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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-02-28 · 122 added, 138 removed, 349 unchanged (43% of the section changed)

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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 years 2023, 2022, and 2021, primarily in education, healthcare, public buildings, residential/living, retail, and hospitality market segments.

See Item 1, entitled “Business,” included in this Annual Report on Form 10-K for additional information regarding our mix of sales in corporate office verses non-corporate office market segments for the last three fiscal years by reportable segment.

More than half of our consolidated net sales were in non-corporate office markets in fiscal years 2024, 2023, and 2022, primarily in education, healthcare, public buildings, retail, residential/living, hospitality, transportation, and consumer residential market segments.

Executive Summary

During 2024, we had consolidated net sales of $1,315.7 million, up 4.3% compared to $1,261.5 million in 2023, primarily due to increased customer demand – particularly in the retail and education market segments.

Consolidated operating income for 2024 was $134.4 million compared to consolidated operating income of $104.5 million in 2023, primarily due to higher sales volumes and lower raw material costs.

Consolidated net income for 2024 was $86.9 million, or $1.48 per diluted share, compared to consolidated net income of $44.5 million, or $0.76 per diluted share, in 2023.

During 2023, we had consolidated net sales of $1,261.5 million, down 2.8% compared to $1,297.9 million in 2022, primarily due to decreased customer demand – particularly in the retail market segment.

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Consolidated net income for 2023 was $44.5 million, or $0.76 per diluted share, compared to consolidated net income of $19.6 million, or $0.33 per diluted share, in 2022.

During 2022, we had consolidated net sales of $1,297.9 million, up 8.1% compared to $1,200.4 million in 2021, primarily due to higher sales in the corporate office, education and retail market segments.

Consolidated operating income for 2022 was $75.4 million compared to consolidated operating income of $104.8 million in 2021, primarily due to higher inflationary pressures on raw materials and freight costs and a $36.2 million goodwill and intangible asset impairment charge in 2022.

Consolidated net income for 2022 was $19.6 million, or $0.33 per diluted share, compared to consolidated net income of $55.2 million, or $0.94 per diluted share, in 2021.

A detailed discussion of our 2024 and 2023 consolidated and segment performance appears below under “Analysis of Results of Operations”.

Cybersecurity Event

As previously disclosed, on November 20, 2022, we discovered a cybersecurity attack, perpetrated by unauthorized third parties, affecting our IT systems.

Promptly, out of an abundance of caution, we shut down certain systems including shipping, inventory management and production systems and engaged forensic experts to evaluate the extent of the Cyber Event and its impact to our operations.

We also took steps to supplement existing security monitoring, including scanning and protective measures, and notified law enforcement.

The Company substantially resumed its operations within two weeks following the occurrence of the Cyber Event.

The investigation of the Cyber Event by our forensic experts was completed during 2023.

We incurred approximately $1.1 million of costs in 2023 in connection with the investigation of the Cyber Event, which were recorded in selling, general and administrative expenses in the consolidated statements of operations.

As previously disclosed in our current report on Form 8-K filed with the Commission on November 23, 2022, we discovered a cybersecurity attack on November 20, 2022, perpetrated by unauthorized third parties, affecting our IT systems.

The investigation of the Cyber Event was completed in fiscal year 2023.

We have cyber risk insurance and recovered $5.6 million in insurance proceeds during fiscal year 2024, representing business interruption proceeds and reimbursement of certain costs in connection with the Cyber Event.

Of the total insurance proceeds received in fiscal 2024, $4.8 million of business interruption proceeds were recognized as a benefit in other income / expense, net in the consolidated statements of operations and $0.8 million was recognized as a reduction of selling, general and administrative expenses.

The insurance claim for the Cyber Event has been closed as of December 29, 2024, and we are not expecting additional proceeds.

During 2023, the Company incurred approximately $1.1 million in connection with the investigation of the Cyber Event, which were recorded in selling, general and administrative expenses in the consolidated statements of operations.

In 2022, we estimated that the Cyber Event adversely affected our fiscal year 2022 revenues by approximately $8 million in lost sales.

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Approximately $4.8 million of the Cyber Event costs in 2022 were included in cost of sales in the consolidated statements of operations and approximately $0.3 million were included in selling, general and administrative expenses.

We have insurance and anticipate that a portion of our financial losses related to the Cyber Event will ultimately be covered by insurance.

We expect to incur ongoing costs for enhanced data security against unauthorized access to, or manipulation of, our systems and data.

Impact of Macroeconomic Conditions

During fiscal year 2023, the continued disruption in economic markets due to ongoing inflation, increases in interest rates, the Russia-Ukraine war, the onset of the Israel-Hamas war, a fairly stabilized but still challenging supply chain environment, a slow post COVID recovery in China and slow market conditions in the rest of Asia, and significant financial pressures in the commercial office market globally, all posed challenges for us.

Disruptions in economic markets due to inflation, high interest rates, the Russia-Ukraine war and the conflict in the Middle East, a still challenging supply chain environment, slow market conditions in certain parts of the globe, the impact of potential tariffs on the demand for our products, fluctuating freight costs, and significant financial pressures in the commercial office market globally, all pose challenges which may adversely affect our future performance .

Management believes it is reasonably likely that these challenges will continue to affect our future operations and demand for our products to some degree during fiscal year 2025.

W e are also anticipating decreases in the cost of raw materials and freight, offset by continued unfavorable manufacturing fixed cost absorption during fiscal year 2024.

To mitigate these impacts, we plan to continue evaluating our cost structure and global manufacturing footprint to identify and activate opportunities to decrease costs and optimize our global cost structure.

During fiscal year 2022, the COVID-19 pandemic had less of an impact on our overall financial results compared with the prior year as consolidated net sales increased 8.1% compared to 2021.

Government imposed COVID-19 lockdowns and restrictions in parts of China in 2022 adversely impacted sales in China by approximately 13% compared to 2021.

Global supply chain challenges and inflationary pressures in 2022 resulted in higher raw material costs, higher freight costs and shipping delays, which increased our operating costs and adversely impacted our gross profit margin in 2022.

W e plan to continue evaluating our cost structure and global manufacturing footprint to identify and activate opportunities to decrease costs and optimize our global cost structure.

The Company expects higher production volumes and lower per unit fixed costs in 2025, and anticipates these impacts will benefit our gross profit margin in 2025.

We also expect that continuing challenges in supply chain markets will result in higher freight costs to some degree in 2025 - particularly in the first half of 2025.

We anticipate that continuing slow market conditions in parts of the globe and significant financial pressures in the commercial office market globally will adversely impact our future performance and demand for our products.

Analysis of Results of Operations

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Because we have substantial international operations, we are impacted, from time to time, by international developments that affect foreign currency transactions.

In 2024, the weakening of the Euro, Canadian dollar, and Chinese Renminbi against the U.S.

dollar had a negative impact on our net sales, partially offset by the strengthening of the British Pound sterling against the U.S.

Currency fluctuations had no material impact to operating income in 2024.

In 2023, the strengthening of the Euro against the U.S.

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dollar had a negative impact on our net sales and operating income.

In 2021, the strengthening of the Euro, Australian dollar, Chinese Renminbi and British Pound sterling against the U.S.

dollar had a positive impact on our net sales and operating income.

The following table presents the amounts (in U.S.

dollars) by which the exchange rates for translating Euros, British Pounds sterling, Australian dollars, Chinese Renminbi and Canadian dollars into U.S.

dollars) by which the exchange rates for translating Euros, British Pounds sterling, Australian dollars, Chinese Renminbi, Canadian dollars, and other currencies into U.S.

dollars have affected our consolidated net sales and operating income during the past three years:

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Restructuring, asset impairment, other (gains) and charges

(0.2) 0.2 0.3

Goodwill and intangible asset impairment charge — — 2.8

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Consolidated net sales for 2024 compared with 2023

For 2024, our consolidated net sales increased $54.2 million (4.3%) compared to 2023, comprised of higher sales volumes (approximately 2.7%) and higher average sales prices (approximately 1.6%).

Fluctuations in currency exchange rates had a negative impact on our year-over-year consolidated net sales comparison of approximately $1.8 million, indicating that if currency levels had remained constant year-over-year, our 2024 net sales would have been higher by this amount.

On a market segment basis, the sales increase was most significant in the retail, education, residential living, and public buildings market segments partially offset by decreases in the hospitality, corporate office, and consumer residential market segments.

See the segment results discussion below for additional information on market segments.

Consolidated net sales for 2023 compared with 2022

For 2023, our consolidated net sales decreased $36.4 million (2.8%) compared to 2022, comprised of lower sales volumes (approximately 7.9%) partially offset by higher prices (approximately 5.1%).

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See the segment results discussion below for additional information on market segments.

Consolidated net sales for 2022 compared with 2021

For 2022, our consolidated net sales increased $97.5 million (8.1%) compared to 2021, comprised of higher sales volumes (approximately 5.4%) and higher prices (approximately 2.7%, including the impact of currency fluctuations).

Fluctuations in currency exchange rates had a negative impact on our year-over-year consolidated net sales comparison of approximately $58.8 million, meaning that if currency levels had remained constant year-over-year, our 2022 net sales would have been higher by this amount.

On a market segment basis, the sales increase was most significant in the corporate office, retail and education market segments.

See the segment results discussion below for additional information on market segments.

Consolidated Cost and Expenses

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Consolidated Cost of Sales

For 2024, our consolidated cost of sales increased $12.3 million (1.5%) compared to 2023, primarily due to higher sales partially offset by lower raw material costs.

Currency translation had a positive impact on consolidated cost of sales and partially reduced our costs by approximately $1.4 million (0.2%) compared to 2023.

As a percentage of net sales, our consolidated cost of sales decreased to 63.3% in 2024 versus 65.0% in 2023.

Management believes it is reasonably likely that lower per unit fixed costs due to higher production volumes and plant productivity initiatives will reduce our costs to some degree in 2025, particularly in the first half of 2025.

These favorable impacts are expected to be partially offset by higher freight costs in 2025.

For 2023, our consolidated cost of sales decreased $39.8 million (4.6%) compared to 2022, primarily due to lower sales and lower freight costs (approximately $19 million) due to stabilizing supply chain conditions.

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As a percentage of net sales, our consolidated cost of sales decreased to 65.0% in 2023 versus 66.3% in 2022.

Management believes it is reasonably likely that lower inflation and decreases in the cost of raw materials, partially offset by unfavorable manufacturing fixed cost absorption, will continue to some degree in 2024, particularly in the first half of 2024.

Management expects to continue managing the fixed cost under-absorption through higher sales prices, product mix and plant productivity initiatives.

For 2022, our consolidated cost of sales increased $92.5 million (12.1%) compared to 2021, primarily due to higher sales and continuing inflationary pressures on raw materials and freight costs.

The increase in consolidated cost of sales was also impacted by higher energy costs (which were up approximately 28%) in our EAAA segment primarily due to shortages in the supply of natural gas in connection with the ongoing conflict between Russia and Ukraine.

Currency translation had a positive impact on consolidated cost of sales of approximately $37.2 million (4.8%) compared to 2021.

The increase in cost of sales in 2022 also included $4.8 million of costs related to the Cyber Event, as discussed above.

As a percentage of net sales, our consolidated cost of sales increased to 66.3% in 2022 versus 64.0% in 2021, due to higher raw materials, freight and energy costs, as discussed above.

Consolidated Gross Profit

For 2024, consolidated gross profit, as a percentage of net sales, was 36.7% compared to 35.0% for 2023.

The increase in gross profit percentage was primarily due to (i) higher pricing (approximately 4%), partially offset by (ii) the unfavorable impact of inflation on raw material costs (approximately 1%), and (iii) unfavorable manufacturing fixed cost absorption and product mix (approximately 2%).

Management expects to continue managing the fixed cost under-absorption through higher sales prices, product mix, and plant productivity measures.

The increase in gross profit percentage was primarily due to (i) lower costs (approximately 1%) driven by lower raw material costs and lower fixed costs per unit as a result of higher volume and (ii) higher pricing (approximately 1%).

Management believes it is reasonably likely that gross profit in 2025 will be positively impacted by lower costs as discussed above.

For 2023, consolidated gross profit, as a percentage of net sales, was 35.0% compared to 33.7% for 2022.

The decrease was primarily due to inflationary pressures for raw materials and freight costs.

Consolidated SG&A Expenses

For 2024, our consolidated SG&A expenses were $348.5 million versus $339.0 million in 2023.

Currency translation had no material impact on consolidated SG&A expenses for 2024.

Consolidated SG&A expenses increased $9.5 million (2.8%) in 2024 compared to 2023, primarily due to higher people costs of $15.7 million driven by increased variable compensation as a result of higher operating income compared to 2023, partially offset by lower severance costs of $5.6 million driven by employee headcount reduction and cost saving initiatives in the prior year period.

As a percentage of net sales, SG&A expenses decreased to 26.5% in 2024 versus 26.9% in 2023.

For 2023, our consolidated SG&A expenses were $339.0 million versus $324.2 million in 2022.

Currency translation had a $1.5 million (0.5%) negative impact on the year-over-year comparison.

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As a percentage of net sales, SG&A expenses increased to 26.9% in 2023 versus 25.0% in 2022.

For 2022, our consolidated SG&A expenses were $324.2 million versus $324.3 million in 2021.

Currency translation had a $9.5 million (4.1%) positive impact on the year-over-year comparison.

Consolidated SG&A expenses were flat compared to 2021 as higher selling expenses of approximately $8.5 million due to higher sales were offset by lower labor costs due to prior year employee reductions and $5.4 million in lower professional fees due to prior year insurance recoveries.

As a percentage of net sales, SG&A expenses decreased to 25.0% in 2022 versus 27.0% in 2021.

Restructuring Plans

Restructuring Plan

On September 8, 2021, the Company committed to a restructuring plan that continued to focus on efforts to improve efficiencies and decrease costs across its worldwide operations, involving the closure of the Company’s manufacturing facility in Thailand.

During the second quarter of 2023, the Company completed the sale of the Thailand real estate and recognized a gain of $2.7 million.

This restructuring plan was completed following the sale of the Thailand facility.

During 2022, in conjunction with the closure of its Thailand facility, the Company recorded a write-down of inventory of $2.5 million within cost of sales in the consolidated statements of operations.

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Goodwill, Intangible Asset and Fixed Asset Impairment

During 2023, there was no impairment of our goodwill or indefinite-lived intangible assets.

During 2024 and 2023 there was no impairment of our goodwill or indefinite-lived intangible assets.

During 2022, we recognized a charge of $36.2 million for the impairment of goodwill and certain intangible assets.

See Note 12 entitled “ Goodwill and Other Intangible Assets ” of Part II, Item 8 of this Annual Report for additional information.

During 2023, there were no material fixed asset impairment charges.

In fiscal years 2022 and 2021, we recognized fixed asset impairment charges of $2.9 million and $4.4 million, respectively, for projects that were abandoned.

These charges are included in selling, general and administrative expenses in the consolidated statements of operations.

Interest Expense

For 2024, our interest expense was $23.2 million, versus $31.8 million in 2023, primarily due to lower outstanding term loan borrowings under the Syndicated Credit Facility.

Our average borrowing rate under the Syndicated Credit Facility as of December 29, 2024, was 5.62% compared to 6.61% at December 31, 2023.

For 2023, our interest expense was $31.8 million, versus $29.9 million in 2022, primarily due to higher interest rates on outstanding term loan borrowings under the Syndicated Credit Facility, partially offset by lower outstanding term loan borrowings under the Facility.

Our average borrowing rate under the Syndicated Credit Facility as of December 31, 2023, was 6.61% compared to 5.78% at January 1, 2023.

For 2022, our interest expense was $29.9 million, versus $29.7 million in 2021.

Higher interest rates in 2022 were offset by lower outstanding term loan borrowings under the Syndicated Credit Facility.

Our average borrowing rate under the Syndicated Credit Facility as of January 1, 2023, was 5.78% compared to 1.91% at January 2, 2022.

Other Expense

During 2023, other expense, net, was $9.1 million, versus $3.6 million in 2022.

The increase was primarily due to the substantial liquidation of our foreign subsidiaries in Brazil and Russia and the resulting recognition of $6.2 million of cumulative translation adjustments reclassified from accumulated other comprehensive loss.

Other Income Expense, net

During 2024, other (income) expense, net, was $(2.4) million versus $9.1 million in 2023.

The decrease was primarily due to the receipt in 2024 of $4.8 million of business interruption insurance proceeds related to the Cyber Event and $2.4 million of insurance proceeds related to a property casualty loss that occurred in fiscal year 2023.

These benefits were partially offset by the recognition of $2.2 million of cumulative translation losses reclassified from accumulated other comprehensive loss due to the substantial liquidation of our foreign subsidiary in Thailand during 2024.

During 2023, $6.2 million of cumulative translation losses were recognized in other (income) expense, net as a result of the substantial liquidation of our foreign subsidiaries in Brazil and Russia.

For fiscal year 2024, the Company recorded income tax expense of $26.6 million on pre-tax income of $113.6 million, resulting in an effective tax rate of 23.4% compared with income tax expense of $19.1 million on pre-tax income of $63.7 million, resulting in an effective tax rate of 30.1%, for fiscal year 2023.

The decrease in the effective tax rate for fiscal year 2024, compared to fiscal year 2023, was primarily due to the release of the valuation allowance on interest expense carryforwards, favorable tax benefits related to share-based compensation, and a favorable tax benefit related to a change in tax rate related to the UK pension plan.

These favorable changes were partially offset by a decrease in favorable tax benefits related to the repatriation of previously taxed foreign earnings and utilization of foreign tax benefits.

For fiscal year 2023, the Company recorded income tax expense of $19.1 million on pre-tax income of $63.7 million, resulting in an effective tax rate of 30.1%.

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This decrease was partially offset by a favorable change to unrecognized tax benefits in fiscal year 2022.

For fiscal year 2022, the Company recorded income tax expense of $22.4 million on pre-tax income of $41.9 million, resulting in an effective tax rate of 53.3%.

This compares with income tax expense of $17.4 million on pre-tax income of $72.6 million, resulting in an effective tax rate of 24.0% for fiscal year 2021.

The effective tax rate for fiscal year 2022 was significantly impacted by a non-deductible goodwill impairment charge.

Excluding the impact of the non-deductible goodwill impairment charge, the effective tax rate was 31.4% for fiscal year 2022.

The increase in the effective tax rate for fiscal year 2022, as compared to fiscal year 2021, excluding the goodwill impairment charge, was primarily due to an increase in non-deductible employee compensation, an increase in the valuation allowance on net operating loss and interest carryforwards, unfavorable changes related to the cash surrender value of Company-owned life insurance policies and unfavorable changes related to foreign exchange movements.

Segment Results

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See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information .

During fiscal year 2024, the Company implemented a cost center realignment initiative as part of the Company’s efforts to centralize certain global/shared functions.

During 2024, SG&A expenses for these global support functions were allocated to adjusted operating income (“AOI”) for each reportable segment consistent with the allocation methodology used to allocate corporate overhead in prior periods.

Prior year AOI amounts below were not recast as there was no material impact to the measure of segment profit for each reportable segment.

There were no changes to the composition of the Company’s operating or reportable segments.

AMS Segment – Net Sales and Adjusted Operating Income (“AOI”)

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106,594 87,789 102,370 21.4 % (14.2) %

(1) Includes allocation of corporate SG&A expenses.

Excludes Cyber Event costs, intangible asset impairment charge, and restructuring, asset impairment, severance, and other, net.

(1) Includes allocation of corporate SG&A expenses and allocation of global support SG&A expenses as discussed above.

Excludes Cyber Event impact, intangible asset impairment charge, and restructuring, asset impairment, severance, and other, net.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.

AMS Segment Net Sales for 2024 compared with 2023

During 2023, net sales in AMS decreased 2.2% versus 2022, comprised of lower sales volume partially offset by higher prices.

On a market segment basis, the AMS sales decrease was most significant in the retail (down 50.6%) market segment partially offset by increases in the education (up 7.9%), corporate office (up 4.1%) and residential living (up 15.4%) market segments.

During 2024, net sales in AMS increased 8.7% versus 2023, comprised of higher sales volume and higher average sales prices.

On a market segment basis, the AMS sales increase was most significant in the retail (up 81.5%), education (up 13.5%), public buildings (up 27.9%), and residential living (up 23.3%) market segments partially offset by decreases in the corporate office (down 1.7%), hospitality (down 18.0%), and consumer residential (down 10.4%) market segments.

AMS Segment Net Sales for 2023 compared with 2022

During 2022, net sales in AMS increased 15.7% versus 2021, comprised of higher sales volumes and higher prices.

On a market segment basis, the AMS sales increase was most significant in the retail (up 54.2%), education (up 18.9%), public buildings (up 18.0%), corporate office (up 11.7%) and healthcare (up 5.8%) market segments.

These increases were partially offset by decreases in the consumer residential (down 8.7%) market segment.

AMS AOI for 2023 compared with 2022

AOI in AMS decreased 14.2% during 2023 compared to 2022, primarily due to unfavorable manufacturing fixed cost absorption and lower sales, partially offset by lower freight costs.

AMS SG&A expenses as a percentage of net sales increased approximately 1.1% compared to 2022, primarily due to higher selling expenses, which contributed to the decrease in AOI for the current year.

As a percentage of net sales, AOI decreased to 11.9% in 2023 versus 13.6% in 2022.

During 2023, net sales in AMS decreased 2.2% versus 2022, comprised of lower sales volume partially offset by higher average sales prices.

AMS AOI for 2024 compared with 2023

AOI in AMS increased 20.4% during 2022 compared to 2021, primarily due to higher sales.

AMS SG&A expenses as a percentage of net sales in 2022 decreased approximately 0.7% compared to 2021, primarily due to lower administrative costs, which contributed to the increase in AOI in 2022.

AOI in AMS increased 21.4% during 2024 compared to 2023.

Higher adjusted gross profit in 2024, driven by higher sales, lower raw material costs, and favorable fixed cost absorption contributed to the increase in AMS AOI for the current year.

AMS SG&A expenses as a percentage of net sales decreased approximately 0.8% compared to 2023, also contributed to the increase in AOI.

As a percentage of net sales, AOI increased to 13.3% in 2024 versus 11.9% in 2023.

AMS AOI for 2023 compared with 2022

AOI in AMS decreased 14.2% during 2023 compared to 2022.

Lower adjusted gross profit in 2023 driven by unfavorable manufacturing fixed cost absorption and lower sales, partially offset by lower freight costs contributed to the decrease in AMS AOI.

AMS SG&A expenses as a percentage of net sales increased approximately 1.1% compared to 2022, primarily due to higher selling expenses also contributed to the decrease in AOI for 2023.

As a percentage of net sales, AOI decreased to 11.9% in 2023 versus 13.6% in 2022.

EAAA Segment – Net Sales and AOI

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34,803 28,608 30,058 21.7 % (4.8) %

(1) Includes allocation of corporate SG&A expenses.

Excludes goodwill and intangible asset impairment charges, purchase accounting amortization, Thailand plant closure inventory write-down, Cyber Event costs, and restructuring, asset impairment, severance, and other, net.

(1) Includes allocation of corporate SG&A expenses and allocation of global support SG&A expenses as discussed above.

Excludes goodwill and intangible asset impairment charges, purchase accounting amortization, Cyber Event impact, Thailand plant closure inventory write-down, and restructuring, asset impairment, severance, and other, net.

See Note 20 entitled “Segment Information” included in Item 8 of this Annual Report on Form 10-K for additional information.

EAAA Segment Net Sales for 2024 compared with 2023

During 2024, net sales in EAAA decreased 1.8% versus 2023, primarily due to lower sales volume.

Currency fluctuations had a negative impact of approximately $0.8 million (0.2%) on EAAA net sales for 2024 compared to 2023 due to the weakening of the Euro, Chinese Renminbi, and Australian dollar against the U.S dollar, partially offset by the strengthening of the British Pound sterling against the U.S.

On a market segment basis, the EAAA sales decrease was most significant in the public buildings (down 21%), hospitality (down 24.1%), and healthcare (down 6.8%) market segments, partially offset by an increase in the residential living (up 9.1%) market segment.

EAAA Segment Net Sales for 2023 compared with 2022

During 2023, net sales in EAAA decreased 3.6% versus 2022, comprised of lower sales volume partially offset by higher selling prices.

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Currency fluctuations had a positive impact of approximately $3.5 million (0.6%) on EAAA net sales for 2023 compared to 2022 due to the strengthening of the Euro, partially offset by the weakening of the Australian dollar and Chinese Renminbi against the U.S.

On a market segment basis, the EAAA sales decrease was most significant in the corporate office (down 3.5%), healthcare (down 23.5%), retail (down 22.8%), and education (down 3.9%) market segments, partially offset by increases in the hospitality (up 11.5%) market segment.

EAAA segment net sales for 2022 compared with 2021

During 2022, net sales in EAAA decreased 0.9% versus 2021.

Higher selling prices and volume were offset by the impact of negative currency fluctuations of approximately $56.7 million (10.3%) for 2022 compared to 2021 due to the weakening of the Euro, Australian dollar, British Pound sterling and Chinese Renminbi against the U.S.

On a market segment basis, EAAA sales increased in the corporate office (up 6.2%) and hospitality (up 22.3%) market segments.

These increases were offset by decreases in the public buildings (down 25.7%), transportation (down 21.3%), retail (down 14.9%) and healthcare (down 8.2%) market segments.

On a market segment basis, the EAAA sales decrease was most significant in the corporate office (down 3.5%), healthcare (down 23.5%), retail (down 22.8%), and education (down 3.9%) market segments, partially offset by an increase in the hospitality (up 11.5%) market segment.

EAAA AOI for 2024 compared with 2023

AOI in EAAA decreased 4.8% during 2023 versus 2022 primarily due to the impact of lower sales, inflationary pressures on raw material costs, and unfavorable manufacturing fixed cost absorption on lower production volumes.

AOI in EAAA increased 21.7% during 2024 versus 2023.

Higher adjusted gross profit in 2024, driven by lower raw material costs partially offset by lower sales volume contributed to the increase in EAAA AOI for the current year.

Currency fluctuations had no material impact on EAAA AOI in 2024 compared to 2023.

As a percentage of net sales, AOI was 5.5% in both 2023 and 2022.

As a percentage of net sales, AOI was 6.8% in 2024 versus 5.5% in 2023.

EAAA AOI for 2023 compared with 2022

AOI in EAAA decreased 19.3% during 2022 versus 2021 due to continuing inflationary pressures on raw materials and higher energy costs (which were up approximately 28%) primarily due to natural gas shortages in connection with the ongoing conflict between Russia and Ukraine.

The decrease in AOI was also due to negative currency fluctuations of approximately $6.5 million (9.9%) due to the weakening of the Euro, Australian dollar, British Pound sterling and Chinese Renminbi against the U.S.

EAAA SG&A expenses as a percentage of net sales in 2022 decreased approximately 2.5% compared to the prior year, which partially offset the negative impacts on AOI discussed above.

As a percentage of net sales, AOI decreased to 5.5% in 2022 versus 6.8% in 2021.

AOI in EAAA decreased 4.8% during 2023 versus 2022.

Lower adjusted gross profit in 2023, driven by lower sales, inflationary pressures on raw material costs, and unfavorable manufacturing fixed cost absorption on lower production volumes contributed to the decrease in EAAA AOI.

Currency fluctuations had no material impact on EAAA AOI in 2023 compared to 2022.

As a percentage of net sales, AOI was 5.5% in both 2023 and 2022.

Financial Condition, Liquidity and Capital Resources

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We generate our cash and other liquidity requirements primarily from our operations and from borrowings under our Syndicated Credit Facility (the “Facility”) 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.

We anticipate that our liquidity, cash flows from operations, cash and cash equivalents, and other sources of liquidity are sufficient to meet our obligations for the next 12 months, and we expect to generate sufficient cash to meet our long-term obligations.

However, the Company’s cash flows from operations can be affected by numerous factors including 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.

Below are estimates of our material cash requirements for future periods.

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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 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 interest rates may increase.

We have borrowings based on variable interest rates (as described below) that expose the Company to the risk that interest rates may increase.

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 former interest rate swap transaction, please see the discussion in Item 7A of this Report.

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Balance Sheet

Accounts receivable, net, were $163.4 million at December 31, 2023, compared to $182.8 million at January 1, 2023.

The decrease of $19.4 million was primarily due to customer collections in 2023, including the impact of delays in customer billings from the Cyber Event, in which the due dates for those delayed billings were pushed from the fourth quarter of 2022 to the first quarter of 2023.

Inventories, net, were $279.1 million at December 31, 2023, compared to $306.3 million at January 1, 2023.

The decrease of $27.2 million was primarily due to decreases in the cost of raw materials during the current year, lower manufacturing volume due to reduced customer demand, and improvements in working capital management.

Accounts receivable, net, were $171.1 million at December 29, 2024, compared to $163.4 million at December 31, 2023.

The increase of $7.7 million was primarily due to the impact of higher net sales as a result of increased customer demand in 2024.

Inventories, net, were $260.6 million at December 29, 2024, compared to $279.1 million at December 31, 2023.

The decrease of $18.5 million was primarily due to higher sales, stronger working capital management, and lower raw material costs during the current year.

Analysis of Cash Flows

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Cash and cash equivalents at end of period $ 99,226 $ 110,498 $ 97,564

We ended 2024 with $99.2 million in cash, a decrease of $11.3 million during the year.

The decrease was primarily due to the following:

• Cash provided by operating activities was $148.4 million for 2024, which represents an increase of $6.4 million compared to 2023.

The increase in operating cash flows was primarily due to higher sales during 2024 resulting in a source of cash from lower inventory balances partially offset by a use of cash as a result of higher accounts receivable.

The 2023 comparable period includes a source of cash for accounts receivable as delayed customer billings related to the 2022 Cyber Event were collected in 2023.

• Cash used in investing activities was $30.4 million for 2024, which represents an increase of $10.9 million compared to 2023.

The increase was primarily attributable to an increase in capital expenditures due to increased capital investment partially offset by $2.4 million of insurance proceeds related to a 2023 property casualty loss.

The 2023 comparable period includes proceeds of approximately $6.6 million from the sale of the Company’s Thailand real estate.

• Cash used in financing activities was $125.2 million for 2024, which represents an increase of $13.7 million compared to 2023.

The increase was primarily attributable to higher prepayments of term loan borrowings during 2024 compared to the 2023 comparable period.

We ended 2023 with $110.5 million in cash, an increase of $12.9 million during the year.

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Fiscal year 2021 also included higher repayments of approximately $60 million of term loan borrowings which contributed to a greater use of cash in that period.

We ended 2021 with $97.3 million in cash, a decrease of $5.8 million during the year.

The decrease was primarily due to the following:

• 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).

Share Repurchases

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The program has no specific expiration date.

No shares of common stock were repurchased during 2023 pursuant to this program.

During 2022, the Company repurchased and retired an aggregate of 1,383,682 shares at a weighted average price of $12.41 per share, or $17.2 million, pursuant to this program.

No shares of common stock were repurchased during 2024 and 2023 pursuant to this program.

As of December 29, 2024, approximately $82.8 million remains authorized pursuant to this program for future share repurchases.

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Fees for standby letters of credit are charged at varying rates computed by applying a margin ranging from 1.25% to 3.00% per annum of the amount available to be drawn under such standby letters of credit, depending on the Company’s consolidated net leverage ratio as of the most recently completed fiscal quarter.

LIBOR Transition

On December 9, 2021 and October 14, 2022, we entered into the fourth and fifth amendments, respectively, to our Facility.

These amendments, among other changes, replaced the LIBOR benchmark rates with specified successor benchmark rates, including SOFR benchmark interest rates applicable to all loans denominated in U.S.

The Facility contains standard and customary covenants for agreements of this type, including various reporting, affirmative and negative covenants.

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Pursuant to a Second Amended and Restated Security and Pledge Agreement, the Facility is secured by substantially all of the assets of Interface, 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 receivable, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries.

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 certain material foreign subsidiaries.

Under the Facility, we are required to make quarterly amortization payments of the term loan borrowings.

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Net sales for the non-guarantor subsidiaries were approximately $573 million for fiscal year 2024, $584 million for fiscal year 2023, and $597 million for fiscal year 2022.

Total indebtedness of the non-guarantor subsidiaries was approximately $133 million as of December 31, 2023.

Included in this $133 million is $103 million of indebtedness from the non-guarantor subsidiaries to guarantor subsidiaries, resulting from the dividend of an asset — a note receivable — by a non-guarantor subsidiary to a guarantor subsidiary.

Total indebtedness of non-guarantor subsidiaries was approximately $43 million as of January 1, 2023.

There was no indebtedness from non-guarantor subsidiaries to guarantor subsidiaries as of January 1, 2023.

Total indebtedness of the non-guarantor subsidiaries was approximately $102 million and $133 million as of December 29, 2024, and December 31, 2023, respectively.

The Senior Notes can be redeemed on or after December 1, 2023, at specified redemption prices.

See Note 9 entitled “Long-Term Debt” in Item 8 of this Report for additional information.

Forward-Looking Statements

The Company expects decreases in the cost of raw materials and freight to continue into fiscal year 2024, due to a stabilizing but still challenging supply chain environment.

We expect these impacts will benefit our gross profit margins in 2024.

We anticipate that a continuing slow post COVID recovery in China, slow market conditions in the rest of Asia, and significant financial pressures in the commercial office market globally will adversely impact our future performance and demand for our products.

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.

Critical Accounting Policies and Estimates

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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 December 31, 2023, and January 1, 2023, we had state net operating loss carryforwards of $192.1 million and $162.8 million, respectively.

As of December 29, 2024, and December 31, 2023, we had state net operating loss carryforwards of $190.1 million and $192.1 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.

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If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.

We review the carrying values of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying value of a reporting may exceed its fair value as set forth in Accounting Standards Codification 350 “ Intangibles — Goodwill and Other ”, as amended by Accounting Standards Update (“ASU”) 2017-04 .

We review the carrying values of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value as set forth in Accounting Standards Codification 350 “ Intangibles — Goodwill and Other ”, as amended by Accounting Standards Update (“ASU”) 2017-04 .

We test goodwill at the reporting unit level, which is an operating segment or one level below an operating segment.

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If we determine that the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired.

If we determine that the carrying value of the reporting unit exceeds its estimated fair value, we measure the goodwill impairment charge based on the excess of the reporting unit’s carrying value over its fair value consistent with ASU 2017-04, “ Simplifying the Test for Goodwill Impairment ”, which we adopted on December 30, 2019.

During the fourth quarter of 2023, we performed our annual quantitative goodwill impairment testing.

We focused our testing on the Americas reporting unit since it is the only reporting unit with an allocated goodwill balance.

During the fourth quarter of 2024 and 2023, we performed our annual quantitative goodwill impairment testing.

We focused our testing on the Americas reporting unit because it is the only reporting unit with an allocated goodwill balance.

The allocated goodwill balances for our EMEA and Asia-Pacific reporting units were written off in prior years as a result of goodwill impairment charges.

The Company performed limited procedures for our EMEA and Asia Pacific reporting units during the 2023 goodwill testing to facilitate a reconciliation of market capitalization.

The annual quantitative goodwill testing performed in 2023 for our Americas reporting unit was consistent with our prior year methodology.

The Company performed limited procedures for our EMEA and Asia-Pacific reporting units during the 2024 and 2023 goodwill testing to facilitate a reconciliation of market capitalization.

The annual quantitative goodwill testing performed in 2024 and 2023 for our Americas reporting unit was consistent with our prior year methodology.

T he Company prepared valuations for the Americas reporting unit on both a market comparable methodology and an income methodology, utilizing a combination of the present value of expected future cash flows and the guideline public company method to determine the estimated fair value of the reporting unit.

In preparing the valuation, past, present and future expectations of performance were considered, including our expectations for the short-term and long-term impacts of macroeconomic conditions, including inflation, and our expected financial performance, including planned revenue and operating income for the Americas reporting unit.

In preparing the valuation, past, present and future expectations of performance were considered, including our expectations for the short-term and long-term impacts of macroeconomic conditions, and our expected financial performance, including planned revenue and operating income for the Americas reporting unit.

The present value model requires management to estimate future cash flows, the timing of these cash flows, and a discount rate based on a weighted average cost of capital.

The discount rate used for the Americas reporting unit was 11.5% in 2023 compared to 13.5% in 2022, which fluctuated based on a risk premium assigned to estimates of expected future performance.

The discount rate used for the Americas reporting unit was 10.5% in 2024 compared to 11.5% in 2023, which fluctuated based on a lower risk premium assigned to estimates of expected future performance.

There is inherent uncertainty associated with key assumptions and estimates used in our impairment testing, including the impact of macroeconomic conditions.

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The goodwill balance of $99.9 million at December 29, 2024, is allocated entirely to our Americas reporting unit.

We have not made any material changes to our goodwill impairment loss assessment methodology during the past three fiscal years.

Currently, we do not believe there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses.

However, we cannot predict or control market factors, including the impact of macroeconomic conditions and the impact of certain risks inherent to our operations, as described in Item 1A “Risk Factors” of this Annual Report.

If actual results are not consistent with our assumptions and estimates, we may be exposed to additional goodwill impairment losses that could be material.

During the fourth quarter of 2022, we performed our annual goodwill quantitative testing.

As a result of our 2023 annual goodwill testing, we determined that the fair value of our Americas reporting unit exceeded its carrying value by 71% at the 2023 m easurement date, and therefore no impairment was indicated.

The goodwill balance of $105.4 million at December 31, 2023, was allocated entirely to our Americas reporting unit.

During the fourth quarter of 2022, we performed our annual goodwill quantitative testing for each reporting unit.

We considered factors such as, but not limited to, our expectations for the short-term and long-term impacts of macroeconomic factors, including ongoing inflation, foreign currency exchange rates, and our expected financial performance, including planned revenue and operating income of each reporting unit.

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For fiscal year 2022, we determined that the carrying value of our EMEA reporting unit exceeded its fair value and that the associated goodwill was impaired.

We recorded a goodwill impairment charge of $29.4 million to write off all the goodwill allocated to our EMEA reporting unit as the excess of carrying value over fair value was higher than the recorded amount of goodwill for the reporting unit.

We recorded a goodwill impairment charge of $29.4 million to write off all the goodwill allocated to our EMEA reporting unit.

As of the 2022 measurement date, the fair value of our Americas reporting unit exceeded its carrying value by 71%, and the Americas reporting unit was not impaired.

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The goodwill balance allocated to our Asia-Pacific reporting unit was previously written off in connection with the 2020 goodwill impairment.

During the fourth quarter of 2021, we performed the annual goodwill impairment test consistent with prior years and the methodology described above, and all reporting units that had a goodwill balance were noted to have a fair value that exceeded their carrying value.

We have not made any material changes to our goodwill impairment loss assessment methodology during the past three fiscal years.

Currently, we do not believe there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses.

If actual results are not consistent with our assumptions and estimates, we may be exposed to additional goodwill impairment losses that could be material.

See Note 12 entitled “ Goodwill and Other Intangible Assets ” of Part II, Item 8 of this Annual Report for additional information.

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While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences may continue to change, and we could experience additional inventory write-downs in the future.

Our inventory reserve on December 31, 2023 and January 1, 2023, was $34.0 million and $28.5 million, respectively.

Our inventory reserve on December 29, 2024 and December 31, 2023, was $38.3 million and $34.0 million, respectively.

To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our 2024 net income would be higher or lower by approximately $2.9 million, on an after-tax basis.

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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 on December 31, 2023 and January 1, 2023, was $3.0 million and $4.0 million, respectively.

Our allowance for expected credit losses on December 29, 2024 and December 31, 2023, was $3.8 million and $3.0 million, respectively.

To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our 2024 net income would be higher or lower by approximately $0.3 million, on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance.

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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 on December 31, 2023 and January 1, 2023, was $4.3 million and $2.1 million, respectively.

Our warranty and sales allowance reserve on December 29, 2024 and December 31, 2023, was $5.3 million and $4.3 million, respectively.

Actual warranty expense incurred could vary significantly from amounts that we estimate.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis