Annual Report — Form 10-K Filing Table of Contents
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10-K — Interface, Inc. Form 10-K for Fiscal Year 2007
(Exact
name of registrant as specified in its charter)
Georgia
58-1451243
(State
of incorporation)
(I.R.S.
Employer Identification No.)
2859
Paces Ferry Road, Suite 2000
Atlanta,
Georgia
30339
(Address
of principal executive offices)
(zip
code)
Registrant’s
telephone number, including area code:
(770)
437-6800
Securities
Registered Pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.10
Par Value Per Share
Series B Participating
Cumulative Preferred Stock Purchase Rights
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES þ NO o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES þ NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”“accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934. (Check one):
Large
Accelerated Filer þ
Accelerated
Filer o
Non-Accelerated
Filer o
Smaller
Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO þ
Aggregate
market value of the voting and non-voting stock held by non-affiliates of the
registrant as of June 29, 2007 (assuming conversion of Class B Common Stock into
Class A Common Stock): $1,057,749,351 (56,084,271 shares valued at the last
sales price of $18.86 on June 29, 2007). See Item 12.
Portions
of the Proxy Statement for the 2008 Annual Meeting of Shareholders are
incorporated by reference into Part III.
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PART
I
ITEM
1. BUSINESS
Introduction
and General
We are
the worldwide leader in design, production and sales of modular carpet. Our
global market share of the specified carpet tile segment is approximately 35%,
which we believe is more than double that of our nearest competitor. In recent
years, modular carpet sales growth in the floorcovering industry has
significantly outpaced the growth of the overall industry, as architects,
designers and end users increasingly recognized the unique and superior
attributes of modular carpet, including its dynamic design capabilities, greater
economic value (which includes lower costs as a result of reduced waste in both
installation and replacement), and installation ease and speed. Our Modular
Carpet segment sales, which do not include modular carpet sales in our Bentley
Prince Street segment, grew from $442.3 million to $930.7 million
during the 2002 to 2007 period, representing a 16.0% compound annual growth
rate.
Our Bentley Prince Street® brand
is the leader in the high-end, designer-oriented sector of the broadloom market
segment, where custom design and high quality are the principal specifying and
purchasing factors.
As a
global company with a reputation for high quality, reliability and premium
positioning, we market products in over 110 countries under established brand
names such as InterfaceFLOR®,
Heuga®, Bentley Prince
Street and FLOR™
in modular carpet; Bentley
Prince Street and
Prince Street House and Home™ in broadloom carpet; and Intersept® in antimicrobial
chemicals. Our principal geographic markets are the Americas, Europe and
Asia-Pacific, where our sales were approximately 55%, 34% and 11%, respectively,
of total net sales for fiscal year 2007.
Capitalizing on our
leadership in modular carpet for the corporate office segment, we embarked on a
segmentation strategy in 2001 to increase our presence and market share for
modular carpet sales in non-corporate office market segments, such as
government, healthcare, hospitality, education and retail space, which combined
are almost twice the size of the approximately $1 billion
U.S. corporate office segment. In 2003, we expanded our segmentation
strategy to target the approximately $11 billion U.S. residential
market segment for carpet. As a result, our mix of corporate office versus
non-corporate office modular carpet sales in the Americas shifted to 46% and
54%, respectively, for 2007 compared with 64% and 36%, respectively, in 2001. We
believe the appeal and utilization of modular carpet is growing in each of these
non-corporate office segments, and we are using our considerable skills and
experience with designing, producing and marketing modular products that make us
the market leader in the corporate office segment to support and facilitate our
penetration into these new segments around the world.
Our
modular carpet leadership, strong business model and segmentation strategy,
implementation of strategic restructuring initiatives commenced in 2000, and
sustained strategic investments in innovative product concepts and designs
enabled us to weather successfully the unprecedented downturn, both in severity
and duration, that affected the commercial interiors industry from 2001 to 2003.
As a result, we were well-positioned to capitalize on improved market conditions
when the commercial interiors industry began to recover in 2004. From 2003 to
2007, we increased our net sales from $593.0 million to
$1,081.3 million, a 12.8% compound annual growth rate. Furthermore, our net
sales increased $166.6 million from 2006 to 2007. We expect further improvements
in net sales and other related value measurements as we build upon our core
strengths and strategies.
In July
2007, we sold our Fabrics Group business segment, which designs, manufactures
and markets specialty fabrics for open plan office furniture systems and
commercial interiors. Thus, we now reflect the results of that
business as discontinued operations. We also sold our Pandel
business, which produces vinyl carpet tile backing and specialty mat and foam
products, in March 2007.
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Our
Strengths
Our
principal competitive strengths include:
Market Leader in
Attractive Modular Carpet Segment. We are the world’s leading
manufacturer of carpet tile with a market share in the specified carpet tile
segment (the segment in which architects and designers are heavily involved in
“specifying”, or selecting, the carpet) of approximately 35%, which we believe
is more than double that of our nearest competitor. Modular carpet has become
more prevalent across all commercial interiors markets as designers, architects
and end users become more familiar with its unique attributes. We are driving
this trend with our product innovations and designs discussed below, and we
expect this trend will continue. According to the 2007 Floor Focus interiors
industry survey of the top 250 designers in the United States, carpet tile was
ranked as the number one “hot product” for the sixth consecutive year. We
believe that we are well positioned to lead and capitalize upon the continued
shift to modular carpet, both domestically and around the world.
Established
Brands and Reputation for Quality, Reliability and
Leadership. Our products are known in the industry for their
high quality, reliability and premium positioning in the marketplace. Our
established brand names in carpets are leaders in the industry. The 2007 Floor Focus survey ranked an
InterfaceFLOR brand first or second in
each of the five survey categories for carpet: design, quality, service,
performance and value. Interface companies also ranked first and third in the
category of “best overall business experience” for carpet companies in this
survey. On the international front, Heuga is one of the
well-recognized brand names in carpet tiles for commercial, institutional and
residential use. More generally, as the
appeal and utilization of modular carpet continues to expand into new market
segments such as education, hospitality and retail space, our reputation as the
inventor and pioneer of modular carpet — as well as our established brands
and leading market position for modular carpet in the corporate office
segment — will enhance our competitive advantage in marketing to the
customers in these new markets.
Innovative
Product Design and Development Capabilities. Our product
design and development capabilities have long given us a significant competitive
advantage, and they continue to do so as modular carpet’s appeal and utilization
expand across virtually every market segment and around the globe. One of our
best design innovations is our
i2™ modular product line, which includes our popular Entropy® product for which
we received a patent in 2005 on the key elements of its design. The i2 line introduced and
features mergeable dye lots, and includes carpet tile products designed to be
installed randomly without reference to the orientation of neighboring
tiles. The
i2 line offers cost-efficient installation and maintenance, interactive
flexibility, and recycled and recyclable materials. Our i2 line of products, which
now comprises more than 37% of our total U.S. modular carpet business,
represents a differentiated category of smart, environmentally sensitive and
stylish modular carpet, and
Entropy has become the fastest growing product in our history. The
award-winning design firm David Oakey Designs had a pivotal role in developing
our i2 product line,
and our long-standing exclusive relationship with David Oakey Designs remains
vibrant and augments our internal research, development and design staff.
Another recent innovation is our patent-pending TacTiles® carpet tile
installation system, which uses small squares of adhesive plastic film to
connect intersecting carpet tiles, thus eliminating the need for traditional
carpet adhesive resulting in a reduction in installation time and waste
materials.
Made-to-Order and
Global Manufacturing Capabilities. The success of our
modernization and restructuring of operations over the past several years gives
us a distinct competitive advantage in meeting two principal requirements of the
specified products markets we primarily target — that is, providing custom
samples quickly and on-time delivery of customized final products. We also can
generate realistic digital samples that allow us to create a virtually unlimited
number of new design concepts and distribute them instantly for customer review,
while at the same time reducing sampling waste. Approximately 75-80% of our
modular carpet products in the United States and Asia-Pacific markets are now
made-to-order and we are increasing our made-to-order production in Europe as
well. Our made-to-order capabilities not only enhance our marketing and sales,
they significantly improve our inventory turns. Our global manufacturing
capabilities in modular carpet production are an important component of this
strength, and give us an advantage in serving the needs of multinational
corporate customers that require products and services at various locations
around the world. Our manufacturing locations across four continents enable us
to compete effectively with local producers in our international markets, while
giving international customers more favorable delivery times and freight
costs.
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Recognized Global
Leadership in Ecological Sustainability. Our long-standing
goal and commitment to be ecologically “sustainable” — that is, the point
at which we are no longer a net “taker” from the earth and do no harm to the
biosphere — has emerged as a competitive strength for our business and
remains a strategic initiative. It now includes Mission Zero™, our global
branding initiative, which represents our mission to eliminate any negative
impact our companies may have on the environment by the year 2020. Our
acknowledged leadership position and expertise in this area resonate deeply with
many of our customers and prospects around the globe, and provide us with a
differentiating advantage in competing for business among architects, designers
and end users of our products, who increasingly make purchase decisions based on
“green” factors. The 2007
Floor Focus survey, which named us the top company among the “Green
Leaders” and gave us the top honors for “Green Kudos,” found that 71% of the
designers surveyed consider sustainability an added benefit and 26% consider it
a “make or break” issue when deciding what products to recommend or
purchase.
Strong Operating
Leverage Position. Our operating leverage, which we define as
our ability to realize profit on incremental sales, is strong and allows us to
increase earnings at a higher rate than our rate of increase in net sales. Our
operating leverage position is primarily a result of (1) the specified,
high-end nature and premium positioning of our principal products in the
marketplace, and (2) the mix of fixed and variable costs in our
manufacturing processes that allow us to increase production of most of our
products without significant incremental increases in fixed costs. For example,
while net sales from our Modular Carpet segment increased from
$442.3 million in 2002 to $930.7 million in 2007, our operating income
from that segment increased from $42.0 million (9.5% of net sales) in 2002
to $133.7 million (14.3% of net sales) in 2007.
Experienced and
Motivated Management and Sales Force. An important component
of our competitive position is the quality of our management team and its
commitment to developing and maintaining an engaged and accountable workforce.
Our team is highly skilled and dedicated to guiding our overall growth and
expansion into our targeted market segments, while maintaining our leadership in
traditional markets and our high contribution margins. We utilize an internal
marketing and predominantly commissioned sales force of approximately 820
experienced personnel, stationed at over 70 locations in over 30 countries, to
market our products and services in person to our customers. We have also
developed special features for our incentive compensation and our sales and
marketing training programs in order to promote performance and facilitate
leadership by our executives in strategic areas.
Our
Business Strategy and Principal Initiatives
Our
business strategy is (1) to continue to use our leading position in the
Modular Carpet segment and our product design and global made-to-order
capabilities as a platform from which to drive acceptance of modular carpet
products across industry segments, while maintaining our leadership position in
the corporate office market segment, and (2) to return to our historical
profit levels in the high-end, designer-oriented sector of the broadloom carpet
market. We will seek to increase revenues and profitability by capitalizing on
the above strengths and pursuing the following key strategic
initiatives:
Continue to
Penetrate Non-Corporate Office Market Segments. We will
continue our focus on product design and marketing and sales efforts in
non-corporate office market segments such as government, education, healthcare,
hospitality, retail and residential space. We began this initiative as part of
our market segmentation strategy in 2001 primarily to reduce our exposure to the
more severe economic cyclicality of the corporate office segment, and we have
shifted our mix of corporate office versus non-corporate office modular carpet
sales in the Americas to 46% and 54%, respectively, in 2007 from 64% and 36%,
respectively, in 2001. To implement this strategy, we:
•
introduced
specialized product offerings tailored to the unique demands of these
segments, including specific designs, functionalities and
prices;
•
created
special sales teams dedicated to penetrating these segments at a high
level, with a focus on specific customer accounts rather than geographic
territories; and
•
realigned
incentives for our corporate office segment sales force generally in order
to encourage their efforts, and where appropriate, to assist our
penetration of these other
segments.
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As part
of this strategy, we launched our FLOR line of products in
2003 to focus on the approximately $11 billion U.S. residential carpet
market segment. These products were specifically created to bring high style
modular floorcovering to the U.S. residential market. FLOR is offered in over
700 Lowe’s stores,
1,580 Target stores, many specialty retailers, over the Internet and in a number
of major retail catalogs. Through such direct and indirect retailing, FLOR sales have grown over
four-fold, from 2004 to 2007. Through agreements
between our FLOR brand
and both Martha Stewart Living Omnimedia and national homebuilder KB Home, we
began to further penetrate the U.S. residential market with a line of
Martha Stewart-branded carpet tiles in the second half of 2007. Through our Heuga Home division, we have
been marketing modular carpet to the residential segment in select international
markets since 2003. We plan to increase our focus on such international
residential soft floorcovering markets, the size of which we believe to be
approximately $2.3 billion in Western Europe alone.
Penetrate
Expanding Geographic Markets for Modular Products. The
popularity of modular carpet continues to increase compared with other
floorcovering products across most markets, internationally as well as in the
United States. While maintaining our leadership in the corporate office segment,
we will continue to build upon our position as the worldwide leader for modular
carpet in order to promote sales in all market segments globally. A principal
part of our international focus — which utilizes our global marketing
capabilities and sales infrastructure — is the significant opportunities in
several emerging geographic markets for modular carpet. Some of these markets,
such as China, India and Eastern Europe, represent large and growing economies
that are essentially new markets for modular carpet products. Others, such as
Germany, are established markets that are transitioning to the use of modular
carpet from historically low levels of penetration. Each of these emerging
markets represents a significant growth opportunity for our modular carpet
business. Our initiative to penetrate these markets will include drawing upon
our internationally recognized
Heuga brand.
Continue to
Minimize Expenses and Invest Strategically. We have steadily
trimmed costs from our operations for several years through multiple and
sometimes painful initiatives, which have made us leaner today and for the
future. Our supply chain and other cost containment initiatives have improved
our cost structure and yielded the operating efficiencies we sought. While we
still seek to minimize our expenses in order to increase profitability, we will
also take advantage of strategic opportunities to invest in systems, processes
and personnel that can help us grow our business and increase profitability and
value.
Sustain
Leadership in Product Design and Development. As discussed
above, our leadership position for product design and development is a
competitive advantage and key strength, especially in the Modular Carpet
segment, where our i2
products and recent
TacTiles installation system have confirmed our position as an innovation
leader. We will continue initiatives to sustain, augment and capitalize upon
that strength to continue to increase our market share in targeted market
segments. Our Mission
Zero global branding initiative, which draws upon and promotes our
ecological sustainability commitment, is part of those initiatives and includes
placing our Mission
Zero logo on many of our marketing and merchandising materials
distributed throughout the world.
Floorcovering
Products/Services
Products
Interface
is the world’s largest manufacturer and marketer of modular carpet, with a
global specified carpet tile market share that we believe is approximately 35%.
We also manufacture and sell broadloom carpet, which generally consists of
tufted carpet sold primarily in twelve-foot rolls, under the Bentley Prince Street brand.
Our broadloom operations focus on the high quality, designer-oriented sector of
the U.S. broadloom carpet market and select international
markets.
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Modular
Carpet. Our modular carpet system, which is marketed under the
established global brands
InterfaceFLOR and
Heuga, and more recently under the Bentley Prince Street brand,
utilizes carpet tiles cut in precise, dimensionally stable squares (usually
50 cm x 50 cm) or rectangles to produce a floorcovering that combines the
appearance and texture of traditional soft floorcovering with the advantages of
a modular carpet system. Our
GlasBac® technology
employs a fiberglass-reinforced polymeric composite backing that allows tile to
be installed and remain flat on the floor without the need for adhesives or
fasteners. We also make carpet tiles with a backing containing post-industrial
and/or post-consumer recycled materials, which we market under the GlasBacRE brand.
Our
carpet tile has become popular for a number of reasons. Carpet tile
incorporating this reinforced backing may be easily removed and replaced,
permitting rearrangement of furniture without the inconvenience and expense
associated with removing, replacing or repairing other soft surface flooring
products, including broadloom carpeting. Because a relatively small portion of a
carpet installation often receives the bulk of traffic and wear, the ability to
rotate carpet tiles between high traffic and low traffic areas and to
selectively replace worn tiles can significantly increase the average life and
cost efficiency of the floorcovering. In addition, carpet tile facilitates
access to sub-floor air delivery systems and telephone, electrical, computer and
other wiring by lessening disruption of operations. It also eliminates the
cumulative damage and unsightly appearance commonly associated with frequent
cutting of conventional carpet as utility connections and disconnections are
made. We believe that, within the overall floorcovering market, the worldwide
demand for modular carpet is increasing as more customers recognize these
advantages.
We use a
number of conventional and technologically advanced methods of carpet
construction to produce carpet tiles in a wide variety of colors, patterns,
textures, pile heights and densities. These varieties are designed to meet both
the practical and aesthetic needs of a broad spectrum of commercial
interiors — particularly offices, healthcare facilities, airports,
educational and other institutions, hospitality spaces, and retail
facilities — and residential interiors. Our carpet tile systems permit
distinctive styling and patterning that can be used to complement interior
designs, to set off areas for particular purposes and to convey graphic
information. While we continue to manufacture and sell a substantial portion of
our carpet tile in standard styles, an increasing percentage of our modular
carpet sales is custom or made-to-order product designed to meet customer
specifications.
In
addition to general uses of our carpet tile, we produce and sell a specially
adapted version of our carpet tile for the healthcare facilities market. Our
carpet tile possesses characteristics — such as the use of the Intersept antimicrobial,
static-controlling nylon yarns, and thermally pigmented, colorfast yarns —
which make it suitable for use in these facilities in place of hard surface
flooring. Moreover, we launched our FLOR line of products to
specifically target modular carpet sales to the residential market segment.
Through our relationship with David Oakey Designs, we also have created modular
carpet products (some of which are part of our i2 product line)
specifically designed for each of the education, hospitality and retail market
segment.
We also
manufacture and sell two-meter roll goods that are structure-backed and offer
many of the advantages of both carpet tile and broadloom carpet. These roll
goods are often used in conjunction with carpet tiles to create special design
effects. Our current principal customers for these products are in the
education, healthcare and government market segments.
We also
sell our TacTiles
carpet tile installation system, along with a variety of traditional adhesives
and products for carpet installation and maintenance.
Broadloom
Carpet. We maintain a significant share of the high-end,
designer-oriented broadloom carpet segment by combining innovative product
design and short production and delivery times with a marketing strategy aimed
at interior designers, architects and other specifiers. Our Bentley Prince Street
designs emphasize the dramatic use of color and multi-dimensional texture. In
addition, we have launched the
Prince Street House and Home collection of high-style broadloom carpet
and area rugs targeted at design-oriented residential consumers. We received the
2007 Best of NeoCon Silver Award in the modular category for the Saturnia™ Collection, which is made up
of carpet tile and broadloom products.
Intersept
Antimicrobial. We sell a proprietary antimicrobial chemical
compound under the registered trademark Intersept. We
incorporate Intersept
in all of our modular carpet products and have licensed Intersept to another company
for use in air filters.
Services
For
several years, we provided or arranged for commercial carpet installation
services, primarily through our Re:Source® service provider network.
The network in the United States included owned and affiliated commercial
floorcovering contractors at various locations across the United States. In
Australia, we offered these services through the largest single carpet
distributor in that country.
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During
the years leading up to 2004, our owned Re:Source dealer businesses
experienced decreased sales volume and intense pricing pressure, primarily due
to the economic downturn in the commercial interiors industry. As a result, we
decided to exit our owned
Re:Source dealer businesses, and in 2004 we began to dispose of several
of our dealer subsidiaries. In 2005, we completed the exit activities related to
the owned dealer businesses. The results of our owned Re:Source dealer businesses
(as well as the Australian dealer business and residential fabrics business that
we also decided to exit) are included in discontinued operations. In early 2006,
we sold certain assets relating to our aligned non-owned dealer network, and
have since discontinued its operations as well. We continue to
provide “turnkey” project management services for national accounts and other
large customers through our InterfaceSERVICES™ business.
Marketing
and Sales
We
traditionally focused our carpet marketing strategy on major accounts, seeking
to build lasting relationships with national and multinational end-users, and on
architects, engineers, interior designers, contracting firms, and other
specifiers who often make or significantly influence purchasing decisions. While
most of our sales are in the corporate office segment, both new construction and
renovation, we emphasize sales in other segments, including retail space,
government institutions, schools, healthcare facilities, tenant improvement
space, hospitality centers, residences and home office space. We began this
initiative as part of our segment diversification strategy in 2001 primarily to
reduce our exposure to the more severe economic cyclicality of the corporate
office segment, and we reduced our mix of corporate office versus non-corporate
office modular carpet sales in the Americas from 64% and 36%, respectively, in
2001 to 46% and 54%, respectively, in 2007. Our marketing efforts are enhanced
by the established and well-known brand names of our carpet products, including
the InterfaceFLOR, FLOR
and Heuga brands in
modular carpet and Bentley
Prince Street brand in broadloom carpet. Our exclusive consulting
agreement with the award-winning, premier design firm David Oakey Designs
enabled us to introduce more than 26 new carpet designs in the United States in
2007 alone.
An
important part of our marketing and sales efforts involves the preparation of
custom-made samples of requested carpet designs, in conjunction with the
development of innovative product designs and styles to meet the customer’s
particular needs. Our mass customization initiative simplified our carpet
manufacturing operations, which significantly improved our ability to respond
quickly and efficiently to requests for samples. In most cases, we can produce
samples to customer specifications in less than five days, which significantly
enhances our marketing and sales efforts and has increased our volume of higher
margin custom or made-to-order sales. In addition, through our websites, we have
made it easy to view and request samples of our products. We also have
technology which allows us to provide digital, simulated samples of our
products, which helps reduce raw material and energy consumption associated with
our samples.
We
primarily use our internal marketing and sales force to market our carpet
products. In order to implement our global marketing efforts, we have product
showrooms or design studios in the United States, Canada, Mexico, Brazil,
Denmark, England, Ireland, France, Germany, Spain, the Netherlands, Australia,
Japan, Hungary, Italy, Norway, Romania, Russia, Singapore and China. We expect
to open offices in other locations around the world as necessary to capitalize
on emerging marketing opportunities.
Manufacturing
We
manufacture carpet at three locations in the United States and at facilities in
the Netherlands, the United Kingdom, Canada, Australia and
Thailand.
Having
foreign manufacturing operations enables us to supply our customers with carpet
from the location offering the most advantageous delivery times, duties and
tariffs, exchange rates, and freight expense, and enhances our ability to
develop a strong local presence in foreign markets. We believe that the ability
to offer consistent products and services on a worldwide basis at attractive
prices is an important competitive advantage in servicing multinational
customers seeking global supply relationships. We will consider additional
locations for manufacturing operations in other parts of the world as necessary
to meet the demands of customers in international markets.
We are in
the process of further standardizing our worldwide modular carpet manufacturing
procedures. In connection with the implementation of this plan, we are seeking
to establish global standards for our tufting equipment, yarn systems and
product styling. We previously had changed our standard carpet tile size to be
50 cm x 50 cm, which we believe has allowed us to reduce operational waste
and fossil fuel energy consumption and to offer consistent product sizing for
our global customers.
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We also
implemented a new, flexible-inputs carpet backing line at our modular carpet
manufacturing facility in LaGrange, Georgia. Using next generation thermoplastic
technology, the custom-designed backing line dramatically improves our ability
to keep reclaimed and waste carpet in the production “technical loop,” and
further permits us to explore other plastics and polymers as inputs. This new
process, which we call “Cool
Blue™”, came on line for production of certain carpet styles in late
2005. In 2007, we implemented new technology that more cleanly
separates the face fiber and backing of reclaimed and waste carpet, thus making
it easier to recycle some of its components and providing a purer supply of
inputs for the Cool
Blue process.
The
environmental management systems of our floorcovering manufacturing facilities
in LaGrange, Georgia, West Point, Georgia, City of Industry, California, Shelf,
England, Northern Ireland, Australia, the Netherlands, Canada and Thailand are
certified under International Standards Organization (ISO) Standard
No. 14001.
Our
significant international operations are subject to various political, economic
and other uncertainties, including risks of restrictive taxation policies,
foreign exchange restrictions, changing political conditions and governmental
regulations. We also receive a substantial portion of our revenues in currencies
other than U.S. dollars, which makes us subject to the risks inherent in
currency translations. Although our ability to manufacture and ship products
from facilities in several foreign countries reduces the risks of foreign
currency fluctuations we might otherwise experience, we also engage from time to
time in hedging programs intended to further reduce those risks.
Competition
We
compete, on a global basis, in the sale of our floorcovering products with other
carpet manufacturers and manufacturers of vinyl and other types of
floorcoverings. Although the industry has experienced significant consolidation,
a large number of manufacturers remain in the industry. We believe we are the
largest manufacturer of modular carpet in the world, possessing a global market
share that we believe is approximately twice that of our nearest competitor.
However, a number of domestic and foreign competitors manufacture modular carpet
as one segment of their business, and some of these competitors have financial
resources greater than ours. In addition, some of the competing carpet
manufacturers have the ability to extrude at least some of their requirements
for fiber used in carpet products, which decreases their dependence on third
party suppliers of fiber.
We
believe the principal competitive factors in our primary floorcovering markets
are brand recognition, quality, design, service, broad product lines, product
performance, marketing strategy and pricing. In the corporate office market
segment, modular carpet competes with various floorcoverings, of which broadloom
carpet is the most common. The quality, service, design, better and longer
average product performance, flexibility (design options, selective rotation or
replacement, use in combination with roll goods) and convenience of our modular
carpet are our principal competitive advantages.
We
believe we have competitive advantages in several other areas as well. First,
our exclusive relationship with David Oakey Designs allows us to introduce
numerous innovative and attractive floorcovering products to our customers.
Additionally, we believe that our global manufacturing capabilities are an
important competitive advantage in serving the needs of multinational corporate
customers. We believe that the incorporation of the Intersept antimicrobial
chemical agent into the backing of our modular carpet enhances our ability to
compete successfully across all of our market segments generally, and
specifically with resilient tile in the healthcare market.
In
addition, we believe that our goal and commitment to be ecologically
“sustainable” by 2020 is a brand-enhancing, competitive strength as well as
a strategic initiative. Increasingly, our customers are concerned about the
environmental and broader ecological implications of their operations and the
products they use in them. Our leadership, knowledge and expertise in the area,
especially in the “green building” movement and the related LEED certification
program, resonate deeply with many of our customers and prospects around the
globe, and these businesses are increasingly making purchase decisions based on
“green” factors. Our modular carpet products historically have had inherent
installation and maintenance advantages that translated into greater efficiency
and waste reduction. We have further enhanced the “green” quality of our modular
carpet in our highly successful i2 product line, and we are
using raw materials and production technologies, such as our Cool Blue and reclaimed
carpet separation processes, that directly reduce the adverse impact of those
operations on the environment and limit our dependence on
petrochemicals.
To
further raise awareness of our goal of becoming sustainable, we launched our
Mission Zero global
branding initiative, which represents our mission to eliminate any negative
impact our companies may have on the environment by the year 2020. As part of
this initiative, our Mission
Zero logo appears on many of our marketing and merchandising materials
distributed throughout the world.
- 8
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Interior
Fabrics
During
the years leading up to 2007, we decided to focus on leveraging the
opportunities within our core modular carpet and Bentley Prince Street
divisions, which have delivered consistently strong performance. In
July 2007, we sold our Fabrics Group business segment to a third
party. This business designs, manufactures and markets specialty
fabrics for open plan office furniture systems and other commercial
interiors. In April 2006, we sold our European fabrics business to an
entity formed by the business’s management team. Current and prior
periods have been restated to include the results of operations and related
disposal costs, gains and losses for these businesses as discontinued
operations. In addition, assets and liabilities of these businesses
have been reported in assets and liabilities held for sale for all reported
periods.
Specialty
Products
In March
2007, we sold Pandel, Inc., our subsidiary that conducted our Specialty Products
business segment. Pandel produces vinyl carpet tile backing and
specialty mat and foam products. In 2003, we sold our
U.S. raised/access flooring business and our adhesives and other specialty
chemicals production business, which also were part of the Specialty Products
business segment. We continue to manufacture and sell our Intercell® brand
raised/access flooring product in Europe, and we continue to market a line
of adhesives for carpet installation and a line of carpet maintenance products
manufactured by the purchaser of our adhesive and specialty chemicals production
business.
Product
Design, Research and Development
We
maintain an active research, development and design staff of approximately 70
people and also draw on the research and development efforts of our suppliers,
particularly in the areas of fibers, yarns and modular carpet backing materials.
Our research and development costs were $15.8 million, $13.6 million and
$10.7 million in 2007, 2006 and 2005, respectively.
Our
research and development team provides technical support and advanced materials
research and development for the entire family of Interface companies. The team
assisted in the development of our NexStep® backing, which
employs moisture-impervious polycarbite precoating technology with a
chlorine-free urethane foam secondary backing, and also helped develop a
post-consumer recycled content, polyvinyl chloride, or PVC, extruded sheet
process that has been incorporated into our GlasBacRE modular carpet
backing. Our post-consumer recycled content PVC extruded sheet exemplifies our
commitment to “closing-the-loop” in recycling. More recently, this
team developed our patent-pending TacTiles carpet tile
installation system, which uses small squares of adhesive plastic film to
connect intersecting carpet tiles, and helped implement our Cool Blue flexible inputs
backing line and reclaimed carpet separation technology. With a goal
of supporting sustainable product designs in floorcoverings applications, we
continue to evaluate 100% renewable polymers based on corn-derived polylactic
acid (PLA) for use in our products and the development of post-consumer
recycling technology for nylon face fibers.
Our
research and development team also is the coordinator of our QUEST and EcoSense
initiatives (discussed below under “Environmental Initiatives”) and supports the
dissemination, consultancies and technical communication of our global
sustainability endeavors. This team also provides all biochemical and technical
support to Intersept
antimicrobial chemical product initiatives.
Innovation
and increased customization in product design and styling are the principal
focus of our product development efforts. Our carpet design and development team
is recognized as an industry leader in carpet design and product engineering for
the commercial and institutional markets.
David
Oakey Designs provides carpet design and consulting services to our
floorcovering businesses pursuant to a consulting agreement with
us. David Oakey Designs’ services under the agreement include
creating commercial carpet designs for use by our floorcovering businesses
throughout the world, and overseeing product development, design and coloration
functions for our modular carpet business in North America. The current
agreement runs through April 2011. While the agreement is in effect, David Oakey
Designs cannot provide similar services to any other carpet company. Through our
relationship with David Oakey Designs, we introduced more than 26 new carpet
designs in 2007 alone, and have enjoyed considerable success in winning
U.S. carpet industry awards.
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David
Oakey Designs also contributed to our implementation of the product development
concept — “simple inputs, pretty outputs” — resulting in the ability
to efficiently produce many products from a single yarn system. Our mass
customization production approach evolved, in major part, from this concept. In
addition to increasing the number and variety of product designs, which enables
us to increase high margin custom sales, the mass customization approach
increases inventory turns and reduces inventory levels (for both raw materials
and standard products) and their related costs because of our more rapid and
flexible production capabilities.
More
recently, our i2
product line — which includes, among others, our patented Entropy modular carpet
product and the RePrise™,
Proscenium™,
B&W™ and Mad About Plaid™ collections
of modular carpet products — represents an innovative breakthrough in the
design of modular carpet. The
i2 line introduced and features mergeable dye lots, cost-efficient
installation and maintenance, interactive flexibility and recycled and
recyclable materials. Some of these products may be installed without regard to
the directional orientation of the carpet tile, and their features also make
installation, maintenance and replacement of modular carpet easier, less
expensive and less wasteful.
Bentley
Prince Street received the 2007 Best of NeoCon Silver Award in the modular
category for our new Saturnia Collection, which is
made up of carpet tile and broadloom products.
Environmental
Initiatives
In the
latter part of 1994, we commenced a new industrial ecological sustainability
initiative called EcoSense, inspired in part by the interest of customers
concerned about the environmental implications of how they and their suppliers
do business. EcoSense, which includes our QUEST waste reduction initiative, is
directed towards the elimination of energy and raw materials waste in our
businesses, and, on a broader and more long-term scale, the practical
reclamation — and ultimate restoration — of shared environmental
resources. The initiative involves a commitment by us:
•
to
learn to meet our raw material and energy needs through recycling of
carpet and other petrochemical products and harnessing benign energy
sources; and
•
to
pursue the creation of new processes to help sustain the earth’s
non-renewable natural resources.
We have
engaged some of the world’s leading authorities on global ecology as
environmental advisors. The list of advisors includes: Paul Hawken, author
of The Ecology of Commerce: A
Declaration of Sustainability and The Next Economy, and
co-author with Amory Lovins and Hunter Lovins of Natural Capitalism: Creating the
Next Industrial Revolution; Mr. Lovins, energy consultant and
co-founder of the Rocky Mountain Institute; John Picard, President of E2
Environmental Enterprises; Jonathan Porritt, director of Forum for the Future;
Bill Browning, fellow and former director of the Rocky Mountain Institute’s
Green Development Services; Dr. Karl-Henrik Robert, founder of The Natural
Step; Janine M. Benyus, author of Biomimicry; Walter Stahel,
Swiss businessman and seminal thinker on environmentally responsible commerce;
and Bob Fox, renowned architect.
Our
leadership, knowledge and expertise in this area, especially in the “green
building” movement and the related LEED certification program, resonate deeply
with many of our customers and prospects around the globe, and these businesses
are increasingly making purchase decisions based on “green” factors. As more
customers in our target markets share our view that sustainability is good
business and not just good deeds, our acknowledged leadership position should
strengthen our brands and provide a differentiated advantage in competing for
business.
Backlog
Our
backlog of unshipped orders (excluding discontinued operations) was
approximately $151.7 million at February 18, 2008, compared with
approximately $102.1 million at February 19, 2007 (this amount excludes the
backlog of the Fabrics Group business segment which was sold in July 2007).
Historically, backlog is subject to significant fluctuations due to the timing
of orders for individual large projects and currency fluctuations. All of the
backlog orders at February 18, 2008 are expected to be shipped during the
succeeding six to nine months.
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Patents
and Trademarks
We own
numerous patents in the United States and abroad on floorcovering and
raised/access flooring products, on manufacturing processes and on the use of
our Intersept
antimicrobial chemical agent in various products. The duration of United States
patents is between 14 and 20 years from the date of filing of a patent
application or issuance of the patent; the duration of patents issued in other
countries varies from country to country. We maintain an active patent and trade
secret program in order to protect our proprietary technology, know-how and
trade secrets. Although we consider our patents to be very valuable
assets, we consider our know-how and technology even more important to our
current business than patents, and, accordingly, believe that expiration of
existing patents or nonissuance of patents under pending applications would not
have a material adverse effect on our operations.
We also
own many trademarks in the United States and abroad. In addition to the United
States, the primary countries in which we have registered our trademarks are the
United Kingdom, Germany, Italy, France, Canada, Australia, Japan, and various
countries in Central and South America. Some of our more prominent registered
trademarks include:
Interface®, InterfaceFLOR, Heuga, Intersept, GlasBac, Bentley Prince Street, Intercell, and Mission Zero. Trademark
registrations in the United States are valid for a period of 10 years and
are renewable for additional 10-year periods as long as the mark remains in
actual use. The duration of trademarks registered in other countries varies from
country to country.
Financial
Information by Operating Segments and Geographic Areas
The Notes
to Consolidated Financial Statements appearing in Item 8 of this Report set
forth information concerning our sales, income and assets by operating segments,
and our sales and long-lived assets by geographic areas. Additional information
regarding sales by operating segment is set forth in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Employees
At
December 30, 2007, we employed a total of 3,701 employees worldwide. Of such
employees, 1,928 are clerical, staff, sales, supervisory and management
personnel and 1,773 are manufacturing personnel. We also utilized the services
of 137 temporary personnel as of December 30, 2007.
Some of
our production employees in Australia and the United Kingdom are represented by
unions. In the Netherlands, a Works Council, the members of which are Interface
employees, is required to be consulted by management with respect to certain
matters relating to our operations in that country, such as a change in control
of Interface Europe B.V. (our modular carpet subsidiary based in the
Netherlands), and the approval of the Council is required for some of our
actions, including changes in compensation scales or employee benefits. Our
management believes that its relations with the Works Council, the unions and
all of our employees are good.
Environmental
Matters
Our
operations are subject to laws and regulations relating to the generation,
storage, handling, emission, transportation and discharge of materials into the
environment. The costs of complying with environmental protection laws and
regulations have not had a material adverse impact on our financial condition or
results of operations in the past and are not expected to have a material
adverse impact in the future. The environmental management systems of our
floorcovering manufacturing facilities in LaGrange, Georgia, West Point,
Georgia, City of Industry, California, Shelf, England, Northern Ireland,
Australia, the Netherlands, Canada and Thailand are certified under ISO Standard
No. 14001.
Our
executive officers, their ages as of December 30, 2007, and their principal
positions with us are set forth below. Executive officers serve at the pleasure
of the Board of Directors.
Name
Age
Principal
Position(s)
Daniel
T. Hendrix
53
President
and Chief Executive Officer
Patrick
C. Lynch
38
Senior
Vice President and Chief Financial Officer
John
R. Wells
46
Senior
Vice President
Raymond
S. Willoch
49
Senior
Vice President-Administration, General Counsel and
Secretary
Robert
A. Coombs
49
Vice
President
Lindsey
K. Parnell
50
Vice
President
Jeffrey
J. Roman
45
Vice
President
Mr. Hendrix
joined us in 1983 after having worked previously for a national accounting firm.
He was promoted to Treasurer in 1984, Chief Financial Officer in 1985, Vice
President-Finance in 1986, Senior Vice President in October 1995, Executive Vice
President in October 2000, and President and Chief Executive Officer in July
2001. He was elected to the Board in October 1996 and has served on the
Executive Committee of the Board since July 2001.
Mr. Lynch
joined us in 1996 after having previously worked for a national accounting firm.
He became Assistant Corporate Controller in 1998 and Assistant Vice President
and Corporate Controller in 2000. Mr. Lynch was promoted to Vice President
and Chief Financial Officer in July 2001. Mr. Lynch was promoted to
Senior Vice President in March 2007.
Mr. Wells
joined us in February 1994 as Vice President-Sales of Interface Flooring
Systems, Inc. (now InterfaceFLOR, LLC), our principal U.S. modular carpet
subsidiary. Mr. Wells was promoted to Senior Vice
President-Sales & Marketing of Interface Flooring Systems in October
1994. He was promoted to Vice President of Interface and President of Interface
Flooring Systems in July 1995. In March 1998, Mr. Wells was also named
President of both Prince Street Technologies, Ltd. and Bentley Mills, Inc.,
making him President of all three of our U.S. carpet mills at that time. In
November 1999, Mr. Wells was named Senior Vice President of Interface, and
President and Chief Executive Officer of Interface Americas Holdings, LLC
(formerly Interface Americas, Inc.), thereby assuming operations responsibility
for all of our floorcovering businesses in the Americas.
Mr. Willoch,
who previously practiced with an Atlanta law firm, joined us in June 1990 as
Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant
Vice President in 1993, Vice President in January 1996, Secretary and General
Counsel in August 1996, and Senior Vice President in February 1998. In July
2001, he was named Senior Vice President-Administration and assumed corporate
responsibility for various staff functions.
Mr. Coombs
originally worked for us from 1988 to 1993 as a marketing manager for our Heuga carpet tile operations
in the United Kingdom and later for all of our European floorcovering
operations. In 1996, Mr. Coombs returned to us as Managing Director of our
Australian operations. He was promoted in 1998 to Vice President-Sales and
Marketing, Asia-Pacific, with responsibility for Australian operations and sales
and marketing in Asia, which was followed by a promotion to Senior Vice
President, Asia-Pacific. He was promoted to Senior Vice President, European
Sales, in May 1999 and Senior Vice President, European Sales and Marketing, in
April 2000. In February 2001, he was promoted to President and Chief Executive
Officer of Interface Overseas Holdings, Inc. with responsibility for all of our
floorcoverings operations in both Europe and the Asia-Pacific region, and he
became a Vice President of Interface. In September 2002, Mr. Coombs
relocated back to Australia, retaining responsibility for our floorcovering
operations in the Asia-Pacific region while Mr. Parnell (see below) assumed
responsibility for floorcovering operations in Europe.
Mr. Parnell
was the Production Director for Firth Carpets (our former European broadloom
operations) at the time it was acquired by us in 1997. In 1998, Mr. Parnell
was promoted to Vice President, Operations for the United Kingdom, and in 1999
he was promoted to Senior Vice President, Operations for our entire European
floorcovering division. In September 2002, he was promoted to President and
Chief Executive Officer of our floorcovering operations in Europe, and became a
Vice President of Interface in October 2002.
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Mr. Roman
joined Interface Asia-Pacific in 1995 as General Manager of Interface Modernform
Company Ltd., our modular carpet joint venture in Thailand, and was promoted to
Vice President of Manufacturing for Asia in 1996. In 1998, he transferred to
Interface Americas, Inc. with responsibility for implementing Y2K-compliant
manufacturing systems in all North American carpet operations. In 2000,
Mr. Roman was named Vice President of Technical Development for Interface
Americas, Inc., and, in 2001, he was named Vice President of Information
Services and Business Systems for Interface Americas, Inc. In February 2004,
Mr. Roman was promoted to Vice President of Interface and assumed
responsibility for the creation of an information technology shared service
function for the Company.
Available
Information
We make
available free of charge on or through our Internet website our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
SEC. Our Internet address is http://www.interfaceinc.com.
ITEM
1A. RISK FACTORS
This
report on Form 10-K contains “forward-looking statements” within the meaning of
the Securities Act of 1933, and the Securities Exchange Act of 1934, and the
Private Securities Litigation Reform Act of 1995. Words such as
“believes,”“anticipates,”“plans,”“expects” and similar expressions are
intended to identify forward-looking statements. Forward-looking
statements include statements regarding the intent, belief or current
expectations of our management team, as well as the assumptions on which such
statements are based. Any forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties that could
cause actual results to differ materially from those contemplated by such
forward-looking statements. We undertake no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes to future operating results over time.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include risks and
uncertainties associated with economic conditions in the commercial interiors
industry as well as the risks and uncertainties discussed immediately
below.
We
compete with a large number of manufacturers in the highly competitive
commercial floorcovering products market, and some of these competitors have
greater financial resources than we do.
The
commercial floorcovering industry is highly competitive. Globally, we compete
for sales of floorcovering products with other carpet manufacturers and
manufacturers of other types of floorcovering. Although the industry has
experienced significant consolidation, a large number of manufacturers remain in
the industry. Some of our competitors, including a number of large diversified
domestic and foreign companies who manufacture modular carpet as one segment of
their business, have greater financial resources than we do.
Sales
of our principal products have been and may continue to be affected by adverse
economic cycles in the renovation and construction of commercial and
institutional buildings.
Sales of
our principal products are related to the renovation and construction of
commercial and institutional buildings. This activity is cyclical and has been
affected by the strength of a country’s or region’s general economy, prevailing
interest rates and other factors that lead to cost control measures by
businesses and other users of commercial or institutional space. The effects of
cyclicality upon the corporate office segment tend to be more pronounced than
the effects upon the institutional segment. Historically, we have generated more
sales in the corporate office segment than in any other market. The effects of
cyclicality upon the new construction segment of the market also tend to be more
pronounced than the effects upon the renovation segment. The adverse cycle
during the years 2001 through 2003 significantly lessened the overall demand for
commercial interiors products, which adversely affected our business during
those years. These effects may recur and could be more pronounced if the global
economy does not improve or is further weakened.
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Our
success depends significantly upon the efforts, abilities and continued service
of our senior management executives and our principal design consultant, and our
loss of any of them could affect us adversely.
We
believe that our success depends to a significant extent upon the efforts and
abilities of our senior management executives. In addition, we rely
significantly on the leadership that David Oakey of David Oakey Designs provides
to our internal design staff. Specifically, David Oakey Designs provides product
design/production engineering services to us under an exclusive consulting
contract that contains non-competition covenants. Our current agreement with
David Oakey Designs extends to April 2011. The loss of any of these key persons
could have an adverse impact on our business.
Our
substantial international operations are subject to various political, economic
and other uncertainties that could adversely affect our business results,
including by restrictive taxation or other government regulation and by foreign
currency fluctuations.
We have
substantial international operations. In fiscal 2007, approximately 51% of our
net sales and a significant portion of our production were outside the United
States, primarily in Europe and Asia-Pacific. Our corporate strategy includes
the expansion and growth of our international business on a worldwide basis. As
a result, our operations are subject to various political, economic and other
uncertainties, including risks of restrictive taxation policies, changing
political conditions and governmental regulations. We also make a substantial
portion of our net sales in currencies other than U.S. dollars
(approximately 49% of 2007 net sales), which subjects us to the risks
inherent in currency translations. The scope and volume of our global operations
make it impossible to eliminate completely all foreign currency translation
risks as an influence on our financial results.
Large
increases in the cost of petroleum-based raw materials could adversely affect us
if we are unable to pass these cost increases through to our
customers.
Petroleum-based
products comprise the predominant portion of the cost of raw materials that we
use in manufacturing. While we attempt to match cost increases with
corresponding price increases, continued large increases in the cost of
petroleum-based raw materials could adversely affect our financial results if we
are unable to pass through such price increases to our customers.
Unanticipated
termination or interruption of any of our arrangements with our primary
third-party suppliers of synthetic fiber could have a material adverse effect on
us.
Invista
Inc., a subsidiary of Koch Industries, Inc., currently supplies approximately
49% of our requirements for synthetic fiber (nylon), which is the principal raw
material that we use in our carpet products. In addition, some of our businesses
have a high degree of dependence on other third party suppliers of synthetic
fiber for certain products or markets. The unanticipated termination or
interruption of any of our supply arrangements with our current suppliers could
have a material adverse effect on us because of the cost and delay associated
with shifting more business to another supplier. We do not have a long-term
supply agreement with Invista.
We
have a significant amount of indebtedness, which could have important negative
consequences to us.
Our
substantial indebtedness could have important negative consequences to us,
including:
•
making
it more difficult for us to satisfy our obligations with respect to such
indebtedness;
•
increasing
our vulnerability to adverse general economic and industry
conditions;
•
limiting
our ability to obtain additional financing to fund capital expenditures,
acquisitions or other growth initiatives, and other general corporate
requirements;
•
requiring
us to dedicate a substantial portion of our cash flow from operations to
interest and principal payments on our indebtedness, thereby reducing the
availability of our cash flow to fund capital expenditures, acquisitions
or other growth initiatives, and other general corporate
requirements;
•
limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
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•
placing
us at a competitive disadvantage compared to our less leveraged
competitors; and
•
limiting
our ability to refinance our existing indebtedness as it
matures.
The
market price of our common stock has been volatile and the value of your
investment may decline.
The
market price of our Class A common stock has been volatile in the past and
may continue to be volatile going forward. Such volatility may cause precipitous
drops in the price of our Class A common stock on the Nasdaq Global Select
Market and may cause your investment in our common stock to lose significant
value. As a general matter, market price volatility has had a significant effect
on the market values of securities issued by many companies for reasons
unrelated to their operating performance. We thus cannot predict the market
price for our common stock going forward.
Our
earnings in a future period could be adversely affected by non-cash adjustments
to goodwill, if a future test of goodwill assets indicates a material impairment
of those assets.
As
prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets,” we undertake an annual review of the
goodwill asset balance reflected in our financial statements. Our review is
conducted during the fourth quarter of the year, unless there has been a
triggering event prescribed by applicable accounting rules that warrants an
earlier interim testing for possible goodwill impairment. In the past, we have
had non-cash adjustments for goodwill impairment as a result of such testings
($44.5 million in 2007, $20.7 million in 2006, $29.0 million in 2004
and $55.4 million in 2002). A future goodwill impairment test may result in
a future non-cash adjustment, which could adversely affect our earnings for any
such future period.
Our
Chairman, together with other insiders, currently has sufficient voting power to
elect a majority of our Board of Directors.
Our
Chairman, Ray C. Anderson, beneficially owns approximately 50% of our
outstanding Class B common stock. The holders of the Class B common
stock are entitled, as a class, to elect a majority of our Board of Directors.
Therefore, Mr. Anderson, together with other insiders, has sufficient
voting power to elect a majority of the Board of Directors. On all other matters
submitted to the shareholders for a vote, the holders of the Class B common
stock generally vote together as a single class with the holders of the
Class A common stock. Mr. Anderson’s beneficial ownership of the
outstanding Class A and Class B common stock combined is approximately
6%.
Our
Rights Agreement could discourage tender offers or other transactions for our
stock that could result in shareholders receiving a premium over the market
price for our stock.
We
maintain our corporate headquarters in Atlanta, Georgia in approximately
20,000 square feet
of leased space. The following table lists our principal manufacturing
facilities and other material physical locations, all of which we own except as
otherwise noted:
Location
Segment
Floor
Space (Sq. Ft.)
Bangkok,
Thailand(1)
Modular
Carpet
129,000
Craigavon,
N.
Ireland
Modular
Carpet
80,986
LaGrange,
Georgia
Modular
Carpet
375,000
LaGrange,
Georgia
Modular
Carpet
160,545
Ontario
(Belleville),
Canada
Modular
Carpet
78,389
Picton,
Australia
Modular
Carpet
98,774
Scherpenzeel,
the
Netherlands
Modular
Carpet
245,424
Shelf,
England
Modular
Carpet
206,882
West
Point,
Georgia
Modular
Carpet
250,000
City
of Industry,
California(2)
Bentley
Prince Street
539,641
__________
(1)
Owned
by a joint venture in which we have a 70%
interest.
(2)
Leased.
We
maintain marketing offices in over 70 locations in over 30 countries and
distribution facilities in approximately 40 locations in six countries. Most of
our marketing locations and many of our distribution facilities are
leased.
We
believe that our manufacturing and distribution facilities and our marketing
offices are sufficient for our present operations. We will continue, however, to
consider the desirability of establishing additional facilities and offices in
other locations around the world as part of our business strategy to meet
expanding global market demands.
ITEM
3. LEGAL PROCEEDINGS
We are
subject to various legal proceedings in the ordinary course of business, none of
which is required to be disclosed under this Item 3.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
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PART
II
ITEM
5.
MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Class
A Common Stock is traded on the Nasdaq Global Select Market under the symbol
IFSIA (which will change to the symbol IFSI.A on April 7, 2008). Our Class
B Common Stock is not publicly traded but is convertible into Class A Common
Stock on a one-for-one basis. The following table sets forth, for the periods
indicated, the high and low intraday prices of the Company’s Class A Common
Stock on the Nasdaq Global (or Global Select, as applicable) Market as well as
dividends paid during such periods.
In March
of 2007, the Company began paying a dividend of $0.02 per share (Class A and
Class B) on a quarterly basis. Future declaration and payment of
dividends is at the discretion of our Board, and depends upon, among other
things, our investment policy and opportunities, results of operations,
financial condition, cash requirements, future prospects, and other factors that
may be considered relevant by our Board at the time of its
determination. Such other factors include limitations contained in
the agreement for our primary revolving credit facility and in the indentures
for our public indebtedness, each of which specify conditions as to when any
dividend payments may be made. As such, we may discontinue our
dividend payments in the future if our Board determines that a cessation of
dividend payments is proper in light of the factors indicated
above.
As of
February 15, 2008, we had 731 holders of record of our Class A Common Stock and
79 holders of record of our Class B Common Stock. We estimate that there are in
excess of 5,500 beneficial holders of our Class A Common Stock.
Stock
Performance
The
following graph and table compare, for the five-year period ended December 30,2007, the Company’s total returns to shareholders (stock price plus dividends,
divided by beginning stock price) with that of (i) all companies listed on the
Nasdaq Composite Index, and (ii) a self-determined peer group comprised
primarily of companies in the commercial interiors industry.
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-
12/29/02
12/28/03
1/02/05
1/01/06
12/31/06
12/30/07
Interface,
Inc.
$100
$180
$325
$268
$463
$534
NASDAQ
Composite Index
$100
$150
$165
$169
$188
$205
Self-Determined
Peer Group (13 Stocks)
$100
$142
$175
$194
$203
$204
Notes
to Performance Graph
(1)
The
lines represent annual index levels derived from compound daily returns
that include all dividends.
(2)
The
indices are re-weighted daily, using the market capitalization on the
previous trading day.
(3)
If
the annual interval, based on the fiscal year-end, is not a trading day,
the preceding trading day is used.
(4)
The
index level was set to $100 as of 12/29/02 (the last day of fiscal
2002).
(5)
The
Company’s fiscal year ends on the Sunday nearest December
31.
(6)
The
following companies are included in the Self-Determined Peer Group
depicted above: Actuant Corp.; Acuity Brands, Inc.; Albany
International Corp., BE Aerospace, Inc.; The Dixie Group, Inc.; Herman
Miller, Inc.; HNI Corporation (formerly known as Hon Industries, Inc.);
Kimball International, Inc.; Knoll, Inc. (beginning in March, 2005 upon
trading commencement); Mohawk Industries, Inc.; Steelcase, Inc.; Unifi,
Inc.; and USG Corp.
- 18
-
ITEM
6. SELECTED FINANCIAL DATA
We
derived the summary consolidated financial data presented below from our audited
consolidated financial statements and the notes thereto for the years
indicated. You should read the summary financial data presented below
together with the audited consolidated financial statements and notes thereto
contained in Item 8 of this Annual Report on Form 10-K. Amounts for
all periods presented have been adjusted for discontinued
operations.
Selected
Financial Data(1)
2007
2006
2005
2004
2003
(in
thousands, except per share data and ratios)
Net
sales
$
1,081,273
$
914,659
$
786,924
$
695,250
$
593,410
Cost
of sales
703,751
603,551
527,647
469,165
402,576
Operating
income(2)
129,391
99,621
77,716
59,918
40,562
Income
(loss) from continuing operations
57,848
35,807
15,282
5,936
(2,120
)
Loss
from discontinued operations, net of tax(3)
(68,660
)
(24,092
)
(12,107
)
(58,311
)
(22,313
)
Loss
on disposal of discontinued operations
--
(1,723
)
(1,935
)
(3,027
)
(8,825
)
Net
income (loss)
(10,812
)
9,992
1,240
(55,402
)
(33,257
)
Income
(loss) from continuing operations per common share
Basic
$
0.96
$
0.66
$
0.30
$
0.12
$
(0.04
)
Diluted
$
0.94
$
0.64
$
0.29
$
0.11
$
(0.04
)
Average
Shares Outstanding
Basic
60,573
54,087
51,551
50,682
50,282
Diluted
61,520
55,713
52,895
52,171
50,282
Cash
dividends per common share
$
0.08
$
--
$
--
$
--
$
--
Property
additions
40,592
28,540
19,354
11,600
9,065
Depreciation
and amortization
22,487
21,750
20,448
22,907
24,104
Balance
Sheet Data
Working
capital
$
238,578
$
380,253
$
317,668
$
344,460
$
365,557
Total
assets
835,232
928,340
838,990
869,798
879,670
Total
long-term debt
310,000
411,365
458,000
460,000
445,000
Shareholders’
equity
294,192
274,394
172,076
194,178
218,733
Current
ratio(4)
2.3
3.2
3.0
3.2
3.2
__________
(1)
In
the third quarter of 2007, we sold our Fabrics Group business
segment. Substantially all of the assets related to these
operations were sold in the third quarter. In the fourth
quarter of 2002, we decided to discontinue the operations related to our
U.S. raised/access flooring business. Substantially all of the
assets related to these operations were sold in the third quarter of
2003. In the third quarter of 2004, we also decided to
discontinue the operations related to our Re:Source dealer businesses (as
well as the operations of a small Australian dealer business and a small
residential fabrics business). The balances have been adjusted
to reflect the discontinued operations of these businesses. For
further analysis, see “Notes to Consolidated Financial Statements –
Discontinued Operations” included in Item 8 of this Report.
(2)
In
the first quarter of 2007, we disposed of our Pandel business, which
comprised our Specialty Products segment. We recognized a loss
of $1.9 million on this disposition. The reported results also
include a restructuring charge of $6.2 million in 2003. The
2003 charge was recognized with respect to a restructuring plan initiated
in 2002.
(3)
Included
in loss from discontinued operations, net of tax, are goodwill and other
intangible asset impairment charges of $48.3 million in 2007, $20.7
million in 2006 and $29.0 million in 2004. Also included in
loss from discontinued operations, net of tax, are charges for impairments
of other assets of $8.8 million in 2007 and $17.5 million in
2004.
(4)
For
purposes of computing our current ratio: (a) current assets include
assets of businesses held for sale of $4.8 million, $158.3 million,
$204.6 million, $252.6 million and $317.5 million in fiscal years 2007,
2006, 2005, 2004 and 2003, respectively, and (b) current liabilities
include liabilities of businesses held for sale of $0.2 million, $22.9
million, $36.8 million, $38.1 million and $11.6 million in fiscal years
2007, 2006, 2005, 2004 and 2003,
respectively.
- 19
-
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Our
revenues are derived from sales of floorcovering products, primarily modular and
broadloom carpet. Our commercial interiors business, as well as the commercial
interiors industry in general, is cyclical in nature and is impacted by economic
conditions and trends that affect the markets for commercial and institutional
business space. The commercial interiors industry is largely driven by
reinvestment by corporations into their existing businesses in the form of new
fixtures and furnishings for their workplaces. In significant part, the timing
and amount of such reinvestments are impacted by the profitability of those
corporations. As a result, macroeconomic factors such as employment rates,
office vacancy rates, capital spending, productivity and efficiency gains that
impact corporate profitability in general, also affect our
businesses.
During
the past several years, we have successfully focused more of our marketing and
sales efforts on non-corporate office segments to reduce somewhat our exposure
to economic cycles that affect the corporate office market segment more
adversely, as well as to capture additional market share. Our mix of corporate
office versus non-corporate office modular carpet sales in the Americas has
shifted over the past several years to 46% and 54%, respectively, for 2007
compared with 64% and 36%, respectively, in 2001. We expect a further shift in
the future as we continue to implement our segmentation strategy.
During
the years 2001-2003, the commercial interiors industry as a whole, and the
broadloom carpet market in particular, experienced decreased demand levels,
which significantly impaired our growth and operating profitability during those
years. During 2004, the commercial interiors industry began recovering from the
downturn, which led to improved sales and operating profitability for us. That
recovery continued at a gradual pace throughout 2005-2007.
Sale
of Fabrics Group Business Segment
In July
2007, we completed the sale of our Fabrics Group business segment to a third
party pursuant to an agreement we entered into in the second quarter of
2007. Following working capital and other adjustments provided for in
the agreement, we received $60.7 million in cash at the closing of the
transaction. We have recognized a $6.5 million receivable related to
additional purchase price under the agreement pursuant to an earn-out
arrangement focused on the performance of that business segment, as owned and
operated by the purchaser, during the 18-month period following the
closing. As discussed in the Notes to Consolidated Financial
Statements in Item 8 of Part II of this Report, in the first quarter of 2007, we
recorded charges for impairment of goodwill of $44.5 million and impairment of
other intangible assets of $3.8 million related to the Fabrics Group business
segment. In addition, as a result of the agreed-upon purchase price
for the segment, we recorded an additional impairment of assets of $13.6 million
in the second quarter of 2007.
Previously,
in April 2006, we sold our European component of the fabrics business (Camborne
Holdings Limited) for $28.8 million to an entity formed by the business’s
management team. In connection with the sale, we recorded a pre-tax
non-cash charge of $20.7 million for the impairment of goodwill in the first
quarter of 2006 and a loss on disposal of $1.7 million in the second
quarter of 2006.
As
described below, the results of operations of the former Fabrics Group business
segment, including the European component, as well as the related impairment
charges and loss on disposal discussed above, are included as part of our
discontinued operations.
Discontinued
Operations
As
described above, in the second quarter of 2007, we entered into an agreement to
sell our Fabrics Group business segment to a third party, and we completed the
sale in the third quarter of 2007. We had previously sold the
European component of that business segment in April 2006. In
addition, in 2004, we decided to exit our owned Re:Source dealer businesses,
which were part of a broader network comprised of both owned and aligned dealers
that sell and install floorcovering products, and we began to dispose of several
of our dealer subsidiaries. We now have sold or terminated all
ongoing operations of our dealer businesses, and in some cases we are completing
their wind-down through subcontracting arrangements.
- 20
-
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” we have reported the results of operations for the Re:Source
dealer businesses (as well as the results of operations of a small Australian
dealer business and a small residential fabrics business that we also decided to
exit at that time), and the results of operations for the former Fabrics Group
business segment (including the European component which was sold in April
2006), for all periods reflected herein, as “discontinued
operations.” Consequently, our discussion of revenues or sales, taxes
and other results of operations (except for net income or loss amounts),
including percentages derived from or based on such amounts, excludes these
discontinued operations unless we indicate otherwise.
Our
discontinued operations had net sales of $82.0 million, $164.5 million and
$229.8 million in 2007, 2006 and 2005, respectively (these results are included
in our Consolidated Statements of Operations as part of the “Loss from
Discontinued Operations, Net of Tax”). Loss from operations of these businesses,
inclusive of goodwill impairments and other asset impairments as well as costs
to sell these businesses, net of tax, was $68.7 million, $24.1 million and $12.1
million in 2007, 2006 and 2005, respectively. For additional
information on discontinued operations, see the notes entitled “Discontinued
Operations,”“Sale of Fabrics Business” and “Taxes on Income” in Item 8 of this
Report.
Restructuring
Charge
We
recorded a pre-tax restructuring charge of $3.3 million in 2006. The
charge reflected: (1) the closure of our fabrics manufacturing
facility in East Douglas, Massachusetts, and consolidation of those operations
into our facility in Elkin, North Carolina; (2) workforce reduction at the East
Douglas, Massachusetts facility; and (3) a reduction in carrying value of
another fabrics facility and other assets. The restructuring charge
was comprised of $0.3 million of cash expenditures for severance benefits and
other similar costs, and $3.0 million of non-cash charges, primarily for the
write-down of carrying value and disposal of assets. Because this
restructuring charge related to the Fabrics Group business segment, it is now
included as part of our discontinued operations.
Sale
of Pandel
In the
first quarter of 2007, we sold our Pandel, Inc. business for $1.4 million and
recorded a loss of $1.9 million on this sale. Pandel comprised our
Specialty Products segment.
Common
Stock Offering
In
November 2006, we sold 5,750,000 shares of our Class A common stock (which
amount includes the underwriters’ exercise in full of their option to purchase
an additional 750,000 shares to cover over-allotments) at a public offering
price of $14.65 per share pursuant to a common stock offering, resulting in net
proceeds of approximately $78.9 million after deducting the underwriting
discounts, commissions and offering expenses.
Pursuant
to the provisions of the American Jobs Creation Act of 2004, the Company
repatriated an aggregate of $35.9 million of earnings from foreign subsidiaries
during 2005. This action took advantage of an opportunity to
repatriate the funds at a substantially reduced tax rate, provided the
transaction occurred before the end of 2005. Consequently, the
Company recorded aggregate tax charges of $3.4 million, or $0.06 per diluted
share, during 2005 related to the repatriation.
Goodwill
Impairment Write-Down
During
the fourth quarters of each of the years 2005 to 2007, we performed the annual
goodwill impairment tests required by SFAS No. 142. In effecting the
impairment testing, we prepared valuations of reporting units in accordance with
the applicable standards, and those valuations were compared with the respective
book values of the reporting units to determine whether any goodwill impairment
existed. In preparing the valuations, past, present and future expectations of
performance were considered. No impairment was indicated in our continuing
operations during these years. However, as described above, we incurred goodwill
impairment charges in connection with the sales of our fabrics businesses in
2006 and 2007, which charges are included as a part of our “Loss from
Discontinued Operations, Net of Tax.”
- 21
-
Results of
Operations
The
following discussion and analyses reflect the factors and trends discussed in
the preceding sections.
Our net
sales that were denominated in currencies other than the U.S. dollar were
approximately 49% in 2007, approximately 49% in 2006, and approximately 46% in
2005. Because we have such substantial international operations, we
are impacted, from time to time, by international developments that affect
foreign currency transactions. For example, the performance of the
euro against the U.S. dollar, for purposes of the translation of European
revenues into U.S. dollars, favorably affected our reported results in 2007
and 2006, when the euro was strengthening relative to the U.S.
dollar. In 2005, however, when the euro weakened relative to the U.S.
dollar, the translation of European revenues into U.S. dollars adversely
affected our reported results. The following table presents the
amount (in U.S. dollars) by which the exchange rates for converting euros into
U.S. dollars have affected our net sales and operating income during the past
three years:
2007
2006
2005
(in
millions)
Net
sales
$
31.1
$
3.7
$
(0.3
)
Operating
income
4.9
0.4
(0.1
)
All
amounts above for all periods exclude our discontinued operations, comprised of
our Fabrics businesses (which we sold in 2006 and 2007), our
U.S. raised/access flooring business (which we sold in September 2003) and
our owned Re:Source dealer businesses (which we exited during
2004-2005).
The
following table presents, as a percentage of net sales, certain items included
in our Consolidated Statements of Operations for the three years ended December30, 2007:
Fiscal
Year
2007
2006
2005
Net
sales
100.0
%
100.0
%
100.0
%
Cost
of
sales
65.1
66.0
67.1
Gross
profit on
sales
34.9
34.0
32.9
Selling,
general and administrative
expenses
22.8
23.1
23.0
Loss
on disposal –
Pandel
0.2
--
--
Operating
income
11.9
10.9
9.9
Interest/Other
expense
3.3
4.7
5.9
Income
(loss) from continuing operations before tax
8.6
6.2
4.0
Income
tax expense
(benefit)
3.3
2.2
2.0
Income
(loss) from continuing
operations
5.3
3.9
1.9
Discontinued
operations, net of
tax
(6.3
)
(2.6
)
(1.5
)
Loss
on
disposal
--
(0.2
)
(0.2
)
Net
income
(loss)
(1.0
)
1.1
0.2
Below we
provide information regarding net sales for each of our three operating
segments, and analyze those results for each of the last three fiscal years
(which were each 52-week periods).
Net
Sales by Business Segment
We
currently classify our businesses into the following three operating segments
for reporting purposes:
•
Modular
Carpet segment, which includes our InterfaceFLOR, Heuga
and FLOR modular
carpet businesses, and also includes our Intersept antimicrobial
chemical sales and licensing program;
•
Bentley
Prince Street segment, which includes our Bentley Prince Street
broadloom, modular carpet and area rug businesses; and
•
Specialty
Products segment, which includes our former subsidiary Pandel, Inc. that
we sold in March 2007.
- 22
-
Net sales
by operating segment and for our company as a whole were as follows for the
three years ended December 30, 2007:
Fiscal Year
Percentage Change
Net Sales By Segment
2007
2006
2005
2007
compared with 2006
2006
compared with 2005
(in
thousands)
Modular
Carpet
$
930,717
$
763,659
$
646,213
21.9
%
18.2
%
Bentley
Prince Street
148,364
137,920
125,167
7.6
%
10.1
%
Specialty
Products
2,192
13,080
15,544
(83.2
%)
(15.9
%)
Total
$
1,081,273
$
914,659
$
786,924
18.2
%
16.2
%
Modular Carpet
Segment. For 2007, net sales for the Modular Carpet segment
increased $167.1 million (21.9%) versus 2006. The weighted average
selling price per square yard in 2007 was up 4.2% compared with 2006 as a result
of the premium positioning of our products in the marketplace. On a
geographic basis, we experienced significant increases in net sales in the
Americas (15% increase), Europe (25% increase) and the Asia-Pacific region (33%
increase). Our increase in the Americas was primarily due to the
continued strength of the corporate office market (7% increase) and the success
of our segmentation strategy, which saw significant increases in the
institutional (which includes education and government facilities, a 21%
increase), healthcare (17% increase) and hospitality (43% increase)
segments. The increase in Europe was driven primarily by the
continued strength of the corporate office market (24% increase), and was
augmented by success in non-corporate segments, primarily the institutional (29%
increase) and hospitality (65% increase) segments. Our growth in
Asia-Pacific was primarily due the strong corporate office market (45% increase)
in that region.
For 2006,
net sales for the Modular Carpet segment increased $117.5 million (18.2%) versus
2005. The weighted average selling price per square yard in 2006 was
up 2.5% compared with 2005, which was partially due to our passing through to
customers increases in our cost of petroleum-based raw materials. On
a geographic basis, we experienced significant increases in net sales in the
Americas (13% increase), Europe (17% increase) and the Asia-Pacific region (15%
increase). Our increase in the Americas was primarily due to the
continued strength of the corporate office market (16% increase) and the success
of our segmentation strategy, which saw significant increases in the hospitality
(118% increase), residential (30% increase) and healthcare (16% increase)
segments. The increase in Europe was driven by the strong corporate
office market (19% increase) as well as success in non-corporate segments such
as institutional (39% increase) and hospitality (28% increase). Our
success in Asia-Pacific was primarily due to the continued strength of the
corporate office market (22% increase) and was offset somewhat by declines in
the hospitality and retail segments.
Bentley Prince Street
Segment. For 2007, sales in the Bentley Prince Street segment
increased $10.4 million (7.6%) versus 2006. Our weighted average
selling price per square yard in 2007 was up 7.0% compared with 2006 as a result
of the premium positioning of our products in the marketplace. The
increase in sales occurred primarily in our non-corporate office segments,
particularly in the hospitality market (64% increase). This increase
was offset to a large degree by flat sales in the corporate office segment in
2007 compared with 2006.
For 2006,
net sales in the Bentley Prince Street segment increased $12.8 million (10.1%)
versus 2005. The weighted average selling price per square yard in
2006 was up approximately 4% compared with 2005, which was partially due to our
passing through to our customers increases in our cost of petroleum-based raw
materials. The increase in sales was attributable primarily to the
success of our segmentation strategy, which led to increases in the hospitality
(170% increase), healthcare (35% increase) and residential (34% increase)
segments during the year.
Specialty Products
Segment. Because we sold Pandel, Inc. (which comprised the
Specialty Products segment) in March 2007, we no longer had sales in the
Specialty Products segment after the first quarter of 2007, and thus the Segment
is not comparable to the prior year period. For 2006, net sales for
our Specialty Products segment decreased by $2.5 million (15.9%) compared with
2005. This decrease was primarily the result of the loss of one major
customer and the inconsistent order pattern of another major customer that
adversely affected 2006 results.
- 23
-
Cost
and Expenses
Company
Consolidated. The following table presents, on a consolidated
basis for our operations, our overall cost of sales and selling, general and
administrative expenses for the three years ended December 30,2007:
Cost and Expenses
Fiscal Year
Percentage Change
2007
2006
2005
2007
compared
with 2006
2006
compared
with 2005
(in
thousands)
Cost
of Sales
$
703,751
$
603,551
$
527,647
16.6
%
14.4
%
Selling,
General and Administrative Expenses
246,258
211,487
181,561
16.4
%
16.5
%
Total
$
950,009
$
815,038
$
709,208
16.6
%
14.9
%
For 2007,
our cost of sales increased $100.2 million (16.6%) versus 2006, primarily due to
increased raw materials costs ($66.1 million) and labor costs ($10.0
million) associated with increased production levels in 2007. Our raw
materials prices in 2007 were consistent with raw material prices
in 2006 as increases in the prices of petroleum-based products were offset
by decreases in the prices of other raw materials. In addition, the
translation of euros into U.S. dollars resulted in an approximately $18.2
million increase in the cost of sales in 2007 compared with 2006. As
a percentage of net sales, cost of sales decreased to 65.1% during 2007 versus
66.0% during 2006. The percentage decrease was primarily due to
increased sales price levels, increased absorption of fixed manufacturing costs
associated with increased production levels, and improved manufacturing
efficiencies in our European modular carpet operations.
For 2006,
our cost of sales increased $75.9 million (14.3%) versus 2005, primarily due to
increased raw materials costs ($50.6 million) and labor costs ($7.6
million) associated with increased production levels during 2006. Our
raw materials prices in 2006 were up an estimated 1-2% versus 2005, primarily
due to increased prices for petroleum-based products. As a percentage
of net sales, cost of sales decreased to 66.0% versus 67.1% during
2005. The percentage decrease was primarily due to the increased
absorption of fixed manufacturing costs associated with increased production
levels.
For 2007,
our selling, general and administrative expenses increased $34.8 million (16.4%)
versus 2006. The primary components of this increase
were: (1) $11.5 million in increased selling costs, commensurate with
the increase in sales volume in 2007, (2) a $7.8 million increase in
expenses due to the translation of euros into U.S. dollars, (3) $7.5 million of
increased marketing expenses as we continue to invest in our marketing
platforms, and (4) $2.5 million related to incremental performance vesting of
restricted stock and other one-time incentive programs in 2007 compared with
2006. However, as a percentage of net sales, selling, general and
administrative expenses decreased to 22.8% for 2007, versus 23.1% for 2006, a
direct result of our continued cost control measures.
For 2006,
our selling, general and administrative expenses increased $29.9 million (16.5%)
versus 2005. The primary components of this increase
were: (1) $13.6 million in increased selling costs due to the
increased level of sales in 2006, as well as planned investments in our
segmentation strategy and in the expansion of our sales force, and (2) $7.6
million of increased administrative expenses, primarily due to increased
information technology costs, investments in our administration infrastructure
related to our residential business, and increased legal expenses.
- 24
-
Cost and Expenses by
Segment. The following table presents the combined cost of
sales and selling, general and administrative expenses for each of our operating
segments for the three years ended December 30, 2007:
Fiscal Year
Percentage Change
Cost
of Sales and Selling, General and Administrative Expenses (Combined)
2007
2006
2005
2007
compared
with 2006
2006
compared
with 2005
(in
thousands)
Modular
Carpet
$
797,060
$
665,415
$
568,862
19.8
%
17.0
%
Bentley
Prince Street
142,771
131,989
121,673
8.2
%
8.5
%
Specialty
Products
2,052
12,716
14,893
(83.9
%)
(14.6
%)
Corporate
Expenses
8,126
4,918
3,780
65.2
%
30.1
%
Total
$
950,009
$
815,038
$
709,208
16.6
%
14.9
%
Interest
and Other Expense
For 2007,
interest expense decreased by $8.1 million versus 2006. The decrease
was due primarily to the repurchase and redemption of all of our outstanding
7.3% bonds (approximately $101.4 million) during the year.
For 2006,
interest expense decreased by $3.3 million versus 2005. The decrease
was due primarily to the repurchase of approximately $46.6 million of our 7.3%
bonds during the year. This decrease in interest was partially offset
by increased borrowings on our revolving credit agreement for the first three
quarters of 2006.
Tax
Our
effective tax rate in 2007 was 38.1%, compared with an effective rate of 36.5%
in 2006. This increase in rate is primarily attributable to (1) a non-deductible
loss on the sale of Pandel, Inc., and (2) an increase in non-deductible business
expenses related to executive compensation.
Our
effective tax rate in 2006 was 36.5%, compared with an effective tax rate of
51.3% in 2005. This decrease in rate is primarily attributable to (1)
a reduction in the statutory tax rate in the Netherlands, (2) changes in state
net operating loss carryforward valuation allowances, and (3) the repatriation
of foreign earnings under The American Jobs Creation Act that occurred in
2005.
Liquidity
and Capital Resources
General
In our
business, we require cash and other liquid assets primarily to purchase raw
materials and to pay other manufacturing costs, in addition to funding normal
course selling, general and administrative expenses, anticipated capital
expenditures, and potential special projects. We generate our cash and other
liquidity requirements primarily from our operations and from borrowings or
letters of credit under our domestic revolving credit facility with a banking
syndicate. We believe that our liquidity position will provide
sufficient funds to meet our current commitments and other cash requirements for
the foreseeable future. We also believe that we will be able to
continue to enhance the generation of free cash flow (particularly in the
short-term because we have no significant debt maturity until February 2010)
through the following initiatives:
·
Improve
our inventory turns by continuing to implement a made-to-order model
throughout our organization;
·
Reduce
our average days sales outstanding through improved credit and collection
practices; and
·
Limit
the amount of our capital expenditures generally to those projects that
have a short-term payback period.
Historically,
we use more cash in the first half of the fiscal year, as we fund insurance
premiums, tax payments, incentive compensation and inventory build-up in
preparation for the holiday/vacation season of our international
operations.
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In
addition, we have a high contribution margin business with low capital
expenditure requirements. Contribution margin represents variable
gross profit margin less the variable component of selling, general and
administrative expenses, and for us is an indicator of profit on incremental
sales after the fixed components of cost of goods sold and selling, general and
administrative expenses have been recovered. While contribution
margin should not be construed as a substitute for gross margin, which is
determined in accordance with GAAP, it is included herein to provide additional
information with respect to our potential for profitability. In
addition, we believe that investors find contribution margin to be a useful tool
for measuring our profitability on an operating basis.
Our
ability to generate cash from operating activities is uncertain because we are
subject to, and in the past have experienced, fluctuations in our level of net
sales. As a result, we cannot assure you that our business will
generate cash flow from operations in an amount sufficient to enable us to pay
the interest and principal on our debt or to fund our other liquidity
needs.
At
December 30, 2007, we had $82.4 million in cash. As of December 30,2007, no borrowings and $12.3 million in letters of credit were outstanding
under our domestic revolving credit facility, and we could have incurred an
additional $62 million of borrowings thereunder. In addition, we
could have incurred the equivalent of $15.7 million of borrowings under our
other international revolving credit facilities.
We have
approximately $70.9 million in contractual cash obligations due by the end of
fiscal year 2008, which includes, among other things, capital expenditure
purchase commitments and interest payments on our debt. We currently
estimate aggregate capital expenditures will be between $48 million and $52
million for 2008. Based on current interest rate and debt levels, we
expect our aggregate interest expense for 2008 to be between $30 million and $32
million.
In
November 2006, we sold 5,750,000 shares of our Class A common stock at a public
offering price of $14.65 per share, resulting in net proceeds of approximately
$78.9 million after deducting the underwriting discounts and commissions and
estimated offering expenses. Also, in July 2007, we sold our Fabrics
Group business segment, and we received $60.7 million in cash at the closing of
the transaction. In September 2007, we completed the redemption of
all of our outstanding 7.3% Senior Notes due 2008, as described
below.
It is
important for you to consider that our domestic revolving credit facility
matures in December 2012, and our outstanding senior and senior subordinated
notes mature in 2010 and 2014, respectively. We cannot assure you that we will
be able to renegotiate or refinance any of our debt on commercially reasonable
terms or at all. If we are unable to refinance our debt or obtain new financing,
we would have to consider other options, such as selling assets to meet our debt
service obligations and other liquidity needs, or using cash, if available, that
would have been used for other business purposes.
Domestic
Revolving Credit Facility
We
amended our domestic revolving credit facility on January 1, 2008. As
amended, it provides for a maximum aggregate amount of loans and letters of
credit of up to $100 million (with the option to increase it to a maximum of
$150 million upon the satisfaction of certain conditions) at any one time,
subject to the borrowing base described below. The key features of the domestic
revolving credit facility are as follows:
•
The
revolving credit facility currently matures on December 31,2012;
•
The
revolving credit facility includes a domestic U.S. dollar syndicated
loan and letter of credit facility made available to Interface, Inc. up to
the lesser of (1) $100 million, or (2) a borrowing base
equal to the sum of specified percentages of eligible accounts receivable,
inventory, equipment and (at our option) real estate in the United States
(the percentages and eligibility requirements for the borrowing base are
specified in the credit facility), less certain
reserves;
•
Advances
under the facility are secured by a first-priority lien on substantially
all of Interface, Inc.’s assets and the assets of each of its material
domestic subsidiaries, which have guaranteed the revolving credit
facility; and
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•
The
revolving credit facility contains a financial covenant (a fixed charge
coverage ratio test) that becomes effective in the event that our excess
borrowing availability falls below $20 million. In such event, we
must comply with the financial covenant for a period commencing on the
last day of the fiscal quarter immediately preceding such event (unless
such event occurs on the last day of a fiscal quarter, in which case the
compliance period commences on such date) and ending on the last day of
the fiscal quarter immediately following the fiscal quarter in which such
event occurred.
The
revolving credit facility also includes various reporting, affirmative and
negative covenants, and other provisions that restrict our ability to take
certain actions, including provisions that restrict our ability to repay our
long-term indebtedness unless we meet a specified minimum excess availability
test.
Interest Rates
and Fees. Interest on borrowings and letters of credit under
the revolving credit facility is charged at varying rates computed by applying a
margin (ranging from 0.0% to 0.25%, in the case of advances at a prime interest
rate, and 1.00% to 2.00%, in the case of advances at LIBOR) over a baseline rate
(such as the prime interest rate or LIBOR), depending on the type of borrowing
and our average excess borrowing availability during the most recently completed
fiscal quarter. In addition, we pay an unused line fee on the facility ranging
from 0.25% to 0.375% depending on our average excess borrowing availability
during the most recently completed fiscal quarter.
Prepayments. Our
revolving credit facility requires prepayment from the proceeds of certain asset
sales.
Covenants. The
revolving credit facility also limits our ability, among other things,
to:
•
incur
indebtedness or contingent
obligations;
•
make
acquisitions of or investments in businesses (in excess of certain
specified amounts);
•
sell
or dispose of assets (in excess of certain specified
amounts);
•
create
or incur liens on assets; and
•
enter
into sale and leaseback
transactions.
We are
presently in compliance with all covenants under the revolving credit facility
and anticipate that we will remain in compliance with the covenants for the
foreseeable future.
Events of
Default. If we breach or fail to perform any of the
affirmative or negative covenants under the revolving credit facility, or if
other specified events occur (such as a bankruptcy or similar event or a change
of control of Interface, Inc. or certain subsidiaries, or if we breach or fail
to perform any covenant or agreement contained in any instrument relating to any
of our other indebtedness exceeding $10 million), after giving effect to
any applicable notice and right to cure provisions, an event of default will
exist. If an event of default exists and is continuing, the lenders’ agent may,
and upon the written request of a specified percentage of the lender group,
shall:
•
declare
all commitments of the lenders under the facility
terminated;
•
declare
all amounts outstanding or accrued thereunder immediately due and payable;
and
•
exercise
other rights and remedies available to them under the agreement and
applicable law.
Collateral. The
facility is secured by substantially all of the assets of Interface, Inc. and
its domestic subsidiaries (subject to exceptions for certain immaterial
subsidiaries), including all of the stock of our domestic subsidiaries and up to
65% of the stock of our first-tier material foreign subsidiaries. If an event of
default occurs under the revolving credit facility, the lenders’ collateral
agent may, upon the request of a specified percentage of lenders, exercise
remedies with respect to the collateral, including, in some instances,
foreclosing mortgages on real estate assets, taking possession of or selling
personal property assets, collecting accounts receivables, or exercising proxies
to take control of the pledged stock of domestic and first-tier material foreign
subsidiaries.
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Foreign
Credit Facilities
On March9, 2007, Interface Europe B.V. (our modular carpet subsidiary based in the
Netherlands) and certain of its subsidiaries entered into a Credit Agreement
with ABN AMRO Bank N.V. Under this Credit Agreement, ABN AMRO provides a credit
facility for borrowings and bank guarantees in varying aggregate amounts over
time as follows:
Interest
on borrowings under this facility is charged at varying rates computed by
applying a margin of 1% over ABN AMRO’s euro base rate (consisting of the
leading refinancing rate as determined from time to time by the European Central
Bank plus a debit interest surcharge), which base rate is subject to a minimum
of 3.5% per annum. Fees on bank guarantees and documentary letters of
credit are charged at a rate of 1% per annum or a part thereof on the maximum
amount and for the maximum duration of each guarantee or documentary letter of
credit issued. An unused line fee of 0.5% per annum is payable with
respect to any undrawn portion of the facility. The facility is
secured by liens on certain real, personal and intangible property of our
principal European subsidiaries. The facility also includes various
financial covenants (which require the borrowers to maintain a minimum interest
coverage ratio, total debt/EBITDA ratio and tangible net worth/total assets) and
affirmative and negative covenants, and other provisions that restrict the
borrowers’ ability to take certain actions. As of December 30, 2007,
there were no borrowings outstanding under this facility.
Some of
our other non-U.S. subsidiaries have an aggregate of the equivalent of $15.7
million of lines of credit available. As of December 30, 2007, there
were no borrowings outstanding under these lines of credit.
We are
presently in compliance with all covenants under these foreign credit facilities
and anticipate that we will remain in compliance with the covenants for the
foreseeable future.
Senior
and Senior Subordinated Notes
As of
December 30, 2007, we had $175 million of our 10.375% Senior Notes due 2010
outstanding and $135 million of our 9.5% Senior Subordinated Notes due 2014
outstanding. The indentures governing our 10.375% Senior Notes and
our 9.5% Senior Subordinated Notes, on a collective basis, contain covenants
that limit or restrict our ability to:
•
incur
additional indebtedness;
•
make
dividend payments or other restricted
payments;
enter
into transactions with shareholders and affiliates;
and
•
enter
into mergers, consolidations or sales of all or substantially all of our
assets.
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In
addition, each of the indentures governing our 10.375% Senior Notes and 9.5%
Senior Subordinated Notes contains a covenant that requires us to make an offer
to purchase the outstanding notes under such indenture in the event of a change
of control of Interface, Inc. (as defined in each respective
indenture).
Each
series of notes is guaranteed, fully, unconditionally, and jointly and
severally, on an unsecured basis by each of our material U.S. subsidiaries. If
we breach or fail to perform any of the affirmative or negative covenants under
one of these indentures, or if other specified events occur (such as a
bankruptcy or similar event), after giving effect to any applicable notice and
right to cure provisions, an event of default will exist. An event of default
also will exist under each indenture if we breach or fail to perform any
covenant or agreement contained in any other instrument (including without
limitation any other indenture) relating to any of our indebtedness exceeding
$20 million and such default or failure results in the indebtedness becoming due
and payable. If an event of default exists and is continuing, the
trustee of the series of notes at issue (or the holders of at least 25% of the
principal amount of such notes) may declare the principal amount of the notes
and accrued interest thereon immediately due and payable (except in the case of
bankruptcy, in which case such amounts are immediately due and payable even in
the absence of such a declaration).
In 2005,
we repurchased $2.0 million of our 7.3% Senior Notes due 2008. In
2006, we repurchased an additional $46.6 million of the 7.3% Senior
Notes. In 2007, we repurchased or redeemed all of the 7.3% Senior
Notes that remained outstanding, which amounted to approximately $101.4
million.
Analysis
of Cash Flows
Our
primary sources of cash during 2007 were: (1) $60.7 million from the sale of our
Fabrics Group business segment, (2) $4.6 million from the exercise of
employee stock options, and (3) $1.4 million from the sale of our Pandel
business. The primary uses of cash during 2007 were: (1) $101.4
million for repurchases and the redemption of our 7.3% Senior Notes due 2008,
(2) $40.6 million for additions to property, plant and equipment,
primarily at our manufacturing locations, and (3) $4.9 million for the payment
of our dividends.
Our
primary sources of cash during 2006 were: (1) $78.9 million from our sale of
5,750,000 shares of common stock, (2) $28.8 million received from the
sale of our European fabrics business, and (3) $7.1 million from the
exercise of employee stock options. The primary uses of cash during
2006 were: (1) $46.6 million for repurchases of our 7.3% Senior Notes, (2) $40.4
million for bond interest payments, and (3) $28.5 million for additions to
property and equipment in our manufacturing locations.
Our
primary sources of cash during 2005 were: (1) $34.0 million from continuing
operations, (2) $27.9 million from discontinued operations, and (3) $3.0 million
from the issuance of stock upon the exercise of employee stock
options. The primary uses of cash during 2005 were: (1) $19.4 million
for additions to property and equipment at our manufacturing facilities, (2)
$2.7 million for purchases of intellectual property, (3) $2.3 million for
deposits on manufacturing equipment, and (4) $2.0 million for repurchases of our
7.3% Senior Notes.
Management
believes that cash provided by operations and long-term loan commitments will
provide adequate funds for current commitments and other requirements in the
foreseeable future.
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Funding
Obligations
We have
various contractual obligations that we must fund as part of our normal
operations. The following table discloses aggregate information about our
contractual obligations (including the remaining contractual obligations related
to our discontinued operations) and the periods in which payments are due. The
amounts and time periods are measured from December 30, 2007.
Payments Due by Period
Total
Payments Due
Less than 1 year
1-3 years
3-5 years
More than
5 years
(in
thousands)
Long-Term
Debt
Obligations
$
310,000
$
--
$
175,000
$
--
$
135,000
Operating
Lease
Obligations(1)
88,769
24,032
32,122
20,302
12,313
Expected
Interest
Payments(2)
115,088
30,981
44,563
25,650
13,894
Unconditional
Purchase Obligations(3)
4,351
3,459
886
6
--
Pension
Cash
Obligations(4)
134,539
12,402
25,542
26,322
70,273
Total
Contractual Cash
Obligations(5)
$
652,747
$
70,874
$
278,113
$
72,280
$
231,480
(1)
Our
capital lease obligations are
insignificant.
(2)
Expected
Interest Payments to be made in future periods reflect anticipated
interest payments related to our $175 million of 10.375% Senior Notes
and our $135 million of 9.5% Senior Subordinated Notes. We have
also assumed in the presentation above that we will hold the Senior Notes
and the Senior Subordinated Notes until maturity. We have
excluded from the presentation interest payments and fees related to our
revolving credit facilities (discussed above), because of the variability
and timing of advances and repayments
thereunder.
(3)
Unconditional
Purchase Obligations does not include unconditional purchase obligations
that are included as liabilities in our Consolidated Balance
Sheet. We have capital expenditure commitments of $1.4 million,
all of which are due in less than 1
year.
(4)
We
have two foreign defined benefit plans and a domestic salary continuation
plan. We have presented above the estimated cash obligations
that will be paid under these plans over the next ten
years. Such amounts are based on several estimates and
assumptions and could differ materially should the underlying estimates
and assumptions change. Our domestic salary continuation plan
is an unfunded plan, and we do not currently have any commitments to make
contributions to this plan. However, we do use insurance
instruments to hedge our exposure under the salary continuation
plan. Contributions to our other employee benefit plans are at
our discretion.
(5)
The
above table does not reflect unrecognized tax benefits of $7.7 million,
the timing of which is uncertain. See the Note entitled “Taxes
on Income” in Item 8 of this Report for further
information.
Critical
Accounting Policies
High-quality
financial statements require rigorous application of high-quality accounting
policies. The policies discussed below are considered by management to be
critical to an understanding of our consolidated financial statements because
their application places the most significant demands on management’s judgment,
with financial reporting results relying on estimations about the effects of
matters that are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs. For all of these
policies, management cautions that future events may not develop as forecasted,
and the best estimates routinely require adjustment.
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Revenue
Recognition. A portion of our revenues is derived from
long-term contracts that are accounted for under the provisions of the American
Institute of Certified Public Accountants’ Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.” Long-term fixed-price contracts are recorded on the percentage of
completion basis using the ratio of costs incurred to estimated total costs at
completion as the measurement basis for progress toward completion and revenue
recognition. Any losses identified on contracts are recognized immediately.
Contract accounting requires significant judgment relative to assessing risks,
estimating contract costs and making related assumptions for schedule and
technical issues. With respect to contract change orders, claims or similar
items, judgment must be used in estimating related amounts and assessing the
potential for realization. These amounts are only included in contract value
when they can be reliably estimated and realization is probable.
Impairment of Long-Lived
Assets. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. If the sum of the expected future undiscounted cash flow is less
than the carrying amount of the asset, an impairment is indicated. A loss is
then recognized for the difference, if any, between the fair value of the asset
(as estimated by management using its best judgment) and the carrying value of
the asset. If actual market value is less favorable than that estimated by
management, additional write-downs may be required.
Deferred Income Tax Assets and
Liabilities. The carrying values of deferred income tax assets
and liabilities reflect the application of our income tax accounting policies in
accordance with SFAS No. 109, “Accounting for Income Taxes,” and are based on
management’s assumptions and estimates regarding future operating results and
levels of taxable income, as well as management’s judgment regarding the
interpretation of the provisions of SFAS No. 109. The carrying values
of liabilities for income taxes currently payable are based on management’s
interpretations of applicable tax laws, and incorporate management’s assumptions
and judgments regarding the use of tax planning strategies in various taxing
jurisdictions. The use of different estimates, assumptions and
judgments in connection with accounting for income taxes may result in
materially different carrying values of income tax assets and liabilities and
results of operations.
We record
a valuation allowance to reduce our deferred tax assets when it is more likely
than not that some portion or all of the deferred tax assets will expire before
realization of the benefit or that future deductibility is not
probable. The ultimate realization of the deferred tax assets depends
on the ability to generate sufficient taxable income of the appropriate
character in the future. This requires us to use estimates and make
assumptions regarding significant future events such as the taxability of
entities operating in various taxing jurisdictions.
Goodwill. Pursuant
to SFAS No. 142, we test goodwill for impairment at least annually. We prepare
valuations of reporting units, and those valuations are compared with the
respective book values of the reporting units to determine whether any goodwill
impairment exists. In preparing the valuations, past, present and expected
future performance is considered. If impairment is indicated, a loss is
recognized for the difference, if any, between the fair value of the goodwill
associated with the reporting unit and the book value of that goodwill. If the
actual fair value of the goodwill is determined to be less than that estimated,
an additional write-down may be required.
Inventories. We
determine the value of inventories using the lower of cost or market value. We
write down inventories for the difference between the carrying value of the
inventories and their estimated market value. If actual market conditions are
less favorable than those projected by management, additional write-downs may be
required.
We
estimate our reserves for inventory obsolescence by continuously examining our
inventories to determine if there are indicators that carrying values exceed net
realizable values. Experience has shown that significant indicators
that could require the need for additional inventory write-downs are the age of
the inventory, the length of its product life cycles, anticipated demand for our
products and current economic conditions. While we believe that
adequate write-downs for inventory obsolescence have been made in the
consolidated financial statements, consumer tastes and preferences will continue
to change and we could experience additional inventory write-downs in the
future. Our inventory reserve on December 30, 2007, and December 31,2006, was $7.7 million and $6.6 million, respectively. To the
extent that actual obsolescence of our inventory differs from our estimate by
10%, our net income would be higher or lower by approximately $0.6 million, on
an after-tax basis.
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Pension
Benefits. Net pension expense recorded is based on, among
other things, assumptions about the discount rate, estimated return on plan
assets and salary increases. While management believes these assumptions are
reasonable, changes in these and other factors and differences between actual
and assumed changes in the present value of liabilities or assets of our plans
above certain thresholds could cause net annual expense to increase or decrease
materially from year to year. The actuarial assumptions used in our
salary continuation plan and our foreign defined benefit plans reporting are
reviewed periodically and compared with external benchmarks to ensure that they
appropriately account for our future pension benefit obligation. The
expected long-term rate of return on plan assets assumption is based on weighted
average expected returns for each asset class. Expected returns
reflect a combination of historical performance analysis and the forward-looking
views of the financial markets, and include input from actuaries, investment
service firms and investment managers. A 1% increase in the actuarial assumption
for discount rate would decrease our projected benefit obligation by
approximately $44.1 million. A 1% decrease in the discount rate would
increase our projected benefit obligation by approximately $57.7
million.
Environmental
Remediation. We provide for remediation costs and penalties
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. Remediation liabilities are accrued based on
estimates of known environmental exposures and are discounted in certain
instances. We regularly monitor the progress of environmental remediation.
Should studies indicate that the cost of remediation is to be more than
previously estimated, an additional accrual would be recorded in the period in
which such determination is made.
Allowances for Doubtful
Accounts. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of customers to make required
payments. Estimating this amount requires us to analyze the financial
strengths of our customers. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. By its nature,
such an estimate is highly subjective, and it is possible that the amount of
accounts receivable that we are unable to collect may be different than the
amount initially estimated. Our allowance for doubtful accounts on
December 30, 2007, and December 31, 2006, was $8.6 million and $6.9 million,
respectively. To the extent the actual collectibility of our accounts
receivable differs from our estimates by 10%, our net income would be higher or
lower by approximately $0.6 million, on an after-tax basis, depending on whether
the actual collectibility was better or worse, respectively, than the estimated
allowance.
Product
Warranties. We typically provide limited warranties with
respect to certain attributes of our carpet products (for example, warranties
regarding excessive surface wear, edge ravel and static electricity) for periods
ranging from ten to twenty years, depending on the particular carpet product and
the environment in which the product is to be installed. We typically
warrant that any services performed will be free from defects in workmanship for
a period of one year following completion. In the event of a breach
of warranty, the remedy typically is limited to repair of the problem or
replacement of the affected product. We record a provision related to
warranty costs based on historical experience and periodically adjust these
provisions to reflect changes in actual experience. Our warranty
reserve on December 30, 2007, and December 31, 2006, was $1.2 million and $1.5
million, respectively. Actual warranty expense incurred could vary
significantly from amounts that we estimate. To the extent the actual
warranty expense differs from our estimates by 10%, our net income would be
higher or lower by approximately $0.1 million, on an after-tax basis, depending
on whether the actual expense is lower or higher, respectively, than the
estimated provision.
Off-Balance
Sheet Arrangements
We are
not a party to any material off-balance sheet arrangements.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment to ARB No. 51.” SFAS No. 160 establishes standards of
accounting and reporting of noncontrolling interests in subsidiaries, currently
known as minority interest, in consolidated financial statements, provides
guidance on accounting for changes in the parent’s ownership interest in a
subsidiary and establishes standards of accounting of the deconsolidation of a
subsidiary due to the loss of control. SFAS No. 160 requires an
entity to present minority interests as a component of
equity. Additionally, SFAS No. 160 requires an entity to present net
income and consolidated comprehensive income attributable to the parent and the
minority interest separately on the face of the consolidated financial
statements. This standard is effective for the fiscal year beginning
after December 15, 2008. We are currently assessing the effect, if
any, that the adoption of this pronouncement will have on our consolidated
financial statements.
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In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141R requires the acquiring entity to
recognize and measure at an acquisition date fair value all identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the
acquiree. The Statement recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase. SFAS
No. 141R requires disclosures about the nature and financial effect of the
business combination and also changes the accounting for certain income tax
assets recorded in purchase accounting. This standard is effective
for the fiscal year beginning after December 15 2008. We are
currently assessing the effect, if any, that the adoption of this pronouncement
will have on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to choose to
measure certain financial assets and liabilities at fair
value. SFAS No. 159 also revises provisions of SFAS No. 115 that
apply to available-for-sale and trading securities. This statement is
effective for fiscal years beginning after November 15, 2007. We are
current evaluating the effect, if any, that the adoption of this pronouncement
will have on our Consolidated Financial Statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of
FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158
requires an employer to recognize a plan’s funded status in its statement of
financial position, measure a plan’s assets and obligations as of the end of the
employer’s fiscal year, and recognize the changes in a defined benefit
post-retirement plan’s funded status in comprehensive income in the year in
which the changes occur. SFAS No. 158’s requirement to recognize the
funded status of a benefit plan and new disclosure requirements became effective
for companies with fiscal years ending after December 15, 2006, on a
prospective basis. As a result of the requirement to recognize the
unfunded status of the plan as a liability, we recorded an adjustment to
accumulated other comprehensive income of $11.4 million in the fourth quarter of
2006. The impact of this statement on our Consolidated Financial
Statements is discussed in Item 8 of this Report in the Note to our Consolidated
Financial Statements entitled “Employee Benefit Plans.”
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108. SAB No. 108 provides additional guidance on
determining the materiality of cumulative unadjusted misstatements in both
current and future financial statements. SAB No. 108 also provides
guidance on the proper accounting and reporting for the correction of immaterial
unadjusted misstatements which may become material in subsequent accounting
periods. SAB No. 108 generally requires prior period financial
statements to be revised if prior misstatements are subsequently discovered;
however, for immaterial prior year revisions, reports filed under the Securities
Exchange Act of 1934 are not required to be amended. SAB No. 108
became effective as of December 31, 2006. We applied the guidance
provided in SAB No. 108 in the fourth quarter of 2006, and identified three
matters in prior reporting periods which were deemed immaterial to those periods
using a consistent evaluation methodology (the “rollover
method”). They were as follows:
•
In
1998, we entered into a sale-leaseback transaction in which a gain was
recognized at the time of sale as opposed to over the lease
period. In addition, we did not use straight-line rental
accounting for the expected lease payments related to this
transaction. To correct these entries, we recorded an entry to
increase liabilities by approximately $3.3 million and decrease retained
earnings by approximately $2.1 million, net of tax;
•
Our
previous methodology for recording legal expenses ensured that we incurred
twelve months of expense in each year. However, the actual
timing and amount of the legal bills received led to an understated
liability on the balance sheet. We have recorded a liability of
approximately $1.2 million and a decrease in retained earnings of
approximately $0.5 million, net of taxes (as the remaining portion of
these costs were capitalizable), to properly record incurred legal
expenses; and
•
We
previously under-recorded the liability related to restricted stock by
approximately $0.7 million. There was no impact to consolidated
shareholders’ equity as a result of this correction, as the liability for
restricted stock is recorded in
equity.
- 33
-
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
November 2007, the FASB granted a deferral for the application of SFAS No.
157 to non-financial assets. For such assets, adoption is required in
fiscal years beginning after November 15, 2008. We are currently
evaluating the effect, if any, that the adoption of this pronouncement will have
on our Consolidated Financial Statements.
In
September 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached
consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). The scope of EITF 06-4 is limited to the
recognition of a liability and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. EITF 06-4 is effective for
fiscal years beginning after December 15, 2007, and we are currently evaluating
the effect of this standard on our Consolidated Financial
Statements.
In July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes.” In summary, FIN 48 requires that all tax
positions subject to SFAS No. 109, “Accounting for Income Taxes,” be
analyzed using a two-step approach. The first step requires an entity to
determine if a tax position is more-likely-than-not to be sustained upon
examination. In the second step, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48 was
effective for us in the first quarter of 2007. See the Note to our
Consolidated Financial Statements entitled “Taxes on Income” in Item 8 of this
Report for further discussion of this standard.
In June
2006, the EITF reached a consensus on Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)” (“EITF
06-03”). EITF 06-03 concludes that (a) the scope of this issue
includes any tax assessed by a governmental authority that is directly imposed
on a revenue-producing transaction between a seller and a customer, and (b) that
the presentation of taxes within the scope on either a gross or a net basis is
an accounting policy decision that should be disclosed under Opinion
22. Furthermore, for taxes reported on a gross basis, a company
should disclose the amounts of those taxes in interim and annual financial
statements for each period for which an income statement is
presented. The consensus, which requires only disclosure changes, is
effective for periods beginning after December 15, 2006. This
standard did not have a material impact on our results of operations or
financial position.
In
October 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”
which requires companies to measure compensation cost for all share-based
payments, including employee stock options. SFAS No. 123R was
effective as of the first fiscal year beginning after June 15,2005. In March 2005, the SEC issued SAB No. 107 regarding the SEC’s
interpretation of SFAS No. 123R and the valuation of share-based payments for
public companies. We adopted SFAS No. 123R in January
2006. See the Note to our Consolidated Financial Statements entitled
“Shareholders Equity” in Item 8 of this Report for further discussion of this
standard.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a
result of the scope of our global operations, we are exposed to an element of
market risk from changes in interest rates and foreign currency exchange rates.
Our results of operations and financial condition could be impacted by this
risk. We manage our exposure to market risk through our regular operating and
financial activities and, to the extent appropriate, through the use of
derivative financial instruments.
We employ
derivative financial instruments as risk management tools and not for
speculative or trading purposes. We monitor the use of derivative financial
instruments through objective measurable systems, well-defined market and credit
risk limits, and timely reports to senior management according to prescribed
guidelines. We have established strict counter-party credit guidelines and enter
into transactions only with financial institutions with a rating of investment
grade or better. As a result, we consider the risk of counter-party default to
be minimal.
- 34
-
Interest
Rate Market Risk Exposure
Changes
in interest rates affect the interest paid on certain of our debt. To mitigate
the impact of fluctuations in interest rates, our management has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. From time to time, we maintain a fixed/variable rate
mix within these parameters either by borrowing on a fixed rate basis or
entering into interest rate swap transactions. In the interest rate swaps, we
agree to exchange, at specified levels, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR. As of December 30, 2007, no such interest
rate swaps were in place.
Foreign
Currency Exchange Market Risk Exposure
A
significant portion of our operations consists of manufacturing and sales
activities in foreign jurisdictions. We manufacture our products in the United
States, Canada, England, Northern Ireland, the Netherlands, Australia and
Thailand, and sell our products in more than 100 countries. As a result, our
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which we distribute our products. Our operating results are exposed
to changes in exchange rates between the U.S. dollar and many other currencies,
including the euro, British pound sterling, Canadian dollar, Australian dollar,
Thai baht and Japanese yen. When the U.S. dollar strengthens against a foreign
currency, the value of anticipated sales in those currencies decreases, and vice
versa. Additionally, to the extent our foreign operations with functional
currencies other than the U.S. dollar transact business in countries other than
the United States, exchange rate changes between two foreign currencies could
ultimately impact us. Finally, because we report in U.S. dollars on a
consolidated basis, foreign currency exchange fluctuations could have a
translation impact on our financial position.
At
December 30, 2007, we recognized a $14.1 million increase in our foreign
currency translation adjustment account compared with December 31, 2006, because
of the strengthening of certain currencies against the U.S. dollar. The increase
was associated primarily with certain foreign subsidiaries located within the
United Kingdom and continental Europe.
Sensitivity
Analysis
For
purposes of specific risk analysis, we use sensitivity analysis to measure the
impact that market risk may have on the fair values of our market-sensitive
instruments.
To
perform sensitivity analysis, we assess the risk of loss in fair values
associated with the impact of hypothetical changes in interest rates and foreign
currency exchange rates on market-sensitive instruments. The market value of
instruments affected by interest rate and foreign currency exchange rate risk is
computed based on the present value of future cash flows as impacted by the
changes in the rates attributable to the market risk being measured. The
discount rates used for the present value computations were selected based on
market interest and foreign currency exchange rates in effect at December 30,2007. The values that result from these computations are then compared with the
market values of the financial instruments. The differences are the hypothetical
gains or losses associated with each type of risk.
Interest
Rate Risk
Based on
a hypothetical immediate 150 basis point increase in interest rates, with all
other variables held constant, the fair value of our fixed rate long-term debt
would be impacted by a net decrease of $12.2 million. Conversely, a 150 basis
point decrease in interest rates would result in a net increase in the fair
value of our fixed rate long-term debt of $18.0 million.
Foreign
Currency Exchange Rate Risk
As of
December 30, 2007, 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
$18.7 million or an increase in the fair value of our financial instruments of
$15.3 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.
- 35
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ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
The
Company is a recognized leader in the worldwide commercial interiors market,
offering modular and broadloom floorcoverings. The Company manufactures modular
and broadloom carpet focusing on the high quality, designer-oriented sector of
the market, and provides specialized carpet replacement, installation and
maintenance services. Additionally, the Company offers Intersept, a proprietary
antimicrobial used in a number of interior finishes, and sponsors the
Envirosense Consortium in its mission to address workplace environmental
issues.
In the
third quarter of 2007, the Company sold its Fabrics Group business segment to a
third party. The Fabrics Group designed, manufactured and marketed
fabrics for open plan office furniture systems and commercial
interiors. In April 2006, the Company sold its European fabrics
business. In addition, in 2004, the Company committed to a plan to
exit its owned Re:Source dealer businesses (as well as a small Australian dealer
business and a small residential fabrics business). In the third quarter 2004,
the Company began to dispose of several of the dealer
subsidiaries. The Company has now sold or terminated ongoing
operations at each of its owned dealer businesses. The results of
operations and related disposal costs, gains and losses for these businesses are
classified as discontinued operations for all periods presented.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions are
eliminated. Investments in which the Company does not have the
ability to exercise significant influence are carried at the lower of cost or
estimated realizable value. The Company monitors investments for
other than temporary declines in value and makes reductions in carrying values
when appropriate.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Examples include provisions for returns, bad debts, product
claims reserves, rebates, estimates of costs to complete performance contracts,
inventory obsolescence and the length of product life cycles, accruals
associated with restructuring activities, income tax exposures and valuation
allowances, environmental liabilities, and the carrying value of goodwill and
property and equipment. Actual results could vary from these
estimates.
Revenue
Recognition
Revenue
is recognized when the following criteria are met: persuasive evidence of an
agreement exists, delivery has occurred or services have been rendered, price to
the buyer is fixed and determinable, and collectibility is reasonably assured.
Delivery is not considered to have occurred until the customer takes title and
assumes the risks and rewards of ownership, which is generally on the date of
shipment. Provisions for discounts, sales returns and allowances are estimated
using historical experience, current economic trends, and the Company’s quality
performance. The related provision is recorded as a reduction of
sales and cost of sales in the same period that the revenue is
recognized. Material differences may result in the amount and timing
of net sales for any period if management makes different judgments or uses
different estimates.
Shipping
and handling fees billed to customers are classified in net sales in the
consolidated statements of operations. Shipping and handling costs incurred are
classified in cost of sales in the consolidated statements of
operations.
Research
and Development
Research
and development costs are expensed as incurred and are included in the selling,
general and administrative expense caption in the consolidated statements of
operations. Research and development expense was $15.8 million, $13.6
million and $10.7 million for the years 2007, 2006 and 2005,
respectively.
- 40
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cash,
Cash Equivalents and Short-Term Investments
Highly
liquid investments with insignificant interest rate risk and with original
maturities of three months or less are classified as cash and cash equivalents.
Investments with maturities greater than three months and less than one year are
classified as short-term investments.
Cash
payments for interest amounted to approximately $38.9 million, $41.9 million and
$43.4 million for the years 2007, 2006 and 2005, respectively. Income
tax payments amounted to approximately $16.8 million, $17.5 million and $14.3
million for the years 2007, 2006 and 2005, respectively. During the
years 2007, 2006 and 2005, the Company received income tax refunds of
$0.6 million, $2.5 million and $0.1 million, respectively.
Inventories
Inventories
are valued at the lower of cost (standards approximating the first-in, first-out
method) or market. Costs included in inventories are based on invoiced costs
and/or production costs, as applicable. Included in production costs
are material, direct labor and allocated overhead. The Company writes down
inventories for the difference between the carrying value of the inventories and
their estimated net realizable value. If actual market conditions are less
favorable than those projected by management, additional write-downs may be
required.
Management
estimates its reserves for inventory obsolescence by continuously examining its
inventories to determine if there are indicators that carrying values exceed net
realizable values. Experience has shown that significant indicators
that could require the need for additional inventory write-downs are the age of
the inventory, the length of its product life cycles, anticipated demand for the
Company’s products, and current economic conditions. While management
believes that adequate write-downs for inventory obsolescence have been made in
the consolidated financial statements, consumer tastes and preferences will
continue to change and the Company could experience additional inventory
write-downs in the future.
Rebates
The
Company has agreements to receive cash consideration from certain of its
vendors, including rebates and cooperative marketing
reimbursements. The amounts received from its vendors are generally
presumed to be a reduction of the prices the Company pays for their products
and, therefore, such amounts are reflected as either a reduction of cost of
sales on the accompanying consolidated statements of operations, or, if the
product inventory is still on hand at the reporting date, it is reflected as a
reduction of “Inventories” on the accompanying consolidated balance
sheets. Vendor rebates are typically dependent upon reaching minimum
purchase thresholds. The Company evaluates the likelihood of reaching
purchase thresholds using past experience and current year
forecasts. When rebates can be reasonably estimated and receipt
becomes probable, the Company records a portion of the rebate as the Company
makes progress towards the purchase threshold.
When the
Company receives direct reimbursements for costs incurred in marketing the
vendor’s product or service, the amount received is recorded as an offset to
selling, general and administrative expenses on the accompanying consolidated
statements of operations.
Assets
and Liabilities of Businesses Held for Sale
The
Company considers businesses to be held for sale when management approves and
commits to a formal plan to actively market a business for sale and the sale is
considered probable. Upon designation as held for sale, the carrying value of
the assets of the business are recorded at the lower of their carrying value or
their estimated fair value, less costs to sell. The Company ceases to record
depreciation expense at that time.
- 41
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Property
and Equipment and Long-Lived Assets
Property
and equipment are carried at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives: buildings and
improvements – ten to forty years; and furniture and equipment – three to twelve
years. Interest costs for the construction/development of certain long-term
assets are capitalized and amortized over the related assets’ estimated useful
lives. The Company capitalized net interest costs of approximately $0.9 million,
$1.1 million and $0.9 million for the fiscal years 2007, 2006 and 2005,
respectively. Depreciation expense amounted to approximately $17.2 million,
$18.2 million and $16.5 million for the years 2007, 2006 and 2005,
respectively. These amounts exclude depreciation expense of approximately $4.2
million, $9.0 million and $10.9 million for 2007, 2006, and 2005, respectively,
now reported as discontinued operations, related to the Fabrics Group business
segment.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset. Repair and maintenance costs are charged
to operating expense as incurred.
Goodwill
and Other Intangible Assets
Goodwill
is the excess of the purchase price over the fair value of net assets acquired
in business combinations accounted for as purchases. Prior to the adoption of
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and
Other Intangible Assets” in December 2001, goodwill was amortized on a
straight-line basis over the periods benefited, principally twenty-five to forty
years. Accumulated amortization amounted to approximately $77.3 million at both
December 30, 2007, and December 31, 2006, and cumulative impairment losses
recognized were $151.4 million as of December 30, 2007, and $106.9 million as of
December 31, 2006.
In June
2001, the Financial Accounting Standards Board (“FASB”) finalized SFAS No. 141,
“Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001, and to purchase business
combinations completed on or after July 1, 2001. It also requires, following the
adoption of SFAS No. 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS No.
141.
The
Company’s previous business combinations were accounted for using the purchase
method. As of December 30, 2007, and December 31, 2006, the net carrying amount
of goodwill was $142.5 million and $135.6 million,
respectively. Other intangible assets were $8.5 million and $6.0
million as of December 30, 2007, and December 31, 2006, respectively. The
Company capitalizes patent defense costs when it determines that a successful
defense is probable. The Company has capitalized $3.2 million and
$3.0 million of such costs in 2007 and 2006, respectively. These
costs are amortized over the remaining useful life of the
patent. Amortization expense during the years 2007, 2006 and 2005 was
$0.7 million, $0.3 million and $0.3 million, respectively.
During
the fourth quarters of 2007, 2006 and 2005, the Company performed the annual
goodwill impairment test required by SFAS No. 142. In effecting
the impairment testing, the Company prepared valuations of reporting units in
accordance with the applicable standards, and those valuations were compared
with the respective book values of the reporting units to determine whether any
goodwill impairment existed. In preparing the valuations, past, present and
future expectations of performance were considered. No additional impairment was
indicated. However, the Company recorded a goodwill impairment charge
of $20.7 million in 2006 in connection with the sale of its European
fabrics operations and a goodwill impairment charge of $44.5 million related to
the sale of its Fabrics Group business segment in 2007, which charges are
included as part of the loss from discontinued operations. The
Company also recorded a charge of $3.8 million for other impaired intangible
assets in connection with the Fabrics Group sale in 2007.
- 42
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
changes in the carrying amounts of goodwill for the year ended December 30,2007, by operating segment are as follows:
The
Company typically provides limited warranties with respect to certain attributes
of its carpet products (for example, warranties regarding excessive surface
wear, edge ravel and static electricity) for periods ranging from ten to twenty
years, depending on the particular carpet product and the environment in which
it is to be installed. The Company typically warrants that services
performed will be free from defects in workmanship for a period of one year
following completion. In the event of a breach of warranty, the
remedy typically is limited to repair of the problem or replacement of the
affected product.
The
Company records a provision related to warranty costs based on historical
experience and periodically adjusts these provisions to reflect changes in
actual experience. Warranty reserves amounted to $1.2 million and
$1.5 million as of December 30, 2007, and December 31, 2006, respectively, and
are included in “Accrued Expenses” in the accompanying consolidated balance
sheets.
Taxes
on Income
The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in tax laws or rates. The effect on deferred tax assets and liabilities
of a change in tax rates will be recognized as income or expense in the period
that includes the enactment date.
The
Company records a valuation allowance to reduce its deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
expire before realization of the benefit or that future deductibility is not
probable. The ultimate realization of the deferred tax assets depends
on the ability to generate sufficient taxable income of the appropriate
character in the future. This requires us to use estimates and make
assumptions regarding significant future events such as the taxability of
entities operating in the various taxing jurisdictions.
The
Company does not record taxes collected from customers and remitted to
governmental authorities on a gross basis.
Fair
Values of Financial Instruments
Fair
values of cash and cash equivalents, short-term investments and short-term debt
approximate cost due to the short period of time to maturity. Fair values of
debt are based on quoted market prices or pricing models using current market
rates.
Translation
of Foreign Currencies
The
financial position and results of operations of the Company’s foreign
subsidiaries are measured generally using local currencies as the functional
currency. Assets and liabilities of these subsidiaries are translated into U.S.
dollars at the exchange rate in effect at each year-end. Income and expense
items are translated at average exchange rates for the year. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account. In the event of a divestiture of a foreign subsidiary, the
related foreign currency translation results are reversed from equity to income.
Foreign currency exchange gains and losses are included in net income
(loss). Foreign exchange translation gains (losses) were $14.1
million, $25.5 million and $(34.4) million, for the years 2007, 2006 and 2005,
respectively.
- 43
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income
(Loss) Per Share
Basic
income (loss) per share is computed based on the average number of common shares
outstanding. Diluted income (loss) per share reflects the increase in
average common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock
method.
Stock-Based
Compensation
As of the
fiscal year 2007, the Company has stock-based employee compensation plans, which
are described more fully in the “Shareholders’ Equity” note below. During 2006,
the Company adopted SFAS No. 123R, “Share-Based Payment” and has recorded
expenses related to such plans in accordance with the standard. The
Company transitioned to the standard using the modified prospective
application. Prior to 2006, those plans were accounted for using the
intrinsic value method under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” as allowed under the provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation.” Compensation expenses related to stock
option plans were not material for 2005.
The
following table illustrates the effect on net income and earnings per share (on
a pro forma basis) if the fair value recognition provisions of SFAS No. 123
were applied to stock-based employee compensation:
FISCAL
YEAR
2007
2006
2005
(in
thousands, except per share data)
Net
income (loss) as reported
$
(10,812
)
$
9,992
$
1,240
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effects
--
--
(526
)
Add:
Recognized stock-based compensation
--
--
--
Pro
forma net income (loss)
$
(10,812
)
$
9,992
$
714
Income
(loss) per share:
Basic
– as reported
$
(0.18
)
$
0.18
$
0.02
Basic
– pro forma
(0.18
)
0.18
0.01
Diluted
– as reported
$
(0.18
)
$
0.18
$
0.02
Diluted
– pro forma
(0.18
)
0.18
0.01
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for grants issued in fiscal years 2007, 2006 and
2005:
FISCAL
YEAR
2007
2006
2005
Risk
free interest rate
4.73
%
4.71
%
4.22
%
Expected
option life
3.25
years
3.18
years
2.0
years
Expected
volatility
60
%
60
%
60
%
Expected
dividend yield
0.51
%
0
%
0
%
The
weighted average fair value of stock options (as of grant date) granted during
the years 2007, 2006 and 2005 was $6.99, $5.04 and $2.21, respectively, per
share.
- 44
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Derivative
Financial Instruments
The
Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended, effective January 1, 2001. SFAS No. 133 requires a
company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a fair value hedge, changes in the fair value of the hedged
assets, liabilities or firm commitments are recognized through earnings. If the
derivative is a cash flow hedge, the effective portion of changes in the fair
value of the derivative are recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a derivative’s
change in fair value is immediately recognized in earnings.
Pension
Benefits
Net pension expense
recorded is based on, among other things, assumptions about the discount rate,
estimated return on plan assets and salary increases. While the Company believes
these assumptions are reasonable, changes in these and other factors and
differences between actual and assumed changes in the present value of
liabilities or assets of the Company’s plans above certain thresholds could
cause net annual expense to increase or decrease materially from year to
year. The actuarial assumptions used in our salary continuation plan
and the Company’s foreign defined benefit plans reporting are reviewed
periodically and compared with external benchmarks to ensure that they
appropriately account for our future pension benefit obligation. The
expected long-term rate of return on plan assets assumption is based on weighted
average expected returns for each asset class. Expected returns
reflect a combination of historical performance analysis and the forward-looking
views of the financial markets, and include input from actuaries, investment
service firms and investment managers.
Environmental
Remediation
The Company
provides for remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. Remediation liabilities are accrued based on estimates of known
environmental exposures and are discounted in certain instances. The Company
regularly monitors the progress of environmental remediation. Should studies
indicate that the cost of remediation is to be more than previously estimated,
an additional accrual would be recorded in the period in which such
determination is made.
Allowances
for Doubtful Accounts
The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. Estimating this
amount requires the Company to analyze the financial strengths of the its
customers. If the financial condition of the Company’s customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. By its nature, such an
estimate is highly subjective, and it is possible that the amount of accounts
receivable that the Company is unable to collect may be different than the
amount initially estimated. The Company’s allowance for doubtful
accounts on December 30, 2007, and December 31, 2006, was $8.6 million and $6.9
million, respectively.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current year financial
statement presentation.
Fiscal
Year
The
Company’s fiscal year is the 52 or 53 week period ending on the Sunday nearest
December 31. All references herein to “2007,”“2006,” and “2005,” mean the
fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006,
respectively. Fiscal years 2007, 2006 and 2005 were each comprised of 52
weeks.
- 45
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment to ARB No. 51.” SFAS No. 160 establishes standards of
accounting and reporting of noncontrolling interests in subsidiaries, currently
known as minority interest, in consolidated financial statements, provides
guidance on accounting for changes in the parent’s ownership interest in a
subsidiary and establishes standards of accounting of the deconsolidation of a
subsidiary due to the loss of control. SFAS No. 160 requires an
entity to present minority interests as a component of
equity. Additionally, SFAS No. 160 requires an entity to present net
income and consolidated comprehensive income attributable to the parent and the
minority interest separately on the face of the consolidated financial
statements. This standard is effective for the fiscal year beginning
after December 15, 2008. The Company is currently assessing the
effect, if any, that the adoption of this pronouncement will have on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141R requires the acquiring entity to
recognize and measure at an acquisition date fair value all identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the
acquiree. The Statement recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase. SFAS
No. 141R requires disclosures about the nature and financial effect of the
business combination and also changes the accounting for certain income tax
assets recorded in purchase accounting. This standard is effective
for the fiscal year beginning after December 15 2008. The Company is
currently assessing the effect, if any, that the adoption of this pronouncement
will have on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to choose to
measure certain financial assets and liabilities at fair
value. SFAS No. 159 also revises provisions of SFAS No. 115 that
apply to available-for-sale and trading securities. This statement is
effective for fiscal years beginning after November 15, 2007. The
Company is current evaluating the effect, if any, that the adoption of this
pronouncement will have on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of
FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158
requires an employer to recognize a plan’s funded status in its statement of
financial position, measure a plan’s assets and obligations as of the end of the
employer’s fiscal year, and recognize the changes in a defined benefit
post-retirement plan’s funded status in comprehensive income in the year in
which the changes occur. SFAS No. 158’s requirement to recognize the
funded status of a benefit plan and new disclosure requirements are effective as
of the end of the fiscal year ending after December 15, 2006 (the 2006
fiscal year-end for the Company) on a prospective basis. As a result
of the requirement to recognize the unfunded status of the plan as a liability,
the Company recorded an adjustment to other accumulated comprehensive income of
$11.4 million in the fourth quarter of 2006. See further discussion
below at the note entitled “Employee Benefit Plans.”
In
September 2006, the Securities & Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108. SAB No. 108 provides additional guidance on
determining the materiality of cumulative unadjusted misstatements in both
current and future financial statements. SAB No. 108 also provides
guidance on the proper accounting and reporting for the correction of immaterial
unadjusted misstatements which may become material in subsequent accounting
periods. SAB No. 108 generally requires prior period financial
statements to be revised if prior misstatements are subsequently discovered;
however, for immaterial prior year revisions, reports filed under the Securities
Exchange Act of 1934 are not required to be amended. SAB No. 108
became effective as of December 31, 2006. The Company applied the
guidance provided in SAB No. 108 in the fourth quarter of 2006, and identified
three matters in prior reporting periods which were deemed immaterial to those
periods using a consistent evaluation methodology (the “rollover
method”). They were as follows:
•
In
1998, the Company entered into a sale-leaseback transaction in which a
gain was recognized at the time of sale as opposed to over the lease
period. In addition, the Company did not use straight-line
rental accounting for the expected lease payments related to this
transaction. To correct these entries, the Company recorded an
entry to increase liabilities by approximately $3.3 million and decrease
retained earnings by approximately $2.1 million, net of tax;
- 46
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
•
The
Company’s previous methodology for recording legal expenses ensured that
the Company incurred twelve months of expense in each
year. However, the actual timing and amount of the legal bills
received led to an understated liability on the balance
sheet. The Company has recorded a liability of approximately
$1.2 million and a decrease in retained earnings of approximately
$0.5 million, net of taxes (as the remaining portion of these costs
were capitalizable), to properly record incurred legal expenses;
and
•
The
Company previously under-recorded the liability related to restricted
stock by approximately $0.7 million. There was no impact to
consolidated shareholders’ equity as a result of this correction, as the
liability for restricted stock is recorded in
equity.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. For financial
assets subject to fair-value measurements, SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. In November 2007, the FASB granted a deferral for
the application of SFAS No. 157 to non-financial assets. For
such assets, adoption is required in fiscal years beginning after November 15,2008. The Company is currently evaluating the effect, if any, that
the adoption of this pronouncement will have on its consolidated financial
statements.
In
September 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached
consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). The scope of EITF 06-4 is limited to the
recognition of a liability and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. EITF 06-4 is effective for
fiscal years beginning after December 15, 2007, and the Company is currently
evaluating the effect of this standard on its consolidated financial
statements.
In July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes.” In summary, FIN No. 48 requires that all tax
positions subject to SFAS No. 109, “Accounting for Income Taxes,” be
analyzed using a two-step approach. The first step requires an entity to
determine if a tax position is more-likely-than-not to be sustained upon
examination. In the second step, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, that is
more-likely-than-not to be realized upon ultimate settlement. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006, with any
adjustment in a company’s tax provision being accounted for as a cumulative
effect of accounting change in beginning equity. See the note below
entitled “Taxes on Income” for further discussion of this standard.
In June
2006, the EITF reached a consensus on Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)” (“EITF
06-03”). EITF 06-03 concludes that (a) the scope of this issue
includes any tax assessed by a governmental authority that is directly imposed
on a revenue-producing transaction between a seller and a customer, and (b) the
presentation of taxes within the scope on either a gross or a net basis is an
accounting policy decision that should be disclosed pursuant to Opinion
22. Furthermore, EITF 06-03 states that for taxes reported on a gross
basis, a company should disclose the amounts of those taxes in interim and
annual financial statements for each period for which an income statement is
presented. EITF is effective for periods beginning after December 15,2006. This standard did not have a material impact on our results of
operations or financial position.
In
October 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”
which requires companies to measure compensation cost for all share-based
payments, including employee stock options. SFAS No. 123R was
effective as of the first fiscal year beginning after June 15,2005. In March 2005, the SEC issued SAB No. 107 regarding the SEC’s
interpretation of SFAS No. 123R and the valuation of share-based payments for
public companies. The Company adopted SFAS No. 123R on January 2,2006. For further information, see the note below entitled
“Shareholders’ Equity.”
- 47
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
RECEIVABLES
The
Company has adopted credit policies and standards intended to reduce the
inherent risk associated with potential increases in its concentration of credit
risk due to increasing trade receivables from sales to owners and users of
commercial office facilities and with specifiers such as architects, engineers
and contracting firms. Management believes that credit risks are further
moderated by the diversity of its end customers and geographic sales areas. The
Company performs ongoing credit evaluations of its customers’ financial
condition and requires collateral as deemed necessary. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. As of December 30,2007, and December 31, 2006, the allowance for bad debts amounted to
approximately $8.6 million and $6.9 million, respectively, for all accounts
receivable of the Company. Reserves for sales returns and allowances
amounted to $3.7 million and $2.2 million as of December 30, 2007, and
December 31, 2006, respectively.
INVENTORIES
Inventories are summarized as
follows:
2007
2006
(in
thousands)
Finished
goods
$
77,036
$
66,991
Work-in-process
17,347
13,537
Raw
materials
31,406
31,765
$
125,789
$
112,293
Reserves
for inventory obsolescence amounted to $7.7 million and $6.6 million as of
December 30, 2007, and December 31, 2006, respectively, and have been netted
against amounts presented above.
PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
2007
2006
(in
thousands)
Land
$
8,858
$
8,226
Buildings
104,255
94,933
Equipment
302,707
269,171
415,820
372,330
Accumulated
depreciation
(253,946
)
(237,699
)
$
161,874
$
134,631
The
estimated cost to complete construction-in-progress for which the Company was
committed at December 30, 2007, was approximately $22.9 million.
- 48
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ACCRUED
EXPENSES
Accrued
expenses are summarized as follows:
2007
2006
(in
thousands)
Compensation
$
50,898
$
47,001
Interest
13,402
15,438
Taxes
14,398
11,771
Accrued
purchases
9,923
9,188
Other
31,767
15,304
$
120,388
$
98,702
Other
non-current liabilities include pension liability of $24.0 million and $50.7
million as of December 30, 2007, and December 31, 2006, respectively (see
the discussion below in the note entitled “Employee Benefit
Plans”).
BORROWINGS
Revolving
Credit Facility
On June30, 2006, the Company amended and restated its revolving credit
facility. Under the amended and restated facility (the “Facility”),
as under its predecessor, the Company’s obligations are secured by a first
priority lien on substantially all of the assets of Interface, Inc. and each of
its material domestic subsidiaries, which subsidiaries also guarantee the
Facility. However, the Facility differed from its predecessor in the following
material respects:
·
The
stated maturity date of the Facility was extended to June 30, 2011 (and
has since been extended to December 31, 2012, see
below);
·
The
borrowing base governing borrowing availability was modified to include
certain eligible equipment and (at our option) real estate, to change
certain existing advance rates and types of eligible inventory and to
change certain reserve requirements relating to borrowing availability (in
each case subject to certain terms and conditions specified
therein);
·
The
maximum aggregate amount of loans and letters of credit available to us at
any one time was increased to $125 million (subsequently modified to $100
million, see below), with an option for us to further increase that amount
to up to a maximum of $150 million subject to the satisfaction
of certain conditions;
·
The
applicable interest rates and unused line fees were reduced. Interest is
charged at varying rates computed by applying a margin (ranging from 0.0%
to 0.25%, in the case of advances at a prime interest rate, and 1.25% to
2.25% (subsequently modified to 1.00% to 2.00%, see below), in the case of
advances at LIBOR) over a baseline rate (such as the prime interest rate
or LIBOR), depending on the type of borrowing and our average excess
borrowing availability during the most recently completed fiscal quarter.
The unused line fee ranges from 0.25% to 0.375%, depending on our average
excess borrowing availability during the most recently completed fiscal
quarter;
·
The
negative covenants were relaxed in several respects, including with
respect to the repayment of our other indebtedness and the payment of
dividends and limiting their application to Interface, Inc. and its
domestic subsidiaries. Additionally, the financial covenants were amended
to delete the senior secured debt coverage ratio and to modify the terms
of the sole remaining financial covenant, a fixed charge coverage
test;
·
The
events of default were amended to limit their application primarily to
Interface, Inc. and its domestic subsidiaries and to make certain of the
events of default less restrictive by increasing the applicable dollar
thresholds thereunder; and
·
The
previously-existing multicurrency loan and letter of credit facility
available to our foreign subsidiary based in the United Kingdom, as well
as the liens on assets in the United Kingdom securing that facility, have
been removed from the Facility.
- 49
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On
January 1, 2008, the Company further amended the Facility. The
amendment (the “First Amendment”) extended the stated maturity date of the
Facility to December 31, 2012. The applicable interest rates for
LIBOR-based loans have been reduced. Interest on those loans is now
charged at varying rates computed by applying a margin ranging from 1.00% to
2.00% (reduced from the range of 1.25% to 2.25%) over the applicable LIBOR rate,
depending on our average excess borrowing availability during the most recently
completed fiscal quarter. The Company also is no longer required to
deliver monthly financial statements to the lenders. In light of our recent
borrowing levels and in an effort to reduce unused line fees, the Company has
reduced the maximum aggregate amount of loans and letters of credit available to
us at any one time from $125 million to $100 million (subject to a borrowing
base, as existed prior to the First Amendment), with an option for us to
increase that maximum aggregate amount to $150 million (the same option level
that existed prior to the First Amendment) upon the satisfaction of certain
conditions. The lender group has been reduced from 5 lenders to 4
lenders, and the lending commitments have been reallocated among the remaining
lenders. In connection with the reduction in the number of lenders and the
reallocation of lending commitments, the threshold of “Required Lenders” for
purposes of certain amendments and consents under the Facility has been
increased from more than 50% of the aggregate amount of the lending commitments
to more than 66 2/3% of the aggregate amount of the lending
commitments.
The
Facility also includes various reporting, affirmative and negative covenants,
and other provisions that restrict the Company’s ability to take certain
actions, including provisions that restrict the Company’s ability to: (1) repay
the Company’s long-term indebtedness unless the Company meets a specified
minimum excess availability test; (2) incur indebtedness or contingent
obligations; (3) make acquisitions of or investments in businesses (in excess of
certain specified amounts); (4) sell or dispose of assets (in excess of certain
specified amounts); (5) create or incur liens on assets; and (6) enter into sale
and leaseback transactions.
The
Company is presently in compliance with all covenants under the Facility and
anticipates that it will remain in compliance with the covenants for the
foreseeable future.
The
Facility is secured by substantially all of the assets of Interface, Inc. and
its domestic subsidiaries (subject to exceptions for certain immaterial
subsidiaries), including all of the stock of our domestic subsidiaries and up to
65% of the stock of our first-tier material foreign subsidiaries. If
an event of default occurs under the Facility, the lenders’ collateral agent
may, upon the request of a specified percentage of lenders, exercise remedies
with respect to the collateral, including, in some instances, foreclosing
mortgages on real estate assets, taking possession of or selling personal
property assets, collecting accounts receivables, or exercising proxies to take
control of the pledged stock of domestic and first-tier material foreign
subsidiaries.
As of
December 30, 2007, and December 31, 2006, the Company had no borrowings
outstanding under the Facility. The amended and restated Facility has
no Multicurrency Loan Facility, and therefore no multicurrency borrowings were
outstanding as of December 30, 2007 or December 31, 2006. At
December 30, 2007, the Company had $12.3 million outstanding in
letters of credit under the Facility. As of December 30, 2007, the
Company could have incurred $62.1 million of additional borrowings under
the Facility.
Credit
Agreement with ABN AMRO Bank N.V.
On March9, 2007, Interface Europe B.V. (our modular carpet subsidiary based in the
Netherlands) and certain of its subsidiaries entered into a Credit Agreement
with ABN AMRO Bank N.V. Under the Credit Agreement, ABN AMRO provides a credit
facility for borrowings and bank guarantees in varying aggregate amounts over
time as follows:
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Interest
on borrowings under this facility is charged at varying rates computed by
applying a margin of 1% over ABN AMRO’s euro base rate (consisting of the
leading refinancing rate as determined from time to time by the European Central
Bank plus a debit interest surcharge), which base rate is subject to a minimum
of 3.5% per annum. Fees on bank guarantees and documentary letters of
credit are charged at a rate of 1% per annum or a part thereof on the maximum
amount and for the maximum duration of each guarantee or documentary letter of
credit issued. An unused line fee of 0.5% per annum is payable with
respect to any undrawn portion of the facility. The facility is
secured by liens on certain real, personal and intangible property of our
principal European subsidiaries. The facility also includes various
financial covenants (which require the borrowers to maintain a minimum interest
coverage ratio, total debt/EBITDA ratio and tangible net worth/total assets) and
affirmative and negative covenants, and other provisions that restrict the
borrowers’ ability to take certain actions. As of December 30, 2007,
there were no borrowings outstanding under this facility.
The
Company is presently in compliance with all covenants under this facility and
anticipate that it will remain in compliance with the covenants for the
foreseeable future.
9.5%
Senior Subordinated Notes
On
February 4, 2004, the Company completed a private offering of $135 million in
9.5% Senior Subordinated Notes due 2014. Interest on these Notes is
payable semi-annually on February 1 and August 1 beginning August 1,2004. Proceeds from the issuance of these Notes were used to redeem
in full the Company’s previously outstanding 9.5% Senior Subordinated Notes due
2005 and to reduce borrowings under the Company’s revolving credit
facility.
These
notes are guaranteed, fully, unconditionally, and jointly and severally, on an
unsecured senior subordinated basis by certain of the Company’s domestic
subsidiaries. The notes will become redeemable for cash after
February 1, 2009, at the Company’s option, in whole or in part, initially at a
redemption price equal to 104.75% of the principal amount, declining to 100% of
the principal amount on February 1, 2012, plus accrued interest thereon to the
date fixed for redemption. As of both December 30, 2007, and December31, 2006, the Company had outstanding $135 million of 9.5% Senior Subordinated
Notes due 2014. At December 30, 2007, and December 31, 2006, the
estimated fair value of these notes, based on then current market prices, was
approximately $141.1 million and $141.8 million, respectively.
10.375%
Senior Notes
On
January 17, 2002, the Company completed a private offering of $175 million in
10.375% Senior Notes due 2010. Interest is payable semi-annually on February 1
and August 1 beginning August 1, 2002. Proceeds from the issuance of these Notes
were used to pay down the revolving credit facility.
The notes
are guaranteed, fully, unconditionally, and jointly and severally, on an
unsecured senior basis by certain of the Company’s domestic subsidiaries. As of
both December 30, 2007, and December 31, 2006, the Company had outstanding $175
million in 10.375% Senior Notes. At December 30, 2007, and December 31, 2006,
the estimated fair value of these notes based on then current market prices was
approximately $183.3 million and $193.4 million, respectively.
7.3%
Senior Notes
As of
December 31, 2006, the Company had outstanding $101.4 million in 7.3% Senior
Notes due 2008. These notes were repurchased and redeemed in their entirety
during 2007. The Company paid premiums of $1.5 million and $1.0
million, during 2007 and 2006, respectively, in connection with the repurchase
and redemption of these notes. These charges are included in other expense in
the consolidated statements of operations. Interest on these notes
was payable semi-annually on April 1 and October 1 beginning on October 1,1998.
Other
Lines of Credit
Subsidiaries
of the Company have an aggregate of the equivalent of $15.7 million of other
lines of credit available at interest rates ranging from 1.0% to 9.6%. As of
December 30, 2007, and December 31, 2006, there were no borrowings outstanding
under these lines of credit.
- 51
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Borrowing
Costs
Deferred
borrowing costs, which include underwriting, legal and other direct costs
related to the issuance of debt, were $5.5 million and $6.7 million, as of
December 30, 2007, and December 31, 2006, respectively. The Company
amortizes these costs over the life of the related debt. Expenses
related to such costs for the years 2007, 2006 and 2005 amounted to $1.2
million, $1.9 million and $2.3 million, respectively.
Future
Maturities
The
aggregate maturities of borrowings for each of the five years subsequent to
December 30, 2007, are as follows:
FISCAL
YEAR
AMOUNT
(in
thousands)
2008
$
--
2009
--
2010
175,000
2011
--
2012
--
Thereafter
135,000
$
310,000
PREFERRED
STOCK
The
Company is authorized to designate and issue up to 5,000,000 shares of $1.00 par
value preferred stock in one or more series and to determine the rights and
preferences of each series, to the extent permitted by the Articles of
Incorporation, and to fix the terms of such preferred stock without any vote or
action by the shareholders. The issuance of any series of preferred stock may
have an adverse effect on the rights of holders of common stock and could
decrease the amount of earnings and assets available for distribution to holders
of common stock. In addition, any issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. As of December 30, 2007, and December 31, 2006, there were
no shares of preferred stock issued.
Preferred
Share Purchase Rights
The
Company has previously issued one purchase right (a “Right”) in respect of each
outstanding share of Common Stock pursuant to a Rights Agreement it entered into
in 1998. Each Right entitles the registered holder of the Common Stock to
purchase from the Company one two-hundredth of a share (a “Unit”) of Series B
Participating Cumulative Preferred Stock (the “Series B Preferred
Stock”).
The
Rights may have certain anti-takeover effects. The Rights will cause substantial
dilution to a person or group that acquires (without the consent of the
Company’s Board of Directors) 15% or more of the outstanding shares of Common
Stock or if other specified events occur without the Rights having been redeemed
or in the event of an exchange of the Rights for Common Stock as permitted under
the Shareholder Rights Plan.
The
dividend and liquidation rights of the Series B Preferred Stock are designed so
that the value of one Unit of Series B Preferred Stock issuable upon exercise of
each Right will approximate the same economic value as one share of Common
Stock, including voting rights. The exercise price per Right is $90, subject to
adjustment. Shares of Series B Preferred Stock will entitle the holder to a
minimum preferential dividend of $1.00 per share, but will entitle the holder to
an aggregate dividend payment of 200 times the dividend declared on each share
of Common Stock. In the event of liquidation, each share of Series B Preferred
Stock will be entitled to a minimum preferential liquidation payment of $1.00,
plus accrued and unpaid dividends and distributions thereon, but will be
entitled to an aggregate payment of 200 times the payment made per share of
Common Stock. In the event of any merger, consolidation or other transaction in
which Common Stock is exchanged for or changed into other stock or securities,
cash or other property, each share of Series B Preferred Stock will be entitled
to receive 200 times the amount received per share of Common Stock. Series B
Preferred Stock is not convertible into Common Stock.
- 52
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Each
share of Series B Preferred Stock will be entitled to 200 votes on all matters
submitted to a vote of the shareholders of the Company, and shares of Series B
Preferred Stock will generally vote together as one class with the Common Stock
and any other voting capital stock of the Company on all matters submitted to a
vote of the Company’s shareholders. While the Company’s Class B Common Stock
remains outstanding, holders of Series B Preferred Stock will vote as a single
class with the Class A Common Stockholders for election of
directors.
Further,
whenever dividends on the Series B Preferred Stock are in arrears in an amount
equal to six quarterly payments, the Series B Preferred Stock, together
with any other shares of preferred stock then entitled to elect directors, shall
have the right, as a single class, to elect one director until the default has
been cured.
The
Company is authorized to issue 80 million shares of $0.10 par value Class A
Common Stock and 40 million shares of $0.10 par value Class B Common Stock.
Class A and Class B Common Stock have identical voting rights except for the
election or removal of directors. Holders of Class B Common Stock are entitled
as a class to elect a majority of the Board of Directors. Under the terms of the
Class B Common Stock, its special voting rights to elect a majority of the Board
members would terminate irrevocably if the total outstanding shares of Class B
Common Stock ever comprises less than ten percent of the Company’s total issued
and outstanding shares of Class A and Class B Common Stock. On December 30,2007, the outstanding Class B shares constituted approximately 10.5% of the
total outstanding shares of Class A and Class B Common Stock.
The
Company’s Class A Common Stock is traded on the Nasdaq Global Select Market
under the symbol IFSIA (which will change to the symbol IFSI.A on
April 7, 2008). The Company’s Class B Common Stock is not publicly
traded. Class B Common Stock is convertible into Class A Common Stock on a
one-for-one basis.
Both
classes of Common Stock share in dividends available to common shareholders. The
Company paid dividends totaling $0.08 per share during 2007. There
were no dividends paid in 2006 or 2005. The future declaration and
payment of dividends is at the discretion of the Company’s Board, and depends
upon, among other things, the Company’s investment policy and opportunities,
results of operations, financial condition, cash requirements, future prospects,
and other factors that may be considered relevant at the time of the Board’s
determination. Such other factors include limitations contained in
the agreement for its primary revolving credit facility and in the indentures
for our public indebtedness, each of which specify conditions as to when any
dividend payments may be made. As such, the Company may discontinue
its dividend payments in the future if its Board determines that a cessation of
dividend payments is proper in light of the factors indicated
above.
All
treasury stock is accounted for using the cost method.
Common
Stock Offering
On
November 10, 2006, the Company sold 5,750,000 shares of its Class A common stock
(which amount includes the underwriters’ exercise in full of their option to
purchase an additional 750,000 shares to cover over-allotments) at a public
offering price of $14.65 per share pursuant to a common stock offering,
resulting in net proceeds of approximately $78.9 million after deducting the
underwriting discounts, commissions and estimated offering
expenses. The proceeds of this offering were primarily used to repay
our outstanding debt, as well as to fund other general corporate
purposes.
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following tables show changes in common shareholders’ equity during the past
three years.
The
Company has an Omnibus Stock Incentive Plan (“Omnibus Plan”) under which a
committee of independent directors is authorized to grant directors and key
employees, including officers, options to purchase the Company’s Common Stock.
Options are exercisable for shares of Class A or Class B Common Stock at a price
not less than 100% of the fair market value on the date of grant. The options
become exercisable either immediately upon the grant date or ratably over a time
period ranging from one to five years from the date of the grant. The
Company’s options expire at the end of time periods ranging from three to ten
years from the date of the grant. Initially, in 1997, an aggregate of 3,600,000
shares of Common Stock not previously authorized for issuance under any plan,
plus the number of shares subject to outstanding stock options granted under
certain predecessor plans minus the number of shares issued on or after the
effective date pursuant to the exercise of such outstanding stock options
granted under predecessor plans, were available to be issued under the Omnibus
Plan. In May 2001, the shareholders approved an amendment to the Omnibus Plan
which increased by 2,000,000 the number of shares of Common Stock authorized for
issuance under the Omnibus Plan. In May 2006, the shareholders
approved an amendment to the Omnibus Plan. The amendment extended the
term of the Omnibus Plan until February 2016, and increased the number of shares
authorized for issuance or transfer on or after the effective date of the
amendment to 4,250,000 shares.
- 56
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In the
first quarter of 2006, the Company adopted SFAS No. 123R, “Share-Based
Payments,” which revises SFAS No. 123, “Accounting for Stock-Based
Compensation.” This standard requires that the Company measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant date fair market value of the
award. That cost will be recognized over the period in which the
employee is required to provide the services – the requisite service period
(usually the vesting period) – in exchange for the award. The grant
date fair value for options and similar instruments will be estimated using
option pricing models. Under SFAS No. 123R, the Company is required
to select a valuation technique or option pricing model that meets the criteria
as stated in the standard, which includes a binomial model and the Black-Scholes
model. The Company is continuing to use the Black-Scholes
model. SFAS No. 123R requires that the Company estimate forfeitures
for stock options and reduce compensation expense accordingly. The
Company has reduced its expense by the assumed forfeiture rate and will evaluate
actual experience against the assumed forfeiture rate going
forward.
The
Company recognized stock option compensation expense of $0.3 million in each of
2007 and 2006. There was no recognized expense related to stock
options in 2005. The remaining unrecognized compensation cost related
to unvested awards at December 30, 2007, approximated $0.3 million, and the
weighted average period of time over which this cost will be recognized is
approximately two years.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for grants issued in fiscal years 2007, 2006 and
2005:
FISCAL
YEAR
2007
2006
2005
Risk
free interest rate
4.73
%
4.71
%
4.22
%
Expected
option life
3.25
years
3.18
years
2.0
years
Expected
volatility
60
%
60
%
60
%
Expected
dividend yield
0.51
%
0
%
0
%
The
weighted average fair value of stock options (as of grant date) granted during
the years 2007, 2006 and 2005 was $6.99, $5.04 and $2.21, respectively, per
share.
The
following table summarizes stock options outstanding as of December 30, 2007, as
well as activity during the previous fiscal year:
(a) At
December 30, 2007, the weighted-average remaining contractual life of options
outstanding was 3.2 years.
(b) At
December 30, 2007, the weighted-average remaining contractual life of options
exercisable was 2.9 years.
At
December 30, 2007, the aggregate intrinsic values of options outstanding and
options exercisable were $8.2 million and $7.1 million, respectively
(the intrinsic value of a stock option is the amount by which the market value
of the underlying stock exceeds the exercise price of the option).
The
intrinsic value of stock options exercised in 2007, 2006 and 2005 was $10.6
million, $7.9 million and $2.0 million, respectively. The cash
proceeds related to stock options exercised in 2007, 2006 and 2005 were $4.6
million, $7.1 million and $3.0 million, respectively.
- 57
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During
fiscal years 2007, 2006 and 2005, the Company granted restricted stock awards
totaling 327,000, 394,000 and 386,000 shares, respectively, of Class B common
stock. These awards (or a portion thereof) vest with respect to each
recipient over a three to five year period from the date of grant, provided the
individual remains in the employment or service of the Company as of the vesting
date. Additionally, these shares (or a portion thereof) could vest
earlier upon the attainment of certain performance criteria, in the event of a
change in control of the Company, or upon involuntary termination without
cause.
Compensation
expense related to the vesting of restricted stock was $5.0 million, $2.9
million and $1.7 million for 2007, 2006 and 2005, respectively. SFAS
No. 123R requires that the Company estimate forfeitures for restricted stock and
reduce compensation expense accordingly. The Company has reduced its
expense by the assumed forfeiture rate and will evaluate actual experience
against the assumed forfeiture rate going forward.
The
following table summarizes restricted stock activity as of December 30, 2007,
and during the previous fiscal year:
As of
December 30, 2007, the unrecognized total compensation cost related to unvested
restricted stock was $4.7 million. That cost is expected to be
recognized by the end of 2011.
As stated
above, SFAS No. 123R requires the Company to estimate forfeitures in calculating
the expense related to stock-based compensation, as opposed to only recognizing
these forfeitures and the corresponding reduction in expense as they
occur. In prior years, the Company did not estimate the forfeitures
of its restricted stock as the expense was recorded. In accordance
with the standard, the Company is required to record a cumulative effect of the
change in accounting principle to reduce previously recognized compensation for
awards not expected to vest (i.e., forfeited or cancelled
awards). Upon adoption of SFAS No. 123R, the Company adjusted for
this cumulative effect and recognized a reduction in stock-based compensation,
which was recorded within the selling, general and administrative expense on the
Company’s consolidated statement of operations. The adjustment was
not recorded as a cumulative effect adjustment, net of tax, because the amount
was not material to the consolidated statement of operations.
- 58
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
INCOME
(LOSS) PER SHARE
Basic
income (loss) per share is computed by dividing net income (loss) to common
shareholders by the weighted average number of shares of Class A and Class B
Common Stock outstanding during each year. Shares issued or reacquired during
the year have been weighted for the portion of the year that they were
outstanding. Diluted income (loss) per share is calculated in a
manner consistent with that of basic income (loss) per share while giving effect
to all potentially dilutive common shares that were outstanding during the
year.
Basic
income (loss) per share has been computed based upon 60,573,000, 54,087,000 and
51,551,000 weighted average shares outstanding for the years 2007, 2006 and
2005, respectively. Diluted income (loss) per share has been computed based upon
61,520,000, 55,713,000 and 52,895,000 shares outstanding for the years 2007,
2006 and 2005, respectively. For fiscal years 2007, 2006 and 2005,
options to purchase 40,000, 65,000 and 529,000 shares of common stock,
respectively, were not included in the computation of diluted earnings per share
as their impact would be anti-dilutive.
FISCAL
YEAR
2007
2006
2005
(in
thousands, except per share data)
Basic
and diluted income (loss) available to shareholders
(numerator):
Income
(loss) from continuing operations
$
57,848
$
35,807
$
15,282
Loss
from discontinued operations
(68,660
)
(24,092
)
(12,107
)
Loss
on disposal of discontinued operations
--
(1,723
)
(1,935
)
Net
income (loss)
$
(10,812
)
$
9,992
$
1,240
Shares
(denominator):
Weighted
average shares outstanding
60,573
54,087
51,551
Dilutive
securities:
Options
and awards
947
1,626
1,344
Total
assuming conversion
61,520
55,713
52,895
Income
(loss) per share – basic:
Income
(loss) from continuing operations
$
0.96
$
0.66
$
0.30
Loss
from discontinued operations
(1.14
)
(0.45
)
(0.24
)
Loss
on sale of discontinued operations
--
(0.03
)
(0.04
)
Net
income (loss)
$
(0.18
)
$
0.18
$
0.02
Income
(loss) per share – diluted:
Income
(loss) from continuing operations
$
0.94
$
0.64
$
0.29
Loss
from discontinued operations
(1.12
)
(0.43
)
(0.23
)
Loss
on sale of discontinued operations
--
(0.03
)
(0.04
)
Net
income (loss)
$
(0.18
)
$
0.18
$
0.02
RESTRUCTURING
CHARGE
During
the first quarter of 2006, the Company recorded a pre-tax restructuring charge
of $3.3 million. The charge reflected: (i) the
closure of a fabrics manufacturing facility in East Douglas, Massachusetts, and
consolidation of those operations into the Company’s Elkin, North Carolina
facility; (ii) workforce reduction at this facility; and (iii) a reduction in
carrying value of another fabrics facility and other assets. As these
charges related to the divested Fabrics Group business segment, they have been
included in “Loss from discontinued operations, net of tax” in the consolidated
statements of operations.
- 59
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary
of the restructuring activities is presented below:
Total
Restructuring Charge
Costs
Incurred
During 2006
Balance
at 12/31/06
Costs
Incurred
During 2007
Balance
at 12/31/07
(in
thousands)
Facilities
consolidation
$
1,000
$
818
$
182
$
182
$
--
Workforce
reduction
300
215
85
85
--
Other
impaired assets
1,960
1,960
--
--
--
$
3,260
$
3,260
$
267
$
267
$
-
Of the
total restructuring charge, approximately $0.3 million relates to expenditures
for severance benefits and other similar costs, and $3.0 million relates to
non-cash charges, primarily for the write-down of carrying value and disposal of
certain assets. The total amounts incurred to date for this
restructuring plan are $3.3 million, and there are not expected to be any
further expenses related to this plan. The plan was substantially
completed by the end of 2006.
TAXES
ON INCOME
Provisions
for federal, foreign and state income taxes in the consolidated statements of
operations consisted of the following components:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
Current
expense/(benefit):
Federal
$
190
$
(115
)
$
2,079
Foreign
20,332
16,183
13,081
State
770
(71
)
706
21,292
15,997
15,866
Deferred
expense/(benefit):
Federal
(2,184
)
141
(10,972
)
Foreign
6,291
2,503
4,225
State
(982
)
156
575
3,125
2,800
(6,172
)
$
24,417
$
18,797
$
9,694
Income
tax expense (benefit) is included in the accompanying consolidated statements of
operations as follows:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
Continuing
operations
$
35,582
$
20,612
$
16,090
Loss
from discontinued operations
(11,165
)
(1,815
)
(6,454
)
Loss
on disposal of discontinued operations
--
--
58
$
24,417
$
18,797
$
9,694
- 60
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income
(loss) from continuing operations before taxes on income consisted of the
following:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
U.S.
operations
$
10,462
$
3,008
$
(9,951
)
Foreign
operations
82,968
53,411
41,323
$
93,430
$
56,419
$
31,372
Deferred
income taxes for the years ended December 30, 2007, and December 31, 2006,
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
At
December 30, 2007, the Company had approximately $125.7 million in federal net
operating loss carryforwards from continuing operations with expiration dates
through 2025. In addition, the Company had approximately $16.2
million in federal net operating losses from share-based payment awards for
which it has not recorded a financial statement benefit as per SFAS No. 123(R).
The Company’s foreign subsidiaries had approximately $4.6 million in net
operating losses available for an unlimited carryforward period. The Company
expects to utilize all of its federal and foreign carryforwards prior to their
expiration. The Company had approximately $103.7 million in state net
operating loss carryforwards relating to continuing operations with expiration
dates through 2027. The Company had provided a valuation allowance against $19
million of such losses, which the Company does not expect to utilize. In
addition, the Company has approximately $182 million in state net operating loss
carryforwards relating to discontinued operations against which a valuation
allowance has been provided.
The
sources of the temporary differences and their effect on the net deferred tax
asset are as follows:
2007
2006
ASSETS
LIABILITIES
ASSETS
LIABILITIES
(in
thousands)
Basis
differences of property and equipment
$
--
$
8,219
$
--
$
4,857
Basis
difference of intangible assets
--
704
--
860
Foreign
currency loss
--
3,016
--
2,731
Net
operating loss carryforwards
50,051
--
52,848
--
Valuation
allowances on net operation loss carryforwards
(1,140
)
--
(1,045
)
--
Deferred
compensation
14,523
--
14,853
--
Nondeductible
reserves and accruals
5,351
--
2,741
--
Pensions
2,632
--
10,517
--
Other
differences in basis of assets and liabilities
--
86
--
854
$
71,417
$
12,025
$
79,914
$
9,302
- 61
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred
tax assets and liabilities are included in the accompanying balance sheets as
follows:
FISCAL
YEAR
2007
2006
(in
thousands)
Deferred
income taxes (current asset)
$
5,863
$
6,829
Deferred
tax asset (non-current asset)
60,942
65,841
Deferred
income taxes (non-current liabilities)
(7,413
)
(2,058
)
$
59,392
$
70,612
Management
believes, based on the Company’s history of operating expenses and expectations
for the future, that it is more likely than not that future taxable income will
be sufficient to fully utilize the deferred tax assets at December 30,2007.
The
Company’s effective tax rate from continuing operations differs from the U.S.
federal statutory rate. The following summary reconciles taxes at the U.S.
federal statutory rate with the effective rates:
FISCAL
YEAR
2007
2006
2005
Taxes
on income (benefit) at U.S. federal statutory rate
35.0
%
35.0
%
35.0
%
Increase(decrease)
in taxes resulting from:
State
income taxes, net of federal benefit
0.3
0.4
(1.1
)
Non-deductible
business expenses
1.6
0.8
1.4
Foreign
and U.S. tax effects attributable to foreign operations
(0.4
)
2.2
3.3
Nondeductible
loss on sale of subsidiary
0.7
--
--
America
Jobs Creation Act – Repatriation, including state taxes
--
--
10.9
Cumulative
effect of change in tax rates
--
(1.2
)
--
Valuation
allowance additions (reversals) – State NOL
0.1
(0.4
)
2.9
Other
0.8
(0.3
)
(1.1
)
Taxes
on income (benefit) at effective rates
38.1
%
36.5
%
51.3
%
During
the fourth quarter of 2006, the Dutch government enacted a tax rate reduction
from 29.6% to 25.5% effective January 1, 2007. SFAS No.109, “Accounting for
Income Taxes,” requires that deferred tax balances be revalued to reflect such
tax rate changes. The revaluation resulted in a decrease in the Company’s
effective tax rate of 1.2%.
The
American Jobs Creation Act of 2004 (the “Act”) was enacted into law in October
2004. The Act provided for a one-time dividend received deduction of
85%, in excess of the base-period amount, for qualifying foreign earnings
repatriated from controlled foreign corporations. During 2005, the Company
repatriated, under the Act, approximately $35.9 million in previously unremitted
foreign earnings and recorded a provision for taxes on such previously
unremitted foreign earnings of approximately $3.4 million.
During
2006, in connection with the sale of the European component of its fabrics
business, the Company repatriated approximately $1.4 million in previously
unremitted foreign earnings and recorded a provision for taxes on such
previously unremitted foreign earnings of approximately $0.5 million. This
repatriation of foreign earnings during 2006 increased the Company’s effective
rate by 0.9% which has been reflected as a component of the “Foreign and U.S.
tax effects attributable to foreign operations” line item of the effective tax
rate reconciliation.
Undistributed
earnings of the Company’s foreign subsidiaries amounted to approximately $140
million at December 30, 2007. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with its hypothetical calculation. Withholding taxes of approximately
$4 million would be payable upon remittance of all previously unremitted
earnings at December 30, 2007.
- 62
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a
result of the adoption, the Company recognized a $4.6 million increase in its
liability for unrecognized tax benefits with a corresponding decrease to the
opening balance of retained earnings.
As of
January 1, 2007, the Company had unrecognized tax benefits of $7.3 million,
which if recognized would be recorded as a benefit to income taxes and,
therefore, result in a favorable impact on the Company’s effective tax rate in
future periods. For the year ended December 30, 2007, the Company
increased its unrecognized tax benefits by $0.4 million due to changes in the
foreign currency translation of its unrecognized tax benefits. As of
December 30, 2007, the Company had unrecognized tax benefits of $7.7 million,
included in other liabilities in the Company’s consolidated balance sheet; of
which an estimated $7.3 million (if recognized) would have an impact on the
Company’s effective tax rate in future periods. If these benefits are
not favorably settled, $6.0 million of the total amount of unrecognized tax
benefits would require the use of cash in future periods.
The
Company recognizes accrued interest and income tax penalties related to
unrecognized tax benefits as a component of income tax expense. As of
December 30, 2007, the Company had accrued interest and penalties of $0.8
million which is included in the total unrecognized tax benefit noted
above.
The
Company’s federal income tax returns are subject to examination for the years
2003 to the present. The Company files returns in numerous state and
local jurisdictions and in general it is subject to examination by the state tax
authorities for the years 2003 to the present. The Company files
returns in numerous foreign jurisdictions and in general it is subject to
examination by the foreign tax authorities for the years 2001 to the
present.
In August
2006, the Canadian tax authorities (CRA) proposed a reassessment of taxable
income for transfer pricing related adjustments for the years 2001 and 2002. The
Company has included in its liability for unrecognized tax benefits an amount
that is more likely than not to be assessed on final settlement. In November
2006, the Company filed a submission with the CRA to set aside the reassessment
of taxable income. The Company expects to receive an official response from the
CRA during 2008 that may have a material impact on the Company’s unrecognized
tax benefits; however, the estimated outcome is indeterminable at this
time.
Management
believes changes to our unrecognized tax benefits that are reasonably possible
in the next 12 months, other than the Canadian reassessment noted above, will
not have a significant impact on our financial positions or results of
operations. The timing of the ultimate resolution of the Company’s
tax matters and the payment and receipt of related cash is dependent on a number
of factors, many of which are outside the Company’s control.
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows (in thousands):
As
discussed below in the note entitled “Sale of Fabrics Business,” in the second
quarter of 2007, the Company committed to a plan to exit its Fabrics Group
business segment, and in the third quarter of 2007, the Company completed the
sale. Therefore, the results for the Fabrics Group business segment
have been reported as discontinued operations. In connection with
this action, the Company also recorded write-downs for the impairment of assets
and goodwill of $17.4 million and $44.5 million, respectively, in
2007. In connection with the sale, the Company recorded the
aforementioned impairments to reduce the carrying value of the business segment
to its fair value. In 2007, the Company recorded approximately $12.4
million of direct costs to sell the Fabrics Group business
segment.
- 63
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During
2004, the Company committed to a plan to exit its owned Re:Source dealer
businesses and began to dispose of several of the dealer subsidiaries.
Therefore, the results for the owned Re:Source dealer businesses, as well as the
Company’s small Australian dealer and small residential fabrics businesses that
management also decided to exit at that time, are reported as discontinued
operations. In connection with this action, the Company also recorded
write-downs for the impairment of assets of $3.5 million in 2005.
By the
end of 2006, the Company had sold nine dealer businesses (eight of which were
sold to the respective general managers of those businesses) and had closed all
six others. The cash proceeds from the sales were $7.5
million. The Company also received promissory notes in an aggregate
amount of $2.2 million at interest rates ranging from prime to 12% and with
maturities ranging from one to three years. The Company recorded
after-tax losses of $1.9 million in 2005 related to Re:Source dealer business
dispositions.
Summary
operating results for the discontinued businesses are as follows:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
Net
sales
$
82,003
$
164,546
$
229,758
Income
(loss) on operations before taxes on income (benefit)
(79,825
)
(27,631
)
(20,438
)
Taxes
on income (benefit)
(11,165
)
(1,815
)
(6,396
)
Income
(loss) on operations, net of tax
(68,660
)
(25,816
)
(14,042
)
Assets
and liabilities, including reserves, related to discontinued businesses that
were held for sale consist of the following:
FISCAL
YEAR
2007
2006
(in
thousands)
Current
assets
$
79
$
54,156
Property
and equipment
4,706
54,094
Other
assets
7
50,072
Current
liabilities
220
11,181
Other
liabilities
--
11,753
HEDGING
TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The
Company has used derivative financial instruments for the purpose of reducing
its exposure to adverse fluctuations in interest rates. While these hedging
instruments are subject to fluctuations in value, such fluctuations are offset
by the fluctuations in values of the underlying exposures being hedged. The
Company has not held or issued derivative financial instruments for trading
purposes. The Company has historically monitored the use of derivative financial
instruments through the use of objective measurable systems, well-defined market
and credit risk limits, and timely reports to senior management according to
prescribed guidelines. The Company has established strict counter-party credit
guidelines and has entered into transactions only with financial institutions of
investment grade or better. As a result, the Company has historically considered
the risk of counter-party default to be minimal. As of
December 30, 2007, the Company was not a party to any such
transactions.
- 64
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
COMMITMENTS
AND CONTINGENCIES
The
Company leases certain production, distribution and marketing facilities and
equipment. At December 30, 2007, aggregate minimum rent commitments under
operating leases with initial or remaining terms of one year or more consisted
of the following:
FISCAL YEAR
AMOUNT
(in
thousands)
2008
$
24,032
2009
18,357
2010
13,765
2011
11,397
2012
8,905
Thereafter
12,313
$
88,769
The
totals above exclude minimum lease payments of $0.3 million, $0.2 million and
$0.1 million in each of years 2008-2010 related to the discontinued operations
of the Re:Source dealer business. The totals above also exclude
minimum lease payments of $0.6 million in each of years 2008-2010, related to
the discontinued operations of the U.S. raised/access flooring
business.
Rental
expense amounted to approximately $23.1 million, $20.9 million and $18.6
million, for the years 2007, 2006 and 2005, respectively. This
excludes rental expenses of approximately $0.5 million, $2.0 million and $4.6
million for 2007, 2006 and 2005, respectively, related to the discontinued
operations of the Re:Source dealer business, and excludes rental expenses of
approximately $0.6 million, $0.6 million and $0.6 million for 2007, 2006 and
2005, respectively, related to the discontinued operations of the U.S.
raised/access flooring business. This also excludes rental expenses
of $1.9 million, $4.4 million and $6.9 million for 2007, 2006 and 2005,
respectively, related to the discontinued operations of the Fabrics Group
business segment.
The
Company is from time to time a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or
all of such litigation will have a material adverse effect on the Company’s
financial condition or results of operations.
EMPLOYEE
BENEFIT PLANS
Defined
Contribution and Deferred Compensation Plans
The
Company has a 401(k) retirement investment plan (“401(k) Plan”), which is open
to all otherwise eligible U.S. employees with at least six months of service.
The 401(k) Plan calls for Company matching contributions on a sliding scale
based on the level of the employee’s contribution. The Company may, at its
discretion, make additional contributions to the 401(k) Plan based on the
attainment of certain performance targets by its subsidiaries. The Company’s
matching contributions are funded bi-monthly and totaled approximately $2.4
million, $1.4 million and $1.2 million for the years 2007, 2006 and 2005,
respectively, for continuing operations. These totals exclude $0.4
million, $0.7 million and $0.9 million of matching contributions for the years
2007, 2006 and 2005, respectively, related to the discontinued Fabrics and
Re:Source dealer businesses. No discretionary contributions were made
in 2007, 2006 or 2005.
Under the
Company’s nonqualified savings plans (“NSPs”), the Company provides eligible
employees the opportunity to enter into agreements for the deferral of a
specified percentage of their compensation, as defined in the NSPs. The NSPs
call for Company matching contributions on a sliding scale based on the level of
the employee’s contribution. The obligations of the Company under such
agreements to pay the deferred compensation in the future in accordance with the
terms of the NSPs are unsecured general obligations of the Company. Participants
have no right, interest or claim in the assets of the Company, except as
unsecured general creditors. The Company has established a Rabbi Trust to hold,
invest and reinvest deferrals and contributions under the NSPs. If a change in
control of the Company occurs, as defined in the NSPs, the Company will
contribute an amount to the Rabbi Trust sufficient to pay the obligation owed to
each participant. Deferred compensation in connection with the NSPs totaled
$15.8 million at December 30, 2007. The Company invested the
deferrals in cash and marketable securities.
- 65
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Foreign
Defined Benefit Plans
The
Company has trusteed defined benefit retirement plans which cover many of its
European employees. The benefits are generally based on years of service and the
employee’s average monthly compensation. Pension expense was $5.1 million,
$2.9 million and $4.8 million, for the years 2007, 2006 and 2005,
respectively. Plan assets are primarily invested in equity and fixed income
securities. The Company uses a measurement date of December 31 for
the plans. As of December 31, 2007, for the European plans, the
Company had a net liability recorded of $8.7 million, an amount equal to their
unfunded status, and has recorded in Other Comprehensive Income an amount equal
to $27.5 million (net of taxes) related to the future amounts to be recorded in
net post-retirement benefit costs.
- 66
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
tables presented below set forth the funded status of the Company’s significant
foreign defined benefit plans and required disclosures in accordance with SFAS
No. 132, as revised.
FISCAL
YEAR
2007
2006
(in
thousands)
Change
in benefit obligation
Benefit
obligation, beginning of year
$
248,974
$
206,662
Service
cost
3,377
2,429
Interest
cost
12,531
9,913
Benefits
paid
(10,714
)
(7,283
)
Actuarial
loss (gain)
(24,484
)
9,108
Member
contributions
1,007
792
Currency
translation adjustment
8,420
27,353
Benefit
obligation, end of year
$
239,111
$
248,974
Change
in plan assets
Plan
assets, beginning of year
$
213,248
$
176,999
Actual
return on assets
10,385
12,098
Company
contributions
8,048
6,943
Member
contributions
1,487
1,188
Benefits
paid
(10,714
)
(7,283
)
Currency
translation adjustment
7,960
23,303
Plan
assets, end of year
$
230,414
$
213,248
Reconciliation
to balance sheet
Funded
status
$
(8,697
)
$
(35,726
)
Unrecognized
actuarial loss
--
--
Unrecognized
prior service cost
--
--
Unrecognized
transition adjustment
--
--
Net
amount recognized
$
(8,697
)
$
(35,726
)
Amounts
recognized in the consolidated balance sheets
Prepaid
benefit cost
$
--
$
--
Accrued
benefit liability
(8,697
)
(35,726
)
Accumulated
other comprehensive income
--
--
Net
amount recognized
$
(8,697
)
$
(35,726
)
Amounts
recognized in accumulated other
comprehensive
income (after tax)
Unrecognized
actuarial loss
$
26,695
$
43,185
Unamortized
prior service costs
260
288
Total
amount recognized
$
26,955
$
43,473
The
actuarial gain identified above includes approximately $8 million related to a
modification of employee data related to the Company’s plans. In
prior years, a plan modification was not reflected in employee data, and in the
current year, the employee data was updated for this change. The
impact to the 2007 financial statements was a $5.6 million adjustment to other
comprehensive income net of $2.4 million in taxes. The Company has
determined that the modification was not significant to the overall financial
statement presentation in prior years and has therefore included the impact of
the change in the current year.
- 67
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The above
disclosure represents the aggregation of information related to the Company’s
two defined benefit plans which cover many of its European
employees. As of December 30, 2007, one of these plans, which
primarily covers certain employees in the United Kingdom (the “UK Plan”), had an
accumulated benefit obligation in excess of the plan assets. The other plan,
which covers certain employees in Europe (the “Europe Plan”), had assets in
excess of the accumulated benefit obligation. The following table
summarizes this information as of December 30, 2007. As of December31, 2006, both plans had accumulated benefit obligations and projected benefit
obligations in excess of plan assets.
2007
UK
Plan
(in
thousands)
Projected
Benefit Obligation
$
183,025
Accumulated
Benefit Obligation
179,580
Plan
Assets
168,365
Europe
Plan
Projected
Benefit Obligation
$
56,086
Accumulated
Benefit Obligation
54,709
Plan
Assets
62,049
FISCAL
YEAR
2007
2006
2005
(in
thousands)
Components
of net periodic benefit cost
Service
cost
$
3,453
$
2,033
$
2,540
Interest
cost
12,531
9,913
10,089
Expected
return on plan assets
(13,766
)
(11,157
)
(10,457
)
Amortization
of prior service cost
42
39
168
Recognized
net actuarial (gains)/losses
2,834
1,979
2,499
Amortization
of transition asset
--
53
--
Net
periodic benefit cost
$
5,094
$
2,860
$
4,839
For 2008,
it is estimated that approximately $1.3 million of expenses related to the
amortization of unrecognized items will be included in the net periodic benefit
cost. During 2007, other comprehensive income was impacted by
approximately $16.2 million, after tax. The components of this change
were approximately $13.4 million of actuarial gain, and $2.8 million of
amortization loss during the year.
FISCAL
YEAR
2007
2006
2005
Weighted
average assumptions used to determine net periodic benefit
cost
Discount
rate
5.0
%
4.7
%
5.0
%
Expected
return on plan assets
6.2
%
6.2
%
6.4
%
Rate
of compensation
3.4
%
3.4
%
3.2
%
Weighted
average assumptions used to determine benefit obligations
Discount
rate
5.6
%
5.0
%
4.5
%
Rate
of compensation
3.3
%
3.3
%
3.1
%
The
expected long-term rate of return on plan assets assumption is based on weighted
average expected returns for each asset class. Expected returns
reflect a combination of historical performance analysis and the forward-looking
views of the financial markets, and include input from actuaries, investment
service firms and investment managers.
- 68
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company’s foreign defined benefit plans’ accumulated benefit obligations were in
excess of the fair value of the plans’ assets. The projected benefit
obligations, accumulated benefit obligations and fair value of these plan assets
are as follows:
FISCAL
YEAR
2007
2006
(in
thousands)
Projected
benefit obligation
$
239,111
$
248,974
Accumulated
benefit obligations
234,289
243,938
Fair
value of plan assets
230,414
213,248
The
Company’s actual weighted average asset allocations for 2007 and 2006, and the
targeted asset allocation for 2008, of the foreign defined benefit plans by
asset category, are as follows:
FISCAL
YEAR
2008
2007
2006
Target Allocation
Percentage of Plan Assets at Year
End
Asset
Category:
Equity
Securities
70-85
%
65
%
69
%
Debt
Securities
25-35
%
29
%
25
%
Other
0-5
%
6
%
6
%
100
%
100
%
100
%
The
investment objectives of the foreign defined benefit plans are to maximize the
return on the investments without exceeding the limits of the prudent pension
fund investment, to ensure that the assets would be sufficient to exceed minimum
funding requirements, and to achieve a favorable return against the performance
expectation based on historic and projected rates of return over the short
term. The goal is to optimize the long-term return on plan assets at
a moderate level of risk, by balancing higher-returning assets, such as equity
securities, with less volatile assets, such as fixed income
securities. The assets are managed by professional investment firms
and performance is evaluated periodically against specific
benchmarks. The plans’ net assets did not include the Company’s own
stock at December 30, 2007 or December 31, 2006.
During
2008, the Company expects to contribute $7.4 million to the plan trust and $11.4
million in the form of direct benefit payments for its foreign defined benefit
plans. It is anticipated that future benefit payments for the foreign
defined benefit plans will be as follows:
FISCAL
YEAR
EXPECTED PAYMENTS
(in
thousands)
2008
$
11,382
2009
11,597
2010
11,843
2011
12,032
2012
12,188
2013-2017
64,825
- 69
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Domestic
Defined Benefit Plan
The
Company maintains a domestic nonqualified salary continuation plan (“SCP”),
which is designed to induce selected officers of the Company to remain in the
employ of the Company by providing them with retirement, disability and death
benefits in addition to those which they may receive under the Company’s other
retirement plans and benefit programs. The SCP entitles participants to:
(i) retirement benefits upon normal retirement at age 65 (or early
retirement as early as age 55) after completing at least 15 years of service
with the Company (unless otherwise provided in the SCP), payable for the
remainder of their lives (or, if elected by a participant, a reduced benefit is
payable for the remainder of the participant’s life and any surviving spouse’s
life) and in no event less than 10 years under the death benefit feature; (ii)
disability benefits payable for the period of any total disability; and
(iii) death benefits payable to the designated beneficiary of the
participant for a period of up to 10 years. Benefits are determined according to
one of three formulas contained in the SCP, and the SCP is administered by the
Compensation Committee of the Company’s Board of Directors, which has full
discretion in choosing participants and the benefit formula applicable to each.
The Company’s obligations under the SCP are currently unfunded (although the
Company uses insurance instruments to hedge its exposure thereunder). The
Company is required to contribute the present value of its obligations
thereunder to an irrevocable grantor trust in the event of a change in control
as defined in the SCP. The Company uses a measurement date of
December 31 for the domestic SCP.
The
tables presented below set forth the required disclosures in accordance with
SFAS No. 132, as revised, and amounts recognized in the consolidated financial
statements related to the domestic SCP.
FISCAL
YEAR
2007
2006
(in
thousands)
Change
in benefit obligation
Benefit
obligation, beginning of year
$
16,070
$
15,616
Service
cost
262
267
Interest
cost
896
849
Benefits
paid
(1,019
)
(360
)
Actuarial
loss (gain)
138
(302
)
Benefit
obligation, end of year
$
16,347
$
16,070
The
amounts recognized in the consolidated balance sheets are as
follows:
2007
2006
(in
thousands)
Current
liabilities
$
1,051
$
1,019
Non-current
liabilities
15,296
15,051
$
16,347
$
16,070
The
components of the amounts in accumulated other comprehensive income, after tax,
are as follows:
2007
2006
(in
thousands)
Unrecognized
actuarial loss
$
3,075
$
2,850
Unrecognized
transition asset
570
616
Unamortized
prior service cost
203
235
$
3,848
$
3,701
- 70
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
accumulated benefit obligation related to the SCP was $14.2 million and $14.0
million as of December 30, 2007, and December 31, 2006,
respectively. The SCP is currently unfunded; as such, the benefit
obligations disclosed are also the benefit obligations in excess of the plan
assets. The Company uses insurance instruments to hedge its exposure under
the salary continuation plan.
2007
2006
2005
(in
thousands, except for weighted average assumptions)
Weighted
average assumptions used to determine net periodic benefit
cost
Discount
rate
5.75
%
5.5
%
5.8
%
Rate
of compensation
4.0
%
4.0
%
4.0
%
Weighted
average assumptions used to determine benefit obligations
Discount
rate
6.0
%
5.75
%
5.5
%
Rate
of compensation
4.0
%
4.0
%
4.0
%
Components
of net periodic benefit cost
Service
cost
$
262
$
267
$
221
Interest
cost
896
849
802
Amortization
of transition obligation
554
588
546
Net
periodic benefit cost
$
1,712
$
1,704
$
1,569
The
changes in other comprehensive income during 2007, related to this Plan were
approximately $0.4 million, comprised of actuarial loss of $0.1 million and
amortization of transition obligation of $0.2 million and amortization of loss
of $0.1 million.
For 2008,
the Company estimates that approximately $0.6 million of expenses related to the
amortization of unrecognized items will be included in net periodic benefit cost
for the SCP.
During
2007, the Company contributed $1.0 million in the form of direct benefit
payments for its domestic SCP. It is anticipated that future benefit
payments for the SCP will be as follows:
FISCAL
YEAR
EXPECTED PAYMENTS
(in
thousands)
2008
$
1,020
2009
1,051
2010
1,051
2011
1,051
2012
1,051
2013-2017
5,448
- 71
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Clarification
of Adoption of SFAS No. 158 with Regard to the Company’s Defined Benefit
Plans
In 2006,
upon the adoption of SFAS No. 158, the Company recorded the impact of the
standard in its entirety in Other Comprehensive Income, an amount, after tax, of
$19.4 million. During 2007, additional guidance was issued as it
relates to the adoption of SFAS No. 158, and it was clarified that the impact of
the initial adoption would not be included in Other Comprehensive Income, but
rather would be a direct adjustment to Accumulated Other Comprehensive
Income. As a result of this guidance, the Consolidated Statement of
Comprehensive Income (Loss) has been adjusted to show the impact only under
previous pension accounting guidance (an amount of approximately $8.0
million).
SALE
OF FABRICS BUSINESS
In the
second quarter of 2007, the Company entered into an agreement to sell its
Fabrics Group business segment to a third party. The sale was
completed in the third quarter of 2007. The purchase price for the
business segment was $67.2 million, after working capital and certain other
adjustments. Of this $67.2 million, $6.5 million represents deferred
compensation which would be remitted to the Company upon the achievement of
certain performance criteria by the disposed segment over the 18 months
following the sale. At this time, the Company has determined that the
receipt of the deferred amount is probable and has accordingly recorded this
amount as a receivable on the balance sheet. As described in the
notes entitled “Discontinued Operations” and “Impairment of Goodwill,” the
Company incurred impairment charges of approximately $61.9 million during the
first six months of 2007 to reduce the carrying value of the business segment to
fair value as represented by the purchase price. In the second and
third quarters of 2007, the Company incurred approximately $12.4 million of
direct costs to sell the business segment. The major classes of
assets and liabilities related to the business segment at disposition were
accounts receivable of $15.2 million, inventory of $32.7 million, property,
plant and equipment of $36.5 million, and accounts payable and accruals of $11.4
million.
In April
2006, the Company sold its European fabrics business for $28.8 million to an
entity formed by the business’s management team. As discussed below,
an impairment charge of $20.7 million was recorded in 2006 in connection with
this sale. The major classes of assets and liabilities related to
this disposal group included accounts receivable of $11.9 million, inventory of
$11.4 million, property, plant and equipment of $9.5 million, and accounts
payable of $7.6 million. In 2006, the transaction resulted in a net
loss on disposal of $1.7 million.
Current
and prior periods have been restated to include the results of operations and
related disposal costs, gains and losses for these fabrics businesses as
discontinued operations. In addition, assets and liabilities of these
businesses have been reported in assets and liabilities held for sale for all
periods presented.
SALE
OF PANDEL
In the
first quarter of 2007, the Company sold its subsidiary Pandel, Inc. for $1.4
million to an entity formed by the general manager of Pandel. The operations of
Pandel represented the Company’s Specialty Products segment. Pandel
primarily produced vinyl carpet tile backing and specialty mat and foam
products. As a result of this sale, the Company recorded a loss on disposition
of $1.9 million in the first quarter of 2007. The total assets
of this business were $3.3 million, comprised primarily of inventory and
accounts receivable. Total liabilities related to this business were $0.4
million. Prior to the sale, certain of Pandel’s production assets were
conveyed to another subsidiary of the Company, where they continue to be used in
the carpet tile backing process.
- 72
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
IMPAIRMENT
OF GOODWILL
In the
first quarter of 2007, the Company recorded charges for impairment of goodwill
of $44.5 million and impairment of other intangible assets of $3.8 million
related to its Fabrics Group business segment. The Company was
exploring possible strategic options with respect to its fabrics business, and
its analyses indicated that the carrying value of the assets of the fabrics
business exceeded their fair value. When such an indication is
present, the Company measures potential goodwill and other asset impairments
based on an allocation of the estimated fair value of the reporting unit to its
underlying assets and liabilities. An impairment loss is recognized
to the extent that the reporting unit’s recorded goodwill exceeds the implied
fair value of goodwill. In addition to the impairment of goodwill,
the Company determined that other intangible assets of the business unit were
impaired as well. As discussed above in the note entitled “Sale of
Fabrics Business,” in the second quarter of 2007, the Company entered into an
agreement to sell its fabrics business segment for approximately $67.2 million
(after working capital and certain other adjustments). As a result of
this agreed-upon purchase price, the Company recorded an impairment of assets of
approximately $13.6 million in the second quarter of 2007. This impairment was
determined based upon the fair value of the business segment as compared to the
fair value represented by the purchase price. Given the nature of the
Company’s assets and liabilities, the impairment charge was a reduction of
carrying value of property, plant and equipment, as it was determined that all
other assets were carried at a value approximating fair value. These
impairment charges have been included in discontinued operations in the
Consolidated Statement of Operations for 2007.
During
the first quarter of 2006, in connection with the sale of its European fabrics
business (described in more detail above in the note entitled “Sale of Fabrics
Business”), the Company recorded a charge of $20.7 million for the impairment of
goodwill related to its fabrics reporting unit and those European
operations. This charge was based on a review of the Company’s
carrying value of goodwill at its fabrics facilities as compared to the
potential fair value as represented by the proposed sale price. This
impairment charge has been included in discontinued operations in the
Consolidated Statement of Operations for 2006.
SEGMENT
INFORMATION
Based on
the quantitative thresholds specified in SFAS No. 131, the Company has
determined that it has three reportable segments: (1) the
Modular Carpet segment, which includes its InterfaceFLOR, Heuga and
FLOR modular carpet
businesses, as well as its Intersept antimicrobial sales
and licensing program, (2) the Bentley Prince Street segment, which includes its
Bentley Prince Street broadloom,
modular carpet and area rug businesses, and (3) the Specialty Products segment,
which includes Pandel, Inc., a producer of vinyl carpet tile backing and
specialty mat and foam products. The majority of the operations of
the Specialty Products segment were sold in March 2007. In July 2007,
the Company completed the sale of its former Fabrics Group business
segment. Accordingly, the Company has included the operations of the
former Fabrics Group business segment in discontinued operations. The
former segment known as the Re:Source Network, which primarily encompassed the
Company’s owned Re:Source dealers that provided carpet installation and
maintenance services in the United States, is also reported as discontinued
operations in the accompanying Consolidated Statements of
Operations.
The
accounting policies of the operating segments are the same as those described in
the Note entitled “Summary of Significant Accounting Policies.” Segment amounts
disclosed are prior to any elimination entries made in consolidation, except in
the case of net sales, where intercompany sales have been eliminated.
Intersegment sales are accounted for at fair value as if sales were to third
parties. Intersegment sales are not material. The chief
operating decision maker evaluates performance of the segments based on
operating income. Costs excluded from this profit measure primarily consist of
allocated corporate expenses, interest/other expense and income taxes. Corporate
expenses are primarily comprised of corporate overhead expenses. Thus, operating
income includes only the costs that are directly attributable to the operations
of the individual segment. Assets not identifiable to an individual segment are
corporate assets, which are primarily comprised of cash and cash equivalents,
short-term investments, intangible assets and intercompany amounts, which are
eliminated in consolidation.
- 73
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SEGMENT
DISCLOSURES
Summary
information by segment follows:
MODULAR
CARPET
BENTLEY
PRINCE STREET
SPECIALTY
PRODUCTS
TOTAL
2007
(in
thousands)
Net
sales
$
930,717
$
148,364
$
2,192
$
1,081,273
Depreciation
and amortization
14,597
1,891
12
16,500
Operating
income
133,657
5,593
(1,733
)
137,517
Total
assets
541,254
129,261
--
670,515
2006
Net
sales
$
763,659
$
137,920
$
13,080
$
914,659
Depreciation
and amortization
15,669
1,816
87
17,572
Operating
income
98,244
5,931
364
104,539
Total
assets
481,346
118,816
4,045
604,207
2005
Net
sales
$
646,213
$
125,167
$
15,544
$
786,924
Depreciation
and amortization
13,644
1,708
111
15,463
Operating
income
77,351
3,494
651
81,496
A
reconciliation of the Company’s total segment operating income, depreciation and
amortization, and assets to the corresponding consolidated amounts are as
follows:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
DEPRECIATION
AND AMORTIZATION
Total
segment depreciation and amortization
$
16,500
$
17,572
$
15,463
Corporate
depreciation and amortization
5,987
4,178
4,985
Reported
depreciation and amortization
$
22,487
$
21,750
$
20,448
OPERATING
INCOME
Total
segment operating income
$
137,517
$
104,539
$
81,496
Corporate
expenses and eliminations
(8,126
)
(4,918
)
(3,780
)
Reported
operating income
$
129,391
$
99,621
$
77,716
ASSETS
Total
segment assets
$
670,515
$
604,207
Discontinued
operations
4,792
158,322
Corporate
assets and eliminations
159,925
165,811
Reported
total assets
$
835,232
$
928,340
- 74
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restructuring
activities by segment
The table
below details the restructuring activities undertaken in 2006 by
segment. These charges, which relate to our former Fabrics Group
business segment, were incurred during the first quarter of 2006, and are
included in discontinued operations.
MODULAR
CARPET
BENTLEY
PRINCE STREET
FABRICS
GROUP
(FORMER
SEGMENT)
SPECIALITY
PRODUCTS
TOTAL
(in
thousands)
Total
amounts expected to be incurred
$
--
$
--
$
3,260
$
--
$
3,260
Cumulative
amounts incurred to date
--
--
$
3,260
--
$
3,260
Total
amounts incurred in the period
--
--
$
3,260
--
$
3,260
There
were no restructuring activities in 2007 or 2005.
ENTERPRISE-WIDE
DISCLOSURES
The
Company has a large and diverse customer base, which includes numerous customers
located in foreign countries. No single unaffiliated customer
accounted for more than 10% of total sales in any year during the three years
ended December 30, 2007. Sales in foreign markets in 2007, 2006 and
2005 were 51.5%, 48.1% and 46.5%, respectively. These sales were
primarily to customers in Europe, Canada, Asia, Australia and Latin
America. Revenue and long-lived assets related to operations in the
United States and other countries are as follows:
FISCAL
YEAR
2007
2006
2005
(in
thousands)
SALES
TO UNAFFILIATED CUSTOMERS(1)
United
States
$
524,542
$
473,295
$
420,505
United
Kingdom
159,061
125,689
102,724
Other
foreign countries
397,670
315,675
263,695
Net
sales
$
1,081,273
$
914,659
$
786,924
LONG-LIVED
ASSETS(2)
United
States
$
82,362
$
64,471
United
Kingdom
30,677
30,260
Netherlands
20,123
17,626
Other
foreign countries
28,712
22,274
Total
long-lived assets
$
161,874
$
134,631
(1)
Revenue attributed to geographic areas is based on the location of the
customer.
(2)
Long-lived assets include tangible assets physically located in foreign
countries.
- 75
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INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
QUARTERLY
DATA AND SHARE INFORMATION (UNAUDITED)
The
following tables set forth, for the fiscal periods indicated, selected
consolidated financial data and information regarding the market price per share
of the Company’s Class A Common Stock. The prices represent the reported high
and low sale prices during the period presented.
FISCAL
YEAR 2007
FIRST
QUARTER(1)
SECOND
QUARTER(2)(3)
THIRD
QUARTER(3)
FOURTH
QUARTER
(in
thousands, except per share data)
Net
sales
$
243,492
$
264,962
$
279,471
$
293,348
Gross
profit
83,228
92,225
97,929
104,140
Income
from continuing operations
9,069
13,323
15,206
20,250
Loss
from discontinued operations
(49,685
)
(12,325
)
(6,650
)
--
Net
income (loss)
(40,616
)
998
8,556
20,250
Basic
income (loss) per common share:
Income
(loss) from continuing operations
$
0.15
$
0.22
$
0.25
$
0.33
Loss
from discontinued operations
(0.83
)
(0.20
)
(0.11
)
--
Loss
on disposal of discontinued operations
--
--
--
--
Net
income (loss)
(0.68
)
0.02
0.14
0.33
Diluted
income (loss) per common share:
Income
(loss) from continuing operations
$
(0.15
)
$
0.22
$
0.25
$
0.33
Loss
from discontinued operations
(0.81
)
(0.20
)
(0.11
)
--
Loss
on disposal of discontinued operations
--
--
--
--
Net
income (loss)
(0.66
)
0.02
0.14
0.33
Share
prices
High
$
17.10
$
19.46
$
20.55
$
20.00
Low
14.26
15.88
16.67
15.90
(1)
During
the first quarter of 2007, the Company recorded pre-tax non-cash charges
of $44.5 million for the impairment of goodwill and $3.8 million for the
impairment of other intangible assets in connection with the sale of its
Fabrics Group business segment. These charges are included in
“Loss from discontinued operations.”
(2)
During
the second quarter of 2007, the Company recorded a pre-tax non-cash charge
of $13.6 million for the impairment of fixed assets in connection with the
sale of its Fabrics Group business segment. This charge is
included in “Loss from discontinued operations.”
(3)
In
the second and third quarters of 2007, the Company recorded $3.6 million
and $8.8 million, respectively, of direct costs to sell the Fabrics Group
business segment. These charges are included in “Loss from
discontinued operations.”
- 76
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FISCAL
YEAR 2006
FIRST
QUARTER(1)
SECOND
QUARTER(2)
THIRD
QUARTER
FOURTH
QUARTER
(in
thousands, except per share data)
Net
sales
$
198,134
$
223,184
$
234,221
$
259,120
Gross
profit
67,924
75,708
79,912
87,564
Income
from continuing operations
5,435
8,476
9,484
12,412
Loss
from discontinued operations
(22,523
)
(2,591
)
(378
)
(323
)
Net
income (loss)
(17,088
)
5,885
9,106
12,089
Basic
income (loss) per common share:
Income
(loss) from continuing operations
$
0.10
$
0.16
$
0.18
$
0.22
Loss
from discontinued operations
(0.42
)
(0.02
)
(0.01
)
(0.01
)
Loss
on disposal of discontinued operations
--
(0.03
)
--
--
Net
income (loss)
(0.32
)
0.11
0.17
0.21
Diluted
income (loss) per common share:
Income
from continuing operations
$
(0.10
)
$
0.15
$
0.17
$
0.21
Loss
from discontinued operations
(0.41
)
(0.01
)
--
--
Loss
on disposal of discontinued operations
--
(0.03
)
--
--
Net
income (loss)
(0.31
)
0.11
0.17
0.21
Share
prices
High
$
14.31
$
15.70
$
13.83
$
15.59
Low
8.05
9.84
10.12
12.31
(1)
During
the first quarter of 2006, the Company recorded a pre-tax non-cash charge
of $20.7 million for the impairment of goodwill in connection with the
sale of its European fabrics business. This charge is included
in “Loss from discontinued operations.”
(2)
During
the second quarter of 2006, the Company recorded a $1.7 million loss on
the divestiture of its European fabrics business. This loss is
included in “Loss from discontinued
operations.”
- 77
-
INTERFACE,
INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
“guarantor subsidiaries,” which consist of the Company’s principal domestic
subsidiaries, are guarantors of the Company’s 10.375% senior notes due 2010 and
its 9.5% senior subordinated notes due 2014. The Supplemental
Guarantor Financial Statements are presented herein pursuant to requirements of
the Commission.
Net
cash provided by (used for) operating activities
$
21,076
$
17,489
$
23,297
$
--
$
61,862
Cash
flows from investing activities:
Purchase
of plant and equipment
(11,246
)
(9,150
)
1,042
--
(19,354
)
Other
(2,370
)
--
(2,688
)
--
(5,058
)
Cash
used in discontinued operations
(6,159
)
--
--
--
(6,159
)
Net
cash used in investing activities
(19,775
)
(9,150
)
(1,646
)
--
(30,571
)
Cash
flows from financing activities:
Net
borrowings (repayments)
--
--
(2,000
)
--
(2,000
)
Issuance
of senior notes
--
--
--
--
--
Repurchase
of senior subordinated notes
--
--
--
--
--
Debt
issuance cost
--
--
--
--
--
Proceeds
from issuance of common stock
--
--
2,960
--
2,960
Other
478
(262
)
(216
)
--
--
Net
cash provided by (used for)
financing activities
478
(262
)
744
--
960
Effect
of exchange rate changes on cash
(238
)
(1,896
)
--
--
(2,134
)
Net
increase (decrease) in cash
1,541
6,181
22,395
--
30,117
Cash,
at beginning of year
(5,006
)
23,397
(1,233
)
--
17,158
Cash,
at end of year
$
(3,465
)
$
29,578
$
21,162
$
--
$
47,275
- 85
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders of Interface, Inc.
Atlanta,
Georgia
We have
audited the accompanying consolidated balance sheets of Interface, Inc. as of
December 30, 2007 and December 31, 2006 and the related
consolidated statements of operations and comprehensive income (loss) and cash
flows for each of the three years in the period ended
December 30, 2007. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Interface, Inc. at
December 30, 2007 and December 31, 2006, and the results of
its operations and its cash flows for each of the three years in the period
ended December 30, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in the footnote entitled “Taxes on Income”, the Company adopted the
provisions of Financial Interpretation Number 48 during 2007. As
discussed in the footnote entitled “Employee Benefit Plans”, the Company adopted
the provisions of Statement of Financial Accounting Standard No. 158
during 2006. As discussed in the footnote entitled “Recent Accounting
Pronouncements”, the Company adopted the provisions of Staff Accounting Bulletin
No. 108 during 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 30, 2007, based on criteria established in
Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 27, 2008 expressed an unqualified opinion thereon.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of
Directors and Shareholders Interface, Inc.
Atlanta,
Georgia
We have
audited Interface, Inc.’s internal control over financial reporting as of
December 30, 2007, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying “Item 9A, Management’s Report on Internal Control Over Financial
Reporting”. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Interface, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 30, 2007, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), consolidated balance sheets of Interface, Inc.
as of December 30, 2007 and December 31, 2006 and the related consolidated
statements of operations and comprehensive income (loss) and cash flows for each
of the three years in the period ended December 30, 2007 and our
report dated February 27, 2008 expressed an unqualified opinion
thereon.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures. As of the end of the period covered by this Annual
Report on Form 10-K, an evaluation was performed under the supervision and with
the participation of our management, including our President and Chief Executive
Officer and our Senior Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, pursuant to Rule 13a-14(c) under the Act. Based on that
evaluation, our President and Chief Executive Officer and our Senior Vice
President and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this Annual
Report.
Changes in Internal Control over
Financial Reporting. 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.
Management’s Annual Report on
Internal Control over Financial Reporting. The management of
the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 30, 2007 based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
“Internal Control – Integrated Framework.” Based on that assessment,
management believes that, as of December 30, 2007, our internal control over
financial reporting was effective based on those criteria.
Our
independent auditors have issued an audit report on the effectiveness of our
internal control over financial reporting. This report appears on
page 87.
ITEM
9B. OTHER INFORMATION
On
January 10, 2008, the Company awarded shares of restricted stock to the
following executive officers: Daniel T. Hendrix, John R. Wells, Raymond S.
Willoch, Lindsey K. Parnell, Robert A. Coombs, Patrick C. Lynch, and Jeffrey J.
Roman. A copy of the form of agreement used for such executive
officers is attached as Exhibit 10.5 to this Report. These awards of
restricted stock were granted pursuant to the Interface, Inc. Omnibus Stock
Incentive Plan, which was previously filed with the Securities and Exchange
Commission.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information contained under the captions “Nomination and Election of Directors,”“Section 16(a) Beneficial Ownership Reporting Compliance” and “Meetings and
Committees of the Board of Directors” in our definitive Proxy Statement for our
2008 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of our 2007 fiscal year, is incorporated herein by reference. Pursuant to
Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information
relating to our executive officers is included in Item 1 of this
Report.
We have
adopted the “Interface Code of Business Conduct and Ethics” (the “Code”) which
applies to all of our employees, officers and directors, including the Chief
Executive Officer and Chief Financial Officer. The Code may be viewed
on our website at www.interfaceinc.com. Changes
to the Code will be posted on our website. Any waiver of the Code for
executive officers or directors may be made only by our Board of Directors and
will be disclosed to the extent required by law or Nasdaq rules on our website
or in a filing on Form 8-K.
- 88
-
ITEM
11. EXECUTIVE COMPENSATION
The
information contained under the caption “Executive Compensation and Related
Items” in our definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of our 2007 fiscal year,
is incorporated herein by reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information contained under the captions “Principal Shareholders and Management
Stock Ownership” and “Equity Compensation Plan Information” in our definitive
Proxy Statement for our 2008 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of our 2007 fiscal year, is incorporated herein by
reference.
For
purposes of determining the aggregate market value of our voting and non-voting
stock held by non-affiliates, shares held by our directors and executive
officers have been excluded. The exclusion of such shares is not intended to,
and shall not, constitute a determination as to which persons or entities may be
“affiliates” as that term is defined under federal securities laws.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information contained under the caption “Executive Compensation and Related
Items — Certain Relationships and Related Transactions, and Director
Independence” in our definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of our 2007 fiscal year,
is incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information contained under the caption “Information Concerning the Company’s
Accountants” in our definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of our 2007 fiscal year,
is incorporated herein by reference.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial
Statements
The
following Consolidated Financial Statements and Notes thereto of Interface, Inc.
and subsidiaries and related Reports of Independent Registered Public Accounting
Firm are contained in Item 8 of this Report:
Report of
Independent Registered Public Accounting Firm
Report of
Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
- 89
-
2. Financial
Statement Schedule
The
following Consolidated Financial Statement Schedule of Interface, Inc. and
subsidiaries and related Report of Independent Registered Public Accounting Firm
are included as part of this Report (see pages 92-94):
Report of
Independent Registered Public Accounting Firm
Schedule
II — Valuation and Qualifying Accounts and Reserves
3. Exhibits
The
following exhibits are included as part of this Report:
Exhibit
Number
Description of Exhibit
2.1
—
Stock
Purchase Agreement, by and among Interface, Inc., InterfaceFABRIC, Inc.
and Office Fabrics Holding Corp., dated June 19, 2007 (included as Exhibit
2.1 to the Company’s Current Report on Form 8-K dated June 19, 2007,
previously filed with the Commission and incorporated herein by
reference).
Bylaws,
as amended and restated (included as Exhibit 3.1 to the Company’s
quarterly report on Form 10-Q for the quarter ended September 30,2007, previously filed with the Commission and incorporated herein by
reference).
4.1
—
See
Exhibits 3.1 and 3.2 for provisions in the Company’s Articles of
Incorporation and Bylaws defining the rights of holders of Common Stock of
the Company.
Indenture
governing the Company’s 9.5% Senior Subordinated Notes due 2014, dated as
of February 4, 2004, among the Company, certain U.S. subsidiaries of
the Company, as guarantors, and SunTrust Bank, as Trustee (the “2004
Indenture”) (included as Exhibit 4.6 to the Company’s annual report on
Form 10-K for the year ended December 28, 2003 (the “2003 10-K”),
previously filed with the Commission and incorporated herein by
reference); and First Supplemental Indenture related to the 2004
Indenture, dated as of January 10, 2005 (included as Exhibit 99.3 to the
Company’s Current Report on Form 8-K dated February 15, 2005, previously
filed with the Commission and incorporated herein by
reference).
10.1
—
Salary
Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the
Company’s registration statement on Form S-1, File No. 2-82188, previously
filed with the Commission and incorporated herein by
reference).*
Form
of Salary Continuation Agreement, dated as of January 1, 2008 (as used for
Daniel T. Hendrix, Raymond S. Willoch and John R. Wells) (included as
Exhibit 99.5 to the Company’s Current Report on Form 8-K dated January 2,2008, previously filed with the Commission and incorporated herein by
reference).*
10.4
—
Interface,
Inc. Omnibus Stock Incentive Plan (as amended and restated effective
February 22, 2006) (included as Exhibit 99.1 to the Company’s Current
Report on Form 8-K dated May 18, 2006, previously filed with the
Commission and incorporated herein by reference); Forms of Restricted
Stock Agreement, as used for directors, executive officers and other key
employees/consultants (included as Exhibits 99.1, 99.2 and 99.3,
respectively, to the Company’s Current Report on Form 8-K dated January10, 2005, previously filed with the Commission and incorporated herein by
reference).*
10.5
—
Form
of Restricted Stock Agreement, as used for executive
officers.*
UK
Service Agreement between Interface Europe, Ltd. and Lindsey Kenneth
Parnell dated March 13, 2007 (included as Exhibit 10.12 to the Company’s
annual report on Form 10-K for the year ended December 31, 2006 (the “2006
10-K”), previously filed with the Commission and incorporated herein by
reference).*
10.16
—
Overseas
Service Agreement between Interface Europe, Ltd. and Lindsey Kenneth
Parnell dated March 13, 2007 (included as Exhibit 10.13 to the 2006 10-K,
previously filed with the Commission and incorporated herein by
reference).*
10.17
—
Sixth
Amended and Restated Credit Agreement, dated as of June 30, 2006, among
the Company (and certain direct and indirect subsidiaries), the
lenders listed therein, Wachovia Bank, National Association, Bank of
America, N.A. and General Electric Capital Corporation (included as
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated June 30,2006, previously filed with the Commission and incorporated herein by
reference); and First Amendment thereto, dated January 1, 2008 (included
as Exhibit 99.1 to the Company’s Current Report Form 8-K dated January 1,2008, previously filed with the Commission and incorporated herein by
reference).
Split
Dollar Insurance Agreement, dated February 21, 1997, between the Company
and Daniel T. Hendrix (included as Exhibit 10.2 to the Company’s quarterly
report on Form 10-Q for the quarter ended October 4, 1998, previously
filed with the Commission and incorporated herein by
reference).*
Form
of Indemnity Agreement of Officer (as used for certain officers of the
Company, including Daniel T. Hendrix, John R. Wells, Patrick C. Lynch,
Raymond S. Willoch and Lindsey K. Parnell) (included as Exhibit 99.2 to
the Company’s Current Report on Form 8-K dated November 29, 2005,
previously filed with the Commission and incorporated herein by
reference).*
Credit
Agreement, executed on March 9, 2007, among Interface Europe B.V. (and
certain of its subsidiaries) and ABN AMRO Bank N.V. (included as Exhibit
99.1 to the Company’s Current Report on Form 8-K dated March 7, 2007,
previously filed with the Commission and incorporated herein by
reference).
Power
of Attorney (see signature page of this Report).
31.1
—
Certification
of Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
31.2
—
Certification
of Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
32.1
—
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code
by Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
32.2
—
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code
by Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30,2007.
__________
*
Management contract or compensatory plan or agreement required to be filed
pursuant to Item 15(b) of this
Report.
- 91
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Interface,
Inc.
Atlanta,
Georgia
The
audits referred to in our report to Interface, Inc., dated
February 27, 2008, which is contained in Item 8 of this Form 10-K,
included the audit of the Financial Statement Schedule II (Valuation and
Qualifying Accounts and Reserves) set forth in the form 10-K. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our
opinion, this financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
(A)
Includes changes in foreign currency exchange rates.
(B)
Represents costs applied against reserve and adjustments to reflect actual
exposure.
(All
other Schedules for which provision is made in the applicable accounting
requirements of the Securities and Exchange Commission are omitted because they
are either not applicable or the required information is shown in the Company's
Consolidated Financial Statements or the Notes thereto.)
- 94
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Daniel T. Hendrix as attorney-in-fact, with power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact may
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Certification
of Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
31.2
Certification
of Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
32.1
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code
by Chief Executive Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2007.
32.2
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code
by Chief Financial Officer with respect to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30,2007.
- 96
-
- 97
-
Dates Referenced Herein and Documents Incorporated by Reference