INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) JULY 4, 2021 JANUARY 3, 2021 (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 102,372 $ 103,053 Accounts receivable, net 146,938 139,869 Inventories, net 258,215 228,725 Prepaid expenses and other current assets 39,134 23,747 Total current assets 546,659 495,394 Property, plant and equipment, net 345,322 359,036 Operating lease right-of-use assets 94,316 98,013 Deferred tax asset 14,841 18,175 Goodwill and intangibles, net 240,332 253,536 Other assets 80,744 81,857 Total assets $ 1,322,214 $ 1,306,011 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 82,393 $ 58,687 Accrued expenses 118,900 105,739 Current portion of operating lease liabilities 13,116 13,555 Current portion of long-term debt 15,189 15,319 Total current liabilities 229,598 193,300 Long-term debt 541,395 561,251 Operating lease liabilities 83,034 86,468 Deferred income taxes 32,254 34,307 Other long-term liabilities 100,347 104,147 Total liabilities 986,628 979,473 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at July 4, 2021 and January 3, 2021 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 59,066 and 58,664 shares issued and outstanding at July 4, 2021 and January 3, 2021, respectively 5,907 5,865 Additional paid-in capital 250,114 247,920 Retained earnings 229,833 208,562 Accumulated other comprehensive loss – foreign currency translation ( 76,473 ) ( 60,331 ) Accumulated other comprehensive loss – cash flow hedge ( 4,696 ) ( 6,190 ) Accumulated other comprehensive loss – pension liability ( 69,099 ) ( 69,288 ) Total shareholders’ equity 335,586 326,538 Total liabilities and shareholders’ equity $ 1,322,214 $ 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 SIX MONTHS ENDED JULY 4, 2021 JULY 5, 2020 JULY 4, 2021 JULY 5, 2020 NET SALES $ 294,785 $ 259,504 $ 548,045 $ 547,673 Cost of Sales 185,793 162,210 343,015 336,068 GROSS PROFIT ON SALES 108,992 97,294 205,030 211,605 Selling, General and Administrative Expenses 79,830 80,058 159,132 167,741 Restructuring Charges ( 62 ) ( 157 ) ( 192 ) ( 1,275 ) Goodwill and Intangible Asset Impairment Charge — — — 121,258 OPERATING INCOME (LOSS) 29,224 17,393 46,090 ( 76,119 ) Interest Expense 7,289 4,965 14,545 10,595 Other Expense 617 5,139 1,332 6,630 INCOME (LOSS) BEFORE INCOME TAX EXPENSE 21,318 7,289 30,213 ( 93,344 ) Income Tax Expense 5,807 2,580 7,764 4,114 NET INCOME (LOSS) $ 15,511 $ 4,709 $ 22,449 $ ( 97,458 ) Earnings (Loss) Per Share – Basic $ 0.26 $ 0.08 $ 0.38 $ ( 1.67 ) Earnings (Loss) Per Share – Diluted $ 0.26 $ 0.08 $ 0.38 $ ( 1.67 ) Common Shares Outstanding – Basic 59,041 58,484 58,885 58,466 Common Shares Outstanding – Diluted 59,041 58,484 58,885 58,466 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 SIX MONTHS ENDED JULY 4, 2021 JULY 5, 2020 JULY 4, 2021 JULY 5, 2020 Net Income (Loss) $ 15,511 $ 4,709 $ 22,449 $ ( 97,458 ) Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment 3,455 16,160 ( 16,142 ) 915 Other Comprehensive Income (Loss), Cash Flow Hedge 745 ( 351 ) 1,494 ( 6,491 ) Other Comprehensive Income (Loss), Pension Liability Adjustment 100 ( 342 ) 189 1,391 Comprehensive Income (Loss) $ 19,811 $ 20,176 $ 7,990 $ ( 101,643 ) 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) SIX MONTHS ENDED JULY 4, 2021 JULY 5, 2020 OPERATING ACTIVITIES: Net income (loss) $ 22,449 $ ( 97,458 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 23,670 21,748 Stock compensation amortization expense (benefit) 2,472 ( 2,216 ) Deferred income taxes and other 1,057 ( 17,364 ) Amortization of acquired intangible assets 2,862 2,631 Goodwill and intangible asset impairment — 121,258 Working capital changes: Accounts receivable ( 8,816 ) 37,660 Inventories ( 33,855 ) ( 8,792 ) Prepaid expenses and other current assets ( 14,830 ) 1,005 Accounts payable and accrued expenses 40,109 ( 26,045 ) CASH PROVIDED BY OPERATING ACTIVITIES 35,118 32,427 INVESTING ACTIVITIES: Capital expenditures ( 12,112 ) ( 35,665 ) Other — ( 29 ) CASH USED IN INVESTING ACTIVITIES ( 12,112 ) ( 35,694 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 56,796 ) ( 47,779 ) Borrowing of long-term debt 38,000 70,000 Tax withholding payments for share-based compensation ( 193 ) ( 1,488 ) Proceeds from issuance of common stock — 93 Dividends paid ( 1,178 ) ( 4,392 ) Debt issuance costs ( 36 ) — Finance lease payments ( 1,116 ) ( 810 ) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ( 21,319 ) 15,624 Net cash provided by operating, investing and financing activities 1,687 12,357 Effect of exchange rate changes on cash ( 2,368 ) ( 1,814 ) CASH AND CASH EQUIVALENTS: Net change during the period ( 681 ) 10,543 Balance at beginning of period 103,053 81,301 Balance at end of period $ 102,372 $ 91,844 See accompanying notes to consolidated condensed financial statements. -6- Table of Contents INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 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 six-month period ended July 4, 2021 includes 26 weeks, and the six-month period ended July 5, 2020 includes 27 weeks. The three-month periods ended July 4, 2021 and July 5, 2020 both include 13 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 revenue for the first six months of 2021 when excluding the impacts of foreign currency fluctuations, 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 July 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 98 % of total revenue for both six-month periods ended July 4, 2021 and July 5, 2020. The remaining 2 % of revenue was generated from the installation of carpet and other flooring-related material for both 2021 and 2020 six-month periods. Disaggregation of Revenue For the six months ended July 4, 2021 and July 5, 2020, revenue from the Company’s customers is broken down by geography as follows: Six Months Ended Geography July 4, 2021 July 5, 2020 Americas 51.8 % 56.5 % Europe 33.6 % 30.4 % Asia-Pacific 14.6 % 13.1 % 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: July 4, 2021 January 3, 2021 (in thousands) Finished goods $ 172,581 $ 152,836 Work in process 21,791 17,109 Raw materials 63,843 58,780 Inventories, net $ 258,215 $ 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 table shows the computation of basic and diluted EPS: Three Months Ended Six Months Ended July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands, except per share data) Numerator: Net income (loss) $ 15,511 $ 4,709 $ 22,449 $ ( 97,458 ) Less: distributed and undistributed earnings available to participating securities ( 192 ) ( 38 ) ( 229 ) ( 35 ) Distributed and undistributed earnings (loss) available to common shareholders $ 15,319 $ 4,671 $ 22,220 $ ( 97,493 ) Denominator: Weighted average shares outstanding 58,310 58,024 58,283 58,006 Participating securities 731 460 602 460 Shares for basic earnings per share 59,041 58,484 58,885 58,466 Dilutive effect of stock options — — — — Shares for diluted earnings per share 59,041 58,484 58,885 58,466 Basic earnings (loss) per share $ 0.26 $ 0.08 $ 0.38 $ ( 1.67 ) Diluted earnings (loss) per share $ 0.26 $ 0.08 $ 0.38 $ ( 1.67 ) For the three and six months ended July 5, 2020, there were 20,000 stock options in each respective period excluded from the computation of diluted EPS because the impact would be anti-dilutive. -11- Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: July 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 $ — — % $ 3,000 4.00 % Term loan borrowings 264,578 1.83 % 282,215 1.87 % Total borrowings under Syndicated Credit Facility 264,578 1.83 % 285,215 1.89 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 564,578 585,215 Less: Unamortized debt issuance costs ( 7,994 ) ( 8,645 ) Total debt, net 556,584 576,570 Less: Current portion of long-term debt ( 15,189 ) ( 15,319 ) Total long-term debt, net $ 541,395 $ 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 July 4, 2021 and January 3, 2021, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both July 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 July 4, 2021, the estimated fair value of the Senior Notes was $ 315.1 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 July 4, 2021 and January 3, 2021. As of July 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 July 4, 2021 and January 3, 2021, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 8.0 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 $ 1.8 million and $ 2.0 million as of July 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 loss for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statements 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 July 4, 2021 and January 3, 2021, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $ 6.5 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 $ 4.0 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 and six months ended July 5, 2020: Three Months Ended Six Months Ended July 5, 2020 July 5, 2020 (in thousands) Interest rate swap contracts loss $ ( 351 ) $ ( 6,491 ) 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 July 4, 2021, the Company had outstanding foreign currency options with an aggregate notional amount of $ 4.4 million. The table below sets forth the fair value of derivative instruments not designated as hedging instruments as of July 4, 2021 and January 3, 2021: Asset Derivatives Balance Sheet Location Fair Value as of July 4, 2021 Fair Value as of January 3, 2021 (in thousands) Foreign currency options Other current assets $ 3 $ 37 -14- Table of Contents The following tables summarize gains and losses on derivatives not designated as hedging instruments within the consolidated condensed statements of operations for the three and six months ended July 4, 2021 and July 5, 2020: Three Months Ended Statement of Operations Location July 4, 2021 July 5, 2020 (in thousands) Foreign currency options gain (loss) Other expense $ 134 $ ( 1,629 ) Six Months Ended Statement of Operations Location July 4, 2021 July 5, 2020 (in thousands) Foreign currency options gain Other expense $ 319 $ 79 -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 and six months ended July 4, 2021 and July 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 ) — — — Compensation expense related to stock awards, net of forfeitures ( 26 ) ( 2 ) 689 — — — — Pension liability adjustment — — — — 89 — — Foreign currency translation adjustment — — — — — ( 19,597 ) — Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge — — — — — — 749 Balance, at April 4, 2021 59,014 $ 5,901 $ 248,571 $ 214,911 $ ( 69,199 ) $ ( 79,928 ) $ ( 5,441 ) Net income — — — 15,511 — — — Restricted stock issuances 52 6 789 — — — — Unamortized compensation expense related to restricted stock awards — — ( 794 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 589 ) — — — Compensation expense related to stock awards — — 1,548 — — — — Pension liability adjustment — — — — 100 — — Foreign currency translation adjustment — — — — — 3,455 — Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge — — — — — — 745 Balance, at July 4, 2021 59,066 $ 5,907 $ 250,114 $ 229,833 $ ( 69,099 ) $ ( 76,473 ) $ ( 4,696 ) -16- Table of Contents 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 ) — — — Compensation expense related to stock awards, net of forfeitures ( 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 ) Net income — — — 4,709 — — — Issuances of stock (other than restricted stock) 12 1 ( 1 ) — — — — Restricted stock issuances 70 7 2,294 — — — — Unamortized compensation expense related to restricted stock awards — — ( 2,300 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 585 ) — — — Compensation expense related to stock awards, net of forfeitures ( 26 ) ( 3 ) ( 48 ) — — — — Pension liability adjustment — — — — ( 342 ) — — Foreign currency translation adjustment — — — — — 16,160 — Cash flow hedge unrealized loss — — — — — — ( 351 ) Balance, at July 5, 2020 58,544 $ 5,854 $ 246,323 $ 184,206 $ ( 55,309 ) $ ( 112,224 ) $ ( 10,654 ) 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 six months of 2021 or 2020. As of July 4, 2021, there were no stock options outstanding and exercisable. There were no stock options granted in the first six months of 2021 or 2020. There were no stock options exercised and no stock options forfeited in the first six months of 2021. There were 7,500 stock options exercised in the first six months of 2020 and no stock option forfeitures during those six months. Restricted Stock Awards During the six months ended July 4, 2021 and July 5, 2020, the Company granted restricted stock awards for 428,400 and 308,100 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. -17- Table of Contents Compensation expense (benefit) related to restricted stock grants was $ 1.8 million and $( 0.2 ) million for the six months ended July 4, 2021, and July 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 July 4, 2021, as well as activity during the six months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 3, 2021 436,900 $ 24.73 Granted 428,400 14.26 Vested ( 167,200 ) 13.68 Forfeited or canceled ( 3,100 ) 16.69 Outstanding at July 4, 2021 695,000 $ 20.97 As of July 4, 2021, the unrecognized total compensation cost related to unvested restricted stock was $ 7.2 million. That cost is expected to be recognized by the end of 2024. Performance Share Awards During the six months ended July 4, 2021 and July 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 July 4, 2021, as well as the activity during the six 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 July 4, 2021 654,700 $ 15.20 Compensation expense (benefit) related to the performance shares was $ 0.7 million and $( 2.0 ) million for the six months ended July 4, 2021 and July 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 $ 9.0 million as of July 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 $ 0.4 million for the six months ended July 4, 2021. -18- 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 July 4, 2021, there were no significant leases that had not commenced as of the end of the second quarter. The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to the Company’s leases as of July 4, 2021 and January 3, 2021: July 4, 2021 January 3, 2021 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 94,316 $ 98,013 Current portion of operating lease liabilities $ 13,116 $ 13,555 Operating lease liabilities 83,034 86,468 Total operating lease liabilities $ 96,150 $ 100,023 Property, plant and equipment, net $ 7,738 $ 6,138 Accrued expenses $ 1,862 $ 1,496 Other long-term liabilities 3,916 2,688 Total finance lease liabilities $ 5,778 $ 4,184 Lease Costs Three Months Ended Six Months Ended July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 305 $ 335 $ 584 $ 635 Interest on lease liabilities 35 16 67 34 Operating lease cost 5,914 6,759 11,800 12,981 Short-term lease cost 179 166 642 341 Variable lease cost 482 924 1,288 1,570 Total lease cost $ 6,915 $ 8,200 $ 14,381 $ 15,561 -19- Table of Contents Other Supplemental Information Three Months Ended Six Months Ended July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 35 $ 16 $ 67 $ 34 Operating cash flows from operating leases 5,476 5,569 10,676 11,450 Financing cash flows from finance leases 589 411 1,116 810 Right-of-use assets obtained in exchange for new finance lease liabilities 1,471 340 2,744 553 Right-of-use assets obtained in exchange for new operating lease liabilities 3,267 3,088 5,645 4,065 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 July 4, 2021 and January 3, 2021: July 4, 2021 January 3, 2021 Weighted-average remaining lease term – finance leases (in years) 3.46 3.35 Weighted-average remaining lease term – operating leases (in years) 10.26 10.61 Weighted-average discount rate – finance leases 2.82 % 2.64 % Weighted-average discount rate – operating leases 5.96 % 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 six months ended July 4, 2021) $ 9,439 $ 1,046 2022 16,838 1,850 2023 13,798 1,579 2024 11,563 1,053 2025 10,341 419 Thereafter 69,793 140 Total future minimum lease payments (undiscounted) 131,772 6,087 Less: Present value discount ( 35,622 ) ( 309 ) Total lease liability $ 96,150 $ 5,778 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 accounts 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. -20- Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS During the three and six months ended July 4, 2021, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.7 million and $ 1.4 million, respectively. During the three and six months ended July 5, 2020, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.6 million and $ 1.3 million, respectively. The following tables provide the components of net periodic benefit cost for the three and six months ended July 4, 2021 and July 5, 2020: Three Months Ended Six Months Ended Defined Benefit Retirement Plans (Europe) July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Interest cost $ 579 $ 870 $ 1,151 $ 1,761 Expected return on assets ( 860 ) ( 1,038 ) ( 1,709 ) ( 2,102 ) Amortization of prior service cost 29 26 58 52 Amortization of net actuarial losses 409 320 813 646 Net periodic benefit cost $ 157 $ 178 $ 313 $ 357 Three Months Ended Six Months Ended Salary Continuation Plan July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Interest cost $ 177 $ 235 $ 353 $ 469 Amortization of net actuarial losses 186 139 372 279 Net periodic benefit cost $ 363 $ 374 $ 725 $ 748 Three Months Ended Six Months Ended nora Defined Benefit Plan July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Service cost $ 277 $ 259 $ 554 $ 517 Interest cost 104 110 207 221 Amortization of net actuarial losses 92 110 184 110 Net periodic benefit cost $ 473 $ 479 $ 945 $ 848 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. -21- 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 2020 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 July 4, 2021. The changes in the carrying amounts of goodwill attributable to each reportable segment for the six months ended July 4, 2021 are as follows: AMS EAAA Total (in thousands) Balance, at January 3, 2021 $ 122,344 $ 43,433 $ 165,777 Foreign currency translation ( 5,795 ) ( 2,057 ) ( 7,852 ) Balance, at July 4, 2021 $ 116,549 $ 41,376 $ 157,925 Additionally, in fiscal year 2020, 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 $ 82.4 million at July 4, 2021. There were no indicators of additional intangible asset impairment as of the end of the second quarter of 2021. -22- 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 and six months ended July 4, 2021 were $ 20.6 million and $ 36.3 million, respectively, and intersegment revenues for the three and six months ended July 5, 2020 were $ 21.1 million and $ 40.6 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 Six Months Ended July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) Net Sales AMS $ 156,665 $ 151,222 $ 283,632 $ 309,313 EAAA 138,120 108,282 264,413 238,360 Total net sales $ 294,785 $ 259,504 $ 548,045 $ 547,673 Segment AOI AMS $ 21,098 $ 23,942 $ 33,011 $ 47,492 EAAA 9,960 3,530 17,971 9,330 Depreciation and Amortization AMS $ 4,504 $ 3,966 $ 9,227 $ 7,873 EAAA 7,232 6,842 14,443 13,875 Total depreciation and amortization $ 11,736 $ 10,808 $ 23,670 $ 21,748 -23- Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: July 4, 2021 January 3, 2021 (in thousands) Assets AMS $ 834,446 $ 800,068 EAAA 692,208 682,295 Total segment assets 1,526,654 1,482,363 Corporate assets 128,701 111,073 Eliminations ( 333,141 ) ( 287,425 ) Total reported assets $ 1,322,214 $ 1,306,011 Reconciliations of operating income to income (loss) before income tax expense and segment AOI are presented as follows: Three Months Ended Six Months Ended July 4, 2021 July 5, 2020 July 4, 2021 July 5, 2020 (in thousands) AMS operating income $ 21,101 $ 17,189 $ 32,748 $ 37,287 EAAA operating income (loss) 8,123 204 13,342 ( 113,406 ) Consolidated operating income (loss) 29,224 17,393 46,090 ( 76,119 ) Interest expense 7,289 4,965 14,545 10,595 Other expense 617 5,139 1,332 6,630 Income (loss) before income tax expense $ 21,318 $ 7,289 $ 30,213 $ ( 93,344 ) Three Months Ended July 4, 2021 Three Months Ended July 5, 2020 AMS EAAA AMS EAAA (in thousands) Operating income $ 21,101 $ 8,123 $ 17,189 $ 204 Purchase accounting amortization — 1,441 — 1,316 Restructuring, asset impairment, severance and other charges ( 3 ) 396 6,753 2,010 AOI $ 21,098 $ 9,960 $ 23,942 $ 3,530 Six Months Ended July 4, 2021 Six Months Ended July 5, 2020 AMS EAAA AMS EAAA (in thousands) Operating income (loss) $ 32,748 $ 13,342 $ 37,287 $ ( 113,406 ) Purchase accounting amortization — 2,862 — 2,631 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 263 1,767 6,753 892 AOI $ 33,011 $ 17,971 $ 47,492 $ 9,330 -24- Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 11.9 million and $ 11.1 million for the six months ended July 4, 2021 and July 5, 2020, respectively. Income tax payments, net of refunds, amounted to $ 7.5 million and $ 6.9 million for the six months ended July 4, 2021 and July 5, 2020, respectively. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. -25- 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 six months ended July 4, 2021, the Company recorded a total income tax provision of $ 7.8 million on pre-tax income of $ 30.2 million resulting in an effective tax rate of 25.7 %, as compared to a total income tax provision of $ 4.1 million on a pre-tax loss of $ 93.3 million resulting in an effective tax rate of ( 4.4 )% during the six months ended July 5, 2020. The effective tax rate for the period ended July 5, 2020 was primarily impacted by a non-deductible goodwill impairment. Excluding the impact of the goodwill impairment, the effective tax rate was 17.8 % during the six months ended July 5, 2020. The increase in the effective tax rate as compared to the period ended July 5, 2020, excluding the non-deductible goodwill impairment, was due to the one-time favorable impacts of amending prior year tax returns during the six months ended July 5, 2020 which was offset by favorable changes related to company-owned life insurance in the current period. In the first six months of 2021, the Company decreased its liability for unrecognized tax benefits by $ 0.7 million. The decrease was primarily due to settlements with taxing authorities and a lapse of applicable statute of limitations. As of July 4, 2021, the Company had accrued approximately $ 10.1 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 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 $ 1.7 million of unrecognized tax benefits may be recognized within the next 12 months due to a lapse of statute of limitations. -26- Table of Contents NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three and six months ended July 4, 2021 and July 5, 2020 are reflected in the table below: Three Months Ended Statement of Operations Location July 4, 2021 July 5, 2020 (in thousands) Interest rate swap contracts loss Interest expense $ ( 1,046 ) $ ( 1,124 ) Amortization of benefit plan prior service cost and net actuarial losses Other expense ( 716 ) ( 595 ) Total loss reclassified from AOCI, net $ ( 1,762 ) $ ( 1,719 ) Six Months Ended Statement of Operations Location July 4, 2021 July 5, 2020 (in thousands) Interest rate swap contracts loss Interest expense $ ( 2,107 ) $ ( 1,616 ) Amortization of benefit plan prior service cost and net actuarial losses Other expense ( 1,427 ) ( 1,087 ) Total loss reclassified from AOCI, net $ ( 3,534 ) $ ( 2,703 ) -27- 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 ( 192 ) Deductions 579 Balance, at July 4, 2021 $ 293 For the six months ended July 4, 2021, the Company recorded a reduction of $ 0.2 million of previously recognized restructuring charges due to changes in expected cash payments. At July 4, 2021, the restructuring reserve was $ 0.3 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. -28- Table of Contents