NOTE

– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

he Company is a recognized leader in the worldwide commercial interiors market, offering modular carpet and luxury vinyl tile (“LVT”). The Company manufactures modular carpet focusing on the high quality, designer-oriented sector of the market, sources LVT from a

third

party and focuses on the same sector of the market, and provides specialized carpet replacement, installation and maintenance services. Additionally, the Company offers

Intersept

, a proprietary antimicrobial used in a number of interior finishes.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.

All of our subsidiaries are wholly-owned, and we are

not

a party to any joint venture, partnership or other variable interest entity that would potentially qualify for consolidation. All material intercompany accounts and transactions are eliminated. Investments in which the Company does

not

have the ability to exercise significant influence are carried at fair value. The Company monitors investments for other than temporary declines in value and makes reductions in carrying values when appropriate. As of

December 31, 2017

and

January 1, 2017,

the Company did

not

hold significant investments of this nature.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Examples include provisions for returns, bad debts, product claims reserves, rebates, inventory obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures and valuation allowances, environmental liabilities,

and the carrying value of goodwill and property and equipment. Actual results could vary from these estimates.

Revenue Recognition

evenue is recognized when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectability is reasonably assured. Delivery is

not

considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are estimated using historical experience, current economic trends, and the Company’s quality performance. The related provision is recorded as a reduction of sales and cost of sales in the same period that the revenue is recognized. Material differences

may

result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates.

Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.

Research and Development

Research and development costs are expensed as incurred and are included in the selling, general and administrative expense caption in the consolidated statements of operations. Research and development expense was

$14.0

million,

$14.3

million, and

$14.5

million for the years

2017,

2016

and

2015,

respectively.

Cash, Cash Equivalents and Short-Term Investments

Highly liquid investments with insignificant interest rate risk and with original maturities of

three

months or less are classified as cash and cash equivalents. Investments with maturities greater than

three

months and less than

one

year are classified as short-term investments.

The Company did

not

hold any significant amounts of cash equivalents and short-term investments at

December 31, 2017

and

January 1, 2017.

Cash payments for interest amounted to approximately

$6.3

million,

$5.5

million, and

$4.8

million for the years

2017,

2016,

and

2015,

respectively. Income tax payments amounted to approximately

$19.1

million,

$12.8

million and

$7.2

million for the years

2017,

2016

and

2015,

respectively. During the years

2017,

2016

and

2015,

the Company received income tax refunds of

$0.1

million,

$0.2

million and

$3.1

million, respectively.

Inventories

Inventories are

carried at the lower of cost (standards approximating the

first

-in,

first

-out method) or market. Costs included in inventories are based on invoiced costs and/or production costs, as applicable. Included in production costs are material, direct labor and allocated overhead.

The Company writes down inventories for the difference between the carrying value of the inventories and their estimated net realizable value. If actual market conditions are less favorable than those projected by management, additional write-downs

may

be required.

Management estimates its reserves for inventory obsolescence by continuously examining its 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 the Company

’s products, and current economic conditions. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and the Company could experience additional inventory write-downs in the future.

Rebates

The Company has agreements to receive cash consideration from certain of its vendors, including rebates and cooperative marketing reimbursements. The amounts received from its vendors are generally presumed to be a reduction of the prices the Company pays for their products and, therefore, such amounts are reflected as eithe

r a reduction of cost of sales in the accompanying consolidated statements of operations, or, if the product inventory is still on hand at the reporting date, it is reflected as a reduction of “Inventories” on the accompanying consolidated balance sheets. Vendor rebates are typically dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated and receipt becomes probable, the Company records a portion of the rebate as the Company makes progress towards the purchase threshold.

When the Company receives direct reimbursements for costs incurred in marketing the vendor

’s product or service, the amount received is recorded as an offset to selling, general and administrative expenses in the accompanying consolidated statements of operations.

Assets and Liabilities of Businesses Held for Sale

The Company considers businesses to b

e held for sale when the Board or management, having the relevant authority to do so, approves and commits to a formal plan to actively market a business for sale and the sale is considered probable. Upon designation as held for sale, the carrying value of the assets of the business are recorded at the lower of their carrying value or their estimated fair value, less costs to sell. The Company ceases to record depreciation expense at that time.

Property and Equipment and Long-Lived Assets

Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements

–

ten

forty

years; and furniture and equipment –

three

twelve

years. Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related assets’ estimated useful lives. The Company capitalized net interest costs on qualifying expenditures of approximately

$0.6

million,

$0.5

million, and

$0.3

million for the fiscal years

2017,

2016

and

2015,

respectively. Depreciation expense amounted to approximately

$29.5

million,

$30.1

million, and

$30.4

million for the years

2017,

2016,

and

2015

respectively.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount

may

not

be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance costs are charged to operating expense as incurred.

Goodwill and Other Intangible Assets

Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for

as acquisitions. Accumulated amortization amounted to approximately

$77.3

million at both

December 31, 2017

and

January 1, 2017,

and cumulative impairment losses recognized were

$212.6

million as of both

December 31, 2017

and

January 1, 2017.

As of

December 31, 2017,

and

January 1, 2017,

the net carrying amount of goodwill was

$68.8

million and

$61.2

million, respectively. Other intangible assets were

$0.6

million and

$1.0

million as of

December 31, 2017

and

January 1, 2017,

respectively. Amortization expense related to intangible assets during the years

2017,

2016

and

2015

was

$0.7

million,

$0.5

million and

$0.3

million, respectively

The Company capitalizes patent defense costs when it determines that a successful defense is probable. Any patent defense costs are amortized over the remaining useful life of the patent.

During

2016,

the Company determined that approximately

$3.4

million of patent defense costs related to our

TacTiles®

carpet tile installation system should be impaired as a successful defense was deemed

longer probable. This impairment is included in “Restructuring and Asset Impairment Charges” in our consolidated statement of operations.

During the

fourth

quarters of

2017,

2016

and

2015,

as of the last day of the

third

quarter of each year, the Company performed the annual goodwill impairment test required by applicable accounting standards. The Company performs this test at the reporting unit level, which is

one

level below the segment level for the Modular Carpet segment. In effecting the impairment testing, the Company prepared valuations of reporting units on both a market comparable methodology and an income methodology in accordance with the applicable standards, 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 future expectations of performance were considered. The annual testing indicated

potential of goodwill impairment in any of the years presented.

Each of t

he Company’s reporting units maintained fair values in excess of their respective carrying values as of the measurement date, and therefore

impairment was indicated during the impairment testing. As of

December 31, 2017,

if the Company’s estimates of the fair values of its reporting units which carry a goodwill balance were

10%

lower, the Company still believes

goodwill impairment would have existed.

The changes in the carrying amount

s of goodwill for the year ended

December 31, 2017

are as follows:

BALANCE JANUARY 1, 2017		ACQUISITIONS		IMPAIRMENT		FOREIGN CURRENCY TRANSLATION		BALANCE DECEMBER 31, 2017
(in thousands)
$	61,218	$	0	$	0		7,536	$	68,754

Product Warranties

The Company typically provides limited warranties with respect to certain attributes of its carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from

ten

twenty

years, depending on the particular carpet product and the environment in which it is to be installed. Similar limited warranties are provided on certain attributes of its LVT products, typically for a period of

years. The Company typically warrants that 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.

The Company records a provision related to warranty costs based on historical

experience and periodically adjusts these provisions to reflect changes in actual experience. Warranty and sales allowance reserves amounted to

$4.1

million and

$5.5

million as of

December 31, 2017

and

January 1, 2017,

respectively, and are included in “Accrued Expenses” in the accompanying consolidated balance sheets.

Taxes on Income

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company

’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date.

The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than

not

that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is

not

probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions.

The Company does

not

record taxes collected from customers and remitted to governmental authorities on a gross basis.

For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than

not”

threshold to the recognition and derecognition of tax positions. The Company

’s ongoing assessments of the more likely than

not

outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. For further information, see Note

entitled “Taxes on Income.”

Fair Values of Financial Instruments

Fair valu

es of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of debt are based on quoted market prices or pricing models using current market rates.

Translation of Foreign Currencies

The financial position and results of operations of the Company

’s foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in net income (loss). Foreign exchange translation gains (losses) were

$31.6

million, (

$19.0

) million, and (

$32.6

) million for the years

2017,

2016

and

2015,

respectively.

Income (Loss) Per Share

Basic income (loss) per share is computed based on the average number of common shares outstanding. Diluted income (loss) per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method.

Stock-Based Compensation

he Company has stock-based employee compensation plans, which are described more fully in Note

entitled “Shareholders’ Equity”.

The fair value of each

stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. However, there were

stock options granted in

2017,

2016

2015.

The

Company recognizes expense related to its restricted stock and performance share grants based on the grant date fair value of the shares awarded, as determined by its market price at date of grant.

Derivative Financial Instruments

Accounting standards require

a company to recognize all derivatives on the balance sheet at fair value. Derivatives that do

not

meet the criteria of an accounting hedge must be adjusted to fair value through income. If the derivative is a fair value hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings. If the derivative is a cash flow hedge, the effective portion of changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. In

2017,

the Company entered in to an interest rate swap instrument that it has designated as a derivative instrument. See further discussion of this instrument below in Note

entitled “Borrowings”.

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 the Company 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 the Company’s plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year. The actuarial assumptions used in the Company’s salary continuation plan and 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.

Environmental Remediation

The Company provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known environmental exposures and are discounted in certain instances. The Company regularly monitors the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination is made. As of

December 31, 2017,

and

January 1, 2017,

significant amounts were provided for remediation liabilities.

Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Estimating this amount requires the Company to analyze the financial strengths of its customers. If the financial condition of the Company

’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances

may

be required. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that the Company is unable to collect

may

be different than the amount initially estimated.

Reclassifications

Certain prior period amounts have been reclassified to conform to current year financial statement presentation

. These reclassifications had

effect on reported income, comprehensive income, cash flows, or shareholders’ equity as previously reported. Total assets as previously reported was impacted by the adoption of an accounting standard addressing the treatment of deferred taxes as discussed below.

Fiscal Year

The Company

’s fiscal year is the

week period ending on the Sunday nearest

December 31.

All references herein to

“2017,”

“2016,”

and

“2015,”

mean the fiscal years ended

December 31, 2017,

January 1, 2017,

and

January 3, 2016

respectively. Fiscal year

2015

was comprised of

weeks, while fiscal years

2017

and

2016

were each comprised of

weeks.