Tredegar Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Tredegar operates Film Products and Aluminum Extrusions.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable / prior date |
|---|---|---|
| Sales | $235.2 million | $241.5 million, down 2.6% |
| Net sales (sales less freight) | $228.4 million | $234.3 million, down 2.5% |
| Gross margin | 16.0% | 15.3% |
| Income from continuing operations | $8.5 million; $0.26 diluted EPS | $9.5 million; $0.29 diluted EPS |
| Net income | $8.5 million | $4.3 million, including $5.2 million discontinued-operations loss |
| Operating cash flow | $10.0 million | $8.8 million |
| Capital expenditures | $10.2 million | $10.3 million |
| Cash and cash equivalents | $45.2 million | $52.6 million at December 31, 2013 |
| Debt | $134.0 million; net debt $88.8 million | $139.0 million at December 31, 2013 |
| Shareholders’ equity | $416.2 million | $402.7 million at December 31, 2013 |
The effective tax rate on continuing operations was 35.2%, versus 28.3% in Q1 2013. The quarterly dividend was $0.07 per share. The filing reports a revolving-credit leverage ratio of 1.33x and interest coverage of 21.18x; Tredegar was in compliance with its financial covenants. It stated approximately $172 million was available to borrow under its $350 million facility, subject to the most restrictive covenants.
Segment results and material changes
- Film Products: Net sales were $149.2 million, down 3.4%; ongoing operating profit was $16.7 million, down 1.7%. Sales volume fell 7.4%. Management cited lower P&G babycare elastic-laminate sales, competitive pricing pressure, and weaker volume/mix, partly offset by improved operations and favorable currency effects.
- Aluminum Extrusions: Net sales were $79.3 million, down 0.8%; ongoing operating profit was $4.8 million, up 3.2%. Volume rose 2.6%, while lower average aluminum prices weighed on sales. Severe winter weather was estimated to reduce operating profit by about $1.2 million.
- Consolidated ongoing segment operating profit was $21.5 million, compared with $21.6 million. Reported total segment operating profit was $20.2 million after $1.2 million of 2014 shutdown, impairment and restructuring charges. The prior-year quarter included a $1.1 million unrealized gain on the kaléo investment; Q1 2014 included a $0.2 million Harbinger Fund loss.
- Q1 2013 results also included a $5.2 million after-tax environmental indemnification accrual tied to the previously sold Canadian aluminum extrusions business, classified in discontinued operations; there was no corresponding 2014 charge.
Outlook, risks and unusual items
- No full-year earnings guidance is provided. Management said cash, borrowing availability and operating cash flow should be sufficient for working capital, capital expenditures and dividends over the next 12 months.
- Management estimated 2014 capital expenditures of approximately $49 million for Film Products and $9 million for Aluminum Extrusions. The Brazil Film Products capacity expansion was expected to be available by the end of Q2 2014.
- Sales of certain babycare elastic laminate films to P&G were expected to be fully eliminated after Q2 2014. Film Products is highly dependent on P&G; pricing competition, customer/product mix and raw-material pass-through timing are additional risks.
- Tredegar cited exposure to resin, PTA/MEG, aluminum, energy and currency volatility, cyclical end markets, foreign operations and the ability to pass through higher costs. Aluminum Extrusions’ first-quarter weather costs were unusual.
- The kaléo investment had a reported fair value of $37.1 million, based on significant unobservable Level 3 estimates. The filing notes FDA approval of kaléo’s naloxone auto-injector and new debt financing occurred in April 2014, after quarter-end. Valuation is sensitive to assumptions: a 500-basis-point decrease in the discount rate would have increased estimated value by about $7 million; a 500-basis-point increase would have reduced it by about $6 million.
- A 3M patent dispute was remanded for further consideration; management said it intended to defend the matter and did not expect any damages, if awarded, to be material, but expected about $3 million in legal expenses over the next 12–15 months. An appeal of a Commerce scope ruling concerning certain Brazilian PET films also remained a contingency; indemnifications are provided for under the Terphane purchase agreement.
- The Board terminated and redeemed the shareholder rights plan in Q1; the redemption payment was $0.3 million. Corporate expenses included $0.9 million related to responding to a Schedule 13D filing by certain shareholders.
Important facts for investors to verify
- How the planned post-Q2 elimination of certain P&G products affects Film Products volume, pricing and operating profit.
- Progress, timing, spending and expected returns of the Brazil capacity expansion and the stated 2014 capital-spending plans.
- Whether working-capital movements—particularly higher receivables—reverse, and whether cash generation supports dividends and investment needs.
- Debt availability and covenant headroom under the revolving credit agreement, alongside the company’s refinancing and interest-rate exposure.
- Changes in the Level 3 kaléo valuation assumptions and the outcome of the 3M patent litigation and PET-film antidumping-duty appeal.
- Whether Brazilian tax incentives are extended beyond 2014, as management anticipated.