Tredegar Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; compared with the corresponding 2010 periods. Amounts are in U.S. dollars unless noted. Tredegar operates Film Products and Aluminum Extrusions, alongside smaller development and other businesses.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $201.0m | $185.0m | $392.5m | $360.0m |
| Income from continuing operations | $6.0m | $5.0m | $12.7m | $10.7m |
| Net income | $5.7m | $5.0m | $12.4m | $10.7m |
| Diluted EPS, continuing operations | $0.19 | $0.15 | $0.39 | $0.33 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $28.2m | $16.2m |
- Q2 sales rose 8.6% and first-half sales rose 9.0%. Segment net sales (sales less freight) grew 8.8% to $196.2m in Q2 and 9.2% to $383.7m in the first half.
- Consolidated gross margin fell to 14.5% from 16.2% in Q2 and to 16.2% from 16.6% in the first half. SG&A and R&D together were 9.2% of sales in Q2 versus 11.4%, and 9.7% in the first half versus 11.3%.
- Q2 segment operating profit was $13.3m versus $13.1m; first-half segment operating profit was $27.4m versus $28.1m.
- Cash and cash equivalents were $93.8m at June 30, up from $73.2m at year-end 2010. Total debt was $0.37m; no borrowings were outstanding under the $300m revolving facility, with approximately $270m available under the most restrictive covenants. Current assets were $247.4m and current liabilities $91.9m.
- First-half investing cash outflow was $7.5m, including $8.5m of capital expenditures. Financing cash outflow was $2.3m, including $2.9m in dividends; the quarterly dividend was $0.045 per share, up from $0.040.
Material changes and segment results
- Film Products: Q2 net sales increased 4.3% to $132.0m, while ongoing operating profit declined 5.1% to $13.9m. First-half sales rose 4.4% to $263.4m, but operating profit fell 7.4% to $30.5m. Higher resin pass-through pricing lifted sales, offset by lower volume and unfavorable mix, notably in personal care films and surface protection materials.
- The estimated impact of the approximately 90-day resin cost pass-through lag was unfavorable by $2.6m in Q2 and $4.3m in the first half. Foreign currency movements benefited Film Products operating profit by approximately $0.5m in Q2 and $0.6m in the first half.
- Aluminum Extrusions: Q2 net sales rose 21.3% to $63.9m and ongoing operating profit increased to $1.5m from $0.2m. First-half sales rose 23.0% to $119.9m; operating profit was $0.2m versus a $2.8m loss. Higher volumes and aluminum selling prices contributed to improvement.
- Q2 continuing-operations income increased despite lower gross margin, supported in part by lower corporate expenses and a lower effective tax rate. First-half effective tax rate was 33.7%, compared with 40.8%.
Outlook, risks and unusual items
- Management projected 2011 capital expenditures of approximately $12m for Film Products and $4.4m for Aluminum Extrusions. It stated that cash, borrowing availability and operating cash flow should be sufficient for working capital, capital expenditures and dividends for the foreseeable future. The filing gives no broader earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Q2 included $0.8m of Film Products asset impairment charges and $0.3m of restructuring severance charges. The company also recorded a $0.345m discontinued-operations loss for increased environmental obligations related to its former Canadian aluminum extrusions business.
- The IRS is challenging the ordinary tax treatment of a deduction related to the Canadian business sale. If Tredegar does not prevail, additional tax payments could be up to $12m, plus interest and penalties; management said it intends to defend its position but cannot assure the outcome.
- Tredegar held a 21% fully diluted interest in a private specialty pharmaceutical company, carried at $16.0m using Level 3 fair-value estimates. It also reported a $5.7m carrying value for its Harbinger Fund investment; timing and amount of future withdrawal proceeds were unknown.
- Key business risks include Film Products’ dependence on Procter & Gamble, demand and product-mix sensitivity, cyclical construction exposure in Aluminum Extrusions, resin/aluminum/energy cost volatility and limits or delays in passing costs through to customers, foreign currency and international risks, and pension and tax uncertainties.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It noted new accounting guidance for fair-value disclosures and comprehensive-income presentation, with the latter planned for adoption in Q1 2012.
Important facts for investors to verify
- Whether Film Products volumes and product mix recover, and how resin-cost pass-through lags affect margins.
- Whether Aluminum Extrusions’ volume and profit improvement is sustained across cyclical end markets.
- The eventual outcome and potential cost of the IRS tax dispute, as well as the environmental indemnification claim.
- The valuation assumptions and liquidity or realization prospects for the private pharmaceutical and Harbinger investments.
- Actual capital spending, dividend coverage, working-capital movements and compliance with revolving-credit covenants.