Tredegar Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Tredegar manufactures polyethylene films (PE Films), polyester films (Flexible Packaging Films) and aluminum extrusions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $207.7 million | $223.8 million | $623.6 million | $679.2 million |
| Net income (loss) | $12.0 million | ($36.7 million) | $22.7 million | ($26.3 million) |
| Diluted EPS | $0.37 | ($1.13) | $0.69 | ($0.81) |
| Operating cash flow | Not presented by quarter | $34.4 million | $33.3 million | |
| Capital expenditures | Not presented by quarter | $30.9 million | $23.4 million |
- Consolidated gross margin was 16.3% in Q3 versus 15.0% a year earlier, and 16.5% for nine months versus 14.8%. SG&A and R&D together were 10.5% of sales in Q3 and 11.5% for nine months, compared with 8.3% and 9.7%, respectively.
- Net sales by segment for Q3: PE Films $82.2 million, Flexible Packaging Films $27.3 million, and Aluminum Extrusions $91.1 million. Ongoing operating profit was $9.0 million, $0.1 million and $9.4 million, respectively.
- For nine months, segment net sales were $251.5 million, $80.9 million and $270.0 million, respectively; ongoing operating profit was $23.6 million, $1.2 million and $27.8 million.
- Cash and equivalents were $28.4 million at September 30, down from $44.2 million at year-end 2015. Long-term debt was $91.8 million, versus $104.0 million at year-end; debt net of cash was $63.4 million. Current assets were $217.0 million and current liabilities $124.9 million.
- Operating cash flow was slightly higher year over year, while investing outflows increased, chiefly from higher capital spending. Financing used $23.5 million, including $10.8 million in dividends and net debt repayments/refinancing costs. Dividends were $0.33 per share for the first nine months.
Changes versus prior period
- Reported earnings turned positive largely because Q3 and nine-month 2015 results included a $44.5 million non-deductible goodwill impairment charge for Flexible Packaging Films.
- Sales fell 7.2% in Q3 and 8.2% for nine months. PE Films sales declined 12.5% and 14.0%, respectively, mainly from lost customer business and product-transition timing. Aluminum Extrusions sales declined 3.9% and 5.8%, largely reflecting lower aluminum prices. Flexible Packaging Films sales increased 0.5% and 4.6%.
- Ongoing operating profit improved in Aluminum Extrusions, up 29.6% in Q3 and 33.2% for nine months, on operational efficiencies and lower freight, utility and other costs. Flexible Packaging Films profit declined sharply in Q3, partly because prior-year results included a $2.0 million U.S. trade-program refund and larger currency transaction gains.
- Nine-month PE Films ongoing operating profit fell 34.3%, reflecting lost business, product-transition timing and weaker surface-protection demand, partly offset by productivity and lower costs.
Outlook, risks and unusual items
- Management expects the PE Films Lake Zurich domestic-facility consolidation to finish around mid-2017. Estimated total cash expenditures are approximately $16–17 million; expected annual pre-tax cash savings are $5–6 million. Expenses incurred since launch were $5.7 million and cash expenditures $12.5 million through September 30, 2016.
- PE Films expects 2016 R&D spending to exceed 2015 by about $4 million. It estimates a possible annual operating-profit impact of up to $5–10 million from surface-protection customer transitions, with timing uncertain, and about $10 million from a personal-care transition expected after 2018. Management cautions that offsets from growth, cost reductions or new products are not included in these estimates.
- Management estimated 2016 capital expenditures of $27 million for PE Films, $5 million for Flexible Packaging Films and approximately $17 million for Aluminum Extrusions. It stated existing cash, borrowing availability and operating cash flow should cover working capital, capital expenditures and dividends for the next 12 months.
- The March 2016 secured revolving facility provides $400 million and matures March 1, 2021. Approximately $237 million was available to borrow at September 30. The company reported covenant compliance, a 1.14x leverage ratio and 13.66x interest-coverage ratio; covenant limits are 4.00x maximum leverage and 2.50x minimum interest coverage.
- A June 2016 explosion damaged Bonnell’s Newnan, Georgia casting facility and injured five employees, one seriously. Extrusion and finishing resumed the next day; casting operations were expected back by the end of Q2 2017. Replacement equipment and related costs are partly insured, while approximately $2 million of planned equipment and facility upgrades are not expected to be covered.
- Tredegar recognized a $1.9 million insurance-recovery gain in Q3 related to the explosion; additional recoveries were expected. Q3 also included a $1.3 million unrealized loss on its private kaléo investment. That investment’s $18.4 million fair value uses Level 3 assumptions; a 500-basis-point change in discount rate was estimated to change value by about $4–5 million.
- Flexible Packaging Films faces competitive pressure, global excess capacity and weak economic conditions in Brazil. The filing also identifies raw-material and energy costs, foreign exchange, customer concentration in PE Films, pension funding and possible asset impairments as risks.
- A court decision remained pending in an appeal concerning whether certain Brazilian PET films fall within a U.S. antidumping-duty order. The filing says related liabilities are covered by acquisition-agreement indemnifications if duties are ultimately imposed.
Investor verification priorities
- Track PE Films customer losses and product transitions, including whether new products and the facility consolidation offset the disclosed potential profit impacts.
- Monitor completion costs, timing and insurance recoveries for the Lake Zurich consolidation and Newnan explosion.
- Assess Flexible Packaging Films’ profitability amid Brazil’s economic conditions, competition, currency movements and raw-material pass-through timing.
- Review kaléo’s Auvi-Q relaunch assumptions and the sensitivity of Tredegar’s reported investment value to valuation inputs.
- Confirm liquidity, covenant headroom, pension contributions and the ability to fund planned capital spending and dividends.