INTERFACE INC MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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 January 2, 2022, under
Part II, Item 7 of that Form 10-K. Our discussions here focus on our results
during the quarter ended April 3, 2022, or as of, April 3, 2022, and the
comparable periods of 2021, 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 April 3, 2022 and April 4, 2021 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
ongoing COVID-19 pandemic and 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 January 2, 2022, 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.
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Executive Overview

During the quarter ended April 3, 2022, we had consolidated net sales of $288.0
million, up 13.7% compared to $253.3 million in the first quarter last year,
primarily due to the continued rebound in economic activity in certain countries
following the impacts of COVID-19. Higher sales were primarily in the corporate
office, education and healthcare market segments. Consolidated operating income
was $27.4 million for the first quarter of 2022 compared to $16.9 million in the
first quarter last year primarily due to higher sales in the current year
period. Consolidated net income for the quarter ended April 3, 2022 was $13.3
million or $0.22 per share compared to $6.9 million or $0.12 per share in the
first quarter last year.

Impact of the COVID-19 pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic, and the virus continues to impact areas where we operate and sell our
products and services. The COVID-19 pandemic has had material adverse effects on
our business, results of operations, and financial condition. The duration of
the pandemic will ultimately determine the extent to which our operations are
impacted.

During the first quarter of 2022, the COVID-19 pandemic continued to impact our
global supply chain and manufacturing operations, which resulted in raw material
shortages, raw material cost increases, higher freight costs, higher labor costs
and shipping delays. These global supply chain and manufacturing challenges
increased our costs and adversely affected our gross profit margin-particularly
in our EAAA segment. New government imposed COVID-19 lockdowns in parts of China
during the first quarter of 2022 adversely impacted sales in China by
approximately 14% compared with the first quarter last year.



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Analysis of operating results

Consolidated results

The following table presents, as a percentage of net sales, certain items included in our condensed consolidated statements of earnings for the three-month periods ended April 3, 2022 and April 4, 2021:

                                                          Three Months Ended
                                                   April 3, 2022        April 4, 2021
Net sales                                                  100.0  %           100.0  %
Cost of sales                                               62.9               62.1
Gross profit on sales                                       37.1               37.9
Selling, general and administrative expenses                27.3            

31.3

Restructuring and asset impairment charges                   0.3               (0.1)
Operating income                                             9.5                6.7
Interest/Other expense, net                                  2.4                3.1
Income before income tax expense                             7.1                3.6
Income tax expense                                           2.5                0.8
Net income                                                   4.6  %             2.8  %


Consolidated Net Sales

Below is information regarding our consolidated net sales, and analysis of those
results, for the three-month periods ended April 3, 2022, and April 4, 2021:

                                    Three Months Ended              Percentage
                            April 3, 2022       April 4, 2021         Change
                                      (in thousands)
Consolidated net sales     $      288,002      $      253,260           13.7  %


For the quarter ended April 3, 2022, consolidated net sales increased $34.7
million (13.7%) versus the comparable period in 2021, primarily due to higher
sales volume and prices. Currency fluctuations had a negative impact on
consolidated net sales of approximately $7.9 million (3.1%) for the first
quarter of 2022, due primarily to the weakening of the Euro, Australian dollar
and British Pound sterling against the U.S. dollar. On a market segment basis,
the sales increase was primarily in the corporate office, education and
healthcare market segments as a result of higher corporate reinvestment and
government spending on school renovation projects.

Consolidated costs and expenses

The following table presents our consolidated cost of sales and selling, general
and administrative expenses for the three-month periods ended April 3, 2022, and
April 4, 2021:

                                                           Three Months Ended                        Percentage
                                                  April 3, 2022           April 4, 2021                Change
                                                             (in thousands)
Cost of sales                                   $      181,203          $      157,222                        15.3  %
Selling, general and administrative expenses            78,492                  79,302                        (1.0) %


For the quarter ended April 3, 2022, consolidated cost of sales increased $24.0
million (15.3%) compared to the first quarter of 2021, primarily due to higher
sales and continuing inflationary pressures on raw materials, freight and labor
costs. Currency translation had a positive impact on consolidated cost of sales
in the first quarter of 2022 and partially reduced our costs by approximately
$5.2 million (3.3%) compared to the same period last year. As a percentage of
net sales, our cost of sales increased to 62.9% for the first quarter of 2022
versus 62.1% for the first quarter of 2021.
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For the quarter ended April 3, 2022, consolidated selling, general and
administrative ("SG&A") expenses decreased $0.8 million (1.0%) versus the
comparable period in 2021. Currency translation had a positive impact on
consolidated SG&A expenses in the first quarter of 2022 and partially reduced
our costs by approximately $1.9 million (2.7%) compared to the same period last
year. SG&A expenses were also lower for the first quarter of 2022 due to lower
severance costs and lower labor costs of approximately $2.6 million driven by
employee headcount reduction initiatives in response to the impacts of COVID-19.
These lower costs were partially offset by higher selling expenses of
approximately $1.8 million during the first quarter of 2022 due to higher sales.
As a percentage of sales, SG&A expenses decreased to 27.3% for the first quarter
of 2022 versus 31.3% for the first quarter of 2021.

Restructuring activities

On September 8, 2021, the Company committed to a new restructuring plan that
continues 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 at the end of the first quarter of 2022. In the first
quarter of 2022, we recognized restructuring charges of approximately $0.9
million under this plan primarily related to the impairment of property, plant
and equipment at the Thailand facility.

In addition, in conjunction with the closure of its Thai plant, the Company recorded an inventory write-down of $1.1 million in the first quarter of 2022 in cost of sales in the condensed consolidated statements of earnings.

See Note 15 “Restructuring and Other Charges” in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

Interest charges

During the quarter ended April 3, 2022, interest expense was $6.9 million, a
decrease of $0.4 million from the comparable period in 2021, primarily due to
lower outstanding term loan borrowings under the Facility.


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Segment operating results

SMA segment – Net sales and adjusted operating income (“AOI”)

The following table shows AMS segment net sales and AOI for the three-month periods ended April 3, 2022and April 4, 2021:

                                 Three Months Ended
                         April 3, 2022       April 4, 2021       Percentage Change
                                   (in thousands)
AMS segment net sales   $      156,509      $      126,967                  23.3  %
AMS segment AOI(1)              21,138              11,913                  77.4  %


(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items
related to restructuring, asset impairment, severance and other costs. See Note
11 entitled "Segment Information" of Part I, Item 1 of this Quarterly Report on
Form 10-Q for additional information.

During the first quarter of 2022, net sales in AMS increased 23.3% versus the
comparable period in 2021 primarily due to higher sales volume and prices in the
corporate office, education and healthcare market segments.

AOI in AMS increased 77.4% during the first quarter of 2022 compared to the
prior year period primarily due to higher sales. The increase in AOI was also
due to higher pricing and favorable fixed cost absorption, partially offset by
higher raw material costs, higher freight costs, and higher labor costs as a
result of continuing inflationary pressures.

EAAA segment – Net sales and area of ​​interest

The following table shows the net sales and AOI of the EAAA segment for the three-month periods ended April 3, 2022and April 4, 2021:

                                    Three Months Ended
                            April 3, 2022       April 4, 2021       Percentage Change
                                      (in thousands)
EAAA segment net sales     $      131,493      $      126,293                   4.1  %
EAAA segment AOI(1)                 9,504               8,011                  18.6  %


(1) Includes allocation of corporate SG&A expenses. Excludes non-recurring items
related to purchase accounting amortization, Thailand plant closure inventory
write-down, and restructuring, asset impairment, severance and other costs. See
Note 11 entitled "Segment Information" of Part I, Item 1 of this Quarterly
Report on Form 10-Q for additional information.

During the first quarter of 2022, net sales in EAAA increased 4.1% versus the
comparable period in 2021. Currency fluctuations had a negative impact on EAAA
sales of approximately $7.9 million (6.3%) for the first quarter 2022 compared
to the same period last year due to the weakening of the Euro, British Pound
sterling, and Australian dollar against the U.S. dollar. During the first
quarter of 2022, EAAA sales were adversely impacted by new government imposed
COVID-19 lockdowns in parts of China. On a market segment basis, the EAAA sales
increase was most significant in the corporate office and healthcare market
segments, partially offset by decreases in the public buildings market segment.

AOI in EAAA increased 18.6% during the first quarter of 2022 versus the
comparable period in 2021 primarily due to the impact of higher sales. Currency
fluctuations had a negative impact on AOI of approximately $1.0 million (6.8%)
for the first quarter of 2022 compared to the first quarter last year. EAAA SG&A
expenses as a percentage of net sales in the first quarter of 2022 decreased
approximately 3% compared to the first quarter of 2021, which contributed to the
increase in AOI for the first quarter of 2022. AOI in the first quarter of 2022
was adversely impacted by higher raw material costs, higher freight costs, and
higher labor costs as a result of continuing inflationary pressures.


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Cash and capital resources

General

At April 3, 2022, the Company had $76.1 million in cash. At that date, the
Company had $213.5 million in term loan borrowings, $15.0 million in revolving
loan borrowings, and $1.6 million in letters of credit outstanding under our
Facility, and we had $300.0 million of Senior Notes outstanding. As of April 3,
2022, we had additional borrowing capacity of $283.4 million under the Facility
and $4.0 million of borrowing capacity under other credit facilities in place at
other non-U.S. subsidiaries. We anticipate that our liquidity is sufficient to
meet our obligations for the next 12 months.

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 existing 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 $144 million and $136 million for the three-month periods ended
April 3, 2022 and April 4, 2021, respectively. Total indebtedness of the
non-guarantor subsidiaries was approximately $43 million and $45 million as of
April 3, 2022 and January 2, 2022, respectively.

Cash flow analysis

The following table presents a summary of cash flows for the three-month periods ended April 3, 2022 and April 4, 2021respectively:

                                                              Three Months Ended
                                                      April 3, 2022       April 4, 2021
                                                                (in thousands)
  Net cash provided by (used in):
  Operating activities                               $      (17,696)     $       24,855
  Investing activities                                       (4,781)             (5,214)
  Financing activities                                        2,894             (12,981)
  Effect of exchange rate changes on cash                    (1,581)             (2,790)
  Net change in cash and cash equivalents                   (21,164)              3,870
  Cash and cash equivalents at beginning of period           97,252             103,053
  Cash and cash equivalents at end of period         $       76,088      $      106,923


Cash used in operating activities was $17.7 million for the three months ended
April 3, 2022, which represents a decrease of $42.6 million compared with cash
provided by operating activities in the prior year comparable period. The
decrease was primarily due to a greater use of cash for working capital during
the first three months of 2022. Specifically, higher inventories as a result of
increased customer demand, raw material costs and input costs contributed to the
greater use of cash for working capital compared to last year. Accrued bonus
payments during the first quarter of 2022 also contributed to the increased use
of cash. These uses of cash were partially offset by higher accounts receivable
collections during the first quarter of 2022.

Cash used in investing activities was $4.8 million for the three months ended
April 3, 2022, which represents a decrease of $0.4 million from the prior year
comparable period. The decrease from the comparable period was primarily due to
a decrease in capital expenditures due to reduced capital investment.

Cash provided by financing activities was $2.9 million for the three months
ended April 3, 2022, which represents an increase of $15.9 million compared with
cash used in financing activities in the prior year comparable period. The
year-over-year increase was primarily due to higher revolving loan borrowings in
2022 to fund operating activities as described above.

Purchase obligation

In March of 2022, we entered into a purchase obligations commitment to procure
fiberglass raw materials through the end of 2026 for approximately $22.5
million. We expect that approximately $4.5 million will be purchased within the
next 12 months.
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Forward-looking statement on the impact of COVID-19

While we are aggressively managing our response to the COVID-19 pandemic, its
impacts on our full fiscal year 2022 results and beyond are uncertain. We
believe the most significant elements of uncertainty are (1) the intensity and
duration of the impact on construction, renovation, and remodeling; (2)
corporate, government, and consumer spending levels and sentiment; (3) the
ability of our sales channels, supply chain, manufacturing, and distribution
partners to continue operating through disruptions; and (4) the severity of
global supply chain disruptions and their effects on inflation, labor shortages,
raw material shortages, and other factors that disrupt our supply chain and
manufacturing facilities. Any or all of these factors could negatively impact
our financial position, results of operations, cash flows, and outlook. As the
impact of the COVID-19 pandemic continues to affect companies with global
operations, specifically as it relates to the global supply chain, we anticipate
that, at a minimum, our business and results in the first half of 2022 will
continue to be affected, and the timeline and pace of recovery is uncertain.

We anticipate revenue growth in the second quarter of fiscal year 2022 compared
with the first quarter of 2022. We are also anticipating continued impacts to
our global supply chain and manufacturing operations. These impacts are expected
to include significant cost increases in our raw materials globally and
continued labor shortages and cost increases. The impacts may also potentially
include raw material shortages, higher freight costs, shipping delays, and other
disruption. These impacts to our supply chain and manufacturing will increase
our costs and adversely affect our gross margins, they may inhibit our ability
to manufacture and ship product timely, and at times they may inhibit our
ability to meet customer demands and expectations.

We also 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.

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 the uncertainty of COVID-19 and its impact on
global operations, raw material availability and cost, and demand for our
products.

Back

As of April 24, 2022, the consolidated backlog of orders was approximately
$266.6 million. As disclosed in our Annual Report on Form 10-K for the fiscal
year ended January 2, 2022, backlog was approximately $215.6 million as of
February 6, 2022. Disruptions in supply and distribution chains, global travel
restrictions and government imposed lockdowns due to the impact of COVID-19 have
resulted in delays of construction projects and flooring installations in many
regions worldwide.
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