Tredegar Corporation — Q1 2013 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Tredegar’s continuing businesses are Film Products and Aluminum Extrusions. Aluminum Extrusions includes AACOA, acquired in October 2012; Falling Springs is reported as discontinued operations.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $241.5 million | $216.6 million |
| Net sales (sales less freight) | $234.3 million | $211.3 million |
| Operating profit from ongoing segment operations | $21.3 million | $15.8 million |
| Income from continuing operations | $9.5 million; diluted EPS $0.29 | $7.7 million; diluted EPS $0.24 |
| Net income | $4.3 million; diluted EPS $0.13 | $3.0 million; diluted EPS $0.09 |
| Cash provided by operating activities | $8.8 million | $14.1 million |
| Capital expenditures | $10.3 million | $5.5 million |
- Consolidated gross margin declined to 15.3% from 16.4%. The effective tax rate on continuing operations fell to 28.3% from 34.8%.
- Cash and equivalents were $37.7 million at quarter-end, down from $48.8 million at December 31, 2012. Long-term debt was $118 million, down from $128 million. Net debt was $80.3 million.
- About $203 million was available under the $350 million revolving credit facility, subject to covenants. The leverage ratio was 1.13x versus a 3.00x maximum; interest coverage was 18.08x versus a 2.50x minimum.
- Quarterly dividends were $0.07 per share, up from $0.045.
Changes and segment results
- Film Products: Net sales rose 0.4% to $154.4 million and ongoing operating profit rose 10% to $17.0 million. Higher volume and favorable mix were partly offset by competitive pricing and production inefficiencies. Management attributed about $3.5 million of margin pressure primarily to price reductions and operational issues; currency movements benefited operating profit by about $1.5 million.
- Aluminum Extrusions: Net sales increased 38.8% to $79.9 million and ongoing operating profit rose to $4.6 million from $1.7 million. Growth primarily reflected AACOA; the Kentland facility shutdown also improved results. AACOA contributed $22.2 million of consolidated sales and $0.6 million of net income in the quarter.
- Higher total segment operating profit and a lower continuing-operations tax rate lifted continuing income. However, the Intelliject fair-value gain was $1.1 million, versus $3.6 million in Q1 2012, and corporate expenses increased, including from higher pension expense. Discontinued operations recorded a $5.2 million loss, compared with a $4.7 million loss.
Outlook, risks and unusual items
- Management expects 2013 capital expenditures of approximately $74 million for Film Products, including $42 million for the Brazil capacity expansion, and $17 million for Aluminum Extrusions, including $13 million for a Newnan, Georgia expansion. These are estimates, not earnings guidance.
- Management stated that cash, borrowing availability and operating cash flow should meet working-capital, capital-expenditure and dividend needs for the foreseeable future. Operating cash flow was below capital expenditures in Q1.
- The Brazil flexible-packaging facility experienced equipment-related production inefficiencies. Film Products is highly dependent on Procter & Gamble; the filing also cites pricing, raw-material and energy costs, cyclicality in Aluminum Extrusions, foreign-exchange exposure, and acquisition integration as risks.
- Tredegar recorded $5.2 million of environmental indemnification accruals in discontinued operations in each of Q1 2013 and Q1 2012, related to its former Canadian aluminum business. The filing states that indemnification coverage is provided under the sale agreement.
- A Commerce ruling found certain Terphane films outside a Brazilian PET-film antidumping order if a specified layer-thickness condition is met. U.S. producers appealed; an adverse outcome could create duty exposure, with related indemnifications addressed in the purchase agreement.
- Intelliject’s $34.8 million carrying value relies on Level 3 estimates and a 55% discount rate; management disclosed that a 500-basis-point change could alter fair value by approximately $5–6 million. Brazilian tax incentives currently benefiting Terphane expire at the end of 2014; management expects to qualify for extensions.
Key facts for investors to verify
- Whether Film Products can address competitive pricing and Brazil production inefficiencies without further margin erosion.
- AACOA’s ongoing contribution, integration and synergies, and progress and returns from the Brazil and Newnan capacity projects.
- Cash conversion, working-capital needs and funding for planned capital expenditures and dividends; covenant headroom under the revolving facility.
- Resolution of the antidumping-order appeal and the scope and adequacy of indemnification for environmental and other legacy liabilities.
- Assumptions supporting the Intelliject valuation and the expected continuation of Terphane’s tax incentives.