Tredegar Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 5, 2021. Tredegar manufactures aluminum extrusions, surface-protection and other polyethylene films, and flexible packaging films. Personal Care Films was sold in October 2020 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $209.5 million | $184.4 million | $605.5 million | $562.8 million |
| Income (loss) from continuing operations | $6.2 million | $(17.0) million | $36.6 million | $(23.3) million |
| Net income (loss), including discontinued operations | $6.2 million | $(65.2) million | $36.5 million | $(76.3) million |
| Diluted earnings (loss) per share | $0.19 | $(1.95) | $1.09 | $(2.29) |
| Gross profit margin | 15.0% | 22.7% | 18.9% | 22.8% |
| EBITDA from ongoing operations, segments | $17.9 million | $24.9 million | $80.9 million | $62.6 million |
Nine-month operating cash flow was $51.5 million, versus $66.3 million a year earlier. Capital expenditures were $19.6 million; dividends paid were $12.1 million. Cash increased to $30.3 million from $11.8 million at year-end 2020. At September 30, total debt was $127.0 million and net debt was $96.7 million. Shareholders’ equity was $146.3 million.
Current assets were $228.8 million and current liabilities were $150.1 million. Receivables rose $10.9 million and inventories rose $19.2 million from year-end, reflecting higher prices, production and shipment constraints, and supply-chain considerations.
Changes and segment trends
- Sales increased 13.6% in Q3 and 7.6% for the first nine months, with higher selling prices and metal-cost pass-through contributing. Consolidated gross margin declined in both comparisons as labor, freight, raw-material and other operating costs, volume and product mix weighed on profitability.
- Aluminum Extrusions: Q3 net sales rose 18.6%, but EBITDA fell 27.2% to $12.0 million; volume declined 7.1%, including a 13.1% decline in nonresidential building and construction. Nine-month EBITDA increased 8.6% to $45.1 million, helped by higher pricing and a favorable inventory-cost comparison.
- PE Films: Q3 EBITDA declined 20.2% to $4.8 million; nine-month EBITDA fell 38.0% to $21.0 million. Management attributed the pressure chiefly to customer product transitions in Surface Protection, lower volume and resin-cost pass-through timing. Those transitions reduced nine-month EBITDA by an estimated $14.6 million versus 2020.
- Flexible Packaging Films: Q3 EBITDA decreased 22.5% to $7.4 million, while nine-month EBITDA increased 12.0% to $25.3 million. Q3 volume was down 10.2%, affected by lower demand, supply constraints and a manufacturing-line equipment failure.
Outlook, risks and unusual items
- Management cited labor shortages and absenteeism, supply-chain and transportation disruption, rising input costs, and production inefficiencies. Bonnell Aluminum had record bookings and backlog, but labor constraints limited shipments. A Terphane equipment repair was not expected until early 2022.
- Management expected Surface Protection customer transitions to reduce PE Films EBITDA by a further $7 million in 2022 versus 2021, and competitive pricing pressures to reduce it by approximately $6 million. New products, applications, customers and cost savings are being pursued to offset these pressures.
- Tredegar implemented aluminum pricing increases and a quarterly resin-cost pass-through mechanism for certain PE Films products. It projected 2021 capital expenditures of approximately $30 million across the three segments. No consolidated earnings guidance was provided in the filing text.
- Other income included a $8.5 million Brazil tax credit recognized in the first nine months of 2021. Q3 2021 included a $0.3 million pretax gain on the kaléo investment; Q3 2020 included a $36.2 million pretax loss on that investment. The estimated kaléo fair value was $35.5 million, but its shares are not publicly traded and proceeds depend on a future liquidity event. Its valuation includes significant estimates; kaléo also faces a Department of Justice investigation related to its discontinued Evzio business.
- The company reported compliance with debt covenants; leverage was 1.32x against a 4.00x maximum, and approximately $248 million of credit was available under its revolving facility. The facility matures in June 2024.
- Disclosure controls and procedures were deemed ineffective at September 30, 2021 because previously identified material weaknesses in internal control over financial reporting remained unresolved. Remediation was delayed, and management expected implementation of new and revised controls in the first half of 2022; remediation requires effective operation and testing. COVID-19, turnover and training needs were cited as factors.
- Other stated risks include customer concentration and retention, raw-material and energy prices, foreign-exchange movements, pension underfunding, tariffs and trade restrictions, and COVID-19 effects.
Key facts for investors to verify
- Whether aluminum labor and production constraints ease enough to convert strong bookings and backlog into shipments and earnings.
- Whether PE Films can offset the forecast 2022 customer-transition and pricing impacts through new business, productivity and cost savings.
- Timing and financial effect of the Terphane equipment repair, and the durability of demand and raw-material pass-throughs.
- Cash conversion and working-capital trends, given rising receivables and inventories, alongside debt, covenant headroom and capital spending.
- Progress in implementing and testing controls to remediate the material weaknesses, and the assumptions supporting the unquoted kaléo investment valuation.