# Magnera Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Magnera Corp](/companies/magn.md) (CIK 41719)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:03 ET
- Period: 2023-09-30
- Accession: 0000041719-23-000048
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/41719/000004171923000048/glt-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/41719/000004171923000048/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $329.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.07bn | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $285.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $966.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $44.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $98.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $24.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $84.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $2.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$1.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $17.4m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $47.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $3.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $13.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$19.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$70.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.43 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.43 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.56 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 45,099,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 45,033,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$42.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $7.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $25.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-09-30 | $52.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $594.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $1.53bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $255.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.28bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $847.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $1.9m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2023-09-30 | $5.6m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $253.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 59,169 characters.

*The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Annual Report on Form 10-K ("2022 Form 10-K").*

**Forward-Looking Statements** This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:

i. risks related to the military conflict between Russia and Ukraine and related sanctions and its impact on our production, sales, supply chain, cost of energy, and availability of energy due to natural gas supply issues into Europe;

ii. disruptions of our global supply chain, including the availability of key raw materials and transportation for the delivery of critical inputs and of products to customers, and the increase in the costs of transporting materials and products;

iii.risks associated with our ability to increase selling prices quickly or sufficiently enough to recover rapid cost inflation in our raw materials, energy, freight and other costs, and the potential reduction or loss of sales due to price increases;

iv. variations in demand for our products, including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;

v. the impact of competition, changes in industry production capacity, including the construction of new facilities or new machines, the closing of facilities and incremental changes due to capital expenditures or productivity increases;

vi. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

vii.our ability to develop new, high value-added products;

viii.changes in the price or availability of raw materials we use, particularly woodpulp, pulp substitutes, synthetic pulp, other specialty fibers and abaca fiber;

ix. changes in energy-related prices and commodity raw materials with an energy component;

x. the impact of unplanned production interruption at our facilities or at any of our key suppliers;

xi. disruptions in production and/or increased costs due to labor disputes;

xii.the gain or loss of significant customers and/or on-going viability of such customers;

xiii.the impact of war and terrorism;

xiv.the impact of unfavorable outcomes of audits by various state, federal or international tax authorities or changes in pre-tax income and its impact on the valuation of deferred taxes;

xv. enactment of adverse state, federal or foreign tax or other legislation or changes in government legislation, policy or regulation; and

**Introduction** We manufacture a wide array of engineered materials and manage our company along three operating segments:

- *Airlaid Materials* with sales of airlaid nonwoven fabric-like materials used in feminine hygiene products, adult incontinence products, tabletop, specialty wipes, home care products and other airlaid applications;
- *Composite Fibers* with sales of single-serve tea and coffee filtration papers, wallcovering base materials, composite laminate papers, technical specialties including substrates for electrical applications, and metallized products; and
- *Spunlace* with sales of premium quality spunlace nonwovens for critical cleaning, high-performance materials, personal care, hygiene and medical applications.

The former Specialty Papers business’ results of operations and financial condition are reported as discontinued operations. Following is a discussion and analysis primarily of the financial results of operations and financial condition of our continuing operations.

### RESULTS OF OPERATIONS

### Nine months ended September 30, 2023 versus the nine months ended September 30, 2022

**Overview** For the first nine months of 2023, we reported a loss from continuing operations of $69.5 million, or $1.54 per share compared with a loss of $160.0 million or $3.57 per share in the year earlier period. The following table sets forth summarized consolidated results of operations:

*In thousands, except per share*

|  | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net sales | **$1,065,134** | $1,117,423 |
| Gross profit | **98,834** | 106,446 |
| Operating loss | **(1,719)** | (141,032) |
| Continuing operations |  |  |
| Loss | **(69,493)** | (160,004) |
| Loss per share | **(1.54)** | (3.57) |
| Net loss | **(70,387)** | (159,875) |
| Loss per share | **(1.56)** | (3.57) |

The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect the impact of a number of significant items including the loss on sale of our Ober-Schmitten operations, debt refinancing, turnaround strategy costs, strategic initiatives, and CEO transition costs, among others. Our operating results for the first nine months of 2023 reflect: i) the impact of market softness and customer destocking resulting in lower sales volumes and sales, as well as, lower production to manage inventory levels, ii) higher interest expense stemming from the debt refinancing in the first quarter of 2023, iii) costs incurred related to the divestiture of our Ober-Schmitten, Germany facility and our turnaround strategy.

In addition to the results reported in accordance with GAAP, we evaluate our performance using financial metrics not calculated in accordance with GAAP, including adjusted earnings and adjusted earnings before interest expense, interest income, income taxes, depreciation and amortization and share-based compensation (“Adjusted EBITDA”). On an adjusted earnings basis, a non-GAAP measure, we had an adjusted loss from continuing operations of $36.7 million, or $0.81 per share for the first nine months of 2023, compared with a loss of $12.1 million, or $0.27 per share, a year ago. Our Adjusted EBITDA, also a non-GAAP measure, was $67.5 million for the nine months ended September 30, 2023 as compared to $76.6 million for the same period in 2022. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation.

Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

*Goodwill and other asset impairment charges.* This adjustment represents non-cash charges recorded to reduce the carrying amount of certain long-lived assets of our Dresden, Germany facility and goodwill of our Composite Fibers and Spunlace reporting segments.

*Turnaround strategy costs.* This adjustment reflects costs incurred in connection with the Company's turnaround strategy initiated in 2022 under its new chief executive officer to drive operational and financial improvement. These costs are primarily related to professional services fees and employee separation costs.

*Russia/Ukraine conflict charges*. This adjustment represents a non-cash charge recorded to reduce the carrying amount of accounts receivable and inventory directly related to the Russia/Ukraine military conflict and related sanctions.

*Strategic initiatives.* These adjustments primarily reflect professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives including costs associated with acquisitions, related integrations, and charges incurred to step-up acquired inventory to fair-value.

*Ober-Schmitten divestiture costs.* This adjustment reflects the loss on sale of the Ober-Schmitten, Germany operations and professional and other costs directly associated with the sale, and previously anticipated closure, of the facility.

*Debt refinancing costs.* Represents charges to write-off unamortized debt issuance costs in connection with the extinguishment of the Company’s €220.0 million Term Loan and IKB loans, as well as the amendment to the Company's credit facility. These costs also include an early repayment penalty related to the extinguishment of the IKB loans.

*CEO transition costs.* This adjustment reflects a costs associated with the separation of our former CEO, including a non-cash pension settlement charge related to a lump-sum distribution made in Q1 2023 under the terms of his non-qualified pension plan agreement.

*Corporate headquarters relocation.* These adjustments reflect costs incurred in connection with the strategic relocation of the Company’s corporate headquarters to Charlotte, NC. The costs are primarily related to employee relocation costs and exit costs at the former corporate headquarters.

*Cost optimization actions.* These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, improve efficiencies or other objectives. Such actions may include asset rationalization, headcount reductions, or similar actions. These adjustments, which have occurred at various times in the past, are irregular in timing and relate to specific identified programs to reduce or optimize the cost structure of a particular operating segment or a corporate function.

*COVID-19 ERC recovery.* This adjustment reflects the benefit recognized from employee retention credits claimed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and professional services fees directly associated with claiming this benefit.

*Timberland sales and related costs.* These adjustments exclude gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows. These adjustments are irregular in timing and amount and may benefit our operating results.

These adjustments are each unique and not considered to be on-going in nature. The transactions are irregular in timing and amount and may significantly impact our operating performance. As such, these items may not be indicative of our past or future performance and therefore are excluded for comparability purposes.

Adjusted earnings and adjusted earnings per share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP.

The following table sets forth the reconciliation of net loss to adjusted loss from continuing operations for the periods indicated:

*In thousands, except per share*

|  | Nine months ended September 30, 2023 Amount | EPS | 2022 Amount | EPS |
| --- | ---: | ---: | ---: | ---: |
| Net loss | **$(70,387)** | **$(1.56)** | $(159,875) | $(3.57) |
| Exclude: Loss (income) from discontinued operations, net of tax | **894** | **0.02** | (129) | — |
| Loss from continuing operations | **(69,493)** | **(1.54)** | (160,004) | (3.57) |
| Adjustments (pre-tax): |  |  |  |  |
| Goodwill and other asset impairment charges (1) | **—** |  | 159,890 |  |
| Turnaround strategy costs (2) | **7,054** |  | — |  |
| Russia/Ukraine conflict charges (3) | **—** |  | 3,948 |  |
| Strategic initiatives (4) | **2,158** |  | 4,687 |  |
| Ober-Schmitten divestiture(5) | **18,797** |  | — |  |
| Debt refinancing (6) | **1,883** |  | — |  |
| CEO transition costs (7) | **579** |  | 1,489 |  |
| Corporate headquarters relocation | **—** |  | 343 |  |
| Cost optimization actions (8) | **—** |  | 941 |  |
| COVID-19 ERC recovery (9) | **(233)** |  | — |  |
| Timberland sales and related costs | **(1,305)** |  | (2,962) |  |
| Total adjustments (pre-tax) | **28,933** |  | 168,336 |  |
| Income taxes (10) | **867** |  | (20,694) |  |
| Other tax adjustments (11) | **3,005** |  | 301 |  |
| Total after-tax adjustments | **32,805** | **0.73** | 147,943 | 3.30 |
| Adjusted loss from continuing operations | **$(36,688)** | **$(0.81)** | $(12,061) | $(0.27) |

(1) Reflects goodwill impairment charge of $56.1 million related to our Composite Fibers segment and other asset impairment charges of $61.3 million related to our Dresden asset group recognized in Q1 2022. An additional goodwill impairment charge of $42.5 million related to our Spunlace segment was recognized in Q3 2022.

(2) Reflects employee separation costs of $4.3 million and $2.7 million in professional fees.

(3) Reflects bad debt expense charges of $2.9 million and inventory reserves charges of $1.0 million recognized in Q1 2022.

(4) For 2023, primarily reflects integration activities including consulting and legal fees of $1.2 million, the write-off of construction in process asset deemed unusable of $0.5 million, employee separation costs of $0.1 million, and other costs of $0.4 million. For 2022, primarily reflects professional services fees (including legal, audit, valuation specialists and consulting) of $3.3 million, employee separation and other costs of $1.4 million and other costs, all of which are directly related to acquisitions.

(5) Reflects disposal costs of $17.8 million, legal fees of $0.5 million, employee separation costs of $0.1 million, and other costs of $0.4 million in connection with the closure of the Ober-Schmitten facility.

(6) Reflects $1.8 million write-off of deferred debt issuance costs in connection with the Company’s debt refinancing in Q1 2023, and $0.1 million in early repayment penalties and write-off of unamortized financing fees on the IKB loans.

(7) For 2023, primarily reflects pension settlement charge related to the former CEO's separation. For 2022, reflects cash severance and transition related costs of $4.6 million partially offset by a $3.1 million non-cash benefit related to the forfeiture of stock-based compensation awards.

(8) Primarily reflects employee separation costs of $0.4 million, equipment write-down of $0.4 million and other costs of $0.1 million directly associated with closure of a synthetic fiber production facility in the U.K.

(9) Reflects $0.3 million of interest income on employee retention credits claimed under the CARES Act of 2020 and the subsequent related amendments, offset by professional fees of less than $0.1 million.

(10) Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in the U.S., no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets.

(11) Tax effect of applying certain provisions of the CARES Act of 2020. The amount in 2023 also includes $2.4 million of valuation allowance added to deferred tax asset related to the Ober-Schmitten facility.

The following table sets forth the reconciliation of net loss to adjusted EBITDA for the periods indicated:

*In thousands*

| Adjusted EBITDA | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | **$(70,387)** | $(159,875) |
| Exclude: Loss (income) from discontinued operations, net of tax | **894** | (129) |
| Add back: Taxes on continuing operations | **13,421** | (8,569) |
| Depreciation and amortization | **47,394** | 50,482 |
| Interest expense, net | **46,082** | 23,526 |
| EBITDA | **37,404** | (94,565) |
| Adjustments: |  |  |
| Goodwill and other asset impairment charges | **—** | 159,890 |
| Turnaround strategy costs | **7,566** | — |
| Russia/Ukraine conflict charges | **—** | 3,948 |
| Strategic initiatives | **2,158** | 4,687 |
| Ober-Schmitten divestiture | **18,797** | — |
| Debt refinancing | **59** | — |
| CEO transition costs | **579** | 4,592 |
| Corporate headquarters relocation | **—** | 343 |
| Share-based compensation | **2,205** | 37 |
| Cost optimization actions, excluding accelerated depreciation | **—** | 589 |
| COVID-19 ERC recovery | **41** | — |
| Timberland sales and related costs | **(1,305)** | (2,962) |
| Adjusted EBITDA | **$67,504** | $76,559 |

EBITDA is a measure used by management to assess our operating performance and is calculated using

income (loss) from continuing operations and excludes interest expense, interest income, income taxes, and

depreciation and amortization. Adjusted EBITDA is calculated using EBITDA and further excludes certain items management considers to be unrelated to the company’s core operations. The adjustments include, among others, goodwill and other asset impairment charges, the costs of strategic initiatives, turnaround strategy costs, Ober-Schmitten divestiture costs, CEO transition costs, and share-based compensation expense, as well as the elimination of gains from sales of timberlands, among others. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing operating performance.

### Segment Financial Performance

*Dollars in thousands*

| Net Sales | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Airlaid Material | **$458,966** | $447,523 |
| Composite Fibers | **368,031** | 387,436 |
| Spunlace | **239,934** | 282,464 |
| Inter-segment sales elimination | **(1,797)** | — |
| Total | **$1,065,134** | $1,117,423 |
| **Operating income (loss)** |  |  |
| Airlaid Material | **$34,836** | $40,718 |
| Composite Fibers | **14,293** | 12,080 |
| Spunlace | **(4,390)** | (8,051) |
| Other and unallocated | **(46,458)** | (185,779) |
| Total | **$(1,719)** | $(141,032) |
| **Depreciation and amortization** |  |  |
| Airlaid Material | **$22,876** | $22,571 |
| Composite Fibers | **11,760** | 15,276 |
| Spunlace | **9,857** | 8,813 |
| Other and unallocated | **2,901** | 3,822 |
| Total | **$47,394** | $50,482 |
| **Capital expenditures** |  |  |
| Airlaid Material | **$7,039** | $7,457 |
| Composite Fibers | **8,352** | 12,720 |
| Spunlace | **7,481** | 5,227 |
| Other and unallocated | **2,357** | 4,680 |
| Total | **$25,229** | $30,084 |
| **Tons shipped (metric)** |  |  |
| Airlaid Material | **119,149** | 125,658 |
| Composite Fibers | **71,972** | 77,415 |
| Spunlace | **46,047** | 57,768 |
| Inter-segment sales elimination | **(925)** | — |
| Total | **236,243** | $260,841 |

**Segments** Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table set forth above.

Management evaluates results of operations of the operating segments before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of the segments and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

### Sales and Costs of Products Sold

*In thousands*

|  | Nine months ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | **$1,065,134** | $1,117,423 | $(52,289) |
| Costs of products sold | **966,300** | 1,010,977 | (44,677) |
| Gross profit | **$98,834** | $106,446 | $(7,612) |
| Gross profit as a percent of Net sales | **9.3%** | 9.5% |  |

The following table sets forth the contribution to consolidated net sales by each segment:

| Percent of Total Segment | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Airlaid Materials | **43.1%** | 40.0% |
| Composite Fibers | **34.4** | 34.7 |
| Spunlace | **22.5** | 25.3 |
| Total | **100.0%** | 100.0% |

**Net sales** totaled $1,065.1 million and $1,117.4 million in the first nine months of 2023 and 2022, respectively. Net sales for Airlaid Materials increased by 1.9% on a constant currency basis. Net Sales for Composite Fibers and Spunlace decreased by 5.5% and 15.2% on a constant currency basis.

**Airlaid Materials’** net sales increased $11.4 million in the year-over-year comparison mainly driven by higher selling prices from cost-pass-through arrangements with customers and pricing actions to recover significant inflation in raw materials and energy. Shipments were 5.2% lower mainly due to food pads, baby diapers and feminine hygiene categories and currency translation was favorable by $3.0 million.

Airlaid Materials’ first nine months operating income of $34.8 million was $5.9 million lower when compared to the first nine months of 2022. Lower shipments lowered results by $3.2 million. Selling price increases and energy surcharges of $27.3 million more than offset higher raw material and energy costs of $26.8 million. For the first nine months of 2023, primary raw material input costs increased $26 million, or 12%, and energy costs increased $1 million, or 3%,

compared to the same nine months of 2022. The increase in primary raw material input costs was approximately in-line with broader market indices, and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to continue to decline in the fourth quarter. As of September 30, 2023, Airlaid Materials had approximately 79% of its net sales with contracts with pass-through provisions. Operations were unfavorable by $5.6 million mainly driven by lower production to manage customer demand as some customers slowed ordering patterns to manage inventory levels built up at the end of 2022 to avoid anticipated energy and supply chain disruptions in the beginning of 2023. The impact of currency and related hedging positively impacted earnings by $2.4 million. The primary drivers of the change in Airlaid Materials’ operating income are summarized in the following chart (presented in millions):

**Composite Fibers’** net sales was $19.4 million lower in the first nine months of 2023 compared to the year-ago period. Shipments were 7.0% lower mainly due to metallized products and composite laminates categories and currency translation was favorable by $1.7 million.

Composite Fibers had operating income for the first nine months of $14.3 million compared with operating income of $12.1 million in the first nine months of 2022. Higher selling prices and energy surcharges more than offset the continued inflation in energy, raw material, and freight and was a net favorable benefit to results of $9.8 million. For the first nine months of 2023, energy costs increased $1.7 million, or 3%, and primary raw material input costs increased $3.8 million, or 3%, compared to the same nine months of 2022. The increase in primary raw material input costs was approximately in-line with broader market indices, and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to continue to decline in the fourth quarter. As of September 30, 2023, Composite Fibers had approximately 47% of its net sales with contracts with pass-through provisions. Operations was unfavorable by $0.3 million mainly driven by lower production volume to match customer demand and manage inventory levels, largely offset by cost savings from headcount reduction actions taken related to the turnaround strategy, lower energy consumption due to lower production volume and lower depreciation expense due to the Dresden and Ober-Schmitten asset impairments in 2022. The Ober-Schmitten site negatively impacted year-over-year results by $5.7 million. The impact of currency and related hedging negatively impacted earnings by $0.2 million. The primary drivers of the change in Composite Fibers’ operating income are summarized in the following chart (presented in millions):

**Spunlace’s** net sales was $42.5 million lower in the first nine months of 2023 compared to the year-ago period. Shipments were 20.3% lower mainly due to beauty care, critical cleaning and hygiene categories and currency translation was favorable by $0.4 million.

Spunlace had an operating loss of $4.4 million in the first nine months of this year compared with an operating loss of $8.1 million in the first nine months of 2022. Higher selling prices and energy surcharges were partially offset by higher raw material and energy costs favorably impacting earnings by $9.7 million. For the first nine months of 2023, primary raw material input costs increased $5.8 million, or 4%, and energy costs decreased $3.3 million, or 14%, compared to the same nine months of 2022. The increase in primary raw material input costs was approximately in-line with broader market indices, and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to continue to decline in the fourth quarter. Volume was unfavorable by $5.3 million driven by lower shipments in almost all categories. As of September 30, 2023, Spunlace had approximately 38% of its net sales with contracts with pass-through provisions. The primary drivers of the change in Spunlace’s operating income are summarized in the following chart (presented in millions):

**Asset Impairment** During the first quarter of 2022, in connection with an assessment of potential impairment of long-lived and indefinite-lived intangible assets stemming from the compounding impacts resulting from the Russia/Ukraine military conflict and related sanctions, we recorded a $117.3 million non-cash asset impairment charge related to Composite Fibers' Dresden facility and an impairment of Composite Fibers' goodwill. Dresden is a single-line facility that produces wallcover base paper, the majority of which is directly sold into the Russian and Ukrainian markets.

In addition, as a result of economic sanctions and disruptions to the financial markets, certain customers were not able to satisfy outstanding accounts receivables. As such, during the first quarter of 2022, we recognized bad debt expense of approximately $2.9 million directly related to Russian and Ukrainian customers which is included in “Selling, general and administrative expenses” in the accompanying condensed consolidated statements of income. Furthermore, during the first quarter of 2022, we increased inventory reserves by approximately $1.0 million, primarily related to wallcover products. The charge related to inventory reserves is included in “Cost of products sold” in the accompanying condensed consolidated statements of income.

During the third quarter of 2022, we recognized a non-cash goodwill impairment charge for our Spunlace segment

of $42.5 million stemming from inflationary challenges at the time and our selling price increases having been insufficient to offset the impact of inflation. Furthermore, the Spunlace segment had been impacted by unexpected supply chain and other operational issues which, in combination with commercial issues, resulted in an unexpected increase in operating losses.

**Other and Unallocated** The amount of net operating expenses not allocated to an operating segment, and reported as “Other and Unallocated” in our table of Segment Financial Performance, totaled $46.5 million in the first nine months of 2023 compared with $185.8 million in the same period a year ago. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the first nine months of 2023 increased $2.4 million compared to the same period in 2022 mainly driven by higher professional services costs, higher travel costs and wage inflation.

**Income Taxes** For the nine months ended September 30, 2023, we recorded a $13.4 million income tax provision on a pretax loss of $56.1 million from continuing operations. The comparable amounts for 2022 were $8.6 million income tax benefit on a pre-tax loss of $168.6 million. The income tax provision in both periods reflects valuation allowances recorded for the operating losses in the U.S. and certain foreign jurisdictions for which no income tax benefit was recorded. The income tax benefit in 2022 also includes deferred tax benefits associated with the asset impairment charges and related bad debt and inventory reserves.

**Foreign Currency** We own and operate facilities in Canada, Germany, France, the United Kingdom, Spain, and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany, France and Spain, it is the euro, in the UK, it is the British pound sterling, and in the Philippines the functional currency is the peso. On an annual basis, our euro denominated net sales exceeds euro expenses by an estimated €190 million. For the first nine months of 2023, the average currency exchange rate was 1.08 dollar/euro compared with 1.07 in the same period of 2022. With respect to the British pound sterling, Canadian dollar, and Philippine peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the first nine months of 2023.

*In thousands*

|  | Nine months ended September 30, Favorable (unfavorable) |
| --- | ---: |
| Net sales | **$5,080** |
| Costs of products sold | **(2,442)** |
| SG&A expenses | **(325)** |
| Income taxes and other | **41** |
| Net loss | **$2,354** |

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2023 were the same as 2022. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

### Three months ended September 30, 2023 versus the three months ended September 30, 2022

**Overview** For the third quarter of 2023, we reported a loss from continuing operations of $19.7 million, or $0.43 per share compared with a loss of $49.3 million or $1.10 per share in the same period in 2022. The following table sets forth summarized consolidated results of operations:

*In thousands, except per share*

|  | Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net sales | **$329,921** | $371,780 |
| Gross profit | **44,487** | 37,384 |
| Operating income (loss) | **2,653** | (34,067) |
| Continuing operations |  |  |
| Loss | **(19,680)** | (49,254) |
| Loss per share | **(0.43)** | (1.10) |
| Net loss | **(19,863)** | (49,496) |
| Loss per share | **(0.43)** | (1.11) |

The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect the impact of a number of significant items including the loss on sale of our Ober-Schmitten operations, debt refinancing, turnaround strategy costs, strategic initiatives, and CEO transition costs, among others. Our operating results for the three months ended September 30, 2023 reflect: i) the impact of market softness and customer destocking resulting in lower sales volumes and sales, as well as, lower production, ii) higher interest expense stemming from the debt refinancing in the first quarter of 2023, iii) costs incurred related to the sale of our Ober-Schmitten, Germany operations and our turnaround strategy.

In addition to the results reported in accordance with GAAP, we evaluate our performance using financial metrics not calculated in accordance with GAAP, including adjusted earnings and adjusted earnings before interest expense, interest income, income taxes, depreciation and amortization and share-based compensation (“Adjusted EBITDA”). On an adjusted earnings basis, a non-GAAP measure, we had an adjusted loss from continuing operations of $10.4 million, or $(0.23) per share for the third quarter of 2023, compared with a loss of $4.3 million, or $(0.10) per share, a year ago. Our Adjusted EBITDA, also a non-GAAP measure, was $25.5 million for the three months ended September 30, 2023 as compared to $26.3 million for the same period in 2022. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation.

Adjusted earnings and adjusted earnings per share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP.

The following table sets forth the reconciliation of net loss to adjusted loss from continuing operations for the periods indicated:

*In thousands, except per share*

|  | Three months ended September 30, 2023 Amount | EPS | 2022 Amount | EPS |
| --- | ---: | ---: | ---: | ---: |
| Net loss | **$(19,863)** | **$(0.43)** | $(49,496) | $(1.11) |
| Exclude: Loss (income) from discontinued operations, net of tax | **183** | **—** | 242 | 0.01 |
| Loss from continuing operations | **(19,680)** | **(0.43)** | (49,254) | (1.10) |
| Adjustments (pre-tax): |  |  |  |  |
| Goodwill and other asset impairment charges | **—** |  | 42,541 |  |
| Turnaround strategy costs (1) | **372** |  | — |  |
| Strategic initiatives (2) | **488** |  | 2,199 |  |
| Ober-Schmitten divestiture costs (3) | **8,055** |  | — |  |
| CEO transition costs (4) | **(54)** |  | 1,489 |  |
| Corporate headquarters relocation | **—** |  | 120 |  |
| Timberland sales and related costs | **(688)** |  | — |  |
| Total adjustments (pre-tax) | **8,173** |  | 46,349 |  |
| Income taxes (5) | **928** |  | (1,527) |  |
| Other tax adjustments (6) | **207** |  | 126 |  |
| Total after-tax adjustments | **9,308** | **0.21** | 44,948 | 1.00 |
| Adjusted loss from continuing operations | **$(10,372)** | **$(0.23)** | $(4,306) | $(0.10) |

(1) Reflects employee separation costs of $0.4 million.

(2) For 2023, primarily reflects professional fees (tax and IT) of $0.4 million and other costs of $0.1 million. For 2022, primarily reflects professional services fees (including legal, audit, valuation specialists and consulting) of $1.6 million, employee separation and other costs of $0.6 million and other costs, all of which are directly related to acquisitions.

(3) Reflects loss on sale of $17.8 million partially offset by a benefit of $10.3 million related to the reversal of employee separation expenses recorded in Q2 2023 in anticipation of the closure of the facility, and legal fees of $0.5 million.

(4) For 2023, reflects pension settlement benefit of $0.1 million related to the former CEO's separation. For 2022, reflects cash severance and transition related costs of $4.6 million partially offset by a $3.1 million non-cash benefit related to the forfeiture of stock-based compensation awards.

(5) Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in the U.S., no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets.

(6) Tax effect of applying certain provisions of the CARES Act of 2020.

The following table sets forth the reconciliation of net loss to adjusted EBITDA for the periods indicated:

*In thousands*

| Adjusted EBITDA | Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | **$(19,863)** | $(49,496) |
| Exclude: Loss from discontinued operations, net of tax | **183** | 242 |
| Add back: Taxes on continuing operations | **3,328** | 4,920 |
| Depreciation and amortization | **15,693** | 15,546 |
| Interest expense, net | **17,057** | 8,047 |
| EBITDA | **16,398** | (20,741) |
| Adjustments: |  |  |
| Goodwill and other asset impairment charges | **—** | 42,541 |
| Turnaround strategy costs | **370** | — |
| Strategic initiatives | **488** | 2,199 |
| Ober-Schmitten divestiture | **8,055** | — |
| CEO transition costs | **(54)** | 4,592 |
| Corporate headquarters relocation | **—** | 120 |
| Share-based compensation | **898** | (2,382) |
| Timberland sales and related costs | **(688)** | — |
| Adjusted EBITDA | **$25,467** | $26,329 |

EBITDA is a measure used by management to assess our operating performance and is calculated using

income (loss) from continuing operations and excludes interest expense, interest income, income taxes, and

depreciation and amortization. Adjusted EBITDA is calculated using EBITDA and further excludes certain items management considers to be unrelated to the company’s core operations. The adjustments include, among others, Ober-Schmitten divestiture costs, turnaround strategy costs, strategic initiative costs, corporate headquarters relocation expenses, and share-based compensation expense. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing operating performance.

### Segment Financial Performance

*Dollars in thousands*

| Net Sales | Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Airlaid Material | **$147,014** | $154,351 |
| Composite Fibers | **109,715** | 128,269 |
| Spunlace | **73,791** | 89,160 |
| Inter-segment sales elimination | **(599)** | — |
| Total | **$329,921** | $371,780 |
| **Operating income (loss)** |  |  |
| Airlaid Material | **$11,196** | $16,553 |
| Composite Fibers | **7,268** | 6,636 |
| Spunlace | **(1,053)** | (4,671) |
| Other and unallocated | **(14,758)** | (52,585) |
| Total | **$2,653** | $(34,067) |
| **Depreciation and amortization** |  |  |
| Airlaid Material | **$7,553** | $7,400 |
| Composite Fibers | **3,898** | 3,961 |
| Spunlace | **3,289** | 2,954 |
| Other and unallocated | **953** | 1,231 |
| Total | **$15,693** | $15,546 |
| **Capital expenditures** |  |  |
| Airlaid Material | **$2,625** | $1,925 |
| Composite Fibers | **2,579** | 2,462 |
| Spunlace | **2,271** | 1,341 |
| Other and unallocated | **296** | 1,659 |
| Total | **$7,771** | $7,387 |
| **Tons shipped (metric)** |  |  |
| Airlaid Material | **40,076** | 41,925 |
| Composite Fibers | **22,188** | 24,958 |
| Spunlace | **14,436** | 17,674 |
| Inter-segment sales elimination | **(328)** | — |
| Total | **76,372** | $84,557 |

**Segments** Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table set forth above.

Management evaluates results of operations of the operating segments before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of the segments and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

### Sales and Costs of Products Sold

*In thousands*

|  | Three months ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | **$329,921** | $371,780 | $(41,859) |
| Costs of products sold | **285,434** | 334,396 | (48,962) |
| Gross profit | **$44,487** | $37,384 | $7,103 |
| Gross profit as a percent of Net sales | **13.5%** | 10.1% |  |

The following table sets forth the contribution to consolidated net sales by each segment:

| Percent of Total Segment | Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Airlaid Materials | **44.6%** | 41.5% |
| Composite Fibers | **33.0** | 34.5 |
| Spunlace | **22.4** | 24.0 |
| Total | **100.0%** | 100.0% |

**Net sales** totaled $329.9 million and $371.8 million in the three months ended September 30, 2023 and 2022, respectively. Net sales for Airlaid Materials, Composite Fibers and Spunlace decreased by 7.9%, 19.5% and 18.7%, respectively, on a constant currency basis.

**Airlaid Materials’** third quarter net sales decreased $7.3 million in the year-over-year comparison mainly driven by lower selling prices from cost pass-through arrangements and lower energy surcharges in Europe as both raw materials and energy input costs declined compared to last year. Shipments were 4.4% lower mainly in feminine hygiene and table top categories due to European market weakness and customer shift to alternate substrates to manage input costs. Currency translation was favorable by $4.8 million.

Airlaid Materials’ third quarter operating income of $11.2 million was $5.4 million lower when compared to the third quarter of 2022. Shipments were lower primarily in the feminine hygiene and table top categories lowering results by $2.0 million. Selling price was $4.9 million lower compared the third quarter of 2022 due to the lower raw materials costs pass-through, selected pricing actions to retain volume, and lower energy surcharges. Raw material and energy costs were favorable $2.7 million. In the three months ended September 30, 2023, primary raw material input costs decreased $2.2 million, or 3%, and energy costs was in-line with the second quarter of 2022. The decrease in primary raw material input costs was approximately in-line with broader market indices and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to steadily decline in the fourth quarter of 2023. As of September 30, 2023, Airlaid Materials had approximately 79% of its net sales with contracts with pass-through provisions. Operations were unfavorable by $1.9 million primarily due to lower production and higher operational spending. The impact of currency and related hedging positively impacted earnings by $0.7 million. The primary drivers of the change in Airlaid Materials’ operating income are summarized in the following chart (presented in millions):

**Composite Fibers’** revenue was $18.6 million lower in the third quarter of 2023, compared to the year-ago quarter due to lower selling prices of $2.1 million, the sale of Ober-Schmitten mid-quarter this year, and lower overall shipments down 11.1%. Currency translation was favorable by $6.3 million.

Composite Fibers had operating income for the third quarter of $7.3 million compared with operating income of $6.6 million in the third quarter of 2022. Lower energy and raw material costs more than offset the decline in selling prices and energy surcharges and was a net favorable benefit to results of $4.7 million. The strong wallcover shipments were more than offset by lower shipments of higher margin food and beverage and composite laminates categories that negatively impacted income by $4.3 million. In the third quarter of 2023, energy costs decreased $1 million, or 5%, and primary raw material input costs decreased $5.8 million, or 12%, compared to the third quarter of 2022. The decrease in primary raw material input costs was approximately in-line with broader market indices and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to steadily decline in the fourth quarter of 2023. As of September 30, 2023, freight inflation reported as part of raw material, energy and other inflation decreased as global supply chain disruptions experienced in 2022 significantly improved in 2023. As of September 30, 2023, Composite Fibers had approximately 47% of its net sales with contracts with pass-through provisions. During the three months ended September 30, 2023, operations were favorable compared to the third quarter of 2022 by $0.6 million mainly driven by benefits from the Turnaround Strategy, partially offset by lower production. The Ober-Schmitten site negatively impacted year-over-year results by $1.2 million. The impact of currency and related hedging negatively impacted earnings by $0.3 million. The primary drivers of the change in Composite Fibers’ operating income are summarized in the following chart (presented in millions):

**Spunlace’s** revenue was $15.4 million lower in the third quarter of 2023, compared to the year-ago quarter mainly driven by lower shipments of 18.3% and lower selling prices of $0.6 million which were partially offset by favorable currency translation of $1.3 million.

Spunlace had an operating loss of $1.1 million in the third quarter of this year compared with an operating loss of $4.7 million in the third quarter of 2022. In the third quarter of 2023, primary raw material input costs decreased by 2.8 million, or 6%, and energy costs decreased $1.8 million, or 22%, compared to the third quarter of 2022. The decrease in primary raw material input costs was approximately in-line with broader market indices and energy prices were less volatile with the government legislation in Europe capping energy prices. We expect prices for both energy and raw materials to steadily decline in the fourth quarter of 2023. Volume was unfavorable $1.6 million driven by lower shipments in all categories. As of September 30, 2023, Spunlace had approximately 38% of its net sales with contracts with pass-through provisions. Operations were favorable by $0.7 million from headcount actions taken in 2022, which resulted in lower overall spending and other cost improvements as a result of the turnaround strategy. The impact of currency positively impacted earnings by $0.4 million. The primary drivers of the change in Spunlace’s operating income are summarized in the following chart (presented in millions):

**Other and Unallocated** The amount of net operating expenses not allocated to an operating segment, and reported as “Other and Unallocated” in our table of Segment Financial Performance, totaled $14.8 million in the third quarter of 2023 compared with $52.6 million in the same period a year ago. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the third quarter of 2023 increased $0.4 million compared to the third quarter of 2022 which includes a $1.2 million charge in 2023 for costs associated with a supplier’s raw material defect, partially offset by benefits from headcount actions related to the turnaround strategy and lower professional costs.

**Income taxes** In the third quarter of 2023, our U.S. GAAP pre-tax loss from continuing operations totaled $16.4 million and we recorded an income tax expense of $3.3 million which primarily related to the tax provision for foreign jurisdictions, reserves for uncertain tax positions, and valuation allowances for domestic and foreign jurisdiction losses for which no tax benefit could be recognized. The comparable amounts in the same quarter of 2022 were a pre-tax loss of $44.3 million and an income tax provision of $4.9 million.

**Foreign Currency** We own and operate facilities in Canada, Germany, France, the United Kingdom, Spain, and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany, France and Spain, it is the euro, in the UK, it is the British pound sterling, and in the Philippines the functional currency is the peso. On an annual basis, our euro denominated net sales exceeds euro expenses by an estimated €190 million. For the three months ended September 30, 2023, the average currency exchange rate was 1.09 dollar/euro compared with 1.01 in the same period of 2022. With respect to the British pound sterling, Canadian dollar, and Philippine peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the third quarter of 2023.

*In thousands*

|  | Three months ended September 30, Favorable (unfavorable) |
| --- | ---: |
| Net sales | **$11,110** |
| Costs of products sold | **(10,171)** |
| SG&A expenses | **(751)** |
| Income taxes and other | **—** |
| Net loss | **$188** |

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2023 were the same as 2022. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

### LIQUIDITY AND CAPITAL RESOURCES

Our business requires significant expenditures for new or enhanced equipment, to support our research and development efforts, and to support our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:

*In thousands*

|  | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Cash, cash equivalents and restricted cash at the beginning of period | **$119,162** | $148,814 |
| Cash provided (used) by |  |  |
| Operating activities | **(41,955)** | (64,353) |
| Investing activities | **(28,694)** | (25,502) |
| Financing activities | **10,987** | 52,084 |
| Effect of exchange rate changes on cash | **(143)** | (6,760) |
| Change in cash and cash equivalents from discontinued operations | **(734)** | 45 |
| Net cash used | **(60,539)** | (44,486) |
| Cash, cash equivalents and restricted cash at the end of period | **58,623** | 104,328 |
| Less: restricted cash in Prepaid and other current assets | **(3,600)** | (2,000) |
| Less: restricted cash in Other assets | **(2,282)** | (6,993) |
| Cash and cash equivalents at the end of period | **$52,741** | $95,335 |

At September 30, 2023, we had $52.7 million in cash and cash equivalents (“cash”) held by both domestic and foreign subsidiaries. Approximately 99.0% of our cash and cash equivalents is held by our foreign subsidiaries but could be repatriated without incurring a significant amount of additional taxes.

Cash used by operating activities in the first nine months of 2023 totaled $42.0 million compared with $64.4 million in the same period a year ago. The decrease in cash used was primarily due to a decrease in working capital usage of approximately $55.7 million, primarily due to: i) accounts receivable, which was driven by higher accounts receivables in the first nine months of 2022 due in part to the termination of the Spunlace factoring program in the U.S., improved collections, and lower sales in 2023, ii) inventory, which was driven by higher inventory values in 2022 due to raw material and energy inflation and lower raw material levels in 2023, partially offset by, iii) accounts payable which declined in 2023 due to inflationary impacts in 2022 and tighter credit terms by vendors. Cash outflows for prepaid and other current assets increased $20.9 million primarily due to increased vendor prepayment deposits. Operating cash also improved $12.3 million from a decrease in income taxes paid due to higher Canadian income taxes and withholding tax in the first nine months of 2022 and a U.K. income tax refund in Q1 2023. Interest paid increased $19.1 million due to higher interest rates on our debt stemming from the debt refinancing in the first quarter of 2023.

Net cash used by investing activities was $28.7 million in the first nine months of 2023 compared with $25.5 million in the same period a year ago. Capital expenditures totaled $25.2 million and $30.1 million for the nine months ended

September 30, 2023 and 2022, respectively. Capital expenditures are expected to total between $30 million and $35 million in 2023.

Net cash provided by financing activities totaled $11.0 million in the first nine months of 2023 compared with $52.1 million in the same period of 2022. The change in financing activities primarily reflects the new €250.0 million Term Loan we entered into in which the proceeds were used to fully extinguish the €220.0 million Term Loan, the IKB term loans and reduced the revolving credit facility balance. In 2022, we used borrowings under the revolving credit facility for working capital and other operating expenditures.

As discussed in Item 1 - Financial Information, Note - 16, our Credit Agreement and AG Loan contains a number of customary compliance covenants. As of September 30, 2023, the leverage ratio, as calculated in accordance with the definition in our Credit Agreement and AG Loan, was 3.1x, well within the maximum limit. A breach of these requirements would give rise to certain remedies under the Credit Agreement and AG Loan, among which are the termination, and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest. As discussed in Note 16 - “*Long Term Debt,”* on March 30, 2023, we amended our Credit Agreement to permit the maximum leverage ratio (calculated as consolidated senior secured debt to consolidated adjusted EBITDA) to be 4.25 to 1.0 through the quarter ended December 31, 2024, stepping down to 4.0 to 1.0 at March 31, 2025, and 3.50 to 1.0 at March 31, 2026.

Details of our outstanding long-term indebtedness are set forth under Item 1 - Financial Statements – Note 16 -“*Long-Term Debt."*

Financing activities include cash used for common stock dividends. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. In the third quarter of 2022, our Board of Directors suspended the Company’s quarterly cash dividend to focus efforts on optimizing the operational and financial results of the business. As such, we paid no cash dividends in the first nine months of 2023. In the first nine months of 2022, we paid $18.8 million of cash for dividends on our common stock.

We are subject to various federal, state and local laws and regulations intended to protect the environment, as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

At September 30, 2023, we had ample liquidity consisting of $52.7 million of cash on hand and $133.6 million of capacity under our revolving credit facility. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt.

On April 13, 2023, our credit rating from Moody’s Investor Service was upgraded to B3, in part due to our successful refinancing of our €220.0 million Term Loan with the €250.0 million AG Loan as discussed in Note 16 - “*Long Term Debt,”.* In October 2022, our credit rating was downgraded by S&P Global Ratings to CCC+ based on its latest assessment of our business, and no further action has been taken to date. Although the Moody’s Investor Service ratings upgrade action is positive, it does not impact our current interest costs, or reduce the possibility of default on any of our debt.

**Off-Balance-Sheet Arrangements** As of September 30, 2023 and December 31, 2022, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries, are reflected in the condensed consolidated balance sheets included herein in Item 1 – Financial Statements.

## Market risk

As filed, 7,212 characters.

*In thousands, except percentages*

| Long-term debt Average principal outstanding | Year Ended December 31 2023 | 2024 | 2025 | 2026 | 2027 | September 30, 2023 Carrying Value | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| At variable interest rates | $295,308 | $105,940 | $105,940 | $71,401 | $— | $105,940 | $105,940 |
| At fixed interest rates | 777,368 | 760,516 | 759,553 | 759,553 | 759,553 | 761,788 | 592,675 |
|  |  |  |  |  |  | $867,728 | $698,615 |
| Weighted-average interest rate |  |  |  |  |  |  |  |
| On variable rate debt | 3.73% | 8.36% | 8.36% | 5.63% | —% |  |  |
| On fixed rate debt | 5.90% | 6.96% | 6.97% | 6.97% | 6.97% |  |  |

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of September 30, 2023. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

At September 30, 2023, we had $867.7 million of long-term debt, of which $105.9 million was at variable interest rates. Variable-rate debt represents borrowings under our credit agreement. Borrowing rates under our credit agreement are determined at our option at the time of each borrowing. For all U.S. Dollar denominated borrowings, the borrowing rate is either, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the overnight bank funding rate plus 50 basis points; or iii) the daily Simple Secured Overnight Financing Rate (“SOFR”) rate plus 100 basis points plus an applicable spread over either i), ii) or iii) ranging from 250 basis points to 400 basis points based on the Company’s leverage ratio; or (b) the daily Term SOFR-rate plus an applicable margin ranging from 350 basis points to 500 basis points based on the Company’s leverage ratio. For non-U.S. Dollar denominated borrowings, interest is based on the Euro-rate or EURIBOR-rate plus an applicable margin ranging from 350 basis points to 500 basis points based on the Company’s leverage ratio.

At September 30, 2023, the weighted-average interest rate paid was equal to 8.36%. A hypothetical 100 basis point increase in the interest rate on variable rate debt would increase annual interest expense by $1.1 million. In the event rates are 100 basis points lower, interest expense would be $1.1 million lower.

We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. On an annual basis, our euro denominated revenue exceeds euro expenses by an estimated €190 million. With respect to the British pound sterling, Canadian dollar, and Philippine peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 1 – Financial Statements – Note 18.

### Critical Accounting Estimates

The preceding discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to long-lived assets, environmental liabilities, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe that our policies for long- and indefinite-lived assets, environmental liabilities and income taxes represent the most significant and subjective estimates used in the preparation of our consolidated financial statements and are therefore considered our critical accounting policies and estimates.

During the nine months ended September 30, 2023, there were no changes in our critical accounting policies or estimates. See Note 2 — Accounting Policies, of the Condensed Consolidated Financial Statements included elsewhere in this Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, for additional information regarding our critical accounting policies.

**Long- and indefinite-lived Assets** We evaluate the recoverability of our long- and indefinite-lived assets, including plant, equipment, timberlands, goodwill, and other intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if impairment indicators are present.

The fair value of our reporting units, which are also our operating segments, is determined using a market approach and a discounted cash flow model. Our evaluations include a variety of qualitative factors and analyses based on estimates of future cash flows expected to be generated from the use of the underlying assets, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. In 2022, all the goodwill of our Composite Fibers and Spunlace operating segments was fully impaired. Our Airlaid Materials segment’s fair value substantially exceeded its carrying value at the time of its last valuation performed in connection with the last annual impairment test in the fourth quarter of 2022. Airlaid Material’s fair value, as well as the asset groups within each of our operating segments, could be impacted by factors such as unexpected changes in inflation, unexpected changes in market conditions or demand for our products, among other factors. Future adverse changes such as these or in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future.

## Controls and procedures

As filed, 658 characters.

**Evaluation of Disclosure Controls and Procedures** Our Chief Executive Officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2023, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.

**Changes in Internal Controls** There were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0000041719-23-000048. Last ingested by Listed: Nov 6, 2026, 16:17 ET. No prices; not investment advice.