Tredegar Corporation 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Tredegar Corporation for the period ended September 30, 2006. Tredegar operates primarily in two segments: Film Products (specialty films for personal care and surface protection) and Aluminum Extrusions (extruded aluminum products for construction and transportation). The company is an accelerated filer incorporated in Virginia.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2005 |
|---|---|---|---|
| Sales (Revenue) | $296.3 million | $846.7 million | $717.2 million |
| Net Income | $9.7 million | $27.2 million | $15.3 million |
| Earnings Per Share (Diluted) | $0.25 | $0.70 | $0.40 |
| Operating Cash Flow (9mo) | $76.3 million (vs. $35.4 million in 2005) | ||
| Capital Expenditures (9mo) | $31.7 million (vs. $49.0 million in 2005) | ||
| Cash and Equivalents | $29.8 million (as of Sept 30, 2006) | ||
| Total Debt | $78.1 million (as of Sept 30, 2006) | ||
| Shareholders' Equity | $514.9 million (as of Sept 30, 2006) |
Margins: Consolidated gross profit margin decreased to 12.2% in Q3 2006 from 13.5% in Q3 2005. The effective tax rate was 32.7% for Q3 2006.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 23.1% in Q3 2006 and 18.1% for the first nine months of 2006 compared to the prior year.
- Film Products: Sales up 16.0% (Q3) and 11.2% (9mo), driven by higher value-added products and price increases to offset resin costs.
- Aluminum Extrusions: Sales up 30.4% (Q3) and 25.1% (9mo), driven by volume growth (up 7.1% and 8.5% respectively) and higher selling prices.
- Profitability: Net income increased 26.5% in Q3 and 77.0% for the nine-month period.
- Film Products: Operating profit from ongoing operations was flat in Q3 ($13.8M) due to a $1.5M negative impact from the lag in passing through higher resin costs, partially offset by a $1.2M gain from LIFO inventory liquidations related to a plant shutdown.
- Aluminum Extrusions: Operating profit increased 23% in Q3 due to volume growth and lower energy costs, partially offset by the appreciation of the Canadian Dollar and bad debt charges.
- Restructuring and Shutdowns:
- Q3 2006 included a net pretax gain of $1.0M from the shutdown of the LaGrange, Georgia film facility.
- Q3 2006 included a $920,000 charge for environmental costs at the Newnan, Georgia aluminum facility and a $494,000 charge for a sub-lease loss.
- Comparative 2005 periods included significant charges related to the divestiture of Therics (AFBS) and various restructuring costs.
- Working Capital: Accounts receivable increased significantly by $39.9 million (33%) due to higher sales. Accounts payable increased by $26.6 million (43%).
Guidance, Outlook, and Risks
- Capital Expenditures: Expected to be approximately $40 million for Film Products and $8 million for Aluminum Extrusions for the full year 2006.
- Pension Plan Changes: On October 26, 2006, the company announced changes to U.S. pension and savings plans. These changes are expected to reduce the projected benefit obligation by $10 million and reduce pension expense components in 2007 by approximately $2.7 million, though company matching contributions will increase by $700,000.
- Accounting Standards: The company adopted SFAS 123(R) in 2006, resulting in stock-based compensation charges of approximately $1 million for the year. New standards (FAS 158) regarding pension accounting will be effective for the fiscal year ending December 31, 2006, potentially decreasing shareholders' equity by $37 million on a pro forma basis.
- Market Risks:
- Raw Materials: Profit margins are sensitive to resin (Film Products) and aluminum/energy (Aluminum Extrusions) prices. While pass-through agreements exist, there is a lag (approx. 90 days) that can impact margins.
- Currency: Appreciation of the Canadian Dollar had an adverse impact of $1.0M (Q3) and $2.7M (9mo) on operating profit due to a mismatch between USD-denominated sales and CAD-denominated costs in Canada.
- Customer Concentration: The Procter & Gamble Company represented approximately 25% of net sales in 2005.
Investor Verification Checklist
- Resin Cost Pass-Through: Verify the timing and effectiveness of passing increased resin costs to customers in the Film Products segment, given the 90-day lag mentioned.
- Canadian Dollar Exposure: Monitor the CAD/USD exchange rate and the effectiveness of the company's hedging strategies (zero-cost collars) on the Aluminum Extrusions segment's profitability.
- Pension Plan Impact: Review the final impact of the October 2006 pension plan changes on the 2006 year-end balance sheet (FAS 158 adoption) and 2007 expense projections.
- Customer Concentration: Assess the stability of the relationship with Procter & Gamble, which accounts for a significant portion of Film Products revenue.
- Environmental Liabilities: Confirm the status of the environmental project (SEP) at the Newnan, Georgia facility and any potential for additional penalties.