SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended October 3, 1999
Commission File Number 0-12016
------------------------------
INTERFACE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1451243
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 Paces Ferry Road, Suite 2000, Atlanta, Georgia 30339
---------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 437-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Shares outstanding of each of the registrant's classes of common stock at
November 11, 1999:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 46,133,361
Class B Common Stock, $.10 par value per share 6,497,413
1
<PAGE>
INTERFACE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements 3
Balance Sheets - October 3, 1999 and January 3, 1999 3
Statements of Income - Three Months and Nine Months Ended 4
October 3, 1999 and October 4, 1998
Statements of Comprehensive Income - Three Months and 4
Nine Months Ended October 3, 1999 and October 4, 1998
Statements of Cash Flows - Nine Months 5
Ended October 3, 1999 and October 4, 1998
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
ASSETS 1999 1999
- ----- ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 10,936 $ 9,910
Accounts Receivable 214,211 194,803
Inventories 187,605 199,338
Prepaid Expenses 32,306 26,607
Deferred Tax Asset 7,630 7,866
----------- -----------
TOTAL CURRENT ASSETS 452,688 438,524
PROPERTY AND EQUIPMENT, less
accumulated depreciation 241,538 245,312
EXCESS OF COST OVER NET ASSETS ACQUIRED 285,959 302,969
OTHER ASSETS 72,019 50,059
----------- -----------
$ 1,052,204 $ 1,036,864
=========== ===========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES:
Notes Payable $ 16,575 $ 26,855
Accounts Payable 73,855 80,154
Accrued Expenses 105,645 115,317
Current Maturities of Long-Term Debt 2,762 2,786
----------- -----------
TOTAL CURRENT LIABILITIES 198,837 225,112
LONG-TERM DEBT, less current maturities 151,722 112,651
SENIOR NOTES 150,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 22,082 23,482
----------- -----------
TOTAL LIABILITIES 647,641 636,245
----------- -----------
Minority Interest 1,920 1,795
Common Stock 5,967 5,983
Additional Paid-In Capital 222,475 231,959
Retained Earnings 229,339 219,230
Accumulated Other Comprehensive Income - Foreign Currency
Translation (30,993) (31,668)
Minimum Pension Liability Adjustment (6,399) (6,399)
Treasury Stock, 7,200,000, Class A Shares, at Cost (17,746) (20,281)
----------- -----------
$ 1,052,204 $ 1,036,864
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 304,246 $ 328,264 $ 917,564 $ 964,080
Cost of Sales 209,906 215,005 630,956 637,414
--------- --------- --------- ---------
GROSS PROFIT ON SALES 94,340 113,259 286,608 326,666
Selling, General and Administrative Expenses 75,643 80,685 227,741 238,885
--------- --------- --------- ---------
OPERATING INCOME 18,697 32,574 58,867 87,781
Other (Expense) Income - Net (9,998) (10,136) (30,684) (29,626)
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 8,699 22,438 28,183 58,155
Taxes on Income 3,440 8,078 10,989 21,848
--------- --------- --------- ---------
NET INCOME $ 5,259 $ 14,360 $ 17,194 $ 36,307
========= ========= ========= =========
Basic Earnings Per Share $ .10 $ .27 $ .33 $ .70
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ .10 $ .27 $ .33 $ .69
========= ========= ========= =========
Average Shares Outstanding -- Basic 52,829 52,462 52,906 51,773
--------- --------- --------- ---------
Average Shares Outstanding -- Diluted 52,829 54,105 52,906 52,916
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 5,259 $14,360 $17,194 $36,307
Other Comprehensive Income, Foreign
Currency Translation Adjustment 6,663 16,140 675 12,398
------- ------- ------- -------
Comprehensive Income $11,922 $30,500 $17,869 $48,705
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
OCTOBER 3, OCTOBER 4,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 11,984 $ 28,419
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (22,349) 28,998
Acquisitions/Divestiture of businesses 6,217 (62,800)
Other (8,458) (6,369)
-------- --------
(24,590) (98,167)
-------- --------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 30,519 14,997
Issuance/Repurchase of common stock (7,921) 68,121
Dividends paid (7,107) (6,134)
-------- --------
15,491 76,984
-------- --------
Net cash provided by (used for) operating,
investing and financing activities 2,885 7,236
Effect of exchange rate changes on cash (1,859) (1,404)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period 1,026 5,832
Balance at beginning of period 9,910 10,212
-------- --------
Balance at end of period $ 10,936 $ 16,044
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange Commission (the
"Commission") instructions to Form 10-Q, the following footnotes have been
condensed and, therefore, do not contain all disclosures required in connection
with annual financial statements. Reference should be made to the notes to the
Company's year-end financial statements contained in its Annual Report to
Shareholders for the fiscal year ended January 3, 1999, as filed with the
Commission.
The financial information included in this report has been prepared
by the Company, without audit, and should not be relied upon to the same extent
as audited financial statements. In the opinion of management, the financial
information included in this report contains all adjustments (all of which are
normal and recurring) necessary for a fair presentation of the results for the
interim periods. Nevertheless, the results shown for interim periods are not
necessarily indicative of results to be expected for the full year.
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
October 3, January 3,
1999 1999
Finished Goods $112,559 $123,941
Work in Process 29,568 31,908
Raw Materials 45,478 43,489
-------- --------
$187,605 $199,338
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
During the first quarter of 1999, the Company completed the sale of
Joseph, Hamilton & Seaton Ltd., a U.K.-based contract carpet distributor
acquired in connection with the acquisition of the European carpet businesses of
Readicut International PLC. The Company received cash consideration of
approximately $11.2 million in the sale.
During the first half of 1999, the Company acquired five service
companies located in the U.S. As consideration in the acquisitions, the Company
issued Common Stock valued at approximately $.8 million and paid $1.9 million in
cash. All transactions have been accounted for as purchases, and accordingly,
the results of operations of the acquired companies have been included within
the consolidated financial statements since their acquisition dates. The excess
of the purchase price over the fair value of the net assets acquired was
approximately $1.2 million and is being amortized over 25 years.
During 1998, the Company acquired four floorcovering contractors,
four carpet maintenance companies, two additional service companies, and a
raised/access flooring manufacturer, all located in the U.S. The Company also
purchased the vinyl floorcoverings business of Scan-Lock A/S located in Denmark,
and Glenside Fabrics Limited, a manufacturer of upholstery fabrics, located in
Meltham, U.K. As consideration for the acquisitions, the Company issued Common
Stock valued at approximately $1.0 million, $16.9 million in cash, and $.2
million in a note receivable. All transactions have been accounted for as
purchases, and accordingly, the results of operations of the acquired companies
have been included within the consolidated financial statements since their
acquisition dates. The excess of the purchase price over the fair value of the
net assets acquired was approximately $11.7 million and is being amortized over
periods of 25 to 40 years.
NOTE 4 - CONCURRENT PUBLIC OFFERINGS
On April 2, 1998, the Company completed concurrent public offerings
of $150 million aggregate principal amount of 7.30% Senior Notes due 2008 and
3,450,000 shares of Class A Common Stock. The Company used the net proceeds of
both offerings of $212.7 million to reduce amounts outstanding under its senior
credit facility, and for general corporate purposes, including working capital
and acquisitions.
6
<PAGE>
NOTE 5 - STOCK SPLIT
On June 15, 1998, the Company paid a two-for-one stock split,
effected in the form of a 100% stock dividend, to all common shareholders of
record as of June 1, 1998. In connection with the stock split, the Company
issued 29,690,566 shares of Common Stock in the aggregate (including treasury
shares). All earlier references to shares of the Company's Common Stock
contained elsewhere in these Notes have been retroactively adjusted to reflect
the stock split.
NOTE 6 - STOCK REPURCHASES
The Company adopted a share repurchase program in 1998, pursuant to
which it is authorized to repurchase up to 2,000,000 shares of Common Stock in
the open market or in private transactions over a two-year period. To date, the
Company has repurchased and retired an aggregate of 1,075,500 shares of Common
Stock under this program, at prices ranging from $8.45 to $16.78 per share.
NOTE 7 - EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of shares of Class A and
Class B Common Stock outstanding during the period. Shares issued or reacquired
during the period have been weighted for the portion of the period that they
were outstanding. Basic earnings per share has been computed based upon 52,906
shares and 51,773 shares outstanding for the periods ended October 3, 1999 and
October 4, 1998, respectively. Diluted earnings per share is calculated in a
manner consistent with that of basic earnings per share while giving effect to
all dilutive potential common shares that were outstanding during the period.
Diluted earnings per share has been computed based upon 52,906 shares and 52,916
shares outstanding for the periods ended October 3, 1999 and October 4, 1998,
respectively. For the purposes of computing earnings per common share and
dividends per common share, the Company is treating as treasury stock (and
therefore not outstanding) the shares that are owned by a wholly-owned
subsidiary (an aggregate of 7,200,000 Class A shares recorded at cost).
The following is a reconciliation from basic earnings per share to
diluted earnings per share for each of the periods presented:
<TABLE>
<CAPTION>
(In Thousands Except Per Share Amounts)
Average
For the Nine-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
October 3, 1999 $ 17,194 52,906 $ .33
Effect of Dilution:
Options -- --
-------------------------------------------------------
Diluted $ 17,194 52,906 $ .33
======================================================
- ----------------------------------------------------------------------------------------------------------------------------------
October 4, 1998 $ 36,307 51,773 $ .70
Effect of Dilution:
Options -- 1,143
------------------------------------------------------
Diluted $ 36,307 52,916 $ .69
======================================================
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
NOTE 8 - COMPREHENSIVE INCOME
Effective the first quarter of 1998, the Company adopted FAS 130,
"Comprehensive Income". This statement established the standards for reporting
and displaying comprehensive income and its components (revenues, expenses,
gains and losses) as part of a full set of financial statements. This statement
requires that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Since this statement applies only to the presentation of
comprehensive income, it does not have any impact upon results of operations,
financial position, or cash flows.
NOTE 9 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131 which establishes
standards for the way that public business enterprises report information about
operating segments in their financial statements. The standard defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker aggregates operating
segments based on the type of products produced by the segment. Based on the
quantitative thresholds specified in SFAS 131, the Company has determined that
it has two reportable segments. The two reportable segments are Floorcovering
Products/Services and Interior Fabrics. The Floorcovering Products/Services
segment manufactures, installs and services commercial modular and broadloom
carpet, while the Interior Fabrics segment manufactures panel and upholstery
fabrics.
The accounting policies of the operating segments are the same as
those described in Summary of Significant Accounting Policies in the notes to
the Company's year-end financial statements contained in its Annual Report to
Shareholders for the fiscal year ended January 3, 1999, as filed with the
Commission. Segment amounts disclosed are prior to any elimination entries made
in consolidation. 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 expense and income
taxes. Corporate expenses are primarily comprised of corporate overhead
expenses. Thus, operating income includes only the costs that are directly
attributable to the operations of the individual segment. Assets not
identifiable to any individual segment are corporate assets, which are primarily
comprised of cash and cash equivalents, short-term investments, intangible
assets and intercompany amounts, which are eliminated in consolidation.
SEGMENT DISCLOSURES
Summary information by segment follows:
<TABLE>
<CAPTION>
(in thousands)
Floorcovering Interior
For the Nine-Month Period Ended products/services fabrics Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 3, 1999
Net sales $729,625 $147,172 $40,767 $ 917,564
Depreciation and amortization 22,388 6,868 1,431 30,687
Operating income 48,254 16,845 (86) 65,013
Total assets $960,749 $210,825 $46,952 $1,218,526
- -----------------------------------------------------------------------------------------------------------------------------------
October 4, 1998
Net sales $767,678 $163,386 $33,016 $ 964,080
Depreciation and amortization 20,404 6,666 3,343 30,413
Operating income 70,336 23,343 (2,028) 91,651
Total assets $996,218 $213,800 $46,990 $1,257,008
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
<TABLE>
<CAPTION>
Nine-Month
Period Ended
---------------------------------------------------------
(IN THOUSANDS) October 3, 1999 October 4, 1998
<S> <C> <C>
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 30,687 $ 30,413
Corporate depreciation and amortization 588 580
----------- -----------
Reported depreciation and amortization $ 31,275 $ 30,993
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 65,013 $ 91,651
Corporate expenses and other reconciling amounts (6,146) (3,870)
---------- ----------
Reported operating income $ 58,867 $ 87,781
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Total segment assets $ 1,218,526 $ 1,257,008
Corporate assets and eliminations (166,322) (181,871)
------------- ------------
Reported total assets $ 1,052,204 $ 1,075,137
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 7.3% senior notes due
2008 and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor
Financial Statements are presented herein pursuant to requirements of the
Commission.
<TABLE>
<CAPTION>
INTERFACE, INC. AND SUBSIDIARIES
NOTE 10 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 3, 1999
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $ 723,784 $ 287,986 $ -- $(94,206) $ 917,564
--------- --------- -------- -------- ---------
Cost of sales 530,353 194,809 -- (94,206) 630,956
Gross profit on sales 193,431 93,177 -- -- 286,608
Selling, general and administrative 139,572 62,502 25,667 -- 227,741
--------- --------- -------- -------- ---------
expenses
Operating income 53,859 30,675 (25,667) -- 58,867
Other (expense) income (13,575) (3,309) (13,800) -- (30,684)
--------- --------- -------- -------- ---------
Income before taxes on income 40,284 27,366 (39,467) -- 28,183
and equity in income of subsidiaries
Taxes on income 15,710 10,673 (15,394) -- 10,989
Equity in income of subsidiaries -- -- 41,267 (41,267)
--------- --------- -------- -------- ---------
Net income applicable to common shareholders $ 24,574 $ 16,693 $ 17,194 $(41,267) $ 17,194
========= ========= ======== ======== =========
</TABLE>
9
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BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 3, 1999
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,268 $ 2,632 $ 3,036 $ -- $ 10,936
Accounts receivable 159,238 81,687 (26,714) -- 214,211
Inventories 119,872 67,733 -- -- 187,605
Miscellaneous 11,586 34,893 (6,543) -- 39,936
--------- --------- --------- ----------- -----------
Total current assets 295,964 186,945 (30,221) -- 452,688
Property and equipment
less accumulated depreciation 151,499 71,741 18,298 -- 241,538
Investment in subsidiaries 45,784 6,356 822,558 (874,698) --
Miscellaneous 16,058 10,064 45,897 -- 72,019
Excess of cost over net assets acquired 183,755 98,888 3,316 -- 285,959
--------- --------- --------- ----------- -----------
$ 693,060 $ 373,994 $ 859,848 $ (874,698) $ 1,052,204
========= ========= ========= =========== ===========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 5,916 $ 10,659 $ -- $ -- $ 16,575
Accounts payable 35,315 30,572 7,968 -- 73,855
Accrued expenses 71,104 41,179 (6,638) -- 105,645
Current maturities of long-term debt 1,662 1,100 -- -- 2,762
--------- --------- --------- ----------- -----------
Total current liabilities 113,997 83,510 1,330 -- 198,837
Long-term debt, less
current maturities 7,083 47,258 97,381 -- 151,722
Senior notes and senior subordinated
notes -- -- 275,000 -- 275,000
Deferred income taxes/other 15,007 4,718 2,357 -- 22,082
Minority interests -- 1,920 -- -- 1,920
--------- --------- --------- ----------- -----------
Total liabilities 136,087 137,406 376,068 -- 649,561
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,967 (196,344) 5,967
Additional paid-in capital 191,411 12,525 224,261 (205,722) 222,475
Retained earnings 217,726 149,295 259,313 (396,995) 229,339
Foreign currency translation adjustment
income (4,200) (27,431) (5,761) -- (37,392)
Treasury stock, 7,200,000 Class A
shares, at cost -- -- -- (17,746) (17,746)
--------- --------- --------- ----------- -----------
$ 693,060 $ 373,994 $ 859,848 $ (874,698) $ 1,052,204
========= ========= ========= =========== ===========
</TABLE>
10
<PAGE>
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS
ENDED OCTOBER 3, 1999
<TABLE>
<CAPTION>
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 41,332 $(18,450) $(10,900) $ - $ 11,984
Cash flows from investing activities:
Purchase of plant and equipment (18,378) (3,215) (756) - (22,349)
Acquisitions, net of cash acquired -- -- 6,217 - 6,217
Other assets (22,572) 15,286 (1,172) - 8,458
-------- -------- -------- ------ --------
Net cash provided by (used in) investing
activities (40,950) 12,071 4,289 0 (24,590)
Cash flows from financing activities:
Net borrowings (repayments) (1,259) 5,636 26,142 - 30,519
Proceeds from issuance/repurchase of
common stock -- -- (7,921) - (7,921)
Cash dividends paid -- -- (7,107) - (7,107)
Net cash provided by (used in) financing
activities (1,259) 5,636 11,114 - 15,491
Effect of exchange rate change on cash -- (1,859) -- - (1,859)
-------- -------- -------- ------ --------
Net increase (decrease) in cash (877) (2,602) 4,503 - 1,026
Cash at beginning of year 6,145 5,234 (1,469) - 9,910
-------- -------- -------- ------ --------
Cash at end of year $ 5,268 $ 2,632 $ 3,036 $ - $ 10,936
======== ======== ======== ====== ========
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
This report contains statements which may constitute "forward-looking
statements" under applicable securities laws, including statements regarding the
intent, belief or current expectations of the Company and members of its
management team, as well as the assumptions on which such statements are based.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the Safe
Harbor Compliance Statement for Forward-Looking Statements included as Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999, and are hereby incorporated by reference. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics and specialty products. During the quarter ended
October 3, 1999, the Company had revenues and net income of $304.4 million and
$5.3 million, respectively.
The Company's business, as well as the commercial interiors market in
general, is somewhat cyclical in nature. In recent years, the Company has
benefited from a recovery in the U.S. commercial office market which began in
the mid-1990's. However, many of the Company's business segments have
experienced decreased demand levels over the last four quarters. As a result,
the Company's results of operations, and its prospects for the balance of 1999,
have been adversely affected. A significant sustained downturn in the market
would materially impair the Company's revenues and earnings prospects.
During the fourth quarter of 1998, the Company recorded a pre-tax
restructuring charge in the amount of $25.3 million related to plant closures
and consolidations of operations in Asia, Europe and the U.S., which resulted in
an aggregate headcount reduction of approximately 287 salaried and hourly
employees and the write-down and disposal of certain assets. The restructuring
charge is comprised of $13.0 million of cash expenditures for severance benefits
and relocation costs (of which $4.5 million remained unpaid at October 3, 1999
and is included in accrued expenses) and $12.3 million of non-cash charges,
primarily for the write-down of impaired assets.
Results of Operations
For the three month and nine month periods ended October 3, 1999, the
Company's net sales decreased $23.8 million (7.3%) and $46.5 million (4.8%),
respectively, compared with the same periods in 1998. The decreases were
primarily attributable to (i) a decline in sales of broadloom carpet in the U.S.
by the Company's Bentley Mills subsidiary, due to soft market conditions and a
shift to an owned and aligned distribution channel which served to reduce the
number of dealers selling Bentley Mills products, (ii) a decline in sales of
broadloom carpet in Europe, particularly in the United Kingdom, due to the
divestiture of Joseph, Hamilton & Seaton, Ltd. and Firth's loss of sales
personnel due to integration with the modular carpet sales force, and (iii)
decreased sales volume in the Company's interior fabrics operations resulting
from continued soft market conditions. The decrease was offset somewhat by
increased sales volume (i) in the Company's Asia-Pacific division, which
continues to show signs of recovery from the recent economic downturn in that
region, and (ii) in the Company's architectural products division, driven in
part by the 1998 acquisition of Atlantic Access Flooring and its line of steel
panel products. Although sales in the Company's U.S. floorcovering operations
were essentially flat, there was a shift in the relative mix of sales, with
increased service revenues offsetting lower product sales.
Cost of sales, as a percentage of net sales, increased to 69.0% and
68.8%, respectively, for three month and nine month periods ended October 3,
1999, compared to 65.5% and 66.1%, respectively, for the same periods in 1998.
The increase was primarily attributable to (i) the failure to fully absorb
overhead expenses, as a result of the decline in sales, and (ii) the shift in
the relative mix of sales towards service revenues, which historically have had
lower gross profit margins than product sales.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 24.9% in the third quarter of 1999, compared to 24.6% in the
same period in 1998, primarily as a result of the decline in sales, increased
consulting and development
12
<PAGE>
expenses associated with the Year 2000 initiative, and costs associated with the
integration of the Re:Source Americas network, the consolidation of certain of
the Company's operations in the Americas through a "shared services" approach,
and the departure of the Company's former chief operating officer. However, the
SG&A cost-to-sales ratio of 24.8% for the nine-month period ended October 3,
1999 was consistent with the same period in 1998.
For the three month and nine month periods ended October 3, 1999, other
expenses were consistent with the same periods in 1998. However, due primarily
to higher overall levels of bank debt, other expenses increased $1 million
compared to the same nine month period in 1999.
As a result of the aforementioned factors, the Company's net income
decreased 63.4% to $5.3 million and 52.6% to $17.2 million, respectively, for
the three month and nine month periods ended October 3, 1999, compared to the
same periods last year.
Liquidity and Capital Resources
The Company's primary source of cash during the nine months ended
October 3, 1999 was $30.5 million from long-term financing. The primary uses of
cash during the nine months ended October 3, 1999 were (i) $22.3 million for
additions to property and equipment in the Company's manufacturing facilities,
(ii) $10 million for European minimum pension obligations, and (iii) $8.5
million for repurchases of common stock. 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.
In 1998, the Company adopted a share repurchase program, pursuant to
which it is authorized to repurchase up to 2,000,000 shares of Class A Common
Stock in the open market or in private transactions over a two-year period. In
1999 to date, the Company has repurchased and retired 893,000 shares of Class A
Common Stock at an average price of $9.00 per share. Since the adoption of the
program, the Company has repurchased an aggregate of 1,075,500 shares under this
program.
Year 2000
As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year 2000
issue. The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit codes to perform computations or decision-making
functions. The Company has done a comprehensive review of its computer programs
to identify the systems that would be affected by the Year 2000 issue. The
Company has retained IBM Corporation to assist in its Year 2000 conversion
process.
The Company categorizes its systems into one of two categories: those
that are linked to the Company's AS-400 computer network ("IT Systems"), and
those that are not ("Non-IT Systems"). The Company currently estimates the total
cost of modifying its IT Systems to be Year 2000 ready to be approximately $23.4
million. Of such amount, approximately $13.9 million is attributable to the cost
of new hardware and software which will be required in connection with the
global consolidation of the Company's management and financial accounting
systems. This new equipment and upgraded technology will have a definable value
lasting beyond the Year 2000. In these instances, where Year 2000 compliance is
ancillary, the Company intends to capitalize and depreciate such costs. The
remaining $9.5 million (based on current estimates) will be expensed as
incurred. With respect to Non-IT Systems, the Company currently estimates the
total cost of the modifications necessary to be Year 2000 ready to be
approximately $2 million, although it could be more. The Company intends to fund
these costs through operating cash flows.
During the quarter ended October 3, 1999, the Company expensed
approximately $1.1 million in regard to modifications of both IT Systems and
Non-IT Systems. To date, the Company has expensed approximately $8.7 million in
the aggregate in regard to such modifications. The Company does not separately
track its internal costs related to Year 2000 compliance, the majority of which
are compensation expenses for employees in its information technology
department.
The Company has standardized its IT platforms (computers, system
software and network components) and completed functional and Year 2000 testing.
AS/400's, all PC servers, and PC clients are 100% migrated to standards. Voice
PBX and Voice Mail platforms and all WAN and LAN assets are implemented and
certified Year 2000 ready. Application software on AS/400's is migrated to the
standard Year 2000-tested financial, payroll and human resource systems, and
those applications are in service in the Americas. Payroll systems in
Europe/Asia-Pacific are considered Year 2000 ready, and contingency plans are in
place. Service provider system implementations of standard applications are
complete at all sites except one, with deployment scheduled for completion at
that location in November 1999. Business systems remediation, integration and
testing activities are complete. Application software on PC servers principally
involves Lotus Notes and related applications. Notes certification was addressed
in platform testing. Testing of specific applications is complete.
13
<PAGE>
The Company has not deferred in any material respect any of its other
information technology projects to accommodate its Year 2000 compliance efforts.
Remediation and testing of Non-IT equipment is complete, contingency
plans are in place, and the Company anticipates no material interruption in the
functioning of its equipment. The Company is continuing the process of reviewing
its Year 2000 exposure to third party suppliers and customers. Surveys have been
sent to critical suppliers and, in certain cases, on-site Year 2000 audits are
being performed. The Company's most reasonably likely worst-case Year 2000
scenario is that a key supplier's systems will malfunction and, as a result, the
Company will suffer a period of business interruption during which it is unable
to meet related obligations to its customers. The Company is currently unaware
of any Year 2000 problems faced by any suppliers which are likely to have a
material adverse effect on the Company. However, many third parties remain
reluctant to provide detailed information concerning the status of their Year
2000 readiness.
The Company is in the process of developing and implementing
contingency plans in the event of supply problems. The principal contingencies
under consideration include identifying and qualifying substitute suppliers for
key materials, stockpiling certain critical supplies, and pursuing long-term
supply contracts providing the Company with preferential treatment in the event
of shortages. Contingency responses have been identified for all critical supply
items at all owned sites except Intek, where completion is expected in November
1999.
The Company believes that no single customer represents so significant
a portion of its revenues that failure on the part of such a customer to plan
effectively for Year 2000 would materially impact the Company's financial
condition. In addition, the Company believes that the diversity of its customer
base minimizes the potential financial impact of such an event. However, if
broad customer buying trends are reduced due to Year 2000 issues, the Company's
revenues and profitability could be adversely affected.
There can be no guarantee that the foregoing cost estimates or
deadlines will be achieved and actual results could differ from those
anticipated. Specific factors that might cause differences include, but are not
limited to, the ability to locate and correct all relevant computer codes, and
the ability of suppliers, customers and other companies on which the Company
relies to modify or convert their systems to be Year 2000 compliant. This risk
is particularly acute with respect to non-U.S. third parties, as it is widely
reported that many non-U.S. businesses and governments are not addressing their
Year 2000 issues on a timely basis.
Euro Conversion
A single currency called the euro was introduced in Europe on January
1, 1999. Eleven of the fifteen member countries of the European Union adopted
the euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
January 1, 2002 (but not later than July 1, 2002). During this transition
period, parties may settle transactions using either the euro or a participating
country's legacy currency.
The increased price transparency resulting from the use of a single
currency in the eleven participating countries may affect the ability of the
Company to price its products differently in various European markets.
Introduction of the euro may reduce the amount of the Company's
exposure to changes in exchange rates, due to the netting effect of
having assets and liabilities denominated in a single currency as opposed to the
various legacy currencies. Conversely, because there will be less diversity in
the Company's exposure to foreign currencies, movements in the euro's value in
U.S. dollars could have a more pronounced effect, whether positive or negative.
As a result of the adoption of the euro, the Company's foreign exchange hedging
costs could be reduced in the future.
Certain of the Company's business functions have introduced
euro-capability as of January 1, 1999, including, for example, systems for
making and receiving certain payments, pricing and invoicing. Other business
functions will be converted for the euro by the end of the transition period
(December 31, 2001), but may be converted earlier where operationally efficient
or cost-effective, or to meet customer needs. The Company does not expect the
costs associated with these modifications to have a material adverse effect on
future operations.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the scope and volume of its global operations, the
Company is exposed to an element of market risk from changes in interest rates
and foreign currency exchange rates. The Company's results of operations and
financial condition could be impacted by this risk. The Company manages its
exposure to market risk through its regular operating and financial activities
and, to the extent appropriate, through the use of derivative financial
instruments.
The Company employs derivative financial instruments as risk management
tools and not for speculative or trading purposes. The Company monitors 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 counterparty credit guidelines and only enters into
transactions with financial institutions with a rating of investment grade or
better. As a result, the Company considers the risk of counterparty default to
be minimal.
INTEREST RATE MARKET RISK EXPOSURE. Changes in interest rates affect
the interest paid on certain of the Company's debt. To mitigate the impact of
fluctuations in interest rates, management of the Company has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. The Company maintains the 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, the Company
agrees to exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR. The interest rate swap agreements generally have
maturity dates ranging from fifteen to twenty-four months.
At October 3, 1999, the Company had utilized interest rate swap
agreements to effectively convert approximately $43.7 million of variable rate
debt to fixed rate debt. The Company anticipates that for the balance of fiscal
1999 it will utilize swap agreements or other derivative financial instruments
to convert comparable amounts of variable rate to fixed rate debt.
FOREIGN CURRENCY EXCHANGE MARKET RISK EXPOSURE. A significant portion of the
Company's operations consists of manufacturing and sales activities in foreign
jurisdictions. The Company manufactures its products in the U.S., Canada,
England, Northern Ireland, the Netherlands, Australia and Thailand, and sells
its products in more than 100 countries. As a result, the Company's 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 the Company distributes its products. The Company's operating results are
exposed to changes in exchange rates between the U.S. dollar and many other
currencies, including the Dutch guilder, British pound sterling, German mark,
French franc, Canadian dollar, Australian dollar, Thai baht, Japanese yen, and,
since the beginning of 1999, the euro. 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 the Company's foreign
operations with functional currencies other than the U.S. dollar transact
business in countries other than the U.S., exchange rate changes between two
foreign currencies could ultimately impact the Company. Finally, because the
Company reports in U.S. dollars on a consolidated basis, foreign currency
exchange fluctuations can have a translation impact on the Company's financial
position.
To mitigate the short-term effect of changes in currency exchange rates
on the Company's sales denominated in foreign currencies, the Company regularly
hedges by entering into currency swap contracts to hedge certain firm sales
commitments denominated in foreign currencies. In these currency swap
agreements, the Company and a counterparty financial institution exchange equal
initial principal amounts of two currencies at the spot exchange rate. Over the
term of the swap contract, the Company and the counterparty exchange interest
payments in their swapped currencies. At maturity, the principal amount is
reswapped, at the contractual exchange rate. At October 3, 1999, the contracts
served to hedge firmly committed sales in Dutch guilders and Japanese yen. The
contracts generally have maturity dates of fifteen to twenty-four months.
At October 3, 1999, the Company had approximately $10.5 million
(notional amount) of foreign currency hedge contracts outstanding. The Company
expects to hedge a comparable notional amount for the balance of fiscal 1999.
SENSITIVITY ANALYSIS. For purposes of specific risk analysis, the
Company uses sensitivity analysis to measure the impact that market risk may
have on the fair values of the Company's market sensitive instruments.
To perform sensitivity analysis, the Company assesses 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
15
<PAGE>
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 October 3, 1999. The market values that
result from these computations are compared with the market values of these
financial instruments at October 3, 1999. The differences in this comparison are
the hypothetical gains or losses associated with each type of risk.
As of October 3, 1999, based on a hypothetical immediate 150 basis
point increase in interest rates, with all other variables held constant, the
market value of the Company's fixed rate long-term debt would be impacted by a
net decrease of $15.7 million. Conversely, a 150 basis point decrease in
interest rates would result in a net increase in the market value of the
Company's fixed rate long-term debt of $25.9 million. At January 3, 1999, a 150
basis point movement would have resulted in the same changes.
As of October 3, 1999, a 10% movement 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 the Company's financial
instruments of $1.3 million or an increase in the fair value of the Company's
financial instruments of $1.1 million. At January 3, 1999, a 10% movement would
have resulted in the same changes. As the impact of offsetting changes in the
fair market value of the Company's net foreign investments is not included in
the sensitivity model, these results are not indicative of the Company's actual
exposure to foreign currency exchange risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 28, 1998, Collins & Aikman Floorcoverings, Inc.
("CAF") -- in the wake of receiving "cease and desist" letters from the Company
demanding that CAF cease manufacturing certain carpet products that the Company
believed infringe upon certain of its copyrighted product designs -- filed a
lawsuit against the Company asserting that certain of the Company's products,
primarily its Caribbean(TM) design product line, infringed on certain of CAF's
alleged copyrighted product designs. The lawsuit, which is pending in the United
States District Court for the Northern District of Georgia, Atlanta Division,
Civil Action No. 1:98-CV-2069, seeks injunctive relief and unspecified monetary
damages. The lawsuit also asserts other claims against the Company and certain
other parties, including for alleged tortious interference by the Company with
CAF's contractual relationship with the Roman Oakey Designs firm.
On September 28, 1998, the Company filed its answer denying
all the claims asserted by CAF, and also asserting counterclaims against CAF for
copyright infringement. The Company believes the claims asserted by CAF are
unfounded and subject to meritorious defenses, and it is defending vigorously
all the claims. At the present time, discovery has been limited by Court order
to matters relating to CAF's motion for preliminary injunction, and both the
Company and CAF have filed motions for summary judgment. As a result of
Court-ordered mediation not leading to a resolution of the disputes between the
parties, the Company expects the Court will soon set a schedule for arguments
and a hearing on the pending motions.
The Company's insurors have denied coverage under the
Company's insurance policies, which annually would otherwise provide up to $100
million of coverage. On June 8, 1999, the Company filed suit against the
insurors to challenge that denial. That lawsuit is pending in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:99-CV-1485, and is in the early stages of its proceedings.
Both the CAF infringement lawsuit and the Company's insurance
coverage lawsuit involve complex legal and factual issues, and while the Company
believes strongly in the merits of its legal positions, it is impossible to
predict with accuracy the outcome of either such litigation matter at this
stage. The Company intends to continue its aggressive pursuit of its positions
in both actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
John R. Wells was promoted to the position of President of the
Company's Americas floorcovering operations on November 8,
1999. Gordon D. Whitener, former President of the Americas
floorcovering operations, was offered another position within
the Company, but he declined and has departed the Company. Mr.
Whitener has also resigned as a director of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Restated Articles of Incorporation (included as Exhibit 3.1 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).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1,
1990, 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.
4.2 Rights Agreement between the Company and Wachovia Bank, N.A.,
dated as of March 4, 1998, with an effective date of March 16,
1998 (included as Exhibit 10.1A to the Company's registration
statement on Form 8-A/A dated March 12, 1998, previously filed
with the Commission and incorporated herein by reference).
4.3 Indenture governing the Company's 9.5% Senior Subordinated Notes
due 2005, dated as of November 15, 1995, among the Company,
certain U.S. subsidiaries of the Company, as Guarantors, and
First Union National Bank of Georgia, as Trustee (included as
Exhibit 4.1 to the Company's registration statement on Form S-4,
File No. 33-65201, previously filed with the Commission and
incorporated herein by reference); and Supplement No. 1 to
Indenture, dated as of December 27, 1996 (included as Exhibit
4.2(b) to the Company's Annual Report on Form 10-K for the year
ended December 29, 1996, previously filed with the Commission
and incorporated herein by reference).
4.4 Form of Indenture governing the Company's 7.3% senior notes due
2008, among the Company, certain U.S. subsidiaries of the
Company, as Guarantors, and First Union National Bank, as
trustee (included as Exhibit 4.1 to the Company's registration
statement on Form S-3/A, File No. 333-46611, previously filed
with the Commission and incorporated herein by reference).
10.1 Executive Bonus Plan (included as Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended July 3,
1999, previously filed with the Commission and incorporated
herein by reference).
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended
October 3, 1999.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERFACE, INC.
Date: November 16, 1999 By: /s/ Daniel T. Hendrix
-----------------------
Daniel T. Hendrix
Senior Vice President -
Finance, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
27.1 Financial Data Schedule.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from financial
statements included in the Company's quarterly report on Form 10-Q for the
quarter ended October 3, 1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000715787
<NAME> INTERFACE, INC.
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