Tredegar Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Tredegar operates Film Products and Aluminum Extrusions. Results are unaudited and the company cautions that quarterly results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Sales | $234.2 million | $235.2 million; down 0.4% |
| Net income | $9.9 million | $8.5 million |
| Diluted EPS | $0.30 | $0.26 |
| Gross margin | 16.0% | 16.0% |
| Operating cash flow | $12.4 million | $10.0 million |
| Capital expenditures | $7.8 million | $10.2 million |
| Cash and equivalents | $55.2 million | $50.1 million at December 31, 2014 |
| Debt | $141.0 million | $137.3 million at December 31, 2014 |
Operating cash flow less capital expenditures was approximately $4.5 million. Net debt was $85.8 million. The company had $154 million of borrowing availability under its $350 million revolving facility, which matures April 23, 2017, and reported compliance with its financial covenants. The leverage ratio was 1.45x against a 3.00x maximum; interest coverage was 20.01x against a 2.50x minimum. The quarterly dividend was $0.09 per share, up from $0.07.
Comprehensive loss was $22.9 million, despite net income, largely reflecting a $34.7 million foreign-currency translation loss recorded in other comprehensive income. Total assets were $770.4 million and shareholders’ equity was $348.9 million at quarter-end.
Segment results and changes
- Film Products: Net sales fell 10.7% to $133.2 million, while ongoing operating profit increased 5.4% to $17.6 million. Sales volume was essentially flat. Lower average selling prices, unfavorable product mix, currency translation and lost North American babycare laminate business weighed on sales. Profit benefited from product mix, lower manufacturing costs in certain product lines, favorable currency effects and the timing lag in resin-cost pass-through; competitive pricing, lost business, and higher R&D and strategic investment costs were offsets.
- Aluminum Extrusions: Net sales rose 18.1% to $93.6 million and ongoing operating profit rose 11.2% to $5.3 million. Volume increased 7.7%, led by nonresidential construction and automotive markets; higher aluminum costs and inflationary increases also lifted selling prices. Increased manufacturing costs and inefficiencies partly offset volume gains.
- Consolidated pretax income increased to $14.6 million from $13.1 million. The effective tax rate declined to 32.6% from 35.2%. Interest expense increased to $0.9 million from $0.6 million, primarily due to higher average debt.
Outlook, risks and notable items
- Management expects annual Film Products net sales to Procter & Gamble to decline by $25–$35 million by 2016 due to customer product transitions, excluding previously disclosed lost babycare volumes and effects of resin prices and foreign exchange. It expects to offset the effect on ongoing operating profit through growth with other customers and cost and productivity initiatives; management said it did not anticipate the decline would impair previously announced 2016 performance targets.
- Estimated 2015 capital expenditures are approximately $30 million for Film Products and $10 million for Aluminum Extrusions. The filing provides no consolidated earnings guidance.
- Q1 restructuring and shutdown items were a net $52,000 benefit: a $67,000 reversal of previously accrued Film Products severance costs, partly offset by $15,000 of charges related to the Kentland, Indiana facility shutdown. Q1 2014 included $1.245 million of such charges.
- Management believes cash, available borrowing capacity and operating cash flow will meet working-capital, capital-expenditure and dividend needs for the next 12 months. Approximately $41.0 million of quarter-end cash was held outside the U.S.
- Key exposures include Film Products’ reliance on P&G, competition and resin-price pass-through timing; Aluminum Extrusions’ cyclicality and sensitivity to construction demand, aluminum and energy costs; foreign-exchange and international-market risks; and the ability to integrate acquired businesses and execute growth initiatives.
- Tredegar’s approximately 20% interest in privately held kaléo was carried at $39.1 million using Level 3 valuation inputs. The valuation is sensitive to commercialization assumptions and discount rates; a 500-basis-point change in the assumed discount rate would change estimated value by approximately +$7 million or −$5 million, respectively.
- The company reported that the 3M patent matters were settled through a license and a $10 million payment in 2014. A separate appeal concerning the U.S. International Trade Commission’s revocation of the Brazilian PET-film antidumping order was filed in February 2015; related proceedings remain a contingency.
Important facts for investors to verify
- Whether Film Products can replace anticipated P&G sales and maintain its stated 2016 performance targets.
- Whether segment profit improvements persist after resin pass-through timing, currency effects, pricing pressure and manufacturing costs normalize.
- Progress against 2015 capital-spending plans and the impact of the Brazil capacity expansion and Aluminum Extrusions upgrades.
- Revolver availability, covenant headroom and debt levels, including the effect of operating results on leverage.
- The assumptions supporting the kaléo Level 3 valuation, and developments in the PET-film antidumping appeal and Brazilian tax incentives.