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 and six months ended June 29, 2025, or as of, June 29, 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 six-month periods ended June 29, 2025 and June 30, 2024 both include 26 weeks. The three-month periods ended June 29, 2025 and June 30, 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 the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2025. 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. 30 Table of Contents Executive Overview During the quarter ended June 29, 2025, we had consolidated net sales of $375.5 million, up 8.3% compared to $346.6 million in the second quarter last year, primarily due to higher customer demand — particularly in the education, healthcare, and corporate office market segments — and higher average sales prices. Consolidated operating income was $52.0 million for the second quarter of 2025 compared to $38.2 million in the second quarter last year, primarily due to higher sales, higher gross profit margin driven by lower manufacturing costs due to favorable fixed cost absorption on higher volume and production efficiencies, and favorable product mix. Consolidated net income for the quarter ended June 29, 2025, was $32.6 million or $0.55 per diluted share, compared to $22.6 million or $0.38 per diluted share in the second quarter last year. During the first six months of 2025, we had consolidated net sales of $672.9 million, up 5.7% compared to $636.4 million in the first six months of last year, primarily due to higher customer demand — particularly in the education and healthcare market segments. Consolidated operating income was $75.3 million for the first six months of 2025, compared to $62.6 million in the same period last year, primarily due to higher sales and higher gross profit margin as discussed above. Consolidated net income for the six months ended June 29, 2025, was $45.6 million or $0.77 per diluted share, compared to $36.7 million or $0.63 per diluted share in the same period last year. Impact of Macroeconomic Trends Disruptions in global 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. 31 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 and six-month periods ended June 29, 2025 and June 30, 2024: Three Months Ended Six Months Ended June 29, 2025 June 30, 2024 June 29, 2025 June 30, 2024 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 60.6 64.6 61.5 63.4 Gross profit 39.4 35.4 38.5 36.6 Selling, general and administrative expenses 25.5 24.4 27.3 26.8 Operating income 13.9 11.0 11.2 9.8 Interest/Other expense (income), net 2.1 2.0 2.1 2.0 Income before income tax expense 11.8 9.0 9.1 7.8 Income tax expense 3.1 2.5 2.3 2.1 Net income 8.7 % 6.5 % 6.8 % 5.7 % Consolidated Net Sales Below is information regarding our consolidated net sales, and analysis of those results, for the three-month and six-month periods ended June 29, 2025, and June 30, 2024: Three Months Ended Percentage Change Six Months Ended Percentage Change June 29, 2025 June 30, 2024 June 29, 2025 June 30, 2024 (in thousands) (in thousands) Consolidated net sales $ 375,522 $ 346,635 8.3 % $ 672,935 $ 636,378 5.7 % For the quarter ended June 29, 2025, consolidated net sales increased $28.9 million (8.3%) versus the comparable period in 2024, primarily due to higher sales volume (approximately 6%) and higher average sales prices (approximately 2%). Currency fluctuations had a positive impact on consolidated net sales of approximately $4.4 million (1.3%) for the second quarter of 2025, compared to the same period last year from the strengthening of the Euro against the U.S. dollar. On a market segment basis, the sales increase was primarily in the education, healthcare, and corporate office market segments. For the six months ended June 29, 2025, consolidated net sales increased $36.6 million (5.7%) versus the comparable period in 2024, primarily due to higher sales volume (approximately 5%) and higher average sales prices (approximately 1%). Currency fluctuations had no material impact on consolidated net sales for the first six months of 2025. On a market segment basis, the sales increase was primarily in the education, healthcare, and retail market segments partially offset by a decrease in the corporate office market segment. 32 Table of Contents Consolidated Cost and Expenses The following table presents our consolidated cost of sales and selling, general and administrative expenses for the three-month and six-month periods ended June 29, 2025, and June 30, 2024: Three Months Ended Percentage Change Six Months Ended Percentage Change June 29, 2025 June 30, 2024 June 29, 2025 June 30, 2024 (in thousands) (in thousands) Consolidated cost of sales $ 227,545 $ 224,022 1.6 % $ 413,995 $ 403,360 2.6 % Consolidated selling, general and administrative expenses 95,930 84,462 13.6 % 183,666 170,421 7.8 % Consolidated Cost of Sales For the quarter ended June 29, 2025, consolidated cost of sales increased $3.5 million (1.6%) compared to the second quarter of 2024, primarily due to higher sales and higher input costs due to inflation mostly offset by lower manufacturing costs driven by favorable fixed cost absorption on higher volume and production efficiencies. Currency translation had a negative impact on consolidated cost of sales in the second quarter of 2025 and partially increased our costs by approximately $3.0 million (1.3%) compared to the same period last year. As a percentage of net sales, our cost of sales decreased to 60.6% for the second quarter of 2025 versus 64.6% for the second quarter of 2024. For the six months ended June 29, 2025, consolidated cost of sales increased $10.6 million (2.6%) versus the comparable period in 2024, primarily due to higher sales partially offset by lower manufacturing costs as discussed above. Currency translation had no material impact on consolidated cost of sales for the first six months of 2025 compared to the same period last year. As a percentage of net sales, our cost of sales decreased to 61.5% for the first six months of 2025 versus 63.4% for the first six months of 2024. Consolidated Gross Profit For the quarter ended June 29, 2025, gross profit, as a percentage of net sales, was 39.4% compared with 35.4% in the same period last year. The increase in gross profit percentage was primarily due to lower manufacturing costs per unit (approximately 4%) driven by favorable fixed cost absorption and production efficiencies. For the six months ended June 29, 2025, gross profit, as a percentage of net sales, was 38.5% compared with 36.6% in the same period last year. The increase in gross profit percentage was primarily due to lower manufacturing costs (approximately 2%) due to the factors discussed above. Consolidated Selling, General and Administrative (“SG&A”) Expenses For the quarter ended June 29, 2025, consolidated SG&A expenses increased $11.5 million (13.6%) versus the comparable period in 2024. Currency fluctuations had a negative impact on consolidated SG&A expenses of approximately $1.0 million (1.2%) in the second quarter of 2025 compared to the same period last year. SG&A expenses were higher for the second quarter of 2025 primarily due to (i) higher employee benefits and labor costs of $5.0 million, (ii) higher variable compensation of $2.9 million as a result of higher commissions on higher sales and higher bonus costs driven by improved operating results, and (iii) higher severance costs of $2.7 million primarily due to a previously announced employee separation. As a percentage of net sales, SG&A expenses increased to 25.5% for the second quarter of 2025 versus 24.4% for the second quarter of 2024. For the six months ended June 29, 2025, consolidated SG&A expenses increased $13.2 million (7.8%) versus the comparable period in 2024. Currency translation had no material impact on consolidated SG&A expenses in the first six months of 2025 compared to the same period last year. SG&A expenses were higher for the first six months of 2025 primarily due to the factors discussed above for the second quarter of 2025. As a percentage of net sales, SG&A expenses increased to 27.3% for the first six months of 2025 versus 26.8% for the first six months of 2024. 33 Table of Contents Interest Expense During the quarter ended June 29, 2025, interest expense was $4.4 million, a decrease of $1.7 million from the comparable period in 2024, primarily due to lower outstanding term loan borrowings under the Facility. For the six months ended June 29, 2025, interest expense was $8.9 million, a decrease of $3.7 million from the comparable period in 2024, primarily due to lower outstanding term loan borrowings as discussed above. Provision for Income Taxes The effective tax rate for the three and six months ended June 29, 2025, was 26.3% and 25.7%, respectively, compared to 27.6% and 26.7% for the same periods in 2024. The decrease in the effective tax rate for the three months ended June 29, 2025 as compared to the three months ended June 30, 2024 was primarily due to favorable changes in the geographic mix of earnings and favorable changes related to the cash surrender value of Company-owned life insurance. The decrease in the effective tax rate for the six months ended June 29, 2025 as compared to the six months ended June 30, 2024 was primarily due to favorable changes in the geographic mix of earnings and an increase in tax benefits related to share-based compensation. 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 and six-month periods ended June 29, 2025, and June 30, 2024: Three Months Ended Percentage Change Six Months Ended Percentage Change June 29, 2025 June 30, 2024 June 29, 2025 June 30, 2024 (in thousands) (in thousands) AMS segment net sales $ 239,443 $ 215,012 11.4 % $ 419,380 $ 384,927 9.0 % AMS segment AOI (1) 48,845 26,947 81.3 % 68,708 45,027 52.6 % (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 second quarter of 2025, net sales in AMS increased 11.4% versus the comparable period in 2024, primarily due to higher sales volume and higher average sales prices. On a market segment basis, the AMS sales increase was primarily in the education, healthcare, and corporate office market segments. During the first six months of 2025, net sales in AMS increased 9.0% versus the comparable period in 2024, primarily due to higher sales volume and pricing as discussed above. On a market segment basis, the AMS sales increase was primarily in education, healthcare, and retail market segments. AOI in AMS increased 81.3% during the second quarter of 2025 compared to the prior year period, primarily due to higher sales and gross profit margin due to favorable product mix, production efficiencies, and favorable fixed cost absorption. As a percentage of net sales, AOI increased to 20.4% during the second quarter of 2025 compared to 12.5% in the same period last year. AOI in AMS increased 52.6% during the first six months of 2025 compared to the prior year period, primarily due to higher sales and gross profit margin as discussed above. As a percentage of net sales, AOI increased to 16.4% during the first six months of 2025 compared to 11.7% in the same period last year. 34 Table of Contents EAAA Segment – Net Sales and AOI The following table presents EAAA segment net sales and AOI for the three-month and six-month periods ended June 29, 2025, and June 30, 2024: Three Months Ended Percentage Change Six Months Ended Percentage Change June 29, 2025 June 30, 2024 June 29, 2025 June 30, 2024 (in thousands) (in thousands) EAAA segment net sales $ 136,079 $ 131,623 3.4 % $ 253,555 $ 251,451 0.8 % EAAA segment AOI (1) 7,065 12,658 (44.2) % 12,655 20,103 (37.0) % (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 second quarter of 2025, net sales in EAAA increased 3.4% versus the comparable period in 2024, primarily due to favorable currency fluctuations of approximately $4.6 million (3.5%) from the strengthening of the Euro against the U.S. dollar, partially offset by lower volume. On a market segment basis, the EAAA sales increase was primarily in the public buildings and transportation market segments. During the first six months of 2025, net sales in EAAA increased 0.8% versus the comparable period in 2024, primarily due to favorable currency fluctuations of approximately $1.0 million (0.4%), higher sales volume and average sales prices. On a market segment basis, the EAAA sales increase was primarily in the transportation, public buildings, and healthcare market segments, mostly offset by a decrease in the corporate office market segment. AOI in EAAA decreased 44.2% during the second quarter of 2025 versus the comparable period in 2024, primarily due to lower gross profit margin driven by unfavorable fixed cost absorption and higher input costs. Currency fluctuations had no material impact on EAAA AOI for the second quarter of 2025 compared to the same period last year. As a percentage of net sales, AOI decreased to 5.2% during the second quarter of 2025 compared to 9.6% in the same period last year. AOI in EAAA decreased 37.0% during the first six months of 2025 versus the comparable period in 2024, primarily due to lower gross profit margin as discussed above. Currency fluctuations had no material impact on AOI for the first six months of 2025 compared to the same period in 2024. As a percentage of net sales, AOI decreased to 5.0% during the first six months of 2025 compared to 8.0% in the same period last year. 35 Table of Contents Financial Condition, Liquidity and Capital Resources General At June 29, 2025, the Company had $121.7 million in cash. At that date, the Company had $5.6 million in term loan borrowings, $1.3 million in 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 June 29, 2025, we had additional borrowing capacity of $298.2 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 $154 million and $283 million for the three-month and six-month periods ended June 29, 2025, respectively, and net sales for the non-guarantor subsidiaries were approximately $145 million and $278 million for the three-month and six-month periods ended June 30, 2024, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $115 million and $102 million as of June 29, 2025 and December 29, 2024, respectively. Balance Sheet Accounts receivable, net, were $194.3 million at June 29, 2025, compared to $171.1 million at December 29, 2024. The increase of $23.1 million was primarily due to the impact of higher net sales as a result of increased customer demand in the second quarter of 2025. Inventories, net, were $288.2 million at June 29, 2025, compared to $260.6 million at December 29, 2024. The increase of $27.6 million was primarily due to finished goods inventory build attributable to higher expected customer demand in the remainder of 2025. Analysis of Cash Flows The following table presents a summary of cash flows for the six-month periods ended June 29, 2025 and June 30, 2024, respectively: Six Months Ended June 29, 2025 June 30, 2024 (in thousands) Net cash provided by (used in): Operating activities $ 41,867 $ 34,158 Investing activities (14,821) (11,567) Financing activities (13,740) (36,960) Effect of exchange rate changes on cash 9,169 (1,942) Net change in cash and cash equivalents 22,475 (16,311) Cash and cash equivalents at beginning of period 99,226 110,498 Cash and cash equivalents at end of period $ 121,701 $ 94,187 Cash provided by operating activities was $41.9 million for the six months ended June 29, 2025, which represents an increase of $7.7 million from the prior year comparable period, primarily attributable to higher net income for the six months ended June 29, 2025, partially offset by a higher use of cash related to inventory build as discussed above. 36 Table of Contents Cash used in investing activities was $14.8 million for the six months ended June 29, 2025, which represents an increase of $3.3 million from the prior year comparable period, primarily attributable to a greater capital investment in manufacturing automation and robotics solutions during the first six months of 2025. Cash used in financing activities was $13.7 million for the six months ended June 29, 2025, which represents a decrease of $23.2 million from the prior year comparable period. The decrease was primarily attributable to lower outstanding borrowings under the credit facility resulting in lower repayments during the first six months of 2025 compared to the prior year period. Additionally, the repurchase of common stock during the second quarter of 2025 contributed to the use of cash for the current period. Share Repurchases In the May 2022, the Company adopted a share repurchase program in which the Company is authorized to repurchase up to $100 million of its outstanding shares of common stock. The program has no specific expiration date. During the six months ended June 29, 2025, the Company repurchased 217,500 shares of common stock at a weighted average price of $20.44 per share pursuant to this program. Outlook Based on strong second quarter 2025 results, we increased our outlook for the full fiscal year of 2025, while acknowledging a dynamic and uncertain global macroeconomic environment. We anticipate net sales growth in the third quarter of fiscal year 2025 compared with the same period last year. We also expect to incur tariff costs during the remainder of 2025, and we anticipate offsetting these costs through 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 July 20, 2025, the consolidated backlog of unshipped orders was approximately $263.2 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. 37 Table of Contents