Tredegar Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Tredegar manufactures polyethylene films, flexible packaging films and aluminum extrusions.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Sales | $258.7 million | $221.0 million; up 17.1% |
| Net income | $18.2 million; $0.55 per diluted share | $3.7 million; $0.11 per diluted share |
| Operating cash flow | $15.0 million | $3.6 million |
| Capital expenditures | $5.1 million | $12.7 million |
| Cash and cash equivalents | $36.1 million | $36.5 million at December 31, 2017 |
| Debt | $141.0 million | $152.0 million at December 31, 2017 |
Gross profit margin was 18.1%, compared with 14.9% in Q1 2017. The effective tax rate declined to 22.5% from 39.5%, primarily reflecting the U.S. tax law change reducing the federal corporate rate to 21%. The quarterly dividend was $0.11 per share.
At March 31, cash less debt was approximately $104.9 million of net debt. The company reported $259 million of borrowing availability under its $400 million revolving credit facility, was in compliance with its covenants, and had a 1.28x leverage ratio against a 4.00x maximum. Cash included $33.0 million held outside the U.S. Management said cash, borrowing availability and operating cash flow should meet working-capital, capital-expenditure and dividend needs for the next 12 months.
Segment results and period changes
- PE Films: Net sales rose 7.9% to $93.2 million; ongoing operating profit increased 55.4% to $14.0 million. Stronger surface-protection demand and production efficiencies helped, while lower personal-care topsheet volume partly offset gains.
- Flexible Packaging Films: Net sales increased 6.5% to $28.4 million and ongoing operating profit improved to $1.7 million from a $2.0 million loss. Higher volume and pricing and improved productivity helped; lower depreciation and amortization following a $101 million noncash asset impairment in Q4 2017 also materially benefited comparison.
- Aluminum Extrusions: Net sales rose 28.8% to $128.2 million, largely reflecting Futura, acquired in February 2017, higher volume and metal-price pass-through. Ongoing operating profit rose 3.8% to $10.2 million; excluding Futura, profit declined about $0.5 million, with costs and inefficiencies at the Niles line weighing on results.
Consolidated earnings included an $8.2 million unrealized gain on Tredegar’s private-company investment in kaléo, versus $3.3 million a year earlier. The gain is valuation-dependent and not operating cash flow. Operating cash flow also benefited from higher operating profit before depreciation and amortization and $6.7 million of income-tax refunds.
Outlook, commentary and risks
- No consolidated earnings guidance was provided. Management projected 2018 capital expenditures of approximately $57 million: $36 million for PE Films, $5 million for Flexible Packaging Films and $16 million for Aluminum Extrusions.
- PE Films faces a possible post-2018 personal-care product transition that management estimates could reduce annual sales by about $70 million; timing and effects on profit and investment remain uncertain. Surface-protection transitions to alternative processes or materials could reduce annual operating profit by up to $5 million to $10 million over the next few years, with timing uncertain.
- Flexible Packaging Films was operating at full capacity amid Latin American industry overcapacity and competitive pricing pressure. The company planned about $1.8 million in 2018 to restart an idled production line.
- U.S. tariffs on aluminum and sanctions affecting a major Russian aluminum supplier increased aluminum input costs. Tredegar expects to pass through higher costs for most business, but warns that higher prices could prompt customer substitution and harm results.
- Other material exposures include raw-material and energy prices, foreign exchange, customer concentration, manufacturing disruption, pension obligations, international operations and the uncertain valuation of kaléo. The kaléo investment was carried at $62.2 million using Level 3 estimates; its actual value may differ materially.
- The company was still assessing certain Tax Cuts and Jobs Act effects, including GILTI accounting, and expected to complete its assessment during 2018. A Terphane antidumping-duty scope dispute remained under court review; Commerce had again found the films outside the order.
Investor verification priorities
- Assess how much of the earnings increase reflects recurring segment performance versus the $8.2 million kaléo fair-value gain and the prior-year comparison effects.
- Track PE Films customer transitions, especially the estimated personal-care sales exposure and surface-protection alternatives.
- Check aluminum tariff and sanctions effects, pass-through timing, customer substitution risk and operating performance at the Niles facility.
- Monitor Flexible Packaging Films’ pricing, utilization, competitive conditions and planned production-line restart.
- Verify execution of the projected $57 million 2018 capital program, cash generation, debt reduction and continued covenant compliance.
- Review updates to kaléo’s valuation assumptions, tax-law estimates and the Terphane court proceeding.