SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
/ X / OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2001
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
/ / OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 1-10258
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Tredegar Corporation
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(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1497771
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Boulders Parkway
Richmond, Virginia 23225
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 330-1000
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Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of shares of Common Stock, no par value, outstanding as of
April 26, 2001: 38,108,477.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
March 31, Dec. 31,
2001 2000
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Assets
Current assets:
Cash and cash equivalents $ 46,072 $ 44,530
Receivable from securities brokers 5,552 292
Accounts and notes receivable 99,972 96,652
Income taxes recoverable 6,057 3,857
Inventories 45,323 46,825
Deferred income taxes 13,800 13,788
Prepaid expenses and other 2,852 2,818
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Total current assets 219,628 208,762
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Property, plant and equipment, at cost 525,488 518,174
Less accumulated depreciation and amortization 248,357 244,667
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Net property, plant and equipment 277,131 273,507
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Venture capital investments 199,457 232,259
Other assets and deferred charges 51,910 49,661
Goodwill and other intangibles 138,637 139,579
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Total assets $ 886,763 $903,768
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 52,933 $ 51,818
Accrued expenses 35,760 36,593
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Total current liabilities 88,693 88,411
Long-term debt 269,513 268,102
Deferred income taxes 34,502 40,650
Other noncurrent liabilities 9,243 8,877
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Total liabilities 401,951 406,040
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Shareholders' equity:
Common stock, no par value 106,677 106,587
Common stock held in trust for savings
restoration plan (1,212) (1,212)
Unrealized gain on available-for-sale securities 16,420 29,331
Foreign currency translation adjustment (5,933) (5,732)
Loss on derivative financial instruments (271) -
Retained earnings 369,131 368,754
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Total shareholders' equity 484,812 497,728
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Total liabilities and shareholders' equity $ 886,763 $903,768
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See accompanying notes to financial statements.
2
Tredegar Corporation
Consolidated Statements of Income
(In Thousands)
(Unaudited)
First Quarter
Ended March 31
--------------------------
2001 2000
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Revenues:
Gross sales $ 195,489 $236,510
Freight 3,687 4,282
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Net sales 191,802 232,228
Other income (expense), net (5,925) 13,232
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Total 185,877 245,460
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Costs and expenses:
Cost of goods sold 156,855 186,394
Selling, general and administrative 11,942 12,602
Research and development 7,254 6,290
Amortization of intangibles 1,214 1,276
Interest 4,041 4,295
Unusual items 1,600 5,484
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Total 182,906 216,341
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Income before income taxes 2,971 29,119
Income taxes 1,070 10,656
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Net income $ 1,901 $ 18,463
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Earnings per share:
Basic $ .05 $ .49
Diluted .05 .47
Shares used to compute earnings per share:
Basic 38,069 37,718
Diluted 38,809 38,970
Dividends per share $ .04 $ .04
See accompanying notes to financial statements.
3
Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
First Quarter
Ended March 31
--------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 1,901 $ 18,463
Adjustments for noncash items:
Depreciation 7,849 8,062
Amortization of intangibles 1,214 1,276
Deferred income taxes 1,209 (1,441)
Accrued pension income and postretirement
benefits (2,214) (1,673)
Loss (gain) on sale of venture capital investments 6,648 (13,105)
Loss on plant shutdowns and divestitures - 5,293
Changes in assets and liabilities, net of effects from
acquisitions and
divestitures:
Accounts and notes receivable (3,342) 2,387
Inventories 1,582 (168)
Income taxes recoverable (2,200) -
Prepaid expenses and other (37) 830
Accounts payable 2,354 1,409
Accrued expenses and income taxes payable (1,078) 4,957
Other, net 539 (2,678)
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Net cash provided by operating activities 14,425 23,612
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Cash flows from investing activities:
Capital expenditures (13,576) (15,843)
Investments (4,351) (21,603)
Proceeds from the sale of investments 5,072 533
Proceeds from property disposals and divestitures 420 679
Other, net (425) 534
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Net cash used in investing activities (12,860) (35,700)
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Cash flows from financing activities:
Dividends paid (1,524) (1,514)
Net increase (decrease) in borrowings 1,411 -
Proceeds from exercise of stock options 90 1,559
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Net cash (used in) provided by financing activities (23) 45
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Increase (decrease) in cash and cash equivalents 1,542 (12,043)
Cash and cash equivalents at beginning of period 44,530 25,752
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Cash and cash equivalents at end of period $ 46,072 $ 13,709
============= ============
See accompanying notes to financial statements.
4
TREDEGAR CORPORATION
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying consolidated financial
statements of Tredegar Corporation and Subsidiaries ("Tredegar") contain
all adjustments necessary to present fairly, in all material respects,
Tredegar's consolidated financial position as of March 31, 2001, and the
consolidated results of operations and cash flows for the three months
ended March 31, 2001 and 2000. All such adjustments are deemed to be of a
normal, recurring nature. These financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in Tredegar's Annual Report on Form 10-K for the year ended
December 31, 2000. The results of operations for the three months ended
March 31, 2001, are not necessarily indicative of the results to be
expected for the full year.
2. 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. In order 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 futures contracts to hedge the aluminum price risk. The
accounting for these futures contracts has been affected by a new
accounting standard for derivative instruments and hedging activities
issued by the Financial Accounting Standards Board.
We adopted this new standard on January 1, 2001. In accordance with the
transition provisions of the standard, we recorded a net-of-tax
cumulative-effect adjustment in the amount of $303,480, which increased
other comprehensive income as of January 1, 2001. There was no
cumulative-effect adjustment to earnings. During the quarter, we
recognized in cost of goods sold a net-of-tax gain of $292,644 related to
settlement of futures contracts. Given the short-term nature of our
futures contracts, we expect that within the next twelve months, we will
reclassify to earnings the entire loss on derivative financial
instruments.
All derivatives are recognized on the balance sheet at their fair value.
On the date we enter into a derivative contract, our policy requires that
we designate the derivative as one of the following:
- A hedge of (a) the fair value of a recognized asset or liability or (b)
an unrecognized firm commitment (a "fair value" hedge);
- A hedge of (a) a forecasted transaction or (b) the variability of cash
flows that are to be received or paid in connection with a recognized
asset or liability (a "cash flow" hedge);
- A foreign-currency fair value or cash flow hedge (a "foreign currency"
hedge);
- A hedge of a net investment in a foreign operation; or
- An instrument that is held for trading or non-hedging purposes (a
"trading" or "non-hedging" instrument).
5
Substantially all of our derivative contracts are designated as cash flow
hedges. Our policy requires that changes in the fair value of a
derivative that is highly effective as and that is designated and
qualifies as a cash flow hedge, to the extent that the hedge is
effective, are recorded in other comprehensive income until earnings are
affected by the variability of cash flows of the hedged transaction
(e.g., until periodic settlements of a variable-rate asset or liability
are recorded in earnings). Any hedge ineffectiveness (which represents
the amount by which the changes in the fair value of the derivative
exceed the variability in the cash flows of the forecasted transaction)
is recorded in current period earnings.
Our policy requires that we formally document all relationships between
hedging instruments and hedged items, as well as our risk management
objective and strategy for undertaking various hedge transactions. We
also formally assess (both at the hedge's inception and on an ongoing
basis) whether the derivatives that are used in hedging transactions have
been highly effective in offsetting changes in the fair value or cash
flows of hedged items and whether those derivatives may be expected to
remain highly effective in future periods. When it is determined that a
derivative is not (or has ceased to be) highly effective as a hedge, we
discontinue hedge accounting prospectively, as discussed below.
We discontinue hedge accounting prospectively when one of the following
events occur:
- We determine the derivative is no longer effective in offsetting
changes in the fair value or cash flow of a hedged item (including
hedge items such as firm commitments or forecasted transactions);
- The derivative expires or is sold, terminated, or exercised;
- It is no longer probable that the forecasted transaction will occur;
- A hedged firm commitment no longer meets the definition of a firm
commitment; or
- Management determines that designating the derivative as a hedging
instrument is no longer appropriate.
3. See page 12 for information on unusual items recognized in the first
quarter of 2001 and 2000.
6
4. A summary of our venture capital activities for the three months ended
March 31, 2001 and 2000, is provided below:
(In Thousands)
First Quarter
Ended March 31
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2001 2000
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Carrying value of venture capital
investments, beginning of period $ 232,259 $ 140,698
Venture capital investment activity
for period (pre-tax amounts):
New investments 4,351 21,603
Proceeds from the sale of investments, including
receivable from securities brokers (10,332) (18,323)
Realized gains 7,245 16,259
Realized losses, write-offs and write-downs (13,893) (3,154)
(Decrease) increase in net unrealized gain on
available-for-sale securities (20,173) 67,897
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Carrying value of venture capital
investments, end of period $ 199,457 $ 224,980
============= ============
Our remaining unfunded commitments to private venture capital
funds totaled approximately $43.9 million at March 31, 2001, and $50.9
million at December 31, 2000.
A schedule of investments is provided on the next two pages.
7
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Tredegar Corporation
Schedule of Investments at March 31, 2001 and December 31, 2000
(In Thousands, Except Per-Share Amounts)
Yrs. Web Site
Investment Symbol Held (a) Description (www.)
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Securities of Public Companies Held:
Adolor Corporation ADLR 2.3 Develops pain-management therapeutic drugs adolor.com
Illumina, Inc. ILMN 2.4 Fiber optic sensor technology for drug screening illumina.com
Rosetta Inpharmatics, Inc. RSTA 3.8 Gene function/drug screening on a chip rii.com
Vascular Solutions VASC 3.3 Vascular access site closure system vascularsolutions.com
SignalSoft Corporation SGSF 3.1 Wireless caller location detection software signalsoftcorp.com
Openwave Systems, Inc. OPWV 1.4 Infrastructure applications for the Internet openwave.com
Eprise Corporation EPRS 3.3 Web site maintenance & development tool eprise.com
Eclipse Surgical Technologies ESTI 6.8 Coronary revascularization eclipsesurg.com
Superconductor Tech., Inc. SCON 1.8 Manufactures filters for wireless networks suptech.com
Cisco Systems, Inc. CSCO 1.7 Worldwide leader in networking for the Internet cisco.com
Nortel Networks Corporation NT 3.0 Networking solutions and services nortelnetworks.com
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Total securities of public companies held
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Securities of Private Companies Held:
CryoGen 5.5 Micro-cryogenic catheters for medical applications cryogen-inc.com
Sensitech Inc. 4.1 Perishable product mgmt. solutions sensitech.com
Bell Geospace 3.8 Presentation of 3D data to the oil & gas industry bellgeo.com
Songbird Medical, Inc. 3.7 Disposable hearing aids
RedCreek Communications 3.6 Internet and intranet security redcreek.com
Appliant, Inc. 3.5 Software tools for managing executable software appliant.com
Ellipsys Technologies, Inc. 3.4 Telephone system error detection ellipsystech.com
HemoSense 3.4 Point of care blood coagulation time test device hemosense.com
Moai Technologies, Inc. 3.3 System for holding auctions on the Internet moai.com
Babycare, Ltd. 3.1 Direct retailing of baby care products in China
NovaLux, Inc. 2.9 Blue-green light lasers novalux.com
IRSI 2.8 Optical inspection systems irsinc.com
Xcyte Therapies, Inc. 2.7 Develops drugs to treat cancer & other disorders xcytetherapies.com
Advanced Diagnostics, Inc. 2.4 3-D medical imaging equipment
Praxon, Inc. 2.3 Integrated business communications equipment praxon.com
AdiCom Wireless, Inc. 2.2 Wireless local loop technology adicomwireless.com
EndoVasix, Inc. 2.2 Device for treatment of ischemic strokes endovasix.com
eWireless, inc. 2.2 Technology linking cell phone users & advertising ewireless.com
Cooking.com, Inc. 2.0 Sales of cooking-related items over the Internet cooking.com
MediaFlex.com 2.0 Internet-based printing & publishing mediaflex.com
eBabyCare Ltd. 1.8 Sales of babycare products over the Internet in China
Kodiak Technologies, Inc. 1.8 Cooling products for organ & pharma transport kodiaktech.com
Artemis Medical, Inc. 1.7 Medical devices for breast cancer surgery
CEPTYR, Inc. 1.7 Develops small molecule drugs ceptyr.com
GreaterGood.com 1.7 Internet marketing targeted at donors to charities greatergood.com
Etera Corporation 1.6 Sales of branded perennial plants over the Internet etera.com
ThinkFree.com 1.5 Java-based software complementary to Microsoft Office thinkfree.com
BroadRiver Communications 1.4 Local DSL provider purepacket.com
Quarry Technologies, Inc. 1.4 Technology for delivery of differentiated service levels quarrytech.com
Norborn Medical, Inc. 1.3 Device for treatment of cardiovascular disease
FastTrack Systems, Inc. 1.2 Clinical trial data management information systems
Riveon, Inc. 1.1 Web-based data mining software for business managers
MedManage Systems Inc. 1.0 Management of prescription drug sampling programs
Linx Communications, Inc. .8 Unified communications and messaging systems
Infinicon, Inc. .8 Manufacturer of infiniband input/output products
Cbyon, Inc. .7 Provider of software image data to assist surgeons
Extreme Devices .5 Manufacturer of integrated, solid-state electron source
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Subtotal securities of private companies held
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See notes on page 8.
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Tredegar Corporation
Schedule of Investments at March 31, 2001 and December 31, 2000
(In Thousands, Except Per-Shares Amounts)
Public Common Stock or
Equivalents at 3/31/01 3/31/01 (e) 12/31/00 (e)
---------------------------- ----------------------------- ------------------------------
Estimated
Restricted Estimated Estimated
Shares Closing Stock Dis- Fair Carrying Cost Fair Carrying Cost
Investment Held Price count (c) Value (b) Value (b) Basis Value (b) Value (b) Basis
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Securities of Public Companies Held:
Adolor Corporation 700 $ 19.62 20% $ 10,987 $ 10,987 $ 3,000 $ 12,291 $ 12,291 $ 3,000
Illumina, Inc. 1,546 7.06 0% 10,912 10,912 3,675 21,395 21,395 3,925
Rosetta Inpharmatics, Inc. 973 9.00 4% 8,435 8,435 4,512 13,599 13,599 4,745
Vascular Solutions 868 6.25 0% 5,426 5,426 2,450 5,060 5,060 2,450
SignalSoft Corporation 521 7.88 0% 4,095 4,095 1,688 7,261 7,261 3,006
Openwave Systems, Inc. 72 19.84 20% 1,136 1,136 348 2,689 2,689 348
Eprise Corporation 1,130 .66 2% 729 729 1,824 2,633 2,633 2,382
Eclipse Surgical Technologies 453 1.09 0% 494 494 2,464 381 381 2,464
Superconductor Tech., Inc. 110 5.12 20% 451 451 360 603 603 552
Cisco Systems, Inc. 14 15.81 17% 171 171 200 405 405 200
Nortel Networks Corporation 24 14.05 20% 271 271 117 617 617 117
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Total securities of public companies held 43,107 43,107 20,638 66,934 66,934 23,189
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Securities of Private Companies Held:
CryoGen 4,307 3,054 3,054 4,265 3,054 3,054
Sensitech Inc. 3,197 2,333 2,333 3,154 2,333 2,333
Bell Geospace - - 3,500 - - 3,500
Songbird Medical, Inc. 8,123 4,210 4,210 8,013 4,210 4,210
RedCreek Communications 706 549 2,256 706 549 2,256
Appliant, Inc. 6,439 3,899 3,899 6,352 3,899 3,899
Ellipsys Technologies, Inc. - - 2,275 - - 2,275
HemoSense 2,771 2,485 2,485 2,733 2,485 2,485
Moai Technologies, Inc. 4,682 2,021 2,021 6,263 2,021 2,021
Babycare, Ltd. - - 1,009 - - 1,009
NovaLux, Inc. 50,922 10,149 10,149 50,801 10,149 10,149
IRSI 2,542 2,542 4,700 14,993 3,825 4,700
Xcyte Therapies, Inc. 5,611 3,795 3,795 5,598 3,795 3,795
Advanced Diagnostics, Inc. 1,324 1,371 1,371 1,321 1,371 1,371
Praxon, Inc. - - 2,309 - - 2,309
AdiCom Wireless, Inc. - - 4,062 2,648 2,648 4,062
EndoVasix, Inc. 4,280 4,000 4,000 4,270 4,000 4,000
eWireless, inc. 47,841 2,250 2,250 47,728 2,250 2,250
Cooking.com, Inc. 1,500 1,500 4,500 1,500 1,500 4,500
MediaFlex.com - - 3,500 4,085 3,500 3,500
eBabyCare Ltd. - - 314 - - 314
Kodiak Technologies, Inc. 1,744 1,744 1,744 1,694 1,694 1,694
Artemis Medical, Inc. 3,267 2,467 2,467 3,201 2,467 2,467
CEPTYR, Inc. 1,750 1,750 1,750 1,750 1,750 1,750
GreaterGood.com - - 3,797 - - 3,781
Etera Corporation 5,878 5,500 5,500 5,269 5,000 5,000
ThinkFree.com 3,773 1,491 1,491 3,696 1,491 1,491
BroadRiver Communications 2,093 2,093 4,779 9,136 4,779 4,779
Quarry Technologies, Inc. 2,201 2,201 3,679 3,425 3,425 3,425
Norborn Medical, Inc. - - 188 - - 188
FastTrack Systems, Inc. 8,007 5,134 5,134 7,962 5,134 5,134
Riveon, Inc. 1,890 1,890 1,890 1,700 1,700 1,700
MedManage Systems Inc. 4,000 4,000 4,000 4,000 4,000 4,000
Linx Communications, Inc. 3,000 3,000 3,000 3,000 3,000 3,000
Infinicon, Inc. 3,485 3,485 3,485 3,485 3,485 3,485
Cbyon, Inc. 3,500 3,500 3,500 3,500 3,500 3,500
Extreme Devices 5,000 5,000 5,000 5,000 5,000 5,000
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Subtotal securities of private companies held 193,833 87,413 119,396 221,248 98,014 118,386
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See notes on page 8.
8
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Tredegar Corporation
Schedule of Investments at March 31, 2001 and December 31, 2000
(In Thousands, Except Per-Share Amounts)
3/31/01 (e) 12/31/00 (e)
----------------------------- -----------------------------
Estimated Estimated
Yrs. Fair Carrying Cost Fair Carrying Cost
Investment Held (a) Description Value (b) Value (b) Basis Value (b) Value (b) Basis
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Total securities of public companies held (from page 7) 43,107 43,107 20,638 66,934 66,934 23,189
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Subtotal securities of private companies held (from page 7) 193,833 87,413 119,396 221,248 98,014 118,386
Locus Discovery .4 Computational chemogenomics technology 3,000 3,000 3,000 3,000 3,000 3,000
eTunnels .3 VPNs across all ISPs and companies 3,000 3,000 3,000 3,000 3,000 3,000
Elixir .3 Evaluation technology for anti-aging compounds 250 250 250 250 250 250
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Total securities of private companies held 200,083 93,663 125,646 227,498 104,264 124,636
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Limited partnership interests in private venture capital funds
(period held of .3 - 8.5 years) (d) 99,659 62,687 67,720 109,099 61,061 65,271
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Total investments 342,849 $ 199,457 $ 214,004 403,531 $ 232,259 $ 213,096
Estimated taxes on assumed disposal at fair value 46,384 -------------------- 68,557 -------------------
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Estimated net asset value ("NAV") $ 296,465 $ 334,974
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Notes:
(a) The period held for an investment in a company or a venture capital fund is
computed using the initial investment date and the current valuation date. If a
company has merged with another company, then the initial investment date is the
date of the investment in the predecessor company.
(b) Amounts are shown net of carried interest estimated using realized and
unrealized net gains to date. Amounts may change due to changes in estimated
carried interest, and such changes are not expected to be material. Carried
interest is the portion of value payable to portfolio managers based on realized
net gains and is a customary incentive in the venture capital industry.
(c) Restricted securities are securities for which an agreement exists not to
sell shares for a specified period of time, usually 180 days. Also included
within the category of restricted securities are unregistered securities, the
sale of which must comply with an exemption to the Securities Act of 1933
(usually SEC Rule 144). These unregistered securities are either the same class
of stock that is registered and publicly traded or are convertible into a class
of stock that is registered and publicly traded.
(d) At March 31, 2001, Tredegar had ownership interests in 28 venture capital
funds, including an indirect interest in the following public companies, among
others (disposition of shares held by venture funds, including distributions to
limited partners, is at the sole discretion of the general partner of the fund):
Indirect Investment Symbol Description
- -------------------------------------------------------------------------------------------------------------------------------
Universal Access, Inc. UAXS Wholesale provider of high bandwidth services (universalaccessinc.com)
Illumina, Inc. ILMN Fiber optic sensor technology for drug screening (illumina.com)
Adolor Corporation ADLR Develops pain-management therapeutic drugs (adolor.com)
Lucent Technologies, Inc. LU Developer and manufacturer of communications systems (lucent.com)
Array Biopharma ARRY Drug discovery research using innovative chemistry (arraybiopharma.com)
ASAT Holdings ASTT Provider of semiconductor assemply and testing services (asat.com)
SignalSoft Corporation SGSF Wireless caller location detection software (signalsoftcorp.com)
Genomica Corporation GNOM Software for accelerating drug discovery and development (genomica.com)
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Indirect
Interest in Restricted Estimated Indirect
Common Closing Stock Dis- Fair Cost
Indirect Investment Shares Price count Value Basis
- ----------------------------------------------------------------------------------------
Universal Access, Inc. 612 5.70 20% 2,789 521
Illumina, Inc. 202 7.06 20% 1,142 333
Adolor Corporation 84 19.62 20% 1,318 411
Lucent Technologies, Inc. 70 9.97 0% 696 59
Array Biopharma 135 5.38 20% 579 279
ASAT Holdings 179 4.00 20% 571 448
SignalSoft Corporation 50 7.88 20% 317 163
Genomica Corporation 109 4.12 20% 359 296
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(e) Our portfolio is subject to risks typically associated with investments in
technology start-up companies, which include business failure, illiquidity and
stock market volatility.
9
5. Comprehensive income (loss), defined as net income and other
comprehensive income (loss), was a loss of $11.5 million for the first
quarter of 2001 and income of $61.5 million for the first quarter of
2000. Other comprehensive income (loss) for both years includes changes
in unrealized gains and losses on available-for-sale securities and
foreign currency translation adjustments recorded net of deferred income
taxes directly in shareholders' equity. For 2001, other comprehensive
loss also includes the cumulative-effect adjustment for the adoption of
the new accounting standard for derivative instruments (see Note 2) and
changes in the gains and losses on derivative financial instruments
recorded net of deferred income taxes directly in shareholders' equity.
6. The components of inventories are as follows:
(In Thousands)
March 31, Dec. 31,
2001 2000
--------- --------
Finished goods $ 7,438 $ 7,997
Work-in-process 3,865 4,314
Raw materials 22,965 23,889
Stores, supplies and other 11,055 10,625
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Total $45,323 $46,825
======== ========
7. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted
average common and potentially dilutive common equivalent shares
outstanding, determined as follows:
(In Thousands)
First Quarter
Ended March 31,
---------------------
2001 2000
-------- --------
Weighted average shares outstanding used
to compute basic earnings per share 38,069 37,718
Incremental shares issuable upon the
assumed exercise of stock options 740 1,252
-------- --------
Shares used to compute diluted earnings
per share 38,809 38,970
-------- --------
Incremental shares issuable upon the assumed exercise of outstanding
stock options are computed using the average market price during the
related period.
8. On April 27, 2001, we entered into an interest rate swap agreement, with
a notional amount of $50 million, under which we will pay to a
counterparty a fixed interest rate of 4.85% and the counterparty will pay
us a variable interest rate based on one-month LIBOR reset each month.
The swap has been designated as and will be accounted for as a cash flow
hedge. The interest rate swap effectively fixes the rate on $50 million
of our $250 million term loan at 4.85% plus the applicable credit spread
(currently 62.5 basis points).
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
First Quarter 2001 Compared with First Quarter 2000
Net income for the first quarter of 2001 was $1.9 million, down from
$18.5 million in 2000 (five cents per share versus 47 cents per share). Results
in 2001 include $5.3 million (13 cents per share) of realized after-tax losses
from venture capital investments, compared with a gain of $7.8 million (20 cents
per share) in the first quarter of 2000. Results in the first quarter of 2001
also include a net after-tax charge of $1 million (three cents per share)
related to the reorganization of our plastic films business. Results in 2000
include a net after-tax charge of $3.5 million (nine cents per share) related
primarily to the shutdown of a plastic films plant in Manchester, Iowa.
Pretax realized gains and losses from venture capital investment
activities are included in "Other income (expense), net" in the consolidated
statements of income on page 3 and "Venture capital investments" in the
operating profit table on page 13. Operating expenses (primarily management fee
expenses) for our venture capital investment activities are classified in
"Selling, general and administrative expenses" ("SG&A") in the consolidated
statements of income and "Tredegar Investments" in the operating profit table.
During the quarter, the after-tax depreciation in the net asset value
("NAV") of our venture capital investments was $36.1 million. At March 31, 2001,
the NAV of our venture capital investments was $296.5 million. For more
information on our venture capital investment activities, see pages 14 to 16 and
Note 4 on pages 7 to 9.
Net sales in the first quarter of 2001 decreased by 17% due primarily to
lower volume in both Aluminum Extrusions (volume down 28.5%) and Film Products
(volume down 12.7%) compared with the first quarter of 2000. For more
information on net sales, see the business segment review beginning on page 13.
The gross profit margin declined to 18.2% from 19.7%. The lower profit
margin was driven mainly by lower profits in Aluminum Extrusions due to lower
volume and higher conversion costs. The impact on profit margin of the decrease
in volume in Film Products was partially offset by higher sales of new higher
margin products.
SG&A expenses in the first quarter of 2001 were $11.9 million, down from
$12.6 million in 2000 due primarily to the following:
- - The sale of Fiberlux in the second quarter of 2000; and
- - Lower employee related costs.
The benefits of the above were partially offset by increased operating expenses
at Tredegar Investments and at Film Products as a result of the acquisition of
ADMA and Promea in October 2000. As a percentage of net sales, SG&A expenses
increased to 6.2% in the first quarter of 2001 compared with 5.4% in 2000, due
to lower sales from overall lower volume.
11
R&D expenses increased to $7.3 million from $6.3 million last year due to
higher spending at Molecumetics in support of collaboration programs (up
$200,000), higher spending at Therics in support of its development of bone
replacement and reconstructive products (up $626,000) and higher product
development spending at Film Products (up $136,000).
Unusual charges in the first quarter of 2001 totaled $1.6 million ($1
million after income taxes) related to the reorganization of our films business
to more closely align cost structure with capacity utilization.
Unusual charges in the first quarter of 2000 totaled $5.5 million ($3.5
million after income taxes) and included:
- - a pretax charge of $5.3 million for the shutdown of a plastic films manu-
facturing facility in Manchester, Iowa, including an impairment loss for
building and equipment ($4.1 million), severance costs ($700,000), and
excess inventory and other items ($450,000); and
- - a pretax charge of $191,000 for costs associated with the evaluation of
financing and structural options for Tredegar Investments.
For more information on costs and expenses, see the business segment
review beginning on page 13.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, was $688,000 in the first quarter of 2001
and $394,000 in 2000. The average tax-equivalent yield earned on cash
equivalents was approximately 5.6% compared with 5.7% last year while the
average cash and cash equivalents balance was $49.2 million versus $27.7 million
in 2000. Our policy permits investment of excess cash in marketable securities
that have the highest credit ratings and maturities of less than one year. The
primary objectives of our policy are safety of principal and liquidity.
Interest expense was $4 million in the first quarter of 2001 compared
with $4.3 million in 2000. The average rate on variable-rate debt ($250 million
in both periods) was 6.7% in the first quarter of 2001 versus 6.8% in 2000. The
average rate on fixed-rate debt ($15 million in the first quarter of 2001 and
$20 million in 2000) was 7.2% in both periods.
The effective tax rate, excluding unusual items, decreased to 36% in the
first quarter of 2001 from 36.5% in 2000 due to lower taxes accrued on income
from foreign operations.
12
Business Segment Review
The following tables present Tredegar's net sales and operating profit
by segment for the first quarter ended March 31, 2001 and 2000:
Net Sales by Segment
(In Thousands)
(Unaudited)
First Quarter
Ended March 31
---------------------------
2001 2000
------------ -------------
Film Products $ 96,830 $ 99,486
Aluminum Extrusions 93,472 129,240
Fiberlux - 1,782
Biotechnology operations:
Molecumetics 1,331 1,626
Therics 169 94
------------ -------------
Total net sales $ 191,802 $ 232,228
============ =============
Operating Profit by Segment
(In Thousands)
(Unaudited)
First Quarter
Ended March 31
---------------------------
2001 2000
------------ -------------
Film Products:
Ongoing operations $ 15,094 $ 15,750
Unusual items (1,600) (5,293)
------------ -------------
Total Film Products 13,494 10,457
------------ -------------
Aluminum Extrusions 6,381 15,714
Fiberlux - (209)
Biotechnology operations:
Molecumetics (1,772) (1,229)
Therics (2,349) (1,799)
------------ -------------
Total Biotechnology operations (4,121) (3,028)
------------ -------------
Tredegar Investments:
Venture capital activities (8,262) 12,143
Unusual items - (191)
------------ -------------
Total Tredegar Investments (8,262) 11,952
------------ -------------
Total operating profit 7,492 34,886
Interest income 688 394
Interest expense 4,041 4,295
Corporate expenses, net 1,168 1,866
------------ -------------
Income before income taxes 2,971 29,119
Income taxes 1,070 10,656
------------ -------------
Net income $ 1,901 $ 18,463
============ =============
13
First-quarter sales in Film Products declined to $96.8 million, down
slightly from $99.5 million in 2000 due to lower volume reflecting lower demand
for our diaper backsheet film (volume declined to 77 million pounds, a decrease
of 12.7% from last year). Operating profit (excluding unusual items) was $15.1
million, down 4.2% versus the year-ago period. The profit impact of the volume
decline was partially offset by higher sales of new higher margin products.
In Aluminum Extrusions, first quarter sales were $93.5 million versus
$129.2 million in 2000 (down 28%). Operating profit declined 59% to $6.4 million
versus $15.7 million in 2000. Results for the quarter were adversely affected by
a drop in demand from transportation and distribution markets, seasonal weakness
in construction markets, and higher energy costs. Volume declined to 59 million
pounds, down 28.5% from the first quarter of 2000.
For our biotechnology operations (Molecumetics and Therics), revenue was
down slightly for the quarter to $1.5 million from $1.7 million in 2000. The
operating loss was $4.1 million versus $3 million in 2000. The higher losses
reflect increased spending at both Molecumetics and Therics for increased
research and development efforts at these operations.
The depreciation and appreciation in NAV related to venture capital
investment activities for the first quarter of 2001 and 2000 are summarized
below:
(In Millions)
First Quarter
Ended March 31
------------------------
2001 2000
------------ -----------
Net realized gains, losses, writedowns and
related operating expenses for venture
capital investments reflected in Tredegar's
consolidated statements of income (net of tax) $ (5.3) $ 7.8
Change in unrealized appreciation of venture
capital investments (net of tax) (30.8) 79.0
------- -------
After-tax (depreciation) appreciation in NAV
related to venture capital investment performance $ (36.1) $ 86.8
-------- -------
14
The following companies held directly by us, or indirectly through our
interests in other venture capital funds, accounted for most of the net
depreciation in NAV during the current period:
(In Millions)
Appreciation
(Depreciation)
in Estimated NAV
-------------------
1st Quarter Ended
Investment Reason for Change March 31, 2001
- --------------------------------------------------------------------------------------------------------------
Public companies:
Illumina, Inc. Change in stock price $ (6.1)
Rosetta Inpharmatics, Inc. Change in stock price (3.2)
Cosine Communications Change in stock price (position liquidated) (2.2)
Openwave Systems, Inc. Change in stock price (1.1)
Eprise Corporation Change in stock price (1.1)
Adolor Corporation Change in stock price (.9)
Universal Access, Inc. Change in stock price (.7)
Copper Mountain Networks Escrow funds received .8
Private companies:
IRSI Lower valuation of the company (8.0)
BroadRiver Communications Lower valuation of the company (4.5)
MediaFlex.com Lower valuation of the company (2.6)
Adicom Lower valuation of the company (1.7)
Venture capital funds Various (1.4)
Moai Technologies, Inc. Lower valuation of the company (1.0)
Quarry Technologies, Inc. Lower valuation of the company (.9)
Other public and private companies Various (.5)
--------
Depreciation in NAV before operating expenses (35.1)
After-tax operating and other expenses (1.0)
--------
--------
Depreciation in NAV related to investment performance $ (36.1)
========
The cost basis, carrying value and NAV of our venture capital investments
is reconciled below:
(In Millions)
March 31 Dec. 31
2001 2000
------------ -----------
Cost basis of venture capital investments $ 214.0 $ 213.1
Writedowns taken on securities held (charged to earnings) (40.2) (26.6)
Unrealized appreciation on public securities held by Tredegar
(reflected directly in equity net of deferred income taxes) 25.7 45.8
------------ -----------
Carrying value of venture capital investments
reflected in the balance sheet 199.5 232.3
Unrealized appreciation in private securities held by Tredegar
and in its indirect interest in all securities held by venture
capital funds 143.4 171.3
------------ -----------
Estimated fair value of venture capital investments 342.9 403.6
Estimated taxes on assumed disposal at fair value (46.4) (68.6)
------------ -----------
Estimated NAV of venture capital investments $ 296.5 $ 335.0
============ ===========
15
Changes in NAV for the quarter ended March 31, 2001 and 2000 are
summarized below:
(In Millions)
First Quarter
Ended March 31
------------------------
2001 2000
------------ -----------
NAV at beginning of period $ 335.0 $ 180.2
------------ -----------
After-tax (depreciation) appreciation in NAV related to venture
capital investment performance (net of operating expenses) (36.1) 86.8
After-tax operating expenses funded by Tredegar 1.0 0.6
New investments 4.4 21.6
Reduction in NAV due to the sale of investments (7.8) (12.5)
------------ -----------
(Decrease) increase in NAV (38.5) 96.5
------------ -----------
NAV at end of period $ 296.5 $ 276.7
============ ===========
Liquidity and Capital Resources
Tredegar's total assets decreased to $886.8 million at March 31, 2001,
from $903.8 million at December 31, 2000, due primarily to a decrease in the
carrying value of venture capital investments. The carrying value of venture
capital investments decreased $32.8 million compared with December 31, 2000 due
to a decrease in unrealized gains on available-for-sale securities of $20.1
million and a decrease in the cost basis of investments of $12.7 million, net of
write-downs taken. This decrease was partially offset by the following:
- - Higher receivable from securities brokers from the sale of securities (up $5.3
million);
- - Capital expenditures in excess of depreciation, amortization and asset write-
offs ($2.9 million); and
- - Higher prepaid pension asset (up $2.4 million) due to pension income
recognized during the quarter.
In 2001, cash used in continuing operating activities, net of capital
expenditures and dividends, was $675,000 compared with cash provided by
operating activities, net of capital expenditures and dividends, of $6.3 million
in 2000. This change is due primarily to:
- - Lower cash generated by manufacturing operations;
- - Higher spending at Molecumetics and Therics; and
- - Changes in working capital (an investment in working capital of $2.7 million
in the first quarter 2001 versus liquidations of working capital of $9.4
million in 2000).
Capital expenditures in the first quarter of 2001 reflect the normal
replacement of machinery and equipment and:
- - Press modernization at the aluminum extrusion plant in Kentland, Indiana;
- - A new plastic film manufacturing facility in Shanghai, China; and
- - Continued expansion of capacity at the film manufacturing facility in Hungary.
16
The reasons for the change in cash and cash equivalents for the first
quarter of 2001 and 2000, are summarized below:
(In Thousands)
First Quarter
Ended March 31
----------------------
2001 2000
---------- ---------
Cash and cash equivalents, beginning of period $ 44,530 $ 25,752
---------- ---------
Cash (used in) provided by operating activities in
excess of capital expenditures and dividends (675) 6,255
Proceeds from the exercise of stock options 90 1,559
New venture capital investments, net of proceeds
from disposals 721 (21,070)
Net increase (decrease) in borrowings 1,411 -
Other, net (5) 1,213
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,542 (12,043)
---------- ----------
Cash and cash equivalents, end of period $ 46,072 $ 13,709
========== ==========
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, foreign
currencies, emerging markets and technology stocks.
Changes in resin prices, and the timing of those changes, could have a
significant impact on profit margins in Film Products; however, those changes
are generally followed by a corresponding change in selling prices. Profit
margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot
and scrap prices but are also generally followed by a corresponding change in
selling prices; however, there is no assurance that higher ingot costs can be
passed along to customers.
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. In order 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 the
scheduled deliveries.
We sell to customers in foreign markets through our foreign operations
and through exports from U.S. plants. The percentage of consolidated pretax
income earned from manufacturing operations by geographic area for the first
quarter of 2001 and 2000 are presented below:
Estimated % of Consolidated Pretax
Income Earned from Manufacturing
Operations by Geographic Area*
-----------------------------------------------
First Quarter
Ended March 31
----------------------------
2001 2000
------------ -------------
United States 46 % 57 %
Canada 17 19
Latin America 15 12
Europe 11 9
Asia 11 3
------------ -------------
Total 100 % 100 %
============ =============
* The percentages are relative to Tredegar's total pretax income
from manufacturing operations excluding biotechnology
operations, Tredegar Investments, and unusual items.
17
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 operations in emerging
markets have agreements with certain customers that index the pricing of our
products to the U.S. Dollar, the German Mark or the Euro. Our foreign currency
exposure on income from foreign operations in Europe primarily relates to the
Euro. We believe that our exposure to the Canadian Dollar has been substantially
neutralized by 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.
We have investments in private venture capital fund limited partnerships
and early-stage technology companies, including the stock of privately-held
companies and the restricted and unrestricted stock of companies that have
recently registered shares in initial public offerings. The portfolio is subject
to risks typically associated with investments in technology start-up companies,
which include business failure, illiquidity and stock market volatility.
Furthermore, publicly traded stocks of emerging, technology-based companies have
higher volatility and risk than the U.S. stock market as a whole. See pages
14-16 and Note 4 beginning on page 7 for more information.
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:
18
Film Products
- - Film Products is highly dependent on sales associated with one customer -
The Proctor & Gamble Company ("P&G"). P&G comprised 64% of Film Products'
net sales in 2000, 73% in 1999 and 81% in 1998. The loss or significant
reduction of sales associated with P&G would have a material adverse
effect on our business. 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 loss of sales and profits
associated with P&G.
- - Growth of Film Products depends on our ability to develop and deliver new
products, especially in the hygiene market, which comprised over 75% of
Film Products' net sales in each of the last three years. In order to
improve comfort and fit, diapers are now being made with breathable films
that are laminated with nonwovens and with elastic films, replacing
traditional diaper backsheet and other diaper 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, or our inability to deliver new profitable products, could
have a material adverse effect on our business. Our volume and operating
profit in 2000 were negatively affected by the difficulties encountered
in the transition to the cloth-like diaper. During the first quarter of
2001, results were positively impacted by improved efficiencies of our
cloth-like laminates and growth of other higher margin hygiene
components.
- - 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.
Aluminum Extrusions
- - Sales volume and profitability of Aluminum Extrusions is cyclical,
seasonal and highly dependent on general economic conditions in the
United States and Canada. Our market segments are subject to business
cycles as well as 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 13.3% decline in sales volume and 28.2%
decline in operating profit compared with the same period of prior year.
For the first quarter of 2001, the decline in sales volume was 28.5% and
the decline in operating profit was 59.4% compared with the same period
of prior year. The decline in operating profit at approximately 2 times
the rate of the decline in sales volume illustrates the operating
leverage inherent in our operations (fixed operating costs) as well as
pricing and margin pressure that usually accompanies a downturn.
19
- - The markets for our products are highly competitive with price and
service being the principal competitive factors. As competitors increase
capacity or reduce their prices to increase their business, there could
be pressure to reduce prices to our customers. In addition, competition
from foreign extruders could result in loss of market share due to their
ability to produce at lower costs and sell at lower prices than Aluminum
Extrusions. There can be no assurance that we will be able to maintain
current margins and profitability. Our continued success and growth
prospects depend on our ability to retain existing customers and add new
customers.
Biotechnology Operations
- - Molecumetics and Therics have incurred losses since inception, and we are
unsure when, or if, these operating companies will become profitable. We
expect to continue to experience significant operating losses in the
future as we continue our research and development efforts, further
develop our products and services, and expand our marketing and sales
force in an effort to commercialize products. The expansion of our
operations will require substantial expenditures for at least the next
several years.
- - 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. In addition, there can be no assurance that the
FDA and other regulatory authorities will clear our products in a timely
manner.
- - We are highly dependent on several principal members of our management
and scientific staff. The loss of key personnel would have a material
adverse effect on our biotechnology businesses and results of operations,
and could inhibit our product development and commercialization efforts.
In addition, recruiting and retaining qualified scientific personnel to
perform future research and development 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.
Tredegar Investments
- - The inability of companies in which we invest to commercialize and market
their technology, create or develop commercially viable products or
businesses, or raise additional capital when needed would have a negative
impact on our investment returns. The possibility that companies in which
we invest will not be able to commercialize their technology, product or
business concept presents significant risk. Additionally, companies in
which we make seed or expansion round investments will often require
substantial additional equity financing to satisfy continuing working
capital requirements. Each round of venture financing is typically
intended to provide a company with only enough capital to reach the next
stage of development. We cannot predict the circumstances or market
conditions under which the companies in which we invest will seek
additional capital; however, current market conditions are not favorable.
It is possible that one or more of the companies in which we invest will
not be able to raise additional financing or may be able to do so only at
a price or on terms which are unfavorable to us, either of which could
negatively impact our investment returns.
20
- - Many of the venture capital investments we hold are illiquid. For private
companies in which we have invested, there is no secondary market for our
shares and there is no assurance that one will be available in the near
future. Additionally, once a company becomes publicly traded, there is
generally a period of time in which we are not permitted to trade the
securities (the lock-up period).
- - The success of our venture capital investments will be significantly
affected by the state of the securities markets in general and, more
specifically, by the market for initial public offerings, the market for
communications, life science and information technology companies and the
market for mergers and acquisitions. We anticipate that a significant
portion of our returns will be realized through initial public offerings
of companies in which we have invested or through merger and acquisition
activity. The market for initial public offerings and merger and
acquisition activity is cyclical in nature. Thus, we cannot be certain
that the securities markets will be receptive to initial public offerings
or merger and acquisition activity, particularly those of early-stage
companies. As seen during the first quarter of 2001, any adverse change
in the market for public offerings could significantly impact our ability
to realize our investment objective.
- - Valuing our venture capital investments is difficult and inexact. We
value our venture capital investments based on our best estimate of the
value of each individual investment. There is typically no public market
for our investments in privately-held companies. We will consult with
other venture funds and consulting firms when needed to assist in the
valuation of our investments. Valuation is inherently subjective. The net
asset value set by management may not reflect the price at which we could
sell our shares in the open market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See discussion under "Quantitative and Qualitative Disclosures About
Market Risk" beginning on page 17.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed for
the quarter ended March 31, 2001.
22
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: May 10, 2001 /s/ N. A. Scher
----------------- ---------------------------------------------
Norman A. Scher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2001 /s/ Michelle O. Mosier
----------------- ---------------------------------------------
Michelle O. Mosier
Corporate Controller
(Principal Accounting Officer)
23