Tredegar (TG) - 2021 Q4 - Annual Report

Part I Business Tredegar Corporation is an industrial manufacturer with three primary business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films, having divested Personal Care Films and Bright View Technologies in 2020 Description of Business Tredegar Corporation operates through three reportable business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films, with recent divestitures of Personal Care Films and Bright View Technologies - The company's main business segments are Aluminum Extrusions, PE Films, and Flexible Packaging Films[11] - The Personal Care Films business was sold in October 2020 and is now reported as discontinued operations[12] - Bright View Technologies was sold in December 2020, but its financial information remains within the PE Films segment's continuing operations[13] Aluminum Extrusions The Aluminum Extrusions segment, known as Bonnell Aluminum, produces and sells soft and medium-strength alloyed aluminum extrusions primarily in the U.S., accounting for 67% of consolidated net sales in 2021 Aluminum Extrusions Net Sales Contribution | Year | % of Tredegar's Consolidated Net Sales | | :--- | :--- | | 2021 | 67% | | 2020 | 63% | | 2019 | 66% | Aluminum Extrusions Net Sales by Market Segment | Market Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Nonresidential Building & Construction | 50% | 56% | 51% | | Residential Building & Construction | 10% | 9% | 8% | | Automotive | 8% | 8% | 9% | | Consumer Durables | 10% | 10% | 11% | | Machinery & Equipment | 8% | 7% | 7% | | Electrical | 6% | 4% | 7% | | Distribution | 8% | 6% | 7% | - The segment's backlog increased by 313% from $74.2 million in 2020 to $306.4 million in 2021, driven by a 33% increase in bookings and labor shortages impacting shipment levels[18] - Primary raw materials are aluminum ingot and scrap, purchased through open-market and annual contracts. The segment is navigating supply chain issues for paint and other non-aluminum materials[19] PE Films The PE Films segment produces surface protection and polyethylene overwrap films, accounting for 15% of consolidated net sales in 2021, with significant customer concentration and $5.7 million in R&D spending PE Films Net Sales Contribution | Year | % of Tredegar's Consolidated Net Sales | | :--- | :--- | | 2021 | 15% | | 2020 | 19% | | 2019 | 17% | - The top four customers accounted for 88% of the segment's net sales in 2021, indicating significant customer concentration[23] PE Films R&D Spending | Year | R&D Spending (in millions) | | :--- | :--- | | 2021 | $5.7 | | 2020 | $7.7 | | 2019 | $7.0 | Flexible Packaging Films The Flexible Packaging Films segment, operating as Terphane, produces specialized PET-based films for food packaging and industrial applications, primarily manufactured in Brazil and accounting for 18% of consolidated net sales in 2021 Flexible Packaging Films Net Sales Contribution | Year | % of Tredegar's Consolidated Net Sales | | :--- | :--- | | 2021 | 18% | | 2020 | 18% | | 2019 | 17% | - The segment produces PET-based films under the Terphane®, Sealphane®, and Ecophane® brand names for food packaging and industrial uses[24] General This section covers general corporate matters including intellectual property, government regulations, and human capital management, with Tredegar employing approximately 2,400 people globally as of year-end 2021 - The company's operations are subject to numerous U.S. and foreign government regulations, including environmental (Clean Air Act, CERCLA), privacy, and anti-corruption laws[26][27][29] - As of December 31, 2021, the company employed approximately 2,400 people, with 80% in the U.S. About 15% of U.S. employees and all Brazilian employees are represented by labor unions[30] - The company focuses on human capital through health and safety initiatives (including on-site clinics), talent development, competitive compensation, and a commitment to inclusion and diversity[31][32][33][34] Risk Factors The company faces several risks that could materially affect its financial condition and operations, including pandemic impacts, cost volatility, pension underfunding, and internal control weaknesses, alongside segment-specific challenges Risks Related to all Tredegar Businesses Tredegar faces enterprise-wide risks including ongoing COVID-19 impacts, volatile raw material and energy costs, an underfunded pension plan, and identified material weaknesses in internal financial controls - The COVID-19 pandemic continues to adversely affect operations through increased costs of labor and materials, labor shortages, and supply chain disruptions[37][39] - The company's performance is influenced by volatile costs of raw materials (aluminum, resin, PTA, MEG) and energy, with no assurance that price increases can fully offset these costs[39][40] - The company has an underfunded defined benefit pension plan, which was underfunded by $69.5 million as of Dec 31, 2021. A process to terminate and settle the plan was initiated in February 2022 with a $50 million contribution[41] - Material weaknesses have been identified in the company's internal control over financial reporting, which increases the risk of a material misstatement in financial statements. Remediation efforts are ongoing but have been delayed[42][44] Risks Related to Aluminum Extrusions The Aluminum Extrusions segment is subject to cyclical demand, particularly from the U.S. construction sector, faces risks from a major ERP/MES system implementation, and potential impacts from anti-dumping duty evasion or reduction - Sales and profitability are cyclical, seasonal, and highly dependent on U.S. economic conditions, especially in the construction sector[51] - A new ERP/MES system implementation is planned, costing an estimated $28 million over two years, which poses significant implementation and financial risks[51] - The business could be adversely affected if competitors evade anti-dumping duties on aluminum extrusions or if such duties are reduced. The orders are up for review beginning in March 2022[51] Risks Related to PE Films The PE Films segment faces significant customer concentration risk and ongoing profit erosion due to customer product transitions to less costly alternatives and competitive pricing pressures - The segment is highly dependent on a few large customers; the top four comprised 13% of Tredegar's consolidated net sales in 2021[53] - Customer product transitions to alternative materials are expected to adversely impact PE Films' EBITDA by an additional $7 million in 2022, following a $14.8 million negative impact in 2021 vs. 2020[53] - Competitive pricing pressures, separate from product transitions, are expected to reduce EBITDA by approximately $6 million in 2022 compared to 2021[54] Risks Related to Flexible Packaging Films The Flexible Packaging Films segment is exposed to risks from uncertain economic conditions in Brazil, including foreign exchange translation risk, overcapacity in the Latin American market, and potential changes to anti-dumping duties - The segment is exposed to foreign exchange translation risk due to a mismatch between its functional currency (Brazilian Real) and the U.S. Dollar pricing of its sales and raw materials[58] - Overcapacity in the Latin American polyester film market and competition from imports create pricing pressure. While anti-dumping duties are in place for some countries, they were suspended for China and Egypt in May 2021 and are set to expire for others in Q1 2023[58] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[59] Properties Tredegar owns most of its manufacturing facilities, warehouses, and other properties, which are considered to be in good condition with sufficient capacity for current production, with its corporate headquarters leased in Richmond, Virginia - The company's corporate headquarters is located at 1100 Boulders Parkway, Richmond, Virginia 23225[61] Principal Manufacturing Locations as of December 31, 2021 | Segment | U.S. Locations | Outside U.S. Locations | | :--- | :--- | :--- | | Aluminum Extrusions | Carthage, TN; Clearfield, UT; Elkhart, IN; Newnan, GA; Niles, MI | None | | PE Films | Pottsville, PA; Richmond, VA (technical center) | Guangzhou, China | | Flexible Packaging Films | Bloomfield, NY (technical center and production) | Cabo de Santo Agostinho, Brazil | Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 18, "Contingencies," to the Consolidated Financial Statements included in Item 15 of this report - The required information is set forth in Note 18 "Contingencies" to the Consolidated Financial Statements in Item 15[63] Mine Safety Disclosures The company reports that it has no mine safety disclosures - None[64] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Tredegar's common stock trades on the NYSE under "TG", with a history of regular quarterly dividends and a special dividend in 2020, and an ongoing share repurchase program with remaining authorization - Common stock is traded on the New York Stock Exchange (NYSE) under the ticker symbol "TG"[67] - The company has paid a regular quarterly cash dividend since July 1989. A special dividend of $200 million ($5.97 per share) was paid in December 2020[68] - A share repurchase program authorizes the purchase of up to 5 million shares. As of December 31, 2021, 1,732,003 shares remained available for repurchase. No shares were repurchased in 2019, 2020, or 2021[70] RESERVED This item is reserved and contains no information - Item 6 is reserved[74] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for 2021 compared to 2020, covering performance, COVID-19 impacts, segment reviews, accounting policies, liquidity, and market risks Executive Summary In 2021, Tredegar's sales increased to $826.5 million, with net income from continuing operations of $57.9 million, significantly improved from a 2020 net loss due to a gain on the sale of its kaléo investment Financial Performance Summary (2021 vs. 2020) | 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) | - 2021 results include a $10.0 million after-tax gain ($0.30 per share) from the sale of the company's investment in kaléo[79] - 2020 results were negatively impacted by a $47.6 million after-tax loss on the kaléo investment and a $10.5 million goodwill impairment in the Aluminum Extrusions segment[80] The Impact of COVID-19 and Related Financial Considerations The COVID-19 pandemic continues to impact Tredegar's operations through labor shortages, increased costs, and supply chain disruptions, prompting price increases and cost pass-through mechanisms across segments - The company's priorities during the pandemic are employee health and safety and keeping manufacturing sites open[83] - The Aluminum Extrusions segment is experiencing labor shortages, higher absenteeism, and increased hiring costs, which constrain its ability to meet high demand[86] - All business segments are managing supply chain disruptions and escalating costs, prompting price increases and new cost pass-through mechanisms to mitigate margin pressure[87] Operations Review This section details the financial performance of each business segment for 2021 compared to 2020, highlighting changes in sales, EBITDA, and key drivers for Aluminum Extrusions, PE Films, and Flexible Packaging Films Aluminum Extrusions Review In 2021, the Aluminum Extrusions segment's net sales increased by 18.3% to $539.3 million, with EBITDA from ongoing operations rising slightly by 1.5% to $55.9 million, primarily due to higher pricing offsetting increased costs Aluminum Extrusions Financial Summary (2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs) | 183,367 | 186,391 | (1.6)% | | Net Sales | $539,325 | $455,711 | 18.3% | | EBITDA from Ongoing Operations | $55,948 | $55,137 | 1.5% | - EBITDA increased by $0.8 million due to higher pricing ($13.6 million) and an inventory accounting benefit ($6.9 million), mostly offset by higher labor ($7.2 million), supply ($6.4 million), and freight ($3.2 million) costs[95] - Projected capital expenditures for 2022 are $30 million, which includes $15 million for a new ERP/MES system and $6 million for infrastructure upgrades[96] PE Films Review The PE Films segment experienced a significant decline in 2021, with net sales falling 14.6% to $118.9 million and EBITDA dropping 38.6% to $27.7 million, primarily due to customer product transitions and higher resin costs PE Films Financial Summary (2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs) | 39,429 | 45,175 | (12.7)% | | Net Sales | $118,920 | $139,288 | (14.6)% | | EBITDA from Ongoing Operations | $27,694 | $45,107 | (38.6)% | - EBITDA decreased by $17.4 million, with the Surface Protection business contributing a $19.4 million decline. This was primarily due to customer product transitions ($14.8 million), the pass-through lag of higher resin costs ($1.4 million), and higher freight expense ($1.0 million)[98] - The customer product transitions are expected to cause a further decline of $7 million in EBITDA in 2022, at which point the transitions are expected to be complete[99] Flexible Packaging Films Review In 2021, the Flexible Packaging Films segment's net sales increased by 4.0% to $140.0 million, and EBITDA from ongoing operations grew by 3.4% to $31.7 million, driven by favorable currency translation and higher selling prices Flexible Packaging Films Financial Summary (2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs) | 104,569 | 113,115 | (7.6)% | | Net Sales | $139,978 | $134,605 | 4.0% | | EBITDA from Ongoing Operations | $31,684 | $30,645 | 3.4% | - EBITDA increased by $1.0 million, primarily driven by a net favorable currency translation of Real-denominated operating costs ($5.9 million) and higher foreign currency transaction gains ($1.2 million)[103] Corporate Expenses, Interest and Income Taxes Corporate expenses decreased in 2021, interest expense increased, and the effective tax rate for continuing operations was 13.8%, with the company initiating the termination of its frozen pension plan in February 2022 - The effective tax rate for continuing operations was 13.8% in 2021, compared to 32.8% in 2020[106] - In February 2022, Tredegar began the process to terminate its frozen defined benefit pension plan, making a $50 million special contribution to reduce underfunding[107] - Total debt decreased from $134.0 million at year-end 2020 to $73.0 million at year-end 2021. Net debt decreased by $79.7 million, including $47.1 million in proceeds from the sale of the kaléo investment[109] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant estimates, including goodwill impairment, pension benefits based on actuarial assumptions, and income taxes involving judgments on tax laws and deferred tax asset realizability - Goodwill impairment is assessed annually (December 1st) or when triggering events occur. In 2021, a qualitative (Step 0) assessment for the Surface Protection and Futura reporting units concluded that a quantitative test was not necessary[116] - Pension benefit calculations rely on key assumptions such as the discount rate (2.90% in 2021) and expected return on plan assets (3.05% in 2021). The company announced the termination of its frozen pension plan in February 2022[117][118][119] - Accounting for income taxes requires significant judgment regarding the application of tax laws and estimating the future realization of deferred tax assets, for which valuation allowances are established if realization is not more likely than not[121][122] Results of Operations In 2021, sales increased by 9.4% to $826.5 million due to higher selling prices, though consolidated gross profit margin decreased from 22.6% to 18.0% due to increased costs and margin erosion in PE Films - Sales in 2021 increased by 9.4% compared to 2020, primarily due to higher average selling prices in Aluminum Extrusions and Flexible Packaging Films[126] - Consolidated gross profit margin decreased from 22.6% in 2020 to 18.0% in 2021, primarily due to higher operating costs in Aluminum Extrusions and margin erosion in PE Films[127] - Selling, general and administrative (SG&A) and R&D expenses as a percentage of sales decreased to 9.8% in 2021 from 12.3% in 2020[128] Liquidity and Capital Resources Net cash from operating activities was $70.6 million in 2021, with net debt significantly decreasing to $42.5 million, supported by proceeds from the kaléo investment sale and a $375 million revolving credit facility - Net cash provided by operating activities was $70.6 million in 2021, compared to $74.4 million in 2020[139] Debt and Liquidity Summary (as of Dec 31, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Total Debt | $73.0 | | Cash and Cash Equivalents | $30.5 | | Net Debt | $42.5 | | Available Credit | ~$287 | - The company's leverage ratio was 0.81x at December 31, 2021, well below the maximum permitted of 4.00x under its credit agreement[109][148] Quantitative and Qualitative Disclosures About Market Risk This section states that the required disclosures about market risk are included within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" - The discussion of Quantitative and Qualitative Disclosures about Market Risk is located in Item 7[179] Financial Statements and Supplementary Data This section incorporates by reference the financial statements and supplementary data, which are set forth in Item 15 of this report - The information required by this item is set forth in Item 15[179] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants on accounting and financial disclosure - None[180] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting, for which a remediation plan is in progress - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting[184] - Material weaknesses were identified in five areas: Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities[194] - A remediation plan is underway to address the weaknesses, with remaining activities scheduled for completion in the first half of 2022[193][194] - The independent registered public accounting firm, KPMG LLP, expressed an adverse opinion on the operating effectiveness of the company's internal control over financial reporting[191] Other Information The company reports that there is no other information to disclose under this item - None[199] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports that there is no information to disclose under this item - None[200] Part III Directors, Executive Officers and Corporate Governance This section provides information on the company's executive officers and incorporates by reference information about directors and corporate governance from the upcoming Proxy Statement - Information concerning directors and corporate governance is incorporated by reference from the Proxy Statement[202][203] Executive Officers | Name | Age | Title | | :--- | :--- | :--- | | John M. Steitz | 63 | President and Chief Executive Officer | | D. Andrew Edwards | 63 | Executive Vice President and Chief Financial Officer | | Kevin C. Donnelly | 47 | Vice President, General Counsel and Corporate Secretary | Executive Compensation Information regarding director and executive compensation, including the Compensation Discussion and Analysis and committee reports, is incorporated by reference from the company's Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement[207] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[208] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[209] Principal Accounting Fees and Services This section identifies KPMG LLP as the company's independent registered public accounting firm and incorporates by reference information on accounting fees and services, as well as the Audit Committee's pre-approval procedures, from the Proxy Statement - The company's independent registered public accounting firm is KPMG LLP[210] - Information on accounting fees and services is incorporated by reference from the Proxy Statement[210] Part IV Exhibits and Financial Statement Schedules This section contains the index to the company's consolidated financial statements and supplementary data, including KPMG LLP's unqualified opinion on financial statements but an adverse opinion on internal control over financial reporting - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements[216] - KPMG LLP issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021, due to identified material weaknesses[217][226][228] Form 10-K Summary This item is not applicable to this filing - Not Applicable[375]