Tredegar Corporation — Second-Quarter 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Tredegar operates Film Products and Aluminum Extrusions.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $221.2 | $237.0 | $455.4 | $472.2 |
| Income before taxes | $1.5 | $5.9 | $16.1 | $19.0 |
| Net income | $0.6 | $3.8 | $10.5 | $12.2 |
| Diluted EPS | $0.02 | $0.11 | $0.32 | $0.37 |
| Gross profit as percentage of sales | 13.4% | 16.2% | 14.7% | 16.1% |
- Q2 sales fell 6.6%; six-month sales fell 3.5%. Q2 net income declined despite lower 2014 comparison-period results including a $10 million 3M license payment, partly offset by a $1.2 million property-sale gain and other investment items.
- Q2 operating profit from ongoing operations was $6.2 million in Film Products (down 58.7%) and $8.3 million in Aluminum Extrusions (up 3.1%). For the first half, Film Products generated $23.8 million (down 24.9%) and Aluminum Extrusions $13.6 million (up 6.1%).
- Film Products net sales fell 21.0% in Q2, reflecting lost and transitioned customer business, lower pricing, foreign currency effects, and weakness in flexible packaging. Aluminum Extrusions net sales rose 16.2%, supported by 12.4% higher volume and higher average selling prices.
- Six-month operating cash flow was $19.4 million, versus $16.8 million a year earlier. Capital expenditures were $14.4 million, versus $22.9 million. Cash declined to $47.4 million from $50.1 million at year-end.
- At June 30, debt was $135.0 million and cash net of debt was $87.6 million. Shareholders’ equity was $355.9 million. The company had approximately $123 million of additional borrowing availability under its $350 million revolving facility and was in compliance with its financial covenants.
- Dividends were $0.11 per share in Q2 and $0.20 per share for the first half, versus $0.09 and $0.16, respectively, in 2014. Interest expense for the first half increased to $1.8 million from $1.2 million, primarily due to higher average debt.
Material changes and unusual items
- Corporate expenses included $3.9 million of pretax severance and employee-related charges following the resignation of the former CEO and CFO. The company announced leadership changes on June 26.
- Foreign currency translation reduced first-half other comprehensive income by $29.1 million; total comprehensive loss was $15.2 million for the first half.
- Kaléo investment carrying value was $39.1 million and is based on significant unobservable assumptions. Management disclosed that a 500-basis-point change in the discount-rate assumption could change estimated fair value by approximately +$7 million or −$5 million.
- The 2014 comparison includes the $10 million payment to 3M to settle patent litigation and obtain a license. The 3M matter was settled; a separate appeal concerning the scope of U.S. antidumping duties on certain Brazilian PET films remained pending.
Outlook, commentary and risks
- Management said prior performance targets for volume, adjusted EBITDA and return on invested capital were no longer appropriate; current management had no immediate plan to issue replacement targets.
- In July 2015, after the reporting date, Tredegar announced plans to consolidate domestic Film Products production by restructuring its Lake Zurich, Illinois facility. The transition is expected to take 21–24 months, with $13–14 million of estimated cash expenditures and anticipated annual pretax cash savings of $5–6 million once complete. Expected exit costs are $4–5 million, plus approximately $3 million of accelerated noncash depreciation.
- 2015 capital spending estimates were approximately $26 million for Film Products and $10 million for Aluminum Extrusions. Management said existing cash, borrowing availability and operating cash flow should cover working capital, capital spending and dividends for the next 12 months.
- Film Products faces continued customer-business declines and product transitions; management estimated those transitions could reduce sales by $25–35 million through the end of 2016. Flexible packaging operations remain pressured by weak Brazilian market conditions and global excess capacity; changes in recovery expectations could trigger impairment of assets, including $55 million of indefinite-lived intangible assets.
- Key risks include dependence of Film Products on a major customer, raw-material and energy price volatility and pass-through timing, foreign exchange exposure, cyclical end markets for Aluminum Extrusions, and international operating conditions. Tredegar noted it cannot assure full recovery of higher input costs.
Important facts for investors to verify
- Whether Film Products can stabilize customer volumes and pricing, and the timing and financial impact of the Lake Zurich production transition.
- Whether flexible packaging demand recovers sufficiently to avoid impairment of the PET Films reporting unit.
- Whether Aluminum Extrusions can convert volume growth and capacity investment into stronger operating profit while managing labor and production costs.
- Cash generation, debt and covenant headroom, and the availability of foreign-held cash; $37.4 million of cash was held outside the United States.
- Developments in the PET-film antidumping appeal and the assumptions supporting the $39.1 million kaléo investment valuation.