Business context and reporting period
Tredegar Corporation’s Form 10-K reports the fiscal year ended December 31, 2012. The company manufactures plastic films and aluminum extrusions. Its principal segments are Film Products and Aluminum Extrusions; the former “Other” segment ended after Bright View was integrated into Film Products and Falling Springs was sold.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $882.2 million | $794.4 million |
| Income from continuing operations | $43.2 million; $1.34 diluted EPS | $28.5 million; $0.89 diluted EPS |
| Net income | $28.3 million; $0.88 diluted EPS | $24.9 million; $0.77 diluted EPS |
| Gross profit margin | 16.4% | 15.3% |
| Cash provided by operating activities | $82.6 million | $71.8 million |
| Capital expenditures | $33.3 million | $15.9 million |
| Cash and cash equivalents | $48.8 million | $68.9 million |
| Debt | $128.0 million | $125.0 million |
| Net debt | $79.2 million | $56.1 million |
- Sales rose 11.0%. Segment net sales, which exclude freight, were $857.3 million, up from $775.9 million.
- Film Products net sales were $611.9 million, up 14.3%; ongoing operating profit was $70.0 million, up 17.6%. Aluminum Extrusions net sales were $245.5 million, up 2.1%; ongoing operating profit was $9.0 million, compared with $3.5 million.
- Continuing-operations results included a $16.1 million unrealized gain on the Intelliject investment. Net income also reflected a $14.9 million after-tax loss from discontinued operations, including charges related to environmental indemnifications from the 2008 sale of the Canadian extrusion business.
- The 2012 cash flow statement reports $26.7 million of cash used in financing activities, including $30.8 million of dividends paid. Cash declined by $20.1 million during the year.
- At year-end, approximately $199 million remained available under the $350 million revolving credit facility, subject to covenants. The company reported covenant compliance, a 1.20x leverage ratio against a 3.00x maximum, and a 16.24x interest coverage ratio against a 2.50x minimum.
Material changes versus the prior comparable period
- Terphane, acquired in October 2011, contributed materially to Film Products’ growth: 2012 net sales were $138.0 million versus $28.3 million in 2011. Growth was partly offset by lower volumes in personal care and overwrap films, pricing pressure, and unfavorable foreign currency effects.
- AACOA was acquired October 1, 2012 for approximately $54.6 million net of cash acquired, funded primarily with revolving-credit borrowings. It contributed fourth-quarter sales and expanded Aluminum Extrusions’ fabrication capabilities and customer reach.
- Aluminum Extrusions’ Kentland, Indiana facility closed in 2012. Management estimated the closure would add approximately $4–5 million annually to segment ongoing operating profit from 2013 onward.
- Cash used in investing activities fell to $75.6 million from $195.2 million, largely because the 2011 period included the $181.0 million Terphane acquisition. The 2012 period included AACOA acquisition spending and higher capital expenditures.
- Pension and other postretirement obligations increased; the defined benefit pension plan’s funded-status liability rose to $83.3 million from $57.8 million.
Outlook, commentary, risks and unusual items
- Management estimated 2013 capital expenditures of approximately $80 million for Film Products, including $49 million for the Brazil capacity expansion, and approximately $19 million for Aluminum Extrusions, including a Newnan, Georgia expansion. These are estimates, not guaranteed outcomes.
- Management stated that existing cash, borrowing availability and operating cash flows should meet working-capital, capital-expenditure and dividend needs for the foreseeable future. It expected a minimum pension contribution of approximately $0.2 million in 2013 and pension expense of approximately $13.3 million.
- Film Products remains exposed to customer concentration: P&G accounted for approximately 31% of 2012 continuing-operations net sales. Raw-material cost volatility, delayed pass-through pricing, competition, product substitution and foreign exchange are material risks.
- Aluminum Extrusions is cyclical and exposed to construction-market conditions, aluminum and energy costs, pricing pressure, and operating leverage. The company also cites acquisition integration, supply-chain disruption, environmental compliance, customer credit and facility disruption risks.
- The $16.1 million Intelliject gain was based on Level 3 valuation assumptions and milestone-dependent projected cash flows; management disclosed that a 500-basis-point change in its discount-rate assumption would change the investment’s estimated value by approximately $5–6 million. The investment’s estimated year-end fair value was $33.7 million.
- Falling Springs was sold for $16.6 million in cash and Tredegar shares to an entity affiliated with director John D. Gottwald; the sale generated a $3.1 million loss. The related-party nature and terms merit attention.
- Commerce ruled in January 2013 that certain Terphane films were outside a Brazilian PET-film antidumping order if thickness requirements were met. U.S. producers appealed the ruling; the filing says potential related liabilities are covered by contractual indemnifications.
- The company disclosed environmental remediation matters and indemnification obligations. Management did not expect known environmental matters to materially affect financial position, but noted possible adverse effects on results in a period. No legal proceedings were listed in Item 3.
Important facts for investors to verify
- Separate recurring operating performance from the Intelliject fair-value gain, acquisition and restructuring costs, and discontinued-operation environmental charges.
- Track P&G sales concentration, Film Products’ underlying volumes and margins, and whether product diversification offsets personal-care declines.
- Assess delivery, cost, returns and funding of the Brazil and Newnan capacity projects against management’s 2013 capital-spending estimates.
- Monitor pension funding and expense, including the sensitivity of obligations to discount rates and investment returns.
- Review revolving-credit covenant headroom, floating-rate debt exposure, and the company’s ability to fund investment and dividends from cash generation.
- Follow the Terphane antidumping appeal, environmental indemnification claims, and final purchase-accounting adjustments for AACOA.