Tredegar Corporation — Q1 2019 Form 10-Q
Business context and reporting period
Tredegar manufactures polyethylene films (PE Films), polyester films (Flexible Packaging Films) and aluminum extrusions. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are compared with December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $248.5 million | $258.7 million |
| Net sales (sales less freight) | $239.4 million | $249.9 million |
| Gross profit margin | 15.6% | 18.1% |
| Income before income taxes | $23.8 million | $23.5 million |
| Net income | $19.8 million | $18.2 million |
| Diluted EPS | $0.60 | $0.55 |
| Operating cash flow | $11.1 million | $15.0 million |
| Capital expenditures | $12.9 million | $5.1 million |
Net income included a $17.1 million pretax gain on the kaléo investment, including a $17.6 million dividend declared in March and paid in April; the after-tax gain was $14.3 million, or $0.43 per share. The effective tax rate was 16.9%, down from 22.5%, partly reflecting the tax impact of the dividend. Interest expense declined to $1.2 million from $1.6 million.
At March 31, cash was $36.3 million, long-term debt was $110.0 million, and net debt after cash was $73.7 million. The company reported $259 million of borrowing availability under its $400 million revolving credit agreement and compliance with its covenants. It stated cash, available borrowing capacity and operating cash flow should meet working-capital, capital-spending and dividend needs for the next 12 months. Quarterly dividend was $0.11 per share.
Material changes and segment performance
- PE Films net sales fell 28.4% to $66.8 million and ongoing operating profit fell 79.0% to $3.0 million. Lower personal-care and surface-protection volumes, mix and production costs were key factors.
- Flexible Packaging Films net sales increased 18.2% to $33.6 million and ongoing operating profit rose to $2.9 million from $1.7 million, reflecting improved demand and capacity from a restarted Brazilian production line. Management noted continued volatility and Latin American competitive pressures.
- Aluminum Extrusions net sales rose 8.4% to $139.0 million and ongoing operating profit increased 18.5% to $12.1 million. Higher volume and pricing helped, while labor, supplies, maintenance and other costs increased. The Niles facility’s profit was about $1 million below expectations due to continuing inefficiencies.
- Consolidated sales declined 4.0%; ongoing operating profit across the three segments was lower overall, principally because of PE Films. Cash from operations also declined, while higher capital spending drove greater investing cash use.
Outlook, risks and unusual items
- A personal-care customer product transition is expected to adversely affect about $70 million of annual sales; management expects $30–$35 million of sales from the product in 2019, with the possibility of none thereafter. Personal Care’s operating profit plus depreciation and amortization was $0.8 million in Q1; management expects about negative $0.5 million in the first half and positive results in the second half if productivity and sales-growth targets are achieved.
- Delayed customer transitions in Surface Protection could, if fully implemented, reduce annual operating profit by approximately $11 million. The company is pursuing new products and markets to offset the risk.
- Management projected 2019 capital expenditures of $33 million for PE Films, $12 million for Flexible Packaging Films and $18 million for Aluminum Extrusions. These are segment estimates, not consolidated earnings guidance.
- The Shanghai PE Films facility ceased production in Q4 2018. The company estimated total transition costs of $5.0 million, annual cash savings of $1.7 million, and completion by year-end 2019; $3.5 million of expense had been recorded since project inception through Q1 2019.
- Kaléo’s estimated fair value was $101.7 million, including the dividend receivable. Valuation uses significant Level 3 assumptions; the ultimate realized value may differ materially. Kaléo faces regulatory and legal matters, including a Department of Justice investigation relating to its Evzio business.
- Disclosure controls were deemed ineffective at March 31, 2019 because of previously identified material weaknesses in internal control over financial reporting. Remediation efforts were underway and expected to extend into 2020; management cautioned that timing and completion were not assured.
- Other disclosed risks include customer concentration and product transitions, raw-material and energy costs, foreign exchange, international and trade-policy exposure, pension obligations, and manufacturing disruptions. Q1 also included PE Films restructuring, impairment and Shanghai-transition charges, along with professional fees related to accounting guidance and internal-control remediation.
Important facts for investors to verify
- How much reported earnings and the investment’s carrying value depend on kaléo valuation changes and dividends, and the status and potential effect of its DOJ investigation.
- Progress and actual financial impact of the personal-care and surface-protection customer transitions, including replacement sales and mitigation actions.
- Whether PE Films’ profitability stabilizes and whether the Flexible Packaging Films and Aluminum Extrusions improvements continue amid cost and market pressures.
- Actual capital spending, operating cash generation, debt levels and covenant headroom relative to management’s estimates and stated liquidity expectations.
- Remediation progress and independent confirmation that material weaknesses and ineffective disclosure controls have been addressed.