INTERFACE INC 10-Q

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 December 29, 2024, under Part II, Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter ended March 30, 2025, or as of, March 30, 2025, and the comparable periods of 2024, and to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information. The three-month periods ended March 30, 2025 and March 31, 2024 both include 13 weeks. Forward-Looking Statements This report contains statements which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with the economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading “Risk Factors” included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2024, as supplemented in Part II, Item 1A of this report. 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. 26 Table of Contents Executive Overview During the quarter ended March 30, 2025, we had consolidated net sales of $297.4 million, up 2.6% compared to $289.7 million in the first quarter last year, primarily due to higher sales volume — particularly in the education, healthcare, and retail market segments. Fluctuations in currency exchange rates negatively impacted net sales during the first quarter of 2025, as discussed below. Consolidated operating income was $23.2 million for the first quarter of 2025, compared to $24.4 million in the first quarter last year, primarily due to lower gross profit margin as a result of higher manufacturing costs in EAAA and higher freight costs, partially offset by higher pricing. Consolidated net income for the quarter ended March 30, 2025, was $13.0 million or $0.22 per diluted share, compared to consolidated net income of $14.2 million or $0.24 per diluted share, in the first quarter last year. Impact of Macroeconomic Trends Disruptions in economic markets due to the potential impact of government-imposed tariffs and retaliatory tariffs, fluctuating freight costs, supply chain challenges and disruptions, significant pressures in the commercial office market globally, inflation, slow market conditions in certain parts of the globe, the Russia-Ukraine war and the conflict in the Middle East, all pose challenges which may adversely affect our future performance. 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. 27 Table of Contents Analysis of Results of Operations Consolidated Results The following table presents, as a percentage of net sales, certain items included in our consolidated condensed statements of operations for the three-month periods ended March 30, 2025 and March 31, 2024: Three Months Ended March 30, 2025 March 31, 2024 Net sales 100.0 % 100.0 % Cost of sales 62.7 61.9 Gross profit 37.3 38.1 Selling, general and administrative expenses 29.5 29.7 Operating income 7.8 8.4 Interest/Other expense, net 2.0 1.9 Income before income tax expense 5.8 6.5 Income tax expense 1.4 1.7 Net income 4.4 % 4.8 % Consolidated Net Sales Below is information regarding our consolidated net sales, and analysis of those results, for the three-month periods ended March 30, 2025, and March 31, 2024: Three Months Ended Percentage Change March 30, 2025 March 31, 2024 (in thousands) Consolidated net sales $ 297,413 $ 289,743 2.6 % For the quarter ended March 30, 2025, consolidated net sales increased $7.7 million (2.6%) versus the comparable period in 2024, primarily due to higher sales volumes (approximately 3%). Currency fluctuations had a negative impact on net sales of approximately $4.3 million (1.5%) for the first quarter of 2025, compared to the same period last year, primarily due to the weakening of the Euro, Australian dollar, and Canadian dollar against the U.S. dollar. On a market segment basis, the sales increase was primarily in the education, retail, and healthcare market segments partially offset by lower sales in the corporate office market segment. Consolidated Cost and Expenses The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three-month periods ended March 30, 2025, and March 31, 2024: Three Months Ended Percentage Change March 30, 2025 March 31, 2024 (in thousands) Consolidated cost of sales $ 186,450 $ 179,338 4.0 % Consolidated selling, general and administrative expenses 87,736 85,959 2.1 % Consolidated Cost of Sales For the quarter ended March 30, 2025, consolidated cost of sales increased $7.1 million (4.0%) compared to the first quarter of 2024, primarily due to higher sales and higher manufacturing and freight costs due to inflation. Currency fluctuations had a positive impact on consolidated cost of sales for the first quarter of 2025, and partially reduced our costs by approximately $2.9 million (1.6%) compared to the same period last year. As a percentage of net sales, our cost of sales increased to 62.7% for the first quarter of 2025 versus 61.9% for the first quarter of 2024. 28 Table of Contents Consolidated Selling, General and Administrative (“SG&A”) Expenses For the quarter ended March 30, 2025, consolidated SG&A expenses increased $1.8 million (2.1%) versus the comparable period in 2024. Currency translation had no material impact on consolidated SG&A expenses in the first quarter of 2025 compared to the same period last year. SG&A expenses were higher for the first quarter of 2025 primarily due to higher commissions as a result of higher sales compared to the same period last year. As a percentage of net sales, SG&A expenses decreased to 29.5% for the first quarter of 2025 versus 29.7% for the first quarter of 2024. Consolidated Gross Profit For the quarter ended March 30, 2025, consolidated gross profit, as a percentage of net sales, was 37.3% compared with 38.1% in the same period last year. The decrease in consolidated gross profit percentage was primarily due to higher costs (approximately 1%) driven by higher manufacturing costs in EAAA and higher freight costs, partially offset by higher pricing (approximately 0.4%). Interest Expense During the quarter ended March 30, 2025, interest expense was $4.4 million, a decrease of $2.0 million from the comparable period in 2024, primarily due to lower outstanding term loan borrowings under the Facility. 29 Table of Contents Segment Operating Results AMS Segment – Net Sales and Adjusted Operating Income (“AOI”) The following table presents AMS segment net sales and AOI for the three-month periods ended March 30, 2025, and March 31, 2024: Three Months Ended Percentage Change March 30, 2025 March 31, 2024 (in thousands) AMS segment net sales $ 179,937 $ 169,915 5.9 % AMS segment AOI (1) 19,863 18,080 9.9 % (1) Includes allocation of corporate and global support SG&A expenses. Excludes restructuring, asset impairment, severance, and other, net and the impact of a cyber event. See Note 10 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. During the first quarter of 2025, net sales in AMS increased 5.9% versus the comparable period in 2024 primarily due to higher sales volumes. On a market segment basis, the AMS sales increase was primarily in the education, retail, and healthcare market segments partially offset by a decrease in the corporate office market segment. AOI in AMS increased 9.9% during the first quarter of 2025 compared to the prior year period primarily due to higher sales. As a percentage of net sales, AOI increased to 11.0% during the first quarter of 2025 compared to 10.6% in the same period last year. EAAA Segment – Net Sales and AOI The following table presents EAAA segment net sales and AOI for the three-month periods ended March 30, 2025, and March 31, 2024: Three Months Ended Percentage Change March 30, 2025 March 31, 2024 (in thousands) EAAA segment net sales $ 117,476 $ 119,828 (2.0) % EAAA segment AOI (1) 5,591 7,445 (24.9) % (1) Includes allocation of corporate and global support SG&A expenses. Excludes purchase accounting amortization, restructuring, asset impairment, severance and other, net, and the impact of a cyber event. See Note 10 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. During the first quarter of 2025, net sales in EAAA decreased 2.0% versus the comparable period in 2024, primarily due to unfavorable currency fluctuations of approximately $3.6 million (3.0%) from the weakening of the Euro and Australian dollar against the U.S. dollar. On a market segment basis, the EAAA sales decrease was most significant in the corporate office market segment. AOI in EAAA decreased 24.9% during the first quarter of 2025 versus the comparable period in 2024, primarily due to lower sales and lower gross profit margin as a result of higher manufacturing costs and higher freight costs. As a percentage of net sales, AOI decreased to 4.8% during the first quarter of 2025 compared to 6.2% in the same period last year. 30 Table of Contents Financial Condition, Liquidity and Capital Resources General At March 30, 2025, the Company had $97.8 million in cash. At that date, the Company had $5.5 million in term loan borrowings, no revolving loan borrowings, and $0.5 million in letters of credit outstanding under our Facility, and we had $300.0 million of Senior Notes outstanding. As of March 30, 2025, we had additional borrowing capacity of $299.5 million under the Facility. 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. The Senior Notes are unsecured and are guaranteed, jointly and severally, by each of the Company’s material domestic subsidiaries, all of which also guarantee the obligations of the Company under its Facility. The Company’s foreign subsidiaries and certain non-material domestic subsidiaries are considered non-guarantors. Net sales for the non-guarantor subsidiaries were approximately $129 million and $133 million for the three-month periods ended March 30, 2025 and March 31, 2024, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $105 million and $102 million as of March 30, 2025 and December 29, 2024, respectively. Balance Sheet Accounts receivable, net, were $162.8 million at March 30, 2025, compared to $171.1 million at December 29, 2024. The decrease of $8.3 million was primarily due to customer collections in the first quarter of 2025. Inventories, net, were $281.7 million at March 30, 2025, compared to $260.6 million at December 29, 2024. The increase of $21.1 million was primarily due to finished goods inventory build attributable to expected higher customer demand in the remainder of 2025. Analysis of Cash Flows The following table presents a summary of cash flows for the three-month periods ended March 30, 2025 and March 31, 2024, respectively: Three Months Ended March 30, 2025 March 31, 2024 (in thousands) Net cash provided by (used in): Operating activities $ 11,739 $ 12,619 Investing activities (7,467) (1,993) Financing activities (8,668) (29,776) Effect of exchange rate changes on cash 2,927 (1,574) Net change in cash and cash equivalents (1,469) (20,724) Cash and cash equivalents at beginning of period 99,226 110,498 Cash and cash equivalents at end of period $ 97,757 $ 89,774 31 Table of Contents Cash provided by operating activities was $11.7 million for the three months ended March 30, 2025, which represents a decrease of $0.9 million from the prior year comparable period. The decrease was primarily due to changes in working capital during the first three months of 2025 compared with the first three months of 2024. Cash used in investing activities was $7.5 million for the three months ended March 30, 2025, which represents an increase of $5.5 million from the prior year comparable period, primarily attributable to a greater capital investment in manufacturing automation and robotics solutions during the three months ended March 30, 2025. Cash used in financing activities was $8.7 million for the three months ended March 30, 2025, which represents a decrease of $21.1 million from the prior year comparable period. The year-over-year decrease was primarily due to lower outstanding borrowings under the credit facility resulting in lower repayments during the three months ended March 30, 2025. Outlook We anticipate a strong second quarter amid increased global macro-economic uncertainty. We anticipate revenue growth in the second quarter of fiscal year 2025 compared with the first quarter of 2025. We expect that tariffs will impact our results during the third quarter of 2025, and we expect to offset this impact through incremental pricing and productivity initiatives. Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company’s cash flows from operations can be affected by numerous factors including raw material availability and cost, and demand for our products. Backlog As of April 20, 2025, the consolidated backlog of unshipped orders was approximately $255.4 million. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2024, backlog was approximately $223.4 million as of February 2, 2025. D isruptions in supply and distribution chains have resulted in delays of construction projects and flooring installations in many regions worldwide, which also have caused, and may continue to cause, fluctuations in our backlog. 32 Table of Contents