Tredegar Corporation — FY 2015 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2015. Tredegar manufactures polyethylene films, polyester flexible-packaging films, and aluminum extrusions. In 2015, it separated Film Products into PE Films and Flexible Packaging Films, citing their distinct opportunities and challenges. Comparisons below are primarily with FY 2014.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Sales, including freight | $896.2 million | $951.8 million |
| Net sales, excluding freight | $866.3 million | $923.0 million |
| Gross profit margin | 15.7% | 15.2% |
| Income (loss) from continuing operations | $(32.1) million; $(0.99) diluted EPS | $36.0 million; $1.11 diluted EPS |
| Cash provided by operating activities | $74.3 million | $51.2 million |
| Capital expenditures | $32.8 million | $44.9 million |
| Cash and cash equivalents | $44.2 million | $50.1 million |
| Debt | $104.0 million | $137.3 million |
| Net debt | $59.8 million | $87.2 million |
- Sales fell 5.8%. Higher aluminum-extrusion sales were more than offset by declines in both film businesses. Gross margin improved 0.5 percentage points, while SG&A and R&D rose to 9.8% of sales from 8.6%.
- The reported loss reflected a $44.5 million non-deductible goodwill impairment in Flexible Packaging Films and a $20.5 million unrealized loss on Tredegar’s investment in kaleo. Other income (expense), net, was $(20.1) million.
- Operating cash flow increased by $23.0 million, primarily reflecting working-capital volatility. Cash declined by $5.9 million after investing and financing activities; the company made $33.3 million of net repayments on its revolving facility and paid $13.7 million in dividends.
- At year-end, the company had $164 million of borrowing availability under its $350 million revolving credit facility, based on the most restrictive covenants. It reported covenant compliance, a 1.18x leverage ratio against a 3.0x maximum, and a 15.86x interest-coverage ratio against a 2.5x minimum. The facility matures in April 2017.
Segments and material changes
- PE Films: Net sales fell 17.0% to $385.6 million; volume declined 8.5%; ongoing operating profit fell 20.8% to $48.3 million. Lost business and product transitions, particularly in personal-care materials, and unfavorable currency effects drove the decline. P&G sales were $163.9 million, down from $220.8 million.
- Flexible Packaging Films: Net sales fell 7.9% to $105.3 million, despite a 14.3% increase in volume, as competitive pricing and lower raw-material-cost pass-throughs reduced sales. Ongoing operations improved to $5.5 million profit from a $2.9 million loss, aided by currency gains, lower costs, and export-duty refunds. The entire $44.5 million of segment goodwill was written off amid weak Brazilian conditions and global excess capacity.
- Aluminum Extrusions: Net sales rose 9.0% to $375.5 million, with volume up 10.5%; ongoing operating profit increased 18.6% to $30.4 million. Higher volume outweighed lower average selling prices, mainly reflecting lower aluminum costs and mix changes.
- The pension plan was underfunded by $93.2 million at year-end. Pension expense increased to $12.3 million from $6.7 million; a $6.1 million contribution was expected in 2016.
- Total comprehensive loss was $90.7 million, including a $65.5 million foreign-currency translation loss.
Outlook, commentary, and risks
- Management expected 2016 capital expenditures of approximately $30 million for PE Films, $5 million for Flexible Packaging Films, and $24 million for Aluminum Extrusions. Planned projects include PE Films capacity expansions and domestic-facility consolidation, plus additional extrusion capacity at Niles.
- The Lake Zurich PE Films consolidation was expected to be completed around mid-2017. Estimated project cash expenditures were $15–16 million, with annual pre-tax cash savings of $5–6 million once complete. Separately, PE Films estimated additional annual operating-profit exposure of approximately $10 million from certain future product transitions and lost business, likely beginning after 2017.
- Management stated existing cash, borrowing availability, and operating cash flow should meet working-capital, capital-expenditure, and dividend needs for at least the next 12 months. This is not formal earnings guidance.
- Key risks include PE Films’ customer concentration and competitive product transitions; adverse economic and pricing conditions in Brazil; currency and raw-material volatility and limits on passing through cost changes; and Aluminum Extrusions’ cyclical exposure to construction and other markets. Five PE Films customers represented 73% of segment net sales; P&G was Tredegar’s largest customer.
- Additional concerns include the pension deficit and sensitivity to interest rates and investment returns; facility or supply-chain disruptions; environmental obligations; and credit-facility covenant compliance. U.S. protective duties on Chinese aluminum extrusions were scheduled to expire in 2016. The company also disclosed an appeal concerning the revocation of U.S. anti-dumping duties on Brazilian PET films and potential environmental and other contingencies; management did not expect known matters to materially affect financial position, though quarterly or annual results could be affected.
- In October 2015, Sanofi recalled all Auvi-Q and Allerject epinephrine auto-injectors. The recall materially reduced kaleo’s expected prospects and Tredegar’s estimated investment value; the $18.6 million year-end valuation relies on significant unobservable assumptions.
Important facts for investors to verify
- Whether PE Films can offset customer losses and product transitions, including the estimated post-2017 annual profit exposure, with new products and customer diversification.
- Whether the Lake Zurich consolidation reaches completion on schedule and delivers the projected savings within the estimated cost range.
- Whether Flexible Packaging Films can sustain its operating recovery amid Brazilian economic weakness, global capacity, and anti-dumping developments.
- Whether the kaleo investment valuation and product-recall outlook change, and whether further impairment is required.
- Whether pension funding needs, 2016 capital spending, cash generation, and facility refinancing at April 2017 remain manageable.