ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact of the COVID-19 Pandemic
On March 1, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. The COVID-19 pandemic has had material adverse effects on our business, results of operations, and financial condition, and it is anticipated that this will continue for an indefinite period of time. The duration of the pandemic will ultimately determine the extent to which our operations are impacted. We continue to monitor our operations and have implemented various programs to mitigate the effects on our business including reductions in employees, labor costs, marketing expenses, consulting expenses, travel costs, various other costs, and capital expenditures, as well as reducing the amount of the cash dividend that we pay on our common stock. We continue to focus on the impact COVID-19 has on our employees in accordance with the Company’s ongoing safety measures, as well as any local government orders and “shelter in place” directives in place from time to time.
During fiscal year 2021, the COVID-19 pandemic had less of an impact on our overall financial results as consolidated net sales increased 8.8% compared to fiscal year 2020. Government stimulus programs, increased COVID-19 vaccination rates, and fewer COVID-19 related restrictions in some places contributed to a rebound in economic activity in certain countries driving higher revenues globally compared to fiscal year 2020. The sales increase in fiscal year 2021 compared to fiscal year 2020 was primarily in non-corporate office market segments, including healthcare, education, retail, residential / living and transportation. Our global supply chain and manufacturing operations, however, experienced increased adverse impacts and disruptions in 2021 from COVID-19. These impacts included raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages – particularly in the United States. These impacts to our supply chain and manufacturing operations increased our costs, decreased our ability to achieve manufacturing targets, increased lead times to our customers, and adversely affected our gross profit margin as a percentage of net sales. Management believes it is reasonably likely these impacts will continue and affect our future operations and results to some degree, particularly during the first half of 2022.
During fiscal year 2020, the COVID-19 pandemic resulted in 17.9% lower consolidated net sales compared to fiscal year 2019. We temporarily suspended production in certain manufacturing facilities in 2020 due to government lockdowns, shelter in place orders and reduced demand. Our sales mix shifted towards more non-corporate office market segments as the COVID-19 pandemic reduced corporate spending, which impacted sales in the corporate office market. During 2020, the Company recorded $12.9 million of voluntary and involuntary severance costs, which were included in selling, general and administrative expenses in the consolidated statements of operations.
In fiscal year 2020, government grants and payroll protection programs were available in various countries globally to provide assistance to companies impacted by the pandemic. The CARES Act enacted in the United States (see Note 17 entitled “Income Taxes” included in Item 8 of this Annual Report on Form 10-K for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”) provided benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments. The NOW Program provided eligible companies with reimbursement of labor costs as an incentive to retain employees and continue paying them in accordance with the Company’s customary compensation practices. During fiscal year 2020, the Company qualified for benefits under several payroll protection programs and recognized a reduction in payroll costs of approximately $7.3 million, which were recorded as a $6.1 million reduction of selling, general and administrative expenses and a $1.2 million reduction of cost of sales in the consolidated statements of operations, as the Company believes it is probable that the benefits received will not be repaid.
During the first quarter of 2020, as a result of changes in macroeconomic conditions related to the COVID-19 pandemic, we recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets. See Note 12 entitled “Goodwill and Intangible Assets” of Part II, Item 8 of this Annual Report for additional information.
Executive Overview
Our revenues are derived from sales of floorcovering products, primarily modular carpet, luxury vinyl tile (“LVT”) and rubber flooring products. Our 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, including the market for floorcovering products, 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 business.
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During fiscal year 2021, the Company largely completed its integration of the nora acquisition, and integration of its European and Asia-Pacific commercial areas and determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas. See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information. The results of operations discussion below also includes segment information.
We focus our marketing and sales efforts on both corporate office and non-corporate office market 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. More than half of our consolidated net sales were in non-corporate office markets in fiscal year 2021 and fiscal year 2020, primarily in education, healthcare, government, retail, and residential/living market segments. See Item 1, “Business” of this Annual Report on Form 10-K for additional information regarding our mix of modular carpet and resilient flooring sales in corporate office verses non-corporate office market segments for the last three fiscal years by reportable segment.
During 2021, we had consolidated net sales of $1,200.4 million, up 8.8% compared to $1,103.3 million in 2020, primarily due to the rebound in economic activity in certain countries following the impacts of COVID-19. Consolidated operating income for 2021 was $104.8 million compared to consolidated operating loss of $39.3 million in 2020 primarily due to higher sales in 2021 and a $121.3 million impairment of goodwill and certain intangible assets in 2020. Fiscal year 2021 also included $3.9 million of restructuring charges in connection with the planned closure of our Thailand manufacturing operations anticipated to occur in 2022. Consolidated net income for 2021 was $55.2 million or $0.94 per share, compared to consolidated net loss of $71.9 million, or $1.23 per share, in 2020.
During 2020, we had consolidated net sales of $1,103.3 million, down 17.9% compared to $1,343.0 million in 2019, primarily due to the impacts of COVID-19. The consolidated operating loss for 2020 was $39.3 million compared to consolidated operating income of $130.9 million in 2019, due primarily to a $121.3 million goodwill and intangible asset impairment charge recorded in fiscal 2020 due to the impacts of COVID-19. The consolidated net loss for 2020 was $71.9 million, or $1.23 per share, compared to consolidated net income of $79.2 million, or $1.34 per share, in 2019.
A detailed discussion of our 2021 and 2020 consolidated and segment performance appears below under “Analysis of Results of Operations”.
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Analysis of Results of Operations
Consolidated Results
The following discussion and analyses reflect the factors and trends discussed in the preceding sections.
Consolidated net sales denominated in currencies other than the U.S. dollar were approximately 50% in 2021, 51% in 2020, and 49% in 2019. Because we have substantial international operations, we are impacted, from time to time, by international developments that affect foreign currency transactions. In 2021, the strengthening of the Euro, Australian dollar, Chinese Renminbi and British Pound sterling against the U.S. dollar had a positive impact on our net sales and operating income. In 2020, the strengthening of the Euro, British Pound sterling, and Chinese Renminbi against the U.S. dollar had a positive impact on our net sales and operating income. In 2019, the weakening of the Euro, British Pound sterling, Australian dollar, Canadian dollar and Chinese Renminbi against the U.S. dollar had a negative impact on our net sales and operating income.
The following table presents the amounts (in U.S. dollars) by which the exchange rates for translating Euros, British Pounds sterling, Australian dollars, Chinese Renminbi and Canadian dollars into U.S. dollars have affected our consolidated net sales and operating income or loss during the past three years:
(in millions)
The following table presents, as a percentage of net sales, certain items included in our consolidated statements of operations during the past three years:
Fiscal Year
Selling, general and administrative expenses 27.0 30.2 29.0
Restructuring, asset impairment and other charges 0.3 (0.4) 1.0
Goodwill and intangible asset impairment charge — 11.0 —
Operating income (loss) 8.7 (3.6) 9.7
Interest/Other expense 2.7 3.6 2.2
Income (loss) before income tax expense 6.0 (7.2) 7.5
Income tax expense (benefit) 1.4 (0.7) 1.7
Net income (loss) 4.6 % (6.5) % 5.8 %
Consolidated Net Sales
Below we provide information regarding our consolidated net sales and analyze those results for each of the last three fiscal years. Fiscal year 2021 included 52 weeks, fiscal year 2020 included 53 weeks, and fiscal year 2019 included 52 weeks.
Fiscal Year Percentage Change
(in thousands)
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Consolidated net sales for 2021 compared with 2020
For 2021, our consolidated net sales increased $97.1 million (8.8%) compared to 2020, comprised of higher sales volumes (approximately 5.1%) and higher prices (approximately 3.7%). Fluctuations in currency exchange rates had a positive impact on our year-over-year consolidated sales comparison of approximately $23.9 million, meaning that if currency levels had remained constant year over year our 2021 sales would have been lower by this amount. On a market segment basis, the sales increase was most significant in non-corporate office market segments including retail, education and healthcare. See the segment results discussion below for additional information on market segments.
Consolidated net sales for 2020 compared with 2019
For 2020, our consolidated net sales decreased $239.8 million (17.9%) compared to 2019, primarily due to the impacts of COVID-19 resulting in lower sales volumes globally. Fluctuations in currency exchange rates had a positive impact on our year-over-year sales comparison of approximately $7.1 million, meaning that if currency levels had remained constant year over year, our 2020 sales would have been lower by this amount. On a market segment basis, the decrease in consolidated net sales was primarily in the corporate office, retail, hospitality and healthcare market segments. See the segment results discussion below for additional information on market segments.
Consolidated Cost and Expenses
The following table presents our consolidated cost of sales and selling, general and administrative (“SG&A”) expenses during the past three years:
Fiscal Year Percentage Change
(in thousands)
For 2021, our consolidated costs of sales increased $75.0 million (10.8%) compared to 2020, primarily due to higher net sales and the continued adverse impacts of COVID-19. Currency translation had a $16.2 million (2.3%) negative impact on the year-over-year comparison. In 2021, the impact of COVID-19 continued to challenge our global supply chain which contributed to higher cost of sales and lower gross profit margins — particularly in the United States. As a percentage of net sales, our consolidated costs of sales increased to 64.0% in 2021 versus 62.8% in 2020, primarily due to inflationary pressures on raw materials, freight and labor costs driving an approximately 3.4% increase in cost of sales as a percentage of net sales compared to the prior year. The increase in our consolidated cost of sales as a percentage of net sales was partially offset by productivity efficiencies during the year. Management believes it is reasonably likely the inflationary pressures experienced in 2021 will continue to some degree in 2022, particularly in the first half of 2022.
For 2020, our consolidated costs of sales decreased $117.4 million (14.5%) compared with 2019, primarily due to lower net sales. Currency translation had a $4.7 million (0.6%) negative impact on the year-over-year comparison. As a percentage of net sales, our consolidated costs of sales increased to 62.8% in 2020 versus 60.3% in 2019, primarily due to changes in fixed cost absorption driven by lower production volumes due to the impacts of COVID-19.
For 2021, our consolidated SG&A expenses decreased $8.9 million (2.7%) versus 2020. Currency translation had a $5.3 million (1.6%) negative impact on the year-over-year comparison. Consolidated SG&A expenses were lower in 2021 primarily due to (1) lower legal fees and other related costs of $12.6 million primarily due to the settlement of the SEC matter in the prior year period, and (2) lower severance costs of $9.1 million as the prior year included additional cost reduction initiatives implemented in response to COVID-19 as discussed above. These decreases were partially offset by higher labor costs of approximately $11.0 million due to higher performance-based compensation as target performance measures were achieved in 2021, partially offset by cost savings from prior year headcount reduction initiatives. As a percentage of net sales, SG&A expenses decreased to 27.0% in 2021 versus 30.2% in 2020.
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For 2020, our consolidated SG&A expenses decreased $55.9 million (14.4%) versus 2019. Currency translation had a $1.5 million (0.4%) negative impact on the year-over-year comparison. Consolidated SG&A expenses were lower in 2020 primarily due to (1) lower selling expenses of $54.8 million due to lower net sales, (2) $7.3 million of payroll expense credits related to COVID-19 wage support government assistance programs, and (3) $9.2 million lower performance-based compensation due to stock compensation forfeitures and target performance measures not being met due to COVID-19. These reductions were partially offset by $12.9 million of severance expenses due to voluntary and involuntary separations, and a $5.0 million fine to settle the SEC matter as referenced in Item 8 Note 18 - “Commitments and Contingencies”. As a percentage of sales, SG&A expenses increased to 30.2% in 2020 versus 29.0% in 2019, primarily due to lower net sales.
Restructuring Plans
On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involves a reduction of approximately 188 employees and the closure of the Company’s carpet tile manufacturing facility in Thailand, anticipated to occur at the end of the first quarter of 2022. As a result of this plan, the Company expects to incur pre-tax restructuring charges between the third quarter of 2021 and the fourth quarter of 2022 of approximately $4 million to $5 million. The expected charges are comprised of severance expenses ($2.2 million), retention bonuses ($0.5 million), and asset impairment and other charges ($2.0 million). The costs of retention bonuses of approximately $0.5 million will be recognized through the end of fiscal year 2022 as earned over the requisite service periods. Restructuring charges of $3.9 million comprised of severance and asset impairment charges were recognized during the third quarter of 2021.
The Thailand plant closure is expected to result in future cash expenditures of approximately $3 million to $4 million for payment of the employee severance and employee retention bonuses and other costs of the shutdown of the Thailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately $1.7 million. A portion of the annualized savings is expected to be realized on the consolidated statement of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023.
On December 23, 2019, the Company committed to a new restructuring plan to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved a reduction of approximately 105 employees and early termination of two office leases. As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0 million. The charge was comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million). The restructuring charge was expected to result in future cash expenditures of approximately $9.0 million for payment of these employee severance and lease exit costs. The Company expected the plan to yield annualized savings of approximately $6.0 million. A portion of the annualized savings was realized on the consolidated statement of operations in fiscal year 2020, with the remaining portion of the annualized savings realized in fiscal year 2021.
On December 29, 2018, the Company committed to a new restructuring plan in its continuing efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved (i) a restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of certain underutilized and impaired assets that included information technology assets and obsolete manufacturing equipment. The restructuring plan was completed at the end of fiscal year 2020.
Goodwill, Intangible Asset and Fixed Asset Impairment
During 2021, we recognized a fixed asset impairment charge of $4.4 million for projects that were abandoned. During 2020, we recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets. See Note 12 entitled “Goodwill and Intangible Assets” of Part II, Item 8 of this Annual Report for additional information. During 2020, we also recognized fixed asset impairment charges of $5.0 million primarily related to certain FLOR design center closures and other projects that were abandoned or indefinitely delayed. These charges are included in selling, general and administrative expenses in the consolidated statements of operations.
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Interest Expense
For 2021, our interest expense increased $0.5 million to $29.7 million, versus $29.2 million in 2020, primarily due to (1) higher fixed-rate interest expense on the Senior Notes debt, which replaced variable-rate debt under the Syndicated Credit Facility, and (2) $4.9 million of deferred losses recognized on terminated interest rate swaps that were reclassified from accumulated other comprehensive loss into interest expense during the year. These increases were partially offset by $60 million of lower outstanding borrowings under the Syndicated Credit Facility compared to 2020. Our average borrowing rate under the Syndicated Credit Facility was 1.91% for 2021 compared to 1.89% in 2020.
For 2020, our interest expense increased $3.6 million to $29.2 million, versus $25.6 million in 2019, primarily due to (1) a $3.6 million loss on extinguishment of debt to amend the Syndicated Credit Facility and repay a portion of outstanding indebtedness thereunder, and (2) a $3.9 million reclassification from accumulated other comprehensive loss for deferred interest rate swap losses due to the termination of interest rate swap contracts. These increases were partially offset by lower average interest rates on our borrowings under the Syndicated Credit Facility (our average borrowing rate for 2020 was 1.89% compared to 3.27% in 2019) and lower outstanding borrowings under the Syndicated Credit Facility compared to 2019.
Other Expense
Other expenses decreased $8.4 million during fiscal year 2021 compared to 2020, primarily due to a $4.2 million write-down of damaged raw material inventory in 2020, which resulted from a fire at a leased storage facility.
Tax
For the year ended January 2, 2022, the Company recorded income tax expense of $17.4 million on pre-tax income of $72.6 million resulting in an effective tax rate of 24.0%, as compared to an income tax benefit of $7.5 million on pre-tax loss of $79.4 million resulting in an effective tax rate of 9.4% for the year ended January 3, 2021. The effective tax rate for the year ended January 3, 2021 was significantly impacted by a non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions taken in prior years on discontinued operations. Excluding the impact of the non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, the effective tax rate was 14.1% for the year ended January 3, 2021. The increase in the effective tax rate for the year ended January 2, 2022 as compared to the year ended January 3, 2021 was primarily due to the one-time favorable impacts of amending prior year tax returns during the period ended January 3, 2021, an increase in non-deductible employee compensation and an increase in the valuation allowance on net operating loss and interest carryforwards. This increase was partially offset by a decrease in non-deductible business expenses.
For the year ended January 3, 2021, the Company recorded an income tax benefit of $7.5 million on pre-tax loss of $79.4 million resulting in an effective tax rate of 9.4%. The effective tax rate for this period was significantly impacted by a non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions taken in prior years on discontinued operations. Excluding the impact of the non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, the effective tax rate was 14.1% for 2020 compared to 22.2% in 2019. The decrease in the effective tax rate, excluding the goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, was primarily due to the favorable impacts of amending prior year tax returns, retroactive election of the GILTI High-tax Exclusion in the 2019 tax return and reduction in non-deductible employee compensation. This decrease was partially offset by the non-deductible SEC fine.
Segment Results
As discussed above, in fiscal year 2021 the Company determined that it has two operating and reportable segments – AMS and EAAA. Segment information presented below for fiscal years 2020 and 2019 have been restated to conform to the new reportable segment structure. See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.
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AMS Segment - Net Sales and Adjusted Operating Income (“AOI”)
The following table presents AMS segment net sales and AOI for the last three fiscal years:
Fiscal Year Percentage Change
(in thousands)
(1)Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to intangible asset impairment charges, restructuring, asset impairment, severance and other costs. See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.
AMS segment net sales for 2021 compared with 2020
During 2021, net sales in AMS increased 9.7% versus 2020, comprised of higher sales volumes and higher prices. On a market segment basis, the AMS sales increase was most significant in non-corporate office market segments including healthcare (up 19.1%), retail (up 19.1%) and education (up 18.3%). Sales in the corporate office market increased 6.8% in 2021 compared to 2020. These increases were partially offset by decreases in the hospitality (down 38.3%) and public buildings (down 20%) market segments.
AMS segment net sales for 2020 compared with 2019
During 2020, net sales in AMS decreased 21.6% versus the comparable period in 2019. The AMS sales decrease in 2020 was due primarily to the impacts of COVID-19 and lower carpet tile sales volumes. On a market segment basis, the sales decrease in the Americas was most significant in the corporate office (down 33.8%), retail (down 34.8%), healthcare (down 15.2%) and education (down 8.3%) market segments, partially offset by increases in the residential living (up 23.8%) and public buildings (up 8.2%) market segments.
AMS AOI for 2021 compared with 2020
AOI in AMS decreased 4.6% during 2021 compared to 2020 primarily due to higher cost of sales as a result of inflationary pressures on raw materials, freight and labor costs driving an approximately 3.0% increase in cost of sales as a percentage of net sales compared to the prior year. The increase in cost of sales as a percentage of net sales was partially offset by productivity efficiencies during the year. AOI as a percentage of net sales for fiscal 2021 decreased to 13.1% compared to 15.0% in 2020 due to the global supply chain pressures discussed above.
AMS AOI for 2020 compared with 2019
AOI in AMS decreased 26.3% during 2020 compared to 2019 primarily due to the impacts of COVID-19 which resulted in lower sales volumes in 2020. The decrease in AOI was also partially due to costs related to the closure of the FLOR stores in 2020.
EAAA Segment - Net Sales and AOI
The following table presents EAAA segment net sales and AOI for the last three fiscal years:
Fiscal Year Percentage Change
(in thousands)
(1)Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to goodwill and intangible asset impairment charges, purchase accounting amortization, restructuring, asset impairment, severance and other costs. See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.
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EAAA segment net sales for 2021 compared with 2020
During 2021, net sales in EAAA increased 7.7% versus 2020, comprised of higher sales volumes and higher prices. Currency fluctuations had an approximately $21.5 million (4.2%) positive impact on EAAA’s 2021 sales compared to 2020 due to the strengthening of the Euro, British Pound sterling, Australian dollar and the Chinese Renminbi against the U.S. dollar. On a market segment basis, the EAAA sales increase was most significant in non-corporate office market segments including retail (up 53.8%), public buildings (up 30.2%) and healthcare (up 19.0%). Sales in the corporate office market increased 2.4% in 2021 compared to 2020. These increases were partially offset by a decrease in the education (down 2.6%) market segment.
EAAA segment net sales for 2020 compared with 2019
During 2020, net sales in EAAA decreased 13.0% versus 2019, due primarily to the impacts of COVID-19 and lower carpet tile sales volumes. Currency fluctuations had an approximately $7.3 million (1.3%) positive impact on EAAA’s fiscal year 2020 sales compared with 2019, due primarily to the strengthening of the Euro and British Pound sterling against the U.S. dollar. On a market segment basis, the EAAA sales decrease was most significant in the hospitality (down 40.3%), corporate office (down 19.1%), public buildings (down 16.0%) and retail (down 12.9%) market segments.
EAAA AOI for 2021 compared with 2020
AOI in EAAA increased 74.1% during 2021 versus 2020. Currency fluctuations had an approximately $3.1 million (6.4%) positive impact on AOI for 2021. SG&A expenses as a percentage of net sales decreased to 23.0% in 2021 compared to 24.6% in 2020 due to savings from cost reduction initiatives implemented in the prior year. AOI as a percentage of net sales increased to 6.8% in 2021 compared to 4.2% in 2020, due primarily to higher sales as discussed above.
EAAA AOI for 2020 compared with 2019
AOI in EAAA decreased 25.8% during 2020 versus 2019, primarily due to the impacts of COVID-19 which resulted in lower sales volumes in 2020. Currency fluctuations had an approximately $0.9 million (1.4%) positive impact on AOI for 2020.
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 SG&A expenses, anticipated capital expenditures, interest expense 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 Syndicated Credit Facility and Senior Notes discussed below. We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months and we expect to generate sufficient cash to meet our long-term obligations.
Below is a summary of our material cash requirements for future periods:
Payments Due by Period
Total PaymentsDue Less than1 year 1-3 years 3-5 years More than5 years
(in thousands)
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Historically, we use more cash in the first half of the fiscal year, as we pay insurance premiums, taxes and incentive compensation and build up inventory in preparation for the holiday/vacation season of our international operations. As outlined in the table above, we have approximately $79.2 million in material contractual cash obligations due by the end of fiscal year 2022, which includes, among other things, scheduled debt repayments under the Syndicated Credit Facility, pension contributions, interest payments on our debt and lease commitments. Our long-term debt obligations include the contractually scheduled principal repayment of our term loan borrowings under the Syndicated Credit Facility, which matures in 2025, and $300 million on our Senior Notes due in 2028. Operating and finance lease obligations consist of undiscounted lease payments due over the term of the lease. Expected interest payments are those associated with borrowings under the Syndicated Credit Facility and Senior Notes consistent with our contractually scheduled principal repayments. Our purchase obligations are for non-cancellable agreements primarily for raw material purchases and capital expenditures. Our current and long-term pension obligations include contributions and expected benefit payments to be paid by the Company related to certain defined benefit pension plans and excludes the expected benefit payments for two of our funded foreign defined benefit plans as these obligations will be paid by the plans over the next ten years.
Based on current interest rates and debt levels, we expect our aggregate interest expense for 2022 to be between $27 million and $28 million. We estimate aggregate capital expenditures in 2022 to be approximately $30 million, although we are not committed to these amounts.
Liquidity
At January 2, 2022, we had $97.3 million in cash. Approximately $1.7 million of this cash was located in the U.S., and the remaining $95.6 million was located outside of the U.S. The cash located outside of the U.S. is indefinitely reinvested in the respective jurisdictions (except as identified below). We believe that our strategic plans and business needs, particularly for working capital needs and capital expenditure requirements in Europe, Asia, and Australia, support our assertion that a portion of our cash in foreign locations will be reinvested and remittance will be postponed indefinitely. Of the $95.6 million of cash in foreign jurisdictions, approximately $12.9 million represents earnings which we have determined are not permanently reinvested, and as such we have provided for foreign withholding and U.S. state income taxes on these amounts in accordance with applicable accounting standards.
As of January 2, 2022, we had $225.1 million of borrowings outstanding under our Syndicated Credit Facility, of which $217.6 million were term loan borrowings and $7.5 million were revolving loan borrowings. Additionally, $1.6 million in letters of credit were outstanding under the Syndicated Credit Facility at the end of fiscal year 2021. As of January 2, 2022, we had additional borrowing capacity of $290.9 million under the Syndicated Credit Facility and $6.0 million of additional borrowing capacity under our other credit facilities in place at other non-U.S. subsidiaries.
On November 17, 2020, we issued $300 million aggregate principal amount of 5.50% Senior Notes due 2028 (the “Senior Notes”), which are discussed further below. As of January 2, 2022, we had $300.0 million of Senior Notes outstanding.
It is important for you to consider that we have a significant amount of indebtedness. Our Syndicated Credit Facility matures in November of 2025 and the Senior Notes, as discussed below, mature in December 2028. 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.
It is also important for you to consider that borrowings under our Syndicated Credit Facility comprise a substantial portion of our indebtedness, and that these borrowings are based on variable interest rates (as described below) that expose the Company to the risk that short-term interest rates may increase. During 2020, we entered into fixed rate Senior Notes (as described below) which reduced the amount of indebtedness subject to interest rate risk. In the fourth quarter of 2020, we terminated our interest rate swaps that were previously being used to fix a portion of our variable rate debt. For information regarding the current variable interest rates of these borrowings, the potential impact on our interest expense from hypothetical increases in short term interest rates, and the interest rate swap transaction, please see the discussion in Item 7A of this Report.
We are not a party to any material off-balance sheet arrangements.
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Analysis of Cash Flows
The following table presents a summary of cash flows for fiscal years 2021, 2020 and 2019:
Fiscal Year
(in thousands)
Net cash provided by (used in):
Effect of exchange rate changes on cash (3,561) 7,086 (557)
We ended 2021 with $97.3 million in cash, a decrease of $5.8 million during the year. The decrease was primarily due to the following:
•Cash provided by operating activities was $86.7 million for 2021, which represents a decrease of $32.4 million compared to 2020. The decrease was primarily due to a greater use of cash for working capital during 2021. Specifically, higher accounts receivable and inventories primarily attributable to increased customer demand in 2021 were partially offset by increases in accounts payable and accrued expenses that contributed positively to the change in working capital. Lower variable compensation payouts in 2021 related to 2020 performance had a positive impact on cash provided by operating activities, partially offsetting the decrease from changes in working capital.
•Cash used in investing activities was $28.1 million for 2021, which represents a decrease of $33.6 million from 2020. The decrease was primarily due to lower capital expenditures compared to 2020 as two major capital projects were substantially completed in the prior year.
•Cash used in financing activities was $60.9 million for 2021, which represents an increase of $18.1 million compared to 2020. In 2021, we repaid approximately $60 million in term loan borrowings which contributed to the increase in cash used in financing activities (compared with 2020, when repayments on term loan borrowings were largely funded with the proceeds from the issuance of the $300 million Senior Notes).
We ended 2020 with $103.1 million in cash, an increase of $21.8 million during the year. The increase was primarily due to the following:
•Cash provided by operating activities was $119.1 million for 2020, which represents a decrease of $22.7 million compared to 2019. The decrease was primarily due to lower net income due to the impacts of COVID-19, offset by working capital sources of cash, specifically a decrease in accounts receivable of $40.1 million, lower inventories of $38.7 million and lower prepaid and other expenses of $13.0 million. These sources of cash were offset by a $60.9 million use of cash in accounts payable and accrued expenses to fund normal operations.
•Cash used in investing activities was $61.7 million for 2020, which represents a decrease of $12.5 million from 2019. The decrease was primarily due to lower capital expenditures compared to 2019 due to fewer project demands and lower capital investment as a result of the impacts of COVID-19.
•Cash used in financing activities was $42.7 million for 2020, which represents a decrease of $24.0 million compared to 2019. Financing activities for 2020 include higher loan borrowings of $320.0 million primarily due to the issuance of $300 million of Senior Notes, offset by (1) higher repayments of revolving and term loan borrowings as the proceeds from the issuance of the Senior Notes were used to repay $290.7 million of outstanding term and revolving loan borrowings under the Syndicated Credit Facility, and (2) a decrease in dividends paid of $9.8 million.
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We ended 2019 with $81.3 million in cash, an increase of $0.3 million during the year. The most significant uses of cash in 2019 were (1) repayments on our Syndicated Credit Facility of $111.7 million offset by borrowings of $90 million, (2) capital expenditures of $74.6 million, (3) $25.2 million to repurchase 1.6 million shares of the Company’s outstanding common stock, and (3) dividend payments of $15.4 million. These uses were offset by cash flow from operations of $141.8 million, primarily generated from (1) net income of $79.2 million, (2) $19.4 million for increases in accounts payable and accrued expenses, and (3) $2.6 million due to a decrease in inventories. These sources of cash were reduced by working capital uses of (1) $9.7 million due to increases in prepaid expenses, and (2) $0.9 million due to increases in accounts receivable.
We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future.
Syndicated Credit Facility
In the normal course of business, in addition to using our available cash, we fund our operations by borrowing under our Syndicated Credit Facility (the “Facility”). At January 2, 2022, the Facility provided the Company and certain of its subsidiaries with a multicurrency revolving loan facility up to $300 million, as well as other U.S. denominated and multicurrency term loans. Material terms under the Facility are discussed below. For additional information please see Note 9 entitled “Long-Term Debt” in Item 8 of this Report.
Interest RatesandFees
Under the Facility, interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 2.00%, depending on the Company’s consolidated net leverage ratio (as defined in the Facility agreement) as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 3.00% over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee ranging from 0.20% to 0.40% per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.
LIBOR Transition
The U.K. Financial Conduct Authority (the “FCA”), which regulates the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. This announcement indicated that the continuation of LIBOR on the current basis was not guaranteed after 2021, and LIBOR may be discontinued or modified. Additionally, certain U.S. dollar LIBOR rates will be discontinued by June 2023. The Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. We have exposure to LIBOR-based financial instruments under the Facility, which has variable (or floating) interest rates based on LIBOR. The Facility allows for the use of an alternative benchmark rate if LIBOR is no longer available.
On December 9, 2021, we entered into the fourth amendment to the Facility to replace the LIBOR interest rate benchmark applicable to loans and other extensions of credit under the Facility denominated in British Pounds sterling and Euros with specified successor benchmark rates, to amend certain provisions related to the implementation, use and administration of successor benchmark rates, and to set forth certain borrowing requirements in the event LIBOR and other successor rates become unavailable.
Covenants
The Facility contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants. Among other things, these covenants limit our ability to:
•create or incur liens on assets;
•make acquisitions of or investments in businesses (in excess of certain specified amounts);
•engage in any material line of business substantially different from the Company’s current lines of business;
•incur indebtedness or contingent obligations;
•sell or dispose of assets (in excess of certain specified amounts);
•pay dividends or repurchase our stock (in excess of certain specified amounts);
•repay other indebtedness prior to maturity unless we meet certain conditions; and
•enter into sale and leaseback transactions.
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The Facility also requires us to remain in compliance with the following financial covenants as of the end of each fiscal quarter, based on our consolidated results for the year then ended:
•Consolidated Secured Net Leverage Ratio: Must be no greater than 3.00:1.00.
•Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
Events of Default
If we breach or fail to perform any of the affirmative or negative covenants under the 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 $20 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’ Administrative 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
Pursuant to a Second Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets of Interface, Inc. and our 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’ Administrative 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 January 2, 2022, we had outstanding $217.6 million of term loan borrowing and $7.5 million of revolving loan borrowings under the Facility, and had $1.6 million in letters of credit outstanding under the Facility. As of January 2, 2022, the weighted average interest rate on borrowings outstanding under the Facility was 1.91%.
Under the Facility, we are required to make quarterly amortization payments of the term loan borrowings. The amortization payments are due on the last day of the calendar quarter.
We are currently in compliance with all covenants under the Facility and anticipate that we will remain in compliance with the covenants for the foreseeable future.
In the fourth quarter of 2020, we terminated our interest rate swaps and paid approximately $13 million to terminate the swap agreements. For additional information on interest rates, please see Item 7A and Note 9 entitled “Long-Term Debt” in Item 8 of this Report.
Senior Notes
On November 17, 2020, the Company issued $300 million aggregate principal amount of 5.50% Senior Notes due 2028. The Senior Notes bear an interest rate at 5.50% per annum and mature on December 1, 2028. Interest is paid semi-annually on June 1 and December 1 of each year, beginning on June 1, 2021. The Company used the net proceeds to repay $269.7 million of outstanding term loan borrowings and $21.0 million of outstanding revolving loan borrowings under the Facility. In connection with the issuance of the Senior Notes, the Company recorded $5.7 million of debt issuance costs. These debt issuance costs were recorded as a reduction of long-term debt in the consolidated balance sheets and will be amortized over the life of the outstanding debt.
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The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility. The Company’s foreign subsidiaries and certain non-material domestic subsidiaries are considered non-guarantors. Net sales for the non-guarantor subsidiaries were approximately $594 million for fiscal year 2021 and $548 million for fiscal year 2020. Total indebtedness of the non-guarantor subsidiaries was approximately $45 million as of January 2, 2022, and $88 million as of January 3, 2021. The Senior Notes can be redeemed on or after December 1, 2023, at specified redemption prices. See Note 9 entitled “Long-Term Debt” in Item 8 of this report for additional information.
Forward-Looking Statement on Impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full fiscal year 2022 results and beyond are uncertain. We believe the most significant elements of uncertainty are (1) the intensity and duration of the impact on construction, renovation, and remodeling; (2) corporate, government, and consumer spending levels and sentiment; (3) the ability of our sales channels, supply chain, manufacturing, and distribution partners to continue operating through disruptions; and (4) the severity of global supply chain disruptions and their effects on inflation, labor shortages, raw material shortages, and other factors that disrupt our supply chain and manufacturing facilities. Any or all of these factors could negatively impact our financial position, results of operations, cash flows, and outlook. As the impact of the COVID-19 pandemic continues to affect companies with global operations, specifically as it relates to the global supply chain, we anticipate that, at a minimum, our business and results in the first half of 2022 will continue to be affected, and the timeline and pace of recovery is uncertain.
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company’s cash flows from operations can be affected by numerous factors including the uncertainty of COVID-19 and its impact on global operations, raw material availability and cost, demand for our products, and other factors described in “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
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Critical Accounting Policies and Estimates
The policies and estimates 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.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment at the asset group level 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. Management’s judgement in estimating the undiscounted cash flows based on market conditions and trends, and other industry specific metrics used in determining the fair value is subject to uncertainty. 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 applicable accounting standards 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 applicable accounting standards. 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 evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-term business forecasts to provide insight. Further, our global business portfolio gives us the opportunity to employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of January 2, 2022, and January 3, 2021, we had state net operating loss carryforwards of $153.0 million and $142.7 million, respectively. Certain of these state net operating loss carryforwards are reserved with a valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future. The remaining year-end 2021 amounts are expected to be fully recoverable within the applicable statutory expiration periods. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.
Goodwill. Prior to the adoption of Accounting Standards Update (“ASU”) 2017-04 “Intangibles-Goodwill and Other”, we tested goodwill for impairment at least annually using a two-step approach. In the first step of this approach, we prepared valuations of reporting units, using both a market comparable approach and an income approach, 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 expected future performance was considered. If impairment was indicated in this first step of the test, a step two valuation approach was performed. The step two valuation approach compared the implied fair value of goodwill to the book value of goodwill. The implied fair value of goodwill was determined by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit, including both recognized and unrecognized intangible assets, in the same manner as goodwill is determined in a business combination under applicable accounting standards. After completion of this step two test, a loss was 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.
On December 30, 2019, the Company adopted ASU 2017-04, “Intangibles - Goodwill and Other,” that provides for the elimination of Step 2 from the goodwill impairment test described above. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations.
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In accordance with applicable accounting standards, the Company tests goodwill for impairment annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Management’s assessment of whether a triggering event has occurred and the development of any forecasts to be used in the fair value determination are subject to judgement. During the fourth quarters of 2021, 2020 and 2019, we performed the annual goodwill impairment test. We perform this test at the reporting unit level. For our reporting units which carried a goodwill balance as of January 2, 2022, no impairment of goodwill was indicated. As of January 2, 2022, if our estimates of the fair value of our reporting units were 10% lower, we believe no additional goodwill impairment would have existed. However, the full extent of the future impact of COVID-19 on the Company’s operations is uncertain, and a prolonged COVID-19 pandemic could result in additional impairment of 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 net realizable value. We write down inventories for the difference between the carrying value of the inventories and their net realizable value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
Management’s judgement in estimating our reserves for inventory obsolescence is based on continuous examination of 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 January 2, 2022 and January 3, 2021, was $27.1 million and $35.0 million, respectively. To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our 2021 net income would be higher or lower by approximately $2.1 million, on an after-tax basis.
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. The table below represents the changes to the projected benefit obligation as a result of changes in discount rate assumptions:
Foreign Defined Benefit Plans Increase (Decrease) inProjected Benefit Obligation
(in millions)
1% increase in actuarial assumption for discount rate $ (47.1)
1% decrease in actuarial assumption for discount rate 60.2
(in millions)
1% increase in actuarial assumption for discount rate $ (3.0)
1% decrease in actuarial assumption for discount rate 3.6
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Allowances for Expected Credit Losses. We maintain allowances for expected credit losses resulting from the inability of customers to make required payments. Estimating the amount of future expected losses requires us to consider historical losses from our customers, as well as current market conditions and future forecasts of our customers’ ability to make payments for goods and services. 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 expected credit losses on January 2, 2022 and January 3, 2021, was $5.0 million and $6.6 million, respectively. To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2021 net income would be higher or lower by approximately $0.4 million, on an after-tax basis, depending on whether the actual collectability 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. Similar limited warranties are provided on certain attributes of our rubber and LVT products, typically for a period of 5 to 15 years. 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 future expectations and periodically adjust these provisions to reflect changes in actual experience. Our warranty and sales allowance reserve on January 2, 2022 and January 3, 2021, was $2.7 million and $3.2 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 2021 net income would be higher or lower by approximately $0.2 million, on an after-tax basis, depending on whether the actual expense is lower or higher, respectively, than the estimated provision.
Recent Accounting Pronouncements
Please see Note 2 entitled “Recent Accounting Pronouncements” in Item 8 of this Report for discussion of these items.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 we deem appropriate, through the use of derivative financial instruments.
We have employed 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. There were no active derivative instruments as of January 2, 2022.
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 monitors interest rates and has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters, subject to approval by our Board of Directors. In 2017 and 2019, the Company entered into interest rate swap transactions with regard to a portion of its term loan debt. The Company’s interest rate swaps were designated and qualified as cash flow hedges of forecasted interest payments. Both of the Company’s interest rate swaps were terminated in the fourth quarter of 2020.
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, Northern Ireland, the Netherlands, Germany, China, Thailand and Australia, and sell our products in more than 100 countries. As a result, our financial results have been, and 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 and Chinese Renminbi. 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. To mitigate the impact of fluctuations in foreign currency exchange rates, we may enter into derivative transactions from time to time, such as forward contracts and foreign currency options. There were no active foreign currency derivative instruments as of January 2, 2022.
During 2021, we recognized a $40.1 million increase in our accumulated other comprehensive loss – foreign currency translation adjustment account compared with January 3, 2021, because of the strengthening of the Euro, British Pound sterling, Australian dollar, and Chinese Renminbi against the U.S. dollar in 2021.
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 January 2, 2022. 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.
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Interest Rate Risk
As discussed above, our Syndicated Credit Facility is comprised of a combination of term loan and revolving loan borrowings. The following table summarizes our market risks associated with our variable rate debt obligations under the Syndicated Credit Facility and fixed rate Senior Notes debt as of January 2, 2022. For debt obligations, the table presents principal cash flows by year of maturity.
(in thousands)
Long-term Debt:
Our weighted average interest rate for our outstanding borrowings under the Syndicated Credit Facility as of January 2, 2022 and January 3, 2021 was 1.91% and 1.89%, respectively.
An increase in our effective interest rate of 1% on our variable rate debt would increase annual interest expense by approximately $2.3 million. We will continue to review our exposure to interest rate fluctuations and evaluate whether we should continue to manage such exposures through any future interest rate swap transactions. The carrying value of the Company’s borrowings under our Syndicated Credit Facility approximates fair value as the Facility bears variable interest rates that are similar to existing market rates. Based on a hypothetical immediate 100 basis point increase in interest rates, with all other variables held constant, the fair value of our fixed rate long-term debt would be impacted by a net decrease of $10.8 million. Conversely, a 100 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $6.0 million.
Foreign Currency Exchange Rate Risk
As of January 2, 2022, 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 short-term financial instruments (primarily cash, accounts receivable and accounts payable) of approximately $11.3 million or an increase in the fair value of our financial instruments of approximately $13.8 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FISCAL YEAR
Restructuring, asset impairment and other charges 3,621 (4,626) 12,947
Goodwill and intangible asset impairment charge — 121,258 —
Earnings (loss) per share – basic $ 0.94 $ (1.23) $ 1.34
Earnings (loss) per share – diluted $ 0.94 $ (1.23) $ 1.34
See accompanying notes to consolidated financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)
(in thousands)
FISCAL YEAR
Other comprehensive income (loss), after tax:
See accompanying notes to consolidated financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
END OF FISCAL YEAR
ASSETS
Current assets
Prepaid expenses and other current assets 38,320 23,747
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of operating lease liabilities 14,588 13,555
Commitments and contingencies
Shareholders’ equity
Accumulated other comprehensive loss – cash flow hedge (2,722) (6,190)
Accumulated other comprehensive loss – pension liability (53,888) (69,288)
See accompanying notes to consolidated financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FISCAL YEAR
OPERATING ACTIVITIES:
Stock compensation amortization expense (benefit) 5,467 (502) 8,691
Loss on disposal of fixed assets 4,427 4,996 —
Goodwill and intangible asset impairment — 121,258 —
Working capital changes:
INVESTING ACTIVITIES:
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Notes due 2028 — 300,000 —
Repurchase of common stock — — (25,154)
Tax withholding payments for share-based compensation (193) (1,511) (3,278)
Debt issuance costs (36) (7,896) —
Payments for debt extinguishment costs — (660) —
Proceeds from issuance of common stock — 93 60
Effect of exchange rate changes on cash (3,561) 7,086 (557)
CASH AND CASH EQUIVALENTS:
See accompanying notes to consolidated financial statements.
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INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Interface is a global flooring company specializing in carbon neutral carpet tile and resilient flooring, including luxury vinyl tile (“LVT”), vinyl sheet, and nora® rubber flooring. The Company manufactures modular carpet focusing on the high quality, designer-oriented sector of the market, sources resilient flooring including LVT from third parties and focuses on the same sector of the market, and provides specialized carpet replacement, installation and maintenance services. The Company also manufactures and sells resilient rubber flooring.
In the first quarter of 2021, the Company largely completed its integration of the nora acquisition, and integration of its European and Asia-Pacific commercial areas, and determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas. See Note 20 entitled “Segment Information” for additional information.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All of our subsidiaries are wholly-owned, and we are not a party to any joint venture, partnership or other variable interest entity that would potentially qualify for consolidation. All material intercompany accounts and transactions are eliminated.
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, 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, plant and equipment. Actual results could vary from these estimates.
Risks and Uncertainties
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and many companies have experienced disruptions in their operations. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that, except for the impact to our gross margins and our global supply chain in 2021, the 2020 goodwill and intangible asset impairment discussed in Note 12 entitled “Goodwill and Intangible Assets,” the decline in 2020 revenue, and its consequent impacts on production volume, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at January 2, 2022. The Company’s Syndicated Credit Facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum net debt to EBITDA ratio, as defined by the credit facility agreement. On July 15, 2020, November 17, 2020, and December 9, 2021, the Company amended its Syndicated Credit Facility; see Note 9 entitled “Long-Term Debt” for additional information. The full extent of the future impact of COVID-19 on the Company’s operations is uncertain. A prolonged COVID-19 pandemic may continue to have a material adverse impact on our operations, financial condition, and supply chains. It may negatively impact our ability to collect outstanding receivables, manage inventory, and service customers. The impact of COVID-19 could result in additional impairment losses related to goodwill, intangible assets, and property, plant and equipment.
As the virus spreads through communities, it could impact the physical health, mental health, and productivity of our workforce as many of them are required to shelter in place and work from home for prolonged periods of time, and it could also impact our ability to reach our customers and collaborate with them as they are required to shelter in place and work from home for prolonged periods of time. The COVID-19 pandemic is having broad and negative implications on the global economy, which affects the size and timing of our customers’ capital budgets, and could result in delays or terminations of new and existing renovation projects, remodeling projects, new construction projects, and other projects where our products are used.
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COVID-19 Impact
We continue to monitor our operations and have implemented various programs to mitigate the effects of COVID-19 on our business including reductions in employee headcount, labor costs, marketing expenses, consulting spend, travel costs, capital expenditures, and other cost reduction or avoidance initiatives. Government grants and payroll protection programs have been available globally to provide assistance to companies impacted by the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted in the United States (see Note 17 entitled “Income Taxes” for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”) have provided benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments. The NOW Program has provided eligible companies with reimbursement of labor costs as an incentive to retain employees on the payroll.
During fiscal year 2020, the Company received reimbursements under the NOW program and recognized a reduction in payroll costs of approximately $7.3 million, which were recorded as a $6.1 million reduction of selling, general and administrative expenses and a $1.2 million reduction of cost of sales in the consolidated statements of operations. We applied a grant analogy method to recognize the reimbursements under the NOW program as the Company believes it is probable that the benefits received will not be repaid.
Revenue Recognition
Revenue from contracts with customers is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
Revenue Recognized from Contracts with Customers
Contracts with customers typically take the form of invoices for purchase of materials from the Company. Customer payment terms vary by region and are typically less than 60 days. The performance obligation is the delivery of these materials to the customer’s control. During 2021, 2020 and 2019, approximately 98% of the Company’s total revenue was produced from the sale of carpet, resilient flooring, rubber flooring, and related products (TacTiles installation materials, etc.) and the revenue from sales of these products is recognized upon shipment, or in certain cases, upon delivery to the customer. The transaction price for these sales is readily identifiable. The remaining revenue for 2021, 2020 and 2019 of 2% was generated from the installation of carpet and other flooring-related material.
The remaining revenue generated by the Company is for contracts to sell and install carpet and related products at customer locations. For projects underway, the Company recognized installation revenue over time based on a project cost input method as the customer simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a separate performance obligation from the sale of carpet. The majority of these projects are completed within five days of the start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring material and installation services and is specifically identified in the contract with the customer.
The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have similar characteristics, and it is reasonable to expect that the effects from applying this approach are not materially different from applying the accounting standard to individual contracts.
The Company does not have any other significant revenue streams outside of these sales of flooring material, and the sale and installation of flooring material, as described above.
The Company does not record taxes collected from customers and remitted to governmental authorities within revenues. The Company records such taxes collected as a liability on our consolidated balance sheets.
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Performance Obligations
As noted above, the Company primarily generates revenue through the sale of flooring material to end users either upon shipment or upon arrival of the product at its destination. In these instances, there typically is no other obligation to the customers other than the delivery of flooring material with the exception of warranty. The Company does offer a warranty to its customers which guarantees certain on-floor performance characteristics and warrants against manufacturing defects. The warranty is not a service warranty, and there is no ability to separate the warranty obligation from the sale of the flooring or purchase them separately. The Company’s incidence of warranty claims is extremely low, with less than 0.5% of revenue in claims on an annual basis for the last three fiscal years. Given the nature of the warranty as well as the financial impact, the Company has determined that there is no need to identify this warranty as a separate performance obligation, and the Company accounts for warranty on an accrual basis.
For the Company’s installation business, the sales of carpet and other flooring materials and installation services are separate deliverables which under the revenue recognition requirements should be characterized as separate performance obligations. The nature of the installation projects is such that the vast majority – an amount in excess of 85% of these installation projects – are completed in less than five days. The Company’s largest installation customers are retail, education and corporate customers, and these are on a project-by-project basis and are short-term installations. The Company has evaluated these projects at the end of each reporting period and recorded revenue in accordance with the accounting standards for projects which were underway as of the end of 2021, 2020 and 2019.
Costs to Obtain Contracts
The Company pays sales commissions to many of its sales personnel based upon their selling activity. These are direct costs associated with obtaining the contracts and are expensed as the revenue is earned. As these commissions become payable upon shipment (or in certain cases delivery) of product, the commission is earned as the revenue is recognized. There are no other material costs the Company incurs as part of obtaining the sales contract.
Shipping and Handling
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 selling, general and administrative (“SG&A”) expenses and cost of sales in the consolidated statements of operations. Research and development expense was $19.3 million, $18.6 million, and $17.8 million for the years 2021, 2020 and 2019, respectively.
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. Significant concentrations of credit risk may arise from the Company’s cash maintained at various banks, as from time to time cash balances may exceed the FDIC limits. The Company did not hold any significant amounts of cash equivalents and short-term investments at January 2, 2022 and January 3, 2021.
Cash payments for interest amounted to approximately $22.9 million, $32.0 million, and $22.7 million for the years 2021, 2020 and 2019, respectively. 2020 includes cash payments of $12.5 million to terminate the Company’s interest rate swap liabilities. Income tax payments amounted to approximately $23.1 million, $19.3 million and $34.8 million for the years 2021, 2020 and 2019, respectively. During the years 2021, 2020 and 2019, the Company received income tax refunds of $5.4 million, $7.5 million and $1.9 million, respectively.
Allowances for Expected Credit Losses
The Company maintains allowances for expected credit losses for estimated losses resulting from the inability of customers to make required payments. Estimating the amount of future expected losses requires the Company to consider historical losses from our customers, as well as current market conditions and future forecasts of our customers’ ability to make payments for goods and services. 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.
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Inventories
Inventories are carried at the lower of cost (standards approximating the first-in, first-out method) or net realizable value. 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 in the accompanying consolidated statements of operations, or, if the 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 SG&A expenses in the accompanying consolidated statements of operations.
Leases
The Company records a right-of-use asset and lease liability for operating and finance leases once a contract that contains a lease is executed and the Company has the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability is the Company’s incremental borrowing rate, which is based on the estimated rate for a fully collateralized borrowing that fully amortizes over a similar lease term at the commencement date and for the applicable geographical region.
The Company made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use asset and lease liability recorded on the consolidated balance sheets. These leases primarily represent month-to-month operating leases for office equipment where we were reasonably certain that we would not elect an option to extend the lease. The Company also made an accounting policy election not to separate lease and non-lease components for all asset classes and accounts for the lease payments as a single component.
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 on qualifying expenditures of approximately $0.5 million, $1.9 million, and $2.1 million for the fiscal years 2021, 2020 and 2019, respectively. Depreciation expense amounted to approximately $41.9 million, $42.4 million, and $41.5 million for the years 2021, 2020 and 2019 respectively.
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.
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Goodwill and Intangible Assets
In accordance with applicable accounting standards, the Company tests goodwill for impairment annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the fourth quarters of 2021, 2020 and 2019, the Company performed the annual goodwill impairment test. In addition, during the first quarter of 2020—primarily due to anticipated impacts of the COVID-19 pandemic—the Company determined that there were indicators of impairment, and the Company proceeded with a goodwill impairment test as of the end of the first quarter. The Company tests goodwill at the reporting unit level, which is one level below the operating segment level. In performing the impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying 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. See Note 12 entitled “Goodwill and Intangible Assets” for additional information.
Trademark and tradename intangible assets acquired in connection with the nora acquisition are not subject to amortization, but are tested for impairment annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. During the first quarter of 2020—primarily due to anticipated impacts of the COVID-19 pandemic—the Company determined that there were indicators of impairment, and the Company proceeded with an impairment test as of the end of the first quarter. The Company prepared valuations of the intangible assets using the present value of cash flows under the relief from royalty method, which were compared to the carrying value of intangible assets to determine whether any impairment existed. See Note 12 entitled “Goodwill and Intangible Assets” for additional information.
The Company’s other intangible assets consist of developed technology that is amortized on a straight-line basis over the estimated useful life of 7 years.
Product Warranties
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. Similar limited warranties are provided on certain attributes of its rubber and LVT products, typically for a period of 5 to 15 years. 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 future expectations and periodically adjusts these provisions to reflect changes in actual experience. Warranty and sales allowance reserves amounted to $2.7 million and $3.2 million as of January 2, 2022 and January 3, 2021, respectively, and are included in “Accrued Expenses” in the accompanying consolidated balance sheets.
Income Taxes
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.
For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. For further information, see Note 17 entitled “Income Taxes.”
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Fair Values of Financial Instruments
Fair values of cash and cash equivalents 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 and classified as level 2 within the fair value hierarchy. See Note 5 entitled “Fair Value of Financial Instruments” for further information.
Translation of Foreign Currencies
The financial position and results of operations of the Company’s foreign subsidiaries are measured 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 reclassified from equity to income. Foreign exchange translation gains (losses) were $(40.1) million, $52.8 million, and $(11.7) million for the years 2021, 2020 and 2019, respectively.
Earnings per Share
Basic earnings per share is computed based on the average number of common shares outstanding, including participating securities. Diluted earnings 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. See Note 15 entitled “Earnings Per Share” for additional information.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 14 entitled “Shareholders' Equity.”
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. However, there were no stock options granted in 2021, 2020 or 2019.
The Company recognizes expense related to its restricted stock and performance share grants based on the grant date fair value of the shares awarded, as determined by its market price at date of grant.
Derivative Financial Instruments
Derivatives are recognized on the balance sheet at fair value. For derivatives that meet the criteria as designated cash flow hedges, the changes in the fair value of the derivative are recognized in other comprehensive income (or other comprehensive loss) until the hedged item is recognized in earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings each period. Derivative liabilities are recorded in accrued expenses and derivative assets are recorded in other current assets in the consolidated balance sheets. Cash flows from all derivative instruments, including those not designated as hedging instruments, are classified in the same category as the cash flows from the items being hedged.
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 the Company’s salary continuation plan and 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.
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Reclassifications
In the first quarter of 2021, the Company determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas. Segment disclosures for 2020 and 2019 have been restated to conform to the current reportable segment structure.See Note 20 entitled “Segment Information” for additional information.
In 2020, the Company made certain classification and presentation changes related to customer service and other costs. Previously, these costs were presented as a component of cost of sales. Beginning in 2020, these costs are presented as a component of SG&A expense. The Company determined that this change better reflects how management views and operates the business. Reclassifications of the comparative prior year 2019 amounts as reported in the Company’s Annual Report on Form 10-K for the year ended December 29, 2019 have been made to conform to the current presentation as follows:
Statement of Operations Line Item As Reported Reclassification As Reclassified
(in thousands)
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 “2021,” “2020,” and “2019,” mean the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019, respectively. Fiscal year 2021 is comprised of 52 weeks, 2020 is comprised of 53 weeks, and 2019 is comprised of 52 weeks.
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NOTE 2 –RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
On January 4, 2021, the Company adopted Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740 related to intraperiod tax allocation, the calculation of income taxes in interim periods, and the accounting for outside basis differences of foreign subsidiaries and equity method investments. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740, including franchise or similar taxes partially based on income, the accounting for a step-up in tax basis goodwill, and interim recognition of an enacted change in tax laws or rates, by clarifying and amending existing guidance. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.
In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.”The amendments in this update require annual disclosure of transactions with a government that provides assistance to an entity that is accounted for by applying a grant or contribution model by analogy. Required disclosures include the nature of the transaction and the accounting policy applied to account for the transaction, the financial statement line items affected by the transaction and significant terms and conditions. The amendments are effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company adopted this ASU on January 2, 2022 and applied the disclosures retrospectively to transactions reflected in its financial statements at adoption, as permitted by the ASU. See Note 1 entitled “Summary of Significant Accounting Policies” of this Form 10-K for required information as it pertains to government assistance received during the COVID-19 pandemic under the NOW program enacted in the Netherlands.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard addresses the risks from the discontinuation of the London Interbank Offered Rate (LIBOR) and provides optional expedients and exceptions to contracts, hedging relationships and other transactions that reference LIBOR if certain criteria are met. This new guidance is effective and may be applied beginning March 12, 2020 through December 31, 2022. As discussed in Note 9 entitled “Long-Term Debt”: the Company adopted this ASU on December 9, 2021 in connection with the fourth amendment to the Syndicated Credit Facility, which among other things, provided amendments to replace the LIBOR interest rate benchmark applicable to loans with specified successor benchmark rates. The adoption of this ASU did not have a material impact on our consolidated financial statements.
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NOTE3– REVENUE RECOGNITION
Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 98% of total revenue for 2021, 2020 and 2019. The remaining 2% of revenue was generated from the installation of carpet and other flooring-related material in 2021, 2020 and 2019.
Disaggregation of Revenue
For fiscal years 2021, 2020 and 2019, revenue from the Company’s customers is broken down by geography as follows:
Fiscal Year
Revenue from the Company’s customers in the Americas corresponds to the AMS reportable segment, and the EAAA reportable segment includes revenue from the Europe and Asia-Pacific geographies. See Note 20 entitled “Segment Information” for additional information.
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NOTE4–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. 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 expected credit 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 January 2, 2022 and January 3, 2021, the allowance for expected credit losses amounted to $5.0 million and $6.6 million, respectively, for all accounts receivable of the Company.
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NOTE5–FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure estimated fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under applicable accounting standards are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Inputs to the valuation methodology include:
•quoted prices for similar assets in active markets;
•quoted prices for identical or similar assets in inactive markets;
•inputs other than quoted prices that are observable for the asset; and
•inputs that are derived principally or corroborated by observable data by correlation or other.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following table presents the carrying values and estimated fair values, including the level within the fair value hierarchy, of certain financial instruments:
(in thousands)
Assets:
Liabilities:
(1) Carrying values exclude unamortized debt issuance costs and include amounts presented as current liabilities on the consolidated balance sheets.
Company-Owned Life Insurance
The fair value of Company-owned life insurance is measured on a readily determinable cash surrender value on a recurring basis. Company-owned life insurance is recorded at fair value within other assets in the consolidated balance sheets.
Deferred Compensation Investments
Assets associated with the Company’s non-qualified savings plans are held in a rabbi trust and consist of investments in mutual funds and insurance contracts. The fair value of the mutual funds is derived from quoted prices in active markets. The fair value of the insurance contracts is based on observable inputs related to the performance measurement funds that shadow the deferral investment allocations made by participants in the non-qualified savings plans. These investments are recorded at fair value within other assets in the consolidated balance sheets. See Note 19 entitled “Employee Benefit Plans” for additional information on the Company’s non-qualified savings plans.
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Syndicated Credit Facility and Senior Notes
The Company’s liabilities for borrowings under the Syndicated Credit Facility (the “Facility”) and 5.50% Senior Notes due 2028 (the “Senior Notes”) are not recorded at fair value in the consolidated balance sheets. The carrying value of borrowings under the Facility approximates fair value as the Facility bears variable interest rates that are similar to existing market rates. The fair value of the Senior Notes is derived using quoted prices for similar instruments.
Other Assets and Liabilities
Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. See Note 19 entitled “Employee Benefit Plans” for additional information on defined benefit plan assets.
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NOTE6–INVENTORIES
Inventories are summarized as follows:
End of Fiscal Year
(in thousands)
Reserves for inventory obsolescence amounted to $27.1 million and $35.0 million as of January 2, 2022 and January 3, 2021, respectively, and have been netted against amounts presented above.
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NOTE7–PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
End of Fiscal Year
(in thousands)
(1) Includes $14.8 million and $9.9 million of leased equipment for 2021 and 2020, respectively.
(2) Includes $8.3 million and $3.8 million of accumulated amortization on leased equipment for 2021 and 2020, respectively.
As of January 2, 2022 and January 3, 2021, construction-in-progress was approximately $44.6 million and $43.0 million, respectively.
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NOTE8–ACCRUED EXPENSES
Accrued expenses are summarized as follows:
End of Fiscal Year
(in thousands)
Warranty and sales allowances 2,702 3,248
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NOTE9–LONG-TERMDEBT
Long-term debt consisted of the following:
Outstanding Principal Interest Rate(1) Outstanding Principal Interest Rate(1)
(in thousands) (in thousands)
Syndicated Credit Facility:
Less: Unamortized debt issuance costs (7,073) (8,645)
Less: Current portion of long-term debt (15,002) (15,319)
(1) Represents the stated rate of interest, without the effect of debt issuance costs or interest rate swaps.
Syndicated Credit Facility
The Company’s Syndicated Credit Facility (the “Facility”) provides to the Company U.S. denominated and multicurrency term loans and provides to the Company and certain of its subsidiaries a multicurrency revolving credit facility. At January 2, 2022, the Facility provided to the Company and certain of its subsidiaries a multicurrency revolving loan facility up to $300.0 million, as well as other U.S. denominated and multicurrency term loans. At January 2, 2022, the Company had available borrowing capacity of $290.9 million under the revolving loan facility.
Amendments
On December 18, 2019, the Company amended the Facility. The purpose of this amendment was to provide for certain provisions, including but not limited to the following:
•the amendment of certain covenants in the Facility to add new exceptions which allowed the Company and its subsidiaries to accomplish certain intercompany investments and other intercompany transactions desired to be made by the Company and its subsidiaries, and
•amendments to add provisions relating to treatment of certain qualified financial contracts, to modify certain existing provisions dealing with the replacement of LIBOR as a benchmark interest rate with an alternative benchmark rate in the event that LIBOR in the future ceases to be available as a benchmark rate.
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On July 15, 2020, the Company entered into a second amendment to its Facility. This amendment, among other changes, provided for the following: (1) amended the consolidated net leverage ratio covenant making it less restrictive for a period of seven consecutive fiscal quarters beginning with the third quarter of fiscal year 2020 through the first quarter of fiscal year 2022 (the “Relief Period”); (2) amended the pricing grid used to determine interest rate margins on outstanding loans as well as the commitment fee on the unused portion of the Facility to include additional consolidated net leverage ratio levels with increased pricing at higher levels of leverage; (3) amended interest rate provisions to provide for an interest rate floor of either 0.00% or 0.75%, as applicable, on certain tranches of term loans outstanding; and (4) provided temporary restrictions during the Relief Period on the Company’s ability to make acquisitions, pay dividends, repurchase shares, or enter into new credit facilities without lender consent. The Company incurred approximately $1.5 million in debt issuance costs to execute this amendment. Of this amount, approximately $1.0 million of debt issuance costs associated with term loan borrowings was recorded as a reduction of long-term debt, and approximately $0.5 million of debt issuance costs associated with revolving loan borrowings was recorded in other assets in the consolidated balance sheet. These costs will be amortized over the life of the outstanding debt.
On November 17, 2020, the Company entered into a third amendment to its Facility. The third amendment provided for, among other changes, the following amendments to the Facility:
•the amendment of the maturity date of the Facility to November 2025;
•the amendment of the 0.75% interest rate floor in respect of certain loans under the Facility with an interest rate floor of 0.00%;
•amendments to the financial covenants to replace the consolidated net leverage ratio covenant with a consolidated secured net leverage ratio covenant that is not to exceed 3.00 to 1.00;
•amendments to remove the Relief Period restrictions previously imposed pursuant to the second amendment; and
•amendments to provide for the case where any interest rate benchmark in the future ceases to be available.
In connection with the third amendment, the Company recognized a loss on extinguishment of debt of $3.6 million within interest expense in the consolidated statement of operations and recorded approximately $0.9 million of debt issuance costs. Of this amount, approximately $0.1 million of debt issuance costs associated with term loan borrowings was recorded as a reduction of long-term debt, and approximately $0.8 million of debt issuance costs associated with revolving loan borrowings was recorded in other assets in the consolidated balance sheet.
On December 9, 2021, the Company entered into a fourth amendment to its Facility. The fourth amendment provided for, among other changes, the following amendments to the Facility, which became effective on December 16, 2021:
•amendments to replace the LIBOR interest rate benchmark applicable to loans and other extensions of credit under the Facility denominated in British Pounds sterling and Euros with specified successor benchmark rates;
•the amendment of certain provisions related to the implementation, use and administration of successor benchmark rates and to set forth certain borrowing requirements; and
•amendments to provide for the case where any interest rate benchmark in the future ceases to be available.
InterestRatesandFees
Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 2.00%, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 3.00% over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee ranging from 0.20% to 0.40% per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.
Covenants
The Facility contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants. Among other things, these covenants limit the Company’s and its subsidiaries’ ability to:
•create or incur liens on assets;
•make acquisitions of or investments in businesses (in excess of certain specified amounts);
•engage in any material line of business substantially different from the Company’s current lines of business;
•incur indebtedness or contingent obligations;
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•sell or dispose of assets (in excess of certain specified amounts);
•pay dividends or repurchase the Company’s stock (in excess of certain specified amounts);
•repay other indebtedness prior to maturity unless the Company meets certain conditions; and
•enter into sale and leaseback transactions.
The Facility also requires the Company to remain in compliance with the following financial covenants as of the end of each fiscal quarter, based on the Company’s consolidated results for the year then ended:
•Consolidated Secured Net Leverage Ratio: Must be no greater than 3.00:1.00.
•Consolidated Interest Coverage Ratio: Must be no less than 2.25:1.00.
Events of Default
If the Company breaches or fails to perform any of the affirmative or negative covenants under the 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 the Company breaches or fails to perform any covenant or agreement contained in any instrument relating to any of the Company’s other indebtedness exceeding $20 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’ Administrative 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
Pursuant to a Second Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets of the Company and its domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of the Company’s domestic subsidiaries and up to 65% of the stock of its first-tier material foreign subsidiaries. If an event of default occurs under the Facility, the lenders’ Administrative 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 both January 2, 2022 and January 3, 2021, the Company had $1.6 million in letters of credit outstanding under the Facility.
Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings. The amortization payments are due on the last day of the calendar quarter.
The Company is currently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.
5.50% Senior Notes due 2028
On November 17, 2020, the Company issued $300.0 million aggregate principal amount of 5.50% Senior Notes due December 2028 (the “Senior Notes”). The Senior Notes bear an interest rate at 5.50% per annum and mature on December 1, 2028. Interest is paid semi-annually on June 1 and December 1 of each year, beginning on June 1, 2021. The Company used the net proceeds to repay approximately $269.7 million of outstanding term loan borrowings and approximately $21.0 million of outstanding revolving loan borrowings under its existing Facility. In connection with the issuance of the Senior Notes, the Company recorded approximately $5.7 million of debt issuance costs. These costs were recorded as a reduction of long-term debt in the consolidated balance sheet and will be amortized over the life of the outstanding debt.
The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility.
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Redemption
On or after December 1, 2023, the Company may redeem the Senior Notes, in whole or in part, at any time at the redemption prices listed below, plus accrued and unpaid interest, if any, to (but excluding) the redemption date, if redeemed during the 12-month period commencing on December 1 of the years set forth below:
Period Redemption Price
In addition, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes before December 1, 2023 with the proceeds of certain equity offerings at a redemption price of 105.50%, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. The Company may also redeem all or a part of the Senior Notes before December 1, 2023 at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to (but excluding) the redemption date, plus a make-whole premium. If the Company experiences a change of control, the Company will be required to offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest to (but excluding) the date of repurchase.
Covenants
The indenture governing the Senior Notes contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants. Among other things, these covenants limit the Company’s and its subsidiaries’ ability to:
•incur additional indebtedness;
•declare or pay dividends, redeem stock or make other distributions to shareholders;
•make investments;
•create liens on their assets or use their assets as security in other transactions;
•enter into mergers, consolidations or sales, transfers, leases or other dispositions of all or substantially all of the Company’s assets;
•enter into certain transactions with affiliates; and
•sell or transfer certain assets.
Events of Default
If the Company breaches or fails to perform any of the affirmative or negative covenants under the indenture governing the Senior Notes, 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. If an event of default exists and is continuing, the terms of the indenture permit the trustee or the holders of at least 25% in principal amount of outstanding Senior Notes to declare the principal, premium, if any, and accrued but unpaid interest on all the Senior Notes to be due and payable.
Other Lines of Credit
Subsidiaries of the Company have an aggregate of the equivalent of $6.0 million of other lines of credit available at interest rates ranging from 3.5% to 6.0%. As of January 2, 2022 and January 3, 2021, there were no borrowings outstanding under these lines of credit.
Borrowing Costs
Debt issuance costs associated with the Company’s Senior Notes and term loans under the Facility are reflected as a reduction of long-term debt in accordance with applicable accounting standards. These fees are amortized straight-line, which approximates the effective interest method, and over the life of the outstanding borrowing the debt balance will increase by the same amount as the fees that are amortized. As of January 2, 2022 and January 3, 2021, the unamortized debt issuance costs recorded as a reduction of long-term debt were $7.1 million and $8.6 million, respectively. Expenses related to such costs for the years 2021, 2020 and 2019 amounted to $1.6 million, $1.7 million, and $1.8 million, respectively.
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Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of revolving debt, net of accumulated amortization, were $1.6 million and $2.0 million, as of January 2, 2022 and January 3, 2021, respectively. These amounts are included in other long term assets in the Company’s consolidated balance sheets. The Company amortizes these costs over the life of the related debt. Expenses related to such costs for the years 2021, 2020 and 2019 amounted to $0.4 million, $0.4 million, and $0.4 million, respectively.
Future Maturities
The aggregate maturities of borrowings for each of the five fiscal years subsequent to 2021 are as follows:
Fiscal Year Amount
(in thousands)
Total long-term debt in the consolidated balance sheet includes a reduction for unamortized debt issuance costs of $7.1 million which are excluded from the maturities table above.
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NOTE10– DERIVATIVE INSTRUMENTS
Interest Rate Risk Management
From time to time, the Company enters into interest rate swap transactions to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt.
Cash Flow Interest Rate Swaps
The Company reports the changes in fair value of derivatives designated as hedging instruments as a component of other comprehensive income (or other comprehensive loss). In the fourth quarter of 2020, the Company terminated its designated interest rate swap transactions with a total notional value of $250 million. Hedge accounting was also discontinued at that time. The termination resulted in a loss of $3.9 million recorded in interest expense in the consolidated statements of operations in 2020 as it was probable that a portion of the original forecasted transactions related to the portion of the hedged debt that was repaid will not occur by the end of the originally specified time period. As of January 2, 2022 and January 3, 2021, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $3.8 million and $8.7 million, respectively, and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination. We expect that approximately $2.8 million, before tax, related to the terminated interest rate swaps will be reclassified from accumulated other comprehensive loss as an increase to interest expense in the next 12 months.
Forward Contracts
The Company, from time to time, is party to currency forward contracts designed to hedge the cash flow risk of intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. The Company is meeting its objective by hedging the risk of changes in its cash flows (intercompany payments for inventory) attributable to changes in the U.S. dollar/Euro exchange rate (the “hedged risk”). Changes in fair value attributable to components other than exchange rates are excluded from the assessment of effectiveness and amortized to earnings on a straight-line basis. Changes in fair value related to the effective portion of these contracts are reflected as a component of other comprehensive income (or other comprehensive loss). As of January 2, 2022 and January 3, 2021, there were no active forward currency contracts.
Derivative Transactions Not Designated as Hedging Instruments
Our EAAA segment, from time to time, purchases foreign currency options to economically hedge inventory purchases denominated in foreign currencies other than their functional currency. The Company’s objective with respect to these foreign currency options is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to payment on inventory purchases. These options are classified as non-designated derivative instruments. Gains and losses on the changes in fair value of these foreign currency options are recognized in earnings each period. As of January 2, 2022, the Company had no outstanding foreign currency options.
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The table below sets forth the fair value of derivative instruments as of January 3, 2021:
Balance SheetLocation Fair Value Balance SheetLocation Fair Value
(in thousands)
Derivative instruments designated as hedging instruments:
Interest rate swap contracts Other current assets $ — Accrued expenses $ —
Derivative instruments not designated as hedging instruments:
Foreign currency options Other current assets 37 Accrued expenses —
The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges and included in the assessment of hedge effectiveness had on other comprehensive income (loss), net of tax:
Fiscal Year
(in thousands)
Foreign currency contracts gain $ — $ 468
Interest rate swap contracts loss (2,027) (5,957)
Loss recognized in other comprehensive income (loss) $ (2,027) $ (5,489)
Gains and losses from derivatives designated as cash flow hedges reclassified from accumulated other comprehensive loss into net income (loss) are discussed in Note 21 entitled “Items Reclassified From Accumulated Other Comprehensive Loss.”
The following table summarizes gains and losses on derivatives not designated as hedging instruments within the consolidated statements of operations:
Fiscal Year
(in thousands)
Foreign currency options gain (loss) Other expense $ 408 $ 13 $ (627)
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NOTE11–LEASES
General
The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option.
As of January 2, 2022, there were no significant leases that had not commenced as of the end of fiscal year 2021.
The table below represents a summary of the balances recorded in the consolidated balance sheets related to our leases as of January 2, 2022 and January 3, 2021:
(in thousands)
Operating lease right-of-use assets $ 90,561 $ 98,013
Current portion of operating lease liabilities $ 14,588 $ 13,555
Property, plant and equipment, net $ 6,547 $ 6,138
Total finance lease liabilities $ 5,038 $ 4,184
Lease Costs
Fiscal Year
(in thousands)
Finance lease cost:
Amortization of right-of-use assets $ 2,653 $ 1,251 $ 890
Interest on lease liabilities 140 86 51
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Other Supplemental Information
Fiscal Year