Tredegar Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Tredegar manufactures polyethylene and polyester films and aluminum extrusions. The filing is an annual report; fourth-quarter data are identified separately below.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales | $828.3 million | $896.2 million |
| Net sales, excluding freight | $799.3 million | $866.3 million |
| Income (loss) from continuing operations | $24.5 million | $(32.1) million |
| Diluted EPS from continuing operations | $0.75 | $(0.99) |
| Cash provided by operating activities | $48.9 million | $74.3 million |
| Capital expenditures | $45.5 million | $32.8 million |
| Cash and cash equivalents at year-end | $29.5 million | $44.2 million |
| Debt at year-end | $95.0 million | $104.0 million |
- Consolidated gross profit margin was 15.8%, compared with 15.7% in 2015. The filing does not provide a consolidated operating margin as a single headline measure.
- Net debt was $65.5 million, up from $59.8 million, as cash fell more than debt. The company reported $185 million of borrowing availability under its $400 million secured revolver, based on the most restrictive covenants; it was compliant with covenants at year-end.
- Shareholders’ equity was $310.8 million. The defined-benefit pension plan was underfunded by $88.6 million.
- Quarterly 2016 results: sales were $204.8 million and net income was $1.7 million in Q4; diluted EPS was $0.05. The other quarters reported net income of $7.3 million, $3.4 million and $12.0 million.
Material changes and segment results
- Sales declined 7.6% from 2015, principally because of lower PE Films and Aluminum Extrusions sales. Income returned to positive territory, largely because 2015 included a $44.5 million Flexible Packaging Films goodwill impairment and a $20.5 million unrealized loss on the kaleo investment.
- PE Films: Net sales fell 14.1% to $331.1 million; ongoing operating profit fell 45.5% to $26.3 million. Lower volume reflected customer losses and product transitions, weaker demand and lower overwrap-film sales.
- Flexible Packaging Films: Net sales rose 2.6% to $108.0 million as volume increased 8.9%, but ongoing operating profit fell 67.5% to $1.8 million. Competitive pricing, Brazilian currency transaction losses and the absence of prior-year refunds and favorable settlements weighed on results.
- Aluminum Extrusions: Net sales fell 4.1% to $360.1 million, mainly on lower average aluminum-related selling prices, while volume rose 1.7%. Ongoing operating profit increased 24.2% to $37.8 million, aided by efficiencies, freight logistics and lower utility costs.
- Operating cash flow declined $25.4 million, attributed mainly to lower PE Films earnings and working-capital movements, including higher receivables and income taxes recoverable. Capital spending increased by $12.6 million.
Outlook, management commentary, risks and unusual items
- Management expected the PE Films domestic-facility consolidation to be completed around mid-2017, with approximately $5–6 million of annual pretax cash savings when fully implemented. Estimated total project cash expenditures were about $16–17 million.
- Management estimated future annual operating-profit exposure of approximately $10 million from a possible personal-care product transition after 2018, and up to $5–10 million from possible surface-protection transitions; timing and ultimate impact were uncertain.
- 2017 capital expenditure projections were approximately $36 million for PE Films, $4 million for Flexible Packaging Films and $27 million for Aluminum Extrusions. These are management estimates, not earnings guidance.
- On February 15, 2017, Bonnell Aluminum acquired Futura Industries for approximately $92 million, funded through the revolver. Management expected the acquisition to be immediately accretive to ongoing earnings. The acquisition occurred after the reporting date.
- A June 2016 explosion at the Newnan, Georgia aluminum facility injured five employees and damaged casting equipment. Extrusion and finishing resumed promptly; the company expected the cast house to return to production by the end of Q2 2017. Insurance recoveries had offset $4.3 million of $5.0 million in additional 2016 expenses; recovery of the remaining $0.7 million was not assured.
- Key risks include dependence on major PE Films customers (P&G sales were $129 million in 2016), further product transitions and competitive pressure; Brazil’s economic, currency and PET overcapacity risks; cyclical construction demand and high capacity utilization in Aluminum Extrusions; raw-material and energy price volatility; pension funding; and debt-covenant compliance. The company also cited environmental, supply-chain, facility-disruption, cybersecurity and customer-credit risks.
- Other notable items: 2016 included a $1.6 million unrealized gain on the private kaleo investment and a $1.0 million unrealized loss on investment property. The 2016 effective tax rate was 11.6%, including a $6.4 million benefit from excess foreign tax credits related to repatriation of Brazilian cash. The company paid $0.44 per share in dividends during 2016.
- Environmental remediation and other legal matters are disclosed as contingencies. Management did not expect additional environmental costs to materially affect financial position, but said costs could materially affect results or cash flows when incurred. No material pending legal proceeding was listed in Item 3.
Investor verification priorities
- Track PE Films customer retention, product-transition timing and whether new products and restructuring savings offset anticipated lost business.
- Assess Flexible Packaging Films’ profitability amid Brazilian economic and currency conditions, competitive pricing and expected additional PET capacity.
- Verify progress on the Newnan facility restoration, insurance recoveries and the projected return to casting production.
- Review Futura’s post-acquisition results, integration, funding and effect on revolver availability and leverage.
- Monitor operating cash generation, capital spending, pension contributions and covenant headroom; confirm dividend capacity under the secured credit agreement.
- Evaluate assumptions supporting goodwill and intangible-asset valuations, particularly PE Films surface protection, and the Level 3 valuation of the kaleo investment.