Magnera Corp (MAGN) FY 2021 MD&A

ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this annual report. Our discussion and analysis of 2021 compared to 2020 is included herein. For discussion and analysis of 2020 compared to 2019, please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the United States Securities and Exchange Commission on February 25, 2021 and is incorporated herein by reference.

Forward-Looking Statements This Annual Report on Form 10-K 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-K 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 regarding expectations of, among others, environmental costs, capital expenditures and liquidity, 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 associated with the impact of the COVID-19 pandemic, including global and regional economic conditions, changes in demand for our products, interruptions in our global supply chain, ability to continue production by our facilities, credit conditions of our customers or suppliers, or potential legal actions that could arise due to our operations during the pandemic;

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

iv.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;

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

vi.geopolitical matters, including any impact to our operations from events in Russia, Ukraine and Philippines;

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

xvi.our ability to finance, consummate and integrate acquisitions, including our acquisitions of Mount Holly and Jacob Holm.

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

•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;

•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; and

•Spunlace with sales of premium quality spunlace nonwovens for critical cleaning, high-performance materials, personal care, hygiene and medical applications.

COVID-19 Pandemic On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic as the virus spread throughout the world. The COVID-19 pandemic and the actions undertaken throughout the world in an attempt to contain the virus have had an unprecedented and significant impact on global economies in terms of reduced GDP, inflation, volatile energy prices, disruptions in global supply chains, increased unemployment, and insolvencies in a variety of industries and markets. As a result, we have experienced and may continue to experience weaker or volatile demand for certain of our products due to the effects of the pandemic. Shortly after the pandemic began and through the first several months of 2021, our financial performance and results of operations were adversely impacted by the pandemic, particularly by weaker demand for tabletop products used by restaurants, catering and similar venues, all of which were impacted by “lockdowns” throughout many regions of the world. However, demand is improving as restaurants around the world begin to reopen. The majority of our other product portfolios are considered to be “essential or life-sustaining” and we continued to produce products used in the global response effort to the pandemic. We believe demand for certain of our products, such as Composite Fibers’ food and beverage filtration products and Airlaid Materials’ personal hygiene and wipes, will remain stable. The following discussion and analysis primarily focus on the financial results of operations and financial condition of our continuing operations.

Acquisition As discussed in Item 8 - Financial Statements and Supplementary Data, Note 3 “Acquisitions,” we completed our acquisitions of Georgia-Pacific's U.S. nonwovens business (“Mount Holly”) on May 13, 2021 for $170.9 million and the acquisition of all outstanding equity of PMM Holdings (Luxembourg) AG ("Jacob Holm") on October 29, 2021 for $304.0 million. Refer to Note 3 - "Acquisitions" for additional information about these transactions.

RESULTS OF OPERATIONS

2021 versus 2020

Overview For the year ended December 31, 2021, we reported income from continuing operations of $6.7 million, or $0.15 per share compared with $20.8 million and $0.47 per share in 2020. The following table sets forth summarized GAAP-based consolidated results of operations:

We generated $71.0 million of cash from operations in 2021 compared with $109.0 million a year ago. During 2021 and 2020, capital expenditures totaled $30.0 and $28.1 million, respectively. Refer to Liquidity and Capital Resources for additional discussion of our sources and uses of cash.

The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect a number of significant actions we undertook, including strategic initiatives, corporate headquarters relocation, cost optimization and the restructuring and consolidation of our metallized business, among others. Excluding

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these items from reported results, adjusted earnings, a non-GAAP measure, was $27.6 million, or $0.61 per diluted share 2021, compared with $37.4 million, or $0.84 per diluted share, a year ago. The weaker financial performance largely reflects the adverse impact of significantly higher raw material and energy prices. Operating income for our Composite Fibers segment was $14.7 million lower in 2021 compared with 2020 and Airlaid Materials’ operating income was $4.1 million lower. Spunlace, our new segment created in connection with the Jacob Holm acquisition, lost $1.3 million for the two months since the acquisition was completed. In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. 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:

Discontinued Operations. In connection with the sale of the Specialty Papers business, its results of operations, including the loss recorded in 2018 connection with the sale, are reported as discontinued operations for all periods presented. This adjustment reflects the net results of this discontinued operation.

Strategic initiatives. These adjustments primarily reflect professional, investment banker 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.

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.

Restructuring charge – Metallized operations. This adjustment represents charges incurred in 2020 in connection with the decision to restructure a portion of the Composite Fibers segment, primarily consisting of the consolidation of our metallizing operation from Gernsbach, Germany to Caerphilly, UK.

Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, including costs related to the organizational change to a functional operating model. The costs are primarily related to executive separations, other headcount reductions, professional fees, asset write-offs and certain contract termination costs. 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 the corporate function.

COVID-19 incremental costs. This adjustment represents incremental cash costs incurred directly related to the COVID-19 pandemic such as employee incentive payments, enhanced hygiene protocols, safety and supplies, and professional fees primarily associated with the CARES Act benefit.

Asset Impairment Charge. This adjustment represents a non-cash charge recorded to reduce the carrying amount of a tradename intangible asset of the Dresden wallcover business due to the impact of the COVID-19 pandemic on the underlying forecasted revenue stream.

Pension settlement expenses, net. This adjustment reflects professional fees recorded in connection with the Company’s termination of its qualified pension plan and the related actions to settle all obligations to the plan’s participants. Since the pension plan was fully funded, the settlement of pension obligations did not require the use of the Company’s cash, but instead was accomplished with plan assets.

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.

Other tax adjustments. In 2021, these adjustments primarily reflect the tax impact related to the reversal of the permanent reinvestment assertion for certain foreign jurisdictions and a foreign tax benefit related to the establishment of a center of excellence. In 2020, a tax benefit was recorded in connection with passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) related to provisions that modified the “net operating loss” provisions of previous law to allow certain losses to be carried back five years.

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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 diluted 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 income to adjusted earnings for the periods presented:

(1)Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated.

(2)In 2021, reflects the tax impact related to the reversal of permanent reinvestment assertion for certain foreign jurisdictions and a foreign tax benefit related to the establishment of a center of excellence. In 2020, a tax benefit was recorded in connection with passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) related to provisions that modified the “net operating loss” provisions of previous law to allow certain losses to be carried back five years.

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Segment Financial Performance

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 operating segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.

Management evaluates results of operations of the 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 operating 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 segment 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.

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Sales and Costs of Products Sold

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

Net sales on a consolidated basis totaled $1,084.7 million and $916.5 million in 2021 and 2020, respectively. The $168.2 million increase was primarily driven by $60.6 million from the Mount Holly acquisition and $57.6 million from the Jacob Holm acquisition. In addition, higher average selling prices favorably impacted the comparison by $50.6 million and shipping volumes decreased 3.6% on an organic basis.

Composite Fibers’ net sales increased $31.7 million or 6.0% in 2021 compared to 2020 driven by favorable currency translation of $18.5 million and $17.0 million from higher selling prices. During 2021, we announced price increases of 8% and 12% in response to significantly higher input costs. Overall shipments decreased 1.9% in the year-to-year comparison.

Composite Fibers’ 2021 operating income of $37.4 million was $14.7 million lower than 2020. The decline in operating results reflects the adverse impact of significantly higher costs for raw materials, primarily woodpulp, and higher energy prices in Europe, which increased $36.4 million in the aggregate. The adverse impact of inflation more than outpaced the $17.0 million increase in selling prices. The primary drivers are summarized in the following chart (in millions):

Airlaid Materials’ net sales increased $78.8 million, in the comparison of 2021 to 2020, and shipments increased 8.4% each driven by the addition of Mount Holly, which is included prospectively from the May 13, 2021 closing of the transaction. Mount Holly is estimated to generate approximately $100.0 million of net sales on an annual basis. The Airlaid Materials' net sales were impacted by lower shipments in the hygiene and wipes categories (excluding volumes added by Mount Holly). Currency translation was $6.5 million favorable.

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Airlaid Materials’ 2021 operating income of $42.3 million was $4.0 million lower than 2020. Higher shipments positively impacted results by $10.2 million. Selling price increases of $33.6 million, primarily due to raw material cost-pass through provisions and an energy surcharge, were more than offset by higher input costs. Operations were unfavorable $7.3 million as a result of higher spending and inflationary pressures. The impact of currency and related hedging negatively impacted earnings by $2.8 million. The primary drivers are summarized in the following chart (in millions):

Spunlace Spunlace net sales totaled $57.6 million and operating loss totaled $1.3 million for the period October 29, 2021 to December 31, 2021. Shipments were adversely affected by a larger customer's actions to recalibrate orders for wipes to manage year-end inventory, in addition to production delays that were impacted by raw material availability. These factors, combined with unfavorable mix, negatively impacted profitability by approximately $0.7 million. In addition, raw material inflation, particularly on synthetic fibers, coupled with higher than anticipated energy costs, lowered profits by approximately $1.5 million. Operations further negatively impacted results by $1.4 million from lower production, higher than anticipated waste rates and COVID-related labor challenges. The preliminary purchase price allocation resulted in depreciation and amortization of approximately $1.7 million after including the acquisition step-up to fixed and intangible assets.

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 $49.7 million for 2021 compared with $49.2 million in 2020. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the comparison increased $1.3 million.

Gain on Sales of Plant, Equipment and Timberlands, net During each of the past two years, we sold certain assets, primarily timberlands. For a summary of these transactions, refer to Item 8 - Financial Statements and Supplementary Data, Note 7 - "Gain on Dispositions of Plant Equipment and Timberlands."

Interest expense, net For the year ended December 31, 2021, interest expense, net totaled $12.3 million compared with $6.6 million for 2020. The increase reflects additional net borrowings totaling $497.3 million incurred to finance the two acquisitions completed in May 2021 and October 2021. In addition, in connection with the October 2021 issuance of our 4.750% senior notes to finance the Jacob Holm acquisition, we refinanced the amounts outstanding under our variable-rate revolving credit facility which averaged approximately 1.6% at the time they were refinanced, with the proceeds of the fixed-rate notes.

Income taxes For the year ended December 31, 2021, we recorded a $7.0 million income tax provision on a pretax income of $13.7 million from continuing operations. The comparable amounts for 2020 were $11.6 million income tax provision on a pre-tax income of $32.4 million. During 2021, the effective tax rate reflects the impact of $3.6 million of tax expense related to the reversal of a permanent reinvestment assertion for certain foreign jurisdictions and a foreign tax benefit of $10.7 million related to the establishment of a center of excellence. The income tax expense in 2020 includes the impact of nondeductible excise tax totaling $8.3 million partially offset by a $6.1 million benefit recorded in connection with passage of the CARES Act. This Act, which was signed into law on March 27, 2020, modified the “net operating loss” provisions of previous law to allow certain losses to be carried back five years. These amounts are excluded from net income when arriving at adjusted earnings.

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On adjusted pre-tax income of $40.8 million, income tax expense was $13.2 million in 2021. The comparable amounts in 2020 were $60.5 million and $23.1 million, respectively. The effective tax rate on adjusted earnings was 32.4% in the 2021 compared to 38.2% in 2020.

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 €150 million. For 2021 compared to 2020, the average currency exchange rate of the euro strengthened relative to the U.S. dollar by approximately 3.7% , and the British pound sterling to the dollar strengthened by approximately 7.2%. 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 period indicated.

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2021 were the same as 2020, or “constant currency.” It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

Discontinued Operations We completed the sale of our Specialty Papers business on October 31, 2018. Its results of operations are reported as discontinued operations for all periods presented. There was an immaterial amount of activity in results of discontinued operations for 2021 and 2020.

LIQUIDITY AND CAPITAL RESOURCES

Our business requires expenditures for new or enhanced equipment, 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:

At December 31, 2020, we had $138.5 million in cash and cash equivalents (“cash”), of which approximately 90% was held by foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated without incurring a significant amount of additional taxes. In addition to cash, as of December 31, 2021, $118.3 million was available under our existing revolving credit agreement.

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Cash provided by operating activities totaled $71.0 million in 2021 compared with $109.0 million a year ago. The cash from operations includes $22.9 million of cash payments related to strategic initiatives and a $20.4 million tax refund in 2020 associated with the CARES Act. Working capital benefits from accounts payable were largely offset by uses of working capital for accounts receivable and inventory. Operating cash flow in 2021 only includes the EBITDA of the two acquisitions prospectively from their date of acquisition. Operating cash flow in 2020 includes $5.3 million of outflows associated with the metallized restructuring and $6.2 million related to the pension settlement. The following table sets forth a measure of "Adjusted EBITDA" a non-GAAP financial measure used by management to assess the cash generated by our core business operations. Pro forma Adjusted EBITDA presents this measure adjusted to include the historical results of the Mount Holly and Jacob Holm acquisitions for 2021 which aligns with the definition of this measure in accordance with our credit agreement for calculation of covenant compliance.

(1)Represents pro forma Mount Holly EBITDA for the period January 1, 2021 through the May 13, 2021 acquisition date, adjusted to eliminate certain corporate cost overhead allocated to Mount Holly during its period of ownership by its previous parent.

(2)Represents pro forma Jacob Holm EBITDA for the period January 1, 2021 through the October 29, 2021 acquisition date.

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 the costs of strategic initiatives, certain cost optimization and restructuring activities, certain COVID-19 costs, corporate headquarters relocation expenses, pension settlement expenses, asset impairment charge, share-based compensation expense and debt refinancing, as well as the elimination of gains from sales of timberlands. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing operating performance.

Net cash used by investing activities reflects the $464.9 million combined purchase price, net of cash acquired, of the two acquisitions completed in 2021. Capital expenditures totaled $30.0 million in 2021 compared with $28.1 million in 2020. Capital expenditures are expected to total between $45 million and $50 million in 2022.

Net cash provided by financing activities totaled $462.4 million in 2021 compared with a use of $100.3 million in 2020. The change in the year-to-year comparison primarily reflects the issuance of bonds to finance our acquisitions in 2021.

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Details of our outstanding long-term indebtedness are set forth under Item 8 - Financial Statements and Supplementary Data – Note 20 -“Long-Term Debt."

In October 2021, we issued $500 million aggregate principal amount of 4.750% senior notes due 2029 (the “Notes”). The net proceeds from the offering of the Notes, together with cash on hand, were used to pay the purchase price of the Jacob Holm acquisition, certain indebtedness of Jacob Holm, outstanding borrowings under the Revolving Credit Facility including amounts previously borrowed to purchase Mount Holly, and to pay fees and expenses.

Our revolving credit facility due in September 2026, contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 5.25x at the end of 2021. As of December 31, 2021, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 3.8x, within the limits set forth in our credit agreement.

Financing activities includes cash used for common stock dividends. In 2021, we used $24.5 million of cash for dividends on our common stock compared with $23.5 million in 2020. In the second quarter of 2021, we increased the quarterly cash dividend by 3.7%. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

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 costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

As more fully discussed in Item 8 - Financial Statements and Supplementary Data – Note 24 – “Commitments, Contingencies and Legal Proceedings,” we are involved in the Lower Fox River in Wisconsin (the “Fox River”), an EPA Superfund site for which we remain potentially liable for certain government oversight and long-term monitoring and maintenance costs. Pursuant to a consent decree with certain government agencies entered into in January 2019, we paid $20.5 million for past government oversight costs. Although there remains some uncertainty as to the amount we may ultimately be required to spend, primarily for government oversight costs, the consent decree specifies the nature of our future obligations.

We expect to meet all 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.

Off-Balance-Sheet Arrangements As of December 31, 2021 and 2020, 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 consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data.

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