Tredegar Reports Second Quarter 2019 Results

RICHMOND, Va.–(BUSINESS WIRE)–Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported second quarter financial results for the period ended June 30, 2019.

The Company recognized net income of $14.5 million ($0.44 per share) in the second quarter of 2019 compared to net income of $14.7 million ($0.44 per share) in the second quarter of 2018. Net income from ongoing operations, which excludes special items, was $11.7 million ($0.35 per share) in the second quarter of 2019 compared with $11.5 million ($0.35 per share) in the second quarter of 2018. A reconciliation of net income (loss), 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, 2019 and 2018, is provided in Note (a) of the Notes to the Financial Tables in this press release.

Second Quarter Financial Results Highlights

  • Operating profit from ongoing operations for PE Films of $7.8 million was $0.9 million lower than the second quarter of 2018
  • Operating profit from ongoing operations for Flexible Packaging Films of $2.5 million was $1.2 million higher than the second quarter of 2018
  • Operating profit from ongoing operations for Bonnell Aluminum of $14.5 million was $1.4 million higher than the second quarter of 2018

John Steitz, Tredegar’s president and chief executive officer, said, “Overall PE Films profits declined mainly from the previously disclosed lost business relating to a customer product transition in our Personal Care component. Our Surface Protection component of PE Films had record contribution to our quarterly operating profits and continued to benefit from a delay in a possible future customer product transition. Personal Care remains very focused on getting new business as well as cost reduction initiatives.”

Mr. Steitz continued, “Terphane had another quarter of profit growth supported by the re-start in June 2018 of a previously idled production line. Operating profits in Bonnell Aluminum increased in the quarter despite lower volume. If the volume shortfall persists, we’ll continue to develop contingency plans to address these conditions, including proper alignment of our cost structure with customer demand.”

Mr. Steitz further commented, “We had good net cash flow with debt net of cash declining by $29 million during the first half of 2019, including a $17.6 million dividend received in April from our kaléo investment.”

OPERATIONS REVIEW

PE Films

PE Films is composed of surface protection films, personal care materials, 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:

(In Thousands, Except Percentages)

 

Three Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

 

Six Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

 

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales volume (lbs)

 

25,476

 

 

30,099

 

 

(15.4

)%

 

51,322

 

 

64,922

 

 

(20.9

)%

Net sales

 

$

69,161

 

 

$

82,457

 

 

(16.1

)%

 

$

135,941

 

 

$

175,707

 

 

(22.6

)%

Operating profit from ongoing operations

 

$

7,766

 

 

$

8,678

 

 

(10.5

)%

 

$

10,717

 

 

$

22,712

 

 

(52.8

)%

Second Quarter 2019 Results vs. Second Quarter 2018 Results

Net sales (sales less freight) in the second quarter of 2019 decreased by $13.3 million versus 2018 due to lower sales in Personal Care. Surface Protection sales increased $4.3 million while Personal Care sales decreased $18.0 million.

Net sales in Surface Protection increased in the second quarter of 2019 versus the second quarter of 2018 due to higher selling prices and quality claims in 2018 that did not recur in 2019. As discussed further below, a possible customer product transition in Surface Protection continues to be delayed. Net sales decreased in Personal Care as a result of lower volume in most product categories from competitive pressures ($13 million), including a large portion associated with the previously disclosed customer product transition discussed below. In addition, net sales were adversely impacted by mix, the timing in the passthrough of changes in resin prices and the decline in the value of currencies for operations outside of the U.S. relative to the U.S. Dollar.

Operating profit from ongoing operations in the second quarter of 2019 decreased by $0.9 million versus the second quarter of 2018 primarily due to:

  • Higher contribution to profits from Surface Protection primarily due to higher selling prices slightly offset by mix (net favorable impact of $2.1 million), quality claims in 2018 that did not recur in 2019 ($1.3 million) and improved operating efficiencies ($1.9 million);
  • Lower contribution to profits from Personal Care primarily due to lower volume ($5.5 million), unfavorable mix ($1.8 million), the unfavorable timing in the passthrough of changes in resin prices ($0.4 million) and an unfavorable foreign exchange impact ($0.4 million), partially offset by efficiencies primarily from lower fixed manufacturing and selling, general and administrative costs ($1.6 million); and
  • A favorable variance in other components of PE Films of $0.3 million.

Customer Product Transitions in Surface Protection and Personal Care

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 that a portion of its film products used in surface protection applications could be made obsolete by possible future customer product transitions to less costly alternative processes or materials. These transitions principally relate to one customer. The Company previously believed the transitions could possibly be fully implemented by the fourth quarter of 2019; however, these transitions continue to encounter delays resulting in higher than expected volumes which contributed to record operating profit for Surface Protection during the second quarter of 2019. If fully implemented, the Company estimates that the annualized adverse impact on future operating profit from this customer shift versus the performance during the last four quarters ended June 30, 2019, would be approximately $14 million. To offset the potential adverse impact, the Company is aggressively pursuing and making progress on new surface protection products, applications, markets and customers.

During October 2018, the Personal Care component of PE Films completed negotiations with its customer regarding a previously disclosed significant product transition. The total annual sales that will be adversely impacted by this product transition is approximately $70 million. During 2019, the Company expects sales for the product of $30 to $35 million with the potential for no sales thereafter.

Personal Care had operating profit from ongoing operations plus depreciation and amortization of $3.1 million in the fourth quarter of 2018 and negative $0.5 million in the first half of 2019, and expects negative $1.0 million in the second half of 2019. Competitive pressures have led Personal Care to miss its sales and margin goals so far in 2019. Management continues to focus on new business development and cost reduction initiatives.

First Six Months 2019 Results vs. First Six Months 2018 Results

Net sales (sales less freight) in the first six months of 2019 decreased by $40 million versus 2018 primarily due to lower sales in Surface Protection and Personal Care of $5.6 million and $34.8 million, respectively. The decline in sales in Surface Protection occurred in the first quarter of 2019 which the Company believes was the result of customer inventory builds in previous periods. The decline in sales in Personal Care was primarily due to lower volume in most product categories from competitive pressures ($26 million), including a large portion associated with the previously disclosed customer product transition. In addition, net sales were adversely impacted by mix, the timing in the passthrough of changes in resin prices and the decline in the value of currencies for operations outside of the U.S. relative to the U.S. Dollar.

Operating profit from ongoing operations in the first six months of 2019 decreased by $12.0 million versus 2018 primarily due to:

  • Lower contribution to profits from Surface Protection, primarily due to lower volume and mix ($8.1 million) and higher research and development spending ($0.8 million), partially offset by higher selling prices ($4.6 million), quality claims in 2018 that did not recur in 2019 ($1.3 million), manufacturing efficiencies ($1.2 million), favorable raw material costs ($0.7 million), and lower selling, general and administrative costs ($0.3 million);
  • Lower contribution to profits from Personal Care primarily due to lower volume ($10.6 million) and unfavorable mix ($3.1 million), partially offset by efficiencies primarily from lower fixed manufacturing and selling, general and administrative costs ($2.2 million); and
  • A favorable variance in other components of PE Films of $0.3 million.

Capital Expenditures, Depreciation & Amortization

Capital expenditures in PE Films were $12.4 million in the first six months of 2019 compared to $7.4 million in the first six months of 2018. The Company’s latest estimate for 2019 includes projected capital expenditures of $33 million including: $12 million of a total $25 million needed to complete the North American capacity expansion for elastics products in Personal Care ($8 million spent in the first half of 2019); $4 million for a new scale-up line in Surface Protection to improve development and speed to market for new products; $5 million for other development projects; and $10 million for capital expenditures required to support continuity of current operations.

Depreciation expense was $7.2 million in the first six months of 2019 and $7.6 million in the first six months of 2018. Depreciation expense is projected to be $15 million in 2019.

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 and year-to-date operating results from ongoing operations for Flexible Packaging Films is provided below:

 

 

Three Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

 

Six Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

(In Thousands, Except Percentages)

 

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales volume (lbs)

 

26,460

 

 

23,701

 

 

11.6

%

 

51,921

 

 

47,018

 

 

10.4

%

Net sales

 

$

33,443

 

 

$

28,304

 

 

18.2

%

 

$

67,062

 

 

$

56,741

 

 

18.2

%

Operating profit from ongoing operations

 

$

2,517

 

 

$

1,294

 

 

94.5

%

 

$

5,377

 

 

$

3,008

 

 

78.8

%

Second Quarter 2019 Results vs. Second Quarter 2018 Results

Net sales increased in the second quarter of 2019 compared to the second quarter of 2018 due to higher sales volume and increased selling prices associated with the passthrough of higher resin costs. The higher sales volume was associated with increased production capacity for Terphane’s Brazilian operations resulting from the re-start of a previously idled production line in June 2018.

Terphane’s operating profit from ongoing operations in the second quarter of 2019 increased by $1.2 million versus the second quarter of 2018 primarily due to:

  • Higher volume ($1.1 million) and higher selling prices ($0.4 million), partially offset by higher fixed and variable costs ($1.1 million) and costs related to the restarted line ($0.3 million);
  • Net favorable foreign currency translation of Real-denominated operating costs ($0.9 million); and
  • Net lower foreign currency transaction losses of $0.2 million (losses of $0.1 million in 2019 versus losses of $0.3 million in 2018).

First Six Months 2019 Results vs. First Six Months 2018 Results

Net sales and volume increased in the first six months of 2019 compared to the first six months of 2018. The factors impacting sales for Terphane during the first half of 2019 versus last year are similar to the factors described above in the quarterly comparison.

Terphane’s operating results from ongoing operations in the first six months of 2019 increased by $2.4 million versus the first six months of 2018 primarily due to:

  • Higher sales volume ($2.0 million) and higher selling prices ($0.8 million), partially offset by higher fixed and variable costs ($1.9 million) and costs related to the restarted line ($0.6 million);
  • Net favorable foreign currency translation of Real-denominated operating costs of $1.6 million;
  • Net lower foreign currency transaction losses of $0.4 million (break even in 2019 versus losses of $0.4 million in 2018).

Capital Expenditures, Depreciation & Amortization

Capital expenditures in Terphane were $3.0 million in the first six months of 2019 compared to $1.4 million in the first six months of 2018. Capital expenditures are projected to be $12 million in 2019, including $7 million for new capacity for value-added products and productivity projects and $5 million for capital expenditures required to support continuity of current operations. Depreciation expense was $0.5 million in the first six months of 2019 and $0.4 million in the first six months of 2018. Depreciation expense is projected to be $1.0 million in 2019. Amortization expense was $0.2 million in the first six months of 2019 and $0.2 million in the first six months of 2018, and is projected to be $0.5 million in 2019.

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 and year-to-date operating results from ongoing operations for Aluminum Extrusions is provided below:

 

 

Three Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

 

Six Months Ended

June 30,

 

Favorable/

(Unfavorable)

% Change

(In Thousands, Except Percentages)

 

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales volume (lbs)

 

53,127

 

 

55,057

 

 

(3.5

)%

 

106,839

 

 

106,560

 

 

0.3

%

Net sales

 

$

136,757

 

 

$

144,558

 

 

(5.4

)%

 

$

275,804

 

 

$

272,793

 

 

1.1

%

Operating profit from ongoing operations

 

$

14,518

 

 

$

13,156

 

 

10.4

%

 

$

26,603

 

 

$

23,355

 

 

13.9

%

Second Quarter 2019 Results vs. Second Quarter 2018 Results

Net sales in the second quarter of 2019 decreased versus 2018 primarily due to lower sales volume and the passthrough of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs. Sales volume in the second quarter of 2019 decreased by 3.5% versus 2018 due to lower volume in the building and construction and specialty markets.

Operating profit from ongoing operations in the second quarter of 2019 increased by $1.4 million in comparison to the second quarter of 2018, due to higher pricing ($2.6 million) and improved performance at the Niles, Michigan facility ($0.4 million), partially offset by lower volumes ($1.2 million) and higher freight costs ($0.5 million).

First Six Months 2019 Results vs. First Six Months 2018 Results

Net sales in the first six months of 2019 increased versus 2018 primarily due to higher volume in the first quarter of 2019 and an increase in average selling price to cover higher operating costs, partially offset by the passthrough of lower metal costs. Sales volume in the first six months of 2019 was relatively flat versus 2018. Higher average net selling prices had a favorable impact on net sales of $2.0 million, and higher volume improved net sales by $1.1 million.

Operating profit from ongoing operations in the first six months of 2019 increased by $3.2 million in comparison to the first six months of 2018, primarily due to higher pricing ($10.9 million) and higher volume ($0.5 million), partially offset by increased labor and employee-related expenses ($3.9 million), higher operating costs including increased freight costs ($1.4 million), higher supplies and maintenance in the first quarter of 2019 ($1.3 million) and other costs ($1.4 million).

Capital Expenditures, Depreciation & Amortization

Capital expenditures in Bonnell Aluminum were $8.8 million in the first six months of 2019, compared to $5.6 million in the first six months of 2018. Capital expenditures are projected to be $17 million in 2019, including approximately $7 million for infrastructure upgrades at the Carthage, Tennessee facility and other productivity improvements, approximately $1 million for fabrication and automation capabilities, and approximately $9 million required to support continuity of current operations. Depreciation expense was $6.7 million in the first six months of 2019 compared to $6.6 million in the first six months of 2018, and is projected to be $13 million in 2019. Amortization expense was $1.5 million in the first six months of 2019 and $1.8 million in the first six months of 2018, and is projected to be $3 million in 2019.

Corporate Expenses, Interest, Taxes & Other

Pension expense was $4.8 million in the first six months of 2019, versus $5.1 million in the first six months of 2018. 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 $9.7 million in 2019. Corporate expenses, net, increased in the first six months of 2019 versus 2018 primarily due to higher stock-based employee compensation ($0.7 million), and consulting fees ($2.9 million) related to the identification and remediation of previously disclosed material weaknesses in the Company’s internal control over financial reporting, business development activities, and implementation of new accounting guidance.

Interest expense was $2.5 million in the first six months of 2019 in comparison to $3.2 million in the first six months of 2018, primarily due to lower average debt levels.

The effective tax rate used to compute income tax expense from continuing operations was 19.8% in the first six months of 2019, compared to 23.0% in the first six months of 2018. 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 2019 versus 22.2% in 2018 (see also Note (f) of the Notes to Financial Tables). An explanation of differences between the effective tax rate for income from continuing operations and the U.S. federal statutory rate for 2019 and 2018 will be provided in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2019.

Tredegar’s approximately 20% ownership in kaleo, Inc. (“kaléo”), which is accounted for under the fair value method, was estimated at a value of $91.2 million at June 30, 2019, versus $84.6 million at December 31, 2018. In addition, the Company received a cash dividend from kaléo of $17.6 million on April 30, 2019, which had been declared on March 29, 2019. Dividend income recognized on kaléo and changes in the estimated fair value of the Company’s investment in kaléo, which are included in net income (loss) 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 ultimate value of Tredegar’s ownership interest in kaléo could be materially different from the $91.2 million estimated fair value reflected in the Company’s financial statements at June 30, 2019.

CAPITAL STRUCTURE

Total debt was $73.0 million at June 30, 2019, compared to $101.5 million at December 31, 2018. Net debt (debt in excess of cash and cash equivalents) was $38.3 million at June 30, 2019, compared to $67.1 million at December 31, 2018. Net debt is a financial measure that is not calculated or presented in accordance with GAAP. See Note (e) 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.

On June 28, 2019, Tredegar entered into a $500 million five-year, secured revolving credit facility (“Credit Agreement”), with an option to increase that amount by $100 million. The Credit Agreement replaces the Company’s previous $400 million five-year, secured revolving credit facility that was due to expire on March 1, 2021.

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:

  • loss or gain of sales to significant customers on which our business is highly dependent;
  • inability to achieve sales to new customers to replace lost business;
  • inability to develop, efficiently manufacture and deliver new products at competitive prices;
  • failure of our customers to achieve success or maintain market share;
  • failure to protect our intellectual property rights;
  • risks of doing business in countries outside the U.S. that affect our substantial international operations;
  • political, economic, and regulatory factors concerning our products;
  • uncertain economic conditions in countries in which we do business;
  • competition from other manufacturers, including manufacturers in lower-cost countries and manufacturers benefiting from government subsidies;
  • impact of fluctuations in foreign exchange rates;
  • a change in the amount of our underfunded defined benefit (pension) plan liability;
  • an increase in the operating costs incurred by our operating companies, including, for example, the cost of raw materials and energy;
  • inability to successfully identify, complete or integrate strategic acquisitions; failure to realize the expected benefits of such acquisitions and assumption of unanticipated risks in such acquisitions;
  • disruption to our manufacturing facilities;
  • an information technology system failure or breach;
  • volatility and uncertainty of the valuation of our investment in kaléo;
  • the impact of the imposition of tariffs and sanctions on imported aluminum ingot used in our aluminum extrusions;
  • the impact of new tariffs or duties imposed as a result of rising trade tensions between the U.S. and other countries;
  • failure to est

Contacts

Tredegar Corporation

Neill Bellamy, 804-330-1211

neill.bellamy@tredegar.com

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