Tredegar Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Tredegar manufactures polyethylene films, flexible packaging films and aluminum extrusions. Results are unaudited.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales | $207.3 million | $234.2 million |
| Net sales, less freight | $200.3 million | $226.8 million |
| Income before taxes | $10.5 million | $14.6 million |
| Net income | $7.3 million | $9.9 million |
| Diluted EPS | $0.22 | $0.30 |
| Operating cash flow | $4.6 million | $12.4 million |
| Capital expenditures | $8.0 million | $7.8 million |
Sales fell 11.5%; net income declined about 26%. Gross profit as a percentage of sales improved to 18.0% from 16.0%, while SG&A and R&D together rose to 12.0% of sales from 8.9%. The effective tax rate was 30.6%, versus 32.6%; management expected about 34% for full-year 2016. The quarterly dividend was $0.11 per share, up from $0.09.
Segments and material changes
- PE Films: Net sales decreased 16.8% to $88.5 million and ongoing operating profit fell 39.2% to $10.2 million. Lower volume reflected lost business and product transitions, including approximately $6.0 million of sales impact from the largest customer and $5.8 million from other losses. Surface protection film demand and foreign currency translation also weighed on sales. Resin pass-through timing, lower surface-protection volume and mix pressured profit.
- Flexible Packaging Films: Net sales declined 1.7% to $26.4 million, while ongoing operating profit rose to $2.0 million from $0.8 million. Higher volume and operating efficiencies helped; competitive pricing and foreign-exchange transaction losses were headwinds. Management cited weak Brazilian conditions and excess global capacity.
- Aluminum Extrusions: Net sales decreased 8.7% to $85.5 million, primarily as lower aluminum costs reduced selling prices; volume increased 5.1%. Ongoing operating profit rose 41.7% to $7.5 million, supported by higher volume, lower freight and utility costs, and nonrecurring prior-year costs not repeated.
Cash, debt and liquidity
Cash was $40.0 million at March 31, down from $44.2 million at year-end. Operating cash flow decreased mainly due to working-capital movements, including lower accounts payable. Long-term debt was $107.0 million; debt net of cash was $67.0 million. The company entered a new five-year, $400 million secured revolving facility on March 1, replacing its prior $350 million unsecured facility. The filing reports approximately $231 million available to borrow under the most restrictive covenants. The quarter-end leverage ratio was 1.29x and interest coverage was 13.95x; Tredegar reported compliance with all covenants. Management believed available borrowing capacity, cash and operating cash flow would meet working-capital, capital expenditure and dividend needs for the next 12 months.
Outlook, risks and unusual items
- PE Films’ domestic facility consolidation is expected to finish around mid-2017. Management estimates $16–17 million of project cash expenditures and $5–6 million of annual pretax cash savings once complete. The filing also identifies potential additional annual operating-profit exposure of about $10 million from further personal-care product transitions and lost business, likely after 2017.
- Management projected 2016 capital expenditures of approximately $35 million for PE Films, $5 million for Flexible Packaging Films and $22 million for Aluminum Extrusions. PE Films R&D spending was expected to exceed 2015 by about $4 million.
- Q1 included a $0.8 million unrealized gain on Tredegar’s investment in privately held kaléo, recognized in other income. That investment’s $19.4 million fair value relies on Level 3 assumptions and is sensitive to commercialization prospects and discount rates; the filing notes a 500-basis-point change in the discount rate could change estimated value by roughly $4–5 million.
- Q1 included $1.1 million of PE Films consolidation-related expenses, alongside other restructuring and shutdown items. Interest expense included a $0.2 million write-off of unamortized fees from the refinanced credit facility.
- Key disclosed risks include PE Films’ reliance on a small number of major customers, raw-material and energy cost volatility and imperfect pass-through timing, international and currency exposure, challenging Brazilian market conditions, and required pension contributions. The company reported approximately $100.4 million of pension and post-retirement liabilities and expected $6.1 million of pension contributions in 2016.
- A dispute over possible U.S. antidumping duties on certain Terphane exports remained subject to court proceedings; the company described purchase-agreement indemnification for related liabilities. The filing stated that risk factors had not materially changed from the 2015 Form 10-K.
Important facts for investors to verify
- Whether PE Films customer losses and product transitions stabilize, and whether the projected post-2017 additional profit exposure materializes.
- Progress, total cost and timing of the Lake Zurich consolidation, including delivery of projected savings and production transfers.
- Segment demand, margins and raw-material pass-through trends, especially in PE Films and Brazil-based Flexible Packaging Films.
- Cash conversion and working-capital performance, planned capital spending, and covenant headroom under the secured credit facility.
- Changes in kaléo’s valuation assumptions or commercialization prospects, and developments in the Terphane antidumping-duty litigation.