INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) OCTOBER 2, 2022 JANUARY 2, 2022 (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 79,449 $ 97,252 Accounts receivable, net 170,436 171,676 Inventories, net 319,074 265,092 Prepaid expenses and other current assets 34,133 38,320 Total current assets 603,092 572,340 Property, plant and equipment, net 292,059 329,801 Operating lease right-of-use assets 77,447 90,561 Deferred tax asset 22,792 23,994 Goodwill and intangibles, net 174,149 223,204 Other assets 71,094 90,157 Total assets $ 1,240,633 $ 1,330,057 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 83,617 $ 85,924 Accrued expenses 127,483 146,298 Current portion of operating lease liabilities 12,400 14,588 Current portion of long-term debt 14,400 15,002 Total current liabilities 237,900 261,812 Long-term debt 507,094 503,056 Operating lease liabilities 67,021 77,905 Deferred income taxes 29,743 36,723 Other long-term liabilities 77,452 87,163 Total liabilities 919,210 966,659 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at October 2, 2022 and January 2, 2022 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 58,370 and 59,055 shares issued and outstanding at October 2, 2022 and January 2, 2022, respectively 5,837 5,905 Additional paid-in capital 245,007 253,110 Retained earnings 303,837 261,434 Accumulated other comprehensive loss – foreign currency translation ( 187,095 ) ( 100,441 ) Accumulated other comprehensive loss – cash flow hedge ( 1,049 ) ( 2,722 ) Accumulated other comprehensive loss – pension liability ( 45,114 ) ( 53,888 ) Total shareholders’ equity 321,423 363,398 Total liabilities and shareholders’ equity $ 1,240,633 $ 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 NINE MONTHS ENDED OCTOBER 2, 2022 OCTOBER 3, 2021 OCTOBER 2, 2022 OCTOBER 3, 2021 Net sales $ 327,757 $ 312,707 $ 962,364 $ 860,752 Cost of sales 218,972 206,382 630,074 549,397 Gross profit 108,785 106,325 332,290 311,355 Selling, general and administrative expenses 80,848 77,735 240,711 236,867 Restructuring, asset impairment and other charges ( 105 ) 3,813 1,592 3,621 Operating income 28,042 24,777 89,987 70,867 Interest expense 7,747 7,727 21,787 22,272 Other expense, net 124 887 1,688 2,219 Income before income tax expense 20,171 16,163 66,512 46,376 Income tax expense 6,106 5,204 22,336 12,968 Net income $ 14,065 $ 10,959 $ 44,176 $ 33,408 Earnings per share – basic $ 0.24 $ 0.19 $ 0.75 $ 0.57 Earnings per share – diluted $ 0.24 $ 0.19 $ 0.75 $ 0.57 Common shares outstanding – basic 58,681 59,057 59,099 58,942 Common shares outstanding – diluted 58,681 59,057 59,099 58,942 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 NINE MONTHS ENDED OCTOBER 2, 2022 OCTOBER 3, 2021 OCTOBER 2, 2022 OCTOBER 3, 2021 Net income $ 14,065 $ 10,959 $ 44,176 $ 33,408 Other comprehensive loss, after tax: Foreign currency translation adjustment ( 36,800 ) ( 14,553 ) ( 86,654 ) ( 30,695 ) Reclassification from accumulated other comprehensive loss – discontinued cash flow hedge 492 1,323 1,673 2,817 Pension liability adjustment 3,393 2,377 8,774 2,566 Other comprehensive loss ( 32,915 ) ( 10,853 ) ( 76,207 ) ( 25,312 ) Comprehensive income (loss) $ ( 18,850 ) $ 106 $ ( 32,031 ) $ 8,096 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) NINE MONTHS ENDED OCTOBER 2, 2022 OCTOBER 3, 2021 OPERATING ACTIVITIES: Net income $ 44,176 $ 33,408 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 30,661 35,087 Stock compensation amortization expense 6,679 4,150 Deferred income taxes and other 13,616 2,564 Amortization of acquired intangible assets 3,817 4,269 Working capital changes: Accounts receivable ( 8,860 ) ( 17,061 ) Inventories ( 71,487 ) ( 36,230 ) Prepaid expenses and other current assets 2,321 ( 7,022 ) Accounts payable and accrued expenses ( 6,040 ) 44,891 Cash provided by operating activities 14,883 64,056 INVESTING ACTIVITIES: Capital expenditures ( 13,314 ) ( 17,406 ) Cash used in investing activities ( 13,314 ) ( 17,406 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 151,662 ) ( 106,283 ) Borrowing of long-term debt 159,363 57,000 Tax withholding payments for share-based compensation ( 398 ) ( 193 ) Repurchase of common stock ( 14,451 ) — Dividends paid ( 1,773 ) ( 1,771 ) Debt issuance costs — ( 36 ) Finance lease payments ( 1,535 ) ( 1,796 ) Cash used in financing activities ( 10,456 ) ( 53,079 ) Net cash used in operating, investing and financing activities ( 8,887 ) ( 6,429 ) Effect of exchange rate changes on cash ( 8,916 ) ( 3,815 ) CASH AND CASH EQUIVALENTS: Net decrease ( 17,803 ) ( 10,244 ) Balance, beginning of period 97,252 103,053 Balance, end of period $ 79,449 $ 92,809 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 nine-month periods ended October 2, 2022 and October 3, 2021 both include 39 weeks. The three-month periods ended October 2, 2022 and October 3, 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, 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 October 2, 2022. During the third quarter of 2022, the Company permanently closed its operations in Russia, and we are currently in the process of liquidating our legal entity and branch office in the country. While our business activities in Russia and Ukraine were not material, we had approximately $ 3.0 million of total assets, including $ 2.6 million of cash, in Russia at October 2, 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 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. In accordance with applicable accounting standards, the Company tests goodwill for impairment annually in the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During fiscal year 2022, the Company has experienced significant cost inflation along with volatility in the Company stock price. Such circumstances, as well as a negative geopolitical climate in Europe, may warrant the need to write down the value of goodwill associated with our EMEA reporting unit if a future test indicates that its fair value is less than its carrying value. The fair value of the EMEA reporting unit exceeded its carrying value by approximately 20 % at the most recent goodwill test date performed in the fourth quarter of 2021. The goodwill allocated to the EMEA reporting unit as of October 2, 2022 was $ 29.4 million. The amount of any potential future goodwill impairment charge is uncertain as the impairment test involves a significant amount of risk, uncertainty and judgment. 7 Table of Contents 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, and shipping delays. During the first nine months of 2022, new government imposed COVID-19 lockdowns and restrictions in parts of China adversely impacted sales in that region. Recently Issued Accounting Pronouncements Not Yet Adopted In June 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” This ASU clarifies that a contractual restriction on the sale of an equity security is not considered in measuring fair value. The ASU also requires certain disclosures for equity securities subject to contractual sale restrictions. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard. 8 Table of Contents NOTE 2 – REVENUE RECOGNITION Revenue from sales of carpet, modular resilient flooring, rubber flooring, and other flooring-related material was approximately 97 % and 98 % of total revenue for the nine-month periods ended October 2, 2022 and October 3, 2021, respectively. The remaining 3 % and 2 % of revenue was generated from the installation of carpet and other flooring-related material for the 2022 and 2021 nine-month periods, respectively. Disaggregation of Revenue For the nine months ended October 2, 2022 and October 3, 2021, revenue from the Company’s customers is broken down by geography as follows: Nine Months Ended Geography October 2, 2022 October 3, 2021 Americas 57.9 % 53.5 % Europe 29.3 % 32.6 % Asia-Pacific 12.8 % 13.9 % Revenue from the Company’s customers in the Americas corresponds to the AMS operating segment, and the EAAA operating segment includes revenue from the Europe and Asia-Pacific geographies. See Note 11 entitled “Segment Information” for additional information. 9 Table of Contents NOTE 3 – INVENTORIES Inventories are summarized as follows: October 2, 2022 January 2, 2022 (in thousands) Finished goods $ 224,368 $ 182,896 Work-in-process 18,955 15,185 Raw materials 75,751 67,011 Inventories, net $ 319,074 $ 265,092 10 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 Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands, except per share data) Numerator: Net income $ 14,065 $ 10,959 $ 44,176 $ 33,408 Less: distributed and undistributed earnings available to participating securities ( 246 ) ( 127 ) ( 716 ) ( 358 ) Distributed and undistributed earnings available to common shareholders $ 13,819 $ 10,832 $ 43,460 $ 33,050 Denominator: Weighted average shares outstanding 57,656 58,371 58,139 58,312 Participating securities 1,025 686 960 630 Shares for basic EPS 58,681 59,057 59,099 58,942 Shares for diluted EPS 58,681 59,057 59,099 58,942 Basic EPS $ 0.24 $ 0.19 $ 0.75 $ 0.57 Diluted EPS $ 0.24 $ 0.19 $ 0.75 $ 0.57 11 Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: October 2, 2022 January 2, 2022 Outstanding Principal Interest Rate (1) Outstanding Principal Interest Rate (1) (in thousands) (in thousands) Syndicated Credit Facility: Revolving loan borrowings $ 26,001 4.90 % $ 7,500 4.00 % Term loan borrowings 201,614 4.39 % 217,631 1.84 % Total borrowings under Syndicated Credit Facility 227,615 4.45 % 225,131 1.91 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 527,615 525,131 Less: Unamortized debt issuance costs ( 6,121 ) ( 7,073 ) Total debt, net 521,494 518,058 Less: Current portion of long-term debt ( 14,400 ) ( 15,002 ) Total long-term debt, net $ 507,094 $ 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 October 2, 2022 and January 2, 2022, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both October 2, 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 in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future. On October 14, 2022, the Facility was amended to, among other changes, extend the maturity date to October 2027. See Note 16 entitled “Subsequent Events” for additional information. 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. 12 Table of Contents As of October 2, 2022, the estimated fair value of the Senior Notes was $ 255.2 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 The Company has other lines of credit available to certain non-U.S. subsidiaries. The availability under these other lines of credit was the equivalent of $ 2.0 million at an interest rate of 6.25 % as of October 2, 2022 and $ 6.0 million at interest rates ranging from 3.50 % to 6.00 % as of January 2, 2022. As of both October 2, 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 October 2, 2022 and January 2, 2022, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 6.1 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 $ 1.3 million and $ 1.6 million as of October 2, 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. 13 Table of Contents NOTE 6 – DERIVATIVE INSTRUMENTS Interest Rate Risk Management From time to time, the Company enters into interest rate swap transactions to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt. Cash Flow Interest Rate Swaps In the fourth quarter of 2020, the Company terminated its designated interest rate swap transactions with a total notional value of $ 250 million. Hedge accounting was also discontinued at that time. Losses recorded in accumulated other comprehensive loss for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statements of operations to the extent it is probable that a portion of the original forecasted transactions related to the portion of the hedged debt repaid will not occur by the end of the originally specified time period. See Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss” for additional information. As of October 2, 2022 and January 2, 2022, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps was $ 1.4 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 $ 1.4 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 October 2, 2022 and January 2, 2022, the Company had no outstanding foreign currency options. 14 Table of Contents NOTE 7 – SHAREHOLDERS’ EQUITY The following tables depict the activity in the accounts which make up shareholders’ equity for the nine months ended October 2, 2022 and October 3, 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 ) Net income — — — 16,818 — — — Restricted stock issuances 198 20 2,533 — — — — Unamortized compensation expense related to restricted stock awards — — ( 2,553 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 595 ) — — — Compensation expense related to stock awards, net of forfeitures ( 14 ) ( 1 ) 2,145 — — — — Share repurchases ( 415 ) ( 42 ) ( 5,540 ) — — — — Pension liability adjustment — — — — 3,842 — — Foreign currency translation adjustment — — — — — ( 36,670 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 540 Balance, at July 3, 2022 59,097 $ 5,910 $ 251,452 $ 290,358 $ ( 48,507 ) $ ( 150,295 ) $ ( 1,541 ) Net income — — — 14,065 — — — Cash dividends declared, $ 0.01 per common share — — — ( 586 ) — — — Compensation expense related to stock awards, net of forfeitures ( 16 ) ( 2 ) 2,353 — — — — Share repurchases ( 711 ) ( 71 ) ( 8,798 ) — — — — Pension liability adjustment — — — — 3,393 — — Foreign currency translation adjustment — — — — — ( 36,800 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 492 Balance, at October 2, 2022 58,370 $ 5,837 $ 245,007 $ 303,837 $ ( 45,114 ) $ ( 187,095 ) $ ( 1,049 ) 15 Table of Contents SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at 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 ) Net income — — — 15,511 — — — Restricted stock issuances 52 6 789 — — — — Unamortized compensation expense related to restricted stock awards — — ( 794 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 589 ) — — — Compensation expense related to stock awards — — 1,548 — — — — Pension liability adjustment — — — — 100 — — Foreign currency translation adjustment — — — — — 3,455 — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 745 Balance, at July 4, 2021 59,066 $ 5,907 $ 250,114 $ 229,833 $ ( 69,099 ) $ ( 76,473 ) $ ( 4,696 ) Net income — — — 10,959 — — — Cash dividends declared, $ 0.01 per common share — — — ( 593 ) — — — Compensation expense related to stock awards, net of forfeitures ( 11 ) ( 2 ) 1,680 — — — — Pension liability adjustment — — — — 2,377 — — Foreign currency translation adjustment — — — — — ( 14,553 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 1,323 Balance, at October 3, 2021 59,055 $ 5,905 $ 251,794 $ 240,199 $ ( 66,722 ) $ ( 91,026 ) $ ( 3,373 ) Repurchase of Common Stock In the second quarter of 2022, the Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $ 100 million of its outstanding shares of common stock. The program has no specific expiration date. During the nine months ended October 2, 2022, the Company repurchased 1,126,176 shares of common stock at a weighted average price of $ 12.83 per share pursuant to this program. 16 Table of Contents Restricted Stock Awards During the nine months ended October 2, 2022 and October 3, 2021, the Company granted restricted stock awards for 500,800 and 428,400 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. For certain restricted stock awards with a graded vesting schedule, the Company has elected to recognize compensation expense on a straight-line basis over the requisite service period for the entire award. Compensation expense related to restricted stock grants was $ 4.0 million and $ 2.8 million for the nine months ended October 2, 2022, and October 3, 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 October 2, 2022, as well as activity during the nine months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 683,800 $ 21.06 Granted 500,800 13.08 Vested ( 141,900 ) 16.59 Forfeited or canceled ( 30,400 ) 14.05 Outstanding at October 2, 2022 1,012,300 $ 13.91 As of October 2, 2022, the unrecognized total compensation cost related to unvested restricted stock was $ 7.3 million. That cost is expected to be recognized by the end of 2025. Performance Share Awards During the nine months ended October 2, 2022 and October 3, 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 October 2, 2022, as well as the activity during the nine months then ended: Performance Shares Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 718,100 $ 14.98 Granted 366,900 13.02 Vested ( 200 ) 15.36 Forfeited or canceled ( 154,400 ) 16.73 Outstanding at October 2, 2022 930,400 $ 13.91 17 Table of Contents Compensation expense related to the performance shares was $ 2.7 million and $ 1.4 million for the nine months ended October 2, 2022 and October 3, 2021, respectively. The Company has reduced its expense for any performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $ 8.1 million as of October 2, 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 $ 0.6 million for the nine months ended October 2, 2022. 18 Table of Contents NOTE 8 – LEASES General The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option. The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region. As of October 2, 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 October 2, 2022 and January 2, 2022: October 2, 2022 January 2, 2022 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 77,447 $ 90,561 Current portion of operating lease liabilities $ 12,400 $ 14,588 Operating lease liabilities 67,021 77,905 Total operating lease liabilities $ 79,421 $ 92,493 Property, plant and equipment, net $ 5,134 $ 6,547 Accrued expenses $ 1,963 $ 1,837 Other long-term liabilities 3,563 3,201 Total finance lease liabilities $ 5,526 $ 5,038 Lease Costs Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 581 $ 646 $ 1,636 $ 1,230 Interest on lease liabilities 45 37 115 104 Operating lease cost 4,743 5,240 14,310 17,040 Short-term lease cost 204 222 642 864 Variable lease cost 614 730 2,012 2,018 Total lease cost $ 6,187 $ 6,875 $ 18,715 $ 21,256 19 Table of Contents Other Supplemental Information Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 35 $ 16 $ 88 $ 83 Operating cash flows from operating leases 4,406 6,677 13,854 17,353 Financing cash flows from finance leases 525 680 1,535 1,796 Right-of-use assets obtained in exchange for new finance lease liabilities 182 67 2,525 2,811 Right-of-use assets (adjusted) obtained in exchange for (remeasured) new operating lease liabilities ( 734 ) 6,417 6,089 12,062 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 October 2, 2022 and January 2, 2022: October 2, 2022 January 2, 2022 Weighted-average remaining lease term – finance leases (in years) 3.77 3.20 Weighted-average remaining lease term – operating leases (in years) 9.40 9.97 Weighted-average discount rate – finance leases 3.16 % 2.82 % Weighted-average discount rate – operating leases 5.80 % 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 nine months ended October 2, 2022) $ 4,071 $ 532 2023 13,354 1,918 2024 12,413 1,573 2025 10,589 855 2026 10,864 396 Thereafter 54,382 644 Total future minimum lease payments (undiscounted) 105,673 5,918 Less: Present value discount ( 26,252 ) ( 392 ) Total lease liability $ 79,421 $ 5,526 20 Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS During the three and nine months ended October 2, 2022, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.5 million and $ 1.8 million, respectively. During the three and nine months ended October 3, 2021, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.6 million and $ 2.0 million, respectively. The following tables provide the components of net periodic benefit cost for the three and nine months ended October 2, 2022 and October 3, 2021: Three Months Ended Nine Months Ended Defined Benefit Retirement Plans (Europe) October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Interest cost $ 801 $ 570 $ 2,574 $ 1,721 Expected return on plan assets ( 924 ) ( 847 ) ( 2,973 ) ( 2,556 ) Amortization of prior service cost 27 28 89 86 Amortization of net actuarial losses 240 402 771 1,215 Net periodic benefit cost $ 144 $ 153 $ 461 $ 466 Three Months Ended Nine Months Ended Salary Continuation Plan October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Interest cost $ 193 $ 176 $ 579 $ 529 Amortization of net actuarial losses 139 186 418 558 Net periodic benefit cost $ 332 $ 362 $ 997 $ 1,087 Three Months Ended Nine Months Ended nora Defined Benefit Plan October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Service cost $ 200 $ 271 $ 636 $ 825 Interest cost 98 101 313 308 Amortization of net actuarial losses 44 89 142 273 Net periodic benefit cost $ 342 $ 461 $ 1,091 $ 1,406 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. 21 Table of Contents NOTE 10 – GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amounts of goodwill allocated to each reportable segment for the nine months ended October 2, 2022 are as follows: AMS EAAA Total (in thousands) Balance, at January 2, 2022 $ 108,505 $ 38,520 $ 147,025 Foreign currency translation ( 25,733 ) ( 9,136 ) ( 34,869 ) Balance, at October 2, 2022 $ 82,772 $ 29,384 $ 112,156 The net carrying value of intangible assets other than goodwill was $ 62.0 million and $ 76.2 million at October 2, 2022 and January 2, 2022, respectively. 22 Table of Contents NOTE 11 – SEGMENT INFORMATION The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. 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 and nine months ended October 2, 2022 were $ 19.7 million and $ 56.4 million, respectively, and intersegment revenues for the three and nine months ended October 3, 2021 were $ 20.1 million and $ 56.4 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 and nine months ended October 2, 2022 and October 3, 2021 is presented in the following table: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) Net sales AMS $ 194,449 $ 176,770 $ 557,768 $ 460,402 EAAA 133,308 135,937 404,596 400,350 Total net sales $ 327,757 $ 312,707 $ 962,364 $ 860,752 Segment AOI AMS $ 24,975 $ 21,595 $ 74,502 $ 54,606 EAAA 6,273 8,586 25,908 26,557 Depreciation and amortization AMS $ 4,344 $ 4,365 $ 12,585 $ 13,592 EAAA 5,481 7,052 18,076 21,495 Total depreciation and amortization $ 9,825 $ 11,417 $ 30,661 $ 35,087 23 Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: October 2, 2022 January 2, 2022 (in thousands) Assets AMS $ 556,558 $ 652,423 EAAA 635,210 691,844 Total segment assets 1,191,768 1,344,267 Corporate assets 114,204 146,204 Eliminations ( 65,339 ) ( 160,414 ) Total reported assets $ 1,240,633 $ 1,330,057 Reconciliations of operating income to income before income tax expense and segment AOI are presented as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) AMS operating income $ 24,955 $ 21,684 $ 74,618 $ 54,432 EAAA operating income 3,087 3,093 15,369 16,435 Consolidated operating income 28,042 24,777 89,987 70,867 Interest expense 7,747 7,727 21,787 22,272 Other expense, net 124 887 1,688 2,219 Income before income tax expense $ 20,171 $ 16,163 $ 66,512 $ 46,376 Three Months Ended October 2, 2022 Three Months Ended October 3, 2021 AMS EAAA AMS EAAA (in thousands) Operating income $ 24,955 $ 3,087 $ 21,684 $ 3,093 Purchase accounting amortization — 1,204 — 1,407 Thailand plant closure inventory write-down — 477 — — Restructuring, asset impairment, severance and other charges 20 1,505 ( 89 ) 4,086 AOI $ 24,975 $ 6,273 $ 21,595 $ 8,586 Nine Months Ended October 2, 2022 Nine Months Ended October 3, 2021 AMS EAAA AMS EAAA (in thousands) Operating income $ 74,618 $ 15,369 $ 54,432 $ 16,435 Purchase accounting amortization — 3,817 — 4,269 Thailand plant closure inventory write-down — 2,530 — — Restructuring, asset impairment, severance and other charges ( 116 ) 4,192 174 5,853 AOI $ 74,502 $ 25,908 $ 54,606 $ 26,557 24 Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 13.7 million and $ 13.2 million for the nine months ended October 2, 2022 and October 3, 2021, respectively. Income tax payments, net of refunds, amounted to $ 11.5 million and $ 15.3 million for the nine months ended October 2, 2022 and October 3, 2021, respectively. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. 25 Table of Contents NOTE 13 – INCOME TAXES The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate and records any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items. During the nine months ended October 2, 2022, the Company recorded a total income tax provision of $ 22.3 million on pre-tax income of $ 66.5 million resulting in an effective tax rate of 33.6 %, as compared to a total income tax provision of $ 13.0 million on pre-tax income of $ 46.4 million resulting in an effective tax rate of 28.0 % during the nine months ended October 3, 2021. The increase in the effective tax rate for the period ended October 2, 2022 as compared to the period ended October 3, 2021 was primarily due to a non-recurring favorable change to unrecognized tax benefits in the period ended October 3, 2021, unfavorable changes related to company-owned life insurance, an increase in non-deductible executive compensation, and unfavorable changes related to foreign currency. In April of 2021, the Company filed requests with both the Competent Authority in the Netherlands and in the U.K. to initiate a mutual agreement procedure (“MAP”) related to the double taxation arising from adjustments made by Her Majesty’s Revenue & Customs to the Company’s U.K. subsidiaries’ tax returns for years 2012 through 2017. The adjustments result from the interest rate applied in the intra-group financing arrangement between a Company subsidiary in the U.K. and the Netherlands. In June of 2022, the Company was notified that the Competent Authorities had reached an agreement on the interest rate to be applied for the years 2012 through 2017. The Company recognized the adjustments in the nine-month period ending October 2, 2022, based on the outcome of the MAP. The recognition of the adjustments did not have a material impact on the Company’s effective tax rate or its financial position. In the first nine months of 2022, the Company decreased its liability for unrecognized tax benefits by $ 0.1 million. As of October 2, 2022, the Company had accrued approximately $ 8.1 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of October 2, 2022 reflects a reduction for $ 2.8 million of these unrecognized tax benefits. On October 15, 2022, the statute of limitations for the 2018 U.S. federal income tax return and Georgia income tax return closed. As a result of this lapse in the statute of limitations, the Company will recognize $ 2.2 million of unrecognized tax benefits in the fourth quarter of 2022. 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, including the $ 2.2 million to be recognized in the fourth quarter of 2022, may be recognized within the next 12 months due to a lapse of statute of limitations. 26 Table of Contents NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three and nine months ended October 2, 2022 and October 3, 2021 are reflected in the tables below: Three Months Ended Statement of Operations Location October 2, 2022 October 3, 2021 (in thousands) Interest rate swap contracts loss Interest expense $ ( 645 ) $ ( 1,845 ) Amortization of benefit plan net actuarial losses and prior service cost Other expense, net ( 450 ) ( 705 ) Total loss reclassified from AOCI $ ( 1,095 ) $ ( 2,550 ) Nine Months Ended Statement of Operations Location October 2, 2022 October 3, 2021 (in thousands) Interest rate swap contracts loss Interest expense $ ( 2,416 ) $ ( 3,952 ) Amortization of benefit plan net actuarial losses and prior service cost Other expense, net ( 1,420 ) ( 2,132 ) Total loss reclassified from AOCI $ ( 3,836 ) $ ( 6,084 ) 27 Table of Contents NOTE 15 – RESTRUCTURING AND OTHER CHARGES Restructuring, asset impairment and other charges by reportable segment are presented as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (in thousands) AMS $ — $ ( 1 ) $ — $ ( 1 ) EAAA ( 105 ) 3,814 1,592 3,622 Total restructuring, asset impairment and other charges $ ( 105 ) $ 3,813 $ 1,592 $ 3,621 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 Retention Bonuses Asset Impairment and Other Related Charges 2021 Plan 2019 Plan 2021 Plan 2021 Plan Total (in thousands) Balance, at January 2, 2022 $ 2,257 $ 97 $ — $ — $ 2,354 Charged to expenses 1 — 348 1,243 1,592 Deductions ( 1,369 ) ( 97 ) ( 71 ) — ( 1,537 ) Charged to other accounts — — — ( 1,243 ) ( 1,243 ) Balance, at October 2, 2022 $ 889 $ — $ 277 $ — $ 1,166 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 and Other Related Charges Total (in thousands) Estimated expected charges (1) $ 2,300 $ 500 $ 3,700 $ 6,500 Cumulative charges incurred to date (1) 2,258 348 2,893 5,499 (1) Charges are attributable to the EAAA reportable segment. (2) The retention bonuses will be recognized through the first quarter of 2023 as earned over the requisite service periods. In addition, during the nine months ended October 2, 2022, in conjunction with the closure of its Thailand facility, the Company recorded a write-down of inventory of $ 2.5 million within cost of sales in the consolidated condensed statements of operations. 28 Table of Contents The restructuring plan is expected to result in cash expenditures of approximately $ 3 million to $ 4 million for payment of employee severance, employee retention bonuses and other costs to shut down the Thailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in the first quarter of 2023 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. 29 Table of Contents NOTE 16 – SUBSEQUENT EVENTS On October 14, 2022, the Company entered into a fifth amendment to its existing credit facility. This amendment, among other changes, provides for the following: (1) extends the maturity date of the credit facility to October 2027 and (2) replaces the LIBOR benchmark interest rates applicable to all loans denominated in U.S. dollars with the SOFR benchmark interest rates. 30 Table of Contents