INTERFACE INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) FISCAL YEAR 2022 2021 2020 Net sales $ 1,297,919 $ 1,200,398 $ 1,103,262 Cost of sales 860,186 767,665 692,688 Gross profit 437,733 432,733 410,574 Selling, general and administrative expenses 324,190 324,315 333,229 Restructuring, asset impairment and other charges 1,965 3,621 ( 4,626 ) Goodwill and intangible asset impairment charge 36,180 — 121,258 Operating income (loss) 75,398 104,797 ( 39,287 ) Interest expense 29,929 29,681 29,244 Other expense, net 3,552 2,483 10,889 Income (loss) before income tax expense 41,917 72,633 ( 79,420 ) Income tax expense (benefit) 22,357 17,399 ( 7,491 ) Net income (loss) $ 19,560 $ 55,234 $ ( 71,929 ) Earnings (loss) per share – basic $ 0.33 $ 0.94 $ ( 1.23 ) Earnings (loss) per share – diluted $ 0.33 $ 0.94 $ ( 1.23 ) Common shares outstanding – basic 58,865 58,971 58,547 Common shares outstanding – diluted 58,865 58,971 58,547 See accompanying notes to consolidated financial statements. 44 Ta b le of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) FISCAL YEAR 2022 2021 2020 Net income (loss) $ 19,560 $ 55,234 $ ( 71,929 ) Other comprehensive income (loss), after tax: Foreign currency translation adjustment ( 38,334 ) ( 40,110 ) 52,808 Cash flow hedge gain (loss) 1,973 3,468 ( 2,027 ) Pension liability adjustment 26,340 15,400 ( 12,588 ) Other comprehensive income (loss) ( 10,021 ) ( 21,242 ) 38,193 Comprehensive income (loss) $ 9,539 $ 33,992 $ ( 33,736 ) See accompanying notes to consolidated financial statements. 45 Ta b le of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par values) END OF FISCAL YEAR 2022 2021 ASSETS Current assets Cash and cash equivalents $ 97,564 $ 97,252 Accounts receivable, net 182,807 171,676 Inventories, net 306,327 265,092 Prepaid expenses and other current assets 30,339 38,320 Total current assets 617,037 572,340 Property, plant and equipment, net 297,976 329,801 Operating lease right-of-use assets 81,644 90,561 Deferred tax asset 17,767 23,994 Goodwill and intangibles, net 162,195 223,204 Other assets 89,884 90,157 Total assets $ 1,266,503 $ 1,330,057 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 78,264 $ 85,924 Accrued expenses 120,138 146,298 Current portion of operating lease liabilities 11,857 14,588 Current portion of long-term debt 10,211 15,002 Total current liabilities 220,470 261,812 Long-term debt 510,003 503,056 Operating lease liabilities 72,305 77,905 Deferred income taxes 38,662 36,723 Other long-term liabilities 63,526 87,163 Total liabilities 904,966 966,659 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at January 1, 2023 and January 2, 2022 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 58,106 and 59,055 shares issued and outstanding at January 1, 2023 and January 2, 2022, respectively 5,811 5,905 Additional paid-in capital 244,159 253,110 Retained earnings 278,639 261,434 Accumulated other comprehensive loss – foreign currency translation ( 138,775 ) ( 100,441 ) Accumulated other comprehensive loss – cash flow hedge ( 749 ) ( 2,722 ) Accumulated other comprehensive loss – pension liability ( 27,548 ) ( 53,888 ) Total shareholders’ equity 361,537 363,398 Total liabilities and shareholders’ equity $ 1,266,503 $ 1,330,057 See accompanying notes to consolidated financial statements. 46 Ta b le of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) FISCAL YEAR 2022 2021 2020 OPERATING ACTIVITIES: Net income (loss) $ 19,560 $ 55,234 $ ( 71,929 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 40,337 46,345 45,920 Stock compensation amortization expense (benefit) 8,527 5,467 ( 502 ) Loss on disposal of fixed assets 4,319 4,427 4,996 Bad debt expense 26 ( 263 ) 3,843 Deferred income taxes and other 13,414 ( 16,379 ) ( 20,794 ) Amortization of acquired intangible assets 5,038 5,636 5,457 Goodwill and intangible asset impairment 36,180 — 121,258 Working capital changes: Accounts receivable ( 17,489 ) ( 36,096 ) 40,090 Inventories ( 49,651 ) ( 47,074 ) 38,667 Prepaid expenses and other current assets 7,020 ( 4,800 ) 12,967 Accounts payable and accrued expenses ( 24,220 ) 74,192 ( 60,903 ) Cash provided by operating activities 43,061 86,689 119,070 INVESTING ACTIVITIES: Capital expenditures ( 18,437 ) ( 28,071 ) ( 62,949 ) Other — — 1,260 Cash used in investing activities ( 18,437 ) ( 28,071 ) ( 61,689 ) FINANCING ACTIVITIES: Revolving loan borrowing 206,031 76,000 110,000 Revolving loan repayments ( 189,281 ) ( 71,500 ) ( 131,024 ) Term loan repayments ( 13,191 ) ( 60,485 ) ( 304,425 ) Proceeds from issuance of Senior Notes due 2028 — — 300,000 Repurchase of common stock ( 17,171 ) — — Dividends paid ( 2,355 ) ( 2,362 ) ( 5,565 ) Tax withholding payments for share-based compensation ( 402 ) ( 193 ) ( 1,511 ) Debt issuance costs ( 1,032 ) ( 36 ) ( 7,896 ) Payments for debt extinguishment costs — — ( 660 ) Proceeds from issuance of common stock — — 93 Finance lease payments ( 2,089 ) ( 2,282 ) ( 1,727 ) Cash used in financing activities ( 19,490 ) ( 60,858 ) ( 42,715 ) Net cash provided by (used in) operating, investing and financing activities 5,134 ( 2,240 ) 14,666 Effect of exchange rate changes on cash ( 4,822 ) ( 3,561 ) 7,086 CASH AND CASH EQUIVALENTS: Net increase (decrease) 312 ( 5,801 ) 21,752 Balance, beginning of year 97,252 103,053 81,301 Balance, end of year $ 97,564 $ 97,252 $ 103,053 See accompanying notes to consolidated financial statements. 47 Ta b le of Contents INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Interface is a global flooring company specializing in carbon neutral carpet tile and resilient flooring, including luxury vinyl tile (“LVT”), vinyl sheet, rigid core and nora® rubber flooring. The Company manufactures modular carpet focusing on the high quality, designer-oriented sector of the market, sources resilient flooring including LVT from third parties and focuses on the same sector of the market, and provides specialized carpet replacement, installation and maintenance services. The Company also manufactures and sells resilient rubber flooring. The Company has determined that it has two operating and reportable segments – namely Americas (“AMS”) which includes the United States, Canada and Latin America geographic areas, and Europe, Africa, Asia and Australia (collectively “EAAA”). See Note 20 entitled “Segment Information” for additional information. Cybersecurity Event On November 20, 2022, we discovered a cybersecurity attack, perpetrated by unauthorized third parties, affecting our IT systems. Promptly, out of an abundance of caution, we shut down certain systems including shipping, inventory management and production systems and engaged forensic experts to evaluate the extent of the Cyber Event and its impact to our operations. We took steps to supplement existing security monitoring, including scanning and protective measures, and notified law enforcement. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All of our subsidiaries are wholly-owned, and we are not a party to any joint venture, partnership or other variable interest entity that would potentially qualify for consolidation. All material intercompany accounts and transactions are eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Examples include provisions for returns, bad debts, product claims reserves, rebates, inventory obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures and valuation allowances, environmental liabilities, and the carrying value of goodwill, intangible assets and property, plant and equipment. Actual results could vary from these estimates. 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. In connection with the Cyber Event discussed above, security breaches may expose us to fines and other liabilities to the extent sensitive data stored in our IT systems, including data related to customers, suppliers or employees, are misappropriated. Any potential fine or other liability is not probable nor estimable at this time. Accordingly, pursuant to applicable accounting standards, no accrual has been recorded for any contingent liability arising out of the 2022 Cyber Event. The Company considered these impacts and subsequent general uncertainties and volatility in the global economy on the assumptions and estimates used herein, including the goodwill and intangible asset impairments discussed in Note 12 entitled “Goodwill and Intangible Assets.” These uncertainties could result in a future material adverse effect to the Company’s financial statements if actual results differ from these estimates. 48 Ta b le of Contents COVID-19 Impact On March 1, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to impact areas where we operate and sell our products and services. The COVID-19 pandemic has had material adverse effects on our business, results of operations, and financial condition. The duration of the pandemic will ultimately determine the extent to which our operations are impacted. During fiscal year 2022, the COVID-19 pandemic had less of an impact on our overall financial results as sales increased 8.1 % compared to 2021. However, continuing government imposed COVID-19 lockdowns and restrictions in parts of China adversely impacted sales in China by approximately 13 % in 2022 compared with the prior year. Ongoing global supply chain challenges and inflationary pressures resulted in higher raw material costs, higher freight costs and shipping delays during 2022, which increased our operating costs and adversely impacted our gross profit margin. During fiscal year 2020, in connection with the COVID-19 pandemic, government grants and payroll protection programs were available globally to provide assistance to companies impacted by the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“ CARES Act”) enacted in the United States (see Note 17 entitled “ Income Taxes ” 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 on the payroll. During fiscal year 2020, the Company received reimbursements under the NOW Program 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. We applied a grant analogy method to recognize the reimbursements under the NOW Program as the Company believes it is probable that the benefits received will not be repaid. Revenue Recognition Revenue from contracts with customers is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Revenue Recognized from Contracts with Customers Contracts with customers typically take the form of invoices for purchase of materials from the Company. Customer payment terms vary by region and are typically less than 60 days. The performance obligation is the delivery of these materials to the customer’s control. Revenue from the sale of modular carpet, resilient flooring, rubber flooring, and related products (TacTiles installation materials, etc.) was approximately 97 % of the Company’s total revenue in 2022 and approximately 98 % of the Company’s total revenue in both 2021 and 2020. The revenue from sales of these products is recognized upon shipment, or in certain cases, upon delivery to the customer. The transaction price for these sales is readily identifiable. The remaining revenue of approximately 3 % for 2022 and approximately 2 % for both 2021 and 2020 was generated from the installation of carpet and other flooring-related material. For installation projects underway, the Company recognized installation revenue over time based on a project cost input method as the customer simultaneously received and consumed the benefit of the services. The installation of the carpet and related products is a separate performance obligation from the sale of carpet. The majority of these projects are completed within five days of the start of installation. The transaction price for these sale and installation contracts is readily determinable between flooring material and installation services and is specifically identified in the contract with the customer. The Company has utilized the portfolio approach to its contracts with customers, as its contracts with customers have similar characteristics, and it is reasonable to expect that the effects from applying this approach are not materially different from applying the accounting standard to individual contracts. The Company does not have any other significant revenue streams outside of these sales of flooring material, and the sale and installation of flooring material, as described above. 49 Ta b le of Contents The Company does not record taxes collected from customers and remitted to governmental authorities within revenues. The Company records such taxes collected as a liability on our consolidated balance sheets. Performance Obligations As noted above, the Company primarily generates revenue through the sale of flooring material to end users either upon shipment or upon arrival of the product at its destination. In these instances, there typically is no other obligation to the customers other than the delivery of flooring material with the exception of warranty. The Company does offer a warranty to its customers which guarantees certain on-floor performance characteristics and warrants against manufacturing defects. The warranty is not a service warranty, and there is no ability to separate the warranty obligation from the sale of the flooring or purchase them separately. The Company’s incidence of warranty claims is extremely low, with less than 0.5 % of revenue in claims on an annual basis for the last three fiscal years. Given the nature of the warranty as well as the financial impact, the Company has determined that there is no need to identify this warranty as a separate performance obligation, and the Company accounts for warranty on an accrual basis. For the Company’s installation business, the sales of carpet and other flooring materials and installation services are separate deliverables which under the revenue recognition requirements should be characterized as separate performance obligations. The nature of the installation projects is such that the vast majority – an amount in excess of 85 % of these installation projects – are completed in less than five days. The Company’s largest installation customers are retail, education and corporate customers, and these are on a project-by-project basis and are short-term installations. The Company has evaluated these projects at the end of each reporting period and recorded revenue in accordance with the accounting standards for projects which were underway as of the end of 2022, 2021 and 2020. Costs to Obtain Contracts The Company pays sales commissions to many of its sales personnel based upon their selling activity. These are direct costs associated with obtaining the contracts and are expensed as the revenue is earned. As these commissions become payable upon shipment (or in certain cases delivery) of product, the commission is earned as the revenue is recognized. There are no other material costs the Company incurs as part of obtaining the sales contract. Shipping and Handling Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations. Research and Development Research and development costs are expensed as incurred and are included in selling, general and administrative (“SG&A”) expenses and cost of sales in the consolidated statements of operations. Research and development expense includes costs associated with the improvement and enhancement of existing products. Research and development expense was $ 19.1 million, $ 19.3 million, and $ 18.6 million for the years 2022, 2021 and 2020, respectively. Cash, Cash Equivalents and Short-Term Investments Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. Significant concentrations of credit risk may arise from the Company’s cash maintained at various banks, as from time to time cash balances may exceed the FDIC limits. The Company did no t hold any significant amounts of cash equivalents and short-term investments at January 1, 2023 and January 2, 2022. Cash payments for interest amounted to approximately $ 25.1 million, $ 22.9 million, and $ 32.0 million for the years 2022, 2021 and 2020, respectively. Fiscal year 2020 includes cash payments of $ 12.5 million to terminate the Company’s interest rate swap liabilities. Income tax payments amounted to approximately $ 31.4 million, $ 23.1 million and $ 19.3 million for the years 2022, 2021 and 2020, respectively. During the years 2022, 2021 and 2020, the Company received income tax refunds of $ 12.4 million, $ 5.4 million and $ 7.5 million, respectively. 50 Ta b le of Contents Allowances for Expected Credit Losses The Company maintains allowances for expected credit losses for estimated losses resulting from the inability of customers to make required payments. Estimating the amount of future expected losses requires the Company to consider historical losses from our customers, as well as current market conditions and future forecasts of our customers’ ability to make payments for goods and services. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that the Company is unable to collect may be different than the amount initially estimated. Inventories Inventories are carried at the lower of cost (standards approximating the first-in, first-out method) or net realizable value. Costs included in inventories are based on invoiced costs and/or production costs, as applicable. Included in production costs are material, direct labor and allocated overhead. The Company writes down inventories for the difference between the carrying value of the inventories and their estimated net realizable value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. Management estimates its reserves for inventory obsolescence by continuously examining its 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 the Company’s products, and current economic conditions. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences may continue to change, and the Company could experience additional inventory write-downs in the future. Rebates The Company has agreements to receive cash consideration from certain of its vendors, including rebates and cooperative marketing reimbursements. The amounts received from its vendors are generally presumed to be a reduction of the prices the Company pays for their products and, therefore, such amounts are reflected as either a reduction of cost of sales in the accompanying consolidated statements of operations, or, if the inventory is still on hand at the reporting date, it is reflected as a reduction of “Inventories, net” on the accompanying consolidated balance sheets. Vendor rebates are typically dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated and receipt becomes probable, the Company records a portion of the rebate as the Company makes progress towards the purchase threshold. When the Company receives direct reimbursements for costs incurred in marketing the vendor’s product or service, the amount received is recorded as an offset to SG&A expenses in the accompanying consolidated statements of operations. Leases The Company records a right-of-use asset and lease liability for operating and finance leases once a contract that contains a lease is executed and the Company has 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 is the Company’s incremental borrowing rate, which is based on the estimated rate for a fully collateralized borrowing that fully amortizes over a similar lease term at the commencement date and for the applicable geographical region. The Company made an accounting policy election to exclude leases with an initial term of 12 months or less from the calculation of the right-of-use asset and lease liability recorded on the consolidated balance sheets. These leases primarily represent month-to-month operating leases for office equipment where we were reasonably certain that we would not elect an option to extend the lease. The Company also made an accounting policy election not to separate lease and non-lease components for all asset classes and accounts for the lease payments as a single component. Property, Plant and Equipment and Long-Lived Assets Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements – ten to forty years ; and furniture and equipment – three to twelve years . Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related assets’ estimated useful lives. The Company capitalized net interest costs on qualifying expenditures of approximately $ 0.1 million, $ 0.5 million, and $ 1.9 million for the fiscal years 2022, 2021 and 2020, respectively. Total depreciation expense amounted to approximately $ 36.3 million, $ 41.9 million, and $ 42.4 million for the years 2022, 2021 and 2020 respectively. 51 Ta b le of Contents Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance costs are charged to operating expense as incurred. Goodwill and Intangible Assets 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. During the fourth quarters of 2022, 2021 and 2020, the Company performed the annual goodwill impairment test. In addition, during the first quarter of 2020—primarily due to anticipated impacts of the COVID-19 pandemic—the Company determined that there were indicators of impairment, and the Company proceeded with a goodwill impairment test as of the end of the first quarter. The Company tests goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. In performing the impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past, present and future expectations of performance were considered. See Note 12 entitled “Goodwill and Intangible Assets” for additional information. Trademark and tradename intangible assets acquired in connection with the nora acquisition are not subject to amortization, but are tested 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 the intangible asset below its carrying amount. In the fourth quarter of 2022, we determined that the trademark and trade name intangible assets were impaired. During the first quarter of 2020—primarily due to anticipated impacts of the COVID-19 pandemic—the Company determined that there were indicators of impairment, and the Company proceeded with an impairment test as of the end of the first quarter. The Company prepared valuations of the intangible assets using the present value of cash flows under the relief from royalty method, which were compared to the carrying value of intangible assets to determine whether any impairment existed. See Note 12 entitled “Goodwill and Intangible Assets” for additional information. The Company’s other intangible assets primarily consist of developed technology that is amortized on a straight-line basis over the estimated useful life of 7 years. Product Warranties The Company typically provides limited warranties with respect to certain attributes of its carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty years , depending on the particular carpet product and the environment in which it is to be installed. Similar limited warranties are provided on certain attributes of its rubber and LVT products, typically for a period of 5 to 15 years. The Company typically warrants that services performed will be free from defects in workmanship for a period of one year following completion. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product. The Company records a provision related to warranty costs based on historical experience and future expectations and periodically adjusts these provisions to reflect changes in actual experience. Warranty and sales allowance reserves amounted to $ 2.1 million and $ 2.7 million as of January 1, 2023 and January 2, 2022, respectively, and are included in accrued expenses in the accompanying consolidated balance sheets. Income Taxes The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. 52 Ta b le of Contents The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. For further information, see Note 17 entitled “Income Taxes.” Fair Values of Financial Instruments Fair values of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of debt are based on quoted market prices or pricing models using current market rates and classified as level 2 within the fair value hierarchy. See Note 5 entitled “Fair Value of Financial Instruments” for further information. Translation of Foreign Currencies The financial position and results of operations of most of the Company’s foreign subsidiaries are measured using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated each month at average monthly exchange rates throughout the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture or liquidation of a foreign subsidiary, the related foreign currency translation results are reclassified from equity to income. Foreign exchange translation gains (losses) were $( 38.3 ) million, $( 40.1 ) million, and $ 52.8 million for the years 2022, 2021 and 2020, respectively. Earnings per Share Basic earnings per share is computed based on the average number of common shares outstanding, including participating securities. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method. See Note 15 entitled “Earnings Per Share” for additional information. Stock-Based Compensation The Company has stock-based employee compensation plans, which are described more fully in Note 14 entitled “Shareholders' Equity.” The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. However, there were no stock options granted in 2022, 2021 or 2020. The Company recognizes expense related to its restricted stock and performance share grants based on the grant date fair value of the shares awarded, as determined by its market price at date of grant. Derivative Financial Instruments Derivatives are recognized on the balance sheet at fair value. For derivatives that meet the criteria as designated cash flow hedges, the changes in the fair value of the derivative are recognized in other comprehensive income (or other comprehensive loss) until the hedged item is recognized in earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings each period. Derivative liabilities are recorded in accrued expenses and derivative assets are recorded in other current assets in the consolidated balance sheets. Cash flows from all derivative instruments, including those not designated as hedging instruments, are classified in the same category as the cash flows from the items being hedged. 53 Ta b le of Contents Pension Benefits Net pension expense recorded is based on, among other things, assumptions about the discount rate, estimated return on plan assets and salary increases. While the Company believes these assumptions are reasonable, changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of the Company’s plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The actuarial assumptions used in the Company’s salary continuation plan and foreign defined benefit plans reporting are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for our future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers. Fiscal Year The Company’s fiscal year is the 52 or 53 week period ending on the Sunday nearest December 31. All references herein to “2022,” “2021,” and “2020,” mean the fiscal years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively. Fiscal years 2022 and 2021 are both comprised of 52 weeks, and 2020 is comprised of 53 weeks. 54 Ta b le of Contents NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS 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. This ASU is not expected to have a material impact to the Company’s consolidated financial statements. 55 Ta b le of Contents NOTE 3 – REVENUE RECOGNITION Revenue from sales of modular carpet, resilient flooring, rubber flooring, and other flooring-related material was approximately 97 % of total revenue for 2022 and approximately 98 % of total revenue for both 2021 and 2020. The remaining revenue was generated from the installation of carpet and other flooring-related material, which was approximately 3 % of total revenue for 2022 and approximately 2 % of total revenue for both 2021 and 2020. Disaggregation of Revenue For fiscal years 2022, 2021 and 2020, revenue from the Company’s customers is broken down by geography as follows: Fiscal Year Geography 2022 2021 2020 Americas 58.0 % 54.3 % 53.8 % Europe 29.2 % 31.7 % 31.8 % Asia-Pacific 12.8 % 14.0 % 14.4 % Revenue from the Company’s customers in the Americas corresponds to the AMS reportable segment, and the EAAA reportable segment includes revenue from the Europe and Asia-Pacific geographies. See Note 20 entitled “Segment Information” for additional information. 56 Ta b le of Contents NOTE 4 – RECEIVABLES The Company has adopted credit policies and standards intended to reduce the inherent risk associated with potential increases in its concentration of credit risk due to increasing trade receivables. Management believes that credit risks are further moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary. The Company maintains allowances for expected credit losses resulting from the inability of customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of January 1, 2023 and January 2, 2022, the allowance for expected credit losses amounted to $ 4.0 million and $ 5.0 million, respectively, for all accounts receivable of the Company. 57 Ta b le of Contents NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure estimated fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under applicable accounting standards are described below: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs to the valuation methodology include: • quoted prices for similar assets in active markets; • quoted prices for identical or similar assets in inactive markets; • inputs other than quoted prices that are observable for the asset; and • inputs that are derived principally or corroborated by observable data by correlation or other. Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following table presents the carrying values and estimated fair values, including the level within the fair value hierarchy, of certain financial instruments: January 1, 2023 January 2, 2022 Carrying Value Fair Value (Level 1) Fair Value (Level 2) Carrying Value Fair Value (Level 1) Fair Value (Level 2) (in thousands) Assets: Company-owned life insurance $ 22,616 $ — $ 22,616 $ 22,378 $ — $ 22,378 Deferred compensation investments 27,610 11,003 16,607 35,578 15,557 20,021 Liabilities: Borrowings under Syndicated Credit Facility (1) $ 226,332 $ — $ 226,332 $ 225,131 $ — $ 225,131 5.50% Senior Notes due 2028 (1) 300,000 — 248,652 300,000 — 315,039 (1) Carrying values exclude unamortized debt issuance costs and include amounts presented as current liabilities on the consolidated balance sheets. Company-Owned Life Insurance The fair value of Company-owned life insurance is measured on a readily determinable cash surrender value on a recurring basis. Company-owned life insurance is recorded at fair value within other assets in the consolidated balance sheets. Deferred Compensation Investments Assets associated with the Company’s nonqualified savings plans are held in a rabbi trust and consist of investments in mutual funds and insurance contracts. The fair value of the mutual funds is derived from quoted prices in active markets. The fair value of the insurance contracts is based on observable inputs related to the performance measurement funds that shadow the deferral investment allocations made by participants in the nonqualified savings plans. These investments are recorded at fair value within other assets in the consolidated balance sheets. See Note 19 entitled “Employee Benefit Plans” for additional information on the Company’s nonqualified savings plans. 58 Ta b le of Contents Syndicated Credit Facility and Senior Notes The Company’s liabilities for borrowings under the Syndicated Credit Facility (the “Facility”) and 5.50% Senior Notes due 2028 (the “Senior Notes”) are not recorded at fair value in the consolidated balance sheets. The carrying value of borrowings under the Facility approximates fair value as the Facility bears variable interest rates that are similar to existing market rates. The fair value of the Senior Notes is derived using quoted prices for similar instruments. Other Assets and Liabilities Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. See Note 19 entitled “Employee Benefit Plans” for additional information on defined benefit plan assets. 59 Ta b le of Contents NOTE 6 – INVENTORIES Inventories are summarized as follows: End of Fiscal Year 2022 2021 (in thousands) Finished goods $ 209,478 $ 182,896 Work-in-process 15,463 15,185 Raw materials 81,386 67,011 Inventories, net $ 306,327 $ 265,092 Reserves for inventory obsolescence amounted to $ 28.5 million and $ 27.1 million as of January 1, 2023 and January 2, 2022, respectively, and have been netted against amounts presented above. 60 Ta b le of Contents NOTE 7 – PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following: End of Fiscal Year 2022 2021 (in thousands) Land $ 16,307 $ 17,237 Buildings and improvements 169,909 176,980 Equipment and furniture (1) 602,269 642,390 788,485 836,607 Accumulated depreciation and amortization (2) ( 490,509 ) ( 506,806 ) Property, plant and equipment, net $ 297,976 $ 329,801 (1) Includes $ 9.9 million and $ 14.8 million of leased equipment for 2022 and 2021, respectively. (2) Includes $ 4.1 million and $ 8.3 million of accumulated amortization on leased equipment for 2022 and 2021, respectively. As of January 1, 2023 and January 2, 2022, construction-in-progress was approximately $ 24.1 million and $ 44.6 million, respectively. 61 Ta b le of Contents NOTE 8 – ACCRUED EXPENSES Accrued expenses are summarized as follows: End of Fiscal Year 2022 2021 (in thousands) Compensation $ 80,215 $ 96,802 Interest 2,033 1,577 Restructuring 456 2,354 Taxes 17,092 25,295 Accrued purchases 4,609 5,588 Warranty and sales allowances 2,091 2,702 Other 13,642 11,980 Accrued expenses $ 120,138 $ 146,298 62 Ta b le of Contents NOTE 9 – LONG-TERM DEBT Long-term debt consisted of the following: January 1, 2023 January 2, 2022 Outstanding Principal Interest Rate (1) Outstanding Principal Interest Rate (1) (in thousands) (in thousands) Syndicated Credit Facility: Revolving loan borrowings $ 24,250 5.29 % $ 7,500 4.00 % Term loan borrowings 202,082 5.84 % 217,631 1.84 % Total borrowings under Syndicated Credit Facility 226,332 5.78 % 225,131 1.91 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 526,332 525,131 Less: Unamortized debt issuance costs ( 6,118 ) ( 7,073 ) Total debt, net 520,214 518,058 Less: Current portion of long-term debt ( 10,211 ) ( 15,002 ) Total long-term debt, net $ 510,003 $ 503,056 (1) Represents the stated rate of interest, without the effect of debt issuance costs or interest rate swaps. 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. At January 1, 2023, the Facility provided to the Company and certain of its subsidiaries a multicurrency revolving loan facility up to $ 300.0 million, as well as other U.S. denominated and multicurrency term loans. At January 1, 2023, the Company had available borrowing capacity of $ 274.1 million under the revolving loan facility. Significant Facility Amendments On July 15, 2020, the Company entered into a second amendment to its Facility. This amendment, among other changes, provided for the following: (1) amended the consolidated net leverage ratio covenant making it less restrictive for a period of seven consecutive fiscal quarters beginning with the third quarter of fiscal year 2020 through the first quarter of fiscal year 2022 (the “Relief Period”); (2) amended the pricing grid used to determine interest rate margins on outstanding loans as well as the commitment fee on the unused portion of the Facility to include additional consolidated net leverage ratio levels with increased pricing at higher levels of leverage; (3) amended interest rate provisions to provide for an interest rate floor of either 0.00 % or 0.75 %, as applicable, on certain tranches of term loans outstanding; and (4) provided temporary restrictions during the Relief Period on the Company’s ability to make acquisitions, pay dividends, repurchase shares, or enter into new credit facilities without lender consent. The Company incurred approximately $ 1.5 million in debt issuance costs to execute this amendment. Of this amount, approximately $ 1.0 million of debt issuance costs associated with term loan borrowings was recorded as a reduction of long-term debt, and approximately $ 0.5 million of debt issuance costs associated with revolving loan borrowings was recorded in other assets in the consolidated balance sheet. These costs will be amortized over the life of the outstanding debt. 63 Ta b le of Contents On November 17, 2020, the Company entered into a third amendment to its Facility. The third amendment provided for, among other changes, the following amendments to the Facility: • the amendment of the maturity date of the Facility to November 2025; • the amendment of the 0.75 % interest rate floor in respect of certain loans under the Facility with an interest rate floor of 0.00 %; • amendments to the financial covenants to replace the consolidated net leverage ratio covenant with a consolidated secured net leverage ratio covenant that is not to exceed 3.00 to 1.00; • amendments to remove the Relief Period restrictions previously imposed pursuant to the second amendment; and • amendments to provide for the case where any interest rate benchmark in the future ceases to be available. In connection with the third amendment, the Company recognized a loss on extinguishment of debt of $ 3.6 million within interest expense in the consolidated statement of operations and recorded approximately $ 0.9 million of debt issuance costs. Of this amount, approximately $ 0.1 million of debt issuance costs associated with term loan borrowings was recorded as a reduction of long-term debt, and approximately $ 0.8 million of debt issuance costs associated with revolving loan borrowings was recorded in other assets in the consolidated balance sheet. On December 9, 2021, the Company entered into a fourth amendment to its Facility. The fourth amendment provided for, among other changes, the following amendments to the Facility, which became effective on December 16, 2021: • amendments 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; • the amendment of certain provisions related to the implementation, use and administration of successor benchmark rates and to set forth certain borrowing requirements; and • amendments to provide for the case where any interest rate benchmark in the future ceases to be available. On October 14, 2022, the Company entered into a fifth amendment to its Facility. The fifth amendment provided for, among other changes, the following amendments to the Facility: • the amendment of the maturity date of the Facility to October 2027; and • amendments to replace the LIBOR benchmark interest rates applicable to all loans denominated in U.S. dollars with the SOFR benchmark interest rates. In connection with the fifth amendment, the Company recognized a loss on extinguishment of debt of $ 0.1 million within interest expense in the consolidated statement of operations and recorded approximately $ 1.0 million of debt issuance costs. Of this amount, approximately $ 0.4 million of debt issuance costs associated with term loan borrowings was recorded as a reduction of long-term debt, and approximately $ 0.7 million of debt issuance costs associated with revolving loan borrowings was recorded in other assets in the consolidated balance sheet. Interest Rates and Fees Interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25 % to 2.00 %, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans (or SOFR-based and alternative currency loans following the fifth amendment to the Facility) and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25 % to 3.00 % over the applicable Eurocurrency rate (or SOFR rate or alternative currency rate following the fifth amendment to the Facility), 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 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. 64 Ta b le of Contents Covenants The Facility contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants. Among other things, these covenants limit the Company’s and its subsidiaries’ ability to: • create or incur liens on assets; • make acquisitions of or investments in businesses (in excess of certain specified amounts); • engage in any material line of business substantially different from the Company’s current lines of business; • incur indebtedness or contingent obligations; • sell or dispose of assets (in excess of certain specified amounts); • pay dividends or repurchase the Company’s stock (in excess of certain specified amounts); • repay other indebtedness prior to maturity unless the Company meets certain conditions; and • enter into sale and leaseback transactions. The Facility also requires the Company to remain in compliance with the following financial covenants as of the end of each fiscal quarter, based on the Company’s consolidated results for the year then ended: • Consolidated Secured Net Leverage Ratio: Must be no greater than 3.00 :1.00. • Consolidated Interest Coverage Ratio: Must be no less than 2.25 :1.00. Events of Default If the Company breaches or fails to perform any of the affirmative or negative covenants under the Facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc. or certain subsidiaries, or if the Company breaches or fails to perform any covenant or agreement contained in any instrument relating to any of the Company’s other indebtedness exceeding $ 20 million), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the lenders’ Administrative Agent may, and upon the written request of a specified percentage of the lender group shall: • declare all commitments of the lenders under the facility terminated; • declare all amounts outstanding or accrued thereunder immediately due and payable; and • exercise other rights and remedies available to them under the agreement and applicable law. Collateral Pursuant to a Second Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets of the Company and its domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of the Company’s domestic subsidiaries and up to 65 % of the stock of its first-tier material foreign subsidiaries. If an event of default occurs under the Facility, the lenders’ Administrative Agent may, upon the request of a specified percentage of lenders, exercise remedies with respect to the collateral, including, in some instances, foreclosing mortgages on real estate assets, taking possession of or selling personal property assets, collecting accounts receivable, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries. As of both January 1, 2023 and January 2, 2022, the Company had $ 1.6 million in letters of credit outstanding under the Facility. Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings. The amortization payments 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. 65 Ta b le of Contents 5.50% Senior Notes due 2028 On November 17, 2020, the Company issued $ 300.0 million aggregate principal amount of 5.50% Senior Notes due December 2028 (the “Senior Notes”). 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 Company used the net proceeds to repay approximately $ 269.7 million of outstanding term loan borrowings and approximately $ 21.0 million of outstanding revolving loan borrowings under its existing Facility. In connection with the issuance of the Senior Notes, the Company recorded approximately $ 5.7 million of debt issuance costs. These costs were recorded as a reduction of long-term debt in the consolidated balance sheet and will be amortized over the life of the outstanding debt. 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. Redemption On or after December 1, 2023, the Company may redeem the Senior Notes, in whole or in part, at any time at the redemption prices listed below, plus accrued and unpaid interest, if any, to (but excluding) the redemption date, if redeemed during the 12-month period commencing on December 1 of the years set forth below: Period Redemption Price 2023 102.750 % 2024 101.375 % 2025 and thereafter 100.000 % In addition, the Company may redeem up to 35 % of the aggregate principal amount of the Senior Notes before December 1, 2023 with the proceeds of certain equity offerings at a redemption price of 105.50 %, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. The Company may also redeem all or a part of the Senior Notes before December 1, 2023 at a price equal to 100 % of the principal amount plus accrued and unpaid interest, if any, to (but excluding) the redemption date, plus a make-whole premium. If the Company experiences a change of control, the Company will be required to offer to purchase the Senior Notes at 101 % of their principal amount, plus accrued and unpaid interest to (but excluding) the date of repurchase. Covenants The indenture governing the Senior Notes contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants. Among other things, these covenants limit the Company’s and its subsidiaries’ ability to: • incur additional indebtedness; • declare or pay dividends, redeem stock or make other distributions to shareholders; • make investments; • create liens on their assets or use their assets as security in other transactions; • enter into mergers, consolidations or sales, transfers, leases or other dispositions of all or substantially all of the Company’s assets; • enter into certain transactions with affiliates; and • sell or transfer certain assets. The Company is in compliance with all covenants under the indenture governing the Senior Notes and anticipates that it will remain in compliance with the covenants for the foreseeable future. Events of Default If the Company breaches or fails to perform any of the affirmative or negative covenants under the indenture governing the Senior Notes, or if other specified events occur (such as a bankruptcy or similar event), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the terms of the indenture permit the trustee or the holders of at least 25 % in principal amount of outstanding Senior Notes to declare the principal, premium, if any, and accrued but unpaid interest on all the Senior Notes to be due and payable. 66 Ta b le of Contents Other Lines of Credit Other than its Facility, there were no other lines of credit available to the Company as of January 1, 2023. Debt Issuance 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. These fees are amortized straight-line, which approximates the effective interest method, and over the life of the outstanding borrowing the debt balance will increase by the same amount as the fees that are amortized. As of January 1, 2023 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. Expenses related to such costs for the years 2022, 2021 and 2020 amounted to $ 1.2 million, $ 1.6 million, and $ 1.7 million, respectively. Debt issuance costs related to the issuance of revolving debt, which include underwriting, legal and other direct costs, net of accumulated amortization, were $ 1.8 million and $ 1.6 million, as of January 1, 2023 and January 2, 2022, respectively. These amounts are included in other assets in the Company’s consolidated balance sheets. The Company amortizes these costs over the life of the related debt. Expenses related to such costs amounted to $ 0.4 million for each of the years 2022, 2021 and 2020. Future Maturities The aggregate maturities of borrowings for each of the five fiscal years subsequent to 2022 are as follows: Fiscal Year Amount (in thousands) 2023 $ 10,211 2024 10,211 2025 10,211 2026 10,211 2027 185,488 Thereafter 300,000 Total debt $ 526,332 Total long-term debt in the consolidated balance sheets includes a reduction for unamortized debt issuance costs of $ 6.1 million which are excluded from the maturities table above. 67 Ta b le of Contents NOTE 10 – 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 The Company reports the changes in fair value of derivatives designated as hedging instruments as a component of other comprehensive income (or other comprehensive loss). 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. The termination resulted in a loss of $ 3.9 million recorded in interest expense in the consolidated statements of operations in 2020 as it was probable that a portion of the original forecasted transactions related to the portion of the hedged debt that was repaid will not occur by the end of the originally specified time period. As of January 1, 2023 and January 2, 2022, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps, before tax, was $ 1.0 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 $ 1.0 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. Forward Contracts The Company, from time to time, is party to currency forward contracts designed to hedge the cash flow risk of intercompany sales from the manufacturing facility in Europe to the Americas. The Company’s objective and strategy with respect to these currency forward contracts is to protect the Company against adverse fluctuations in currency rates by reducing its exposure to variability in cash flows related to receipt of payment on intercompany sales. As of January 1, 2023 and January 2, 2022, there were no active forward currency contracts. 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 January 1, 2023 and January 2, 2022, the Company had no outstanding foreign currency options. The following table summarizes the impact that changes in the fair value of derivatives designated as cash flow hedges and included in the assessment of hedge effectiveness had on other comprehensive income (loss), net of tax: Fiscal Year 2020 (in thousands) Interest rate swap contracts loss $ ( 2,027 ) Gains and losses from derivatives designated as cash flow hedges reclassified from accumulated other comprehensive loss into net income (loss) are discussed in Note 21 entitled “Items Reclassified From Accumulated Other Comprehensive Loss.” 68 Ta b le of Contents NOTE 11 – 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. As of January 1, 2023, there were no significant leases that had not commenced. The table below represents a summary of the balances recorded in the consolidated balance sheets related to the Company’s leases as of January 1, 2023 and January 2, 2022: January 1, 2023 January 2, 2022 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 81,644 $ 90,561 Current portion of operating lease liabilities $ 11,857 $ 14,588 Operating lease liabilities 72,305 77,905 Total operating lease liabilities $ 84,162 $ 92,493 Property, plant and equipment, net $ 5,845 $ 6,547 Accrued expenses $ 2,101 $ 1,837 Other long-term liabilities 4,138 3,201 Total finance lease liabilities $ 6,239 $ 5,038 Lease Costs Fiscal Year 2022 2021 2020 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 2,238 $ 2,653 $ 1,251 Interest on lease liabilities 164 140 86 Operating lease cost 18,916 21,581 25,213 Short-term lease cost 849 977 525 Variable lease cost 2,692 2,831 3,970 Total lease cost $ 24,859 $ 28,182 $ 31,045 69 Ta b le of Contents Other Supplemental Information Fiscal Year 2022 2021 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 128 $ 108 $ 86 Operating cash flows from operating leases 18,080 22,210 22,206 Financing cash flows from finance leases 2,089 2,282 1,727 Right-of-use assets obtained in exchange for new finance lease liabilities 3,436 3,259 2,546 Right-of-use assets obtained in exchange for new operating lease liabilities 9,307 13,330 2,504 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 January 1, 2023 and January 2, 2022: End of Fiscal Year 2022 2021 Weighted-average remaining lease term – finance leases (in years) 3.82 3.20 Weighted-average remaining lease term – operating leases (in years) 9.29 9.97 Weighted-average discount rate – finance leases 3.79 % 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) 2023 $ 14,572 $ 2,266 2024 13,851 1,890 2025 11,998 1,124 2026 12,197 610 2027 9,926 412 Thereafter 49,249 472 Total future minimum lease payments (undiscounted) 111,793 6,774 Less: Present value discount ( 27,631 ) ( 535 ) Total lease liability $ 84,162 $ 6,239 70 Ta b le of Contents NOTE 12 – GOODWILL AND INTANGIBLE ASSETS Goodwill In 2021, the Company determined that it has two operating and reportable segments – namely AMS and EAAA. See Note 20 entitled “Segment Information” for additional information. The Company tests goodwill for impairment at least annually at the reporting unit level. The Company’s reporting units remain unchanged following the realignment of its operating segments and consist of (1) the Americas, (2) Europe, Middle East and Africa (“EMEA”), and (3) Asia-Pacific. The Americas reporting unit is the same as the AMS reportable segment, and the EMEA and Asia-Pacific reporting units are one level below the EAAA reportable segment. During the fourth quarter of 2022, we performed our annual goodwill impairment testing. T he Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, utilizing a combination of the present value of expected future cash flows and the guideline public company method to determine the estimated fair value of our reporting units. We test goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. In preparing the valuations, past, present and future expectations of performance were considered, including our expectations for the short-term and long-term impacts of macroeconomic conditions, including inflation, foreign currency exchange rates and our expected financial performance, including planned revenue and operating income of each reporting unit. The present value model requires management to estimate future cash flows, the timing of these cash flows, and a discount rate based on a weighted average cost of capital. The discount rate used for each reporting unit ranged from 13.5 % to 14.0 %, which primarily fluctuated based on a country risk premium assigned to the geographical region of the reporting unit. There is inherent uncertainty associated with key assumptions and estimates used in our impairment testing, including the impact of macroeconomic conditions. As a result of our 2022 annual goodwill testing, we determined that the carrying value of our EMEA reporting unit exceeded its fair value and that the associated goodwill was impaired at the measurement date. We recorded a goodwill impairment charge of $ 29.4 million in 2022 to write off all the goodwill allocated to our EMEA reporting unit, as the excess of carrying value over fair value exceeded the recorded amount of goodwill for the EMEA reporting unit. Macroeconomic factors, including inflation, foreign currency exchange rates, and the expected impact to planned revenue and operating income contributed to the lower estimated fair value of our EMEA reporting unit. Higher discount rates also contributed to the lower fair value of our reporting units. We determined that the fair value of our Americas reporting unit exceeded its carrying value by 71 % at the 2022 m easurement date, and therefore no impairment was indicated. The remaining goodwill balance of $ 102.4 million at January 1, 2023 is allocated to our Americas reporting unit. The goodwill balance allocated to our Asia-Pacific reporting unit was previously written off in connection with the 2020 goodwill impairment, as discussed below. During the fourth quarters of 2021 and 2020, the Company performed the annual goodwill impairment test, consistent with the methodology discussed above. The Company performed this test at the reporting unit level, which is an operating segment or one level below the operating segment level. In performing the impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past, present and future expectations of performance were considered, including the ongoing impact of the COVID-19 pandemic in 2021 and 2020. Each of the Company’s reporting units maintained fair values in excess of their respective carrying values as of the measurement dates, and therefore no impairment was indicated as a result of the annual impairment testing in the fourth quarters of 2021 and 2020. During the first quarter of 2020, we performed a qualitative assessment of goodwill impairment indicators, considering macroeconomic conditions related to the COVID-19 pandemic and its potential impact to net sales and operating income. We expected that the duration of the COVID-19 pandemic and its adverse impacts on the global economy, global travel restrictions, COVID-19 related government shutdowns, disruptions to our supply chain, distribution disruption, and disruption to our customers’ plans to spend capital on projects that use our products and services would result in lower revenue and operating income. As a result, we determined that there were indicators of impairment, and the Company proceeded with a quantitative assessment of goodwill for all reporting units at the end of the first quarter. 71 Ta b le of Contents In performing the quantitative goodwill impairment testing in the first quarter of 2020, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. Our reporting units were one level below our operating segment level. In preparing the valuations, past, present and future expectations of performance were considered, including the impact of the COVID-19 pandemic. This methodology was consistent with the approach used to perform the annual quantitative goodwill assessment in prior years. The weighted average cost of capital used in the goodwill impairment testing ranged between 10.0 % and 10.5 %, which primarily fluctuated based on a country risk premium assigned to the geographical region of the reporting unit. There is inherent uncertainty associated with key assumptions used in our impairment testing including the duration of the economic downturn associated with the COVID-19 pandemic and the recovery period. As a result of the 2020 first quarter assessment, we determined that the fair value for two reporting units was less than the carrying value and recognized a goodwill impairment loss of $ 116.5 million in the first quarter of 2020. The expected decline in revenue due to the impact of COVID-19 contributed to the lower fair value of our EMEA and Asia-Pacific reporting units. As such, the goodwill impairment loss was allocated to our EMEA and Asia-Pacific reporting units in the amounts of $ 99.2 million and $ 17.3 million, respectively. We determined that the goodwill in our Americas reporting unit was not impaired as the fair value exceeded the carrying value by more than 90 % at April 5, 2020. The ending balances and the changes in the carrying amounts of goodwill allocated to each reportable segment for the years ended January 1, 2023 and January 2, 2022 are as follows: AMS EAAA Total (in thousands) Goodwill balance, at January 3, 2021 $ 122,344 $ 43,433 $ 165,777 Foreign currency translation (1) ( 13,839 ) ( 4,913 ) ( 18,752 ) Goodwill balance, at January 2, 2022 108,505 38,520 147,025 Impairment — ( 29,384 ) ( 29,384 ) Foreign currency translation (1) ( 6,088 ) ( 9,136 ) ( 15,224 ) Goodwill balance, at January 1, 2023 $ 102,417 $ — $ 102,417 (1) A portion of the goodwill balance allocated to the AMS reportable segment is comprised of goodwill denominated in foreign currency attributable to the nora acquisition. Intangible Assets In the fourth quarter of 2022, we determined that the trademark and trade name intangible assets related to the acquired nora business were impaired and recognized an impairment loss of $ 6.3 million . The impairment loss consisted of charges of $ 3.6 million and $ 2.7 million attributable to the AMS and EAAA reportable segments, respectively. In the first quarter of 2020, we determined that the trademark and trade name intangible assets related to the acquired nora business were also impaired and recognized an impairment loss of $ 4.8 million. The impairment loss consisted of charges of $ 2.7 million and $ 2.1 million attributable to the AMS and EAAA reportable segments, respectively. 72 Ta b le of Contents The Company’s intangible assets other than goodwill consisted of the following as of January 1, 2023 and January 2, 2022 (1) : January 1, 2023 January 2, 2022 Gross Carrying Amount Accumulated Impairment Accumulated Amortization Net Carrying Amount Gross Carrying Amount (2) Accumulated Impairment Accumulated Amortization (2) Net Carrying Amount (in thousands) Intangible assets subject to amortization: Technology $ 36,069 $ — $ ( 22,854 ) $ 13,215 $ 38,330 $ — $ ( 18,850 ) $ 19,480 Other 764 ( 478 ) ( 17 ) 269 1,458 — ( 818 ) 640 Total intangible assets subject to amortization 36,833 ( 478 ) ( 22,871 ) 13,484 39,788 — ( 19,668 ) 20,120 Indefinite-lived intangible assets: Trademarks and trade names 57,375 ( 11,081 ) — 46,294 60,822 ( 4,763 ) — 56,059 Total intangible assets $ 94,208 $ ( 11,559 ) $ ( 22,871 ) $ 59,778 $ 100,610 $ ( 4,763 ) $ ( 19,668 ) $ 76,179 (1) Certain intangible asset balances are subject to changes attributable to foreign currency translation. (2) Net of a $ 3.3 million write off for fully amortized backlog intangible assets. Amortization expense related to intangible assets during the years 2022, 2021 and 2020 was $ 5.0 million, $ 5.6 million and $ 5.5 million, respectively, and is recorded in cost of sales in the consolidated statements of operations. Amortization expense related to intangible assets is expected to be approximately $ 5 million per year for fiscal years 2023 and 2024 and approximately $ 3 million for fiscal year 2025. The developed technology intangible asset will be amortized over its estimated useful life, which ends in fiscal year 2025. 73 Ta b le of Contents NOTE 13 – PREFERRED STOCK The Company is authorized to designate and issue up to 5,000,000 shares of $ 1.00 par value preferred stock in one or more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation, and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock and could decrease the amount of earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. As of January 1, 2023 and January 2, 2022, there were no shares of preferred stock issued. 74 Ta b le of Contents NOTE 14 – SHAREHOLDERS’ EQUITY The Company is authorized to issue 120 million shares of $ 0.10 par value Common Stock. The Company’s Common Stock is traded on the Nasdaq Global Select Market under the symbol TILE. The Company paid cash dividends totaling $ 0.04 per share in both 2022 and 2021, and $ 0.095 per share in 2020, to each share of Common Stock, including participating securities. The future declaration and payment of dividends is at the discretion of the Company’s Board, and depends upon, among other things, the Company’s investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant at the time of the Board’s determination. Such other factors include limitations contained in the agreement for its Syndicated Credit Facility and the indenture governing its 5.50% Senior Notes due 2028, which specify conditions as to when any dividend payments may be made. As such, the Company may discontinue its dividend payments in the future if its Board determines that a cessation of dividend payments is proper in light of the factors indicated above. 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 2022, the Company repurchased and retired an aggregate of 1,383,682 shares, at a weighted average price of $ 12.41 per share, pursuant to this program. All treasury stock is accounted for using the cost method. The following tables depict the activity in the accounts which make up shareholders’ equity for fiscal years 2022, 2021 and 2020: 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 — — — 19,560 — — — Restricted stock issuances 501 50 6,499 — — — — Unamortized compensation expense related to restricted stock awards — — ( 6,549 ) — — — — Cash dividends declared — — — ( 2,355 ) — — — Compensation expense related to stock awards, net of forfeitures and shares received for tax withholdings ( 66 ) ( 6 ) 8,132 — — — — Share repurchases ( 1,384 ) ( 138 ) ( 17,033 ) — — — — Pension liability adjustment — — — — 26,340 — — Foreign currency translation adjustment — — — — — ( 38,334 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 1,973 Balance, at January 1, 2023 58,106 $ 5,811 $ 244,159 $ 278,639 $ ( 27,548 ) $ ( 138,775 ) $ ( 749 ) 75 Ta b le 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 — — — 55,234 — — — Restricted stock issuances 429 43 6,066 — — — — Unamortized compensation expense related to restricted stock awards — — ( 6,109 ) — — — — Cash dividends declared — — — ( 2,362 ) — — — Compensation expense related to stock awards, net of forfeitures ( 38 ) ( 3 ) 5,233 — — — — Pension liability adjustment — — — — 15,400 — — Foreign currency translation adjustment — — — — — ( 40,110 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 3,468 Balance, at January 2, 2022 59,055 $ 5,905 $ 253,110 $ 261,434 $ ( 53,888 ) $ ( 100,441 ) $ ( 2,722 ) SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at December 29, 2019 58,416 $ 5,842 $ 250,306 $ 286,056 $ ( 56,700 ) $ ( 113,139 ) $ ( 4,163 ) Net loss — — — ( 71,929 ) — — — Issuances of stock (other than restricted stock) 239 24 195 — — — — Restricted stock issuances 304 30 3,999 — — — — Unamortized compensation expense related to restricted stock awards — — ( 4,030 ) — — — — Cash dividends declared — — — ( 5,565 ) — — — Compensation expense related to stock awards, net of forfeitures ( 295 ) ( 31 ) ( 2,550 ) — — — — Pension liability adjustment — — — — ( 12,588 ) — — Foreign currency translation adjustment — — — — — 52,808 — Cash flow hedge unrealized loss — — — — — — ( 2,027 ) Balance, at January 3, 2021 58,664 $ 5,865 $ 247,920 $ 208,562 $ ( 69,288 ) $ ( 60,331 ) $ ( 6,190 ) Stock Incentive Plans The Company has stock incentive plans under which a committee of independent directors is authorized to grant directors and key employees, including officers, restricted stock, incentive stock options, nonqualified stock options, stock appreciation rights, deferred shares, performance shares and performance units. In May 2015, the shareholders approved an amendment and restatement of the then-existing Omnibus Stock Incentive Plan. This amendment and restatement extended the term of the Omnibus Plan and set the number of shares authorized for issuance or transfer on or after the effective date of the amendment and restatement at 5,161,020 shares, except that each share issued under the 2015 plan pursuant to an award other than a stock option reduced the number of such authorized shares by 1.33 shares. In May 2020, the shareholders approved the adoption of a new 2020 Omnibus Stock Incentive Plan (“2020 Omnibus Plan”). The aggregate number of shares of common stock that may be issued or transferred under the 2020 Omnibus Plan on or after the effective date of the plan is 3,700,000 (and the 1.33 multiplier discussed in the paragraph immediately above was eliminated). No award may be granted after the tenth anniversary of the effective date of the 2020 Omnibus Plan. 76 Ta b le of Contents Accounting standards require that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair market value of the award. That expense will be recognized over the period that the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange for the award. 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. Stock Options Stock options are exercisable for shares of Common Stock at a price not less than 100 % of the fair market value on the date of grant. The options become exercisable either immediately upon the grant date or ratably over a time period ranging from one to five years from the date of the grant. The Company’s options expire at the end of time periods ranging from three to ten years from the date of the grant. There was no stock option compensation expense during 2022, 2021 or 2020. There were no stock options outstanding or exercisable as of January 1, 2023 or January 2, 2022. Restricted Stock Awards During fiscal years 2022, 2021 and 2020, the Company granted restricted stock awards totaling 500,800 , 428,400 , and 308,100 shares, respectively, of Common Stock. The weighted average grant date fair value of restricted stock awards granted during 2022, 2021 and 2020 was $ 13.08 , $ 14.26 , and $ 13.08 , respectively. These awards (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 awards of restricted stock was $ 5.3 million, $ 3.8 million and $ 1.3 million for 2022, 2021 and 2020, respectively. These grants are made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized. The Company has reduced its expense for any restricted stock forfeited during the period. The expense related to awards of restricted stock is captured in SG&A expenses in the consolidated statements of operations. The following table summarizes restricted stock outstanding as of January 1, 2023, as well as activity during the year: 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 ( 36,300 ) 14.04 Outstanding at January 1, 2023 1,006,400 $ 13.91 As of January 1, 2023, the unrecognized total compensation cost related to unvested restricted stock was $ 5.8 million. That cost is expected to be recognized by the end of 2025. Performance Share Awards In each of the years 2022, 2021 and 2020, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years , subject to (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 expense related to these performance shares is captured in SG&A expenses in the consolidated statements of operations. 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. 77 Ta b le of Contents The following table summarizes the performance shares outstanding as of January 1, 2023, as well as the activity during the year: 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 ( 161,200 ) 16.62 Outstanding at January 1, 2023 923,600 $ 13.91 Compensation expense (benefit) related to the performance shares for 2022, 2021 and 2020 was $ 3.2 million, $ 1.7 million and $( 1.8 ) million, 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 $ 7.6 million as of January 1, 2023. 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 respect to restricted stock and performance shares was $ 0.8 million, $ 0.7 million, and $ 0.6 million in 2022, 2021 and 2020, respectively. 78 Ta b le of Contents NOTE 15 – EARNINGS PER SHARE The Company calculates basic and diluted earnings per common share using the two-class method. Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted average common shares outstanding, including participating securities outstanding, during the period as depicted 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. Income attributable to non-controlling interest is included in the computation of basic and diluted earnings per share, where applicable. The Company includes all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of common 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: Fiscal Year 2022 2021 2020 (in thousands, except per share data) Numerator: Net income (loss) $ 19,560 $ 55,234 $ ( 71,929 ) Less: distributed and undistributed earnings available to participating securities ( 323 ) ( 602 ) ( 42 ) Distributed and undistributed earnings (loss) available to common shareholders $ 19,237 $ 54,632 $ ( 71,971 ) Denominator: Weighted average shares outstanding 57,893 58,328 58,110 Participating securities 972 643 437 Shares for basic EPS 58,865 58,971 58,547 Shares for diluted EPS 58,865 58,971 58,547 Basic EPS $ 0.33 $ 0.94 $ ( 1.23 ) Diluted EPS $ 0.33 $ 0.94 $ ( 1.23 ) 79 Ta b le of Contents NOTE 16 – RESTRUCTURING AND OTHER CHARGES Restructuring, asset impairment and other charges by reportable segment are presented as follows: Fiscal Year 2022 2021 2020 (in thousands) AMS $ — $ ( 1 ) $ ( 288 ) EAAA 1,965 3,622 ( 4,338 ) Total restructuring, asset impairment and other charges $ 1,965 $ 3,621 $ ( 4,626 ) A summary of the restructuring reserve balance, recorded within accrued expenses in the consolidated balance sheets, for the 2021, 2019 and 2018 restructuring plans is presented below: Workforce Reduction Retention Bonuses Other Exit Costs Asset Impairment and Other Related Charges 2021 Plan 2019 Plan 2018 Plan 2021 Plan 2019 Plan 2018 Plan 2021 Plan Total (in thousands) Balance, at December 29, 2019 $ — $ 8,634 $ 1,898 $ — $ 139 $ 774 $ — $ 11,445 Charged to expenses — ( 3,704 ) ( 223 ) — — ( 699 ) — ( 4,626 ) Deductions — ( 3,866 ) ( 1,675 ) — ( 139 ) ( 75 ) — ( 5,755 ) Balance, at January 3, 2021 — 1,064 — — — — — 1,064 Charged to expenses 2,257 ( 286 ) — — — — 1,650 3,621 Deductions — ( 681 ) — — — — — ( 681 ) Charged to other accounts — — — — — — ( 1,650 ) ( 1,650 ) Balance, at January 2, 2022 2,257 97 — — — — — 2,354 Charged to expenses 1 — — 493 — — 1,471 1,965 Deductions ( 1,981 ) ( 97 ) — ( 314 ) — — — ( 2,392 ) Charged to other accounts — — — — — — ( 1,471 ) ( 1,471 ) Balance, at January 1, 2023 $ 277 $ — $ — $ 179 $ — $ — $ — $ 456 Below is a discussion of the restructuring plan activities under the 2021, 2019 and 2018 restructuring plans. 2021 Restructuring Plan On September 8, 2021, the Company committed to a 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. 80 Ta b le of Contents 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 $ 3,200 $ 6,000 Cumulative charges incurred to date (1) 2,258 493 3,121 5,872 (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 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 statements of operations. 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 was realized in the consolidated statements of operations in 2022, with the remaining portion of the annualized savings expected to be realized in 2023. 2019 Restructuring Plan On December 23, 2019, the Company committed to a restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved a reduction of approximately 105 employees and early termination of two office leases. As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately $ 9.0 million (comprised of $ 1.1 million attributable to the AMS reportable segment and $ 7.9 million attributable to the EAAA reportable segment). The charge was comprised of severance expenses ($ 8.8 million) and lease exit costs ($ 0.2 million). The plan was expected to result in future cash expenditures of approximately $ 9.0 million for the payment of employee severance and lease exit costs. In 2021 and 2020, the Company recorded reductions of $ 0.3 million and $ 3.7 million, respectively, of the previously recognized charges due to changes in expected cash payments for employee severance. The 2019 restructuring plan was completed as of the end of the first quarter of 2022. Cumulative charges under the 2019 restructuring plan, net of reductions of previously recognized charges, were $ 0.8 million within the AMS reportable segment and $ 4.2 million within the EAAA reportable segment. The Company expected the plan to yield annualized savings of approximately $ 6.0 million. A portion of the annualized savings was realized in the consolidated statements of operations in 2020, with the remaining portion of the annualized savings realized in 2021. 81 Ta b le of Contents 2018 Restructuring Plan On December 29, 2018, the Company committed to a 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 (comprised of $ 7.7 million attributable to the AMS reportable segment and $ 12.8 million attributable to the EAAA reportable segment). 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 $ 12.0 million, primarily for severance payments (approximately $ 10.8 million). In the third quarter of 2019, the Company recorded $ 0.7 million of restructuring charges related to additional lease exit costs in connection with the restructuring plan announced on December 29, 2018. In the fourth quarter of 2019, the Company adjusted its previously recorded severance expenses in connection with the 2018 restructuring plan and recognized a reduction in restructuring costs of $ 1.7 million in 2019. In 2020, the Company further adjusted its previously recorded severance expenses and other exit costs and recognized a reduction in restructuring costs of $ 0.9 million. The restructuring plan was completed as of January 3, 2021. Cumulative charges under the 2018 restructuring plan, net of reductions of previously recognized charges, were $ 6.4 million within the AMS reportable segment and $ 12.1 million within the EAAA reportable segment. 82 Ta b le of Contents NOTE 17 – INCOME TAXES Income (loss) before income taxes consisted of the following: Fiscal Year 2022 2021 2020 (in thousands) U.S. operations $ 11,758 $ 4,460 $ ( 7,104 ) Foreign operations 30,159 68,173 ( 72,316 ) Income (loss) before income taxes $ 41,917 $ 72,633 $ ( 79,420 ) Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components: Fiscal Year 2022 2021 2020 (in thousands) Current expense (benefit): Federal $ 1,624 $ 1,987 $ ( 22,976 ) Foreign 20,903 21,372 14,822 State 1,307 1,418 529 Current expense (benefit) 23,834 24,777 ( 7,625 ) Deferred expense (benefit): Federal 346 ( 2,841 ) 1,787 Foreign ( 2,053 ) ( 3,846 ) ( 2,422 ) State 230 ( 691 ) 769 Deferred expense (benefit) ( 1,477 ) ( 7,378 ) 134 Total income tax expense (benefit) $ 22,357 $ 17,399 $ ( 7,491 ) 83 Ta b le of Contents The Company’s effective tax rate was 53.3 %, 24.0 % and 9.4 % for fiscal years 2022, 2021 and 2020, respectively. The following summary reconciles income taxes at the U.S. federal statutory rate of 21 % applicable for all periods presented to the Company’s actual income tax expense (benefit): Fiscal Year 2022 2021 2020 (in thousands) Income taxes at U.S. federal statutory rate $ 8,803 $ 15,253 $ ( 16,678 ) Increase (decrease) in taxes resulting from: State income taxes, net of federal tax effect 817 ( 87 ) ( 2,033 ) Non-deductible business expenses 237 330 1,792 Non-deductible employee compensation 1,678 1,213 ( 210 ) Tax effects of Company-owned life insurance 612 ( 762 ) ( 898 ) Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested 1,123 1,219 748 Foreign and U.S. tax effects attributable to foreign operations 3,528 1,748 ( 11,991 ) Valuation allowance effect 2,898 1,349 12,927 Research and development tax credits ( 917 ) ( 793 ) ( 780 ) Goodwill impairment 6,171 — 24,464 Unrecognized tax benefits ( 2,463 ) ( 2,663 ) ( 14,962 ) Other ( 130 ) 592 130 Income tax expense (benefit) $ 22,357 $ 17,399 $ ( 7,491 ) On August 16, 2022, the Inflation Reduction Act of 2022 (“Inflation Reduction Act”) was signed into law, with tax provisions primarily focused on implementing a 15 % minimum tax on global adjusted financial statement income (“AFSI”) for corporations with average AFSI exceeding $ 1 billion over a three-year period, a 1 % excise tax on share repurchases and various climate and clean energy tax incentives. While we continue to evaluate the impacts of the Inflation Reduction Act, it is not expected to have a material impact on the Company’s financial statements. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic and provides certain tax relief to businesses. Tax provisions of the CARES Act include, among other things, the deferral of certain payroll taxes, relief for retaining employees, and certain income tax provisions for corporations. For the year ended January 3, 2021, the Company deferred $ 4.1 million in payroll taxes under the CARES Act which was paid as of January 2, 2022. In addition, for the year ended January 3, 2021, the Company benefited from the relaxed 163(j) limitation and the technical correction related to depreciation of leasehold improvements, both of which did not have a material impact on the Company’s effective tax rate for that year. Some of the provisions of the CARES Act, including the deferral of certain payroll taxes and the relaxed 163(j) limitation, are not applicable for tax years after 2020, and as a result the Company did not benefit from these provisions for the years ended January 1, 2023 and January 2, 2022. Deferred income taxes for the years ended January 1, 2023 and January 2, 2022, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 84 Ta b le of Contents The temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows: End of Fiscal Year 2022 2021 (in thousands) Deferred tax assets Lease liability $ 23,649 $ 25,426 Net operating loss and interest carryforwards 7,616 5,962 Federal tax credit carryforwards 10,904 10,054 Derivative instruments 295 1,126 Deferred compensation 16,577 19,487 Inventory 3,521 3,100 Prepaids, accruals and reserves 6,947 8,777 Capitalized costs 7,467 4,805 Pensions — 6,431 Other 58 175 Deferred tax asset, gross 77,034 85,343 Valuation allowance ( 18,236 ) ( 15,338 ) Deferred tax asset, net $ 58,798 $ 70,005 Deferred tax liabilities Property and equipment $ 25,319 $ 25,352 Intangible assets 25,533 30,736 Lease asset 22,811 24,856 Pensions 4,284 — Foreign currency 600 458 Foreign withholding and U.S. state taxes on unremitted earnings 1,146 1,332 Deferred tax liabilities 79,693 82,734 Net deferred tax liabilities $ 20,895 $ 12,729 Management believes, based on the Company’s history of taxable income and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the federal deferred tax assets at January 1, 2023. Beginning in 2018, the Company has elected to account for tax effects of the global intangible low-taxed income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Internal Revenue Code Section 163(j) interest limitation (“Interest Limitation”) and base-erosion and anti-abuse tax (“BEAT”) provisions included in the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) in the period when incurred, and therefore has not provided any deferred tax impacts for these provisions in its consolidated financial statements. As of January 1, 2023, the Company has approximately $ 10.9 million of foreign tax credit carryforwards with expiration dates through 2032. A full valuation allowance has been provided as the Company does not expect to utilize these foreign tax credits before the expiration dates. As of January 1, 2023, the Company has approximately $ 162.8 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2042 and has provided a valuation allowance against $ 100.3 million of such losses, which the Company does not expect to utilize. In addition, as of January 1, 2023, the Company has approximately $ 21.2 million in state net operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided. As of January 1, 2023, and January 2, 2022, non-current deferred tax assets were reduced by approximately $ 2.8 million of unrecognized tax benefits. 85 Ta b le of Contents Historically, the Company has not provided for U.S. income taxes and foreign withholding taxes on the undistributed accumulated earnings of its foreign subsidiaries, with the exception of its Canada subsidiaries and a specific portion of the undistributed earnings of foreign subsidiaries outside of Canada, because such earnings were deemed to be permanently reinvested. In September of 2021, as part of an overall restructuring plan, the Company made the decision to close its manufacturing facility in Thailand. As a result, the Company is no longer asserting that the undistributed earnings in its Thailand subsidiaries are permanently reinvested. The Company provided for U.S. income taxes and foreign withholding taxes on these earnings at January 1, 2023 and January 2, 2022. Although the Tax Act created a dividends received deduction that generally eliminates additional U.S. federal income taxes on dividends from our foreign subsidiaries, the Company continues to assert that all of its undistributed earnings in its non-U.S. subsidiaries, excluding undistributed earnings for which U.S. income taxes and foreign withholding taxes have been provided, are indefinitely reinvested outside of the U.S. The Company expects that domestic cash resources will be sufficient to fund its domestic operations and cash commitments in the future. In the event the Company determines not to continue to assert that all or part of its undistributed earnings in its non-U.S. subsidiaries are permanently reinvested, an actual repatriation from its non-U.S. subsidiaries could still be subject to additional foreign withholding and U.S. state taxes, the determination of which is not practicable. The Company’s federal income tax returns are subject to examination for the years 2019 to the present. The Company files returns in numerous state and local jurisdictions and in general it is subject to examination by the state tax authorities for the years 2017 to the present. The Company files returns in numerous foreign jurisdictions and in general it is subject to examination by the foreign tax authorities for the years 2011 to the present. As a result of an audit of the Company’s U.K. subsidiaries, Her Majesty’s Revenue & Customs (“HMRC”) issued notices of amendment to the Company’s U.K. tax returns for the 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 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 the HMRC adjustments. 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 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. As of January 1, 2023, and January 2, 2022, the Company had $ 5.7 million and $ 8.2 million, respectively, of unrecognized tax benefits. For the years ended January 1, 2023 and January 2, 2022, the Company recognized as income tax benefits $ 2.5 million and $ 2.7 million, respectively, of previously unrecognized tax benefits. It is reasonably possible that approximately $ 0.9 million of unrecognized tax benefits may be recognized within the next 12 months. If any of the $ 5.7 million of unrecognized tax benefits as of January 1, 2023 are recognized, there would be a favorable impact on the Company’s effective tax rate of approximately $ 5.0 million in future periods. If the unrecognized tax benefits are not favorably settled, $ 2.9 million of the total amount of unrecognized tax benefits would require the use of cash in future periods. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2023, the Company had accrued interest and penalties of $ 0.4 million, which is included in the total unrecognized tax benefit noted above. The timing of the ultimate resolution of the Company’s tax matters and the payment and receipt of related cash is dependent on a number of factors, many of which are outside the Company’s control. 86 Ta b le of Contents A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows: Fiscal Year 2022 2021 2020 (in thousands) Balance at beginning of year $ 8,220 $ 10,799 $ 25,486 Increases related to tax positions taken during the current year 342 265 271 Increases related to tax positions taken during the prior years 204 198 536 Decreases related to tax positions taken during the prior years ( 447 ) — ( 673 ) Decreases related to lapse of applicable statute of limitations ( 2,574 ) ( 2,309 ) ( 14,992 ) Changes due to settlements — ( 836 ) — Changes due to foreign currency translation ( 2 ) 103 171 Balance at end of year $ 5,743 $ 8,220 $ 10,799 87 Ta b le of Contents NOTE 18 – COMMITMENTS AND CONTINGENCIES From time to time, the Company is a party to legal proceedings, whether arising in the ordinary course of business or otherwise. Some of the proceedings the Company is involved in are summarized below. Lawsuit by Former CEO in Connection with Termination On January 19, 2020, the Company’s Board of Directors voted to terminate for cause the employment of Jay D. Gould, then President and Chief Executive Officer, effective immediately, for violations of the Company’s working environment policies. On February 14, 2020, Mr. Gould filed a lawsuit against the Company in the United States District Court of the Northern District of Georgia, Gould v. Interface, Inc. , Case No. 1:20-cv-00695. In his lawsuit, Mr. Gould asserted several claims against the Company in connection with his termination, including that the termination was a wrongful retaliation against Mr. Gould and breached his employment contract with the Company, that public statements made by the Company in connection with his termination defamed Mr. Gould (two counts) and that the Company’s investigation into Mr. Gould’s conduct that preceded the termination was negligently performed. Among other unspecified relief, Mr. Gould seeks in excess of $ 10 million in damages for the breach of contract claim and $ 100 million for each of the other claims, as well as attorneys’ fees. The Court granted judgment on the pleadings in favor of the Company on Mr. Gould’s putative claim of negligent investigation, and Mr. Gould’s defamation claims were dismissed with prejudice by stipulation of the parties. On March 31, 2022, the Court entered an order granting the Company’s motion for summary judgment on all of Mr. Gould’s remaining claims, leaving only the Company’s counterclaim against Mr. Gould for breach of fiduciary duty pending in the District Court. An attempted interlocutory appeal by Mr. Gould of the summary judgment order was remanded by the 11th Circuit Court of Appeals back to the District Court as premature. The Company believes Mr. Gould’s lawsuit is without merit and intends to defend vigorously against it. Putative Class Action Lawsuit As previously reported, the Securities & Exchange Commission (the “SEC”) conducted an investigation into the Company’s historical quarterly earnings per share calculations and rounding practices during the period 2014-2017. In the third quarter of 2020, the Company successfully reached a settlement with the SEC in this matter. The Company consented to the entry of an order by the SEC which states, among other things, that the Company was negligent in making certain accounting entries in 2015 and 2016. As part of the settlement, the Company did not admit or deny any wrongdoing. The Company paid a $ 5.0 million fine to resolve the matter, and was ordered to cease-and-desist from violating certain federal securities laws. On November 12, 2020, the Company, the Company’s former president and chief executive officer, and its current chief financial officer and chairman were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of New York, Swanson v. Interface, Inc. et al. (case :120-cv-05518). The lawsuit is a federal securities law putative class action that alleges that the defendants made materially false and misleading statements regarding the Company’s business, operational and compliance policies. The specific allegations relate to the subject matter of the concluded SEC investigation described above. The complaint does not quantify the damages sought. The Court has appointed a lead plaintiff, which filed an Amended Complaint that, among other things, added the Company’s former chief financial officer as a defendant. As in the original complaint, the allegations in the Amended Complaint relate to the subject matter of the concluded SEC investigation described above. The Company filed a motion to dismiss the Amended Complaint, and that motion was denied by the Court on June 6, 2022. The Company filed its Answer to the Amended Complaint on July 21, 2022. Discovery in the case is proceeding. The Company believes the putative class action is without merit and that the Company has good defenses to it. The Company intends to defend itself vigorously against the action. 88 Ta b le of Contents NOTE 19 – EMPLOYEE BENEFIT PLANS Defined Contribution and Deferred Compensation Plans The Company has a 401(k) retirement investment plan (“401(k) Plan”), which is open to all eligible U.S. employees with at least six months of service. The 401(k) Plan calls for Company matching contributions on a sliding scale based on the level of the employee’s contribution. The Company may, at its discretion, make additional contributions to the 401(k) Plan based on the attainment of certain performance targets by its subsidiaries. The Company’s matching contributions are funded bi-monthly and totaled approximately $ 3.3 million, $ 3.0 million, and $ 1.6 million for the years 2022, 2021 and 2020, respectively. No discretionary contributions were made in 2022, 2021 or 2020. Under the Company’s nonqualified savings plans (“NSPs”), the Company provides eligible employees the opportunity to enter into agreements for the deferral of a specified percentage of their compensation, as defined in the NSPs. The NSPs call for Company matching contributions on a sliding scale based on the level of the employee’s contribution. The obligations of the Company under such agreements to pay the deferred compensation in the future in accordance with the terms of the NSPs are unsecured general obligations of the Company. Participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The Company has established a rabbi trust to hold, invest and reinvest deferrals and contributions under the NSPs. If a change in control of the Company occurs, as defined in the NSPs, the Company will contribute an amount to the rabbi trust sufficient to pay the obligation owed to each participant. The deferred compensation liability in connection with the NSPs totaled $ 27.5 million and $ 34.2 million at January 1, 2023 and January 2, 2022, respectively. The Company invests the deferrals in insurance instruments with readily determinable cash surrender values and in exchange traded mutual funds beginning in fiscal 2021. The value of the insurance instruments was $ 16.6 million and $ 20.0 million as of January 1, 2023 and January 2, 2022, respectively. The fair value of the mutual fund investments at January 1, 2023 and January 2, 2022 was $ 11.0 million and $ 15.6 million, respectively. In 2020, the Company temporarily suspended its 401(k) and NSP matching contributions described above. These employer matching contributions were resumed in 2021. Multiemployer Plan On December 31, 2019, a plan amendment was executed to eliminate future service accruals in our defined benefit pension plan in the Netherlands (the “Dutch Plan”), which resulted in a curtailment of the plan. The Dutch Plan remains in existence and continues to pay vested benefits. Active participants no longer accrue benefits after December 31, 2019, and instead participate in the Industry-Wide Pension Fund (the “IWPF”) multi-employer plan beginning in fiscal year 2020. During 2022, 2021 and 2020, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 2.4 million, $ 2.6 million and $ 2.5 million, respectively. The Company’s contributions into the IWPF are less than 5 % of total plan contributions. The IWPF is more than 95 % funded at the end of 2021, which is the latest date plan information is available. The IWPF multi-employer plan is not considered to be significant based on the funded status of the plan and our contributions. Foreign Defined Benefit Plans The Company has trusteed defined benefit retirement plans which cover many of its European employees. The benefits under these defined benefit retirement plans are generally based on years of service and the employee’s average monthly compensation. In connection with the nora acquisition in 2018, the Company acquired an additional defined benefit plan, which covers certain employees in Germany (the “nora Plan”). The nora plan has no plan assets. The Company uses a year-end measurement date for the plans, which is the closest practical date to the Company’s fiscal year end. As described above, on December 31, 2019, a plan amendment was executed to eliminate future service accruals in the Dutch defined benefit plan. The Dutch Plan remains in existence and continues to pay vested benefits. The reduction in future benefit accruals resulted in a curtailment of the Dutch Plan. Participants in the Dutch Plan no longer accrue benefits under the plan after December 31, 2019 and participate in the IWPF beginning in fiscal year 2020. Although the Dutch Plan is frozen to new participants, vested benefits will continue to be accounted for in accordance with applicable accounting standards for defined benefit plans. The Dutch Plan is financed by assets held in an insurance contract. The guarantee provision included in the insurance contract, that existed to fund any shortfall between the fair value of plan investments and the benefit obligation, expired on December 31, 2019. The Company will fund the cost to guarantee vested benefits and this amount is recorded as an obligation on the Company’s consolidated balance sheets. 89 Ta b le of Contents As discussed above, the Company still has an obligation to pay vested benefits in the frozen Dutch Plan. As of January 1, 2023, the under-funded status of the Dutch Plan of $ 5.5 million is recorded on the consolidated balance sheet in other long-term liabilities. Pension expense for our three European defined benefit plans was $ 2.0 million, $ 2.5 million, and $ 2.5 million for the years 2022, 2021 and 2020, respectively. Plan assets are primarily invested in insurance contracts and fixed income securities. As of January 1, 2023, for the European plans, the Company had a net liability recorded of $ 8.0 million, an amount equal to their under-funded status, and had recorded in accumulated other comprehensive loss an amount equal to $ 23.7 million (net of taxes of approximately $ 4.3 million) related to the future amounts to be recorded in net periodic benefit costs. In the next fiscal year, approximately $ 0.6 million will be reclassified from accumulated other comprehensive loss into net periodic benefit cost. The tables presented below set forth the funded status of the Company’s significant foreign defined benefit plans and required disclosures in accordance with applicable accounting standards: Fiscal Year 2022 2021 (in thousands) Change in benefit obligation: Benefit obligation, beginning of year $ 324,408 $ 364,443 Service cost 840 1,087 Interest cost 3,793 2,687 Benefits and expenses paid ( 9,890 ) ( 11,339 ) Actuarial gain ( 96,556 ) ( 19,723 ) Currency translation adjustment ( 27,155 ) ( 12,747 ) Benefit obligation, end of year $ 195,440 $ 324,408 Change in plan assets: Plan assets, beginning of year $ 285,600 $ 303,531 Actual return on assets ( 66,759 ) ( 2,817 ) Company contributions 4,001 5,393 Benefits paid ( 9,890 ) ( 11,339 ) Currency translation adjustment ( 25,467 ) ( 9,168 ) Plan assets, end of year $ 187,485 $ 285,600 Funded status $ ( 7,955 ) $ ( 38,808 ) Amounts recognized in consolidated balance sheets: Other assets $ 26,586 $ 10,975 Current liabilities ( 1,032 ) ( 1,049 ) Other long-term liabilities, net of current portion ( 33,509 ) ( 48,734 ) Under-funded status at end of fiscal year $ ( 7,955 ) $ ( 38,808 ) Amounts recognized in accumulated other comprehensive loss, after tax: Unrecognized actuarial loss $ 23,737 $ 45,209 Unamortized prior service credits — — Total amount recognized $ 23,737 $ 45,209 Accumulated benefit obligation $ 195,440 $ 324,408 90 Ta b le of Contents The above disclosure represents the aggregation of information related to the Company’s three defined benefit plans which cover many of its European employees. The decrease in the projected benefit obligation of $ 129.0 million for 2022 compared to prior year was primarily due to the increase in the discount rates used to measure the obligation and the impact of foreign currency translation due to the weakening of the Euro and British Pound sterling against the U.S. dollar in 2022. As of January 1, 2023, one of these plans, which primarily covers certain employees in the United Kingdom (the “UK Plan”), had assets in excess of the accumulated benefit obligation. The accumulated benefit obligation of the Dutch Plan exceeded plan assets as of January 1, 2023. The nora Plan is an unfunded defined benefit plan and the accumulated benefit obligation exceeded plan assets as of January 1, 2023. The following table summarizes this information as of January 1, 2023 and January 2, 2022. End of Fiscal Year 2022 2021 (in thousands) UK Plan Projected benefit obligation $ 98,730 $ 181,997 Accumulated benefit obligation 98,730 181,997 Plan assets 125,315 192,971 Dutch Plan Projected benefit obligation $ 67,689 $ 97,108 Accumulated benefit obligation 67,689 97,108 Plan assets 62,170 92,629 nora Plan Projected benefit obligation $ 29,021 $ 45,303 Accumulated benefit obligation 29,021 45,303 Plan assets — — Fiscal Year 2022 2021 2020 (in thousands) Components of net periodic benefit cost: Service cost $ 840 $ 1,087 $ 1,070 Interest cost 3,793 2,687 4,038 Expected return on plan assets ( 3,957 ) ( 3,312 ) ( 4,256 ) Amortization of prior service cost 117 114 106 Amortization of net actuarial losses 1,201 1,968 1,549 Net periodic benefit cost $ 1,994 $ 2,544 $ 2,507 In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income (loss) in the consolidated statements of operations, while all other components of net periodic benefit costs are presented within other expense, net, in the consolidated statements of operations. During 2022, other comprehensive loss was impacted by a net gain of approximately $ 17.1 million (net of $ 10.0 million of tax), comprised of actuarial gain of approximately $ 16.4 million (net of $ 9.5 million of tax) and amortization of loss of $ 0.7 million (net of $ 0.5 million of tax). 91 Ta b le of Contents Fiscal Year 2022 2021 2020 Weighted average assumptions used to determine net periodic benefit cost: Discount rate 1.4 % 0.9 % 1.0 % Expected return on plan assets 3.0 % 1.5 % 1.2 % Weighted average assumptions used to determine benefit obligations: Discount rate 4.4 % 1.6 % 1.0 % The expected long-term rate of return on plan assets assumption is based on weighted average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers. The investment objectives of the foreign defined benefit plans are to maximize the return on the investments to ensure that the assets are sufficient to exceed minimum funding requirements, and to achieve a favorable return against performance expectations based on historical and projected rates of return over the short term. The goal is to optimize the long-term return on plan assets at a moderate level of risk, by balancing higher-returning assets, such as equity securities, with less volatile assets, such as fixed income securities. The assets are managed by professional investment firms and performance is evaluated periodically against specific benchmarks. The plans’ net assets did not include the Company’s own stock at January 1, 2023 or January 2, 2022. Dutch Plan Assets and Indexation Benefit As is common in Dutch pension plans, the Dutch Plan includes a provision for discretionary benefit increases termed “indexation.” The indexation benefit is meant to adjust pension benefits for cost-of-living increases, similar to U.S. consumer price index-based cost-of-living adjustments for U.S. retirement plans. The indexation benefit is not guaranteed, and is only provided for and paid out if sufficient assets are available due to favorable asset returns. Both the vested benefit amounts as well as amounts related to the discretionary indexation benefits under the Dutch Plan are paid pursuant to an insurance contract with a private insurer (the “Contract”). The Dutch Plan itself is financed by investment assets held within the Contract. Prior to December 31, 2019, the Contract guaranteed payment of vested benefits, regardless of whether Dutch Plan assets held through the Contract were ultimately sufficient to pay vested amounts, and also provided for payment of the indexation amount on a contingent basis if the actual return on Dutch Plan assets were sufficient to pay it. This type of insurance arrangement is common in The Netherlands, although not necessarily common in other jurisdictions. After the Dutch Plan curtailment on December 31, 2019, any shortfall in plan assets to pay vested benefits will be funded by the Company. The assets under the Dutch Plan, including any indexation benefit, are identified as level 3 assets under the fair value hierarchy. Under the express terms of the Contract, contract value is the greater of (i) the value of the discounted vested benefits of the Dutch Plan and (ii) the fair value of the underlying investment assets held by the insurance company under the Contract. As between those two values, the former was the greater for 2022 and 2021 and this represents the plan assets as shown above for the Dutch Plan. Because the Company will fund the cost to guarantee vested benefits, the Company has recorded a provision, which reduces the Dutch Plan assets, that consists of the net present value of the expected future guarantee payments due to the insurance company pursuant to the Company’s guarantee. As explained above, the Contract also will pay the indexation benefit if sufficient assets are available, which the Company believes not to be probable as of the end of 2022 based on recent returns. The indexation benefit for 2022 and 2021 is not significant. 92 Ta b le of Contents The Company’s actual weighted average asset allocations for 2022 and 2021, and the targeted asset allocation for 2023, of the foreign defined benefit plans by asset category, are as follows: Fiscal Year 2023 2022 2021 Asset Category Target Allocation Percentage of Plan Assets at Year End Equity securities — % — — % — % — % Debt and debt securities 65 % — 70 % 53 % 63 % Short-term investments — % — 2 % 13 % 4 % Other investments 30 % — 35 % 34 % 33 % 100 % 100 % 100 % The following table sets forth by level within the fair value hierarchy the foreign defined benefit plans’ assets at fair value, as of January 1, 2023 and January 2, 2022. The nora plan is currently unfunded. As required by accounting standards, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As noted above, the Dutch Plan assets as represented by the insurance contract are classified as a level 3 asset and included in the “Other” asset category. Pension Plan Assets by Category as of January 1, 2023 Dutch Plan UK Plan Total (in thousands) Level 1 $ — $ 44,335 $ 44,335 Level 2 — 53,286 53,286 Level 3 62,170 27,694 89,864 Total $ 62,170 $ 125,315 $ 187,485 Pension Plan Assets by Category as of January 2, 2022 Dutch Plan UK Plan Total (in thousands) Level 1 $ — $ 57,338 $ 57,338 Level 2 — 107,136 107,136 Level 3 92,629 28,497 121,126 Total $ 92,629 $ 192,971 $ 285,600 The tables below detail the foreign defined benefit plans’ assets by asset allocation and fair value hierarchy: End of Fiscal Year 2022 Asset Category Level 1 Level 2 Level 3 (in thousands) Debt and debt securities $ 19,614 $ 53,286 $ 26,778 Short-term investments (1) 24,721 — — Other investments (2) — — 63,086 $ 44,335 $ 53,286 $ 89,864 93 Ta b le of Contents End of Fiscal Year 2021 Asset Category Level 1 Level 2 Level 3 (in thousands) Debt and debt securities $ 45,516 $ 107,136 $ 27,176 Short-term investments (1) 11,822 — — Other investments (2) — — 93,950 $ 57,338 $ 107,136 $ 121,126 (1) Short-term investments are generally invested in interest-bearing accounts. (2) Other investments are comprised of insurance contracts. Assets identified as level 2 above pertain to corporate bonds and other debt securities. The fair values of these assets are calculated based on quoted market prices for similar assets. With the exception of the Dutch Plan assets as discussed above, the assets identified as level 3 above in 2022 and 2021 relate to insured annuities and direct lending assets held by the UK Plan. The fair value of these assets was calculated using the present value of the future cash flows due under the insurance annuities, and for the direct lending assets the value is based on the asset value from the latest available valuation with adjustments for any drawdowns and distribution payments made between the valuation date and the reporting date. The range of discount rates used in the fair value calculation of level 3 assets held by the Dutch Plan and the UK Plan were 3.70 % to 4.75 % for 2022 and 1.00 % to 1.85 % for 2021. The weighted average discount rates were 3.72 % and 1.01 % for 2022 and 2021, respectively. These amounts are weighted based on the fair value of level 3 plan assets subject to fluctuations in the discount rate. Any changes in these variables will impact the fair value of level 3 assets. The table below indicates the change in value related to these level 3 assets during 2022 and 2021: Fiscal Year 2022 2021 (in thousands) Balance of level 3 assets, beginning of year $ 121,126 $ 137,623 Actual return on plan assets (1) ( 21,968 ) ( 10,189 ) Purchases, sales and settlements, net 389 440 Assets transferred to (from) level 3 ( 710 ) 732 Translation adjustment ( 8,973 ) ( 7,480 ) Balance of level 3 assets, end of year $ 89,864 $ 121,126 (1) Includes $ 22.2 million and $ 6.6 million for 2022 and 2021, respectively, of unrealized losses recognized during the period in other comprehensive income (loss) for assets held at year end. During 2023, the Company expects to contribute $ 2.5 million to the plans. It is anticipated that future benefit payments for the foreign defined benefit plans will be as follows: Fiscal Year Expected Payments (in thousands) 2023 $ 10,283 2024 10,316 2025 10,384 2026 10,495 2027 10,787 2028-2032 54,345 94 Ta b le of Contents Domestic Defined Benefit Plan The Company maintains a domestic nonqualified salary continuation plan (“SCP”), which is designed to induce selected officers of the Company to remain in the employ of the Company by providing them with retirement, disability and death benefits in addition to those which they may receive under the Company’s other retirement plans and benefit programs. The SCP entitles participants to: (i) retirement benefits upon normal retirement at age 65 (or early retirement as early as age 55 ) after completing at least 15 years of service with the Company (unless otherwise provided in the SCP), payable for the remainder of their lives (or, if elected by a participant, a reduced benefit is payable for the remainder of the participant’s life and any surviving spouse’s life) and in no event less than 10 years under the death benefit feature; (ii) disability benefits payable for the period of any total disability; and (iii) death benefits payable to the designated beneficiary of the participant for a period of up to 10 years. Benefits are determined according to one of three formulas contained in the SCP, and the SCP is administered by the Compensation Committee of the Company’s Board of Directors, which has full discretion in choosing participants and the benefit formula applicable to each. The Company’s obligations under the SCP are currently unfunded (although the Company uses insurance instruments to hedge its exposure thereunder). The Company is required to contribute the present value of its obligations thereunder to an irrevocable grantor trust in the event of a change in control as defined in the SCP. The Company uses a year-end measurement date for the domestic SCP. The tables presented below set forth the required disclosures in accordance with applicable accounting standards, and amounts recognized in the consolidated financial statements related to the domestic SCP. There is no service cost component of the change in benefit obligation in 2022 and 2021 as there are no longer any participants accruing benefits in the plan. Fiscal Year 2022 2021 (in thousands) Change in benefit obligation: Benefit obligation, beginning of year $ 30,053 $ 33,834 Interest cost 771 706 Benefits paid ( 1,873 ) ( 1,965 ) Actuarial gain ( 6,220 ) ( 2,522 ) Benefit obligation, end of year $ 22,731 $ 30,053 The amounts recognized in the consolidated balance sheets are as follows: End of Fiscal Year 2022 2021 (in thousands) Current liabilities $ 1,873 $ 1,873 Non-current liabilities 20,858 28,180 Total benefit obligation $ 22,731 $ 30,053 The components of the amounts in accumulated other comprehensive loss, after tax, are as follows: Fiscal Year 2022 2021 (in thousands) Unrecognized actuarial loss $ 3,811 $ 8,679 The accumulated benefit obligation related to the SCP was $ 22.7 million and $ 30.1 million as of January 1, 2023 and January 2, 2022, respectively. The SCP is currently unfunded; as such, the benefit obligations disclosed are also the benefit obligations in excess of the plan assets. The Company uses insurance instruments to help limit its exposure under the SCP. 95 Ta b le of Contents Fiscal Year 2022 2021 2020 (in thousands, except for assumptions) Assumptions used to determine net periodic benefit cost: Discount rate 2.65 % 2.15 % 3.05 % Assumptions used to determine benefit obligations: Discount rate 5.20 % 2.65 % 2.15 % Components of net periodic benefit cost: Interest cost $ 771 $ 706 $ 938 Amortizations 557 743 558 Net periodic benefit cost $ 1,328 $ 1,449 $ 1,496 The changes in other comprehensive loss during 2022 related to the SCP as a result of plan activity was a net gain of approximately $ 4.9 million (net of $ 1.9 million of tax), primarily comprised of a net gain during the period of $ 4.5 million (net of $ 1.7 million of tax) and amortization of loss of $ 0.4 million (net of $ 0.2 million of tax). During 2022, the Company contributed $ 1.9 million in the form of direct benefit payments for its domestic SCP. It is anticipated that future benefit payments for the SCP will be as follows: Fiscal Year Expected Payments (in thousands) 2023 $ 1,873 2024 1,873 2025 1,873 2026 1,873 2027 1,868 2028-2032 8,761 96 Ta b le of Contents NOTE 20 – SEGMENT INFORMATION The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. In 2021, 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; Cyber Event impact; goodwill and intangible asset impairment charges; changes in equity award forfeiture accounting; restructuring, asset impairment, severance and other charges; and an SEC settlement fine. Intersegment revenues for 2022, 2021 and 2020 were $ 75.5 million, $ 78.1 million and $ 71.5 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM. The Company has determined that it has two reportable segments – AMS and EAAA, as each operating segment meets the quantitative thresholds defined in the accounting guidance. Segment information for 2022, 2021 and 2020 is presented in the tables below – segment information for fiscal year 2020 has been recast to reflect the new reportable segment structure: Fiscal Year 2022 2021 2020 (in thousands) Net sales AMS $ 753,740 $ 651,216 $ 593,418 EAAA 544,179 549,182 509,844 Total net sales $ 1,297,919 $ 1,200,398 $ 1,103,262 Segment AOI AMS $ 102,370 $ 85,014 $ 89,097 EAAA 30,058 37,268 21,403 Depreciation and amortization AMS $ 16,827 $ 17,963 $ 17,164 EAAA 23,510 28,382 28,756 Total depreciation and amortization $ 40,337 $ 46,345 $ 45,920 97 Ta b le of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: End of Fiscal Year 2022 2021 (in thousands) Assets AMS $ 588,110 $ 652,423 EAAA 652,921 691,844 Total segment assets 1,241,031 1,344,267 Corporate assets 110,495 146,204 Eliminations ( 85,023 ) ( 160,414 ) Total reported assets $ 1,266,503 $ 1,330,057 Total assets in the table above include operating lease right-of-use assets for fiscal years 2022 and 2021. Below is a summary of the operating lease right-of-use assets by reportable segment and a reconciliation to the consolidated amounts: End of Fiscal Year Operating Lease Right-of-Use Assets 2022 2021 (in thousands) AMS $ 14,140 $ 12,662 EAAA 58,255 67,741 Total segment operating lease right-of-use assets 72,395 80,403 Corporate operating lease right-of-use assets 9,249 10,158 Total operating lease right-of-use assets $ 81,644 $ 90,561 Reconciliations of operating income (loss) to income (loss) before income tax expense and segment AOI are presented as follows: Fiscal Year 2022 2021 2020 (in thousands) AMS operating income $ 92,234 $ 81,445 $ 73,234 EAAA operating income (loss) ( 16,836 ) 23,352 ( 112,521 ) Consolidated operating income (loss) 75,398 104,797 ( 39,287 ) Interest expense 29,929 29,681 29,244 Other expense, net 3,552 2,483 10,889 Income (loss) before income tax expense $ 41,917 $ 72,633 $ ( 79,420 ) 98 Ta b le of Contents Fiscal Year 2022 2021 2020 AMS EAAA AMS EAAA AMS EAAA (in thousands) Operating income (loss) $ 92,234 $ ( 16,836 ) $ 81,445 $ 23,352 $ 73,234 $ ( 112,521 ) Purchase accounting amortization — 5,038 — 5,636 — 5,457 Thailand plant closure inventory write-down — 2,530 — — — — Cyber Event impact 3,878 1,215 — — — — Goodwill and intangible asset impairment 3,838 32,342 — — 2,695 118,563 Impact of change in equity award forfeiture accounting — — — — 757 650 Restructuring, asset impairment, severance and other charges 2,420 5,769 3,569 8,280 9,722 6,943 SEC fine — — — — 2,689 2,311 AOI $ 102,370 $ 30,058 $ 85,014 $ 37,268 $ 89,097 $ 21,403 The Company has a large and diverse customer base, which includes numerous customers located in foreign countries. No single unaffiliated customer accounted for more than 10 % of total sales in any year during the past three years. Sales to customers in foreign markets in 2022, 2021 and 2020 were approximately 47 %, 50 % and 51 %, respectively, of total net sales. These sales were primarily to customers in Europe, Canada, Asia, Australia and Latin America. Net sales and long-lived assets for the United States and other significant countries (that individually represent 10 % or greater of consolidated totals for each year presented) are as follows: Fiscal Year Net Sales to Unaffiliated Customers (1) 2022 2021 2020 (2) (in thousands) United States $ 694,299 $ 596,844 $ 545,183 Other foreign countries 603,620 603,554 558,079 Total net sales $ 1,297,919 $ 1,200,398 $ 1,103,262 End of Fiscal Year Long-Lived Assets (3) 2022 2021 (in thousands) United States $ 146,210 $ 157,194 Germany 64,182 71,114 Netherlands 42,422 47,476 Australia 29,924 33,536 Other foreign countries 15,238 20,481 Total long-lived assets $ 297,976 $ 329,801 (1) Revenue attributed to geographic areas is based on the location of the customer. (2) Net sales in Germany were $ 115.4 million in 2020, which exceeded 10 % of consolidated net sales for that year. Net sales in Germany did not exceed 10 % of consolidated net sales for all other periods presented. (3) Long-lived assets attributed to geographic areas are based on the physical location of the asset. 2022 includes $ 1.3 million and $ 4.5 million of leased equipment, net of accumulated amortization, in the United States and foreign countries, respectively. 2021 includes $ 1.6 million and $ 4.9 million of leased equipment, net of accumulated amortization, in the United States and foreign countries, respectively 99 Ta b le of Contents NOTE 21 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated statements of operations for the fiscal years 2022, 2021 and 2020, are reflected in the table below: Fiscal Year Statement of Operations Location 2022 2021 2020 (in thousands) Interest rate swap contracts loss (1) Interest expense $ ( 2,809 ) $ ( 4,861 ) $ ( 7,287 ) Amortization of benefit plan net actuarial losses and prior service cost (2) Other expense, net ( 1,875 ) ( 2,825 ) ( 2,213 ) Total loss reclassified from AOCI $ ( 4,684 ) $ ( 7,686 ) $ ( 9,500 ) (1) Other comprehensive income (loss) includes tax of $ 0.8 million, $ 1.4 million and $( 2.5 ) million for 2022, 2021 and 2020, respectively, related to cash flow hedges. (2) See Note 19 entitled “Employee Benefit Plans” for the tax effects in other comprehensive income (loss) related to the Company’s defined benefit plans. 100 Ta b le of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Interface, Inc. Atlanta, Georgia Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Interface, Inc. (the “Company”) as of January 1, 2023, and January 2, 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the three years in the period ended January 1, 2023, and the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company on January 1, 2023, and January 2, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2023 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 101 Ta b le of Contents Goodwill Impairment Assessment As described in Notes 1 and 12 to the consolidated financial statements, the Company’s consolidated goodwill balance was $102 million as of January 1, 2023. Goodwill is tested for impairment annually as of the measurement date or more frequently if events or changes in circumstances indicate the asset might be impaired. During the fourth quarter of fiscal 2022, the Company performed the annual impairment test for all reporting units, which resulted in the Company recording a goodwill impairment charge for the Europe, Middle East and Africa (“EMEA”) reporting unit in the amount of $29.4 million. The goodwill impairment test consists of a comparison of the fair value of a reporting unit with its carrying value, including the goodwill allocated to the reporting unit. If the carrying value of a reporting unit exceeds its fair value, the Company will recognize an impairment loss equal to the amount of the excess, limited to the amount of goodwill allocated to that reporting unit. The Company estimates the fair value of its reporting units using a weighting of fair values derived from an income approach and a market approach. We identified the estimate of the fair value of the EMEA reporting unit used in the goodwill impairment assessment as of the annual measurement date, as a critical audit matter. The principal considerations for our determination are: (i) this reporting unit had relatively low excess fair value over carrying value; therefore, the fair value estimates were particularly sensitive to changes in significant assumptions such as projected revenue, gross margin, earnings, and the discount rate included in the income approach, (ii) the greater than usual volatility and uncertainty underlying the market data used in the market approach includes assumptions utilized by management for which changes to these assumptions can have a significant impact on the fair value of the reporting unit, and (iii) auditing management’s valuation methods and assumptions utilized in estimating the fair value of the EMEA reporting unit involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address this matter, including the involvement of individuals with specialized skill or knowledge. The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls related to management’s forecasting process, including controls over management’s review of the data and significant assumptions utilized to determine fair value of the EMEA reporting unit, including projected revenue, gross margin, earnings, and the discount rate, all referred to as significant assumptions, included in the income approach. • Evaluating the reasonableness of the significant assumptions described above used in management’s income approach analysis by comparing them to prior period forecasts, historical operating performance, the Company’s projected budget, peer company historical operating performance, publicly available industry analyst projections, and internal and external communications made by the Company. • Testing the reconciliation of the estimated fair value of the Company’s reporting units to the indicated market capitalization of the Company as a whole. • Utilizing personnel with specialized knowledge and skill of valuation techniques to assist in: (i) evaluating the methodologies used by management to determine the fair value of the EMEA reporting unit including the weighting of the income and market approaches (ii) testing the mathematical accuracy of the Company’s calculations, (iii) evaluating the reasonableness of significant assumptions used in the income approach including the discount rate, (iv) assessing the reasonableness of certain market data used in the market approach, and (v) evaluating the reasonableness of the market capitalization reconciliation. We are uncertain as to the year we began serving consecutively as the auditor of the Company's financial statements; however, we are aware that we have been the Company's auditor consecutively since at least 1981. /s/ BDO USA, LLP Atlanta, Georgia March 1, 2023 102 Ta b le of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Interface, Inc. Atlanta, Georgia Opinion on Internal Control over Financial Reporting We have audited Interface, Inc. (the “Company’s”) internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of January 1, 2023 and January 2, 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the three years in the period ended January 1, 2023, and the related notes and schedules and our report dated March 1, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Atlanta, Georgia March 1, 2023 103 Ta b le of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.