Tredegar Corporation — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Tredegar operates Film Products and Aluminum Extrusions, among other activities. The quarter includes Terphane, acquired in October 2011; Bright View was incorporated into Film Products effective January 1, 2012.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Sales | $217.2 million | $191.5 million |
| Net sales (less freight) | $211.9 million | $187.5 million |
| Income from continuing operations | $7.8 million; $0.24/share | $6.7 million; $0.21/share |
| Net income | $3.0 million; $0.09/share | $6.7 million; $0.21/share |
| Operating cash flow | $14.1 million | $2.7 million |
| Capital expenditures | $5.5 million | $4.7 million |
- Sales rose 13.4%; net sales increased 13.0%. Continuing-operations income increased 17.0%, but net income fell because of a $4.8 million environmental indemnification accrual recorded as a discontinued-operations loss.
- Gross profit margin increased to 16.5% from 15.5%. SG&A and R&D together were 10.6% of sales versus 10.3%.
- Segment ongoing operating profit: Film Products $15.5 million versus $15.6 million; Aluminum Extrusions $1.7 million versus a $1.2 million loss.
- Cash and equivalents were $70.8 million at March 31, versus $68.9 million at year-end. Debt was $122.0 million, down from $125.0 million; net debt was $51.2 million. Current assets of $254.9 million exceeded current liabilities of $119.9 million.
- Effective tax rate on continuing operations was 34.8%, up from 31.0%. Interest expense increased to $1.0 million from $0.4 million, mainly due to acquisition-related borrowings.
Material changes and drivers
- Film Products net sales grew 16.9%, primarily from Terphane, which contributed $32.2 million in net sales and $2.6 million in operating profit. Higher volume was partly offset by lower surface-protection and personal-care film volumes; ongoing segment profit was essentially flat.
- Aluminum Extrusions net sales rose 2.9% on higher volume, while lower aluminum prices reduced average selling prices. Profit improved with increased volume, value-added service margins, and lower energy costs.
- Operating cash flow improved primarily from normal working-capital volatility. Investing cash outflow included $5.5 million of capital spending and $3.3 million of Terphane purchase-price adjustments. Financing cash outflow included $3.0 million of debt repayment and $1.4 million of dividends.
- Q1 results included a $3.6 million unrealized gain on a specialty-pharmaceutical investment and a $1.1 million unrealized loss on the Harbinger investment. These fair-value items affected reported earnings.
Outlook, risks and contingencies
- Management expected cash, operating cash flow, and available borrowing capacity to meet working-capital, capital-expenditure, and dividend needs for the foreseeable future. No specific earnings guidance was provided.
- Film Products projected 2012 capital expenditures of about $48 million, including approximately $27 million for a multi-year capacity expansion in Brazil. Aluminum Extrusions projected approximately $5.1 million.
- The Kentland, Indiana, Aluminum Extrusions facility was scheduled to close by September 30, 2012. Estimated shutdown charges were about $8 million, including approximately $4 million of cash costs; management expected annual segment operating-profit improvement of $2–3 million beginning in 2013.
- On April 23, 2012, after quarter-end, Tredegar entered a new $350 million, five-year unsecured revolving credit facility, with an option to increase it by $75 million. It replaced the prior $300 million facility; $102 million was borrowed to refinance prior facility debt. Key covenants include maximum leverage of 3.0x and minimum adjusted EBIT-to-interest coverage of 2.5x.
- Potential exposures include up to $12 million plus interest and penalties if the IRS successfully challenges the tax treatment of a deduction related to the former Canadian business. Separately, potential Terphane antidumping duties were estimated at $9.6 million through March 31 and were not accrued; the company disputes applicability and cites seller indemnification, subject to the purchase-agreement terms.
- Key business risks include dependence of Film Products on Procter & Gamble, acquisition integration and performance, cyclical construction exposure in Aluminum Extrusions, raw-material and energy-price volatility, foreign-currency and international-market risks, and delays in passing resin-cost changes through to customers.
Important facts for investors to verify
- Whether Terphane’s operating performance, integration, and planned Brazilian capacity expansion meet expectations.
- The final resolution and financial impact of the IRS tax matter and Terphane antidumping-duty dispute, including the scope and collectability of indemnifications.
- Actual Kentland closure costs, timing, and realized annual savings, compared with management’s estimates.
- The sensitivity of earnings to resin, aluminum, energy, currency, customer-volume, and investment fair-value changes.
- Compliance with credit-facility covenants and the company’s ability to fund planned capital spending, dividends, and other obligations.