Magnera Corp: Form 10-Q for the period ended Dec 28, 2024

Executive Summary

Business. The Company’s operations are organized into two operating segments: Americas and Rest of the World. The structure is designed to align us with our customers, provide improved service, drive future growth and to facilitate synergy realization. The Americas segment consists of sites in North America and South America that manufacture a wide range of products and components of personal care and consumer solution products and components of products including medical garments, wipes, dryer sheets, face masks, filtration, baby diapers and adult incontinence. The Rest of World segment consists of sites throughout Europe and China that manufacture a broad collection of personal care and consumer solution products and components of products including medical garments, wipes, face masks, cable wrap, filtration, baby diapers and adult incontinence.

Raw Material Trends. Our primary raw materials are polymer resin and wood-based fibers and pulps. In addition, we use other materials in various manufacturing processes. While temporary industry-wide shortages of raw materials have occurred, we have historically been able to manage the supply chain disruption by working closely with our suppliers and customers. Changes in the price of raw materials are generally passed on to customers through contractual price mechanisms over time, during contract renewals, and other means.

Outlook. The Company is affected by general economic and industrial growth, raw material availability, cost inflation, supply chain disruptions, and general industrial production. Our business has both geographic and end market diversity, which reduces the effect of any one of these factors on our overall performance. Our results are affected by our ability to pass through raw material and other cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers. Despite global macro-economic challenges in the short-term attributed to continued rising inflation, currency devaluation and general market softness, we continue to believe our underlying long-term demand fundamental in all divisions will remain strong as we focus on providing advantaged products in targeted markets. For fiscal 2025, we project post-merger free cash flow of $75-95 million including $85 million of capital spending. For the calculation of post-merger free cash flow and further information related to free cash flow as a non-GAAP financial measure, see “Liquidity and Capital Resources.”

Recent Acquisition

Our acquisition strategy is focused on improving our long-term financial performance, enhancing our market positions, and expanding our existing and complementary product lines. We seek to obtain businesses for attractive post-synergy multiples, creating value for our stockholders from synergy realization, leveraging the acquired products across our customer base, creating new platforms for future growth, and assuming best practices from the businesses we acquire. While the expected benefits on earnings are estimated at the commencement of each transaction, once the execution of the plan and integration occur, we are generally unable to accurately estimate or track what the ultimate effects have been due to system integrations and movements of activities to multiple facilities. As business combinations and restructuring plans have not allowed us to accurately separate realized synergies compared to what was initially identified, we estimate the synergy realization based on the overall segment profitability post-integration.

Glatfelter

On November 4, 2024, the Transaction was completed with GLT. The Transaction combined GLT’s sustainable solutions and product portfolio with Treasure’s portfolio of proprietary technologies and global scale. The Company is now a global leader in growing markets while serving some of the world’s largest brand owners. The Company expects to realize annual synergies of $55 million net of incremental standalone costs. See Note 3—Acquisition.

Results of Operations

Comparison of the Quarterly Period Ended December 28, 2024 (the “Quarter”) and the Quarterly Period Ended December 30, 2023 (the “Prior Quarter”)

Business integration expenses consist of restructuring and impairment charges, acquisition/merger related costs, and other business optimization costs. Tables present dollars in millions.

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Consolidated Overview

Net sales: The net sales increase included revenue from the Transaction, which occurred mid-Quarter on November 4th, of $186 million and increased selling prices of $11 million, which were partially offset by a $14 million unfavorable impact from foreign currency changes.

Operating income (loss): The operating loss increase included a $12 million inventory fair value step-up charge, a $9 million unfavorable impact from increased business integration costs, losses from the acquired GLT business of $4 million and a $4 million unfavorable impact from foreign currency changes partially offset by a $15 million favorable change from prior year hyperinflation in our Argentinian subsidiary and a favorable impact from price cost spread of $6 million.

Americas

Net sales: The net sales increase in the Americas segment included revenue from the Transaction of $70 million and increased selling prices of $12 million which were partially offset by a $13 million unfavorable impact from foreign currency changes.

Operating income (loss): The operating loss increase included a $10 million unfavorable impact from increased business integration costs, a $5 million inventory fair value step-up charge and a $4 million unfavorable impact from foreign currency changes partially offset by a $15 million favorable change from prior year hyperinflation in our Argentinian subsidiary.

Rest of World

Net sales: The net sales increase in the Rest of World segment included revenue from the Transaction of $116 million.

Operating income (loss): The operating loss increase included a $7 million inventory fair value step-up charge and losses from the acquired Glatfelter business partially offset by a favorable impact from price cost spread of $4 million.

Other expense: The increase in other expense is due to a $15 million prepayment penalty charge for retiring debt concurrently with the Transaction as well as currency losses related to intercompany loans.

Interest expense: The interest expense increase is primarily attributed to debt that was incurred concurrently with the closing of the Transaction.

Changes in Comprehensive Income

The $162 million decline in comprehensive income from the Prior Quarter is attributed to a $110 million unfavorable change in currency translation and a $52 million increased net loss. Currency translation changes are primarily related to non-U.S. subsidiaries with a functional currency other than the U.S. dollar whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates. The change in currency translation in the Quarter was primarily attributed to locations utilizing the Euro and Brazilian real as their functional currency. As part of its overall risk management, the Company uses derivative instruments to reduce foreign currency exposure to translation of certain foreign operations. The Company records changes to the fair value of these instruments in Accumulated other comprehensive loss. The change in fair value of these instruments in the quarter is primarily attributed to the change in the forward foreign exchange curves between measurement dates.

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Liquidity and Capital Resources

Senior Secured Credit Facility

We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. At the end of the Quarter, the Company had no outstanding balance on its asset-based revolving line of credit that matures in November 2029. The Company was in compliance with all covenants at the end of the Quarter.

Cash Flows

Net cash from operating activities decreased $31 million from the Prior YTD primarily related to $19 million of charges related to the Transaction and higher working capital.

Net cash from investing activities increased $7 million from the Prior YTD primarily attributed to cash acquired in connection with the Transaction in the YTD compared to the settlement of short-term marketable securities in Prior YTD.

Net cash from financing activities increased $42 million from Prior YTD primarily attributed to higher transfers from Berry prior to the Transaction.

Free Cash Flow

Our consolidated free cash flow for the YTD are summarized as follows:

(1) Pre-merger cash flow includes pre-Transaction cash from operations and other cash payments burdened by the Transaction.

We use free cash flow metrics as a supplemental measure of liquidity as it assists us in assessing our ability to fund growth through generation of cash. Free cash flow metrics may be calculated differently by other companies, including other companies in our industry or peer group, limiting its usefulness on a comparative basis. Free cash flow metrics are not a financial measure presented in accordance with GAAP and should not be considered as an alternative to any other measure determined in accordance with GAAP.

Liquidity Outlook

At December 28, 2024, our cash balance was $215 million, which was primarily located outside the U.S. We believe our existing U.S. based cash and cash flow from U.S. operations, together with available borrowings under our senior secured credit facilities, will be adequate to meet our short-term and long-term liquidity needs with the exception of funds needed to cover all long-term debt obligations, which we intend to refinance prior to maturity. The Company has the ability to repatriate the cash located outside the U.S. to the extent not needed to meet operational and capital needs without significant restrictions.

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Interest Rate Risk

We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities and accounts receivable supply chain financing programs. Our senior secured credit facilities are comprised of (i) $785 million Term Loan and (ii) a $350 million Revolving Credit Facility with no borrowings outstanding. Borrowings under our senior secured credit facilities bear interest at a rate equal to an applicable margin plus SOFR. The applicable margin for SOFR rate borrowings under the Revolving Credit Facility ranges from 1.50% to 2.00%, and the margin for the Term Loan is 4.25% per annum. As of period end, the SOFR rate of approximately 4.36% was applicable to the Term Loan. A change of 0.25% on these floating interest rate exposures would increase our annual interest expense by approximately $2 million.

Foreign Currency Risk

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, British pound sterling, Brazilian real, Chinese renminbi, Canadian dollar and Mexican peso. Significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. dollars whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates and impact our Comprehensive income. A 10% decline in foreign currency exchange rates would have had a $2 million unfavorable impact on our Net income for the quarterly period ended December 28, 2024. See Note 7-Financial Instruments and Fair Value Measurements.

(a) Evaluation of Disclosure Controls and Procedures.

Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the commission (such as this Form 10-Q) is recorded, processed, summarized, and reported on a timely basis.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

(b) Changes in internal control over financial reporting.

As part of the Transaction’s transition services agreement, the Company will rely on Berry’s systems and processes through the integration period. In November 2024, Berry announced the intent to merge with Amcor plc. Ramification to the Company, if any, as a result of the Berry/Amcor merger are being assessed and we will continue to evaluate the potential impacts to the transition services provided by Berry and closely monitor developments as they arise.

Other than in connection with the Transaction and the proposed merger of Berry and Amcor, there were no changes in our internal control over financial reporting that occurred during the Quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Before investing in our securities, we recommend that investors carefully consider the risks described in our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including our Form 8-K/A filed on January 31, 2024, and other documents filed with the SEC. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.

Additionally, we caution readers that the list of risk factors discussed in our SEC filings may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, readers should not place undue reliance on those statements.

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