Tredegar Corporation (NYSE: TG) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Tredegar manufactures aluminum extrusions, polyethylene films and flexible packaging films. Personal Care Films was sold in October 2020 and is reported as discontinued operations; Bright View Technologies was sold in December 2020 and remains in continuing operations for comparison purposes.
Financial performance
- Sales: $184.8 million, down 3.8%. Segment net sales (sales less freight) were $178.6 million, down 3.6%.
- Profit: Continuing-operations net income was $9.6 million, or $0.29 per diluted share, versus a $20.7 million loss, or $0.62 loss per diluted share. Including discontinued operations, net income was $9.0 million versus a $22.3 million loss.
- Margins and segment EBITDA from ongoing operations: Consolidated gross margin was 20.2%, compared with 20.9%. Aluminum Extrusions EBITDA was $13.3 million (+13.9%); PE Films was $7.2 million (-41.9%); Flexible Packaging Films was $9.6 million (+46.8%).
- Cash flow: Operating cash flow was $9.9 million versus $15.1 million; capital expenditures were $5.3 million versus $4.9 million. Cash increased $10.0 million during the quarter to $21.9 million.
- Debt and liquidity: Debt was $143.0 million, up from $134.0 million at year-end; debt net of cash was $121.1 million. Approximately $232 million of credit was available under the revolving facility. The company reported covenant compliance, with a 1.54x leverage ratio against a 4.00x maximum and 32.61x interest coverage against a 3.00x minimum.
- Balance sheet: Total assets were $522.5 million and shareholders’ equity was $116.0 million at March 31, 2021. Pension and postretirement obligations were $106.0 million. The company paid $4.0 million in dividends ($0.12 per share).
Material changes and drivers
- Aluminum Extrusions sales volume fell 6.2%, including a 15.1% decline in nonresidential building and construction. Higher pricing and a favorable $2.3 million year-over-year FIFO raw-material cost variance more than offset lower volume and higher operating costs in segment EBITDA. Management cited record bookings and backlog, alongside labor constraints and shipment challenges.
- PE Films volume declined 15.9% and net sales fell 24.0%, primarily from lower volume and unfavorable mix tied to customer transitions in Surface Protection. EBITDA declined $5.2 million year over year.
- Flexible Packaging Films volume rose 6.3% and net sales increased 6.4%; EBITDA improved on volume, mix, lower raw-material costs and favorable currency effects.
- The 2020 comparison included a $26.1 million loss on the kaléo investment and a $13.7 million goodwill impairment charge in continuing operations. In Q1 2021, the kaléo investment contributed a $0.7 million pretax gain. These items make the reported year-over-year earnings comparison unusually favorable.
- Q1 2021 discontinued-operations loss was $0.6 million, including a $0.3 million favorable adjustment to Personal Care Films’ disposal estimate. The sold business had no sales in Q1 2021; Q1 2020 included $36.2 million of sales.
Outlook, risks and contingencies
- Management estimated that remaining Surface Protection customer product transitions could reduce PE Films EBITDA from ongoing operations by $18 million in 2021 versus 2020, including approximately $5.8 million in Q1, and a further $4 million in 2022 versus 2021. The company is pursuing new products, customers and cost savings to offset the impact.
- Projected 2021 capital expenditures were approximately $21 million for Aluminum Extrusions, $4 million for PE Films and $9 million for Flexible Packaging Films. The filing provides no consolidated earnings guidance.
- COVID-19-related absenteeism and hiring difficulties constrained Aluminum Extrusions’ labor availability; all businesses reported supply-chain disruption, including raw-material shortages and transportation delays. Management warned that pandemic effects on employees, supply chains, customers and the economy could cause actual results to differ materially from expectations.
- Commodity and energy costs, the ability to pass through cost increases, foreign exchange movements, customer concentration, international and trade risks, and pension funding remain material business risks. The company hedges certain aluminum and Brazilian-real exposures.
- The estimated $35.0 million fair value of the approximately 19% kaléo investment is based on Level 3 valuation assumptions; kaléo is privately held, and the ultimate realizable value may differ materially. The filing notes a Department of Justice investigation related to kaléo’s discontinued Evzio business.
- Internal controls: Management concluded disclosure controls were not effective as of March 31, 2021 because material weaknesses in internal control over financial reporting remained. Remediation was ongoing, and completion timing was uncertain.
- The American Rescue Plan Act reduced the company’s required minimum pension contributions for 2021 to zero following its elections under the law. Management estimated pension underfunding at approximately $70 million at March 31, down from $103 million at December 31, 2020; these interim estimates are not year-end GAAP measurements.
Important facts for investors to verify
- Progress and financial effect of the Surface Protection customer transitions, and whether replacement products and cost savings offset the projected decline.
- Whether Aluminum Extrusions can convert record bookings and backlog into shipments despite labor, weather and supply-chain constraints.
- Debt levels, available revolver capacity, covenant compliance and cash generation as working-capital needs and capital spending evolve.
- Remediation progress and testing of internal controls, given management’s conclusion that disclosure controls were ineffective.
- Key assumptions behind kaléo’s fair value and any developments affecting a potential liquidity event or the disclosed investigation.
- Actual 2021 pension funding and status of the divested Personal Care Films transition services and disposal adjustments.