TREDEGAR CORPORATION
Forward-looking and Cautionary Statements
Some of the information contained in this Quarterly Report on Form 10-Q ("Form
10-Q") may constitute "forward-looking statements" within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. When the Company uses the words "believe," "estimate," "anticipate,"
"appear to," "expect," "project," "plan," "likely," "may" and similar
expressions, it does so to identify forward-looking statements. Such statements
are based on the Company's then current expectations and are subject to a number
of risks and uncertainties that could cause actual results to differ materially
from those addressed in the forward-looking statements. It is possible that the
Company's actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition indicated in or
implied by these forward-looking statements. In addition, the Company's current
projections for its businesses could be materially affected by the highly
uncertain impact of the coronavirus ("COVID-19") pandemic. As a consequence, the
Company's results could differ significantly from its projections, depending on,
among other things, the ultimate impact of the pandemic on employees, supply
chains, customers and the U.S. and world economies. Accordingly, you should not
place undue reliance on these forward-looking statements. Factors that could
cause actual results to differ from expectations include, without limitation,
the following:
•loss or gain of sales to significant customers on which the Company's business
is highly dependent;
•inability to achieve sales to new customers to replace lost business;
•inability to develop, efficiently manufacture and deliver new products at
competitive prices;
•failure of the Company's customers to achieve success or maintain market share;
•failure to protect our intellectual property rights;
•risks of doing business in countries outside the U.S. that affect our
international operations;
•political, economic, and regulatory factors concerning the Company's products;
•uncertain economic conditions in countries in which the Company does business;
•competition from other manufacturers, including manufacturers in lower-cost
countries and manufacturers benefiting from government subsidies;
•impact of fluctuations in foreign exchange rates;
•a change in the amount of the Company's underfunded defined benefit pension
plan liability;
•an increase in the operating costs incurred by the Company's business units,
including, for example, the cost of raw materials and energy;
•inability to successfully identify, complete or integrate strategic
acquisitions; failure to realize the expected benefits of such acquisitions and
assumption of unanticipated risks in such acquisitions;
•disruptions to the Company's manufacturing facilities, including those
resulting from labor shortages;
•the impact of public health epidemics on employees, production and the global
economy, such as the COVID-19 pandemic;
•an information technology system failure or breach;
•volatility and uncertainty of the valuation of the Company's investment in
kaleo, Inc. ("kaléo");
•the impact of the imposition of tariffs and sanctions on imported aluminum
ingot used by Bonnell Aluminum ;
•the impact of new tariffs, duties or other trade restrictions imposed as a
result of rising trade tensions between the U.S. and other countries;
•the termination of anti-dumping duties on products imported to Brazil that
compete with products produced by Flexible Packaging ;
•failure to establish and maintain effective internal control over financial
reporting;
and the other factors discussed in the reports Tredegar files with or furnishes
to the Securities and Exchange Commission (the "SEC") from time to time,
including the risks and important factors set forth in additional detail in Part
I, Item 1A of Tredegar's Annual Report on Form 10-K for the year ended December
31, 2020 (the "2020 Form 10-K"). Readers are urged to review and consider
carefully the disclosures Tredegar makes in its filings with the SEC .
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Tredegar does not undertake, and expressly disclaims any duty, to update any
forward-looking statement to reflect any change in management's expectations or
any change in conditions, assumptions or circumstances on which such statements
are based, except as required by applicable law.
References herein to "Tredegar," "the Company," "we," "us" and "our" are to
Tredegar Corporation and its subsidiaries, collectively, unless the context
otherwise indicates or requires.
Unless otherwise stated or indicated, all comparisons are to the prior year
period. References to "Notes" are to notes to our consolidated financial
statements found in Part I, Item 1 of this Form 10-Q.
Executive Summary
Tredegar Corporation is an industrial manufacturer with three primary
businesses: custom aluminum extrusions for the North American building &
construction, automotive and specialty end-use markets through its Aluminum
Extrusions segment; surface protection films for high-technology applications in
the global electronics industry through its PE Films segment; and specialized
polyester films primarily for the Latin American flexible packaging market
through its Flexible Packaging Films segment. With approximately 2,400
employees, the Company operates manufacturing facilities in North America , South
America , and Asia .
On October 30, 2020 , the Company completed the sale of its personal care films
business ("Personal Care Films "), which was part of its PE Films segment. The
transaction excluded the packaging film lines and related operations located at
the Pottsville, Pennsylvania manufacturing site ("Pottsville Packaging "), which
are now being reported within the Surface Protection component of PE Films . All
historical results for Personal Care Films have been presented as discontinued
operations.
On December 31, 2020 , the Company completed the sale of Bright View
Technologies, which was part of its PE Films segment. The sale did not represent
a strategic shift nor did it have a major effect on the Company's historical and
ongoing operations, thus all financial information for Bright View Technologies
has been presented in continuing operations.
Third quarter 2021 net income from continuing operations was $6.2 million ($0.19
per diluted share) compared with net loss from continuing operations of $17.0
million ($0.51 per diluted share) in the third quarter of 2020.
Third quarter 2021 results include:
•An after-tax gain on the Company's investment in kaléo of $0.2 million ($0.01
per share), which is accounted for under the fair value method (see Note 7 for
more details).
Third quarter 2020 results include:
•An after-tax loss on the Company's investment in kaléo of $28.2 million ($0.84
per diluted share).
Other losses related to asset impairments and costs associated with exit and
disposal activities for continuing operations were not material for the three
and nine months ended September 30, 2021 and 2020, respectively. Gains and
losses associated with plant shutdowns, asset impairments, restructurings and
other items are described in Results of Operations. Earnings before interest,
taxes, depreciation and amortization ("EBITDA") from ongoing operations is the
measure of profit and loss used by Tredegar's chief operating decision maker
("CODM") for purposes of assessing financial performance. The Company uses sales
less freight ("net sales") from continuing operations as its measure of revenues
from external customers at the segment level. This measure is separately
included in the financial information regularly provided to the CODM.
Earnings before interest and taxes ("EBIT") from ongoing operations is a
non-GAAP financial measure included in the reconciliation of segment financial
information to consolidated results for the Company. It is not intended to
represent the stand-alone results for Tredegar's ongoing operations under
generally accepted accounting standards in the United States ("GAAP") and should
not be considered as an alternative to net income as defined by GAAP. We believe
that EBIT is a widely understood and utilized metric that is meaningful to
certain investors and that including this financial metric in the reconciliation
of management's performance metric, EBITDA from ongoing operations, provides
useful information to those investors that primarily utilize EBIT to analyze the
Company's core operations.
THE IMPACT OF COVID-19 AND RELATED FINANCIAL CONSIDERATIONS
Essential Business and Employee Considerations
The Company's priorities during the COVID-19 pandemic continue to be to protect
the health and safety of employees while keeping its manufacturing sites open
due to the essential nature of many of its products. The Company has continued
to manufacture the full range of products at its facilities.
The Company's protocols to protect the health and well-being of its employees
from COVID-19 continue to evolve as the Centers for Disease Control ("CDC"), the
Office of the Surgeon General and other state and local health departments learn
more about the virus and its variants. Consistent with recommendations and
mandates from government agencies and health authorities, the Company has
implemented multiple layers of COVID-19 protections and interventions.
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The Company has engaged in an education campaign that provides employees with
the most accurate and up-to-date information related to COVID-19 vaccines and
has offered different monetary and/or time-away-from-work incentives to
encourage employees to get vaccinated. While the Company believes that these
efforts have encouraged employees to be vaccinated, vaccination rates in its
U.S. manufacturing sites vary widely, ranging from 23% to 78%, with most U.S.
sites having vaccination rates above 50%. The Company will continue to monitor
available information to assess safeguards that may be taken to try to prevent a
COVID-19 outbreak in the workplace.
Bonnell Aluminum continues to experience higher than normal absenteeism and
hiring difficulties, which it attributes to COVID-19-related factors. While the
average number of direct labor employees at Bonnell Aluminum facilities
increased approximately 6% in the third quarter of 2021, compared with the
abnormally low levels related to the pandemic in the second and third quarters
of 2020, there continues to be a shortage of labor to meet existing demand and
desired shipment levels. Moreover, onboarding new employees has resulted in
higher hiring and training costs in 2021 versus last year.
All three of the Company's business segments are managing through supply chain
disruptions and escalating costs, including raw material cost increases,
shortages, transportation cost increases and delays. To offset growing cost
pressures, Bonnell Aluminum implemented its second selling price increase in
2021, which became effective April 26, 2021 , and is preparing for an upcoming
price increase effective January 3, 2022 . In response to unprecedented cost
increases and supply issues for polyethylene and polypropylene resin, PE Films
implemented a quarterly resin cost pass-through mechanism, effective July 1,
2021 , for all products and customers not previously covered by such
arrangements. Terphane, the Company's flexible packaging business headquartered
in Brazil , continues to monitor cost escalations to adjust selling prices as
market dynamics permit.
Financial Considerations
Approximately 62% of Bonnell Aluminum's sales volume in 2020 was related to
building and construction ("B&C") markets (non-residential B&C of 55% and
residential B&C of 7%). Non-residential B&C volume started to decline in the
fourth quarter of 2020 after the fulfillment of contracts that existed at the
start of the COVID-19 pandemic. Recently, market demand in this sector has been
strong but was not reflected in Bonnell Aluminum's third quarter 2021 results,
due to pandemic-related labor shortages and resulting production inefficiencies.
Non-residential B&C volume declined 13.1% versus the third quarter of last year.
However, current bookings and backlog remain at record high levels which we
believe will bode well for future operations and results when production
constraints are alleviated.
The Surface Protection component of PE Films had record EBITDA from ongoing
operations in 2020 but is experiencing a decline in volume in 2021, primarily
related to a previously disclosed customer product transition unrelated to the
pandemic. In addition, the lag in the pass-through of significant
pandemic-related increases in resin costs, and some of such cost increases
incurred prior to mid-year that will not be recovered even on a lagging basis,
have adversely impacted PE Films' profitability in 2021.
At Terphane, the Company believes that the pandemic-related surge in demand for
flexible packaging films that began in early 2020 returned to lower pre-pandemic
levels during the second quarter of 2021. Also, production and sales volumes for
Terphane during the third quarter of 2021 were adversely impacted by an
equipment failure on a manufacturing line that was unrelated to the pandemic and
supply chain restrictions, which Terphane believes are impacting others in the
industry as well. While the equipment failure is not expected to be fixed until
early in 2022, Terphane has adjusted operations for the interim period to meet
anticipated customer demand.
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OPERATIONS REVIEW
Aluminum Extrusions
A summary of results for Aluminum Extrusions is provided below:
Three Months Ended Favorable/ Nine Months Ended Favorable/
(In thousands, except September 30, (Unfavorable) September 30, (Unfavorable)
percentages) 2021 2020 % Change 2021 2020 % Change
Sales volume (lbs) 45,407 48,859 (7.1)% 138,793 139,985 (0.9)%
Net sales $ 137,086 $ 115,621 18.6% $ 394,492 $ 339,566 16.2%
Ongoing operations:
EBITDA $ 12,038 $ 16,540 (27.2)% $ 45,062 $ 41,496 8.6%
Depreciation &
amortization (3,900) (4,251) 8.3% (12,062) (12,632) 4.5%
EBIT* $ 8,138 $ 12,289 (33.8)% $ 33,000 $ 28,864 14.3%
Capital expenditures $ 5,183 $ 1,784 $ 11,956 $ 4,713 *See the table in Note 11, "Business Segments," of this Form 10-Q ("Note 11") for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP.
Third Quarter 2021 Results vs. Third Quarter 2020 Results Net sales (sales less freight) in the third quarter of 2021 increased versus the third quarter of 2020, primarily due to the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs, partially offset by lower volume. Sales volume in the third quarter of 2021 decreased by 7.1% versus the third quarter of 2020. Sales volume associated with the non-residential B&C market, which represented 55% of volume in 2020, declined 13.1% in the third quarter of 2021 versus the third quarter of 2020. Sales volume associated with specialty markets, which represented 31% of total volume in 2020, increased 11.4% in the third quarter of 2021 versus the third quarter of 2020, and sales volume associated with the automotive market, which represented 9% of total volume in 2020, decreased 34.9% in the third quarter of 2021 versus the third quarter of 2020. A portion of the decline in automotive sales was attributed to the supply chain issues in the automotive industry. See "The Impact of COVID-19 and Related Financial Considerations" section for more information on business conditions. EBITDA from ongoing operations in the third quarter of 2021 decreased by$4.5 million in comparison to the third quarter of 2020, primarily due to lower volume ($1.8 million ), increased labor and employee-related costs ($2.4 million ), other operating costs ($4.0 million ), freight expenses ($1.3 million ) and higher general, selling and administrative expenses ($0.3 million ), partially offset by higher pricing ($5.5 million ). Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q for additional information on aluminum prices. First Nine Months of 2021 Results vs. First Nine Months 2020 Results Net sales in the first nine months of 2021 increased versus the first nine months of 2020, primarily due to the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs, partially offset by lower volume. Sales volume in the first nine months of 2021 decreased by 0.9% versus the first nine months of 2020. EBITDA from ongoing operations in the first nine months of 2021 increased by$3.6 million in comparison to the first nine months of 2020 due to higher pricing ($10.2 million ), partially offset by higher labor and employee-related costs ($5.4 million ) and other operational costs ($5.3 million ), higher general, administrative and selling expenses ($1.3 million ) and higher freight costs ($2.3 million ). In addition, inventories accounted for under the first-in first-out method resulted in a benefit of$5.8 million in the first nine months of 2021 versus a charge of$1.9 million in the first nine months of 2020. Projected Capital Expenditures andDepreciation & Amortization Capital expenditures forBonnell Aluminum are projected to be$19 million in 2021, including$3 million for infrastructure upgrades at theCarthage, Tennessee andNewnan, Georgia facilities and$5 million for strategic projects. In addition, approximately$11 million will be required to support continuity of current operations. Depreciation expense is projected to be$14 million in 2021. Amortization expense is projected to be$3 million in 2021. 27 --------------------------------------------------------------------------------PE Films A summary of results forPE Films is provided below: Three Months Ended Favorable/ Nine Months Ended Favorable/ (In thousands, except September 30, (Unfavorable) September 30, (Unfavorable) percentages) 2021 2020 % Change 2021 2020 % Change Sales volume (lbs) 9,283 9,556 (2.9)% 30,066 33,348 (9.8)% Net sales$ 28,501 $ 26,440 7.8%$ 87,885 $ 103,444 (15.0)% Ongoing operations: EBITDA $ 4,821$ 6,041 (20.2)%$ 21,035 $ 33,928 (38.0)% Depreciation & amortization (1,591) (1,785) 10.9% (4,681) (4,868) 3.8% EBIT* $ 3,230$ 4,256 (24.1)%$ 16,354 $ 29,060 (43.7)% Capital expenditures $ 1,023$ 187 $ 2,757 $ 3,231
* See the table in Note 11 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP.
Third Quarter 2021 Results vs. Third Quarter 2020 Results Net sales increased by$2.1 million in the third quarter of 2021 versus the third quarter of 2020, primarily due to higher pricing associated with the pass-through of increased resin costs, partially offset by lower volume associated with the previously disclosed customer product transitions in Surface Protection. EBITDA from ongoing operations in the third quarter of 2021 decreased by$1.2 million versus the third quarter of 2020, primarily due to: •A$1.3 million decrease from Surface Protection related to lower sales associated with the customer product transitions ($1.6 million ), margin erosion associated with higher resin costs that occurred before the resin index pricing plan was fully implemented ($0.5 million ) and the pass-through lag associated with higher resin costs ($0.3 million ), partially offset by higher sales for products unrelated to the customer product transitions ($0.3 million ), lower fixed costs ($0.5 million ) and lower selling, general, and administrative expenses ($0.3 million ); •A$0.4 million decrease fromPottsville Packaging primarily related to the pass-through lag associated with higher resin costs; and •A$0.9 million favorable variance associated with the divestiture of Bright View Technologies at the end of 2020. Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q for additional information on resin prices. Customer Product Transitions and Other Factors in Surface Protection The Surface Protection component ofPE Films supports manufacturers of optical and other specialty substrates used in flat panel display products. These films are primarily used by customers to protect components of displays in the manufacturing and transportation processes and then discarded. The Company previously reported the risk that a portion of its film products used in surface protection applications would be made obsolete by customer product transitions to less costly alternative processes or materials. The Company estimates that these transitions, which principally relate to one customer, adversely impacted EBITDA from ongoing operations forPE Films by$14.6 million during the first nine months of 2021 versus 2020. No additional adverse impacts from the transitions are anticipated during the fourth quarter of 2021 versus 2020. However, a further decline of$7 million in EBITDA from ongoing operations due to the transitions is expected in 2022 versus 2021, at which time the transitions are expected to be complete. The Surface Protection business is also experiencing competitive pricing pressures, unrelated to the customer product transitions, that are expected to adversely impact EBITDA from ongoing operations by approximately$6 million in 2022 versus 2021. To offset the expected adverse impact of the customer transitions and pricing pressures, the Company is aggressively pursuing and making progress in generating contribution from sales of new surface protection products, applications and customers and driving production efficiencies and cost savings. Annual contribution to EBITDA from ongoing operations forPE Films from sales of new surface protection products, applications and customers has increased by approximately$12 million during the past two calendar years. First Nine Months of 2021 Results vs. First Nine Months 2020 Results Net sales in the first nine months of 2021 decreased versus the first nine months 2020, primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection, partially offset by higher pricing associated with the pass-through of increased resin costs. 28 -------------------------------------------------------------------------------- EBITDA from ongoing operations in the first nine months of 2021 decreased by$12.9 million versus the first nine months of 2020 primarily due to: •A$12.5 million decrease from Surface Protection primarily related to lower sales and unfavorable mix associated with the customer product transitions ($14.6 million ), margin erosion associated with higher resin costs that occurred before the resin index pricing plan was fully implemented ($1.4 million ) and the pass-through lag associated with higher resin costs ($1.0 million ), partially offset by higher sales of products unrelated to the customer product transitions ($0.9 million ) and production efficiencies and cost savings ($2.8 million ); •A$1.4 million decrease fromPottsville Packaging primarily related to the pass-through lag associated with higher resin costs; and •A$1.6 million favorable variance associated with the divestiture of Bright View Technologies at the end of 2020. Projected Capital Expenditures andDepreciation & Amortization Capital expenditures forPE Films are projected to be$4 million in 2021, including$2 million for productivity projects and$2 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be$6 million in 2021. There is no amortization expense forPE Films .Flexible Packaging Films A summary of results forFlexible Packaging Films is provided below: Three Months Ended Favorable/ Nine Months Ended Favorable/ September 30, (Unfavorable) September 30, (Unfavorable) (In thousands, except percentages) 2021 2020 % Change 2021 2020 % Change Sales volume (lbs) 27,029 30,115 (10.2)% 78,666 85,059 (7.5)% Net sales$ 36,666 $ 35,856 2.3%$ 102,560 $ 100,534 2.0% Ongoing operations: EBITDA$ 7,396 $ 9,546 (22.5)%$ 25,296 $ 22,594 12.0% Depreciation & amortization (493) (443) (11.3)% (1,466) (1,306) (12.3)% EBIT*$ 6,903 $ 9,103 (24.2)%$ 23,830 $ 21,288 11.9% Capital expenditures$ 1,895 $ 1,183 $ 4,283 $ 2,448
* See the table in Note 11 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP.
Third Quarter 2021 Results vs. Third Quarter 2020 Results Sales volume declined by 10.2% during the third quarter of 2021 versus the third quarter of 2020, primarily due to lower demand, reduced production capacity as a result of an equipment failure on a production line and supply chain restrictions, which Terphane believes are impacting others in the industry as well. While the equipment failure is not expected to be fixed until early in 2022, Terphane has adjusted operations for the interim period to meet anticipated customer demand. Net sales in the third quarter of 2021 increased 2.3% compared to the third quarter of 2020, primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume. EBITDA from ongoing operations in the third quarter of 2021 decreased by$2.2 million versus the third quarter of 2020 primarily due to: •Lower sales volume ($1.8 million ), higher raw material costs ($4.8 million ) and higher selling and general administration expenses ($0.1 million ), partially offset by higher selling prices ($3.4 million ) from the pass-through of higher resin costs; •Net favorable foreign currency translation of Real-denominated operating costs ($1.1 million ); and •Higher foreign currency transaction gains ($0.2 million ) in the third quarter of 2021 versus the third quarter of 2020. First Nine Months of 2021 Results vs. First Nine Months 2020 Results Sales volume declined by 7.5% during the first nine months of 2021 versus the first nine months of 2020, primarily due to temporary resin supply issues, an equipment failure impacting production and lower demand. The Company believes that the pandemic-related surge in demand that began in early 2020 returned to lower pre-pandemic levels during the second quarter of 2021. Net sales in the first nine months of 2021 increased 2.0% compared to the first nine months of 2020, primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume. 29 -------------------------------------------------------------------------------- EBITDA from ongoing operations in the first nine months of 2021 increased by$2.7 million versus the first nine months of 2020 primarily due to: •Favorable product mix ($1.7 million ), higher selling prices from the pass-through of higher resin costs ($0.8 million ), and lower selling and general administration expenses ($0.4 million ), offset by lower sales volume ($3.5 million ) and higher fixed ($0.8 million ) and variable ($0.4 million ) costs; •Net favorable currency translation of Real-denominated operating costs ($4.7 million ); •Higher foreign currency transaction gains ($0.3 million ) in the first nine months of 2021 versus 2020; and •Lower value-added tax credits received in the first nine months of 2021 ($0.5 million ) compared with the first nine months of 2020 ($1.2 million ). Projected Capital Expenditures andDepreciation & Amortization Capital expenditures forFlexible Packaging Films are projected to be$7 million in 2021, including$4 million for new capacity for value-added products and productivity projects and$3 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be$2 million in 2021. Amortization expense is projected to be$0.4 million in 2021. Corporate Expenses, Interest, Taxes & Other Corporate expenses, net, increased in the first nine months of 2021 versus the first nine months of 2020, primarily due to higher professional fees related to remediation activities of previously disclosed material weaknesses in the Company's internal control over financial reporting ($0.6 million ). Interest expense was$2.6 million in the first nine months of 2021 in comparison to$1.6 million in the first nine months of 2020, primarily due to higher average debt levels. The effective tax rate used to compute income taxes for continuing operations in the first nine months of 2021 was 22.7%, compared to 26.2% in the first nine months of 2020. The differences between theU.S. federal statutory rate and the effective tax rate for the first nine months of 2021 and 2020 are shown in the table provided in Note 12. Pension expense was$10.5 million in the first nine months of 2021, a favorable change of$0.1 million compared to the first nine months of 2020. The impact on earnings from pension expense is reflected in "Corporate expenses, net" in the net sales and EBITDA from ongoing operations by segment table. Pension expense is projected to be$14 million in 2021, which is determined at the beginning of the year based on the funded status of the Company's defined benefit pension plan and actuarial assumptions at that time. Tredegar's frozen defined benefit pension plan was underfunded on a GAAP basis by$103 million atDecember 31, 2020 , comprised of investments at fair value of$233 million and a projected benefit obligation ("PBO") of$336 million . GAAP accounting requires adjustment for changes in values of assets and the PBO only at the end of each year, even though these values change daily. The Company estimates that changes to the values of pension plan assets and liabilities resulted in a decrease in the underfunding from$103 million atDecember 31, 2020 to approximately$73 million atSeptember 30, 2021 . Tredegar owns approximately 18% of kaléo, which makes and sells an epinephrine delivery device under the name AUVI-Q®. The Company accounts for its investment in kaléo using a fair value method. The Company's estimate of the fair value of its interest in kaléo atSeptember 30, 2021 was$35.5 million ($30.3 million after taxes), essentially unchanged from the balance atJune 30, 2021 of$35.2 million ($30.1 million after taxes) andDecember 31, 2020 of$34.6 million ($29.7 million after taxes). kaléo's stock is not publicly traded. The ultimate value of the Company's ownership interest in kaléo could be materially different from the estimated fair value and will ultimately be determined and realized only if and when a liquidity event occurs. See Note 7 for more information on this investment. Net capitalization and other credit measures are provided in Liquidity and Capital Resources. Critical Accounting Policies In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with GAAP. The Company believes the estimates, assumptions and judgments described in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of the 2020 Form 10-K have the greatest potential impact on our financial statements, so Tredegar considers these to be its critical accounting policies. These policies include accounting for impairment of long-lived assets and goodwill, investment accounted for under the fair value method, pension benefits and income taxes. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the consistent application of these policies enables it to provide readers of the financial statements with useful and reliable information about 30 --------------------------------------------------------------------------------
our operating results and financial condition. Since
Results of Operations
Third Quarter of 2021 Compared with the Third Quarter of 2020
Sales in the third quarter of 2021 increased by 13.6% compared with the third
quarter of 2020. Net sales in Aluminum Extrusions increased 18.6% due to the
pass-through of higher metal costs and an increase in average selling prices to
cover higher operating costs, partially offset by lower volume. Net sales
increased 7.8% in PE Films , primarily due to higher pricing associated with the
pass-through of increased resin costs, partially offset by lower volume
associated with the previously disclosed customer product transitions in Surface
Protection. Net sales in Flexible Packaging Films increased 2.3% primarily due
to higher selling prices from the pass-through of higher resin costs and
favorable product mix, partially offset by lower sales volume. For more
information on net sales and volume, see the Executive Summary.
Consolidated gross profit (sales minus cost of goods sold and freight) as a
percentage of sales (gross profit margin) was 15.0% in the third quarter of 2021
compared to 22.7% in the third quarter of 2020. The gross profit margin in
Aluminum Extrusions decreased primarily due to lower volume, increased operating
costs and freight expenses, partially offset by higher pricing. The gross profit
margin in PE Films decreased primarily due to lower sales associated with the
customer product transitions and the pass-through lag associated with higher
resin costs, partially offset by higher sales for products unrelated to the
customer product transitions. The gross profit margin in Flexible Packaging
Films decreased due to a lower sales volume and higher raw material costs,
partially offset by higher selling prices from the pass-through of higher resin
costs.
As a percentage of sales, selling, general and administrative ("SG&A") and
research and development ("R&D") expenses were 8.8% in the third quarter of
2021, compared with 12.0% in the third quarter of last year. SG&A expenses were
down year-over-year, while net sales increased. Decreased SG&A spending is
primarily due to nonrecurring corporate costs associated with the divested
Personal Care Films business, lower professional fees associated with business
development activities and nonrecurring SG&A expenses related to Bright View
Technologies in the third quarter of 2020. R&D expense remained consistent with
prior year.
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Pre-tax gains and losses associated with plant shutdowns, asset impairments,
restructurings and other items for continuing operations in the third quarters
of 2021 and 2020 detailed below are shown in the statements of net sales and
EBITDA from ongoing operations by segment table in Note 11 and are included in
"Asset impairments and costs associated with exit and disposal activities, net
of adjustments" in the consolidated statements of income, unless otherwise
noted.
Three Months Ended
September 30,
($ in millions) 2021 2020
Aluminum Extrusions:
(Gains) losses from sale of assets, investment writedowns and other items:
Consulting expenses for enterprise resource planning feasibility study1 $ - 0.3
Environmental charges at Newnan, Georgia plant3 0.1 -
COVID-19-related expenses, net of relief2 0.1 0.5
Total for Aluminum Extrusions $ 0.2 $ 0.8
PE Films:
(Gains) losses associated with plant shutdowns, asset impairments and
restructurings:
Other restructuring costs - severance $ 0.1 $ -
(Gains) losses from sale of assets, investment writedowns and other items:
COVID-19-related expenses2 0.1 -
Total for PE Films $ 0.2 $ -
Corporate:
(Gains) losses associated with plant shutdowns, asset impairments and
restructurings:
(Gain), net of costs associated with the sale of the Lake Zurich
manufacturing facility assets 1.5 0.6 Write-down of investment in Harbinger Capital Partners Special Situations Fund2
- 0.1 Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend1
(0.1) -
Transition service fees, net of corporate costs associated with the
divested
0.1 1.1
Total for Corporate $ 1.3 $ 1.8
1. Included in "Selling, general and administrative expenses" in the consolidated statements of
income.
2. Included in "Other income (expense), net" in the consolidated statements of income.
3. Included in "Cost of goods sold" in the consolidated statements of income.
Average debt outstanding and interest rates were as follows:
Three Months Ended September 30,
(In millions) 2021 2020
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread: Average outstanding debt balance
$ 122.5 $ 24.3
Average interest rate 1.8 % 1.7 %
32-------------------------------------------------------------------------------- First Nine Months of 2021 Results vs. First Nine Months 2020 Results Sales in the first nine months of 2021 increased by 7.6% compared with the first nine months of 2020. Net sales increased 16.2% in Aluminum Extrusions due to the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs, partially offset by lower volume. Net sales decreased 15.0% inPE Films primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection. Net sales inFlexible Packaging Films increased 2.0% primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume. For more information on net sales and volume, see the Executive Summary. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 18.9% in the first nine months of 2021 compared to 22.8% in the first nine months of 2020. The gross profit margin in Aluminum Extrusions decreased primarily due to higher freight, labor and employee-related costs and other operational costs. The gross profit margin inPE Films decreased primarily due to lower sales and unfavorable mix associated with the customer product transitions in Surface Protection and margin erosion associated with higher resin costs that occurred before the resin index pricing plan was fully implemented, partially offset by higher sales of products unrelated to the customer product transitions and production efficiencies and cost savings. The gross profit margin inFlexible Packaging Films decreased due to lower sales volume and higher fixed and variable costs partially offset by favorable product mix. As a percentage of sales, SG&A and R&D expenses were 9.9% in the first nine months of 2021, compared with 12.0% in the first nine months of last year. SG&A and R&D expenses were down year-over-year, while net sales increased. Decreased spending is primarily due to nonrecurring corporate costs associated with the divestedPersonal Care Films business, lower R&D spending, and nonrecurring SG&A expenses related to Bright View Technologies in the first nine months of 2020. 33 -------------------------------------------------------------------------------- Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in the first nine months of 2021 and 2020 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 11 and are included in "Asset impairments and costs associated with exit and disposal activities, net of adjustments" in the consolidated statements of income, unless otherwise noted. Nine Months Ended September 30, ($ in millions) 2021 2020 Aluminum Extrusions: (Gains) losses from sale of assets, investment writedowns and other items: Consulting expenses for enterprise resource planning feasibility study1 $ -$ 1.2 Environmental charges at Newnan, Georgia plant3 0.1 - COVID-19-related expenses, net of relief2 0.1 1.4 Total for Aluminum Extrusions$ 0.2 $ 2.6 PE Films: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Other restructuring costs - severance$ 0.1 $ 0.1 (Gains) losses from sale of assets, investment writedowns and other items: COVID-19-related expenses2 0.4 0.2 Total for PE Films$ 0.5 $ 0.3 Flexible Packaging Films : (Gains) losses from sale of assets, investment writedowns and other items: One-time tax credit inBrazil for PIS/COFINS social contribution non-income taxes resulting from a favorable decision byBrazil's Supreme Court regarding the calculation of such taxes2,4$ (8.5) $ - COVID-19-related expenses2 0.1 - Total for Flexible Packaging Films$ (8.4) $ - Corporate: (Gains) losses associated with plant shutdowns, asset impairments and restructurings: Costs, net of gain associated with the sale of theLake Zurich manufacturing facility assets$ 0.1 $ - (Gains) losses from sale of assets, investment writedowns and other items: Professional fees associated with: remediation activities and other costs relating to the Company's material weaknesses in internal control over financial reporting; and business development activities1
4.4 4.1 Write-down of investment in Harbinger Capital Partners Special Situations Fund2
0.5 0.3 Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend1
0.3 -
Transition service fees, net of corporate costs associated with the
divested
(0.5) 1.1
Accelerated recognition of stock-based compensation expense1 - 0.1
Total for Corporate $ 4.8 $ 5.6
1. Included in "Selling, general and administrative expenses" in the consolidated statements of
income.
2. Included in "Other income (expense), net" in the consolidated statements of income.
3. Included in "Cost of goods sold" in the consolidated statements of income.
4. See Note 13 to the Consolidated Financial Statements.
34
--------------------------------------------------------------------------------Average debt outstanding and interest rates were as follows:
Nine Months Ended September 30,
(In millions) 2021 2020
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread: Average outstanding debt balance
$ 131.5 $ 37.0
Average interest rate 1.7 % 2.5 %
Liquidity and Capital Resources
The Company continues to focus on improving working capital management. Measures
such as days sales outstanding ("DSO"), days inventory outstanding ("DIO") and
days payables outstanding ("DPO") are used to evaluate changes in working
capital. Changes in operating assets and liabilities from continuing operations
from December 31, 2020 to September 30, 2021 are summarized below. Cash flows
for discontinued operations have not been separately disclosed in the
consolidated statements of cash flows.
•Accounts and other receivables increased $10.9 million (12.6%).
•Accounts and other receivables in Aluminum Extrusions increased by $13.8
million primarily due to higher selling prices from the pass-through of higher
metal costs and an increase in average selling prices to cover higher operating
costs, partially offset by lower volume and improved collection efforts during
the nine months ended 2021. DSO (represents trailing 12 months net sales divided
by a rolling 12-month average of accounts and other receivables balances) was
approximately 47.2 days for the 12 months ended September 30, 2021 and 47.5 days
for the 12 months ended December 31, 2020 .
•Accounts and other receivables in PE Films decreased by $3.4 million due to
lower volume and unfavorable mix associated with the previously disclosed
customer product transitions in Surface Protection, partially offset by higher
pricing associated with the pass-through of increased resin costs. DSO was
approximately 28.7 days for the 12 months ended September 30, 2021 and 30.2 days
for the 12 months ended December 31, 2020 .
•Accounts and other receivables in Flexible Packaging Films increased by $1.1
million primarily due to a one-time tax credit in Brazil for unemployment/social
security insurance non-income taxes ("PIS/COFINS") received during the second
quarter of 2021. DSO was approximately 39.8 days for the 12 months ended
September 30, 2021 and 41.0 days for the 12 months ended December 31, 2020 .
•Inventories increased $19.2 million (29.0%).
•Inventories in Aluminum Extrusions increased by $15.4 million due to higher
average aluminum prices and the impact of COVID-19-related operational and
production inefficiencies on the timing of shipments. DIO (represents trailing
12 months costs of goods sold calculated on a first-in first-out basis divided
by a rolling 12-month average of inventory balances calculated on the first-in
first-out basis) was approximately 40.0 days for the 12 months ended
September 30, 2021 and 39.3 days for the 12 months ended December 31, 2020 .
•Inventories in PE Films decreased $1.2 million due to lower planned raw
material and finished good levels due to declining sales volume relative to
2020, partially offset by increased resin costs. DIO of approximately 62.4 days
for the 12 months ended September 30, 2021 was higher compared 59.2 days for the
12 months ended December 31, 2020 due to the lower Surface Protection 12-month
average of costs of goods sold as a result of lower sales volume.
•Inventories in Flexible Packaging Films increased by $5.1 million primarily due
to higher finished good levels due to lower than anticipated sales volume and
higher planned raw material levels due to anticipated freight delays. DIO was
approximately 94.4 days for the 12 months ended September 30, 2021 and 89.4 days
for the 12 months ended December 31, 2020 .
•Net property, plant and equipment increased $1.4 million primarily due to
capital expenditures of $19.0 million , partially offset by depreciation expense
of $16.2 million , disposals, net of cash proceeds of $0.5 million and
unfavorable changes in foreign exchange rates of $0.6 million .
•Identifiable intangible assets, net decreased by $2.2 million (11.8%) due to
amortization expense.
•Accounts payable increased $26.2 million (29.2%).
•Accounts payable in Aluminum Extrusions increased by $22.0 million primarily
due to higher average aluminum prices and favorable payment terms with certain
vendors. DPO (represents trailing 12 months costs of goods sold calculated on a
first-in first-out basis divided by a rolling 12-month average of accounts
payable balances) was
35
--------------------------------------------------------------------------------
approximately 58.7 days for the 12 months ended September 30, 2021 and 53.1 days
for the 12 months ended December 31, 2020 .
•Accounts payable in PE Films increased by $4.2 million primarily due to higher
resin costs and favorable payment terms with certain vendors. DPO was
approximately 38.7 days for the 12 months ended September 30, 2021 and 36.8 days
for the 12 months ended December 31, 2020 .
•Accounts payable in Flexible Packaging Films increased $1.5 million due to
higher resin costs and favorable payment terms with certain vendors. DPO was
approximately 68.2 days for the 12 months ended September 30, 2021 and 61.7 days
for the 12 months ended December 31, 2020 .
Net cash provided by operating activities was $51.5 million in the first nine
months of 2021 compared to $66.3 million in the first nine months of 2020. The
decrease was primarily due to lower net working capital ($10.6 million ) and
lower EBITDA for business segments of $6.6 million in the first nine months of
2021 versus the first nine months months of 2020.
Net cash used in investing activities increased during the first nine months of
2021 compared to the first nine months of 2020 due to higher capital expenditure
spending of $6.2 million , partially offset by $4.7 million cash proceeds from
the sale of the Lake Zurich manufacturing facility assets.
Net cash used in financing activities of $18.2 million in the first nine months
of 2021, compared to $47.6 million in the first nine months of 2020, decreased
primarily due to higher net repayments ($28.0 million ) in 2020 under the Credit
Agreement (as defined below), partially offset by $0.9 million of proceeds from
the exercise of stock options in the first nine months of 2021 and repurchases
of employee common stock for tax withholdings of $0.6 million in the first nine
months of 2020.
Tredegar has a five-year secured revolving credit agreement (the "Credit
Agreement") providing for aggregate borrowings in an amount of $375 million ,
which matures in June 2024 .
Net capitalization and indebtedness as defined under the Credit Agreement as of
September 30, 2021 were as follows:
Net Capitalization and Indebtedness as of
(In thousands)
Net capitalization:
Cash and cash equivalents $ 30,253 Debt:
Credit Agreement 127,000 Debt, net of cash and cash equivalents 96,747 Shareholders' equity 146,279 Net capitalization$ 243,026 Indebtedness as defined in Credit Agreement: Total debt$ 127,000 Indebtedness$ 127,000
Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-Credit EBITDA levels as follows:
Pricing Under The Credit Agreement (Basis Points)
Credit Spread Commitment
Indebtedness-to-Credit EBITDA Ratio Over LIBOR Fee
> 3.5x but <= 4.0x 200.0 40
> 3.0x but <= 3.5x 187.5 35
> 2.0x but <= 3.0x 175.0 30
> 1.0x but <= 2.0x 162.5 25
<= 1.0x 150.0 20
36-------------------------------------------------------------------------------- AtSeptember 30, 2021 , the interest rate on debt under the Credit Agreement existing at that date was priced at one-month LIBOR plus the applicable credit spread of 162.5 basis points. The most restrictive covenants in the Credit Agreement include: •Maximum indebtedness-to-Credit EBITDA ("Leverage Ratio") of 4.00x; •Minimum Credit EBITDA-to-interest expense of 3.00x; and •Maximum aggregate distributions to shareholders over the remaining term of the Credit Agreement of$75 million ; provided, that if the Leverage Ratio of equal to or greater than 3.00x, a limitation on such payments for the succeeding quarter at the greater of (i)$4.75 million and (ii) 50% of consolidated net income for the most recent fiscal quarter. The Credit Agreement is secured by substantially all of the Company's and its domestic subsidiaries' assets, including equity in certain material first-tier foreign subsidiaries. AtSeptember 30, 2021 , based upon the most restrictive covenant within the Credit Agreement, available credit under the Credit Agreement was approximately$248 million . Total debt outstanding was$127 million and$134 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Credit EBITDA is not intended to represent net income (loss) or cash flow from operations as defined by GAAP and should not be considered as an alternative to either net income (loss) or to cash flow. The computations of Credit EBITDA and the leverage ratio and interest coverage ratio as defined in the Credit Agreement are presented below. 37 --------------------------------------------------------------------------------
Computations of Credit EBITDA and Leverage Ratio and Interest Coverage Ratio as Defined in the Credit
Agreement Along with Related Most Restrictive Covenants as of and for the Twelve Months Ended
2021 (In Thousands)
Computation of Credit EBITDA for the twelve months ended
$ 37,366
Plus:
After-tax losses related to discontinued operations 5,684 Total income tax expense for continuing operations 10,823 Interest expense 3,544 Depreciation and amortization expense for continuing operations 25,677 All non-cash losses and expenses, plus cash losses and expenses not to exceed$10,000 , for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of$9,233 ) 12,203
Charges related to stock option grants and awards accounted for under the fair value-based method
2,092
Losses related to the application of the equity method of accounting
-
Losses related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting
-
Minus:
After-tax income related to discontinued operations - Total income tax benefits for continuing operations - Interest income (41) All non-cash gains and income, plus cash gains and income in excess of$10,000 , for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings -
Income related to changes in estimates for stock option grants and awards accounted for under the fair value-based method
-
Income related to the application of the equity method of accounting
-
Income related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting
(1,297)
Plus cash dividends declared on investments in an amount not to exceed $10,000 for such period 318
Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and
asset dispositions -
Plus or minus, as applicable, pro forma EBITDA adjustments to pension expense associated with the early payment of pension obligations
-
Credit EBITDA as defined in Credit Agreement $ 96,369
Computations of leverage and interest coverage ratios as defined in the Credit Agreement at September 30,
2021 :
Leverage ratio (indebtedness-to-Credit EBITDA) 1.32x
Interest coverage ratio (Credit EBITDA-to-interest expense) 27.19x
Most restrictive covenants as defined in the Credit Agreement:
Available balance of maximum permitted aggregate amount of dividends that can be paid by
Tredegar during the remaining term of the Credit Agreement ($75,000 minus $16,134 of dividends
paid after December 1, 2020 ) 58,866
Maximum leverage ratio permitted 4.00x
Minimum interest coverage ratio permitted 3.00x
Tredegar was in compliance with all of its debt covenants as of September 30,
2021 . Noncompliance with any of the debt covenants may have a material adverse
effect on its financial condition or liquidity, in the event such noncompliance
cannot be cured or should the Company be unable to obtain a waiver from the
lenders. Renegotiation of the covenant through an amendment to the Credit
Agreement may effectively cure the noncompliance, but may have an effect on its
financial condition or liquidity depending upon how the covenant is
renegotiated.
At September 30, 2021 , the Company had cash and cash equivalents of $30.3
million , including cash and cash equivalents held by locations outside the U.S.
of $17.7 million .
38--------------------------------------------------------------------------------
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