The following tables present Tredegar’s net sales and operating profit by segment for the second quarters and six months ended June 30, 2003 and 2002:
Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance. See Note 2 on page 5 regarding the reclassification of unusual items and losses associated with plant shutdowns, asset impairments and restructurings.
Net sales and operating profit from ongoing operations in Film Products were down 9.1% and 46%, respectively, in the second quarter, and 2.4% and 35%, respectively, for the first six months. Volume for the quarter was 66 million pounds, down 19% from 81 million pounds in 2002. Year-to-date volume decreased 12% to 139 million pounds from 158 million pounds. Results for 2002 and the first quarter of 2003 include revenues and profits related to certain discontinued domestic backsheet business with The Procter & Gamble Company (“P&G”).
On June 16, we announced that we would not achieve the $12 million ongoing operating profit level in Film Products that had been expected in the second quarter due to higher costs associated with raw materials, lower than expected volumes from a seasonal customer and higher manufacturing costs on certain new products. We were unable to recover the full cost of resin price increases, and costs related to certain new product start-ups were higher than expected. Our strategy in Film Products is based on expanding sales of apertured, elastic and breathable film products. We are commercializing several new products, including a new feminine pad topsheet for P&G for European markets. We continue to expect growth in 2004 from sales and operating profit from ongoing operations.
Net sales and operating profit from ongoing operations in Aluminum Extrusions were down 10.6% and 53%, respectively, in the second quarter, and 5.8% and 61%, respectively, for the first six months. Volume for the quarter was 58 million pounds, down 8% from 63 million pounds in 2002. Year-to-date volume decreased 6% to 112 million pounds from 119 million pounds.
The decline in ongoing operating profit in Aluminum Extrusions is primarily due to lower volume and higher energy and insurance costs. Appreciation of the Canadian Dollar against the U.S. Dollar also had an adverse impact (see “Quantitative and Qualitative Disclosures About Market Risk” on page 17). Recent orders reflect a pick-up in overall industry demand; however, we cannot forecast a significant profit upturn until we see more evidence of a sustainable increase in order rates at appropriate margins.
The second-quarter operating loss from ongoing operations at Therics was $3.3 million compared to a loss of $3.1 million in 2002. On a similar basis, the year-to-date loss was $6.6 million compared to $6.8 million in 2002. In April, we announced that we had suspended efforts to sell Therics pending a reassessment of strategic alternatives. We will provide an update on the status of this strategic review when we report third-quarter earnings.
Liquidity and Capital Resources
Tredegar’s total assets decreased to $809.7 million at June 30, 2003, from $838 million at December 31, 2002, due primarily to the impact of the sale of substantially all of the venture capital investment portfolio, partially offset by capital expenditures in excess of depreciation and positive foreign currency translation adjustments associated with Canadian and European operations.
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The net deferred income tax liability (deferred income tax liabilities minus deferred income tax assets) increased to $45.6 million at June 30, 2003, from $6.5 million at December 31, 2002, due to the reversal of deferred tax assets totaling approximately $35 million related to the sale of the venture capital portfolio. Pretax proceeds from the sale totaled $21.5 million. An additional $54.4 million of proceeds, in the form of income tax recoveries, are expected in mid-2004 from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments. See Note 2 on page 5 for more information.
Cash provided by operating activities was $47.4 million in the first six months of 2003 compared with $27.8 million in 2002. The increase is due primarily to a decrease in the level of primary working capital (accounts receivable, inventories and accounts payable).
Cash used in investing activities was $7.5 million in the first six months of 2003 compared with cash used in investing activities of $20.9 million in 2002. The change is primarily attributable to proceeds from the sale of venture capital investments, net of investments made, of $18.7 million in 2003 versus a net investment of $4.7 million in 2002. This was partially offset by higher capital expenditures, an increase of $12.2 million.
Capital expenditures in the first six months of 2003 reflect the normal replacement of machinery and equipment and:
| • | Machinery and equipment purchased to upgrade lines and expand capacity at our films plant in Kerkrade, The Netherlands; |
| • | Expansion of capacity at our films plant in Shanghai, China; and |
| • | Machinery and equipment purchased to upgrade our wastewater treatment system at our aluminum extrusions plant in Newnan, Georgia. |
Cash used in financing activities was $36.8 million in the first six months of 2003 versus $7.2 million in 2002. This change is attributable to repayments of debt in the total amount of $29.2 million in 2003. In addition, we repurchased 406,400 shares of our common stock during the first six months of 2003 for a total of $5.2 million (an average price of $12.72 per share).
Debt outstanding of $230.1 million at June 30, 2003, consisted of a $225 million term loan and other debt of $5.1 million. On April 16, 2003, we extended our $100 million 364-day credit facility for one year. This short-term facility is an interim step to longer-term financing that we hope to complete by September 30, 2003. There are no amounts currently borrowed under this facility.
Quantitative and Qualitative Disclosures About Market Risk
Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets.
Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices. There is no assurance of our ability to pass through higher raw material and energy costs to our customers.
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In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. To hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire aluminum, based on scheduled deliveries.
In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers.
We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of consolidated net sales from manufacturing operations related to foreign markets for the first six months of 2003 and 2002 are presented below:
Percentage of Net Sales from Manufacturing
Operations Related to Foreign Markets*
| | Six Months
Ended June 30 | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
| | Exports
From U.S. | | Foreign
Operations | | Exports
From U.S. | | Foreign
Operations | |
| |
| |
| |
| |
| |
Canada | | 4 | % | 18 | % | 3 | % | 18 | % |
Europe | | 3 | | 12 | | 4 | | 8 | |
Latin America | | 3 | | 2 | | 3 | | 2 | |
Asia | | 3 | | 2 | | 4 | | 2 | |
| |
| |
| |
| |
| |
Total | | 13 | % | 34 | % | 14 | % | 30 | % |
| |
| |
| |
| |
| |
| * | Based on consolidated net sales from manufacturing operations. |
We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from foreign operations in Europe primarily relates to the Euro. In Canada, the U.S. Dollar-based spread (the difference between selling prices and aluminum costs) generated from Canadian casting operations and exports from Canada to the U.S. are currently in excess of our Canadian Dollar-based operating profit. Consequently, at current sales levels our Canadian aluminum extrusion operations will generally be negatively affected by appreciation of the Canadian Dollar relative to the U.S. Dollar, and positively affected by depreciation of the Canadian Dollar relative to the U.S. Dollar.
Forward-Looking and Cautionary Statements
From time to time, we may make statements that may constitute “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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. Factors that may cause such a difference include, but are not limited to the following:
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General
| • | Our future performance is influenced by costs incurred by Film Products and Aluminum Extrusions including, for example, the cost of energy and raw materials. There is no assurance that we will be able to offset fully the effects of higher raw material costs through price increases. Further, there is no assurance that cost control efforts will positively impact results or that such efforts could be increased to a level that offsets any additional future declines in revenue or increases in energy or raw material costs. |
Film Products
| • | Film Products is highly dependent on sales associated with one customer, P&G. P&G comprised 33% of our net sales in 2002, 31% in 2001 and 28% in 2000. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business, as would delays in P&G rolling out products utilizing new technologies developed by Tredegar. While we have undertaken efforts to expand our customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with P&G. See the business segment review beginning on page 16 for a discussion regarding the loss of P&G’s domestic diaper backsheet business. |
| • | Growth of Film Products depends on our ability to develop and deliver new products, especially in the personal care market, which comprised over 75% of Film Products’ net sales in each of the last three years. Personal care products are now being made with a variety of new materials, replacing traditional backsheet and other components. While we have substantial technical resources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from our technologies, our inability to develop and deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business. |
| • | Film Products operates in a field where our significant customers and competitors have substantial intellectual property portfolios. The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents. Although we are not currently involved in any patent litigation, the outcome of any such action could have a significant adverse impact on Film Products. |
| • | As Film Products expands its personal care business, we have greater credit risk that is inherent in broadening our customer base. |
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Aluminum Extrusions
| • | Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economic conditions of end-use markets in the United States and Canada, particularly in the construction, distribution and transportation industries. Our market segments are also subject to seasonal slowdowns during the winter months. From 1992 to the second quarter of 2000, profits in Aluminum Extrusions grew as a result of positive economic conditions in the markets we serve and manufacturing efficiencies. However, a slowdown in these markets in the second half of 2000 resulted in a 13% decline in sales volume and 28% decline in ongoing operating profit compared with the second half of 1999. The aluminum extrusions industry continued to be affected by poor economic conditions in 2001 and 2002. Our sales volume declined 23% and operating profit declined 49% in 2002 compared with 2000. In 2001, our sales volume declined 20% and operating profit declined 52% compared with 2000. The decline in ongoing operating profit during these periods at approximately two to three times the rate of the decline in sales volume illustrates the operating leverage inherent in our operations (fixed operating costs). Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts that usually accompany a downturn. |
| • | The markets for our products are highly competitive with product quality, service and price being the principal competitive factors. As competitors increase capacity or reduce prices to increase business, there could be pressure to reduce prices to our customers. Aluminum Extrusions is under increasing domestic and foreign competitive pressures, including a growing presence of Chinese imports in a number of markets. This competition could result in loss of market share due to a competitor’s ability to produce at lower costs and sell at lower prices. There can be no assurance that we will be able to maintain current margins and profitability. Our continued success and prospects depend on our ability to retain existing customers and participate in overall industry cross-cycle growth. |
Therics
| • | Efforts to sell Therics have been suspended pending a reassessment of our strategic options. We will continue to incur losses as we support Therics’ operations during the reassessment process. There is no assurance we will realize any return on our continuing investment in Therics. |
| • | Therics has incurred losses since inception, and we are unsure when, or if, it will become profitable. We have not brought any products to commercialization. There can be no assurance that any new products can be brought to market successfully. In addition, there can be no assurance that the FDA and other regulatory authorities will clear our products in a timely manner. |
| • | Our ability to develop and commercialize products will depend on our ability to internally develop preclinical, clinical, regulatory and sales and marketing capabilities, or enter into arrangements with third parties to provide those functions. We may not be successful in developing these capabilities or entering into agreements with third parties on favorable terms. Further, our reliance upon third parties for these capabilities could reduce our control over such activities and could make us dependent upon these parties. Our inability to develop or contract for these capabilities would significantly impair our ability to develop and commercialize products. |
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| • | We are highly dependent on several principal members of our management and scientific staff. The loss of key personnel could have a material adverse effect on Therics’ business and results of operations, and could inhibit product development and commercialization efforts. In addition, recruiting and retaining qualified scientific personnel to perform future R&D work is critical to our success. Competition for experienced scientists is intense. Failure to recruit and retain executive management and scientific personnel on acceptable terms could prevent us from achieving our business objectives. |
| • | The patent positions of biotechnology firms generally are highly uncertain and involve complex legal and factual questions that can determine who has the right to develop a particular product. No clear policy has emerged regarding the breadth of claims covered by biotechnology patents in the United States. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us. |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
See discussion under “Quantitative and Qualitative Disclosures About Market Risk” beginning on page 17.
| Item 4. | Controls and Procedures. |
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Tredegar required to be included in our periodic SEC filings.
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
| Item 4. | Submission of Matters to a Vote of Security Holders. |
Tredegar’s Annual Meeting of Shareholders was held on April 24, 2003. The following sets forth the vote results with respect to each of the matters voted upon at the meeting:
Nominee | | No. of
Votes “For” | | No. of Votes
“Withheld” |
Austin Brockenbrough, III | | 34,885,846 | | 297,729 |
Donald T. Cowles | | 34,907,781 | | 275,794 |
William M. Gottwald | | 34,834,891 | | 348,684 |
Richard L. Morrill | | 34,890,618 | | 292,957 |
Norman A. Scher | | 34,873,397 | | 310,178 |
R. Gregory Williams | | 34,893,593 | | 289,982 |
There were no broker non-votes with respect to the election of directors.
The term of office for the following directors continued after the annual meeting and such directors were not up for election at the annual meeting:
Phyllis Cothran
Richard W. Goodrum
Floyd D. Gottwald, Jr.
John D. Gottwald
Thomas G. Slater, Jr.
Approval of the designation of PricewaterhouseCoopers LLP as the auditors for Tredegar for the fiscal year ending December 31, 2003:
No. of Votes
“For” | | No. of Votes
“Against” | | No. of
Abstentions |
34,788,883 | | 355,114 | | 39,578 |
There were no broker non-votes with respect to the approval of auditors.
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| Item 6. | Exhibits and Reports on Form 8-K. |
3 | Amended By-Laws |
| |
4 | First amendment to Credit Agreement, dated as of April 29, 2003, by and among Tredegar Corporation, as borrower, and the lenders (SunTrust Bank, as syndication agent, Bank of America, N.A., as documentation agent, and Wachovia Bank, National Association, as administrative agent for the lenders) |
| |
31.1 | Certification of Norman A. Scher, President and Chief Executive Officer of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | Certification of D. Andrew Edwards, Vice President, Finance and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | Certification of Norman A. Scher, President and Chief Executive Officer of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | Certification of D. Andrew Edwards, Vice President, Finance and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
On July 21, 2003, we furnished a Form 8-K with respect to our second quarter 2003 earnings press release dated July 21, 2003. On June 16, 2003, we furnished a Form 8-K with respect to our press release announcing the scheduled closing of our films plant in New Bern, North Carolina. The press release also provided an update to certain forward-looking statements relative to 2003, including the second quarter of 2003, and provided information on other cost reduction efforts. On April 21, 2003, we furnished a Form 8-K with respect to our first quarter 2003 earnings press release dated April 21, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | Tredegar Corporation
(Registrant)
|
Date:
| August 13, 2003 | | |
/s/ D. Andrew Edwards
|
| | | |
|
| | | D. Andrew Edwards
Vice President, Finance and
Treasurer
(Principal Financial and Accounting Officer) |
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