Tredegar Corporation — Q3 2014 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2014. Tredegar operates Film Products and Aluminum Extrusions. Comparisons below are with the corresponding 2013 periods; amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $240.4 | $243.2 | $712.6 | $728.3 |
| Net sales, excluding freight | $232.7 | $235.7 | $691.7 | $706.1 |
| Income from continuing operations | $10.7 | $7.4 | $23.0 | $26.5 |
| Net income | $11.6 | $7.0 | $23.8 | $12.5 |
| Diluted EPS, continuing operations | $0.33 | $0.23 | $0.70 | $0.81 |
| Diluted EPS, net income | $0.36 | $0.21 | $0.73 | $0.38 |
| Operating profit, ongoing segment operations | $19.0 | $23.0 | $63.5 | $67.7 |
Consolidated gross margin was 14.4% in Q3 versus 15.3% a year earlier, and 15.6% for the first nine months versus 15.3%. The nine-month effective tax rate was 34.6%, compared with 31.5%.
Cash and debt: Cash was $51.9 at September 30, 2014, versus $52.6 at year-end 2013. Nine-month operating cash flow was $37.2, capital expenditures were $32.6, and cash used in investing activities was $27.5. Long-term debt was $138.8; debt net of cash was $86.8. The company reported $156 million of borrowing availability under its $350 million revolving facility, compliance with all covenants, a 1.43x leverage ratio against a 3.00x maximum, and a 23.15x interest coverage ratio against a 2.50x minimum. Management said available borrowing capacity, cash and operating cash flow should meet working-capital, capital expenditure and dividend needs for the next 12 months.
Current assets were $258.7 and current liabilities $132.4 at quarter-end. Dividends were $0.09 per share for Q3 and $0.25 per share for the first nine months.
Changes versus prior periods
- Film Products weakened: Q3 net sales declined 9.0% and ongoing operating profit fell 32.7%. Nine-month net sales declined 6.7% and ongoing operating profit fell 18.9%. Lower volume, including lost North American babycare elastic laminate business, weaker product mix and manufacturing costs weighed on results.
- Aluminum Extrusions improved: Q3 net sales rose 14.1% and ongoing operating profit rose 67.9%. Nine-month net sales grew 7.3% and ongoing operating profit rose 50.3%, supported by volume, product mix, pricing and efficiencies.
- Q3 continuing-operations income rose year over year, but nine-month continuing-operations income and diluted EPS declined. Nine-month reported net income increased largely because 2013 included a $14.0 million after-tax environmental indemnity accrual in discontinued operations; 2014 recorded a $0.9 million benefit from adjusting those accruals.
- Operating cash flow fell to $37.2 from $44.9 for the first nine months, which the company attributed primarily to working-capital volatility. Capital expenditures were lower than the prior-year period.
Outlook, commentary and notable items
- Film Products: Management expected 2014 sales volumes to be 7–10% below 2013, citing delayed Brazilian capacity start-up, customer inventory corrections and competitive pressure in lower-tier surface protection film. The new Brazil line became available for commercial production at the end of Q3, with volume ramp-up expected in Q4 2014 and further growth in 2015. Management expected to meet its margin performance target through efficiencies, product mix and cost controls, while warning that lower volumes would pressure near-term operating profit. 2014 capital expenditures were estimated at approximately $40 million.
- Aluminum Extrusions: Management expected 2014 volume growth of 6–8% and an adjusted EBITDA margin of 9–10%. A key automotive program’s volume ramp-up had shifted from Q3 to Q4.
- Unusual items: The company paid 3M a one-time $10 million license fee in June 2014 to settle patent litigation. The Q3 results also included a $4.0 million pretax unrealized gain on its kaléo investment (versus a $3.1 million loss in Q3 2013); the nine-month gain was $2.9 million. The kaléo valuation is Level 3 and depends on uncertain commercial milestones and cash-flow assumptions. A 500-basis-point change in the discount-rate assumption would change its estimated value by approximately $6–8 million.
- Other items included restructuring and facility shutdown charges, a $1.2 million gain on sale of investment property, and $0.8 million of nine-month unrealized losses on the Harbinger Fund investment. Brazilian tax incentives then in effect were due to expire at year-end 2014; management anticipated qualifying for replacement incentives.
- Key risks include Film Products’ dependence on P&G, competitive and volume pressures, cyclical Aluminum Extrusions demand, raw-material and energy costs and pass-through timing, foreign currency exposure, and risks associated with international operations. The filing said risk factors had not materially changed from the 2013 Form 10-K. A PET-film antidumping scope ruling was under appeal; the filing said indemnification for related liabilities was provided under the Terphane purchase agreement.
Investor verification points
- Track Film Products volumes, customer concentration and whether the Brazil line ramps as planned; verify whether management’s 7–10% full-year volume decline expectation and margin target were achieved.
- Assess whether Aluminum Extrusions met its expected 6–8% volume growth and 9–10% adjusted EBITDA margin, including the delayed automotive program.
- Separate recurring operating performance from the $10 million 3M payment, kaléo fair-value gains, investment-property gain and discontinued-operations indemnity adjustments.
- Monitor working-capital conversion, capital spending, cash generation, borrowing availability and covenant headroom.
- Review the sensitivity and assumptions behind kaléo’s Level 3 valuation, the outcome of the PET-film appeal, and the status of Brazilian tax incentives.