Tredegar Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Tredegar manufactures aluminum extrusions, polyethylene films and flexible packaging films. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $228.3 million | $248.5 million |
| Net income (loss) | $(22.3) million | $19.8 million |
| Diluted earnings (loss) per share | $(0.67) | $0.60 |
| Operating cash flow | $15.1 million | $11.1 million |
| Capital expenditures | $4.9 million | $12.9 million |
| Dividend per share | $0.12 | $0.11 |
- Consolidated gross profit margin was 19.5%, up from 15.6%. SG&A and R&D were 12.3% of sales, versus 10.7%.
- Q1 2020 included a $26.1 million pretax fair-value loss on Tredegar’s kaléo investment and a $13.7 million goodwill impairment in Aluminum Extrusions. The kaléo loss was $20.4 million after tax; the impairment was $10.5 million after tax.
- Debt was $43.0 million and cash was $35.1 million at quarter-end, or $7.9 million of net debt. The $500 million revolving credit facility had approximately $345 million available under its most restrictive covenants.
- Credit EBITDA for the trailing four quarters was $97.0 million; leverage was 0.44x against a 4.00x maximum, and interest coverage was 28.76x against a 3.00x minimum. Tredegar reported compliance with all financial covenants.
Segments and changes versus prior year
- Aluminum Extrusions: Net sales fell 15.2% to $117.9 million; ongoing-operations EBITDA fell 27.8% to $11.7 million. Sales volume declined 11.7%, with lower volume the principal earnings headwind.
- PE Films: Net sales rose 6.7% to $71.3 million; ongoing-operations EBITDA increased to $14.2 million from $6.5 million, mainly on Surface Protection volume and mix. Personal Care sales were lower.
- Flexible Packaging Films: Net sales declined 9.1% to $30.6 million, mainly from lower selling prices reflecting raw-material cost pass-throughs. Ongoing-operations EBITDA rose to $6.6 million from $3.2 million, aided by efficiencies, lower fixed costs and a favorable $1.2 million settlement of a value-added-tax dispute.
- Other income swung from $17.1 million of income in Q1 2019 to $26.2 million of expense in Q1 2020, principally because of the kaléo valuation change. Q1 2019’s kaléo gain included a $17.6 million pretax dividend.
Cash, liquidity and balance sheet
- Cash from operations increased to $15.1 million. Investing cash use was $4.9 million, primarily capital expenditures; financing cash use was $3.6 million, including $4.0 million of dividends and $1.0 million of net debt repayments.
- Cash increased by $3.6 million during the quarter to $35.1 million. $25.2 million was held outside the United States.
- Total assets were $663.2 million and shareholders’ equity was $338.6 million at March 31, down from $712.7 million and $376.7 million at December 31, 2019, respectively. The kaléo investment declined to $69.4 million from $95.5 million.
- Management reduced its 2020 capital expenditure budget from $47 million to $36 million and said it was focused on conserving cash and optimizing working capital.
Outlook, commentary and material risks
- COVID-19: Management described forecasts as highly uncertain and dependent on reopening timing, recession depth, customer demand, supply chains and employee availability. Facilities were generally operating as essential businesses, but shutdowns and staffing disruptions had occurred.
- Aluminum Extrusions: Bonnell Aluminum’s pre-pandemic 2020 plan was 201 million pounds of volume and $65 million of ongoing-operations EBITDA; its then-current projection was 173 million pounds and $45 million. For AACOA, the projection fell from $9.7 million of EBITDA to less than $1 million, prompting a full $13.7 million goodwill write-off. Management said over 80% of output at the affected Niles and Elkhart facilities served consumer durable, building/construction and automotive customers.
- Other businesses: Demand was strong for food-packaging films and certain hygiene products. Surface Protection had performed strongly in Q1, but management anticipated a slowdown for much of the rest of 2020. A possible customer transition to alternative products or processes could reduce Surface Protection EBITDA by approximately $14 million over the next four quarters compared with the prior four quarters.
- kaléo valuation: Tredegar owns approximately 18.4% of the privately held company. Its $69.4 million estimated fair value uses significant assumptions and Level 3 inputs; management cautioned the realized value could differ materially. The valuation reflected COVID-related demand concerns, lower comparable-company multiples and a higher liquidity discount. The filing also cites an ongoing Department of Justice investigation related to kaléo’s Evzio business as a valuation risk.
- Restructuring: Production at the Lake Zurich, Illinois PE Films facility was shut down in March, with production transferred to Terre Haute. Expected pretax cash costs are $6.9 million, plus $1.7 million of noncash write-offs and accelerated depreciation. Completion was expected by year-end 2020; sale of the property was expected later.
- Pensions: Management estimated COVID-related market movements increased the frozen defined-benefit plan’s underfunding from $100 million at December 31, 2019 to $125 million at March 31, 2020. Expected 2020 pension contributions were $12.3 million.
- Internal controls: Disclosure controls were deemed ineffective at March 31 because material weaknesses in internal control over financial reporting remained. Remediation was expected to extend into 2021 and could be delayed by COVID-19.
- The Lake Zurich shutdown and goodwill impairment were unusual items. The company also identified risks from raw-material and energy costs, foreign exchange, customer concentration, and the pandemic’s effects on demand and operations.
Key facts for investors to verify
- Progress and assumptions behind the 2020 Bonnell and AACOA volume and EBITDA projections, and the continuing effects of COVID-19 on customer demand.
- Whether the potential Surface Protection customer transition occurs, and its timing and earnings impact.
- Changes in kaléo’s estimated fair value, valuation assumptions and the status or impact of the disclosed DOJ investigation.
- Cash generation, capital spending, dividend decisions and covenant headroom as operating conditions evolve.
- Execution of the Lake Zurich shutdown and property sale, and progress toward remediating the material control weaknesses.