SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended October 2, 2011

Commission File Number 001-33994

INTERFACE, INC.

(Exact name of registrant as specified in its charter)

GEORGIA		58-1451243
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
(Address of principal executive offices and zip code)

(770) 437-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Shares outstanding of each of the registrant’s classes of common stock at November 4, 2011:

Class		Number of Shares
Class A Common Stock, $.10 par value per share		58,598,808
Class B Common Stock, $.10 par value per share		6,880,407

 

 

INTERFACE, INC.

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Condensed Balance Sheets — October 2, 2011 and January 2, 2011			3
Consolidated Condensed Statements of Operations — Three Months and Nine Months Ended October 2, 2011 and October 3, 2010			4
Consolidated Statements of Comprehensive Income (Loss)— Three Months and Nine Months Ended October 2, 2011 and October 3, 2010			5
Consolidated Condensed Statements of Cash Flows — Nine Months Ended October 2, 2011 and October 3, 2010			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			26
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Removed and Reserved			27
Item 5. Other Information			27
Item 6. Exhibits			27
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

		OCT. 2, 2011				JAN. 2, 2011
		(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents		$	44,386			$	69,236
Accounts Receivable, Net			158,009				151,463
Inventories			171,116				136,766
Prepaid Expenses and Other Current Assets			28,365				24,362
Deferred Income Taxes			9,110				10,062
Assets of Business Held for Sale			1,200				1,200
TOTAL CURRENT ASSETS			412,186				393,089
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation			188,070				177,792
DEFERRED TAX ASSET			46,997				53,022
GOODWILL			76,566				75,239
OTHER ASSETS			55,486				56,291
TOTAL ASSETS		$	779,305			$	755,433
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable		$	57,481			$	55,859
Accrued Expenses			96,261				112,657
TOTAL CURRENT LIABILITIES			153,742				168,516
SENIOR NOTES			283,010				282,951
SENIOR SUBORDINATED NOTES			11,477				11,477
DEFERRED INCOME TAXES			8,471				7,563
OTHER			34,074				36,054
TOTAL LIABILITIES			490,774				506,561
Commitments and Contingencies
SHAREHOLDERS’ EQUITY:
Preferred Stock			—				—
Common Stock			6,546				6,445
Additional Paid-In Capital			360,184				349,662
Retained Earnings (Deficit)			(19,369	)			(49,770	)
Accumulated Other Comprehensive Loss — Foreign Currency Translation Adjustment			(27,601	)			(26,269	)
Accumulated Other Comprehensive Loss — Pension Liability			(31,229	)			(31,196	)
TOTAL SHAREHOLDERS’ EQUITY			288,531				248,872
		$	779,305			$	755,433

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		OCT. 2, 2011				OCT. 3, 2010				OCT. 2, 2011				OCT. 3, 2010
NET SALES		$	273,106			$	252,724			$	786,148			$	696,502
Cost of Sales			178,681				163,244				510,020				453,514
GROSS PROFIT ON SALES			94,425				89,480				276,128				242,988
Selling, General and Administrative Expenses			69,087				61,441				203,125				176,597
Restructuring Charge			—				—				—				3,131
OPERATING INCOME			25,338				28,039				73,003				63,260
Interest Expense			6,428				8,409				19,867				25,346
Bond Retirement Expenses			—				—				—				1,085
Other Expense (Income)			(175	)			463				(126	)			1,008
INCOME BEFORE INCOME TAX EXPENSE			19,085				19,167				53,262				35,821
Income Tax Expense			6,917				6,825				18,456				13,365
NET INCOME			12,168				12,342				34,806				22,456
Income Attributable to Non-Controlling Interest in Subsidiary			—				(264	)			—				(876	)
NET INCOME ATTRIBUTABLE TO INTERFACE, INC.		$	12,168			$	12,078			$	34,806			$	21,580
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Basic		$	0.19			$	0.19			$	0.53			$	0.34
Earnings Per Share Attributable to Interface, Inc. Common Shareholders — Diluted		$	0.19			$	0.19			$	0.53			$	0.34
Common Shares Outstanding — Basic			65,469				64,025				65,228				63,623
Common Shares Outstanding — Diluted			65,676				64,578				65,457				64,106

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		OCT. 2, 2011				OCT. 3, 2010				OCT. 2, 2011				OCT. 3, 2010
Net Income		$	12,168			$	12,342			$	34,806			$	22,456
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment and Pension Liability Adjustment			(13,723	)			23,247				(1,365	)			1,786
Comprehensive Income (Loss)		$	(1,555	)		$	35,589			$	33,441			$	24,242
Comprehensive Income Attributable to Non-Controlling Interest in Subsidiary			—				(1,081	)			—				(1,957	)
Comprehensive Income (Loss) Attributable to Interface, Inc.		$	(1,555	)		$	34,508			$	33,441			$	22,285

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

		NINE MONTHS ENDED
		OCT. 2, 2011				OCT. 3, 2010
OPERATING ACTIVITIES:
Net Income		$	34,806			$	22,456
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Premiums Paid to Repurchase Senior Subordinated Notes			—				792
Depreciation and Amortization			19,900				17,352
Stock Compensation Amortization Expense			8,558				1,901
Deferred Income Taxes and Other			8,244				(167	)
Working Capital Changes:
Accounts Receivable			(6,808	)			(10,069	)
Inventories			(34,862	)			(20,453	)
Prepaid Expenses			(3,850	)			(7,404	)
Accounts Payable and Accrued Expenses			(16,001	)			27,196
CASH PROVIDED BY OPERATING ACTIVITIES:			9,987				31,604
INVESTING ACTIVITIES:
Capital Expenditures			(30,759	)			(18,443	)
Other			(1,624	)			(1,816	)
CASH USED IN INVESTING ACTIVITIES:			(32,383	)			(20,259	)
FINANCING ACTIVITIES:
Repurchase of Senior and Senior Subordinated Notes			—				(39,586	)
Premiums Paid to Repurchase Senior Subordinated Notes			—				(792	)
Proceeds from Issuance of Common Stock			2,610				1,803
Dividends Paid to Interface, Inc. Shareholders			(3,921	)			(1,435	)
Other			(509	)			—
Dividends Paid to Joint Venture Partner			—				(7,904	)
CASH USED IN FINANCING ACTIVITIES:			(1,820	)			(47,914	)
Net Cash Used in Operating, Investing and Financing Activities			(24,216	)			(36,569	)
Effect of Exchange Rate Changes on Cash			(634	)			2,060
CASH AND CASH EQUIVALENTS:
Net Change During the Period			(24,850	)			(34,509	)
Balance at Beginning of Period			69,236				115,363
Balance at End of Period		$	44,386			$	80,854

See accompanying notes to consolidated condensed financial statements.

INTERFACE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — CONDENSED FOOTNOTES

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended January 2, 2011, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The January 2, 2011, consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

As described below in Note 9, the Company has sold its Fabrics Group business segment. The results of operations and related disposal costs, gains and losses for this business are classified as discontinued operations for all periods presented.

Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 — INVENTORIES

Inventories are summarized as follows:

		Oct. 2, 2011				Jan. 2, 2011
		(In thousands)
Finished Goods		$	103,157			$	78,303
Work in Process			20,114				16,731
Raw Materials			47,845				41,732
		$	171,116			$	136,766

NOTE 3 — EARNINGS PER SHARE

The Company computes basic earnings per share (“EPS”) attributable to common shareholders by dividing net income attributable to common shareholders by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings. Income attributable to non-controlling interest in subsidiary is included in the calculation of basic and diluted EPS, where applicable.

The Company includes all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations when the inclusion of these shares would be dilutive. As a result, the Company includes all outstanding restricted stock awards in the calculation of basic and diluted EPS. Distributed earnings include common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed. Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock. The following tables show distributed and undistributed earnings:

		Three Months Ended								Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
Basic Earnings Per Share Attributable to Common Shareholders:
Distributed Earnings		$	0.02			$	0.01			$	0.06			$	0.02
Undistributed Earnings			0.17				0.18				0.47				0.32
Total		$	0.19			$	0.19			$	0.53			$	0.34
Diluted Earnings Per Share Attributable to Common Shareholders:
Distributed Earnings		$	0.02			$	0.01			$	0.06			$	0.02
Undistributed Earnings			0.17				0.18				0.47				0.32
Total		$	0.19			$	0.19			$	0.53			$	0.34

The following table presents net income and net income attributable to Interface, Inc. that was attributable to participating securities:

		Three Months Ended								Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
		(In millions)
Net Income		$	0.3			$	0.3			$	0.9			$	0.6
Net Income Attributable to Interface, Inc.		$	0.3			$	0.3			$	0.9			$	0.6

The weighted average shares for basic and diluted EPS were as follows:

		Three Months Ended								Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
		(In thousands)
Weighted Average Shares Outstanding			63,703				62,284				63,462				61,882
Participating Securities			1,766				1,741				1,766				1,741
Shares for Basic Earnings Per Share			65,469				64,025				65,228				63,623
Dilutive Effect of Stock Options			207				553				229				483
Shares for Diluted Earnings Per Share			65,676				64,578				65,457				64,106

For the quarters ended October 2, 2011, and October 3, 2010, options to purchase 249,000 and 389,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive. For the nine-month periods ended October 2, 2011, and October 3, 2010, options to purchase 20,000 and 404,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive.

NOTE 4 — SEGMENT INFORMATION

Based on the quantitative thresholds specified in applicable accounting standards, the Company has determined that it has two reportable segments: (1) the Modular Carpet segment, which includes its InterfaceFLOR, Heuga and FLOR modular carpet businesses, as well as its Intersept antimicrobial sales and licensing program, and (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses. In 2007, the Company sold its former Fabrics Group business segment (see Note 9 for further information). Accordingly, the Company has included the operations of the former Fabrics Group business segment in discontinued operations.

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision-maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.

Segment Disclosures

Summary information by segment follows:

		Modular				Bentley
		Carpet				Prince Street				Total
		(In thousands)
Three Months Ended October 2, 2011
Net Sales		$	248,721			$	24,385			$	273,106
Depreciation and Amortization			5,493				554				6,047
Operating Income (Loss)			26,333				(63	)			26,270
Three Months Ended October 3, 2010
Net Sales		$	226,513			$	26,211			$	252,724
Depreciation and Amortization			4,251				538				4,789
Operating Income			29,450				45				29,495

		Modular				Bentley
		Carpet				Prince Street				Total
		(In thousands)
Nine Months Ended October 2, 2011
Net Sales		$	708,567			$	77,581			$	786,148
Depreciation and Amortization			20,296				1,677				21,973
Operating Income (Loss)			78,604				(124	)			78,480
Nine Months Ended October 3, 2010
Net Sales		$	623,215			$	73,287			$	696,502
Depreciation and Amortization			12,668				1,660				14,328
Operating Income (Loss)			72,004				(2,511	)			69,493

A reconciliation of the Company’s total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows:

		Three Months Ended								Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
		(In thousands)								(In thousands)
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization		$	6,047			$	4,789			$	21,973			$	14,328
Corporate depreciation and amortization			1,179				1,562				6,485				4,925
Reported depreciation and amortization		$	7,226			$	6,351			$	28,458			$	19,253
OPERATING INCOME
Total segment operating income		$	26,270			$	29,495			$	78,480			$	69,493
Corporate income, expenses and other reconciling amounts			(932	)			(1,456	)			(5,477	)			(6,233	)
Reported operating income		$	25,338			$	28,039			$	73,003			$	63,260

		Oct. 2, 2011				Jan. 2, 2011
ASSETS		(In thousands)
Total segment assets		$	664,457			$	610,024
Discontinued operations			1,200				1,200
Corporate assets and eliminations			113,648				144,209
Reported total assets		$	779,305			$	755,433

NOTE 5 — LONG-TERM DEBT

7 5/8% Senior Notes

On December 3, 2010, the Company completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. The Company used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of the 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of the 9.5% Senior Subordinated Notes pursuant to a Company tender offer.

As of October 2, 2011, the balance of the 7 5/8% Senior Notes outstanding was $275 million. The estimated fair value of the 7 5/8% Senior Notes as of October 2, 2011, based on then current market prices, was $279.1 million.

11 3/8% Senior Secured Notes

On June 5, 2009, the Company completed a private offering of $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013 (the “11 3/8% Senior Secured Notes”). Interest on the 11 3/8% Senior Secured Notes is payable semi-annually on May 1 and November 1, beginning November 1, 2009. The 11 3/8% Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries. The Senior Secured Notes are secured by a second-priority lien on substantially all of the Company’s and certain of the Company’s domestic subsidiaries’ assets that secure the Company’s domestic revolving credit facility on a first-priority basis.

As of October 2, 2011, the balance of the 11 3/8% Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $8.0 million. The estimated fair value of the Senior Secured Notes as of October 2, 2011, based on then current market prices, was $8.1 million.

9.5% Senior Subordinated Notes

On February 4, 2004, the Company completed a private offering of $135 million of 9.5% Senior Subordinated Notes due 2014. Interest on these notes is payable semi-annually on February 1 and August 1 beginning August 1, 2004. As of October 2, 2011, the Company had outstanding $11.5 million in 9.5% Senior Subordinated Notes due 2014 (the “9.5% Senior Subordinated Notes”). The estimated fair value of the 9.5% Senior Subordinated Notes as of October 2, 2011, based on then current market prices, was $11.5 million.

During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of the 9.5% Senior Subordinated Notes at a price equal to 103.167% of the face value of the notes. Accordingly, the premium paid in connection with this redemption was approximately $0.8 million. In addition, the Company wrote off the portion of the unamortized debt issuance costs related to the redeemed bonds, an amount equal to $0.3 million. These expenses are contained in the “Bond Retirement Expense” line item in the Company’s consolidated condensed statements of operations.

Credit Facilities

On June 24, 2011, the Company amended and restated its primary revolving credit facility. Under the amended and restated facility (the “Facility”), as under its predecessor, the Company’s obligations are secured by a first priority lien on substantially all of the assets of Interface, Inc. and each of its material domestic subsidiaries, which subsidiaries also guarantee the Facility. The maximum aggregate amount of loans and letters of credit available to the Company at any one time remains $100 million (with the option to further increase that amount to up to a maximum of $150 million — the same option amount as in its predecessor — subject to the satisfaction of certain conditions), subject to a borrowing base described in the Facility. The Facility differs from its predecessor in the following key respects:

	•		The stated maturity date of the Facility has been extended to June 24, 2016.
	•		The borrowing base governing borrowing availability has been expanded in certain respects.
	•		The applicable interest rates and unused line fees have been reduced. Interest is now charged at varying rates computed by applying a margin ranging from 0.75% to 2.25% (reduced from the range of 1.75% to 4.00%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and the average excess borrowing availability during the most recently completed fiscal quarter. The unused line fee was reduced to 0.375% per annum from 0.75% per annum.
	•		The negative covenants have been relaxed in certain respects, including with respect to the amount of other indebtedness and liens the Company may incur or allow to exist.
	•		The threshold to trigger the applicability of the Facility’s only financial covenant, a fixed charge coverage test, and the assertion of cash dominion by the lender group has been raised.
	•		The events of default have been amended to make certain of the events of default less restrictive by increasing the applicable dollar thresholds thereunder.
	•		The lender group has been changed in certain respects, and the lending commitments have been reallocated among the lenders. In addition, the threshold of “Required Lenders” for purposes of certain amendments and consents under the Facility has been lowered to more than 50% of the aggregate amount of the lending commitments from more than 66 2/3% of the aggregate amount of the lending commitments.

As of October 2, 2011, there were zero borrowings and $5.2 million in letters of credit outstanding under the Facility. As of October 2 2011, the Company could have incurred $80.6 million of additional borrowings under the Facility.

Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank N.V. Under this Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time. As of October 2, 2011, there were no borrowings outstanding under this facility, and the Company could have incurred €14.0 million (approximately $19.0 million) of additional borrowings under the facility.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $18.2 million of lines of credit available. As of October 2, 2011, there were no borrowings outstanding under these lines of credit.

NOTE 6 — STOCK-BASED COMPENSATION

Stock Option Awards

In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period in which the employee is required to provide the services — the requisite service period (usually the vesting period) — in exchange for the award. The grant date fair value for options and similar instruments will be estimated using option pricing models. Under applicable accounting standards, the Company is required to select a valuation technique or option pricing model. The Company uses the Black-Scholes model. Accounting standards require that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

During the first nine months of 2011 and 2010, the Company recognized stock option compensation costs of $0.7 million and $1.1 million, respectively. In the third quarters of 2011 and 2010, the Company recognized stock option compensation costs of $0.2 million and $0.4 million, respectively. The remaining unrecognized compensation cost related to unvested stock option awards at October 2, 2011, approximated $0.7 million, and the weighted average period of time over which this cost will be recognized is approximately one year.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first nine months of fiscal year 2010. There were no stock options granted in 2011.

		Nine Months Ended
		Oct. 3, 2010
Risk free interest rate			2.09	%
Expected life		5.5 years
Expected volatility			61	%
Expected dividend yield			0.3	%

The weighted average grant date fair value of stock options granted during the first nine months of fiscal 2010 was $6.79 per share.

The following table summarizes stock options outstanding as of October 2, 2011, as well as activity during the nine months then ended:

						Weighted Average
		Shares				Exercise Price
Outstanding at January 2, 2011			1,148,500			$	7.51
Granted			—				—
Exercised			487,000				4.43
Forfeited or canceled			23,500				6.29
Outstanding at October 2, 2011			638,000			$	7.19
Exercisable at October 2, 2011			498,000			$	7.95

At October 2, 2011, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $2.3 million and $2.3 million, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).

Cash proceeds and intrinsic value related to total stock options exercised during the first nine months of fiscal years 2011 and 2010 are provided in the table below. The Company did not recognize any significant tax benefit with regard to stock options in either period.

		Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010
		(In millions)
Proceeds from stock options exercised		$	2.6			$	1.8
Intrinsic value of stock options exercised		$	5.9			$	3.9

Restricted Stock Awards

During the nine months ended October 2, 2011, and October 3, 2010, the Company granted restricted stock awards for 668,000 and 529,000 shares, respectively, of Class B common stock. These awards (or a portion thereof) vest with respect to each recipient over a two to five-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, these shares (or a portion thereof) could vest earlier upon the attainment of certain performance criteria, in the event of a change in control of the Company, or upon involuntary termination without cause.

Compensation expense related to restricted stock grants was $8.6 million and $1.9 million for the nine months ended October 2, 2011, and October 3, 2010, respectively. Accounting standards require that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

The following table summarizes restricted stock activity as of October 2, 2011, and during the nine months then ended:

						Weighted Average
		Shares				Grant Date Fair Value
Outstanding at January 2, 2011			1,740,000			$	13.04
Granted			668,000				17.08
Vested			600,000				12.23
Forfeited or canceled			42,000				14.21
Outstanding at October 2, 2011			1,766,000			$	15.03

As of October 2, 2011, the unrecognized total compensation cost related to unvested restricted stock was $13.3 million. That cost is expected to be recognized by the end of 2015.

For the nine months ended October 2, 2011 and October 3, 2010, the Company recognized tax benefits of $2.4 million and $0.5 million, respectively, with regard to restricted stock.

NOTE 7 — EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and nine-month periods ended October 2, 2011, and October 3, 2010, respectively:

		Three Months Ended								Nine Months Ended
Defined Benefit Retirement Plan (Europe)		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
		(In thousands)								(In thousands)
Service cost		$	72			$	88			$	217			$	266
Interest cost			2,835				2,715				8,605				8,094
Expected return on assets			(2,935	)			(2,772	)			(8,910	)			(8,264	)
Amortization of prior service costs			21				22				63				66
Recognized net actuarial (gains)/losses			149				413				454				1,226
Net periodic benefit cost		$	142			$	466			$	429			$	1,388

		Three Months Ended								Nine Months Ended
Salary Continuation Plan (SCP)		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
		(In thousands)								(In thousands)
Service cost		$	98			$	86			$	295			$	257
Interest cost			284				280				853				841
Amortization of transition obligation			55				55				164				164
Amortization of prior service cost			12				12				36				36
Amortization of loss			93				68				277				205
Net periodic benefit cost		$	542			$	501			$	1,625			$	1,503

NOTE 8 — 2010 RESTRUCTURING CHARGE

In the first quarter of 2010, the Company adopted a restructuring plan primarily related to workforce reduction in its European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A total of approximately 50 employees were affected by this restructuring plan. In connection with this plan, the Company recorded a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involves cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed in the first quarter of 2010.

A summary of these restructuring activities is presented below:

		Total
		Restructuring				Costs Incurred				Costs Incurred				Balance at
		Charge				in 2010				in 2011				Oct. 2, 2011
		(In thousands)
Workforce reduction		$	3,131			$	2,674			$	457			$	—

The table below details these restructuring activities by segment:

		Modular				Bentley
		Carpet				Prince Street				Corporate				Total
		(In thousands)
Total amounts expected to be incurred		$	2,951			$	180			$	—			$	3,131
Cumulative amounts incurred to date			2,951				180				—				3,131
Total amounts incurred in the nine-month period ended October 2, 2011			457				—				—				457

NOTE 9 — DISCONTINUED OPERATIONS

In 2007, the Company sold its Fabrics Group business segment. All activity related to this business has been included in discontinued operations. Assets and liabilities of this business segment have been reported in assets and liabilities held for sale for all periods presented. Discontinued operations had no net sales and no net income or loss in either the three-month or nine-month periods ended October 2, 2011, and October 3, 2010.

NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $12.0 million and $21.2 million for the nine months ended October 2, 2011, and October 3, 2010, respectively. Income tax payments amounted to $15.2 million and $10.8 million for the nine months ended October 2, 2011, and October 3, 2010, respectively.

NOTE 11 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard regarding the performance of a company’s annual goodwill impairment evaluation. This standard allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. This standard is effective for fiscal years beginning after December 31, 2011. At this time the Company does not expect adoption of this standard will have any significant impact on its consolidated financial statements.

In June 2011, the FASB amended an accounting standard regarding the presentation of comprehensive income. This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods ending after December 31, 2012, with earlier adoption permitted. As this amendment only effects presentation, there is not expected to be any impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued new accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Such criteria now require performing Step 2 if qualitative factors indicate that it is more likely than not that an impairment to goodwill exists. This recent guidance is effective for fiscal years beginning after December 15, 2010, as well as for interim periods within such years. The adoption of this standard did not have any significant impact on the Company’s consolidated condensed financial statements.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. The standard became effective for the Company in the first quarter of 2011. The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.

NOTE 12 — INCOME TAXES

Accounting standards require that all tax positions be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. In the first nine months of 2011, the Company increased its liability for unrecognized tax benefits by $0.1 million. As of October 2, 2011, the Company had approximately $8.2 million accrued for unrecognized tax benefits.

NOTE 13 — DIVIDEND TO NON-CONTROLLING INTEREST PARTNER

In the third quarter of 2010, the Company’s Thailand manufacturing joint venture paid dividends on a pro rata basis to its shareholders, including a dividend to the non-controlling interest partner in the joint venture. All operations, assets and liabilities of this joint venture are currently and have been previously consolidated by the Company. The dividend paid to the non-controlling interest partner was $7.9 million and had the effect of lowering the non-controlling interest in subsidiary balance as presented in the Company’s balance sheet.

On November 3, 2010, the Company purchased the shares of the Thailand manufacturing joint venture that were held by the non-controlling interest partner for approximately $4.3 million. After this purchase, the Company now owns all of the shares of the Thailand venture.

NOTE 14 — SUBSEQUENT EVENT

On October 26, 2011, the Company committed to a restructuring plan intended to reduce costs across its worldwide operations and more closely align its operations with reduced demand levels in certain markets. As a result of this plan, the Company expects to incur restructuring and asset impairment charges of approximately $6.5 million to $8.0 million during the fourth quarter of 2011. The majority of the charge will relate to reductions of approximately 100 employees (approximately $5-6 million) as well as smaller amounts for contract termination costs (approximately $0.5-1.0 million) and impairment of assets (approximately $0.8-1.0 million). The Company anticipates that approximately $5.5-6.5 million of this charge will result in future cash expenditures, primarily severance expense. Actions related to this restructuring plan are expected to be completed by the end of the fourth quarter of 2011, and the Company expects to generate annual savings of approximately $11.0 million as a result thereof.

NOTE 15 — SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013, its 9.5% Senior Subordinated Notes due 2014 and its 7 5/8% Senior Notes due 2018. These guarantees are full and unconditional. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.

INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 2011

										INTERFACE,				CONSOLIDATION
						NON-				INC.				AND
		GUARANTOR				GUARANTOR				(PARENT				ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(IN THOUSANDS)
Net sales		$	182,658			$	134,854			$	—			$	(44,406	)		$	273,106
Cost of sales			134,448				88,639				—				(44,406	)			178,681
Gross profit on sales			48,210				46,215				—				—				94,425
Selling, general and administrative expenses			30,972				32,062				6,053				—				69,087
Operating income (loss)			17,238				14,153				(6,053	)			—				25,338
Interest/Other expense			7,823				2,763				(4,333	)			—				6,253
Income (loss) before taxes on income and equity in income of subsidiaries			9,415				11,390				(1,720	)			—				19,085
Income tax expense (benefit)			3,412				4,128				(623	)			—				6,917
Equity in income (loss) of subsidiaries			—				—				13,265				(13,265	)			—
Net income (loss)			6,003				7,262				12,168				(13,265	)			12,168
Income attributable to non-controlling interest in subsidiary			—				—				—				—				—
Net income (loss) attributable to Interface, Inc.		$	6,003			$	7,262			$	12,168			$	(13,265	)		$	12,168

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 2, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION AND
		GUARANTOR				GUARANTOR				(PARENT				ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(IN THOUSANDS)
Net sales		$	512,183			$	405,303			$	—			$	(131,338	)		$	786,148
Cost of sales			378,571				262,787				—				(131,338	)			510,020
Gross profit on sales			133,612				142,516				—				—				276,128
Selling, general and administrative expenses			86,872				94,901				21,352				—				203,125
Operating income (loss)			46,740				47,615				(21,352	)			—				73,003
Interest/Other expense			20,654				9,689				(10,602	)			—				19,741
Income (loss) before taxes on income and equity in income of subsidiaries			26,086				37,926				(10,750	)			—				53,262
Income tax expense (benefit)			9,110				13,118				(3,772	)			—				18,456
Equity in income (loss) of subsidiaries			—				—				41,784				(41,784	)			—
Net income (loss)			16,976				24,808				34,806				(41,784	)			34,806
Income attributable to non-controlling interest in subsidiary			—				—				—				—				—
Net income (loss) attributable to Interface, Inc.		$	16,976			$	24,808			$	34,806			$	(41,784	)		$	34,806

CONDENSED CONSOLIDATING BALANCE SHEET

OCTOBER 2, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION
		GUARANTOR				GUARANTOR				(PARENT				AND ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,813			$	30,456			$	12,117			$	—			$	44,386
Accounts receivable			67,456				89,877				676				—				158,009
Inventories			96,980				74,136				—				—				171,116
Prepaids and deferred income taxes			9,071				17,598				10,806				—				37,475
Assets of business held for sale			—				1,200				—				—				1,200
Total current assets			175,320				213,267				23,599				—				412,186
Property and equipment less accumulated depreciation			83,806				99,589				4,675				—				188,070
Investment in subsidiaries			241,113				153,434				189,892				(584,439	)			—
Goodwill			6,954				69,612				—				—				76,566
Other assets			6,545				12,138				83,800				—				102,483
		$	513,738			$	548,040			$	301,966			$	(584,439	)		$	779,305
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities		$	15,340			$	52,044			$	86,358			$	—			$	153,742
Senior notes and senior subordinated notes			—				—				294,487				—				294,487
Deferred income taxes			11,124				1,615				(4,268	)			—				8,471
Other			4,242				1,902				27,930				—				34,074
Total liabilities			30,706				55,561				404,507				—				490,774
Common stock			94,145				102,199				6,546				(196,344	)			6,546
Additional paid-in capital			249,302				12,525				360,184				(261,827	)			360,184
Retained earnings (deficit)			141,184				424,722				(460,115	)			(125,160	)			(19,369	)
Foreign currency translation adjustment			(1,599	)			(19,119	)			(5,775	)			(1,108	)			(27,601	)
Pension liability			—				(27,848	)			(3,381	)			—				(31,229	)
		$	513,738			$	548,040			$	301,966			$	(584,439	)		$	779,305

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS
ENDED OCTOBER 2, 2011

						NON-				INTERFACE, INC.				CONSOLIDATION
		GUARANTOR				GUARANTOR				(PARENT				AND ELIMINATION				CONSOLIDATED
		SUBSIDIARIES				SUBSIDIARIES				CORPORATION)				ENTRIES				TOTALS
		(IN THOUSANDS)
Net cash provided by (used in) operating activities		$	(7,940	)		$	11,306			$	5,694			$	927			$	9,987
Cash flows from investing activities:
Purchase of plant and equipment			(15,048	)			(15,343	)			(368	)			—				(30,759	)
Other			(399	)			(1,083	)			(142	)			—				(1,624	)
Net cash used for investing activities			(15,447	)			(16,426	)			(510	)			—				(32,383	)
Cash flows from financing activities:
Other			24,114				3,609				(27,305	)			( 927	)			(509	)
Proceeds from issuance of common stock			—				—				2,610				—				2,610
Dividends paid to Interface, Inc. shareholders			—				—				(3,921	)			—				(3,921	)
Net cash used in financing activities			24,114				3,609				(28,616	)			(927	)			(1,820	)
Effect of exchange rate change on cash			—				(634	)			—				—				(634	)
Net increase (decrease) in cash			727				(2,145	)			(23,432	)			—				(24,850	)
Cash at beginning of period			1,086				32,601				35,549				—				69,236
Cash at end of period		$	1,813			$	30,456			$	12,117			$	—			$	44,386

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2, 2011, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, October 2, 2011, and the comparable periods of 2010 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.

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 economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011, which discussion is hereby incorporated by reference. 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.

7 5/8% Senior Notes

On December 3, 2010, we completed a private offering of $275 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”). Interest on the 7 5/8% Senior Notes is payable semi-annually on June 1 and December 1, beginning June 1, 2011. We used the net proceeds from the sale of the 7 5/8% Senior Notes (plus cash on hand) in connection with the repurchase of approximately $141.9 million aggregate principal amount of our 11 3/8% Senior Secured Notes and approximately $98.5 million aggregate principal amount of our 9.5% Senior Subordinated Notes pursuant to a Company tender offer.

Restructuring Plans

In the first quarter of 2010, we adopted a restructuring plan primarily related to workforce reduction in our European modular carpet operations. This reduction was in response to the continued challenging economic climate in that region. Smaller amounts were incurred in connection with restructuring activities in the Americas. A total of approximately 50 employees were affected by this restructuring plan. In connection with this plan, we recorded a pre-tax restructuring charge of $3.1 million. Substantially all of this charge involved cash expenditures, primarily severance expenses. Actions and expenses related to this plan were substantially completed in the first quarter of 2010.

In October of 2011, we committed to a restructuring plan intended to reduce costs across our worldwide operations and more closely align our operations with reduced demand levels in certain markets. As a result of this plan, we expect to incur restructuring and asset impairment charges of approximately $6.5 million to $8.0 million during the fourth quarter of 2011. The majority of the charge will relate to reductions of approximately 100 employees (approximately $5-6 million) as well as smaller amounts for contract termination costs (approximately $0.5-1.0 million) and impairment of assets (approximately $0.8-1.0 million). We anticipate that approximately $5.5-6.5 million of this charge will result in future cash expenditures, primarily severance expense. Actions related to this restructuring plan are expected to be completed by the end of the fourth quarter of 2011, and we expect to generate annual savings of approximately $11.0 million as a result thereof.

Discontinued Operations

In 2007, we sold our Fabrics Group business segment. In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics Group business segment for all periods reflected herein, as “discontinued operations.”

Our discontinued operations had no net sales and no net income or loss in either of the three-month or nine-month periods ended October 2, 2011 and October 3, 2010.

General

During the quarter ended October 2, 2011, we had net sales of $273.1 million, compared with net sales of $252.7 million in the third quarter last year. Fluctuations in currency exchange rates positively impacted 2011 third quarter sales by 4% (approximately $10 million), compared with the prior year period. During the first nine months of fiscal year 2011, we had net sales of $768.1 million, compared with net sales of $696.5 million in the first nine months of last year. Fluctuations in currency exchange rates positively impacted sales in the first nine months of 2011 by 4% (approximately $26 million), compared with the prior year period.

Included in our results for the nine months ended October 3, 2010 is $1.1 million of bond retirement expenses (comprised of $0.8 million of premiums and $0.3 million of write-offs of unamortized debt issuance costs) related to the partial redemption of our 9.5% Senior Subordinated Notes discussed in the Note entitled “Long-Term Debt” in Item 1. Also included in the nine-month period ended October 3, 2010 is $3.1 million of restructuring charges, as described above.

During the third quarter of 2011, we had net income attributable to Interface, Inc. of $12.2 million, or $0.19 per diluted share, compared with net income attributable to Interface, Inc. of $12.1 million, or $0.19 per diluted share, in the third quarter of 2010. Net income in the third quarter of 2011 was $12.1 million, or $0.19 per diluted share, compared with net income of $12.3 million, or $0.19 per diluted share, in the third quarter of 2010.

During the nine months ended October 2, 2011, we had net income attributable to Interface, Inc. of $34.8 million, or $0.53 per diluted share, compared with net income attributable to Interface, Inc. of $21.6 million, or $0.34 per diluted share, in the first nine months of 2010. Net income was $34.8 million, or $0.53 per diluted share, in the nine months ended October 2, 2011, compared with net income of $22.5 million, or $0.34 per diluted share, in the first nine months of 2010.

Results of Operations

The following table presents, as a percentage of net sales, certain items included in our Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended October 2, 2011, and October 3, 2010, respectively:

		Three Months Ended								Nine Months Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			65.4				64.6				64.9				65.1
Gross profit on sales			34.6				35.4				35.1				34.9
Selling, general and administrative expenses			25.3				24.3				25.8				25.4
Restructuring charge			—				—				—				0.4
Operating income			9.3				11.1				9.3				9.1
Bond retirement expenses			—				—				—				0.2
Interest/Other expenses			2.3				3.5				2.5				3.8
Income before tax expense			7.0				7.6				6.8				5.1
Income tax expense			2.5				2.7				2.3				1.9
Net income			4.5				4.9				4.4				3.2
Net income attributable to Interface, Inc.			4.5				4.8				4.4				3.1