INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) APRIL 4, 2021 JANUARY 3, 2021 (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 106,923 $ 103,053 Accounts receivable, net 128,610 139,869 Inventories, net 243,067 228,725 Prepaid expenses and other current assets 38,827 23,747 Total current assets 517,427 495,394 Property, plant and equipment, net 348,632 359,036 Operating lease right-of-use assets 94,609 98,013 Deferred tax asset 15,007 18,175 Goodwill and intangibles, net 239,158 253,536 Other assets 80,493 81,857 Total assets $ 1,295,326 $ 1,306,011 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 72,029 $ 58,687 Accrued expenses 116,590 105,739 Current portion of operating lease liabilities 13,289 13,555 Current portion of long-term debt 15,176 15,319 Total current liabilities 217,084 193,300 Long-term debt 547,395 561,251 Operating lease liabilities 83,173 86,468 Deferred income taxes 32,462 34,307 Other long-term liabilities 100,397 104,147 Total liabilities 980,511 979,473 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at April 4, 2021 and January 3, 2021 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 59,014 and 58,664 shares issued and outstanding at April 4, 2021 and January 3, 2021, respectively 5,901 5,865 Additional paid-in capital 248,571 247,920 Retained earnings 214,911 208,562 Accumulated other comprehensive loss – foreign currency translation ( 79,928 ) ( 60,331 ) Accumulated other comprehensive loss – cash flow hedge ( 5,441 ) ( 6,190 ) Accumulated other comprehensive loss – pension liability ( 69,199 ) ( 69,288 ) Total shareholders’ equity 314,815 326,538 Total liabilities and shareholders’ equity $ 1,295,326 $ 1,306,011 See accompanying notes to consolidated condensed financial statements. -3- Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) THREE MONTHS ENDED APRIL 4, 2021 APRIL 5, 2020 NET SALES $ 253,260 $ 288,169 Cost of Sales 157,222 173,858 GROSS PROFIT ON SALES 96,038 114,311 Selling, General and Administrative Expenses 79,302 87,683 Restructuring Charges ( 130 ) ( 1,118 ) Goodwill and Intangible Asset Impairment Charge — 121,258 OPERATING INCOME (LOSS) 16,866 ( 93,512 ) Interest Expense 7,256 5,630 Other Expense 715 1,491 INCOME (LOSS) BEFORE INCOME TAX EXPENSE 8,895 ( 100,633 ) Income Tax Expense 1,957 1,534 NET INCOME (LOSS) $ 6,938 $ ( 102,167 ) Earnings (Loss) Per Share – Basic $ 0.12 $ ( 1.75 ) Earnings (Loss) Per Share – Diluted $ 0.12 $ ( 1.75 ) Common Shares Outstanding – Basic 58,730 58,450 Common Shares Outstanding – Diluted 58,730 58,452 See accompanying notes to consolidated condensed financial statements. -4- Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 4, 2021 APRIL 5, 2020 Net Income (Loss) $ 6,938 $ ( 102,167 ) Other Comprehensive Loss, Foreign Currency Translation Adjustment ( 19,597 ) ( 15,245 ) Other Comprehensive Income (Loss), Cash Flow Hedge 749 ( 6,140 ) Other Comprehensive Income, Pension Liability Adjustment 89 1,733 Comprehensive Loss $ ( 11,821 ) $ ( 121,819 ) See accompanying notes to consolidated condensed financial statements. -5- Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 4, 2021 APRIL 5, 2020 OPERATING ACTIVITIES: Net income (loss) $ 6,938 $ ( 102,167 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 11,934 10,940 Stock compensation amortization expense (benefit) 924 ( 2,932 ) Deferred income taxes and other 230 ( 15,732 ) Amortization of acquired intangible assets 1,421 1,315 Goodwill and intangible asset impairment — 121,258 Working capital changes: Accounts receivable 9,794 28,635 Inventories ( 19,046 ) ( 22,514 ) Prepaid expenses and other current assets ( 15,852 ) ( 7,464 ) Accounts payable and accrued expenses 28,512 ( 27,056 ) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 24,855 ( 15,717 ) INVESTING ACTIVITIES: Capital expenditures ( 5,214 ) ( 22,204 ) Other — ( 90 ) CASH USED IN INVESTING ACTIVITIES ( 5,214 ) ( 22,294 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 30,239 ) ( 19,875 ) Borrowing of long-term debt 18,000 54,000 Tax withholding payments for share-based compensation ( 179 ) ( 1,344 ) Proceeds from issuance of common stock — 93 Debt issuance costs ( 36 ) — Finance lease payments ( 527 ) ( 399 ) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ( 12,981 ) 32,475 Net cash provided by (used in) operating, investing and financing activities 6,660 ( 5,536 ) Effect of exchange rate changes on cash ( 2,790 ) ( 3,114 ) CASH AND CASH EQUIVALENTS: Net change during the period 3,870 ( 8,650 ) Balance at beginning of period 103,053 81,301 Balance at end of period $ 106,923 $ 72,651 See accompanying notes to consolidated condensed financial statements. -6- Table of Contents INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 3, 2021, as filed with the Commission. The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature unless otherwise disclosed. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 3, 2021, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (“GAAP”). The three month period ended April 4, 2021 includes 13 weeks, and the three month period ended April 5, 2020 includes 14 weeks. Risks and Uncertainties The World Health Organization declared the COVID-19 outbreak a pandemic in March 2020, 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 goodwill and intangible asset impairment recorded in the first quarter of 2020 and discussed in Note 10 “Goodwill and Intangible Assets,” the decline in 2021 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 April 4, 2021. The Company’s primary credit facility has various financial and other covenants including, but not limited to, a covenant to not exceed a maximum secured net debt to EBITDA ratio, as defined by the credit facility agreement. The Company is currently in compliance with all covenants under the credit facility agreement and anticipates that it will remain in compliance with the covenants for the foreseeable future. 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, produce our products 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. 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, various other costs, and capital expenditures, as well as suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives. Reclassifications In the first quarter of fiscal 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 have been restated to conform to the current reportable segment structure. See Note 11 entitled “Segment Information” for additional information. -7- Table of Contents 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. Recently Issued Accounting Pronouncements Not Yet Adopted In March 2020, the Financial Accounting Standards Board (“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. The Company is currently evaluating the impact of adoption of this standard. -8- Table of Contents NOTE 2 – REVENUE RECOGNITION Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 99 % and 98 % of total revenue for the three month periods ended April 4, 2021 and April 5, 2020, respectively. The remaining 1 % and 2 % of revenue was generated from the installation of carpet and other flooring-related material for the 2021 and 2020 three month periods, respectively. Disaggregation of Revenue For the three months ended April 4, 2021 and April 5, 2020, revenue from the Company’s customers is broken down by geography as follows: Three Months Ended Geography April 4, 2021 April 5, 2020 Americas 50.1 % 54.9 % Europe 35.1 % 32.8 % Asia-Pacific 14.8 % 12.3 % Revenue from the Company’s customers in the Americas corresponds to the AMS operating segment, and the EAAA operating segment includes revenue from the Europe and Asia-Pacific geographies. See Note 11 entitled “Segment Information” for additional information. -9- Table of Contents NOTE 3 – INVENTORIES Inventories are summarized as follows: April 4, 2021 January 3, 2021 (in thousands) Finished goods $ 169,213 $ 152,836 Work in process 15,743 17,109 Raw materials 58,111 58,780 Inventories, net $ 243,067 $ 228,725 -10- Table of Contents NOTE 4 – EARNINGS PER SHARE The Company computes basic earnings or loss per share (“EPS”) by dividing net income or loss by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings. The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in the basic and diluted EPS calculations when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following tables show distributed and undistributed earnings: Three Months Ended Earnings (Loss) Per Share April 4, 2021 April 5, 2020 Basic Earnings (Loss) Per Share: Distributed earnings $ 0.01 $ 0.07 Undistributed earnings (loss) 0.11 ( 1.82 ) Total $ 0.12 $ ( 1.75 ) Diluted Earnings (Loss) Per Share: Distributed earnings $ 0.01 $ 0.07 Undistributed earnings (loss) 0.11 ( 1.82 ) Total $ 0.12 $ ( 1.75 ) Basic earnings (loss) per share $ 0.12 $ ( 1.75 ) Diluted earnings (loss) per share $ 0.12 $ ( 1.75 ) The following table presents net income that was attributable to participating securities: Three Months Ended April 4, 2021 April 5, 2020 (in millions) Net income attributable to participating securities $ 0.1 $ — The weighted average shares for basic and diluted EPS were as follows: Three Months Ended April 4, 2021 April 5, 2020 (in thousands) Weighted average shares outstanding 57,979 58,060 Participating securities 751 390 Shares for basic earnings per share 58,730 58,450 Dilutive effect of stock options — 2 Shares for diluted earnings per share 58,730 58,452 For all periods presented, there were no stock options or participating securities excluded from the computation of diluted EPS. -11- Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: April 4, 2021 January 3, 2021 Outstanding Principal Interest Rate (1) Outstanding Principal Interest Rate (1) (in thousands) (in thousands) Syndicated Credit Facility: Revolving loan borrowings $ — 4.00 % $ 3,000 4.00 % Term loan borrowings 270,901 1.84 % 282,215 1.87 % Total borrowings under Syndicated Credit Facility 270,901 1.84 % 285,215 1.89 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 570,901 585,215 Less: Unamortized debt issuance costs ( 8,330 ) ( 8,645 ) Total debt, net 562,571 576,570 Less: Current portion of long-term debt ( 15,176 ) ( 15,319 ) Total long-term debt, net $ 547,395 $ 561,251 (1) Represents the stated rate of interest, without the effect of debt issuance costs or interest rate swaps. Syndicated Credit Facility The Syndicated Credit Facility (the “Facility”) provides the Company and certain of its subsidiaries a multicurrency revolving loan and U.S. denominated and multicurrency term loans. Interest on base rate loans is charged at varying rates computed by applying a margin 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 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 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. As of both April 4, 2021 and January 3, 2021, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both April 4, 2021 and January 3, 2021, the carrying value of the Company’s borrowings under the Facility approximated its fair value as the Facility bears interest rates that are similar to existing market rates. Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which 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 The 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 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. -12- Table of Contents As of April 4, 2021, the estimated fair value of the Senior Notes was $ 310.7 million, compared with a carrying value recorded in the Company’s consolidated condensed balance sheet of $ 300.0 million, excluding unamortized debt issuance costs. The fair value of the Senior Notes is derived using quoted prices for similar instruments and is considered Level 2 within the fair value hierarchy. Other Lines of Credit Subsidiaries of the Company had 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 both April 4, 2021 and January 3, 2021. As of April 4, 2021 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. 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 April 4, 2021 and January 3, 2021, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 8.3 million and $ 8.6 million, respectively. Other deferred borrowing costs, which include underwriting, legal and other direct costs related to the issuance of revolving debt, net of accumulated amortization, were $ 1.9 million and $ 2.0 million as of April 4, 2021 and January 3, 2021, respectively. These amounts are included in other assets in the Company’s consolidated condensed balance sheets. The Company amortizes these costs over the life of the related debt. -13- Table of Contents NOTE 6 – 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 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. Losses recorded in accumulated other comprehensive income for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statement of operations to the extent it is probable that a portion of the original forecasted transactions related to the portion of the hedged debt repaid will not occur by the end of the originally specified time period. See Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss” for additional information. As of April 4, 2021 and January 3, 2021, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $ 7.6 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 $ 4.1 million 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. The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges had on accumulated other comprehensive loss, net of tax, during the three months ended April 5, 2020: Three Months Ended April 5, 2020 (in thousands) Interest rate swap contracts loss $ ( 6,140 ) Derivative Transactions Not Designated as Hedging Instruments Our Asia-Pacific operations, from time to time, purchase 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 April 4, 2021, the Company had outstanding foreign currency options with an aggregate notional amount of $ 8.8 million. The table below sets forth the fair value of derivative instruments not designated as hedging instruments as of April 4, 2021 and January 3, 2021: Asset Derivatives Balance Sheet Location Fair Value as of April 4, 2021 Fair Value as of January 3, 2021 (in thousands) Foreign currency options Other current assets $ 21 $ 37 -14- Table of Contents The following table summarizes gains and losses on derivatives not designated as hedging instruments within the consolidated condensed statements of operations for the three months ended April 4, 2021 and April 5, 2020: Three Months Ended Statement of Operations Location April 4, 2021 April 5, 2020 (in thousands) Foreign currency options gain Other expense $ 185 $ 1,700 -15- Table of Contents NOTE 7 – SHAREHOLDERS’ EQUITY The following tables depict the activity in the accounts which make up shareholders’ equity for the three months ended April 4, 2021 and April 5, 2020: SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at January 3, 2021 58,664 $ 5,865 $ 247,920 $ 208,562 $ ( 69,288 ) $ ( 60,331 ) $ ( 6,190 ) Net income — — — 6,938 — — — Restricted stock issuances 376 38 5,277 — — — — Unamortized compensation expense related to restricted stock awards — — ( 5,315 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 589 ) — — — Forfeitures and compensation expense related to stock awards ( 26 ) ( 2 ) 689 — — — — Pension liability adjustment — — — — 89 — — Foreign currency translation adjustment — — — — — ( 19,597 ) — Reclassification out of accumulated other comprehensive income - discontinued cash flow hedge — — — — — — 749 Balance, at April 4, 2021 59,014 $ 5,901 $ 248,571 $ 214,911 $ ( 69,199 ) $ ( 79,928 ) $ ( 5,441 ) SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at December 29, 2019 58,416 $ 5,842 $ 250,306 $ 286,056 $ ( 56,700 ) $ ( 113,139 ) $ ( 4,163 ) Net loss — — — ( 102,167 ) — — — Issuances of stock (other than restricted stock) 220 22 197 — — — — Restricted stock issuances 107 10 1,720 — — — — Unamortized compensation expense related to restricted stock awards — — ( 1,731 ) — — — — Cash dividends declared, $ 0.065 per common share — — — ( 3,807 ) — — — Forfeitures and compensation expense related to stock awards ( 255 ) ( 25 ) ( 4,114 ) — — — — Pension liability adjustment — — — — 1,733 — — Foreign currency translation adjustment — — — — — ( 15,245 ) — Cash flow hedge unrealized loss — — — — — — ( 6,140 ) Balance, at April 5, 2020 58,488 $ 5,849 $ 246,378 $ 180,082 $ ( 54,967 ) $ ( 128,384 ) $ ( 10,303 ) Stock Option Awards In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange for the award. All outstanding stock options vested prior to the end of 2013, and therefore there was no stock option compensation expense in the first three months of 2021 or 2020. As of April 4, 2021, there were no stock options outstanding and exercisable. There were no stock options granted in the first three months of 2021 or 2020. There were no stock options exercised and no stock options forfeited in the first three months of 2021. There were 7,500 stock options exercised in the first three months of 2020 and no stock option forfeitures during those three months. -16- Table of Contents Restricted Stock Awards During the three months ended April 4, 2021 and April 5, 2020, the Company granted restricted stock awards for 375,600 and 199,600 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three -year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause. Compensation expense (benefit) related to restricted stock grants was $ 0.7 million and $( 0.7 ) million for the three months ended April 4, 2021, and April 5, 2020, respectively. The Company has reduced its expense for restricted stock forfeited during the period. The following table summarizes restricted stock outstanding as of April 4, 2021, as well as activity during the three months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 3, 2021 436,900 $ 24.73 Granted 375,600 14.15 Vested ( 58,600 ) 24.09 Forfeited or canceled ( 3,100 ) 16.69 Outstanding at April 4, 2021 750,800 $ 19.52 As of April 4, 2021, the unrecognized total compensation cost related to unvested restricted stock was $ 7.5 million. That cost is expected to be recognized by the end of 2024. Performance Share Awards During the three months ended April 4, 2021 and April 5, 2020, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years , subject to the employee’s continued employment, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200 %) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards. The following table summarizes the performance shares outstanding as of April 4, 2021, as well as the activity during the three months then ended: Performance Shares Weighted Average Grant Date Fair Value Outstanding at January 3, 2021 405,300 $ 16.94 Granted 296,900 14.15 Vested — — Forfeited or canceled ( 47,500 ) 23.42 Outstanding at April 4, 2021 654,700 $ 15.20 Compensation expense (benefit) related to the performance shares was $ 0.2 million and $( 2.2 ) million for the three months ended April 4, 2021 and April 5, 2020, respectively. The Company has reduced its expense for performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $ 9.5 million as of April 4, 2021. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2024. The tax benefit recognized with regard to restricted stock and performance shares was approximately $ 0.2 million for the three months ended April 4, 2021. -17- Table of Contents NOTE 8 – 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. The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have 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 was the Company’s incremental borrowing rate for the applicable geographical region. As of April 4, 2021, there were no significant leases that had not commenced as of the end of the first quarter. The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to our leases as of April 4, 2021 and January 3, 2021: April 4, 2021 January 3, 2021 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 94,609 $ 98,013 Current portion of operating lease liabilities $ 13,289 $ 13,555 Operating lease liabilities 83,173 86,468 Total operating lease liabilities $ 96,462 $ 100,023 Property, plant and equipment, net $ 6,835 $ 6,138 Accrued expenses $ 1,733 $ 1,496 Other long-term liabilities 3,148 2,688 Total finance lease liabilities $ 4,881 $ 4,184 Lease Costs Three Months Ended April 4, 2021 April 5, 2020 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 279 $ 300 Interest on lease liabilities 32 18 Operating lease cost 5,886 6,222 Short-term lease cost 463 175 Variable lease cost 806 646 Total lease cost $ 7,466 $ 7,361 -18- Table of Contents Other Supplemental Information Three Months Ended April 4, 2021 April 5, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 32 $ 18 Operating cash flows from operating leases 5,200 5,881 Financing cash flows from finance leases 527 399 Right-of-use assets obtained in exchange for new finance lease liabilities 1,273 213 Right-of-use assets obtained in exchange for new operating lease liabilities 2,378 977 Lease Term and Discount Rate The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of April 4, 2021 and January 3, 2021: April 4, 2021 January 3, 2021 Weighted-average remaining lease term – finance leases (in years) 3.19 3.35 Weighted-average remaining lease term – operating leases (in years) 10.41 10.61 Weighted-average discount rate – finance leases 2.60 % 2.64 % Weighted-average discount rate – operating leases 5.98 % 5.98 % Maturity Analysis A maturity analysis of lease payments under non-cancellable leases is presented as follows: Fiscal Year Operating Leases Finance Leases (in thousands) 2021 (excluding the three months ended April 4, 2021) $ 14,250 $ 1,437 2022 16,036 1,519 2023 13,000 1,237 2024 10,889 712 2025 9,939 196 Thereafter 68,815 — Total future minimum lease payments (undiscounted) 132,929 5,101 Less: Present value discount ( 36,467 ) ( 220 ) Total lease liability $ 96,462 $ 4,881 Policy Elections The Company made an accounting policy election not to separate lease and non-lease components for all asset classes, except for data center assets, and will account for the lease payments as a single component. The Company also 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 condensed balance sheets. These leases primarily represent month-to-month operating leases for vehicles and office equipment where we were reasonably certain that we would not elect an option to extend the lease. -19- Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS The Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.7 million during both three month periods ended April 4, 2021 and April 5, 2020. The following tables provide the components of net periodic benefit cost for the three months ended April 4, 2021 and April 5, 2020: Three Months Ended Defined Benefit Retirement Plans (Europe) April 4, 2021 April 5, 2020 (in thousands) Interest cost $ 572 $ 891 Expected return on assets ( 849 ) ( 1,064 ) Amortization of prior service cost 29 26 Amortization of net actuarial losses 404 326 Net periodic benefit cost $ 156 $ 179 Three Months Ended Salary Continuation Plan April 4, 2021 April 5, 2020 (in thousands) Interest cost $ 176 $ 234 Amortization of net actuarial losses 186 140 Net periodic benefit cost $ 362 $ 374 Three Months Ended nora Defined Benefit Plan April 4, 2021 April 5, 2020 (in thousands) Service cost $ 277 $ 258 Interest cost 103 111 Amortization of net actuarial losses 92 — Net periodic benefit cost $ 472 $ 369 In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income (loss) in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense in the consolidated condensed statements of operations. -20- Table of Contents NOTE 10 – GOODWILL AND INTANGIBLE ASSETS In the first quarter of 2021, the Company determined that it has two operating and reportable segments – namely AMS and EAAA. See Note 11 entitled “Segment Information” for additional information. The Company tests goodwill for impairment at least annually at the reporting unit level. The Company’s reporting units remain unchanged following the realignment of its segments and consist of Americas, Europe, and Asia-Pacific. The Americas reporting unit is the same as the AMS reportable segment, and the Europe and Asia-Pacific reporting units are one level below the EAAA reportable segment. During the first quarter of 2020, as a result of changes in macroeconomic conditions related to the COVID-19 pandemic, the Company recognized a charge of $ 121.3 million for the impairment of goodwill and certain intangible assets. As a result of the first quarter assessment, we determined that the fair value for two reporting units was less than the carrying value and recognized a goodwill impairment loss of $ 116.5 million in the first quarter of 2020. The expected decline in revenue due to the impact of COVID-19 contributed to the lower fair value of our Europe and Asia-Pacific reporting units. As such, the goodwill impairment loss was allocated to our Europe and Asia-Pacific reporting units in the amounts of $ 99.2 million and $ 17.3 million, respectively. There were no indicators of additional goodwill impairment as of April 4, 2021. The changes in the carrying amounts of goodwill for the three months ended April 4, 2021 are as follows: Goodwill (in thousands) Balance, at January 3, 2021 $ 165,777 Foreign currency translation ( 9,815 ) Balance, at April 4, 2021 $ 155,962 Additionally, we determined that the trademarks and trade names intangible assets related to the acquired nora business were also impaired and recognized an impairment loss of $ 4.8 million in the first quarter of 2020. The carrying value of intangible assets was $ 83.2 million at April 4, 2021. There were no indicators of additional intangible asset impairment as of the end of the first quarter of 2021. -21- Table of Contents NOTE 11 – SEGMENT INFORMATION The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. 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 segments organized by geographical area – namely (a) Americas (“AMS”) and (b) 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. Pursuant to the management approach discussed above, the Company’s CODM, our chief executive officer, evaluates performance at the AMS and EAAA operating segment levels and makes operating and resource allocation decisions based on segment adjusted operating income or loss (“AOI”), which includes allocations of corporate selling, general and administrative expenses. AOI excludes nora purchase accounting amortization, goodwill and intangible asset impairment charges, changes in equity award forfeiture accounting, restructuring charges, asset impairment, severance and other charges. Intersegment revenues for the three months ended April 4, 2021 and April 5, 2020 were $ 15.7 million and $ 19.5 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM. The Company has determined that it has two reportable segments – AMS and EAAA as each operating segment meets the quantitative thresholds defined in the accounting guidance. Segment information below for fiscal year 2020 has been restated to reflect our new reportable segment structure. Three Months Ended April 4, 2021 April 5, 2020 (in thousands) Net Sales AMS $ 126,967 $ 158,091 EAAA 126,293 130,078 Total net sales $ 253,260 $ 288,169 Segment AOI AMS $ 11,913 $ 23,552 EAAA 8,011 5,798 Depreciation and Amortization AMS $ 4,723 $ 3,907 EAAA 7,211 7,033 Total depreciation and amortization $ 11,934 $ 10,940 -22- Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: April 4, 2021 January 3, 2021 (in thousands) Assets AMS $ 795,007 $ 800,068 EAAA 679,240 682,295 Total segment assets $ 1,474,247 $ 1,482,363 Corporate assets 129,199 111,073 Eliminations ( 308,120 ) ( 287,425 ) Total reported assets $ 1,295,326 $ 1,306,011 A reconciliation of operating income to income (loss) before income tax expense and segment AOI is presented as follows: Three Months Ended April 4, 2021 April 5, 2020 (in thousands) AMS operating income $ 11,647 $ 20,100 EAAA operating income (loss) 5,219 ( 113,612 ) Consolidated operating income (loss) $ 16,866 $ ( 93,512 ) Interest expense 7,256 5,630 Other expense 715 1,491 Income (loss) before income tax expense $ 8,895 $ ( 100,633 ) Three Months Ended April 4, 2021 AMS EAAA (in thousands) Operating income $ 11,647 $ 5,219 Purchase accounting amortization — 1,421 Restructuring, asset impairment, severance and other charges 266 1,371 AOI $ 11,913 $ 8,011 Three Months Ended April 5, 2020 AMS EAAA (in thousands) Operating income (loss) $ 20,100 $ ( 113,612 ) Purchase accounting amortization — 1,315 Goodwill and intangible asset impairment 2,695 118,563 Impact of change in equity award forfeiture accounting 757 650 Restructuring, asset impairment, severance and other charges — ( 1,118 ) AOI $ 23,552 $ 5,798 -23- Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 1.6 million and $ 6.6 million for the three months ended April 4, 2021 and April 5, 2020, respectively. Income tax payments, net of refunds, amounted to $ 3.2 million and $ 9.3 million for the three months ended April 4, 2021 and April 5, 2020, respectively. Non-Cash Investing and Financing Activities On March 16, 2021, the Company declared cash dividends on its common stock of $ 0.6 million, which were paid during the second quarter of 2021 to shareholders of record as of April 2, 2021. At April 4, 2021, the dividends were recorded within Accrued Expenses in the consolidated condensed balance sheet. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. -24- Table of Contents NOTE 13 – INCOME TAXES The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items. During the three months ended April 4, 2021, the Company recorded a total income tax provision of $ 2.0 million on pre-tax income of $ 8.9 million resulting in an effective tax rate of 22.0 %, as compared to a total income tax provision of $ 1.5 million on a pre-tax loss of $ 100.6 million resulting in an effective tax rate of ( 1.5 )% during the three months ended April 5, 2020. The effective tax rate for the period ended April 5, 2020 was primarily impacted by a non-deductible goodwill impairment. Excluding the impact of the goodwill impairment, the effective tax rate was 7.4 % during the three months ended April 5, 2020. The increase in the effective tax rate as compared to the period ended April 5, 2020, excluding the non-deductible goodwill impairment, was due to the one-time favorable impacts of amending prior year tax returns during the three months ended April 5, 2020. In the first three months of 2021, the Company decreased its liability for unrecognized tax benefits by $ 0.8 million. The decrease was primarily due to settlements with taxing authorities and lapse of applicable statute of limitations. As of April 4, 2021, the Company had accrued approximately $ 10.0 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of April 4, 2021 reflects a reduction for $ 3.0 million of these unrecognized tax benefits. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, it is reasonably possible that approximately $ 1.8 million of unrecognized tax benefits may be recognized within the next 12 months due to a lapse of statute of limitations. -25- Table of Contents NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive income (loss) (“AOCI”), before tax, to the consolidated condensed statements of operations during the three months ended April 4, 2021 and April 5, 2020 are reflected in the table below: Three Months Ended Statement of Operations Location April 4, 2021 April 5, 2020 (in thousands) Interest rate swap contracts loss Interest expense $ ( 1,061 ) $ ( 492 ) Amortization of benefit plan prior service cost and net actuarial losses Other expense ( 711 ) ( 492 ) Total loss reclassified from AOCI, net $ ( 1,772 ) $ ( 984 ) -26- Table of Contents NOTE 15 – RESTRUCTURING CHARGES A summary of restructuring activities for the 2019 restructuring plan is presented below: Workforce Reduction (in thousands) Balance, at January 3, 2021 $ 1,064 Charged to expenses ( 130 ) Deductions 474 Balance, at April 4, 2021 $ 460 For the three months ended April 4, 2021, the Company recorded a reduction of $ 0.1 million of previously recognized restructuring charges due to changes in expected cash payments. At April 4, 2021, the restructuring reserve was $ 0.5 million. Below is a discussion of the restructuring plan activities under the 2019 restructuring plan. 2019 Restructuring Plan 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 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 plan was expected to result in 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 2021 and expects 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. -27- Table of Contents