Tredegar (TG) - 2020 Q4 - Annual Report

Part I Business Tredegar operates in Aluminum Extrusions, PE Films, and Flexible Packaging Films, having divested non-core businesses in 2020 - Tredegar operates through three reportable business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films[11] - In 2020, the company completed the sale of its Personal Care Films business, which is now presented as discontinued operations, and also sold Bright View Technologies, which remains in continuing operations[12][13] Aluminum Extrusions Net Sales by Market Segment (2018-2020) | Market Segment | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Building and construction: | | | | | Nonresidential | 56% | 51% | 51% | | Residential | 9% | 8% | 8% | | Automotive | 8% | 9% | 8% | | Specialty: | | | | | Consumer durables | 10% | 11% | 12% | | Machinery & equipment | 7% | 7% | 7% | | Electrical | 4% | 7% | 7% | | Distribution | 6% | 7% | 7% | | Total | 100% | 100% | 100% | - The PE Films segment is highly concentrated, with its top four customers accounting for 84% of its net sales in 2020[21] - The backlog for the Aluminum Extrusions segment increased by approximately 41% from \$52.8 million at the end of 2019 to \$74.2 million at the end of 2020[25] - As of December 31, 2020, Tredegar employed approximately 2,400 people, with about 34% represented by labor unions in the U.S. and Brazil[30] Risk Factors The company faces risks including cyclical business, customer concentration, internal control weaknesses, underfunded pension, and COVID-19 impacts - The sales volume and profitability of the Aluminum Extrusions segment are cyclical, seasonal, and highly dependent on U.S. economic conditions, particularly in the construction sector[40] - The PE Films segment is highly dependent on a few large customers. A product transition by one key customer is expected to reduce PE Films' EBITDA from ongoing operations by an estimated \$18 million in 2021 versus 2020[42] - The Flexible Packaging Films segment faces risks from overcapacity in Latin American polyester film production and economic uncertainty in Brazil, which could adversely impact financial results[45] - The company has identified material weaknesses in its internal control over financial reporting, which increases the risk of a material misstatement in its financial statements[47] - Tredegar has an underfunded defined benefit pension plan, which was underfunded by \$103.1 million as of December 31, 2020, and requires an expected cash contribution of approximately \$11.7 million in 2021[51] - The COVID-19 pandemic poses risks to operations, including higher absenteeism and hiring difficulties at Bonnell Aluminum, which could adversely affect financial condition and results[55] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[57] Properties Tredegar owns most manufacturing facilities in the U.S., Brazil, and China, which are in good condition with sufficient capacity Principal Manufacturing Locations by Segment | Segment | Locations in the U.S. | Locations Outside the U.S. | | :--- | :--- | :--- | | 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) | Cabo de Santo Agostinho, Brazil | Legal Proceedings Legal proceedings information is incorporated by reference from Note 18 "Contingencies" to the Consolidated Financial Statements - The required information for this item is set forth in Note 18 "Contingencies" to the Consolidated Financial Statements[61] Mine Safety Disclosures The company reports no mine safety disclosures - None[62] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Tredegar's common stock trades on NYSE, with a $200 million special dividend in 2020 and an unused share repurchase program - On December 1, 2020, the Board declared a special dividend of \$200 million, or \$5.97 per share, which was paid in December 2020[66] - The company has a share repurchase program authorizing the purchase of up to 5 million shares, with 1,732,003 shares remaining available for repurchase as of December 31, 2020. No shares were repurchased in 2020[68] Selected Financial Data This section provides a five-year financial and segment data summary from 2016 to 2020, including historical results for discontinued operations Five-Year Financial Summary (2016-2020) | Year Ended Dec 31 | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales (in thousands) | \$755,290 | \$826,324 | \$851,834 | \$725,867 | \$595,665 | | Net Income (Loss) (in thousands) | \$(75,444) | \$48,259 | \$24,842 | \$38,251 | \$24,466 | | Diluted EPS | \$(2.26) | \$1.45 | \$0.75 | \$1.16 | \$0.75 | | Total Assets (in thousands) | \$514,870 | \$712,668 | \$707,373 | \$755,743 | \$651,162 | | Total Debt (in thousands) | \$134,000 | \$42,000 | \$101,500 | \$152,000 | \$95,000 | Segment Net Sales (2016-2020, in thousands) | Segment | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Aluminum Extrusions | \$455,711 | \$529,602 | \$573,126 | \$466,833 | \$360,098 | | PE Films | \$139,288 | \$133,807 | \$127,708 | \$128,406 | \$109,674 | | Flexible Packaging Films | \$134,605 | \$133,935 | \$123,830 | \$108,355 | \$108,028 | Segment EBITDA from Ongoing Operations (2018-2020, in thousands) | Segment | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Aluminum Extrusions | \$55,137 | \$65,683 | \$65,479 | | PE Films | \$45,107 | \$41,133 | \$32,404 | | Flexible Packaging Films | \$30,645 | \$14,737 | \$11,154 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, sales decreased, leading to a net loss from continuing operations due to kaléo losses and goodwill impairment, while a special dividend increased net debt Financial Highlights (2019 vs. 2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Sales | \$755.3 million | \$826.3 million | | Net Income (Loss) from Continuing Operations | \$(16.8 million) | \$58.5 million | | Diluted EPS from Continuing Operations | \$(0.51) | \$1.76 | - The 2020 results were significantly impacted by a \$47.6 million after-tax loss on the investment in kaléo and a \$10.5 million after-tax goodwill impairment for the Aluminum Extrusions' AACOA reporting unit[89] - The COVID-19 pandemic led to higher absenteeism and hiring difficulties at Bonnell Aluminum, while demand for flexible food packaging films produced by Terphane remained strong[95][97] - The company paid a special dividend of \$200 million in December 2020, increasing total debt to \$134 million and net debt to \$122.2 million at year-end[99] Operations Review In 2020, Aluminum Extrusions' EBITDA declined due to lower volumes, while PE Films' EBITDA grew despite expected future customer transition impacts, and Flexible Packaging Films' EBITDA significantly increased Aluminum Extrusions Performance (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs in thousands) | 186,391 lbs | 208,249 lbs | (10.5%) | | Net Sales (in thousands) | \$455,711 | \$529,602 | (14.0%) | | EBITDA from Ongoing Operations (in thousands) | \$55,137 | \$65,683 | (16.1%) | PE Films Performance (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs in thousands) | 45,175 lbs | 43,983 lbs | 2.7% | | Net Sales (in thousands) | \$139,288 | \$133,807 | 4.1% | | EBITDA from Ongoing Operations (in thousands) | \$45,107 | \$41,133 | 9.7% | - A customer product transition in the Surface Protection business is projected to decrease PE Films' EBITDA from ongoing operations by \$18 million in 2021 versus 2020 and an additional \$4 million in 2022 versus 2021[109] Flexible Packaging Films Performance (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales Volume (lbs in thousands) | 113,115 lbs | 105,276 lbs | 7.4% | | Net Sales (in thousands) | \$134,605 | \$133,935 | 0.5% | | EBITDA from Ongoing Operations (in thousands) | \$30,645 | \$14,737 | 107.9% | Critical Accounting Policies Critical accounting policies involve significant estimates for goodwill impairment, kaléo investment valuation, pension obligations, and income taxes, with notable impairments and fair value decreases in 2020 - In the first quarter of 2020, the company recognized a goodwill impairment charge of \$13.7 million (\$10.5 million after-tax), representing the entire goodwill amount for the Aluminum Extrusions' AACOA reporting unit[121] - The investment in privately held kaléo is accounted for under the fair value method (Level 3 inputs). Its estimated fair value dropped from \$95.5 million at Dec 31, 2019, to \$34.6 million at Dec 31, 2020[122][124] - Pension benefit calculations rely on key assumptions such as discount rates and expected return on plan assets. The weighted average discount rate decreased from 3.27% in 2019 to 2.57% in 2020, while the expected long-term return on assets was 5.00% for 2020[126][127] Liquidity and Capital Resources Net cash from operations decreased in 2020, while total debt increased to fund a special dividend, but the company maintained compliance with amended credit agreement covenants and sufficient borrowing capacity - Net cash provided by operating activities was \$74.4 million in 2020, a decrease from \$115.9 million in 2019, primarily due to lower net working capital efficiencies and a dividend received from kaléo in 2019[160] - The company amended its revolving credit agreement on December 1, 2020, reducing the facility from \$500 million to \$375 million and permitting a one-time special dividend of up to \$200 million[163][164] Net Capitalization and Indebtedness (as of Dec 31, 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Cash and cash equivalents | \$11,846 | | Debt | \$134,000 | | Debt, net of cash | \$122,154 | | Shareholders' equity | \$109,055 | | Net capitalization | \$231,209 | - As of December 31, 2020, the company was in compliance with all debt covenants, with a leverage ratio of 1.43x (well below the maximum of 4.00x)[168][169] Quantitative and Qualitative Disclosures About Market Risk Tredegar faces market risks from interest rates, raw material prices, energy costs, and foreign currency fluctuations, which it manages using derivative financial instruments - The company is exposed to price volatility for key raw materials: aluminum for Aluminum Extrusions, polyethylene resin for PE Films, and polyester resin (PTA/MEG) for Flexible Packaging Films[177] - Aluminum Extrusions uses forward purchase commitments and futures contracts to hedge its exposure to aluminum price volatility under fixed-price forward sales contracts, which generally have a duration of not more than 12 months[178] - The Flexible Packaging Films business in Brazil has significant foreign exchange translation risk, as sales and raw material costs are priced in U.S. Dollars while most operating costs are in Brazilian Real. The company uses foreign exchange forward rate contracts to hedge this exposure on a short-term basis[192][193] Financial Statements and Supplementary Data This item incorporates the company's audited consolidated financial statements and supplementary data by reference to Item 15 - The information required by this item, including the consolidated financial statements and supplementary data, is set forth in Item 15[196] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on accounting and financial disclosure - None[197] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, due to material weaknesses across all five COSO framework components, with an ongoing remediation plan - The CEO and CFO concluded that due to material weaknesses in internal control over financial reporting, the company's disclosure controls and procedures were not effective as of December 31, 2020[201] - Management's evaluation identified material weaknesses across all five components of the COSO framework: Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities[213] - The company's independent registered public accounting firm, KPMG LLP, expressed an adverse opinion on the operating effectiveness of the company's internal control over financial reporting[209] - A remediation plan is ongoing to address the identified material weaknesses, with implementation having begun in the second quarter of 2019[211][217] Other Information The company reports no other information for this item - None[218] Part III Directors, Executive Officers and Corporate Governance This section details executive officers' backgrounds and incorporates director and corporate governance information by reference from the Proxy Statement Executive Officers | Name | Age | Title | | :--- | :--- | :--- | | John M. Steitz | 62 | President and Chief Executive Officer | | D. Andrew Edwards | 62 | Executive Vice President and Chief Financial Officer | | Kevin C. Donnelly | 46 | Vice President, General Counsel and Corporate Secretary | Executive Compensation Information on director and executive compensation is incorporated by reference from the Proxy Statement - Information related to executive compensation is incorporated by reference from the Proxy Statement[226] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement - Information related to security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[227] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement - Information related to certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[228] Principal Accounting Fees and Services Information on principal accounting fees and services, and Audit Committee's pre-approval policies is incorporated by reference from the Proxy Statement - Information related to principal accounting fees and services is incorporated by reference from the Proxy Statement[229] Part IV Exhibits and Financial Statement Schedules This section includes the consolidated financial statements and KPMG's reports, noting an unqualified opinion on financials but an adverse opinion on internal controls due to material weaknesses - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements[235] - KPMG LLP issued an adverse opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2020, due to identified material weaknesses[236][247] Notes to Financial Statements The notes provide detailed financial statement support, covering 2020 divestitures, kaléo investment fair value changes, segment performance, debt amendments, pension status, and accounting policies - On October 30, 2020, the company sold its Personal Care Films business, resulting in a pre-tax loss of \$50.0 million. The historical results are now presented as discontinued operations[266][314] - The fair value of the investment in kaléo decreased from \$95.5 million at year-end 2019 to \$34.6 million at year-end 2020, resulting in a pre-tax loss of \$60.9 million for 2020[326] - The company's defined benefit pension plan was underfunded by \$103.1 million at the end of 2020, compared to \$100.4 million at the end of 2019[378] - In December 2020, the company amended its credit agreement, reducing the facility size to \$375 million and permitting the \$200 million special dividend. Total debt outstanding was \$134 million at year-end[359][362] Form 10-K Summary This item is Not Applicable - Not Applicable[411]