INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) APRIL 2, 2023 JANUARY 1, 2023 (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 101,273 $ 97,564 Accounts receivable, net 147,759 182,807 Inventories, net 312,745 306,327 Assets held for sale 3,433 — Prepaid expenses and other current assets 46,563 30,339 Total current assets 611,773 617,037 Property, plant and equipment, net 291,838 297,976 Operating lease right-of-use assets 80,226 81,644 Deferred tax asset 17,386 17,767 Goodwill and intangibles, net 162,890 162,195 Other assets 89,092 89,884 Total assets $ 1,253,205 $ 1,266,503 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 85,640 $ 78,264 Accrued expenses 114,027 120,138 Current portion of operating lease liabilities 11,601 11,857 Current portion of long-term debt 10,216 10,211 Total current liabilities 221,484 220,470 Long-term debt 490,901 510,003 Operating lease liabilities 71,325 72,305 Deferred income taxes 39,213 38,662 Other long-term liabilities 63,253 63,526 Total liabilities 886,176 904,966 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at April 2, 2023 and January 1, 2023 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 58,053 and 58,106 shares issued and outstanding at April 2, 2023 and January 1, 2023, respectively 5,805 5,811 Additional paid-in capital 246,001 244,159 Retained earnings 277,345 278,639 Accumulated other comprehensive loss – foreign currency translation ( 133,845 ) ( 138,775 ) Accumulated other comprehensive loss – cash flow hedge ( 450 ) ( 749 ) Accumulated other comprehensive loss – pension liability ( 27,827 ) ( 27,548 ) Total shareholders’ equity 367,029 361,537 Total liabilities and shareholders’ equity $ 1,253,205 $ 1,266,503 See accompanying notes to consolidated condensed financial statements. 3 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) THREE MONTHS ENDED APRIL 2, 2023 APRIL 3, 2022 Net sales $ 295,792 $ 288,002 Cost of sales 199,919 181,203 Gross profit 95,873 106,799 Selling, general and administrative expenses 86,254 78,492 Restructuring, asset impairment and other charges 142 887 Operating income 9,477 27,420 Interest expense 8,505 6,850 Other expense, net 1,500 170 Income (loss) before income tax expense ( 528 ) 20,400 Income tax expense 186 7,107 Net income (loss) $ ( 714 ) $ 13,293 Earnings (loss) per share – basic $ ( 0.01 ) $ 0.22 Earnings (loss) per share – diluted $ ( 0.01 ) $ 0.22 Common shares outstanding – basic 58,079 59,248 Common shares outstanding – diluted 58,079 59,248 See accompanying notes to consolidated condensed financial statements. 4 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 2, 2023 APRIL 3, 2022 Net income (loss) $ ( 714 ) $ 13,293 Other comprehensive income (loss), after tax: Foreign currency translation adjustment 4,930 ( 13,184 ) Reclassification from accumulated other comprehensive loss – discontinued cash flow hedge 299 641 Pension liability adjustment ( 279 ) 1,539 Other comprehensive income (loss) 4,950 ( 11,004 ) Comprehensive income $ 4,236 $ 2,289 See accompanying notes to consolidated condensed financial statements. 5 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) THREE MONTHS ENDED APRIL 2, 2023 APRIL 3, 2022 OPERATING ACTIVITIES: Net income (loss) $ ( 714 ) $ 13,293 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 9,991 10,670 Stock compensation amortization expense 3,004 2,182 Deferred income taxes and other 599 4,196 Amortization of acquired intangible assets 1,283 1,342 Working capital changes: Accounts receivable 35,791 26,135 Inventories ( 5,306 ) ( 56,464 ) Prepaid expenses and other current assets ( 16,148 ) ( 5,252 ) Accounts payable and accrued expenses 1,084 ( 13,798 ) Cash provided by (used in) operating activities 29,584 ( 17,696 ) INVESTING ACTIVITIES: Capital expenditures ( 5,712 ) ( 4,781 ) Cash used in investing activities ( 5,712 ) ( 4,781 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 53,225 ) ( 44,729 ) Borrowing of long-term debt 34,000 48,500 Tax withholding payments for share-based compensation ( 1,167 ) ( 398 ) Finance lease payments ( 643 ) ( 479 ) Cash (used in) provided by financing activities ( 21,035 ) 2,894 Net cash provided by (used in) operating, investing and financing activities 2,837 ( 19,583 ) Effect of exchange rate changes on cash 872 ( 1,581 ) CASH AND CASH EQUIVALENTS: Net increase (decrease) 3,709 ( 21,164 ) Balance, beginning of period 97,564 97,252 Balance, end of period $ 101,273 $ 76,088 See accompanying notes to consolidated condensed financial statements. 6 Table of Contents INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation References in this Quarterly Report on Form 10-Q to “Interface,” “the Company,” “we,” “our,” “ours” and “us” refer to Interface, Inc. and its subsidiaries or any of them, unless the context requires otherwise. As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 1, 2023, as filed with the Commission. The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature unless otherwise disclosed. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 1, 2023, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (“GAAP”). The three-month periods ended April 2, 2023 and April 3, 2022 both include 13 weeks. Risks and Uncertainties Global economic challenges, including the impact of the COVID-19 pandemic, the war in Ukraine, inflation and supply chain disruptions could cause economic uncertainty and volatility. The Company considered these impacts and subsequent general uncertainties and volatility in the global economy on the assumptions and estimates used herein. In connection with the Cyber Event discussed below, 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. These uncertainties could result in a future material adverse effect to the amounts reported within the Company’s consolidated condensed financial statements if actual results differ from these estimates. 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. Recently Adopted Accounting Pronouncements In June 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-03, “ Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .” This ASU clarifies that a contractual restriction on the sale of an equity security is not considered in measuring fair value. The ASU also requires certain disclosures for equity securities subject to contractual sale restrictions. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company adopted this standard on April 2, 2023. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. 7 Table of Contents NOTE 2 – REVENUE RECOGNITION Revenue from sales of modular carpet, resilient flooring, rubber flooring, and other flooring-related material was approximately 98 % and 99 % of total revenue for the three-month periods ended April 2, 2023 and April 3, 2022, respectively. The remaining 2 % and 1 % of revenue was generated from the installation of carpet and other flooring-related material for the 2023 and 2022 three-month periods, respectively. Disaggregation of Revenue For the three months ended April 2, 2023 and April 3, 2022, revenue from the Company’s customers is broken down by geography as follows: Three Months Ended Geography April 2, 2023 April 3, 2022 Americas 57.2 % 54.4 % Europe 32.0 % 32.6 % Asia-Pacific 10.8 % 13.0 % 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 11 entitled “Segment Information” for additional information. 8 Table of Contents NOTE 3 – INVENTORIES Inventories are summarized as follows: April 2, 2023 January 1, 2023 (in thousands) Finished goods $ 224,665 $ 209,478 Work-in-process 19,236 15,463 Raw materials 68,844 81,386 Inventories, net $ 312,745 $ 306,327 9 Table of Contents NOTE 4 – EARNINGS PER SHARE The Company computes basic earnings (loss) per share (“EPS”) by dividing net income (loss) by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings (loss). 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 shares outstanding for basic EPS as these awards are considered participating securities. Any unvested stock awards considered non-participating securities are included in diluted EPS calculations when the inclusion of these shares would be dilutive. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. The following table shows the computation of basic and diluted EPS: Three Months Ended April 2, 2023 April 3, 2022 (in thousands, except per share data) Numerator: Net income (loss) $ ( 714 ) $ 13,293 Less: distributed and undistributed earnings available to participating securities ( 9 ) ( 190 ) Distributed and undistributed earnings (loss) available to common shareholders $ ( 723 ) $ 13,103 Denominator: Weighted average shares outstanding 57,177 58,403 Participating securities 902 845 Shares for basic EPS 58,079 59,248 Shares for diluted EPS 58,079 59,248 Basic EPS $ ( 0.01 ) $ 0.22 Diluted EPS $ ( 0.01 ) $ 0.22 For the three months ended April 2, 2023, 1,728,579 non-participating securities that could potentially dilute basic EPS in the future, consisting of restricted share units and performance shares, were excluded from the computation of diluted EPS as these securities would have been antidilutive for the period. 10 Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: April 2, 2023 January 1, 2023 Outstanding Principal Interest Rate (1) Outstanding Principal Interest Rate (1) (in thousands) (in thousands) Syndicated Credit Facility: Revolving loan borrowings $ 9,360 5.18 % $ 24,250 5.29 % Term loan borrowings 197,597 6.14 % 202,082 5.84 % Total borrowings under Syndicated Credit Facility 206,957 6.10 % 226,332 5.78 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 506,957 526,332 Less: Unamortized debt issuance costs ( 5,840 ) ( 6,118 ) Total debt, net 501,117 520,214 Less: Current portion of long-term debt ( 10,216 ) ( 10,211 ) Total long-term debt, net $ 490,901 $ 510,003 (1) Represents the stated rate of interest, without the effect of debt issuance costs. Syndicated Credit Facility The Company’s Syndicated Credit Facility (the “Facility”) provides to the Company U.S. denominated and multicurrency term loans and provides to the Company and certain of its subsidiaries a multicurrency revolving credit facility. Interest on base rate loans is charged at varying rates computed by applying a margin depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. Interest on SOFR-based and alternative currency loans and fees for letters of credit are charged at varying rates computed by applying a margin over the applicable SOFR rate or alternative currency rate, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee per annum (depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility. As of both April 2, 2023 and January 1, 2023, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both April 2, 2023 and January 1, 2023, the carrying value of the Company’s borrowings under the Facility approximated its fair value as the Facility bears interest rates that are similar to existing market rates. Under the Facility, the Company is required to make quarterly amortization payments of the term loan borrowings, which are due on the last day of the calendar quarter. The Company is in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future. 5.50% Senior Notes due 2028 The 5.50% Senior Notes due 2028 (the “Senior Notes”) bear an interest rate at 5.50 % per annum and mature on December 1, 2028. Interest is paid semi-annually on June 1 and December 1 of each year. The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its Facility. 11 Table of Contents As of April 2, 2023, the estimated fair value of the Senior Notes was $ 244.1 million, compared with a carrying value recorded in the Company’s consolidated condensed balance sheet of $ 300.0 million, excluding unamortized debt issuance costs. The fair value of the Senior Notes is derived using quoted prices for similar instruments and is considered Level 2 within the fair value hierarchy. 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. 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. As these fees are expensed over the life of the outstanding borrowing, the debt balance will increase by the same amount as the fees that are expensed. As of April 2, 2023 and January 1, 2023, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 5.8 million and $ 6.1 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 $ 1.7 million and $ 1.8 million as of April 2, 2023 and January 1, 2023, respectively. These amounts are included in other assets in the Company’s consolidated condensed balance sheets. The Company amortizes these costs over the life of the related debt. 12 Table of Contents NOTE 6 – DERIVATIVE INSTRUMENTS Interest Rate Risk Management From time to time, the Company enters into interest rate swap transactions to fix the variable interest rate on a portion of its term loan borrowing in order to manage a portion of its exposure to interest rate fluctuations. The Company’s objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability to cash flows relating to interest payments on a portion of its outstanding debt. Cash Flow Interest Rate Swaps In the fourth quarter of 2020, the Company terminated its designated interest rate swap transactions with a total notional value of $ 250 million. Hedge accounting was also discontinued at that time. Losses recorded in accumulated other comprehensive loss for these terminated interest rate swaps are reclassified and recorded in the consolidated condensed statements of operations to the extent it is probable that a portion of the original forecasted transactions related to the portion of the hedged debt repaid will not occur by the end of the originally specified time period. See Note 14 entitled “Items Reclassified From Accumulated Other Comprehensive Loss” for additional information. As of April 2, 2023 and January 1, 2023, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps, before tax, was $ 0.6 million and $ 1.0 million, respectively, and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination. We expect that approximately $ 0.6 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. 13 Table of Contents NOTE 7 – SHAREHOLDERS’ EQUITY The following tables depict the activity in the accounts which make up shareholders’ equity for the three months ended April 2, 2023 and April 3, 2022: SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at January 1, 2023 58,106 $ 5,811 $ 244,159 $ 278,639 $ ( 27,548 ) $ ( 138,775 ) $ ( 749 ) Net loss — — — ( 714 ) — — — Issuances of stock related to performance shares 79 8 ( 8 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 580 ) — — — Compensation expense related to stock awards, net of forfeitures and shares received for tax withholdings ( 132 ) ( 14 ) 1,850 — — — — Pension liability adjustment — — — — ( 279 ) — — Foreign currency translation adjustment — — — — — 4,930 — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 299 Balance, at April 2, 2023 58,053 $ 5,805 $ 246,001 $ 277,345 $ ( 27,827 ) $ ( 133,845 ) $ ( 450 ) SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at January 2, 2022 59,055 $ 5,905 $ 253,110 $ 261,434 $ ( 53,888 ) $ ( 100,441 ) $ ( 2,722 ) Net income — — — 13,293 — — — Restricted stock issuances 303 30 3,966 — — — — Unamortized compensation expense related to restricted stock awards — — ( 3,996 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 592 ) — — — Compensation expense related to stock awards, net of shares received for tax withholdings ( 30 ) ( 2 ) 1,787 — — — — Pension liability adjustment — — — — 1,539 — — Foreign currency translation adjustment — — — — — ( 13,184 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 641 Balance, at April 3, 2022 59,328 $ 5,933 $ 254,867 $ 274,135 $ ( 52,349 ) $ ( 113,625 ) $ ( 2,081 ) Restricted Stock Awards During the three months ended April 2, 2023, no restricted stock awards were granted. Awards of restricted stock (or a portion thereof) vest with respect to each recipient over a one to three-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company or upon involuntary termination without cause. For certain restricted stock awards with a graded vesting schedule, the Company has elected to recognize compensation expense on a straight-line basis over the requisite service period for the entire award. Compensation expense related to restricted stock grants was $ 1.4 million and $ 1.2 million for the three months ended April 2, 2023 and April 3, 2022, respectively. The Company has reduced its expense for any restricted stock forfeited during the period. 14 Table of Contents The following table summarizes restricted stock outstanding as of April 2, 2023, as well as activity during the three months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 1,006,400 $ 13.91 Granted — — Vested ( 270,000 ) 15.15 Forfeited or canceled ( 6,800 ) 13.54 Outstanding at April 2, 2023 729,600 $ 13.45 As of April 2, 2023, the unrecognized total compensation cost related to unvested restricted stock was $ 4.2 million. That cost is expected to be recognized by the first quarter of 2025. Restricted Share Unit Awards During the three months ended April 2, 2023, the Company granted awards for 586,500 restricted share units to certain employees pursuant to the Company’s 2020 Omnibus Stock Incentive Plan. Each restricted share unit represents one share of the Company’s common stock to be issued to the award recipient once the vesting criteria have been satisfied. Awards of restricted share units have a graded vesting schedule over a three-year period from the date of grant, with one-third of the restricted share units vesting on each of the first, second and third anniversaries of the date of grant, provided the individual remains in the employment or service of the Company until such anniversaries. Additionally, certain awards (or a portion thereof) could vest earlier in the event of a change in control of the Company, upon involuntary termination without cause, or upon retirement provided certain eligibility criteria are met. The Company recognizes expense related to restricted share unit grants based on the grant date fair value of the units awarded, as determined by the market price of the Company’s common stock at date of grant. The expense is captured in selling, general and administrative expenses in the consolidated condensed statements of operations, and the Company has elected to recognize compensation expense on a straight-line basis over the requisite service period for the entire award for awards with a graded vesting schedule. Compensation expense related to the restricted share units was $ 0.5 million for the three months ended April 2, 2023. The Company reduces its expense for any restricted share units forfeited during the period. Grants of restricted share units are made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized. The following table summarizes restricted share units outstanding as of April 2, 2023, as well as activity during the three months then ended: Restricted Share Units Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 — $ — Granted 586,500 10.39 Vested — — Forfeited or canceled — — Outstanding at April 2, 2023 586,500 $ 10.39 As of April 2, 2023, the unrecognized total compensation cost related to unvested restricted share units was $ 5.6 million. That cost is expected to be recognized by the end of 2026. 15 Table of Contents Performance Share Awards During the three months ended April 2, 2023 and April 3, 2022, the Company issued awards of performance shares to certain employees. These awards vest based on the achievement of certain performance-based goals over a performance period of one to three years , subject to (among other things) the employee’s continued employment through the last date of the performance period, and will be settled in shares of our common stock or in cash at the Company’s election. The number of shares that may be issued in settlement of the performance shares to the award recipients may be greater (up to 200 %) or lesser than the nominal award amount depending on actual performance achieved as compared to the performance targets set forth in the awards. The Company evaluates the probability of achieving the performance-based goals as of the end of each reporting period and adjusts compensation expense based on this assessment. The following table summarizes the performance shares outstanding as of April 2, 2023, as well as the activity during the three months then ended: Performance Shares Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 923,600 $ 13.91 Granted 467,500 10.79 Vested ( 79,400 ) 15.16 Forfeited or canceled ( 169,700 ) 15.13 Outstanding at April 2, 2023 1,142,000 $ 12.36 Compensation expense related to the performance shares was $ 1.1 million and $ 1.0 million for the three months ended April 2, 2023 and April 3, 2022, 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 $ 9.0 million as of April 2, 2023. Depending on the performance of the Company, any compensation expense related to these outstanding performance shares will be recognized by the end of 2026. The tax benefit recognized with respect to restricted stock, restricted share units and performance shares was approximately $ 0.3 million for the three months ended April 2, 2023. 16 Table of Contents NOTE 8 – LEASES General The Company has operating and finance leases for manufacturing equipment, corporate offices, showrooms, distribution facilities, design centers, as well as computer and office equipment. The Company’s leases have terms ranging from 1 to 20 years, some of which may include options to extend the lease term for up to 5 years, and certain leases may include an option to terminate the lease. Our lease accounting may include these options to extend or terminate a lease when it is reasonably certain that we will exercise that option. The Company records a right-of-use asset and lease liability for leases extending beyond one year for operating and finance leases once a contract that contains a lease is executed and we have the right to control the use of the leased asset. The right-of-use asset is measured as the present value of the lease obligation. The discount rate used to calculate the present value of the lease liability was the Company’s incremental borrowing rate for the applicable geographical region. As of April 2, 2023, there were no significant leases that had not commenced. The table below represents a summary of the balances recorded in the consolidated condensed balance sheets related to the Company’s leases as of April 2, 2023 and January 1, 2023: April 2, 2023 January 1, 2023 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 80,226 $ 81,644 Current portion of operating lease liabilities $ 11,601 $ 11,857 Operating lease liabilities 71,325 72,305 Total operating lease liabilities $ 82,926 $ 84,162 Property, plant and equipment, net $ 5,838 $ 5,845 Accrued expenses $ 2,173 $ 2,101 Other long-term liabilities 4,050 4,138 Total finance lease liabilities $ 6,223 $ 6,239 Lease Costs Three Months Ended April 2, 2023 April 3, 2022 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 655 $ 517 Interest on lease liabilities 60 29 Operating lease cost 4,703 4,918 Short-term lease cost 356 227 Variable lease cost 733 616 Total lease cost $ 6,507 $ 6,307 17 Table of Contents Other Supplemental Information Three Months Ended April 2, 2023 April 3, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 52 $ 21 Operating cash flows from operating leases 4,201 4,635 Financing cash flows from finance leases 643 479 Right-of-use assets obtained in exchange for new finance lease liabilities 557 382 Right-of-use assets obtained in exchange for new operating lease liabilities 1,121 20 Lease Term and Discount Rate The table below presents the weighted average remaining lease terms and discount rates for finance and operating leases as of April 2, 2023 and January 1, 2023: April 2, 2023 January 1, 2023 Weighted-average remaining lease term – finance leases (in years) 3.73 3.82 Weighted-average remaining lease term – operating leases (in years) 9.16 9.29 Weighted-average discount rate – finance leases 4.16 % 3.79 % Weighted-average discount rate – operating leases 5.91 % 5.89 % 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 (excluding the three months ended April 2, 2023) $ 10,792 $ 1,761 2024 14,237 2,069 2025 12,463 1,260 2026 12,407 711 2027 10,015 495 Thereafter 49,813 496 Total future minimum lease payments (undiscounted) 109,727 6,792 Less: Present value discount ( 26,801 ) ( 569 ) Total lease liability $ 82,926 $ 6,223 18 Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS During the three-month periods ended April 2, 2023 and April 3, 2022, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.6 million and $ 0.7 million, respectively. The following tables provide the components of net periodic benefit cost for the three months ended April 2, 2023 and April 3, 2022: Three Months Ended Defined Benefit Retirement Plans (Europe) April 2, 2023 April 3, 2022 (in thousands) Interest cost $ 1,735 $ 916 Expected return on plan assets ( 1,964 ) ( 1,059 ) Amortization of prior service cost 29 32 Amortization of net actuarial losses 223 275 Net periodic benefit cost $ 23 $ 164 Three Months Ended Salary Continuation Plan April 2, 2023 April 3, 2022 (in thousands) Interest cost $ 283 $ 193 Amortization of net actuarial losses 49 139 Net periodic benefit cost $ 332 $ 332 Three Months Ended nora Defined Benefit Plan April 2, 2023 April 3, 2022 (in thousands) Service cost $ 114 $ 225 Interest cost 272 110 Amortization of net actuarial (gains) losses ( 109 ) 50 Net periodic benefit cost $ 277 $ 385 In accordance with applicable accounting standards, the service cost component of net periodic benefit costs is presented within operating income in the consolidated condensed statements of operations, while all other components of net periodic benefit costs are presented within other expense, net, in the consolidated condensed statements of operations. 19 Table of Contents NOTE 10 – GOODWILL AND INTANGIBLE ASSETS The ending balance and the change in the carrying amounts of good will fo r the three months ended April 2, 2023 are as follows: Goodwill (1) (in thousands) Balance, at January 1, 2023 $ 102,417 Foreign currency translation (2) 1,257 Balance, at April 2, 2023 $ 103,674 (1) The goodwill balance is allocated entirely to the AMS reportable segment. All goodwill allocated to the EAAA reportable segment was previously written off as a result of impairment charges. (2) A portion of the goodwill balance is comprised of goodwill denominated in foreign currency attributable to the nora acquisition. The net carrying value of intangible assets other than goodwill was $ 59.2 million and $ 59.8 million at April 2, 2023 and January 1, 2023, respectively. 20 Table of Contents NOTE 11 – SEGMENT INFORMATION The Company determines that an operating segment exists if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has operating results that are regularly reviewed by the chief operating decision maker (“CODM”) and (iii) has discrete financial information. Additionally, accounting standards require the utilization of a “management approach” to report the financial results of operating segments, which is based on information used by the CODM to assess performance and make operating and resource allocation decisions. The Company determined that it has two operating segments organized by geographical area – namely (a) Americas (“AMS”) and (b) Europe, Africa, Asia and Australia (collectively “EAAA”). The AMS operating segment includes the United States, Canada and Latin America geographic areas. Pursuant to the management approach discussed above, the Company’s CODM, our chief executive officer, evaluates performance at the AMS and EAAA operating segment levels and makes operating and resource allocation decisions based on segment adjusted operating income (“AOI”), which includes allocations of corporate selling, general and administrative expenses. AOI excludes nora purchase accounting amortization; Thailand plant closure inventory write-down; Cyber Event impact; property casualty loss; and restructuring, asset impairment, severance and other charges. Intersegment revenues for the three months ended April 2, 2023 and April 3, 2022 were $ 22.6 million and $ 17.3 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM. The Company has determined that it has two reportable segments – AMS and EAAA, as each operating segment meets the quantitative thresholds defined in the accounting guidance. Segment information for the three months ended April 2, 2023 and April 3, 2022 is presented in the following table: Three Months Ended April 2, 2023 April 3, 2022 (in thousands) Net sales AMS $ 169,241 $ 156,509 EAAA 126,551 131,493 Total net sales $ 295,792 $ 288,002 Segment AOI AMS $ 11,269 $ 21,138 EAAA 3,929 9,504 Depreciation and amortization AMS $ 4,393 $ 4,058 EAAA 5,598 6,612 Total depreciation and amortization $ 9,991 $ 10,670 21 Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: April 2, 2023 January 1, 2023 (in thousands) Assets AMS $ 554,790 $ 588,110 EAAA 655,823 652,921 Total segment assets 1,210,613 1,241,031 Corporate assets 121,418 110,495 Eliminations ( 78,826 ) ( 85,023 ) Total reported assets $ 1,253,205 $ 1,266,503 Reconciliations of operating income to income (loss) before income tax expense and segment AOI are presented as follows: Three Months Ended April 2, 2023 April 3, 2022 (in thousands) AMS operating income $ 8,715 $ 21,250 EAAA operating income 762 6,170 Consolidated operating income 9,477 27,420 Interest expense 8,505 6,850 Other expense, net 1,500 170 Income (loss) before income tax expense $ ( 528 ) $ 20,400 Three Months Ended April 2, 2023 Three Months Ended April 3, 2022 AMS EAAA AMS EAAA (in thousands) Operating income $ 8,715 $ 762 $ 21,250 $ 6,170 Purchase accounting amortization — 1,283 — 1,342 Thailand plant closure inventory write-down — — — 1,115 Cyber Event impact 228 200 — — Property casualty loss 1,300 — — — Restructuring, asset impairment, severance and other charges 1,026 1,684 ( 112 ) 877 AOI $ 11,269 $ 3,929 $ 21,138 $ 9,504 22 Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 3.7 million and $ 1.3 million for the three months ended April 2, 2023 and April 3, 2022, respectively. Income tax payments, net of refunds, amounted to $ 5.1 million and $ 2.8 million for the three months ended April 2, 2023 and April 3, 2022, respectively. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. Non-Cash Financing Activities On March 14, 2023, the Company declared cash dividends on its common stock of $ 0.6 million, which were paid during the second quarter of 2023 to shareholders of record as of March 31, 2023. At April 2, 2023, the dividends were recorded within accrued expenses in the consolidated condensed balance sheet. 23 Table of Contents NOTE 13 – INCOME TAXES The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate (“AETR”) and records any changes affecting the estimated AETR in the interim period in which the change occurs, including discrete tax items. During the three months ended April 2, 2023, the Company recorded a total income tax provision of $ 0.2 million on pre-tax loss of $ 0.5 million resulting in a negative effective tax rate of 35.2 %, as compared to a total income tax provision of $ 7.1 million on pre-tax income of $ 20.4 million resulting in an effective tax rate of 34.8 % during the three months ended April 3, 2022. The pre-tax loss for the three months ended April 2, 2023 included significant unusual or infrequent items that are specifically excluded from the AETR. The tax effects related to these specifically excluded items are recognized discretely. The income tax benefits recognized discretely were at a lower effective tax rate compared to the estimated AETR resulting in an overall negative effective tax rate for the three months ended April 2, 2023. The year-over-year change in the effective tax rate is primarily due to the tax effects of relatively low pre-tax loss in the current year quarter compared to pre-tax income in the prior year quarter and favorable changes related to the cash surrender value of Company-owned life insurance policies. In the first three months of 2023, the Company increased its liability for unrecognized tax benefits by $ 0.3 million. As of April 2, 2023, the Company had accrued approximately $ 6.0 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of April 2, 2023 reflects a reduction for $ 2.8 million of these unrecognized tax benefits. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, it is reasonably possible that approximately $ 1.1 million of unrecognized tax benefits may be recognized within the next 12 months, of which $ 0.4 million would result in a favorable impact to the effective tax rate. 24 Table of Contents NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three months ended April 2, 2023 and April 3, 2022 are reflected in the table below: Three Months Ended Statement of Operations Location April 2, 2023 April 3, 2022 (in thousands) Interest rate swap contracts loss Interest expense $ ( 393 ) $ ( 893 ) Amortization of benefit plan net actuarial losses and prior service cost Other expense, net ( 192 ) ( 496 ) Total loss reclassified from AOCI $ ( 585 ) $ ( 1,389 ) 25 Table of Contents NOTE 15 – RESTRUCTURING AND OTHER CHARGES Restructuring, asset impairment and other charges are as follows: Three Months Ended April 2, 2023 April 3, 2022 (in thousands) Restructuring, asset impairment and other charges (1) $ 142 $ 887 (1) Charges are attributable to the EAAA reportable segment. 2021 Restructuring Plan A summary of the restructuring reserve balance, recorded within accrued expenses in the consolidated condensed balance sheets, for the 2021 restructuring plan is presented below: Workforce Reduction Retention Bonuses Asset Impairment and Other Related Charges Total (in thousands) Balance, at January 1, 2023 $ 277 $ 179 $ — $ 456 Charged to expenses 23 ( 19 ) 138 142 Deductions ( 300 ) ( 160 ) — ( 460 ) Charged to other accounts — — ( 138 ) ( 138 ) Balance, at April 2, 2023 $ — $ — $ — $ — Below is a discussion of the restructuring plan activities under the 2021 restructuring plan. On September 8, 2021, the Company committed to a new restructuring plan that continued to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involved a reduction of approximately 188 employees and the closure of the Company’s manufacturing facility in Thailand at the end of the first quarter of 2022. Expected charges and cumulative charges incurred to date under the 2021 restructuring plan are as follows: Workforce Reduction Retention Bonuses Asset Impairment and Other Related Charges Total (in thousands) Estimated expected charges (1) $ 2,281 $ 474 $ 3,259 $ 6,014 Cumulative charges incurred to date (1) 2,281 474 3,259 6,014 (1) Charges are attributable to the EAAA reportable segment. In addition, during the three months ended April 3, 2022, in conjunction with the closure of its Thailand facility, the Company recorded a write-down of inventory of $ 1.1 million within cost of sales in the consolidated condensed statements of operations. The restructuring plan was 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 second quarter of 2023 following the sale of the Thailand manufacturing facility, as described in Note 16 entitled “Assets Held For Sale,” and expects the plan to yield annualized savings of approximately $ 1.7 million. A portion of the annualized savings was realized on the consolidated condensed statements of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023. 26 Table of Contents NOTE 16 – ASSETS HELD FOR SALE On September 8, 2021, the Company announced a restructuring plan that involved the closure of its manufacturing facility in Thailand and committed to a plan to sell the Thailand facility in connection with this restructuring plan. See Note 15 entitled “Restructuring and Other Charges” for additional information. On March 7, 2023, the Company entered into a binding agreement to sell the Thailand manufacturing facility for approximately $ 6.7 million. The transaction is expected to close in the second quarter of 2023. The Company determined that the Thailand manufacturing facility met the assets held for sale criteria during the first quarter of 2023. Accordingly, we have reported the carrying value of the manufacturing facility as assets held for sale in the consolidated condensed balance sheet as of April 2, 2023. We discontinued recording depreciation expense on the manufacturing facility once the assets held for sale criteria were met. We determined that the Thailand facility sale did not meet the criteria for classification as discontinued operations. 27 Table of Contents