Tredegar Corporation — 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013; quarterly figures are also reported for the fourth quarter. Tredegar manufactures plastic films and aluminum extrusions. Its two continuing segments are Film Products and Aluminum Extrusions. Comparisons below are primarily with 2012.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Sales, including freight | $959.3 million | $882.2 million |
| Net sales, excluding freight | $930.7 million | $857.3 million |
| Income from continuing operations | $35.9 million; $1.10 diluted EPS | $43.2 million; $1.34 diluted EPS |
| Net income | $21.9 million; $0.67 diluted EPS | $28.3 million; $0.88 diluted EPS |
| Cash from operating activities | $76.7 million | $82.6 million |
| Capital expenditures | $79.7 million | $33.3 million |
| Cash and cash equivalents at year-end | $52.6 million | $48.8 million |
| Total debt at year-end | $139.0 million | $128.0 million |
- Consolidated gross profit was 15.2% of sales, down from 16.4%. Management attributed pressure mainly to higher pension expense and, in Film Products, pricing competition, resin pass-through timing, higher costs and operational inefficiencies.
- Film Products net sales rose 1.5% to $621.2 million and ongoing operating profit rose 1.5% to $71.0 million. Higher volume and mix were partly offset by lower average selling prices and cost pressures.
- Aluminum Extrusions net sales increased 26.1% to $309.5 million and ongoing operating profit more than doubled to $18.3 million. Growth reflected the AACOA acquisition, cost savings from the Kentland plant closure and improved value-added pricing.
- Fourth-quarter sales were $231.1 million versus $233.0 million in fourth-quarter 2012. Fourth-quarter continuing-operations income was $9.4 million versus $13.9 million.
- Net debt—debt less cash—was $86.4 million, compared with $79.2 million a year earlier. The $350 million revolving facility matures in 2017; approximately $165 million was available at year-end under the most restrictive covenants. Tredegar reported compliance with its covenants.
- The effective tax rate on continuing operations increased to 32.1% from 29.8%, principally because of reduced benefit from foreign tax incentives. The regular dividend was $0.28 per share in 2013; 2012 included a special $0.75-per-share dividend.
Material changes versus the prior comparable period
- Sales grew 8.7%, but continuing-operations income fell 16.8%. The prior-year result included a $16.1 million unrealized gain on Tredegar’s investment in kaleo, compared with a $3.4 million gain in 2013; pension costs also rose materially.
- Aluminum Extrusions’ increase reflects acquisition and operating changes, not solely organic growth. AACOA contributed $88.1 million of 2013 net sales, compared with $19.5 million after its October 2012 acquisition.
- Operating cash flow declined by $5.9 million, while capital expenditures increased to $79.7 million, including substantial capacity-expansion projects in Brazil and Georgia.
- Discontinued operations recorded a $14.0 million loss in 2013, principally from an environmental indemnification accrual related to the 2008 sale of the Canadian aluminum extrusions business. The comparable 2012 loss was $14.9 million.
Outlook, commentary, risks and unusual items
- P&G notified Tredegar that it would eliminate certain North American babycare elastic laminate volumes by mid-2014. The affected product line generated $50.9 million in 2013 sales, about 19% of Tredegar’s sales to P&G. Management estimated an eventual annual ongoing operating-profit impact of about $9 million, expected to be fully realized by 2015. The Red Springs facility, dedicated to this line, was scheduled to close; estimated shutdown charges were about $1.3 million.
- Management expected 2014 company-wide cost savings to partly offset the P&G volume loss and weakness in flexible packaging films, and said it aimed to offset the P&G impact by 2015 through growth, new products, capacity expansion and efficiencies. Planned 2014 capital expenditures were approximately $50 million for Film Products and $10 million for Aluminum Extrusions. Brazilian expansion capacity was expected to be available by the end of second-quarter 2014.
- Key risks include customer concentration at P&G (28% of 2013 continuing-operations net sales), raw-material and energy price volatility, competitive pricing and margin compression, cyclical construction demand, foreign exchange, supply-chain disruption, acquisition integration, and pension funding and assumptions.
- Unusual valuation items included the $3.4 million unrealized kaleo gain, a $0.4 million unrealized Harbinger loss and a $1.0 million unrealized loss on investment property. The kaleo holding was valued using significant unobservable inputs; its $37.1 million reported fair value was sensitive to assumptions about milestones, projected cash flows and discount rates.
- Environmental remediation and indemnification matters remain contingencies. The filing also describes a remanded 3M patent case and an appeal by U.S. PET-film producers of a Commerce Department scope ruling concerning Terphane imports. Tredegar said it expected about $3 million of legal expenses over the next 12–18 months for the 3M matter and believed it had defenses. Management stated known environmental remediation was not expected to materially affect financial position, though costs could materially affect results in a period.
- After year-end, on February 19, 2014, the board authorized termination and redemption of the shareholder rights agreement. The filing reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Timing, actual volume loss and realized profit impact from P&G’s supplier consolidation, and whether replacement business and savings meet management’s stated offset objective.
- Whether Film Products’ Brazil expansion and Aluminum Extrusions’ Georgia capacity project deliver planned capacity, returns and cash flows, given the sharp increase in 2013 capital spending.
- Resolution and cash consequences of the Canadian environmental indemnification accrual, Newnan remediation estimates and other environmental obligations.
- Quality of reported earnings excluding investment fair-value gains and losses, acquisition effects, pension expense and discontinued-operation charges.
- Whether operating cash generation, available borrowing capacity and covenant headroom remain sufficient to fund investment, dividends and other commitments.
- Developments in the kaleo and Harbinger investments, the 3M patent litigation and the PET-film trade-duty appeal.