Tredegar Corporation — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Tredegar manufactures custom aluminum extrusions, polyethylene films and flexible packaging films. The annual results reflect Personal Care Films as discontinued operations following its October 2020 sale; Bright View was sold in December but remained in continuing operations.
Financial performance and liquidity
- Revenue: Continuing-operations sales were $755.3 million, down 8.6% from $826.3 million in 2019. Segment net sales, which exclude freight, were $729.6 million.
- Earnings: Continuing-operations net loss was $16.8 million, or $0.51 per diluted share, versus income of $58.5 million, or $1.76 per diluted share, in 2019. Total net loss was $75.4 million, or $2.26 per diluted share, including a $58.6 million loss from discontinued operations.
- Major non-operating and unusual items: Tredegar recorded a $60.9 million pre-tax fair-value loss on its kaléo investment ($47.6 million after tax), a $13.7 million goodwill impairment in Aluminum Extrusions ($10.5 million after tax), and a $50.0 million pre-tax loss on the Personal Care Films sale. Bright View’s sale generated a $2.3 million pre-tax loss.
- Margins and segment results: Consolidated gross profit margin rose to 22.6% from 18.9%, principally reflecting improved Flexible Packaging Films performance. Segment EBITDA from ongoing operations was $55.1 million for Aluminum Extrusions, $45.1 million for PE Films and $30.6 million for Flexible Packaging Films.
- Cash flow: Operating cash flow was $74.4 million, compared with $115.9 million in 2019. Investing activities provided $32.9 million, including divestiture proceeds, while financing activities used $125.6 million, largely reflecting dividends.
- Debt and liquidity: Year-end debt was $134.0 million versus $42.0 million; cash was $11.8 million and net debt was $122.2 million. The amended $375 million revolving facility matures in June 2024, with approximately $241 million available under the most restrictive covenant. Leverage was 1.43x against a 4.00x maximum; the company reported compliance with covenants.
- Balance sheet and pension: Total assets were $514.9 million and shareholders’ equity was $109.1 million, down from $712.7 million and $376.7 million, respectively. The defined-benefit pension plan was underfunded by $103.1 million; an approximately $11.7 million contribution was expected in 2021.
Changes versus 2019
- Aluminum Extrusions net sales declined 14.0%, with volume down 10.5%; EBITDA fell 16.1% to $55.1 million. Management attributed the volume decline mainly to COVID-19-related demand weakness. Year-end backlog increased approximately 41% to $74.2 million.
- PE Films net sales increased 4.1% and EBITDA rose 9.7%, supported by Surface Protection products unrelated to customer transitions and Pottsville Packaging.
- Flexible Packaging Films net sales were nearly flat, up 0.5%, while EBITDA more than doubled to $30.6 million, supported by lower raw-material costs, higher volume and favorable mix.
- Lower sales and a $60.9 million kaléo valuation loss contrasted with 2019, when Tredegar recorded a $28.5 million gain on the investment, including a $17.6 million cash dividend.
- Tredegar paid a $200 million special dividend ($5.97 per share) in December. Total declared dividends were $6.45 per share for 2020, compared with $0.46 in 2019; debt rose in part to fund the special dividend.
Outlook, risks and contingencies
- Management expected remaining Surface Protection customer product transitions, principally involving one customer, to reduce PE Films’ ongoing EBITDA contribution by an estimated $18 million in 2021 versus 2020 and a further $4 million in 2022 versus 2021. The company was pursuing new products, applications, customers and cost savings to offset the effect.
- COVID-19 continued to affect demand and operations. Bonnell Aluminum reported higher absenteeism and hiring challenges that constrained desired shipments; management noted weakness in building and construction during the fourth quarter, alongside strong bookings and backlog.
- Projected 2021 capital expenditures were $21 million for Aluminum Extrusions, $5 million for PE Films and $9 million for Flexible Packaging Films. Projected 2021 pension expense was $14.0 million.
- Key risks include cyclical construction and aluminum markets, concentrated PE Films customers and possible product obsolescence, raw-material and energy price volatility, foreign-exchange exposure in Brazil, trade and anti-dumping developments, supply-chain and facility disruption, environmental compliance, and uncertainty in the private-company valuation of kaléo. The estimated $34.6 million kaléo value is based on Level 3 assumptions; actual realizable value could differ materially.
- Environmental investigations and remediation are ongoing at certain current and former sites. Tredegar said it was accrued for known matters, but unexpected costs could be material. Other routine legal actions were not expected by management to materially affect financial position.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses across the control environment, risk assessment, information and communication, monitoring, and process-level and IT controls. KPMG issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation continued into 2021; timing and completion were not assured.
Important facts for investors to verify
- Progress and realized costs of remediating material weaknesses, including whether controls are tested and found effective.
- Timing and financial impact of the Surface Protection customer transitions, and whether new products and cost actions offset expected lost contribution.
- Actual 2021 Aluminum Extrusions volume, labor availability, backlog conversion and demand in building and construction.
- Cash generation, debt levels, covenant headroom and permitted future dividends following the special distribution.
- Assumptions underlying the kaléo fair-value estimate and any developments affecting its products, market access or legal matters.
- Required pension contributions and potential changes in funding needs, interest rates and investment returns.