INTERFACE, INC. 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 endedJanuary 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 endedOctober 3, 2021 includes 39 weeks, and the nine-month period endedOctober 4, 2020 includes 40 weeks. The three-month periods endedOctober 3, 2021 andOctober 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 endedJanuary 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. -29- -------------------------------------------------------------------------------- Table of Contents Impact of the COVID-19 Pandemic InMarch 2020 , theWorld 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 inthe 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 endedOctober 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 andAsia-Pacific commercial areas and determined that it has two operating and reportable segments - namelyAmericas ("AMS") andEurope ,Africa ,Asia andAustralia (collectively "EAAA"). The AMS operating segment is unchanged from prior year and continues to includethe United States ,Canada andLatin 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 endedOctober 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 theU.S. dollar. Restructuring OnSeptember 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 inThailand 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 theThailand 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. -30- -------------------------------------------------------------------------------- Table of ContentsGoodwill , 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$121.3 million for the impairment of goodwill and certain intangible assets. See Note 10 entitled "Goodwill and Intangible Assets" of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Results of Operations Consolidated The following table presents, as a percentage of net sales, certain items included in our consolidated condensed statements of operations for the three-month and nine-month periods endedOctober 3, 2021 andOctober 4, 2020 : Three Months Ended Nine Months Ended October 3, 2021 October 4, 2020 October 3, 2021 October 4, 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 66.0 63.3 63.8 62.0 Gross profit on sales 34.0 36.7 36.2 38.0 Selling, general and administrative expenses 24.9 31.6 27.5 31.0 Restructuring and asset impairment charges 1.2 (0.7) 0.4 (0.4)Goodwill and intangible asset impairment charge - - - 14.7 Operating income (loss) 7.9 5.8 8.3 (7.3) Interest/Other expenses 2.8 3.0 2.8 3.1 Income (loss) before tax expense 5.1 2.8 5.5 (10.4) Income tax expense 1.7 0.6 1.5 0.7 Net income (loss) 3.4 % 2.2 % 4.0 % (11.1) % Net Sales Below is information regarding our consolidated net sales, and analysis of those results, for the three-month and nine-month periods endedOctober 3, 2021 , andOctober 4, 2020 : Three Months Ended Nine Months Ended October 3, October 4, Percentage October 3, October 4, Percentage 2021 2020 Change 2021 2020 Change (in thousands) (in thousands) Consolidated net sales$ 312,707 $ 278,642 12.2 %$ 860,752 $ 826,315 4.2 % For the quarter endedOctober 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 theU.S. dollar. For the nine months endedOctober 3, 2021 , consolidated net sales increased$34.4 million (4.2%) versus the comparable period in 2020, including positive currency fluctuations of approximately$27.5 million (3.3%). The sales increase was primarily due to higher sales in the retail, healthcare, education, residential living and transportation market segments partially offset by decreases in the hospitality and corporate market segments. Currency fluctuations had a positive impact on the first nine months of 2021 sales compared to the same period last year mostly due to the strengthening of the Euro, British Pound sterling, Australian dollar and Chinese Renminbi against theU.S. dollar. -31-
-------------------------------------------------------------------------------- Table of Contents Cost and Expenses The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three-month and nine-month periods endedOctober 3, 2021 , andOctober 4, 2020 : Three Months Ended Nine Months Ended October 3, October 4, Percentage October 3, October 4, Percentage 2021 2020 Change 2021 2020 Change (in thousands) (in thousands) Cost of sales$ 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 endedOctober 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 endedOctober 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 endedOctober 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 theSEC matter in the prior year period, including a$5 million expense for a civil money penalty to theSEC . 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 endedOctober 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 theSEC 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 3, 2021 , respectively, compared to 2020 primarily due to a$4.2 million write-down of damaged raw material inventory in 2020, which resulted from a fire at a leased storage facility. -32- -------------------------------------------------------------------------------- Table of Contents Segment Operating Results As discussed above, the Company has two operating and reportable segments - AMS and EAAA. Segment information presented below for fiscal year 2020 has been restated to conform to the new reportable segment structure. AMS Segment -Net Sales and Adjusted Operating Income ("AOI") The following table presents AMS segment net sales and AOI for the three-month and nine-month periods endedOctober 3, 2021 , andOctober 4, 2020 : Three Months Ended Nine Months Ended October 3, October 4, October 3, October 4, 2021 2020 Percentage Change 2021 2020 Percentage Change (in thousands) (in thousands) AMS segment net sales$ 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 endedOctober 3, 2021 , andOctober 4, 2020 : Three Months Ended Nine Months Ended October 3, October 4, October 3, October 4, 2021 2020 Percentage Change 2021 2020 Percentage Change (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 theU.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. -33- -------------------------------------------------------------------------------- Table of Contents 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 theU.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. -34- -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources General AtOctober 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 ofOctober 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 endedOctober 3, 2021 , respectively. Total indebtedness of the non-guarantor subsidiaries was approximately$57 million and$88 million as ofOctober 3, 2021 andJanuary 3, 2021 , respectively. Analysis of Cash Flows The following table presents a summary of cash flows for the nine-month periods endedOctober 3, 2021 andOctober 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
Cash provided by operating activities was$64.1 million for the nine months endedOctober 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 endedOctober 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 endedOctober 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. -35- -------------------------------------------------------------------------------- Table of Contents 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 inthe 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 ofOctober 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 endedJanuary 3, 2021 , backlog was approximately$177.7 million as ofFebruary 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. -36-
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