# Interface Inc: Form 10-Q for the period ended Oct 1, 2023

- Company: [Interface Inc](/companies/tile.md) (CIK 715787)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 16:15 ET
- Period: 2023-10-01
- Accession: 0000715787-23-000036
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/715787/000071578723000036/tile-20231001.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/715787/000071578723000036/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-03 to 2023-10-01 | $311.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-02 to 2023-10-01 | $936.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-03 to 2023-10-01 | $200.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-02 to 2023-10-01 | $618.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-03 to 2023-10-01 | $110.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-02 to 2023-10-01 | $317.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-03 to 2023-10-01 | $79.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-02 to 2023-10-01 | $251.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-03 to 2023-10-01 | $31.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-02 to 2023-10-01 | $69.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-03 to 2023-10-01 | $8.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-02 to 2023-10-01 | $25.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-03 to 2023-10-01 | $6.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-02 to 2023-10-01 | $11.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-03 to 2023-10-01 | $9.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-02 to 2023-10-01 | $25.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-03 to 2023-10-01 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-02 to 2023-10-01 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-03 to 2023-10-01 | $0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-02 to 2023-10-01 | $0.43 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-03 to 2023-10-01 | 58,342,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-02 to 2023-10-01 | 58,233,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-02 to 2023-10-01 | $114.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-02 to 2023-10-01 | $17.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-02 to 2023-10-01 | $1.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-02 to 2023-10-01 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-10-01 | $119.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-01 | $585.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-01 | $1.20bn | us-gaap:Assets |
| Current liabilities | at 2023-10-01 | $210.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-10-01 | $814.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-10-01 | $435.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-10-01 | $8.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-10-01 | $387.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 26,947 characters.

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 1, 2023, under Part II, Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended October 1, 2023, or as of, October 1, 2023, and the comparable periods of 2022, 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 October 1, 2023 and October 2, 2022, both include 39 weeks. The three-month periods ended October 1, 2023 and October 2, 2022, 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 January 1, 2023. 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.

### Executive Overview

During the quarter ended October 1, 2023, we had consolidated net sales of $311.0 million, down 5.1% compared to $327.8 million in the third quarter last year, primarily due to decreased customer demand. Lower sales were primarily in the retail, public buildings and corporate office market segments. Consolidated operating income was $31.0 million for the third quarter of 2023 compared to $28.0 million in the third quarter last year, primarily due to higher gross profit margin as a result of higher pricing and lower freight costs coupled with lower selling, general and administrative costs. Consolidated net income for the quarter ended October 1, 2023, was $9.9 million or $0.17 per share, compared to $14.1 million or $0.24 per share in the third quarter last year.

During the first nine months of 2023, we had consolidated net sales of $936.4 million, down 2.7% compared to $962.4 million in the first nine months of last year, primarily due to decreased customer demand. Lower sales were primarily in the retail and corporate office market segments, partially offset by increases in the education market segment. Consolidated operating income was $69.4 million for the first nine months of 2023, compared to $90.0 million in the same period last year. This decline was due to lower sales, inflationary pressures on raw materials, and lower manufacturing fixed cost absorption, partially offset by higher pricing, resulting in lower gross profit margin in the current year period coupled with higher selling, general and administrative costs. Consolidated net income for the nine months ended October 1, 2023, was $25.0 million or $0.43 per share, compared to $44.2 million or $0.75 per share in the same period last year.

### Cybersecurity Event

As previously disclosed in our current report on Form 8-K filed with the Commission on November 23, 2022, we discovered a cybersecurity attack, perpetrated by unauthorized third parties, affecting our IT systems on November 20, 2022. During the first nine months of 2023, we incurred approximately $1.0 million of additional expenses related to the investigation of the Cyber Event. These costs were primarily included in selling, general and administrative expenses in the consolidated condensed statement of operations. The investigation of the Cyber Event was substantially completed early in the third quarter of 2023. We have cyber risk insurance and anticipate that a portion of our costs and expenses related to the Cyber Event will ultimately be recovered by insurance. We expect to incur ongoing costs for enhanced data security against unauthorized access to, or manipulation of, our systems and data.

### Impact of Macroeconomic Trends

The continued disruption in economic markets due to high inflation, increases in interest rates, the Russia-Ukraine war and the Israel-Hamas war, a fairly stabilized but still challenging supply chain environment, a slow post COVID recovery in China and slow market conditions in the rest of Asia, and significant financial pressures in the commercial office market globally, all pose challenges which may adversely affect our future performance. These impacts have increased our costs and adversely affected our gross profit margin. To mitigate these impacts, we 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.

### 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 October 1, 2023 and October 2, 2022:

|  | Three Months Ended October 1, 2023 | October 2, 2022 | Nine Months Ended October 1, 2023 | October 2, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of sales | 64.5 | 66.8 | 66.0 | 65.5 |
| Gross profit | 35.5 | 33.2 | 34.0 | 34.5 |
| Selling, general and administrative expenses | 25.5 | 24.7 | 26.8 | 25.0 |
| Restructuring, asset impairment, other (gains) and charges | — | 0.0 | (0.3) | 0.2 |
| Operating income | 10.0 | 8.5 | 7.5 | 9.3 |
| Interest/Other expense, net | 4.8 | 2.4 | 3.5 | 2.4 |
| Income before income tax expense | 5.2 | 6.1 | 4.0 | 6.9 |
| Income tax expense | 2.0 | 1.9 | 1.3 | 2.3 |
| Net income | 3.2% | 4.2% | 2.7% | 4.6% |

### 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 October 1, 2023, and October 2, 2022:

*(in thousands)*

*(in thousands)*

|  | Three Months Ended October 1, 2023 | October 2, 2022 | Percentage Change October 1, 2023 | Nine Months Ended October 2, 2022 |  | Percentage Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated net sales | $311,006 | $327,757 | (5.1)% | $936,380 | $962,364 | (2.7)% |

For the quarter ended October 1, 2023, consolidated net sales decreased $16.8 million (5.1%) versus the comparable period in 2022, primarily due to lower sales volume (approximately 12%) partially offset by higher prices (approximately 7%). Currency fluctuations had a positive impact on consolidated net sales of approximately $4.9 million (1.5%) for the third quarter of 2023, due primarily to the strengthening of the Euro and British Pound sterling against the U.S. dollar, partially offset by the weakening of the Australian dollar and Chinese Renminbi against the U.S. dollar. On a market segment basis, the sales decrease was primarily in the retail, public buildings, and corporate office market segments partially offset by increases in the healthcare market segment.

For the nine months ended October 1, 2023, consolidated net sales decreased $26.0 million (2.7%) versus the comparable period in 2022, primarily due to lower sales volume (approximately 8%) partially offset by higher prices (approximately 5%). Currency fluctuations had a negative impact on consolidated net sales of approximately $3.1 million (0.3%) for the first nine months of 2023, due primarily to the weakening of the Australian dollar, Chinese Renminbi and Canadian dollar against the U.S. dollar, partially offset by the strengthening of the Euro against the U.S. dollar. On a market segment basis, the sales decrease was primarily in the retail and corporate office market segments partially offset by increases in the education 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 and nine-month periods ended October 1, 2023, and October 2, 2022:

*(in thousands)*

*(in thousands)*

|  | Three Months Ended October 1, 2023 | October 2, 2022 | Percentage Change October 1, 2023 | Nine Months Ended October 2, 2022 |  | Percentage Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated cost of sales | $200,748 | $218,972 | (8.3)% | $618,463 | $630,074 | (1.8)% |
| Consolidated selling, general and administrative expenses | 79,273 | 80,848 | (1.9)% | 251,049 | 240,711 | 4.3% |

#### Consolidated Cost of Sales

For the quarter ended October 1, 2023, consolidated cost of sales decreased $18.2 million (8.3%) compared to the third quarter of 2022, primarily due to lower sales as discussed above and the favorable impact of inflation on raw material and freight costs (approximately 2%) due to stabilizing supply chain conditions. Currency translation had a negative impact on consolidated cost of sales in the third quarter of 2023 and partially increased our costs by approximately $3.2 million (1.5%) compared to the same period last year. As a percentage of net sales, our cost of sales decreased to 64.5% for the third quarter of 2023 versus 66.8% for the third quarter of 2022.

For the nine months ended October 1, 2023, consolidated cost of sales decreased $11.6 million (1.8%) versus the comparable period in 2022, primarily due to lower sales as discussed above. Currency translation had a positive impact on consolidated cost of sales for the first nine months of 2023 and partially reduced our costs by approximately $2.5 million (0.4%) compared to the same period last year. As a percentage of net sales, our cost of sales increased to 66.0% for the first nine months of 2023 versus 65.5% for the first nine months of 2022.

#### Consolidated Gross Profit

For the quarter ended October 1, 2023, consolidated gross profit, as a percentage of net sales, was 35.5% compared with 33.2% in the same period last year. The increase in gross profit margin was primarily due to (i) higher pricing (approximately 4%), (ii) the favorable impact of inflation on raw material and freight costs (approximately 1%), partially offset by (iii) lower manufacturing fixed cost absorption and product mix (approximately 3%).

For the nine months ended October 1, 2023, consolidated gross profit, as a percentage of net sales, was 34.0% compared with 34.5% in the same period last year. The decrease in gross profit percentage was primarily due to (i) lower manufacturing fixed cost absorption and product mix (approximately 3%) and (ii) the unfavorable impact of inflation on raw material and freight costs (approximately 2%), partially offset by (iii) higher pricing (approximately 4%).

#### Consolidated Selling, General and Administrative (“SG&A”) Expenses

For the quarter ended October 1, 2023, consolidated SG&A expenses decreased $1.6 million (1.9%) versus the comparable period in 2022. Currency fluctuations had a negative impact on consolidated SG&A expenses in the third quarter of 2023 of approximately $1.3 million (1.7%) compared to the same period last year. SG&A expenses were lower for the third quarter of 2023 primarily due to lower plant closure and severance costs of approximately $1.3 million related to the closure of our Thailand and Russia operations. As a percentage of net sales, SG&A expenses increased to 25.5% for the third quarter of 2023 versus 24.7% for the third quarter of 2022.

For the nine months ended October 1, 2023, consolidated SG&A expenses increased $10.3 million (4.3%) versus the comparable period in 2022. Currency translation had no material impact on consolidated SG&A expenses for the first nine months of 2023 compared to the same period last year. SG&A expenses in the first nine months of 2023 compared to the same period last year included (i) $7.7 million of higher selling expenses due to sales and marketing initiatives, (ii) higher severance costs of approximately $2.6 million driven by employee reductions and cost saving initiatives, and (iii) Cyber Event costs of $1.0 million. These increases were partially offset by lower plant closure costs of approximately $1.2 million as discussed above. As a percentage of net sales, SG&A expenses increased to 26.8% for the first nine months of 2023 versus 25.0% for the first nine months of 2022.

### Restructuring Activities

On September 8, 2021, the Company committed to a new restructuring plan that continued 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. During the second quarter of 2023, the Company completed the sale of the Thailand manufacturing facility and recognized a gain of $2.7 million.

See Note 15 entitled “Restructuring and Other” and Note 16 entitled “Assets Disposed” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

### Interest Expense

During the quarter ended October 1, 2023, interest expense was $8.2 million, an increase of $0.4 million from the comparable period in 2022, primarily due to higher interest rates on outstanding term loan borrowings under the Facility. For the nine months ended October 1, 2023, interest expense was $25.0 million, an increase of $3.2 million from the comparable period in 2022, primarily due to higher interest rates as discussed above.

### Other Expense

During the quarter ended October 1, 2023, other expense, net, was $6.7 million, an increase of $6.6 million compared to the same period last year, driven by the substantial liquidation of our foreign subsidiaries in Brazil and Russia and the recognition of $6.2 million of cumulative translation adjustments reclassified from accumulated other comprehensive loss.

### 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 October 1, 2023, and October 2, 2022:

*(in thousands)*

*(in thousands)*

|  | Three Months Ended October 1, 2023 | October 2, 2022 | Percentage Change October 1, 2023 | Nine Months Ended October 2, 2022 |  | Percentage Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| AMS segment net sales | $178,194 | $194,449 | (8.4)% | $548,716 | $557,768 | (1.6)% |
| AMS segment AOI(1) | 23,318 | 24,975 | (6.6)% | 58,621 | 74,502 | (21.3)% |

(1) Includes allocation of corporate SG&A expenses. Excludes Cyber Event costs, and restructuring, asset impairment, severance, and other, net. See Note 11 entitled “Segment Information” of Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

During the third quarter of 2023, net sales in AMS decreased 8.4% versus the comparable period in 2022, primarily due to lower sales volume partially offset by higher prices. The sales decrease was primarily in the retail, public buildings, and corporate office market segments partially offset by increases in the healthcare and residential living market segments.

During the first nine months of 2023, net sales in AMS decreased 1.6% versus the comparable period in 2022, primarily due to lower sales volume partially offset by higher prices. The sales decrease was primarily in the retail and public buildings market segments partially offset by increases in the education, corporate office, healthcare, and residential living market segments.

AOI in AMS decreased 6.6% during the third quarter of 2023 compared to the prior year period, primarily due to lower sales partially offset by lower freight costs. As a percentage of net sales, AOI increased to 13.1% during the third quarter of 2023 compared to 12.8% in the same period last year.

AOI in AMS decreased 21.3% during the first nine months of 2023 compared to the prior year period, primarily due to higher raw material costs as a result of inflation, lower manufacturing fixed cost absorption in the current period, and lower sales. AMS SG&A expenses as a percentage of net sales for the first nine months of 2023 increased approximately 1.3%, which contributed to the decrease in AOI for the first nine months of 2023. As a percentage of net sales, AOI decreased to 10.7% during the first nine months of 2023 compared to 13.4% 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 and nine-month periods ended October 1, 2023, and October 2, 2022:

*(in thousands)*

*(in thousands)*

|  | Three Months Ended October 1, 2023 | October 2, 2022 | Percentage Change October 1, 2023 | Nine Months Ended October 2, 2022 |  | Percentage Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| EAAA segment net sales | $132,812 | $133,308 | (0.4)% | $387,664 | $404,596 | (4.2)% |
| EAAA segment AOI(1) | 9,049 | 6,273 | 44.3% | 16,805 | 25,908 | (35.1)% |

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

During the third quarter of 2023, net sales in EAAA decreased 0.4% versus the comparable period in 2022, primarily due to lower sales volume mostly offset by higher prices. Slower economic recovery and decreased customer demand in Asia resulted in approximately 15% lower net sales in Asia during the current quarter compared to the same period last year. Currency fluctuations had a positive impact on EAAA sales of approximately $5.3 million (3.9%) for the third quarter of 2023 compared to the same period last year due to the strengthening of the Euro and British Pound sterling against the U.S. dollar, partially offset by the weakening of the Australian dollar and Chinese Renminbi against the U.S. dollar. On a market segment basis, the EAAA sales decrease was primarily in the retail, public buildings, and corporate office market segments.

During the first nine months of 2023, net sales in EAAA decreased 4.2% versus the comparable period in 2022, primarily due to lower sales in Asia, as discussed above. Higher prices partially offset lower EAAA sales volume. Currency fluctuations had a negative impact on EAAA sales of approximately $1.1 million (0.3%) for the first nine months of 2023 compared to the same period last year due to the weakening of the Australian dollar and Chinese Renminbi against the U.S. dollar, partially offset by the strengthening of the Euro against the U.S. dollar. On a market segment basis, the EAAA sales decrease was primarily in the corporate office, healthcare and retail market segments partially offset by increases in the education market segment.

AOI in EAAA increased 44.3% during the third quarter of 2023 versus the comparable period in 2022 primarily due to higher pricing and the impact of lower raw material costs compared to the same period last year. Currency fluctuations had no material impact to EAAA AOI for the third quarter of 2023 compared to the same period last year. As a percentage of net sales, AOI increased to 6.8% during the third quarter of 2023 compared to 4.7% in the same period last year.

AOI in EAAA decreased 35.1% during the first nine months of 2023 versus the comparable period in 2022, primarily due to the impact of lower sales, inflationary pressures on raw material costs, and lower manufacturing fixed cost absorption on lower manufacturing production volumes partially offset by higher pricing. Currency fluctuations had no material impact to EAAA AOI for the first nine months of 2023 compared to the same period in 2022. As a percentage of net sales, AOI decreased to 4.3% during the first nine months of 2023 compared to 6.4% in the same period last year.

### Financial Condition, Liquidity and Capital Resources

### General

At October 1, 2023, the Company had $119.6 million in cash. At that date, the Company had $143.4 million in term loan borrowings, $5.9 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 October 1, 2023, we had additional borrowing capacity of $292.5 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 $148 million and $431 million for the three-month and nine-month periods ended October 1, 2023, respectively, and net sales for the non-guarantor subsidiaries were approximately $147 million and $443 million for the three-month and nine-month periods ended October 2, 2022, respectively. Total indebtedness of the non-guarantor subsidiaries was approximately $131 million as of October 1, 2023. Included in this $131 million is $99 million of indebtedness from the non-guarantor subsidiaries to guarantor subsidiaries, resulting from the dividend of an asset — a note receivable — by a non-guarantor subsidiary to a guarantor subsidiary. Total indebtedness of non-guarantor subsidiaries was approximately $43 million as of January 1, 2023. There was no indebtedness from non-guarantor subsidiaries to guarantor subsidiaries as of January 1, 2023.

### Balance Sheet

Accounts receivable, net, were $143.9 million at October 1, 2023, compared to $182.8 million at January 1, 2023. The decrease of $38.9 million was primarily due to customer collections in the first nine months of 2023, including the impact of delays in customer billings from the Cyber Event, in which the due dates for those delayed billings were pushed from the fourth quarter of 2022 to the first quarter of 2023.

Inventories, net, were $289.3 million at October 1, 2023, compared to $306.3 million at January 1, 2023. The decrease of $17.0 million was primarily due to lower manufacturing volume and inventory build due to reduced customer demand and improvements in working capital management.

### Analysis of Cash Flows

The following table presents a summary of cash flows for the nine-month periods ended October 1, 2023 and October 2, 2022, respectively:

*(in thousands)*

| Net cash provided by (used in): | Nine Months Ended October 1, 2023 | October 2, 2022 |
| --- | ---: | ---: |
| Operating activities | $114,217 | $14,883 |
| Investing activities | (10,645) | (13,314) |
| Financing activities | (80,847) | (10,456) |
| Effect of exchange rate changes on cash | (656) | (8,916) |
| Net change in cash and cash equivalents | 22,069 | (17,803) |
| Cash and cash equivalents at beginning of period | 97,564 | 97,252 |
| Cash and cash equivalents at end of period | $119,633 | $79,449 |

Cash provided by operating activities was $114.2 million for the nine months ended October 1, 2023, which represents an increase of $99.3 million from the prior year period. The increase in operating cash flows was primarily due to a greater source of cash from working capital during the first nine months of 2023. Specifically, customer collections in the first nine months of 2023 contributed to a decrease in accounts receivable, primarily attributable to delays in customer billings from the Cyber Event, in which the due dates for those delayed billings were pushed from the fourth quarter of 2022 to the first quarter of 2023. The 2022 nine-month period also included a greater use of cash for working capital attributable to an increase in inventories compared with the nine months ended October 1, 2023.

Cash used in investing activities was $10.6 million for the nine months ended October 1, 2023, which represents a decrease of $2.7 million from the prior year period. The decreased use of cash from the comparable prior year period was primarily attributable to proceeds of approximately $6.6 million from the sale of the Company’s Thailand manufacturing facility in the second quarter of 2023, partially offset by higher capital expenditures due to increased capital investment.

Cash used in financing activities was $80.8 million for the nine months ended October 1, 2023, which represents an increase of $70.4 million from the prior year period. The increased use of cash from the comparable period was primarily due to higher repayments of term loan and revolving loan borrowings in 2023 as a result of cash generated from operating activities as described above. The prior year comparable period also includes repurchases of the Company’s common stock that did not occur in 2023, which partially offset the increased use of cash for financing activities in 2023 compared with the prior year period.

### Outlook

We anticipate that net sales will be down for fiscal year 2023 compared with fiscal year 2022. We are also anticipating decreases in the cost of raw materials and freight offset by continued lower manufacturing fixed cost absorption versus the comparable prior year period. We are also anticipating higher selling, general, and administrative costs for fiscal year 2023 versus the comparable prior year period primarily due to inflation.

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, demand for our products, and the timing of accounts receivable collections and the timing of payments for accounts payable and accrued liabilities.

### Backlog

As of October 22, 2023, the consolidated backlog of unshipped orders was approximately $210.3 million. As disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, backlog was approximately $197.4 million as of February 5, 2023. The increase in the backlog is due to the impact of delays and timing of construction projects and flooring installations.

## Market risk

As filed, 2,534 characters.

The discussion below in this Item 3 is based upon the more detailed discussions of our market risk and related matters included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, under Part II, Item 7A of that Form 10-K. The discussion here focuses on the nine months ended October 1, 2023, and any material changes from (or other important intervening developments since the time of) the information discussed in that Form 10-K. This discussion should be read in conjunction with that Form 10-K for more detailed and background information.

### Sensitivity Analysis

For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market sensitive instruments. To perform sensitivity analysis, we assess the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments.

Because the debt outstanding under our Facility has variable interest rates based on an underlying prime lending rate or other benchmark rate, we do not believe changes in interest rates would have any significant impact on the fair value of that debt instrument. Changes in the underlying prime lending rate or other benchmark rate would, however, impact the amount of our interest expense. For a discussion of these hypothetical impacts on our interest expense, please see the discussion in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 1, 2023.

As of October 1, 2023, based on a hypothetical immediate 100 basis point increase in interest rates, with all other variables held constant, the fair value of our fixed rate long-term debt would be impacted by a net decrease of $10.9 million. Conversely, a 100 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $11.5 million.

As of October 1, 2023, a 10% decrease or increase in the levels of foreign currency exchange rates against the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of our financial instruments of $12.0 million or an increase in the fair value of our financial instruments of $14.6 million, respectively. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.

## Controls and procedures

As filed, 1,521 characters.

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under the Act.

No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Based on the evaluation, our President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 232 characters.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000715787-23-000036. Last ingested by Listed: Nov 2, 2026, 15:56 ET. No prices; not investment advice.