Tredegar Corporation — Q3 2022 Form 10-Q
Business context and period. Tredegar manufactures custom aluminum extrusions, surface-protection and overwrap films, and flexible packaging films. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions except per-share data and where noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $238.5 | $209.5 | $749.4 | $605.5 |
| Income from continuing operations | $1.0 | $6.2 | $32.3 | $36.6 |
| Diluted EPS from continuing operations | $0.03 | $0.19 | $0.96 | $1.09 |
| Gross profit margin | 11.9% | 15.0% | 15.9% | 18.9% |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(23.2) | $51.5 |
| Capital expenditures | Not stated by quarter | Not stated by quarter | $25.5 | $19.6 |
Q3 pre-tax income from continuing operations was $2.1 million versus $8.1 million a year earlier. Nine-month pre-tax income was $39.7 million versus $47.3 million. Nine-month net income, including discontinued operations, was $32.3 million versus $36.5 million.
Segments. Q3 net sales (sales less freight) were $161.6 million for Aluminum Extrusions, $20.1 million for PE Films, and $47.3 million for Flexible Packaging Films. Ongoing-operations EBITDA was $12.1 million, $0.4 million, and $7.8 million, respectively. For the first nine months, segment EBITDA was $57.9 million, $14.5 million, and $20.5 million, respectively.
Liquidity and debt. At September 30, cash was $19.3 million, long-term debt was $124.0 million, and debt net of cash was $104.8 million. Debt was $73.0 million at December 31, 2021. The company had approximately $249 million of available credit under its $375 million secured revolving facility, which matures June 29, 2027. It reported compliance with covenants; trailing Credit EBITDA leverage was 1.1x and interest coverage was 23.93x. Nine-month dividends paid were $12.6 million.
Material changes and drivers
- Sales rose 13.8% in Q3 and 23.8% for the nine-month period, but margins and earnings declined. Higher costs, freight, weaker PE Films results, and—in Q3—an unfavorable aluminum inventory-cost timing effect weighed on profitability.
- Aluminum Extrusions’ Q3 net sales increased 17.9%, while volume was nearly flat and EBITDA was essentially unchanged. Management cited higher labor, supplies, utilities and freight costs, lower productivity, and a $3.8 million unfavorable FIFO aluminum-cost timing effect, compared with a $1.7 million benefit in Q3 2021.
- PE Films’ Q3 net sales fell 29.6%, volume fell 23.7%, and EBITDA declined 91.1%. Weak electronics demand, customer inventory corrections, competitive pricing, unfavorable mix, and customer product transitions affected Surface Protection.
- Flexible Packaging Films’ Q3 net sales rose 28.9% and EBITDA rose 5.9%; higher volume, pricing and mix were partly offset by raw-material and fixed costs and unfavorable currency translation. Nine-month EBITDA fell 19.0% despite higher sales.
- Nine-month operating cash flow swung to a $23.2 million use, principally reflecting the $50 million pension contribution and higher working capital. Inventories increased $25.5 million from year-end, to $114.1 million.
Outlook, commentary, risks and unusual items
- Management said demand for Aluminum Extrusions and PE Films was uncertain amid recession concerns and customer inventory corrections. Aluminum order input slowed and open orders fell to 59 million pounds at quarter-end from 86 million at the end of Q2.
- Surface Protection demand remains uncertain. Customer product transitions were complete by Q2 2022; management estimated those transitions had reduced pre-tax income and PE Films ongoing EBITDA by a cumulative $7 million versus 2021. It expected competitive pricing pressures to reduce full-year 2022 pre-tax income and ongoing EBITDA by approximately $5 million versus 2021.
- Projected 2022 capital expenditures: approximately $30 million for Aluminum Extrusions, $3 million for PE Films, and $8 million for Flexible Packaging Films. Aluminum’s forecast includes a $15 million ERP/MES investment; the project is expected to cost $28 million over two years.
- The frozen defined-benefit pension plan is being terminated and settled, a process that could take up to 24 months. After the $50 million special contribution, management estimated underfunding at approximately $10 million at September 30 versus $69 million at year-end 2021, and expected no required minimum contributions before final settlement. Settlement costs and the ultimate benefit obligation remain uncertain; plan administrative costs were estimated at $4–$5 million.
- Q3 included a $2.5 million out-of-period adjustment related to inventory and accrued labor costs. Nine-month 2022 results included a $1.4 million gain from a post-closing payment on the kaléo investment sale; 2021 included an $8.5 million one-time Brazilian tax credit. A discrete U.S. tax benefit reduced the nine-month 2022 effective tax rate to 18.8%; Q3’s rate was 52.6%, and management noted Brazilian income taxes are no longer creditable in the U.S. for the foreseeable future.
- Surface Protection had $57.3 million of goodwill. An impairment analysis found fair value exceeded carrying value, but management said uncertain demand could change future cash-flow estimates.
- Disclosure controls were not effective at September 30 because previously identified material weaknesses in internal control over financial reporting remained. Remediation and testing were ongoing; the company said the weaknesses cannot be considered remediated until controls operate effectively for a sufficient period.
- Key risks include demand and customer concentration, raw-material and energy costs and pass-through timing, foreign exchange, inflation and economic conditions, manufacturing and labor disruption, and pension settlement outcomes. Management stated existing cash, borrowing availability and operating cash flow were expected to cover material short-term requirements for at least the next 12 months.
Important facts for investors to verify
- Whether weaker Surface Protection demand and pricing improve, and whether the reporting unit’s goodwill or long-lived assets require a later impairment.
- How much working capital and inventory can be released if demand slows, and whether operating cash flow recovers after the pension contribution.
- The pension plan’s eventual settlement cost and obligation, including whether market conditions alter the estimated underfunding.
- Progress toward remediating material weaknesses and the timing of management’s conclusion that controls are effective.
- How floating-rate borrowing costs, raw-material pass-through lags, and foreign-exchange movements affect margins and covenant headroom.