Tredegar Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; compared with the corresponding 2011 periods. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
Tredegar operates Film Products and Aluminum Extrusions, alongside a smaller mitigation banking business. Film Products includes Terphane, acquired in October 2011; its results are included in Tredegar’s consolidated results from the acquisition date. Tredegar says the acquisition is intended to extend specialty-film offerings and expand in Latin America.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $216.1 million | $201.0 million | $433.3 million | $392.5 million |
| Net sales (sales less freight) | $210.2 million | $196.2 million | $422.0 million | $383.7 million |
| Income from continuing operations | $7.4 million | $6.0 million | $15.2 million | $12.7 million |
| Continuing-operations diluted EPS | $0.23 | $0.19 | $0.47 | $0.39 |
| Net income | $7.4 million | $5.7 million | $10.4 million | $12.4 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $27.5 million | $28.2 million |
Sales rose 7.5% in Q2 and 10.4% in the first half. Consolidated gross profit margin increased to 15.5% from 14.5% in Q2 and to 16.0% from 15.0% in the first half. SG&A and R&D together rose as a share of sales: 10.4% versus 9.2% in Q2 and 10.5% versus 9.7% year to date.
- Film Products: Net sales increased 13.8% in Q2 and 15.3% year to date, largely due to Terphane; ongoing operating profit was $13.4 million in Q2 versus $12.8 million, and $28.9 million year to date versus $28.4 million.
- Aluminum Extrusions: Net sales declined 6.6% in Q2 and 2.2% year to date, mainly reflecting lower aluminum prices. Ongoing operating profit improved to $3.8 million in Q2 versus $1.5 million and $5.5 million year to date versus $0.2 million, aided by product mix, pricing and lower energy costs.
First-half net income fell despite higher continuing-operations income, principally because 2012 included a $4.8 million charge for environmental indemnifications associated with the sale of the Canadian aluminum extrusions business; the comparable 2011 period included a $0.3 million charge.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $52.6 million, long-term debt was $98.0 million, and net debt was $45.4 million. Shareholders’ equity was $397.2 million.
- First-half operating cash flow was $27.5 million; investing activities used $12.2 million, including $8.9 million of capital expenditures and $3.3 million of Terphane purchase-price adjustments. Financing activities used $31.1 million, including $28.4 million of debt principal payments and financing costs and $2.9 million of dividends. Cash declined $16.4 million to $52.6 million.
- A new $350 million unsecured revolving credit facility, entered into April 23, 2012, matures in April 2017 and includes an option to increase capacity by $75 million. At quarter-end, approximately $211 million was available to borrow, subject to the facility’s most restrictive covenants.
- The reported leverage ratio was 0.99x against a 3.00x ongoing maximum; interest coverage was 15.81x against a 2.50x minimum. Management stated existing availability, cash and operating cash flow should meet working-capital, capital expenditure and dividend needs for the foreseeable future.
Outlook, risks and unusual items
- Tredegar projected 2012 Film Products capital expenditures of approximately $44 million, including about $24 million for a multi-year Brazil capacity expansion; Aluminum Extrusions capital expenditures were projected at approximately $4 million. These are segment estimates, not a stated consolidated total.
- The Kentland, Indiana, Aluminum Extrusions plant was scheduled to close during Q3 2012. The company estimated approximately $6 million of shutdown charges, most recognized over 18 months, and expected annual segment operating-profit improvement of $2–3 million beginning in 2013.
- Terphane’s production was stabilized after efficiency issues related to a line upgrade, but further work to increase output was expected through the rest of 2012. Management noted Terphane margins were below the prior-year period.
- Results included a $2.7 million Q2 and $6.3 million first-half unrealized gain on a privately held specialty-pharmaceutical investment, which increased reported earnings. The $23.9 million investment is valued using significant unobservable inputs; management disclosed sensitivity to valuation assumptions. A separate $1.1 million first-quarter unrealized loss was recorded on the Harbinger investment.
- Tredegar estimated potential U.S. antidumping duties of approximately $8.6 million on certain Terphane film shipments. It contests the duties, has not recorded the estimated amount, and expects to seek recovery from the seller under purchase-agreement indemnifications if necessary.
- Key operating risks include Film Products’ dependence on Procter & Gamble, cyclical demand in Aluminum Extrusions, raw-material and energy price volatility, delays in passing through input costs, foreign-currency exposure, and acquisition integration and performance. The company reported no material change in its previously disclosed risk factors.
Most important facts for investors to verify
- How much of earnings growth reflects recurring segment performance versus the noncash specialty-pharmaceutical valuation gain.
- Terphane’s continuing production recovery, margins, integration progress and expected returns from the Brazil expansion.
- Whether Kentland’s closure charges remain near the estimate and whether projected annual savings materialize.
- The outcome and potential recovery for the estimated $8.6 million antidumping-duty exposure, and the separate Canadian-sale environmental indemnification matter.
- Ongoing covenant headroom and liquidity, alongside exposure to customer concentration, raw-material costs and delayed price pass-through.