Tredegar (TG) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Details Tredegar's unaudited financial statements, management's analysis, market risks, and internal controls Item 1. Financial Statements Tredegar's unaudited Q3 and 9M 2023 financial statements reveal significant net losses due to sales decline, pension settlement, and goodwill impairment Condensed Consolidated Balance Sheets (unaudited) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change | | :----------------------------- | :-------------------------- | :-------------------------- | :----- | | Total Assets | $479,517 | $542,093 | (11.5%) | | Total Liabilities | $325,326 | $340,331 | (4.4%) | | Total Shareholders' Equity | $154,191 | $201,762 | (23.6%) | | Cash and cash equivalents | $48,604 | $19,232 | 152.7% | | Inventories | $79,301 | $127,771 | (37.9%) | | Goodwill | $35,717 | $70,608 | (49.4%) | Condensed Consolidated Statements of Income (Loss) (unaudited) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Sales | $166,192 | $238,486 | $535,481 | $749,415 | | Net income (loss) | $(50,380) | $1,033 | $(70,314) | $32,322 | | Basic EPS | $(1.47) | $0.03 | $(2.06) | $0.96 | | Diluted EPS | $(1.47) | $0.03 | $(2.06) | $0.96 | | Pension settlement loss | $25,612 | — | $25,612 | — | | Goodwill impairment | $19,478 | — | $34,891 | — | Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(50,380) | $1,033 | $(70,314) | $32,322 | | Other comprehensive income (loss) | $20,673 | $(2,331) | $29,624 | $(162) | | Comprehensive income (loss) | $(29,707) | $(1,298) | $(40,690) | $32,160 | Condensed Consolidated Statements of Cash Flows (unaudited) | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash from operating activities | $44,238 | $(23,152) | | Net cash from investing activities | $(22,008) | $(24,121) | | Net cash from financing activities | $7,712 | $36,807 | | Cash and cash equivalents at end of period | $48,604 | $19,250 | Condensed Consolidated Statements of Shareholders' Equity (unaudited) | Metric (in thousands) | Balance Jan 1, 2023 | Balance Sep 30, 2023 | | :-------------------- | :------------------ | :------------------- | | Total Shareholders' Equity | $201,762 | $154,191 | | Net income (loss) | — | $(70,314) | | Cash dividends declared | — | $(8,884) | Notes to the Condensed Consolidated Financial Statements (unaudited) Provides detailed explanations and disclosures for Tredegar's financial statements, covering significant events and accounting policies Note 1. Basis of Presentation Outlines the basis of financial statement preparation, including significant business developments and accounting impacts - The Company entered a definitive agreement to sell its flexible packaging films business (Terphane) to Oben Group, contingent on regulatory approvals in Brazil and Columbia[26] - A plan was adopted to close the PE Films technical center in Richmond, VA, by the end of 2023, expecting $1.7 million in cash costs and up to $3.7 million in non-cash asset write-downs/accelerated depreciation[27] - A non-cash partial goodwill impairment of $19.5 million ($15.1 million after deferred income tax benefits) was recognized in Q3 2023 for the Surface Protection unit due to market uncertainty in consumer electronics, with a total of $34.9 million ($27.0 million after deferred income tax benefits) for the first nine months of 2023[34] Note 2. Accounts and Other Receivables | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Customer receivables | $69,945 | $83,667 | | Other receivables | $2,326 | $3,874 | | Less: Allowance for bad debts | $(1,927) | $(2,997) | | Total accounts and other receivables, net | $70,344 | $84,544 | Note 3. Inventories | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Finished goods | $28,664 | $34,686 | | Work-in-process | $9,569 | $15,604 | | Raw materials | $20,314 | $58,262 | | Stores, supplies and other | $20,754 | $19,219 | | Total | $79,301 | $127,771 | Note 4. Pension and Other Postretirement Benefits Details pension settlement losses, net periodic benefit costs, and the completion of the pension plan termination process - A pre-tax pension settlement loss of $25.6 million was recognized in Q3 2023 due to lump sum distributions from the pension plan assets exceeding the pension plan's service and interest cost[40] - The pension plan termination and settlement process was completed on November 3, 2023, after a final contribution of $27.7 million, transferring the obligation to Massachusetts Mutual Life Insurance Company[41] | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Pension settlement loss | $25,612 | — | $25,612 | — | | Net periodic benefit cost (Pension) | $28,714 | $3,483 | $35,521 | $10,422 | Note 5. Other Income (Expense), Net Presents other income and expenses, including gains on investments and miscellaneous items | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain on investment in kaléo | $— | $— | $262 | $1,406 | | Other | $(51) | $140 | $(52) | $(225) | | Total | $(51) | $140 | $210 | $1,181 | Note 6. Earnings Per Share Provides basic and diluted earnings per share figures, along with basic shares outstanding | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $(1.47) | $0.03 | $(2.06) | $0.96 | | Diluted EPS | $(1.47) | $0.03 | $(2.06) | $0.96 | | Basic Shares Outstanding (in thousands) | 34,264 | 33,870 | 34,081 | 33,780 | Note 7. Accumulated Other Comprehensive Income (Loss) Details changes in accumulated other comprehensive income (loss), including foreign currency translation and pension adjustments | Metric (in thousands) | Balance Jan 1, 2023 | Balance Sep 30, 2023 | | :-------------------- | :------------------ | :------------------- | | Foreign Currency Translation | $(86,079) | $(85,156) | | Derivative Financial Instruments | $(2,480) | $(774) | | Pension & Other Postretirement Benefit Adjust | $(59,036) | $(32,041) | | Total Accumulated Other Comprehensive Income (Loss) | $(147,595) | $(117,971) | Note 8. Derivatives Describes the use of derivative financial instruments to hedge against aluminum price and foreign currency exposures - Aluminum Extrusions uses forward purchase commitments and futures contracts to hedge margin exposure from fixed-price forward sales contracts against volatile aluminum costs[57] - Terphane Ltda. uses foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars to hedge exposure from U.S. Dollar sales and Brazilian Real operating costs[60] | Derivative Type (in thousands) | Sep 30, 2023 (Net Fair Value) | Dec 31, 2022 (Net Fair Value) | | :----------------------------- | :---------------------------- | :---------------------------- | | Aluminum futures contracts | $(1,979) | $(3,581) | | Foreign currency forward contracts | $1,937 | $811 | Note 9. Income Taxes Explains the effective tax rate, impact of goodwill impairment and pension settlement, and Brazilian tax legislation changes - The effective tax rate for the first nine months of 2023 was 18.8%, influenced by tax benefits from goodwill impairment and pension settlement loss, and the creditable treatment of Brazil income tax[64][66] - Brazil enacted new tax legislation in Q2 2023, making Brazil income tax creditable again after 2023, which reversed a discrete tax benefit recognized in Q1 2022[64] - Terphane Ltda. benefits from income tax incentives in Brazil, reducing its statutory federal income tax rate to 15.25% on certain products, with a benefit of $0.5 million in the first nine months of 2023[68] Note 10. Business Segments Presents financial data for Tredegar's business segments, including net sales, EBITDA from ongoing operations, and identifiable assets | Segment (in thousands) | Q3 2023 Net Sales | Q3 2022 Net Sales | 9M 2023 Net Sales | 9M 2022 Net Sales | | :--------------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Aluminum Extrusions | $109,410 | $161,649 | $364,607 | $510,066 | | PE Films | $19,938 | $20,059 | $56,036 | $82,613 | | Flexible Packaging Films | $30,111 | $47,278 | $94,861 | $128,117 | | Total Net Sales | $159,459 | $228,986 | $515,504 | $720,796 | | Segment (in thousands) | Q3 2023 EBITDA from Ongoing Operations | Q3 2022 EBITDA from Ongoing Operations | 9M 2023 EBITDA from Ongoing Operations | 9M 2022 EBITDA from Ongoing Operations | | :--------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Aluminum Extrusions | $5,113 | $12,071 | $29,968 | $57,885 | | PE Films | $4,037 | $431 | $6,700 | $14,543 | | Flexible Packaging Films | $477 | $7,830 | $2,076 | $20,495 | | Segment (in thousands) | Sep 30, 2023 Identifiable Assets | Dec 31, 2022 Identifiable Assets | | :--------------------- | :------------------------------- | :------------------------------- | | Aluminum Extrusions | $256,671 | $293,308 | | PE Films | $58,459 | $102,431 | | Flexible Packaging Films | $82,789 | $103,448 | | Subtotal | $397,919 | $499,187 | Note 11. Supply Chain Financing Details the amount of accounts payable financed through supply chain financing arrangements | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Accounts payable financed | $14,200 | $25,900 | Note 12. Debt Outlines debt outstanding, credit agreement amendments, interest rates, and key restrictive covenants - The Credit Agreement was amended on August 3, 2023, reducing aggregate borrowings from $375 million to $200 million and revising restrictive covenants[79] - As of September 30, 2023, $155.0 million of debt was outstanding, principally priced at an interest rate equal to the Adjusted Term SOFR Rate plus 200.0 basis points[80] - Key restrictive covenants include a Total Net Leverage Ratio (5.0x for Q3 2023) and an Interest Coverage Ratio (2.50x for Q3 2023), and a prohibition on dividend payments and share repurchases through December 31, 2024[86] Note 13. Subsequent Events Reports significant events occurring after the reporting period, including new borrowings and ABL Credit Facility amendments - Terphane Limitada borrowed $20 million in October 2023, secured by its assets, with repayment expected upon the Contingent Terphane Sale[84] - A majority of lenders consented to amend the Credit Agreement to implement an ABL Credit Facility, with initial borrowing availability of $180 million, reducing to $125 million upon the earlier of March 31, 2025, or the Terphane Sale proceeds[85][87] - The ABL Credit Facility will replace existing financial covenants with a minimum fixed charge coverage ratio triggered by low availability after the ABL Adjustment Date[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Tredegar's Q3 and 9M 2023 net losses, segment challenges, strategic initiatives, and liquidity management efforts Forward-looking and Cautionary Statements Highlights inherent risks in forward-looking statements, including customer loss, economic conditions, and credit facility compliance - Forward-looking statements are identified by words like "believe," "estimate," "anticipate," and are subject to risks such as loss of significant customers, inability to develop new products, and uncertain economic conditions[91][93] - Key risks include noncompliance with credit facility covenants, the unfinalized ABL Credit Facility amendment, and the inability to successfully complete strategic dispositions like the Terphane sale[93] Critical Accounting Policies and Estimates Confirms no material changes to critical accounting policies and estimates since December 31, 2022 - No material changes to critical accounting policies and estimates have occurred since December 31, 2022[96] Business Overview Describes Tredegar's three primary business segments and key profitability measures used by management - Tredegar operates three primary businesses: Aluminum Extrusions (North American B&C, automotive, specialty), PE Films (surface protection for electronics), and Flexible Packaging Films (polyester films for Latin American packaging)[98] - EBITDA from ongoing operations is the key profitability measure used by the CODM, and net sales are used for segment-level revenue[99] Third Quarter Financial Results Highlights Summarizes Tredegar's Q3 2023 financial performance, highlighting net loss and segment-specific EBITDA declines | Metric (in millions) | Q3 2023 | Q3 2022 | | :------------------- | :------ | :------ | | Net income (loss) | $(50.4) | $1.0 | | Diluted EPS | $(1.47) | $0.03 | - Aluminum Extrusions' EBITDA from ongoing operations decreased to $5.1 million in Q3 2023 from $12.1 million in Q3 2022 due to sluggish market conditions and a 28.6% decline in sales volume[103] - Flexible Packaging Films' EBITDA from ongoing operations was $0.5 million in Q3 2023, down from $7.8 million in Q3 2022, primarily due to lower sales volume and margins driven by global excess capacity and imports[103] Results of Operations Analyzes Tredegar's consolidated financial performance for Q3 and 9M 2023, detailing changes in net income, sales, and key expenses Third Quarter of 2023 Compared with the Third Quarter of 2022 Compares Tredegar's Q3 2023 financial results to Q3 2022, focusing on net loss, sales, and margin changes | Metric (in thousands) | Q3 2023 | Q3 2022 | Change | | :-------------------- | :------ | :------ | :----- | | Net income (loss) | $(50,380) | $1,033 | $(51,413) | | Sales | $166,192 | $238,486 | $(72,294) | | Pension settlement loss | $25,612 | — | $25,612 | | Goodwill impairment | $19,478 | — | $19,478 | - Consolidated gross profit margin decreased to 9.0% in Q3 2023 from 11.9% in Q3 2022, impacted by lower sales volume, higher labor/employee-related costs, lower pricing, and higher supply expense[111] - SG&A and R&D expenses as a percentage of sales increased to 13.3% in Q3 2023 from 8.6% in Q3 2022, primarily due to higher professional fees associated with business development activities[112] First Nine Months of 2023 Compared with the First Nine Months of 2022 Compares Tredegar's 9M 2023 financial results to 9M 2022, detailing net loss, sales, and expense impacts | Metric (in thousands) | 9M 2023 | 9M 2022 | Change | | :-------------------- | :------ | :------ | :----- | | Net income (loss) | $(70,314) | $32,322 | $(102,636) | | Sales | $535,481 | $749,415 | $(213,934) | | Pension settlement loss | $25,612 | — | $25,612 | | Goodwill impairment | $34,891 | — | $34,891 | - Consolidated gross profit margin decreased to 10.9% in 9M 2023 from 15.9% in 9M 2022, affected by lower sales volume, higher labor/employee-related costs, and unfavorable raw material cost flow-through[123] - SG&A and R&D expenses as a percentage of sales increased to 11.3% in 9M 2023 from 8.5% in 9M 2022, despite a decrease in absolute spending, due to a larger decline in sales[124] Segment Operations Review Reviews the operational and financial performance of Tredegar's Aluminum Extrusions, PE Films, and Flexible Packaging Films segments Aluminum Extrusions Reviews the Aluminum Extrusions segment's Q3 and 9M 2023 performance, noting sales volume and EBITDA declines due to market conditions | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Sales volume (lbs) | 32,457 | 45,457 | 105,511 | 137,427 | | Net sales (in thousands) | $109,410 | $161,649 | $364,607 | $510,066 | | EBITDA from ongoing operations (in thousands) | $5,113 | $12,071 | $29,968 | $57,885 | - Sales volume in nonresidential B&C declined 28.9% in Q3 2023, and specialty market volume decreased 35.6%, while automotive increased 14.2%[135] - Open orders at the end of Q3 2023 were 17 million pounds, significantly below the 2019 quarterly range of 21-27 million pounds, reflecting sluggish demand and increased imports[136] PE Films Examines the PE Films segment's Q3 and 9M 2023 performance, including goodwill impairment and technical center closure plans | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Sales volume (lbs) | 7,224 | 7,081 | 20,837 | 27,273 | | Net sales (in thousands) | $19,938 | $20,059 | $56,036 | $82,613 | | EBITDA from ongoing operations (in thousands) | $4,037 | $431 | $6,700 | $14,543 | - The PE Films technical center in Richmond, VA, is closing by the end of 2023, with anticipated net annual cash savings of $3.4 million starting in Q4 2023[148] - A non-cash partial goodwill impairment of $19.5 million was recognized in Q3 2023 ($34.9 million for 9M 2023) for the Surface Protection unit due to market uncertainty in consumer electronics[149] Flexible Packaging Films Assesses Flexible Packaging Films' Q3 and 9M 2023 performance, highlighting impacts from lower selling prices and global excess capacity | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Sales volume (lbs) | 22,163 | 28,889 | 65,732 | 82,210 | | Net sales (in thousands) | $30,111 | $47,278 | $94,861 | $128,117 | | EBITDA from ongoing operations (in thousands) | $477 | $7,830 | $2,076 | $20,495 | - Lower selling prices, driven by excess global capacity and competition from Asian imports in Brazil, significantly impacted net sales and EBITDA[152][153] Corporate Expenses, Interest & Other Details corporate expenses and interest costs for the first nine months of 2023, noting impacts from professional fees and higher debt levels - Corporate expenses remained flat in the first nine months of 2023 due to higher professional fees associated with business development activities ($3.3 million), offset by lower accruals for employee-related compensation ($2.5 million) and lower external and internal audit fees ($0.6 million)[156] - Interest expense of $7.8 million in the first nine months of 2023 increased $4.6 million compared to the first nine months of 2022 due to higher average debt levels and interest rates[157] Status of Current Corporate Strategic Initiatives Updates on key strategic initiatives, including the Terphane sale, pension plan termination, and expected cash proceeds - The definitive agreement to sell Terphane to Oben Group is contingent on competition filing approvals in Brazil and Columbia, with CADE's review deadline no later than September 23, 2024[158] - The pension plan termination and settlement process was completed on November 3, 2023, after a final contribution of $27.7 million[160] - The company expects after-tax cash proceeds of $85 million from the Terphane sale, subject to deductions and tax changes[159] Liquidity and Capital Resources Analyzes Tredegar's liquidity and capital resources, focusing on operating cash flow, debt levels, and the transition to an ABL Credit Facility - Net cash provided by operating activities was $44.2 million in 9M 2023, a significant improvement from a $23.2 million outflow in 9M 2022, due to improved working capital and lower pension contributions[166] - The company is transitioning to an ABL Credit Facility to reduce debt covenant violation risk, with a majority of lenders consenting to an amendment in November 2023[178][181] | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $48,604 | $19,232 | | Total debt outstanding | $155,000 | $137,000 | | Available credit under Credit Agreement | $4,700 | N/A | | Total Net Leverage Ratio | 3.33x | 1.39x | | Interest Coverage Ratio | 3.32x | N/A | Item 3. Quantitative and Qualitative Disclosures About Market Risk Tredegar manages market risks from interest rates, raw material/energy prices, and foreign currencies using derivative instruments and hedging strategies - Tredegar faces market risks from interest rates, polyethylene and polypropylene resin prices, PTA and MEG prices, aluminum ingot and scrap prices, energy prices, foreign currencies, and emerging markets[182] - Aluminum Extrusions hedges aluminum price volatility from fixed-price forward sales contracts using forward purchase commitments and futures contracts[184] - Flexible Packaging Films (Terphane Ltda.) has significant foreign currency translation risk due to U.S. Dollar-denominated sales and raw material costs versus Brazilian Real-denominated operating costs, which it hedges with foreign exchange forward contracts[195][196] Item 4. Controls and Procedures Disclosure controls and internal control over financial reporting were ineffective as of September 30, 2023, due to material weaknesses, with remediation efforts ongoing Evaluation of Disclosure Controls and Procedures Concludes that disclosure controls and procedures were ineffective as of September 30, 2023, due to identified material weaknesses - Disclosure controls and procedures were deemed ineffective as of September 30, 2023, due to material weaknesses in internal control over financial reporting[203] Management's Report on Internal Control Over Financial Reporting Management reports ineffective internal control over financial reporting as of December 31, 2022, due to resource and communication deficiencies - Management concluded that internal control over financial reporting was not effective as of December 31, 2022, due to insufficient competent resources and an ineffective information and communication process[208] - The identified material weaknesses create a reasonable possibility that a material misstatement of financial statements may not be prevented or detected timely[209] - KPMG LLP, the independent auditor, expressed an adverse opinion on the operating effectiveness of the company's internal control over financial reporting for 2022[210] Remediation Plan and Efforts to Address the Identified Material Weaknesses Details the company's revised remediation plan for material weaknesses, including control enhancements and internal compliance department expansion - The company is executing a revised remediation plan, including comprehensive review and update of internal control documentation, development of enhanced controls, and expansion of the internal control compliance department[212][213] - Remediation of controls in the Aluminum Extrusion business's expenditure process is delayed to Q4 2023 due to resource constraints and focus on revenue process controls[214] - Material weaknesses cannot be considered remediated until controls have operated effectively for a sufficient period and management has tested them[215] Changes in Internal Control Over Financial Reporting Reports ongoing changes to remediate material weaknesses, with no other significant changes in Q3 2023 - Changes are being implemented to remediate material weaknesses, but no other material changes to internal control over financial reporting occurred in Q3 2023[217] PART II - OTHER INFORMATION Provides updates on Tredegar's risk factors, equity security sales, other information, and a list of filed exhibits Item 1A. Risk Factors Updates risk factors, highlighting uncertainties in the Terphane sale and the unfinalized ABL credit facility amendment - The planned divestiture of Terphane is subject to conditions beyond the company's control, including competition filing approvals in Brazil and Columbia, with CADE's review deadline no later than September 23, 2024[219] - The anticipated amendment to the Credit Agreement for an ABL Credit Facility has not been finalized and may not be completed by the end of 2023, despite lender consent[221] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities. The company's Credit Agreement contains restrictive covenants, including limitations on dividend payments to shareholders - The Credit Agreement includes financial and other restrictive covenants, such as a restriction on the company's ability to pay dividends to shareholders[222] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q3 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q3 2023[223] Item 6. Exhibits Key exhibits include the Purchase and Sale Agreement for Terphane, Credit Agreement amendments, and certifications from the CEO and CFO - Key exhibits include the Purchase and Sale Agreement for Terphane, Amendment No. 2 to the Second Amended and Restated Credit Agreement, and certifications from the CEO and CFO[224]