INTERFACE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par values) JULY 2, 2023 JANUARY 1, 2023 (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 92,935 $ 97,564 Accounts receivable, net 166,304 182,807 Inventories, net 288,181 306,327 Prepaid expenses and other current assets 34,078 30,339 Total current assets 581,498 617,037 Property, plant and equipment, net 288,669 297,976 Operating lease right-of-use assets 79,987 81,644 Deferred tax asset 17,015 17,767 Goodwill and intangibles, net 162,560 162,195 Other assets 90,225 89,884 Total assets $ 1,219,954 $ 1,266,503 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 69,835 $ 78,264 Accrued expenses 102,589 120,138 Current portion of operating lease liabilities 11,671 11,857 Current portion of long-term debt 10,222 10,211 Total current liabilities 194,317 220,470 Long-term debt 465,348 510,003 Operating lease liabilities 71,155 72,305 Deferred income taxes 36,202 38,662 Other long-term liabilities 68,024 63,526 Total liabilities 835,046 904,966 Commitments and contingencies Shareholders’ equity Preferred stock, par value $ 1.00 per share; 5,000 shares authorized; none issued or outstanding at July 2, 2023 and January 1, 2023 — — Common stock, par value $ 0.10 per share; 120,000 shares authorized; 58,112 and 58,106 shares issued and outstanding at July 2, 2023 and January 1, 2023, respectively 5,811 5,811 Additional paid-in capital 247,797 244,159 Retained earnings 292,561 278,639 Accumulated other comprehensive loss – foreign currency translation ( 132,484 ) ( 138,775 ) Accumulated other comprehensive loss – cash flow hedge ( 150 ) ( 749 ) Accumulated other comprehensive loss – pension liability ( 28,627 ) ( 27,548 ) Total shareholders’ equity 384,908 361,537 Total liabilities and shareholders’ equity $ 1,219,954 $ 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 SIX MONTHS ENDED JULY 2, 2023 JULY 3, 2022 JULY 2, 2023 JULY 3, 2022 Net sales $ 329,582 $ 346,605 $ 625,374 $ 634,607 Cost of sales 217,796 229,899 417,715 411,102 Gross profit 111,786 116,706 207,659 223,505 Selling, general and administrative expenses 85,522 81,371 171,776 159,863 Restructuring, asset impairment and other charges ( 2,644 ) 810 ( 2,502 ) 1,697 Operating income 28,908 34,525 38,385 61,945 Interest expense 8,318 7,190 16,823 14,040 Other (income) expense, net ( 528 ) 1,394 972 1,564 Income before income tax expense 21,118 25,941 20,590 46,341 Income tax expense 5,321 9,123 5,507 16,230 Net income $ 15,797 $ 16,818 $ 15,083 $ 30,111 Earnings per share – basic $ 0.27 $ 0.28 $ 0.26 $ 0.51 Earnings per share – diluted $ 0.27 $ 0.28 $ 0.26 $ 0.51 Common shares outstanding – basic 58,074 59,368 58,077 59,308 Common shares outstanding – diluted 58,170 59,368 58,180 59,308 See accompanying notes to consolidated condensed financial statements. 4 Table of Contents INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) THREE MONTHS ENDED SIX MONTHS ENDED JULY 2, 2023 JULY 3, 2022 JULY 2, 2023 JULY 3, 2022 Net income $ 15,797 $ 16,818 $ 15,083 $ 30,111 Other comprehensive income (loss), after tax: Foreign currency translation adjustment 1,361 ( 36,670 ) 6,291 ( 49,854 ) Reclassification from accumulated other comprehensive loss – discontinued cash flow hedge 300 540 599 1,181 Pension liability adjustment ( 800 ) 3,842 ( 1,079 ) 5,381 Other comprehensive income (loss) 861 ( 32,288 ) 5,811 ( 43,292 ) Comprehensive income (loss) $ 16,658 $ ( 15,470 ) $ 20,894 $ ( 13,181 ) 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) SIX MONTHS ENDED JULY 2, 2023 JULY 3, 2022 OPERATING ACTIVITIES: Net income $ 15,083 $ 30,111 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 20,146 20,836 Share-based compensation expense 5,125 4,327 Gain on disposal of property, plant and equipment, net ( 2,541 ) — Deferred income taxes and other ( 618 ) 8,941 Amortization of acquired intangible assets 2,584 2,613 Working capital changes: Accounts receivable 17,770 ( 7,782 ) Inventories 19,943 ( 63,226 ) Prepaid expenses and other current assets ( 3,611 ) ( 5,696 ) Accounts payable and accrued expenses ( 25,957 ) ( 2,832 ) Cash provided by (used in) operating activities 47,924 ( 12,708 ) INVESTING ACTIVITIES: Capital expenditures ( 11,331 ) ( 9,127 ) Proceeds from sale of property, plant and equipment 6,593 — Cash used in investing activities ( 4,738 ) ( 9,127 ) FINANCING ACTIVITIES: Repayments of long-term debt ( 112,107 ) ( 79,682 ) Borrowing of long-term debt 67,000 109,377 Tax withholding payments for share-based compensation ( 1,487 ) ( 398 ) Repurchase of common stock — ( 5,582 ) Dividends paid ( 1,161 ) ( 1,187 ) Finance lease payments ( 1,308 ) ( 1,010 ) Cash (used in) provided by financing activities ( 49,063 ) 21,518 Net cash used in operating, investing and financing activities ( 5,877 ) ( 317 ) Effect of exchange rate changes on cash 1,248 ( 5,282 ) CASH AND CASH EQUIVALENTS: Net decrease ( 4,629 ) ( 5,599 ) Balance, beginning of period 97,564 97,252 Balance, end of period $ 92,935 $ 91,653 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 six-month periods ended July 2, 2023 and July 3, 2022 both include 26 weeks. The three-month periods ended July 2, 2023 and July 3, 2022 both include 13 weeks. Risks and Uncertainties Global economic challenges, including the impact of 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. The investigation of the Cyber Event was substantially completed early in the third quarter of 2023. Recently Adopted Accounting Pronouncements In July 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2023-03, “ Presentation of Financial Statements (Topic 205), Income Statement — Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), Compensation — Stock Compensation (Topic 718) .” This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Accounting Bulletin (“SAB”) number 120. The ASU provides clarifying guidance related to employee and non-employee share-based payment accounting, including guidance related to spring-loaded awards. ASU 2023-03 is effective upon issuance. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. In June 2022, the Financial Accounting Standards Board issued 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 % of total revenue for both six-month periods ended July 2, 2023 and July 3, 2022. The remaining 2 % of revenue was generated from the installation of carpet and other flooring-related material for both 2023 and 2022 six-month periods. Disaggregation of Revenue For the six months ended July 2, 2023 and July 3, 2022, revenue from the Company’s customers is broken down by geography as follows: Six Months Ended Geography July 2, 2023 July 3, 2022 Americas 59.2 % 57.2 % Europe 29.9 % 29.8 % Asia-Pacific 10.9 % 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: July 2, 2023 January 1, 2023 (in thousands) Finished goods $ 207,336 $ 209,478 Work-in-process 18,456 15,463 Raw materials 62,389 81,386 Inventories, net $ 288,181 $ 306,327 9 Table of Contents NOTE 4 – EARNINGS PER SHARE The Company computes basic earnings per share (“EPS”) by dividing net income by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings. The Company includes all unvested stock awards 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 Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands, except per share data) Numerator: Net income $ 15,797 $ 16,818 $ 15,083 $ 30,111 Less: distributed and undistributed earnings available to participating securities ( 189 ) ( 286 ) ( 207 ) ( 470 ) Distributed and undistributed earnings available to common shareholders $ 15,608 $ 16,532 $ 14,876 $ 29,641 Denominator: Weighted average shares outstanding 57,381 58,358 57,279 58,380 Participating securities 693 1,010 798 928 Shares for basic EPS 58,074 59,368 58,077 59,308 Dilutive effect of non-participating securities 96 — 103 — Shares for diluted EPS 58,170 59,368 58,180 59,308 Basic EPS $ 0.27 $ 0.28 $ 0.26 $ 0.51 Diluted EPS $ 0.27 $ 0.28 $ 0.26 $ 0.51 For the three and six months ended July 2, 2023, 1,476,804 and 1,322,278 non-participating securities, respectively, 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 respective periods. 10 Table of Contents NOTE 5 – LONG-TERM DEBT Long-term debt consisted of the following: July 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 $ 6,994 5.66 % $ 24,250 5.29 % Term loan borrowings 174,138 6.46 % 202,082 5.84 % Total borrowings under Syndicated Credit Facility 181,132 6.43 % 226,332 5.78 % 5.50% Senior Notes due 2028 300,000 5.50 % 300,000 5.50 % Total debt 481,132 526,332 Less: Unamortized debt issuance costs ( 5,562 ) ( 6,118 ) Total debt, net 475,570 520,214 Less: Current portion of long-term debt ( 10,222 ) ( 10,211 ) Total long-term debt, net $ 465,348 $ 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 July 2, 2023 and January 1, 2023, the Company had $ 1.6 million in letters of credit outstanding under the Facility. As of both July 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. The fair value of borrowings under the Facility is estimated using observable market rates and is considered Level 2 within the fair value hierarchy. 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 July 2, 2023, the estimated fair value of the Senior Notes was $ 245.0 million, compared with a carrying value recorded in the Company’s consolidated condensed balance sheet of $ 296.2 million ($ 300.0 million excluding $ 3.8 million of 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 July 2, 2023 and January 1, 2023, the unamortized debt issuance costs recorded as a reduction of long-term debt were $ 5.6 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 $ 1.6 million and $ 1.8 million as of July 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 July 2, 2023 and January 1, 2023, the remaining accumulated other comprehensive loss associated with the terminated interest rate swaps, before tax, was $ 0.2 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 $ 0.2 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 six months ended July 2, 2023 and July 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 share-based plans, 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 ) Net income — — — 15,797 — — — Issuances of stock related to restricted share units and performance shares 5 1 ( 1 ) — — — — Restricted stock issuances 102 10 697 — — — — Unrecognized compensation expense related to restricted stock awards — — ( 708 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 581 ) — — — Compensation expense related to share-based plans, net of forfeitures and shares received for tax withholdings ( 48 ) ( 5 ) 1,808 — — — — Pension liability adjustment — — — — ( 800 ) — — Foreign currency translation adjustment — — — — — 1,361 — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 300 Balance, at July 2, 2023 58,112 $ 5,811 $ 247,797 $ 292,561 $ ( 28,627 ) $ ( 132,484 ) $ ( 150 ) 14 Table of Contents SHARES COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS PENSION LIABILITY FOREIGN CURRENCY TRANSLATION ADJUSTMENT CASH FLOW HEDGE (in thousands) Balance, at January 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 — — — — Unrecognized compensation expense related to restricted stock awards — — ( 3,996 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 592 ) — — — Compensation expense related to share-based plans, net of shares received for tax withholdings ( 30 ) ( 2 ) 1,787 — — — — Pension liability adjustment — — — — 1,539 — — Foreign currency translation adjustment — — — — — ( 13,184 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 641 Balance, at April 3, 2022 59,328 $ 5,933 $ 254,867 $ 274,135 $ ( 52,349 ) $ ( 113,625 ) $ ( 2,081 ) Net income — — — 16,818 — — — Restricted stock issuances 198 20 2,533 — — — — Unrecognized compensation expense related to restricted stock awards — — ( 2,553 ) — — — — Cash dividends declared, $ 0.01 per common share — — — ( 595 ) — — — Compensation expense related to share-based plans, net of forfeitures ( 14 ) ( 1 ) 2,145 — — — — Share repurchases ( 415 ) ( 42 ) ( 5,540 ) — — — — Pension liability adjustment — — — — 3,842 — — Foreign currency translation adjustment — — — — — ( 36,670 ) — Reclassification out of accumulated other comprehensive loss – discontinued cash flow hedge — — — — — — 540 Balance, at July 3, 2022 59,097 $ 5,910 $ 251,452 $ 290,358 $ ( 48,507 ) $ ( 150,295 ) $ ( 1,541 ) Repurchase of Common Stock In the second quarter of 2022, the Company adopted a new share repurchase program in which the Company is authorized to repurchase up to $ 100 million of its outstanding shares of common stock. The program has no specific expiration date. No shares of common stock were repurchased during the six months ended July 2, 2023. During the first six months of 2022, the Company repurchased 415,223 shares of common stock at a weighted average price of $ 13.44 per share pursuant to this program. Restricted Stock Awards During the six months ended July 2, 2023, the Company granted restricted stock awards for 102,300 shares of common stock. 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 $ 2.4 million and $ 2.6 million for the six months ended July 2, 2023 and July 3, 2022, respectively. The Company has reduced its expense for any restricted stock forfeited during the period. 15 Table of Contents The following table summarizes restricted stock outstanding as of July 2, 2023, as well as activity during the six months then ended: Restricted Shares Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 1,006,400 $ 13.91 Granted 102,300 6.92 Vested ( 405,100 ) 14.43 Forfeited or canceled ( 14,700 ) 13.58 Outstanding at July 2, 2023 688,900 $ 12.57 As of July 2, 2023, the unrecognized total compensation cost related to unvested restricted stock was $ 3.8 million. That cost is expected to be recognized by the first quarter of 2025. Restricted Share Unit Awards During the six months ended July 2, 2023, the Company granted awards for 593,000 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 $ 1.0 million for the six months ended July 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 July 2, 2023, as well as activity during the six months then ended: Restricted Share Units Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 — $ — Granted 593,000 10.36 Vested ( 2,100 ) 10.80 Forfeited or canceled ( 9,100 ) 10.80 Outstanding at July 2, 2023 581,800 $ 10.36 As of July 2, 2023, the unrecognized total compensation cost related to unvested restricted share units was $ 5.1 million. That cost is expected to be recognized by the end of 2026. 16 Table of Contents Performance Share Awards During the six months ended July 2, 2023, 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 July 2, 2023, as well as the activity during the six 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 ( 82,300 ) 15.11 Forfeited or canceled ( 190,100 ) 14.84 Outstanding at July 2, 2023 1,118,700 $ 12.36 Compensation expense related to the performance shares was $ 1.7 million for both six-month periods ended July 2, 2023 and July 3, 2022. The Company has reduced its expense for any performance shares forfeited during the period. Unrecognized compensation expense related to these performance shares was approximately $ 8.1 million as of July 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 $ 0.5 million for the six months ended July 2, 2023. 17 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 July 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 July 2, 2023 and January 1, 2023: July 2, 2023 January 1, 2023 Balance Sheet Location Operating Leases Finance Leases Operating Leases Finance Leases (in thousands) Operating lease right-of-use assets $ 79,987 $ 81,644 Current portion of operating lease liabilities $ 11,671 $ 11,857 Operating lease liabilities 71,155 72,305 Total operating lease liabilities $ 82,826 $ 84,162 Property, plant and equipment, net $ 5,726 $ 5,845 Accrued expenses $ 2,182 $ 2,101 Other long-term liabilities 3,930 4,138 Total finance lease liabilities $ 6,112 $ 6,239 Lease Costs Three Months Ended Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Finance lease cost: Amortization of right-of-use assets $ 705 $ 538 $ 1,360 $ 1,055 Interest on lease liabilities 85 41 145 70 Operating lease cost 4,698 4,649 9,401 9,567 Short-term lease cost 391 211 747 438 Variable lease cost 608 782 1,341 1,398 Total lease cost $ 6,487 $ 6,221 $ 12,994 $ 12,528 18 Table of Contents Other Supplemental Information Three Months Ended Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 55 $ 32 $ 107 $ 53 Operating cash flows from operating leases 4,440 4,813 8,641 9,448 Financing cash flows from finance leases 665 531 1,308 1,010 Right-of-use assets obtained in exchange for new finance lease liabilities 479 1,961 1,036 2,343 Right-of-use assets obtained in exchange for new operating lease liabilities 2,842 6,803 3,963 6,823 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 July 2, 2023 and January 1, 2023: July 2, 2023 January 1, 2023 Weighted-average remaining lease term – finance leases (in years) 3.66 3.82 Weighted-average remaining lease term – operating leases (in years) 8.92 9.29 Weighted-average discount rate – finance leases 4.41 % 3.79 % Weighted-average discount rate – operating leases 5.97 % 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 six months ended July 2, 2023) $ 6,892 $ 1,178 2024 15,169 2,201 2025 13,247 1,389 2026 12,970 832 2027 10,472 572 Thereafter 50,237 515 Total future minimum lease payments (undiscounted) 108,987 6,687 Less: Present value discount ( 26,161 ) ( 575 ) Total lease liability $ 82,826 $ 6,112 19 Table of Contents NOTE 9 – EMPLOYEE BENEFIT PLANS During the three and six months ended July 2, 2023, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.7 million and $ 1.3 million, respectively. During the three and six months ended July 3, 2022, the Company recorded multi-employer pension expense related to multi-employer contributions of $ 0.6 million and $ 1.3 million, respectively. The following tables provide the components of net periodic benefit cost for the three and six months ended July 2, 2023 and July 3, 2022: Three Months Ended Six Months Ended Defined Benefit Retirement Plans (Europe) July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Interest cost $ 1,778 $ 857 $ 3,513 $ 1,773 Expected return on plan assets ( 2,015 ) ( 990 ) ( 3,979 ) ( 2,049 ) Amortization of prior service cost 30 30 59 62 Amortization of net actuarial losses 228 256 451 531 Net periodic benefit cost $ 21 $ 153 $ 44 $ 317 Three Months Ended Six Months Ended Salary Continuation Plan July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Interest cost $ 284 $ 193 $ 567 $ 386 Amortization of net actuarial losses 48 140 97 279 Net periodic benefit cost $ 332 $ 333 $ 664 $ 665 Three Months Ended Six Months Ended nora Defined Benefit Plan July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Service cost $ 115 $ 211 $ 229 $ 436 Interest cost 275 105 547 215 Amortization of net actuarial (gains) losses ( 111 ) 48 ( 220 ) 98 Net periodic benefit cost $ 279 $ 364 $ 556 $ 749 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 (income) expense, net, in the consolidated condensed statements of operations. 20 Table of Contents NOTE 10 – GOODWILL AND INTANGIBLE ASSETS The ending balance and the change in the carrying amounts of goodwill for the six months ended July 2, 2023 are as follows: Goodwill (1) (in thousands) Balance, at January 1, 2023 $ 102,417 Foreign currency translation (2) 1,881 Balance, at July 2, 2023 $ 104,298 (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 $ 58.3 million and $ 59.8 million at July 2, 2023 and January 1, 2023, respectively. 21 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 and six months ended July 2, 2023, were $ 24.7 million and $ 47.3 million, respectively, and intersegment revenues for the three and six months ended July 3, 2022, were $ 19.4 million and $ 36.7 million, respectively. Intersegment revenues are eliminated from net sales presented below since these amounts are not included in the information provided to the CODM. The Company has determined that it has two reportable segments – AMS and EAAA, as each operating segment meets the quantitative thresholds defined in the accounting guidance. Segment information for the three and six months ended July 2, 2023 and July 3, 2022 is presented in the following table: Three Months Ended Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Net sales AMS $ 201,281 $ 206,810 $ 370,522 $ 363,319 EAAA 128,301 139,795 254,852 271,288 Total net sales $ 329,582 $ 346,605 $ 625,374 $ 634,607 Segment AOI AMS $ 24,034 $ 28,389 $ 35,303 $ 49,527 EAAA 3,827 10,131 7,756 19,635 Depreciation and amortization AMS $ 4,424 $ 4,183 $ 8,817 $ 8,241 EAAA 5,731 5,983 11,329 12,595 Total depreciation and amortization $ 10,155 $ 10,166 $ 20,146 $ 20,836 22 Table of Contents A reconciliation of the Company’s total operating segment assets to the corresponding consolidated amounts follows: July 2, 2023 January 1, 2023 (in thousands) Assets AMS $ 568,933 $ 588,110 EAAA 636,037 652,921 Total segment assets 1,204,970 1,241,031 Corporate assets 106,931 110,495 Eliminations ( 91,947 ) ( 85,023 ) Total reported assets $ 1,219,954 $ 1,266,503 Reconciliations of operating income to income before income tax expense and segment AOI are presented as follows: Three Months Ended Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) AMS operating income $ 24,752 $ 28,413 $ 33,467 $ 49,663 EAAA operating income 4,156 6,112 4,918 12,282 Consolidated operating income 28,908 34,525 38,385 61,945 Interest expense 8,318 7,190 16,823 14,040 Other (income) expense, net ( 528 ) 1,394 972 1,564 Income before income tax expense $ 21,118 $ 25,941 $ 20,590 $ 46,341 Three Months Ended July 2, 2023 Three Months Ended July 3, 2022 AMS EAAA AMS EAAA (in thousands) Operating income $ 24,752 $ 4,156 $ 28,413 $ 6,112 Purchase accounting amortization — 1,301 — 1,271 Thailand plant closure inventory write-down — — — 938 Cyber Event impact 264 173 — — Property casualty loss (1) ( 1,300 ) — — — Restructuring, asset impairment, severance and other charges 318 ( 1,803 ) ( 24 ) 1,810 AOI $ 24,034 $ 3,827 $ 28,389 $ 10,131 (1) Represents insurance recovery of loss recognized in the first quarter of 2023. Six Months Ended July 2, 2023 Six Months Ended July 3, 2022 AMS EAAA AMS EAAA (in thousands) Operating income $ 33,467 $ 4,918 $ 49,663 $ 12,282 Purchase accounting amortization — 2,584 — 2,613 Thailand plant closure inventory write-down — — — 2,053 Cyber Event impact 492 373 — — Restructuring, asset impairment, severance and other charges 1,344 ( 119 ) ( 136 ) 2,687 AOI $ 35,303 $ 7,756 $ 49,527 $ 19,635 23 Table of Contents NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest amounted to $ 14.7 million and $ 11.2 million for the six months ended July 2, 2023 and July 3, 2022, respectively. Income tax payments, net of refunds, amounted to $ 10.1 million and $ 6.8 million for the six months ended July 2, 2023 and July 3, 2022, respectively. See Note 8 entitled “Leases” for supplemental disclosures related to finance and operating leases. 24 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 six months ended July 2, 2023, the Company recorded a total income tax provision of $ 5.5 million on pre-tax income of $ 20.6 million resulting in an effective tax rate of 26.7 %, as compared to a total income tax provision of $ 16.2 million on pre-tax income of $ 46.3 million resulting in an effective tax rate of 35.0 % during the six months ended July 3, 2022. The decrease in the effective tax rate for the period ended July 2, 2023, as compared to the period ended July 3, 2022, was primarily due to favorable changes related to the cash surrender value of Company-owned life insurance, non-recurring non-deductible charges related to the closure of the Company’s manufacturing facility in Thailand incurred in the first half of 2022 and favorable changes related to foreign exchange movements. This decrease was partially offset by a non-recurring favorable change to unrecognized tax benefits in the period ended July 3, 2022, and an increase in the valuation allowance on interest carryforwards. In the first six months of 2023, the Company increased its liability for unrecognized tax benefits by $ 0.5 million. As of July 2, 2023, the Company had accrued approximately $ 6.2 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 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 $ 1.2 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. 25 Table of Contents NOTE 14 – ITEMS RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE LOSS Amounts reclassified out of accumulated other comprehensive loss (“AOCI”), before tax, to the consolidated condensed statements of operations during the three and six months ended July 2, 2023 and July 3, 2022 are reflected in the tables below: Three Months Ended Statement of Operations Location July 2, 2023 July 3, 2022 (in thousands) Interest rate swap contracts loss Interest expense $ ( 393 ) $ ( 878 ) Amortization of benefit plan net actuarial losses and prior service cost Other (income) expense, net ( 195 ) ( 474 ) Total loss reclassified from AOCI $ ( 588 ) $ ( 1,352 ) Six Months Ended Statement of Operations Location July 2, 2023 July 3, 2022 (in thousands) Interest rate swap contracts loss Interest expense $ ( 786 ) $ ( 1,771 ) Amortization of benefit plan net actuarial losses and prior service cost Other (income) expense, net ( 387 ) ( 970 ) Total loss reclassified from AOCI $ ( 1,173 ) $ ( 2,741 ) 26 Table of Contents NOTE 15 – RESTRUCTURING AND OTHER CHARGES Restructuring, asset impairment and other charges were as follows: Three Months Ended Six Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 (in thousands) Restructuring, asset impairment and other charges (1) $ ( 2,644 ) $ 810 $ ( 2,502 ) $ 1,697 (1) Restructuring, asset impairment and other charges are attributable to the EAAA reportable segment. 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 $ 3,295 $ 6,050 Cumulative charges incurred to date (1) 2,281 474 3,295 6,050 (1) Charges are attributable to the EAAA reportable segment. 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 ) 174 178 Deductions ( 300 ) ( 160 ) — ( 460 ) Charged to other accounts — — ( 174 ) ( 174 ) Balance, at July 2, 2023 $ — $ — $ — $ — The Company recognized a gain of $ 2.7 million on the sale of the Thailand facility during the three months ended July 2, 2023. See Note 16 entitled “Assets Disposed” for additional information. In addition, during the six months ended July 3, 2022, in conjunction with the closure of its Thailand facility, the Company recorded a write-down of inventory of $ 2.1 million within cost of sales in the consolidated condensed statements of operations. The Company completed the 2021 restructuring plan in the second quarter of 2023, following the sale of the Thailand manufacturing facility, as described in Note 16 entitled “Assets Disposed,” 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. 27 Table of Contents NOTE 16 – ASSETS DISPOSED 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. During the second quarter of 2023, the Company completed the sale of the Thailand manufacturing facility for a selling price of $ 6.6 million and recognized a gain of $ 2.7 million. The gain is recorded in restructuring, asset impairment and other charges in the consolidated condensed statements of operations and is attributable to the EAAA reportable segment. The Company determined that the Thailand facility sale did not meet the criteria for classification as discontinued operations. 28 Table of Contents NOTE 17 – COMMITMENTS AND CONTINGENCIES From time to time, we are a party to legal proceedings, whether arising in the ordinary course of business or otherwise. The disclosure under the headings “Lawsuit by Former CEO in Connection with Termination” and “Putative Class Action Lawsuit” set forth in Note 18 to the consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended January 1, 2023 is incorporated by reference herein. In the lawsuit by the former CEO, Mr. Gould filed a motion for reconsideration of the Court’s grant of summary judgment in favor of the Company on Mr. Gould’s breach of contract claim. On July 31, 2023, the Court denied that motion for reconsideration. Also on July 31, 2023, the Company filed a motion to dismiss without prejudice its counterclaim against Mr. Gould for breach of fiduciary duty. On August 2, 2023, the Court granted that motion to dismiss, resulting in a final judgment in the trial court, subject to possible appeal by Mr. Gould. The Company believes Mr. Gould’s lawsuit and any appeal therefrom is without merit and intends to defend vigorously against it. In the putative class action, the Court preliminarily approved a settlement of the lawsuit for $ 7.5 million, and the Company’s insurers funded the settlement amount into escrow. As a result, in the second quarter of 2023, the Company reversed the $ 7.5 million asset and liability that were previously recorded in the first quarter of 2023. Putative class member proofs of claims are due by September 13, 2023, and the Court will hold a hearing on final approval of the settlement on September 18, 2023. 29 Table of Contents