Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today
reported second-quarter financial results for the period ended June 30,
2018.
Second quarter 2018 net income was $14.7 million ($0.44 per share)
compared with net income of $44.2 million ($1.34 per share) in the
second quarter of 2017. Net income from ongoing operations, which
excludes special items, was $11.5 million ($0.35 per share) in the
second quarter of 2018 compared with $8.3 million ($0.25 per share) in
the second quarter of 2017. A reconciliation of net income, a financial
measure calculated in accordance with U.S. generally accepted accounting
principles (“GAAP”), to net income from ongoing operations, a non-GAAP
financial measure, for the three and six months ended June 30, 2018 and
2017, is provided in Note (a) of the Notes to the Financial Tables in
this press release.
Highlights for ongoing operations for the second quarter of 2018 include:
John Gottwald, Tredegar’s president and chief executive officer, said,
“Our PE Films segment had a solid first six months, but recent
discussions with customers firmed up the timing of previously disclosed
product transitions away from certain products in personal care and
surface protection films. Our future earnings will be adversely impacted
in a meaningful way by these transitions.”
Mr. Gottwald continued, “Terphane’s profit improvement was mainly due to
lower depreciation and amortization expenses as a consequence of the
impairment charge taken in the fourth quarter of last year. Bonnell
Aluminum showed good profit improvement despite continued inefficiencies
at our facility in Niles, Michigan.”
Mr. Gottwald further stated, “I’m especially pleased to see our debt,
net of cash, at $60.7 million, which reflects a decline of approximately
$55 million this year.”
OPERATIONS REVIEW
PE Films
PE Films is composed of personal care materials, surface protection
films, polyethylene overwrap films and films for other markets. A
summary of second-quarter and year-to-date operating results from
ongoing operations for PE Films is provided below:
%
Second-Quarter 2018 Results vs. Second-Quarter
2017 Results
Net sales (sales less freight) in the second quarter of 2018 decreased
by $7.2 million versus 2017 primarily due to lower volume in Personal
Care. The sales decline in Personal Care was primarily related to lower
demand for topsheet from its largest customer and, due to timing, lower
sales of elastic materials in the second quarter of 2018 versus 2017.
The Company believes it is making inroads with customers for new elastic
products in Europe. In addition, the company is spending $25 million at
its plant in Terre Haute, Indiana to expand elastics capacity to serve
customers in North America, which is expected to begin production in the
middle of 2019.
Sales volume in the second quarter of 2018 in Surface Protection was
comparable to the prior year with strong demand for components of flat
panel displays continuing through the first half of 2018. Looking
forward, there are indications that sales volume in Surface Protection
during the third quarter of 2018 may decline sequentially and when
compared to last year due to a combination of factors. These factors
include a possible inventory build-up by customers during the first half
of 2018 and partial customer product transitions, which have already
begun, to alternative processes or materials as further discussed in the
last two paragraphs of this section.
Operating profit from ongoing operations in the second quarter of 2018
decreased by $2.0 million versus the second quarter of 2017 primarily
due to:
In June 2018, the Company announced plans to close its facility in
Shanghai, China, which primarily produces topsheet films used as
components for personal care products. Production is expected to cease
at this plant by the end of 2018. The Company expects to recognize costs
associated with exit and disposal activities of $7.1 million comprised
of: (i) retention, severance and related costs ($3.6 million), (ii)
customer-related costs ($1.1 million), and (iii) legal, asset disposal
and other cash costs ($2.4 million). In addition, the Company expects
non-cash asset write-offs and accelerated depreciation of $0.9 million.
Net annual cash savings from consolidating operations of $1.7 million is
expected. Proceeds from expected property disposals are uncertain. The
Company anticipates that these activities, including property disposals,
will require 12-18 months to execute, and the costs are expected to be
incurred during this period. See additional information on current
year-to-date costs in Note (b) in the Notes to Financial Statements.
The Company continues to anticipate a significant customer product
transition in the Personal Care component of PE Films. The Company now
expects that customer product transition to begin in the fourth quarter
of 2018. The Company currently estimates that, when fully implemented,
this will adversely impact the annual sales of the business unit by $70
million and will materially impact earnings. Ongoing discussions with
this customer will determine the full implementation schedule. The loss
of this business without replacement with new business could trigger an
impairment of Personal Care’s long-lived assets and goodwill. As of June
30, 2018, the goodwill balance carried by Personal Care was $47 million.
Personal Care has been increasing its R&D spending (an increase of $5
million in 2017 versus 2014), is investing capital, and is accelerating
sales and marketing efforts to capture growth and diversify its customer
base and product offerings in personal care products. The overall timing
and net change in Personal Care’s revenues and profits and capital
expenditures needed to support these efforts during this transition
period are uncertain at this time.
The Surface Protection component of PE Films supports manufacturers of
optical and other specialty substrates used in flat panel display
products. These films are primarily used by customers to protect
components of displays in the manufacturing and transportation process
and then discarded.
The Company previously reported the risk over the next few years that a
portion of its film used in surface protection applications will be made
obsolete by possible future customer product transitions to less costly
alternative processes or materials. The Company estimates that the
customer product transitions will be fully implemented by the fourth
quarter of 2019. When fully implemented, the Company estimates that the
annualized adverse impact on future ongoing operating profit from this
customer shift will be approximately $10 million. The Company is
aggressively pursuing new surface protection products, applications and
customers.
Year-To-Date 2018 Results vs. Year-To-Date 2017
Results
Net sales (sales less freight) in the first six months of 2018 decreased
by $0.3 million versus 2017 primarily due to lower topsheet and elastics
volume in Personal Care, partially offset by an increase in Surface
Protection volume. The factors impacting sales for PE Films during the
first half of 2018 versus last year are similar to the factors described
above in the quarterly comparison.
Operating profit from ongoing operations in the first six months of 2018
increased by $3.0 million versus the first six months of 2017 primarily
due to:
Capital Expenditures, Depreciation &
Amortization
Capital expenditures in PE Films were $7.4 million in the first six
months of 2018 compared to $7.8 million in the first six months of 2017.
Capital expenditures are projected to be $32 million in 2018, including:
$15 million of a total $25 million expected for North American capacity
expansion for elastics products in Personal Care; new capacity for next
generation products in Surface Protection ($6 million); and
approximately $10 million for routine capital expenditures required to
support operations. Depreciation expense was $7.6 million in the first
six months of 2018 and $6.9 million in the first six months of 2017.
Depreciation expense is projected to be $16 million in 2018.
Flexible Packaging Films
Flexible Packaging Films, which is also referred to as Terphane,
produces polyester-based films for use in packaging applications that
have specialized properties, such as heat resistance, strength, barrier
protection and the ability to accept high-quality print graphics. A
summary of second quarter operating results from ongoing operations for
Flexible Packaging Films is provided below:
Favorable/(Unfavorable)% Change
Favorable/(Unfavorable)% Change
7.9
%
6.8
%
6.5
%
6.5
%
NA
NA
Second-Quarter 2018 Results vs. Second-Quarter
2017 Results
Net sales and volume increased in the second quarter of 2018 compared
with the second quarter of 2017 due to higher demand. Terphane was
operating at full capacity utilization during the second quarter. To
increase capacity, Terphane is spending approximately $1.8 million
(including capital expenditures of $1 million and project expenses of
$0.8 million) on a previously idled production line which was restarted
in mid-June. Also during the second quarter, a nationwide trucking
strike caused a disruption of shipments, lowering sales volume by
approximately 0.9 million pounds.
Terphane’s operating results from ongoing operations in the second
quarter of 2018 increased by $1.6 million versus the second quarter of
2017 primarily due to:
Terphane’s quarterly financial results have been volatile, and the
Company expects continued uncertainty and volatility until industry
capacity utilization and the competitive dynamics in Latin America
improve.
Year-To-Date 2018 Results vs. Year-To-Date 2017
Results
Net sales and volume increased in the first six months of 2018 compared
with the first six months of 2017 due to higher demand.
Terphane’s operating results from ongoing operations in the first six
months of 2018 increased by $5.3 million versus the first six months of
2017 primarily due to:
Capital Expenditures, Depreciation &
Amortization
Capital expenditures in Terphane were $1.4 million in the first six
months of 2018 compared to $1.2 million in the first six months of 2017.
Terphane currently estimates that total capital expenditures in 2018
will be $5 million, including approximately $1 million to re-start the
idled production line referenced above and $4 million for routine
capital expenditures required to support operations. Depreciation
expense was $0.4 million in the first six months of 2018 and $3.7
million in the first six months of 2017. Depreciation expense is
projected to be $1.0 million in 2018. Amortization expense was $0.2
million in the first six months of 2018 and $1.5 million in the first
six months of 2017, and is projected to be $0.5 million in 2018.
Aggregate depreciation and amortization expense is projected at $1.5
million in 2018, down significantly from $10.5 million in 2017 due to
the write-down of Terphane’s long-lived assets during the fourth quarter
of 2017.
Aluminum Extrusions
Aluminum Extrusions, which includes Bonnell Aluminum and its operating
divisions, AACOA and Futura, produces high-quality, soft-alloy and
medium-strength aluminum extrusions primarily for the following markets:
building and construction, automotive, and specialty, which consists of
consumer durables, machinery and equipment, electrical and distribution
end-use products.
A summary of second-quarter results from ongoing operations for Aluminum
Extrusions is provided below:
*
Sales volume for the six months ended June 30, 2018 and 2017
excludes sales volume associated with Futura Industries
Corporation (“Futura”), acquired on February 15, 2017.
Second-Quarter 2018 Results vs. Second-Quarter
2017 Results
Net sales in the second quarter of 2018 increased versus 2017 primarily
due to higher sales volume and an increase in average selling prices
primarily due to the pass-through to customers of higher market-driven
raw material costs.
Sales volume in the second quarter of 2018 increased by 5.9% versus 2017
due to higher volume in the nonresidential building and construction and
specialty markets. Higher average net selling prices, primarily
attributed to an increase in aluminum market prices, had a favorable
impact on net sales of $14.4 million, and higher volume improved net
sales by $6.9 million. Bookings and backlog remain strong.
Operating profit from ongoing operations in the second quarter of 2018
increased by $1.4 million in comparison to the second quarter of 2017,
primarily due to higher volume and inflation-related sales prices ($2.4
million), partially offset by increased operating costs, including
employee-related expenses and higher depreciation ($1.0 million).
Bonnell Aluminum’s Niles, Michigan facility continued to experience
inefficiencies. Without these inefficiencies, the Company estimates that
operating profit from ongoing operations in the second quarter of 2018
would have been higher by $1 million.
On March 8, 2018, the U.S. imposed tariffs of 10% on aluminum ingot and
semi-finished aluminum imported into the U.S. from certain countries,
including countries from which Bonnell Aluminum has historically sourced
aluminum supplies. On April 6, 2018, the U.S. announced sanctions on
certain Russian individuals and on companies controlled by those
individuals, including United Company RUSAL Plc, Russia’s largest
aluminum producer and a substantial supplier of primary aluminum to the
U.S. market. Collectively, these events have resulted in a significant
increase in the cost of aluminum ingot used by Bonnell Aluminum to make
its products. The average U.S. Midwest Transaction price, the benchmark
price for P1020 high-grade aluminum ingot delivered, averaged $1.24 per
pound in the second quarter of 2018, up $0.28 from $0.96 per pound in
the first quarter of 2017. This price has exceeded $1.35 per pound on
certain days in the second quarter of 2018. In 2017, aluminum raw
materials comprised 43% of Bonnell Aluminum’s average selling price when
the U.S. Midwest Transaction price averaged $0.98 per pound. For the
vast majority of its business, Bonnell Aluminum expects to be able to
pass through higher aluminum costs to customers. However, sustained
higher costs for aluminum extrusions could result in reduced demand and
product substitutions in place of aluminum extrusions, which could
materially and negatively affect Bonnell Aluminum’s business and results
of operations. In addition, continued sanctions on RUSAL Plc could
result in aluminum billet supply shortages in the U.S. aluminum
extrusion market, although Bonnell does not currently anticipate any
impact of such potential shortages on its access to aluminum.
Year-To-Date 2018 Results vs. Year-To-Date 2017
Results
Net sales in the first six months of 2018 increased versus 2017
primarily due to the addition of Futura and higher volume. Futura
contributed $47.3 million of net sales in the first six months of 2018
versus $29.4 million for the 131 days owned during the first six months
of 2017 (acquired on February 15, 2017). Excluding the impact of Futura,
net sales improved due to higher sales volume and an increase in average
selling prices primarily due to the pass-through to customers of higher
market-driven raw material costs.
Volume on an organic basis (which excludes the impact of the Futura
acquisition) in the second quarter of 2018 increased by 4.4% versus 2017
due to higher volume in the nonresidential building and construction and
specialty markets. Higher average net selling prices, primarily
attributed to an increase in aluminum market prices, had a favorable
impact on net sales of $24.7 million, and higher volume improved net
sales by $6.9 million.
Operating profit from ongoing operations in the first six months of 2018
increased by $1.8 million in comparison to the first six months of 2017.
Excluding the favorable profit impact of Futura ($1.4 million),
operating profit from ongoing operations increased $0.4 million,
primarily due to:
Capital Expenditures, Depreciation &
Amortization
Capital expenditures in Bonnell Aluminum were $5.6 million in the first
six months of 2018 (including $1.1 million associated with Futura),
compared to $17.7 million in the first six months of 2017. Capital
expenditures in 2017 included the extrusions capacity expansion project
at the facility in Niles, Michigan. Capital expenditures are projected
to be $14 million in 2018, including approximately $7 million for
infrastructure upgrades and expanded fabrication and machining
capabilities, and approximately $7 million for routine items required to
support operations. Depreciation expense was $6.6 million in the first
six months of 2018 compared to $5.3 million in the first six months of
2017, and is projected to be $13 million in 2018. Amortization expense
was $1.8 million in the first six months of 2018 and $1.4 million in the
first six months of 2017, and is projected to be $4 million in 2018.
Corporate Expenses, Interest, Taxes & Other
Pension expense was $5.1 million in the first six months of 2018, versus
$5.2 million in the first six months of 2017. The impact on earnings
from pension expense is reflected in “Corporate expenses, net” in the
Net Sales and Operating Profit by Segment table. Pension expense is
projected to be $10.2 million in 2018. Corporate expenses, net,
increased in the first six months of 2018 versus 2017 primarily due to
higher stock-based employee benefit costs and professional fees for
services rendered early in the first quarter of 2018 associated with the
Terphane non-cash asset impairment loss that was recognized in the
fourth quarter of 2017.
Interest expense was $3.2 million in the first six months of 2018 in
comparison to $2.8 million in the first six months of 2017, primarily
due to higher interest rates.
The effective tax rate used to compute income tax expense from
continuing operations was 23.0% in the first six months of 2018,
compared to 9.9% in the first six months of 2017. The effective tax rate
from ongoing operations comparable to the earnings reconciliation table
provided in Note (a) of the Notes to Financial Tables in this press
release was 22.2% for the first six months of 2018 versus 39.1% in 2017
(see also Note (e) of the Notes to Financial Tables). The effective tax
rates benefited from the U.S. Tax Cuts and Jobs Act enacted in December
2017, which, among other impacts, reduced the U.S. federal corporate
income tax rate from 35% to 21% beginning in 2018. An explanation of
additional significant differences between the effective tax rate for
income from continuing operations and the U.S. federal statutory rate
for 2018 and 2017 will be provided in the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2018 (“Form 10-Q”).
Tredegar’s approximately 20% ownership in kaleo, Inc. (“kaléo”), which
is accounted for under the fair value method, was estimated at a value
of $68 million at June 30, 2018, versus $54 million at December 31, 2017
and $62 million at March 31, 2018. The changes in the estimated fair
value of the Company’s investment in kaléo, which are included in net
income under GAAP, have consistently been excluded from net income from
ongoing operations as shown in the reconciliation table in Note (a) of
the Notes to the Financial Tables in this press release. Kaléo’s stock
is not publicly traded. The Company’s valuation estimate is based on
projection assumptions that have a wide range of possible outcomes.
Ultimately, the true value of Tredegar’s ownership interest in kaléo
will be determined if and when a liquidity event occurs.
CAPITAL STRUCTURE
Total debt was $123.0 million at June 30, 2018, compared to $152.0
million at December 31, 2017. Net debt (debt in excess of cash and cash
equivalents) was $60.7 million at June 30, 2018, compared to $104.9
million at March 31, 2018 and $115.5 million at December 31, 2017. The
decline in net debt of $44.2 million from March 31 to June 30, 2018
included the impact of a U.S. federal income tax refund received in June
of approximately $19 million. Net debt is a financial measure that is
not calculated or presented in accordance with GAAP. See Note (d) of the
Notes to the Financial Tables in this press release for a reconciliation
of this non-GAAP financial measure to the most directly comparable GAAP
financial measure.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Some of the information contained in this press release may constitute
“forward-looking statements” within the meaning of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. When
we use the words “believe,” “estimate,” “anticipate,” “expect,”
“project,” “plan,” “likely,” “may” and similar expressions, we do so to
identify forward-looking statements. Such statements are based on our
then current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from
those addressed in the forward-looking statements. It is possible that
our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Accordingly, you should not place undue reliance on these
forward-looking statements. Factors that could cause actual results to
differ from expectations include, without limitation, the following:
and the other factors discussed in the reports Tredegar files with or
furnishes to the Securities and Exchange Commission (the “SEC”) from
time to time, including the risks and important factors set forth in
additional detail in Part I, Item 1A of Tredegar’s Annual Report on Form
10-K for the year ended December 31, 2017. Readers are urged to review
and consider carefully the disclosures Tredegar makes in its filings
with the SEC.
Tredegar does not undertake, and expressly disclaims any duty, to update
any forward-looking statement made in this press release to reflect any
change in management’s expectations or any change in conditions,
assumptions or circumstances on which such statements are based, except
as required by applicable law.
To the extent that the financial information portion of this press
release contains non-GAAP financial measures, it also presents both the
most directly comparable financial measures calculated and presented in
accordance with GAAP and a quantitative reconciliation of the difference
between any such non-GAAP measures and such comparable GAAP financial
measures. Reconciliations of non-GAAP financial measures are provided in
the Notes to the Financial Tables included with this press release and
can also be found within “Presentations” in the “Investors” section of
our website, www.tredegar.com.
Tredegar uses its website as a channel of distribution of material
company information. Financial information and other material
information regarding Tredegar is posted on and assembled in the
“Investors” section of its website.
Tredegar Corporation is a manufacturer of plastic films and aluminum
extrusions. A global company headquartered in Richmond, Virginia,
Tredegar had 2017 sales of $961 million. With approximately 3,200
employees, the company operates manufacturing facilities in North
America, South America, Europe, and Asia.
Notes to the Financial Tables
(Unaudited)
Three Months EndedJune 30,
Six Months EndedJune 30,
Reconciliations of the pre-tax and post-tax balances attributed to net
income are shown in Note (e).
Plant shutdowns, asset impairments, restructurings and other items in
the second quarter of 2018 include:
Plant shutdowns, asset impairments, restructurings and other items in
the first six months of 2018 include:
Plant shutdowns, asset impairments, restructurings and other items in
the second quarter of 2017 include:
Plant shutdowns, asset impairments, restructurings and other items in
the first six months of 2017 include:
Net debt is not intended to represent total debt as defined by
GAAP. Net debt is utilized by management in evaluating the
Company’s financial leverage and equity valuation, and management
believes that investors also may find net debt to be helpful for
the same purposes.
Taxes Expense(Benefit)
EffectiveTax Rate
22.2
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