Tredegar Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results cover Film Products and Aluminum Extrusions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $237.0 million | $243.5 million | $472.2 million | $485.1 million |
| Income from continuing operations | $3.8 million | $9.6 million | $12.2 million | $19.1 million |
| Diluted continuing-operations EPS | $0.11 | $0.29 | $0.37 | $0.59 |
| Net income | $3.8 million | $1.3 million | $12.2 million | $5.6 million |
Sales declined 2.7% in both the quarter and first half. Consolidated gross margin increased to 16.2% from 15.4% in Q2 and to 16.1% from 15.3% for the first half, helped in part by lower pension expense. The 2013 net income comparison includes after-tax discontinued-operation losses of $8.3 million in Q2 and $13.5 million for the first half, relating to environmental indemnifications from a previously sold business.
Segment trends: Film Products net sales fell 7.7% in Q2 and 5.6% in the first half; ongoing operating profit declined 20.1% and 11.3%, respectively. Aluminum Extrusions net sales rose 8.6% in Q2 and 3.8% in the first half; ongoing operating profit rose 86.7% and 43.5%, respectively. Extrusions benefited from volume, manufacturing efficiencies, lower SG&A and improved product mix.
- Cash flow: First-half operating cash flow was $16.8 million, down from $20.6 million. Capital expenditures were $22.9 million, versus $34.6 million a year earlier. Investing cash outflow was $18.2 million; financing cash outflow was $7.5 million.
- Liquidity and debt: June 30 cash was $44.0 million and long-term debt was $136.8 million, leaving debt net of cash of $92.7 million. Approximately $165 million was available under the $350 million revolving facility; the company reported covenant compliance. Cash included $32.8 million held outside the U.S.
- Margins, dividends and pension: Dividends declared were $0.09 per share for Q2 and $0.16 for the first half. Management plans an additional discretionary $5 million pension contribution in Q3; required 2014 contributions were expected to be about $0.2 million.
Material changes, unusual items and outlook
- Q2 earnings included a $10 million pretax one-time payment to 3M under a non-exclusive license settling all related patent litigation. The payment substantially affected reported results and was included in other income (expense), net.
- Other reported items included a $1.1 million unrealized loss on the kaléo investment, a $0.6 million first-half unrealized loss on the Harbinger Fund, and a $1.2 million gain on sale of investment property. First-half restructuring, shutdown and environmental charges also included $1.4 million of Film Products severance and $0.7 million related to the Red Springs facility shutdown.
- Film Products volumes were weak, particularly in certain North American babycare elastic films, surface protection and flexible packaging. Management said babycare elastic film sales would be discontinued in the second half, with only de minimis sales expected in Q3. For 2014, Film Products volumes were projected 7–10% below 2013; management expected second-half operating profit to be pressured before the Brazil capacity ramp-up, but expected to meet its margin performance target.
- The Brazil flexible-packaging capacity ramp-up was delayed and expected to begin in Q4 2014. Film Products estimated 2014 capital expenditures of about $45 million, including the expansion project.
- Aluminum Extrusions expected 2014 volume growth of 6–8% over 2013 and an adjusted EBITDA margin of 9–10%. A key automotive program ramp-up shifted from Q3 to Q4; nonresidential construction growth was below industry projections. Estimated 2014 capital expenditures were about $9 million.
- Risks include Film Products’ dependence on P&G, competitive pricing, customer inventory corrections, new-capacity execution, cyclical construction demand, and volatility in resin, aluminum, energy and currency costs. The company noted there is no assurance it can pass through higher raw-material and energy costs. An appeal remained pending over a U.S. Commerce scope ruling on certain Brazilian PET film imports; potential duties were subject to the ruling and related purchase-agreement indemnifications.
- Management stated existing cash, borrowing availability and operating cash flow should meet working-capital, capital expenditure and dividend needs for the next 12 months. It also cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether Film Products stabilizes volumes and meets its margin target despite the forecast 7–10% volume decline and discontinued babycare products.
- Whether the Brazil expansion begins ramping up in Q4 and whether the automotive program ramp-up occurs as rescheduled.
- Cash generation relative to planned capital spending, dividends and the additional discretionary pension contribution.
- Revolver availability and covenant headroom; the filing reports compliance and $165 million availability but does not provide a forecast of future borrowing needs.
- The valuation sensitivity of the $36.0 million kaléo investment: its Level 3 fair value relies on uncertain commercialization and cash-flow assumptions.
- Developments in the PET film import-duty appeal and the potential impact of raw-material, energy, foreign-exchange and customer-concentration risks.