Tredegar Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
Tredegar reported four segments: Film Products, Aluminum Extrusions, AFBS and Other. After quarter-end, on October 24, 2011, the company acquired 100% of Terphane Holdings, a polyester-film producer with operations in Brazil and New York, for approximately $188 million, subject to post-closing adjustments. The purchase was funded with available cash and borrowing under Tredegar’s revolving credit facility.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $202.6 | $197.5 | $595.1 | $557.5 |
| Net income from continuing operations | $12.7 | $9.0 | $25.5 | $19.7 |
| Net income | $12.7 | $9.0 | $25.1 | $19.7 |
| Diluted EPS | $0.40 | $0.28 | $0.78 | $0.60 |
| Gross margin | 16.4% | 17.1% | 17.1% | 16.8% |
- Cash flow: Nine-month operating cash flow was $48.7, versus $29.6 in 2010. Investing cash outflow was $9.6, including $11.2 of capital expenditures; financing cash outflow was $3.7, principally dividends of $4.3. Cash increased $36.2 to $109.4.
- Liquidity and debt: At September 30, cash was $109.4 and reported debt was zero. Approximately $267 of the $300 revolving facility was available at that date. In October, Tredegar borrowed $125 to help fund the Terphane acquisition and used $63 of cash. The filing does not provide a post-acquisition debt balance.
- Balance sheet: Total assets were $602.9, shareholders’ equity $441.3 and current assets $264.4 at September 30. Current liabilities were $90.6.
- Taxes and dividends: The nine-month effective tax rate was 19.9%, compared with 35.0% in 2010. Q3 tax expense was a benefit of $0.1, producing a reported effective rate of (1.1)%. Dividends were $0.045 per share in Q3 and $0.135 per share for nine months.
Material changes versus the prior comparable period
- Q3 sales rose 2.6%, while net income from continuing operations increased to $12.7 from $9.0. The quarter’s tax benefit materially affected the comparison.
- For the first nine months, sales increased 6.7% and continuing-operations income rose to $25.5 from $19.7. The lower effective tax rate reflected, among other items, an estimated tax benefit related to the Italian business divestiture.
- Film Products: Q3 net sales fell 5.6% to $129.7 and ongoing operating profit fell 7.9% to $16.4; volume declined 11.7%. Nine-month sales were up 0.9%, but ongoing operating profit declined 7.6% to $46.9.
- Aluminum Extrusions: Q3 net sales rose 22.3% to $66.8 and ongoing operating profit increased to $2.3 from $0.1. Nine-month sales rose 22.8% to $186.7; the segment moved to $2.5 of operating profit from a $2.6 loss.
- Q3 gross margin declined year over year, while nine-month gross margin improved. Higher volume helped Aluminum Extrusions; lower Film Products volume weighed on results.
- Nine-month operating cash flow improved, partly reflecting normal working-capital volatility. Cash from operations was higher despite increased receivables; inventories declined 19.5% from year-end.
Outlook, management commentary, risks and unusual items
- Management expected Film Products sales volume and operating profit to face pressure from weaker end-user demand and competitive pricing in mature product lines. Margin compression under new multi-year supply agreements might not be fully offset by cost savings and efficiency efforts.
- Film Products’ resin-price pass-through agreements generally include an average 90-day lag for certain contracts. The lag benefited Q3 2011 operating profit by an estimated $2.5 million, but was unfavorable by $1.8 million for the first nine months. Currency changes benefited Film Products operating profit by approximately $1.2 million in Q3 and $1.7 million year to date.
- Management projected 2011 capital expenditures of approximately $12 million for Film Products and $2.8 million for Aluminum Extrusions. It stated that cash, borrowing availability and operating cash flow should be sufficient for working capital, capital expenditures and dividends for the foreseeable future.
- The Terphane acquisition adds integration, execution and potential unanticipated-liability risks. The filing cautions that acquired businesses may not deliver expected revenue, profit or productivity.
- Film Products is highly dependent on one customer, Procter & Gamble. Aluminum Extrusions is cyclical and exposed to end-market demand, raw-material and energy prices. Tredegar also cites foreign-currency and international operating risks and the possibility that cost increases cannot be passed through fully.
- Unusual items included $2.3 million of Terphane acquisition-related expense, a $1.0 million gain on the Italian film business divestiture (including $4.3 million of previously unrealized currency gains), $0.8 million of Film Products impairment charges and $0.5 million of restructuring charges for the first nine months. A $0.345 million environmental indemnification adjustment was recorded as a discontinued-operations loss.
- The IRS disputed the ordinary, rather than capital, tax treatment of a loss claimed on the 2008 sale of the Canadian aluminum extrusions business. Tredegar said it planned to defend its position; an adverse final determination could require up to $12 million in additional tax, plus interest and penalties.
- Tredegar’s $16.0 million specialty-pharmaceutical investment relies on Level 3 fair-value estimates, and the timing and amount of future withdrawal proceeds from its Harbinger Fund investment were unknown at September 30.
Important facts for investors to verify
- Post-acquisition Terphane performance, integration progress, final purchase-price adjustments and the resulting debt and liquidity position.
- Whether Film Products volume and margins stabilize, particularly given customer concentration, mature-product pricing pressure and resin pass-through timing.
- Aluminum Extrusions’ ability to sustain improved volumes and profitability through changing economic, aluminum and energy conditions.
- Outcome and potential exposure from the IRS tax dispute, and realization of the estimated $5 million tax benefit associated with the Italian divestiture.
- Cash generation, covenant headroom and capital allocation after acquisition financing; confirm that the company remains within revolving-credit covenants.