Press release·02/26/2025 22:33:48

Financial Performance Overview

Interface, Inc., a global commercial flooring company, has reported its financial results for the past three fiscal years. The company’s performance has been impacted by various factors, including the aftermath of a 2022 cyber event, macroeconomic conditions, and fluctuations in foreign currency exchange rates.

Impact of the Cyber Event

In 2023, the company incurred approximately $1.1 million in connection with the investigation of a 2022 cyber event. The cyber event was estimated to have adversely affected the company’s fiscal year 2022 revenues by approximately $8 million in lost sales. The company also incurred around $5 million of costs related to the cyber event in 2022 for idle plant costs, direct labor costs, and third-party remediation.

Macroeconomic Conditions

The company has faced several macroeconomic challenges that have adversely affected its future performance, including:

• Disruptions in economic markets due to inflation, high interest rates, the Russia-Ukraine war, and a challenging supply chain environment
• Slow market conditions in certain parts of the globe
• Significant financial pressures in the commercial office market globally
• Fluctuating freight costs

Management believes these challenges are likely to continue affecting the company’s future operations and product demand to some degree during fiscal year 2025. The company plans to continue evaluating its cost structure and global manufacturing footprint to identify and activate opportunities to decrease costs and optimize its global cost structure.

Consolidated Results

The company’s consolidated net sales denominated in currencies other than the U.S. dollar were approximately 43% in 2024, 46% in 2023, and 47% in 2022. Currency fluctuations had a negative impact on the company’s net sales and operating income in 2022, but no material impact in 2023 and 2024.

The following table presents the company’s consolidated financial performance over the past three fiscal years:

Fiscal Year	2024	2023	2022
Net sales	100.0%	100.0%	100.0%
Cost of sales	63.3%	65.0%	66.3%
Gross profit	36.7%	35.0%	33.7%
SG&A expenses	26.5%	26.9%	25.0%
Operating income	10.2%	8.3%	5.7%
Net income	6.6%	3.6%	1.4%

Consolidated Net Sales

Consolidated net sales increased by 4.3% in 2024 compared to 2023, driven by higher sales volumes (approximately 2.7%) and higher average sales prices (approximately 1.6%). 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.

In 2023, consolidated net sales decreased by 2.8% compared to 2022, due to lower sales volumes (approximately 7.9%) partially offset by higher prices (approximately 5.1%). The sales decrease was most significant in the retail and healthcare market segments, partially offset by increases in education and residential living market segments.

Consolidated Cost and Expenses

Consolidated cost of sales increased by 1.5% in 2024 compared to 2023, primarily due to higher sales partially offset by lower raw material costs. As a percentage of net sales, consolidated cost of sales decreased to 63.3% in 2024 from 65.0% in 2023. Management believes lower per unit fixed costs due to higher production volumes and plant productivity initiatives will reduce costs in 2025, partially offset by higher freight costs.

In 2023, consolidated cost of sales decreased by 4.6% compared to 2022, primarily due to lower sales and lower freight costs (approximately $19 million) due to stabilizing supply chain conditions. As a percentage of net sales, consolidated cost of sales decreased to 65.0% in 2023 from 66.3% in 2022.

Consolidated gross profit, as a percentage of net sales, was 36.7% in 2024 compared to 35.0% in 2023. The increase was primarily due to lower costs (approximately 1%) and higher pricing (approximately 1%). Management believes gross profit in 2025 will be positively impacted by lower costs.

Consolidated SG&A expenses increased by 2.8% in 2024 compared to 2023, primarily due to higher people costs of $15.7 million driven by increased variable compensation, partially offset by lower severance costs of $5.6 million. As a percentage of net sales, SG&A expenses decreased to 26.5% in 2024 from 26.9% in 2023.

In 2023, consolidated SG&A expenses increased by 4.6% compared to 2022, primarily due to higher selling expenses, severance costs, professional fees, and variable compensation costs, partially offset by lower plant closure costs.

Restructuring Plan

In 2021, the company committed to a restructuring plan involving the closure of its 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.

Goodwill, Intangible Asset and Fixed Asset Impairment

There was no impairment of goodwill or indefinite-lived intangible assets in 2024 and 2023. In 2022, the company recognized a $36.2 million charge for the impairment of goodwill and certain intangible assets.

Interest Expense

Interest expense decreased to $23.2 million in 2024 from $31.8 million in 2023, primarily due to lower outstanding term loan borrowings under the Syndicated Credit Facility. The average borrowing rate under the Facility was 5.62% in 2024 compared to 6.61% in 2023.

In 2023, interest expense increased to $31.8 million from $29.9 million in 2022, primarily due to higher interest rates on outstanding term loan borrowings under the Facility, partially offset by lower outstanding term loan borrowings.

Other Income Expense, net

Other income, net, was $2.4 million in 2024 compared to an expense of $9.1 million in 2023. The decrease was primarily due to the receipt of business interruption insurance proceeds related to the cyber event and insurance proceeds related to a property casualty loss, partially offset by the recognition of cumulative translation losses.

In 2023, $6.2 million of cumulative translation losses were recognized as a result of the substantial liquidation of the company’s foreign subsidiaries in Brazil and Russia.

Tax

The company’s effective tax rate was 23.4% in 2024, down from 30.1% in 2023. The decrease 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 for the UK pension plan.

In 2023, the effective tax rate was 30.1% compared to 53.3% in 2022. Excluding the impact of the non-deductible goodwill impairment charge in 2022, the effective tax rate was 31.4%. The decrease in 2023 was primarily due to favorable changes related to the cash surrender value of company-owned life insurance, utilization of foreign tax credits, and repatriation of previously taxed foreign earnings.

Segment Results

The company has two operating and reportable segments: AMS and EAAA.

AMS Segment:

• Net sales increased 8.7% in 2024 compared to 2023, driven by higher sales volume and higher average sales prices. The increase was most significant in the retail, education, public buildings, and residential living market segments.
• Net sales decreased 2.2% in 2023 compared to 2022, due to lower sales volume partially offset by higher average sales prices. The decrease was most significant in the retail market segment.
• AOI increased 21.4% in 2024 compared to 2023, driven by higher adjusted gross profit and lower SG&A expenses as a percentage of net sales.
• AOI decreased 14.2% in 2023 compared to 2022, due to lower adjusted gross profit partially offset by lower SG&A expenses as a percentage of net sales.

EAAA Segment:

• Net sales decreased 1.8% in 2024 compared to 2023, primarily due to lower sales volume. The decrease was most significant in the public buildings, hospitality, and healthcare market segments, partially offset by an increase in the residential living market segment.
• Net sales decreased 3.6% in 2023 compared to 2022, due to lower sales volume partially offset by higher selling prices. The decrease was most significant in the corporate office, healthcare, retail, and education market segments, partially offset by an increase in the hospitality market segment.
• AOI increased 21.7% in 2024 compared to 2023, driven by higher adjusted gross profit.
• AOI decreased 4.8% in 2023 compared to 2022, due to lower adjusted gross profit.

Financial Condition, Liquidity and Capital Resources

The company’s liquidity, cash flows from operations, cash and cash equivalents, and other sources of liquidity are sufficient to meet its obligations for the next 12 months. However, the company’s cash flows from operations can be affected by numerous factors, including raw material availability and cost, demand for products, and other macroeconomic conditions.

As of December 29, 2024, the company had $99.2 million in cash, with approximately $3.1 million located in the U.S. and $96.1 million located outside the U.S. The company has $5.6 million of borrowings outstanding under its Syndicated Credit Facility, with additional borrowing capacity of $299.3 million. The company also has $300 million of 5.50% Senior Notes due 2028 outstanding.

The company’s balance sheet shows accounts receivable, net, of $171.1 million at the end of 2024, up from $163.4 million at the end of 2023. Inventories, net, decreased to $260.6 million at the end of 2024 from $279.1 million at the end of 2023.

Cash Flows

The company’s cash flows from operating activities were $148.4 million in 2024, up from $142.0 million in 2023. The increase 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 from higher accounts receivable.

Cash used in investing activities was $30.4 million in 2024, up from $19.5 million in 2023, primarily due to an increase in capital expenditures.

Cash used in financing activities was $125.2 million in 2024, up from $111.6 million in 2023, primarily due to higher prepayments of term loan borrowings.

Market Risk

The company is exposed to market risk from changes in interest rates and foreign currency exchange rates. To mitigate these risks, the company monitors interest rates and foreign currency fluctuations and may enter into derivative transactions, such as interest rate swaps and forward contracts, from time to time.

An increase in the company’s effective interest rate of 1% on its variable rate debt would increase annual interest expense by approximately $0.1 million. A 10% decrease or increase in foreign currency exchange rates against the U.S. dollar would result in a respective decrease or increase in the fair value of the company’s financial instruments of $12.6 million.

Outlook

The company expects continued challenges from macroeconomic conditions, including inflation, high interest rates, and supply chain disruptions, to affect its future operations and product demand to some degree during fiscal year 2025. However, the company believes it can manage these challenges through cost-saving initiatives and by optimizing its global manufacturing footprint. The company remains focused on delivering value to its customers and shareholders through its diverse product offerings and global presence.