PE Films
A summary of results for PE Films is provided below:
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Three Months Ended
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Favorable/
(Unfavorable)
% Change
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Six Months Ended
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Favorable/
(Unfavorable)
% Change
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(In thousands, except percentages)
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June 30,
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June 30,
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2021
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2020
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2021
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2020
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Sales volume (lbs)
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10,538
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11,613
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(9.3)%
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20,782
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23,792
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(12.7)%
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Net sales
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$
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31,430
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$
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40,203
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(21.8)%
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$
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59,384
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$
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77,004
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(22.9)%
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Ongoing operations:
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EBITDA
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$
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9,001
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$
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15,471
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(41.8)%
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$
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16,213
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$
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27,884
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(41.9)%
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Depreciation & amortization
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$
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(1,671)
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$
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(1,589)
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(5.2)%
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$
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(3,090)
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$
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(3,083)
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(0.2)%
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EBIT*
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$
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7,330
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$
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13,882
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(47.2)%
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$
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13,123
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$
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24,801
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(47.1)%
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Capital expenditures
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$
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500
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$
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1,423
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$
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1,733
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$
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3,044
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* See the table in Note 11 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP.
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Second Quarter 2021 Results vs. Second Quarter 2020 Results
Net sales declined by $8.8 million in the second quarter of 2021 versus the second quarter of 2020, primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection.
EBITDA from ongoing operations in the second quarter of 2021 decreased by $6.5 million versus the second quarter of 2020, primarily due to:
•A $5.7 million decrease from Surface Protection related to lower sales associated with the customer product transitions ($7.2 million) and higher resin costs, net of existing index based pricing ($1.0 million), partially offset by higher sales of products unrelated to the customer product transitions ($0.9 million), higher productivity ($0.7 million), lower research and development expenses ($0.4 million) and lower other operating costs ($0.5 million); and
•A $0.6 million decrease from Pottsville Packaging primarily related to higher resin costs. Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q for additional information on resin prices.
Customer Product Transitions in Surface Protection
The Surface Protection component of PE Films supports manufacturers of optical and other specialty substrates used in flat panel display products. These films are primarily used by customers to protect components of displays in the manufacturing and transportation processes and then discarded.
The Company previously reported the risk that a portion of its film products used in surface protection applications will be made obsolete by possible future customer product transitions to less costly alternative processes or materials. These transitions principally relate to one customer. The Company believes that previously reported delays in this customer's transitions have been resolved by the customer and much of the remaining transitions are expected to occur by the end of 2021. Under this scenario, the Company estimates that the contribution to EBITDA from ongoing operations for PE Films could decline due to the remaining customer product transitions by $18 million in 2021 versus 2020 (of which approximately $13 million occurred during the first six months of 2021) and $4 million in 2022 versus 2021. To offset the expected adverse impact, the Company is aggressively pursuing and making progress in generating contribution from sales from new surface protection products, applications and customers and implementing cost savings measures. Annual contribution to EBITDA from ongoing operations for PE Films on surface protection products unrelated to the customer product transitions have increased by approximately $12 million during the past two years.
First Six Months of 2021 Results vs. First Six Months 2020 Results
Net sales in the first six months of 2021 decreased versus the first six months 2020, primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection.
EBITDA from ongoing operation in the first six months of 2021 decreased by $11.7 million versus the first six months of 2020 primarily due to:
•A $11.1 million decrease from Surface Protection primarily related to lower sales and unfavorable mix associated with the customer product transitions ($13.0 million) and higher resin costs, net of existing index based pricing ($1.7 million), partially offset by higher sales of products unrelated to the customer product transitions ($1.8 million) and higher productivity ($2.0 million); and
•A $1.0 million decrease from Pottsville Packaging primarily related to higher resin costs.
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures for PE Films are projected to be $4 million in 2021, including $2 million for productivity projects and $2 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $6 million in 2021. There is no amortization expense for PE Films.
Flexible Packaging Films
A summary of results for Flexible Packaging Films is provided below:
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Three Months Ended
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Favorable/
(Unfavorable)
% Change
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Six Months Ended
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Favorable/
(Unfavorable)
% Change
|
(In thousands, except percentages)
|
June 30,
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June 30,
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2021
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2020
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2021
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2020
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Sales volume (lbs)
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24,230
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29,195
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(17.0)%
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51,638
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54,974
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(6.1)%
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Net sales
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$
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33,374
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$
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34,104
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(2.1)%
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$
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65,895
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$
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64,678
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1.9%
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Ongoing operations:
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EBITDA
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$
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8,277
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$
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6,495
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27.4%
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$
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17,901
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$
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13,048
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37.2%
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Depreciation & amortization
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$
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(506)
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$
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(436)
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(16.1)%
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$
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(972)
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$
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(864)
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(12.5)%
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EBIT*
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$
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7,771
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$
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6,059
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28.3%
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$
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16,929
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$
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12,184
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38.9%
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Capital expenditures
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$
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1,117
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$
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417
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$
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2,388
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$
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1,265
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* See the table in Note 11 for a reconciliation of this non-GAAP measure to the most comparable measure calculated in accordance with GAAP.
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Second Quarter 2021 Results vs. Second Quarter 2020 Results
Sales volume declined by 17.0% during the second quarter of 2021 versus the second quarter of 2020, primarily due to temporary resin supply issues impacting production and lower demand, which the Company believes was related to customer inventory corrections in Brazil. Net sales in the second quarter of 2021 decreased 2.1% compared to the second quarter of 2020, primarily due to lower sales volume, partially offset by favorable product mix and higher selling prices from the pass-through of higher resin costs.
EBITDA from ongoing operations in the second quarter of 2021 increased by $1.8 million versus the second quarter of 2020 primarily due to:
•Lower sales volume ($2.8 million), partially offset by favorable product mix ($0.7 million), lower fixed ($0.5 million) and variable ($0.2 million) costs, higher selling prices from the pass-through of higher resin costs ($0.5 million) and lower selling and general administration expenses ($0.6 million);
•Net favorable foreign currency translation of Real-denominated operating costs ($2.2 million); and
•Higher foreign currency transaction losses of $0.1 million in the second quarter of 2021 versus the second quarter of 2020.
First Six Months of 2021 Results vs. First Six Months 2020 Results
Sales volume declined by 6.1% during the first six months of 2021 versus the first six months of 2020, primarily due to the factors adversely impacting the second quarter of 2021 mentioned above. Net sales in the first six months of 2021 increased 1.9% compared to the first six months of 2020, primarily due to favorable product mix and higher selling prices from the pass-through of higher resin costs, partially offset by lower sales volume.
EBITDA from ongoing operations in the first six months of 2021 increased by $4.8 million versus the first six months of 2020 primarily due to:
•Higher selling prices from the pass-through of higher resin costs ($1.6 million), favorable product mix ($1.4 million), lower variable costs ($0.4 million) and lower selling and general administration expenses ($0.5 million), partially offset by lower sales volume ($1.7 million) and higher fixed costs ($0.6 million);
•Net favorable currency translation of Real-denominated operating costs ($3.5 million);
•Foreign currency transaction loss of $0.1 million in the first six months of 2021 versus losses of $0.2 million in the first six months of 2020; and
•Lower value-added tax credits received in the first six months of 2021 ($0.5 million) compared with the first six months of 2020 ($1.2 million).
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures for Flexible Packaging Films are projected to be $8 million in 2021, including $5 million for new capacity for value-added products and productivity projects and $3 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $2 million in 2021. Amortization expense is projected to be $0.4 million in 2021.
Corporate Expenses, Interest, Taxes & Other
Corporate expenses, net, increased in the first six months of 2021 versus the first six months of 2020, primarily due to higher employee-related compensation ($1.8 million), stock-based compensation ($1.3 million), costs associated with held for sale assets ($0.4 million) and write-downs related to the investment held in Harbinger Capital Partners Special Situations Fund ($0.3 million), partially offset by lower professional fees related to remediation activities of previously disclosed material weaknesses in the Company’s internal control over financial reporting and business development activities ($1.0 million) and favorable transition service fees, net of corporate costs associated with the divested Personal Care Films business ($0.6 million).
Interest expense was $1.7 million in the first six months of 2021 in comparison to $1.1 million in the first six months of 2020, primarily due to higher average debt levels.
The effective tax rate used to compute income taxes for continuing operations in the first six months of 2021 was 22.5%, compared to 27.1% in the first six months of 2020. The differences between the U.S. federal statutory rate and the effective tax rate for the first six months of 2021 and 2020 are shown in the table provided in Note 12.
Pension expense was $7.0 million in the first six months of 2021, a favorable change of $0.1 million compared to the first six months of 2020. The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the net sales and EBITDA from ongoing operations by segment table. Pension expense is projected to be $14 million in 2021, which is determined at the beginning of the year based on the funded status of the Company’s defined benefit pension plan and actuarial assumptions at that time. Tredegar’s frozen defined benefit pension plan was underfunded on a GAAP basis by $103 million at December 31, 2020, comprised of investments at fair value of $233 million and a projected benefit obligation (“PBO”) of $336 million. GAAP accounting requires adjustment for changes in values of assets and the PBO only at the end of each year, even though these values change daily. The Company estimates that changes to the values of pension plan assets and liabilities resulted in a decrease in the underfunding from $103 million at December 31, 2020 to approximately $75 million at June 30, 2021.
Tredegar owns approximately 19% of kaléo, which makes and sells an epinephrine delivery device under the name AUVI-Q®. The Company accounts for its investment in kaléo using a fair value method. The Company’s estimate of the fair value of its interest in kaléo at June 30, 2021 was $35.2 million ($30.1 million after taxes), essentially unchanged from the balance at March 31, 2021 of $35.0 million ($30.0 million after taxes) and December 31, 2020 of $34.6 million ($29.7 million after taxes). kaléo’s stock is not publicly traded. The ultimate value of the Company’s ownership interest in kaléo could be materially different from the estimated fair value and will ultimately be determined and realized only if and when a liquidity event occurs. See Note 7 for more information on this investment.
Net capitalization and other credit measures are provided in Liquidity and Capital Resources.
Critical Accounting Policies
In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with GAAP. The Company believes the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of the 2020 Form 10-K have the greatest potential impact on our financial statements, so Tredegar considers these to be its critical accounting policies. These policies include accounting for impairment of long-lived assets and goodwill, investment accounted for under the fair value method, pension benefits and income taxes. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the consistent application of these policies enables it to provide readers of the financial statements with useful and reliable information about our operating results and financial condition. Since December 31, 2020, there have been no changes in these policies that have had a material impact on results of operations or financial position. For more information on new accounting pronouncements, see Note 1.
Results of Operations
Second Quarter of 2021 Compared with the Second Quarter of 2020
Sales in the second quarter of 2021 increased by 13.4% compared with the second quarter of 2020. Net sales in Aluminum Extrusions increased 31.3% due to higher volume, the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs. Net sales decreased 21.8% in PE Films, primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection. Net sales in Flexible Packaging Films decreased 2.1% primarily due to lower sales volume, partially offset by a favorable product mix and higher selling prices from the pass-through of higher resin costs. For more information on net sales and volume, see the Executive Summary.
Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 21.5% in the second quarter of 2021 compared to 24.9% in the second quarter of 2020. The gross profit margin in Aluminum Extrusions increased primarily due to higher average selling prices and favorable FIFO variance in the second quarter of 2021 due to aluminum raw materials previously acquired at lower costs. This favorable FIFO variance was due to aluminum raw materials previously acquired at lower costs in a quickly rising pricing environment driving a benefit of $3.1 million in the second quarter of 2021 versus a charge of $2.1 million in the second quarter of 2020. The gross profit margin in PE Films decreased primarily due to lower volume, unfavorable mix associated with the customer product transitions in Surface Protection and higher resin costs, net of existing index based pricing, partially offset by higher sales of products unrelated to the customer product transitions and higher productivity. The gross profit margin in Flexible Packaging Films increased due to a favorable product mix and higher selling prices from the pass-through of higher resin costs.
As a percentage of sales, selling, general and administrative (“SG&A”) and research and development ("R&D") expenses were 10.3% in the second quarter of 2021, compared with 12.6% in the second quarter of last year. SG&A and R&D expenses were down year-over-year, while net sales increased. Decreased spending is primarily due to nonrecurring SG&A expenses related to Bright View Technologies in the second quarter of 2020 and lower R&D spending, partially offset by higher employee-related compensation expense.
Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in the second quarters of 2021 and 2020 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 11 and are included in “Asset impairments and costs associated with exit and
disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted.
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Three Months Ended June 30,
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($ in millions)
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2021
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2020
|
Aluminum Extrusions:
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(Gains) losses from sale of assets, investment writedowns and other items:
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Consulting expenses for enterprise resource planning feasibility study1
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$
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—
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$
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0.2
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COVID-19-related expenses, net of relief2
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0.3
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0.9
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Total for Aluminum Extrusions
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$
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0.3
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$
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1.1
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PE Films:
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(Gains) losses from sale of assets, investment writedowns and other items:
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COVID-19-related expenses2
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$
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0.1
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$
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0.1
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Total for PE Films
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$
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0.1
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$
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0.1
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Flexible Packaging Films:
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(Gains) losses from sale of assets, investment writedowns and other items:
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One-time tax credit in Brazil for unemployment/social security insurance non-income taxes resulting from a favorable decision by Brazil’s Supreme Court regarding the calculation of such taxes2,3
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$
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(8.5)
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$
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—
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Total for Flexible Packaging Films
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$
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(8.5)
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$
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—
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Corporate:
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(Gains) losses associated with plant shutdowns, asset impairments and restructurings:
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Maintenance costs associated with held-for-sale assets
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$
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0.2
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$
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—
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(Gains) losses from sale of assets, investment writedowns and other items:
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|
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Professional fees associated with: remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting; and business development activities1
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1.7
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1.8
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Write-down of investment in Harbinger Capital Partners Special Situations Fund2
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0.4
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|
—
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Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend1
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0.1
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—
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Transition service fees, net of corporate costs associated with the divested Personal Care Films business2
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(0.3)
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—
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Accelerated recognition of stock-based compensation expense1
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—
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|
0.1
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Total for Corporate
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$
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2.1
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$
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1.9
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1. Included in “Selling, general and administrative expenses” in the consolidated statements of income.
2. Included in “Other income (expense), net” in the consolidated statements of income.
3. See Note 13 to the Consolidated Financial Statements.
4. See Note 2 to the Consolidated Financial Statements.
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Average debt outstanding and interest rates were as follows:
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Three Months Ended June 30,
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(In millions)
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2021
|
|
2020
|
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:
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Average outstanding debt balance
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$
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133.8
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|
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$
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43.6
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|
Average interest rate
|
1.8
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%
|
|
2.1
|
%
|
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|
|
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|
|
First Six Months of 2021 Results vs. First Six Months 2020 Results
Sales in the first six months of 2021 increased by 4.6% compared with the first six months of 2020. Net sales increased 14.9% in Aluminum Extrusions due to higher sales volume in the specialty and automotive markets and the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs. Net sales decreased 22.9% in PE Films primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection. Net sales in Flexible Packaging Films increased 1.9% primarily due to a favorable product mix and higher selling prices from the pass-through of higher resin costs, partially offset by lower sales volume. For more information on net sales and volume, see the Executive Summary.
Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 20.9% in the first six months of 2021 compared to 22.8% in the first six months of 2020. The gross profit margin in Aluminum Extrusions increased primarily due to higher average selling prices and favorable FIFO variance in the first six months of 2021 due to aluminum raw materials previously acquired at lower costs. The gross profit margin in PE Films decreased primarily due to lower volume, unfavorable mix associated with the customer product transitions in Surface Protection and higher resin costs, net of existing index based pricing, partially offset by higher sales of products unrelated to the customer product transitions and higher productivity. The gross profit margin in Flexible Packaging Films increased due to favorable product mix and higher selling prices from the pass-through of higher resin costs, partially offset by lower sales volume.
As a percentage of sales, SG&A and R&D expenses were 10.6% in the first six months of 2021, compared with 12.1% in the first six months of last year. SG&A and R&D expenses were down year-over-year, while net sales increased. Decreased spending is primarily due to nonrecurring SG&A expenses related to Bright View Technologies in the first six months of 2020, lower R&D spending, lower professional fees related to remediation activities of previously disclosed material weaknesses in the Company’s internal control over financial reporting and business development activities, partially offset by higher employee-related compensation and higher stock compensation.
Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in the first six months of 2021 and 2020 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 11 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted.
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|
|
|
|
|
|
|
|
Six Months Ended June 30,
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($ in millions)
|
2021
|
2020
|
Aluminum Extrusions:
|
|
|
(Gains) losses from sale of assets, investment writedowns and other items:
|
|
|
Consulting expenses for enterprise resource planning feasibility study1
|
$
|
—
|
|
$
|
0.9
|
|
COVID-19-related expenses, net of relief2
|
0.1
|
|
0.9
|
|
Total for Aluminum Extrusions
|
$
|
0.1
|
|
$
|
1.8
|
|
PE Films:
|
|
|
(Gains) losses from sale of assets, investment writedowns and other items:
|
|
|
COVID-19-related expenses2
|
$
|
0.3
|
|
$
|
0.1
|
|
Total for PE Films
|
$
|
0.3
|
|
$
|
0.1
|
|
Flexible Packaging Films:
|
|
|
(Gains) losses from sale of assets, investment writedowns and other items:
|
|
|
One-time tax credit in Brazil for PIS/COFINS social contribution non-income taxes resulting from a favorable decision by Brazil’s Supreme Court regarding the calculation of such taxes2,3
|
$
|
(8.5)
|
|
$
|
—
|
|
COVID-19-related expenses2
|
0.1
|
|
—
|
|
Total for Flexible Packaging Films
|
$
|
(8.4)
|
|
$
|
—
|
|
Corporate:
|
|
|
(Gains) losses associated with plant shutdowns, asset impairments and restructurings:
|
|
|
Maintenance costs associated with held-for-sale assets4
|
$
|
0.4
|
|
$
|
—
|
|
(Gains) losses from sale of assets, investment writedowns and other items:
|
|
|
Professional fees associated with: remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting; and business development activities1
|
2.6
|
|
3.6
|
|
Write-down of investment in Harbinger Capital Partners Special Situations Fund2
|
0.5
|
|
0.2
|
|
Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 special dividend1
|
0.5
|
—
|
|
Transition service fees, net of corporate costs associated with the divested Personal Care Films business2
|
(0.6)
|
|
—
|
|
Accelerated recognition of stock-based compensation expense1
|
—
|
|
0.1
|
|
Total for Corporate
|
$
|
3.4
|
|
$
|
3.9
|
|
1. Included in “Selling, general and administrative expenses” in the consolidated statements of income.
2. Included in “Other income (expense), net” in the consolidated statements of income.
3. See Note 13 to the Consolidated Financial Statements.
4. See Note 2 to the Consolidated Financial Statements.
|
Average debt outstanding and interest rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In millions)
|
2021
|
|
2020
|
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:
|
|
|
|
Average outstanding debt balance
|
$
|
136.1
|
|
|
$
|
43.4
|
|
Average interest rate
|
1.7
|
%
|
|
2.7
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%
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Liquidity and Capital Resources
The Company continues to focus on improving working capital management. Measures such as days sales outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used to evaluate changes in working capital. Changes in operating assets and liabilities from continuing operations from December 31, 2020 to June 30, 2021 are summarized below. Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.
•Accounts and other receivables increased $13.3 million (15.4%).
◦Accounts and other receivables in Aluminum Extrusions increased by $14.5 million primarily due to higher selling prices from the pass-through of higher metal costs and an increase in average selling prices to cover higher operating costs, partially offset with improved collection efforts during the second quarter of 2021. DSO (represents trailing 12 months net sales divided by a rolling 12-month average of accounts and other receivables balances) was approximately 45.9 days for the 12 months ended June 30, 2021 and 47.5 days for the 12 months ended December 31, 2020.
◦Accounts and other receivables in PE Films decreased by $3.1 million due to lower sales volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection, partially offset by higher selling prices of packaging products as a result of the pass-through of increased resin costs. DSO was approximately 30.1 days for the 12 months ended June 30, 2021 and 30.2 days for the 12 months ended December 31, 2020.
◦Accounts and other receivables in Flexible Packaging Films increased by $2.7 million primarily due to a one-time tax credit in Brazil for PIS/COFINS social contribution non-income taxes, partially offset by higher sales volume to customers that have shorter payment terms. DSO was approximately 38.9 days for the 12 months ended June 30, 2021 and 41.0 days for the 12 months ended December 31, 2020.
•Inventories increased $14.7 million (22.2%).
◦Inventories in Aluminum Extrusions increased by $7.8 million due to higher average aluminum prices and the impact of COVID-19-related operational and production inefficiencies on the timing of shipments. DIO (represents trailing 12 months costs of goods sold calculated on a FIFO basis divided by a rolling 12-month average of inventory balances calculated on the FIFO basis) was approximately 38.9 days for the 12 months ended June 30, 2021 and 39.3 days for the 12 months ended December 31, 2020.
◦Inventories in PE Films remained flat as of June 30, 2021 compared to December 31, 2020. DIO of approximately 64.7 days for the 12 months ended June 30, 2021 was higher compared 59.2 days for the 12 months ended December 31, 2020 due to the higher Surface Protection 12-month average of raw materials inventory.
◦Inventories in Flexible Packaging Films increased by $6.4 million primarily due to higher planned raw material levels due to temporary resin supply issues and higher finished good levels due to lower than anticipated sales volume. DIO was approximately 92.4 days for the 12 months ended June 30, 2021 and 89.4 days for the 12 months ended December 31, 2020.
•Net property, plant and equipment increased $2.0 million (1.2%) primarily due to depreciation expense of $10.9 million, offset by capital expenditures of $12.3 million and a reduction from the effect of changes in foreign exchange rates of $0.9 million.
•Identifiable intangible assets, net decreased by $1.4 million (7.5%) due to amortization expense of $1.4 million.
•Accounts payable increased $23.5 million (26.2%).
◦Accounts payable in Aluminum Extrusions increased by $15.0 million primarily due to higher average aluminum prices and favorable payment terms with certain vendors. DPO (represents trailing 12 months costs of goods sold calculated on a FIFO basis divided by a rolling 12-month average of accounts payable balances) was approximately 55.2 days for the 12 months ended June 30, 2021 and 53.1 days for the 12 months ended December 31, 2020.
◦Accounts payable in PE Films increased by $5.8 million primarily due to higher resin costs related to raw material purchases during the second quarter of 2021. DPO of approximately 35.0 days for the 12 months ended June 30, 2021 declined from 36.8 days for the 12 months ended December 31, 2020 due to the lower Surface Protection 12-month average of costs of goods sold as a result of lower sales volume.
◦Accounts payable in Flexible Packaging Films increased $3.1 million due to higher raw material purchases during the first six months of 2021. DPO was approximately 67.0 days for the 12 months ended June 30, 2021 and 61.7 days for the 12 months ended December 31, 2020.
Net cash provided by operating activities was $41.5 million in the first six months of 2021 compared to $36.1 million in the first six months of 2020. The increase was primarily due to higher net working capital ($3.5 million) and higher EBITDA for business segments of $1.0 million in the first six months of 2021 versus the first six months of 2020.
Net cash used in investing activities increased during the first six months of 2021 compared to the first six months of 2020 due to higher capital expenditure spending of $2.5 million.
Net cash used in financing activities of $24.2 million in the first six months of 2021, compared to $16.6 million in the first six months of 2020, increased primarily due to higher net repayments ($9.0 million) under the Credit Agreement (as defined below), partially offset by repurchases of employee common stock for tax withholdings of $0.6 million in the first six months of 2020.
Tredegar has a five-year secured revolving credit agreement (the “Credit Agreement”) providing for aggregate borrowings in an amount of $375 million, which matures in June 2024.
Net capitalization and indebtedness as defined under the Credit Agreement as of June 30, 2021 were as follows:
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Net Capitalization and Indebtedness as of June 30, 2021
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(In thousands)
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Net capitalization:
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Cash and cash equivalents
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$
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18,298
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Debt:
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Credit Agreement
|
117,000
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Debt, net of cash and cash equivalents
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98,702
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Shareholders’ equity
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143,340
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Net capitalization
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$
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242,042
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Indebtedness as defined in Credit Agreement:
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Total debt
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$
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117,000
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Indebtedness
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$
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117,000
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Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-Credit EBITDA levels as follows:
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Pricing Under The Credit Agreement (Basis Points)
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Indebtedness-to-Credit EBITDA Ratio
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Credit Spread
Over LIBOR
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Commitment
Fee
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> 3.5x but <= 4.0x
|
200.0
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|
40
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> 3.0x but <= 3.5x
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187.5
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35
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> 2.0x but <= 3.0x
|
175.0
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30
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> 1.0x but <= 2.0x
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162.5
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25
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<= 1.0x
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150.0
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20
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At June 30, 2021, the interest rate on debt under the Credit Agreement existing at that date was priced at one-month LIBOR plus the applicable credit spread of 162.5 basis points.
The most restrictive covenants in the Credit Agreement include:
•Maximum indebtedness-to-Credit EBITDA (“Leverage Ratio”) of 4.00x;
•Minimum Credit EBITDA-to-interest expense of 3.00x; and
•Maximum aggregate distributions to shareholders over the remaining term of the Credit Agreement of $75 million; provided, that if the Leverage Ratio of equal to or greater than 3.00x, a limitation on such payments for the succeeding quarter at the greater of (i) $4.75 million and (ii) 50% of consolidated net income for the most recent fiscal quarter.
The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries. At June 30, 2021, based upon the most restrictive covenant within the Credit Agreement, available credit under the Credit Agreement was approximately $258 million. Total debt outstanding was $117 million and $134 million as of June 30, 2021 and December 31, 2020, respectively.
Credit EBITDA is not intended to represent net income (loss) or cash flow from operations as defined by GAAP and should not be considered as an alternative to either net income (loss) or to cash flow. The computations of Credit EBITDA and the leverage ratio and interest coverage ratio as defined in the Credit Agreement are presented below.
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Computations of Credit EBITDA and Leverage Ratio and Interest Coverage Ratio as Defined in the Credit Agreement Along with Related Most Restrictive Covenants as of and for the Twelve Months Ended June 30, 2021 (In Thousands)
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Computation of Credit EBITDA for the twelve months ended June 30, 2021:
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Net income (loss)
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$
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(34,051)
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Plus:
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After-tax losses related to discontinued operations
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53,896
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Total income tax expense for continuing operations
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2,973
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Interest expense
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3,196
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Depreciation and amortization expense for continuing operations
|
26,350
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All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $9,990)
|
13,055
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Charges related to stock option grants and awards accounted for under the fair value-based method
|
2,047
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Losses related to the application of the equity method of accounting
|
—
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Losses related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting
|
35,182
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Minus:
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After-tax income related to discontinued operations
|
—
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Total income tax benefits for continuing operations
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—
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Interest income
|
(44)
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All non-cash gains and income, plus cash gains and income in excess of $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings
|
—
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Income related to changes in estimates for stock option grants and awards accounted for under the fair value-based method
|
—
|
|
Income related to the application of the equity method of accounting
|
—
|
|
Income related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting
|
—
|
|
Plus cash dividends declared on investments in an amount not to exceed $10,000 for such period
|
318
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|
Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions
|
—
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Plus or minus, as applicable, pro forma EBITDA adjustments to pension expense associated with the early payment of pension obligations
|
—
|
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Credit EBITDA as defined in Credit Agreement
|
$
|
102,922
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Computations of leverage and interest coverage ratios as defined in the Credit Agreement at June 30, 2021:
|
Leverage ratio (indebtedness-to-Credit EBITDA)
|
1.14x
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Interest coverage ratio (Credit EBITDA-to-interest expense)
|
32.20x
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Most restrictive covenants as defined in the Credit Agreement:
|
|
Available balance of maximum permitted aggregate amount of dividends that can be paid by Tredegar during the remaining term of the Credit Agreement ($75,000 minus $12,090 of dividends paid after December 1, 2020)
|
62,910
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Maximum leverage ratio permitted
|
4.00x
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Minimum interest coverage ratio permitted
|
3.00x
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Tredegar was in compliance with all of its debt covenants as of June 30, 2021. Noncompliance with any of the debt covenants may have a material adverse effect on its financial condition or liquidity, in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated.
At June 30, 2021, the Company had cash and cash equivalents of $18.3 million, including cash and cash equivalents held by locations outside the U.S. of $8.6 million.