Tredegar Reports First Quarter 2022 Results

RICHMOND, Va.–(BUSINESS WIRE)–Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported first quarter financial results for the period ended March 31, 2022.

First quarter 2022 net income from continuing operations was $16.5 million (0.49 per diluted share) compared to net income from continuing operations of $9.6 million ($0.29 per diluted share) in the first quarter of 2021. Net income from ongoing operations, which excludes special items, was $16.9 million ($0.50 per diluted share) in the first quarter of 2022 compared with $10.1 million ($0.30 per diluted share) in the first quarter of 2021. A reconciliation of net income (loss) from continuing operations, a financial measure calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), to net income from ongoing operations, a non-GAAP financial measure, for the three months ended March 31, 2022 and 2021, is provided in Note (a) to the Financial Statements in this press release.

First Quarter Financial Results Highlights

• Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations for Aluminum Extrusions of $23.9 million was $10.6 million higher than the first quarter of 2021

• EBITDA from ongoing operations for PE Films of $7.0 million was $0.2 million lower than the first quarter of 2021

• EBITDA from ongoing operations for Flexible Packaging Films of $5.0 million was $4.6 million lower than the first quarter of 2021
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John Steitz, Tredegar’s president and chief executive officer, said, “Bonnell Aluminum had a record quarter for profitability that included a benefit of $7.1 million from the timing of the flow through of inventory costs. Even without this benefit, we are pleased with its performance in a challenging environment, which included labor shortage, supply chain and inflationary issues. Backlog continues to be robust.”

Mr. Steitz continued, “PE Films continues to make progress in its efforts to reverse the sales and profit declines that occurred in 2021 from previously disclosed product transitions. We should have a better idea by year-end on whether these efforts will translate into a meaningful rebound of growth. Terphane had a good first quarter compared with exceptional results last year, especially considering the heightened cost and competitive pressures that exist in the current economic environment.”

Mr. Steitz further stated, “Debt, net of cash, increased by $63.2 million mainly as a result of the previously disclosed $50 million contribution in February to our frozen pension plan, in conjunction with the initiation of a process to terminate and settle the plan, as well as higher working capital that we typically experience in the first quarter of the year.”

OPERATIONS REVIEW

Aluminum Extrusions

Aluminum Extrusions, which is also referred to as Bonnell Aluminum, produces high-quality, soft-alloy and medium-strength custom fabricated and finished aluminum extrusions primarily for the following markets: building and construction (B&C), automotive, and specialty (which consists of consumer durables, machinery and equipment, electrical and renewable energy, and distribution end-use products). A summary of results for Aluminum Extrusions is provided below:

First Quarter 2022 Results vs. First Quarter 2021 Results

Net sales (sales less freight) in the first quarter of 2022 increased by 33.8% versus 2021 primarily due to an increase in average selling prices to cover significantly higher aluminum raw material costs and higher operating costs, partially offset by lower sales volume. Sales volume in the first quarter of 2022 decreased by 3.1% versus 2021. Sales volume in the specialty market, which represented 34% of total volume in 2021, decreased 5.2% in the first quarter of 2022 versus 2021. Sales volume in the automotive market, which represented 8% of total volume in 2021, declined 20.0% versus the first quarter of 2021. Non-residential B&C sales volume, which represented 51% of 2021 volume, increased 1.3% in the first quarter of 2022 versus 2021. Strong market demand in this sector has not been fully reflected in Bonnell Aluminum’s first quarter 2022 results, due to pandemic-related labor shortages and resulting production inefficiencies. While the average number of direct labor employees at Bonnell Aluminum facilities increased approximately 5% and 3% in the first quarter of 2022 compared to the first and fourth quarters of 2021, respectively, the estimated average labor shortage levels was 143, 133 and 147 workers in the first quarter of 2022 and first and fourth quarters of 2021, respectively. Moreover, onboarding new employees has resulted in higher hiring and training costs in 2022 versus last year. However, current bookings and backlog remain at record high levels.

EBITDA from ongoing operations in the first quarter of 2022 increased by $10.6 million in comparison to the first quarter of 2021 primarily due to:

• Higher pricing ($14.7 million, net of the pass-through of aluminum raw material costs), partially offset by: lower volume ($0.4 million); higher labor and employee-related costs ($1.3 million) and lower labor productivity ($1.1 million); higher maintenance costs ($1.1 million); higher supply expense, including significant price increases in paint, chemicals, packaging and other supplies ($3.8 million); higher freight rates ($1.1 million); and increased selling, general and administrative expenses ($1.5 million); and

• The timing of the flow through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at lower prices in a quickly rising commodity pricing environment, resulted in a benefit of $7.1 million in the first quarter of 2022 versus a benefit of $1.0 million in the first quarter of 2021. The benefit in the first quarter of 2022 was net of an adverse impact from the lag in pricing ($1.8 million), in which products promised to customers at a specified price were shipped in a later period.

Aluminum Extrusions believes that it has adequate supply agreements for aluminum raw materials in 2022 and is in the process of securing supply sources to meet expected needs in 2023. Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 (“First Quarter Form 10-Q”) for additional information on aluminum price trends.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for Bonnell Aluminum are projected to be $31 million in 2022, including $15 million for new enterprise resource planning and manufacturing execution systems (“ERP/MES”), $6 million for infrastructure upgrades at the facilities located in Niles, Michigan, Carthage, Tennessee and Newnan, Georgia and $3 million for other strategic projects. The ERP/MES project is expected to cost $28 million over a two-year time span. In addition to strategic projects, approximately $7 million will be required to support continuity of current operations. Depreciation expense is projected to be $14 million in 2022. Amortization expense is projected to be $2 million in 2022.

PE Films

PE Films produces surface protection films, polyethylene overwrap and polypropylene films for other markets. A summary of results for PE Films is provided below:

First Quarter 2022 Results vs. First Quarter 2021 Results

Net sales increased by $3.2 million in the first quarter of 2022 versus the first quarter of 2021 primarily due to higher volume in Surface Protection and higher selling prices for overwrap films. Sales volume in Surface Protection increased 5% versus the first quarter of 2021.

EBITDA from ongoing operations in the first quarter of 2022 decreased by $0.2 million versus the first quarter of 2021, primarily due to:

• A $0.9 million decrease from Surface Protection associated with lower sales related to previously disclosed customer product transitions ($1.5 million), competitive pricing pressures for products unrelated to the customer product transitions ($1.4 million) and higher freight expense ($0.2 million), partially offset by higher volume, favorable mix ($1.0 million) and the pass-through lag associated with resin costs (benefit of $0.6 million in the first quarter of 2022 vs. charge of $0.5 million in the first quarter of 2021); and

• A $0.7 million increase from overwrap films primarily related to a benefit from the pass-through lag associated with resin costs (benefit of $0.3 million in the first quarter of 2022 versus a charge of $0.3 million in the first quarter of 2021) and favorable selling, general and administrative expenses ($0.4 million), partially offset by unfavorable mix ($0.2 million).

Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the First Quarter Form 10-Q for additional information on resin price trends.

Customer Product Transitions and Other Factors in Surface Protection

The Surface Protection component of PE 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 pre-tax income from continuing operations as reported under GAAP and EBITDA from ongoing operations for PE Films by $14.8 million during 2021 versus 2020. A total decline of $7 million in pre-tax income from continuing operations as reported under GAAP and 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 pre-tax income from continuing operations as reported under GAAP and EBITDA from ongoing operations by approximately $6 million for full year 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 pre-tax income from continuing operations as reported under GAAP and EBITDA from ongoing operations for PE Films from sales of products unrelated to previously disclosed customer product transitions increased $7 million for the two-year period ended December 31, 2021, which excludes the impact of resin pass-through lag but includes the adverse impact of customer inventory corrections, customer production slowdowns associated with COVID-19-related factors, and a slowdown in the television market in the fourth quarter of 2021.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for PE Films are projected to be $5 million in 2022, including $2 million for productivity projects and $3 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $7 million in 2022. There is no amortization expense for PE Films.

Flexible Packaging Films

Flexible Packaging Films, which is also referred to as Terphane, produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. A summary of results for Flexible Packaging Films is provided below:

First Quarter 2022 Results vs. First Quarter 2021 Results

Sales volume declined by 5.1% during the first quarter of 2022 versus the first quarter of 2021, which reflected the surge in pandemic-related demand. Net sales in the first quarter of 2022 increased 20.7% compared to the first quarter of 2021, 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 first quarter of 2022 decreased by $4.6 million versus the first quarter of 2021 primarily due to:

• Higher raw material costs ($6.0 million), higher variable costs ($1.6 million) and lower sales volume ($0.8 million), partially offset by higher selling prices ($4.9 million) from the pass-through of higher resin costs, favorable absorption of fixed costs ($0.4 million) and favorable product mix ($0.3 million);

• Net unfavorable foreign currency translation of Real-denominated operating costs ($0.3 million); and

• Foreign currency transaction losses ($0.9 million) in the first quarter of 2022 compared to foreign currency transaction gains ($0.4 million) in the first quarter of 2021.

Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in the First Quarter Form 10-Q for additional information on polyester fiber and component price trends.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for Flexible Packaging Films are projected to be $8 million in 2022, including $4 million for new capacity for value-added products and productivity projects and $4 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $2 million in 2022. Amortization expense is projected to be $0.4 million in 2022.

Corporate Expenses, Interest, Taxes & Other

Corporate expenses, net in the first three months of 2022 remained consistent with the first three months of 2021 as lower stock-based compensation ($0.8 million) was substantially offset by higher professional fees associated with remediation activities related to the Company’s previously disclosed material weaknesses in internal control over financial reporting ($0.3 million), non-recurring 2021 transition service fee income, net of corporate costs associated with the divested Personal Care Films business ($0.3 million) and higher professional fees associated with business development activities ($0.1 million).

Interest expense of $0.8 million in the first three months of 2022 remained consistent with the first three months of 2021 as lower average debt levels were offset by higher average interest rates.

The effective tax rate used to compute income tax expense (benefit) for continuing operations in the first three months of 2022 was 4.5%, compared to 24.4% in the first three months of 2021. The decrease in the effective tax rate for continuing operations is primarily due to a discrete benefit recorded in the first quarter of 2022 resulting from the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These regulations overhaul various components of the foreign tax credit regime including the determination of creditable foreign taxes and limit the amount of foreign taxes that are creditable against U.S. income taxes. This one-time discrete benefit is expected to reduce the effective tax rate for the remainder of 2022, which will be offset by an expected increase to the effective tax rate as the result of Brazilian income tax no longer being creditable in the U.S. for the foreseeable future. The effective tax rate from ongoing operations comparable to the earnings reconciliation table provided in Note (a) to the Financial Statements in this press release was 25.5% for the first three months of 2022 versus 24.4% for the first three months of 2021 (see also Note (e) to the Financial Statements). Refer to Note 9 to the Company’s Condensed Consolidated Financial Statements in the First Quarter Form 10-Q for an explanation of differences between the effective tax rate for income (loss) from continuing operations and the U.S. federal statutory rate for 2022 and 2021.

Pension expense under GAAP of $3.5 million in the first three months of 2022 remained consistent with the first three months of 2021. On February 10, 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan, which could take up to 24 months to complete. In connection therewith, the Company borrowed funds under its revolving credit agreement and made a $50 million contribution to the pension plan (the “Special Contribution”) to reduce its underfunding and as part of a program within the pension plan to hedge or fix the expected future contributions that will be needed by the Company through the settlement process. The Company expects to realize income tax cash benefits on the Special Contribution of approximately $11 million in 2022. Administrative costs for the pension plan through the settlement process are estimated at $4 to $5 million.

Tredegar’s frozen defined benefit pension plan was underfunded on a GAAP basis by $69 million at December 31, 2021, comprised of investments at fair value of $245 million and a projected benefit obligation (“PBO”) of $314 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 the Special Contribution and changes to the values of pension plan assets and liabilities resulted in a decrease in the underfunding on a GAAP basis from $69 million at December 31, 2021 to approximately $13 million at March 31, 2022. The ultimate settlement benefit obligation may differ from the PBO, depending on market factors for buyers of pension obligations at the time of settlement.

Prior to the Special Contribution, GAAP pension expense was a reasonable proxy for the Company’s required minimum cash contribution to the pension plan. The Company estimates that, with the Special Contribution, there will be no required minimum cash contributions until final settlement. Pension expense under GAAP is projected to be approximately $14 million in 2022, which is mainly comprised of non-cash amortization of deferred net actuarial losses reflected in the Company’s shareholders’ equity as accumulated other comprehensive losses. Beginning in 2022, and consistent with no expected required minimum cash contributions, no pension expense is included in calculating earnings before interest, taxes, depreciation and amortization as defined in the Company’s revolving credit agreement (“Credit EBITDA”), which is used to compute certain borrowing ratios and a significant consideration for computing non-GAAP net income (loss) from ongoing operations.

The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the accompanying net sales and EBITDA from ongoing operations by segment tables. However, beginning in 2022 and consistent with excluding GAAP pension expense from Credit EBITDA as described above, GAAP pension expense has been presented separately and removed from net income (loss) from continuing operations and diluted earnings (loss) per share as reported under GAAP for purposes of determining Tredegar’s non-GAAP presentation of net income (loss) and diluted earnings (loss) per share from ongoing operations (see related reconciliation in Note (a) to the Financial Statements in this press release for more information).

Total debt was $131.3 million at March 31, 2022 compared to total debt of $73.0 million at December 31, 2021. Net debt (debt in excess of cash and cash equivalents), a non-GAAP financial measure, was $105.7 million at March 31, 2022 compared to $42.5 million at December 31, 2021. The Company’s revolving credit agreement allows for borrowings of up to $375 million and matures in June 2024. The Company believes that its most restrictive covenant (computed quarterly) is the leverage ratio, which permits maximum borrowings of up to 4x Credit EBITDA for the trailing four quarters. The Company had Credit EBITDA and a leverage ratio (calculated in the “Liquidity and Capital Resources” section of the First Quarter Form 10-Q) of $109.9 million and 1.19x, respectively, at March 31, 2022. See Note (h) to the Financial Statements in this press release for a reconciliation of net debt to the most directly comparable GAAP financial measure.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Some of the information contained in this press release 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 COVID-19 pandemic.

Contacts

Tredegar Corporation

Neill Bellamy, 804-330-1211

neill.bellamy@tredegar.com

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