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 ended, or as of,April 4, 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 three month period endedApril 4, 2021 includes 13 weeks, and the three month period endedApril 5, 2020 includes 14 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. -28- -------------------------------------------------------------------------------- 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 spread in 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, and it is anticipated that this will continue for an indefinite period of time. The duration of the pandemic will ultimately determine the extent to which our operations are impacted. We continue to monitor our operations and have implemented various programs to mitigate the effects on our business including reductions in employees, labor costs, marketing expenses, consulting expenses, travel costs, various other costs, and capital expenditures, as well as reducing the amount of the cash dividend that we pay on our common stock and suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives. During the first quarter of 2021, the COVID-19 pandemic continued to impact our global operations, as consolidated net sales declined 12.1% compared to the same period last year. Lower sales are primarily in the corporate office market segment as COVID-19 continues to impact corporate spending and reinvestment. As discussed above, the Company implemented, and continues to implement, various cost cutting initiatives to mitigate the effects of COVID-19 on our operations. During the three months endedApril 4, 2021 , the Company recorded$1.4 million of involuntary severance costs, which are included in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations. In addition, many of our salesforce and administrative employees globally continue to work remotely in accordance with the Company's ongoing safety measures, as well as any local government orders and "shelter in place" directives in place from time to time. 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 endedApril 4, 2021 , consolidated net sales were$253.3 million compared with net sales of$288.2 million in the first quarter last year. The first quarter of 2021 was negatively impacted by the continued effects of the COVID-19 pandemic as discussed above. Fluctuations in currency exchange rates had a positive impact on net sales of approximately$11.8 million for the first quarter of 2021 compared to the first quarter of last year, mostly driven by the strengthening of the Euro, British Pound sterling and Australian dollar against theU.S. dollar. -29- -------------------------------------------------------------------------------- Table of ContentsGoodwill , Intangible Asset and Fixed Asset Impairment During the first quarter of 2021, there were no indicators of goodwill or intangible asset impairment. During the first quarter of 2020, the Company recognized a charge of$121.3 million for the impairment of goodwill and certain intangible assets. See Note 10 entitled "Goodwill and Intangible Assets" of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Results of Operations Consolidated The following table presents, as a percentage of net sales, certain items included in our consolidated condensed statements of operations for the three month periods endedApril 4, 2021 andApril 5, 2020 : Three Months Ended April 4, 2021 April 5, 2020 Net sales 100.0 % 100.0 % Cost of sales 62.1 60.3 Gross profit on sales 37.9 39.7 Selling, general and administrative expenses 31.3
30.4
Restructuring charges (0.1)
(0.4)
Goodwill and intangible asset impairment charge - 42.1 Operating income (loss) 6.7 (32.4) Interest/Other expenses 3.1 2.5 Income (loss) before tax expense 3.6 (34.9) Income tax expense 0.8 0.5 Net income (loss) 2.8 % (35.4) % Net Sales Below is information regarding our consolidated net sales, and analysis of those results, for the three month periods endedApril 4, 2021 , andApril 5, 2020 : Three Months Ended Percentage April 4, 2021 April 5, 2020 Change (in thousands) Consolidated net sales$ 253,260 $ 288,169 (12.1) % For the quarter endedApril 4, 2021 , consolidated net sales decreased$34.9 million (12.1%) versus the comparable period in 2020, net of positive currency fluctuations of approximately$11.8 million (4.1%). The sales decline was primarily due to the impact of the COVID-19 pandemic as discussed above. Currency fluctuations had a positive impact on first quarter 2021 sales compared to the first quarter of 2020 mostly due to the strengthening of the Euro, British Pound sterling and Australian dollar against theU.S. dollar. Cost and Expenses The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three month periods endedApril 4, 2021 , andApril 5, 2020 : Three Months Ended Percentage April 4, 2021 April 5, 2020 Change (in thousands) Cost of sales$ 157,222 $ 173,858 (9.6) % Selling, general and administrative expenses 79,302 87,683 (9.6) % -30-
-------------------------------------------------------------------------------- Table of Contents For the quarter endedApril 4, 2021 , consolidated cost of sales decreased$16.6 million (9.6%) compared to the first quarter of 2020, primarily due to lower net sales and the negative impact of currency fluctuations of approximately$7.6 million (4.3%) on the year-over-year comparison. As a percentage of net sales, our cost of sales increased to 62.1% for the first quarter of 2021 versus 60.3% for the first quarter of 2020, primarily due to changes in fixed cost absorption driven by lower production volumes due to the impact of COVID-19. For the quarter endedApril 4, 2021 , consolidated selling, general and administrative ("SG&A") expenses decreased$8.4 million (9.6%) versus the comparable period in 2020. Currency translation had a$2.8 million (3.2%) negative impact on the year-over-year comparison. SG&A expenses were lower for the first quarter of 2021 primarily due to (1) lower selling expenses of$8.9 million due to lower net sales, and (2) lower marketing expenses of$1.3 million due to fewer marketing initiatives. These decreases were partially offset by higher performance-based compensation of$2.4 million as these costs were lower in the prior year due to the impacts of COVID-19. As a percentage of sales, SG&A expenses increased to 31.3% for the first quarter of 2021 versus 30.4% for the first quarter of 2020. Interest Expense For the quarter endedApril 4, 2021 , interest expense increased$1.7 million , from$5.6 million in the comparable period last year to$7.3 million , primarily due to deferred losses on terminated interest rate swaps that were reclassified from accumulated other comprehensive loss into interest expense during the quarter. Segment Operating Results As discussed above, in the first quarter of 2021, the Company has two operating and reportable segments - AMS and EAAA. Segment information presented below for fiscal year 2020 has been restated to conform to the new reportable segment structure. AMS Segment -Net Sales and Adjusted Operating Income ("AOI") The following table presents AMS segment net sales and AOI for the three month periods endedApril 4, 2021 , andApril 5, 2020 : Three Months Ended April 4, 2021 April 5, 2020 Percentage Change (in thousands) AMS segment net sales$ 126,967 $ 158,091 (19.7) % AMS segment AOI(1) 11,913 23,552 (49.4) % (1) Includes allocation of corporate SG&A expenses During the first quarter of 2021, net sales in AMS decreased 19.7% versus the comparable period in 2020 primarily due to the continued impacts of COVID-19. On a market segment basis, the AMS sales decrease was most significant in the corporate, hospitality, public buildings and education market segments, partially offset by increases in the healthcare and consumer residential market segments. AOI in AMS decreased 49.4% during the first quarter of 2021 primarily due to lower net sales as discussed above. Lower profit margins due to lower fixed cost leverage in the plant, higher raw material costs and higher freight costs also contributed to the decrease in AOI compared to the prior year period, partially offset by lower selling expenses due to reduced sales. -31- -------------------------------------------------------------------------------- Table of Contents EAAA Segment -Net Sales and AOI The following table presents EAAA segment net sales and AOI for the three month periods endedApril 4, 2021 , andApril 5, 2020 : Three Months Ended April 4, 2021 April 5, 2020 Percentage Change (in thousands) EAAA segment net sales$ 126,293 $ 130,078 (2.9) % EAAA segment AOI(1) 8,011 5,798 38.2 % (1) Includes allocation of corporate SG&A expenses During the first quarter of 2021, net sales in EAAA decreased 2.9% versus the comparable period in 2020 primarily due to the continued impacts of COVID-19. Currency fluctuations had an approximately$11.2 million (8.6%) positive impact on EAAA's first quarter 2021 sales compared to 2020 due to the strengthening of the Euro, British Pound sterling and the Australian dollar against theU.S. dollar. On a market segment basis, the EAAA sales decrease was most significant in the corporate, transportation and hospitality market segments, partially offset by increases in the public building, retail, and education market segments. AOI in EAAA increased 38.2% during the first quarter of 2021 versus the comparable period in 2020. Currency fluctuations had an approximately$1.5 million (13.2%) positive impact on AOI for the quarter. The impact of lower net sales was offset by higher gross profit margins and lower SG&A expenses, comprised of lower selling expenses and lower labor costs due to employee position eliminations. -32- -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources General AtApril 4, 2021 , we had$106.9 million in cash. At that date, we had$270.9 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 ofApril 4, 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$136 million for the three month period endedApril 4, 2021 . Total indebtedness of the non-guarantor subsidiaries was approximately$79 million as ofApril 4, 2021 . Analysis of Cash Flows The following table presents a summary of cash flows for the three month periods endedApril 4, 2021 andApril 5, 2020 , respectively: Three Months Ended April 4, 2021 April 5, 2020 (in thousands)
Net cash provided by (used in): Operating activities$ 24,855 $ (15,717) Investing activities (5,214) (22,294) Financing activities (12,981) 32,475 Effect of exchange rate changes on cash (2,790) (3,114) Net change in cash and cash equivalents 3,870 (8,650) Cash and cash equivalents at beginning of period 103,053 81,301 Cash and cash equivalents at end of period$ 106,923 $ 72,651 Cash provided by operating activities was$24.9 million for the three months endedApril 4, 2021 , which represents an increase of$40.6 million compared with cash used in operating activities in the prior year comparable period. The increase was primarily due to variable compensation payouts in 2021 related to 2020 performance that were greatly reduced versus the payouts that occurred in 2020 related to 2019 performance. Working capital changes also contributed positively, specifically increases in accounts payable and accrued expenses, offset by higher inventories and higher prepaid expenses due primarily to a build-up of inventory due to higher expected demand. Accounts receivable collections also contributed to the increase in working capital during 2021 despite lower net sales due to the impacts of COVID-19. Cash used in investing activities was$5.2 million for the three months endedApril 4, 2021 , which represents a decrease of$17.1 million from the prior year comparable period. The decrease was primarily due to a decrease in capital expenditures from the prior year comparable period due to reduced capital investment as a result of the impacts of COVID-19. Cash used in financing activities was$13.0 million for the three months endedApril 4, 2021 , which represents a decrease of$45.5 million compared with cash provided by financing activities in the prior year comparable period. Financing activities for 2021 include lower revolving loan borrowings offset by higher repayments of term loan and revolving loan debt. -33- -------------------------------------------------------------------------------- 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; and (3) the ability of our sales channels, supply chain, manufacturing, 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. As the impact of the COVID-19 pandemic continues to affect companies with global operations, we anticipate that our business and results in the second quarter of 2021 will continue to be adversely affected, and the timeline and pace of recovery is uncertain. While we are unable to predict with certainty, we anticipate revenue and operating income growth in the second quarter of fiscal year 2021 compared with the second quarter of 2020. The Company has implemented several cost reduction and avoidance initiatives to align with anticipated customer demand, including a voluntary employee separation program, temporary employee furloughs and other time-and-pay reduction programs, involuntary employee separations where necessary to streamline roles and responsibilities, and various other cost reducing initiatives. In addition, the Company has reduced its capital spending plans. 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 ofApril 25, 2021 , the consolidated backlog of orders was approximately$202.9 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. -34-
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