Tredegar Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports quarterly results, including Q4. Tredegar manufactures plastic films and aluminum extrusions, with a smaller “Other” segment. Financial statements were audited by PricewaterhouseCoopers, which issued an unqualified opinion; management reported effective internal control over financial reporting. Terphane, acquired October 24, 2011, was excluded from management’s and the auditor’s internal-control assessment.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales | $797.6 million | $740.5 million |
| Income from continuing operations | $29.2 million | $27.0 million |
| Diluted EPS from continuing operations | $0.91 | $0.83 |
| Net income | $24.9 million | $27.0 million |
| Gross profit margin | 15.5% | 17.1% |
| Cash provided by operating activities | $71.8 million | $46.4 million |
| Capital expenditures | $15.9 million | $20.4 million |
| Cash and cash equivalents at year-end | $68.9 million | $73.2 million |
| Total debt at year-end | $125.0 million | $0.5 million |
| Shareholders’ equity at year-end | $397.0 million | $417.5 million |
Sales rose 7.7%, but gross margin contracted. Operating cash flow improved, while investing cash outflow increased to $195.2 million, primarily reflecting the $181.0 million Terphane purchase and capital expenditures. Financing cash inflow was $120.4 million, principally from $125 million of revolver borrowings. Net debt was $56.1 million, versus net cash of $72.7 million a year earlier. The $300 million revolving facility matures in 2014; approximately $162 million was available at year-end under the most restrictive covenants. The leverage ratio was 1.13x against a 3.00x ongoing maximum, and the interest coverage ratio was 35.40x against a 2.50x minimum.
Q4 2011: Sales were $202.5 million versus $182.9 million in Q4 2010. Continuing-operations income was $3.8 million; a $4.0 million discontinued-operations loss resulted in a $0.3 million net loss, compared with Q4 2010 net income of $7.3 million.
Material changes versus the prior comparable period
- Film Products: Net sales increased 2.8% to $535.2 million, but ongoing operating profit fell 10.9% to $63.4 million. Terphane contributed $28.3 million in net sales after acquisition. Lower volumes in personal-care and surface-protection films weighed on results; reduced resin pass-through lag, acquisition contribution, efficiency improvements and favorable currency effects partly offset the decline.
- Aluminum Extrusions: Net sales rose 20.4% to $240.4 million and sales volume increased 13.8%. Ongoing operating results improved to a $3.5 million profit from a $4.2 million loss, reflecting higher volume and selling prices.
- Other: Ongoing operating losses narrowed to $2.8 million from $4.2 million. Bright View operations moved into Film Products effective January 1, 2012.
- The reported net-income decline despite higher continuing-operations income included a $4.4 million after-tax discontinued-operations charge for Canadian-business environmental indemnifications.
Outlook, risks, contingencies and unusual items
- Management anticipated lower demand and competitive pricing pressure in mature Film Products lines, with margin compression potentially not fully offset by cost savings. Film Products’ resin-cost pass-through agreements can have an average 90-day lag.
- 2012 Film Products capital spending was estimated at approximately $48 million, including about $27 million for a multi-year capacity expansion in Brazil. Aluminum Extrusions capital spending was estimated at $4.5 million.
- Tredegar announced the Kentland, Indiana aluminum facility closure by September 30, 2012. Estimated charges were approximately $8 million, including about $4 million of cash expenditures; most charges were expected over 18 months.
- Minimum required pension contributions for 2012 were estimated at $5.3 million; 2012 pension expense was estimated at $7.8 million. The pension plan’s funded-status liability rose to $57.8 million from $8.3 million, reflecting lower discount rates and negative 2011 asset returns.
- Terphane was acquired for approximately $181 million net of cash acquired, funded with $125 million of revolver debt and approximately $56 million of cash. Preliminary purchase accounting included $61.4 million of goodwill and $59.0 million of identifiable intangible assets. Purchase-price allocation remained subject to assessment and adjustment.
- Terphane shipments faced a disputed U.S. antidumping-duty claim estimated at approximately $9.3 million through year-end; no liability was recorded. The company cited purchase-agreement indemnification from the seller if duties are ultimately payable, subject to the agreement’s terms.
- The IRS challenged the tax treatment of a loss related to the former Canadian aluminum business. If Tredegar does not prevail, potential additional tax payments could be up to $12 million plus interest and penalties.
- Other significant exposures include P&G concentration (about 36% of continuing-operations sales in 2011), volatile resin/aluminum/energy costs, cyclical construction demand, environmental obligations, foreign-exchange movements, acquisition integration and investment valuation risk. Management stated known environmental remediation was not expected to materially affect financial position, though costs could materially affect results in a period.
- FY2011 unusual items included Terphane acquisition and integration costs, asset impairments, a purchase-accounting inventory charge, an Italian business divestiture with recognition of currency translation gains, and fair-value changes in private investments.
Important facts for investors to verify
- Whether Terphane meets expected growth and profitability targets, and how final purchase accounting and integration costs affect reported results.
- Whether planned Brazil expansion spending, capacity utilization and customer demand generate adequate returns.
- Progress on Kentland closure costs, workforce impacts and any resulting operational or customer disruptions.
- Film Products’ volume, margins, resin pass-through timing and dependence on P&G; and the trajectory of the construction recovery for Aluminum Extrusions.
- Changes in pension funding requirements and plan asset performance, as well as compliance with revolver covenants and debt maturity planning.
- Resolution and recoverability of the disputed Terphane duties, Canadian-business indemnification accruals and IRS tax matter.