Tredegar Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Tredegar operates Aluminum Extrusions, PE Films, and Flexible Packaging Films.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales | $191.1 million | $236.6 million |
| Net income (loss) | $(1.0) million | $16.4 million |
| Diluted EPS | $(0.03) | $0.49 |
| Gross profit margin | 13.4% | 19.1% |
| Cash from operating activities | $(9.1) million | $(54.7) million |
- Sales fell 19.2%; net sales, defined as sales less freight, declined 19.0% to $185.1 million. Lower volumes and weaker demand affected all three segments.
- Segment EBITDA from ongoing operations: Aluminum Extrusions $14.6 million, down 38.8%; PE Films $1.8 million, down 73.8%; Flexible Packaging Films $1.4 million, down 73.2%.
- Interest expense rose to $2.3 million from $0.8 million, reflecting higher average debt and interest rates. Average borrowing costs were 6.3% versus 1.9%.
- Capital expenditures were $9.0 million. Cash and cash equivalents were $15.0 million at quarter-end, down from $19.2 million at year-end 2022.
- Debt was $155.0 million, up from $137.0 million at December 31, 2022; debt net of cash was $140.0 million. Available credit under the facility was approximately $113 million.
- Current assets were $228.7 million and current liabilities $116.6 million. The company declared cash dividends of $0.13 per share.
Material changes and management commentary
- Management attributed lower results to market slowdowns and customer inventory corrections, alongside lower volumes, weaker product mix, cost inflation and lower pass-through benefits from raw materials.
- Aluminum Extrusions sales volume declined 12.7%; customer order cancellations and slower orders left quarter-end open orders at 27 million pounds, down from 41 million at Q4 2022.
- PE Films volume declined 30.2%. Surface Protection was particularly affected by weak electronics demand, reduced customer capacity utilization, inventory corrections, and lower sales to higher-value customers. Flexible Packaging Films volume declined 23.7% amid soft demand.
- Working capital movements included a $14.1 million inventory reduction and a $22.7 million decrease in accounts payable. Management noted that negative operating cash flow after capital expenditures and dividends in recent quarters increased net debt and leverage.
Outlook, liquidity, and risks
- Management said recovery timing, particularly for Aluminum Extrusions and PE Films, remains uncertain. It expects Flexible Packaging Films demand to improve from current levels during the remainder of 2023.
- The company stated that cash, borrowing availability, and expected operating cash flow should cover working capital, capital expenditures, debt repayments, and anticipated dividends for at least the next 12 months. This is management’s assessment, not a guarantee.
- Projected 2023 capital expenditures include $26 million for Aluminum Extrusions, including $11 million for ERP/MES implementation, and $7 million for Flexible Packaging Films. ERP/MES is expected to cost approximately $30 million over multiple years. The PE Films capital expenditure period stated in the filing is inconsistent with the reporting period, so a clear 2023 estimate is not provided.
- The company was in compliance with its debt covenants at quarter-end. Its total net leverage ratio was 2.09x against a 4.00x maximum; interest coverage was 10.29x against a 3.00x minimum. Dividends and repurchases face restrictions when leverage exceeds 2.00x, subject to the agreement’s terms.
- The frozen pension plan settlement is delayed pending IRS review. Management was hopeful completion would occur by year-end 2023; final underfunding may change with market conditions. Estimated settlement-process administrative costs are $4–$5 million.
- Management identified potential impairment sensitivity for PE Films’ Surface Protection reporting unit, citing weak electronics demand, competitive pricing, and lower-than-expected sales or profit growth. Goodwill for that reporting unit was $57.3 million; no impairment indicator was identified in Q1.
- Other risks include customer concentration, raw-material and energy costs, interest and foreign-exchange volatility, international and trade-related risks, and execution of the ERP/MES project.
Controls and unusual items
- Management concluded disclosure controls were not effective as of March 31, 2023, due to continuing material weaknesses in internal control over financial reporting. Remediation is underway, but the weaknesses are not considered resolved until controls operate effectively and are tested.
- Q1 included a $0.3 million gain from final sale adjustments on the company’s former kaleo investment. Asset impairment and exit-related charges were not material. The 2022 comparison included a $50 million pension contribution, contributing to the much larger operating cash outflow in that period.
- The effective tax rate was (48.8)% versus 4.5% in Q1 2022, reflecting the current-period pretax loss, lower Brazilian tax incentives, and a discrete tax benefit recorded in the prior-year quarter.
Important facts for investors to verify
- Whether demand, customer inventory levels, and segment volumes stabilize, especially in electronics-related Surface Protection and Aluminum Extrusions.
- Debt, cash generation, covenant headroom, and the effect of elevated interest rates on liquidity and dividend capacity.
- Progress and cost of pension-plan settlement, including IRS review and final funding requirements.
- Remediation and independent validation of the disclosed material weaknesses in financial reporting controls.
- Surface Protection valuation assumptions and whether weak demand or mix changes trigger an impairment assessment.