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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-02-26 · 240 added, 173 removed, 229 unchanged (64% of the section changed)

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 and suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives.

During fiscal year 2020, the COVID-19 pandemic resulted in lower revenues across all geographic regions.

Our sales mix shifted towards more non-corporate office market segments as the COVID-19 pandemic reduced corporate spending impacting sales in the corporate office market.

In 2020, consolidated net sales declined 17.9% compared to 2019 primarily due to COVID-19.

As discussed above, the Company implemented, and continues to implement, various cost cutting initiatives to mitigate the effects of COVID-19 on our operations.

During 2020, the Company recorded $12.9 million of voluntary and involuntary severance costs, which are included in selling, general and administrative expenses in the consolidated statements of operations.

We anticipate future annualized savings of approximately $15 million as a result of these separation initiatives.

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.

In response to the reduced demand and to enhance employee safety measures, we temporarily suspended production in our U.S.

manufacturing facilities from March 18, 2020 to March 23, 2020, and then again from April 6, 2020 to April 13, 2020.

We also substantially reduced production in our Craigavon, U.K.

facility beginning on April 20, 2020 through the end of the third quarter, and our Thailand, China, and Australia plants were at times operating in reduced shifts in light of reduced demand.

During the first quarter of 2020, our Asia-Pacific region was primarily impacted by COVID-19 due to government shutdowns in China and the temporary closure of our China plant in late January 2020 to February 9, 2020.

In addition, almost all of our salesforce and administrative employees globally continue to work remotely in accordance with the Company’s ongoing safety measures, as well as any local government orders and “shelter in place” directives in place from time to time.

As a result of the COVID-19 pandemic, government grants and payroll protection programs are 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”) provide benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments.

The NOW Program provides 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 are 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.

Our revenues are derived from sales of floorcovering products, primarily modular carpet, luxury vinyl tile (“LVT”) and, starting in August 2018, rubber flooring products.

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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.

Most of our sales are to customers in the corporate office market segment, but we also focus our marketing and sales efforts on non-corporate office segments to reduce somewhat our exposure to economic cycles that affect the corporate office market segment more adversely, as well as to capture additional market share.

In the Americas, our mix of corporate office versus non-corporate office modular carpet and LVT sales was 47% and 53% , respectively, for 2019 .

Company-wide, our mix of corporate office versus non-corporate office modular carpet and LVT sales was 61% and 39% , respectively, in 2019 .

On August 7, 2018, the Company completed the acquisition of nora for a purchase price of €385.1 million, or $447.2 million at the exchange rate as of the transaction date, including acquired cash of €40.0 million ($46.5 million) for a net purchase price of €345.1 million ($400.7 million).

Nora is an industry leader in the rubber flooring market, and this acquisition is expected to advance the Company’s growth strategy in expanding market segments, particularly in the healthcare, life sciences and education market segments.

Similar to Interface, nora operates on an international footprint and the Company expects the acquisition will also allow for geographic sales synergies as well.

During fiscal 2019, the Company continued to expand into these market segments as the sales of rubber flooring products were primarily in the healthcare, education and transportation market segments.

During 2019 , we had net sales of $1,343.0 million , up 13.9% compared to $1,179.6 million in 2018 .

Operating income for 2019 was $130.9 million compared to $76.4 million in 2018 .

Net income for 2019 was $79.2 million , or $1.34 per share, compared to $50.3 million , or $0.84 per share, in 2018 .

The 2019 period included the results of the acquired nora business for the full fiscal year, $5.9 million of purchase accounting amortization in connection with the nora acquisition, and $12.9 million of restructuring and other charges.

The 2018 period included the results on the nora acquisition from August 7, 2018 to the end of the 2018 fiscal year.

As noted above, our sales mix of corporate office verses non-corporate office market segments has shifted towards non-corporate office markets in fiscal year 2020 primarily due to the impacts of COVID-19 on the corporate office market.

We focus our marketing and sales efforts on both corporate office and non-corporate office segments, to reduce somewhat our exposure to economic cycles that affect the corporate office market segment more adversely, as well as to capture additional market share.

Our mix of modular carpet and resilient flooring sales in corporate office verses non-corporate office market segments for the last three fiscal years is summarized below:

2020 2019 2018

Corporate Office Non-Corporate Office Corporate Office Non-Corporate Office Corporate Office Non-Corporate Office

Americas 37 % 63 % 47 % 53 % 45 % 55 %

Company-wide 47 % 53 % 61 % 39 % 60 % 40 %

During 2020, we had 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 operating loss for 2020 was $39.3 million compared to operating income of $130.9 million in 2019.

Net loss for 2020 was $71.9 million, or $1.23 per share, compared to net income of $79.2 million, or $1.34 per share, in 2019.

The 2020 period was impacted by a $121.3 million goodwill and intangible asset impairment loss recorded in the first quarter and $12.9 million of severance charges related to cost saving initiatives in response to COVID-19.

These charges were partially offset by $9.3 million of lower payroll costs due to furloughs and credits from payroll protection programs.

During 2019, we had net sales of $1,343.0 million, up 13.9% compared to $1,179.6 million in 2018.

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Net income for 2019 was $79.2 million, or $1.34 per share, compared with $50.3 million, or $0.84 per share, in 2018.

The 2018 period included the results of the acquired nora business from August 7 through the end of the year, including nora net sales of $112.6 million during that stub period.

These results included amortization related to the fair value of inventory acquired of $26.7 million, and amortization of acquired intangible assets of $5.4 million.

2018 also includes $9.5 million related to nora transaction expenses.

Also included in our results for 2018 were $20.5 million of restructuring and asset impairment charges as well as $6.7 million of tax benefits related to the finalization of our analysis of the U.S.

Tax Cuts and Jobs Act enacted in 2017.

Please see Item 8, Note 16 “ Income Taxes ” for further discussion of these tax benefits.

The 2018 period included the results of the nora acquisition (described below) from August 7, 2018 through the end of the 2018 fiscal year.

Nora is an industry leader in the rubber flooring market, and the acquisition has expanded the Company’s presence within non-corporate office market segments since the acquisition date.

Restructuring Plans

On December 23, 2019, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy.

The plan involves a reduction of approximately 105 employees and early termination of two office leases.

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 is comprised of severance expenses ( $8.8 million ) and lease exit costs ( $0.2 million ).

The restructuring plan is expected to result in future cash expenditures of approximately $9.0 million for payment of the employee severance and lease exit costs, as described above.

The Company expects to complete the restructuring plan in fiscal year 2020, and expects the plan to yield annualized savings of approximately $6.0 million .

A portion of the annualized savings is expected to be realized on the income statement in fiscal year 2020, with the remaining portion of the annualized savings expected to be realized in fiscal year 2021.

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 income statement in fiscal year 2020, with the remaining portion of the annualized savings expected to be 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.

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The charge was expected to result in future cash expenditures of $12 million, primarily for severance payments (approximately $10.8 million).

The restructuring plan was substantially complete at the end of fiscal 2019.

The Company redeployed the savings toward the funding of sales and strategic growth initiatives in 2019, yielding negligible net savings on the Company’s income statement.

In connection with the 2018 restructuring plan, the Company recorded $0.7 million of additional lease exit costs in the third quarter of 2019 , and in the fourth quarter of 2019 the Company adjusted its expected severance expenses and recognized a decrease in restructuring costs of $1.7 million.

In the first quarter of 2017, the Company recorded a restructuring charge of $7.3 million, which was related to a previous restructuring plan announced in 2016, primarily related to exit costs associated with the closure of various FLOR retail stores.

The 2017 charge was comprised of lease exit costs of $3.4 million, asset impairment charges of $3.3 million and severance charges of $0.6 million.

The restructuring plan was substantially completed in 2017.

The restructuring plan was completed at the end of fiscal year 2020.

Goodwill, Intangible Asset and Fixed Asset Impairment

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 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.

Analysis of Results of Operations

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Because we have such substantial international operations, we are impacted, from time to time, by international developments that affect foreign currency transactions.

In 2019 , the weakening of the Euro, British pound, Australian dollar, Canadian dollar and Chinese renminbi against the U.S.

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.

In 2018, the strengthening of the Euro and British pound against the U.S.

In 2018, the strengthening of the Euro and British pound sterling against the U.S.

dollar had a positive impact on our net sales and operating income.

In 2017, the strengthening of the Euro, Australian dollar and Canadian dollar had a positive 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, Australian dollars and Canadian dollars into U.S.

dollars) by which the exchange rates for translating Euros, British pounds sterling, Australian dollars and Canadian dollars into U.S.

dollars have affected our net sales and operating income during the past three years:

2020 2019 2018

(in millions)

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The following table presents, as a percentage of net sales, certain items included in our consolidated statements of operations during the past three years:

2020 2019 2018

Net sales 100.0 % 100.0 % 100.0 %

Cost of sales 62.8 60.3 63.6

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Restructuring, asset impairment and other charges (0.4) 1.0 1.7

Operating income

Goodwill and intangible asset impairment charge 11.0 — —

Operating income (loss) (3.6) 9.7 6.5

Interest/Other expense 3.6 2.2 1.8

Income before income tax expense

Income tax expense

Income (loss) before income tax expense (7.2) 7.5 4.7

Income tax expense (benefit) (0.7) 1.7 0.4

Net income (loss) (6.5) % 5.8 % 4.3 %

Below we provide information regarding our net sales and analyze those results for each of the last three fiscal years.

Fiscal years 2019 , 2018 , and 2017 were 52-week periods.

Percentage Change

2019 compared with 2018

2018 compared with 2017

Fiscal year 2020 includes 53 weeks, and fiscal years 2019 and 2018 were both 52 week periods.

Fiscal Year Percentage Change

2020 2019 2018 2020 compared with 2019 2019 compared with 2018

(in thousands)

Americas $ 593,418 $ 757,112 $ 682,261 (21.6) % 11.0 %

Europe 351,287 393,194 319,677 (10.7) % 23.0 %

Asia-Pacific 158,557 192,723 177,635 (17.7) % 8.5 %

Net sales $ 1,103,262 $ 1,343,029 $ 1,179,573 (17.9) % 13.9 %

Net sales for 2020 compared with 2019

For 2019 , our net sales increased $163.5 million ( 13.9% ) as compared to 2018 .

For fiscal year 2020, our net sales decreased $239.8 million (17.9%) compared to 2019.

As discussed above, the decrease was 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 geographic basis, we experienced sales declines across all our regions.

Sales in the Americas were down 21.6%, sales in Europe were down 10.7% as reported in U.S.

dollars, and sales in our Asia-Pacific region were down 17.7%.

The sales decrease of 21.6% in the Americas 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.

In Europe, net sales in the region decreased both in U.S.

dollars (down 10.7%) and local currency (down 12.5%).

The decrease in sales was due primarily to the impacts of COVID-19 and lower carpet tile sales volumes, partially offset by the strengthening of the Euro and British pound sterling against the U.S.

On a market segment basis, the sales decrease in Europe was most significant in the corporate office (down 18.0%), hospitality (down 47.5%) and public buildings (down 14.2%) market segments, partially offset by increases in the transportation (up 40.3%), leisure (up 57.1%), healthcare (up 10.5%) and education (up 9.0%) market segments.

In the Asia-Pacific region, net sales decreased 17.7% primarily due to the impacts of COVID-19 and lower carpet tile sales volumes.

This sales decrease was partially offset by the strengthening of the Chinese Renminbi against the U.S.

On a market segment basis, the sales decrease in Asia-Pacific was most significant in the corporate office (down 21.4%), retail (down 43.2%), healthcare (down 32.6%), hospitality (down 34.3%) and public buildings (down 20.3%) market segments, partially offset by increases in the leisure (up 63.5%) and education (up 15.5%) market segments.

Net sales for 2019 compared with 2018

For 2019, our net sales increased $163.5 million (13.9%) compared to 2018.

As discussed above, the 2019 period included revenue from the nora acquisition for the full fiscal year.

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Fluctuations in currency exchange rates had a negative impact on our year-over-year sales comparison of approximately $26.2 million, meaning that if currency levels had remained constant year over year, our 2019 sales would have been higher by this amount.

On a geographic basis, including the impact of the nora acquisition, we experienced sales growth across all our regions.

On a geographic basis, including the impact of the nora acquisition, we experienced sales growth across all of our regions.

Sales in the Americas were up 11.0%, sales in Europe were up 23.0% as reported in U.S.

dollars, and sales in Asia-Pacific were up 8.5%.

The sales increase of 11.0% in the Americas in 2019 was due primarily to the impact of the nora acquisition and growth from our luxury vinyl tile (“LVT”) products.

The sales increase of 11.0% in the Americas in 2019 was due primarily to the impact of the nora acquisition and growth from our LVT products.

The legacy Americas carpet and LVT business grew approximately 3.6% for the year.

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In Europe, sales in the region were up in both U.S.

dollars ( 23.0% ) and local currency (29.1%).

This increase was due primarily to the impact of the nora acquisition and growth from our LVT products offset by weakening of the Euro and British pound against the U.S.

dollars (up 23.0%) and local currency (up 29.1%).

This increase was due primarily to the impact of the nora acquisition and growth from our LVT products offset by weakening of the Euro and British pound sterling against the U.S.

The legacy European carpet and LVT business declined 2.7% on a U.S.

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The decline in legacy sales on a U.S.

dollars basis was primarily due to the weakening of the Euro and British pound against the U.S.

dollars basis was primarily due to the weakening of the Euro and British pound sterling against the U.S.

In Asia-Pacific, sales increased 8.5% primarily due to the impact of the nora acquisition and growth in our LVT products.

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The sales decline in the legacy Asia-Pacific business was primarily in the corporate (down 5.7%) and government (down 17.9%) market segments, partially offset by increases in the retail market segment (up 12.0%).

Net sales for 2018 compared with 2017

For 2018 , our net sales increased $183.1 million ( 18.4% ) compared to 2017 .

As discussed above, the 2018 period included revenue of $112.6 million from the nora acquisition that was not present in 2017.

Fluctuations in currency exchange rates had a positive impact on our year-over-year sales comparison of approximately $8.4 million , meaning that if currency levels had remained constant year over year our 2018 sales would have been lower by this amount.

On a geographic basis, including the impact of nora, we experienced sales growth across all of our regions.

Sales in the Americas were up 16.0% , sales in Europe were up 29.7% as reported in U.S.

dollars, and sales in Asia-Pacific were up 9.7% .

The sales increase of 16.0% in the Americas in 2018 was due primarily to the impact of the nora acquisition.

The legacy Interface Americas carpet and LVT business grew approximately 8% for the year.

This increase in the legacy business was due to an increase in the corporate office market segment (up 9%) as well as increases in the retail (up 18%) and hospitality (up 7%) market segments.

The increase in retail was due to the performance of our Interface SERVICES™ business, which had a larger percentage of its sales in the retail segment.

These legacy sales increases were partially offset by a decline in the government (down 10%) market segment.

In Europe, sales in the region were up in both U.S.

dollars ( 29.7% ) and local currency (25.0%).

This sales increase was due primarily to the impact of the nora acquisition, growth in our LVT products and the strengthening of the Euro and British pound against the U.S.

The legacy Interface European carpet and LVT business grew 9% on a U.S.

dollar basis, and 5% in local currency.

The sales growth in the legacy Interface European business was most pronounced in the corporate office (up 9%), retail (up 11%), healthcare (up 15%), and hospitality (up 34%) market segments.

In Asia-Pacific, sales increased 9.7% primarily due to the impact of the nora acquisition and growth in our LVT products.

This sales increase was partially offset by the weakening of the Australian dollar and lower sales in Australia.

The legacy Interface Asia-Pacific carpet and LVT business grew 1% on a U.S.

dollar basis and 2% in local currency.

Within the region on a legacy Interface basis, Asia sales increased 8% while Australia sales decreased 5% as translated into U.S.

The sales growth in the legacy Asia-Pacific business was primarily in the hospitality (up 5%) and healthcare (up 6%) market segments, partially offset by decreases in government (down 32%) and retail (down 3%) market segments.

Cost and Expenses

The following table presents our overall cost of sales and selling, general and administrative (“SG&A”) expenses during the past three years:

Cost and Expenses

Percentage Change

2019 compared

Fiscal Year Percentage Change

2020 2019 2018 2020 compared

with 2019 2019 compared

(in thousands)

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Selling, general and administrative expenses 333,229 389,117 332,975 (14.4) % 16.9 %

For 2019 , our costs of sales increased $62.4 million ( 8.3% ) compared to 2018 .

For 2020, our costs of sales decreased $117.4 million (14.5%) compared to 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 sales, our 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 impact of COVID-19.

For 2019, our costs of sales increased $60.4 million (8.1%) compared with 2018.

Included in 2019 are costs of sales for the acquired nora business for the full year, which includes purchase accounting amortization of $5.9 million related to acquired intangible assets.

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This decrease was primarily due to productivity initiatives and the nora non-recurring inventory step-up amortization which occurred in 2018, but did not recur in 2019.

For 2018 , our costs of sales increased $144.8 million ( 23.7% ) compared with 2017 .

Included in the 2018 period are cost of sales of $96.6 million for the acquired nora business, which includes amortization related to acquired inventory and intangible assets of $32.1 million.

Fluctuations in currency exchange rates did not have a significant impact (less than 1%) on the year-over-year comparison.

In absolute dollars, the increase in costs of sales was a result of higher sales for 2018 as compared to 2017 .

As a percentage of sales, our costs of sales increased to 64.0% in 2018 versus 61.3% in 2017 .

This increase was a result of (1) higher costs of sales related to the acquired nora business, including purchase accounting amortization of $32.1 million for acquired inventory and intangible assets, (2) delayed productivity initiatives due to increased sales and production volumes, as well as (3) a change in the sales mix weighted more heavily toward the Interface Services business, which typically generates a lower gross margin compared to the rest of our operations.

For 2020, our 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.

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 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.

For 2019, our SG&A expenses increased $56.1 million (16.9%) versus 2018.

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As a percentage of sales, SG&A expenses increased to 29.0% in 2019 versus 28.2% in 2018.

For 2018 , our SG&A expenses increased $60.3 million ( 22.6% ) versus 2017 .

SG&A expenses for the acquired nora business were $34.9 million from August 7 through the end of the 2018 year.

Currency fluctuations had only a slight (less than 1%) unfavorable impact on SG&A expenses.

The increase in SG&A expenses during the year was due to (1) transaction costs in connection with the nora acquisition of $5.3 million, (2) higher performance-based stock compensation of approximately $7.0 million as performance targets were met to a higher degree in 2018 as compared to 2017, (3) higher selling expenses of $24.0 million related to the acquired nora business, (4) higher selling expense of $7.5 million due to higher sales volumes in the legacy Interface business, and (5) higher administrative expenses of $15.8 million primarily due to the acquired nora business as noted above.

As a percentage of sales, SG&A expenses increased to 27.8% in 2018 versus 26.8% in 2017 .

Interest Expense

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 income for deferred interest rate swap losses due to the termination of our 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.

For 2019, our interest expense increased $10.2 million to $25.6 million, versus $15.4 million in 2018.

This increase was a result of higher outstanding borrowings incurred in August 2018 to complete the nora acquisition offset slightly by lower average interest rates on our borrowings (our average borrowing rate for 2019 was 3.27% as compared to 3.50% for 2018).

This increase was a result of higher outstanding borrowings incurred in August 2018 to complete the nora acquisition offset slightly by lower average interest rates on our borrowings (our average borrowing rate, including the impact of interest rate swaps, for 2019 was 3.27% as compared to 3.50% for 2018).

Our interest rate swaps, entered into in 2017 and 2019, had approximately $0.2 million impact on interest expense for 2019.

For 2018 , our interest expense increased $8.3 million to $15.4 million , versus $7.1 million in 2017 .

This increase was a result of (1) additional debt incurred to complete the nora acquisition and (2) higher average interest rates on our borrowings (our average borrowing rate for 2018 was 3.5% as compared to 2.9% for 2017).

Our interest rate swap entered into in 2017 did not have any significant impact on interest expense for 2018.

On December 22, 2017, the U.S.

Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law.

Among the significant changes resulting from the law, the Tax Act reduced the U.S.

federal income tax rate from 35% to 21% effective January 1, 2018 and created a modified territorial tax system with a one-time mandatory “transition toll tax” on previously unrepatriated foreign earnings.

As of December 31, 2017, the Company recorded a provisional tax expense of $3.5 million related to the remeasurement of its net deferred tax asset and a provisional tax expense of $11.7 million related to the one-time transition toll tax.

As of December 30, 2018, the Company completed the accounting of remeasuring its net deferred tax asset which resulted in a $1.7 million decrease to the previously recorded provisional amount and completed its assessment of the one-time transition toll tax which resulted in a $5.0 million decrease to the previously recorded provisional amount.

See Note 16 – “ Income Taxes ” to the consolidated financial statements in Item 8 for further information on the financial statement impact of the Tax Act.

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 penalty.

Our effective tax rate in 2019 was 22.2%, compared with an effective tax rate of 8.6% in 2018.

The increase in our effective tax rate in 2019 compared to 2018 was primarily due to the nonrecurring $6.7 million tax benefit realized in 2018 related to the impacts of the Tax Act as discussed above.

The increase in our effective tax rate in 2019 compared to 2018 was primarily due to a nonrecurring $6.7 million tax benefit realized in 2018 related to the impacts of the U.S.

Tax Cuts and Jobs Act enacted into law in 2017.

In addition, there was a net increase in our effective tax rate in 2019 due to less U.S.

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state income taxes.

Our effective tax rate in 2018 was 8.6% , compared with an effective tax rate of 47.0% in 2017 .

The decrease in our effective tax rate in 2018 compared to 2017 was primarily due to a $6.7 million tax benefit related to the impacts of the Tax Act as discussed above, the reduction in the U.S.

federal income tax rate from 35% to 21%, and an increase in U.S.

federal and foreign tax credits.

Liquidity and Capital Resources

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 discussed below.

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.

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.

On August 7, 2018, our Syndicated Credit Facility was amended and restated in connection with our acquisition of nora.

Please see Note 9 – “ Long-Term Debt ” and Note 19 – “ Acquisition of Nora ” in Item 8 for additional information.

At December 29, 2019 , we had $81.3 million in cash.

At January 3, 2021, we had $103.1 million in cash.

Approximately $1.7 million of this cash was located in the U.S., and the remaining $101.4 million was located outside of the U.S.

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state income taxes on these amounts in accordance with applicable accounting standards.

As of December 29, 2019 , we had $602.5 million of borrowings and $2.2 million in letters of credit outstanding under our amended and restated Syndicated Credit Facility.

Of those borrowings outstanding, $581.6 million were term loan borrowings and $20.9 million were revolving loan borrowings.

As of December 29, 2019 , we had additional borrowing capacity of $276.9 million under our amended and restated Syndicated Credit Facility and $9.5 million of borrowings under our other credit facilities in place at other non-U.S.

As of January 3, 2021, we had $285.2 million of borrowings outstanding under our Syndicated Credit Facility, of which $282.2 million were term loan borrowings and $3.0 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 2020.

As of January 3, 2021, we had additional borrowing capacity of $295.4 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 3, 2021, we had $300.0 million of Senior Notes outstanding.

We have approximately $81.2 million in contractual cash obligations due by the end of fiscal year 2021, which includes, among other things, pension cash contributions, interest payments on our debt and lease commitments.

Based on current interest rates and debt levels, we expect our aggregate interest expense for 2021 to be between $32 million and $33 million.

We estimate aggregate capital expenditures in 2020 to be between $50 million and $60 million , although we are not committed to these amounts.

We estimate aggregate capital expenditures in 2021 to be approximately $30 million, although we are not committed to these amounts.

It is important for you to consider that we have a significant amount of indebtedness.

Our amended and restated Syndicated Credit Facility matures in August of 2023.

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 the substantial majority 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 may increase.

We have, however, entered into interest rate swap transactions to fix the variable interest rate with respect to $250 million of the term loan borrowings under the Syndicated Credit Facility.

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 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.

Syndicated Credit Facility

On August 7, 2018, we amended and restated our Syndicated Credit Facility (the “Facility”) in connection with the nora Holding GmbH (“nora”) acquisition.

On August 7, 2018, we amended and restated our Syndicated Credit Facility (the “Facility”) in connection with the nora acquisition.

The purpose of the amended and restated Facility was to fund the nora purchase price and related fees and expenses of the acquisition, and to increase the credit available to us and our subsidiaries following the closing of the nora acquisition in view of the larger enterprise.

At December 29, 2019, the amended and restated Facility provided to us and certain of our subsidiaries a multicurrency revolving loan facility up to $300 million, as well as other U.S.

denominated and multicurrency term loans.

On December 18, 2019, the Company amended its Facility, with certain of its wholly-owned foreign subsidiaries as co-borrowers.

On December 18, 2019, the Company again amended the Facility, with certain of its wholly-owned foreign subsidiaries as co-borrowers.

The primary purpose of this amendment was to allow the Company to make various intercompany transactions.

In connection with the amended and restated Facility as discussed above, we recorded $8.8 million of debt issuance costs associated with the new term loans that are reflected as a reduction of long-term debt in accordance with applicable accounting standards.

As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed.

As of December 29, 2019 outstanding debt issuance costs are $6.3 million .

On July 15, 2020 and November 17, 2020, the Company entered into the second and third amendments, respectively, to its Facility.

The primary purpose of the second amendment was to provide the Company with a less restrictive consolidated net leverage ratio covenant in response to the COVID-19 pandemic.

The primary purpose of the third amendment was to extend the maturity date of the Facility to November 2025, replace the consolidated net leverage ratio covenant with a consolidated secured net leverage ratio, and modify various interest rate provisions.

See Note 9 – “Long-Term Debt” in Item 8 of this Report for additional information.

At January 3, 2021, the Facility provides 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.

In connection with the 2018 amendment to the Facility as discussed above, we recorded $8.8 million of debt issuance costs associated with the new term loans that are reflected as a reduction of long-term debt.

In connection with the second and third amendments to the Facility as discussed above, the Company recorded debt issuance costs of $1.5 million and $0.9 million, respectively.

These debt issuance costs were allocated between term and revolving loans and a portion recorded as a reduction of long-term debt ($1.1 million) for the term loans and other assets ($1.3 million) for the revolving loans, in accordance with applicable accounting standards.

As of January 3, 2021, total outstanding debt issuance costs were $10.6 million.

Interest Rates and Fees

Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 1.25%, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter.

Interest on LIBOR-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable LIBOR rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter.

Interest on multi-currency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 2.25% over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter.

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.

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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 Net Leverage Ratio:

Must be no greater than 4.25 :1.00, subject to a step-down as described in the Facility Agreement.

• Consolidated Secured Net Leverage Ratio:

Must be no greater than 3.00:1.00.

• Consolidated Interest Coverage Ratio:

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• exercise other rights and remedies available to them under the agreement and applicable law.

Pursuant to an Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets of Interface, Inc.

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 December 29, 2019 , we had outstanding $581.6 million of term loan borrowing and $20.9 million of revolving loan borrowings under the Facility, and had $2.2 million in letters of credit outstanding under the Facility.

As of December 29, 2019 , the weighted average interest rate on borrowings outstanding under the Facility was 3.27% .

Under the amended and restated Facility, we are required to make quarterly amortization payments of the Term Loan A borrowings, which commenced in the fourth quarter of 2018.

As of January 3, 2021, we had outstanding $282.2 million of term loan borrowing and $3.0 million of revolving loan borrowings under the Facility, and had $1.6 million in letters of credit outstanding under the Facility.

As of January 3, 2021, the weighted average interest rate on borrowings outstanding under the Facility was 1.89%.

Under the Facility, we are required to make quarterly amortization payments of the term loan borrowings, which commenced in the fourth quarter of 2018.

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 third quarter of 2017 and first quarter of 2019, we entered into interest rate swap transactions that fixed the variable interest rate with respect to $100 million and $150 million, respectively, of the term loan borrowings under the Syndicated Credit Facility.

For additional information, please see Item 7A and Note 9 entitled “ Long-Term Debt ” in Item 8 of this Report.

In the fourth quarter of 2020, we terminated both 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.

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.

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 $548 million for fiscal year 2020.

Total indebtedness of the non-guarantor subsidiaries was approximately $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.

Analysis of Cash Flows

The following table presents a summary of cash flows for fiscal years 2020, 2019, and 2018:

2020 2019 2018

(in thousands)

Net cash provided by (used in):

Operating activities $ 119,070 $ 141,768 $ 91,767

Investing activities (61,689) (74,222) (455,685)

Financing activities (42,715) (66,677) 361,526

Effect of exchange rate changes on cash 7,086 (557) (3,656)

Net change in cash and cash equivalents 21,752 312 (6,048)

Cash and cash equivalents at beginning of period 81,301 80,989 87,037

Cash and cash equivalents at end of period $ 103,053 $ 81,301 $ 80,989

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 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.

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.

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In addition to working capital generation of cash, the Company also borrowed $17 million under its Syndicated Credit Facility during 2018.

We ended 2017 with $87.0 million in cash, a decrease of $78.6 million during the year.

The most significant decrease in cash was due to our share repurchase program which used $91.6 million of cash to repurchase and retire 4.6 million shares of our outstanding common stock, pursuant to our established share repurchase plans.

We also used $72.0 million of cash to repay outstanding borrowings under our Syndicated Credit Facility (including $15.0 million of required amortization payments under our term loan), as well as $15.5 million for the payment of dividends.

We borrowed $25.0 million during 2017 under our Syndicated Credit Facility.

Outside of these financing activities, we also used cash of $30.5 million for capital expenditures during 2017.

These uses of cash were partially offset by cash flow from operations of $103.4 million.

The significant components of cash flow from operations were (1) net income of $53.2 million, and (2) a $12.0 million increase in accruals and accounts payable.

Cash flow from operations was partially offset by (1) an increase of accounts receivable of $10.3 million, and (2) an increase in inventory of $13.6 million.

Included in cash flow from operations is a $15.2 million add-back to net income related to the non-cash charge recorded in 2017 in connection with the Tax Act.

A portion of this impact (an estimated $9.8 million) will result in cash expenditures over the next eight years as is allowed by the Tax Act.

We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future.

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The following table discloses aggregate information about our contractual obligations and the periods in which payments are due.

The amounts and time periods are measured from December 29, 2019 .

The amounts and time periods are measured from January 3, 2021.

Payments Due by Period

Total Payments

Due Less than

1 year 1-3 years 3-5 years More than

(in thousands)

Long-Term Debt Obligations (1)

$ 585,215 $ 15,319 $ 30,638 $ 239,258 $ 300,000

Operating and Finance Lease Obligations (2)

143,198 20,653 30,457 21,344 70,744

Expected Interest Payments (3)

160,257 23,439 45,729 41,589 49,500

Unconditional Purchase Obligations (4)

14,529 14,529 — — —

Pension Cash Obligations (5)

36,923 7,262 6,315 6,624 16,722

Total Contractual Cash Obligations (6)

$ 940,122 $ 81,202 $ 113,139 $ 308,815 $ 436,966

(1) Total long-term debt in the consolidated balance sheet includes a reduction for unamortized debt issuance costs of $8.6 million which are excluded from the long-term debt obligations in the table above.

The table above includes $15.3 million classified as the current portion of long-term debt in the consolidated balance sheet of January 3, 2021.

(2) Operating and finance lease obligations represent undiscounted future lease payments.

Expected interest payments to be made in future periods reflect anticipated interest payments related to the $581.6 million of Term Loan borrowings outstanding and the $20.9 million of revolving loan borrowings outstanding under our Syndicated Credit Facility as of December 29, 2019 .

We have also assumed in the presentation above that these borrowings will remain outstanding until maturity with the exception of the required amortization payments for our Term Loan A borrowings.

(3) Expected interest payments to be made in future periods reflect anticipated interest payments related to the $300.0 million of 5.50% Senior Notes due 2028 outstanding, $282.2 million of Term Loan borrowings outstanding and the $3.0 million of revolving loan borrowings outstanding under our Syndicated Credit Facility as of January 3, 2021.

We have also assumed in the presentation above that these borrowings will remain outstanding until maturity with the exception of the required amortization payments for our term loan borrowings.

(4) Unconditional purchase obligations do not include unconditional purchase obligations that are included as liabilities in our consolidated balance sheet.

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(5) We have three foreign defined benefit plans and a domestic salary continuation plan.

We have presented above the estimated cash obligations that will be paid under these plans over the next ten years.

Such amounts are based on several estimates and assumptions and could differ materially should the underlying estimates and assumptions change.

Our domestic salary continuation plan and the nora plan are unfunded plans, and we do not currently have any commitments to make contributions to these plans.

However, we do use insurance instruments to hedge our exposure under the salary continuation plan.

However, the table above includes the expected benefit payments for these unfunded plans which will be paid by the Company.

We use insurance instruments to hedge our exposure under the salary continuation plan.

Contributions to our other employee benefit plans are at our discretion.

The above table does not reflect expected benefit payments for two of our funded foreign defined benefit plans of approximately $114.8 million, which will be paid by the plans over the next ten years.

(6) The above table does not reflect unrecognized tax benefits of $10.8 million, the timing of which payments are uncertain.

See Note 17 entitled “Income Taxes” in Item 8 of this Report for further 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 year fiscal 2021 results and beyond are uncertain.

We believe the most significant elements of uncertainty are (1) the intensity and duration of the impact on construction, renovation, and remodeling;

(2) corporate, government, and consumer spending levels and sentiment;

and (3) the ability of our sales channels, supply chain, manufacturing, and distribution partners to continue operating through disruptions.

Any or all of these factors could negatively impact our financial position, results of operations, cash flows, and outlook.

As the impact of the COVID-19 pandemic continues to affect companies with global operations, we anticipate that our business and results in the first quarter of 2021 will continue to be adversely affected, and the timeline and pace of recovery is uncertain.

Due to customary seasonality and the impact of COVID-19, we anticipate a sequential decrease in revenue and operating income in the first quarter of fiscal year 2021 compared with the fourth quarter of 2020.

During 2020, the Company implemented several cost reduction and avoidance initiatives to align with anticipated customer demand, including a voluntary employee separation program, temporary employee furloughs and other time-and-pay reduction programs, involuntary employee separations where necessary to streamline roles and responsibilities, and various other cost reducing initiatives.

The Company also suspended merit-based salary increases, as well as its 401(k) and Non-Qualified Savings Plan (NSP) matching contributions, and benefited from lower than originally anticipated performance-based compensation and variable compensation for 2020.

In addition, the Company reduced its capital spending plans.

In January 2021, the Company resumed its 401(k) and NSP matching contributions on a prospective basis, as well as customary merit-based salary increases for fiscal year 2021.

The Company will also establish new performance-based compensation and variable compensation targets for fiscal year 2021.

All of these items will increase costs compared to fiscal year 2020.

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.

Critical Accounting Policies

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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 December 29, 2019 , and December 30, 2018 , we had state net operating loss carryforwards of $87.6 million and $96.1 million , respectively.

As of January 3, 2021, and December 29, 2019, we had state net operating loss carryforwards of $142.7 million and $87.6 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.

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If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.

We test goodwill for impairment at least annually using a two-step approach.

In the first step of this approach, we prepare valuations of reporting units, using both a market comparable approach and an income approach, and those valuations are compared with the respective book values of the reporting units to determine whether any goodwill impairment exists.

Prior to the adoption of 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 are compared with the respective book values of the reporting units to determine whether any goodwill impairment exists.

In preparing the valuations, past, present and expected future performance is considered.

If impairment is indicated in this first step of the test, a step two valuation approach is performed.

The step two valuation approach compares the implied fair value of goodwill to the book value of goodwill.

The implied fair value of goodwill is 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 is recognized for the difference, if any, between the fair value of the goodwill associated with the reporting unit and the book value of that goodwill.

If the actual fair value of the goodwill is determined to be less than that estimated, an additional write-down may be required.

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.

If the actual fair value of the goodwill was determined to be less than that estimated, an additional write-down may be required.

On December 30, 2019, the Company adopted Accounting Standards Update 2017-04, “Intangibles - Goodwill and Other,” that provides for the elimination of Step 2 from the goodwill impairment test.

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.

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 2020, 2019 and 2018, 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 December 29, 2019 , no impairment of goodwill was indicated.

As of December 29, 2019 , 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 Company has experienced significant competitive pressure in fiscal 2019 along with volatility in the company stock price.

As such, it is reasonably possible that such circumstances along with a recent acquisition may together warrant the need to write down the value of goodwill in the near term.

For our reporting units which carried a goodwill balance as of January 3, 2021, no impairment of goodwill was indicated.

As of January 3, 2021, 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.

We determine the value of inventories using the lower of cost or net realizable value.

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While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and we could experience additional inventory write-downs in the future.

Our inventory reserve on December 29, 2019 and December 30, 2018 , was $28.3 million and $28.1 million , respectively.

Our inventory reserve on January 3, 2021 and December 29, 2019, was $35.0 million and $28.3 million, respectively.

To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our 2020 net income would be higher or lower by approximately $3.2 million, on an after-tax basis.

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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) in

Foreign Defined Benefit Plans Increase (Decrease) in

Projected Benefit Obligation

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1% decrease in actuarial assumption for discount rate 72.0

Domestic Salary Continuation Plan

Increase (Decrease) in

Domestic Salary Continuation Plan Increase (Decrease) in

Projected Benefit Obligation

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1% decrease in actuarial assumption for discount rate 4.3

Allowances for Doubtful Accounts.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.

Estimating this amount requires us to analyze the financial strengths of our customers.

If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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 doubtful accounts on December 29, 2019 and December 30, 2018 , was $3.8 million and $3.5 million , respectively.

Our allowance for expected credit losses on January 3, 2021 and December 29, 2019, was $6.6 million and $3.8 million, respectively.

To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2020 net income would be higher or lower by approximately $0.6 million, on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance.

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We record a provision related to warranty costs based on historical experience and periodically adjust these provisions to reflect changes in actual experience.

Our warranty and sales allowance reserve on December 29, 2019 and December 30, 2018 , was $3.9 million and $3.5 million , respectively.

Our warranty and sales allowance reserve on January 3, 2021 and December 29, 2019, was $3.2 million and $3.9 million, respectively.

Actual warranty expense incurred could vary significantly from amounts that we estimate.

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The most significant of the fair value estimates is related to intangible assets not subject to amortization and intangible assets subject to amortization.

We acquired $103.3 million of intangible assets in connection with the nora acquisition.This amount of intangible assets was determined based primarily on nora’s projected cash flows.

We acquired $103.3 million of intangible assets in connection with the nora acquisition.

This amount of intangible assets was determined based primarily on nora’s projected cash flows.

The projected cash flows include various assumptions, including the timing of projects embedded in backlog, success in securing future business, profitability of the business, and the appropriate risk-adjusted discount rate used to discount the projected cash flows.

At December 29, 2019 intangible assets, net of amortization, were approximately $89.1 million.

At January 3, 2021 intangible assets, net of amortization and impairments, were approximately $87.7 million.

The final residual value assigned to goodwill related to the nora acquisition was $201.9 million, at the acquisition date exchange rate.

We completed our final valuation of the assets acquired and liabilities assumed at the acquisition date in the second quarter of 2019.

At January 3, 2021, goodwill, net of impairments, was $165.8 million.

Off-Balance Sheet Arrangements

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Recent Accounting Pronouncements

Please see Item 8, Note 2 entitled “ Recent Accounting Pronouncements ” for discussion of these items.

Please see Note 2 entitled “Recent Accounting Pronouncements” in Item 8 of this Report for discussion of these items.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis