expense
|
|
|
3.2 |
|
|
|
3.6 |
|
|
|
3.1 |
|
|
|
3.7 |
|
Income
from continuing operations before tax expense
|
|
|
7.9 |
|
|
|
8.9 |
|
|
|
8.4 |
|
|
|
7.7 |
|
Income
tax expense
|
|
|
3.0 |
|
|
|
3.4 |
|
|
|
3.2 |
|
|
|
2.9 |
|
Income
from continuing operations
|
|
|
4.9 |
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
4.8 |
|
Discontinued
operations, net of tax
|
|
|
(1.9 |
) |
|
|
(2.4 |
) |
|
|
(0.6 |
) |
|
|
(8.7 |
) |
Loss
on disposal
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Net
income (loss)
|
|
|
3.0 |
|
|
|
3.1 |
|
|
|
4.6 |
|
|
|
(3.9 |
) |
Below we
provide information regarding net sales for each of our three operating
segments, and analyze those results for the three-month and nine-month periods
ended September 28, 2008, and September 30, 2007, respectively.
Net
Sales by Business Segment
Net sales
by operating segment and for our Company as a whole were as follows for the
three-month and nine-month periods ended September 28, 2008, and September 30,
2007, respectively:
|
|
Three Months Ended
|
|
|
Percentage
|
Net Sales By Segment
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Modular
Carpet
|
|
$ |
242,986 |
|
|
$ |
242,889 |
|
|
|
0.0 |
% |
Bentley
Prince Street
|
|
|
35,437 |
|
|
|
36,582 |
|
|
|
(3.1 |
%) |
Specialty
Products (sold in March 2007)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
|
|
$ |
278,423 |
|
|
$ |
279,471 |
|
|
|
(0.4 |
%) |
|
|
Nine Months Ended
|
|
|
Percentage
|
Net Sales By Segment
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Modular
Carpet
|
|
$ |
728,372 |
|
|
$ |
673,666 |
|
|
|
8.1 |
% |
Bentley
Prince Street
|
|
|
106,792 |
|
|
|
112,067 |
|
|
|
(4.7 |
%) |
Specialty
Products (sold in March 2007)
|
|
|
-- |
|
|
|
2,192 |
|
|
|
* |
|
Total
|
|
$ |
835,164 |
|
|
$ |
787,925 |
|
|
|
6.0 |
% |
* Not
meaningful
For the
quarter ended September 28, 2008, net sales for the Modular Carpet segment were
flat compared with the third quarter of 2007. On a geographic basis,
sales were down slightly in the Americas for the third quarter 2008 versus the
year ago period, as increases in our sales into the retail, education and
government market segments were offset by a decline in corporate office
sales. Sales in the Asia-Pacific region in the third quarter of 2008
grew 13% over the third quarter last year due primarily to a relatively good
economic climate in that region and the implementation of our market
diversification strategy, with the largest increases in non-office sales coming
in the healthcare and retail market segments. Sales in Europe were
down approximately 9% in local currency, mostly due to softening conditions in
the corporate office market in Western Europe. However, as reported
in U.S. dollars, 2008 third quarter sales in Europe were down only 1% compared
with the prior year period due to the strength of the Euro versus the U.S.
dollar.
For the
nine months ended September 28, 2008, net sales for the Modular Carpet segment
increased $54.7
million (8.1%) versus the comparable period in 2007. On a geographic
basis, we experienced increases in net sales in the Americas and Asia-Pacific
(up 5% and 23%, respectively) for the nine months ended September 28, 2008,
versus the comparable period in 2007. Sales growth in the Americas is
primarily attributable to increases in our sales into the education, government
and hospitality market segments in North America, as well as the market’s
general trend toward carpet tile. These increases were somewhat
offset by a decline in corporate office sales due to the weakening economic
condition in this region. Sales growth in Asia-Pacific is
attributable in large part to a relatively good economic climate in that region
as well as increased sales into the retail and hospitality market
segments. In Europe, sales in the first nine months of 2008 were down
approximately 5% in local currency compared with the first nine months of last
year, mostly due to softening conditions in the corporate office market in
Western Europe. However, as reported in U.S. dollars, sales in Europe
in the first nine months of 2008 were up 8% compared with the prior year period
due to the strength of the Euro versus the U.S. dollar.
Bentley Prince Street
Segment. In our Bentley Prince Street segment, net sales for
the quarter ended September 28, 2008, decreased $1.2 million (3.1%) versus
the comparable period in 2007. For the nine months ended September
28, 2008, net sales for our Bentley Prince Street segment decreased
$5.3 million (4.7%) versus the comparable period in 2007. These
decreases were attributable primarily to declining broadloom sales volume in the
high-end corporate office and retail markets, and were somewhat offset by strong
sales growth of modular carpet by Bentley Prince Street.
Specialty Products Segment.
Because we sold Pandel, Inc. (which comprised the Specialty Products
segment) on March 7, 2007, we no longer had sales in the Specialty Products
segment in the quarters ended September 28, 2008 or September 30,
2007. For the nine months ended September 30, 2007, all of our net
sales for the Specialty Products segment were derived in the first quarter of
2007, and thus are not comparable to the nine-month period in
2008.
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-month and nine-month periods ended
September 28, 2008, and September 30, 2007, respectively:
|
|
Three Months Ended
|
|
|
Percentage
|
Cost and Expenses
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Cost
of sales
|
|
$ |
183,506 |
|
|
$ |
181,542 |
|
|
|
1.1 |
% |
Selling,
general and administrative expenses
|
|
|
63,895 |
|
|
|
63,179 |
|
|
|
1.1 |
% |
Total
|
|
$ |
247,401 |
|
|
$ |
244,721 |
|
|
|
1.1 |
% |
|
|
Nine Months Ended
|
|
|
Percentage
|
Cost and Expenses
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Cost
of sales
|
|
$ |
540,688 |
|
|
$ |
514,543 |
|
|
|
5.1 |
% |
Selling,
general and administrative expenses
|
|
|
199,047 |
|
|
|
181,558 |
|
|
|
9.6 |
% |
Total
|
|
$ |
739,735 |
|
|
$ |
696,101 |
|
|
|
6.3 |
% |
For the
quarter ended September 28, 2008, our cost of sales increased $2.0 million
(1.1%) versus the comparable period in 2007. The translation of Euros
into U.S. dollars resulted in an approximate $4.1 million increase in cost of
sales during the third quarter 2008 compared with the same period in 2007, which
offset a similar decline in cost of sales in local currency in our European
modular carpet operations. Our raw material prices in the third
quarter of 2008 were approximately 3-5% higher than those in the third quarter
of 2007. As a percentage of net sales, cost of sales increased to 65.9%
for the quarter ended September 28, 2008, versus 65.0% for the comparable period
in 2007. The percentage increase was due to the above-mentioned items
as well as (1) the under-absorption of fixed overhead costs as a result of lower
production volumes in our European modular carpet operations, and (2) additional
fixed costs as a result of our plant expansion in our Asia-Pacific modular
carpet operations. The percentage increase was somewhat offset by
increased sales price levels in the third quarter of 2008 versus the comparable
period in 2007.
For the
nine months ended September 28, 2008, our cost of sales increased $26.1 million
(5.1%) versus the comparable period in 2007, primarily due to increased product
($17.4 million) and labor ($2.6 million) costs associated with increased
production levels during the first nine months of 2008. The
translation of Euros into U.S. dollars resulted in an approximate
$14.6 million increase in cost of sales during the first nine months of
2008 compared with the same period in 2007. As a percentage of net
sales, cost of sales decreased to 64.7% for the nine months ended
September 28, 2008, versus 65.3% for the comparable period in
2007. The percentage decrease was primarily due to (1) increased
sales price levels in the first nine months of 2008 versus the comparable period
in 2007, and (2) improved manufacturing efficiencies during the first two
quarters of 2008 in our Asia-Pacific and European modular carpet operations,
which were somewhat offset by the negative impacts described above in our
discussion of cost of sales in the third quarter of 2008.
For the
quarter ended September 28, 2008, our selling, general and administrative
expenses increased $0.7 million (1.1%) versus the comparable period in
2007. The primary components of this increase were: (1) a $2.4
million increase in expenses due to the translation of foreign currency into
U.S. dollars, and (2) $1.0 million of incremental marketing expense related to
the expansion of our market diversification strategy in Europe. These
increases were mostly offset by a $2.2 million reduction in administrative costs
in the 2008 third quarter, primarily due to lower incentive plan compensation
compared with the prior year period. As a result of these items, as a
percentage of net sales, selling, general and administrative expenses increased
for the quarter ended September 28, 2008, to 22.9% from 22.6% for the comparable
period in 2007.
For the
nine months ended September 28, 2008, our selling, general and administrative
expenses increased $17.5 million (9.6%) versus the comparable period in
2007. The primary components of this increase
were: (1) an $8.0 million increase in expenses due to the
translation of Euros into U.S. dollars, (2) an $8.8 million increase in selling
expenses, commensurate with the increase in sales volume, and (3) $6.2
million of increased marketing expense as we continue to invest in our marketing
platforms, particularly in market diversification in Europe. These
increases were somewhat offset by reduced incentive plan compensation, which was
$6.7 million lower in the first nine months of 2008 versus the comparable period
in 2007. As a result of these items, as a percentage of net sales,
selling, general and administrative expenses increased to 23.8% for the nine
months ended September 28, 2008, versus 23.0% for the comparable period in
2007.
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:
Cost
of Sales and Selling, General and
|
|
Three Months Ended
|
|
|
Percentage
|
Administrative Expenses
(Combined)
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Modular
Carpet
|
|
$ |
212,689 |
|
|
$ |
207,702 |
|
|
|
2.4 |
% |
Bentley
Prince Street
|
|
|
34,712 |
|
|
|
35,323 |
|
|
|
(1.7 |
%) |
Specialty
Products (sold in March 2007)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Corporate
Expenses and Eliminations
|
|
|
-- |
|
|
|
1,696 |
|
|
|
* |
|
Total
|
|
$ |
247,401 |
|
|
$ |
244,721 |
|
|
|
1.1 |
% |
Cost
of Sales and Selling, General and
|
|
Nine Months Ended
|
|
|
Percentage
|
Administrative Expenses
(Combined)
|
|
Sept. 28, 2008
|
|
|
Sept. 30, 2007
|
|
|
Change
|
|
|
(In
thousands)
|
|
|
|
|
Modular
Carpet
|
|
$ |
631,842 |
|
|
$ |
580,098 |
|
|
|
8.9 |
% |
Bentley
Prince Street
|
|
|
104,278 |
|
|
|
107,841 |
|
|
|
(3.3 |
%) |
Specialty
Products (sold in March 2007)
|
|
|
-- |
|
|
|
2,052 |
|
|
|
* |
|
Corporate
Expenses and Eliminations
|
|
|
3,615 |
|
|
|
6,110 |
|
|
|
(40.8 |
%) |
Total
|
|
$ |
739,735 |
|
|
$ |
696,101 |
|
|
|
6.3 |
% |
*Not
meaningful
Interest
Expenses
For the
three-month period ended September 28, 2008, interest expense decreased $0.5
million to $8.2 million, versus $8.7 million in the comparable period in
2007. For the nine-month period ended September 28, 2008, interest
expense decreased $2.8 million to $24.1 million, versus $26.9 million in
the comparable period in 2007. These decreases were due primarily to
the lower levels of debt outstanding on a daily basis during each of the 2008
periods versus the comparable periods in 2007. During the first nine
months of 2007, we repurchased or redeemed all of our then-outstanding 7.3%
Senior Notes due 2008 (a total of $101.4 million).
Liquidity
and Capital Resources
General
At
September 28, 2008, we had $85.5 million in cash, no borrowings and $9.9 million
in letters of credit outstanding under our domestic revolving credit facility,
and no borrowings outstanding under our European credit facility. As
of September 28, 2008, we could have incurred $65.6 million of additional
borrowings under our domestic revolving credit facility and €21.0 million
(approximately $30.7 million) under our European credit facility. In
addition, we could have incurred the equivalent of an additional $16.1 million
of borrowings under our other credit facilities in place at other non-U.S.
subsidiaries.
Our
primary sources of cash during the nine-month period ended September 28, 2008,
were: (1) $10.3 million from cash received as a reduction of accounts
receivable, (2) $4.2 million associated with a reduction in deferred income
taxes and other assets, and (3) $1.4 million from the exercise of employee stock
options. The primary uses of cash during the nine-month period ended
September 28, 2008, were: (1) $39.5 million to fund working capital needs
for inventory purchases, accounts payable and accruals, (2) $20.7 million for
capital expenditures, and (3) $5.7 million for the payment of
dividends.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
discussion below in this Item 3 is based upon the more detailed discussions of
our market risk and related matters included in our Annual Report on Form 10-K
for the fiscal year ended December 30, 2007, under Item 7A of that Form
10-K. Our discussion here focuses on the quarter ended September 28,
2008, and any material changes from (or other important intervening developments
since the time of) the information discussed in that Form 10-K. This
discussion should be read in conjunction with that Form 10-K for more detailed
and background information.
At
September 28, 2008, we recognized an $8.6 million decrease in our foreign
currency translation adjustment account compared to December 30, 2007, primarily
because of the strengthening of the U.S. dollar against the Euro, the Canadian
dollar and the Australian dollar.
Sensitivity Analysis. For
purposes of specific risk analysis, we use sensitivity analysis to measure the
impact that market risk may have on the fair values of our market sensitive
instruments.
To
perform sensitivity analysis, we assess the risk of loss in fair values
associated with the impact of hypothetical changes in interest rates and foreign
currency exchange rates on market sensitive instruments. The market value of
instruments affected by interest rate and foreign currency exchange rate risk is
computed based on the present value of future cash flows as impacted by the
changes in the rates attributable to the market risk being measured. The
discount rates used for the present value computations were selected based on
market interest and foreign currency exchange rates in effect at September 28,
2008. The values that result from these computations are compared with the
market values of these financial instruments at September 28, 2008. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk.
As of
September 28, 2008, based on a hypothetical immediate 150 basis point increase
in interest rates, with all other variables held constant, the market value of
our fixed rate long-term debt would be impacted by a net decrease of
approximately $10.7 million. Conversely, a 150 basis point decrease in
interest rates would result in a net increase in the market value of our fixed
rate long-term debt of approximately $12.8 million.
As of
September 28, 2008, 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
$13.0 million or an increase in the fair value of our financial instruments of
$10.7 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
4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
was performed under the supervision and with the participation of our
management, including our President and Chief Executive Officer and our Senior
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 Senior Vice President and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this Quarterly Report.
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.
PART II -
OTHER INFORMATION
ITEM
1. 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 1.
ITEM
1A. RISK FACTORS
The
following risk factor supplements the “Risk Factors” included in Part I,
Item 1A, of our Annual Report on Form 10-K for fiscal year
2007. Except as set forth below, there are no material changes in
risk factors in the third quarter of 2008.
The
recent worldwide financial and credit crisis could have a material adverse
effect on our business, financial condition and results of
operations.
The
recent worldwide financial and credit crisis has reduced the availability of
liquidity and credit to fund the continuation and expansion of many business
operations worldwide. This shortage of liquidity and credit, combined
with recent substantial losses in worldwide equity markets, could lead to an
extended worldwide economic recession and result in a material adverse effect on
our business, financial condition and results of operations. The
limited availability of credit and liquidity adversely affects the ability of
customers and suppliers to obtain financing for significant purchases and
operations and could cause them to fail to meet their obligations to us or
result in decreased demand for our products as customers may defer or delay
renovation and construction projects where our carpet is used. In
addition, our ability to access the capital markets may be severely restricted
at a time when we would like, or need, to access those markets, which could have
a negative impact on our growth plans, our flexibility to react to changing
economic and business conditions, and our ability to refinance existing
debt. The financial and credit crisis also could have an impact on
the lenders under our credit facilities, causing them to fail to meet their
obligations to us.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
The
following exhibits are filed with this report:
EXHIBIT
NUMBER
|
DESCRIPTION
OF EXHIBIT
|
31.1
|
Section
3.02 Certification of Chief Executive Officer.
|
31.2
|
Section
3.02 Certification of Chief Financial Officer.
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. §
1350.
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. §
1350.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
INTERFACE,
INC.
|
|
|
|
Date: November
5, 2008
|
By:
|
/s/ Patrick
C.
Lynch
|
|
|
Patrick
C. Lynch
|
|
|
Senior
Vice President
|
|
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
|
DESCRIPTION OF EXHIBIT
|
|
|
|
31.1
|
|
Section
302 Certification of Chief Executive Officer.
|
31.2
|
|
Section
302 Certification of Chief Financial Officer.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. §
1350.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. §
1350.
|