Tredegar Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Tredegar is an industrial manufacturer with Aluminum Extrusions, PE Films, and Flexible Packaging Films segments. Amounts below are in U.S. dollars.
Financial results and position
- Sales: $236.6 million, up 28.0% from $184.8 million. Segment net sales, which exclude freight, were $228.5 million, up 27.9%.
- Profit: Continuing-operations net income was $16.5 million, or $0.49 per diluted share, versus $9.6 million, or $0.29. Total net income was $16.4 million versus $9.0 million.
- Margins and segment EBITDA: Consolidated gross margin declined to 19.1% from 20.2%. EBITDA from ongoing operations was $23.9 million for Aluminum Extrusions (up $10.6 million), $7.0 million for PE Films (down $0.2 million), and $5.0 million for Flexible Packaging Films (down $4.6 million).
- Cash flow: Operating cash flow was a use of $54.7 million, compared with $9.9 million provided in Q1 2021; the period included a $50 million pension contribution and weaker working capital. Capital expenditures were $5.1 million. Cash ended the quarter at $25.6 million, down from $30.5 million at year-end 2021.
- Debt and liquidity: Debt was $131.3 million, up from $73.0 million at December 31, 2021; net debt was $105.6 million. The company reported $244 million of available credit under its $375 million revolving facility, which matures in June 2024. Its leverage ratio was 1.19x, against a 4.00x maximum, and it was in compliance with debt covenants.
- Balance sheet: Total assets were $564.7 million and shareholders’ equity was $211.9 million at March 31, 2022. Receivables and inventories rose to $129.6 million and $104.6 million, respectively, from $103.3 million and $88.6 million at year-end.
Material changes and management commentary
- Aluminum Extrusions sales increased mainly because higher selling prices reflected higher aluminum and operating costs; volume declined 3.1%. EBITDA benefited from pricing and the timing of lower-cost aluminum flowing through inventory, while labor shortages, lower productivity, and higher supply and freight costs were headwinds. Bookings and backlog remained at record levels.
- PE Films net sales rose on higher Surface Protection volume and overwrap pricing, but EBITDA edged lower amid customer product transitions, competitive pricing pressure, and higher freight costs. Management expected customer transitions to reduce 2022 pre-tax income and EBITDA by a further $7 million versus 2021, and competitive pricing pressures to reduce them by approximately $6 million versus 2021.
- Flexible Packaging Films sales rose primarily from resin-cost pass-through and product mix, but volume fell 5.1% and EBITDA declined 47.7%. Higher raw-material and variable costs, lower volume, and foreign-exchange transaction losses outweighed price increases and favorable mix.
- Consolidated sales growth substantially reflected price increases and cost pass-throughs; gross margin nevertheless declined. Management cited persistent supply-chain disruption and inflation, including raw-material, transportation, and energy costs. The company seeks to mitigate these pressures through price increases and contractual pass-through provisions, but cannot assure full recovery.
Outlook, unusual items, and risks
- Pension plan: Tredegar contributed $50 million in February and began terminating and settling its frozen defined-benefit plan, a process that could take up to 24 months. Management estimated the plan’s GAAP underfunding at approximately $13 million at March 31, versus $69 million at December 31, 2021; actual settlement obligations may differ. The contribution was funded with borrowings. Management expected approximately $11 million of related income-tax cash benefits in 2022 and $4–$5 million of pension administrative costs through settlement.
- Capital spending: Projected 2022 capital expenditures were $31 million for Aluminum Extrusions, $5 million for PE Films, and $8 million for Flexible Packaging Films. These include ERP/MES investment and new capacity and productivity projects. Management said current cash, borrowing availability, and operating cash flow should cover near-term requirements for at least 12 months.
- Taxes: The Q1 effective tax rate was 4.5%, versus 24.4%, primarily due to a discrete benefit from new U.S. foreign-tax-credit regulations. Management expected this one-time benefit to lower the rate for the rest of 2022, partly offset by higher rates because Brazilian income taxes would no longer be creditable in the U.S.
- Market and operating risks: The filing highlights raw-material and energy price volatility, currency movements, supply-chain and labor disruptions, customer concentration and product transitions, inflation, COVID-19 impacts, and geopolitical and trade risks, including the Russian invasion of Ukraine and tariffs or sanctions affecting aluminum.
- Financial reporting controls: Management concluded disclosure controls were not effective at March 31, 2022 because previously identified material weaknesses in internal control over financial reporting remained. Remediation was underway, but the weaknesses were not considered remediated; management could not assure when remediation would be complete.
- Other items: Q1 2022 included $0.2 million of COVID-related costs, while Q1 2021 included a gain on the kaléo investment and transition-service income. Tredegar sold its approximately 18% kaléo interest in December 2021 for $47.1 million.
Important facts for investors to verify
- Whether Aluminum Extrusions can convert record bookings and backlog into production and shipments despite labor constraints, and whether its pricing and aluminum-cost timing benefits persist.
- Whether PE Films offsets the expected customer-transition and competitive-pricing headwinds with new products, customers, and cost savings.
- Whether Flexible Packaging Films can restore volume and margins as raw-material costs, pass-through timing, and currency effects change.
- Progress and final costs of the pension settlement, including the actual settlement obligation and realization of the expected tax benefit.
- Working-capital requirements, debt levels, borrowing availability, and continued compliance with credit-agreement covenants.
- Management’s remediation of material weaknesses and whether controls operate effectively for a sufficient period to support a future conclusion that they are remediated.