Tredegar Corporation reported fourth quarter and full year financial results for the period ended December 31, 2019.

Fourth quarter 2019 net loss was $3.1 million ($0.09 per share) compared with net income of $26.2 million ($0.79 per share) in the fourth quarter of 2018. Net income from ongoing operations, which excludes special items, was $7.2 million ($0.22 per share) in the fourth quarter of 2019 and $14.2 million ($0.43 per share) in the fourth quarter of 2018. Full year 2019 net income was $48.3 million ($1.45 per share) compared with net income of $24.8 million ($0.75 per share) in 2018. Net income from ongoing operations, which excludes special items, was $37.6 million ($1.13 per share) in 2019 and $47.3 million ($1.43 per share) in 2018. A reconciliation of net income (loss), 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 and twelve months ended December 31, 2019 and 2018, is provided in Note (a) of the Notes to the Financial Tables in this press release.

Fourth Quarter Financial Results Highlights

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations for Aluminum Extrusions of $14.5 million was $3.4 million lower than the fourth quarter of 2018

EBITDA from ongoing operations for PE Films of $9.5 million was $3.5 million lower than the fourth quarter of 2018

EBITDA from ongoing operations for Flexible Packaging Films of $4.3 million was $0.7 million higher than the fourth quarter of 2018

John Steitz, Tredegar’s president and chief executive officer, said, “Bonnell Aluminum’s full year operating results in 2019 beat 2018 despite softness in its markets. Delivering value to customers and managing operations and costs to levels consistent with sales continue to be priorities. Our Surface Protection component of PE Films achieved record profit in 2019 with the continued delay of a possible customer product transition, obtaining new business and cost improvements.”

Mr. Steitz continued, “Our Personal Care component of PE Films in 2019 mostly mitigated the adverse impact of missed sales and margin goals with cost reduction efforts. The Personal Care team continues to be focused on business development activities. In this regard, they recently completed a contract extension with a key customer for sales through at least 2022 that we previously thought might be lost in 2020. Terphane’s turnaround, which began in 2018, continued into 2019. We look forward to further improvements at Terphane.”

Mr. Steitz further stated, “Tredegar’s overall cash generation in 2019 was truly exceptional with debt net of cash declining by $57 million.”

OPERATIONS REVIEW

Aluminum Extrusions

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

Fourth Quarter 2019 Results vs. Fourth Quarter 2018 Results

Net sales (sales less freight) in the fourth quarter of 2019 decreased versus 2018 primarily due to lower sales volume and the passthrough of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs. Sales volume in the fourth quarter of 2019 decreased by 17.4% versus 2018. Sales volume in the fourth quarter of 2018 was unusually strong with an increase of 20% over the fourth quarter of 2017. Sales volume in the fourth quarter of 2019 was down 1% versus the fourth quarter of 2017. Lower bookings and backlog information for Bonnell Aluminum and industry data continues to indicate softness across all key end-use markets.

EBITDA from ongoing operations in the fourth quarter of 2019 decreased by $3.4 million in comparison to the fourth quarter of 2018 due to:

Lower volumes ($5.7 million) and higher labor and employee-related expenses ($0.9 million), partially offset by higher pricing ($3.5 million) and lower die and other operating expenses ($1.2 million); and

A charge for inventories accounted for under the last in, first out (“LIFO”) method ($0.5 million) in the fourth quarter of 2019 versus a benefit in the fourth quarter of 2018 ($1.0 million).

In October 2019, Bonnell Aluminum announced that it would implement a selling price increase of $0.035 per pound and an additional 5% on fabrication and finishing services effective on shipments beginning January 6, 2020, or as permissible by contract. The Company estimates that approximately 20% - 25% of Bonnell Aluminum’s net sales relate to applicable value-added fabrication and finishing services. The price increase is in addition to selling price changes that normally occur from the passthrough to customers of aluminum raw material cost-related volatility. The price increase is expected to offset continuous cost pressures in the current tight market for skilled labor and in other areas.

Full Year 2019 Results vs. Full Year 2018 Results

Net sales in 2019 decreased versus 2018 primarily due to lower sales volume and the passthrough of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.

EBITDA from ongoing operations in 2019 increased slightly in comparison to 2018. Excluding the adverse impact of the accounting for inventories under the LIFO method in the fourth quarter of 2019 versus 2018 ($1.5 million as noted above), EBITDA from ongoing operations increased $1.7 million despite a 7% decline in sales volume. The increase was primarily due to higher pricing ($22.8 million) and fabrication profits ($1.0 million), partially offset by lower sales volume ($8.7 million), increased labor and employee-related expenses ($7.4 million), higher supplies, maintenance, utilities and other operating costs ($2.0 million), increased freight costs ($2.0 million) and increased general and administrative expenses ($1.9 million).

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for Bonnell Aluminum are projected to be $23 million in 2020, including the expected initial investment for a multi-year project to migrate to a new division-wide enterprise resource planning and manufacturing excellence system ($6 million), infrastructure upgrades at the Carthage, Tennessee and Newnan, Georgia facilities ($4 million), and approximately $12 million required to support continuity of current operations. Depreciation expense is projected to be $14 million in 2020. Amortization expense is projected to be $3 million in 2020.

PE Films

PE Films is composed of surface protection films, personal care materials, polyethylene overwrap films and films for other markets. A summary of fourth quarter and full year operating results from ongoing operations for PE Films is provided below:

Fourth Quarter 2019 Results vs. Fourth Quarter 2018 Results

Net sales in the fourth quarter of 2019 decreased by $13.3 million versus 2018 due to lower sales in Personal Care. Surface Protection sales increased $1.5 million while Personal Care sales decreased $14.3 million.

Net sales in Surface Protection increased in the fourth quarter of 2019 versus the fourth quarter of 2018 due to higher volume and favorable mix, partially offset by a one-time benefit in 2018 from replacement sales associated with prior quality claims. As discussed further below, a possible customer product transition in Surface Protection continues to be delayed. Net sales decreased in Personal Care as a result of lower volume in most product categories from competitive pressures ($8.0 million), including a large portion associated with the previously disclosed customer product transition discussed below. In addition, net sales were adversely impacted by unfavorable product mix and pricing and the decline in the value of currencies for operations outside of the U.S. relative to the U.S. Dollar.

EBITDA from ongoing operations in the fourth quarter of 2019 decreased by $3.5 million versus the fourth quarter of 2018 primarily due to:

A $0.3 million increase from Surface Protection, primarily due to higher volume and mix (net favorable impact of $3.3 million) and favorable resin prices ($0.9 million), partially offset by a one-time benefit in the fourth quarter of 2018 from replacement sales associated with prior quality claims ($2.5 million), higher manufacturing costs ($0.5 million) and higher selling, general and administrative costs ($0.5 million); and

A $3.5 million decrease from Personal Care, primarily due to lower volume ($2.9 million), and unfavorable mix and pricing ($1.8 million), partially offset by lower fixed manufacturing costs ($1.3 million).

Customer Product Transitions in Personal Care and Surface Protection

The Company previously disclosed a significant customer product transition for the Personal Care component of PE Films. Annual sales for this product declined from approximately $70 million in 2018 to $30 million in 2019. The Company recently extended an arrangement with this customer that is expected to generate sales of this product at approximately 2019 levels through at least 2022.

Personal Care had approximately break-even EBITDA from ongoing operations in 2019 as competitive pressures resulted in missed sales and margin goals. Personal Care continues to focus on new business development and cost reduction initiatives in an effort to improve profitability.

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 will be made obsolete by possible future customer product transitions to less costly alternative processes or materials. These transitions principally relate to one customer. The full transition continues to encounter delays, resulting in higher than expected sales to this customer in 2019. The Company estimates that during 2020 the adverse impact on EBITDA from ongoing operations from this customer shift versus 2019 could possibly be $14 million. To offset the potential adverse impact, the Company is aggressively pursuing and making progress generating sales from new surface protection products, applications and customers.

Full Year 2019 Results vs. Full Year 2018 Results

Net sales in 2019 decreased by $59.7 million versus 2018 due to lower sales in Personal Care of $65 million. The decline in net sales in Personal Care was primarily due to lower volume in most product categories from competitive pressures ($48 million), including a large portion associated with the customer product transition discussed above. In addition, net sales in Personal Care were adversely impacted by pricing, mix and the decline in the value of currencies for operations outside of the U.S. relative to the U.S. Dollar.

EBITDA from ongoing operations in 2019 decreased by $13.3 million versus 2018 primarily due to:

A $6.8 million increase from Surface Protection, primarily due to higher selling prices ($6.0 million), quality claims in 2018 that did not recur in 2019 ($1.2 million), production efficiencies ($1.4 million), and favorable raw material costs ($1.9 million), partially offset by unfavorable mix (net impact of $2.0 million) and higher fixed manufacturing and general and administrative costs ($1.5 million); and

A $19.6 million decrease from Personal Care, primarily due to lower volume and unfavorable mix ($19.3 million), unfavorable pricing ($4.8 million), and production inefficiencies ($3.8 million), partially offset by the timing in the passthrough of changes in resin prices ($2.1 million), lower fixed manufacturing ($4.4 million) and selling, general and administrative costs ($1.8 million).

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for PE Films are projected to be $16 million in 2020 including: $1.5 million to complete a scale-up line in Surface Protection to improve development and speed to market for new products; $6 million for other development projects; and $8 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $15 million in 2020. 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 fourth quarter and full year operating results from ongoing operations for Flexible Packaging Films is provided below:

Fourth Quarter 2019 Results vs. Fourth Quarter 2018 Results

Net sales in the fourth quarter of 2019 decreased 4.1% versus the fourth quarter of 2018 primarily due to lower selling prices.

Terphane’s EBITDA from ongoing operations in the fourth quarter of 2019 increased by $0.7 million versus the fourth quarter of 2018 primarily due to:

Higher volume ($0.3 million) and lower fixed and variable costs ($0.2 million), offset by lower selling prices ($0.1 million);

Net favorable foreign currency translation of Real-denominated operating costs ($0.1 million); and

Foreign currency transaction gains of $0.2 million in 2019 versus losses of $0.4 million in 2018.

Full Year 2019 Results vs. Full Year 2018 Results

Net sales in 2019 increased versus 2018 primarily due to higher sales volume and increased selling prices.

Terphane’s EBITDA from ongoing operations in 2019 increased by $3.6 million versus 2018 due to:

Higher volume ($2.6 million) and higher selling prices ($1.6 million), partially offset by higher fixed and variable costs, including costs related to a restarted line ($2.0 million);

Net favorable foreign currency translation of Real-denominated operating costs of $0.4 million; and

Foreign currency transaction gains of $1.0 million in 2019 versus losses of $0.8 million in 2018.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures for Terphane are projected to be $8 million in 2020, including $6 million for new capacity for value-added products and productivity projects and $1 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $2 million in 2020. Amortization expense is projected to be $0.4 million in 2020.

Corporate Expenses, Investments, Interest and Taxes

Pension expense was $9.6 million in 2019, a favorable change of $0.8 million from 2018. The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the net sales and EBITDA from ongoing operations by segment statements. Pension expense is projected to be $14.2 million in 2020. Corporate expenses, net, increased in 2019 versus 2018 primarily due to higher stock-based employee compensation ($1.7 million), and consulting fees ($4.1 million) related to the identification and remediation of previously disclosed material weaknesses in the Company’s internal control over financial reporting, business development activities, and implementation of new accounting guidance.

Interest expense was $4.1 million in 2019 in comparison to $5.7 million in 2018, primarily due to lower average debt levels.

During 2019, the Company recognized consolidated income tax expense of $9.9 million based on pretax income of $58.2 million. During 2018, the Company recognized consolidated income tax expense of $11.5 million based on pretax income of $36.4 million. The effective tax rate from ongoing operations comparable to the earnings reconciliation table provided in Note (a) of the Notes to Financial Tables in this press release was 22.0% in 2019 and 22.8% in 2018 (see also Note (h) of the Notes to Financial Tables). An explanation of differences between the effective tax rate for income from continuing operations and the U.S. federal statutory rate for 2019 and 2018 will be provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).

Tredegar’s approximately 18% ownership in kaleo, Inc. (“kaléo”), which is accounted for under the fair value method, was estimated at a value of $95.5 million at December 31, 2019 (unchanged from September 30, 2019), versus a fair value estimate of $84.6 million at December 31, 2018. In addition, the Company received a cash dividend from kaléo of $17.6 million on April 30, 2019. Dividend income recognized on kaléo and changes in the estimated fair value of the Company’s investment in kaléo, which are included in net income (loss) under GAAP, have consistently been excluded from net income from ongoing operations as shown in the reconciliation table in Note (a) of the Notes to the Financial Tables in this press release. Kaléo’s stock is not publicly traded. The ultimate value of Tredegar’s ownership interest in kaléo could be materially different from the $95.5 million estimated fair value reflected in the Company’s financial statements at December 31, 2019.

CAPITAL STRUCTURE

Total debt was $42.0 million at December 31, 2019, compared to $101.5 million at December 31, 2018. Net debt (debt in excess of cash and cash equivalents) was $10.6 million at December 31, 2019, compared to $67.1 million at December 31, 2018. Net debt is a financial measure that is not calculated or presented in accordance with GAAP. See the Notes to the Financial Tables for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.