Tredegar Corporation — Form 10-Q Summary
Business context and reporting period
Tredegar manufactures aluminum extrusions, polyethylene films (PE Films) and flexible packaging films. This filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Third quarter: Sales were $243.2, down 9.0%. Net income was $17.1, or $0.51 per diluted share, versus a net loss of $34.2, or $1.03 per share, in 2018. Results included after-tax gains of $3.4 from the kaléo investment and $5.9 from the Shanghai facility sale.
- First nine months: Sales were $739.9, down 6.3%. Net income was $51.4, or $1.55 per diluted share, versus a $1.3 net loss in 2018. The 2019 result included $28.5 of kaléo-related gains, including a $17.6 cash dividend, and a $6.3 pre-tax Shanghai facility sale gain. The 2018 comparison included a $46.8 goodwill impairment charge.
- Margins: Consolidated gross profit margin was 17.5% in Q3 versus 15.1% a year earlier, and 17.3% for the nine months versus 16.7%. Q3 segment ongoing operating profit was $12.1 for Aluminum Extrusions, $6.9 for PE Films and $4.0 for Flexible Packaging Films. For the nine months, respective amounts were $38.8, $17.6 and $9.4.
- Cash flow: Operating cash flow was $86.3 for the nine months, versus $93.0 in 2018. Capital expenditures were $37.2, compared with $25.1. Cash, cash equivalents and restricted cash increased to $44.7 from $34.4 at year-end; $7.8 was restricted proceeds from the Shanghai sale.
- Debt and liquidity: Long-term debt was $68.0, down from $101.5 at December 31, 2018. Cash less debt was $31.1. The company reported approximately $376 of revolver availability, was compliant with financial covenants, and had a 0.61x leverage ratio against a 4.00x maximum. Current assets were $260.3 and current liabilities $154.4.
- Other metrics: Dividends were $0.12 per share in Q3 and $0.34 for the first nine months. The effective tax rate for the nine months was 14.1%, versus 172.1% in 2018, whose rate was distorted by the non-deductible goodwill impairment.
Material changes versus the prior comparable period
- Lower sales in Aluminum Extrusions and PE Films drove the consolidated revenue decline; Flexible Packaging Films sales increased. Q3 sales volumes fell 9.2% in Aluminum Extrusions and 10.8% in PE Films, while Flexible Packaging Films volume rose 2.4%.
- Aluminum Extrusions ongoing operating profit improved 3.6% in Q3 and 10.4% for the nine months, principally on higher pricing, despite lower volumes and higher operating costs.
- PE Films ongoing operating profit rose 66.2% in Q3, helped by stronger Surface Protection results and nonrecurring 2018 quality claims, but fell 34.4% for the nine months as Personal Care weakened.
- Flexible Packaging Films ongoing operating profit increased 10.8% in Q3 and 41.7% for the nine months, supported by higher volume and pricing.
- Debt declined, while capital expenditures increased. Operating cash flow was lower, in part because 2018 included a greater net benefit from income tax refunds; the 2019 period included the kaléo dividend.
Outlook, commentary, risks and unusual items
- No consolidated earnings guidance is provided. Management expected 2019 capital expenditures of approximately $15 for Aluminum Extrusions, $27 for PE Films and $10 for Flexible Packaging Films.
- Bonnell Aluminum announced a price increase effective on shipments beginning January 6, 2020: $0.035 per pound and an additional 5% on fabrication and finishing services, subject to contract terms.
- PE Films faces customer product-transition and competitive risks. Management estimated a possible $14 adverse operating-profit impact from a Surface Protection customer shift over the next four quarters versus the prior four quarters. Personal Care sales for a transitioning product were expected to be $30–$35 in 2019, versus approximately $70 in 2018; management expected Personal Care operating profit plus depreciation and amortization to be negative $1.3 in Q4 2019.
- The Lake Zurich PE Films plant was expected to cease production in Q4 2019, with the shutdown completed by the end of 2020. Estimated costs are $7.6 cash and $1.6 non-cash; expected real-property sale proceeds are approximately $5. A European Personal Care consolidation was also planned, with estimated cash costs of $1.7.
- The $95.5 fair value of kaléo is an estimate using significant assumptions; realization depends on a future liquidity event and could differ materially. The filing notes an ongoing Department of Justice investigation related to kaléo’s Evzio business as a potential adverse factor.
- Disclosure controls were not effective as of September 30, 2019 because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway and expected to extend into 2020; management did not assure when remediation would be complete.
- Other risks include customer concentration and transitions, raw-material and energy costs, foreign exchange, international operations, tariffs, pension obligations, and competition. Management believed cash, borrowing availability and operating cash flow would meet working-capital, capital-spending and dividend needs for the next 12 months.
Important facts for investors to verify
- How much of reported earnings and the improvement versus 2018 reflects recurring segment operations rather than kaléo valuation/dividend gains, the Shanghai sale gain and the prior-year goodwill impairment.
- Whether PE Films can mitigate the disclosed Personal Care declines and potential Surface Protection customer transition, including the stated possible $14 operating-profit exposure.
- The assumptions and potential volatility behind kaléo’s $95.5 estimated fair value, and developments in the DOJ investigation or any liquidity event.
- Progress and testing results for remediation of the material weaknesses, and whether disclosure controls become effective.
- Execution, costs and timing of the Lake Zurich shutdown and European consolidation, alongside planned capital expenditures and the effect on cash generation.
- Ongoing covenant compliance, revolver availability and access to the restricted Shanghai sale proceeds during liquidation of the relevant entity.