Tredegar Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Tredegar operates in Aluminum Extrusions, PE Films, and Flexible Packaging Films (Terphane). Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $166.2 | $238.5 | $535.5 | $749.4 |
| Gross margin | 9.0% | 11.9% | 10.9% | 15.9% |
| Net income (loss) | $(50.4) | $1.0 | $(70.3) | $32.3 |
| Diluted EPS | $(1.47) | $0.03 | $(2.06) | $0.96 |
| EBITDA from ongoing operations, by segment total | $(23.4) | $13.2 | $(23.3) | $72.8 |
Q3 sales fell 30% year over year; nine-month sales fell 29%. The declines primarily reflected weaker volumes and lower raw-material cost pass-through, with particularly weak Aluminum Extrusions and Flexible Packaging Films. Q3 gross margin contracted 2.9 percentage points. The reported losses included a $25.6 million pension settlement charge and goodwill impairment charges of $19.5 million in Q3 and $34.9 million year to date.
Segment results and changes
- Aluminum Extrusions: Q3 net sales were $109.4 million, down 32%, and ongoing EBITDA was $5.1 million versus $12.1 million. Volume declined 29% to 32.5 million pounds; open orders were about 17 million pounds at quarter-end. Nine-month ongoing EBITDA declined 48% to $30.0 million.
- PE Films: Q3 net sales were $19.9 million, roughly flat, while ongoing EBITDA improved to $4.0 million from $0.4 million. Nine-month net sales declined 32% and EBITDA declined 54%, mainly reflecting weak consumer-electronics demand and customer inventory corrections. Surface Protection goodwill was partially impaired.
- Flexible Packaging Films: Q3 net sales fell 36% to $30.1 million and ongoing EBITDA fell to $0.5 million from $7.8 million. Nine-month net sales declined 26% and EBITDA 90%, amid lower volumes and pricing, global excess capacity, and competition from imports in Brazil.
Cash flow, debt, and liquidity
- Operating cash flow was $44.2 million for the first nine months, versus cash used of $23.2 million in 2022. The improvement reflected working-capital changes and the prior-year $50 million pension contribution.
- Capital expenditures were $22.3 million; investing cash outflow was $22.0 million. Financing provided $7.7 million. Cash rose to $48.6 million from $19.2 million at year-end 2022.
- Debt was $155.0 million at September 30, up from $137.0 million at year-end; net debt was $106.4 million. Interest expense for nine months increased to $7.8 million from $3.2 million, reflecting higher average borrowings and rates.
- Only approximately $4.7 million of borrowing availability remained under the existing facility based on its restrictive covenants. The company reported covenant compliance at quarter-end: total net leverage was 3.33x versus a 5.00x maximum, and interest coverage was 3.32x versus a 2.50x minimum. Leverage was 4.21x pro forma for final pension funding.
- The credit agreement prohibits dividends and share repurchases for fiscal quarters ending September 30, 2023 through December 31, 2024. Management stated that cash, borrowing availability, and operating cash flow should cover material short-term needs for at least 12 months.
Outlook, strategic actions, and risks
- Management described severe downturns across all three businesses and said the timing of market recovery remained uncertain. PE Films expected lower Surface Protection volume in Q4, consistent with seasonality.
- The company planned to close its Richmond, Virginia PE Films technical center by year-end 2023. It estimated $1.7 million of cash exit costs, up to $3.7 million of non-cash write-downs and accelerated depreciation, and net annual cash savings of $3.4 million beginning in Q4 2023.
- Tredegar agreed to sell Terphane to Oben Group, subject to closing conditions and competition approvals. The company estimated after-tax cash proceeds of $85 million; timing and proceeds remain uncertain. CADE’s review deadline in Brazil is no later than September 23, 2024. Terphane remained a continuing operation at quarter-end.
- After quarter-end, Terphane Brazil borrowed $20 million at SOFR plus 5.99%, with the funds loaned to Tredegar. The company also received majority-lender consent advice letters for a proposed asset-based revolving facility, subject to final documentation. It targeted completion by year-end 2023; lender consent expired December 31, 2023. The proposed facility’s availability and covenants are conditional on its completion and borrowing-base assets.
- The pension plan was fully funded with a $27.7 million contribution on October 31, 2023; the termination and transfer of obligations to Massachusetts Mutual Life Insurance Company were completed November 3, 2023.
- Market risks include cyclical demand, customer concentration, raw-material and energy costs, foreign exchange, competition and the ability to pass costs through. Management identified continuing uncertainty in consumer electronics and Brazilian flexible-packaging markets.
Controls and unusual items
Management concluded disclosure controls were not effective at September 30, 2023 because material weaknesses in internal control over financial reporting remained. Remediation was ongoing; certain Aluminum Extrusions expenditure controls were delayed to Q4 2023, and the company cautioned that it could not assure when remediation would be complete. The filing says the weaknesses had not resulted in material misstatements of the 2022 financial statements.
The pension settlement charge followed $64.5 million of lump-sum distributions that triggered plan remeasurement. The partial Surface Protection goodwill impairment reflected reduced capacity utilization, inventory corrections, uncertain recovery timing, and expected business conditions. These were significant non-cash or non-recurring influences on reported results.
Most important facts for investors to verify
- Whether the Terphane sale receives all required approvals, closes, and delivers proceeds near the estimated $85 million after tax.
- Whether the proposed asset-based credit facility is finalized, its borrowing availability and terms, and Tredegar’s covenant headroom in the interim.
- Whether operating results and cash generation recover sufficiently to support debt service amid weak demand and limited existing-facility availability.
- Whether PE Films’ Surface Protection outlook and valuation assumptions stabilize or lead to further impairment.
- Whether internal-control remediation is completed and controls demonstrate effective operation.
- Whether segment volumes, pricing, margins, inventory levels, and foreign-exchange exposure improve, particularly in Aluminum Extrusions and Flexible Packaging Films.