INTERFACE INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
Impact of the COVID-19 pandemic
OnMarch 1, 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in 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, and it is anticipated that this will continue for an indefinite period of time. The duration of the pandemic will ultimately determine the extent to which our operations are impacted. We continue to monitor our operations and have implemented various programs to mitigate the effects on our business including reductions in employees, labor costs, marketing expenses, consulting expenses, travel costs, various other costs, and capital expenditures, as well as reducing the amount of the cash dividend that we pay on our common stock. We continue to focus on the impact COVID-19 has on our employees in accordance with the Company's ongoing safety measures, as well as any local government orders and "shelter in place" directives in place from time to time. During fiscal year 2021, the COVID-19 pandemic had less of an impact on our overall financial results as consolidated net sales increased 8.8% compared to fiscal year 2020. Government stimulus programs, increased COVID-19 vaccination rates, and fewer COVID-19 related restrictions in some places contributed to a rebound in economic activity in certain countries driving higher revenues globally compared to fiscal year 2020. The sales increase in fiscal year 2021 compared to fiscal year 2020 was primarily in non-corporate office market segments, including healthcare, education, retail, residential / living and transportation. Our global supply chain and manufacturing operations, however, experienced increased adverse impacts and disruptions in 2021 from COVID-19. These impacts included raw material shortages, raw material cost increases, higher freight costs, shipping delays, and labor shortages - particularly inthe United States . These impacts to our supply chain and manufacturing operations increased our costs, decreased our ability to achieve manufacturing targets, increased lead times to our customers, and adversely affected our gross profit margin as a percentage of net sales. Management believes it is reasonably likely these impacts will continue and affect our future operations and results to some degree, particularly during the first half of 2022. During fiscal year 2020, the COVID-19 pandemic resulted in 17.9% lower consolidated net sales compared to fiscal year 2019. We temporarily suspended production in certain manufacturing facilities in 2020 due to government lockdowns, shelter in place orders and reduced demand. Our sales mix shifted towards more non-corporate office market segments as the COVID-19 pandemic reduced corporate spending, which impacted sales in the corporate office market. During 2020, the Company recorded$12.9 million of voluntary and involuntary severance costs, which were included in selling, general and administrative expenses in the consolidated statements of operations. In fiscal year 2020, government grants and payroll protection programs were available in various countries globally to provide assistance to companies impacted by the pandemic. The CARES Act enacted inthe United States (see Note 17 entitled "Income Taxes" included in Item 8 of this Annual Report on Form 10-K for additional information) and a payroll protection program enacted inthe Netherlands (the "NOW Program") provided benefits related to payroll costs either as reimbursements, lower payroll tax rates or deferral of payroll tax payments. The NOW Program provided eligible companies with reimbursement of labor costs as an incentive to retain employees and continue paying them in accordance with the Company's customary compensation practices. During fiscal year 2020, the Company qualified for benefits under several payroll protection programs and recognized a reduction in payroll costs of approximately$7.3 million , which were recorded as a$6.1 million reduction of selling, general and administrative expenses and a$1.2 million reduction of cost of sales in the consolidated statements of operations, as the Company believes it is probable that the benefits received will not be repaid. During the first quarter of 2020, as a result of changes in macroeconomic conditions related to the COVID-19 pandemic, we recognized a charge of$121.3 million for the impairment of goodwill and certain intangible assets. See Note 12 entitled "Goodwill and Intangible Assets" of Part II, Item 8 of this Annual Report for additional information.
Executive Overview
Our revenues are derived from sales of floorcovering products, primarily modular
carpet, luxury vinyl tile ("LVT") and rubber flooring products. Our business, as
well as the commercial interiors industry in general, is cyclical in nature and
is impacted by economic conditions and trends that affect the markets for
commercial and institutional business space. The commercial interiors industry,
including the market for floorcovering products, is largely driven by
reinvestment by corporations into their existing businesses in the form of new
fixtures and furnishings for their workplaces. In significant part, the timing
and amount of such reinvestments are impacted by the profitability of those
corporations. As a result, macroeconomic factors such as employment rates,
office vacancy rates, capital spending, productivity and efficiency gains that
impact corporate profitability in general, also affect our business.
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During fiscal year 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 Note 20
entitled "Segment Information" included in Item 8 of this Annual Report on Form
10-K for additional information. The results of operations discussion below also
includes segment information.
We focus our marketing and sales efforts on both corporate office and
non-corporate office market segments, to reduce somewhat our exposure to
economic cycles that affect the corporate office market segment more adversely,
as well as to capture additional market share. More than half of our
consolidated net sales were in non-corporate office markets in fiscal year 2021
and fiscal year 2020, primarily in education, healthcare, government, retail,
and residential/living market segments. See Item 1, "Business" of this Annual
Report on Form 10-K for additional information regarding our mix of modular
carpet and resilient flooring sales in corporate office verses non-corporate
office market segments for the last three fiscal years by reportable segment.
During 2021, we had consolidated net sales of $1,200.4 million , up 8.8% compared
to $1,103.3 million in 2020, primarily due to the rebound in economic activity
in certain countries following the impacts of COVID-19. Consolidated operating
income for 2021 was $104.8 million compared to consolidated operating loss of
$39.3 million in 2020 primarily due to higher sales in 2021 and a $121.3 million
impairment of goodwill and certain intangible assets in 2020. Fiscal year 2021
also included $3.9 million of restructuring charges in connection with the
planned closure of our Thailand manufacturing operations anticipated to occur in
2022. Consolidated net income for 2021 was $55.2 million or $0.94 per share,
compared to consolidated net loss of $71.9 million , or $1.23 per share, in 2020.
During 2020, we had consolidated net sales of $1,103.3 million , down 17.9%
compared to $1,343.0 million in 2019, primarily due to the impacts of COVID-19.
The consolidated operating loss for 2020 was $39.3 million compared to
consolidated operating income of $130.9 million in 2019, due primarily to a
$121.3 million goodwill and intangible asset impairment charge recorded in
fiscal 2020 due to the impacts of COVID-19. The consolidated net loss for 2020
was $71.9 million , or $1.23 per share, compared to consolidated net income of
$79.2 million , or $1.34 per share, in 2019.
A detailed analysis of our consolidated and segment performance for 2021 and 2020 is set out below under the heading “Analysis of operating results”.
26 -------------------------------------------------------------------------------- Tab le of Contents Analysis of Results of Operations
Consolidated results
The following discussion and analyzes reflect the factors and trends discussed in previous sections.
Consolidated net sales denominated in currencies other than theU.S. dollar were approximately 50% in 2021, 51% in 2020, and 49% in 2019. Because we have substantial international operations, we are impacted, from time to time, by international developments that affect foreign currency transactions. In 2021, the strengthening of the Euro, Australian dollar, Chinese Renminbi and British Pound sterling against theU.S. dollar had a positive impact on our net sales and operating income. In 2020, the strengthening of the Euro, British Pound sterling, and Chinese Renminbi against theU.S. dollar had a positive impact on our net sales and operating income. In 2019, the weakening of the Euro, British Pound sterling, Australian dollar, Canadian dollar and Chinese Renminbi against theU.S. dollar had a negative impact on our net sales and operating income.
The following table shows the amounts (in
2021 2020 2019
(in
millions)
Impact of changes in foreign currency on consolidated net sales$ 23.9 $ 7.1$ (26.2) Impact of changes in foreign currency on consolidated operating income (loss) 3.2 0.9 (3.9) The following table presents, as a percentage of net sales, certain items included in our consolidated statements of operations during the past three years: Fiscal Year 2021 2020 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 64.0 62.8 60.3 Gross profit on sales 36.0 37.2 39.7 Selling, general and administrative expenses 27.0 30.2
29.0
Restructuring, impairment of assets and other charges 0.3 (0.4)
1.0
Goodwill and intangible asset impairment charge - 11.0 - Operating income (loss) 8.7 (3.6) 9.7 Interest/Other expense 2.7 3.6 2.2 Income (loss) before income tax expense 6.0 (7.2) 7.5 Income tax expense (benefit) 1.4 (0.7) 1.7 Net income (loss) 4.6 % (6.5) % 5.8 % ConsolidatedNet Sales Below we provide information regarding our consolidated net sales and analyze those results for each of the last three fiscal years. Fiscal year 2021 included 52 weeks, fiscal year 2020 included 53 weeks, and fiscal year 2019 included 52 weeks. Fiscal Year Percentage Change 2021 2020 2019 2021 compared with 2020 compared with (in thousands) 2020 2019 Consolidated net sales$ 1,200,398 $ 1,103,262 $ 1,343,029 8.8 % (17.9) % 27
-------------------------------------------------------------------------------- Tab le of Contents Consolidated net sales for 2021 compared with 2020 For 2021, our consolidated net sales increased$97.1 million (8.8%) compared to 2020, comprised of higher sales volumes (approximately 5.1%) and higher prices (approximately 3.7%). Fluctuations in currency exchange rates had a positive impact on our year-over-year consolidated sales comparison of approximately$23.9 million , meaning that if currency levels had remained constant year over year our 2021 sales would have been lower by this amount. On a market segment basis, the sales increase was most significant in non-corporate office market segments including retail, education and healthcare. See the segment results discussion below for additional information on market segments.
Consolidated turnover 2020 compared to 2019
For 2020, our consolidated net sales decreased$239.8 million (17.9%) compared to 2019, primarily due to the impacts of COVID-19 resulting in lower sales volumes globally. Fluctuations in currency exchange rates had a positive impact on our year-over-year sales comparison of approximately$7.1 million , meaning that if currency levels had remained constant year over year, our 2020 sales would have been lower by this amount. On a market segment basis, the decrease in consolidated net sales was primarily in the corporate office, retail, hospitality and healthcare market segments. See the segment results discussion below for additional information on market segments.
Consolidated costs and expenses
The following table shows our consolidated cost of sales and selling, general and administrative (“SG&A”) expenses over the past three years:
Fiscal Year Percentage Change
2021 2020 2019 2021 compared 2020 compared
(in thousands) with 2020 with 2019
Consolidated cost of sales $ 767,665 $ 692,688 $ 810,062 10.8 % (14.5) %
Consolidated selling, general and
administrative expenses 324,315 333,229 389,117 (2.7) % (14.4) %
For 2021, our consolidated costs of sales increased $75.0 million (10.8%)
compared to 2020, primarily due to higher net sales and the continued adverse
impacts of COVID-19. Currency translation had a $16.2 million (2.3%) negative
impact on the year-over-year comparison. In 2021, the impact of COVID-19
continued to challenge our global supply chain which contributed to higher cost
of sales and lower gross profit margins - particularly in the United States . As
a percentage of net sales, our consolidated costs of sales increased to 64.0% in
2021 versus 62.8% in 2020, primarily due to inflationary pressures on raw
materials, freight and labor costs driving an approximately 3.4% increase in
cost of sales as a percentage of net sales compared to the prior year. The
increase in our consolidated cost of sales as a percentage of net sales was
partially offset by productivity efficiencies during the year. Management
believes it is reasonably likely the inflationary pressures experienced in 2021
will continue to some degree in 2022, particularly in the first half of 2022.
For 2020, our consolidated costs of sales decreased $117.4 million (14.5%)
compared with 2019, primarily due to lower net sales. Currency translation had a
$4.7 million (0.6%) negative impact on the year-over-year comparison. As a
percentage of net sales, our consolidated costs of sales increased to 62.8% in
2020 versus 60.3% in 2019, primarily due to changes in fixed cost absorption
driven by lower production volumes due to the impacts of COVID-19.
For 2021, our consolidated SG&A expenses decreased $8.9 million (2.7%) versus
2020. Currency translation had a $5.3 million (1.6%) negative impact on the
year-over-year comparison. Consolidated SG&A expenses were lower in 2021
primarily due to (1) lower legal fees and other related costs of $12.6 million
primarily due to the settlement of the SEC matter in the prior year period, and
(2) lower severance costs of $9.1 million as the prior year included additional
cost reduction initiatives implemented in response to COVID-19 as discussed
above. These decreases were partially offset by higher labor costs of
approximately $11.0 million due to higher performance-based compensation as
target performance measures were achieved in 2021, partially offset by cost
savings from prior year headcount reduction initiatives. As a percentage of net
sales, SG&A expenses decreased to 27.0% in 2021 versus 30.2% in 2020.
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For 2020, our consolidated SG&A expenses decreased $55.9 million (14.4%) versus
2019. Currency translation had a $1.5 million (0.4%) negative impact on the
year-over-year comparison. Consolidated SG&A expenses were lower in 2020
primarily due to (1) lower selling expenses of $54.8 million due to lower net
sales, (2) $7.3 million of payroll expense credits related to COVID-19 wage
support government assistance programs, and (3) $9.2 million lower
performance-based compensation due to stock compensation forfeitures and target
performance measures not being met due to COVID-19. These reductions were
partially offset by $12.9 million of severance expenses due to voluntary and
involuntary separations, and a $5.0 million fine to settle the SEC matter as
referenced in Item 8 Note 18 - "Commitments and Contingencies". As a percentage
of sales, SG&A expenses increased to 30.2% in 2020 versus 29.0% in 2019,
primarily due to lower net sales.
Restructuring plans
OnSeptember 8, 2021 , the Company committed to a new restructuring plan that continues to focus on efforts to improve efficiencies and decrease costs across its worldwide operations. The plan involves a reduction of approximately 188 employees and the closure of the Company's carpet tile manufacturing facility inThailand , anticipated to occur at the end of the first quarter of 2022. As a result of this plan, the Company expects to incur pre-tax restructuring charges between the third quarter of 2021 and the fourth quarter of 2022 of approximately$4 million to$5 million . The expected charges are comprised of severance expenses ($2.2 million ), retention bonuses ($0.5 million ), and asset impairment and other charges ($2.0 million ). The costs of retention bonuses of approximately$0.5 million will be recognized through the end of fiscal year 2022 as earned over the requisite service periods. Restructuring charges of$3.9 million comprised of severance and asset impairment charges were recognized during the third quarter of 2021. TheThailand plant closure is expected to result in future cash expenditures of approximately$3 million to$4 million for payment of the employee severance and employee retention bonuses and other costs of the shutdown of theThailand manufacturing facility, as described above. The Company expects to complete the restructuring plan in fiscal year 2022 and expects the plan to yield annualized savings of approximately$1.7 million . A portion of the annualized savings is expected to be realized on the consolidated statement of operations in fiscal year 2022, with the remaining portion of the annualized savings expected to be realized in fiscal year 2023. OnDecember 23, 2019 , the Company committed to a new restructuring plan to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved a reduction of approximately 105 employees and early termination of two office leases. As a result of this plan, the Company recorded a pre-tax restructuring charge in the fourth quarter of 2019 of approximately$9.0 million . The charge was comprised of severance expenses ($8.8 million ) and lease exit costs ($0.2 million ). The restructuring charge was expected to result in future cash expenditures of approximately$9.0 million for payment of these employee severance and lease exit costs. The Company expected the plan to yield annualized savings of approximately$6.0 million . A portion of the annualized savings was realized on the consolidated statement of operations in fiscal year 2020, with the remaining portion of the annualized savings realized in fiscal year 2021. OnDecember 29, 2018 , the Company committed to a new restructuring plan in its continuing efforts to improve efficiencies and decrease costs across its worldwide operations, and more closely align its operating structure with its business strategy. The plan involved (i) a restructuring of its sales and administrative operations in theUnited Kingdom , (ii) a reduction of approximately 200 employees, primarily in theEurope andAsia-Pacific geographic regions, and (iii) the write-down of certain underutilized and impaired assets that included information technology assets and obsolete manufacturing equipment. The restructuring plan was completed at the end of fiscal year 2020.
During 2021, we recognized a fixed asset impairment charge of$4.4 million for projects that were abandoned. During 2020, we recognized a charge of$121.3 million for the impairment of goodwill and certain intangible assets. See Note 12 entitled "Goodwill and Intangible Assets" of Part II, Item 8 of this Annual Report for additional information. During 2020, we also recognized fixed asset impairment charges of$5.0 million primarily related to certainFLOR design center closures and other projects that were abandoned or indefinitely delayed. These charges are included in selling, general and administrative expenses in the consolidated statements of operations. 29
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Interest charges
For 2021, our interest expense increased$0.5 million to$29.7 million , versus$29.2 million in 2020, primarily due to (1) higher fixed-rate interest expense on the Senior Notes debt, which replaced variable-rate debt under the Syndicated Credit Facility, and (2)$4.9 million of deferred losses recognized on terminated interest rate swaps that were reclassified from accumulated other comprehensive loss into interest expense during the year. These increases were partially offset by$60 million of lower outstanding borrowings under the Syndicated Credit Facility compared to 2020. Our average borrowing rate under the Syndicated Credit Facility was 1.91% for 2021 compared to 1.89% in 2020. For 2020, our interest expense increased$3.6 million to$29.2 million , versus$25.6 million in 2019, primarily due to (1) a$3.6 million loss on extinguishment of debt to amend the Syndicated Credit Facility and repay a portion of outstanding indebtedness thereunder, and (2) a$3.9 million reclassification from accumulated other comprehensive loss for deferred interest rate swap losses due to the termination of interest rate swap contracts. These increases were partially offset by lower average interest rates on our borrowings under the Syndicated Credit Facility (our average borrowing rate for 2020 was 1.89% compared to 3.27% in 2019) and lower outstanding borrowings under the Syndicated Credit Facility compared to 2019.
Other expenses
Other expenses decreased$8.4 million during fiscal year 2021 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.
Tax
For the year endedJanuary 2, 2022 , the Company recorded income tax expense of$17.4 million on pre-tax income of$72.6 million resulting in an effective tax rate of 24.0%, as compared to an income tax benefit of$7.5 million on pre-tax loss of$79.4 million resulting in an effective tax rate of 9.4% for the year endedJanuary 3, 2021 . The effective tax rate for the year endedJanuary 3, 2021 was significantly impacted by a non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions taken in prior years on discontinued operations. Excluding the impact of the non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, the effective tax rate was 14.1% for the year endedJanuary 3, 2021 . The increase in the effective tax rate for the year endedJanuary 2, 2022 as compared to the year endedJanuary 3, 2021 was primarily due to the one-time favorable impacts of amending prior year tax returns during the period endedJanuary 3, 2021 , an increase in non-deductible employee compensation and an increase in the valuation allowance on net operating loss and interest carryforwards. This increase was partially offset by a decrease in non-deductible business expenses. For the year endedJanuary 3, 2021 , the Company recorded an income tax benefit of$7.5 million on pre-tax loss of$79.4 million resulting in an effective tax rate of 9.4%. The effective tax rate for this period was significantly impacted by a non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions taken in prior years on discontinued operations. Excluding the impact of the non-deductible goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, the effective tax rate was 14.1% for 2020 compared to 22.2% in 2019. The decrease in the effective tax rate, excluding the goodwill impairment charge and recognition of income tax benefits related to uncertain tax positions on discontinued operations, was primarily due to the favorable impacts of amending prior year tax returns, retroactive election of theGILTI High -tax Exclusion in the 2019 tax return and reduction in non-deductible employee compensation. This decrease was partially offset by the non-deductibleSEC fine. Segment Results As discussed above, in fiscal year 2021 the Company determined that it has two operating and reportable segments - AMS and EAAA. Segment information presented below for fiscal years 2020 and 2019 have been restated to conform to the new reportable segment structure. See Note 20 entitled "Segment Information" included in Item 8 of this Annual Report on Form 10-K for additional information. 30
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SMA segment –
The following table presents AMS segment net sales and AOI for the last three
fiscal years:
Fiscal Year Percentage Change
2021 2020 2019 2021 compared with 2020 compared with
(in thousands) 2020 2019
AMS segment net sales$ 651,216 $ 593,418 $ 757,112 9.7 % (21.6) % AMS segment AOI(1) 85,014 89,097 120,921 (4.6) % (26.3) % (1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items related to intangible asset impairment charges, restructuring, asset impairment, severance and other costs. See Note 20 entitled "Segment Information" included in Item 8 of this Annual Report on Form 10-K for additional information.
AMS segment revenue in 2021 vs. 2020
During 2021, net sales in AMS increased 9.7% versus 2020, comprised of higher sales volumes and higher prices. On a market segment basis, the AMS sales increase was most significant in non-corporate office market segments including healthcare (up 19.1%), retail (up 19.1%) and education (up 18.3%). Sales in the corporate office market increased 6.8% in 2021 compared to 2020. These increases were partially offset by decreases in the hospitality (down 38.3%) and public buildings (down 20%) market segments.
AMS segment revenue in 2020 compared to 2019
During 2020, net sales in AMS decreased 21.6% versus the comparable period in 2019. The AMS sales decrease in 2020 was due primarily to the impacts of COVID-19 and lower carpet tile sales volumes. On a market segment basis, the sales decrease in theAmericas was most significant in the corporate office (down 33.8%), retail (down 34.8%), healthcare (down 15.2%) and education (down 8.3%) market segments, partially offset by increases in the residential living (up 23.8%) and public buildings (up 8.2%) market segments.
AMS AOI for 2021 vs. 2020
AOI in AMS decreased 4.6% during 2021 compared to 2020 primarily due to higher cost of sales as a result of inflationary pressures on raw materials, freight and labor costs driving an approximately 3.0% increase in cost of sales as a percentage of net sales compared to the prior year. The increase in cost of sales as a percentage of net sales was partially offset by productivity efficiencies during the year. AOI as a percentage of net sales for fiscal 2021 decreased to 13.1% compared to 15.0% in 2020 due to the global supply chain pressures discussed above.
AMS AOI for 2020 vs. 2019
AOI in AMS decreased 26.3% during 2020 compared to 2019 primarily due to the impacts of COVID-19 which resulted in lower sales volumes in 2020. The decrease in AOI was also partially due to costs related to the closure of theFLOR stores in 2020.
EAAA segment –
The following table presents EAAA segment net sales and AOI for the last three
fiscal years:
Fiscal Year Percentage Change
2021 2020 2019 2021 compared with 2020 compared with
(in thousands) 2020 2019
EAAA segment net sales$ 549,182 $ 509,844 $ 585,917 7.7 % (13.0) % EAAA segment AOI(1) 37,268 21,403 28,832 74.1 % (25.8) % (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 20 entitled "Segment Information" included in Item 8 of this Annual Report on Form 10-K for additional information. 31
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EAAA segment revenue in 2021 compared to 2020
During 2021, net sales in EAAA increased 7.7% versus 2020, comprised of higher sales volumes and higher prices. Currency fluctuations had an approximately$21.5 million (4.2%) positive impact on EAAA's 2021 sales compared to 2020 due to the strengthening of the Euro, British Pound sterling, Australian dollar and the Chinese Renminbi against theU.S. dollar. On a market segment basis, the EAAA sales increase was most significant in non-corporate office market segments including retail (up 53.8%), public buildings (up 30.2%) and healthcare (up 19.0%). Sales in the corporate office market increased 2.4% in 2021 compared to 2020. These increases were partially offset by a decrease in the education (down 2.6%) market segment.
EAAA segment revenue in 2020 compared to 2019
During 2020, net sales in EAAA decreased 13.0% versus 2019, due primarily to the impacts of COVID-19 and lower carpet tile sales volumes. Currency fluctuations had an approximately$7.3 million (1.3%) positive impact on EAAA's fiscal year 2020 sales compared with 2019, due primarily to the strengthening of the Euro and British Pound sterling against theU.S. dollar. On a market segment basis, the EAAA sales decrease was most significant in the hospitality (down 40.3%), corporate office (down 19.1%), public buildings (down 16.0%) and retail (down 12.9%) market segments.
AOI EAAA for 2021 vs. 2020
AOI in EAAA increased 74.1% during 2021 versus 2020. Currency fluctuations had an approximately$3.1 million (6.4%) positive impact on AOI for 2021. SG&A expenses as a percentage of net sales decreased to 23.0% in 2021 compared to 24.6% in 2020 due to savings from cost reduction initiatives implemented in the prior year. AOI as a percentage of net sales increased to 6.8% in 2021 compared to 4.2% in 2020, due primarily to higher sales as discussed above.
AOI EAAA for 2020 vs. 2019
AOI in EAAA decreased by 25.8% in 2020 compared to 2019, mainly due to the impacts of COVID-19 which led to lower sales volumes in 2020. Currency fluctuations impacted of about
Cash and capital resources
General
In our business, we require cash and other liquid assets primarily to purchase raw materials and to pay other manufacturing costs, in addition to funding normal course SG&A expenses, anticipated capital expenditures, interest expense and potential special projects. We generate our cash and other liquidity requirements primarily from our operations and from borrowings or letters of credit under our Syndicated Credit Facility and Senior Notes discussed below. We anticipate that our liquidity is sufficient to meet our obligations for the next 12 months and we expect to generate sufficient cash to meet our long-term obligations.
Below is a summary of our significant cash requirements for future periods:
Payments Due by Period
Total Payments Less than More than
Due 1 year 1-3 years 3-5 years 5 years
(in thousands)
Long-term debt obligations $ 525,131 $ 15,002
Operating lease obligations and financing
130,820 19,802 28,625 21,726 60,667 Expected interest payments 132,949 21,941 42,756 35,252 33,000 Purchase obligations 17,787 16,531 1,193 63 - Pension cash obligations 33,917 5,970 5,973 6,211 15,763 Total$ 840,604 $ 79,246 $ 108,551 $ 243,377 $ 409,430 32
-------------------------------------------------------------------------------- Tab le of Contents Historically, we use more cash in the first half of the fiscal year, as we pay insurance premiums, taxes and incentive compensation and build up inventory in preparation for the holiday/vacation season of our international operations. As outlined in the table above, we have approximately$79.2 million in material contractual cash obligations due by the end of fiscal year 2022, which includes, among other things, scheduled debt repayments under the Syndicated Credit Facility, pension contributions, interest payments on our debt and lease commitments. Our long-term debt obligations include the contractually scheduled principal repayment of our term loan borrowings under the Syndicated Credit Facility, which matures in 2025, and$300 million on our Senior Notes due in 2028. Operating and finance lease obligations consist of undiscounted lease payments due over the term of the lease. Expected interest payments are those associated with borrowings under the Syndicated Credit Facility and Senior Notes consistent with our contractually scheduled principal repayments. Our purchase obligations are for non-cancellable agreements primarily for raw material purchases and capital expenditures. Our current and long-term pension obligations include contributions and expected benefit payments to be paid by the Company related to certain defined benefit pension plans and excludes the expected benefit payments for two of our funded foreign defined benefit plans as these obligations will be paid by the plans over the next ten years. Based on current interest rates and debt levels, we expect our aggregate interest expense for 2022 to be between$27 million and$28 million . We estimate aggregate capital expenditures in 2022 to be approximately$30 million , although we are not committed to these amounts.
Liquidity
AtJanuary 2, 2022 , we had$97.3 million in cash. Approximately$1.7 million of this cash was located in theU.S. , and the remaining$95.6 million was located outside of theU.S. The cash located outside of theU.S. is indefinitely reinvested in the respective jurisdictions (except as identified below). We believe that our strategic plans and business needs, particularly for working capital needs and capital expenditure requirements inEurope ,Asia , andAustralia , support our assertion that a portion of our cash in foreign locations will be reinvested and remittance will be postponed indefinitely. Of the$95.6 million of cash in foreign jurisdictions, approximately$12.9 million represents earnings which we have determined are not permanently reinvested, and as such we have provided for foreign withholding andU.S. state income taxes on these amounts in accordance with applicable accounting standards. As ofJanuary 2, 2022 , we had$225.1 million of borrowings outstanding under our Syndicated Credit Facility, of which$217.6 million were term loan borrowings and$7.5 million were revolving loan borrowings. Additionally,$1.6 million in letters of credit were outstanding under the Syndicated Credit Facility at the end of fiscal year 2021. As ofJanuary 2, 2022 , we had additional borrowing capacity of$290.9 million under the Syndicated Credit Facility and$6.0 million of additional borrowing capacity under our other credit facilities in place at other non-U.S. subsidiaries. OnNovember 17, 2020 , we issued$300 million aggregate principal amount of 5.50% Senior Notes due 2028 (the "Senior Notes"), which are discussed further below. As ofJanuary 2, 2022 , we had$300.0 million of Senior Notes outstanding. It is important for you to consider that we have a significant amount of indebtedness. Our Syndicated Credit Facility matures in November of 2025 and the Senior Notes, as discussed below, mature inDecember 2028 . We cannot assure you that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms, or at all. If we are unable to refinance our debt or obtain new financing, we would have to consider other options, such as selling assets to meet our debt service obligations and other liquidity needs, or using cash, if available, that would have been used for other business purposes. It is also important for you to consider that borrowings under our Syndicated Credit Facility comprise a substantial portion of our indebtedness, and that these borrowings are based on variable interest rates (as described below) that expose the Company to the risk that short-term interest rates may increase. During 2020, we entered into fixed rate Senior Notes (as described below) which reduced the amount of indebtedness subject to interest rate risk. In the fourth quarter of 2020, we terminated our interest rate swaps that were previously being used to fix a portion of our variable rate debt. For information regarding the current variable interest rates of these borrowings, the potential impact on our interest expense from hypothetical increases in short term interest rates, and the interest rate swap transaction, please see the discussion in Item 7A of this Report.
We are not party to any material off-balance sheet arrangements.
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Analysis of Cash Flows
The following table presents a summary of cash flows for fiscal years 2021, 2020
and 2019:
Fiscal Year
2021 2020 2019
(in thousands)
Net cash provided by (used in):
Operating activities $ 86,689 $ 119,070 $ 141,768
Investing activities (28,071) (61,689) (74,222)
Financing activities (60,858) (42,715) (66,677)
Effect of exchange rate changes on cash (3,561) 7,086
(557)
Net change in cash and cash equivalents (5,801) 21,752
312
Cash and cash equivalents at beginning of period 103,053 81,301
80,989
Cash and cash equivalents at the end of the period
We ended 2021 with
•Cash provided by operating activities was$86.7 million for 2021, which represents a decrease of$32.4 million compared to 2020. The decrease was primarily due to a greater use of cash for working capital during 2021. Specifically, higher accounts receivable and inventories primarily attributable to increased customer demand in 2021 were partially offset by increases in accounts payable and accrued expenses that contributed positively to the change in working capital. Lower variable compensation payouts in 2021 related to 2020 performance had a positive impact on cash provided by operating activities, partially offsetting the decrease from changes in working capital. •Cash used in investing activities was$28.1 million for 2021, which represents a decrease of$33.6 million from 2020. The decrease was primarily due to lower capital expenditures compared to 2020 as two major capital projects were substantially completed in the prior year. •Cash used in financing activities was$60.9 million for 2021, which represents an increase of$18.1 million compared to 2020. In 2021, we repaid approximately$60 million in term loan borrowings which contributed to the increase in cash used in financing activities (compared with 2020, when repayments on term loan borrowings were largely funded with the proceeds from the issuance of the$300 million Senior Notes).
We ended 2020 with
•Cash provided by operating activities was$119.1 million for 2020, which represents a decrease of$22.7 million compared to 2019. The decrease was primarily due to lower net income due to the impacts of COVID-19, offset by working capital sources of cash, specifically a decrease in accounts receivable of$40.1 million , lower inventories of$38.7 million and lower prepaid and other expenses of$13.0 million . These sources of cash were offset by a$60.9 million use of cash in accounts payable and accrued expenses to fund normal operations. •Cash used in investing activities was$61.7 million for 2020, which represents a decrease of$12.5 million from 2019. The decrease was primarily due to lower capital expenditures compared to 2019 due to fewer project demands and lower capital investment as a result of the impacts of COVID-19. •Cash used in financing activities was$42.7 million for 2020, which represents a decrease of$24.0 million compared to 2019. Financing activities for 2020 include higher loan borrowings of$320.0 million primarily due to the issuance of$300 million of Senior Notes, offset by (1) higher repayments of revolving and term loan borrowings as the proceeds from the issuance of the Senior Notes were used to repay$290.7 million of outstanding term and revolving loan borrowings under the Syndicated Credit Facility, and (2) a decrease in dividends paid of$9.8 million . 34
-------------------------------------------------------------------------------- Tab le of Contents We ended 2019 with$81.3 million in cash, an increase of$0.3 million during the year. The most significant uses of cash in 2019 were (1) repayments on our Syndicated Credit Facility of$111.7 million offset by borrowings of$90 million , (2) capital expenditures of$74.6 million , (3)$25.2 million to repurchase 1.6 million shares of the Company's outstanding common stock, and (3) dividend payments of$15.4 million . These uses were offset by cash flow from operations of$141.8 million , primarily generated from (1) net income of$79.2 million , (2)$19.4 million for increases in accounts payable and accrued expenses, and (3)$2.6 million due to a decrease in inventories. These sources of cash were reduced by working capital uses of (1)$9.7 million due to increases in prepaid expenses, and (2)$0.9 million due to increases in accounts receivable.
We believe that our liquidity position will provide sufficient funds to meet our current commitments and our other cash requirements for the foreseeable future.
Syndicated credit facility
In the normal course of business, in addition to using our available cash, we fund our operations by borrowing under our Syndicated Credit Facility (the "Facility"). AtJanuary 2, 2022 , the Facility provided the Company and certain of its subsidiaries with a multicurrency revolving loan facility up to$300 million , as well as otherU.S. denominated and multicurrency term loans. Material terms under the Facility are discussed below. For additional information please see Note 9 entitled "Long-Term Debt" in Item 8 of this Report.
Interest Rates and Fees
Under the Facility, interest on base rate loans is charged at varying rates computed by applying a margin ranging from 0.25% to 2.00%, depending on the Company's consolidated net leverage ratio (as defined in the Facility agreement) as of the most recently completed fiscal quarter. Interest on Eurocurrency-based loans and fees for letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 3.00% over the applicable Eurocurrency rate, depending on the Company's consolidated net leverage ratio as of the most recently completed fiscal quarter. In addition, the Company pays a commitment fee ranging from 0.20% to 0.40% per annum (depending on the Company's consolidated net leverage ratio as of the most recently completed fiscal quarter) on the unused portion of the Facility.
LIBOR Transition
The U.K. Financial Conduct Authority (the "FCA"), which regulates theLondon interbank offered rate ("LIBOR"), announced that theFCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. This announcement indicated that the continuation of LIBOR on the current basis was not guaranteed after 2021, and LIBOR may be discontinued or modified. Additionally, certainU.S. dollar LIBOR rates will be discontinued byJune 2023 . TheFederal Reserve Bank of New York began publishing the Secured Overnight Financing Rate ("SOFR") inApril 2018 as an alternative for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized byU.S. Treasury securities. We have exposure to LIBOR-based financial instruments under the Facility, which has variable (or floating) interest rates based on LIBOR. The Facility allows for the use of an alternative benchmark rate if LIBOR is no longer available. OnDecember 9, 2021 , we entered into the fourth amendment to the Facility to replace the LIBOR interest rate benchmark applicable to loans and other extensions of credit under the Facility denominated in British Pounds sterling and Euros with specified successor benchmark rates, to amend certain provisions related to the implementation, use and administration of successor benchmark rates, and to set forth certain borrowing requirements in the event LIBOR and other successor rates become unavailable.
pacts
The Facility contains standard and customary covenants for agreements of this
type, including various reporting, affirmative and negative covenants. Among
other things, these covenants limit our ability to:
•create or incur liens on assets;
•make acquisitions of or investments in businesses (in excess of certain
specified amounts);
•engage in any material line of business substantially different from the
Company's current lines of business;
•incur indebtedness or contingent obligations;
•sell or dispose of assets (in excess of certain specified amounts);
•pay dividends or repurchase our stock (in excess of certain specified amounts);
•repay other indebtedness prior to maturity unless we meet certain conditions;
and
•enter into sale and leaseback transactions.
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Table of Contents The facility also requires us to comply with the following financial covenants at the end of each fiscal quarter, based on our consolidated results for the year then ended:
• Consolidated net secured leverage ratio: must not exceed 3.00:1.00. • Consolidated interest coverage ratio: must not be less than 2.25:1.00.
Event of default
If we breach or fail to perform any of the affirmative or negative covenants under the Facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control ofInterface, Inc. or certain subsidiaries, or if we breach or fail to perform any covenant or agreement contained in any instrument relating to any of our other indebtedness exceeding$20 million ), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the lenders' Administrative Agent may, and upon the written request of a specified percentage of the lender group shall: •declare all commitments of the lenders under the facility terminated; •declare all amounts outstanding or accrued thereunder immediately due and payable; and •exercise other rights and remedies available to them under the agreement and applicable law. Collateral Pursuant to a Second Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets ofInterface, Inc. and our domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of our domestic subsidiaries and up to 65% of the stock of our first-tier material foreign subsidiaries. If an event of default occurs under the Facility, the lenders' Administrative Agent may, upon the request of a specified percentage of lenders, exercise remedies with respect to the collateral, including, in some instances, foreclosing mortgages on real estate assets, taking possession of or selling personal property assets, collecting accounts receivables, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries. As ofJanuary 2, 2022 , we had outstanding$217.6 million of term loan borrowing and$7.5 million of revolving loan borrowings under the Facility, and had$1.6 million in letters of credit outstanding under the Facility. As ofJanuary 2, 2022 , the weighted average interest rate on borrowings outstanding under the Facility was 1.91%. Under the Facility, we are required to make quarterly amortization payments of the term loan borrowings. The amortization payments are due on the last day of the calendar quarter.
We are currently in compliance with all of the covenants under the facility and expect that we will continue to be in compliance with the covenants for the foreseeable future.
In the fourth quarter of 2020, we terminated our interest rate swaps and paid approximately$13 million to terminate the swap agreements. For additional information on interest rates, please see Item 7A and Note 9 entitled "Long-Term Debt" in Item 8 of this Report.
Senior Notes
OnNovember 17, 2020 , the Company issued$300 million aggregate principal amount of 5.50% Senior Notes due 2028. The Senior Notes bear an interest rate at 5.50% per annum and mature onDecember 1, 2028 . Interest is paid semi-annually onJune 1 andDecember 1 of each year, beginning onJune 1, 2021 . The Company used the net proceeds to repay$269.7 million of outstanding term loan borrowings and$21.0 million of outstanding revolving loan borrowings under the Facility. In connection with the issuance of the Senior Notes, the Company recorded$5.7 million of debt issuance costs. These debt issuance costs were recorded as a reduction of long-term debt in the consolidated balance sheets and will be amortized over the life of the outstanding debt. 36 -------------------------------------------------------------------------------- Tab le of Contents 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$594 million for fiscal year 2021 and$548 million for fiscal year 2020. Total indebtedness of the non-guarantor subsidiaries was approximately$45 million as ofJanuary 2, 2022 , and$88 million as ofJanuary 3, 2021 . The Senior Notes can be redeemed on or afterDecember 1, 2023 , at specified redemption prices. See Note 9 entitled "Long-Term Debt" in Item 8 of this report for additional information.
Forward-looking statement on the impact of COVID-19
While we are aggressively managing our response to the COVID-19 pandemic, its
impacts on our full fiscal year 2022 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; (3) the
ability of our sales channels, supply chain, manufacturing, and distribution
partners to continue operating through disruptions; and (4) the severity of
global supply chain disruptions and their effects on inflation, labor shortages,
raw material shortages, and other factors that disrupt our supply chain and
manufacturing facilities. Any or all of these factors could negatively impact
our financial position, results of operations, cash flows, and outlook. As the
impact of the COVID-19 pandemic continues to affect companies with global
operations, specifically as it relates to the global supply chain, we anticipate
that, at a minimum, our business and results in the first half of 2022 will
continue to be affected, and the timeline and pace of recovery is uncertain.
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, demand for our products,
and other factors described in "Risk Factors" included in Part I, Item 1A of
this Annual Report on Form 10-K.
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Critical Accounting Policies and Estimates
The policies and estimates discussed below are considered by management to be
critical to an understanding of our consolidated financial statements because
their application places the most significant demands on management's judgment,
with financial reporting results relying on estimations about the effects of
matters that are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs. For all of these
policies, management cautions that future events may not develop as forecasted,
and the best estimates routinely require adjustment.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment
at the asset group level whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If the sum of the expected
future undiscounted cash flow is less than the carrying amount of the asset, an
impairment is indicated. A loss is then recognized for the difference, if any,
between the fair value of the asset (as estimated by management using its best
judgment) and the carrying value of the asset. Management's judgement in
estimating the undiscounted cash flows based on market conditions and trends,
and other industry specific metrics used in determining the fair value is
subject to uncertainty. If actual market value is less favorable than that
estimated by management, additional write-downs may be required.
Deferred Income Tax Assets and Liabilities. The carrying values of deferred
income tax assets and liabilities reflect the application of our income tax
accounting policies in accordance with applicable accounting standards and are
based on management's assumptions and estimates regarding future operating
results and levels of taxable income, as well as management's judgment regarding
the interpretation of the provisions of applicable accounting standards. The
carrying values of liabilities for income taxes currently payable are based on
management's interpretations of applicable tax laws and incorporate management's
assumptions and judgments regarding the use of tax planning strategies in
various taxing jurisdictions. The use of different estimates, assumptions and
judgments in connection with accounting for income taxes may result in
materially different carrying values of income tax assets and liabilities and
results of operations.
We evaluate the recoverability of these deferred tax assets by assessing the
adequacy of future expected taxable income from all sources, including reversal
of taxable temporary differences, forecasted operating earnings and available
tax planning strategies. These sources of income inherently rely heavily on
estimates. We use our historical experience and our short and long-term business
forecasts to provide insight. Further, our global business portfolio gives us
the opportunity to employ various prudent and feasible tax planning strategies
to facilitate the recoverability of future deductions. To the extent we do not
consider it more likely than not that a deferred tax asset will be recovered, a
valuation allowance is established. As of January 2, 2022 , and January 3, 2021 ,
we had state net operating loss carryforwards of $153.0 million and $142.7
million , respectively. Certain of these state net operating loss carryforwards
are reserved with a valuation allowance because, based on the available
evidence, we believe it is more likely than not that we would not be able to
utilize those deferred tax assets in the future. The remaining year-end 2021
amounts are expected to be fully recoverable within the applicable statutory
expiration periods. If the actual amounts of taxable income differ from our
estimates, the amount of our valuation allowance could be materially impacted.
Goodwill . Prior to the adoption of Accounting Standards Update ("ASU") 2017-04
"Intangibles-Goodwill and Other", we tested goodwill for impairment at least
annually using a two-step approach. In the first step of this approach, we
prepared valuations of reporting units, using both a market comparable approach
and an income approach, and those valuations were compared with the respective
book values of the reporting units to determine whether any goodwill impairment
existed. In preparing the valuations, past, present and expected future
performance was considered. If impairment was indicated in this first step of
the test, a step two valuation approach was performed. The step two valuation
approach compared the implied fair value of goodwill to the book value of
goodwill. The implied fair value of goodwill was determined by allocating the
estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit, including both recognized and unrecognized intangible assets, in
the same manner as goodwill is determined in a business combination under
applicable accounting standards. After completion of this step two test, a loss
was recognized for the difference, if any, between the fair value of the
goodwill associated with the reporting unit and the book value of that goodwill.
On December 30, 2019 , the Company adopted ASU 2017-04, "Intangibles - Goodwill
and Other," that provides for the elimination of Step 2 from the goodwill
impairment test described above. Under the new guidance, impairment charges are
recognized to the extent the carrying amount of a reporting unit exceeds its
fair value with certain limitations.
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In accordance with applicable accounting standards, the Company tests goodwill
for impairment annually and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Management's assessment of whether a
triggering event has occurred and the development of any forecasts to be used in
the fair value determination are subject to judgement. During the fourth
quarters of 2021, 2020 and 2019, we performed the annual goodwill impairment
test. We perform this test at the reporting unit level. For our reporting units
which carried a goodwill balance as of January 2, 2022 , no impairment of
goodwill was indicated. As of January 2, 2022 , if our estimates of the fair
value of our reporting units were 10% lower, we believe no additional goodwill
impairment would have existed. However, the full extent of the future impact of
COVID-19 on the Company's operations is uncertain, and a prolonged COVID-19
pandemic could result in additional impairment of goodwill. If the actual fair
value of the goodwill is determined to be less than that estimated, an
additional write-down may be required.
Inventories. We determine the value of inventories using the lower of cost or
net realizable value. We write down inventories for the difference between the
carrying value of the inventories and their net realizable value. If actual
market conditions are less favorable than those projected by management,
additional write-downs may be required.
Management's judgement in estimating our reserves for inventory obsolescence is
based on continuous examination of our inventories to determine if there are
indicators that carrying values exceed net realizable values. Experience has
shown that significant indicators that could require the need for additional
inventory write-downs are the age of the inventory, the length of its product
life cycles, anticipated demand for our products and current economic
conditions. While we believe that adequate write-downs for inventory
obsolescence have been made in the consolidated financial statements, consumer
tastes and preferences will continue to change and we could experience
additional inventory write-downs in the future. Our inventory reserve on
January 2, 2022 and January 3, 2021 , was $27.1 million and $35.0 million ,
respectively. To the extent that actual obsolescence of our inventory differs
from our estimate by 10%, our 2021 net income would be higher or lower by
approximately $2.1 million , on an after-tax basis.
Pension Benefits. Net pension expense recorded is based on, among other things,
assumptions about the discount rate, estimated return on plan assets and salary
increases. While management believes these assumptions are reasonable, changes
in these and other factors and differences between actual and assumed changes in
the present value of liabilities or assets of our plans above certain thresholds
could cause net annual expense to increase or decrease materially from year to
year. The actuarial assumptions used in our salary continuation plan and our
foreign defined benefit plans reporting are reviewed periodically and compared
with external benchmarks to ensure that they appropriately account for our
future pension benefit obligation. The expected long-term rate of return on plan
assets assumption is based on weighted average expected returns for each asset
class. Expected returns reflect a combination of historical performance analysis
and the forward-looking views of the financial markets, and include input from
actuaries, investment service firms and investment managers. The table below
represents the changes to the projected benefit obligation as a result of
changes in discount rate assumptions:
Increase (Decrease) in
Projected Benefit
Foreign Defined Benefit Plans Obligation
(in millions)
1% increase in actuarial assumption for discount rate $
(47.1)
1% decrease in actuarial assumption for discount rate 60.2
Increase (Decrease) in
Projected Benefit
Domestic Salary Continuation Plan
Obligation
(in millions)
1% increase in actuarial assumption for discount rate $ (3.0)
1% decrease in actuarial assumption for discount rate 3.6
39
-------------------------------------------------------------------------------- Tab le of Contents Allowances for Expected Credit Losses. We maintain allowances for expected credit losses resulting from the inability of customers to make required payments. Estimating the amount of future expected losses requires us to consider historical losses from our customers, as well as current market conditions and future forecasts of our customers' ability to make payments for goods and services. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated. Our allowance for expected credit losses onJanuary 2, 2022 andJanuary 3, 2021 , was$5.0 million and$6.6 million , respectively. To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2021 net income would be higher or lower by approximately$0.4 million , on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance. Product Warranties. We typically provide limited warranties with respect to certain attributes of our carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to twenty years, depending on the particular carpet product and the environment in which the product is to be installed. Similar limited warranties are provided on certain attributes of our rubber and LVT products, typically for a period of 5 to 15 years. We typically warrant that any services performed will be free from defects in workmanship for a period of one year following completion. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product. We record a provision related to warranty costs based on historical experience and future expectations and periodically adjust these provisions to reflect changes in actual experience. Our warranty and sales allowance reserve onJanuary 2, 2022 andJanuary 3, 2021 , was$2.7 million and$3.2 million , respectively. Actual warranty expense incurred could vary significantly from amounts that we estimate. To the extent the actual warranty expense differs from our estimates by 10%, our 2021 net income would be higher or lower by approximately$0.2 million , on an after-tax basis, depending on whether the actual expense is lower or higher, respectively, than the estimated provision.
Recent accounting pronouncements
Please see Note 2 “Recent Accounting Pronouncements” in Section 8 of this report for a discussion of these sections.
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