Tredegar Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts below are in millions unless stated otherwise. Tredegar operates Film Products and Aluminum Extrusions businesses; results also include Other. Terphane, acquired in October 2011, contributed to Film Products results.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $218.8 | $202.6 | $652.1 | $595.1 |
| Income from continuing operations | $14.5 | $12.7 | $29.7 | $25.5 |
| Net income | $7.4 | $12.7 | $17.8 | $25.1 |
| Diluted EPS, continuing operations | $0.45 | $0.40 | $0.92 | $0.79 |
| Diluted EPS, net income | $0.23 | $0.40 | $0.55 | $0.78 |
- Q3 sales rose 8.0%; nine-month sales rose 9.6%. Q3 and year-to-date continuing income improved, while net income fell because of charges recorded in discontinued operations.
- Gross profit as a percentage of sales improved to 17.8% from 16.4% in Q3 and to 16.6% from 15.5% year to date. Q3 SG&A and R&D were 9.0% of sales versus 10.5%; the nine-month ratio was 10.0% in both years.
- Film Products net sales were $155.3 million in Q3, up 19.7%, and $459.2 million for nine months, up 16.8%. Ongoing operating profit was $21.1 million and $50.0 million, respectively. Terphane contributed $34.8 million of Q3 net sales and $101.6 million year to date.
- Aluminum Extrusions net sales fell 17.4% to $55.2 million in Q3 and 7.6% to $172.5 million year to date. Ongoing operating profit was $1.8 million in Q3 versus $2.3 million, but $7.3 million year to date versus $2.5 million.
- Operating cash flow was $49.6 million for nine months, versus $48.7 million. Investing activities used $22.8 million, including $20.6 million of capital expenditures; financing activities used $51.0 million, principally debt payments and dividends. Cash declined $24.8 million to $44.2 million.
- At September 30, cash was $44.2 million, current assets $219.7 million, current liabilities $113.8 million, long-term debt $80.0 million and shareholders’ equity $406.9 million. Net debt was $35.8 million.
Material changes and unusual items
- The $7.1 million Q3 and $11.9 million nine-month losses from discontinued operations primarily reflect environmental indemnification accruals related to the 2008 sale of the Canadian aluminum extrusions business. The nine-month accrual was $11.9 million; the filing reports it as net of tax.
- Continuing results included an unrealized fair-value gain of $2.7 million in Q3 and $9.0 million year to date on a specialty pharmaceutical investment. Its estimated carrying value was $26.6 million, based on significant unobservable inputs; management disclosed that a 500-basis-point change in its discount-rate assumption could change estimated value by approximately $5.1 million to $5.9 million.
- Other 2012 charges included $2.7 million net pretax for the Kentland, Indiana plant shutdown year to date, a $0.8 million film-facility impairment, and acquisition/integration and severance costs. The filing estimates total Kentland shutdown charges of approximately $4.5 million and an annual operating-profit benefit of $2–3 million beginning in 2013.
- The effective tax rate on continuing operations was 28.0% for the first nine months, up from 19.9%; the 2011 rate benefited from a deduction related to a subsidiary divestiture. Brazilian tax incentives benefiting Terphane are scheduled to expire at the end of 2014; management expects to qualify for extensions.
Liquidity, outlook and risks
- In April 2012 Tredegar refinanced with a $350 million unsecured revolving facility maturing in 2017, with an option to increase commitments by $75 million. At September 30, approximately $229 million was available under covenant limits. The company borrowed a further $51 million in October to fund the AACOA acquisition, reducing availability accordingly.
- At September 30, the credit-agreement leverage ratio was 0.81x against a 3.00x ongoing maximum; interest coverage was 14.67x against a 2.50x minimum. Management said cash, borrowing availability and operating cash flow should meet foreseeable working-capital, capital-expenditure and dividend needs.
- AACOA was acquired on October 1 for $50.8 million, subject to post-closing adjustments. Management expects the acquisition to add fabrication capabilities and broaden markets and geographic coverage.
- Film Products estimated 2012 capital expenditures of approximately $36 million, including about $22 million for the Brazil capacity expansion. Aluminum Extrusions estimated approximately $4 million.
- Key risks include dependence of Film Products on Procter & Gamble, margin pressure in personal care materials, cyclical demand in Aluminum Extrusions, raw-material and energy price volatility, foreign-exchange exposure, acquisition integration and covenant compliance. Resin-cost pass-throughs may lag by about 90 days.
- Tredegar is contesting U.S. antidumping duties on certain Terphane PET film imports. Estimated potential duties through October 24, 2011 were approximately $8.6 million and were not accrued; the company cites purchase-agreement indemnification, subject to its terms.
- No specific earnings guidance was provided. Management noted that results may fluctuate and that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the $11.9 million environmental indemnity exposure grows, and the status and collectability of any related recoveries.
- Progress and costs of the AACOA integration and Brazil capacity expansion, including the effect on debt and revolving-facility availability.
- Whether the specialty pharmaceutical investment’s Level 3 valuation assumptions and milestones support its reported carrying value.
- Developments in the Terphane antidumping-duty dispute and the scope and enforceability of seller indemnification.
- Performance of Film Products’ personal-care and surface-protection markets, resin pass-through timing, and Aluminum Extrusions demand and cost recovery.