Tredegar (TG) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Tredegar Corporation's unaudited consolidated financial statements, detailed notes, and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements. This section presents Tredegar Corporation's unaudited consolidated financial statements, including balance sheets, income statements, comprehensive income statements, cash flow statements, and statements of shareholders' equity for the periods ended June 30, 2020, and December 31, 2019 (for balance sheet) or June 30, 2019 (for income, comprehensive income, cash flow, and shareholders' equity) Consolidated Balance Sheets This section provides a snapshot of Tredegar Corporation's financial position at June 30, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (In Thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :------------------ | | Total assets | $658,807 | $712,668 | | Total liabilities | $307,933 | $335,919 | | Total shareholders' equity | $350,874 | $376,749 | | Cash and cash equivalents | $39,930 | $31,422 | | Accounts and other receivables, net | $100,460 | $107,558 | | Inventories | $85,218 | $81,380 | | Long-term debt | $34,000 | $42,000 | - Total assets decreased by $53.861 million from December 31, 2019, to June 30, 2020, primarily driven by a decrease in investment in kaléo and net property, plant and equipment[5] - Total liabilities decreased by $27.986 million, mainly due to a reduction in long-term debt and deferred income taxes[5] - Shareholders' equity decreased by $25.875 million, influenced by changes in retained earnings and accumulated other comprehensive income (loss)[5] Consolidated Statements of Income This section details Tredegar Corporation's financial performance, including sales, net income, and earnings per share, for the three and six months ended June 30, 2020 and 2019 Consolidated Statements of Income Highlights (In Thousands, Except Per Share Data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales | $218,638 | $248,248 | $446,940 | $496,714 | | Net income (loss) | $11,196 | $14,477 | $(11,126) | $34,261 | | Basic EPS | $0.33 | $0.44 | $(0.33) | $1.03 | | Diluted EPS | $0.33 | $0.44 | $(0.33) | $1.03 | | Dividends per share | $0.12 | $0.11 | $0.24 | $0.22 | - Sales decreased by 11.9% for the three months ended June 30, 2020, and by 10.0% for the six months ended June 30, 2020, compared to the prior year periods[7] - Net income for the three months ended June 30, 2020, decreased to $11.2 million from $14.5 million in the prior year, while the six-month period saw a net loss of $11.1 million compared to a net income of $34.3 million in 2019, largely due to a goodwill impairment charge and a decline in the kaléo investment value[7] Consolidated Statements of Comprehensive Income (Loss) This section outlines Tredegar Corporation's comprehensive income, including net income and other comprehensive income (loss), for the three and six months ended June 30, 2020 and 2019 Consolidated Statements of Comprehensive Income (Loss) Highlights (In Thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $11,196 | $14,477 | $(11,126) | $34,261 | | Other comprehensive income (loss) | $3,715 | $3,207 | $(8,658) | $4,143 | | Comprehensive income (loss) | $14,911 | $17,684 | $(19,784) | $38,404 | - Other comprehensive income (loss) for the six months ended June 30, 2020, was a loss of $8.7 million, a significant decrease from a gain of $4.1 million in the prior year, primarily due to unrealized foreign currency translation adjustments and derivative financial instruments adjustments[10] Consolidated Statements of Cash Flows This section details Tredegar Corporation's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020 and 2019 Consolidated Statements of Cash Flows Highlights (In Thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $36,062 | $68,496 | | Net cash used in investing activities | $(8,806) | $(24,229) | | Net cash used in financing activities | $(16,611) | $(38,431) | | Increase in cash & cash equivalents | $8,508 | $5,372 | | Cash & cash equivalents at end of period | $39,930 | $39,769 | - Net cash provided by operating activities decreased by $32.4 million for the six months ended June 30, 2020, primarily due to changes in working capital and the absence of a kaléo dividend received in the prior year[13][157] - Net cash used in investing activities decreased to $8.8 million in 2020 from $24.2 million in 2019, mainly due to lower capital expenditures[13][158] - Net cash used in financing activities decreased to $16.6 million in 2020 from $38.4 million in 2019, driven by lower net debt repayments[13][159] Consolidated Statement of Shareholders' Equity This section presents the changes in Tredegar Corporation's total shareholders' equity for the three and six months ended June 30, 2020 and 2019 Changes in Total Shareholders' Equity (In Thousands) | Period | Balance at Beginning | Net Income (Loss) | Other Comprehensive Income (Loss) | Cash Dividends Declared | Stock-based Compensation Expense | Other Adjustments | Balance at End | | :-------------------------------- | :------------------- | :---------------- | :-------------------------------- | :---------------------- | :------------------------------- | :---------------- | :------------- | | Three Months Ended June 30, 2020 | $338,590 | $11,196 | $3,715 | $(4,021) | $1,394 | $(9) | $350,874 | | Six Months Ended June 30, 2020 | $376,749 | $(11,126) | $(8,658) | $(8,025) | $2,520 | $(604) | $350,874 | | Three Months Ended June 30, 2019 | $372,621 | $14,477 | $3,207 | $(3,669) | $1,679 | $(46) | $388,276 | | Six Months Ended June 30, 2019 | $354,857 | $34,261 | $4,143 | $(7,320) | $3,189 | $(870) | $388,276 | - Total shareholders' equity decreased from $376.7 million at January 1, 2020, to $350.9 million at June 30, 2020, primarily due to a net loss and negative other comprehensive income[16] NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS This section provides detailed notes to the unaudited consolidated interim financial statements, covering accounting policies, significant estimates, and specific financial statement line items Note 1. BASIS OF PRESENTATION This note outlines the basis of presentation for the financial statements, including GAAP compliance, fiscal year conventions, and the adoption of new accounting standards - The financial statements are prepared in accordance with U.S. GAAP and include all necessary adjustments for fair presentation, with the Aluminum Extrusions segment operating on a 52/53-week fiscal year while other segments follow a calendar year[23][24] - The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, in Q1 2020, which resulted in an immaterial adjustment of less than $0.2 million[26] Accounts and Other Receivables, Net (In Thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :------------------ | | Customer receivables | $99,520 | $106,153 | | Other receivables | $4,323 | $4,441 | | Total accounts and other receivables | $103,843 | $110,594 | | Less: Allowance for bad debts and sales returns | $(3,383) | $(3,036) | | Total accounts and other receivables, net | $100,460 | $107,558 | Note 2. LONG-LIVED ASSETS & GOODWILL IMPAIRMENT This note details the goodwill impairment charge recognized in the Aluminum Extrusions segment and the assessment of long-lived assets for impairment - The Company recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes) in the first three months of 2020 for the AACOA reporting unit within Aluminum Extrusions, due to severe impacts from COVID-19 on consumer durable, building & construction, and automotive markets[29][30] - No impairment indicators were identified for long-lived assets during the three months ended June 30, 2020, but future interim tests may be required due to ongoing COVID-19 disruptions[28][31][32] Note 3. ASSET IMPAIRMENTS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES This note outlines the planned shutdown of the Lake Zurich plant, including expected cash costs and non-cash asset write-offs, and details accrued expenses for exit and disposal activities - The Company plans to complete the Lake Zurich plant shutdown by the end of 2020, with total expected pre-tax cash costs of $6.9 million and non-cash asset write-offs/accelerated depreciation of $1.3 million[33] Accrued Expenses for Exit and Disposal Activities (In Thousands) | Metric | Severance | Asset Impairments | Other | Total | | :-------------------------------- | :-------- | :---------------- | :---- | :---- | | Balance at January 1, 2020 | $1,294 | $0 | $86 | $1,380 | | Charges in 2020 (Lake Zurich & other) | $245 | $11 | $341 | $597 | | Cash payments | $(1,148) | $0 | $(386) | $(1,534) | | Charges against assets | $0 | $(11) | $0 | $(11) | | Balance at June 30, 2020 | $391 | $0 | $41 | $432 | Note 4. INVENTORIES This note provides a breakdown of inventory components and highlights changes in total inventories from December 31, 2019, to June 30, 2020 Inventory Components (In Thousands) | Component | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :------------------ | | Finished goods | $19,565 | $24,504 | | Work-in-process | $13,123 | $12,328 | | Raw materials | $30,482 | $24,735 | | Stores, supplies and other | $22,048 | $19,813 | | Total | $85,218 | $81,380 | - Total inventories increased by $3.8 million from December 31, 2019, to June 30, 2020, primarily driven by increases in raw materials and stores, supplies and other[35] Note 5. EARNINGS PER SHARE This note details the shares used to compute basic and diluted earnings per share and explains the absence of dilutive impact for the six months ended June 30, 2020 Shares Used to Compute EPS (In Thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic weighted average shares | 33,435 | 33,270 | 33,374 | 33,197 | | Diluted weighted average shares | 33,436 | 33,278 | 33,374 | 33,203 | - For the six months ended June 30, 2020, there was no dilutive impact from stock options and restricted stock due to a net loss[36] Note 6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note details the changes in accumulated other comprehensive income (loss), primarily due to foreign currency translation adjustments and derivative financial instruments Changes in Accumulated Other Comprehensive Income (Loss) (In Thousands) | Component | Jan 1, 2020 Balance | Net OCI - Current Period | June 30, 2020 Balance | | :-------------------------------- | :------------------ | :----------------------- | :-------------------- | | Foreign currency translation adjustment | $(100,663) | $(12,003) | $(112,666) | | Gain (loss) on derivative financial instruments | $(1,307) | $(2,517) | $(3,824) | | Pension and other post-retirement benefit adjustments | $(95,681) | $5,862 | $(89,819) | | Total | $(197,651) | $(8,658) | $(206,309) | - Accumulated other comprehensive loss increased by $8.7 million for the six months ended June 30, 2020, primarily due to negative foreign currency translation adjustments and derivative financial instrument adjustments[38] - The Company expects $1.4 million of unrealized after-tax losses on derivative instruments to be reclassified to earnings within the next 12 months[61] Note 7. INVESTMENTS This note discusses the Company's investment in kaléo, Inc., detailing its fair value and the factors contributing to its decline - The Company's investment in kaléo, Inc. (approx. 18% interest) was valued at $70.7 million as of June 30, 2020, down from $95.5 million at December 31, 2019[46][47] - The decline in kaléo's fair value during the first six months of 2020 was mainly due to lower expectations for 2020 EBITDA and net cash flow from reduced market demand for epinephrine delivery devices due to COVID-19 social distancing, and a higher private company liquidity discount (20% at June 30, 2020 vs. 10% at Dec 31, 2019)[47][48] - The fair value of kaléo is estimated using a weighted average of the EBITDA Multiple Method (80%) and the Discounted Cash Flow (DCF) Method (20%)[49] Note 8. DERIVATIVE FINANCIAL INSTRUMENTS This note describes Tredegar's use of derivative financial instruments to hedge exposure to aluminum prices and foreign currency fluctuations - Tredegar uses derivative financial instruments (forward purchase commitments and futures contracts for aluminum, and foreign currency forward contracts) to hedge margin exposure from fixed-price forward sales in Aluminum Extrusions and currency volatility in Flexible Packaging Films[54][55] Net Fair Value of Derivative Instruments (In Thousands) | Derivative Type | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :------------------ | | Aluminum futures contracts (net asset/liability) | $(1,857) | $(1,253) | | Foreign currency forward contracts (net asset/liability) | $(4,058) | $(852) | - Terphane Ltda. has outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars, hedging approximately 76% of its R$ operating cost exposure for the period July-Dec 2020[59] Note 9. PENSION AND OTHER POSTRETIREMENT BENEFITS This note details the net periodic benefit cost for pension and other post-retirement plans and outlines expected pension contributions for 2020 Net Periodic Benefit Cost (In Thousands) | Metric | Pension Benefits (6 Months Ended June 30, 2020) | Pension Benefits (6 Months Ended June 30, 2019) | Other Post-Retirement Benefits (6 Months Ended June 30, 2020) | Other Post-Retirement Benefits (6 Months Ended June 30, 2019) | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :------------------------------------------------------------ | :------------------------------------------------------------ | | Service cost | $0 | $0 | $18 | $16 | | Interest cost | $5,070 | $6,135 | $120 | $146 | | Expected return on plan assets | $(5,608) | $(6,808) | $0 | $0 | | Amortization of prior service costs, (gains) losses and net transition asset | $7,628 | $5,459 | $(94) | $(115) | | Net periodic benefit cost | $7,090 | $4,786 | $44 | $47 | - Net periodic pension benefit cost increased to $7.1 million for the first six months of 2020 from $4.8 million in 2019[63] - The Company expects total required pension contributions for 2020 to be $12.3 million, with $2.4 million deferred until January 1, 2021, under the CARES Act[63] Note 10. OTHER INCOME (EXPENSE), NET This note analyzes the components of other income (expense), net, highlighting the impact of the kaléo investment value and COVID-19 related expenses Other Income (Expense), Net (In Thousands) | Component | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gain (loss) on investment in kaléo | $1,300 | $7,100 | $(24,800) | $24,182 | | COVID-19-related expenses | $(1,294) | $0 | $(1,294) | $0 | | Other | $(19) | $(4) | $(131) | $24 | | Total | $(13) | $7,096 | $(26,225) | $24,206 | - Other income (expense), net, shifted from a gain of $7.1 million in Q2 2019 to a loss of $0.013 million in Q2 2020, and from a gain of $24.2 million in H1 2019 to a loss of $26.2 million in H1 2020, primarily due to a significant decline in the kaléo investment value and COVID-19 related expenses[65] Note 11. BUSINESS SEGMENTS This note provides a detailed breakdown of Tredegar's financial performance by its three business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films - Tredegar operates in three business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films, with EBITDA from ongoing operations as the key profitability measure used by management[67][68] Net Sales by Segment (In Thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Aluminum Extrusions | $106,058 | $136,757 | $223,945 | $275,804 | | PE Films | $71,012 | $69,161 | $142,273 | $135,941 | | Flexible Packaging Films | $34,104 | $33,443 | $64,678 | $67,062 | | Total net sales | $211,174 | $239,361 | $430,896 | $478,807 | EBITDA from Ongoing Operations by Segment (In Thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Aluminum Extrusions | $13,279 | $18,600 | $24,956 | $34,767 | | PE Films | $15,319 | $11,160 | $29,507 | $17,703 | | Flexible Packaging Films | $6,495 | $2,880 | $13,048 | $6,084 | | Total | $35,093 | $32,640 | $67,511 | $58,554 | Net Sales by Geographic Area (In Thousands) | Geographic Area | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $141,559 | $162,788 | $287,742 | $335,042 | | Exports from the United States | $29,137 | $34,872 | $60,834 | $55,820 | | Operations outside the United States | $39,678 | $41,999 | $82,320 | $85,938 | | Total | $211,174 | $239,361 | $430,896 | $478,807 | Net Sales by Product Group (In Thousands) | Product Group | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Aluminum Extrusions | $106,058 | $136,757 | $223,945 | $275,804 | | PE Films | $71,012 | $69,161 | $142,273 | $135,941 | | Flexible Packaging Films | $34,104 | $33,443 | $64,678 | $67,062 | | Total | $211,174 | $239,361 | $430,896 | $478,807 | Note 12. INCOME TAXES This note discusses the effective income tax rate, its reconciliation, and the impact of foreign tax incentives on the Company's tax expense - The effective tax rate for the first six months of 2020 was 23.8% on a pretax loss of $14.6 million, compared to 19.8% in the first six months of 2019[76] Effective Income Tax Rate Reconciliation (Six Months Ended June 30) | Item | 2020 Amount (In Thousands) | 2020 % | 2019 Amount (In Thousands) | 2019 % | | :-------------------------------- | :------------------------- | :----- | :------------------------- | :----- | | Federal statutory rate | $(3,066) | 21.0 | $8,972 | 21.0 | | Foreign tax incentives | $(2,630) | 18.0 | $(1,074) | (3.0) | | Foreign rate differences | $2,510 | (17.0) | $1,191 | 3.3 | | Effective income tax rate | $(3,477) | 23.8 | $8,467 | 19.8 | - Brazilian tax incentives reduced the statutory federal income tax rate for Terphane Ltda. to 15.25% on certain products, providing a benefit of $2.6 million in H1 2020 and $1.1 million in H1 2019[79] Note 13. NEW ACCOUNTING PRONOUNCEMENTS This note outlines the adoption of new accounting standards and the ongoing evaluation of their potential impact on the Company's financial statements - The Company adopted ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement) in Q1 2020, with no material impact on its consolidated financial statements[82][83] - The Company is currently evaluating the impact of ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on Tredegar Corporation's financial condition, liquidity, and results of operations, including the impact of COVID-19 and critical accounting policies Forward-looking and Cautionary Statements This section contains forward-looking statements subject to risks and uncertainties, including the highly uncertain impact of COVID-19 on the Company's results, employees, supply chains, customers, and the global economy - Forward-looking statements are identified by words like 'believe,' 'estimate,' 'anticipate,' 'expect,' and 'project,' and are subject to risks that could cause actual results to differ materially[87] - The Company's current projections are materially affected by the highly uncertain impact of COVID-19, which could significantly alter results depending on the pandemic's duration and impact on various stakeholders[87] Executive Summary Tredegar Corporation manufactures aluminum extrusions, polyethylene plastic films, and polyester films, reporting a net income of $11.2 million ($0.33 per share) for Q2 2020, down from $14.5 million ($0.44 per share) in Q2 2019 - Tredegar manufactures aluminum extrusions (Aluminum Extrusions segment), polyethylene plastic films (PE Films segment), and polyester films (Flexible Packaging Films segment)[93] Net Income and EPS (Q2 2020 vs. Q2 2019) | Metric | Q2 2020 | Q2 2019 | | :---------------- | :------ | :------ | | Net income | $11.2M | $14.5M | | EPS | $0.33 | $0.44 | | After-tax gain on kaléo investment | $0.9M | $5.6M | The Impact of COVID-19 Tredegar's businesses are deemed essential, maintaining operations with strict health protocols, while Bonnell Aluminum faces significant sales volume and EBITDA declines, and the kaléo investment fair value declined by $24.8 million due to COVID-19 impacts - Tredegar's businesses are classified as 'essential services,' 'critical manufacturers,' and 'life sustaining industries,' allowing them to remain operational during the pandemic[96] - The Company implemented extensive health and safety protocols, including temperature checks, social distancing, face coverings, remote work, and facility disinfection[97][98] Bonnell Aluminum 2020 Projections (Pre- vs. Post-COVID-19) | Metric | Pre-COVID-19 Plan | Current Projection (Post-COVID-19) | | :---------------- | :---------------- | :--------------------------------- | | Sales volume | 201 million lbs | 170 million lbs | | EBITDA from ongoing operations | $65 million | $42 million | - Demand for flexible food packaging films (Terphane) and hygiene/medical apertured films (PE Films Personal Care) remained strong, while Surface Protection had record performance but expects a H2 slowdown[104] - The defined benefit pension plan's underfunding increased from $100 million at December 31, 2019, to an estimated $130 million at June 30, 2020, due to COVID-19 related changes in asset and liability values[105] - The fair value of the kaléo investment declined by $24.8 million ($19.5 million after tax) from December 31, 2019, to June 30, 2020, primarily due to lower market demand for epinephrine delivery devices and a higher private company liquidity discount[106] - The Company reduced its 2020 capital expenditures budget from $47 million to $31 million to conserve cash and borrowing capacity[107] OPERATIONS REVIEW This section reviews the operational performance of Tredegar's three business segments: Aluminum Extrusions, PE Films, and Flexible Packaging Films, highlighting key financial metrics and factors influencing their results Aluminum Extrusions This section details the operating results for the Aluminum Extrusions segment, noting decreases in sales volume, net sales, and EBITDA due to lower demand and metal costs Aluminum Extrusions Operating Results (In Thousands, Except Percentages) | Metric | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :------------------------ | :------ | :------ | :------- | :------ | :------ | :------- | | Sales volume (lbs) | 43,807 | 53,127 | (17.5)% | 91,124 | 106,839 | (14.7)% | | Net sales | $106,058 | $136,757 | (22.4)% | $223,945 | $275,804 | (18.8)% | | EBITDA from ongoing operations | $13,279 | $18,600 | (28.6)% | $24,956 | $34,767 | (28.2)% | | Capital expenditures | $1,355 | $4,420 | | $2,929 | $8,787 | | - Net sales decreased due to lower sales volume (17.5% in Q2, 14.7% in H1) and the pass-through of lower metal costs, partially offset by higher selling prices[111][113] - EBITDA from ongoing operations decreased by $5.3 million in Q2 and $9.8 million in H1, primarily due to lower volumes and higher labor costs, exacerbated by FIFO accounting charges in a dropping commodity price environment[112][114] - Projected capital expenditures for Bonnell Aluminum in 2020 are $12 million, including investments for a new ERP system and infrastructure upgrades[115] PE Films This section reviews the PE Films segment's performance, noting increased net sales and EBITDA driven by Surface Protection, despite challenges in Personal Care and a delayed customer product transition PE Films Operating Results (In Thousands, Except Percentages) | Metric | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :------------------------ | :------ | :------ | :------- | :------ | :------ | :------- | | Sales volume (lbs) | 25,818 | 25,476 | 1.3 % | 53,346 | 51,322 | 3.9 % | | Net sales | $71,012 | $69,161 | 2.7 % | $142,273 | $135,941 | 4.7 % | | EBITDA from ongoing operations | $15,319 | $11,160 | 37.3 % | $29,507 | $17,703 | 66.7 % | | Capital expenditures | $2,110 | $5,654 | | $4,525 | $12,358 | | - Net sales increased in Q2 and H1 primarily due to higher volume in Surface Protection, while Personal Care sales decreased due to unfavorable pricing and foreign currency impacts[117][118][125][126] - EBITDA from ongoing operations significantly increased by $4.2 million in Q2 and $11.8 million in H1, driven by higher volume and product mix in Surface Protection and favorable product mix, lower freight, and resin cost pass-through timing in Personal Care[119][124][126] - A significant customer product transition in Surface Protection continues to be delayed, but the Company estimates a potential adverse impact of $14 million on EBITDA from ongoing operations over the next four quarters compared to the last four quarters ended June 30, 2020[123] - Projected capital expenditures for PE Films in 2020 are $13 million, including investments for a scale-up line in Surface Protection and other development projects[127] Flexible Packaging Films This section details the Flexible Packaging Films segment's performance, highlighting increased sales volume and significantly higher EBITDA driven by lower raw material costs and strong demand for food packaging Flexible Packaging Films Operating Results (In Thousands, Except Percentages) | Metric | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :------------------------ | :------ | :------ | :------- | :------ | :------ | :------- | | Sales volume (lbs) | 29,195 | 26,460 | 10.3 % | 54,974 | 51,921 | 5.9 % | | Net sales | $34,104 | $33,443 | 2.0 % | $64,678 | $67,062 | (3.6)% | | EBITDA from ongoing operations | $6,495 | $2,880 | 125.5 % | $13,048 | $6,084 | 114.5 % | | Capital expenditures | $417 | $1,260 | | $1,265 | $2,994 | | - Net sales increased by 2.0% in Q2 2020 due to higher sales volume, partially offset by lower selling prices from resin cost pass-throughs, while H1 2020 net sales decreased by 3.6% due to lower selling prices despite higher sales volume[129][130] - EBITDA from ongoing operations more than doubled in both Q2 ($3.6 million increase) and H1 ($7.0 million increase), driven by lower raw material costs, higher sales volume, production efficiencies, and favorable foreign currency translation[129][131][132] - Terphane experienced strong demand for food packaging materials during COVID-19, particularly for value-added products in the U.S. and Europe[129] - Projected capital expenditures for Flexible Packaging Films in 2020 are $6 million, including new capacity for value-added products[132] Corporate Expenses, Interest and Taxes This section reviews changes in corporate expenses, interest expense, and the effective tax rate, noting increases in pension expense and consulting fees, and decreases in interest expense due to lower debt - Pension expense was $7.1 million in H1 2020, up from $4.8 million in H1 2019, with a projected annual expense of approximately $14 million for 2020[133] - Corporate expenses, net, increased in H1 2020 primarily due to $2.2 million higher consulting fees for internal control remediation and business development activities[133] - Interest expense decreased to $1.1 million in H1 2020 from $2.5 million in H1 2019, mainly due to lower average debt levels[134] - The effective tax rate for H1 2020 was 23.8%, compared to 19.8% in H1 2019[134] Critical Accounting Policies The Company's critical accounting policies, involving significant estimates and judgments, include accounting for impairment of long-lived assets and goodwill, investments, pension benefits, and income taxes, with no material changes since December 31, 2019 - Critical accounting policies include impairment of long-lived assets and goodwill, investments accounted for under the fair value method, pension benefits, and income taxes[137] - These policies require difficult, subjective, and complex judgments due to inherent uncertainties, and actual results could differ significantly from estimates[137] - No material changes to these policies have occurred since December 31, 2019[137] Results of Operations This section provides a detailed comparison of the Company's consolidated and segment-level financial performance for the second quarter and first six months of 2020 against the corresponding periods in 2019 Second Quarter of 2020 Compared with the Second Quarter of 2019 This section compares Tredegar's consolidated and segment-level financial performance for the second quarter of 2020 against the second quarter of 2019, focusing on sales, gross profit, and expenses - Overall sales decreased by 11.9% in Q2 2020, with Aluminum Extrusions sales falling 22.4%, PE Films sales rising 2.7%, and Flexible Packaging Films sales increasing 2.0%[139] - Consolidated gross profit margin increased to 22.6% in Q2 2020 from 18.8% in Q2 2019, driven by higher profits in PE Films Surface Protection and Flexible Packaging Films, partially offset by lower margins in Aluminum Extrusions[140] - SG&A and R&D expenses as a percentage of sales increased to 13.8% in Q2 2020 from 11.8% in Q2 2019, due to higher consulting fees for internal control remediation and business development, despite decreased net sales[141] - Interest expense decreased to $0.5 million in Q2 2020 from $1.3 million in Q2 2019, primarily due to lower average debt levels and interest rates[146] First Six Months 2020 Results vs. First Six Months 2019 Results This section compares Tredegar's consolidated and segment-level financial performance for the first six months of 2020 against the first six months of 2019, focusing on sales, gross profit, and expenses - Overall sales decreased by 10.0% in H1 2020, with Aluminum Extrusions sales falling 18.8%, PE Films sales rising 4.7%, and Flexible Packaging Films sales decreasing 3.6%[147] - Consolidated gross profit margin increased to 21.0% in H1 2020 from 17.2% in H1 2019, driven by higher profits in PE Films Surface Protection and Flexible Packaging Films, partially offset by lower margins in Aluminum Extrusions[148] - SG&A and R&D expenses as a percentage of sales increased to 13.0% in H1 2020 from 11.2% in H1 2019, due to higher consulting fees for internal control remediation and business development, despite decreased net sales[149] - Interest expense decreased to $1.1 million in H1 2020 from $2.5 million in H1 2019, primarily due to lower average debt levels and interest rates[154] Liquidity and Capital Resources Tredegar focuses on improving working capital management, with accounts receivable decreasing by $7.1 million and inventories increasing by $3.8 million from December 31, 2019, to June 30, 2020 - Accounts and other receivables decreased by $7.1 million (6.6%) from December 31, 2019, to June 30, 2020, primarily in Aluminum Extrusions and PE Films[156] - Inventories increased by $3.8 million (4.7%), mainly in Aluminum Extrusions and PE Films, partially offset by a decrease in Flexible Packaging Films[156] - Net cash provided by operating activities declined by $32.4 million in H1 2020, primarily due to changes in working capital and the absence of a kaléo dividend received in 2019[157] - Net cash used in investing activities was $8.8 million in H1 2020, down from $24.2 million in H1 2019, mainly due to reduced capital expenditures[158] Net Capitalization and Indebtedness (In Thousands) | Metric | Amount | | :-------------------------------- | :----- | | Cash and cash equivalents | $39,930 | | Debt (Credit Agreement) | $34,000 | | Cash and cash equivalents, net of debt | $5,930 | | Shareholders' equity | $350,874 | | Net capitalization | $344,944 | | Indebtedness | $34,000 | - At June 30, 2020, the Company had $34.0 million in debt under its $500 million revolving credit agreement, with approximately $354 million available to borrow[107][164] - Tredegar was in compliance with all financial covenants in the Credit Agreement as of June 30, 2020, including a leverage ratio of 0.35x (max 4.00x) and an interest coverage ratio of 36.49x (min 3.00x)[167] Item 3. Quantitative and Qualitative Disclosures About Market Risk. Tredegar is exposed to market risks from interest rates, raw material prices, energy prices, and foreign currency fluctuations, utilizing derivative financial instruments to hedge certain exposures - Tredegar is exposed to market risks from interest rates, polyethylene and polypropylene resin prices, Terephthalic Acid (PTA) and Monoethylene Glycol (MEG) prices, aluminum ingot and scrap prices, energy prices, foreign currencies, and emerging markets[169] - Aluminum Extrusions' profit margins are sensitive to fluctuations in aluminum ingot, scrap, and natural gas prices, while PE Films and Flexible Packaging Films are sensitive to resin prices[170] - The Company uses forward purchase commitments and futures contracts to hedge aluminum price volatility for fixed-price forward sales contracts, typically with durations of not more than 12 months[171] - Flexible Packaging Films (Terphane Ltda.) has significant foreign exchange translation risk due to a net mismatch of R$136 million in annual operating costs, as sales and raw materials are primarily U.S. Dollar-denominated while conversion and SG&A costs are Brazilian Real-denominated[181][182] - Foreign currency changes had an unfavorable impact on PE Films' operating profit from ongoing operations of $0.5 million in Q2 2020 and $1.1 million in H1 2020 compared to prior year periods[183] Item 4. Controls and Procedures. This section addresses the evaluation of disclosure controls and procedures, outlining identified material weaknesses in internal control over financial reporting and the ongoing remediation plan Evaluation of Disclosure Controls and Procedures The Company's CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to material weaknesses in internal control over financial reporting - The Company's disclosure controls and procedures were not effective as of June 30, 2020, due to material weaknesses in internal control over financial reporting[191] - Material weaknesses were identified in the control environment, risk assessment, information and communication, monitoring activities, and pervasive process-level and general information technology controls[197][205] - These material weaknesses create a reasonable possibility that a material misstatement of financial statements may not be prevented or detected on a timely basis[198] Remediation Plan The Company's remediation efforts for the identified material weaknesses are ongoing and expected to extend into 2021, with progress made in documentation, risk assessment, and control implementation - Remediation efforts are ongoing and expected to extend into 2021, with potential negative impacts on the timeline due to COVID-19 related limitations[201] - Key remediation steps include identifying material processes, conducting interviews, substantially completing documentation updates, commencing risk assessment validation, designing new controls, and implementing controls in Aluminum Extrusions and corporate functions[202] - The Company is working with an outside consultant to assist in completing the remediation plan[203] Changes in Internal Control Over Financial Reporting During the quarter ended June 30, 2020, the Company began designing and implementing internal controls for certain processes within its Aluminum business and corporate functions as part of its remediation plan - During Q2 2020, the Company began designing and implementing internal controls for certain processes within its Aluminum business and corporate functions as part of the remediation plan[207] - No other material changes to internal control over financial reporting occurred during Q2 2020, apart from the ongoing remediation efforts[207] PART II - OTHER INFORMATION This section includes additional information not covered in Part I, specifically addressing risk factors and a list of exhibits filed with the report Item 1A. Risk Factors. There are no additional material updates or changes to the risk factors previously disclosed in the 2019 Form 10-K, except for the item disclosed in the First Quarter Form 10-Q - No material updates or changes to risk factors from the 2019 Form 10-K, except for those disclosed in the First Quarter Form 10-Q[208] Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including certifications from the President and CEO, and Vice President and CFO, pursuant to the Sarbanes-Oxley Act, as well as XBRL instance documents - Exhibits include certifications from the President and CEO (31.1, 32.1) and Vice President and CFO (31.2, 32.2) under the Sarbanes-Oxley Act[209] - XBRL Instance Document and Related Items (101) and Cover Page Interactive Data File (104) are also included[209] SIGNATURES This section contains the official signatures of Tredegar Corporation's President and Chief Executive Officer, Vice President and Chief Financial Officer, and Corporate Treasurer and Controller, certifying the filing of the report on August 6, 2020 - The report is signed by John M. Steitz (President and CEO), D. Andrew Edwards (Vice President and CFO), and Frasier W. Brickhouse, II (Corporate Treasurer and Controller) on August 6, 2020[212]