UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended October 03, 2021
Commission File Number 001-33994
INTERFACE INC
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Georgia | | 58-1451243 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
1280 West Peachtree Street, Atlanta, Georgia 30309
(Address of principal executive offices and zip code)
(770) 437-6800
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $0.10 Par Value Per Share | TILE | Nasdaq Global Select Market |
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 ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ¨ | Accelerated filer | þ | Non-accelerated filer | ¨ | Smaller reporting company | ☐ | |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
Shares outstanding of each of the registrant’s classes of common stock at November 4, 2021:
| | | | | |
| Class | Number of Shares |
| Common Stock, $0.10 par value per share | 59,054,937 |
INTERFACE, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except par values)
| | | | | | | | | | | |
| OCTOBER 3, 2021 | | JANUARY 3, 2021 |
| (UNAUDITED) | | |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 92,809 | | | $ | 103,053 | |
| Accounts receivable, net | 153,239 | | | 139,869 | |
| Inventories, net | 256,652 | | | 228,725 | |
| Prepaid expenses and other current assets | 33,011 | | | 23,747 | |
| Total current assets | 535,711 | | | 495,394 | |
| Property, plant and equipment, net | 333,663 | | | 359,036 | |
| Operating lease right-of-use assets | 93,999 | | | 98,013 | |
| Deferred tax asset | 14,658 | | | 18,175 | |
| Goodwill and intangibles, net | 230,928 | | | 253,536 | |
| Other assets | 80,283 | | | 81,857 | |
| | | | |
| Total assets | $ | 1,289,242 | | | $ | 1,306,011 | |
| | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities | | | |
| Accounts payable | $ | 72,517 | | | $ | 58,687 | |
| Accrued expenses | 132,212 | | | 105,739 | |
| Current portion of operating lease liabilities | 15,040 | | | 13,555 | |
| Current portion of long-term debt | 15,067 | | | 15,319 | |
| Total current liabilities | 234,836 | | | 193,300 | |
| Long-term debt | 509,912 | | | 561,251 | |
| Operating lease liabilities | 80,741 | | | 86,468 | |
| Deferred income taxes | 30,492 | | | 34,307 | |
| Other long-term liabilities | 96,484 | | | 104,147 | |
| | | | |
| Total liabilities | 952,465 | | | 979,473 | |
| | | | |
| Commitments and contingencies | 0 | | 0 |
| | | | |
| Shareholders’ equity | | | |
| Preferred stock, par value $1.00 per share; 5,000 shares authorized; none issued or outstanding at October 3, 2021 and January 3, 2021 | — | | | — | |
| Common stock, par value $0.10 per share; 120,000 shares authorized; 59,055 and 58,664 shares issued and outstanding at October 3, 2021 and January 3, 2021, respectively | 5,905 | | | 5,865 | |
| Additional paid-in capital | 251,794 | | | 247,920 | |
| Retained earnings | 240,199 | | | 208,562 | |
| Accumulated other comprehensive loss – foreign currency translation | (91,026) | | | (60,331) | |
| Accumulated other comprehensive loss – cash flow hedge | (3,373) | | | (6,190) | |
| Accumulated other comprehensive loss – pension liability | (66,722) | | | (69,288) | |
| | | | |
| Total shareholders’ equity | 336,777 | | | 326,538 | |
| | | | |
| Total liabilities and shareholders’ equity | $ | 1,289,242 | | | $ | 1,306,011 | |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| OCTOBER 3, 2021 | | OCTOBER 4, 2020 | | OCTOBER 3, 2021 | | OCTOBER 4, 2020 |
| NET SALES | $ | 312,707 | | | $ | 278,642 | | | $ | 860,752 | | | $ | 826,315 | |
| Cost of Sales | 206,382 | | | 176,480 | | | 549,397 | | | 512,548 | |
| GROSS PROFIT ON SALES | 106,325 | | | 102,162 | | | 311,355 | | | 313,767 | |
| | | | | | | | |
| Selling, General and Administrative Expenses | 77,735 | | | 88,161 | | | 236,867 | | | 255,902 | |
| Restructuring and Asset Impairment Charges | 3,813 | | | (1,881) | | | 3,621 | | | (3,156) | |
| Goodwill and Intangible Asset Impairment Charge | — | | | — | | | — | | | 121,258 | |
| OPERATING INCOME (LOSS) | 24,777 | | | 15,882 | | | 70,867 | | | (60,237) | |
| | | | | | | | |
| Interest Expense | 7,727 | | | 5,426 | | | 22,272 | | | 16,021 | |
| Other Expense | 887 | | | 2,921 | | | 2,219 | | | 9,551 | |
| | | | | | | | |
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE | 16,163 | | | 7,535 | | | 46,376 | | | (85,809) | |
| Income Tax Expense | 5,204 | | | 1,622 | | | 12,968 | | | 5,736 | |
| | | | | | | | |
| NET INCOME (LOSS) | $ | 10,959 | | | $ | 5,913 | | | $ | 33,408 | | | $ | (91,545) | |
| | | | | | | | |
| Earnings (Loss) Per Share – Basic | $ | 0.19 | | | $ | 0.10 | | | $ | 0.57 | | | $ | (1.56) | |
| Earnings (Loss) Per Share – Diluted | $ | 0.19 | | | $ | 0.10 | | | $ | 0.57 | | | $ | (1.56) | |
| | | | | | | | |
| Common Shares Outstanding – Basic | 59,057 | | | 58,592 | | | 58,942 | | | 58,507 | |
| Common Shares Outstanding – Diluted | 59,057 | | | 58,592 | | | 58,942 | | | 58,507 | |
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 |
| OCTOBER 3, 2021 | | OCTOBER 4, 2020 | | OCTOBER 3, 2021 | | OCTOBER 4, 2020 |
| Net Income (Loss) | $ | 10,959 | | | $ | 5,913 | | | $ | 33,408 | | | $ | (91,545) | |
| Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment | (14,553) | | | 23,402 | | | (30,695) | | | 24,317 | |
| Other Comprehensive Income (Loss), Cash Flow Hedge | 1,323 | | | 864 | | | 2,817 | | | (5,627) | |
| Other Comprehensive Income (Loss), Pension Liability Adjustment | 2,377 | | | (1,471) | | | 2,566 | | | (80) | |
| Comprehensive Income (Loss) | $ | 106 | | | $ | 28,708 | | | $ | 8,096 | | | $ | (72,935) | |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | | | | | | | | | |
| NINE MONTHS ENDED |
| OCTOBER 3, 2021 | | OCTOBER 4, 2020 |
| OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 33,408 | | | $ | (91,545) | |
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | |
| Depreciation and amortization | 35,087 | | | 33,480 | |
| Stock compensation amortization expense (benefit) | 4,150 | | | (1,416) | |
| Deferred income taxes and other | 2,564 | | | (20,438) | |
| Amortization of acquired intangible assets | 4,269 | | | 4,030 | |
| Goodwill and intangible asset impairment | — | | | 121,258 | |
| Working capital changes: | | | |
| Accounts receivable | (17,061) | | | 47,572 | |
| Inventories | (36,230) | | | 13,203 | |
| Prepaid expenses and other current assets | (7,022) | | | 8,819 | |
| Accounts payable and accrued expenses | 44,891 | | | (17,695) | |
| | | | |
| CASH PROVIDED BY OPERATING ACTIVITIES | 64,056 | | | 97,268 | |
| | | | |
| INVESTING ACTIVITIES: | | | |
| Capital expenditures | (17,406) | | | (46,884) | |
| Other | — | | | (183) | |
| | | | |
| CASH USED IN INVESTING ACTIVITIES | (17,406) | | | (47,067) | |
| | | | |
| FINANCING ACTIVITIES: | | | |
| Repayments of long-term debt | (106,283) | | | (114,022) | |
| Borrowing of long-term debt | 57,000 | | | 93,000 | |
| Tax withholding payments for share-based compensation | (193) | | | (1,505) | |
| Proceeds from issuance of common stock | — | | | 93 | |
| Dividends paid | (1,771) | | | (4,978) | |
| Debt issuance costs | (36) | | | (1,519) | |
| Finance lease payments | (1,796) | | | (1,252) | |
| | | | |
| CASH USED IN FINANCING ACTIVITIES | (53,079) | | | (30,183) | |
| | | | |
| Net cash (used in) provided by operating, investing and financing activities | (6,429) | | | 20,018 | |
| Effect of exchange rate changes on cash | (3,815) | | | 2,400 | |
| | | | |
| CASH AND CASH EQUIVALENTS: | | | |
| Net change during the period | (10,244) | | | 22,418 | |
| Balance at beginning of period | 103,053 | | | 81,301 | |
| | | | |
| Balance at end of period | $ | 92,809 | | | $ | 103,719 | |
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 January 3, 2021, 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 necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature unless otherwise disclosed. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 3, 2021, 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 (“GAAP”).
The nine-month period ended October 3, 2021 includes 39 weeks, and the nine-month period ended October 4, 2020 includes 40 weeks. The three-month periods ended October 3, 2021 and October 4, 2020 both include 13 weeks.
Risks and Uncertainties
The World Health Organization declared the COVID-19 outbreak a pandemic in March 2020, and many companies have experienced disruptions in their operations. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that, except for the goodwill and intangible asset impairment recorded in the first quarter of 2020 and discussed in Note 10 “Goodwill and Intangible Assets,” the continued impacts to our global supply chain, and its consequent impacts on production volume, raw material shortages, raw material cost increases, higher freight costs, shipping delays and labor shortages, gross profit margins, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at October 3, 2021. The Company’s primary credit facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum secured net debt to EBITDA ratio, as defined by the credit facility agreement. The Company is currently in compliance with all covenants under the credit facility agreement and anticipates that it will remain in compliance with the covenants for the foreseeable future. The full extent of the future impact of COVID-19 on the Company’s operations is uncertain. A prolonged COVID-19 pandemic may continue to have a material adverse impact on our operations, financial condition, and supply chains. It may negatively impact our ability to collect outstanding receivables, manage inventory, produce our products and service customers. The impact of COVID-19 could result in additional impairment losses related to goodwill, intangible assets, and property, plant and equipment.
As the virus spreads through communities, it could impact the physical health, mental health, and productivity of our workforce as many of them are required to shelter in place and work from home for prolonged periods of time, and it could also impact our ability to reach our customers and collaborate with them as they are required to shelter in place and work from home for prolonged periods of time. The COVID-19 pandemic is having broad and negative implications on the global economy, which affects the size and timing of our customers’ capital budgets, and could result in delays or terminations of new and existing renovation projects, remodeling projects, new construction projects, and other projects where our products are used.
COVID-19 Impact
We continue to monitor our operations and have implemented various programs to mitigate the effects of COVID-19 on our business. Our global supply chain and manufacturing operations continue to experience increased impacts of COVID-19 including raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages – particularly in the United States.
Reclassifications
In the first quarter of fiscal 2021, the Company determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas. Segment disclosures for 2020 have been restated to conform to the current reportable segment structure. See Note 11 entitled “Segment Information” for additional information.
Recently Adopted Accounting Pronouncements
On January 4, 2021, the Company adopted Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740 related to intraperiod tax allocation, the calculation of income taxes in interim periods, and the accounting for outside basis differences of foreign subsidiaries and equity method investments. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740, including franchise or similar taxes partially based on income, the accounting for a step-up in tax basis goodwill, and interim recognition of an enacted change in tax laws or rates, by clarifying and amending existing guidance. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard addresses the risks from the discontinuation of the London Interbank Offered Rate (LIBOR) and provides optional expedients and exceptions to contracts, hedging relationships and other transactions that reference LIBOR if certain criteria are met. This new guidance is effective and may be applied beginning March 12, 2020 through December 31, 2022. While the Company is currently evaluating the impact of adoption of this standard, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
NOTE 2 – REVENUE RECOGNITION
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for both nine-month periods ended October 3, 2021 and October 4, 2020. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material for both 2021 and 2020 nine-month periods.
Disaggregation of Revenue
For the nine months ended October 3, 2021 and October 4, 2020, revenue from the Company’s customers is broken down by geography as follows:
| | | | | | | | | | | |
| Nine Months Ended |
| Geography | October 3, 2021 | | October 4, 2020 |
| Americas | 53.5% | | 54.7% |
| Europe | 32.6% | | 31.4% |
| Asia-Pacific | 13.9% | | 13.9% |
Revenue from the Company’s customers in the Americas corresponds to the AMS operating segment, and the EAAA operating segment includes revenue from the Europe and Asia-Pacific geographies. See Note 11 entitled “Segment Information” for additional information.
NOTE 3 – INVENTORIES
Inventories are summarized as follows:
| | | | | | | | | | | |
| October 3, 2021 | | January 3, 2021 |
| (in thousands) |
| Finished goods | $ | 176,180 | | | $ | 152,836 | |
| Work in process | 16,487 | | | 17,109 | |
| Raw materials | 63,985 | | | 58,780 | |
| Inventories, net | $ | 256,652 | | | $ | 228,725 | |
NOTE 4 – EARNINGS PER SHARE
The Company computes basic earnings or loss per share (“EPS”) by dividing net income or loss by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.
The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in the basic and diluted EPS calculations when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following table shows the computation of basic and diluted EPS:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands, except per share data) |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 10,959 | | | $ | 5,913 | | | $ | 33,408 | | | $ | (91,545) | |
| Less: distributed and undistributed earnings available to participating securities | (127) | | | (46) | | | (358) | | | (38) | |
| Distributed and undistributed earnings (loss) available to common shareholders | $ | 10,832 | | | $ | 5,867 | | | $ | 33,050 | | | $ | (91,583) | |
| | | | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding | 58,371 | | | 58,140 | | | 58,312 | | | 58,055 | |
| Participating securities | 686 | | | 452 | | | 630 | | | 452 | |
| Shares for basic EPS | 59,057 | | | 58,592 | | | 58,942 | | | 58,507 | |
| Dilutive effect of stock options | — | | | — | | | — | | | — | |
| Shares for diluted EPS | 59,057 | | | 58,592 | | | 58,942 | | | 58,507 | |
| | | | | | | | |
| Basic EPS | $ | 0.19 | | | $ | 0.10 | | | $ | 0.57 | | | $ | (1.56) | |
| Diluted EPS | $ | 0.19 | | | $ | 0.10 | | | $ | 0.57 | | | $ | (1.56) | |
NOTE 5 – LONG-TERM DEBT
Long-term debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 3, 2021 | | January 3, 2021 |
| Outstanding Principal | | Interest Rate(1) | | Outstanding Principal | | Interest Rate(1) |
| (in thousands) | | | | (in thousands) | | |
| Syndicated Credit Facility: | | | | | | | |
| Revolving loan borrowings | $ | — | | | — | % | | $ | 3,000 | | | 4.00 | % |
| Term loan borrowings | 232,639 | | | 1.82 | % | | 282,215 | | | 1.87 | % |
| Total borrowings under Syndicated Credit Facility | 232,639 | | | 1.82 | % | | 285,215 | | | 1.89 | % |
| | | | | | | |
| 5.50% Senior Notes due 2028 | 300,000 | | | 5.50 | % | | 300,000 | | | 5.50 | % |
| | | | | | | | |
| Total debt | 532,639 | | | | | 585,215 | | | |
| Less: Unamortized debt issuance costs | (7,660) | | | | | (8,645) | | | |
| | | | | | | | |
| Total debt, net | 524,979 | | | | | 576,570 | | | |
| Less: Current portion of long-term debt | (15,067) | | | | | (15,319) | | | |
| | | | | | | | |
| Total long-term debt, net | $ | 509,912 | | | | | $ | 561,251 | | | |
(1) Represents the stated rate of interest, without the effect of debt issuance costs or interest rate swaps.
Syndicated Credit Facility
The Syndicated Credit Facility (the “Facility”) provides the Company and certain of its subsidiaries a multicurrency revolving loan and U.S. denominated and multicurrency term loans. Interest on base rate loans is charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.
As of both October 3, 2021 and January 3, 2021, the Company had $1.6 million in letters of credit outstanding under the Facility.
As of both October 3, 2021 and January 3, 2021, the carrying value of the Company’s borrowings under the Facility approximated its fair value as the Facility bears interest rates that are similar to existing market rates.
Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which are due on the last day of the calendar quarter.
The Company is currently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
5.50% Senior Notes due 2028
The 5.50% Senior Notes due 2028 (the “Senior Notes”) bear an interest rate at 5.50% per annum and mature on December 1, 2028. Interest is paid semi-annually on June 1 and December 1 of each year, beginning on June 1, 2021. The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility.
As of October 3, 2021, the estimated fair value of the Senior Notes was $316.5 million, compared with a carrying value recorded in the Company’s consolidated condensed balance sheet of $300.0 million, excluding unamortized debt issuance costs. The fair value of the Senior Notes is derived using quoted prices for similar instruments and is considered Level 2 within the fair value hierarchy.
Other Lines of Credit
Subsidiaries of the Company had an aggregate of the equivalent of $6.0 million of other lines of credit available at interest rates ranging from 3.5% to 6.0% as of both October 3, 2021 and January 3, 2021. As of October 3, 2021 and January 3, 2021, there were no borrowings outstanding under these lines of credit.
Borrowing Costs
Debt issuance costs associated with the Company’s Senior Notes and term loans under the Facility are reflected as a reduction of long-term debt in accordance with applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of October 3, 2021 and January 3, 2021, the unamortized debt issuance costs recorded as a reduction of long-term debt were $7.7 million and $8.6 million, respectively.
Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of revolving debt, net of accumulated amortization, were $1.7 million and $2.0 million as of October 3, 2021 and January 3, 2021, respectively. These amounts are included in other assets in the Company’s consolidated condensed balance sheets. The Company amortizes these costs over the life of the related debt.
NOTE 6 – DERIVATIVE INSTRUMENTS
Interest Rate Risk Management
From time to time, the Company enters into interest rate swap transactions to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt.
Cash Flow Interest Rate Swaps
In the fourth quarter of 2020 the Company terminated its designated interest rate swap transactions with a total notional value of $250 million. Hedge accounting was also discontinued at that time. Losses recorded in accumulated other comprehensive loss for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statements of operations to the extent it is probable that a portion of the original forecasted transactions related to the portion of the hedged debt repaid will not occur by the end of the originally specified time period. See Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss” for additional information.
As of October 3, 2021 and January 3, 2021, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $4.7 million and $8.7 million, respectively, and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination. We expect that approximately $3.3 million related to the terminated interest rate swaps will be reclassified from accumulated other comprehensive loss as an increase to interest expense in the next 12 months.
The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges had on accumulated other comprehensive loss, net of tax, during the three and nine months ended October 4, 2020:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 4, 2020 | | October 4, 2020 |
| (in thousands) |
| Interest rate swap contracts gain (loss) | $ | 864 | | | $ | (5,627) | |
Derivative Transactions Not Designated as Hedging Instruments
Our Asia-Pacific operations, from time to time, purchase foreign currency options to economically hedge inventory purchases denominated in foreign currencies other than their functional currency. The Company’s objective with respect to these foreign currency options is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to payment on inventory purchases. These options are classified as non-designated derivative instruments. Gains and losses on the changes in fair value of these foreign currency options are recognized in earnings each period. As of October 3, 2021, the Company had no outstanding foreign currency options.
The table below sets forth the fair value of derivative instruments not designated as hedging instruments as of October 3, 2021 and January 3, 2021:
| | | | | | | | | | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | Fair Value as of October 3, 2021 | | Fair Value as of January 3, 2021 |
| | | (in thousands) |
| Foreign currency options | Other current assets | | $ | — | | | $ | 37 | |
The following tables summarize gains and losses on derivatives not designated as hedging instruments within the consolidated condensed statements of operations for the three and nine months ended October 3, 2021 and October 4, 2020:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| Statement of Operations Location | | October 3, 2021 | | October 4, 2020 |
| | | (in thousands) |
| Foreign currency options gain | Other expense | | $ | 101 | | | $ | 11 | |
| | | | | | | | | | | | | | | | | |
| | | Nine Months Ended |
| Statement of Operations Location | | October 3, 2021 | | October 4, 2020 |
| | | (in thousands) |
| Foreign currency options gain | Other expense | | $ | 420 | | | $ | 90 | |
NOTE 7 – SHAREHOLDERS’ EQUITY
The following tables depict the activity in the accounts which make up shareholders’ equity for the three and nine months ended October 3, 2021 and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SHARES | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED
EARNINGS | | PENSION LIABILITY | | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | CASH FLOW
HEDGE |
| (in thousands) |
| Balance, at January 3, 2021 | 58,664 | | | $ | 5,865 | | | $ | 247,920 | | | $ | 208,562 | | | $ | (69,288) | | | $ | (60,331) | | | $ | (6,190) | |
| Net income | — | | | — | | | — | | | 6,938 | | | — | | | — | | | — | |
| Restricted stock issuances | 376 | | | 38 | | | 5,277 | | | — | | | — | | | — | | | — | |
| Unamortized compensation expense related to restricted stock awards | — | | | — | | | (5,315) | | | — | | | — | | | — | | | — | |
| Cash dividends declared, $0.01 per common share | — | | | — | | | — | | | (589) | | | — | | | — | | | — | |
| Compensation expense related to stock awards, net of forfeitures | (26) | | | (2) | | | 689 | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | 89 | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (19,597) | | | — | |
| Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge | — | | | — | | | — | | | — | | | — | | | — | | | 749 | |
| Balance, at April 4, 2021 | 59,014 | | | $ | 5,901 | | | $ | 248,571 | | | $ | 214,911 | | | $ | (69,199) | | | $ | (79,928) | | | $ | (5,441) | |
| Net income | — | | | — | | | — | | | 15,511 | | | — | | | — | | | — | |
| Restricted stock issuances | 52 | | | 6 | | | 789 | | | — | | | — | | | — | | | — | |
| Unamortized compensation expense related to restricted stock awards | — | | | — | | | (794) | | | — | | | — | | | — | | | — | |
| Cash dividends declared, $0.01 per common share | — | | | — | | | — | | | (589) | | | — | | | — | | | — | |
| Compensation expense related to stock awards | — | | | — | | | 1,548 | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | 100 | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 3,455 | | | — | |
| Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge | — | | | — | | | — | | | — | | | — | | | — | | | 745 | |
| Balance, at July 4, 2021 | 59,066 | | | $ | 5,907 | | | $ | 250,114 | | | $ | 229,833 | | | $ | (69,099) | | | $ | (76,473) | | | $ | (4,696) | |
| Net income | — | | | — | | | — | | | 10,959 | | | — | | | — | | | — | |
| Cash dividends declared, $0.01 per common share | — | | | — | | | — | | | (593) | | | — | | | — | | | — | |
| Compensation expense related to stock awards, net of forfeitures | (11) | | | (2) | | | 1,680 | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | 2,377 | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (14,553) | | | — | |
| Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge | — | | | — | | | — | | | — | | | — | | | — | | | 1,323 | |
| Balance, at October 3, 2021 | 59,055 | | | $ | 5,905 | | | $ | 251,794 | | | $ | 240,199 | | | $ | (66,722) | | | $ | (91,026) | | | $ | (3,373) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SHARES | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED
EARNINGS | | PENSION LIABILITY | | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | CASH FLOW
HEDGE |
| (in thousands) |
| Balance, at December 29, 2019 | 58,416 | | | $ | 5,842 | | | $ | 250,306 | | | $ | 286,056 | | | $ | (56,700) | | | $ | (113,139) | | | $ | (4,163) | |
| Net loss | — | | | — | | | — | | | (102,167) | | | — | | | — | | | — | |
| Issuances of stock (other than restricted stock) | 220 | | | 22 | | | 197 | | | — | | | — | | | — | | | — | |
| Restricted stock issuances | 107 | | | 10 | | | 1,720 | | | — | | | — | | | — | | | — | |
| Unamortized compensation expense related to restricted stock awards | — | | | — | | | (1,731) | | | — | | | — | | | — | | | — | |
| Cash dividends declared, $0.065 per common share | — | | | — | | | — | | | (3,807) | | | — | | | — | | | — | |
| Compensation expense related to stock awards, net of forfeitures | (255) | | | (25) | | | (4,114) | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | 1,733 | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (15,245) | | | — | |
| Cash flow hedge unrealized loss | — | | | — | | | — | | | — | | | — | | | — | | | (6,140) | |
| Balance, at April 5, 2020 | 58,488 | | | $ | 5,849 | | | $ | 246,378 | | | $ | 180,082 | | | $ | (54,967) | | | $ | (128,384) | | | $ | (10,303) | |
| Net income | — | | | — | | | — | | | 4,709 | | | — | | | — | | | — | |
| Issuances of stock (other than restricted stock) | 12 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Restricted stock issuances | 70 | | | 7 | | | 2,294 | | | — | | | — | | | — | | | — | |
| Unamortized compensation expense related to restricted stock awards | — | | | — | | | (2,300) | | | — | | | — | | | — | | | — | |
| Cash dividends declared, $0.01 per common share | — | | | — | | | — | | | (585) | | | — | | | — | | | — | |
| Compensation expense related to stock awards, net of forfeitures | (26) | | | (3) | | | (48) | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | (342) | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 16,160 | | | — | |
| Cash flow hedge unrealized loss | — | | | — | | | — | | | — | | | — | | | — | | | (351) | |
| Balance, at July 5, 2020 | 58,544 | | | $ | 5,854 | | | $ | 246,323 | | | $ | 184,206 | | | $ | (55,309) | | | $ | (112,224) | | | $ | (10,654) | |
| Net income | — | | | — | | | — | | | 5,913 | | | — | | | — | | | — | |
| Issuances of stock (other than restricted stock) | 7 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Restricted stock issuances | 127 | | | 13 | | | (15) | | | — | | | — | | | — | | | — | |
| Unamortized compensation expense related to restricted stock awards | — | | | — | | | 2 | | | — | | | — | | | — | | | — | |
| Cash dividends declared, $0.01 per common share | — | | | — | | | — | | | (586) | | | — | | | — | | | — | |
| Compensation expense related to stock awards, net of forfeitures | (8) | | | (1) | | | 703 | | | — | | | — | | | — | | | — | |
| Pension liability adjustment | — | | | — | | | — | | | — | | | (1,471) | | | — | | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 23,402 | | | — | |
| Cash flow hedge unrealized loss | — | | | — | | | — | | | — | | | — | | | — | | | 864 | |
| Balance, at October 4, 2020 | 58,670 | | | $ | 5,867 | | | $ | 247,012 | | | $ | 189,533 | | | $ | (56,780) | | | $ | (88,822) | | | $ | (9,790) | |
Restricted Stock Awards
During the nine months ended October 3, 2021 and October 4, 2020, the Company granted restricted stock awards for 428,400 and 308,100 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-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, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause.
Compensation expense related to restricted stock grants was $2.8 million and $0.6 million for the nine months ended October 3, 2021, and October 4, 2020, respectively. The Company has reduced its expense for restricted stock forfeited during the period.
The following table summarizes restricted stock outstanding as of October 3, 2021, as well as activity during the nine months then ended:
| | | | | | | | | | | |
| Restricted Shares | | Weighted Average
Grant Date
Fair Value |
| Outstanding at January 3, 2021 | 436,900 | | | $ | 24.73 | |
| Granted | 428,400 | | | 14.26 | |
| Vested | (167,200) | | | 13.68 | |
| Forfeited or canceled | (14,300) | | | 15.48 | |
| Outstanding at October 3, 2021 | 683,800 | | | $ | 21.06 | |
As of October 3, 2021, the unrecognized total compensation cost related to unvested restricted stock was $6.1 million. That cost is expected to be recognized by the end of 2024.
Performance Share Awards
During the nine months ended October 3, 2021 and October 4, 2020, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years, subject to the employee’s continued employment, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200%) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.
The following table summarizes the performance shares outstanding as of October 3, 2021, as well as the activity during the nine months then ended:
| | | | | | | | | | | |
| Performance Shares | | Weighted Average
Grant Date
Fair Value |
| Outstanding at January 3, 2021 | 405,300 | | | $ | 16.94 | |
| Granted | 375,800 | | | 13.94 | |
| Vested | — | | | — | |
| Forfeited or canceled | (63,000) | | | 21.43 | |
| Outstanding at October 3, 2021 | 718,100 | | | $ | 14.98 | |
Compensation expense (benefit) related to the performance shares was $1.4 million and $(2.0) million for the nine months ended October 3, 2021 and October 4, 2020, respectively. The Company has reduced its expense for performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $9.0 million as of October 3, 2021. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2024.
The tax benefit recognized with regard to restricted stock and performance shares was approximately $0.8 million for the nine months ended October 3, 2021.
NOTE 8 – LEASES
General
The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option.
The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region.
As of October 3, 2021, there were no significant leases that had not commenced.
The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to the Company’s leases as of October 3, 2021 and January 3, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 3, 2021 | | January 3, 2021 |
| Balance Sheet Location | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
| (in thousands) |
| Operating lease right-of-use assets | $ | 93,999 | | | | | $ | 98,013 | | | |
| | | | | | | | |
| Current portion of operating lease liabilities | $ | 15,040 | | | | | $ | 13,555 | | | |
| Operating lease liabilities | 80,741 | | | | | 86,468 | | | |
| Total operating lease liabilities | $ | 95,781 | | | | | $ | 100,023 | | | |
| | | | | | | | |
| Property, plant and equipment, net | | | $ | 6,961 | | | | | $ | 6,138 | |
| | | | | | | | |
| Accrued expenses | | | $ | 1,814 | | | | | $ | 1,496 | |
| Other long-term liabilities | | | 3,490 | | | | | 2,688 | |
| Total finance lease liabilities | | | $ | 5,304 | | | | | $ | 4,184 | |
Lease Costs
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Finance lease cost: | | | | | | | |
| Amortization of right-of-use assets | $ | 646 | | | $ | 176 | | | $ | 1,230 | | | $ | 811 | |
| Interest on lease liabilities | 37 | | | 22 | | | 104 | | | 56 | |
| Operating lease cost | 5,240 | | | 6,095 | | | 17,040 | | | 19,076 | |
| Short-term lease cost | 222 | | | 85 | | | 864 | | | 426 | |
| Variable lease cost | 730 | | | 1,089 | | | 2,018 | | | 2,659 | |
| Total lease cost | $ | 6,875 | | | $ | 7,467 | | | $ | 21,256 | | | $ | 23,028 | |
Other Supplemental Information
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from finance leases | $ | 16 | | | $ | 22 | | | $ | 83 | | | $ | 56 | |
| Operating cash flows from operating leases | 6,677 | | | 5,528 | | | 17,353 | | | 16,978 | |
| Financing cash flows from finance leases | 680 | | | 442 | | | 1,796 | | | 1,252 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | 67 | | | 1,156 | | | 2,811 | | | 1,709 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 6,417 | | | 1,517 | | | 12,062 | | | 5,582 | |
Lease Term and Discount Rate
The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of October 3, 2021 and January 3, 2021:
| | | | | | | | | | | |
| | October 3, 2021 | | January 3, 2021 |
| Weighted-average remaining lease term – finance leases (in years) | 3.28 | | 3.35 |
| Weighted-average remaining lease term – operating leases (in years) | 10.03 | | 10.61 |
| Weighted-average discount rate – finance leases | 2.84 | % | | 2.64 | % |
| Weighted-average discount rate – operating leases | 5.87 | % | | 5.98 | % |
Maturity Analysis
A maturity analysis of lease payments under non-cancellable leases is presented as follows:
| | | | | | | | | | | |
| Fiscal Year | Operating Leases | | Finance Leases |
| (in thousands) |
| 2021 (excluding the nine months ended October 3, 2021) | $ | 4,842 | | | $ | 696 | |
| 2022 | 17,833 | | | 1,821 | |
| 2023 | 13,698 | | | 1,441 | |
| 2024 | 12,225 | | | 1,055 | |
| 2025 | 10,578 | | | 412 | |
| Thereafter | 71,205 | | | 135 | |
| Total future minimum lease payments (undiscounted) | 130,381 | | | 5,560 | |
| Less: Present value discount | (34,600) | | | (256) | |
| Total lease liability | $ | 95,781 | | | $ | 5,304 | |
NOTE 9 – EMPLOYEE BENEFIT PLANS
During the three and nine months ended October 3, 2021, the Company recorded multi-employer pension expense related to multi-employer contributions of $0.6 million and $2.0 million, respectively. During the three and nine months ended October 4, 2020, the Company recorded multi-employer pension expense related to multi-employer contributions of $0.6 million and $1.9 million, respectively.
The following tables provide the components of net periodic benefit cost for the three and nine months ended October 3, 2021 and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
Defined Benefit Retirement Plans (Europe) | October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Interest cost | $ | 570 | | | $ | 907 | | | $ | 1,721 | | | $ | 2,668 | |
| Expected return on assets | (847) | | | (1,082) | | | (2,556) | | | (3,184) | |
| Amortization of prior service cost | 28 | | | 27 | | | 86 | | | 79 | |
| Amortization of net actuarial losses | 402 | | | 335 | | | 1,215 | | | 981 | |
| Net periodic benefit cost | $ | 153 | | | $ | 187 | | | $ | 466 | | | $ | 544 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Salary Continuation Plan | October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Interest cost | $ | 176 | | | $ | 234 | | | $ | 529 | | | $ | 703 | |
| Amortization of net actuarial losses | 186 | | | 140 | | | 558 | | | 419 | |
| Net periodic benefit cost | $ | 362 | | | $ | 374 | | | $ | 1,087 | | | $ | 1,122 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
nora Defined Benefit Plan | October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Service cost | $ | 271 | | | $ | 274 | | | $ | 825 | | | $ | 791 | |
| Interest cost | 101 | | | 117 | | | 308 | | | 338 | |
| Amortization of net actuarial losses | 89 | | | 58 | | | 273 | | | 168 | |
| Net periodic benefit cost | $ | 461 | | | $ | 449 | | | $ | 1,406 | | | $ | 1,297 | |
In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income (loss) in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense in the consolidated condensed statements of operations.
NOTE 10 – GOODWILL AND INTANGIBLE ASSETS
In the first quarter of 2021, the Company determined that it has two operating and reportable segments – namely AMS and EAAA. See Note 11 entitled “Segment Information” for additional information. The Company tests goodwill for impairment at least annually at the reporting unit level. The Company’s reporting units remain unchanged following the realignment of its operating segments and consist of the Americas, Europe, and Asia-Pacific. The Americas reporting unit is the same as the AMS reportable segment, and the Europe and Asia-Pacific reporting units are one level below the EAAA reportable segment.
During the first quarter of 2020, as a result of changes in macroeconomic conditions related to the COVID-19 pandemic, the Company recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets. As a result of the first quarter 2020 assessment, we determined that the fair value for two reporting units was less than their carrying value and recognized a goodwill impairment loss of $116.5 million in the first quarter of 2020. The expected decline in revenue due to the impact of COVID-19 contributed to the lower fair value of our Europe and Asia-Pacific reporting units. As such, the goodwill impairment loss was allocated to our Europe and Asia-Pacific reporting units in the amounts of $99.2 million and $17.3 million, respectively. There were no indicators of additional goodwill impairment as of October 3, 2021.
The changes in the carrying amounts of goodwill attributable to each reportable segment for the nine months ended October 3, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| AMS | | EAAA | | Total |
| | | (in thousands) | | |
| Balance, at January 3, 2021 | $ | 122,344 | | | $ | 43,433 | | | $ | 165,777 | |
| Foreign currency translation | (10,272) | | | (3,647) | | | (13,919) | |
| Balance, at October 3, 2021 | $ | 112,072 | | | $ | 39,786 | | | $ | 151,858 | |
Additionally, we determined that the trademarks and trade names intangible assets related to the acquired nora business were also impaired and recognized an impairment loss of $4.8 million in the first quarter of 2020. The carrying value of intangible assets was $79.0 million at October 3, 2021. There were no indicators of additional intangible asset impairment as of the end of the third quarter of 2021.
NOTE 11 – SEGMENT INFORMATION
The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. In the first quarter of 2021, the Company largely completed its integration of the nora acquisition, and integration of its European and Asia-Pacific commercial areas and determined that it has 2 operating segments organized by geographical area – namely (a) Americas (“AMS”) and (b) Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas.
Pursuant to the management approach discussed above, the Company’s CODM, our chief executive officer, evaluates performance at the AMS and EAAA operating segment levels and makes operating and resource allocation decisions based on segment adjusted operating income or loss (“AOI”), which includes allocations of corporate selling, general and administrative expenses. AOI excludes nora purchase accounting amortization, goodwill and intangible asset impairment charges, changes in equity award forfeiture accounting, restructuring charges, asset impairment, severance and other charges, and an SEC settlement fine. Intersegment revenues for the three and nine months ended October 3, 2021 were $20.1 million and $56.4 million, respectively, and intersegment revenues for the three and nine months ended October 4, 2020 were $15.6 million and $56.2 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM.
The Company has determined that it has 2 reportable segments – AMS and EAAA as each operating segment meets the quantitative thresholds defined in the accounting guidance.
Segment information below for fiscal year 2020 has been restated to reflect our new reportable segment structure.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Net Sales | | | | | | | |
| AMS | $ | 176,770 | | | $ | 142,858 | | | $ | 460,402 | | | $ | 452,171 | |
| EAAA | 135,937 | | | 135,784 | | | 400,350 | | | 374,144 | |
| Total net sales | $ | 312,707 | | | $ | 278,642 | | | $ | 860,752 | | | $ | 826,315 | |
| | | | | | | | |
| Segment AOI | | | | | | | |
| AMS | $ | 21,595 | | | $ | 20,279 | | | $ | 54,606 | | | $ | 67,771 | |
| EAAA | 8,586 | | | 7,821 | | | 26,557 | | | 17,151 | |
| | | | | | | | |
| Depreciation and Amortization | | | | | | | |
| AMS | $ | 4,365 | | | $ | 4,301 | | | $ | 13,592 | | | $ | 12,174 | |
| EAAA | 7,052 | | | 7,431 | | | 21,495 | | | 21,306 | |
| Total depreciation and amortization | $ | 11,417 | | | $ | 11,732 | | | $ | 35,087 | | | $ | 33,480 | |
A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows:
| | | | | | | | | | | |
| October 3, 2021 | | January 3, 2021 |
| (in thousands) |
| Assets | | | |
| AMS | $ | 808,015 | | | $ | 800,068 | |
| EAAA | 697,799 | | | 682,295 | |
| Total segment assets | 1,505,814 | | | 1,482,363 | |
| Corporate assets | 123,196 | | | 111,073 | |
| Eliminations | (339,768) | | | (287,425) | |
| Total reported assets | $ | 1,289,242 | | | $ | 1,306,011 | |
Reconciliations of operating income (loss) to income (loss) before income tax expense and segment AOI are presented as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| AMS operating income | $ | 21,684 | | | $ | 14,857 | | | $ | 54,432 | | | $ | 52,144 | |
| EAAA operating income (loss) | 3,093 | | | 1,025 | | | 16,435 | | | (112,381) | |
| Consolidated operating income (loss) | 24,777 | | | 15,882 | | | 70,867 | | | (60,237) | |
| Interest expense | 7,727 | | | 5,426 | | | 22,272 | | | 16,021 | |
| Other expense | 887 | | | 2,921 | | | 2,219 | | | 9,551 | |
| Income (loss) before income tax expense | $ | 16,163 | | | $ | 7,535 | | | $ | 46,376 | | | $ | (85,809) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 3, 2021 | | Three Months Ended October 4, 2020 |
| AMS | | EAAA | | AMS | | EAAA |
| (in thousands) |
| Operating income | $ | 21,684 | | | $ | 3,093 | | | $ | 14,857 | | | $ | 1,025 | |
| Purchase accounting amortization | — | | | 1,407 | | | — | | | 1,399 | |
| Restructuring, asset impairment, severance and other charges | (89) | | | 4,086 | | | 2,733 | | | 3,086 | |
| SEC fine | — | | | — | | | 2,689 | | | 2,311 | |
| AOI | $ | 21,595 | | | $ | 8,586 | | | $ | 20,279 | | | $ | 7,821 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 3, 2021 | | Nine Months Ended October 4, 2020 |
| AMS | | EAAA | | AMS | | EAAA |
| (in thousands) |
| Operating income (loss) | $ | 54,432 | | | $ | 16,435 | | | $ | 52,144 | | | $ | (112,381) | |
| Purchase accounting amortization | — | | | 4,269 | | | — | | | 4,030 | |
| Goodwill and intangible asset impairment | — | | | — | | | 2,695 | | | 118,563 | |
| Impact of change in equity award forfeiture accounting | — | | | — | | | 757 | | | 650 | |
| Restructuring, asset impairment, severance and other charges | 174 | | | 5,853 | | | 9,486 | | | 3,978 | |
| SEC fine | — | | | — | | | 2,689 | | | 2,311 | |
| AOI | $ | 54,606 | | | $ | 26,557 | | | $ | 67,771 | | | $ | 17,151 | |
NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest amounted to $13.2 million and $16.0 million for the nine months ended October 3, 2021 and October 4, 2020, respectively. Income tax payments, net of refunds, amounted to $15.3 million and $8.2 million for the nine months ended October 3, 2021 and October 4, 2020, respectively.
See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases.
NOTE 13 – INCOME TAXES
The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items.
During the nine months ended October 3, 2021, the Company recorded a total income tax provision of $13.0 million on pre-tax income of $46.4 million resulting in an effective tax rate of 28.0%, as compared to a total income tax provision of $5.7 million on a pre-tax loss of $85.8 million resulting in an effective tax rate of (6.7)% during the nine months ended October 4, 2020. The effective tax rate for the period ended October 4, 2020 was primarily impacted by a non-deductible goodwill impairment. Excluding the impact of the goodwill impairment, the effective tax rate was 18.7% during the nine months ended October 4, 2020. The increase in the effective tax rate as compared to the period ended October 4, 2020, excluding the non-deductible goodwill impairment, was due to the one-time favorable impacts of amending prior year tax returns during the nine months ended October 4, 2020.
In the first nine months of 2021, the Company decreased its liability for unrecognized tax benefits by $0.6 million. The decrease was primarily due to settlements with taxing authorities and a lapse of applicable statute of limitations. As of October 3, 2021, the Company had accrued approximately $10.2 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of October 3, 2021 reflects a reduction for $3.0 million of these unrecognized tax benefits.
In October 2021, the statute of limitations for the 2017 U.S. federal income tax return closed. As a result of this lapse in the statute of limitations, the Company will recognize $1.2 million of unrecognized tax benefits in the fourth quarter of 2021.
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, it is reasonably possible that approximately $1.7 million of unrecognized tax benefits, including the $1.2 million to be recognized in the fourth quarter of 2021, may be recognized within the next 12 months due to a lapse of statute of limitations.
NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three and nine months ended October 3, 2021 and October 4, 2020 are reflected in the table below:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| Statement of Operations Location | | October 3, 2021 | | October 4, 2020 |
| | | (in thousands) |
| Interest rate swap contracts loss | Interest expense | | $ | (1,845) | | | $ | (1,328) | |
| Amortization of benefit plan prior service cost and net actuarial losses | Other expense | | (705) | | | (560) | |
| Total loss reclassified from AOCI, net | | | $ | (2,550) | | | $ | (1,888) | |
| | | | | | | | | | | | | | | | | |
| | | Nine Months Ended |
| Statement of Operations Location | | October 3, 2021 | | October 4, 2020 |
| | | (in thousands) |
| Interest rate swap contracts loss | Interest expense | | $ | (3,952) | | | $ | (2,944) | |
| Amortization of benefit plan prior service cost and net actuarial losses | Other expense | | (2,132) | | | (1,647) | |
| Total loss reclassified from AOCI, net | | | $ | (6,084) | | | $ | (4,591) | |
NOTE 15 – RESTRUCTURING AND OTHER CHARGES
A summary of restructuring activities for the 2021 and 2019 restructuring plans are presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Workforce Reduction | | Asset Impairment | | |
| 2021 Plan | | 2019 Plan | | 2021 Plan | | Total |
| (in thousands) |
| Balance, at January 3, 2021 | $ | — | | | $ | 1,064 | | | $ | — | | | $ | 1,064 | |
| Charged to expenses | 2,229 | | | (258) | | | 1,650 | | | 3,621 | |
| Deductions | — | | | (645) | | | — | | | (645) | |
| Charged to other accounts | — | | | — | | | (1,650) | | | (1,650) | |
| Balance, at October 3, 2021 | $ | 2,229 | | | $ | 161 | | | $ | — | | | $ | 2,390 | |
For the nine months ended October 3, 2021, the Company recorded restructuring and asset impairment charges of $3.6 million. At October 3, 2021, the restructuring reserve was $2.4 million. Below is a discussion of the restructuring plan activities under the 2021 and 2019 restructuring plans.
2021 Restructuring Plan
On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involves a reduction of approximately 188 employees and the closure of the Company’s manufacturing facility in Thailand at the end of the first quarter of 2022. As a result of this plan, the Company expects to incur pre-tax restructuring charges between the third quarter of 2021 and the fourth quarter of 2022 of approximately $4 million to $5 million. The expected charges are comprised of severance expenses ($2.2 million), retention bonuses ($0.5 million), and asset impairment and other charges ($2.0 million). The retention costs of approximately $0.5 million will be recognized through the end of fiscal year 2022 as earned over the requisite service periods. Restructuring charges of $3.9 million comprised of severance and asset impairment charges were recognized during the third quarter of 2021.
The restructuring plan is expected to result in future cash expenditures of approximately $3 million to $4 million for payment of the employee severance, employee retention bonuses and other costs of the shutdown of the Thailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately $1.7 million. A portion of the annualized savings is expected to be realized on the income statement in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023.
2019 Restructuring Plan
On December 23, 2019, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved a reduction of approximately 105 employees and early termination of 2 office leases. As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0 million. The charge was comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million).
The restructuring plan was expected to result in cash expenditures of approximately $9.0 million for payment of the employee severance and lease exit costs, as described above. The Company expects to complete the restructuring plan in fiscal year 2021 and expects the plan to yield annualized savings of approximately $6.0 million. A portion of the annualized savings was realized on the income statement in fiscal year 2020, with the remaining portion of the annualized savings expected to be realized in fiscal year 2021.
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 January 3, 2021, under Part II, Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, October 3, 2021, and the comparable periods of 2020 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. The nine-month period ended October 3, 2021 includes 39 weeks, and the nine-month period ended October 4, 2020 includes 40 weeks. The three-month periods ended October 3, 2021 and October 4, 2020 both include 13 weeks.
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 the ongoing COVID-19 pandemic and the economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2021. 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.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to impact areas where we operate and sell our products and services. The COVID-19 pandemic has had material adverse effects on our business, results of operations, and financial condition. The duration of the pandemic will ultimately determine the extent to which our operations are impacted.
During the third quarter of 2021, the COVID-19 pandemic had less of an impact on our overall global operations and financial results as COVID-19 vaccination rates increased, COVID-19 related restrictions loosened, and certain countries continued to experience a rebound in economic activity. Consolidated net sales increased 12.2% during the third quarter of 2021 compared to the same period last year. Our global supply chain and manufacturing operations experienced increased impacts of COVID-19 in the quarter. These impacts included raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages – particularly in the United States. These impacts to our supply chain and manufacturing operations increased our costs and adversely affected our gross profit and gross margin.
During the first nine months of 2021, consolidated net sales increased 4.2% compared to the same period last year primarily due to the continued economic recovery from the COVID-19 pandemic in certain countries. During the nine months ended October 3, 2021, the Company recorded $1.2 million of net severance costs in connection with its programs to mitigate the impact of the COVID-19 pandemic, which are included in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations.
General
In the first quarter of 2021, the Company largely completed its integration of the nora acquisition, and integration of its European and Asia-Pacific commercial areas and determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas. See Part I, Item 1, Note 11 of this Quarterly Report on Form 10-Q entitled “Segment Information” for additional information. The results of operations discussion below also includes segment information.
During the quarter ended October 3, 2021, consolidated net sales were $312.7 million compared with net sales of $278.6 million in the third quarter last year. During the first nine months of 2021, consolidated net sales were $860.8 million compared to $826.3 million in the first nine months of last year. Higher net sales during the third quarter of 2021, primarily in the corporate office and education market segments, were due to higher corporate spending, government spending on school renovation projects, and higher prices compared to the same period last year. Higher net sales during the first nine months of 2021 were primarily due to higher sales in non-corporate office market segments including education, healthcare, and transportation. As discussed above, the COVID-19 pandemic continued to impact the third quarter and first nine months of 2021, adversely affecting gross profit margins. Fluctuations in currency exchange rates had a positive impact on net sales of approximately $2.5 million for the third quarter of 2021 and a positive impact of $27.5 million for the first nine months of 2021 compared to the third quarter and first nine months of last year, respectively, mostly driven by the strengthening of the Euro, British Pound sterling, Australian dollar and Chinese Renminbi against the U.S. dollar.
Restructuring
On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involves a reduction of approximately 188 employees and the closure of the Company’s manufacturing facility in Thailand at the end of the first quarter of 2022. As a result of this plan, the Company expects to incur pre-tax restructuring charges between the third quarter of 2021 and the fourth quarter of 2022 of approximately $4 million to $5 million. The expected charges are comprised of severance expenses ($2.2 million), retention bonuses ($0.5 million), and asset impairment and other charges ($2.0 million). The retention costs of approximately $0.5 million will be recognized through the end of fiscal year 2022 as earned over the requisite service periods. Restructuring charges of $3.9 million comprised of severance and asset impairment charges were recognized during the third quarter of 2021.
The restructuring plan is expected to result in future cash expenditures of approximately $3 million to $4 million for payment of the employee severance and employee retention bonuses and other costs of the shutdown of the Thailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately $1.7 million. A portion of the annualized savings is expected to be realized on the income statement in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023.
Goodwill, Intangible Asset and Fixed Asset Impairment
During the first nine months of 2021, there were no indicators of goodwill or intangible asset impairment. During the first quarter of 2020, the Company recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets. See Note 10 entitled “Goodwill and Intangible Assets” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Results of Operations
Consolidated
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 October 3, 2021 and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 3, 2021 | | October 4, 2020 | | October 3, 2021 | | October 4, 2020 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 66.0 | | | 63.3 | | | 63.8 | | | 62.0 | |
| Gross profit on sales | 34.0 | | | 36.7 | | | 36.2 | | | 38.0 | |
| Selling, general and administrative expenses | 24.9 | | | 31.6 | | | 27.5 | | | 31.0 | |
| Restructuring and asset impairment charges | 1.2 | | | (0.7) | | | 0.4 | | | (0.4) | |
| Goodwill and intangible asset impairment charge | — | | | — | | | — | | | 14.7 | |
| Operating income (loss) | 7.9 | | | 5.8 | | | 8.3 | | | (7.3) | |
| Interest/Other expenses | 2.8 | | | 3.0 | | | 2.8 | | | 3.1 | |
| Income (loss) before tax expense | 5.1 | | | 2.8 | | | 5.5 | | | (10.4) | |
| Income tax expense | 1.7 | | | 0.6 | | | 1.5 | | | 0.7 | |
| Net income (loss) | 3.4 | % | | 2.2 | % | | 4.0 | % | | (11.1) | % |
Net Sales
Below is information regarding our consolidated net sales, and analysis of those results, for the three-month and nine-month periods ended October 3, 2021, and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Percentage
Change | | Nine Months Ended | | Percentage
Change |
| October 3, 2021 | | October 4, 2020 | | | October 3, 2021 | | October 4, 2020 | |
| (in thousands) | | | | (in thousands) | | |
| Consolidated net sales | $ | 312,707 | | | $ | 278,642 | | | 12.2 | % | | $ | 860,752 | | | $ | 826,315 | | | 4.2 | % |
For the quarter ended October 3, 2021, consolidated net sales increased $34.1 million (12.2%) versus the comparable period in 2020, including positive currency fluctuations of approximately $2.5 million (0.9%). The sales increase was primarily due to higher net sales in the corporate, retail, healthcare, education and transportation market segments partially offset by lower sales in the hospitality market segment. Currency fluctuations had a positive impact on third quarter 2021 sales compared to the third quarter of 2020 mostly due to the strengthening of the Euro, British Pound sterling, Australian dollar and Chinese Renminbi against the U.S. dollar.
For the nine months ended October 3, 2021, consolidated net sales increased $34.4 million (4.2%) versus the comparable period in 2020, including positive currency fluctuations of approximately $27.5 million (3.3%). The sales increase was primarily due to higher sales in the retail, healthcare, education, residential living and transportation market segments partially offset by decreases in the hospitality and corporate market segments. Currency fluctuations had a positive impact on the first nine months of 2021 sales compared to the same period last year mostly due to the strengthening of the Euro, British Pound sterling, Australian dollar and Chinese Renminbi against the U.S. dollar.
Cost and Expenses
The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three-month and nine-month periods ended October 3, 2021, and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Percentage
Change | | Nine Months Ended | | Percentage
Change |
| October 3, 2021 | | October 4, 2020 | | | October 3, 2021 | | October 4, 2020 | |
| (in thousands) | | | | (in thousands) | | |
| Cost of sales | $ | 206,382 | | | $ | 176,480 | | | 16.9 | % | | $ | 549,397 | | | $ | 512,548 | | | 7.2 | % |
| Selling, general and administrative expenses | 77,735 | | | 88,161 | | | (11.8) | % | | 236,867 | | | 255,902 | | | (7.4) | % |
For the quarter ended October 3, 2021, consolidated cost of sales increased $29.9 million (16.9%) compared to the third quarter of 2020, primarily due to higher net sales and the impacts of COVID-19 on our supply chain and manufacturing operations resulting in higher labor costs, higher shipping costs and higher raw material costs. Currency fluctuations had a negative impact on consolidated costs of sales of approximately $1.9 million (1.1%) on the year-over-year comparison. As a percentage of net sales, our cost of sales increased to 66.0% for the third quarter of 2021 versus 63.3% for the third quarter of 2020.
For the nine months ended October 3, 2021, consolidated cost of sales increased $36.8 million (7.2%) versus the comparable period in 2020, primarily due to the impacts of COVID-19 on our supply chain and manufacturing operations as discussed above and the negative impact of currency fluctuations of approximately $18.5 million (3.6%) on the year-over-year comparison. As a percentage of net sales, our cost of sales increased to 63.8% for the first nine months of 2021 versus 62.0% for the first nine months of 2020.
For the quarter ended October 3, 2021, consolidated selling, general and administrative (“SG&A”) expenses decreased $10.4 million (11.8%) versus the comparable period in 2020. Currency translation had a $0.4 million (0.4%) negative impact on the year-over-year comparison. SG&A expenses were lower for the third quarter of 2021 primarily due to (1) lower severance costs of $7.5 million due to employee separations in the prior year period to mitigate the impacts of COVID-19 and (2) lower legal fees and other related costs primarily due to the settlement of the SEC matter in the prior year period, including a $5 million expense for a civil money penalty to the SEC. These decreases were partially offset by higher labor costs in the third quarter of 2021 as performance-based compensation costs were lower in the prior year period due to the impacts of COVID-19. As a percentage of sales, SG&A expenses decreased to 24.9% for the third quarter of 2021 versus 31.6% for the third quarter of 2020.
For the nine months ended October 3, 2021, consolidated SG&A expenses decreased $19.0 million (7.4%) versus the comparable period in 2020. Currency translation had a $6.2 million (2.4%) negative impact on the year-over-year comparison. SG&A expenses were lower for the first nine months of 2021 primarily due to (1) lower legal fees and other related costs primarily due to the settlement of the SEC matter in the prior year period as discussed above and (2) lower severance costs of $13.4 million due to the prior year cost reduction initiatives in response to COVID-19. These decreases were partially offset by higher performance-based compensation as these costs were lower in the prior year period due to the impacts of COVID-19. As a percentage of sales, SG&A expenses decreased to 27.5% for the first nine months of 2021 versus 31.0% for the first nine months of 2020.
Interest Expense
For the quarter ended October 3, 2021, interest expense increased $2.3 million, from $5.4 million in the comparable period last year to $7.7 million. For the nine months ended October 3, 2021, interest expense increased $6.3 million, from $16.0 million in the comparable period last year, to $22.3 million. The increase in both the three months and nine months ended October 3, 2021 was primarily due to higher fixed-rate interest expense on the senior notes debt, which replaced variable-rate debt under the credit facility, and deferred losses recognized on terminated interest rate swaps that were reclassified from accumulated other comprehensive loss into interest expense during the respective periods.
Other Expense
Other expenses decreased $2.0 million and $7.3 million during the three months and nine months ended October 3, 2021, respectively, compared to 2020 primarily due to a $4.2 million write-down of damaged raw material inventory in 2020, which resulted from a fire at a leased storage facility.
Segment Operating Results
As discussed above, the Company has two operating and reportable segments – AMS and EAAA. Segment information presented below for fiscal year 2020 has been restated to conform to the new reportable segment structure.
AMS Segment - Net Sales and Adjusted Operating Income (“AOI”)
The following table presents AMS segment net sales and AOI for the three-month and nine-month periods ended October 3, 2021, and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Percentage Change | | Nine Months Ended | | Percentage Change |
| October 3, 2021 | | October 4, 2020 | | | October 3, 2021 | | October 4, 2020 | |
| (in thousands) | | | | (in thousands) | | |
| AMS segment net sales | $ | 176,770 | | | $ | 142,858 | | | 23.7 | % | | $ | 460,402 | | | $ | 452,171 | | | 1.8 | % |
AMS segment AOI(1) | 21,595 | | | 20,279 | | | 6.5 | % | | 54,606 | | | 67,771 | | | (19.4) | % |
(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to goodwill and intangible asset impairment charges, purchase accounting amortization, restructuring, asset impairment, severance and other costs. See Note 11 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
During the third quarter of 2021, net sales in AMS increased 23.7% versus the comparable period in 2020 primarily due to higher sales in the corporate office, education and healthcare market segments, partially offset by decreases in the hospitality market segment. Higher prices also contributed to the increase in sales for the quarter.
During the first nine months of 2021, net sales in AMS increased 1.8% versus the comparable period in 2020 primarily due to higher sales in non-corporate office market segments including education, healthcare, retail, consumer residential and transportation market segments. These increases were partially offset by decreases in the corporate office and hospitality market segments.
AOI in AMS increased 6.5% during the third quarter of 2021 compared to the prior year period primarily due to higher sales. Lower profit margins (AOI as a percentage of net sales) compared to the prior year period were due to higher raw material costs, higher freight costs, higher labor costs, and higher performance-based compensation which adversely impacted AMS’s AOI in the third quarter of 2021.
AOI in AMS decreased 19.4% during the first nine months of 2021 compared to the prior year period primarily due to the impact of lower profit margins as discussed above.
EAAA Segment - Net Sales and AOI
The following table presents EAAA segment net sales and AOI for the three-month and nine-month periods ended October 3, 2021, and October 4, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Percentage Change | | Nine Months Ended | | Percentage Change |
| October 3, 2021 | | October 4, 2020 | | | October 3, 2021 | | October 4, 2020 | |
| (in thousands) | | | | (in thousands) | | |
| EAAA segment net sales | $ | 135,937 | | | $ | 135,784 | | | 0.1 | % | | $ | 400,350 | | | $ | 374,144 | | | 7.0 | % |
EAAA segment AOI(1) | 8,586 | | | 7,821 | | | 9.8 | % | | 26,557 | | | 17,151 | | | 54.8 | % |
(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to goodwill and intangible asset impairment charges, purchase accounting amortization, restructuring, asset impairment, severance and other costs. See Note 11 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
During the third quarter of 2021, net sales in EAAA increased 0.1% versus the comparable period in 2020. Currency fluctuations had an approximately $1.9 million (1.4%) positive impact on EAAA’s third quarter 2021 sales compared to third quarter 2020 due to the strengthening of the Euro, British Pound sterling, Australian dollar and the Chinese Renminbi against the U.S. dollar. On a market segment basis, the EAAA sales increase was most significant in the corporate office, retail, and transportation market segments, partially offset by decreases in the education, residential living and leisure market segments.
During the first nine months of 2021, net sales in EAAA increased 7.0% versus the comparable period in 2020. Currency fluctuations had an approximately $25.6 million (6.8%) positive impact on EAAA’s first nine months of 2021 sales compared to the first nine months of 2020 due to the strengthening of the Euro, British Pound sterling, Australian dollar and the Chinese Renminbi against the U.S. dollar. On a market segment basis, the EAAA sales increase was most significant in the retail, public buildings, corporate office, residential living and transportation market segments partially offset by decreases in the leisure market segment.
AOI in EAAA increased 9.8% during the third quarter of 2021 versus the comparable period in 2020 primarily due to the impact of higher net sales and lower selling expenses. Currency fluctuations had an approximately $0.1 million (0.4%) positive impact on AOI for the third quarter of 2021.
AOI in EAAA increased 54.8% during the first nine months of 2021 versus the comparable period in 2020. Currency fluctuations had an approximately $2.7 million (7.1%) positive impact on AOI for the nine-month period of 2021. The impact of higher net sales and higher gross profit margins partially offset by higher SG&A expenses, comprised of higher performance-based compensation and lower government wage support programs, contributed to the increase in AOI.
Liquidity and Capital Resources
General
At October 3, 2021, we had $92.8 million in cash. At that date, we had $232.6 million in term loan borrowing, no revolving loan borrowings, and $1.6 million in letters of credit outstanding under our Syndicated Credit Facility, and we had $300.0 million of Senior Notes outstanding. As of October 3, 2021, we had additional borrowing capacity of $298.4 million under the Syndicated Credit Facility and $6.0 million of borrowing capacity under other credit facilities in place at other non-U.S. subsidiaries. We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months.
The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility. The Company’s foreign subsidiaries and certain non-material domestic subsidiaries are considered non-guarantors. Net sales for the non-guarantor subsidiaries were approximately $148 million and $432 million for the three-month and nine-month periods ended October 3, 2021, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $57 million and $88 million as of October 3, 2021 and January 3, 2021, respectively.
Analysis of Cash Flows
The following table presents a summary of cash flows for the nine-month periods ended October 3, 2021 and October 4, 2020, respectively:
| | | | | | | | | | | |
| Nine Months Ended |
| October 3, 2021 | | October 4, 2020 |
| (in thousands) |
| Net cash provided by (used in): | | | |
| Operating activities | $ | 64,056 | | | $ | 97,268 | |
| Investing activities | (17,406) | | | (47,067) | |
| Financing activities | (53,079) | | | (30,183) | |
| Effect of exchange rate changes on cash | (3,815) | | | 2,400 | |
| Net change in cash and cash equivalents | (10,244) | | | 22,418 | |
| Cash and cash equivalents at beginning of period | 103,053 | | | 81,301 | |
| Cash and cash equivalents at end of period | $ | 92,809 | | | $ | 103,719 | |
Cash provided by operating activities was $64.1 million for the nine months ended October 3, 2021, which represents a decrease of $33.2 million from the prior year comparable period. The decrease was primarily due to a greater use of cash for working capital during the first nine months of 2021. Specifically, increases in accounts payable and accrued expenses that contributed positively to the change in working capital were offset by higher inventories and higher prepaid expenses attributable primarily to a build-up of inventory due to increased customer demand in 2021. Increases in accounts receivable as a result of higher net sales also contributed to the change in working capital during 2021. Lower variable compensation payouts in 2021 related to 2020 performance also had a positive impact on cash provided by operating activities, partially offsetting the decrease from changes in working capital.
Cash used in investing activities was $17.4 million for the nine months ended October 3, 2021, which represents a decrease of $29.7 million from the prior year comparable period. The decrease from the comparable period was primarily due to a decrease in capital expenditures due to reduced capital investment as a result of the impacts of COVID-19.
Cash used in financing activities was $53.1 million for the nine months ended October 3, 2021, which represents an increase of $22.9 million from the prior year comparable period. The year-over-year increase was primarily due to the Company paying down the outstanding balance on the term loans in 2021 partially offset by lower dividend payments.
Forward-Looking Statement on Impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full year fiscal 2021 results and beyond are uncertain. We believe the most significant elements of uncertainty are (1) the intensity and duration of the impact on construction, renovation, and remodeling; (2) corporate, government, and consumer spending levels and sentiment including but not limited to when and how employees will be required to work from their office versus working from home; (3) new and renewed government mandated lockdowns, quarantine and other procedures in response to resurgences of COVID-19 cases and variants of the virus; and (4) the ability of our sales channels, supply chain, manufacturing, suppliers, freight providers and distribution partners to continue operating through disruptions. Any or all of these factors could negatively impact our financial position, results of operations, cash flows, and outlook.
We anticipate revenue growth in the fourth quarter of fiscal year 2021 compared with the fourth quarter of 2020. We are also anticipating continued impacts to our global supply chain and manufacturing operations. These impacts are expected to include significant cost increases in our raw materials globally and continued labor shortages and cost increases – particularly in the United States. The impacts may also potentially include raw material shortages, higher freight costs, shipping delays, and other disruption. These impacts to our supply chain and manufacturing will increase our costs and adversely affect our gross margins, they may inhibit our ability to manufacture and ship product timely, and at times they may inhibit our ability to meet customer demands and expectations.
We also plan to continue evaluating our cost structure and global manufacturing footprint to identify and activate opportunities to decrease costs and optimize our global cost structure.
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company’s cash flows from operations can be affected by numerous factors including the uncertainty of COVID-19 and its impact on global operations, raw material availability and cost, and demand for our products.
Backlog
As of October 24, 2021, the consolidated backlog of orders was approximately $244.0 million. As disclosed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, backlog was approximately $177.7 million as of February 7, 2021. Disruptions in supply and distribution chains, global travel restrictions and government shelter in place orders due to the impact of COVID-19 have resulted in delays of construction projects and flooring installations in many regions worldwide.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The 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 January 3, 2021, under Part II, Item 7A of that Form 10-K. The discussion here focuses on the nine months ended October 3, 2021, 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.
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.
Because the debt outstanding under our Syndicated Credit Facility has variable interest rates based on an underlying prime lending rate or LIBOR rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or LIBOR rate would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 3, 2021.
As of October 3, 2021, based on a hypothetical immediate 100 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 $11.4 million. Conversely, a 100 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $6.5 million.
As of October 3, 2021, 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 $11.0 million or an increase in the fair value of our financial instruments of $13.5 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 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.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Based on the 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 Quarterly Report to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
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
From time to time, we are a party to legal proceedings, whether arising in the ordinary course of business or otherwise. The disclosure under the headings “Lawsuit by Former CEO in Connection with Termination” and “Putative Class Action Lawsuit” set forth in Note 18 to the consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended January 3, 2021 is incorporated by reference herein. In the lawsuit by the former CEO, Mr. Gould’s defamation claims (two counts) were dismissed with prejudice by stipulation of the parties. The Company has filed a motion for summary judgment on Mr. Gould’s remaining claims, and that motion is pending with the Court. The Company believes the lawsuit is without merit and intends to defend vigorously against it.
In the putative class action lawsuit, the Court has appointed a lead plaintiff, which filed an Amended Complaint that, among other things, added the Company’s former chief financial officer as a defendant. As in the original complaint, the allegations in the Amended Complaint relate to the subject matter of the concluded SEC investigation described in Note 18 to the consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended January 3, 2021. The Company has filed a motion to dismiss the Amended Complaint in its entirety, and that motion is pending with the Court. The Company believes the putative class action is without merit and that the Company has good defenses to it. The Company intends to defend itself vigorously against the action.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended January 3, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no purchases made by or on behalf of the Company, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during our third quarter ended October 3, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The following exhibits are filed or furnished with this report:
| | | | | |
EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 101.INS | XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. |
| 104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended October 3, 2021, formatted in Inline XBRL |
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 9, 2021 | By: | /s/ Bruce A. Hausmann |
| | Bruce A. Hausmann
Chief Financial Officer
(Principal Financial Officer) |
