Tredegar Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Tredegar operates Aluminum Extrusions, PE Films, and Flexible Packaging Films. Unless otherwise stated, amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $274.4 million | $211.1 million | $510.9 million | $396.0 million |
| Income from continuing operations | $14.8 million | $20.7 million | $31.2 million | $30.3 million |
| Diluted continuing-operations EPS | $0.44 | $0.61 | $0.93 | $0.90 |
| Gross profit margin | 16.5% | 21.5% | 17.7% | 20.9% |
| Operating cash flow | Not separately presented for the quarter | $(9.4) million | $41.5 million |
Q2 sales increased about 30% year over year, largely reflecting higher selling prices to recover higher raw-material and operating costs. Despite higher sales, Q2 continuing-operations income declined, and gross margin contracted. First-half continuing income was slightly higher year over year, helped by a lower effective tax rate.
At June 30, cash was $27.5 million, long-term debt was $101.5 million, and shareholders’ equity was $211.8 million. Debt was $73.0 million at December 31, 2021. The company had approximately $273 million of available credit under its $375 million secured revolving facility. Reported covenant ratios were 0.73x total net leverage and 27.35x interest coverage, versus maximum and minimum covenant levels of 4.00x and 3.00x, respectively; Tredegar reported compliance with all covenants.
Segments and changes versus prior year
- Aluminum Extrusions: Q2 net sales rose 36.6% to $190.3 million; ongoing EBITDA increased 11.0% to $21.9 million. First-half EBITDA rose 38.7% to $45.8 million. Higher pricing more than offset cost pressure, while labor shortages, lower productivity, higher supplies, utilities, and freight weighed on results. Q2 sales volume was flat; first-half volume declined 1.5%.
- PE Films: Q2 net sales were essentially flat at $31.4 million, while ongoing EBITDA fell 21.5% to $7.1 million. First-half EBITDA declined 13.0% to $14.1 million. Customer product transitions, competitive pricing, and lower volume pressured results.
- Flexible Packaging Films: Q2 net sales increased 24.6% to $41.6 million, but ongoing EBITDA declined 7.8% to $7.6 million. First-half net sales rose 22.7%, while EBITDA fell 29.2% to $12.7 million as higher raw-material, operating, and currency-related costs outpaced price recovery.
Consolidated Q2 results also compare against a substantial prior-year item: Q2 2021 included an $8.5 million Brazilian tax credit gain. Q2 2022 included a $1.4 million gain from post-closing adjustments on the sale of Tredegar’s kaléo investment.
Cash, capital allocation, outlook, and risks
- First-half operating cash flow was negative $9.4 million, primarily reflecting a $50 million special contribution to the frozen pension plan. Receivables and inventory also increased; inventory rose $32.8 million from year-end. First-half capital expenditures were $13.5 million, and dividends paid were $8.1 million.
- Tredegar is pursuing termination and settlement of its frozen defined-benefit pension plan, a process that could take up to 24 months. Management estimated the plan’s GAAP underfunding declined from $69 million at year-end 2021 to approximately $12 million at June 30, 2022. It expects no required minimum contributions before final settlement, but estimates $4–$5 million of plan administrative costs through settlement. The ultimate settlement obligation may differ from the projected benefit obligation.
- Management said existing borrowing availability, cash, and operating cash flow should cover material short-term needs for at least the next 12 months. Projected 2022 capital expenditures were $31 million for Aluminum Extrusions, $4 million for PE Films, and $8 million for Flexible Packaging Films. No consolidated earnings guidance was provided in the filing.
- Management expected PE Films’ customer transitions to reduce 2022 pre-tax income and ongoing EBITDA by a further $7 million versus 2021, with competitive pricing pressures expected to have an additional approximate $6 million adverse impact. The company is pursuing new products, customers, efficiencies, and cost savings.
- Risks include inflation and raw-material, energy, and transportation costs; the ability to pass costs through to customers; labor shortages and production inefficiencies; customer and market changes; foreign-exchange exposure; and economic and geopolitical uncertainty, including the effects of COVID-19 and the Russian invasion of Ukraine. Flexible Packaging Films has currency exposure in Brazil, partly hedged through forward contracts.
- Controls and reporting risk: Management concluded disclosure controls were not effective at June 30, 2022 because previously identified material weaknesses in internal control over financial reporting remained. Remediation was delayed by resource constraints and turnover; management scheduled remaining implementation activities for Q3 2022 but stated the weaknesses would not be remediated until controls operate effectively and are tested.
Important facts for investors to verify
- Whether Aluminum Extrusions can sustain pricing and improve labor availability, productivity, and cost recovery as bookings and backlog evolve.
- Whether PE Films can offset customer transitions and competitive pricing pressure with new products, customers, and savings.
- Whether Flexible Packaging Films can recover margins as raw-material costs and Brazilian-real exposure change, and how effective its hedges and pass-throughs remain.
- The pension plan’s actual settlement cost, timing, administrative expenses, and final funding needs.
- Working-capital conversion, especially elevated inventories and receivables, and cash generation after the pension contribution.
- Progress in remediating material weaknesses and whether controls are tested and found effective; also monitor debt-covenant headroom and borrowing costs under the SOFR-based facility.