Tredegar Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Tredegar manufactures PE films, flexible packaging films and aluminum extrusions. Comparisons below are with the corresponding 2018 periods unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $248.2 million | $263.8 million | $496.7 million | $522.5 million |
| Net income | $14.5 million | $14.7 million | $34.3 million | $32.9 million |
| Diluted EPS | $0.44 | $0.44 | $1.03 | $1.00 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $68.5 million | $71.8 million |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $24.3 million | $14.5 million |
- Q2 sales declined 5.9%; net income declined 1.7%. For the first half, sales declined 4.9%, while net income rose 4.2%.
- Gross profit margin was 18.8% in Q2 versus 16.9%; for the first half it was 17.2% versus 17.5%. SG&A and R&D were 11.8% of sales in Q2 and 11.2% for the first half, compared with 9.7% and 9.9%, respectively.
- Q2 segment net sales and ongoing operating profit: PE Films $69.2 million and $7.8 million; Flexible Packaging Films $33.4 million and $2.5 million; Aluminum Extrusions $136.8 million and $14.5 million. PE Films’ first-half ongoing operating profit fell 52.8% to $10.7 million; Flexible Packaging Films rose 78.8% to $5.4 million; Aluminum Extrusions rose 13.9% to $26.6 million.
- At June 30, cash and cash equivalents were $34.7 million, plus $5.1 million restricted cash. Debt was $73.0 million, down from $101.5 million at year-end 2018. Shareholders’ equity was $388.3 million.
- Cash provided by operations decreased $3.3 million year over year. Management cited lower operating profit before depreciation and amortization and the timing of tax refunds, partly offset by Kaléo’s $17.6 million dividend and the Shanghai facility-sale deposit.
Material changes and unusual items
- Kaléo investment gains recognized in other income were $7.1 million in Q2 and $24.2 million for the first half; the first-half amount included a $17.6 million cash dividend. The investment’s reported fair value was $91.2 million, versus $84.6 million at December 31, 2018. These gains materially supported reported earnings.
- PE Films weakness, especially in Personal Care, drove most of the sales and first-half profit decline. Flexible Packaging Films benefited from higher volume and selling prices; Aluminum Extrusions’ Q2 sales fell with lower volume and lower metal-cost pass-through, while pricing supported profit.
- Tredegar entered a new $500 million, five-year secured revolving credit agreement on June 28, replacing its prior $400 million facility. At quarter-end, $73.0 million was drawn and approximately $342 million was available under the most restrictive covenants. The leverage ratio was 0.7x against a 4.0x maximum, and the interest coverage ratio was 20.83x against a 3.0x minimum. The company reported covenant compliance.
- Lease accounting adoption added approximately $21 million of right-of-use assets and $22 million of lease liabilities; management said adoption had no material overall effect on the financial statements.
Outlook, management commentary and risks
- Management said existing borrowing availability, cash and operating cash flow should meet working-capital, capital expenditure and dividend needs for the next 12 months. No consolidated earnings guidance was provided in the filing.
- 2019 capital expenditure estimates were approximately $33 million for PE Films, $12 million for Flexible Packaging Films and $17 million for Aluminum Extrusions.
- A PE Films customer transition in Surface Protection remains delayed. If fully implemented, management estimated an approximately $14 million annualized adverse operating-profit impact compared with the four quarters ended June 30, 2019. Management is pursuing new products, applications, markets and customers.
- Personal Care faces competitive pressure and a significant customer product transition; management reported negative $0.5 million of operating profit plus depreciation and amortization for the first half and expected negative $1.0 million in the second half of 2019.
- Tredegar planned to close the Lake Zurich, Illinois facility and transfer production, with production expected to cease in Q4 2019 and completion of activities anticipated by end-2020. The filing gives differing cost estimates: Note 3 estimates $7.6 million cash costs and $1.6 million non-cash charges, while MD&A gives $9.3 million cash costs and $1.7 million non-cash charges. MD&A estimates $4 million in annual pre-tax cash savings and approximately $5 million of property-sale proceeds.
- Key risks include customer losses and product transitions, raw-material and energy costs and pass-through timing, foreign exchange exposure, manufacturing disruption, trade measures, pension obligations and volatility in Kaléo’s valuation. Kaléo’s valuation incorporates significant assumptions and is exposed to an ongoing Department of Justice investigation concerning its Evzio business; ultimate realization may differ materially from the recorded value.
- Disclosure controls were assessed as ineffective at June 30, 2019 because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway, expected to extend into 2020, and the company could not assure when weaknesses would be remediated.
Important facts for investors to verify
- Reconcile the inconsistent Lake Zurich closure-cost estimates and monitor transfer, savings and sale-proceeds execution.
- Assess PE Films’ customer-transition exposure, Personal Care competitiveness and progress in replacing or offsetting affected sales.
- Evaluate the sustainability of earnings excluding Kaléo gains and the assumptions, legal exposure and liquidity-event uncertainty underlying its $91.2 million fair value.
- Track remediation and testing of internal controls, including whether management reports that the material weaknesses have been fully addressed.
- Monitor operating cash flow, planned capital spending, available revolver capacity and compliance with credit-agreement covenants.