Tredegar (TG) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Tredegar Corporation's unaudited condensed consolidated financial statements for Q3 and the first nine months of 2021, including balance sheets, income statements, cash flows, and detailed notes, reflecting a significant turnaround in net income driven by non-operating items Condensed Consolidated Balance Sheet Highlights (Unaudited) | (In Thousands) | Sep 30, 2021 (In thousands) | Dec 31, 2020 (In thousands) | | :--- | :--- | :--- | | Total Current Assets | $228,790 | $188,435 | | Total Assets | $545,834 | $514,870 | | Total Current Liabilities | $150,063 | $140,752 | | Long-term Debt | $127,000 | $134,000 | | Total Liabilities | $399,555 | $405,815 | | Total Shareholders' Equity | $146,279 | $109,055 | Condensed Consolidated Statements of Income (Loss) Highlights (Unaudited) | (In Thousands, Except Per Share Data) | Three Months Ended Sep 30, 2021 (In thousands) | Three Months Ended Sep 30, 2020 (In thousands) | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | :--- | :--- | | Sales | $209,517 | $184,370 | $605,468 | $562,766 | | Net Income (Loss) from Continuing Operations | $6,229 | $(16,976) | $36,576 | $(23,308) | | Net Income (Loss) | $6,203 | $(65,213) | $36,472 | $(76,339) | | Diluted Earnings (Loss) Per Share | $0.19 | $(1.95) | $1.09 | $(2.29) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | (In Thousands) | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $51,487 | $66,326 | | Net cash used in investing activities | $(14,827) | $(13,416) | | Net cash used in financing activities | $(18,199) | $(47,634) | | Increase in cash & cash equivalents | $18,407 | $3,600 | Notes to Financial Statements - Divestitures and Discontinued Operations The company completed the sale of its Personal Care Films business in October 2020, now reported as discontinued operations, while the Bright View Technologies sale in December 2020 remains within continuing operations, with the former showing a net loss of $0.1 million in 2021 compared to a $53.0 million loss in 2020 - The sale of the Personal Care Films business was completed on October 30, 2020, and its historical results are presented as discontinued operations[25][29] Financial Results of Discontinued Operations (In thousands) | | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | | Sales | $0 | $98,053 | | Held for sale impairment loss | $0 | $45,054 | | Income (loss) from discontinued operations, net of tax | $(104) | $(53,031) | Notes to Financial Statements - Goodwill and Investments The company recognized a $13.7 million goodwill impairment charge in early 2020 for its Aluminum Extrusions segment but identified no impairment in 2021, while its investment in kaléo, Inc. was valued at $35.5 million as of September 30, 2021, yielding a $1.2 million pre-tax gain for the first nine months of 2021, a significant reversal from the prior year's $61.0 million loss - In the first three months of 2020, the company recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes) for the Aluminum Extrusions' AACOA reporting unit, with no impairment identified in 2021[37] - The estimated fair value of the investment in kaléo, Inc. was $35.5 million as of September 30, 2021, compared to $34.6 million as of December 31, 2020[48] Gain (Loss) on kaléo Investment (In thousands) | | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | | Gain (loss) on investment in kaléo | $1,197 | $(61,000) | Notes to Financial Statements - Business Segments The company's Aluminum Extrusions segment saw increased net sales but modest EBITDA growth in the first nine months of 2021, while PE Films experienced declines in both, and Flexible Packaging Films achieved slightly higher net sales and improved EBITDA, with management primarily using EBITDA from ongoing operations as a profitability measure Net Sales by Segment (In thousands) | Segment | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | | Aluminum Extrusions | $394,492 | $339,566 | | PE Films | $87,885 | $103,444 | | Flexible Packaging Films | $102,560 | $100,534 | EBITDA from Ongoing Operations by Segment (In thousands) | Segment | Nine Months Ended Sep 30, 2021 (In thousands) | Nine Months Ended Sep 30, 2020 (In thousands) | | :--- | :--- | :--- | | Aluminum Extrusions | $45,062 | $41,496 | | PE Films | $21,035 | $33,928 | | Flexible Packaging Films | $25,296 | $22,594 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's Q3 2021 return to profitability, driven by non-operating items, while operational segments face COVID-19 related challenges including labor shortages, supply chain disruptions, and cost inflation, which the company mitigates through price increases and cost pass-throughs, maintaining strong liquidity COVID-19 Impact and Business Conditions The company continues to operate all manufacturing sites as essential businesses while managing COVID-19 related challenges, with Bonnell Aluminum facing significant labor shortages and hiring difficulties, and all segments experiencing supply chain disruptions and escalating raw material and transportation costs, prompting price increases and new cost pass-through mechanisms - Bonnell Aluminum is experiencing higher than normal absenteeism and hiring difficulties, leading to a labor shortage that constrains its ability to meet demand[93] - To combat rising costs, Bonnell Aluminum has implemented price increases, and PE Films initiated a quarterly resin cost pass-through mechanism effective July 1, 2021[94] - PE Films' profitability in 2021 is adversely impacted by a customer product transition and lags in passing through significant resin cost increases[96] Operations Review by Segment In Q3 2021, Aluminum Extrusions' EBITDA fell 27.2% YoY to $12.0 million due to lower volume and higher costs, despite higher sales from price pass-throughs, while PE Films' EBITDA declined 20.2% to $4.8 million due to customer product transition and resin cost pressures, and Flexible Packaging Films' EBITDA decreased 22.5% to $7.4 million driven by a 10.2% volume drop from lower demand and an equipment failure Aluminum Extrusions Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 (In thousands) | Q3 2020 (In thousands) | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs) | 45,407 | 48,859 | (7.1)% | | Net Sales | $137,086 | $115,621 | 18.6% | | EBITDA | $12,038 | $16,540 | (27.2)% | - The PE Films Surface Protection business is being adversely affected by customer product transitions, which are estimated to have a negative EBITDA impact of $14.6 million in the first nine months of 2021 and a further $7 million in 2022[110] - Flexible Packaging Films' Q3 2021 sales volume declined 10.2% YoY due to lower demand, an equipment failure, and supply chain restrictions[115] Liquidity and Capital Resources Net cash from operating activities for the first nine months of 2021 was $51.5 million, a decrease from $66.3 million in the prior year, primarily due to changes in working capital, while the company maintained a strong liquidity position with $127 million in debt and approximately $248 million available under its $375 million credit facility as of September 30, 2021, remaining in full compliance with all debt covenants with a leverage ratio of 1.32x - Net cash provided by operating activities decreased to $51.5 million in the first nine months of 2021 from $66.3 million in the same period of 2020[149] - As of September 30, 2021, total debt was $127 million, with approximately $248 million of available credit under the company's revolving credit agreement[154] Key Credit Metrics as of September 30, 2021 | Metric | Value | Covenant Limit | | :--- | :--- | :--- | | Leverage Ratio | 1.32x | < 4.00x | | Interest Coverage Ratio | 27.19x | > 3.00x | Item 3. Quantitative and Qualitative Disclosures About Market Risk Tredegar is exposed to market risks from volatility in interest rates, commodity prices (aluminum, resins, natural gas), and foreign currencies, particularly the Brazilian Real, which the company actively manages through futures contracts for aluminum, a quarterly resin cost pass-through mechanism for PE Films, and foreign currency forward contracts for Flexible Packaging Films - The company has exposure to volatility in prices for aluminum, polyethylene and polypropylene resin, PTA, MEG, and natural gas[159][160] - To manage resin price volatility, PE Films implemented a quarterly resin cost pass-through mechanism for all customers not previously covered, effective July 1, 2021[169] - The Flexible Packaging Films business in Brazil (Terphane Ltda.) hedges its foreign exchange risk arising from U.S. Dollar-denominated sales and Brazilian Real-denominated operating costs using forward contracts[175][176] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021, due to ongoing material weaknesses in internal control over financial reporting related to the control environment, risk assessment, information and communication, monitoring, and control activities, with remediation efforts delayed and now expected to be completed in the first half of 2022 - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2021, because of ongoing material weaknesses in internal control over financial reporting[183] - The identified material weaknesses relate to five components of the COSO framework: Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities[194] - Remediation of the material weaknesses has been delayed due to factors including the COVID-19 pandemic and employee turnover, with the company now expecting to complete implementation of new controls in the first half of 2022, a delay from the previous target of year-end 2021[196] PART II - OTHER INFORMATION Item 1A. Risk Factors The company reports no additional material updates or changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - There are no material updates or changes to the risk factors previously disclosed in the 2020 Form 10-K[200] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as the XBRL interactive data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and XBRL data files[201]