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 nine months ended September 28, 2025, or as of, September 28, 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 nine-month periods ended September 28, 2025 and September 29, 2024 both include 39 weeks. The three-month periods ended September 28, 2025 and September 29, 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 September 28, 2025, we had consolidated net sales of $364.5 million, up 5.9% compared to $344.3 million in the third quarter last year, primarily due to higher customer demand — particularly in the healthcare and corporate office market segments — and higher average sales prices. Consolidated operating income was $53.4 million for the third quarter of 2025 compared to $42.2 million in the third quarter last year, primarily due to higher sales and higher gross profit margin driven by higher pricing and favorable product mix combined with manufacturing efficiencies that offset higher raw material and tariff-related costs. Consolidated net income for the quarter ended September 28, 2025, was $46.1 million, or $0.78 per diluted share, compared to $28.4 million, or $0.48 per diluted share, in the third quarter last year. During the first nine months of 2025, we had consolidated net sales of $1,037.5 million, up 5.8% compared to $980.6 million in the first nine months of last year, primarily due to higher customer demand — particularly in the healthcare and education market segments. Consolidated operating income was $128.6 million for the first nine months of 2025, compared to $104.8 million in the same period last year, primarily due to higher sales and higher gross profit margin due to the same factors discussed above for the third quarter 2025. Consolidated net income for the nine months ended September 28, 2025, was $91.7 million, or $1.55 per diluted share, compared to $65.2 million, or $1.11 per diluted share, in the same period last year. Impact of Macroeconomic Trends Disruptions in global economic markets due to the impact of government-imposed tariffs and retaliatory tariffs, 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 nine-month periods ended September 28, 2025 and September 29, 2024: Three Months Ended Nine Months Ended September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 60.6 62.9 61.2 63.2 Gross profit 39.4 37.1 38.8 36.8 Selling, general and administrative expenses 24.8 24.8 26.4 26.1 Operating income 14.6 12.3 12.4 10.7 Interest/Other expense, net 1.3 1.8 1.9 1.9 Income before income tax expense 13.3 10.5 10.5 8.8 Income tax expense 0.6 2.2 1.7 2.1 Net income 12.7 % 8.3 % 8.8 % 6.7 % Consolidated Net Sales Below is information regarding our consolidated net sales, and analysis of those results, for the three-month and nine-month periods ended September 28, 2025, and September 29, 2024: Three Months Ended Percentage Change Nine Months Ended Percentage Change September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 (in thousands) (in thousands) Consolidated net sales $ 364,526 $ 344,270 5.9 % $ 1,037,461 $ 980,648 5.8 % For the quarter ended September 28, 2025, consolidated net sales increased $20.3 million (5.9%) versus the comparable period in 2024, primarily due to higher average sales prices (approximately 4%) and higher sales volume (approximately 2%). Currency fluctuations had a positive impact on consolidated net sales of approximately $5.9 million (1.7%) for the third quarter of 2025, compared to the same period last year, primarily from the strengthening of the Euro against the U.S. dollar. On a market segment basis, the sales increase was primarily in the healthcare and corporate office market segments, partially offset by lower sales in the retail and education market segments. For the nine months ended September 28, 2025, consolidated net sales increased $56.8 million (5.8%) versus the comparable period in 2024, primarily due to higher sales volume (approximately 4%) - particularly rubber sales -- and higher average sales prices (approximately 2%). Currency fluctuations had a positive impact on consolidated net sales of approximately $6.0 million (0.6%) for the first nine months of 2025 due to the factors discussed above for the current quarter. On a market segment basis, the sales increase was primarily in the healthcare, education, public buildings, and transportation market segments. 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 nine-month periods ended September 28, 2025, and September 29, 2024: Three Months Ended Percentage Change Nine Months Ended Percentage Change September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 (in thousands) (in thousands) Consolidated cost of sales $ 220,894 $ 216,645 2.0 % $ 634,889 $ 620,005 2.4 % Consolidated selling, general and administrative expenses 90,272 85,450 5.6 % 273,938 255,871 7.1 % Consolidated Cost of Sales For the quarter ended September 28, 2025, consolidated cost of sales increased $4.2 million (2.0%) compared to the third quarter of 2024, primarily due to higher sales volume and tariff costs on rubber and luxury vinyl tile products imported into the U.S. (approximately $2.8 million) partially offset by lower manufacturing costs driven by favorable fixed cost absorption and production efficiencies. Currency translation had a negative impact on consolidated cost of sales in the third quarter of 2025 and increased our costs by approximately $3.5 million (1.6%) compared to the same period last year. As a percentage of net sales, our cost of sales decreased to 60.6% for the third quarter of 2025 versus 62.9% for the third quarter of 2024. For the nine months ended September 28, 2025, consolidated cost of sales increased $14.9 million (2.4%) versus the comparable period in 2024, primarily due to higher sales and tariff costs as discussed above partially offset by lower manufacturing costs driven by favorable fixed cost absorption and production efficiencies. Currency translation had a negative impact on consolidated cost of sales for the first nine months of 2025 and increased our costs by approximately $3.5 million (0.6%) compared to the same period last year. As a percentage of net sales, our cost of sales decreased to 61.2% for the first nine months of 2025 versus 63.2% for the first nine months of 2024. Consolidated Gross Profit For the quarter ended September 28, 2025, gross profit, as a percentage of net sales, was 39.4% compared with 37.1% in the same period last year. The increase in gross profit percentage was primarily due to higher average sales prices and favorable product mix (approximately 1%) combined with favorable manufacturing costs (approximately 1%) as discussed above. For the nine months ended September 28, 2025, gross profit, as a percentage of net sales, was 38.8% compared with 36.8% in the same period last year. The increase in gross profit percentage was primarily due to higher average sales prices and favorable product mix (approximately 1%) and lower manufacturing costs (approximately 1%) as discussed above. Consolidated Selling, General and Administrative (“SG&A”) Expenses For the quarter ended September 28, 2025, consolidated SG&A expenses increased $4.8 million (5.6%) versus the comparable period in 2024. Currency fluctuations had a negative impact on consolidated SG&A expenses of approximately $1.3 million (1.5%) in the third quarter of 2025 compared to the same period last year. SG&A expenses were higher for the third quarter of 2025 primarily due to (i) higher variable compensation of $3.4 million as a result of higher commissions on higher sales and (ii) higher bonus costs driven by improved operating results and higher labor costs of approximately $1.3 million. As a percentage of net sales, SG&A expenses were 24.8% for both the third quarter of 2025 and the third quarter of 2024. 33 Table of Contents For the nine months ended September 28, 2025, consolidated SG&A expenses increased $18.1 million (7.1%) versus the comparable period in 2024. Currency translation had a negative impact on consolidated SG&A expenses of approximately $1.3 million (0.5%) in the first nine months of 2025 compared to the same period last year. SG&A expenses were higher for the first nine months of 2025 primarily due to (i) higher variable compensation of $6.9 million as a result of higher commissions on higher sales and higher bonus costs driven by improved operating results, (ii) higher employee benefits and labor costs of $5.5 million, and (iii) higher severance costs of $3.5 million due to employee separations. As a percentage of net sales, SG&A expenses increased to 26.4% for the first nine months of 2025 versus 26.1% for the first nine months of 2024. Interest Expense During the quarter ended September 28, 2025, interest expense was $4.2 million, a decrease of $1.5 million from the comparable period in 2024, primarily due to lower outstanding term loan borrowings under the Facility. For the nine months ended September 28, 2025, interest expense was $13.1 million, a decrease of $5.2 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 nine months ended September 28, 2025, was 4.8% and 16.5%, respectively, compared to 21.2% and 24.4% for the same periods in 2024. The decrease in the effective tax rate for the three and nine months ended September 28, 2025, compared to the same periods in the prior year was primarily due to the remeasurement and adjustment of deferred taxes and a favorable mix of geographic earnings. See Note 12 entitled “Income Taxes” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information, including a discussion of the remeasurement and adjustment of deferred taxes that was recognized in the third quarter of 2025. 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 nine-month periods ended September 28, 2025, and September 29, 2024: Three Months Ended Percentage Change Nine Months Ended Percentage Change September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 (in thousands) (in thousands) AMS segment net sales $ 218,614 $ 210,155 4.0 % $ 637,994 $ 595,082 7.2 % AMS segment AOI (1) 40,476 32,187 25.8 % 109,184 77,214 41.4 % (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 third quarter of 2025, net sales in AMS increased 4.0% versus the comparable period in 2024, primarily due to higher average sales prices and higher volume. On a market segment basis, the AMS sales increase was primarily in the healthcare and corporate office market segments partially offset by a decrease in the retail market segment. During the first nine months of 2025, net sales in AMS increased 7.2% versus the comparable period in 2024, primarily due to higher average sales prices and higher sales volume - particularly increased rubber flooring volume. On a market segment basis, the AMS sales increase was primarily in the healthcare, education, and corporate office market segments. AOI in AMS increased 25.8% during the third quarter of 2025 compared to the prior year period, primarily due to higher sales and gross profit margin due to higher average sales prices, favorable product mix, and manufacturing efficiencies, partially offset by tariff costs. As a percentage of net sales, AOI increased to 18.5% during the third quarter of 2025 compared to 15.3% in the same period last year. 34 Table of Contents AOI in AMS increased 41.4% during the first nine months of 2025 compared to the prior year period, primarily due to higher sales and gross profit margin due to higher average sales prices, favorable product mix, and manufacturing efficiencies, partially offset by tariff costs. As a percentage of net sales, AOI increased to 17.1% during the first nine months of 2025 compared to 13.0% in the same period last year. 35 Table of Contents EAAA Segment – Net Sales and AOI The following table presents EAAA segment net sales and AOI for the three-month and nine-month periods ended September 28, 2025, and September 29, 2024: Three Months Ended Percentage Change Nine Months Ended Percentage Change September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 (in thousands) (in thousands) EAAA segment net sales $ 145,912 $ 134,115 8.8 % $ 399,467 $ 385,566 3.6 % EAAA segment AOI (1) 13,670 11,299 21.0 % 26,325 31,402 (16.2) % (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 third quarter of 2025, net sales in EAAA increased 8.8% versus the comparable period in 2024, primarily due to favorable currency fluctuations of approximately $6.0 million (4.5%) from the strengthening of the Euro against the U.S. dollar, higher sales volume, and higher average sales prices. On a market segment basis, the EAAA sales increase was primarily in the corporate office, transportation, and healthcare market segments. During the first nine months of 2025, net sales in EAAA increased 3.6% versus the comparable period in 2024, primarily due to favorable currency fluctuations of approximately $7.0 million (1.8%), higher sales volume, and higher average sales prices. On a market segment basis, the EAAA sales increase was primarily in the transportation, public buildings, and healthcare market segments, partially offset by a decrease in the corporate office market segment. AOI in EAAA increased 21.0% during the third quarter of 2025 versus the comparable period in 2024, primarily due to higher gross profit margin primarily driven by higher average sales prices. Currency fluctuations had a positive impact on EAAA AOI of approximately $1.2 million (5.6%) for the third quarter of 2025 compared to the same period last year. As a percentage of net sales, AOI increased to 9.4% during the third quarter of 2025 compared to 8.4% in the same period last year. AOI in EAAA decreased 16.2% during the first nine months of 2025 versus the comparable period in 2024, primarily due to lower gross profit margin driven by higher raw material input costs and unfavorable fixed cost absorption in our manufacturing facilities. Currency fluctuations had a positive impact on AOI of approximately $1.5 million (2.4%) for the first nine months of 2025 compared to the same period in 2024. As a percentage of net sales, AOI decreased to 6.6% during the first nine months of 2025 compared to 8.1% in the same period last year. 36 Table of Contents Financial Condition, Liquidity and Capital Resources General At September 28, 2025, the Company had $187.4 million in cash. At that date, the Company had $5.5 million in term loan borrowings, $4.6 million in revolving loan borrowings, and $0.6 million in letters of credit outstanding under our Facility, and we had $300.0 million of Senior Notes outstanding. As of September 28, 2025, we had additional borrowing capacity of $294.8 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 $159 million and $442 million for the three-month and nine-month periods ended September 28, 2025, respectively, and net sales for the non-guarantor subsidiaries were approximately $149 million and $427 million for the three-month and nine-month periods ended September 29, 2024, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $13 million and $102 million as of September 28, 2025 and December 29, 2024, respectively. During the three months ended September 28, 2025, certain outstanding debt owed by the non-guarantor subsidiaries was partially repaid and partially contributed by a guarantor subsidiary to the capital of a non-guarantor subsidiary, reducing total indebtedness of the non-guarantor subsidiaries by approximately $105 million. Balance Sheet Accounts receivable, net, were $187.1 million at September 28, 2025, compared to $171.1 million at December 29, 2024. The increase of $16.0 million was primarily due to the impact of higher net sales as a result of increased customer demand in 2025. Inventories, net, were $286.8 million at September 28, 2025, compared to $260.6 million at December 29, 2024. The increase of $26.2 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 nine-month periods ended September 28, 2025 and September 29, 2024, respectively: Nine Months Ended September 28, 2025 September 29, 2024 (in thousands) Net cash provided by (used in): Operating activities $ 118,596 $ 110,387 Investing activities (25,477) (16,694) Financing activities (13,995) (89,545) Effect of exchange rate changes on cash 9,005 955 Net change in cash and cash equivalents 88,129 5,103 Cash and cash equivalents at beginning of period 99,226 110,498 Cash and cash equivalents at end of period $ 187,355 $ 115,601 Cash provided by operating activities was $118.6 million for the nine months ended September 28, 2025, which represents an increase of $8.2 million from the prior year comparable period, primarily attributable to higher net income for the nine months ended September 28, 2025, partially offset by a higher use of cash related to inventory build as discussed above. 37 Table of Contents Cash used in investing activities was $25.5 million for the nine months ended September 28, 2025, which represents an increase of $8.8 million from the prior year comparable period, primarily attributable to a greater capital investment in manufacturing automation and robotics solutions during the first nine months of 2025. Cash used in financing activities was $14.0 million for the nine months ended September 28, 2025, which represents a decrease of $75.6 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 nine months of 2025 compared to the prior year period. Additionally, the repurchase of common stock during the first nine months of 2025 contributed to the use of cash for the current period. Share Repurchases In 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 nine months ended September 28, 2025, the Company repurchased 250,000 shares of common stock at a weighted average price of $20.57 per share pursuant to this program. Outlook Based on the strength of our third quarter and year to date 2025 results, we increased our outlook for the full fiscal year of 2025, while acknowledging a challenging and uncertain global macroeconomic environment. We anticipate net sales growth in the fourth 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 October 19, 2025, the consolidated backlog of unshipped orders was approximately $244.4 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. 38 Table of Contents