Tredegar Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial-statement amounts are generally in millions unless noted. Tredegar’s principal segments are Film Products and Aluminum Extrusions.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $243.5 | $215.9 | $485.1 | $432.5 |
| Income from continuing operations | $9.6 | $7.4 | $19.1 | $15.1 |
| Net income | $1.3 | $7.4 | $5.6 | $10.4 |
| Diluted EPS, continuing operations | $0.29 | $0.23 | $0.59 | $0.47 |
| Diluted EPS, total | $0.04 | $0.23 | $0.17 | $0.32 |
- Sales increased 12.8% in Q2 and 12.2% for the first half. The filing attributes much of Aluminum Extrusions’ growth to AACOA, acquired in October 2012.
- Consolidated gross margin was 15.4% in Q2 versus 15.5% a year earlier, and 15.3% for the first half versus 15.9%. Higher pension expense weighed on margins.
- Segment ongoing operating profit improved: Film Products was $18.7 million in Q2 and $35.7 million year to date; Aluminum Extrusions was $4.3 million and $8.9 million, respectively. Film Products benefited from volume and mix but faced pricing and production-cost pressure. Aluminum Extrusions benefited from AACOA, improved pricing, and Kentland shutdown savings, partly offset by inefficiencies and higher energy costs.
- Operating cash flow was $20.6 million for the first half, down from $27.5 million. Capital expenditures were $34.6 million, compared with $8.9 million; cash at June 30 was $44.4 million, down from $48.8 million at year-end.
- Long-term debt was $139.0 million, up from $128.0 million at year-end; net debt was $94.6 million. The $350 million revolving facility had approximately $192 million available under the most restrictive covenants. Covenant leverage was 1.27x against a 3.00x maximum; interest coverage was 21.91x against a 2.50x minimum.
- Current assets were $255.9 million and current liabilities $136.7 million. Dividends were $0.07 per share in Q2 and $0.14 per share for the first half, versus $0.045 and $0.09, respectively, in 2012.
Material changes and unusual items
- Continuing-operations income improved, but total net income declined because discontinued operations included environmental indemnification charges tied to the 2008 sale of the Canadian aluminum extrusions business: $8.3 million in Q2 and $13.5 million for the first half of 2013, after tax.
- AACOA contributed $22.5 million of sales and $0.7 million of net income in Q2, and $44.7 million of sales and $1.3 million of net income for the first half. Its purchase price, net of cash acquired, was finalized at $54.1 million.
- Reported continuing-operations results included unrealized Intelliject investment gains of $2.1 million in Q2 and $3.2 million year to date. The investment’s $36.9 million fair value uses significant unobservable inputs; management disclosed that a 500-basis-point change in the discount rate could move estimated value by approximately $4 million or $6 million, depending on direction.
- Tredegar recorded a $1.0 million unrealized loss on Virginia investment property in Q2. Plant shutdown, restructuring, and related charges were $0.6 million for the first half, including costs associated with the Kentland facility shutdown.
- First-half comprehensive loss was $3.2 million, including $12.9 million of foreign-currency translation losses, despite net income of $5.6 million.
Outlook, risks, and contingencies
- Management estimated 2013 capital expenditures of approximately $70 million for Film Products, including $44 million for a multi-year capacity expansion in Brazil, and approximately $16 million for Aluminum Extrusions, including $12 million for a Newnan, Georgia automotive-capacity project. Management expected depreciation of approximately $31 million and $7.5 million, respectively.
- Management stated that available borrowing capacity, cash balances, and operating cash flow should cover working capital, capital expenditures, and dividends for the foreseeable future. It also intended to make a discretionary $5 million pension contribution in 2013; required pension contributions were estimated at approximately $0.2 million.
- Key risks include Film Products’ dependence on one major customer, P&G; competitive pricing and product-development demands; cyclical end markets for Aluminum Extrusions; raw-material and energy-price volatility and limits or delays in passing costs through; foreign-exchange and international operating exposures; and acquisition integration and performance risks.
- Terphane’s Brazilian PET films were ruled outside a U.S. antidumping order subject to a specified layer-thickness condition. U.S. producers appealed the ruling; a reversal or other adverse outcome could create duties, with related indemnifications addressed in the purchase agreement.
- The filing reports no material change in risk factors from the 2012 Form 10-K. Management identified forward-looking statements as subject to uncertainty and did not provide a specific earnings forecast.
Important facts for investors to verify
- Whether Canadian-business environmental indemnification charges could continue or increase, and the status of related claims and purchase-agreement protections.
- Whether Film Products can sustain volume and mix gains while managing price competition, Brazilian production costs, and resin pass-through timing.
- AACOA’s ongoing contribution and integration benefits, and whether Aluminum Extrusions can offset volume weakness excluding the acquisition.
- Progress, spending, and expected returns for the Brazil and Newnan capacity projects, including whether planned capital spending remains on schedule.
- The assumptions supporting the Level 3 Intelliject valuation and the potential effect of changes in development, commercialization, and discount-rate assumptions.
- Cash conversion and borrowing needs as capital expenditures proceed, alongside covenant headroom and the planned dividend and pension contributions.