INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) APRIL 3, 2022 JANUARY 2, 2022 (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 76,088 $ 97,252 Accounts receivable, net 144,994 171,676 Inventories, net 319,367 265,092 Prepaid expenses and other current assets 43,330 38,320 Total current assets 583,779 572,340 Property, plant and equipment, net 320,778 329,801 Operating lease right-of-use assets 85,323 90,561 Deferred tax asset 23,096 23,994 Goodwill and intangibles, net 212,437 223,204 Other assets 84,372 90,157 Total assets $ 1,309,785 $ 1,330,057 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 86,975 $ 85,924 Accrued expenses 130,047 146,298 Current portion of operating lease liabilities 13,906 14,588 Current portion of long-term debt 14,939 15,002 Total current liabilities 245,867 261,812 Long-term debt 506,803 503,056 Operating lease liabilities 73,454 77,905 Deferred income taxes 35,585 36,723 Other long-term liabilities 81,196 87,163 Total liabilities 942,905 966,659 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at April 3, 2022 and January 2, 2022 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 59,328 and 59,055 shares issued and outstanding at April 3, 2022 and January 2, 2022, respectively 5,933 5,905 Additional paid-in capital 254,867 253,110 Retained earnings 274,135 261,434 Accumulated other comprehensive loss – foreign currency translation ( 113,625 ) ( 100,441 ) Accumulated other comprehensive loss – cash flow hedge ( 2,081 ) ( 2,722 ) Accumulated other comprehensive loss – pension liability ( 52,349 ) ( 53,888 ) Total shareholders’ equity 366,880 363,398 Total liabilities and shareholders’ equity $ 1,309,785 $ 1,330,057 See accompanying notes to consolidated condensed financial statements. 3 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) THREE MONTHS ENDED APRIL 3, 2022 APRIL 4, 2021 Net sales $ 288,002 $ 253,260 Cost of sales 181,203 157,222 Gross profit on sales 106,799 96,038 Selling, general and administrative expenses 78,492 79,302 Restructuring and asset impairment charges 887 ( 130 ) Operating income 27,420 16,866 Interest expense 6,850 7,256 Other expense, net 170 715 Income before income tax expense 20,400 8,895 Income tax expense 7,107 1,957 Net income $ 13,293 $ 6,938 Earnings per share – basic $ 0.22 $ 0.12 Earnings per share – diluted $ 0.22 $ 0.12 Common shares outstanding – basic 59,248 58,730 Common shares outstanding – diluted 59,248 58,730 See accompanying notes to consolidated condensed financial statements. 4 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 3, 2022 APRIL 4, 2021 Net income $ 13,293 $ 6,938 Other comprehensive loss, after tax: Foreign currency translation adjustment ( 13,184 ) ( 19,597 ) Reclassification from accumulated other comprehensive loss - discontinued cash flow hedge 641 749 Pension liability adjustment 1,539 89 Other comprehensive loss ( 11,004 ) ( 18,759 ) Comprehensive income (loss) $ 2,289 $ ( 11,821 ) See accompanying notes to consolidated condensed financial statements. 5 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 3, 2022 APRIL 4, 2021 OPERATING ACTIVITIES: Net income $ 13,293 $ 6,938 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 10,670 11,934 Stock compensation amortization expense 2,182 924 Deferred income taxes and other 4,196 230 Amortization of acquired intangible assets 1,342 1,421 Working capital changes: Accounts receivable 26,135 9,794 Inventories ( 56,464 ) ( 19,046 ) Prepaid expenses and other current assets ( 5,252 ) ( 15,852 ) Accounts payable and accrued expenses ( 13,798 ) 28,512 Cash (used in) provided by operating activities ( 17,696 ) 24,855 INVESTING ACTIVITIES: Capital expenditures ( 4,781 ) ( 5,214 ) Cash used in investing activities ( 4,781 ) ( 5,214 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 44,729 ) ( 30,239 ) Borrowing of long-term debt 48,500 18,000 Tax withholding payments for share-based compensation ( 398 ) ( 179 ) Debt issuance costs — ( 36 ) Finance lease payments ( 479 ) ( 527 ) Cash provided by (used in) financing activities 2,894 ( 12,981 ) Net cash (used in) provided by operating, investing and financing activities ( 19,583 ) 6,660 Effect of exchange rate changes on cash ( 1,581 ) ( 2,790 ) CASH AND CASH EQUIVALENTS: Net (decrease) increase ( 21,164 ) 3,870 Balance, beginning of period 97,252 103,053 Balance, end of period $ 76,088 $ 106,923 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 References in this Quarterly Report on Form 10-Q to “Interface,” “the Company,” “we,” “our,” “ours” and “us” refer to Interface, Inc. and its subsidiaries or any of them, unless the context requires otherwise. 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 2, 2022, 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 2, 2022, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (“GAAP”). The three-month periods ended April 3, 2022 and April 4, 2021 both include 13 weeks. Risks and Uncertainties Global economic challenges, including the impact of the COVID-19 pandemic, the war in Ukraine, rising inflation and supply chain disruptions could cause economic uncertainty and volatility. The Company considered these impacts and subsequent general uncertainties and volatility in the global economy on the assumptions and estimates used herein. The Company determined that except for the continued impacts to our global supply chain, production volume, raw material shortages, raw material cost increases, higher freight costs, shipping delays and labor shortages, gross profit margins, operating income, net income, cash flows, and order rates, there were no other material adverse impacts on the Company’s results of operations and financial position at April 3, 2022. 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. COVID-19 Impact We continue to monitor our operations and have implemented various programs to mitigate the effects of COVID-19 on our business. Our global supply chain and manufacturing operations continue to experience increased impacts of COVID-19 including raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages. During the first quarter of 2022, new government imposed COVID-19 lockdowns in parts of China adversely impacted sales in that region. 7 Table of Contents NOTE 2 – REVENUE RECOGNITION Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 99 % of total revenue for both three-month periods ended April 3, 2022 and April 4, 2021. The remaining 1 % of revenue was generated from the installation of carpet and other flooring-related material for both three-month periods. Disaggregation of Revenue For the three months ended April 3, 2022 and April 4, 2021, revenue from the Company’s customers is broken down by geography as follows: Three Months Ended Geography April 3, 2022 April 4, 2021 Americas 54.4 % 50.1 % Europe 32.6 % 35.1 % Asia-Pacific 13.0 % 14.8 % 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. 8 Table of Contents NOTE 3 – INVENTORIES Inventories are summarized as follows: April 3, 2022 January 2, 2022 (in thousands) Finished goods $ 227,257 $ 182,896 Work-in-process 18,505 15,185 Raw materials 73,605 67,011 Inventories, net $ 319,367 $ 265,092 9 Table of Contents NOTE 4 – EARNINGS PER SHARE The Company computes basic earnings per share (“EPS”) by dividing net income 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 April 3, 2022 April 4, 2021 (in thousands, except per share data) Numerator: Net income $ 13,293 $ 6,938 Less: distributed and undistributed earnings available to participating securities ( 190 ) ( 89 ) Distributed and undistributed earnings available to common shareholders $ 13,103 $ 6,849 Denominator: Weighted average shares outstanding 58,403 57,979 Participating securities 845 751 Shares for basic EPS 59,248 58,730 Dilutive effect of stock options — — Shares for diluted EPS 59,248 58,730 Basic EPS $ 0.22 $ 0.12 Diluted EPS $ 0.22 $ 0.12 10 Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: April 3, 2022 January 2, 2022 Outstanding Principal Interest Rate (1) Outstanding Principal Interest Rate (1) (in thousands) (in thousands) Syndicated Credit Facility: Revolving loan borrowings $ 15,000 1.89 % $ 7,500 4.00 % Term loan borrowings 213,498 1.88 % 217,631 1.84 % Total borrowings under Syndicated Credit Facility 228,498 1.88 % 225,131 1.91 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 528,498 525,131 Less: Unamortized debt issuance costs ( 6,756 ) ( 7,073 ) Total debt, net 521,742 518,058 Less: Current portion of long-term debt ( 14,939 ) ( 15,002 ) Total long-term debt, net $ 506,803 $ 503,056 (1) Represents the stated rate of interest, without the effect of debt issuance costs. Syndicated Credit Facility The Company’s Syndicated Credit Facility (the “Facility”) provides to the Company U.S. denominated and multicurrency term loans and provides to the Company and certain of its subsidiaries a multicurrency revolving credit facility. Interest on base rate loans is charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable Eurocurrency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility. As of both April 3, 2022 and January 2, 2022, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both April 3, 2022 and January 2, 2022, 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. 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. 11 Table of Contents As of April 3, 2022, the estimated fair value of the Senior Notes was $ 289.5 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 $ 4.0 million of other lines of credit available at interest rates ranging from 3.5 % to 4.5 % as of April 3, 2022, and $ 6.0 million of other lines of credit available at interest rates ranging from 3.5 % to 6.0 % as of January 2, 2022. As of April 3, 2022 and January 2, 2022, there were no borrowings outstanding under these lines of credit. Borrowing Costs Debt issuance costs associated with the Company’s Senior Notes and term loans under the Facility are reflected as a reduction of long-term debt in accordance with applicable accounting standards. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of April 3, 2022 and January 2, 2022, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 6.8 million and $ 7.1 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 $ 1.5 million and $ 1.6 million as of April 3, 2022 and January 2, 2022, 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. 12 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 April 3, 2022 and January 2, 2022, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $ 2.9 million and $ 3.8 million, respectively, and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination. We expect that approximately $ 2.3 million, before tax, related to the terminated interest rate swaps will be reclassified from accumulated other comprehensive loss as an increase to interest expense in the next 12 months. Derivative Transactions Not Designated as Hedging Instruments Our EAAA segment, from time to time, purchases foreign currency options to economically hedge inventory purchases denominated in foreign currencies other than their functional currency. The Company’s objective with respect to these foreign currency options is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to payment on inventory purchases. These options are classified as non-designated derivative instruments. Gains and losses on the changes in fair value of these foreign currency options are recognized in earnings each period. As of April 3, 2022 and January 2, 2022, the Company had no outstanding foreign currency options. The following table summarizes gains on derivatives not designated as hedging instruments within the consolidated condensed statements of operations for the three months ended April 4, 2021: Three Months Ended Statement of Operations Location April 4, 2021 (in thousands) Foreign currency options gain Other expense, net $ 185 13 Table of Contents NOTE 7 – SHAREHOLDERS’ EQUITY The following tables depict the activity in the accounts which make up shareholders’ equity for the three months ended April 3, 2022 and April 4, 2021: SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at January 2, 2022 59,055 $ 5,905 $ 253,110 $ 261,434 $ ( 53,888 ) $ ( 100,441 ) $ ( 2,722 ) Net income — — — 13,293 — — — Restricted stock issuances 303 30 3,966 — — — — Unamortized compensation expense related to restricted stock awards — — ( 3,996 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 592 ) — — — Compensation expense related to stock awards, net of shares received for tax withholdings ( 30 ) ( 2 ) 1,787 — — — — Pension liability adjustment — — — — 1,539 — — Foreign currency translation adjustment — — — — — ( 13,184 ) — Reclassification out of accumulated other comprehensive loss - discontinued cash flow hedge — — — — — — 641 Balance, at April 3, 2022 59,328 $ 5,933 $ 254,867 $ 274,135 $ ( 52,349 ) $ ( 113,625 ) $ ( 2,081 ) 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 and shares received for tax withholdings ( 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 ) 14 Table of Contents Restricted Stock Awards During the three months ended April 3, 2022 and April 4, 2021, the Company granted restricted stock awards for 302,600 and 375,600 shares of common stock, respectively. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause. Compensation expense related to restricted stock grants was $ 1.2 million and $ 0.7 million for the three months ended April 3, 2022, and April 4, 2021, respectively. The Company has reduced its expense for any restricted stock forfeited during the period. The following table summarizes restricted stock outstanding as of April 3, 2022, as well as activity during the three months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 683,800 $ 21.06 Granted 302,600 13.21 Vested ( 87,900 ) 17.54 Forfeited or canceled — — Outstanding at April 3, 2022 898,500 $ 18.76 As of April 3, 2022, the unrecognized total compensation cost related to unvested restricted stock was $ 7.9 million. That cost is expected to be recognized by the end of 2025. Performance Share Awards During the three months ended April 3, 2022 and April 4, 2021, 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 (among other things) the employee’s continued employment through the last date of the performance period, 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 Company evaluates the probability of achieving the performance-based goals as of the end of each reporting period and adjusts compensation expense based on this assessment. The following table summarizes the performance shares outstanding as of April 3, 2022, as well as the activity during the three months then ended: Performance Shares Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 718,100 $ 14.98 Granted 227,800 13.19 Vested — — Forfeited or canceled ( 115,100 ) 17.54 Outstanding at April 3, 2022 830,800 $ 14.13 Compensation expense related to the performance shares was $ 1.0 million and $ 0.2 million for the three months ended April 3, 2022 and April 4, 2021, respectively. The Company has reduced its expense for performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $ 8.6 million as of April 3, 2022. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2025. The tax benefit recognized with regard to restricted stock and performance shares was approximately $ 0.3 million for the three months ended April 3, 2022. 15 Table of Contents NOTE 8 – LEASES General The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option. The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region. As of April 3, 2022, there were no significant leases that had not commenced. The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to the Company’s leases as of April 3, 2022 and January 2, 2022: April 3, 2022 January 2, 2022 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 85,323 $ 90,561 Current portion of operating lease liabilities $ 13,906 $ 14,588 Operating lease liabilities 73,454 77,905 Total operating lease liabilities $ 87,360 $ 92,493 Property, plant and equipment, net $ 4,475 $ 6,547 Accrued expenses $ 1,806 $ 1,837 Other long-term liabilities 3,055 3,201 Total finance lease liabilities $ 4,861 $ 5,038 Lease Costs Three Months Ended April 3, 2022 April 4, 2021 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 517 $ 279 Interest on lease liabilities 29 32 Operating lease cost 4,918 5,886 Short-term lease cost 227 463 Variable lease cost 616 806 Total lease cost $ 6,307 $ 7,466 16 Table of Contents Other Supplemental Information Three Months Ended April 3, 2022 April 4, 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 21 $ 32 Operating cash flows from operating leases 4,635 5,200 Financing cash flows from finance leases 479 527 Right-of-use assets obtained in exchange for new finance lease liabilities 382 1,273 Right-of-use assets obtained in exchange for new operating lease liabilities 20 2,378 Lease Term and Discount Rate The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of April 3, 2022 and January 2, 2022: April 3, 2022 January 2, 2022 Weighted-average remaining lease term – finance leases (in years) 3.37 3.20 Weighted-average remaining lease term – operating leases (in years) 9.89 9.97 Weighted-average discount rate – finance leases 2.90 % 2.82 % Weighted-average discount rate – operating leases 5.89 % 5.87 % Maturity Analysis A maturity analysis of lease payments under non-cancellable leases is presented as follows: Fiscal Year Operating Leases Finance Leases (in thousands) 2022 (excluding the three months ended April 3, 2022) $ 13,077 $ 1,433 2023 13,540 1,582 2024 11,980 1,208 2025 10,162 487 2026 10,387 165 Thereafter 59,149 260 Total future minimum lease payments (undiscounted) 118,295 5,135 Less: Present value discount ( 30,935 ) ( 274 ) Total lease liability $ 87,360 $ 4,861 17 Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS During both three-month periods ended April 3, 2022 and April 4, 2021, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.7 million. The following tables provide the components of net periodic benefit cost for the three months ended April 3, 2022 and April 4, 2021: Three Months Ended Defined Benefit Retirement Plans (Europe) April 3, 2022 April 4, 2021 (in thousands) Interest cost $ 916 $ 572 Expected return on plan assets ( 1,059 ) ( 849 ) Amortization of prior service cost 32 29 Amortization of net actuarial losses 275 404 Net periodic benefit cost $ 164 $ 156 Three Months Ended Salary Continuation Plan April 3, 2022 April 4, 2021 (in thousands) Interest cost $ 193 $ 176 Amortization of net actuarial losses 139 186 Net periodic benefit cost $ 332 $ 362 Three Months Ended nora Defined Benefit Plan April 3, 2022 April 4, 2021 (in thousands) Service cost $ 225 $ 277 Interest cost 110 103 Amortization of net actuarial losses 50 92 Net periodic benefit cost $ 385 $ 472 In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense, net, in the consolidated condensed statements of operations. 18 Table of Contents NOTE 10 – GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amounts of goodwill attributable to each reportable segment for the three months ended April 3, 2022 are as follows: AMS EAAA Total (in thousands) Balance, at January 2, 2022 $ 108,505 $ 38,520 $ 147,025 Foreign currency translation ( 5,325 ) ( 1,890 ) ( 7,215 ) Balance, at April 3, 2022 $ 103,180 $ 36,630 $ 139,810 The net carrying value of intangible assets was $ 72.6 million and $ 76.2 million at April 3, 2022 and January 2, 2022, respectively. 19 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. The Company 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 includes 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 (“AOI”), which includes allocations of corporate selling, general and administrative expenses. AOI excludes nora purchase accounting amortization, Thailand plant closure inventory write-down, and restructuring charges, asset impairment, severance and other charges. Intersegment revenues for the three months ended April 3, 2022 and April 4, 2021 were $ 17.3 million and $ 15.7 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 for the three months ended April 3, 2022 and April 4, 2021 is presented in the following table: Three Months Ended April 3, 2022 April 4, 2021 (in thousands) Net sales AMS $ 156,509 $ 126,967 EAAA 131,493 126,293 Total net sales $ 288,002 $ 253,260 Segment AOI AMS $ 21,138 $ 11,913 EAAA 9,504 8,011 Depreciation and amortization AMS $ 4,058 $ 4,723 EAAA 6,612 7,211 Total depreciation and amortization $ 10,670 $ 11,934 20 Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: April 3, 2022 January 2, 2022 (in thousands) Assets AMS $ 546,993 $ 652,423 EAAA 687,535 691,844 Total segment assets 1,234,528 1,344,267 Corporate assets 132,386 146,204 Eliminations ( 57,129 ) ( 160,414 ) Total reported assets $ 1,309,785 $ 1,330,057 Reconciliations of operating income to income before income tax expense and segment AOI are presented as follows: Three Months Ended April 3, 2022 April 4, 2021 (in thousands) AMS operating income $ 21,250 $ 11,647 EAAA operating income 6,170 5,219 Consolidated operating income 27,420 16,866 Interest expense 6,850 7,256 Other expense, net 170 715 Income before income tax expense $ 20,400 $ 8,895 Three Months Ended April 3, 2022 Three Months Ended April 4, 2021 AMS EAAA AMS EAAA (in thousands) Operating income $ 21,250 $ 6,170 $ 11,647 $ 5,219 Purchase accounting amortization — 1,342 — 1,421 Thailand plant closure inventory write-down — 1,115 — — Restructuring, asset impairment, severance and other charges ( 112 ) 877 266 1,371 AOI $ 21,138 $ 9,504 $ 11,913 $ 8,011 21 Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 1.3 million and $ 1.6 million for the three months ended April 3, 2022 and April 4, 2021, respectively. Income tax payments, net of refunds, amounted to $ 2.8 million and $ 3.2 million for the three months ended April 3, 2022 and April 4, 2021, respectively. Non-Cash Financing Activities On March 15, 2022, the Company declared cash dividends on its common stock of $ 0.6 million, which were paid during the second quarter of 2022 to shareholders of record as of April 1, 2022. At April 3, 2022, the dividends were recorded within accrued expenses in the consolidated condensed balance sheet. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. 22 Table of Contents NOTE 13 – INCOME TAXES The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items. During the three months ended April 3, 2022, the Company recorded a total income tax provision of $ 7.1 million on pre-tax income of $ 20.4 million resulting in an effective tax rate of 34.8 %, as compared to a total income tax provision of $ 2.0 million on pre-tax income of $ 8.9 million resulting in an effective tax rate of 22.0 % during the three months ended April 4, 2021. The increase in the effective tax rate for the period ended April 3, 2022 as compared to the period ended April 4, 2021 was primarily due to a non-recurring favorable change to unrecognized tax benefits in the period ended April 4, 2021, unfavorable changes related to company-owned life insurance, an increase in non-deductible executive compensation, and non-deductible charges related to the closure of the Company’s manufacturing facility in Thailand in the first quarter of 2022. In the first three months of 2022, the Company increased its liability for unrecognized tax benefits by $ 0.3 million. As of April 3, 2022, the Company had accrued approximately $ 8.5 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of April 3, 2022 reflects a reduction for $ 2.8 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 $ 2.6 million of unrecognized tax benefits may be recognized within the next 12 months due to a lapse of statute of limitations. 23 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 months ended April 3, 2022 and April 4, 2021 are reflected in the table below: Three Months Ended Statement of Operations Location April 3, 2022 April 4, 2021 (in thousands) Interest rate swap contracts loss Interest expense $ ( 893 ) $ ( 1,061 ) Amortization of benefit plan net actuarial losses and prior service cost Other expense, net ( 496 ) ( 711 ) Total loss reclassified from AOCI $ ( 1,389 ) $ ( 1,772 ) 24 Table of Contents NOTE 15 – RESTRUCTURING AND OTHER CHARGES Restructuring and asset impairment charges by reportable segment are presented as follows: Three Months Ended April 3, 2022 April 4, 2021 (in thousands) AMS $ — $ — EAAA 887 ( 130 ) Total restructuring and asset impairment charges $ 887 $ ( 130 ) A summary of the restructuring reserve balance, recorded within accrued expenses in the consolidated condensed balance sheets, for the 2021 and 2019 restructuring plans is presented below: Workforce Reduction Asset Impairment 2021 Plan 2019 Plan 2021 Plan Total (in thousands) Balance, at January 2, 2022 $ 2,257 $ 97 $ — $ 2,354 Charged to expenses 1 — 886 887 Deductions ( 957 ) ( 97 ) — ( 1,054 ) Charged to other accounts — — ( 886 ) ( 886 ) Balance, at April 3, 2022 $ 1,301 $ — $ — $ 1,301 Below is a discussion of the restructuring plan activities under the 2021 and 2019 restructuring plans. 2021 Restructuring Plan 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 manufacturing facility in Thailand at the end of the first quarter of 2022. Expected charges and cumulative charges incurred to date under the 2021 restructuring plan are as follows: Workforce Reduction Retention Bonuses (2) Asset Impairment Total (in thousands) Estimated expected charges (1) $ 2,258 $ 500 $ 2,536 $ 5,000 — $ 6,000 Cumulative charges incurred to date (1) 2,258 — 2,536 4,794 (1) Charges are attributable to the EAAA reportable segment. (2) The retention bonuses will be recognized through the end of fiscal year 2022 as earned over the requisite service periods. In addition, during the three months ended April 3, 2022, in conjunction with the closure of its Thailand Facility, the Company recorded a write-down of inventory of $ 1.1 million within cost of sales in the consolidated condensed statements of operations. The restructuring plan is expected to result in cash expenditures of approximately $ 3 million to $ 4 million for payment of the employee severance, 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 condensed statement of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023. 2019 Restructuring Plan The 2019 restructuring plan has been completed as of April 3, 2022. 25 Table of Contents