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: • inability to successfully complete strategic dispositions, failure to realize the expected benefits of such dispositions and assumption of unanticipated risks in such dispositions; • failure by governmental entities to prevent foreign companies from evading anti-dumping and countervailing duties; • noncompliance with any of the financial and other restrictive covenants in the Company's asset-based credit facility; • the impact of macroeconomic factors, such as inflation, interest rates, recession risks and other lagging effects of the COVID-19 pandemic; • an increase in the operating costs incurred by the Company’s business units, including, for example, the cost of raw materials and energy; • failure to continue to attract, develop and retain certain key officers or employees; • disruptions to the Company’s manufacturing facilities, including those resulting from labor shortages; • inability to develop, efficiently manufacture and deliver new products at competitive prices; • the impact of the imposition of tariffs and sanctions on imported aluminum ingot used by Bonnell Aluminum; • unanticipated problems or delays with the implementation of the enterprise resource planning and manufacturing executions systems, or security breaches and other disruptions to the Company's information technology infrastructure; • loss 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; • 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; • competition from other manufacturers, including manufacturers in lower-cost countries and manufacturers benefiting from government subsidies; • impact of fluctuations in foreign exchange rates; • an information technology system failure or breach; • the impact of public health epidemics on employees, production and the global economy, such as the COVID-19 pandemic; • 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; • impairment of the Surface Protection reporting unit's goodwill; 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, 2023 (the “2023 Form 10-K”). 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. 23 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. 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 2023 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, 2023, 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. As of September 30, 2024, we had 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. On November 1, 2024, we completed the sale of our Flexible Packaging Film business ("Terphane") to Oben Group ("Oben"). For more information, see Note 11. Since the sale was completed after September 30, 2024, the historical financial results of Terphane are reported as continuing operations in this Form 10-Q. In all future public filings, the historical financial results of Terphane will be reflected as discontinued operations under GAAP for all periods. 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 9. 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. Third quarter 2024 net income (loss) was $(3.9) million ($(0.11) per diluted share) compared to $(50.4) million ($(1.47) per diluted share) in the third quarter of 2023. Third Quarter Financial Results Highlights • EBITDA from ongoing operations for Aluminum Extrusions (also referred to as "Bonnell Aluminum") was $6.2 million in the third quarter of 2024 versus $5.1 million in the third quarter of last year and $12.9 million in the second quarter of 2024. ◦ Sales volume was 34.6 million pounds in the third quarter of 2024 versus 32.5 million pounds in the third quarter of last year and 34.9 million pounds in the second quarter of 2024. ◦ Open orders at the end of the third quarter of 2024 were approximately 15.5 million pounds (versus 17 million pounds in the third quarter of 2023 and 14 million pounds at the end of the second quarter of 2024). Net new orders increased 27% in the third quarter of 2024 versus the third quarter of 2023 and increased 7% versus the second quarter of 2024. • EBITDA from ongoing operations for PE Films was $5.9 million in the third quarter of 2024 versus $4.0 million in the third quarter of 2023 and $10.1 million in the second quarter of 2024. Sales volume was 9.6 million pounds in the third quarter of 2024 versus 7.2 million pounds in the third quarter of 2023 and 10.5 million pounds in the second quarter of 2024. • EBITDA from ongoing operations for Terphane was $3.7 million during the third quarter of 2024 versus $0.5 million in the third quarter of 2023 and $3.2 million during the second quarter of 2024. Sales volume was 25.3 pounds in the third quarter of 2024 versus 22.2 million pounds in the third quarter 2023 and 25.1 million pounds in the second quarter of 2024. 24 Aluminum Extrusions experienced unfavorable costs, including manufacturing inefficiencies, a shift in mix and margin pressures from imports and excess industry capacity. PE Films EBITDA performance during the third quarter moderated as expected versus the first two quarters of 2024. Tredegar closed on the sale of Terphane on November 1, 2024. Results of Operations Third Quarter of 2024 Compared with the Third Quarter of 2023 The following table presents a bridge of consolidated net income (loss) from the third quarter of 2023 to the third quarter of 2024 with management's related discussion and analysis below the table. (In thousands) Net income (loss) for the three months ended September 30, 2023 $ (50,380) Income tax expense (benefit) (13,307) Income (loss) before income taxes for the three months ended September 30, 2023 (63,687) Change in income (loss) from increases (decreases) in the following items: Sales 15,859 Other income (expense), net 29 Total 15,888 Change in income (loss) from (increases) decreases in the following items: Cost of goods sold (7,137) Freight (352) Selling, general and administrative (445) Research and development 319 Pension and postretirement benefits 3,064 Asset impairments and costs associated with exit and disposal activities, net of adjustments 4,633 Pension settlement loss 25,612 Goodwill impairment 19,478 Other (371) Total 44,801 Income (loss) before income taxes for the three months ended September 30, 2024 (2,998) Income tax expense (benefit) 948 Net income (loss) for the three months ended September 30, 2024 $ (3,946) Sales in the third quarter of 2024 increased by $15.9 million compared with the third quarter of 2023. Net sales (sales less freight) in Aluminum Extrusions increased $6.3 million, primarily due to higher sales volume and the pass-through of higher metal costs, partially offset by lower pricing associated with a shift in mix. Net sales in PE Films increased $4.9 million, primarily due to volume increases in both Surface Protection and overwrap films. Net sales in Flexible Packaging Films increased $4.3 million, primarily due to higher sales volume. For more information on net sales and volume, see the Segment Operations Review below. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 12.8% in the third quarter of 2024 compared to 9.0% in the third quarter of 2023. The gross profit margin in Aluminum Extrusions increased compared to the prior year period primarily due to higher volume, favorable variable manufacturing costs, lower labor-related costs, and lower freight rates, partially offset by lower net pricing after the pass-through of metal cost changes associated with a shift in mix and manufacturing inefficiencies. Additionally, the timing of the flow-through under the first-in first-out ("FIFO") method of aluminum raw material costs, which were previously acquired at higher prices in a quickly changing commodity pricing environment and passed through to customers, resulted in a charge of $1.0 million in the third quarter of 2024 versus a charge of $1.2 million in the third quarter of 2023. The gross profit margin in PE Films increased due to a higher Surface Protection contribution margin associated with higher volume and manufacturing costs savings, partially offset by unfavorable pricing. The gross profit margin in Flexible Packaging Films increased primarily due to lower variable costs, lower raw material costs, higher volume, favorable product mix, and lower fixed costs, partially offset by lower selling prices from global excess capacity and margin pressures. As a percentage of sales, selling, general and administrative (“SG&A”) and research and development ("R&D") expenses of 12.2% in the third quarter of 2024 remained consistent with the third quarter of 2023. 25 During the third quarter of 2023, the Company remeasured the pension plan, which resulted in a pre-tax pension settlement loss in the condensed consolidated results of operation of $25.6 million. The remeasurement of the pension benefit obligation and plan assets was triggered by $64.5 million of lump sum distributions from the pension plan assets which exceeded the pension plan's service and interest cost. See Note 4 for additional information. The decrease in asset impairments and costs associated with exit and disposal activities, net of adjustments is primarily related to closure of the PE Films technical center in Richmond, VA. See Note 1 for more information. In the third quarter of 2023, a non-cash partial goodwill impairment of $19.5 million was recognized. See Note 1 for more information. The effective tax rate used to compute income taxes was (31.6)% in the third quarter of 2024 compared to 20.9% in the third quarter of 2023. Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for the third quarters of 2024 and 2023 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment in Note 9 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 September 30, (In millions) 2024 2023 Aluminum Extrusions: (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: Consulting expenses for ERP/MES project 1 0.7 $ 1.2 Storm damage to the Newnan, Georgia plant 1 — 0.1 Legal fees associated with the Aluminum Extruders Trade Case 1 0.4 — Resolution of customer quality complaint 2 0.8 — Total for Aluminum Extrusions $ 1.9 $ 1.4 PE Films: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Write-down of Richmond, Virginia Technical Center assets 4 $ — $ 3.4 Richmond, Virginia Technical Center closure expenses, including severance 4 — 1.1 Goodwill impairment 4 — 19.5 Total for PE Films $ — $ 24.0 Flexible Packaging Films: (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with business development activities 1 $ 0.1 $ — Total for Flexible Packaging Films $ 0.1 $ — Corporate: (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with business development activities 1 $ 0.7 $ 2.9 Professional fees associated with remediation activities related to internal control over financial reporting 1 0.3 0.2 Professional fees associated with the transition to the ABL Facility 1 0.1 — Net periodic benefit cost for the frozen defined benefit pension plan in process of termination 3 — 3.1 Pension settlement loss 3 — 25.6 Total for Corporate $ 1.1 $ 31.8 1. Included in “Selling, general and administrative expenses” in the condensed consolidated statements of income. 2. Included in “Sales” in the condensed consolidated statements of income. 3. See Note 4 for additional information. 4. See Note 1 for additional information. 26 Average total debt outstanding and interest rates were as follows: Three Months Ended September 30, (In millions, except percentages) 2024 2023 Floating-rate debt with interest charged on a rollover basis plus a credit spread: Average total outstanding debt balance $ 145.5 $ 138.2 Average interest rate 9.4 % 7.4 % First Nine Months of 2024 Compared with the First Nine Months of 2023 The following table presents a bridge of consolidated net income (loss) from the first nine months of 2023 to the first nine months of 2024 with management's related discussion and analysis below the table. (In thousands) Net income (loss) for the nine months ended September 30, 2023 $ (70,314) Income tax expense (benefit) (16,307) Income (loss) before income taxes for the nine months ended September 30, 2023 (86,621) Change in income (loss) from increases (decreases) in the following items: Sales 12,541 Other income (expense), net 100 Total 12,641 Change in income (loss) from (increases) decreases in the following items: Cost of goods sold 14,948 Freight (856) Selling, general and administrative (2,696) Research and development 2,381 Pension and postretirement benefits 9,792 Interest expense (2,523) Asset impairments and costs associated with exit and disposal activities, net of adjustments 4,115 Pension settlement loss 25,612 Goodwill impairment 34,891 Other 23 Total 85,687 Income (loss) before income taxes for the nine months ended September 30, 2024 11,707 Income tax expense (benefit) 3,573 Net income (loss) for the nine months ended September 30, 2024 $ 8,134 Sales in the first nine months of 2024 increased by $12.5 million compared with the first nine months of 2023. Net sales in Aluminum Extrusions decreased $15.3 million, primarily due to lower sales volume and the pass-through of lower metal costs. Net sales in PE Films increased $22.8 million, primarily due to an increase in sales volume in Surface Protection. Net sales in Flexible Packaging Films increased $4.2 million primarily due to higher volume, partially offset by lower selling prices that the Company believes are driven by excess global capacity and strong competition in Brazil, Latin America and the U.S and unfavorable product mix. For more information on net sales and volume, see the Segment Operations Review below. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 15.5% in the first nine months of 2024 compared to 10.9% in the first nine months of 2023. The gross profit margin in Aluminum Extrusions increased compared to the prior year period primarily due to higher net pricing after the pass-through of metal cost changes and mix, favorable variable manufacturing costs, lower utilities and lower freight rates, partially offset by lower volume, manufacturing inefficiencies and higher labor and employee-related costs. Additionally, the timing of the flow-through under the FIFO method of aluminum raw material costs, which were previously acquired at higher prices in a quickly changing commodity pricing environment and passed through to customers, resulted in a charge of $1.0 million in the first nine months of 2024 versus a charge of $0.8 million in the first nine months of 2023. The gross profit margin in PE Films increased due to a higher Surface Protection contribution margin associated with substantially higher volume, operating efficiencies and manufacturing costs savings, favorable pricing, and lower fixed costs. The gross profit margin in Flexible Packaging Films increased primarily due to lower raw material costs, lower fixed costs, higher sales volume, and favorable product mix, partially offset by lower selling prices from global excess capacity and margin pressures and higher variable costs. 27 As a percentage of sales, SG&A and R&D expenses of 11.1% in the first nine months of 2024 remained consistent with the first nine months of 2023. During the first nine months of 2023, the Company remeasured the pension plan, which resulted in a pre-tax pension settlement loss in the condensed consolidated results of operation of $25.6 million. The remeasurement of the pension benefit obligation and plan assets was triggered by $64.5 million of lump sum distributions from the pension plan assets which exceeded the pension plan's service and interest cost. See Note 4 for additional information. Interest expense of $10.3 million in the first nine months of 2024 increased $2.5 million compared to the first nine months of 2023 due to higher average debt and higher interest rates. See Note 10 for additional information. The decrease in asset impairments and costs associated with exit and disposal activities, net of adjustments is primarily related to closure of the PE Films technical center in Richmond, VA. See Note 1 for more information. In the first nine months of 2023, a non-cash partial goodwill impairment of $34.9 million was recognized. See Note 1 for more information. The effective tax rate used to compute income taxes was 30.5% in the first nine months of 2024 compared to 18.8% in the first nine months of 2023. See Note 8 for additional information. 28 Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for the first nine months of 2024 and 2023 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment in Note 9 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. Nine Months Ended September 30, (In millions) 2024 2023 Aluminum Extrusions: (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: Consulting expenses for ERP/MES project 1 2.1 1.2 Storm damage to the Newnan, Georgia plant 1 0.3 0.5 Legal fees associated with the Aluminum Extruders Trade Case 1 0.9 — Resolution of customer quality complaint 5 0.8 — Total for Aluminum Extrusions $ 4.1 $ 1.8 PE Films: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Write-down of Richmond, Virginia Technical Center assets 4 $ — $ 3.4 Richmond, Virginia Technical Center closure expenses, including severance 4 0.3 1.1 Richmond, Virginia Technical Center lease abandonment 4 0.3 — Goodwill impairment 4 — 34.9 Total for PE Films $ 0.6 $ 39.4 Flexible Packaging Films: (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 1 0.1 — Total for Flexible Packaging Films $ 0.1 $ 0.1 Corporate: (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with business development activities 1 $ 1.6 $ 4.8 Professional fees associated with remediation activities related to internal control over financial reporting 1 1.6 1.2 Professional fees associated with the transition to the ABL Facility 1 0.3 — Group annuity contract premium expense adjustment 2 (0.2) — Write-down of investment in Harbinger Capital Partners Special Situations Fund 2 — 0.2 Stock-based compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend 1 — (0.2) Net periodic benefit cost for the frozen defined benefit pension plan in process of termination 3 — 9.9 Pension settlement loss 3 — 25.6 Total for Corporate $ 3.3 $ 41.5 1. Included in “Selling, general and administrative expenses” in the condensed consolidated statements of income. 2. Included in “Other income (expense), net” in the condensed consolidated statements of income. 3. See Note 4 for additional information. 4. See Note 1 for additional information. 5. Included in “Sales” in the condensed consolidated statements of income. 29 Average total debt outstanding and interest rates were as follows: Nine Months Ended September 30, (In millions, except percentages) 2024 2023 Floating-rate debt with interest charged on a rollover basis plus a credit spread: Average total outstanding debt balance $ 148.6 $ 145.1 Average interest rate 9.0 % 6.8 % Segment Operations Review Aluminum Extrusions A summary of results for Aluminum Extrusions is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Nine Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) September 30, September 30, 2024 2023 2024 2023 Sales volume (lbs) 34,556 32,457 6.5% 103,303 105,511 (2.1)% Net sales $ 115,717 $ 109,410 5.8% $ 349,353 $ 364,607 (4.2)% Ongoing operations: EBITDA $ 6,177 $ 5,113 20.8% $ 31,624 $ 29,968 5.5% Depreciation & amortization (4,404) (4,683) 6.0% (13,392) (13,252) (1.1)% EBIT* $ 1,773 $ 430 NM** $ 18,232 $ 16,716 9.1% Capital expenditures $ 1,449 $ 4,489 $ 4,461 $ 17,862 *See the table in Note 9 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. **Not meaningful ("NM") Third Quarter 2024 Results vs. Third Quarter 2023 Results Net sales (sales less freight) in the third quarter of 2024 increased 5.8% versus the third quarter of 2023 primarily due to higher sales volume and the pass-through of higher metal costs, partially offset by lower pricing associated with a shift in mix. Sales volume in the third quarter of 2024 increased 6.5% versus the third quarter of 2023 but decreased 0.9% versus the second quarter 2024. Net new orders, which remain low compared to pre-pandemic levels, increased 27.3% in the third quarter of 2024 versus the third quarter of 2023 and increased 7% versus the second quarter of 2024. Since January 2021, net new orders for the Company's aluminum extruded products have generally tracked the ISM ® Manufacturing PMI ® . In addition, the Architecture Billings Index (ABI), a key leading indicator for non-residential B&C, has demonstrated a decline in billings (i.e., an index below 50) for the last 20 months ended September 2024. The Company believes that net new orders continue to be below pre-pandemic levels due to higher interest rates, tighter lender requirements and the increase in remote working, which particularly impacts the non-residential B&C end-use market. In addition, data indicates that aluminum extrusion imports have increased significantly in recent years, especially during the pandemic, and some of Bonnell Aluminum’s customers have increased their sourcing of aluminum extrusions from producers outside of the U.S. Open orders at the end of the third quarter of 2024 were 15.5 million pounds (versus 14 million pounds at the end of the second quarter of 2024 and 17 million pounds at the end of the third quarter of 2023). This level is below the quarterly range of 21 to 27 million pounds in 2019 before pandemic-related disruptions (particularly starting in early 2021 with the re-opening of markets following the rollout of vaccines) that resulted in long lead times, driving a peak in open orders of approximately 100 million pounds during the first quarter of 2022. The Company is part of a coalition of members of the Aluminum Extruders Council that filed a trade case with the U.S. Department of Commerce (“USDOC”) and the U.S. International Trade Commission (“USITC”) against 15 countries in response to alleged large and increasing volumes of unfairly priced imports of aluminum extrusions since 2019. In November 2023, the USITC found that there is a reasonable indication that the American aluminum extrusions industry is materially injured or threatened with injury due to imports from 14 countries, including China. On September 27, 2024, the USDOC announced its final determinations that aluminum extrusion producers and exporters in 14 countries, including China, sold aluminum extrusions at less-than-fair value in the U.S. The final USITC vote on October 30, 2024, indicated that it believes that the industry was not materially injured by reason of the subject imports, despite the USDOC determinations of pricing below fair value and receiving unfair subsidies. The coalition is evaluating next steps for challenging the decision. 30 EBITDA from ongoing operations in the third quarter of 2024 increased $1.1 million versus the third quarter of 2023 primarily due to: • Higher volume ($1.8 million), favorable variable manufacturing costs ($1.7 million), lower labor-related costs ($0.1 million) and lower freight rates ($0.2 million), partially offset by unfavorable net pricing after the pass-through of metal cost and changes associated with a shift in mix ($1.1 million), manufacturing inefficiencies ($0.8 million), higher maintenance expense ($0.4 million) and higher SG&A expenses, including other employee-related compensation ($0.8 million); and • The timing of the flow-through under the FIFO method of aluminum raw material costs, which were previously acquired at higher prices in a quickly changing commodity pricing environment and passed through to customers, resulted in a charge of $1.0 million in the third quarter of 2024 versus a charge of $1.2 million in the third quarter of 2023. First Nine Months of 2024 Results vs. First Nine Months of 2023 Results Net sales in the first nine months of 2024 decreased 4.2% versus the first nine months of 2023 primarily due to lower sales volume and the pass-through of lower metal costs. Sales volume in the first nine months of 2024 decreased 2.1% versus the first nine months of 2023. EBITDA from ongoing operations in the first nine months of 2024 increased $1.7 million in comparison to the first nine months of 2023 primarily due to: • Higher net pricing after the pass-through of metal cost changes and mix ($2.0 million), favorable variable manufacturing costs ($3.7 million), lower utilities ($0.2 million) and lower freight rates ($0.9 million), partially offset by lower volume ($1.6 million), manufacturing inefficiencies ($0.8 million), higher labor and employee-related costs ($0.1 million), and higher SG&A, including other employee-related compensation ($2.4 million); and • The timing of the flow-through under the FIFO method of aluminum raw material costs, which were previously acquired at higher prices in a quickly changing commodity pricing environment and passed through to customers, resulted in a charge of $1.0 million in the first nine months of 2024 versus a charge of $0.8 million in the first nine months of 2023. 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 $8 million in 2024, including $4 million for productivity projects and $4 million for capital expenditures required to support continuity of operations. The projected spending reflects stringent spending measures that the Company has implemented to control its financial leverage (See "Liquidity and Capital Resources" section below for more information). The multi-year implementation of new enterprise resource planning and manufacturing execution systems ("ERP/MES") has been reorganized with the timing for the go-live date being uncertain. The ERP/MES project commenced in 2022, with spending to-date of approximately $21 million. Depreciation expense is projected to be $16 million in 2024. Amortization expense is projected to be $2 million in 2024. PE Films A summary of results for PE Films is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Nine Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) September 30, September 30, 2024 2023 2024 2023 Sales volume (lbs) 9,640 7,224 33.4% 30,223 20,837 45.0% Net sales $ 24,879 $ 19,938 24.8% $ 78,811 $ 56,036 40.6% Ongoing operations: EBITDA $ 5,876 $ 4,037 45.6% $ 22,913 $ 6,700 NM** Depreciation & amortization (1,299) (2,111) 38.5% (3,944) (5,305) 25.7% EBIT* $ 4,577 $ 1,926 NM** $ 18,969 $ 1,395 NM** Capital expenditures $ 517 $ 431 $ 1,127 $ 1,506 * See the table in Note 9 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. **Not meaningful ("NM") 31 Third Quarter 2024 Results vs. Third Quarter 2023 Results Net sales in the third quarter of 2024 were 24.8% higher c ompared to the third quarter of 2023, with volu me increases in Surface Protection and overwrap films. Surface Protection sales volume in the third quarter of 2024 increased 37.5% versus the third quarter of 2023 and declined 16.5% versus the second quarter of 2024. Surface Protection sales volume began to moderate during the third quarter of 2024, following extremely high sales volume in the second quarter associated with the restocking of Surface Protection customer inventories. EBITDA from ongoing operations in the third quarter of 2024 increased $1.8 million versus the third quarter of 2023, primarily due to: • A $2.4 million increase in Surface Protection primarily due to higher contribution margin associated with higher volume ($2.0 million) and manufacturing costs savings ($1.1 million), partially offset by unfavorable pricing ($0.2 million) and higher SG&A ($0.1 million); • A foreign currency transaction loss of $0.2 million in the third quarter of 2024 versus no gain or loss in the third quarter of 2023; • The pass-through lag associated with resin costs (a charge of $0.2 million in the third quarter of 2024 versus a benefit of $0.1 million in the third quarter of 2023); and • A $0.6 million decrease in overwrap films, primarily due to pricing and mix. There have been significant cyclical swings in the sales volume and EBITDA from ongoing operations for PE Films in the past 2.5 years, largely due to the unprecedented downturn in the display industry during the second half of 2022 and first half of 2023. EBITDA from ongoing operations for the first half of 2024, the second and first halves of 2023 and the second and first halves of 2022 were $17.0 million, $8.6 million, $2.7 million, $(2.2) million and $14.1 million, respectively, which averages approximately $4 million per quarter. First Nine Months of 2024 Results vs. First Nine Months of 2023 Results Net sales in the first nine months of 2024 increased 40.6% compared to the first nine months of 2023 primarily due to an increase in sales volume in Surface Protection, as a result of factors noted above. Sales volume increased 62.3% in Surface Protection in the first nine months of 2024 versus the first nine months of 2023. EBITDA from ongoing operations in the first nine months of 2024 increased $16.2 million versus the first nine months of 2023, primarily due to: • A $16.0 million increase in Surface Protection primarily due to higher contribution margin associated with substantially higher volume ($9.4 million), operating efficiencies and manufacturing costs savings ($5.9 million), favorable pricing ($0.3 million), lower fixed costs ($0.2 million) and lower SG&A, including lower costs associated with the closure of the Richmond Technical Center in 2023 ($1.2 million); • A foreign currency transaction loss of $0.1 million in the first nine months of 2024 versus a gain of $0.3 million in the first nine months of 2023; • The pass-through lag associated with resin costs (a charge of $0.7 million in the first nine months of 2024 versus a charge of $0.1 million in the first nine months of 2023); and • A $0.2 million increase from overwrap films, primarily due to cost improvements ($1.0 million), partially offset by a shift in mix ($0.8 million). 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. Projected Capital Expenditures and Depreciation & Amortization Capital expenditures for PE Films are projected to be $2 million in 2024, including $1 million for productivity projects and $1 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $5 million in 2024. There is no amortization expense for PE Films. 32 Flexible Packaging Films A summary of results for Flexible Packaging Films is provided below: Three Months Ended Favorable/ (Unfavorable) % Change Nine Months Ended Favorable/ (Unfavorable) % Change (In thousands, except percentages) September 30, September 30, 2024 2023 2024 2023 Sales volume (lbs) 25,295 22,163 14.1% 72,342 65,732 10.1% Net sales $ 34,370 $ 30,111 14.1% $ 99,025 $ 94,861 4.4% Ongoing operations: EBITDA $ 3,749 $ 477 NM** $ 8,915 $ 2,076 NM** Depreciation & amortization (708) (704) (0.6)% (2,191) (2,115) (3.6)% EBIT* $ 3,041 $ (227) NM** $ 6,724 $ (39) NM** Capital expenditures $ 948 $ 1,408 $ 2,108 $ 2,891 * See the table in Note 9 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. **Not meaningful ("NM") Third Quarter 2024 Results vs. Third Quarter 2023 Results Net sales in the third quarter of 2024 increased 14.1% compared to the third quarter of 2023 primarily due to higher sales volume. EBITDA from ongoing operations in the third quarter of 2024 increased $3.3 million versus the third quarter of 2023, primarily due to: • Lower variable costs ($1.5 million), lower raw material costs ($1.1 million), higher volume ($1.0 million), favorable product mix ($0.8 million), lower fixed costs ($0.2 million), and lower SG&A ($0.2 million), partially offset by lower selling prices from global excess capacity and margin pressures ($0.6 million); • Foreign currency transaction gains ($0.1 million) in the third quarter of 2024 compared to foreign currency transaction gains ($0.2 million) in the third quarter of 2023; and • Net unfavorable foreign currency translation of Real-denominated operating costs ($0.8 million). First Nine Months of 2024 Results vs. First Nine Months of 2023 Results Net sales in the first nine months of 2024 increased 4.4% compared to the first nine months of 2023 primarily due to higher volume partially offset by lower selling prices that the Company believes are driven by excess global capacity and strong competition in Brazil, Latin America and the U.S and unfavorable product mix. EBITDA from ongoing operations in the first nine months of 2024 increased $6.8 million versus the first nine months of 2023 primarily due to: • Lower raw material costs ($5.1 million), lower fixed costs ($3.1 million), higher sales volume ($2.5 million), favorable product mix ($1.4 million), and lower SG&A ($0.6 million), partially offset by lower selling prices from global excess capacity and margin pressures ($4.0 million) and higher variable costs ($0.4 million); • Foreign currency transaction gains ($0.1 million) in the first nine months of 2024 compared to foreign currency transaction losses ($0.1 million) in the first nine months of 2023; and • Net unfavorable foreign currency translation of Real-denominated operating costs ($1.6 million). 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 $4 million in 2024 for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $3 million in 2024. Amortization expense is projected to be $0.1 million in 2024. 33 Corporate Expenses, Interest & Other Corporate expenses, net in the first nine months of 2024 decreased $13.7 million compared to the first nine months of 2023 primarily due to lower pension expense as a result of the pension plan termination completed in 2023 ($10.1 million) and lower business development activities ($3.4 million). Interest expense of $10.3 million in the first nine months of 2024 increased $2.5 million compared to the first nine months of 2023 due to higher average debt and higher interest rates. 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, 2023 to September 30, 2024 are summarized below. • Accounts and other receivables increased $13.7 million (20.2%). ◦ Accounts and other receivables in Aluminum Extrusions increased $7.3 million primarily due to higher sales volume in the third quarter of 2024, partially offset by lower pricing associated with a shift in mix. DSO (represents trailing 12 months net sales divided by a rolling 12-month average of accounts and other receivables balances) was approximately 44.1 days for the 12 months ended September 30, 2024 and 45.1 days for the 12 months ended December 31, 2023. ◦ Accounts and other receivables in PE Films increased $2.8 million primarily due to increased sales volume. DSO was approximately 24.2 days for the 12 months ended September 30, 2024 and 26.3 days for the 12 months ended December 31, 2023. ◦ Accounts and other receivables in Flexible Packaging Films increased $3.7 million primarily due to increased sales volume. DSO was approximately 36.0 days for the 12 months ended September 30, 2024 and 38.1 days for the 12 months ended December 31, 2023. • Inventories increased $6.0 million (7.3%). ◦ Inventories in Aluminum Extrusions increased $1.3 million primarily due to higher average aluminum prices. DIO (represents trailing 12 months costs of goods sold calculated on a FIFO basis divided by a rolling 12-month average of inventory balances calculated on the FIFO basis) was approximately 47.3 days for the 12 months ended September 30, 2024 and 51.6 days for the 12 months ended December 31, 2023. ◦ Inventories in PE Films increased $1.8 million primarily due to higher raw materials and finished goods levels to support increased sales volume during the first nine months of 2024. DIO was approximately 50.1 days for the 12 months ended September 30, 2024 and 57.2 days for the 12 months ended December 31, 2023. ◦ Inventories in Flexible Packaging Films increased $2.8 million primarily due to higher raw materials and finished goods levels to support increased sales volume during the first nine months of 2024. DIO was approximately 104.0 days for the 12 months ended September 30, 2024 and 117.7 days for the 12 months ended December 31, 2023. • Net property, plant and equipment decreased $14.8 million primarily due to depreciation expense of $18.4 million and a $3.0 million unfavorable change in the value of the U.S. dollar relative to foreign currencies, partially offset by capital expenditures of $7.1 million. • Identifiable intangible assets, net decreased $1.5 million (15.1%) due to amortization expense. • Deferred income tax assets decreased $2.3 million (9.1%). See Note 8 for more information. • Accounts payable decreased $6.0 million (6.3%). ◦ Accounts payable in Aluminum Extrusions decreased $10.3 million primarily due to the timing of payments. DPO (represents trailing 12 months costs of goods sold calculated on a FIFO basis divided by a rolling 12-month average of accounts payable balances) was approximately 45.7 days for the 12 months ended September 30, 2024 and 49.8 days for the 12 months ended December 31, 2023. ◦ Accounts payable in PE Films increased $1.3 million primarily due to higher raw material purchases. DPO was approximately 42.9 days for the 12 months ended September 30, 2024 and 43.4 days for the 12 months ended December 31, 2023. ◦ Accounts payable in Flexible Packaging Films increased $3.4 million primarily due to higher raw material purchases and favorable payment terms. DPO was approximately 75.4 days for the 12 months ended September 30, 2024 and 61.7 days for the 12 months ended December 31, 2023. 34 Net cash provided by operating activities was $6.1 million in the first nine months of 2024 compared to net cash provided by operating activities of $44.2 million in the first nine months of 2023. The decrease was primarily due to lower working capital, partially offset by higher EBITDA from ongoing operations for all reportable segments in the first nine months of 2024 versus prior year. Net cash used in investing activities was $7.5 million in the first nine months of 2024 compared to $22.0 million the first nine months of 2023. The decrease was primarily due to lower capital expenditures ($14.6 million). Net cash used in financing activities of $3.6 million in the first nine months of 2024 compared to net cash provided by financing activities of $7.7 million in the first nine months of 2023. The change was primarily due to higher net debt principal payments ($21.0 million) under the ABL Facility (as defined below) during the first nine months of 2024 as compared to the first nine months of 2023 and dividends paid ($8.9 million) during the first nine months of 2023. At September 30, 2024, the Company had cash, cash equivalents and restricted cash of $6.6 million, including cash and cash equivalents held in locations outside the U.S. of $2.7 million. Debt and Credit Agreements ABL Facility On December 27, 2023, the Company entered into Amendment No. 3 to the Second Amended and Restated Credit Agreement (the "Credit Agreement"), which provides the Company with a $180 million senior secured asset-based revolving credit facility that will mature on June 30, 2026. On April 16, 2024, the Company entered into Amendment No. 4 to the Credit Agreement (as amended by Amendment No. 3 and Amendment No. 4, the “ABL Facility”) that, among other items: (i) moves the ABL Adjustment Date (defined below) from March 31, 2025 to September 30, 2025 and (ii) requires weekly reporting of the borrowing base financial covenant until the ABL Adjustment Date. The ABL Facility is secured by substantially all assets of the Company and its domestic subsidiaries, including equity in certain material first-tier foreign subsidiaries. Availability for borrowings under the ABL Facility is governed by a borrowing base, determined by the application of specified advance rates against eligible assets, including a portion of trade accounts receivable, inventory, cash and cash equivalents, owned real properties, and owned machinery and equipment. Upon the earlier of September 30, 2025 or the date the Company receives the proceeds from the sale of Terphane (the “ABL Adjustment Date”), the $180 million ABL Facility will be reduced to $125 million. As of September 30, 2024, Minimum Liquidity (as defined in the ABL Facility) of $45.1 million, after reducing the borrowing base by the aggregate outstanding borrowings of $122.0 million and standby letters of credit of $12.9 million was in excess of the $10 million Minimum Liquidity financial covenant. Under the terms of the ABL Facility, certain domestic bank accounts are subject to blocked account agreements, each of which contains a springing feature whereby the lenders may exercise control over those accounts during a cash dominion period (any such period, a “Cash Dominion Period”). A Cash Dominion Period was implemented on the date of the closing of the ABL Facility and will remain in effect at all times prior to the ABL Adjustment Date. After the ABL Adjustment Date, a Cash Dominion Period goes into effect if availability under the ABL Facility falls below 12.5% or an Event of Default (as defined in the ABL Facility) occurs. The Company would then be subject to the Cash Dominion Period until the Event of Default is waived or ABL Facility availability is above 12.5% of the $125 million aggregate commitment for 30 consecutive days. Receipts that have not yet been applied to the ABL Facility are classified as restricted cash in the Company’s consolidated balance sheets. The financial covenants in the ABL Facility are as follows: • Until the ABL Adjustment Date, the Company is required to maintain (i) a minimum Credit EBITDA (as defined in the ABL Facility), as of the end of each fiscal month for the 12-month period then ended (presented below) and (ii) a Minimum Liquidity (as defined in the ABL Facility) of $10.0 million. 35 Minimum Credit EBITDA (In thousands) September 2024 $ 25,370 October 2024 26,070 November 2024 27,640 December 2024 29,640 January 2025 29,740 February 2025 29,850 March 2025 29,980 April 2025 30,340 May 2025 30,700 June 2025 31,030 July 2025 31,370 August 2025 31,710 September 2025 $ 32,080 • Following the ABL Adjustment Date, the foregoing financial covenants will cease to exist and will be replaced with a minimum fixed charge coverage ratio of 1.00:1.00 that will be triggered in the event that availability is less than 10% of $125 million commitment amount and continuing thereafter until availability is greater than 10% of the $125 million commitment amount for 30 consecutive days. 36 The computation of Credit EBITDA, as defined in the ABL Facility, is presented below. Computations of Credit EBITDA (as defined in the ABL Facility) as of and for the Twelve Months Ended September 30, 2024 * Computations of Credit EBITDA for the twelve months ended September 30, 2024 (in thousands): Net income (loss) $ (27,456) Plus: After-tax losses related to discontinued operations — Total income tax expense for continuing operations — Interest expense 14,130 Depreciation and amortization expense for continuing operations 26,515 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 $8,722) 76,005 Charges related to stock option grants and awards accounted for under the fair value-based method — 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 — Fees, costs and expenses incurred in connection with the amendment process 373 Terphane sale transaction costs in an amount not to exceed $10,000 1,716 Minus: After-tax income related to discontinued operations — Total income tax benefits for continuing operations (34,245) Interest income (423) 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 (144) 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 2,627 Credit EBITDA 59,098 * 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. 37 The computation of the ABL Facility Minimum Liquidity financial covenant, as defined in the ABL Facility, is presented below. (In thousands, except percentages) September 30, 2024 December 31, 2023 Maximum aggregate principal $ 180,000 $ 180,000 Maximum borrowing limit per the Borrowing base as defined in the ABL Facility (includes eligible domestic cash and cash equivalents of $4,282 as of September 30, 2024 and $3,846 as of December 31, 2023) $ 180,000 $ 172,286 ABL Facility outstanding debt (matures on June 30, 2026) 122,000 126,322 Outstanding standby letters of credit 12,937 13,080 ABL Facility Minimum Liquidity $ 45,063 $ 32,884 Minimum Liquidity financial covenant $ 10,000 $ 10,000 In addition to the financial covenants, the ABL Facility contains restrictive covenants, including covenants that restrict the Company’s ability to pay dividends and repurchase shares of its common stock. After the ABL Adjustment Date, the Company is no longer prohibited from making dividend payments and share repurchases. All decisions with respect to the declaration and payment of future dividends and share repurchases will be made by the Board in its sole discretion based upon earnings, financial condition, anticipated cash needs and other such considerations as the Board deems relevant. As of September 30, 2024, the Company was in compliance with all debt covenants. On November 1, 2024, with the closing of the Terphane Sale, the ABL Adjustment Date has occurred. Terphane Brazil Loan On October 26, 2023, Terphane Ltda., the Company’s wholly owned subsidiary in Brazil, borrowed $20 million secured by certain of its assets (“Terphane Brazil Loan”). This U.S. Dollar borrowing matures on October 30, 2028. On October 26, 2023, the Company borrowed $20 million from Terphane Ltda. (the “Intercompany Loan”) at the same interest rate as the Terphane Brazil Loan, thereby transferring the funds to the U.S. In connection with the closing of the Terphane Sale, both the Terphane Brazil Loan and the Intercompany Loan were assumed by Oben. PE Films Guangzhou Loan On June 25, 2024, PE Films' business location in Guangzhou, China, Guangzhou Tredegar Film Products Co., Ltd. (“Guangzhou Tredegar”), entered into a 9.5 million Chinese Yuan, which is equivalent to $1.4 million as of September 30, 2024, revolving loan with the Industrial and Commercial Bank of China. The loan matures on July 3, 2025. The interest rate is the one year loan prime rate published by the National Interbank Funding Center for the working day immediately preceding the drawdown date, minus 0.45%. As of September 30, 2024, the National Interbank Funding Center rate was 3.35%. The revolving loan is secured by a mortgage contract listing the Guangzhou Tredegar factory building as collateral. The mortgage contract has a maximum value of 30 million Chinese Yuan and is effective from June 25, 2024 through May 31, 2027. For more information on the ABL Facility, the Terphane Brazil Loan and the PE Films Guangzhou Loan, see Note 10 for additional information. 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 expenditure, and debt repayments for at least the next 12 months. In the longer term, liquidity will depend on many factors, including the 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. In addition, the completion of the Terphane Sale has provided additional liquidity.