Executive Summary / Key Takeaways

• Interface, Inc. is demonstrating robust financial and operational momentum, driven by its "One Interface" strategy, which integrates selling teams and globalizes supply chain management, leading to significant share gains and margin expansion.
• The company reported strong third-quarter 2025 results, with net sales up 5.9% year-over-year to $364.5 million and diluted EPS increasing 62.5% to $0.78, fueled by higher demand in healthcare and corporate office segments and enhanced manufacturing efficiencies.
• Strategic investments in automation and robotics are yielding substantial productivity gains, contributing significantly to gross profit margin expansion, with these initiatives now being extended globally.
• Interface's commitment to sustainability and product innovation, including a new carbon-negative rubber flooring prototype and upcoming innovations, strengthens its competitive moat and expands its addressable market.
• A strong balance sheet, with a net leverage ratio of 0.6x and ample liquidity, provides financial flexibility for continued strategic investments and shareholder returns, as evidenced by a recent dividend increase and share repurchases.

The Foundation of a Flooring Leader: Strategy, Innovation, and Competitive Edge

Interface, Inc. (NASDAQ: TILE), established in 1973, has long been a pioneering force in the commercial flooring industry, renowned for its modular carpet products. The company's journey has been marked by a relentless pursuit of innovation and sustainability, fundamentally shaping its current strategic direction. A pivotal moment in its history was the introduction of the i2 modular carpet tile portfolio around 1999-2000, featuring the Entropy product. This innovation revolutionized carpet tile design by offering modularity, mergeable dye lots, and random installations, providing customers with unparalleled flexibility and adaptability. The strategic acquisition of Nora, a rubber flooring company, in 2018 further diversified Interface's portfolio, proving to be a strong fit that later enabled a comprehensive, integrated selling strategy.

The company's current trajectory is largely defined by its "One Interface" strategy, a multi-year initiative launched in 2024. This strategy focuses on building robust global functions, accelerating growth through enhanced commercial productivity, expanding margins via global supply chain management, simplifying operations, and leading in design, performance, and sustainability. This integrated approach is not merely an internal restructuring but a fundamental shift designed to present a unified, cohesive experience to customers across its diverse product offerings.

Interface operates within a competitive landscape characterized by both large, diversified players and specialized niche providers. Key direct competitors include Mohawk Industries (MHK), Armstrong World Industries (AWI), and Tarkett (TKTT.PA). Interface holds a specialized position, particularly in sustainable and customizable products for commercial interiors like healthcare and education. While larger rivals like Mohawk Industries benefit from immense scale and broader market reach, Interface differentiates itself through its strong brand recognition in sustainable flooring, proprietary technologies, and a global distribution network that includes direct sales channels.

Interface's core technological differentiation is a significant competitive advantage. Its i2 modular carpet tile system offers superior design flexibility and ease of installation, reducing waste and simplifying maintenance for customers. Beyond carpet tile, the company has made quantifiable strides in sustainability. Interface has reduced the carbon footprint of its carpet tile by 35%, LVT by 46%, and Nora rubber by 21% compared to its 2019 baseline. Furthermore, 52% of its products now use recycled or bio-based materials, and it has cut global greenhouse gas emissions by 4% year-over-year, with 80% of its manufacturing energy sourced from renewables.

A key innovation involves a strategic investment to incorporate captured carbon into its U.S. and European manufacturing processes. This raw material stores more carbon and lowers the carbon footprint of carpet tile products without additional cost to customers. In early 2025, Interface also introduced a proof-of-concept carbon-negative rubber flooring prototype in Germany, showcasing its commitment to extending carbon reduction innovations across its Nora product category. These technological advancements and sustainability leadership not only enhance Interface's brand and market positioning but also contribute to its competitive moat by offering unique, high-value solutions that resonate with environmentally conscious customers and help them meet their own sustainability goals.

Strategic Execution Driving Financial Outperformance

The "One Interface" strategy has demonstrably translated into strong financial performance. For the third quarter ended September 28, 2025, consolidated net sales increased by 5.9% year-over-year to $364.5 million. This growth was primarily driven by higher customer demand, particularly in the healthcare and corporate office market segments, and increased average sales prices. For the first nine months of 2025, consolidated net sales reached $1,037.5 million, marking a 5.8% increase over the prior year, with healthcare and education leading the demand.

Profitability has seen significant expansion. Consolidated operating income for Q3 2025 rose to $53.4 million, up from $42.2 million in the prior year. This improvement was largely due to higher sales and an expanded gross profit margin, which increased to 39.4% in Q3 2025 from 37.1% in Q3 2024. The margin expansion was attributed to higher average sales prices, a favorable product mix (contributing approximately 1%), and favorable manufacturing costs (contributing approximately 1%) driven by manufacturing efficiencies. Bruce Hausman, CFO, noted that manufacturing efficiencies drove about half of the margin expansion in Q3 2025, with the remainder from price and mix. For the first nine months of 2025, operating income was $128.6 million, up from $104.8 million in the same period last year.

The Americas (AMS) segment has been a significant growth engine. In Q3 2025, AMS net sales increased 4% year-over-year to $218.6 million, with Adjusted Operating Income (AOI) surging 25.8% to $40.5 million. The AOI as a percentage of net sales for AMS increased to 18.5% in Q3 2025 from 15.3% in the prior year. This strong performance is a direct result of the combined Interface and Nora selling teams, which have driven double-digit order growth and significant market share gains in carpet tile and rubber. Notably, Nora Rubber sales grew 20% in Q3 2025 and were up 19% year-to-date, with nearly 40% growth in the Americas in Q2 2025. The company is now extending its successful U.S. robotic systems to facilities in Europe and Australia, with benefits expected in 2026.

The Europe, Africa, Asia, and Australia (EAAA) segment also showed increased momentum in Q3 2025, with net sales up 8.8% to $145.9 million. Currency fluctuations positively impacted EAAA net sales by approximately $6 million (4.5%) in Q3 2025. However, for the first nine months of 2025, EAAA's AOI decreased by 16.2%, primarily due to higher raw material input costs and unfavorable fixed cost absorption.

Interface's market segment diversification is proving effective. Global healthcare billings were up 29% in Q3 2025, with double-digit gains across both Americas and EAAA. Corporate office billings increased 5% in Q3 2025 and were up year-to-date, benefiting from the "flight to quality Class A space" and companies refreshing environments for hybrid workforces. Education billings, while slightly down (approximately 2.5%) in Q3 2025, remained up high single digits year-to-date, driven by modernization initiatives and regional migration.

Financial Health and Capital Allocation

Interface maintains a robust financial position, providing significant flexibility. As of September 28, 2025, the company held $187.4 million in cash and cash equivalents and had an additional borrowing capacity of $294.8 million under its credit facility. Management anticipates that current liquidity is sufficient to meet obligations for the next 12 months and expects to generate sufficient cash for long-term needs.

Cash flow generation remains strong. Cash provided by operating activities for the first nine months of 2025 increased by $8.2 million to $118.6 million, primarily due to higher net income, partially offset by increased cash usage for inventory build in anticipation of higher demand. The company's net debt, defined as total debt minus cash on hand, stood at $120.4 million, resulting in a healthy net leverage ratio of 0.6x (calculated as net debt divided by the last 12 months of adjusted EBITDA).

Interface's capital allocation strategy prioritizes investing in the business for growth and margin expansion. Capital expenditures for the first nine months of 2025 increased by $8.8 million to $25.5 million, mainly due to greater investment in manufacturing automation and robotics solutions. Bruce Hausman indicated that CapEx in 2026 might increase by approximately $10 million compared to 2025 levels to further fund productivity and innovation initiatives.

The company also returns capital to shareholders, repurchasing 250,000 shares of common stock at a weighted average price of $20.57 per share during the first nine months of 2025. Additionally, the Board of Directors recently increased the regular quarterly cash dividend to $0.02 per share from $0.01 per share, reflecting confidence in the business.

Outlook and Key Risks

Based on its strong year-to-date results, Interface has increased its outlook for the full fiscal year 2025. The company now anticipates net sales of $1.375 billion to $1.390 billion. Adjusted gross profit margin is projected at 38.5% of net sales, with adjusted SG&A expenses of $362 million, adjusted interest and other expenses of $25 million, and an adjusted effective income tax rate of 26%. Capital expenditures are expected to be $45 million, and the fully diluted weighted average share count is estimated at 59.1 million shares. Management anticipates net sales growth in the fourth quarter of fiscal year 2025 compared to the same period last year. As of October 19, 2025, the consolidated backlog of unshipped orders was approximately $244.4 million, indicating solid underlying demand.

Despite this positive outlook, Interface acknowledges a challenging and uncertain global macroeconomic environment. Key risks include global economic challenges such as government-imposed tariffs, supply chain disruptions, inflation, and geopolitical conflicts. Interface's exposure to tariffs is primarily limited to imports of Nora Rubber from Germany and LVT from South Korea into the U.S. While these tariffs diluted the adjusted gross profit percentage by approximately 30 basis points in Q3 2025, and are expected to dilute Q4 2025 by 50 basis points, management anticipates offsetting these costs through pricing and productivity initiatives. Legal proceedings, such as a PFAS lawsuit filed in April 2025, also present a potential risk, though Interface intends to vigorously defend against the claims.

Conclusion

Interface, Inc. is executing a compelling investment thesis, demonstrating consistent growth and expanding profitability through its "One Interface" strategy. The company's historical commitment to innovation, particularly with its i2 modular carpet tiles and the strategic integration of Nora rubber flooring, has laid a strong foundation. Current performance, marked by robust sales growth in key segments like healthcare and corporate office, significant margin expansion driven by manufacturing automation, and a strong balance sheet, underscores the effectiveness of its strategic initiatives. Interface's leadership in sustainability and ongoing technological advancements, such as carbon footprint reduction and new product innovations, further solidify its competitive moat against rivals like Mohawk, Armstrong, and Tarkett. With a clear strategic roadmap, disciplined capital allocation, and a positive outlook for 2025, Interface appears well-positioned to continue outpacing the industry and delivering long-term value to its shareholders, even amidst a dynamic global environment.