Tredegar Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Tredegar manufactures aluminum extrusions, polyethylene films, and flexible packaging films. Unless noted otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $218.6 million | $248.2 million | $446.9 million | $496.7 million |
| Net income (loss) | $11.2 million | $14.5 million | $(11.1) million | $34.3 million |
| Diluted EPS | $0.33 | $0.44 | $(0.33) | $1.03 |
| Gross profit margin | 22.6% | 18.8% | 21.0% | 17.2% |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $36.1 million | $68.5 million |
Q2 sales fell 11.9% year over year, while net income declined by $3.3 million. The first-half loss included a $24.8 million pretax decline in the fair value of the kaléo investment and a $13.7 million goodwill impairment charge. The six-month income tax benefit was $3.5 million; the effective tax rate was 23.8%.
Q2 segment EBITDA from ongoing operations: Aluminum Extrusions $13.3 million (down 28.6%); PE Films $15.3 million (up 37.3%); Flexible Packaging Films $6.5 million (up 125.5%). For the first half, the respective amounts were $25.0 million (down 28.2%), $29.5 million (up 66.7%), and $13.0 million (up 114.5%). These are the company’s segment performance measures, not consolidated GAAP operating income.
Liquidity, debt and cash flow
- At June 30, cash was $39.9 million and revolving-credit debt was $34.0 million, resulting in $5.9 million of net cash. Total current assets were $236.8 million and current liabilities were $148.5 million.
- Six-month operating cash flow was $36.1 million; capital expenditures were $8.8 million. Financing used $16.6 million, including $8.0 million of net debt repayments and $8.0 million of dividends paid. Cash increased $8.5 million to $39.9 million.
- The $500 million revolving credit agreement matures in June 2024. Approximately $354 million was available under the facility at quarter-end. The company reported a 0.35x leverage ratio against a 4.00x maximum, a 36.49x interest coverage ratio against a 3.00x minimum, and compliance with all financial covenants.
- Quarterly dividends were $0.12 per share. The board retains discretion over future dividends, subject to financial condition, cash needs and credit-agreement restrictions.
Material changes and management commentary
- Aluminum Extrusions: Q2 volume fell 17.5% and net sales fell 22.4%, reflecting weaker demand, especially in specialty and automotive markets, and lower metal-cost pass-through. Management’s COVID-affected 2020 projection was 170 million pounds of volume and $42 million of ongoing EBITDA, versus a pre-pandemic plan of 201 million pounds and $65 million EBITDA. The projection assumed no further facility downtime.
- PE Films: Q2 net sales increased 2.7% and segment EBITDA rose 37.3%. Surface Protection achieved record performance for the quarter and first half, but management anticipated a second-half slowdown and customer inventory corrections. A possible customer product transition could reduce EBITDA by about $14 million over the next four quarters versus the prior four quarters.
- Flexible Packaging Films: Q2 net sales increased 2.0% and EBITDA more than doubled, supported by stronger food-packaging demand, lower raw-material costs, volume and production efficiencies. Six-month sales decreased 3.6%, while EBITDA increased 114.5%.
- Management reduced the 2020 capital-expenditure budget from $47 million to $31 million and said it was focused on cash conservation and working capital. The disclosed segment-level 2020 capital-expenditure projections total approximately $31 million.
Outlook, risks and unusual items
- COVID-19 created significant uncertainty for demand, employees, supply chains and customers. Aluminum Extrusions’ acquired AACOA reporting unit was severely affected, prompting a full $13.7 million goodwill write-off in Q1. Management said further impairment testing could be required if conditions change.
- The kaléo investment was valued at $70.7 million at June 30, down $24.8 million from year-end; its estimated value reflects Level 3 assumptions and a 20% private-company liquidity discount. Management cited weaker expected demand for epinephrine devices during the pandemic. The ultimate value depends on a future liquidity event and may differ materially from the estimate. kaléo also faces an ongoing Department of Justice investigation related to its discontinued Evzio business.
- The company estimated its defined-benefit pension plan underfunding increased from $100 million at year-end 2019 to $130 million at June 30, 2020. It expected 2020 pension expense of approximately $14 million and elected under the CARES Act to defer $2.4 million of required contributions until January 2021.
- The Lake Zurich PE Films plant shutdown was completed in March, with production transferred to Terre Haute. Expected total costs include $6.9 million of pretax cash costs and $1.3 million of noncash write-offs and accelerated depreciation; completion was anticipated by year-end 2020.
- Disclosure controls and procedures were deemed ineffective at June 30 because of continuing material weaknesses in internal control over financial reporting. Remediation was underway and expected to extend into 2021; COVID-related restrictions could delay it. The filing says the weaknesses had not resulted in material misstatements of the 2019 financial statements.
- Other identified risks include raw-material and energy prices, foreign exchange, customer concentration and product transitions, pension funding, international operations, and the possibility that COVID-19 materially alters business projections. The filing provides no formal consolidated earnings guidance.
Key facts for investors to verify
- Whether Aluminum Extrusions’ projected 2020 volume and EBITDA remain achievable as pandemic effects and nonresidential construction demand evolve.
- Whether the Surface Protection customer transition occurs and how its potential $14 million EBITDA impact compares with new products and customer wins.
- Whether kaléo’s valuation assumptions, expected demand and potential legal exposure support the reported $70.7 million carrying value.
- Whether pension underfunding, deferred contributions and required cash funding change materially.
- Progress and independent validation of internal-control remediation, including whether material weaknesses persist into 2021.
- Whether operating cash flow, covenant headroom and dividend capacity remain adequate under further stress.