TREDEGAR CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking and Cautionary Statements Some of the information contained in this Quarterly Report on Form 10-Q ("Form 10-Q") may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When the Company uses the words “believe,” “estimate,” “anticipate,” “appear to,” “expect,” “project,” “plan,” “likely,” “may” and similar expressions, it does so to identify forward-looking statements. Such statements are based on the Company's then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is possible that the Company's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ materially from expectations include, without limitation, the following: • loss or gain of sales to significant customers on which the Company’s business is highly dependent; • inability to achieve sales to new customers to replace lost business; • inability to develop, efficiently manufacture and deliver new products at competitive prices; • failure of the Company’s customers to achieve success or maintain market share; • failure to protect our intellectual property rights; • risks of doing business in countries outside the U.S. that affect our international operations; • political, economic, and regulatory factors concerning the Company’s products; • uncertain economic conditions in countries in which the Company does business, including continued high inflation and the effects of the Russian invasion of Ukraine; • competition from other manufacturers, including manufacturers in lower-cost countries and manufacturers benefiting from government subsidies; • impact of fluctuations in foreign exchange rates; • movement of pension plan assets and liabilities relating to differences between the ultimate settlement benefit obligation and the projected benefit obligation, census data, administrative costs, and the effectiveness of hedging activities; • an increase in the operating costs incurred by the Company’s business units, including, for example, the cost of raw materials and energy; • unanticipated problems or delays with the implementation of an enterprise resource planning and manufacturing executions systems, or security breaches and other disruptions to the Company's information technology infrastructure; • inability to successfully identify, complete or integrate strategic acquisitions; failure to realize the expected benefits of such acquisitions and assumption of unanticipated risks in such acquisitions; • disruptions to the Company’s manufacturing facilities, including those resulting from labor shortages; • failure to continue to attract, develop and retain certain key officers or employees; • noncompliance with any of the financial and other restrictive covenants in the Company's revolving credit facility; • the impact of public health epidemics on employees, production and the global economy, such as the COVID-19 pandemic; • an information technology system failure or breach; • the impact of the imposition of tariffs and sanctions on imported aluminum ingot used by Bonnell Aluminum; • the impact of new tariffs, duties or other trade restrictions imposed as a result of trade tensions between the U.S. and other countries; • the termination of anti-dumping duties on products imported to Brazil that compete with products produced by Flexible Packaging; • impairment of the Surface Protection reporting unit's goodwill; • failure to establish and maintain effective internal control over financial reporting; and the other factors discussed in the reports Tredegar files with or furnishes to the Securities and Exchange Commission (the “SEC”) from time to time, including the risks and important factors set forth in additional detail in Part I, Item 1A of Tredegar’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) and Part II, Item 1A of this Form 10-Q. Readers are urged to review and consider carefully the disclosures Tredegar makes in its filings with the SEC. Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law. References herein to “Tredegar,” “the Company,” “we,” “us” and “our” are to Tredegar Corporation and its subsidiaries, collectively, unless the context otherwise indicates or requires. 21 Unless otherwise stated or indicated, all comparisons are to the prior year period. References to "Notes" are to notes to our condensed consolidated financial statements found in Part I, Item 1 of this Form 10-Q. Critical Accounting Policies and Estimates In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting standards in the United States ("GAAP"). The Company believes the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the 2022 Form 10-K have the greatest potential impact on our financial statements, so Tredegar considers these to be its critical accounting policies. Since December 31, 2022, there have been no changes in these policies or estimates that have had a material impact on our results of operations or financial position. Business Overview Tredegar Corporation is an industrial manufacturer with three primary businesses: custom aluminum extrusions for the North American building and construction ("B&C"), automotive and specialty end-use markets through its Aluminum Extrusions segment; surface protection films for high-technology applications in the global electronics industry through its PE Films segment; and specialized polyester films primarily for the Latin American flexible packaging market through its Flexible Packaging Films segment. With approximately 1,800 employees, the Company operates manufacturing facilities in North America, South America, and Asia. Earnings before interest, taxes, depreciation and amortization ("EBITDA") from ongoing operations is the measure of segment profit and loss used by Tredegar’s chief operating decision maker ("CODM") for purposes of assessing financial performance. The Company uses sales less freight (“net sales”) as its measure of revenues from external customers at the segment level. This measure is separately included in the financial information regularly provided to the CODM. Earnings before interest and taxes ("EBIT") from ongoing operations is a non-GAAP financial measure included in the reconciliation of segment financial information to consolidated results for the Company in Note 10. It is not intended to represent the stand-alone results for Tredegar's ongoing operations under GAAP and should not be considered as an alternative to net income as defined by GAAP. We believe that EBIT is a widely understood and utilized metric that is meaningful to certain investors and that including this financial metric in the reconciliation of management’s performance metric, EBITDA from ongoing operations, provides useful information to those investors that primarily utilize EBIT to analyze the Company’s core operations. Second quarter 2023 net income (loss) was $(18.9) million ($(0.56) per diluted share) compared with net income (loss) of $14.9 million ($0.44 per diluted share) in the second quarter of 2022. Second Quarter Financial Results Highlights • EBITDA from ongoing operations for Aluminum Extrusions was $10.2 million in the second quarter of 2023 versus $21.9 million in the second quarter of last year. EBITDA from ongoing operations during the last four quarters has been weak, in a range of $8.9 to $14.6 million. ◦ Sales volume of 35.5 million pounds in the second quarter of 2023 was relatively consistent with the first quarter of 2023 and the fourth quarter of 2022 but declined significantly versus 49.0 million pounds in the second quarter of last year. ◦ Open orders at the end of the second quarter of 2023 were 20 million pounds (versus 27 million pounds at the end of the first quarter of 2023), which is below the quarterly range of 21 to 27 million pounds in 2019 before pandemic-related disruptions that resulted in excessive open orders, which peaked in the first quarter of 2022 at approximately 100 million pounds. ◦ While open orders have declined over the past year, Aluminum Extrusions has realized three sequential quarters of net booking growth. • EBITDA from ongoing operations for PE Films was $0.8 million in the second quarter of 2023 versus $7.1 million in the second quarter of 2022 as very weak conditions persisted in the consumer electronics market. EBITDA from ongoing operations during the last four quarters has been low with a range of negative $2.6 million to positive $1.8 million. • EBITDA from ongoing operations for Flexible Packaging Films was $0.2 million during the second quarter of 2023 versus $7.6 million in the second quarter of 2022 primarily due to lower sales volume, which the Company believes is mainly due to customer inventory corrections, lower margins and unfavorable cost variances. The Company recognized a net loss for the second quarter of 2023, with all business segments and their respective markets experiencing depressed conditions, which the Company believes can be traced to the residual impact of the pandemic. 22 The timing of recovery for our businesses remains uncertain and has been slow in occurring. Debt, net of cash, declined during the quarter as a result of improvements in working capital, with further improvements anticipated by year end. Other losses related to asset impairments and costs associated with exit and disposal activities were not material for the three and six months ended June 30, 2023 and 2022, respectively. Gains and losses associated with plant shutdowns, asset impairments, restructurings and other items are described in Results of Operations below. Results of Operations Second Quarter of 2023 Compared with the Second Quarter of 2022 The following table presents a bridge of consolidated net income (loss) from the second quarter of 2022 to the second quarter of 2023 with management's related discussion and analysis below the table. (In thousands) Net income (loss) for the three months ended June 30, 2022 $ 14,869 Income tax expense (benefit) 5,556 Income (loss) before income taxes for the three months ended June 30, 2022 20,425 Increase (decrease) in income from increases (decreases) in the following items: Sales (96,196) Other income (expense), net (1,362) Total (97,558) Increase (decrease) in income from (increases) decreases in the following items: Cost of goods sold 64,821 Freight 3,837 Selling, general and administrative 1,973 Goodwill impairment (15,413) Other (338) Total 54,880 Income (loss) before income taxes for the three months ended June 30, 2023 (22,253) Income tax expense (benefit) (3,331) Net income (loss) for the three months ended June 30, 2023 $ (18,922) Sales in the second quarter of 2023 decreased by $96.2 million compared with the second quarter of 2022. Net sales (sales less freight) in Aluminum Extrusions decreased $68.5 million, primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in prices to cover higher operating costs. Net sales in PE Films decreased $15.5 million, primarily due to continuing weak market demand and unfavorable product mix. Net sales in Flexible Packaging Films decreased $8.4 million, primarily due to lower sales volume, lower selling prices from the pass-through of lower resin costs and unfavorable product mix. For more information on net sales and volume, see the Segment Operations Review below. Other income (expense), net was $(20) thousand in the second quarter of 2023 compared to other income (expense), net of $1.3 million in the second quarter of 2022. The change in other income (expense), net is primarily due to cash consideration of $1.4 million received in May 2022 related to the customary post-closing adjustments on the sale of the investment in kaleo, Inc. ("kaléo"), which was sold in December 2021. See Note 5 for additional information. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 9.9% in the second quarter of 2023 compared to 16.5% in the second quarter of 2022. The gross profit margin in Aluminum Extrusions decreased primarily due to lower sales volume, higher labor and employee-related costs, lower labor productivity, lower pricing and higher supply expense associated with inflationary costs, partially offset by lower utility costs and lower freight rates. Additionally, the timing of the flow through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at higher prices in a quickly changing commodity pricing environment, resulted in a charge of $1.3 million in the second quarter of 2023 versus a charge of $1.6 million in the second quarter of 2022. The gross profit margin in PE Films decreased primarily due to a lower Surface Protection contribution margin associated with a market slowdown, customer inventory corrections and the pass-through lag associated with resin costs, partially offset by overwrap films favorable pricing and mix. The gross profit margin in Flexible Packaging Films decreased primarily due to lower selling prices from the pass-through of lower resin costs and margin pressures, lower sales volume, higher fixed costs, higher variable costs and unfavorable product mix, partially offset by lower raw material costs. 23 As a percentage of sales, selling, general and administrative (“SG&A”) and research and development ("R&D") expenses were 10.3% in the second quarter of 2023 compared with 7.5% in the second quarter of 2022. While second quarter SG&A expenses and sales decreased year-over-year, R&D expenses remained relatively consistent with the prior year period. Lower SG&A spending is primarily due to lower accruals for employee-related compensation and lower stock-based compensation, partially offset by higher professional fees associated with business development activities. In the second quarter of 2023, a non-cash partial goodwill impairment of $15.4 million was recognized, see the PE Films section in Segment Operations Review below for more information. The effective tax rate used to compute income taxes for the second quarter of 2023 was 15.0%, compared to 27.3% in the second quarter of 2022. The change in the effective tax rate is primarily due to a pre-tax loss in the three months ending June 30, 2023 versus pre-tax income in the three months ending June 30, 2022, lower Brazil tax incentives and a discrete charge in the second quarter of 2023 for a Brazil tax law change. See Note 9 for additional information. Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for the second quarters of 2023 and 2022 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 10 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the condensed consolidated statements of income, unless otherwise noted. Three Months Ended June 30, (In millions) 2023 2022 Aluminum Extrusions: (Gains) losses from sale of assets, investment writedowns and other items: Storm damage to the Newnan, Georgia plant 2 $ (0.2) $ — Total for Aluminum Extrusions $ (0.2) $ — PE Films: (Gains) losses from sale of assets, investment writedowns and other items: COVID-19-related expenses 1 $ — $ 0.1 Goodwill impairment 15.4 — Total for PE Films $ 15.4 $ 0.1 Corporate: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Other restructuring costs - severance $ — $ 0.1 (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with business development activities 2 1.6 0.1 Professional fees associated with remediation activities related to internal control over financial reporting 2 0.5 0.8 Write-down of investment in Harbinger Capital Partners Special Situations Fund 1 0.2 — Stock-based compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend 2 (0.1) (0.2) Net periodic benefit cost for the frozen defined benefit pension plan in process of termination 3 3.4 3.5 Total for Corporate $ 5.6 $ 4.3 1. Included in “Other income (expense), net” in the condensed consolidated statements of income. 2. Included in “Selling, general and administrative expenses” in the condensed consolidated statements of income. 3. See “Corporate Expenses, Interest, & Other” below and Note 4 for additional information. Average debt outstanding and interest rates were as follows: Three Months Ended June 30, (In millions, except percentages) 2023 2022 Floating-rate debt with interest charged on a rollover basis plus a credit spread: Average outstanding debt balance $ 150.0 $ 109.9 Average interest rate 6.9 % 2.4 % 24 First Six Months of 2023 Compared with the First Six Months of 2022 The following table presents a bridge of consolidated net income (loss) from the first six months of 2022 to the first six months of 2023 with management's related discussion and analysis below the table. (In thousands) Net income (loss) for the six months ended June 30, 2022 $ 31,292 Income tax expense (benefit) 6,334 Income (loss) before income taxes for the six months ended June 30, 2022 37,626 Increase (decrease) in income from increases (decreases) in the following items: Sales (141,640) Other income (expense), net (781) Total (142,421) Increase (decrease) in income from (increases) decreases in the following items: Cost of goods sold 88,556 Freight 5,875 Selling, general and administrative 4,249 Goodwill impairment (15,413) Other (1,406) Total 81,861 Income (loss) before income taxes for the six months ended June 30, 2023 (22,934) Income tax expense (benefit) (3,000) Net income (loss) for the six months ended June 30, 2023 $ (19,934) Sales in the first six months of 2023 decreased by $141.6 million compared with the first six months of 2022. Net sales (sales less freight) in Aluminum Extrusions decreased $93.2 million, primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in prices to cover higher operating costs. Net sales in PE Films decreased $26.5 million, primarily due to continuing weak market demand and unfavorable product mix. Net sales in Flexible Packaging Films decreased $16.1 million, primarily due to lower sales volume and lower selling prices from the pass-through of lower resin costs, partially offset by favorable product mix. For more information on net sales and volume, see the Segment Operations Review below. Other income (expense), net was $0.3 million in the first six months of 2023 compared to other income (expense), net of $1.0 million in the first six months of 2022. The change in other income (expense), net is primarily due to cash consideration of $0.3 million received in January 2023 compared to $1.4 million received in May 2022 related to the customary post-closing adjustments on the sale of the investment in kaléo, which was sold in December 2021. See Note 5 for additional information. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 11.7% in the first six months of 2023 compared to 17.7% in the first six months of 2022. The gross profit margin in Aluminum Extrusions decreased primarily due to lower sales volume, higher labor and employee-related costs, lower labor productivity and higher supply expense, including higher paint expense associated with a shift to more painted product in the first quarter of 2023 and inflationary costs for other supplies, partially offset by higher pricing and lower utility costs. Additionally, the timing of the flow through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at lower prices in a quickly changing commodity pricing environment, resulted in a benefit of $0.4 million in the first six months of 2023 versus a benefit of $5.5 million in the first six months of 2022. The gross profit margin in PE Films decreased primarily due to a lower Surface Protection contribution margin for previously disclosed customer product transitions and for non-transitioning products associated with a market slowdown and customer inventory corrections, partially offset by favorable pricing and mix for overwrap films. The gross profit margin in Flexible Packaging Films decreased primarily due to lower sales volume, lower selling prices from the pass-through of lower resin costs and margin pressures, higher fixed costs, higher variable costs and unfavorable product mix, partially offset by lower raw material costs. As a percentage of sales, SG&A and R&D expenses were 10.4% in the first six months of 2023, compared with 8.5% in the first six months of 2022. While first half SG&A expenses and sales decreased year-over-year, R&D expenses remained relatively consistent with the prior year period. Lower SG&A spending was primarily due to lower accruals for employee-related compensation and lower stock-based compensation, partially offset by higher professional fees associated with business development activities. 25 In the first half of 2023, a non-cash partial goodwill impairment of $15.4 million was recognized, see the PE Films section in Segment Operations Review below for more information. The effective tax rate used to compute income taxes for the first six months of 2023 was 13.1%, compared to 16.9% in the first six months of 2022. The change in the effective tax rate is primarily due to a pre-tax loss in first six months of 2023 versus pre-tax income in first six months of 2022, lower Brazil tax incentives, a discrete charge in the second quarter of 2023 for a Brazil tax law change and a large discrete benefit recorded in the first quarter of 2022, resulting from the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. See Note 9 for additional information. Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for the first six months of 2023 and 2022 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 10 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the condensed consolidated statements of income, unless otherwise noted. Six Months Ended June 30, (In millions) 2023 2022 Aluminum Extrusions: (Gains) losses from sale of assets, investment writedowns and other items: Storm damage to the Newnan, Georgia plant 2 $ 0.4 $ — COVID-19-related expenses, net of relief 1 — 0.1 Total for Aluminum Extrusions $ 0.4 $ 0.1 PE Films: (Gains) losses from sale of assets, investment writedowns and other items: COVID-19-related expenses 1 $ — $ 0.2 Goodwill Impairment 15.4 — Total for PE Films $ 15.4 $ 0.2 Flexible Packaging Films: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Other restructuring costs - severance $ 0.1 $ — Total for Flexible Packaging Films $ 0.1 $ — Corporate: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Other restructuring costs - severance $ — $ 0.1 (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with business development activities 2 $ 1.9 $ 1.6 Professional fees associated with remediation activities related to internal control over financial reporting 2 1.0 1.2 Write-down of investment in Harbinger Capital Partners Special Situations Fund 1 0.2 — Stock-based compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend 2 (0.2) (0.2) Net periodic benefit cost for the frozen defined benefit pension plan in process of termination 3 6.8 6.9 Total for Corporate $ 9.7 $ 9.6 1. Included in “Other income (expense), net” in the condensed consolidated statements of income. 2. Included in “Selling, general and administrative expenses” in the condensed consolidated statements of income. 3. See “Corporate Expenses, Interest, & Other” below and Note 4 for additional information. Average debt outstanding and interest rates were as follows: Six Months Ended June 30, (In millions, except percentages) 2023 2022 Floating-rate debt with interest charged on a rollover basis plus a credit spread: Average outstanding debt balance $ 148.5 $ 106.9 Average interest rate 6.6 % 2.1 % 26 Segment Operations Review Aluminum Extrusions A summary of results for Aluminum Extrusions is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Six Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) June 30, June 30, 2023 2022 2023 2022 Sales volume (lbs) 35,492 48,960 (27.5)% 73,054 91,970 (20.6)% Net sales $ 121,827 $ 190,308 (36.0)% $ 255,197 $ 348,417 (26.8)% Ongoing operations: EBITDA $ 10,217 $ 21,895 (53.3)% $ 24,855 $ 45,814 (45.7)% Depreciation & amortization (4,158) (4,169) 0.3% (8,569) (8,430) (1.6)% EBIT* $ 6,059 $ 17,726 (65.8)% $ 16,286 $ 37,384 (56.4)% Capital expenditures $ 5,631 $ 3,989 $ 13,373 $ 6,870 *See the table in Note 10 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. Second Quarter 2023 Results vs. Second Quarter 2022 Results Net sales (sales less freight) in the second quarter of 2023 decreased 36.0% versus the second quarter of 2022 primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in prices to cover higher operating costs. Sales volume in the second quarter of 2023 declined 27.5% versus the second quarter of 2022. No nresidential B&C sales volume, which represented 53% of 2022 volume, declined 23.8% in the second quarter of 2023 versus the second quarter of 2022. Sales volume in the specialty market, which represented 29% of total volume in 2022, decreased 32.7% in the second quarter of 2023 versus the second quarter of 2022. Sales volume in the automotive market, which represented 8% of total volume in 2022, decreased 7.8% in the second quarter of 2023 versus the second quarter of 2022. Beginning in the third quarter of 2022, the Company observed slowing order input and order cancellations as customers continued to report high inventory levels, which carried into 2023. Open orders at the end of the second quarter of 2023 were 20 million pounds (versus 27 million pounds at the end of the first quarter of 2023 and 86 million pounds at the end of the second quarter 2022). This level is below the quarterly range of 21 to 27 million pounds in 2019 before pandemic-related disruptions that resulted in long lead times driving a peak in open orders of approximately 100 million pounds during the first quarter of 2022. In addition, data indicates that aluminum extrusion imports have increased significantly in recent years, and some of Bonnell Aluminum’s customers may have sourced, and continue to source, aluminum extrusions from producers outside of the United States. The Company is closely monitoring the situation and is prepared to work with the U.S. Government to ensure a fairly traded market. Nonetheless, Bonnell Aluminum has experienced three sequential quarters of net booking growth. Net bookings were 16.9, 19.0, 20.4 and 28.2 million pounds in the third quarter of 2022 through the second quarter of 2023, respectively. EBITDA from ongoing operations in the second quarter of 2023 decreased $11.7 million or 53.3% versus the second quarter of 2022 primarily due to: • Lower volume ($11.9 million), higher labor and employee-related costs ($0.7 million), lower labor productivity ($0.5 million), lower pricing ($1.0 million) and higher supply expense associated with inflationary costs ($0.8 million), partially offset by lower utility costs ($1.0 million), lower freight rates ($0.3 million) and lower SG&A expenses ($1.6 million); and • The timing of the flow-through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at higher prices in a quickly changing commodity pricing environment, resulted in a charge of $1.3 million in the second quarter of 2023 versus a charge of $1.6 million in the second quarter of 2022. First Six Months of 2023 Results v. First Six Months of 2022 Results Net sales in the first six months of 2023 decreased 26.8% versus the first six months of 2022 primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in prices to cover higher operating costs. Sales volume in the first six months of 2023 decreased by 20.6% versus t he first six months of 2022. EBITDA from ongoing operations in the first six months of 2023 decreased $21.0 million or 45.7% in comparis on to the first six months of 2022 prim arily due to: • Lower volume ($16.1 million), higher labor and employee-related costs ($2.4 million), lower labor productivity ($1.0 million) and higher supply expense, including higher paint expense associated with a shift to more painted product in 27 the first six months of 2023, and inflationary costs for other supplies ($3.0 million), partially offset by higher pricing ($5.6 million), lower utility costs ($0.6 million) and lower SG&A expenses ($0.8 million); and • The timing of the flow-through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at lower prices in a quickly changing commodity pricing environment, resulted in a benefit of $0.4 million in the first six months of 2023 versus a benefit of $5.5 million in the first six months of 2022. R efer to Item 3. Q uantitative and Qualitative Disclosures About Market Risk in this Form 10-Q f or additional information on aluminum prices. Projected Capital Expenditures and Depreciation & Amortization Capital expenditures for Bonnell Aluminum are projected to be $19 million in 2023 versus the previously disclosed projection of $26 million. The Company has implemented stringent spending measures to control its financial leverage (see “Net Debt, Financial Leverage and Debt Covenants” section for more information). In this regard, Bonnell Aluminum has reduced projected capital expenditures in the second half of 2023 to $5 million to mainly support continuity of current operations versus broader spending of $14 million during the first half of the year. The most significant reduction relates to the multi-year implementation of new enterprise resource planning and manufacturing execution systems ("ERP/MES"). This project is being reorganized with an extended implementation period that increases the utilization of existing dedicated internal resources over a longer period in place of more costly external consultants. As a result, the earliest “go-live” date for the new ERP/MES is likely in 2025. The ERP/MES project commenced in 2022, with spending to-date of approximately $21 million. Depreciation expense is projected to be $15 million in 2023. Amortization expense is projected to be $2 million in 2023. PE Films A summary of results for PE Films is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Six Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) June 30, June 30, 2023 2022 2023 2022 Sales volume (lbs) 6,245 9,639 (35.2)% 13,613 20,192 (32.6)% Net sales $ 15,918 $ 31,424 (49.3)% $ 36,099 $ 62,555 (42.3)% Ongoing operations: EBITDA $ 814 $ 7,065 (88.5)% $ 2,663 $ 14,112 (81.1)% Depreciation & amortization (1,552) (1,559) 0.4% (3,195) (3,154) (1.3)% EBIT* $ (738) $ 5,506 (113.4)% $ (532) $ 10,958 (104.9)% Capital expenditures $ 360 $ 1,163 $ 1,075 $ 1,744 * See the table in Note 10 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. Second Quarter 2023 Results vs. Second Quarter 2022 Results Net sales in the second quarter of 2023 decreased 49.3% compared to the second quarter of 2022. Sales volume in the second quarter of 2023 decreased in both Surface Protection and overwrap films versus the second quarter of 2022. Surface Protection sales volume in the second quarter of 2023 declined 54.2% versus the second quarter of 2022 and 26.9% versus the first quarter of 2023. Surface Protection sales continue to be adversely impacted by weak market demand for consumer electronics which began in the third quarter of last year. Manufacturers in the supply chain are experiencing reduced capacity utilization and inventory corrections. In addition, these market conditions are adversely impacting mix through reduced sales to our highest value-added customers. The timing of a recovery in Surface Protection remains uncertain. EBITDA from ongoing operations in the second quarter of 2023 decreased $6.3 million v ersus the second quarter of 2022, primarily due to: • A $7.7 million decrease from Surface Protection: ◦ Lower contribution margin associated with a market slowdown and customer inventory corrections ($8.6 million), partially offset by lower SG&A and operating efficiencies ($0.7 million); and ◦ The pass-through lag associated with resin costs ($0.1 million charge in the second quarter of 2023 versus a charge of $0.3 million in the second quarter of 2022). • A $1.4 million increase from overwrap films primarily due to cost improvements. 28 First Six Months of 2023 Results v. First Six Months of 2022 Results Net sale s in the first six months of 2023 decreased 42.3% compared to the first six months of 2022 primarily due to a decrease in sales volume in Surface Protection, as a result of the factors noted above. Sales volume declined 45.4% in Surface Protection in the first six months of 2023. EBITDA from ongoing operations in the first six months of 2023 decreased by $11.4 million versus the first six months of 2022, primarily due to: • A $12.6 million decrease from Surface Protection: ◦ Lower contribution margin for non-transitioning products associated with a market slowdown and customer inventory corrections ($12.7 million) and for previously disclosed customer product transitions ($0.7 million), partially offset by lower SG&A and other employee-related expenses and operating efficiencies ($1.2 million); and ◦ The pass-through lag associated with resin costs ($0.2 million charge in the second quarter of 2023 versus a benefit of $0.2 million in the second quarter of 2022). • A $1.1 million increase from overwrap films primarily due to cost improvements ($1.5 million), partially offset by the pass-through lag associated with resin costs (a charge of $0.2 million in the first six months of 2023 versus a benefit of $0.2 million in the first six months of 2022). R efer to Item 3. Q uantitative and Qualitative Disclosures About Market Risk in this Form 10-Q f or additional information on resin prices. Closure of PE Films Technical Center On August 3, 2023, the Company adopted a plan to close the PE Films technical center in Richmond, VA and reduce its efforts to develop and sell films supporting the semiconductor market. Future research & development activities for PE Films will be performed at the facility in Pottsville, PA. PE Films continues to have new business opportunities primarily relating to surface protection films that protect components of flat panel and flexible displays. The Company anticipates all activities to cease at the PE Films technical center in Richmond, VA, by the end of 2023. The Company expects to recognize cash costs associated with exit activities of $1.8 million for: (i) severance and related costs ($0.9 million), (ii) vacating the facility lease ($0.6 million payable through June 2025), and (iii) building closure costs ($0.3 million). In addition, the Company expects non-cash asset write-offs and accelerated depreciation of up to $4.5 million. Net annual cash savings of $3.4 million are anticipated, beginning in the fourth quarter of 2023. Goodwill Impairment in Surface Protection Manufacturers in the supply chain for consumer electronics continue to experience reduced capacity utilization and inventory corrections. In light of the continued uncertainty about the timing of a recovery for this market and the expected adverse future impact to the Surface Protection business, the Company performed a goodwill impairment analysis of the Surface Protection component of PE Films using projections that contemplate the expected market recovery and business conditions. The analysis concluded that the fair value of Surface Protection was less than its carrying value, thus a non-cash partial goodwill impairment of $15.4 million ($11.9 million after deferred income tax benefits) was recognized during the second quarter of 2023. Projected Capital Expenditures and Depreciation & Amortization Capital expenditures for PE Films are projected to be $3 million in 2023, including $1 million for productivity projects and $2 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $6 million in 2023. There is no amortization expense for PE Films. 29 Flexible Packaging Films A summary of results for Flexible Packaging Films is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Six Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) June 30, June 30, 2023 2022 2023 2022 Sales volume (lbs) 23,724 27,315 (13.1)% 43,569 53,321 (18.3)% Net sales $ 33,223 $ 41,595 (20.1)% $ 64,750 $ 80,839 (19.9)% Ongoing operations: EBITDA $ 249 $ 7,631 (96.7)% $ 1,599 $ 12,665 (87.4)% Depreciation & amortization (711) (583) (22.0)% (1,411) (1,132) (24.6)% EBIT* $ (462) $ 7,048 (106.6)% $ 188 $ 11,533 (98.4)% Capital expenditures $ 878 $ 3,264 $ 1,483 $ 4,809 * See the table in Note 10 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. Second Quarter 2023 Results vs. Second Quarter 2022 Results Net sales in the second quarter of 2023 decreased 20.1% compared to the second quarter of 2022 primarily due to lower sales volume, lower selling prices from the pass-through of lower resin costs and unfavorable product mix. The Company believes that lower sales volume was primarily due to customer inventory corrections. While sales volume in the second quarter of 2023 was still below expected normalized levels, it improved 20% over the first quarter of the year. EBITDA from ongoing operations in the second quarter of 2023 decreased $7.4 million versus the second quarter of 2022, primarily due to: • Lower selling prices from the pass-through of lower resin costs and margin pressures ($2.9 million), lower sales volume ($1.9 million), higher fixed costs ($1.1 million, primarily due to under absorption from lower production volumes), higher variable costs ($1.8 million, including higher costs resulting from quality issues and other costs associated with the shutdown of production lines to adjust production volumes to sales levels) and unfavorable product mix ($0.6 million), partially offset by lower raw material costs ($1.3 million) and lower SG&A expenses ($0.1 million); • Foreign currency transaction losses ($0.2 million) in the second quarter of 2023 compared to foreign currency transaction gains ($0.6 million) in the second quarter of 2022; and • Net favorable foreign currency translation of Real-denominated operating costs ($0.2 million). First Six Months of 2023 Results v. First Six Months of 2022 Results Net sales in the first six months of 2023 decreased 19.9% compared to the first six months of 2022 primarily due to lower sales volume and lower selling prices from the pass-through of lower resin costs, partially offset by favorable product mix. EBITDA from ongoing operations in the first six months of 2023 decreased $11.1 million versus the first six months of 2022 primarily due to: • Lower sales volume ($4.9 million), lower selling prices from the pass-through of lower resin costs and margin pressures ($3.6 million), higher fixed costs ($2.1 million, primarily due to under absorption from lower production volumes), higher variable costs ($0.7 million, including higher costs resulting from quality issues) and unfavorable product mix ($1.3 million), partially offset by lower raw material costs ($1.6 million) and lower SG&A expenses ($0.1 million); • Net unfavorable foreign currency translation of Real-denominated operating costs ($0.1 million); and • Foreign currency transaction losses ($0.2 million) in the second quarter of 2023 compared to foreign currency transaction losses ($0.3 million) in the second quarter of 2022. 30 Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Form 10-Q f or additional information on polyester fiber and component price trends. Projected Capital Expenditures and Depreciation & Amortization Capital expenditures for Flexible Packaging Films are projected to be $6 million in 2023, including $2 million for new capacity for value-added products and productivity projects and $4 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $3 million in 2023. Amortization expense is projected to be $0.1 million in 2023. Corporate Expenses, Interest & Other Corporate expenses, net in the first six months of 2023 decreased $2.0 million compared to the first six months of 2022 primarily due to lower accruals for employee-related compensation ($2.1 million) and lower stock-based compensation ($0.4 million), partially offset by higher professional fees associated with business development activities ($0.6 million). Interest expense of $4.7 million in the first six months of 2023 increased $2.7 million compared to the first six months of 2022 due to higher average debt levels and interest rates. Pension expense under GAAP of $6.8 million in the first six months of 2023 remained consistent with the first six months of 2022. In February 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan. In connection therewith, the Company borrowed funds under its revolving credit agreement ("Credit Agreement") and made a $50 million contribution to the pension plan (the “Special Contribution”) to reduce its underfunding and as part of a program within the pension plan to hedge or fix the expected future contributions that will be needed by the Company through the settlement process. The funds borrowed for the Special Contribution were effectively made available with proceeds received in December 2021 from the sale of the Company’s investment in kaléo. In addition, the Company realized income tax cash benefits on the Special Contribution of $11 million in the fourth quarter of 2022. During the second quarter of 2023, the Company received a favorable IRS determination letter, and government agencies and the Company expect the completion of the settlement process on or about October 31, 2023. Administrative costs for the entire settlement process with respect to the pension plan are estimated at $4 to $5 million. The estimated underfunding of Tredegar’s frozen defined benefit pension plan was approximately $30 million at June 30, 2023. As of December 31, 2022, the estimated underfunding of $28 million was comprised of investments at fair value of $218 million and a projected benefit obligation (“PBO”) of $246 million. GAAP accounting requires adjustment for changes in values of assets and the PBO only at the end of each year, even though these values change daily. The ultimate underfunded amount at settlement may differ from the current amounts, depending on changes in market factors, including with respect to buyers of pension obligations at the time of settlement. Prior to the Special Contribution, GAAP pension expense was a reasonable proxy for the Company’s required minimum cash contribution to the pension plan. The Company estimates that, with the Special Contribution, there will be no required minimum cash contributions until final settlement. Pension expense under GAAP is projected to be approximately $14 million in 2023, which is mainly comprised of non-cash amortization of deferred net actuarial losses reflected in the Company’s shareholders’ equity as accumulated other comprehensive losses. Beginning in 2022, and consistent with no expected required minimum cash contributions, no pension expense is included in calculating earnings before interest, taxes, depreciation and amortization as defined in the Company’s revolving Credit Agreement ("Credit EBITDA"). Net capitalization and other credit measures are provided in Liquidity and Capital Resources below. Liquidity and Capital Resources The Company continues to focus on improving working capital management. Measures such as days sales outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used to evaluate changes in working capital. Changes in operating assets and liabilities from December 31, 2022 to June 30, 2023 are summarized below. 31 • Accounts and other receivables decreased $5.4 million (6.4%). ◦ Accounts and other receivables in Aluminum Extrusions decreased $6.8 million primarily due to lower sales volume and the pass-through of lower metal costs. DSO (represents trailing 12 months net sales divided by a rolling 12-month average of accounts and other receivables balances) was approximately 48.9 days for the 12 months ended June 30, 2023 and 48.7 days for the 12 months ended December 31, 2022. ◦ Accounts and other receivables in PE Films remained relatively flat. DSO was approximately 28.8 days for the 12 months ended June 30, 2023, which was lower compared to 30.3 days for the 12 months ended December 31, 2022 due to shorter customer repayment terms associated with sales of lower margin product during the second quarter of 2023. ◦ Accounts and other receivables in Flexible Packaging Films increased $1.0 million primarily due to sales to customers in 2023 that contain unfavorable terms. DSO was approximately 39.0 days for the 12 months ended June 30, 2023 and 41.1 days for the 12 months ended December 31, 2022. • Inventories decreased $41.1 million (32.2%). ◦ Inventories in Aluminum Extrusions decreased $23.9 million due to decreased raw material levels as a result of slowing order input and order cancellations as customers continue to report high inventory levels. DIO (represents trailing 12 months costs of goods sold calculated on a first-in first-out basis divided by a rolling 12-month average of inventory balances calculated on the first-in first-out basis) was approximately 57.5 days for the 12 months ended June 30, 2023 and 53.6 days for the 12 months ended December 31, 2022. ◦ Inventories in PE Films decreased $2.3 million due to lower raw materials and finished goods for overwrap films. DIO was approximately 68.3 days for the 12 months ended June 30, 2023 and 66.8 days for the 12 months ended December 31, 2022. ◦ Inventories in Flexible Packaging Films decreased $14.8 million primarily due to lower raw material purchases and lower finished goods levels as a result of lower sales volume. DIO was approximately 122.8 days for the 12 months ended June 30, 2023 and 108.0 days for the 12 months ended December 31, 2022. • Net property, plant and equipment increased $3.5 million primarily due to capital expenditures of $14.5 million and a $1.7 million favorable change in the value of the U.S. dollar relative to foreign currencies, partially offset by depreciation expense of $12.4 million. • Identifiable intangible assets, net decreased $0.9 million (7.7%) due to amortization expense. • Deferred income tax assets increased $0.7 million primarily due to changes in other comprehensive income, increase in net operational losses, and a decrease in the deferred tax liability related to the goodwill impairment. See Note 9 for additional information. • Accounts payable decreased $32.6 million (28.4%). ◦ Accounts payable in Aluminum Extrusions decreased $21.2 million primarily due to lower raw material purchases and favorable vendor terms. DPO (represents trailing 12 months costs of goods sold calculated on a first-in first-out basis divided by a rolling 12-month average of accounts payable balances) was approximately 56.8 days for the 12 months ended June 30, 2023 and 64.2 days for the 12 months ended December 31, 2022. ◦ Accounts payable in PE Films remained relatively flat. DPO was approximately 43.9 days for the 12 months ended June 30, 2023 and 51.0 days for the 12 months ended December 31, 2022. ◦ Accounts payable in Flexible Packaging Films decreased $11.4 million primarily due to lower raw material purchases. DPO was approximately 64.3 days for the 12 months ended June 30, 2023 and 72.4 days for the 12 months ended December 31, 2022. Net cash provided by operating activities was $22.7 million in the first six months of 2023 compared to net cash used in operating activities of $9.4 million in the first six months of 2022. The change in operating activities is primarily due to the Special Contribution ($50 million) and improved working capital due to factors discussed earlier in this section relating to accounts and other receivables, inventories and accounts payable. Net cash used in investing activities was $15.6 million in the first six months of 2023 compared to net cash used in investing activities of $12.1 million the first six months of 2022. The increase was due to higher capital expenditures ($2.4 million), partially offset by cash consideration of $0.3 million received in January 2023 compared to $1.4 million received in the May 2022 related to the customary post-closing adjustments on the sale of the investment in kaléo, which was sold in December 2021. Net cash used in financing activities was $4.9 million in the first six months of 2023, compared to net cash provided by financing activities of $18.7 million in the first six months of 2022. The change in financing activities was primarily due to 32 lower net borrowings ($24.5 million) under the Credit Agreement during the first six months of 2023 as compared to the first six months of 2022 when the Company borrowed funds and made a $50 million Special Contribution to the pension plan in February 2022 and lower deferred financing costs ($1.2 million). The Company believes that existing borrowing availability, current cash balances and cash flow from operations will be sufficient to satisfy short term material cash requirements related to working capital, capital expenditures and debt repayments for at least the next twelve months. In the longer term, liquidity will depend on many factors, including results of operations, the timing and extent of capital expenditures, changes in operating plans or other events that would cause the Company to seek additional financing in future periods. At June 30, 2023, the Company had cash and cash equivalents of $21.2 million, including cash and cash equivalents held in locations outside the U.S. of $13.9 million. As of June 30, 2023, Tredegar had a five-year, revolving, secured credit facility that permits aggregate borrowings of $375 million and matures on June 29, 2027. Net capitalization and indebtedness as defined under the Credit Agreement as of June 30, 2023 were as follows: Net Capitalization and Indebtedness as of June 30, 2023 (In thousands) Net capitalization: Cash and cash equivalents $ 21,193 Debt: Credit Agreement 141,000 Debt, net of cash and cash equivalents 119,807 Shareholders’ equity 183,149 Net capitalization $ 302,956 Indebtedness as defined in Credit Agreement: Total debt $ 141,000 Indebtedness $ 141,000 Borrowings under the Credit Agreement bear an interest rate equal to SOFR plus a credit spread adjustment of 10 basis points ("Adjusted Term SOFR Rate") and an amount depending on the type of borrowing and commitment fees charged on the unused amount under the Credit Agreement at various Total Net Leverage Ratio levels as follows: Pricing Under the Credit Agreement (Basis Points) Total Net Leverage Ratio Term Benchmark Spread Commitment Fee <= 1.0x 150.0 20 >1.0x but <=2.0x 162.5 25 >2.0x but <=3.0x 175.0 30 >3.0x but <=3.5x 187.5 35 >3.5x 200.0 40 At June 30, 2023, $141.0 million of the outstanding debt was principally priced at an interest rate equal to the Adjusted Term SOFR Rate plus the applicable credit spread of 175.0 basis points. The primary financial restrictive covenants in the Credit Agreement include: • Total Net Leverage Ratio of 4.00x; • Interest Coverage Ratio of 3.00x; and • Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $75 million (provided that the $75 million basket will reset at the end of each fiscal quarter when the Total Net Leverage ratio is less than or equal to 2.00x). Under the Credit Agreement: 33 • Total Net Leverage Ratio is defined as the ratio of (a)(i) total indebtedness minus (ii) liquidity (the lesser of $50,000,000 and the aggregate amount of cash and cash equivalents) to (b) Credit EBITDA; and • Interest Coverage Ratio is defined as the ratio of Credit EBITDA to interest expense. The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries. At June 30, 2023, based upon the restrictive covenants within the Credit Agreement, available credit under the Credit Agreement was approximately $33 million. Total debt outstanding was $141.0 million and $137.0 million as of June 30, 2023 and December 31, 2022, respectively. Credit EBITDA is not intended to represent net income (loss) or cash flow from operations as defined by GAAP and should not be considered as an alternative to either net income (loss) or to cash flow. The computations of Credit EBITDA, the Total Net Leverage Ratio and Interest Coverage Ratio as defined in the Credit Agreement are presented below. 34 Computations of Credit EBITDA, Total Net Leverage Ratio and Interest Coverage Ratio (in each case, as Defined in the Credit Agreement) Along with Related Primary Restrictive Covenants as of and for the Twelve Months Ended June 30, 2023 Computation of Credit EBITDA for the twelve months ended June 30, 2023 (In Thousands): Net income (loss) $ (22,772) Plus: After-tax losses related to discontinued operations — Total income tax expense for continuing operations — Interest expense 7,656 Depreciation and amortization expense for continuing operations 26,894 All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $6,399) 22,002 Charges related to stock option grants and awards accounted for under the fair value-based method 773 Losses related to the application of the equity method of accounting — Losses related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting — Minus: After-tax income related to discontinued operations (27) Total income tax benefits for continuing operations (4,945) Interest income (99) All non-cash gains and income, plus cash gains and income in excess of $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings — Income related to changes in estimates for stock option grants and awards accounted for under the fair value-based method — Income related to the application of the equity method of accounting — Income related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting (262) Plus cash dividends declared on investments in an amount not to exceed $10,000 for such period — Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions — Plus or minus, as applicable, pro forma EBITDA adjustments to pension expense associated with the early payment of pension obligations 14,264 Credit EBITDA $ 43,484 Computations of Total Net Leverage Ratio and Interest Coverage Ratio at June 30, 2023: Total Net Leverage Ratio 2.76x Interest Coverage Ratio 5.68x Primary restrictive covenants: Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $75 million $ 75,000 Maximum Total Net Leverage Ratio permitted 4.00x Minimum Interest Coverage Ratio permitted 3.00x 35 The Company had Credit EBITDA and a Total Net Leverage Ratio of $43.5 million and 2.76x, respectively, at June 30, 2023, which had significantly deteriorated from the Credit EBITDA and Total Net Leverage Ratio at December 31, 2022 of $84.4 million and 1.39x, respectively. Tredegar was in compliance with all of its debt covenants as of June 30, 2023. Noncompliance with any of the debt covenants could have a material adverse effect on its financial condition or liquidity, in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement could effectively cure the noncompliance, but could have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated. In addition, the Company’s projections indicate further deterioration of the Total Net Leverage Ratio without paying dividends to between 4.0x and 5.0x through the quarter ending March 31, 2024. Subsequent to June 30, 2023, the Company amended the Credit Agreement. To reduce the risk of potential violations of the primary financial restrictive covenants in the Credit Agreement while the Company's businesses and markets are experiencing a downturn, the Company (i) suspended its regular quarterly dividend (which had an annual cash outlay of approximately $17.7 million) and (ii) amended the Credit Agreement, effective August 3, 2023, to: a. Change the fiscal quarter maximum Total Net Leverage Ratio covenant from 4.0x to: (i) 5.0x for the quarters ending September 30, 2023 through March 31, 2024, (ii) 4.75x for the quarter ending June 30, 2024, (iii) 4.25 for the quarter ending September 30, 2024, and (iv) 4.0x for the quarter ending December 31, 2024 and thereafter. b. Change the fiscal quarter minimum Interest Coverage Ratio covenant from 3.0x to: (i) 2.50x for the quarters ending September 30, 2023 through June 30, 2024, (ii) 2.75x for the quarter ending September 30, 2024, and (iii) 3.0x for the quarter ending December 31, 2024 and thereafter. c. Reduce the maximum borrowing availability from $375 million to $200 million. d. Increase the drawn spread by 25 basis points across all levels of the interest rate pricing grid, beginning the quarter ending September 30, 2023. e. Amend the restricted payments covenant to prohibit dividends and share repurchases during fiscal quarters ending September 30, 2023 through December 31, 2024. To further decrease the risk of a debt covenant violation during a severe cyclical downturn, the Company is investigating the replacement of the existing EBITDA-based credit facility by the end of 2023 with other financing alternatives, including borrowings that would be permitted based on the level of secured receivables, inventories and machinery and equipment and sale and leaseback of existing Company-owned property.