Flexible Packaging Films
A summary of results for Flexible Packaging Films is provided below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Favorable/ (Unfavorable) % Change | | Nine Months Ended | | Favorable/ (Unfavorable) % Change |
(In thousands, except percentages) | September 30, | | September 30, | |
2022 | | 2021 | | 2022 | | 2021 | |
Sales volume (lbs) | 28,889 | | | 27,029 | | | 6.9% | | 82,210 | | | 78,666 | | | 4.5% |
Net sales | $ | 47,278 | | | $ | 36,666 | | | 28.9% | | $ | 128,117 | | | $ | 102,560 | | | 24.9% |
Ongoing operations: | | | | | | | | | | | |
EBITDA | $ | 7,830 | | | $ | 7,396 | | | 5.9% | | $ | 20,495 | | | $ | 25,296 | | | (19.0)% |
Depreciation & amortization | (590) | | | (493) | | | (19.7)% | | (1,723) | | | (1,466) | | | (17.5)% |
EBIT* | $ | 7,240 | | | $ | 6,903 | | | 4.9% | | $ | 18,772 | | | $ | 23,830 | | | (21.2)% |
Capital expenditures | $ | 2,501 | | | $ | 1,895 | | | | | $ | 7,310 | | | $ | 4,283 | | | |
* See the table in Note 10 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP. |
Third Quarter 2022 Results vs. Third Quarter 2021 Results
Net sales in the third quarter of 2022 increased 28.9% compared to the third quarter of 2021, primarily due to higher selling prices from the pass-through of higher resin costs, higher sales volume and favorable product mix.
EBITDA from ongoing operations in the third quarter of 2022 increased by $0.4 million versus the third quarter of 2021, primarily due to:
•Higher selling prices ($6.9 million) from the pass-through of higher resin costs, higher sales volume ($0.9 million), favorable product mix ($0.5 million), and lower variable costs ($0.4 million), partially offset by higher raw material costs ($5.6 million), higher fixed costs ($0.6 million) and higher SG&A expenses ($0.4 million);
•Net unfavorable foreign currency translation of Real-denominated operating costs ($1.2 million); and
•Foreign currency transaction gains ($0.1 million) in the third quarter of 2022 compared to foreign currency transaction gains ($0.6 million) in the third quarter of 2021.
First Nine Months of 2022 Results vs. First Nine Months of 2021 Results
Net sales in the first nine months of 2022 increased 24.9% compared to the first nine months of 2021, primarily due to higher selling prices from the pass-through of higher resin costs, favorable product mix and higher sales volume.
EBITDA from ongoing operations in the first nine months of 2022 decreased by $4.8 million versus the first nine months of 2021, primarily due to:
•Higher raw material costs ($16.3 million), higher fixed ($0.7 million) and variable costs ($1.5 million), and higher SG&A expenses ($1.0 million), partially offset by higher selling prices ($15.5 million) from the pass-through of higher resin costs, higher sales volume ($1.9 million) and favorable product mix ($1.3 million);
•Net unfavorable foreign currency translation of Real-denominated operating costs ($3.1 million); and
•Foreign currency transaction losses ($0.3 million) in the first nine months of 2022 compared to foreign currency transaction gains ($0.6 million) in the first nine months of 2021.
Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk in this 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 & Other
Corporate expenses, net in the first nine months of 2022 decreased $0.3 million compared to the first nine months of 2021 primarily due to lower professional fees associated with business development activities ($1.6 million) and lower stock-
based compensation ($1.2 million), offset by higher professional fees associated with remediation activities related to the Company's previously disclosed material weaknesses in internal control over financial reporting ($2.3 million).
Interest expense of $3.2 million in the first nine months of 2022 increased $0.6 million compared to the first nine months of 2021 due to higher average interest rates during the first nine months of 2022, partially offset by lower average debt levels.
Pension expense under GAAP of $10.4 million in the first nine months of 2022 remained consistent with the first nine 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 $10 million at September 30, 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").
Net capitalization and other credit measures are provided in Liquidity and Capital Resources below.
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, 2021 to September 30, 2022 are summarized below. Cash flows for discontinued operations have not been separately disclosed in the condensed consolidated statements of cash flows.
•Accounts and other receivables increased $6.8 million (6.5%).
◦Accounts and other receivables in Aluminum Extrusions increased $7.3 million primarily due to an increase in average selling prices to cover higher operating costs, partially offset by lower sales volume. DSO (represents trailing 12 months net sales divided by a rolling 12-month average of accounts and other receivables balances) was approximately 48.3 days for the 12 months ended September 30, 2022 and 47.6 days for the 12 months ended December 31, 2021.
◦Accounts and other receivables in PE Films decreased $6.8 million due to lower sales volume in both Surface Protection and overwrap films, partially offset by increased overwrap films sales as a result of the pricing impact associated with the pass-through of resin costs. DSO was approximately 29.4 days for the 12 months ended September 30, 2022 and 28.5 days for the 12 months ended December 31, 2021.
◦Accounts and other receivables in Flexible Packaging Films increased $6.2 million primarily due to higher selling prices from the pass-through of higher resin costs, favorable product mix and higher sales volume. DSO was approximately 40.8 days for the 12 months ended September 30, 2022 and 40.0 days for the 12 months ended December 31, 2021.
•Inventories increased $25.5 million (28.8%).
◦Inventories in Aluminum Extrusions increased $12.8 million due to increased raw material levels due to slowing order input, order cancellations as customers report high inventory levels, and increased aluminum supplier costs. 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 48.3 days for the 12 months ended September 30, 2022 and 41.4 days for the 12 months ended December 31, 2021.
◦Inventories in PE Films increased $2.9 million due to lower sales volume and higher planned raw material levels from the first half of 2022. DIO was approximately 62.6 days for the 12 months ended September 30, 2022 and 62.8 days for the 12 months ended December 31, 2021.
◦Inventories in Flexible Packaging Films increased $9.8 million primarily due to the impact of higher average resin prices on raw materials, higher planned finished good levels and the impact from the change in the U.S. dollar value of currencies related to operations outside of the U.S. DIO was approximately 96.7 days for the 12 months ended September 30, 2022 and 93.1 days for the 12 months ended December 31, 2021.
•Net property, plant and equipment increased $9.1 million primarily due to capital expenditures of $28.5 million, partially offset by depreciation expense of $17.5 million and a $1.1 million unfavorable change in the value of the U.S. dollar relative to foreign currencies.
•Identifiable intangible assets, net decreased $2.0 million (13.8%) due to amortization expense.
•Deferred income tax assets decreased $3.9 million primarily due to changes in other comprehensive income and the projected utilization of foreign tax credits partially offset by the change in the deferred tax liability as a result of 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. See Note 9 for additional information.
•Accounts payable increased $3.1 million (2.5%).
◦Accounts payable in Aluminum Extrusions increased $4.8 million primarily due to the timing of purchasing raw materials at higher aluminum prices and higher aluminum supplier costs. 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 approximately 63.3 days for the 12 months ended September 30, 2022 and 60.1 days for the 12 months ended December 31, 2021.
◦Accounts payable in PE Films decreased $2.5 million primarily due to lower raw material purchases. DPO was approximately 51.9 days for the 12 months ended September 30, 2022 and 44.0 days for the 12 months ended December 31, 2021.
◦Accounts payable in Flexible Packaging Films remained flat compared to the prior year. DPO was approximately 69.5 days for the 12 months ended September 30, 2022 and 68.2 days for the 12 months ended December 31, 2021.
Net cash used in operating activities was $23.2 million in the first nine months of 2022 compared to net cash provided by operating activities of $51.5 million in the first nine months of 2021. The change in operating activities is primarily due to the Special Contribution ($50 million) and higher working capital due to factors discussed earlier in this section relating to accounts and other receivables, inventories and accounts payable.
Net cash used in investing activities increased during the first nine months of 2022 compared to the first nine months of 2021 due to higher capital expenditure spending ($6.0 million) and cash proceeds received during the three months ended September 30, 2021 from the sale of the Lake Zurich manufacturing facility assets ($4.7 million), partially offset by a gain related to additional cash consideration received during the first nine months of 2022 in connection with the Company's sale of its investment interests kaléo ($1.4 million).
Net cash provided by financing activities was $36.8 million in the first nine months of 2022, compared to net cash used in financing activities of $18.2 million in the first nine months of 2021. The change in financing activities is primarily due to higher net borrowings ($58.0 million) under the Credit Agreement (as defined below) to fund the $50 million Special Contribution to the pension plan, higher deferred financing costs ($1.2 million), repurchases of employee common stock for tax withholdings of $0.4 million in the first nine months of 2022, and $0.9 million of proceeds from the exercise of stock options in the first nine months of 2021.
The Company believes that existing borrowing availability, current cash balances and cash flow from operations will be sufficient to satisfy short term material cash requirements related to working capital, capital expenditures, debt repayments and dividend requirements for at least the next twelve months. In the longer term, liquidity will depend on many factors, including results of operations, the timing and extent of capital expenditures, changes in operating plans, or other events that would cause the Company to seek additional financing in future periods.
At September 30, 2022, the Company had cash and cash equivalents of $19.3 million, including cash and cash equivalents held in locations outside the U.S. of $8.5 million.
On June 29, 2022, Tredegar entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) that replaced its existing $375 million five-year, secured revolving credit facility that was due to expire on June 28, 2024. The Credit Agreement is a five-year, revolving, secured credit facility that permits aggregate borrowings of $375 million and matures on June 29, 2027.
Net capitalization and indebtedness as defined under the Credit Agreement as of September 30, 2022 were as follows: | | | | | |
Net Capitalization and Indebtedness as of September 30, 2022 |
(In thousands) |
Net capitalization: | |
Cash and cash equivalents | $ | 19,250 | |
Debt: | |
Credit Agreement | 124,000 | |
Debt, net of cash and cash equivalents | 104,750 | |
Shareholders’ equity | 207,058 | |
Net capitalization | $ | 311,808 | |
Indebtedness as defined in Credit Agreement: | |
Total debt | $ | 124,000 | |
Indebtedness | $ | 124,000 | |
Borrowings under the Credit Agreement bear an interest rate equal to Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment of 10 basis points ("Adjusted Term SOFR Rate") and an amount depending on the type of borrowing and commitment fees charged on the unused amount under the Credit Agreement at various Total Net Leverage Ratio levels as follows: | | | | | | | | |
Pricing Under the Credit Agreement (Basis Points) |
Total Net Leverage Ratio | Term Benchmark Spread | Commitment Fee |
<= 1.0x | 150.0 | | 20 | |
>1.0x but <=2.0x | 162.5 | | 25 | |
>2.0x but <=3.0x | 175.0 | | 30 | |
>3.0x but <=3.5x | 187.5 | | 35 | |
>3.5x | 200.0 | | 40 | |
At September 30, 2022, $124.0 million of the outstanding debt was principally priced at an interest rate equal to the Adjusted Term SOFR Rate plus the applicable credit spread of 150.0 basis points. Prior to the Credit Agreement, the interest rate was based on LIBOR plus an applicable credit spread.
The primary restrictive covenants in the Credit Agreement include:
•Total Net Leverage Ratio of 4.00x;
•Interest Coverage Ratio of 3.00x; and
•Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $75 million (provided that the $75 million basket will reset at the end of each fiscal quarter when the Total Net Leverage ratio is less than or equal to 2.00x).
Under the Credit Agreement:
•Total Net Leverage Ratio is defined as the ratio of (a)(i) total indebtedness minus (ii) liquidity (the lesser of $50,000,000 and the aggregate amount of cash and cash equivalents) to (b) Credit EBITDA; and
•Interest Coverage Ratio is defined as the ratio of (a) Credit EBITDA to (b) interest expense.
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. At September 30, 2022, based upon the restrictive covenants within the Credit Agreement, available credit under the Credit Agreement was approximately $249 million. Total debt outstanding was $124.0 million and $73.0 million as of September 30, 2022 and December 31, 2021, 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, the Total Net Leverage Ratio and Interest Coverage Ratio as defined in the Credit Agreement are presented below.
| | | | | |
Computations of Credit EBITDA, Total Net Leverage Ratio and Interest Coverage Ratio (in each case, as Defined in the Credit Agreement) Along with Related Primary Restrictive Covenants as of and for the Twelve Months Ended September 30, 2022 |
Computation of Credit EBITDA for the twelve months ended September 30, 2022 (In Thousands): |
Net income (loss) | $ | 53,676 | |
Plus: | |
After-tax losses related to discontinued operations | — | |
Total income tax expense for continuing operations | 6,016 | |
Interest expense | 3,989 | |
Depreciation and amortization expense for continuing operations | 24,966 | |
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 $8,225) | 8,253 | |
Charges related to stock option grants and awards accounted for under the fair value-based method | 1,829 | |
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 | (61) | |
Total income tax benefits for continuing operations | — | |
Interest income | (74) | |
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 | (3,859) | |
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 | (12,989) | |
Plus cash dividends declared on investments in an amount not to exceed $10,000 for such period | — | |
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 | 13,724 | |
Credit EBITDA | $ | 95,470 | |
Computations of Total Net Leverage Ratio and Interest Coverage Ratio at September 30, 2022: |
Total Net Leverage Ratio | 1.1x |
Interest Coverage Ratio | 23.93x |
Primary restrictive covenants: | |
Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $75 million | Unlimited |
Maximum Total Net 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, 2022. Noncompliance with any of the debt covenants could 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 could effectively cure the noncompliance, but could have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated.