Tredegar Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Tredegar manufactures polyethylene films, polyester packaging films and aluminum extrusions.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Sales | $1,065.5 million | $961.3 million |
| Net sales, excluding freight | $1,029.4 million | $927.6 million |
| Net income | $24.8 million | $38.3 million |
| Diluted EPS | $0.75 | $1.16 |
| Gross margin | 16.9% | 16.7% |
| Cash from operating activities | $97.8 million | $88.2 million |
| Capital expenditures | $40.8 million | $44.4 million |
| Cash and cash equivalents | $34.4 million | $36.5 million |
| Debt | $101.5 million | $152.0 million |
| Net debt | $67.1 million | $115.5 million |
Operating cash flow increased by $9.6 million, with tax refunds contributing to the improvement. Cash used in investing activities was $34.1 million, versus $125.6 million in 2017, when the company acquired Futura. Financing activities used $64.1 million in 2018, including $50.5 million of net debt repayments and $14.6 million in dividends. The quarterly dividend was $0.11 per share, or $0.44 for the year.
At year-end, approximately $298 million was available under the $400 million revolving credit facility, which matures in March 2021. Tredegar reported compliance with its covenants; leverage was 1.03x against a maximum of 4.00x, and interest coverage was 11.79x against a minimum of 2.50x.
Segments and changes versus 2017
| Segment | 2018 net sales | 2018 ongoing operating profit | Change in sales |
|---|---|---|---|
| PE Films | $332.5 million | $36.2 million | Down 5.7% |
| Flexible Packaging Films | $123.8 million | $9.9 million | Up 14.3% |
| Aluminum Extrusions | $573.1 million | $48.6 million | Up 22.8% |
PE Films’ sales and ongoing profit declined with lower Personal Care volume, competitive pressure, unfavorable mix and Surface Protection quality claims. Flexible Packaging Films returned to profit from a 2017 operating loss, helped by higher volume, increased selling prices and a production line restart; year-over-year depreciation and amortization were also substantially lower following the 2017 asset write-down. Aluminum Extrusions benefited from higher volume and pass-through of higher metal costs, as well as a full year of Futura ownership. Niles plant inefficiencies were estimated to have reduced 2018 operating profit by about $3 million; fourth-quarter capacity utilization exceeded 90%.
Consolidated net income fell despite higher sales and gross margin. Reported results included a $46.8 million non-cash goodwill impairment charge in PE Films and a $30.6 million pre-tax unrealized gain on Tredegar’s private kaléo investment. The impairment followed an expected major Personal Care customer product transition. The 2017 comparison included a $101 million non-cash Flexible Packaging Films asset impairment, a $33.8 million kaléo gain, a Terphane-related escrow gain and substantial tax benefits, making year-to-year net income comparisons sensitive to unusual items.
Outlook, risks and unusual items
- Customer transitions: A Personal Care product transition is expected to adversely affect about $70 million of annual sales. Tredegar expects $30–$35 million of sales from the product in 2019, with potentially no sales thereafter. Personal Care projected negative $1.5 million of operating profit plus depreciation and amortization in the first half of 2019, with a return to positive results in the second half conditional on production and sales growth targets.
- Surface Protection: Potential customer transitions to alternative processes or materials, possibly fully implemented by the fourth quarter of 2019, could reduce annual operating profit by an estimated $11 million when fully in effect.
- Capital spending and restructuring: Management’s 2019 plans projected approximately $45 million of PE Films, $13 million of Flexible Packaging Films and $18 million of Aluminum Extrusions capital expenditures. The Shanghai facility closure was expected to produce $1.7 million in annual cash savings; total exit and disposal costs were estimated at $5.0 million, with execution expected to take 12–18 months.
- Investment valuation: Tredegar reported its approximately 20% kaléo interest at an estimated fair value of $84.6 million, versus its $7.5 million cost basis. This is a Level 3 estimate without an active market and could differ materially from realizable value. The Department of Justice began an investigation of kaléo’s Evzio business in 2018; the impact was uncertain.
- Financial reporting controls: Management found internal control over financial reporting ineffective at year-end 2018 due to material weaknesses spanning the control environment, risk assessment, information and communication, monitoring, process controls and IT controls. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Remediation was planned through 2019 and could extend beyond it.
- Pension and contingencies: The defined benefit pension plan was underfunded by $81.9 million at year-end; an approximately $8.1 million contribution was expected in 2019. The company also disclosed environmental remediation matters, potential future costs and ordinary-course legal actions. Management did not expect these to materially affect financial position, but quarterly or annual results could be affected.
- Market and operating risks: Key exposures include PE Films customer concentration and competitive pressure; PET overcapacity and Brazilian real/dollar mismatch; cyclical aluminum demand, higher aluminum tariffs and energy costs; raw-material pass-through timing; and supply-chain, facility-disruption and cybersecurity risks.
- Leadership: Tredegar announced that CEO John D. Gottwald would retire effective immediately after the filing; director John M. Steitz was elected to succeed him.
Important facts for investors to verify
- Whether Personal Care replaces the lost customer business and meets the production and sales targets underpinning its projected second-half 2019 recovery.
- Timing and realized impact of the estimated $11 million annual Surface Protection profit exposure.
- Progress and independent evidence of effective remediation of the material weaknesses in financial reporting controls.
- Whether kaléo’s estimated $84.6 million value is supportable, and any developments in the DOJ investigation or a potential liquidity event.
- Aluminum Extrusions’ ability to address Niles inefficiencies and sustain demand, pricing and capacity utilization.
- Cash generation, pension contributions, capital spending and covenant headroom, including the revolving facility’s 2021 maturity.