Tredegar Corporation — FY 2021 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2021; it also reports fourth-quarter results. Tredegar manufactures aluminum extrusions, polyethylene films, and specialized PET packaging films. Its three reporting segments are Aluminum Extrusions, PE Films, and Flexible Packaging Films. Personal Care Films was sold in October 2020 and is reported as discontinued operations; comparisons with 2020 are affected by that divestiture.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Sales | $826.5 million | $755.3 million |
| Net income (loss) from continuing operations | $57.9 million | ($16.8 million) |
| Diluted EPS from continuing operations | $1.72 | ($0.51) |
| Gross profit margin | 18.0% | 22.6% |
| Operating cash flow | $70.6 million | $74.4 million |
| Capital expenditures | $27.4 million | $23.4 million |
| Cash and cash equivalents at year-end | $30.5 million | $11.8 million |
| Total debt at year-end | $73.0 million | $134.0 million |
Sales rose 9.4%, but gross margin contracted amid inflation, mix and volume pressures. Net income improved substantially, but included a $12.8 million pretax gain on the sale of the kaléo investment and an $8.5 million Brazilian tax credit. In 2020, results included a $60.9 million pretax kaléo investment loss and a $13.7 million goodwill impairment charge. The reported earnings rebound therefore includes significant unusual items.
Operating cash flow declined mainly because of higher working capital. Year-end net debt, a non-GAAP measure, was $42.5 million, versus $122.2 million a year earlier. The $375 million revolving credit facility matures in June 2024; approximately $287 million of availability remained at year-end. Tredegar reported covenant compliance, a 0.81x leverage ratio against a 4.00x maximum, and a 26.59x interest coverage ratio against a 3.00x minimum.
Segments and changes versus prior year
- Aluminum Extrusions: Net sales increased 18.3% to $539.3 million, primarily from higher selling prices that covered higher aluminum and operating costs; volume declined 1.6%. Ongoing-operations EBITDA increased 1.5% to $55.9 million. Backlog rose to $306.4 million from $74.2 million, with labor shortages limiting shipments.
- PE Films: Net sales fell 14.6% to $118.9 million and ongoing-operations EBITDA fell 38.6% to $27.7 million. Surface Protection customer product transitions drove lower volume and unfavorable mix; resin-cost pass-through timing and freight also weighed on earnings.
- Flexible Packaging Films: Net sales rose 4.0% to $140.0 million and ongoing-operations EBITDA rose 3.4% to $31.7 million. Higher pricing, product mix and favorable currency effects more than offset lower volume and higher raw-material costs. Volume was affected by weaker demand, resin supply issues and an equipment failure.
Fourth-quarter 2021 sales were $221.0 million, versus $192.5 million in fourth-quarter 2020; net income was $21.4 million, versus $0.9 million. Fourth-quarter 2021 continuing-operations EPS was $0.64 per diluted share.
Outlook, risks, and unusual matters
- Management expects PE Films to face a further approximately $7 million EBITDA decline in 2022 from customer product transitions and approximately $6 million from unrelated competitive pricing pressure. The transitions are expected to be complete in 2022. The company is pursuing new products and customers, efficiencies and cost savings to offset these pressures.
- Aluminum Extrusions reported record bookings and backlog but continued to face labor constraints and production inefficiencies. Its 2022 capital expenditure projection is approximately $30 million, including $15 million for an ERP/manufacturing execution systems project expected to cost $28 million over two years. Projected 2022 segment capital spending was $5 million for PE Films and $8 million for Flexible Packaging Films.
- In February 2022, Tredegar borrowed under its credit facility and contributed $50 million to its frozen defined-benefit pension plan as it began a termination and settlement process expected to take up to 24 months. The plan was underfunded by roughly $70 million at year-end 2021; the filing reports a $314 million projected benefit obligation and $244.6 million of plan assets. The company estimates no required minimum contributions before final settlement, but the ultimate settlement cost may differ from estimates.
- COVID-19-related absenteeism and hiring challenges, labor and freight inflation, raw-material and energy price volatility, and supply-chain disruption may affect costs and production. The company says it may not be able to pass through cost increases fully or promptly. Other disclosed risks include customer concentration and product substitution in PE Films, cyclical construction demand, Brazilian currency and market exposure, environmental liabilities, and cybersecurity or facility disruptions.
- Financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2021 because of material weaknesses involving staffing and training, risk assessment, information and communication, monitoring, and process-level and IT controls. KPMG issued an adverse opinion on internal control effectiveness but an unqualified opinion on the financial statements. Remediation remained in progress, with management testing planned to begin in the first half of 2022; the weaknesses were not considered remediated.
- Known environmental remediation matters are accrued, but the company says additional or unexpected costs could be material. It considers other legal actions sufficiently accrued and not expected to materially affect financial position, while indemnification exposure cannot be reliably quantified.
Important facts for investors to verify
- How much of the earnings improvement reflects ongoing segment performance versus the kaléo gain, Brazilian tax credit, and other unusual items.
- Whether PE Films can replace transitioning customer business and offset the disclosed 2022 EBITDA headwinds.
- Whether labor availability and supply-chain constraints ease enough for Aluminum Extrusions to convert its substantial backlog into shipments and earnings.
- The cash, borrowing and final-settlement effects of the pension termination, including the post-year-end $50 million contribution.
- Progress and testing results for remediation of material weaknesses in internal controls, and whether management concludes controls are effective in 2022.
- Actual 2022 capital spending, ERP/MES implementation costs and execution, and compliance with credit-facility covenants and dividend limits.