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 September 30, 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
- --------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Boulders Parkway
Richmond, Virginia 23225
- ---------------------------------------- -----------------------------------
(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
October 29, 2001: 38,124,727.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 74,081 $ 44,530
Receivable from securities brokers 480 292
Accounts and notes receivable 102,705 96,652
Income taxes recoverable 8,348 3,857
Inventories 43,832 46,825
Deferred income taxes 13,630 13,788
Prepaid expenses and other 3,132 2,818
--------- ---------
Total current assets 246,208 208,762
--------- ---------
Property, plant and equipment, at cost 538,404 518,174
Less accumulated depreciation 268,182 244,667
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Net property, plant and equipment 270,222 273,507
--------- ---------
Venture capital investments 169,506 232,259
Other assets and deferred charges 56,260 49,661
Goodwill and other intangibles 137,999 139,579
--------- ---------
Total assets $880,195 $ 903,768
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 50,127 $ 51,818
Accrued expenses 44,037 36,593
--------- ---------
Total current liabilities 94,164 88,411
Long-term debt 264,767 268,102
Deferred income taxes 26,880 40,650
Other noncurrent liabilities 9,407 8,877
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Total liabilities 395,218 406,040
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Shareholders' equity:
Common stock, no par value 106,764 106,587
Common stock held in trust for savings
restoration plan (1,212) (1,212)
Unrealized gain on available-for-sale securities 8,624 29,331
Foreign currency translation adjustment (5,697) (5,732)
Loss on derivative financial instruments (1,983) -
Retained earnings 378,481 368,754
--------- ---------
Total shareholders' equity 484,977 497,728
--------- ---------
Total liabilities and shareholders' equity $880,195 $ 903,768
========= =========
See accompanying notes to financial statements.
2
Tredegar Corporation
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended September 30 Ended September 30
-------------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- --------
Revenues:
Gross sales $202,380 $ 219,678 $599,311 $684,198
Freight 3,968 4,051 11,653 12,840
--------- --------- --------- --------
Net sales 198,412 215,627 587,658 671,358
Other income (expense), net (4,151) 79,641 (7,839) 113,567
--------- --------- --------- --------
Total 194,261 295,268 579,819 784,925
--------- --------- --------- --------
Costs and expenses:
Cost of goods sold 160,473 177,170 478,310 542,172
Selling, general and administrative 12,539 15,236 35,870 41,161
Research and development 9,014 6,910 24,271 18,887
Amortization of goodwill and other intangibles 1,226 1,276 3,682 3,828
Interest 2,954 4,455 10,227 13,057
Unusual items 9,848 16,870 10,477 21,829
--------- --------- --------- --------
Total 196,054 221,917 562,837 640,934
--------- --------- --------- --------
Income (loss) from continuing operations
before income taxes (1,793) 73,351 16,982 143,991
Income taxes (679) 26,313 4,082 52,122
--------- --------- --------- --------
Income (loss) from continuing operations (1,114) 47,038 12,900 91,869
Income from discontinued operations - - 1,396 -
--------- --------- --------- --------
Net income (loss) $ (1,114) $ 47,038 $ 14,296 $ 91,869
========= ========= ========= ========
Earnings (loss) per share:
Basic:
Continuing operations $ (.03) $ 1.24 $ .34 $ 2.43
Discontinued operations - - .04 -
--------- --------- --------- --------
Net income (loss) $ (.03) $ 1.24 $ .38 $ 2.43
========= ========= ========= ========
Diluted:
Continuing operations $ (.03) $ 1.21 $ .33 $ 2.36
Discontinued operations - - .04 -
--------- --------- --------- --------
Net income (loss) $ (.03) $ 1.21 $ .37 $ 2.36
========= ========= ========= ========
Shares used to compute earnings (loss) per share:
Basic 38,059 37,944 38,055 37,859
Diluted 38,059 38,847 38,824 38,952
Dividends per share $ .04 $ .04 $ .12 $ .12
See accompanying notes to financial statements.
3
Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months
Ended September 30
------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 14,296 $ 91,869
Adjustments for noncash items:
Income from discontinued operations (1,396) -
Depreciation 24,149 23,734
Amortization of intangibles 3,682 3,828
Write-off of goodwill - 9,950
Deferred income taxes 521 1,661
Accrued pension income and postretirement benefits (7,740) (5,703)
Loss (gain) on venture capital investments 8,976 (112,839)
Loss on equipment writedowns and divestitures 5,721 11,689
Allowance for doubtful accounts 298 4,010
Changes in assets and liabilities, net of effects
from acquisitions and divestitures:
Accounts and notes receivable (6,613) 5,663
Inventories 2,883 3,630
Income taxes recoverable (4,491) -
Prepaid expenses and other (309) 329
Accounts payable (392) (1,020)
Accrued expenses and income taxes payable 4,555 7,020
Other, net 1,465 (378)
--------- ---------
Net cash provided by operating activities 45,605 43,443
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Cash flows from investing activities:
Capital expenditures (30,010) (60,418)
Venture capital investments (16,560) (74,783)
Proceeds from the sale of venture capital investments 37,794 112,131
Proceeds from property disposals and divestitures 2,224 9,205
Other, net (1,775) (2,328)
--------- ---------
Net cash used in investing activities (8,327) (16,193)
--------- ---------
Cash flows from financing activities:
Dividends paid (4,569) (4,554)
Net decrease in borrowings (3,335) (5,000)
Proceeds from exercise of stock options (including
related income tax benefits realized) 177 3,710
--------- ---------
Net cash used in financing activities (7,727) (5,844)
--------- ---------
Increase in cash and cash equivalents 29,551 21,406
Cash and cash equivalents at beginning of period 44,530 25,752
--------- ---------
Cash and cash equivalents at end of period $ 74,081 $ 47,158
========= =========
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 September
30, 2001, and the consolidated results of operations and cash flows for
the nine months ended September 30, 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 nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
Effective January 1, 2001, we adopted the new accounting
standard for derivative instruments and hedging activities issued by
the Financial Accounting Standards Board. This standard affects our
accounting for futures contracts to hedge aluminum price risk and our
interest rate swap agreements to hedge interest rate risk.
2. See pages 11 through 13 for information on unusual items recognized
during the quarter and the nine months ended September 30, 2001 and
2000.
3. A summary of our venture capital activities for the quarter and nine
months ended September 30, 2001 and 2000, is provided below:
(In Thousands)
Third Quarter Nine Months
Ended September 30 Ended September 30
--------------------- ------------------------
2001 2000 2001 2000
---------- --------- --------- ---------
Carrying value, beginning of period $ 198,476 $262,277 $ 232,259 $140,698
Activity for period (pre-tax):
New investments 7,452 27,772 16,560 74,783
Proceeds from the sale of investments,
including receivables from security
brokers (9,740) (84,909) (37,982) (128,344)
Realized gains 5,926 80,301 24,788 117,306
Realized losses, write-offs and write-downs (10,041) (1,003) (33,764) (4,467)
Increase (decrease) in net unrealized gain
on available-for-sale securities (22,567) 73,666 (32,355) 158,128
---------- --------- --------- ---------
Carrying value, end of period $ 169,506 $358,104 $ 169,506 $358,104
========== ========= ========= =========
Our remaining unfunded commitments to private venture capital
funds totaled approximately $40.3 million at September 30, 2001, and
$50.9 million at December 31, 2000.
A schedule of investments is provided on the following two
pages.
5
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Tredegar Corporation
Schedule of Investments at September 30, 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 2.8 Develops pain-management therapeutic drugs adolor.com
Illumina, Inc. ILMN 2.9 Fiber optic sensor technology for drug screening illumina.com
SignalSoft Corporation SGSF 3.6 Wireless caller location detection software signalsoftcorp.com
Vascular Solutions VASC 3.8 Vascular access site closure system vascularsolutions.com
Photon Dynamics, Inc. (f) PHTN 3.3 Test and repair systems for flat panel display industry photondynamics.com
Cisco Systems, Inc. (f) CSCO 2.2 Worldwide leader in networking for the Internet cisco.com
Nortel Networks Corporation (f) NT 3.5 Networking solutions and services nortelnetworks.com
CardioGenesis Corporation CGCP 7.3 Coronary revascularization eclipsesurg.com
Openwave Systems, Inc. (f) OPWV 1.9 Infrastructure applications for the Internet openwave.com
Lifeminders.com, Inc. LFMN 2.0 Online direct marketing of personalized content lifeminders.com
Superconductor Tech., Inc. SCON 1.8 Manufactures filters for wireless networks suptech.com
Rosetta Inpharmatics, Inc. RSTA 4.1 Gene function/drug screening on a chip rii.com
Eprise Corporation EPRS 3.3 Web site maintenance & development tool eprise.com
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Total securities of public companies held
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Securities of Private Companies Held:
CryoGen 6.0 Micro-cryogenic catheters for medical applications cryogen-inc.com
Sensitech Inc. 4.6 Perishable product mgmt. solutions sensitech.com
Bell Geospace 4.3 Presentation of 3D data to the oil & gas industry bellgeo.com
Songbird Medical, Inc. 4.2 Disposable hearing aids
RedCreek Communications 4.1 Internet and intranet security redcreek.com
Appliant, Inc. 4.0 Software tools for managing executable software appliant.com
Ellipsys Technologies, Inc. 3.9 Telephone system error detection ellipsystech.com
HemoSense 3.9 Point of care blood coagulation time test device hemosense.com
Moai Technologies, Inc. 3.8 System for holding auctions on the Internet moai.com
Babycare, Ltd. 3.6 Direct retailing of baby care products in China
NovaLux, Inc. 3.4 Blue-green light lasers novalux.com
Xcyte Therapies, Inc. 3.2 Develops drugs to treat cancer & other disorders xcytetherapies.com
Advanced Diagnostics, Inc. 2.9 3-D medical imaging equipment
Praxon, Inc. 2.8 Integrated business communications equipment praxon.com
AdiCom Wireless, Inc. 2.7 Wireless local loop technology adicomwireless.com
EndoVasix, Inc. 2.7 Device for treatment of ischemic strokes endovasix.com
eWireless, inc. 2.7 Technology linking cell phone users & advertising ewireless.com
Cooking.com, Inc. 2.5 Sales of cooking-related items over the Internet cooking.com
MediaFlex.com 2.5 Internet-based printing & publishing mediaflex.com
eBabyCare Ltd. 2.3 Sales of babycare products over the Internet in China
Kodiak Technologies, Inc. 2.3 Cooling products for organ & pharma transport kodiaktech.com
Artemis Medical, Inc. 2.2 Medical devices for breast cancer surgery
CEPTYR, Inc. 2.2 Develops small molecule drugs ceptyr.com
GreaterGood.com 2.2 Internet marketing targeted at donors to charities greatergood.com
Etera Corporation 2.1 Sales of branded perennial plants over the Internet etera.com
ThinkFree.com 2.0 Java-based software complementary to Microsoft Office thinkfree.com
BroadRiver Communications 1.9 Local DSL provider purepacket.com
Quarry Technologies, Inc. 1.9 Technology for delivery of differentiated service levels quarrytech.com
Norborn Medical, Inc. 1.8 Device for treatment of cardiovascular disease
FastTrack Systems, Inc. 1.7 Clinical trial data management information systems
Riveon, Inc. 1.6 Web-based data mining software for business managers
MedManage Systems Inc. 1.5 Management of prescription drug sampling programs
Linx Communications, Inc. 1.3 Unified communications and messaging systems
Infinicon, Inc. 1.3 Manufacturer of infiniband input/output products
Cbyon, Inc. 1.2 Provider of software image data to assist surgeons
Extreme Devices 1.0 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 7.
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Tredegar Corporation
Schedule of Investments at September 30, 2001 and December 31, 2000
(In Thousands, Except Per-Share Amounts)
Public Common Stock or
Equivalents at 9/30/01 9/30/01 (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
- ------------------------------------------------------------------------------------------------------------------------------------
Securities of Public Companies Held:
Adolor Corporation 583 $ 16.93 0% $ 9,876 $ 9,876 $ 2,386 $ 12,291 $ 12,291 $ 3,000
Illumina, Inc. 1,380 6.50 0% 8,970 8,970 3,282 21,395 21,395 3,925
SignalSoft Corporation 412 3.93 0% 1,612 1,612 1,330 7,261 7,261 3,006
Vascular Solutions 861 1.77 0% 1,523 1,523 2,429 5,060 5,060 2,450
Photon Dynamics, Inc. (f) 21 23.15 20% 387 387 940 14,993 3,825 4,700
Cisco Systems, Inc. (f) 14 12.18 0% 165 165 200 405 405 200
Nortel Networks Corporation (f) 25 5.61 20% 113 105 117 617 617 117
CardioGenesis Corporation 113 .84 0% 95 95 616 381 381 2,464
Openwave Systems, Inc. (f) 1 12.75 0% 18 18 7 2,689 2,689 348
Lifeminders.com, Inc. 4 1.55 0% 7 7 17 - - -
Superconductor Tech., Inc. - - 0% - - - 603 603 552
Rosetta Inpharmatics, Inc. - - 0% - - - 13,599 13,599 4,745
Eprise Corporation - - 0% - - - 2,633 2,633 2,382
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Total securities of public companies held 22,766 22,758 11,324 81,927 70,759 27,889
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Securities of Private Companies Held:
CryoGen 4,432 3,179 3,179 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. 3,190 3,190 4,210 8,013 4,210 4,210
RedCreek Communications - - 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. - - 2,021 6,263 2,021 2,021
Babycare, Ltd. - - 1,009 - - 1,009
NovaLux, Inc. 50,721 10,149 10,149 50,801 10,149 10,149
Xcyte Therapies, Inc. 5,589 3,795 3,795 5,598 3,795 3,795
Advanced Diagnostics, Inc. 2,032 2,121 2,121 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. 4,263 4,000 4,000 4,270 4,000 4,000
eWireless, inc. 47,652 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. 2,094 2,094 2,094 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 - - 5,500 5,269 5,000 5,000
ThinkFree.com 3,773 1,491 1,491 3,696 1,491 1,491
BroadRiver Communications - - 4,779 9,136 4,779 4,779
Quarry Technologies, Inc. 2,567 2,567 4,046 3,425 3,425 3,425
Norborn Medical, Inc. - - 188 - - 188
FastTrack Systems, Inc. 7,182 5,479 5,479 7,962 5,134 5,134
Riveon, Inc. - - 1,990 1,700 1,700 1,700
MedManage Systems Inc. 5,200 5,200 5,200 4,000 4,000 4,000
Linx Communications, Inc. 125 125 3,000 3,000 3,000 3,000
Infinicon, Inc. 3,485 3,485 3,485 3,485 3,485 3,485
Cbyon, Inc. 3,839 3,839 3,839 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 170,068 72,398 118,272 206,255 94,189 113,686
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See notes on page 7.
6
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Tredegar Corporation
Schedule of Investments at September 30, 2001 and December 31, 2000
(In Thousands, Except Per-Share Amounts)
Yrs. Web Site
Investment Held (a) Description (www.)
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Total securities of public companies held (from page 6)
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Subtotal securities of private companies held (from page 6)
Locus Discovery .9 Computational chemogenomics technology
eTunnels .8 VPNs across all ISPs and companies
Elixir .8 Evaluation technology for anti-aging compounds
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Total securities of private companies held
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Limited partnership interests in private venture capital funds (period held of
.8 - 9.0 years) (d)
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Total investments
Estimated taxes on assumed disposal at fair value
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Estimated net asset value ("NAV")
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Tredegar Corporation
Schedule of Investments at September 30, 2001 and December 31, 2000 9/30/01(e) 12/31/00(e)
(In Thousands, Except Per-Share Amounts) --------------------------------------------------------------
Estimated Estimated
Fair Carrying Cost Fair Carrying Cost
Investment Value (b) Value (b) Basis Value (b) Value (b) Basis
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Total securities of public companies held (from page 6) 22,766 22,758 11,324 81,927 70,759 27,889
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Subtotal securities of private companies held (from page 6) 170,068 72,398 118,272 206,255 94,189 113,686
Locus Discovery 6,333 4,000 4,000 3,000 3,000 3,000
eTunnels 3,000 3,000 3,000 3,000 3,000 3,000
Elixir 2,827 2,827 2,827 250 250 250
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Total securities of private companies held 182,228 82,225 128,099 212,505 100,439 119,936
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Limited partnership interests in private venture capital funds
(period held of .8 - 9.0 years) 77,413 64,523 72,370 109,099 61,061 65,271
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Total investments 282,407 $169,506 $211,793 403,531 $232,259 $213,096
-------------------- --------------------
Estimated taxes on assumed disposal at fair value 25,421 68,557
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Estimated net asset value ("NAV") $ 256,986 $ 334,974
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(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 September 30, 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
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Adolor Corporation ADLR Develops pain-management therapeutic drugs (adolor.com)
Illumina, Inc. ILMN Fiber optic sensor technology for drug screening (illumina.com)
Array Biopharma ARRY Drug discovery research using innovative chemistry (arraybiopharma.com)
Seattle Genetics SGEN Biopharmaceuticals for treatment of cancers (seattlegenetics.com)
Universal Access, Inc. UAXS Wholesale provider of high bandwidth services (universalaccessinc.com)
ASAT Holdings ASTT Provider of semiconductor assemply and testing services (asat.com)
Lucent Technologies, Inc. LU Developer and manufacturer of communications systems (lucent.com)
Metromedia Fiber Network MFNX Provider of high-band width fiber optic communications (mmfn.com)
- --------------------------------------------------------------------------------------------------------------
Indirect
Indirect -------------------
Interest in Restricted Estimated
Common Closing Stock Dis- Fair Cost
Indirect Investment Shares Price count Value Basis
- ----------------------------------------------------------------------------------------------
Adolor Corporation 85 16.93 20% 1,148 411
Illumina, Inc. 203 6.50 20% 1,056 333
Array Biopharma 129 9.02 20% 933 279
Seattle Genetics 120 5.00 20% 481 219
Universal Access, Inc. 736 0.74 20% 436 521
ASAT Holdings 188 2.75 20% 414 449
Lucent Technologies, Inc. 71 5.73 0% 405 59
Metromedia Fiber Network 447 0.34 20% 122 546
- ----------------------------------------------------------------------------------------------
(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.
(f) Public company stock received from the acquisition of a private company in
the portfolio.
7
Certain events subsequent to September 30, 2001, indicate that
there has been a $50 million reduction in the estimated fair value of
private companies in our venture capital investment portfolio (a $30
million reduction in NAV). A write-off of related cost basis (carrying
value) is expected in the fourth quarter of approximately $2 million
($1.3 million after income taxes).
4. Comprehensive income (loss), defined as net income (loss) and other
comprehensive income (loss), was a loss of $17.5 million for the third
quarter of 2001 and income of $89 million for the third quarter of
2000. Comprehensive income (loss) was a loss of $8.4 million for the
first nine months of 2001 and income of $187.2 million for the first
nine months of 2000. Other comprehensive income (loss) for both periods
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 income (loss) includes the cumulative-effect
adjustment for the adoption of the new accounting standard for
derivative financial instruments (see Note 1) and changes in the gains
and losses on derivative financial instruments recorded net of deferred
income taxes directly in shareholders' equity.
5. The components of inventories are as follows:
(In Thousands)
Sept. 30, Dec. 31,
2001 2000
---------- ---------
Finished goods $ 7,225 $ 7,997
Work-in-process 4,386 4,314
Raw materials 20,771 23,889
Stores, supplies and other 11,450 10,625
---------- ---------
Total $ 43,832 $ 46,825
========== =========
6. 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)
Third Quarter Nine Months
Ended September 30 Ended September 30
--------------------- ------------------------
2001 2000 2001 2000
---------- --------- --------- ---------
Weighted average shares outstanding used
to compute basic earnings per share 38,059 37,944 38,055 37,859
Incremental shares issuable upon the
assumed exercise of stock options - 903 769 1,093
---------- --------- --------- ---------
Shares used to compute diluted earnings
per share 38,059 38,847 38,824 38,952
========== ========= ========= =========
Incremental shares issuable upon the assumed exercise of
outstanding stock options are computed using the average market price
during the related period. No incremental shares were assumed exercised
in the third quarter of 2001 due to their anti-dilutive effect on the
loss per share recognized for the period.
8
7. On April 27, 2001, we entered into a two-year interest rate swap
agreement, with a notional amount of $50 million, under which we pay to
a counterparty a fixed interest rate of 4.85% and the counterparty pays
us a variable interest rate based on one-month LIBOR reset each month.
This swap has been designated as and is accounted for as a cash flow
hedge. It 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).
On June 22, 2001, we entered into another two-year interest
rate swap agreement, with a notional amount of $25 million, under which
we pay to a counterparty a fixed interest rate of 4.64% and the
counterparty pays us a variable interest rate based on one-month LIBOR
reset each month. This swap has been designated as and is accounted for
as a cash flow hedge. It effectively fixes the rate on $25 million of
our $250 million term loan at 4.64% plus the applicable credit spread
(currently 62.5 basis points).
8. The overall effective tax rate for the quarter ended September 30, 2001
is 37.9% versus 35.9% for the same quarter of prior year. The change is
due to the amount of non-deductible expenses relative to the pretax
loss.
The overall effective tax rate from continuing operations for
the nine months ended September 30, 2001 is 24% compared with 36.2% in
the same period of the prior year. The decline in the overall rate is
due primarily to the $1.9 million tax benefit related to the reversal
of income tax contingency accruals upon favorable conclusion of IRS
examinations through 1997.
Results for the nine months also include an after-tax gain
from discontinued operations of $1.4 million related to the reversal of
an income tax contingency accrual upon favorable conclusion of IRS
examinations through 1997. The accrual was originally recorded in
conjunction with the sale of The Elk Horn Coal Corporation in 1994.
9. In June 2001, the Financial Accounting Standards Board issued two new
standards that primarily affect the accounting for acquisitions
initiated after June 30, 2001 and the accounting for goodwill. There
are transition provisions that may result in the reclassification of
carrying values among existing goodwill and other intangible assets.
Once adopted, these standards prohibit amortization of goodwill, but
require transitional and annual impairment reviews that may result in
the recognition of losses, among other requirements.
We anticipate that adoption of these standards will result in
an annual reduction of amortization expense of approximately $4.6
million ($3 million after income taxes). Additionally, we will
reclassify from intangible assets to goodwill approximately $396,000
related to the Therics workforce, which no longer qualifies as a
separately identifiable intangible asset. We have not yet completed the
transitional impairment review. We will adopt these standards in the
first quarter of 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Third Quarter 2001 Compared with Third Quarter 2000
The loss for the third quarter of 2001 was $1.1 million (three cents
per share), compared with net income of $47 million in 2000 ($1.21 per share).
Results in the third quarter of 2001 include $3.6 million (nine cents per share)
of realized net after-tax losses from venture capital investments compared with
net after-tax gains of $49.8 million ($1.28 per share) in the third quarter of
2000. The third quarter of 2001 also includes an after-tax charge of $6.3
million (17 cents per share) related to two plant closings, while results in
2000 include a net after-tax charge of $10.8 million (28 cents per share)
related primarily to a write-off of excess capacity and associated goodwill in
our plastic films business.
Pre-tax 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 14. 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 "Venture capital investments" in the operating profit
table.
After-tax depreciation in the net asset value ("NAV") of the venture
capital investment portfolio during the third quarter was $32.2 million. At
September 30, 2001, the NAV of the portfolio was $257 million. For more
information on our venture capital investment activities, see pages 15-17 and
Note 3 on pages 5-8 (including discussion of events subsequent to September 30,
2001, affecting the venture capital investment portfolio).
Net sales in the third quarter of 2001 decreased by 8% compared with
2000 due primarily to lower volume in Aluminum Extrusions (volume down 14%). For
more information on net sales, see the business segment review beginning on page
14.
The gross profit margin during the third quarter of 2001 increased to
19.1% from 17.8% in 2000. The improved profit margin was driven mainly by higher
sales of new higher-margin products in Film Products. The gross profit margin in
2000 was negatively impacted by higher production costs associated with the
commercialization of new products in Film Products.
SG&A expenses in the third quarter of 2001 were $12.5 million, down
from $15.2 million in 2000. The decline in SG&A expenses is primarily due to a
$3.5 million charge in the third quarter of 2000 for a provision for doubtful
accounts related to two film customers. As a percentage of net sales, SG&A
expenses were 6.3% in the third quarter of 2001 compared with 7.1% in 2000.
R&D expenses increased to $9 million in the third quarter of 2001
versus $6.9 million in 2000 primarily due to higher spending in Tredegar Biotech
(Molecumetics and Therics) in support of increased research and development
efforts.
10
Unusual items in the third quarter of 2001 totaled $9.8 million ($6.3
million after income taxes) and included:
- - a charge of $6.8 million ($4.4 million after income taxes) for the shutdown
of the aluminum extrusions plant in El Campo, Texas, including an
impairment loss for building and equipment ($4.5 million), severance costs
($710,000), excess working capital ($890,000) and other items ($700,000);
and
- - a charge of $3 million ($1.9 million after income taxes) for the shutdown
of the films manufacturing facility in Tacoma, Washington, including an
impairment loss for equipment ($1.2 million), dismantling of equipment and
restoration of the leased space ($700,000), excess working capital
($650,000) and other items ($450,000).
Unusual items in the third quarter of 2000 totaled $16.9 million ($10.8
million after income taxes) and included:
- - a charge of $17.9 million ($11.4 million after income taxes) for the
write-off of excess production capacity at our plastic films plants in Lake
Zurich, Illinois, and Terre Haute, Indiana, including an impairment loss
for equipment of $7.9 million and an impairment loss for the related
goodwill of $10 million; and
- - a reversal of $1 million ($640,000 after income taxes) related to the first
quarter charge for the shutdown of the Manchester, Iowa, films
manufacturing facility due to revised estimates.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, was $717,000 in the third quarter of 2001
and $494,000 in 2000. The average tax-equivalent yield earned on cash
equivalents was approximately 3.6% in the third quarter of 2001 and 6.5% in the
third quarter of last year. The average cash and cash equivalents balance was
approximately $78 million for the third quarter of 2001 versus approximately $30
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 decreased to $3 million in the third quarter of 2001
from $4.5 million in 2000 due to a lower overall average interest rate and lower
average debt outstanding. The average rate on variable-rate debt (approximately
$255 million in 2001 versus $260 million in 2000), including the portion fixed
by interest rate swaps (see Note 7 on pages 8-9), was 4.4% in the third quarter
of 2001 versus 7.35% in 2000. The average rate on fixed-rate debt ($10 million
in the third quarter of 2001 and $15 million in the third quarter of 2000) was
7.2% in both periods.
The effective tax rate from manufacturing operations, excluding unusual
items, decreased to 35.5% in the third quarter of 2001 from 36.5% in 2000 due to
lower taxes accrued on income from foreign operations. The overall effective tax
rate for the quarter was 37.9% versus 35.9% in the same quarter of the prior
year. The change is due to the amount of non-deductible expenses relative to the
pretax loss.
Nine Months 2001 Compared with Nine Months 2000
Net income for the first nine months of 2001 was $14.3 million, down
from $91.9 million in 2000 (37 cents per share versus $2.36 per share). Results
for 2001 include $8.8 million (23 cents per share) of realized after-tax losses
from venture capital investments compared with a gain of $69.8 million ($1.79
11
per share) in 2000. Results in 2001 also include an after-tax gain of $2.5
million (seven cents per share) related to the reversal of income tax
contingency accruals and related interest received on tax overpayments upon
favorable conclusion of certain IRS examinations and a gain of $1.4 million
(four cents per share) related to the reversal of income tax contingency
accruals associated with discontinued operations.
The after-tax depreciation in the NAV of the venture capital investment
portfolio through the first nine months of this year was $66.9 million. See Note
3 on pages 5-8 for more information on our venture capital investment
activities, including discussion of events subsequent to September 30, 2001,
affecting the venture capital investment portfolio.
Net sales for the nine months ended September 30, 2001, decreased by
12.5% compared with the same period of last year. The lower net sales are due to
lower volume in both Aluminum Extrusions (volume down 21%) and Film Products
(volume down 6%). The impact on net sales of the decrease in volume in Film
Products was offset by higher sales of new higher-margin products. For more
information on net sales, see the business segment review beginning on page 14.
The gross profit margin for the first nine months of 2001 decreased to
18.6% from 19.2% in 2000 primarily due to lower profit in Aluminum Extrusions
resulting from lower volume.
SG&A expenses were $35.9 million in 2001, down from $41.2 million in
2000. The decrease is primarily attributable to lower employee-related costs and
the $3.5 million provision for doubtful accounts related to two film customers
recorded in 2000. As a percentage of net sales, SG&A expenses were flat at 6.1%
in both periods.
R&D expenses increased to $24.3 million in 2001 from $18.9 million in
2000 due to higher spending in Tredegar Biotech in support of increased research
and development efforts.
Unusual items for the nine months ended September 30, 2001, totaled
$10.5 million ($4.8 million after income taxes) and included:
- - a charge of $1.6 million ($1 million after income taxes) for further
rationalization in the plastic films business;
- - a gain of $1 million ($621,000 after income taxes) for interest received
on tax overpayments upon favorable conclusion of IRS examinations
through 1997 (included in "Corporate expenses, net" in the net sales and
operating profit by segment table);
- - an income tax benefit of $1.9 million related to the reversal of income
tax contingency accruals upon favorable conclusion of IRS examinations
through 1997 (included in "Income taxes" in the Consolidated Statements
of Income)
- - a charge of $6.8 million ($4.4 million after income taxes) for the
shutdown of the aluminum extrusions plant in El Campo, Texas, including
an impairment loss for building and equipment ($4.5 million), severance
costs ($710,000), excess working capital ($890,000) and other items
($700,000); and
- - a charge of $3 million ($1.9 million after income taxes) for the
shutdown of the films manufacturing facility in Tacoma, Washington,
including an impairment loss for equipment ($1.2 million), dismantling
of equipment and restoration of the leased space ($700,000), excess
working capital($650,000) and other items ($450,000).
12
Results for the nine months also include an after-tax gain from
discontinued operations of $1.4 million related to the reversal of an income tax
contingency accrual upon favorable conclusion of IRS examinations through 1997.
The accrual was originally recorded in conjunction with the sale of The Elk Horn
Coal Corporation in 1994.
Unusual items for the nine months ended September 30, 2000, totaled
$21.8 million ($14 million after income taxes) and included:
- - a charge of $5.3 million ($3.4 million after income taxes) for the shutdown
of a plastic films manufacturing 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);
- - a charge of $191,000 ($122,000 after income taxes) for costs associated
with the evaluation of financing and structural options for Tredegar
Investments;
- - a gain of $525,000 ($336,000 after income taxes) for the sale of Fiberlux,
Inc.;
- - a charge of $17.9 million ($11.4 million after income taxes) for the
write-off of excess production capacity at our plastic films plants in Lake
Zurich, Illinois, and Terre Haute, Indiana, including an impairment loss
for equipment of $7.9 million and an impairment loss for the related
goodwill of $10 million; and
- - a reversal of $1 million ($640,000 after income taxes) related to the first
quarter charge for the shutdown of the Manchester, Iowa, production
facility due to revised estimates.
Interest income for 2001 was $2.1 million versus $1.4 million in 2000.
The average cash and cash equivalents balance was approximately $65 million for
the nine months ended September 30, 2001 versus approximately $22 million for
the same period in 2000. The average tax-equivalent yield earned on cash
equivalents was approximately 4.4% for 2001 and 6.2% for 2000.
Interest expense decreased to $10.2 million in 2001 from $13.1 million
in 2000 due to a lower overall average interest rate and lower average debt
outstanding. The average rate on variable-rate debt ($254.4 million in 2001
versus $254.3 million in 2000) was 5.4% in 2001 versus 7.1% in 2000. The average
rate on fixed-rate debt ($13 million in 2001 and $18 million in 2000) was 7.2%
in both periods.
The effective income tax rate from manufacturing operations, excluding
unusual items, decreased to 35.5% in 2001 from 36.5% in 2000 due to lower taxes
accrued on income from foreign operations. The overall effective tax rate from
continuing operations for the nine months ended September 30, 2001, is 24%
compared with 36.2% in 2000. The decline in the overall rate is due primarily to
the $1.9 million tax benefit related to the reversal of income tax contingency
accruals upon favorable conclusion of IRS examinations through 1997.
13
Business Segment Review
The following tables present Tredegar's net sales and operating profit
by segment for the third quarter and nine months ended September 30, 2001 and
2000.
Net Sales by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------- -------------------------------
2001 2000 2001 2000
------------- ----------- ------------- ------------
Film Products $ 99,016 $ 95,058 $ 286,589 $ 288,448
Aluminum Extrusions 98,722 118,622 297,228 375,467
Fiberlux - - - 1,856
Tredegar Biotech:
Molecumetics 581 1,826 3,485 5,278
Therics 93 121 356 309
------------- ----------- ------------- ------------
Total net sales $ 198,412 $ 215,627 $ 587,658 $ 671,358
============= =========== ============= ============
Operating Profit by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------- -------------------------------
2001 2000 2001 2000
------------- ----------- ------------- ------------
Film Products:
Ongoing operations $ 16,107 $ 7,675 $ 44,073 $ 36,206
Unusual items (3,000) (16,870) (4,600) (22,163)
------------- ----------- ------------- ------------
Total Film Products 13,107 (9,195) 39,473 14,043
------------- ----------- ------------- ------------
Aluminum Extrusions:
Ongoing operations 7,191 12,941 23,743 45,786
Unusual items (6,848) - (6,848) -
------------- ----------- ------------- ------------
Total Aluminum Extrusions 343 12,941 16,895 45,786
------------- ----------- ------------- ------------
Fiberlux:
Ongoing operations - - - (264)
Unusual items - - - 525
------------- ----------- ------------- ------------
Total Fiberlux - - - 261
------------- ----------- ------------- ------------
Tredegar Biotech:
Molecumetics (3,121) (1,014) (6,277) (3,521)
Therics (3,602) (1,930) (9,170) (5,783)
------------- ----------- ------------- ------------
Total Tredegar Biotech (6,723) (2,944) (15,447) (9,304)
------------- ----------- ------------- ------------
Tredegar Investments:
Venture capital investments (5,622) 77,843 (13,693) 109,046
Unusual items - - - (191)
------------- ----------- ------------- ------------
Total Tredegar Investments (5,622) 77,843 (13,693) 108,855
------------- ----------- ------------- ------------
Total operating profit 1,105 78,645 27,228 159,641
Interest income 717 494 2,131 1,391
Interest expense 2,954 4,455 10,227 13,057
Corporate expenses, net 661 1,333 2,150 3,984
------------- ----------- ------------- ------------
Income (loss) from continuing
operations before income taxes (1,793) 73,351 16,982 143,991
Income taxes (679) 26,313 4,082 52,122
------------- ----------- ------------- ------------
Income (loss) from continuing operations (1,114) 47,038 12,900 91,869
Income from discontinued operations - - 1,396 -
------------- ----------- ------------- ------------
Net income (loss) $ (1,114) $ 47,038 $ 14,296 $ 91,869
============= =========== ============= ============
14
Third-quarter net sales in Film Products increased 4% to $99 million
while operating profit, excluding unusual items, was $16.1 million compared with
$7.7 million in 2000. On a year-to-date basis, net sales in Film Products were
relatively flat at $286.6 million while operating profit, excluding unusual
items increased 21.7%. Volume in Film Products for the nine months ended
September 30, 2001 declined 6% compared with the same period of last year. The
decline in volume is primarily due to lower demand for our diaper backsheet
film. The profit impact of the volume decline in diaper backsheet was offset by
higher sales of new, higher-margin specialty film components for diapers and
feminine hygiene products. Additionally, last year's third-quarter operating
profit included a $3.5 million charge for doubtful accounts.
In Aluminum Extrusions, third-quarter net sales were down 16.8% to
$98.7 million while operating profit, excluding unusual items, was $7.2 million,
down 44.4% versus the third quarter of 2000. On a year-to-date basis, net sales
declined 20.8% to $297.2 million while operating profit was $23.7 million, down
48.1% compared with the same period of the prior year. The aluminum extrusions
industry and Tredegar continue to be affected by poor economic conditions in our
end-use markets. Volume for the first nine months of the year declined 21%
compared with the same period of the prior year.
For Tredegar Biotech, revenue was down for the quarter and nine months
ended September 30, 2001 compared with the same periods of the prior year. The
third-quarter operating loss in 2001 was $6.7 million versus $2.9 million in
2000. On a year-to-date basis, the operating loss was $15.4 million in 2001
versus $9.3 million in 2000. The higher losses in 2001 were due primarily to
increased spending at both Molecumetics and Therics in support of research and
development efforts.
The depreciation or appreciation in NAV related to venture capital
investment activities for the third quarter and nine months ended September 30,
2001 and 2000 is summarized below:
(In Millions)
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------- -------------------------------
2001 2000 2001 2000
------------- ----------- ------------- ------------
Net realized gains, losses, write-downs
and related operating expenses for
venture capital investments reflected
in Tredegar's consolidated statements
of income (net of tax) $ (3.6) $ 49.8 $ (8.8) $ 69.8
Change in unrealized appreciation of venture
capital investments (net of tax) (28.6) 51.7 (58.1) 180.3
------------- ----------- ------------- ------------
After-tax appreciation (depreciation) in NAV
related to investment performance $ (32.2) $ 101.5 $ (66.9) $ 250.1
============= =========== ============= ============
See Note 3 on pages 5-8 for more information on our venture capital
investment activities, including a discussion of events subsequent to September
30, 2001, affecting the NAV of our venture capital investment portfolio.
15
The following companies held directly in the portfolio, or indirectly
through our interests in other venture capital funds, accounted for most of the
changes in NAV during the quarter and nine months ended September 30, 2001:
(In Millions)
Appreciation (Depreciation)
in Estimated NAV
-----------------------------
3rd Quarter Nine Months
Ended Ended
Investment Reason for Change 9/30/01 9/30/01
- -------------------------------------------------------------------------------------------------------------------------
Public companies:
Photon Dynamics, Inc. Acquisition of IRSI, a direct holding $ 0.3 $ (7.7)
Illumina, Inc. Change in stock price (5.2) (6.3)
Vascular Solutions Change in stock price (3.7) (2.3)
Cosine Communications Change in stock price - (2.2)
Universal Access Change in stock price (1.7) (2.2)
SignalSoft Corporation Change in stock price (2.2) (1.3)
Eprise Corporation Change in stock price - (1.0)
Adolor Corporation Change in stock price (2.0) 0.4
Private companies:
Venture capital funds Various (lower valuations) (8.7) (16.1)
BroadRiver Communications Lower valuation - (5.8)
Moai Technologies, Inc. Lower valuation (3.0) (4.0)
Etera Corporation Lower valuation - (3.7)
Songbird Medical, Inc. Lower valuation (3.2) (3.1)
MediaFlex.com Lower valuation - (2.6)
Linx Communications, Inc. Lower valuation (1.8) (1.8)
AdiCom Wireless, Inc. Lower valuation - (1.7)
Riveon Lower valuation - (1.3)
Quarry Technologies, Inc. Lower valuation - (0.9)
Locus Discovery Higher valuation 1.5 1.5
Other public and private companies Various (1.6) (1.8)
----------- ------------
Depreciation in NAV before operating expenses (31.3) (63.9)
After-tax operating expenses (0.9) (3.0)
----------- ------------
Depreciation in NAV related to investment performance $(32.2) $(66.9)
=========== ============
The cost basis, carrying value and NAV of the venture capital portfolio
is reconciled below:
(In Millions)
Sept. 30, Dec. 31,
2001 2000
-------------------------------
Cost basis of investments $ 211.8 $ 213.1
Write-downs taken on securities held (charged to earnings) (55.7) (26.6)
Unrealized appreciation on public securities held by Tredegar
(reflected directly in equity net of deferred income taxes) 13.4 45.8
------------- ------------
Carrying value of investments reflected in the balance sheet 169.5 232.3
Unrealized appreciation in private securities held by Tredegar
and in its indirect interest in all securities held by venture
capital funds 112.9 171.3
------------- ------------
Estimated fair value of venture capital investments 282.4 403.6
Estimated income taxes on assumed disposal at fair value (25.4) (68.6)
------------- ------------
NAV of venture capital investments $ 257.0 $ 335.0
============= ============
16
Changes in NAV for the quarter and nine months ended September 30, 2001
and 2000 are summarized below:
(In Millions)
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------- -------------------------------
2001 2000 2001 2000
------------- ----------- ------------- ------------
NAV at beginning of period $ 289.0 $ 347.2 $ 335.0 $ 180.2
------------- ----------- ------------- ------------
After-tax appreciation (depreciation) in NAV
related to investment performance
(net of operating expenses) (32.2) 101.5 (66.9) 250.1
After-tax operating expenses funded by Tredegar .9 1.1 3.0 2.6
New investments 7.5 27.8 16.6 74.8
Reduction in NAV due to the sale of investments (8.2) (57.0) (30.7) (87.1)
------------- ----------- ------------- ------------
(Decrease) increase in NAV (32.0) 73.4 (78.0) 240.4
------------- ----------- ------------- ------------
NAV at end of the period $ 257.0 $ 420.6 $ 257.0 $ 420.6
============= =========== ============= ============
Our internal rate of return ("IRR") since inception in 1992 through
September 30, 2001, is estimated at 50% (33% after income taxes), but is not
necessarily indicative of future performance. IRR is the discount rate that
equates the net present value of investment cash inflows with investment cash
outflows. The IRR is calculated as an annualized compounded rate of return using
actual investment cash flows, modified to incorporate our share of the current
valuation of unliquidated holdings and operating expenses (and taxes in case of
the after-tax IRR).
Liquidity and Capital Resources
Tredegar's total assets decreased to $880.2 million at September 30,
2001, from $903.8 million at December 31, 2000. The decrease is primarily
attributable to the decline in the carrying value of venture capital investments
(decrease of $62.8 million to $169.5). This decrease was partially offset by
increases in the following:
- - Cash and cash equivalents increased ($29.6 million) due to the reasons
described on the next page; and
- - Higher prepaid pension asset (up $8.1 million) due to pension income
recognized during the period.
The carrying value of the venture capital investments decreased
compared with December 31, 2000, for the reasons noted in the table presented in
Note 3 on page 5.
17
The reasons for the increase in cash and cash equivalents to $74.1
million at September 30, 2001, from $44.5 million at December 31, 2000, and the
decrease in cash and cash equivalents from $25.8 million at December 31, 1999,
to $21.4 million at September 30, 2000, are summarized below:
(In Thousands)
Nine Months
Ended September 30
--------------------------------
2001 2000
----------- -------------
Cash and cash equivalents, beginning of period $ 44,530 $ 25,752
----------- -------------
Cash provided by (used in) operating activities
net of capital expenditures and dividends 11,026 (21,529)
Proceeds from the exercise of stock options 177 3,710
Net decrease in borrowings (3,335) (5,000)
New venture capital investments, net of proceeds
from disposals 21,234 37,348
Proceeds from divestitures and property disposals 2,224 9,205
Other, net (1,775) (2,328)
----------- -------------
Net increase in cash and cash equivalents 29,551 21,406
----------- -------------
Cash and cash equivalents, end of period $ 74,081 $ 47,158
=========== =============
In 2001, cash provided by continuing operating activities, net of
capital expenditures and dividends was $11 million compared with cash used in
operating activities, net of capital expenditures and dividends of $21.5 million
in 2000. In the table above and in the statements of cash flows, income taxes
related to venture capital activities, divestitures and property disposals are
classified in operating activities, while related gains and losses are
effectively classified with proceeds. In addition, income tax benefits on
write-downs of venture capital investments typically lag financial reporting
recognition. Consequently, despite pretax losses for venture capital investments
of $9 million for the first nine months of 2001, operating activities include
income taxes paid of $7 million for the period. Pretax gains for venture capital
investments were $112.8 million for the first nine months of 2000 and cash used
in operating activities includes related income taxes paid of $38 million. The
remaining change is primarily due to:
- - Changes in working capital;
- - Increased spending at Tredegar Biotech;
- - Lower income from manufacturing operations; and
- - A decrease in the level of capital expenditures.
Capital expenditures have decreased from $60.4 million in 2000 to $30
million in 2001. Capital expenditures in 2001 reflect the normal replacement of
machinery and equipment and the following key capital projects:
- - Press modernization at the aluminum extrusion plant in Kentland,
Indiana;
- - A new plastic films manufacturing facility in Shanghai, China, which
began production in the second quarter of 2001 and makes film used
primarily for hygiene products; and
- - Continued expansion of plastic films manufacturing capacity at the
facility in Hungary, which produces disposable films for hygiene
products marketed in Europe.
18
Capital expenditures in 2000 included the following key capital projects:
- - A new feminine hygiene products topsheet film production line at the
plant in Terre Haute, Indiana;
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films;
- - Expansion of capacity in Brazil for plastic films for hygiene products;
- - Continued expansion of plastic films manufacturing capacity at the
Hungary facility;
- - A new plastic films manufacturing facility in Shanghai, China; and
- - The second phase of a modernization program at the aluminum extrusion
plant in Newnan, Georgia.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued two new
standards that primarily affect the accounting for acquisitions initiated after
June 30, 2001, and the accounting for goodwill. There are transition provisions
that may result in the reclassification of carrying values among existing
goodwill and other intangible assets. Once adopted, these standards prohibit
amortization of goodwill, but require transitional and annual impairment reviews
that may result in the recognition of losses, among other requirements.
We anticipate that adoption of these standards will result in an annual
reduction of amortization expense of approximately $4.6 million ($3 million
after income taxes). Additionally, we will reclassify from intangible assets to
goodwill approximately $396,000 related to the Therics workforce, which no
longer qualifies as a separately identifiable intangible asset. We have not yet
completed the transitional impairment review. We will adopt these standards in
the first quarter of 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
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 fluctuations 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.
19
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 nine months
ended September 30, 2001 and 2000 are presented below:
Percentage of Net Sales from Manufacturing
Operations Related to Foreign Markets*
- --------------------------------------------------------------------------------
Nine Months
Ended September 30
-----------------------------------------------------------------
2001 2000
---------------------- -------------------------------
Exports Foreign Exports Foreign
From U.S. Operations From U.S. Operations
--------- ---------- --------- -----------
Canada 3 % 15 % 3 % 18 %
Europe 1 7 1 4
Latin America 3 3 3 2
Asia 3 1 4 1
--------- ---------- --------- -----------
Total 10 % 26 % 11 % 25 %
--------- ---------- --------- -----------
* Based on consolidated net sales from manufacturing operations
(excluding Tredegar Biotech and Tredegar Investments).
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 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. The acquisition of Exxon Films on May 17, 1999, increased the proportion of
assets located in the U.S. It also increased the amount of operating profit
earned in the U.S., partially offset by higher U.S. Dollar interest expense on
higher debt related to the acquisition.
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 15-17 and Note 3 on pages 5-8 for more information.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No.
3 Amended By-laws
(b) Reports on Form 8-K. No reports on Form 8-K have been filed
for the quarter ended September 30, 2001.
21
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: November 12, 2001 /s/ D. Andrew Edwards
---------------------- --------------------------------------------
D. Andrew Edwards
Vice President, Finance and
Treasurer
(Principal Financial Officer)
Date: November 12, 2001 /s/ Michelle O. Mosier
---------------------- --------------------------------------------
Michelle O. Mosier
Corporate Controller
(Principal Accounting Officer)
22