Tredegar Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Tredegar operates Aluminum Extrusions, PE Films and Flexible Packaging Films. Personal Care Films was sold in October 2020 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $211.1m | $186.3m | $396.0m | $378.4m |
| Continuing-operations income (loss) | $20.7m | $14.3m | $30.3m | $(6.3)m |
| Net income (loss), including discontinued operations | $21.2m | $11.2m | $30.3m | $(11.1)m |
| Diluted EPS | $0.63 | $0.33 | $0.90 | $(0.33) |
| Gross margin | 21.5% | 24.9% | 20.9% | 22.8% |
Q2 sales rose 13.4%; first-half sales rose 4.6%. Despite higher sales, gross margin contracted, reflecting mix, resin costs and segment differences. First-half operating cash flow was $41.5m, versus $36.1m; capital expenditures were $11.3m, versus $8.8m. Cash increased to $18.3m from $11.8m at year-end 2020.
Debt was $117.0m at June 30, down from $134.0m at December 31, 2020. The company reported $258m of available credit under its $375m revolving facility and compliance with debt covenants. Shareholders’ equity was $143.3m, up from $109.1m.
Segment results and period changes
- Aluminum Extrusions: Q2 net sales increased 31.3% to $139.3m and ongoing-operations EBITDA increased 48.5% to $19.7m. Volume rose 11.9%; growth in specialty and automotive markets more than offset a 10.2% decline in non-residential building and construction volume. Higher aluminum selling prices and a favorable FIFO inventory-cost timing effect contributed to results.
- PE Films: Q2 net sales fell 21.8% to $31.4m and ongoing-operations EBITDA fell 41.8% to $9.0m. Lower volume and unfavorable mix from customer product transitions, plus higher resin costs, weighed on performance.
- Flexible Packaging Films: Q2 net sales declined 2.1% to $33.4m, while ongoing-operations EBITDA rose 27.4% to $8.3m. Lower volume from resin supply constraints and customer inventory adjustments was offset by mix, pricing pass-throughs, lower costs and favorable currency translation.
Comparisons also reflect unusual items: Q2 2021 includes an $8.5m pretax Brazilian tax credit ($6.6m after tax); the first half of 2020 included a $24.8m loss on the kaléo investment and a $13.7m goodwill impairment charge.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance is provided in the filing. Management projected 2021 capital expenditures of approximately $21m for Aluminum Extrusions, $4m for PE Films and $8m for Flexible Packaging Films.
- Management expected remaining Surface Protection customer transitions to occur largely by the end of 2021. It estimated these transitions could reduce PE Films ongoing-operations EBITDA by $18m in 2021 versus 2020, including approximately $13m in the first half, and a further $4m in 2022 versus 2021. New products, customers and cost savings are intended to offset some of the effect.
- Management cited COVID-related absenteeism and hiring challenges, aluminum and resin shortages, transportation delays, and raw-material cost increases. Bonnell Aluminum had record bookings and backlog, but labor constraints limited desired shipments. Surface Protection began a quarterly resin pass-through mechanism effective July 1, 2021 for eligible products and customers.
- The estimated fair value of Tredegar’s approximately 19% kaléo interest was $35.2m; kaléo is privately held, and realized value depends on a future liquidity event. Its valuation relies on estimates and is subject to business, regulatory and legal risks, including a DOJ investigation involving kaléo’s discontinued Evzio business.
- Disclosure controls were deemed ineffective at June 30, 2021 because previously identified material weaknesses in internal control over financial reporting remained. Remediation continued; management said testing was expected to begin in the second half of 2021, but gave no assurance as to when weaknesses would be remediated.
Important facts for investors to verify
- How much reported earnings and margins depend on the one-time Brazilian tax credit and favorable aluminum FIFO timing, versus underlying recurring performance.
- Whether PE Films can replace revenue and EBITDA affected by customer transitions, and whether the stated timing and impact estimates change.
- Whether aluminum and resin availability, labor constraints, freight costs and customer demand improve or further pressure production and working capital.
- How kaléo’s operating, legal and regulatory developments affect the estimated value of Tredegar’s investment.
- Progress and independent validation of remediation of the material weaknesses in financial reporting controls.