Tredegar Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Tredegar manufactures polyethylene films (PE Films), polyester films (Flexible Packaging Films, also called Terphane) and aluminum extrusions. This unaudited report covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance
Amounts in millions except per-share data.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $208.5 | $221.2 | $415.9 | $455.4 |
| Net income | $3.4 | $0.6 | $10.7 | $10.5 |
| Diluted EPS | $0.10 | $0.02 | $0.33 | $0.32 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $18.1 | $19.4 |
- Q2 consolidated gross margin was 15.2%, up from 13.4%; six-month gross margin was 16.6%, up from 14.7%. The filing attributes improvement to segment-level factors and lower pension expense; PE Films remained under pressure.
- Six-month capital expenditures were $19.0 million, versus $14.4 million. Operating cash flow less capital expenditures was negative $0.9 million.
- Cash was $27.5 million at June 30, down from $44.2 million at year-end 2015. Long-term debt was $94.0 million, down from $104.0 million; net debt was $66.5 million. The current ratio was approximately 1.8.
- The $400 million secured revolving credit facility had approximately $242 million available under the most restrictive covenants. Covenant leverage was 1.15x against a 4.00x maximum; interest coverage was 13.87x against a 2.50x minimum. The company reported compliance.
- Six-month dividends were $0.22 per share, compared with $0.20 in 2015.
Material changes and segment trends
- PE Films: Q2 net sales fell 12.1% to $80.8 million and ongoing operating profit fell 53.4% to $4.3 million. Six-month sales declined 14.6% to $169.3 million and operating profit declined 44.2% to $14.6 million. Drivers included lost personal-care business, lower surface-protection demand and unfavorable currency effects. Management cited lower flat-panel-display demand and customer product transitions.
- Flexible Packaging Films: Q2 net sales rose 16.6% to $27.2 million; the ongoing operating loss narrowed to $0.9 million from $3.1 million. Six-month sales rose 6.8% to $53.6 million, and ongoing operating results improved to $1.1 million profit from a $2.3 million loss. Higher volume and efficiencies helped, while competitive pricing and Brazilian currency transaction losses weighed on results.
- Aluminum Extrusions: Q2 net sales declined 4.8% to $93.4 million, but ongoing operating profit increased 30.8% to $10.9 million. Six-month sales fell 6.7% to $178.9 million while operating profit rose 35.1% to $18.4 million. Higher volume and marginal pricing, lower freight and utility costs, and efficiencies supported profit; lower aluminum prices reduced reported sales.
- Consolidated sales declined 5.7% in Q2 and 8.7% for the first six months. Q2 net income improved from the prior year, which included $3.9 million of severance charges tied to former senior executives. Six-month net income was broadly flat.
Outlook, commentary and risks
- The Lake Zurich PE Films facility consolidation is expected to finish by mid-2017. Estimated total cash expenditures are $16–17 million; expected annual pre-tax cash savings are $5–6 million. The company expects approximately $3 million of accelerated noncash depreciation over the project. Six-month project cash spending was $5.8 million.
- Management estimated an annual adverse operating-profit impact of about $10 million from a personal-care product transition expected after 2018. Possible surface-protection transitions could adversely affect annual operating profit by up to $5–10 million; timing and ultimate impact remain uncertain. PE Films R&D spending is expected to be about $5 million higher in 2016 than in 2015.
- 2016 capital expenditure estimates were $30 million for PE Films, $5 million for Flexible Packaging Films and approximately $22 million for Aluminum Extrusions. Management said cash, borrowing availability and operating cash flow should cover working capital, capital expenditures and dividends for the next 12 months.
- An explosion at the Newnan, Georgia aluminum facility on June 29 injured five employees, one seriously, and damaged the casting department. The cause and repair or replacement plan were still under evaluation. A $0.6 million accrual was recorded; no insurance receivable or asset impairment was recorded at quarter-end.
- Tredegar recorded a $1.1 million first-half unrealized gain on its approximately 19% investment in private company kaléo. The $19.7 million fair value relies on Level 3 estimates; management disclosed that a 500-basis-point change in the discount-rate assumption could move estimated value by approximately $5–6 million.
- Terphane distributed $10.7 million to Tredegar in Q2 amid concerns about Brazil’s political and economic conditions. Brazilian competition, currency movements and inflation remain risks. The company also cites raw-material and energy cost volatility, PE Films customer concentration, potential customer transitions, pension funding needs and execution risks in restructuring and capital projects.
- A dispute over potential U.S. antidumping duties on certain Brazilian PET films remained subject to court proceedings. The company described indemnification provisions in the Terphane acquisition agreement for related liabilities.
Important facts for investors to verify
- Whether PE Films can stabilize volume and offset the disclosed potential customer and product-transition losses.
- Whether the Lake Zurich consolidation meets its mid-2017 schedule, cost estimate and $5–6 million annual savings target.
- The extent of Newnan explosion damage, downtime, insurance recovery and any subsequent impairment or liability recognition.
- Whether Terphane’s improved volume and profitability persist despite Brazilian market, currency and competitive pressures.
- The assumptions supporting kaléo’s Level 3 valuation and any subsequent financing, commercialization or valuation changes.
- Execution of 2016 capital spending plans, cash generation, debt levels and continued compliance with credit-facility covenants.