Tredegar Corporation — FY 2014 Form 10-K
Business context and reporting period. Tredegar manufactures plastic films and aluminum extrusions. This annual filing covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter report. Comparisons are primarily with FY 2013. Film Products serves personal care, flexible packaging, surface protection and other markets; Aluminum Extrusions sells mainly to U.S. building, construction, automotive and industrial markets.
Financial performance and position
- Revenue: Sales were $951.8 million, down 0.8% from $959.3 million. Net sales, defined as sales less freight, were $923.0 million, down 0.8%. Film Products net sales fell 6.8% to $578.7 million; Aluminum Extrusions net sales rose 11.3% to $344.3 million.
- Profit: Income from continuing operations was $36.0 million, or $1.11 per diluted share, versus $35.9 million, or $1.10, in 2013. Net income was $36.9 million, or $1.13 per diluted share, compared with $21.9 million, or $0.67. The 2014 net result included $0.9 million of income from discontinued operations; 2013 included a $14.0 million discontinued-operations loss.
- Segments: Film Products ongoing operating profit declined 18.2% to $58.1 million. Aluminum Extrusions ongoing operating profit increased 40.3% to $25.7 million.
- Margins and costs: Consolidated gross profit was 15.2% of sales, unchanged from 2013. Film Products faced lower volumes, pricing pressure and higher manufacturing costs; Aluminum Extrusions benefited from volume, mix, efficiencies and value-added pricing.
- Cash flow and investment: Operating cash flow was $51.2 million, down from $76.7 million. Capital expenditures were $44.9 million, versus $79.7 million. Cash declined to $50.1 million from $52.6 million.
- Debt and liquidity: Debt was $137.3 million; net debt (debt less cash) was $87.2 million, compared with $86.4 million in 2013. The company had approximately $155 million available under its $350 million revolving facility, was in compliance with covenants, and reported a 1.42x leverage ratio against a 3.00x maximum.
- Other financial considerations: The pension plan’s funded deficit widened to $96.4 million from $42.5 million, principally reflecting actuarial changes including lower discount rates. Shareholders’ equity decreased to $372.0 million from $402.7 million. Comprehensive loss was $23.0 million, including foreign currency translation and pension-related losses.
Material changes versus 2013
- Film Products lost certain North American babycare elastic-laminate volumes after P&G consolidated suppliers. Related 2014 domestic net sales were $17.1 million versus $50.9 million in 2013; management estimated an approximately $9 million annual operating-profit impact when fully realized, including about $2 million in 2015.
- Film Products sales volume fell 8.6%; total net sales declined $42.6 million. Currency movements reduced net sales by approximately $2.6 million but favorably affected ongoing operating profit by approximately $4.5 million.
- Aluminum Extrusions volume rose 7.1%, and net sales increased with higher volumes, selling prices and a greater share of finished and fabricated products.
- Cash from operations fell mainly because of working-capital movements. Capital spending fell as the Brazil capacity expansion project progressed toward completion.
- The effective tax rate declined to 20.7% from 32.1%, including a $4.9 million benefit from capital loss carryforwards and a $2.2 million adjustment reversing previously accrued deferred tax liabilities.
Outlook, commentary, risks and unusual items
- Outlook: No consolidated earnings or revenue guidance is provided. Management expected Film Products’ expanded Latin American PET-film capacity and planned surface-protection and personal-care capacity additions to support longer-term growth, while acknowledging excess global PET-film supply. Aluminum Extrusions cited improving nonresidential construction demand, anodizing-capacity upgrades and an expected 2015 ramp-up of automotive production.
- Planned spending and funding: Management estimated 2015 capital expenditures of approximately $31 million for Film Products and $10 million for Aluminum Extrusions. Minimum required pension contributions were expected to be $2.4 million in 2015; pension expense was estimated at $12.3 million. Management said cash, borrowing availability and operating cash flow should cover working capital, capital spending and dividends for at least 12 months.
- Unusual items: 2014 included a $10.0 million one-time license payment to 3M resolving patent litigation, a $2.0 million unrealized gain on the kaléo investment, a $0.8 million unrealized loss on Harbinger, and a $1.2 million gain on sale of investment property. Shutdown, restructuring and other charges totaled $13.8 million. Tax adjustments materially lowered the reported tax rate.
- Principal risks: Customer concentration remains significant: P&G represented about 24% of consolidated continuing-operations net sales in 2014. Other risks include raw-material and energy price volatility and limits or lags in passing through cost increases; competitive pricing and product obsolescence; cyclical construction markets; foreign-exchange and international operating exposure; supply-chain and facility disruptions; and pension funding sensitivity to rates and asset returns.
- Contingencies: Tredegar reported environmental remediation and indemnification exposures, including continuing environmental costs at its Newnan, Georgia facility. Management did not expect known matters to materially affect financial position, but stated they could affect quarterly or annual operating results. Certain U.S. PET-film producers appealed the revocation of the Brazilian PET-film anti-dumping order; a separate appeal challenged a Commerce scope ruling concerning Terphane exports.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor issued an unqualified opinion on the financial statements and internal control.
Important facts for investors to verify
- Whether replacement business offsets the P&G babycare volume loss and its estimated annual profit impact.
- Film Products’ capacity utilization, pricing and margins as the Brazil expansion ramps amid global PET-film overcapacity.
- Whether Aluminum Extrusions sustains volume, mix and margin gains as automotive capacity ramps and construction demand evolves.
- The sustainability of earnings excluding the 3M payment, investment fair-value movements and 2014 tax benefits.
- Pension funding needs, actuarial assumptions and the effect of further interest-rate or asset-return changes.
- Available revolver capacity, covenant headroom and cash accessibility, including $40.5 million held outside the U.S.
- Developments in environmental obligations and the pending trade-duty litigation and appeals.