Tredegar Corporation — 2019 Form 10-K
Business context and period: Tredegar manufactures aluminum extrusions, polyethylene (PE) films and polyester-based flexible packaging films. This annual report covers the fiscal year ended December 31, 2019; the filing also reports a fourth-quarter net loss.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $972.4 million | $1,065.5 million |
| Net income | $48.3 million; $1.45 diluted EPS | $24.8 million; $0.75 diluted EPS |
| Gross margin | 17.4% | 16.9% |
| Operating cash flow | $115.9 million | $97.8 million |
| Capital expenditures | $50.9 million | $40.8 million |
| Year-end cash | $31.4 million | $34.4 million |
| Year-end debt | $42.0 million | $101.5 million |
Operating cash flow less capital expenditures was approximately $65.0 million. Cash flow benefited from working-capital changes and a $17.6 million cash dividend from kaléo. Management said cash, borrowing availability and operating cash flow should cover working capital, capital expenditures and dividends for at least the next 12 months.
Segment results and changes
- Aluminum Extrusions: Net sales fell 7.6% to $529.6 million, mainly on 7% lower volume and lower metal-cost pass-through. Ongoing EBITDA was broadly flat at $65.7 million; higher pricing offset volume and cost pressures. Backlog declined 22% to $52.8 million.
- PE Films: Net sales fell 18.0% to $272.8 million and ongoing EBITDA fell 26.0% to $37.8 million. Personal Care sales declined amid competition and customer product transitions; Surface Protection EBITDA improved.
- Flexible Packaging Films: Net sales rose 8.2% to $133.9 million and ongoing EBITDA increased 32.1% to $14.7 million, supported by higher volume and pricing.
Consolidated sales declined 8.7%. The reported net-income increase includes significant investment and asset-sale gains: a $28.5 million kaléo gain, including its $17.6 million dividend, and a $6.3 million gain on the Shanghai facility sale. By contrast, 2018 included a $46.8 million PE Films goodwill impairment charge. Thus, reported earnings comparisons reflect material unusual items.
Liquidity, debt and other key items
- Net debt (debt less cash) was $10.6 million at year-end, versus $67.1 million a year earlier. Approximately $370 million was available under the $500 million revolving facility; Tredegar reported compliance with its covenants.
- The defined-benefit pension plan was underfunded by $100.4 million under GAAP. The company expected a $12.3 million contribution in 2020.
- 2019 dividend declarations totaled $0.46 per share. The quarterly dividend increased from $0.11 to $0.12 in the second half of 2019.
- Management projected 2020 capital expenditures of approximately $47 million across the three segments.
Outlook, risks and unusual matters
- Management estimated that a Surface Protection customer transition could reduce ongoing EBITDA by as much as $14 million over the next four quarters compared with the prior four-quarter period. The company is pursuing replacement products, applications and customers.
- A Personal Care product’s annual sales fell from about $70 million in 2018 to $30 million in 2019. An extended customer arrangement was expected to maintain sales near the 2019 level through at least 2022; Personal Care was approximately break-even on ongoing EBITDA in 2019.
- Tredegar identified COVID-19 as a potential risk to operations, customers and supply chains; at filing, the financial impact could not be estimated.
- Other risks include cyclical construction and aluminum markets, competition and customer concentration in PE Films, Brazilian currency and industry exposure, raw-material and energy-price volatility, environmental obligations, and possible manufacturing or supply-chain disruptions.
- Management concluded that internal control over financial reporting was ineffective at December 31, 2019 due to material weaknesses spanning the control environment, risk assessment, information and communication, monitoring, and control activities. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Remediation was expected to continue through 2020 and into the first quarter of 2021.
- The $95.5 million carrying value of the private kaléo investment is based on significant unobservable inputs, has no active secondary market, and may differ materially from eventual realization. Kaléo also faced a Department of Justice investigation concerning its Evzio business.
Key facts for investors to verify
- Underlying earnings and cash generation excluding the kaléo valuation gain and dividend, Shanghai sale gain, working-capital movements and restructuring items.
- Progress replacing Surface Protection business and sustaining the Personal Care customer arrangement and profitability.
- Remediation and independent testing of the disclosed material weaknesses, and any subsequent reporting-control findings.
- 2020 pension contributions, capital spending, liquidity and compliance with revolving-credit covenants.
- Changes in kaléo’s business, investigation and investment valuation, alongside COVID-19 effects and relevant customer, supply-chain and market developments.