Tredegar Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is with Q1 2016 unless stated otherwise. Tredegar manufactures polyethylene films, flexible packaging films and aluminum extrusions.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $221.0 million | $207.3 million |
| Net sales (sales less freight) | $212.7 million | $200.3 million |
| Income before income taxes | $6.1 million | $10.5 million |
| Net income | $3.7 million | $7.3 million |
| Diluted earnings per share | $0.11 | $0.22 |
| Gross profit margin | 14.0% | 18.0% |
| Operating cash flow | $3.6 million | $4.7 million |
| Capital expenditures | $12.7 million | $8.0 million |
Sales rose 6.6%, but earnings fell as gross margin contracted and segment performance weakened in Flexible Packaging Films. The quarter included a $3.3 million pretax unrealized gain on Tredegar’s kaléo investment, versus $0.8 million a year earlier; these gains are non-operating and based on Level 3 valuation inputs.
Cash used in investing activities was $99.7 million, principally the $87.0 million cash funding for the Futura acquisition and capital spending. Financing activities provided $95.1 million, largely from net borrowings. Cash declined $0.6 million to $28.9 million. Operating cash flow less capital expenditures was negative $9.1 million, before acquisition spending.
At March 31, 2017, debt was $193.0 million, up from $95.0 million at year-end 2016; debt net of cash was $164.1 million. The company had approximately $126 million of borrowing availability under its secured $400 million revolving facility, subject to covenants. Its leverage ratio was 2.44x against a 4.00x maximum, and interest coverage was 10.79x against a 2.50x minimum. Tredegar reported compliance with all financial covenants. Current assets were $239.4 million and current liabilities $131.4 million.
Segments and material changes
- PE Films: Net sales decreased 2.3% to $86.4 million and ongoing operating profit declined 11.8% to $9.0 million. Lower volume from lost business and product transitions was partly offset by better surface-protection mix. Management cited potential customer shifts to alternative surface-protection processes or materials, with a preliminary annual operating-profit risk of up to $5–10 million, timing uncertain. A further personal-care product transition after 2018 could also affect results; its impact is uncertain.
- Flexible Packaging Films: Net sales increased 1.3% to $26.7 million, but ongoing operations moved from $2.0 million profit to a $2.0 million loss. Management attributed the deterioration to competitive pricing and excess industry capacity, weak Brazilian conditions, production inefficiencies, cost pass-through timing, inflation and the Brazilian real’s appreciation against the U.S. dollar. Results are expected to remain volatile until industry utilization and Brazil’s business environment improve.
- Aluminum Extrusions: Net sales increased 16.5% to $99.6 million and ongoing operating profit rose 31.1% to $9.8 million. Results included Futura, acquired February 15, which contributed $8.3 million sales and $0.9 million ongoing operating profit during its first 40 days under Tredegar. Excluding Futura, management cited higher volume and operating efficiencies.
Acquisition, outlook and other notable items
- Tredegar acquired Futura for an initial purchase price of approximately $92 million, funded with about $87 million in cash. The preliminary financial-reporting net purchase price was $82.8 million after recognizing a $4.25 million receivable for a contingent earnout escrow; final purchase-price and allocation adjustments remained pending.
- Management expected the PE Films domestic facility consolidation to finish in the second half of 2017. Estimated total project cash expenditures are approximately $17 million, with expected annual pretax cash savings of $5–6 million once complete. About $14.1 million had been spent through March 31.
- For 2017, management estimated capital expenditures of $30 million for PE Films, $4 million for Flexible Packaging Films and $23 million for Aluminum Extrusions. These are estimates, not earnings guidance.
- The Newnan, Georgia aluminum cast house damaged in a 2016 explosion was expected to return to production by the end of Q2 2017. Of $2.0 million of additional first-quarter explosion-related costs, $1.6 million was offset by anticipated insurance recoveries; recovery of the remaining $0.4 million was not assured.
- On April 28, 2017, after quarter-end, Tredegar settled escrow agreements relating to certain tax and legal risks, assumed certain liabilities and received $12 million. Management expected to recognize a gain in Q2 2017.
- Management said available borrowing capacity, cash and operating cash flow should cover working capital, capital expenditure and dividend needs for the next 12 months. The quarterly dividend was $0.11 per share.
Risks and contingencies
Key disclosed risks include raw-material and energy price volatility and imperfect or delayed cost pass-through; PE Films customer concentration and product transitions; weak Brazilian market conditions, inflation and currency exposure; acquisition integration and Futura’s ability to meet expectations; pension funding needs; and possible impairment of goodwill or intangible assets. The company also disclosed a pending court decision concerning the scope of U.S. antidumping duties on certain Terphane film products exported from Brazil. The filing reported no additional material changes to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- Whether Futura meets the earnout performance conditions and how final purchase accounting or post-closing adjustments affect reported results.
- Whether the significant year-over-year earnings decline and gross-margin compression persist, especially in Flexible Packaging Films.
- Progress on PE Films customer transitions, surface-protection alternatives and the expected consolidation savings and completion schedule.
- Recovery of remaining Newnan explosion-related costs from insurers and the timing of the facility’s return to production.
- Debt, covenant headroom, cash generation and planned capital spending as integration and expansion investments continue.
- The sensitivity of the kaléo investment valuation: its $23.5 million carrying value used a 45% discount rate; a 500-basis-point decrease or increase in that rate was estimated to change fair value by approximately +$6 million or −$5 million, respectively.