Tredegar Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparison is with the corresponding 2012 periods. Tredegar’s principal segments are Film Products and Aluminum Extrusions. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $243.2 | $216.6 | $728.3 | $649.2 |
| Net sales (sales less freight) | $235.7 | $210.5 | $706.1 | $631.7 |
| Income from continuing operations | $7.4 | $14.2 | $26.5 | $29.3 |
| Net income | $7.0 | $7.4 | $12.5 | $17.8 |
| Diluted EPS from continuing operations | $0.23 | $0.44 | $0.81 | $0.91 |
| Gross profit as a percentage of sales | 15.3% | 17.6% | 15.3% | 16.5% |
- Q3 segment ongoing operating profit was $19.6 million for Film Products and $3.4 million for Aluminum Extrusions, versus $21.1 million and $1.8 million, respectively, a year earlier. Nine-month amounts were $55.4 million and $12.4 million, versus $50.0 million and $7.3 million.
- Operating cash flow for the first nine months was $44.9 million, compared with $49.6 million. Capital expenditures were $54.7 million, versus $20.6 million. Cash declined from $48.8 million at year-end 2012 to $42.6 million.
- At September 30, debt was $134.0 million and net debt was $91.4 million. The revolving facility had approximately $179 million available under the most restrictive covenants. The company reported covenant compliance; leverage was 1.30x against a 3.00x maximum, and interest coverage was 20.26x against a 2.50x minimum.
- Current assets were $244.1 million and current liabilities $132.9 million. Shareholders’ equity was $376.7 million. Dividends were $0.07 per share in Q3 and $0.21 per share for the nine months.
Material changes versus prior periods
- Consolidated sales rose 12.3% in Q3 and 12.2% year to date, mainly reflecting the AACOA acquisition and higher Film Products volumes. AACOA contributed $22.7 million of Q3 sales and $67.4 million for the nine months.
- Film Products net sales increased 1.2% in Q3 and 2.3% year to date, but Q3 ongoing operating profit fell 7.0%. Higher volumes and improved mix were outweighed in part by competitive price pressure, flexible-packaging production inefficiencies and the lag in passing through resin costs. Nine-month ongoing operating profit increased 10.7%.
- Aluminum Extrusions net sales rose 42.2% in Q3 and 37.0% year to date, primarily due to AACOA. Ongoing operating profit increased 85.6% in Q3 and 68.1% for the nine months, with contributions from AACOA and savings after the Kentland facility shutdown.
- Despite increased segment ongoing operating profit, consolidated continuing income declined. Q3 results included a $3.1 million unrealized loss on the Intelliject investment, versus a $2.7 million gain in Q3 2012; year-to-date gains were $0.1 million versus $9.0 million. Higher pension expense and corporate costs also weighed on results.
- The effective tax rate on continuing operations was 31.5% for the first nine months, compared with 27.8%. Foreign tax incentives contributed $1.9 million, or $0.06 per share, in the 2013 period.
Outlook, commentary, risks and unusual items
- P&G informed Tredegar it will eliminate certain North American babycare elastic-laminate volumes by mid-2014. The affected product line generated $55 million of sales in the last twelve months ended September 30, 2013. Tredegar expects an annual operating-profit reduction of approximately $9 million when the full impact is realized in 2015; it expects cost savings and growth initiatives to offset the loss by 2015. The change is expected to lead to closure of the dedicated leased Red Springs facility, with shutdown charges not expected to exceed $1 million.
- Management expects company-wide cost savings in 2014 and continued investment in growth. Film Products estimated 2013 capital expenditures of approximately $68 million, including $44 million for expansion in Brazil. Aluminum Extrusions estimated approximately $18 million, including $14 million for a Newnan, Georgia capacity expansion. The filing states existing cash, borrowing availability and operating cash flow are expected to fund working capital, capital spending and dividends for the next twelve months.
- The Intelliject investment was carried at $33.8 million and valued using significant unobservable inputs; a 500-basis-point change in the discount-rate assumption would change estimated value by approximately $4–5 million. Management cited reassessed royalty and milestone timing and increased pipeline development and commercialization expenses.
- Tredegar recorded $14.0 million of charges in the first nine months for environmental indemnifications related to its 2008 sale of a Canadian aluminum extrusions business. The filing also reports $0.5 million of such charges in Q3. The amount of any remaining exposure is not clearly stated in the provided filing text.
- A Commerce Department scope ruling concluded certain Terphane films were outside a Brazilian PET-film antidumping order if a specified layer-thickness condition is met. U.S. producers appealed; an adverse outcome could result in duties, although the purchase agreement provides for specified indemnifications.
- Key business risks include Film Products’ dependence on P&G, competitive pricing and flexible-packaging market weakness; cyclical Aluminum Extrusions demand; raw-material, energy and foreign-exchange volatility; and execution and integration risks from acquisitions. Management stated that the Brazilian tax incentives currently in place expire at the end of 2014, while it anticipates qualifying for extensions.
Important facts for investors to verify
- Progress, timing and realized earnings impact of P&G’s volume reductions, and whether planned savings and growth offset the expected $9 million annual operating-profit impact.
- Film Products pricing, resin pass-through timing, flexible-packaging utilization and production efficiency, alongside Aluminum Extrusions’ performance excluding AACOA and Kentland-related benefits.
- Completion, spending and returns on the Brazil and Newnan capacity projects, and the effect of elevated capital expenditures on cash and debt.
- Valuation assumptions and milestones for Intelliject, plus the remaining exposure from environmental indemnifications and the Terphane antidumping-duty appeal.
- Availability under the credit facility, covenant headroom, foreign-held cash and the expected continuation of Brazilian tax incentives.