Tredegar Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Tredegar operates Aluminum Extrusions, PE Films, and Flexible Packaging Films. Personal Care Films is reported as discontinued operations following an agreement to sell the business; the sale closed at the end of October 2020.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $184.4m | $206.0m | $562.8m | $628.0m |
| Continuing-operations income (loss) | ($17.0m) | $15.1m | ($23.3m) | $57.5m |
| Discontinued-operations income (loss), net | ($48.2m) | $2.1m | ($53.0m) | ($6.1m) |
| Net income (loss) | ($65.2m) | $17.1m | ($76.3m) | $51.4m |
| Diluted EPS | ($1.95) | $0.51 | ($2.29) | $1.55 |
Continuing-operations gross margin was 22.7% in Q3 versus 18.9% a year earlier, and 22.8% for the nine months versus 18.8%. SG&A and R&D were 12.0% of sales in both 2020 periods, compared with 10.3% in Q3 2019 and 9.9% in the first nine months of 2019.
- Segment EBITDA from ongoing operations: Q3 Aluminum Extrusions $16.5m (up 0.5%); PE Films $6.0m (down 41.1%); Flexible Packaging Films $9.5m (up 117.3%). Nine-month results were $41.5m (down 19.0%), $33.9m (up 11.4%), and $22.6m (up 115.7%), respectively.
- Cash flow: Operating activities provided $66.3m in the first nine months, versus $86.3m in 2019. Investing activities used $13.4m versus $26.3m; capital expenditures were $13.4m versus $37.2m. Financing activities used $47.6m, including $35.0m net debt repayments and $12.0m of dividends. Cash rose $3.6m to $35.0m. Cash flows for discontinued operations are not separately disclosed.
- Liquidity and debt: At September 30, cash was $35.0m and revolving-credit debt was $7.0m, leaving net cash of $28.0m. Approximately $376m was available under the $500m revolver, subject to covenants. Leverage was 0.07x against a 4.00x maximum; Tredegar reported compliance with all financial covenants.
- Balance sheet: Total assets were $567.6m, down from $712.7m at year-end 2019; shareholders’ equity was $289.3m, down from $376.7m. Pension and other postretirement obligations, net, were $104.6m.
Material changes and unusual items
- Q3 continuing results included a $36.2m pre-tax ($28.2m after-tax) decline in the fair value of Tredegar’s approximately 18% investment in private company kaléo. For the first nine months, the decline was $61.0m pre-tax. The investment was valued at $34.5m at September 30; its ultimate realizable value may differ materially.
- The Personal Care sale agreement provided for approximately $60.5m, subject to customary adjustments. Tredegar recorded a $45.1m noncash impairment charge on the held-for-sale business, contributing to the discontinued-operations loss. The filing also identifies a $24.5m foreign-currency translation amount expected to be released into earnings upon sale.
- Aluminum Extrusions’ nine-month results included a $13.7m goodwill impairment charge related to AACOA, reflecting expected business impacts including COVID-19.
- Q3 sales fell 10.5%. Aluminum Extrusions’ lower volume and metal-cost pass-through reduced sales; PE Films was affected by customer product transitions and inventory corrections; Flexible Packaging Films benefited from stronger volume and product mix. Nine-month operating cash flow was lower partly because 2019 included a $17.6m kaléo dividend and 2020 had less favorable working-capital movements.
Outlook, risks and controls
- No consolidated earnings guidance is provided. Management’s current Bonnell Aluminum projection for 2020 was 184m pounds of volume and $51m EBITDA, improved from its August projection of 170m pounds and $42m. The pre-COVID annual plan had been 201m pounds and $65m EBITDA. Management noted hiring and absenteeism constraints and uncertainty in future building-and-construction demand.
- Management expects Surface Protection customer transitions and related inventory corrections to continue weighing on PE Films. It estimated potential EBITDA contribution declines of $18m in 2021 versus 2020 and $4m in 2022 versus 2021 from remaining transitions, while pursuing replacement products and customers. The slowdown was expected to continue in Q4 2020.
- Terphane reported strong demand for flexible food-packaging films during the pandemic. COVID-19 remains a material uncertainty: management cautioned that future impairment estimates, pension valuations, results, cash flows, and financial condition could be adversely affected.
- Other notable risks include kaléo valuation uncertainty and an ongoing Department of Justice investigation related to kaléo’s discontinued Evzio business; customer concentration and product obsolescence; raw-material, energy, and foreign-exchange volatility; and pension underfunding. Management estimated the pension plan’s underfunding had increased from $100m at year-end 2019 to $120m at September 30, 2020. The company deferred $7.9m of 2020 pension contributions until January 1, 2021 under the CARES Act.
- Disclosure controls were deemed ineffective at September 30, 2020 because of continuing material weaknesses in internal control over financial reporting. Remediation was ongoing and expected to extend into 2021; COVID-19 could delay it.
Important facts for investors to verify
- Final proceeds, customary adjustments, and the post-closing financial and operating effects of the Personal Care divestiture.
- Whether kaléo’s private-company valuation assumptions, customer demand, pricing, liquidity discount, and legal exposure change materially.
- Actual timing and financial impact of PE Films customer transitions, and progress replacing affected contribution.
- Bonnell Aluminum’s realized volume and EBITDA versus management’s current projection, including labor availability and end-market demand.
- Progress and testing results for remediation of internal-control material weaknesses, alongside covenant headroom and pension funding needs.