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Item 7. Management’s Discussion and Analysis

2022-03-02 compared with 2021-03-03 · 286 added, 274 removed, 195 unchanged (74% of the section changed)

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The duration of the pandemic will ultimately determine the extent to which our operations are impacted.

We continue to monitor our operations and have implemented various programs to mitigate the effects on our business including reductions in employees, labor costs, marketing expenses, consulting expenses, travel costs, various other costs, and capital expenditures, as well as reducing the amount of the cash dividend that we pay on our common stock and suspending and reducing shifts in our production facilities, temporarily furloughing employees, and implementing other cost reduction or avoidance initiatives.

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

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

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

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

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

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

We continue to focus on the impact COVID-19 has on our employees in accordance with the Company’s ongoing safety measures, as well as any local government orders and “shelter in place” directives in place from time to time.

During fiscal year 2021, the COVID-19 pandemic had less of an impact on our overall financial results as consolidated net sales increased 8.8% compared to fiscal year 2020.

Government stimulus programs, increased COVID-19 vaccination rates, and fewer COVID-19 related restrictions in some places contributed to a rebound in economic activity in certain countries driving higher revenues globally compared to fiscal year 2020.

The sales increase in fiscal year 2021 compared to fiscal year 2020 was primarily in non-corporate office market segments, including healthcare, education, retail, residential / living and transportation.

Our global supply chain and manufacturing operations, however, experienced increased adverse impacts and disruptions in 2021 from COVID-19.

These impacts included raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages – particularly in the United States.

These impacts to our supply chain and manufacturing operations increased our costs, decreased our ability to achieve manufacturing targets, increased lead times to our customers, and adversely affected our gross profit margin as a percentage of net sales.

Management believes it is reasonably likely these impacts will continue and affect our future operations and results to some degree, particularly during the first half of 2022.

During fiscal year 2020, the COVID-19 pandemic resulted in 17.9% lower consolidated net sales compared to fiscal year 2019.

We temporarily suspended production in certain manufacturing facilities in 2020 due to government lockdowns, shelter in place orders and reduced demand.

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

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

In fiscal year 2020, government grants and payroll protection programs were available in various countries globally to provide assistance to companies impacted by the pandemic.

The CARES Act enacted in the United States (see Note 17 entitled “ Income Taxes ” included in Item 8 of this Annual Report on Form 10-K for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”) provided benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments.

The NOW Program provided eligible companies with reimbursement of labor costs as an incentive to retain employees and continue paying them in accordance with the Company’s customary compensation practices.

During fiscal year 2020, the Company qualified for benefits under several payroll protection programs and recognized a reduction in payroll costs of approximately $7.3 million, which were recorded as a $6.1 million reduction of selling, general and administrative expenses and a $1.2 million reduction of cost of sales in the consolidated statements of operations, as the Company believes it is probable that the benefits received will not be repaid.

During the first quarter of 2020, as a result of changes in macroeconomic conditions related to the COVID-19 pandemic, we recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets.

See Note 12 entitled “Goodwill and Intangible Assets” of Part II, Item 8 of this Annual Report for additional information.

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

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

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

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

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

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

As a result of the COVID-19 pandemic, government grants and payroll protection programs are available in various countries globally to provide assistance to companies impacted by the pandemic.

The CARES Act enacted in the United States (see Note 17 entitled “ Income Taxes ” included in Item 8 of this Annual Report on Form 10-K for additional information) and a payroll protection program enacted in the Netherlands (the “NOW Program”) provide benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments.

The NOW Program provides eligible companies with reimbursement of labor costs as an incentive to retain employees and continue paying them in accordance with the Company’s customary compensation practices.

During fiscal year 2020, the Company qualified for benefits under several payroll protection programs and recognized a reduction in payroll costs of approximately $7.3 million, which are recorded as a $6.1 million reduction of selling, general and administrative expenses and a $1.2 million reduction of cost of sales in the consolidated statements of operations, as the Company believes it is probable that the benefits received will not be repaid.

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

Executive Overview

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

Our business, as well as the commercial interiors industry in general, is cyclical in nature and is impacted by economic conditions and trends that affect the markets for commercial and institutional business space.

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As a result, macroeconomic factors such as employment rates, office vacancy rates, capital spending, productivity and efficiency gains that impact corporate profitability in general, also affect our business.

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

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

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

2020 2019 2018

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

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

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

During 2020, we had net sales of $1,103.3 million, down 17.9% compared to $1,343.0 million in 2019, primarily due to the impacts of COVID-19.

The operating loss for 2020 was $39.3 million compared to operating income of $130.9 million in 2019.

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

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

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

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

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

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

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

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

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

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

Restructuring Plans

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

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

As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0 million.

The charge was comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million).

The restructuring charge was expected to result in future cash expenditures of approximately $9.0 million for payment of these employee severance and lease exit costs.

The Company expected the plan to yield annualized savings of approximately $6.0 million.

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

On December 29, 2018, the Company committed to a new restructuring plan in its continuing efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy.

The plan involved (i) a restructuring of its sales and administrative operations in the United Kingdom, (ii) a reduction of approximately 200 employees, primarily in the Europe and Asia-Pacific geographic regions, and (iii) the write-down of certain underutilized and impaired assets that included information technology assets and obsolete manufacturing equipment.

As a result of this plan, the Company recorded a pre-tax restructuring and asset impairment charge in the fourth quarter of 2018 of approximately $20.5 million.

The charge was comprised of severance expenses (approximately $10.8 million), impairment of assets (approximately $8.6 million) and other items (approximately $1.1 million).

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

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

Goodwill, Intangible Asset and Fixed Asset Impairment

During 2020, we recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets.

See Note 12 entitled “Goodwill and Intangible Assets” of Part II, Item 8 of this Annual Report for additional information.

During 2020, we recognized fixed asset impairment charges of $5.0 million primarily related to certain FLOR design center closures and other projects that were abandoned or indefinitely delayed.

These charges are included in selling, general and administrative expenses in the consolidated statements of operations.

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During fiscal year 2021, the Company largely completed its integration of the nora acquisition, and integration of its European and Asia-Pacific commercial areas and determined that it has two operating and reportable segments – namely Americas (“AMS”) and Europe, Africa, Asia and Australia (collectively “EAAA”).

The AMS operating segment is unchanged from prior year and continues to include the United States, Canada and Latin America geographic areas.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information .

The results of operations discussion below also includes segment information.

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

More than half of our consolidated net sales were in non-corporate office markets in fiscal year 2021 and fiscal year 2020, primarily in education, healthcare, government, retail, and residential/living market segments.

See Item 1, “Business” of this Annual Report on Form 10-K for additional information regarding our mix of modular carpet and resilient flooring sales in corporate office verses non-corporate office market segments for the last three fiscal years by reportable segment.

During 2021, we had consolidated net sales of $1,200.4 million, up 8.8% compared to $1,103.3 million in 2020, primarily due to the rebound in economic activity in certain countries following the impacts of COVID-19.

Consolidated operating income for 2021 was $104.8 million compared to consolidated operating loss of $39.3 million in 2020 primarily due to higher sales in 2021 and a $121.3 million impairment of goodwill and certain intangible assets in 2020 .

Fiscal year 2021 also included $3.9 million of restructuring charges in connection with the planned closure of our Thailand manufacturing operations anticipated to occur in 2022.

Consolidated net income for 2021 was $55.2 million or $0.94 per share, compared to consolidated net loss of $71.9 million, or $1.23 per share, in 2020.

During 2020, we had consolidated net sales of $1,103.3 million, down 17.9% compared to $1,343.0 million in 2019, primarily due to the impacts of COVID-19.

The consolidated operating loss for 2020 was $39.3 million compared to consolidated operating income of $130.9 million in 2019, due primarily to a $121.3 million goodwill and intangible asset impairment charge recorded in fiscal 2020 due to the impacts of COVID-19.

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

A detailed discussion of our 2021 and 2020 consolidated and segment performance appears below under “Analysis of Results of Operations”.

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Analysis of Results of Operations

Consolidated Results

The following discussion and analyses reflect the factors and trends discussed in the preceding sections.

Net sales denominated in currencies other than the U.S.

Consolidated net sales denominated in currencies other than the U.S.

dollar were approximately 50% in 2021, 51% in 2020, and 49% in 2019.

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

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

In 2021, the strengthening of the Euro, Australian dollar, Chinese Renminbi and British Pound sterling against the U.S.

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

In 2020, the strengthening of the Euro, British Pound sterling, and Chinese Renminbi against the U.S.

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

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

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

The following table presents the amounts (in U.S.

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

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

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

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

2021 2020 2019

(in millions)

Impact of changes in foreign currency on net sales $ 7.1 $ (26.2) $ 8.4

Impact of changes in foreign currency on operating income 0.9 (3.9) 1.2

Impact of changes in foreign currency on consolidated net sales $ 23.9 $ 7.1 $ (26.2)

Impact of changes in foreign currency on consolidated operating income (loss) 3.2 0.9 (3.9)

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

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Net income (loss) 4.6 % (6.5) % 5.8 %

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

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

Consolidated Net Sales

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

Fiscal year 2021 included 52 weeks, fiscal year 2020 included 53 weeks, and fiscal year 2019 included 52 weeks.

Fiscal Year Percentage Change

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(in thousands)

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

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

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

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

Net sales for 2020 compared with 2019

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

As discussed above, the decrease was primarily due to the impacts of COVID-19 resulting in lower sales volumes globally.

Consolidated net sales $ 1,200,398 $ 1,103,262 $ 1,343,029 8.8 % (17.9) %

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Consolidated net sales for 2021 compared with 2020

For 2021, our consolidated net sales increased $97.1 million (8.8%) compared to 2020, comprised of higher sales volumes (approximately 5.1%) and higher prices (approximately 3.7%).

Fluctuations in currency exchange rates had a positive impact on our year-over-year consolidated sales comparison of approximately $23.9 million, meaning that if currency levels had remained constant year over year our 2021 sales would have been lower by this amount.

On a market segment basis, the sales increase was most significant in non-corporate office market segments including retail, education and healthcare.

See the segment results discussion below for additional information on market segments.

Consolidated net sales for 2020 compared with 2019

For 2020, our consolidated net sales decreased $239.8 million (17.9%) compared to 2019, primarily due to the impacts of COVID-19 resulting in lower sales volumes globally.

Fluctuations in currency exchange rates had a positive impact on our year-over-year sales comparison of approximately $7.1 million, meaning that if currency levels had remained constant year over year, our 2020 sales would have been lower by this amount.

On a geographic basis, we experienced sales declines across all our regions.

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

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

The sales decrease of 21.6% in the Americas in 2020 was due primarily to the impacts of COVID-19 and lower carpet tile sales volumes.

On a market segment basis, the sales decrease in the Americas was most significant in the corporate office (down 33.8%), retail (down 34.8%), healthcare (down 15.2%) and education (down 8.3%) market segments, partially offset by increases in the residential living (up 23.8%) and public buildings (up 8.2%) market segments.

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

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

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

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

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

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

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

Net sales for 2019 compared with 2018

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

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

The 2018 period included nora revenue only from the acquisition date on August 7, 2018 to the end of the 2018 fiscal year of $112.6 million during that stub period.

The increase in net sales was primarily volume related and not materially impacted by changing prices.

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

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

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

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

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

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

This increase in the legacy business was due to increased sales in the corporate office market segment (up 8.6%) as well as increases in the healthcare (up 18.2%) and education (up 7.6%) market segments.

These legacy sales increases were partially offset by a decline in the retail market segment (down 24.6%).

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

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

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

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

dollar basis, but grew 2.6% in local currency.

The sales growth in local currency in the legacy European business was most pronounced in the corporate office segment (up 6.9%).

The decline in legacy sales on a U.S.

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

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

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

The legacy Asia-Pacific carpet and LVT business declined 3.9% on a U.S.

dollar basis, but increased 0.1% in local currency.

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

Cost and Expenses

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

On a market segment basis, the decrease in consolidated net sales was primarily in the corporate office, retail, hospitality and healthcare market segments.

See the segment results discussion below for additional information on market segments.

Consolidated Cost and Expenses

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

Fiscal Year Percentage Change

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(in thousands)

Cost of sales $ 692,688 $ 810,062 $ 749,690 (14.5) % 8.1 %

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

For 2020, our costs of sales decreased $117.4 million (14.5%) compared to 2019, primarily due to lower net sales.

Consolidated cost of sales $ 767,665 $ 692,688 $ 810,062 10.8 % (14.5) %

Consolidated selling, general and administrative expenses 324,315 333,229 389,117 (2.7) % (14.4) %

For 2021, our consolidated costs of sales increased $75.0 million (10.8%) compared to 2020, primarily due to higher net sales and the continued adverse impacts of COVID-19.

Currency translation had a $16.2 million (2.3%) negative impact on the year-over-year comparison.

As a percentage of sales, our costs of sales increased to 62.8% in 2020 versus 60.3% in 2019, primarily due to changes in fixed cost absorption driven by lower production volumes due to the impact of COVID-19.

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

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

Fluctuations in currency exchange rates had a 1.8% positive impact on the year-over-year comparison.

In absolute dollars, the increase in costs of sales was a result of higher sales for 2019 as compared to 2018, as well as the full year impact of the acquired nora business.

As a percentage of sales, our costs of sales decreased to 60.3% in 2019 versus 63.6% in 2018.

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

For 2020, our SG&A expenses decreased $55.9 million (14.4%) versus 2019.

In 2021, the impact of COVID-19 continued to challenge our global supply chain which contributed to higher cost of sales and lower gross profit margins — particularly in the United States.

As a percentage of net sales, our consolidated costs of sales increased to 64.0% in 2021 versus 62.8% in 2020, primarily due to inflationary pressures on raw materials, freight and labor costs driving an approximately 3.4% increase in cost of sales as a percentage of net sales compared to the prior year.

The increase in our consolidated cost of sales as a percentage of net sales was partially offset by productivity efficiencies during the year.

Management believes it is reasonably likely the inflationary pressures experienced in 2021 will continue to some degree in 2022, particularly in the first half of 2022.

For 2020, our consolidated costs of sales decreased $117.4 million (14.5%) compared with 2019, primarily due to lower net sales.

Currency translation had a $4.7 million (0.6%) negative impact on the year-over-year comparison.

SG&A expenses were lower in 2020 primarily due to (1) lower selling expenses of $54.8 million due to lower net sales, (2) $7.3 million of payroll expense credits related to COVID-19 wage support government assistance programs, and (3) $9.2 million lower performance-based compensation due to forfeitures and target performance measures not being met due to COVID-19.

As a percentage of net sales, our consolidated costs of sales increased to 62.8% in 2020 versus 60.3% in 2019, primarily due to changes in fixed cost absorption driven by lower production volumes due to the impacts of COVID-19.

For 2021, our consolidated SG&A expenses decreased $8.9 million (2.7%) versus 2020.

Currency translation had a $5.3 million (1.6%) negative impact on the year-over-year comparison.

Consolidated SG&A expenses were lower in 2021 primarily due to (1) lower legal fees and other related costs of $12.6 million primarily due to the settlement of the SEC matter in the prior year period, and (2) lower severance costs of $9.1 million as the prior year included additional cost reduction initiatives implemented in response to COVID-19 as discussed above.

These decreases were partially offset by higher labor costs of approximately $11.0 million due to higher performance-based compensation as target performance measures were achieved in 2021, partially offset by cost savings from prior year headcount reduction initiatives.

As a percentage of net sales, SG&A expenses decreased to 27.0% in 2021 versus 30.2% in 2020.

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For 2020, our consolidated SG&A expenses decreased $55.9 million (14.4%) versus 2019.

Currency translation had a $1.5 million (0.4%) negative impact on the year-over-year comparison.

Consolidated SG&A expenses were lower in 2020 primarily due to (1) lower selling expenses of $54.8 million due to lower net sales, (2) $7.3 million of payroll expense credits related to COVID-19 wage support government assistance programs, and (3) $9.2 million lower performance-based compensation due to stock compensation forfeitures and target performance measures not being met due to COVID-19.

These reductions were partially offset by $12.9 million of severance expenses due to voluntary and involuntary separations, and a $5.0 million fine to settle the SEC matter as referenced in Item 8 Note 18 - “Commitments and Contingencies”.

As a percentage of sales, SG&A expenses increased to 30.2% in 2020 versus 29.0% in 2019, primarily due to lower net sales.

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

Included in the 2019 period were a full year of SG&A expenses for the acquired nora business versus only a stub period of approximately five months in 2018.

Fluctuations in currency rates had a 1.5% favorable impact on SG&A expenses.

The increase in SG&A expenses during the year was primarily due to (1) higher selling expenses for the full year impact in 2019 of the acquired nora business, (2) higher year-over-year legal expenses of $3.5 million related to the SEC matter discussed in Note 18 – “Commitments and Contingencies”, and (3) higher selling expenses related to bringing the Company’s global sales organization together for a meeting to accelerate the nora integration, advance our selling system transformation, and engage the sales force in the Company’s sustainability mission.

These increases were partially offset by lower stock compensation expense of $5.8 million compared to prior year.

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

Restructuring Plans

On September 8, 2021, the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations.

The plan involves a reduction of approximately 188 employees and the closure of the Company’s carpet tile manufacturing facility in Thailand, anticipated to occur at the end of the first quarter of 2022.

As a result of this plan, the Company expects to incur pre-tax restructuring charges between the third quarter of 2021 and the fourth quarter of 2022 of approximately $4 million to $5 million.

The expected charges are comprised of severance expenses ($2.2 million), retention bonuses ($0.5 million), and asset impairment and other charges ($2.0 million).

The costs of retention bonuses of approximately $0.5 million will be recognized through the end of fiscal year 2022 as earned over the requisite service periods.

Restructuring charges of $3.9 million comprised of severance and asset impairment charges were recognized during the third quarter of 2021.

The Thailand plant closure is expected to result in future cash expenditures of approximately $3 million to $4 million for payment of the employee severance and employee retention bonuses and other costs of the shutdown of the Thailand manufacturing facility, as described above.

The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately $1.7 million.

A portion of the annualized savings is expected to be realized on the consolidated statement of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023.

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

As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $9.0 million.

The charge was comprised of severance expenses ($8.8 million) and lease exit costs ($0.2 million).

The restructuring charge was expected to result in future cash expenditures of approximately $9.0 million for payment of these employee severance and lease exit costs.

The Company expected the plan to yield annualized savings of approximately $6.0 million.

A portion of the annualized savings was realized on the consolidated statement of operations in fiscal year 2020, with the remaining portion of the annualized savings realized in fiscal year 2021.

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

Goodwill, Intangible Asset and Fixed Asset Impairment

During 2021, we recognized a fixed asset impairment charge of $4.4 million for projects that were abandoned.

During 2020, we recognized a charge of $121.3 million for the impairment of goodwill and certain intangible assets.

See Note 12 entitled “Goodwill and Intangible Assets” of Part II, Item 8 of this Annual Report for additional information.

During 2020, we also recognized fixed asset impairment charges of $5.0 million primarily related to certain FLOR design center closures and other projects that were abandoned or indefinitely delayed.

These charges are included in selling, general and administrative expenses in the consolidated statements of operations.

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Interest Expense

For 2020, our interest expense increased $3.6 million to $29.2 million, versus $25.6 million in 2019, primarily due to (1) a $3.6 million loss on extinguishment of debt to amend the Syndicated Credit Facility and repay a portion of outstanding indebtedness thereunder, and (2) a $3.9 million reclassification from accumulated other comprehensive income for deferred interest rate swap losses due to the termination of our interest rate swap contracts.

For 2021, our interest expense increased $0.5 million to $29.7 million, versus $29.2 million in 2020, primarily due to (1) higher fixed-rate interest expense on the Senior Notes debt, which replaced variable-rate debt under the Syndicated Credit Facility, and (2) $4.9 million of deferred losses recognized on terminated interest rate swaps that were reclassified from accumulated other comprehensive loss into interest expense during the year.

These increases were partially offset by $60 million of lower outstanding borrowings under the Syndicated Credit Facility compared to 2020.

Our average borrowing rate under the Syndicated Credit Facility was 1.91% for 2021 compared to 1.89% in 2020.

For 2020, our interest expense increased $3.6 million to $29.2 million, versus $25.6 million in 2019, primarily due to (1) a $3.6 million loss on extinguishment of debt to amend the Syndicated Credit Facility and repay a portion of outstanding indebtedness thereunder, and (2) a $3.9 million reclassification from accumulated other comprehensive loss for deferred interest rate swap losses due to the termination of interest rate swap contracts.

These increases were partially offset by lower average interest rates on our borrowings under the Syndicated Credit Facility (our average borrowing rate for 2020 was 1.89% compared to 3.27% in 2019) and lower outstanding borrowings under the Syndicated Credit Facility compared to 2019.

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

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

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

Other Expense

Other expenses decreased $8.4 million during fiscal year 2021 compared to 2020, primarily due to a $4.2 million write-down of damaged raw material inventory in 2020, which resulted from a fire at a leased storage facility.

For the year ended January 2, 2022, the Company recorded income tax expense of $17.4 million on pre-tax income of $72.6 million resulting in an effective tax rate of 24.0%, as compared to an income tax benefit of $7.5 million on pre-tax loss of $79.4 million resulting in an effective tax rate of 9.4% for the year ended January 3, 2021.

The effective tax rate for the year ended January 3, 2021 was significantly impacted by a non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions taken in prior years on discontinued operations.

Excluding the impact of the non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, the effective tax rate was 14.1% for the year ended January 3, 2021.

The increase in the effective tax rate for the year ended January 2, 2022 as compared to the year ended January 3, 2021 was primarily due to the one-time favorable impacts of amending prior year tax returns during the period ended January 3, 2021, an increase in non-deductible employee compensation and an increase in the valuation allowance on net operating loss and interest carryforwards.

This increase was partially offset by a decrease in non-deductible business expenses.

For the year ended January 3, 2021, the Company recorded an income tax benefit of $7.5 million on pre-tax loss of $79.4 million resulting in an effective tax rate of 9.4%.

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The decrease in the effective tax rate, excluding the goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, was primarily due to the favorable impacts of amending prior year tax returns, retroactive election of the GILTI High-tax Exclusion in the 2019 tax return and reduction in non-deductible employee compensation.

This decrease was partially offset by the non-deductible SEC penalty.

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

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

Tax Cuts and Jobs Act enacted into law in 2017.

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

federal and foreign tax credits which was partially offset by a reduction in non-deductible expenses, favorable change in unrecognized tax benefits and a higher portion of income earned in foreign jurisdictions not subject to U.S.

state income taxes.

This decrease was partially offset by the non-deductible SEC fine.

Segment Results

As discussed above, in fiscal year 2021 the Company determined that it has two operating and reportable segments – AMS and EAAA.

Segment information presented below for fiscal years 2020 and 2019 have been restated to conform to the new reportable segment structure.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information .

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AMS Segment - Net Sales and Adjusted Operating Income (“AOI”)

The following table presents AMS segment net sales and AOI for the last three fiscal years:

Fiscal Year Percentage Change

2021 2020 2019 2021 compared with 2020 2020 compared with 2019

(in thousands)

AMS segment net sales $ 651,216 $ 593,418 $ 757,112 9.7 % (21.6) %

AMS segment AOI (1)

85,014 89,097 120,921 (4.6) % (26.3) %

(1) Includes allocation of corporate SG&A expenses.

Excludes non-recurring items related to intangible asset impairment charges, restructuring, asset impairment, severance and other costs.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.

AMS segment net sales for 2021 compared with 2020

During 2021, net sales in AMS increased 9.7% versus 2020, comprised of higher sales volumes and higher prices.

On a market segment basis, the AMS sales increase was most significant in non-corporate office market segments including healthcare (up 19.1%), retail (up 19.1%) and education (up 18.3%).

Sales in the corporate office market increased 6.8% in 2021 compared to 2020.

These increases were partially offset by decreases in the hospitality (down 38.3%) and public buildings (down 20%) market segments.

AMS segment net sales for 2020 compared with 2019

During 2020, net sales in AMS decreased 21.6% versus the comparable period in 2019.

The AMS sales decrease in 2020 was due primarily to the impacts of COVID-19 and lower carpet tile sales volumes.

AMS AOI for 2021 compared with 2020

AOI in AMS decreased 4.6% during 2021 compared to 2020 primarily due to higher cost of sales as a result of inflationary pressures on raw materials, freight and labor costs driving an approximately 3.0% increase in cost of sales as a percentage of net sales compared to the prior year.

The increase in cost of sales as a percentage of net sales was partially offset by productivity efficiencies during the year.

AOI as a percentage of net sales for fiscal 2021 decreased to 13.1% compared to 15.0% in 2020 due to the global supply chain pressures discussed above.

AMS AOI for 2020 compared with 2019

AOI in AMS decreased 26.3% during 2020 compared to 2019 primarily due to the impacts of COVID-19 which resulted in lower sales volumes in 2020.

The decrease in AOI was also partially due to costs related to the closure of the FLOR stores in 2020.

EAAA Segment - Net Sales and AOI

The following table presents EAAA segment net sales and AOI for the last three fiscal years:

Fiscal Year Percentage Change

2021 2020 2019 2021 compared with 2020 2020 compared with 2019

(in thousands)

EAAA segment net sales $ 549,182 $ 509,844 $ 585,917 7.7 % (13.0) %

EAAA segment AOI (1)

37,268 21,403 28,832 74.1 % (25.8) %

(1) Includes allocation of corporate SG&A expenses.

Excludes non-recurring items related to goodwill and intangible asset impairment charges, purchase accounting amortization, restructuring, asset impairment, severance and other costs.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.

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EAAA segment net sales for 2021 compared with 2020

During 2021, net sales in EAAA increased 7.7% versus 2020, comprised of higher sales volumes and higher prices.

Currency fluctuations had an approximately $21.5 million (4.2%) positive impact on EAAA’s 2021 sales compared to 2020 due to the strengthening of the Euro, British Pound sterling, Australian dollar and the Chinese Renminbi against the U.S.

On a market segment basis, the EAAA sales increase was most significant in non-corporate office market segments including retail (up 53.8%), public buildings (up 30.2%) and healthcare (up 19.0%).

Sales in the corporate office market increased 2.4% in 2021 compared to 2020.

These increases were partially offset by a decrease in the education (down 2.6%) market segment.

EAAA segment net sales for 2020 compared with 2019

During 2020, net sales in EAAA decreased 13.0% versus 2019, due primarily to the impacts of COVID-19 and lower carpet tile sales volumes.

Currency fluctuations had an approximately $7.3 million (1.3%) positive impact on EAAA’s fiscal year 2020 sales compared with 2019, due primarily to the strengthening of the Euro and British Pound sterling against the U.S.

On a market segment basis, the EAAA sales decrease was most significant in the hospitality (down 40.3%), corporate office (down 19.1%), public buildings (down 16.0%) and retail (down 12.9%) market segments.

EAAA AOI for 2021 compared with 2020

AOI in EAAA increased 74.1% during 2021 versus 2020.

Currency fluctuations had an approximately $3.1 million (6.4%) positive impact on AOI for 2021.

SG&A expenses as a percentage of net sales decreased to 23.0% in 2021 compared to 24.6% in 2020 due to savings from cost reduction initiatives implemented in the prior year.

AOI as a percentage of net sales increased to 6.8% in 2021 compared to 4.2% in 2020, due primarily to higher sales as discussed above.

EAAA AOI for 2020 compared with 2019

AOI in EAAA decreased 25.8% during 2020 versus 2019, primarily due to the impacts of COVID-19 which resulted in lower sales volumes in 2020.

Currency fluctuations had an approximately $0.9 million (1.4%) positive impact on AOI for 2020.

Liquidity and Capital Resources

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We generate our cash and other liquidity requirements primarily from our operations and from borrowings or letters of credit under our Syndicated Credit Facility and Senior Notes discussed below.

We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months.

We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months and we expect to generate sufficient cash to meet our long-term obligations.

Below is a summary of our material cash requirements for future periods:

Payments Due by Period

Total Payments

Due Less than

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

(in thousands)

Long-term debt obligations $ 525,131 $ 15,002 $ 30,004 $ 180,125 $ 300,000

Operating and finance lease obligations 130,820 19,802 28,625 21,726 60,667

Expected interest payments 132,949 21,941 42,756 35,252 33,000

Purchase obligations 17,787 16,531 1,193 63 —

Pension cash obligations 33,917 5,970 5,973 6,211 15,763

Total $ 840,604 $ 79,246 $ 108,551 $ 243,377 $ 409,430

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Historically, we use more cash in the first half of the fiscal year, as we pay insurance premiums, taxes and incentive compensation and build up inventory in preparation for the holiday/vacation season of our international operations.

As outlined in the table above, we have approximately $79.2 million in material contractual cash obligations due by the end of fiscal year 2022, which includes, among other things, scheduled debt repayments under the Syndicated Credit Facility, pension contributions, interest payments on our debt and lease commitments.

Our long-term debt obligations include the contractually scheduled principal repayment of our term loan borrowings under the Syndicated Credit Facility, which matures in 2025, and $300 million on our Senior Notes due in 2028.

Operating and finance lease obligations consist of undiscounted lease payments due over the term of the lease.

Expected interest payments are those associated with borrowings under the Syndicated Credit Facility and Senior Notes consistent with our contractually scheduled principal repayments.

Our purchase obligations are for non-cancellable agreements primarily for raw material purchases and capital expenditures.

Our current and long-term pension obligations include contributions and expected benefit payments to be paid by the Company related to certain defined benefit pension plans and excludes the expected benefit payments for two of our funded foreign defined benefit plans as these obligations will be paid by the plans over the next ten years.

Based on current interest rates and debt levels, we expect our aggregate interest expense for 2022 to be between $27 million and $28 million.

We estimate aggregate capital expenditures in 2022 to be approximately $30 million, although we are not committed to these amounts.

At January 2, 2022, we had $97.3 million in cash.

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As of January 2, 2022, we had $300.0 million of Senior Notes outstanding.

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

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

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

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

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If we are unable to refinance our debt or obtain new financing, we would have to consider other options, such as selling assets to meet our debt service obligations and other liquidity needs, or using cash, if available, that would have been used for other business purposes.

It is also important for you to consider that borrowings under our Syndicated Credit Facility comprise a substantial portion of our indebtedness, and that these borrowings are based on variable interest rates (as described below) that expose the Company to the risk that short-term interest may increase.

During 2020, we entered into fixed rate Senior Notes (as described below) which reduced the amount of indebtedness subject to interest rate risk.

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For information regarding the current variable interest rates of these borrowings, the potential impact on our interest expense from hypothetical increases in short term interest rates, and the interest rate swap transaction, please see the discussion in Item 7A of this Report.

We are not a party to any material off-balance sheet arrangements.

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Analysis of Cash Flows

The following table presents a summary of cash flows for fiscal years 2021, 2020 and 2019:

2021 2020 2019

(in thousands)

Net cash provided by (used in):

Operating activities $ 86,689 $ 119,070 $ 141,768

Investing activities (28,071) (61,689) (74,222)

Financing activities (60,858) (42,715) (66,677)

Effect of exchange rate changes on cash (3,561) 7,086 (557)

Net change in cash and cash equivalents (5,801) 21,752 312

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

Cash and cash equivalents at end of period $ 97,252 $ 103,053 $ 81,301

We ended 2021 with $97.3 million in cash, a decrease of $5.8 million during the year.

The decrease was primarily due to the following:

• Cash provided by operating activities was $86.7 million for 2021, which represents a decrease of $32.4 million compared to 2020.

The decrease was primarily due to a greater use of cash for working capital during 2021.

Specifically, higher accounts receivable and inventories primarily attributable to increased customer demand in 2021 were partially offset by increases in accounts payable and accrued expenses that contributed positively to the change in working capital.

Lower variable compensation payouts in 2021 related to 2020 performance had a positive impact on cash provided by operating activities, partially offsetting the decrease from changes in working capital.

• Cash used in investing activities was $28.1 million for 2021, which represents a decrease of $33.6 million from 2020.

The decrease was primarily due to lower capital expenditures compared to 2020 as two major capital projects were substantially completed in the prior year.

• Cash used in financing activities was $60.9 million for 2021, which represents an increase of $18.1 million compared to 2020.

In 2021, we repaid approximately $60 million in term loan borrowings which contributed to the increase in cash used in financing activities (compared with 2020, when repayments on term loan borrowings were largely funded with the proceeds from the issuance of the $300 million Senior Notes).

We ended 2020 with $103.1 million in cash, an increase of $21.8 million during the year.

The increase was primarily due to the following:

• Cash provided by operating activities was $119.1 million for 2020, which represents a decrease of $22.7 million compared to 2019.

The decrease was primarily due to lower net income due to the impacts of COVID-19, offset by working capital sources of cash, specifically a decrease in accounts receivable of $40.1 million, lower inventories of $38.7 million and lower prepaid and other expenses of $13.0 million.

These sources of cash were offset by a $60.9 million use of cash in accounts payable and accrued expenses to fund normal operations.

• Cash used in investing activities was $61.7 million for 2020, which represents a decrease of $12.5 million from 2019.

The decrease was primarily due to lower capital expenditures compared to 2019 due to fewer project demands and lower capital investment as a result of the impacts of COVID-19.

• Cash used in financing activities was $42.7 million for 2020, which represents a decrease of $24.0 million compared to 2019.

Financing activities for 2020 include higher loan borrowings of $320.0 million primarily due to the issuance of $300 million of Senior Notes, offset by (1) higher repayments of revolving and term loan borrowings as the proceeds from the issuance of the Senior Notes were used to repay $290.7 million of outstanding term and revolving loan borrowings under the Syndicated Credit Facility, and (2) a decrease in dividends paid of $9.8 million.

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We ended 2019 with $81.3 million in cash, an increase of $0.3 million during the year.

These uses were offset by cash flow from operations of $141.8 million, primarily generated from (1) net income of $79.2 million, (2) $19.4 million for increases in accounts payable and accrued expenses, and (3) $2.6 million due to a decrease in inventories.

These sources of cash were reduced by working capital uses of (1) $9.7 million due to increases in prepaid expenses, and (2) $0.9 million due to increases in accounts receivable.

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

Syndicated Credit Facility

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

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

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

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

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

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

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

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

At January 3, 2021, the Facility provides the Company and certain of its subsidiaries with a multicurrency revolving loan facility up to $300 million, as well as other U.S.

In the normal course of business, in addition to using our available cash, we fund our operations by borrowing under our Syndicated Credit Facility (the “Facility”).

At January 2, 2022, the Facility provided the Company and certain of its subsidiaries with a multicurrency revolving loan facility up to $300 million, as well as other U.S.

denominated and multicurrency term loans.

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

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

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

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

Material terms under the Facility are discussed below.

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

Interest Rates and Fees

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In addition, the Company pays a commitment fee ranging from 0.20% to 0.40% per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.

LIBOR Transition

Financial Conduct Authority (the “FCA”), which regulates the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.

This announcement indicated that the continuation of LIBOR on the current basis was not guaranteed after 2021, and LIBOR may be discontinued or modified.

Additionally, certain U.S.

dollar LIBOR rates will be discontinued by June 2023.

The Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR.

SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S.

Treasury securities.

We have exposure to LIBOR-based financial instruments under the Facility, which has variable (or floating) interest rates based on LIBOR.

The Facility allows for the use of an alternative benchmark rate if LIBOR is no longer available.

On December 9, 2021, we entered into the fourth amendment to the Facility to replace the LIBOR interest rate benchmark applicable to loans and other extensions of credit under the Facility denominated in British Pounds sterling and Euros with specified successor benchmark rates, to amend certain provisions related to the implementation, use and administration of successor benchmark rates, and to set forth certain borrowing requirements in the event LIBOR and other successor rates become unavailable.

The Facility contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants.

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• enter into sale and leaseback transactions.

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The Facility also requires us to remain in compliance with the following financial covenants as of the end of each fiscal quarter, based on our consolidated results for the year then ended:

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As of January 2, 2022, the weighted average interest rate on borrowings outstanding under the Facility was 1.91%.

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

Under the Facility, we are required to make quarterly amortization payments of the term loan borrowings.

The amortization payments are due on the last day of the calendar quarter.

We are currently in compliance with all covenants under the Facility and anticipate that we will remain in compliance with the covenants for the foreseeable future.

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

In the fourth quarter of 2020, we terminated both interest rate swaps and paid approximately $13 million to terminate the swap agreements.

In the fourth quarter of 2020, we terminated our interest rate swaps and paid approximately $13 million to terminate the swap agreements.

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

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These debt issuance costs were recorded as a reduction of long-term debt in the consolidated balance sheets and will be amortized over the life of the outstanding debt.

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The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its existing Facility.

The Company’s foreign subsidiaries and certain non-material domestic subsidiaries are considered non-guarantors.

Net sales for the non-guarantor subsidiaries were approximately $548 million for fiscal year 2020.

Total indebtedness of the non-guarantor subsidiaries was approximately $88 million as of January 3, 2021.

Net sales for the non-guarantor subsidiaries were approximately $594 million for fiscal year 2021 and $548 million for fiscal year 2020.

Total indebtedness of the non-guarantor subsidiaries was approximately $45 million as of January 2, 2022, and $88 million as of January 3, 2021.

The Senior Notes can be redeemed on or after December 1, 2023, at specified redemption prices.

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

Analysis of Cash Flows

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

2020 2019 2018

(in thousands)

Net cash provided by (used in):

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

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

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

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

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

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

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

We ended 2020 with $103.1 million in cash, an increase of $21.8 million during the year.

The increase was primarily due to the following:

• Cash provided by operating activities was $119.1 million for 2020, which represents a decrease of $22.7 million compared to 2019.

These sources of cash were offset by a $60.9 million use of cash in accounts payable and accrued expenses to fund normal operations.

• Cash used in investing activities was $61.7 million for 2020, which represents a decrease of $12.5 million from 2019.

The decrease was primarily due to lower capital expenditures compared to 2019 due to fewer project demands and lower capital investment as a result of the impacts of COVID-19.

• Cash used in financing activities was $42.7 million for 2020, which represents a decrease of $24.0 million compared to 2019.

Financing activities for 2020 include higher loan borrowings of $320.0 million due to the issuance of $300 million of Senior Notes, offset by (1) higher repayments of revolving and term loan borrowings as the proceeds from the issuance of the Senior Notes were used to repay $290.7 million of outstanding term and revolving loan borrowings under the Syndicated Credit Facility and (2) a decrease in dividends paid of $9.8 million.

We ended 2019 with $81.3 million in cash, an increase of $0.3 million during the year.

The most significant uses of cash in 2019 were (1) repayments on our Syndicated Credit Facility of $111.7 million offset by borrowings of $90 million, (2) capital expenditures of $74.6 million, (3) $25.2 million to repurchase 1.6 million shares of the Company’s outstanding common stock, and (3) dividend payments of $15.4 million These uses were offset by cash flow from operations of $141.8 million, primarily generated from (1) net income of $79.2 million, (2) $19.4 million for increases in accounts payable and accrued expenses, and (3) $2.6 million due to a decrease in inventories.

These sources of cash were reduced by working capital uses of (1) $9.7 million due to increases in prepaid expenses and (2) $0.9 million due to increases in accounts receivable.

We ended 2018 with $81.0 million in cash, a decrease of $6.0 million during the year.

During 2018, we borrowed $462.8 million of new term loan debt to finance the acquisition of nora.

The cash purchase price for nora, net of cash acquired, was $400.7 million.

Other than the nora purchase transaction, the most significant uses of cash in 2018 were (1) repayments on our Syndicated Credit Facility of $64.5 million, (2) capital expenditures of $54.9 million, (3) dividend payments of $15.5 million and (4) $14.5 million of cash used to repurchase our common stock.

These uses were offset by cash flow generated by operations of $91.8 million.

Our cash flow from operations was primarily generated by net income of $50.3 million.

This net income was offset by working capital uses, primarily $18.8 million for an increase in inventory and $15.5 million due to increases in prepaid and other current assets.

The Company generated cash of $9.9 million for increases in accounts payable and accrued expenses.

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

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

Funding Obligations

We have various contractual obligations that we must fund as part of our normal operations.

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

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

Payments Due by Period

Total Payments

Due Less than

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

(in thousands)

Long-Term Debt Obligations (1)

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

Operating and Finance Lease Obligations (2)

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

Expected Interest Payments (3)

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

Unconditional Purchase Obligations (4)

14,529 14,529 — — —

Pension Cash Obligations (5)

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

Total Contractual Cash Obligations (6)

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

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

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

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

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

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

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

Our capital expenditure commitments of approximately $9.6 million are included in the table above.

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

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

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

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

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

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

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

See Note 17 entitled “Income Taxes” in Item 8 of this Report for further information.

Forward-Looking Statement on Impact of COVID-19

While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full year fiscal 2021 results and beyond are uncertain.

While we are aggressively managing our response to the COVID-19 pandemic, its impacts on our full fiscal year 2022 results and beyond are uncertain.

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

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

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

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

and (4) the severity of global supply chain disruptions and their effects on inflation, labor shortages, raw material shortages, and other factors that disrupt our supply chain and manufacturing facilities.

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

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

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

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

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

In addition, the Company reduced its capital spending plans.

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

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

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

As the impact of the COVID-19 pandemic continues to affect companies with global operations, specifically as it relates to the global supply chain, we anticipate that, at a minimum, our business and results in the first half of 2022 will continue to be affected, and the timeline and pace of recovery is uncertain.

Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements.

However, the Company’s cash flows from operations can be affected by numerous factors including the uncertainty of COVID-19 and its impact on global operations, raw material availability and cost, demand for our products, and other factors described in “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

Critical Accounting Policies

The policies discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimations about the effects of matters that are inherently uncertain.

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Critical Accounting Policies and Estimates

The policies and estimates discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimations about the effects of matters that are inherently uncertain.

Specific risks for these critical accounting policies are described in the following paragraphs.

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A loss is then recognized for the difference, if any, between the fair value of the asset (as estimated by management using its best judgment) and the carrying value of the asset.

The management estimate of fair value considers undiscounted cash flows, market conditions and trends, and other industry specific metrics.

Management’s judgement in estimating the undiscounted cash flows based on market conditions and trends, and other industry specific metrics used in determining the fair value is subject to uncertainty.

If actual market value is less favorable than that estimated by management, additional write-downs may be required.

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To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

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

As of January 2, 2022, and January 3, 2021, we had state net operating loss carryforwards of $153.0 million and $142.7 million, respectively.

Certain of these state net operating loss carryforwards are reserved with a valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future.

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

Prior to the adoption of ASU 2017-04 “Intangibles-Goodwill and Other”, we tested goodwill for impairment at least annually using a two-step approach.

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

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

Prior to the adoption of Accounting Standards Update (“ASU”) 2017-04 “Intangibles-Goodwill and Other”, we tested goodwill for impairment at least annually using a two-step approach.

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

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

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

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After completion of this step two test, a loss was recognized for the difference, if any, between the fair value of the goodwill associated with the reporting unit and the book value of that goodwill.

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

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

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

Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations.

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In accordance with applicable accounting standards, the Company tests goodwill for impairment annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Management’s assessment of whether a triggering event has occurred and the development of any forecasts to be used in the fair value determination are subject to judgement.

During the fourth quarters of 2021, 2020 and 2019, we performed the annual goodwill impairment test.

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However, the full extent of the future impact of COVID-19 on the Company’s operations is uncertain, and a prolonged COVID-19 pandemic could result in additional impairment of goodwill.

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

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

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If actual market conditions are less favorable than those projected by management, additional write-downs may be required.

We estimate our reserves for inventory obsolescence by continuously examining our inventories to determine if there are indicators that carrying values exceed net realizable values.

Management’s judgement in estimating our reserves for inventory obsolescence is based on continuous examination of our inventories to determine if there are indicators that carrying values exceed net realizable values.

Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for our products and current economic conditions.

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

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

Our inventory reserve on January 2, 2022 and January 3, 2021, was $27.1 million and $35.0 million, respectively.

To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our 2021 net income would be higher or lower by approximately $2.1 million, on an after-tax basis.

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1% decrease in actuarial assumption for discount rate 3.6

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Allowances for Expected Credit Losses.

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By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated.

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

Our allowance for expected credit losses on January 2, 2022 and January 3, 2021, was $5.0 million and $6.6 million, respectively.

To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2021 net income would be higher or lower by approximately $0.4 million, on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance.

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In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product.

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

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

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

Our warranty and sales allowance reserve on January 2, 2022 and January 3, 2021, was $2.7 million and $3.2 million, respectively.

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

To the extent the actual warranty expense differs from our estimates by 10%, our 2021 net income would be higher or lower by approximately $0.2 million, on an after-tax basis, depending on whether the actual expense is lower or higher, respectively, than the estimated provision.

nora Acquisition.

We are required to estimate the fair value of the assets acquired and liabilities assumed in business combinations as of the acquisition date, including identified intangible assets.

The amount of purchase price paid in excess of the net assets acquired is recorded as goodwill.

The fair values are estimated in accordance with accounting standards which define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs that are unobservable to the marketplace participant).

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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

We are not a party to any material off-balance sheet arrangements.

Recent Accounting Pronouncements

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis