Tredegar Corporation — Q3 2015 Form 10-Q
Business context and period. Quarterly report for the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Tredegar reports PE Films, Flexible Packaging Films (Terphane) and Aluminum Extrusions. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $223.8 | $240.4 | $679.2 | $712.6 |
| Net income (loss) | $(36.7) | $11.6 | $(26.3) | $23.8 |
| Diluted EPS | $(1.13) | $0.36 | $(0.81) | $0.73 |
| Gross profit margin | 15.0% | 14.4% | 14.8% | 15.6% |
| Operating cash flow | — | $33.3 | $37.2 | |
| Capital expenditures | — | $23.4 | $32.6 |
Q3 and nine-month results included a $44.5 million non-deductible goodwill impairment charge for Terphane, resulting in a reported nine-month effective tax rate of (52.7%). The company reported $9.1 million of income tax expense on a $17.2 million pretax continuing-operations loss for the first nine months.
At September 30, cash was $46.6 million and long-term debt was $134.0 million, or net debt of $87.4 million. Shareholders’ equity was $281.8 million. Cash declined $3.4 million from year-end 2014. Nine-month financing cash use was $10.7 million, including $10.1 million of dividends and $3.3 million of net debt repayments.
Segment performance and changes
- PE Films: Q3 net sales fell 18.4% to $93.9 million; ongoing operating profit declined 32.7% to $9.7 million. Nine-month sales fell 17.6% to $292.3 million and ongoing operating profit fell 24.0% to $35.8 million. Drivers included lost and transitioning business with its largest customer, lower volumes, currency effects and pricing pressure.
- Flexible Packaging Films: Q3 sales fell 2.8% to $27.2 million, while ongoing operating profit was $4.1 million versus a $1.3 million loss. Nine-month sales fell 7.2% to $77.3 million; ongoing operating profit was $1.8 million versus a $2.3 million loss. Results benefited from duty refunds and foreign-exchange transaction gains; management cited significant competitive pricing pressure and weak Brazilian market conditions.
- Aluminum Extrusions: Q3 sales rose 5.8% to $94.8 million and ongoing operating profit rose 26.4% to $7.3 million. Nine-month sales rose 13.1% to $286.7 million and ongoing operating profit rose 12.4% to $20.9 million, mainly reflecting higher volumes.
Management split Film Products into PE Films and Flexible Packaging Films in Q3, ending efforts to integrate Terphane with the other film operations. Consolidated sales declined 6.9% in Q3 and 4.7% for the first nine months. Nine-month gross margin decreased from 15.6% to 14.8%, with higher pension expense among the cited pressures.
Outlook, risks and unusual items
- PE Films’ domestic Lake Zurich consolidation is expected to take 21–24 months. Management estimates $13–14 million of total cash expenditures, including about $8 million of capital spending, and expects annual pretax cash savings of $5–6 million after completion. Approximately $4–5 million of exit and disposal costs and $3 million of accelerated noncash depreciation are expected over the period.
- PE Films identified possible additional annual operating-profit exposure of about $10 million from future personal-care product transitions and lost business, likely after 2017. Its dependence on P&G is a stated risk.
- Terphane faces weak Brazilian economic conditions, global excess capacity, price convergence and ongoing dumping activity. The $44.5 million impairment wrote off all goodwill assigned to the unit. The company reported trailing-12-month adjusted EBITDA of $11.4 million, which included $5.5 million of duty refunds and currency gains.
- Tredegar’s approximately 20% investment in private company kaléo was carried at $39.1 million using Level 3 fair-value estimates. On October 28, 2015, after quarter-end, Sanofi announced a voluntary recall of all Auvi-Q and Allerject injectors; Tredegar said the effect on kaléo’s estimated fair value was unknown.
- Liquidity: about $124 million was available under the $350 million revolving credit facility at September 30; the facility matures April 23, 2017. Tredegar was in compliance with its covenants, with a 1.57x leverage ratio versus a 3.00x maximum. Management expects cash, borrowing availability and operating cash flow to meet working-capital, capital-spending and dividend needs for the next 12 months.
- Other risks include raw-material, energy, interest-rate and foreign-currency volatility, and inability to pass through cost increases. A legal appeal concerning the scope of U.S. antidumping duties on certain Terphane imports remained pending. Management stated risk factors had not materially changed from the 2014 Form 10-K.
Key facts for investors to verify
- Whether PE Films’ customer transitions, volume trends and planned consolidation deliver the forecast savings and limit further lost-business exposure.
- Whether Terphane can sustain profitability amid Brazilian market weakness and pricing pressure, and how the post-quarter injector recall affects the $39.1 million kaléo valuation.
- Cash generation, planned capital spending and dividend capacity, along with covenant headroom and refinancing needs before the credit facility matures.
- Exposure to foreign exchange, commodity costs, pension expense, and the outcome of the pending antidumping-duty appeal.