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OFFON

INTERFACE, INC.

(TILE)
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INTERFACE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/10/2021 | 04:08pm EDT
Our discussions below in this Item 2 are based upon the more detailed
discussions about our business, operations and financial condition included in
our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, under
Part II, Item 7 of that Form 10-K. Our discussions here focus on our results
during the quarter and six months ended, or as of, July 4, 2021, and the
comparable periods of 2020 for comparison purposes, and, to the extent
applicable, any material changes from the information discussed in that
Form 10-K or other important intervening developments or information since that
time. These discussions should be read in conjunction with that Form 10-K for
more detailed and background information. The six-month period ended July 4,
2021 includes 26 weeks, and the six-month period ended July 5, 2020 includes 27
weeks. The three-month periods ended July 4, 2021 and July 5, 2020 both include
13 weeks.
Forward-Looking Statements
This report contains statements which may constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include risks and uncertainties associated with the
ongoing COVID-19 pandemic and the economic conditions in the commercial
interiors industry as well as the risks and uncertainties discussed under the
heading "Risk Factors" included in Part I, Item 1A of the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 2021. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
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Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic, and the virus continues to impact areas where we operate and sell our
products and services. The COVID-19 pandemic has had material adverse effects on
our business, results of operations, and financial condition. The duration of
the pandemic will ultimately determine the extent to which our operations are
impacted.
During the second quarter of 2021, the COVID-19 pandemic had less of an impact
on our overall global operations and financial results as COVID-19 vaccination
rates increased, COVID-19 related restrictions loosened, and certain countries
began to experience a rebound in economic activity. Our global supply chain and
manufacturing experienced increased impacts of COVID-19 in the quarter. These
impacts included raw material shortages, raw material cost increases, higher
freight costs, shipping delays, and labor shortages - particularly in the United
States. These impacts to our supply chain and manufacturing increased our costs
and adversely affected our gross margins.
During the second quarter of 2021, consolidated net sales increased 13.6%
compared to the same period last year. Higher sales are primarily in the
corporate office and retail market segments. During the second quarter of 2021,
we began a phased re-opening of our corporate headquarters and global
administrative offices and our salesforce and administrative staff are actively
working in these locations in accordance with the Company's ongoing safety
measures, as well as any local government orders and directives which remain
very fluid.
During the first six months of 2021, the COVID-19 pandemic continued to impact
our global operations, as consolidated net sales increased 0.1% compared to the
same period last year. Net sales for the first six months of 2021 were impacted
by lower sales in the corporate office market segment during the first quarter
of 2021. During the six months ended July 4, 2021, the Company recorded $0.9
million of net severance costs in connection with its programs to mitigate the
impact of the COVID-19 pandemic as discussed above, which are included in
selling, general and administrative expenses in the Consolidated Condensed
Statements of Operations.
General
In the first quarter of 2021, the Company largely completed its integration of
the nora acquisition, and integration of its European and Asia-Pacific
commercial areas and determined that it has two operating and reportable
segments - namely Americas ("AMS") and Europe, Africa, Asia and Australia
(collectively "EAAA"). The AMS operating segment is unchanged from prior year
and continues to include the United States, Canada and Latin America geographic
areas. See Part I, Item 1, Note 11 of this Quarterly Report on Form 10-Q
entitled "Segment Information" for additional information. The results of
operations discussion below also includes segment information.
During the quarter ended July 4, 2021, consolidated net sales were $294.8
million compared with net sales of $259.5 million in the second quarter last
year. During the first six months of 2021, consolidated net sales were $548.0
million compared to $547.7 million in the first six months of last year. Higher
net sales during the second quarter of 2021, primarily in the corporate office
market segment was due to higher corporate spending and reinvestment. As
discussed above, the COVID-19 pandemic continued to impact the first six months
of 2021. Fluctuations in currency exchange rates had a positive impact on net
sales of approximately $13.1 million for the second quarter of 2021 and a
positive impact of $25.0 million for the first six months of 2021 compared to
the second quarter and first six months of last year, respectively, mostly
driven by the strengthening of the Euro, British Pound sterling, Australian
dollar and Chinese Renminbi against the U.S. dollar.
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Goodwill, Intangible Asset and Fixed Asset Impairment
During the first six months of 2021, there were no indicators of goodwill or
intangible asset impairment. During the first quarter of 2020, the Company
recognized a charge of $121.3 million for the impairment of goodwill and certain
intangible assets. See Note 10 entitled "Goodwill and Intangible Assets" of Part
I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Results of Operations
Consolidated
The following table presents, as a percentage of net sales, certain items
included in our consolidated condensed statements of operations for the three
and six-month periods ended July 4, 2021 and July 5, 2020:
                                                            Three Months Ended                                    Six Months Ended
                                                July 4, 2021               July 5, 2020              July 4, 2021               July 5, 2020
Net sales                                              100.0  %                     100.0  %                100.0  %                     100.0  %
Cost of sales                                           63.0                         62.5                    62.6                         61.4
Gross profit on sales                                   37.0                         37.5                    37.4                         38.6
Selling, general and administrative expenses            27.1                         30.9                    29.0                         30.6
Restructuring charges                                    0.0                         (0.1)                      -                         (0.2)
Goodwill and intangible asset impairment
charge                                                     -                            -                       -                         22.1
Operating income (loss)                                  9.9                          6.7                     8.4                        (13.9)
Interest/Other expenses                                  2.7                          3.9                     2.9                          3.1
Income (loss) before tax expense                         7.2                          2.8                     5.5                        (17.0)
Income tax expense                                       2.0                          1.0                     1.4                          0.8
Net income (loss)                                        5.2  %                       1.8  %                  4.1  %                     (17.8) %


Net Sales
Below is information regarding our consolidated net sales, and analysis of those
results, for the three and six-month periods ended July 4, 2021, and July 5,
2020:
                                          Three Months Ended                      Percentage                      Six Months Ended                       Percentage
                                  July 4, 2021           July 5, 2020               Change               July 4, 2021           July 5, 2020               Change
                                            (in thousands)                                                         (in thousands)
Consolidated net sales          $     294,785$     259,504                     13.6  %       $     548,045$     547,673                      0.1  %


For the quarter ended July 4, 2021, consolidated net sales increased $35.3
million (13.6%) versus the comparable period in 2020, including positive
currency fluctuations of approximately $13.1 million (5.1%). The sales increase
was primarily due to higher net sales in the corporate, retail, healthcare,
education and transportation market segments. Currency fluctuations had a
positive impact on second quarter 2021 sales compared to the second quarter of
2020 mostly due to the strengthening of the Euro, British Pound sterling,
Australian dollar and Chinese Renminbi against the U.S. dollar.
For the six months ended July 4, 2021, consolidated net sales increased
$0.4 million (0.1%) versus the comparable period in 2020, including positive
currency fluctuations of approximately $25.0 million (4.6%). The sales increase
was primarily due to higher sales in the retail and transportation market
segments partially offset by decreases in the hospitality and corporate market
segments. Currency fluctuations had a positive impact on the first six months of
2021 sales compared to the same period last year mostly due to the strengthening
of the Euro, British Pound sterling, Australian dollar and Chinese Renminbi
against the U.S. dollar.



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Cost and Expenses
The following table presents our consolidated cost of sales and selling, general
and administrative expenses for the three and six-month periods ended July 4,
2021, and July 5, 2020:
                                      Three Months Ended                      Percentage                      Six Months Ended                       Percentage
                              July 4, 2021           July 5, 2020               Change               July 4, 2021           July 5, 2020               Change
                                        (in thousands)                                                         (in thousands)
Cost of sales               $     185,793$     162,210                     14.5  %       $     343,015$     336,068                      2.1  %
Selling, general and
administrative expenses            79,830                 80,058                     (0.3) %             159,132                167,741                 

(5.1) %



For the quarter ended July 4, 2021, consolidated cost of sales increased $23.6
million (14.5%) compared to the second quarter of 2020, primarily due to higher
net sales and the negative impact of currency fluctuations of approximately $8.8
million (5.4%) on the year-over-year comparison. As a percentage of net sales,
our cost of sales increased to 63.0% for the second quarter of 2021 versus 62.5%
for the second quarter of 2020, primarily due to price increases for certain raw
materials.
For the six months ended July 4, 2021, consolidated cost of sales increased
$6.9 million (2.1%) versus the comparable period in 2020, primarily due to
higher net sales and the negative impact of currency fluctuations of
approximately $16.4 million (4.9%) on the year-over-year comparison. As a
percentage of net sales, our cost of sales increased to 62.6% for the first six
months of 2021 versus 61.4% for the first six months of 2020, primarily due to
price increases for certain raw materials.
For the quarter ended July 4, 2021, consolidated selling, general and
administrative ("SG&A") expenses decreased $0.2 million (0.3%) versus the
comparable period in 2020. Currency translation had a $2.9 million (3.6%)
negative impact on the year-over-year comparison. SG&A expenses were lower for
the second quarter of 2021 primarily due to (1) lower asset impairment and exit
activity costs of $5.0 million compared to the prior year period as fiscal 2020
included one-time costs to exit certain FLOR design center locations and (2)
lower severance costs of $3.5 million due to employee separations in the prior
year period to mitigate the impacts of COVID-19. These decreases were partially
offset by higher labor costs in the second quarter of 2021 as performance-based
compensation costs were lower in the prior year period due to the impacts of
COVID-19. As a percentage of sales, SG&A expenses decreased to 27.1% for the
second quarter of 2021 versus 30.9% for the second quarter of 2020.
For the six months ended July 4, 2021, consolidated SG&A expenses decreased
$8.6 million (5.1%) versus the comparable period in 2020. Currency translation
had a $5.7 million (3.4%) negative impact on the year-over-year comparison. SG&A
expenses were lower for the first six months of 2021 primarily due to (1) lower
asset impairment and exit activity costs of $4.7 million compared to the prior
year period as fiscal 2020 included one-time costs to exit certain FLOR design
center locations, (2) lower severance costs of $2.0 million due to the prior
year period impacts of COVID-19 as discussed above, and (3) lower professional
fees of $4.2 million and lower marketing and other one-time costs of $2.7
million. These decreases were partially offset by higher performance-based
compensation as these costs were lower in the prior year period due to the
impacts of COVID-19. As a percentage of sales, SG&A expenses decreased to 29.0%
for the first six months of 2021 versus 30.6% for the first six months of 2020.
Interest Expense
For the quarter ended July 4, 2021, interest expense increased $2.3 million,
from $5.0 million in the comparable period last year to $7.3 million. For the
six months ended July 4, 2021, interest expense increased $3.9 million, from
$10.6 million in the comparable period last year to $14.5 million. The increase
in both the three and six months ended July 4, 2021 was primarily due to higher
fixed-rate interest expense on the senior notes debt, which replaced
variable-rate debt under the credit facility, and deferred losses on terminated
interest rate swaps that were reclassified from accumulated other comprehensive
loss into interest expense during the respective periods.
Other Expense
Other expenses decreased $4.5 million and $5.3 million during the three and six
months ended July 4, 2021, respectively, compared to 2020 primarily due to a
$4.2 million write-down of damaged raw material inventory in 2020, which
resulted from a fire at a leased storage facility.

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Segment Operating Results
As discussed above, the Company has two operating and reportable segments - AMS
and EAAA. Segment information presented below for fiscal year 2020 has been
restated to conform to the new reportable segment structure.
AMS Segment - Net Sales and Adjusted Operating Income ("AOI")
The following table presents AMS segment net sales and AOI for the three and six
month periods ended July 4, 2021, and July 5, 2020:
                                        Three Months Ended                                                      Six Months Ended
                                July 4, 2021           July 5, 2020         Percentage Change          July 4, 2021           July 5, 2020         Percentage Change
                                          (in thousands)                                                         (in thousands)
AMS segment net sales         $     156,665$     151,222                      3.6  %       $     283,632$     309,313                     (8.3) %
AMS segment AOI(1)                   21,098                 23,942                    (11.9) %              33,011                 47,492                    (30.5) %


(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items
related to goodwill and intangible asset impairment charges, purchase accounting
amortization, restructuring, asset impairment, severance and other costs. See
Note 11 entitled "Segment Information" of Part 1, Item 1 of this Quarterly
Report on Form 10-Q for additional information.
During the second quarter of 2021, net sales in AMS increased 3.6% versus the
comparable period in 2020 primarily due to higher sales in the retail,
healthcare and transportation market segments, partially offset by decreases in
the hospitality and public buildings market segments.
During the first six months of 2021, net sales in AMS decreased 8.3% versus the
comparable period in 2020 primarily due to the continued impacts of COVID-19. On
a market segment basis, the AMS sales decrease was most significant in the
corporate, public buildings and hospitality market segments, partially offset by
increases in the retail, transportation and consumer residential market
segments.
AOI in AMS decreased 11.9% during the second quarter of 2021 primarily due to
higher raw material costs, higher freight costs and higher overtime costs
compared to prior year. Higher SG&A costs due to higher performance-based
compensation also contributed to the decrease in AOI.
AOI in AMS decreased 30.5% during the first six months of 2021 primarily due to
lower net sales as discussed above. Lower profit margins due to lower fixed cost
leverage in the plant, higher raw material costs, higher freight costs and
higher overtime costs as well as higher performance-based compensation also
contributed to the decrease in AOI compared to the prior year period.
EAAA Segment - Net Sales and AOI
The following table presents EAAA segment net sales and AOI for the three and
six-month periods ended July 4, 2021, and July 5, 2020:
                                          Three Months Ended                                                      Six Months Ended
                                  July 4, 2021           July 5, 2020         Percentage Change          July 4, 2021           July 5, 2020         Percentage Change
                                            (in thousands)                                                         (in thousands)
EAAA segment net sales          $     138,120$     108,282                     27.6  %       $     264,413$     238,360                     10.9  %
EAAA segment AOI(1)                     9,960                  3,530                    182.2  %              17,971                  9,330                     92.6  %


(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items
related to goodwill and intangible asset impairment charges, purchase accounting
amortization, restructuring, asset impairment, severance and other costs. See
Note 11 entitled "Segment Information" of Part 1, Item 1 of this Quarterly
Report on Form 10-Q for additional information.
During the second quarter of 2021, net sales in EAAA increased 27.6% versus the
comparable period in 2020. Currency fluctuations had an approximately
$12.2 million (11.3%) positive impact on EAAA's second quarter 2021 sales
compared to 2020 due to the strengthening of the Euro, British Pound sterling,
Australian dollar and the Chinese Renminbi against the U.S. dollar. On a market
segment basis, the EAAA sales increase was most significant in the corporate,
retail, education and public buildings market segments.
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During the first six months of 2021, net sales in EAAA increased 10.9% versus
the comparable period in 2020. Currency fluctuations had an approximately
$23.6 million (9.9%) positive impact on EAAA's first six months of 2021 sales
compared to 2020 due to the strengthening of the Euro, British Pound sterling,
Australian dollar and the Chinese Renminbi against the U.S. dollar. On a market
segment basis, the EAAA sales increase was most significant in the public
buildings, retail and education market segments.
AOI in EAAA increased 182.2% during the second quarter of 2021 versus the
comparable period in 2020. Currency fluctuations had an approximately
$1.4 million (12.2%) positive impact on AOI for the quarter. The impact of
higher net sales and higher gross profit margins contributed to the increase in
AOI.
AOI in EAAA increased 92.6% during the first six months of 2021 versus the
comparable period in 2020. Currency fluctuations had an approximately
$3.0 million (12.8%) positive impact on AOI for the six-month period of 2021.
The impact of higher net sales and higher gross profit margins partially offset
by higher SG&A expenses, comprised of higher performance-based compensation and
lower government wage support programs, contributed to the increase in AOI.
                                      -34-
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Liquidity and Capital Resources
General
At July 4, 2021, we had $102.4 million in cash. At that date, we had $264.6
million in term loan borrowing, no revolving loan borrowings, and $1.6 million
in letters of credit outstanding under our Syndicated Credit Facility, and we
had $300.0 million of Senior Notes outstanding. As of July 4, 2021, we had
additional borrowing capacity of $298.4 million under the Syndicated Credit
Facility and $6.0 million of borrowing capacity under other credit facilities in
place at other non-U.S. subsidiaries. We anticipate that our liquidity is
sufficient to meet our obligations for the next 12 months.
The Senior Notes are unsecured and are guaranteed, jointly and severally, by
each of the Company's material domestic subsidiaries, all of which also
guarantee the obligations of the Company under its existing Facility. The
Company's foreign subsidiaries and certain non-material domestic subsidiaries
are considered non-guarantors. Net sales for the non-guarantor subsidiaries were
approximately $148 million and $284 million for the three and six-month periods
ended July 4, 2021, respectively. Total indebtedness of the non-guarantor
subsidiaries was approximately $65 million and $88 million as of July 4, 2021
and January 3, 2021, respectively.
Analysis of Cash Flows
The following table presents a summary of cash flows for the six-month periods
ended July 4, 2021 and July 5, 2020, respectively:
                                                               Six Months Ended
                                                       July 4, 2021       July 5, 2020
                                                                (in thousands)
   Net cash provided by (used in):
   Operating activities                               $      35,118$      32,427
   Investing activities                                     (12,112)           (35,694)
   Financing activities                                     (21,319)            15,624
   Effect of exchange rate changes on cash                   (2,368)            (1,814)
   Net change in cash and cash equivalents                     (681)            10,543
   Cash and cash equivalents at beginning of period         103,053             81,301
   Cash and cash equivalents at end of period         $     102,372$      91,844


Cash provided by operating activities was $35.1 million for the six months ended
July 4, 2021, which represents an increase of $2.7 million from the prior year
comparable period. The increase was primarily due to variable compensation
payouts in 2021 related to 2020 performance that were greatly reduced versus the
payouts that occurred in 2020 related to 2019 performance. The lower variable
compensation payouts in 2021 were offset by a greater use of cash from working
capital. Specifically, increases in accounts payable and accrued expenses that
contributed positively to the change in working capital were offset by higher
inventories and higher prepaid expenses attributable primarily to a build-up of
inventory due to increased customer demand. Increases in accounts receivable as
a result of higher net sales also contributed to the change in working capital
during the year.
Cash used in investing activities was $12.1 million for the six months ended
July 4, 2021, which represents a decrease of $23.6 million from the prior year
comparable period. The decrease from the comparable period was primarily due to
a decrease in capital expenditures due to reduced capital investment as a result
of the impacts of COVID-19.
Cash used in financing activities was $21.3 million for the six months ended
July 4, 2021, which represents a decrease of $36.9 million compared with cash
provided by financing activities in the prior year comparable period. Financing
activities for 2021 include lower revolving loan borrowings offset by higher
repayments of term loan and revolving loan debt. Lower dividend payments in 2021
compared with the prior year comparable period also contributed to the change.

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Forward-Looking Statement on Impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its
impacts on our full year fiscal 2021 results and beyond are uncertain. We
believe the most significant elements of uncertainty are (1) the intensity and
duration of the impact on construction, renovation, and remodeling; (2)
corporate, government, and consumer spending levels and sentiment including but
not limited to when and how employees will be required to work from their office
versus working from home; (3) new and renewed government mandated lockdowns,
quarantine and other procedures in response to resurgences of COVID-19 cases and
variants of the virus; and (4) the ability of our sales channels, supply chain,
manufacturing, suppliers, freight providers and distribution partners to
continue operating through disruptions. Any or all of these factors could
negatively impact our financial position, results of operations, cash flows, and
outlook.

We anticipate revenue growth in the third quarter of fiscal year 2021 compared
with the third quarter of 2020. We are also anticipating continued impacts to
our global supply chain and manufacturing operations. These impacts are
anticipated to include significant cost increases in our raw materials globally
and continued labor shortages - particularly in the United States. The impacts
may also potentially include raw material shortages, higher freight costs,
shipping delays, and other disruption. These impacts to our supply chain and
manufacturing will increase our costs and adversely affect our gross margins,
they may inhibit our ability to manufacture and ship product timely, and at
times they may inhibit our ability to meet customer demands and expectations.

We also plan to continue evaluating our cost structure and global manufacturing
footprint to identify and activate opportunities to decrease costs and optimize
our global cost structure.
Cash flows from operations, cash and cash equivalents, and other sources of
liquidity are expected to be available and sufficient to meet foreseeable cash
requirements. However, the Company's cash flows from operations can be affected
by numerous factors including the uncertainty of COVID-19 and its impact on
global operations, raw material availability and cost, and demand for our
products.
Backlog
As of July 25, 2021, the consolidated backlog of orders was approximately $231.8
million. As disclosed in our Annual Report on Form 10-K for the fiscal year
ended January 3, 2021, backlog was approximately $177.7 million as of February
7, 2021. Disruptions in supply and distribution chains, global travel
restrictions and government shelter in place orders due to the impact of
COVID-19 have resulted in delays of construction projects and flooring
installations in many regions worldwide.
                                      -36-

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