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
- ----
For the quarterly period ended June 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
/ / OF THE SECURITIES EXCHANGE ACT OF 1934
- ----
For the transition period from to
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Commission file number 1-10258
Tredegar Industries, Inc.
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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
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
July 31, 1998: 36,052,283.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Industries, Inc.
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
June 30, Dec. 31,
1998 1997
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 26,573 $120,065
Accounts and notes receivable 95,321 69,672
Inventories 34,991 20,008
Income taxes recoverable 1,071 294
Deferred income taxes 8,675 8,722
Prepaid expenses and other 3,569 4,369
--------- ---------
Total current assets 170,200 223,130
--------- ---------
Property, plant and equipment, at cost 342,306 283,995
Less accumulated depreciation and amortization 192,186 183,397
--------- ---------
Net property, plant and equipment 150,120 100,598
--------- ---------
Other assets and deferred charges 89,791 67,134
Goodwill and other intangibles 33,027 20,075
--------- ---------
Total assets $443,138 $410,937
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 45,268 $ 33,168
Accrued expenses 46,546 39,618
--------- ---------
Total current liabilities 91,814 72,786
Long-term debt 25,000 30,000
Deferred income taxes 30,394 22,108
Other noncurrent liabilities 13,808 13,497
--------- ---------
Total liabilities 161,016 138,391
--------- ---------
Shareholders' equity:
Common stock, no par value 93,778 115,291
Common stock held in trust for savings
restoration plan (1,212) (1,020)
Unrealized gain on available-for-sale securities 7,145 5,020
Foreign currency translation adjustment (830) (37)
Retained earnings 183,241 153,292
--------- ---------
Total shareholders' equity 282,122 272,546
--------- ---------
Total liabilities and shareholders' equity $443,138 $410,937
========= =========
See accompanying notes to financial statements.
2
Tredegar Industries, Inc.
Consolidated Statements of Income
(In Thousands)
(Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Net sales $ 169,946 $ 144,969 $ 326,606 $ 278,314
Other income (expense), net 1,911 5,058 3,301 7,903
--------- --------- --------- ---------
Total 171,857 150,027 329,907 286,217
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 134,475 114,295 257,571 221,255
Selling, general and administrative 10,136 8,929 18,976 17,490
Research and development 3,600 3,181 6,947 6,447
Interest 292 621 686 1,142
Unusual items - (2,250) (765) (2,250)
--------- --------- --------- ---------
Total 148,503 124,776 283,415 244,084
--------- --------- --------- ---------
Income before income taxes 23,354 25,251 46,492 42,133
Income taxes 8,193 8,904 14,035 14,832
--------- --------- --------- ---------
Net income $ 15,161 $ 16,347 $ 32,457 $ 27,301
========= ========= ========= =========
Earnings per share:
Basic $ .42 $ .44 $ .90 $ .74
Diluted .39 .42 .84 .69
Shares used to compute earnings per share:
Basic 35,904 36,789 36,150 36,759
Diluted 38,557 39,387 38,788 39,309
Dividends per share $ .04 $ .027 $ .07 $ .053
See accompanying notes to financial statements.
3
Tredegar Industries, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six Months
Ended June 30
-------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 32,457 $ 27,301
Adjustments for noncash items:
Depreciation 10,385 9,109
Amortization of intangibles 34 26
Deferred income taxes 588 23
Accrued pension income and postretirement
benefits (1,773) (1,877)
Gain on sale of technology-related investments (2,185) (6,359)
Gain on divestitures (765) (2,250)
Changes in assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts and notes receivable (4,110) (8,137)
Inventories (4,015) 589
Income taxes recoverable (777) 2,023
Prepaid expenses and other 970 (367)
Accounts payable 6,994 12,662
Accrued expenses and income taxes payable (4,185) 4,423
Other, net (1,575) (835)
--------- ---------
Net cash provided by operating activities 32,043 36,331
--------- ---------
Cash flows from investing activities:
Capital expenditures (13,604) (8,404)
Acquisitions (net of cash acquired of $1,097 in
1998; excludes equity issued of $11,219 in 1998) (60,527) (13,469)
Investments (13,726) (6,828)
Proceeds from the sale of investments 2,919 5,783
Proceeds from property disposals and divestitures 690 2,355
Other, net (855) (308)
--------- ---------
Net cash used in investing activities (85,103) (20,871)
--------- ---------
Cash flows from financing activities:
Dividends paid (2,508) (1,963)
Net decrease in borrowings (5,000) (5,000)
Repurchases of Tredegar common stock (34,163) (1,955)
Tredegar common stock purchased by trust for
savings restoration plan (192) -
Proceeds from exercise of stock options 1,431 1,348
--------- ---------
Net cash used in financing activities (40,432) (7,570)
--------- ---------
(Decrease) increase in cash and cash equivalents (93,492) 7,890
Cash and cash equivalents at beginning of period 120,065 101,261
--------- ---------
Cash and cash equivalents at end of period $ 26,573 $109,151
========= =========
See accompanying notes to financial statements.
4
TREDEGAR INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying consolidated financial
statements of Tredegar Industries, Inc. and Subsidiaries ("Tredegar")
contain all adjustments necessary to present fairly, in all material
respects, Tredegar's consolidated financial position as of June 30,
1998, and the consolidated results of their operations and their cash
flows for the six months ended June 30, 1998 and 1997. 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 notes thereto included in
Tredegar's Annual Report on Form 10-K for the year ended December 31,
1997. The results of operations for the six months ended June 30, 1998,
are not necessarily indicative of the results to be expected for the
full year.
On May 20, 1998, Tredegar's Board of Directors declared a
three-for-one stock split payable on July 1, 1998, to shareholders of
record on June 15, 1998. Accordingly, all historical references to
per-share amounts, shares repurchased and the shares used to compute
earnings per share have been restated to reflect the split.
2. Unusual items in 1998 include a first-quarter pretax gain of $765,000
on the sale of APPX Software. Income taxes include a tax benefit of $2
million related to the sale, including a tax benefit for the excess of
APPX Software's income tax basis over its financial reporting basis.
Unusual items in 1997 include a gain of $2.25 million related to the
redemption of preferred stock received in connection with the 1996
divestiture of Molded Products. Net income and earnings per share,
adjusted for unusual items and technology-related investment activities
affecting the comparability of operating results, are presented below:
(In Thousands Except Per-Share Amounts)
Second Quarter Six Months
Ended June 30 Ended June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income as reported $ 15,161 $ 16,347 $ 32,457 $ 27,301
After-tax effect of unusual items:
Gain on sale of APPX Software - - (2,766) -
Redemption of preferred stock received in connection
with the divestiture of Molded Products - (1,440) - (1,440)
--------- --------- --------- ---------
Net income as adjusted for unusual items 15,161 14,907 29,691 25,861
After-tax effect of technology-related net investment
(gains) losses (671) (2,863) (1,103) (4,069)
--------- --------- --------- ---------
Net income as adjusted for unusual items and technology-
related investment activities $ 14,490 $ 12,044 $ 28,588 $ 21,792
========= ========= ========= =========
Diluted earnings per share:
As reported $ .39 $ .42 $ .84 $ .69
As adjusted for unusual items .39 .38 .77 .65
As adjusted for unusual items and technology-related
investment activities .37 .31 .74 .55
3. The carrying value of technology-related investments (included in
"Other assets" in the consolidated balance sheet) at June 30, 1998 and
December 31, 1997, was $49.8 million ($39.3 million cost basis) and
$33.5 million ($25.8 million cost basis), respectively. The excess of
the carrying value over the cost basis is related to available-for-sale
5
securities stated at their closing market price, with unrealized
holding gains excluded from earnings and reported net of deferred
income taxes in shareholders' equity until realized. The estimated fair
value of technology-related investments was $55.8 million and $40.8
million at June 30, 1998 and December 31, 1997, respectively.
4. Comprehensive income, defined as net income and other comprehensive
income, for the second quarters ended June 30, 1998 and 1997 was $17.8
million and $16.2 million, respectively. Comprehensive income for the
six months ended June 30, 1998 and 1997 was $33.8 million and $26.9
million, respectively. Other comprehensive income 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.
5. The components of inventories are as follows:
(In Thousands)
June 30 Dec. 31
1998 1997
-------------- --------------
Finished goods $ 4,755 $ 1,865
Work-in-process 5,193 2,340
Raw materials 17,305 9,297
Stores, supplies and other 7,738 6,506
-------------- --------------
Total $34,991 $20,008
============== ==============
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)
Second Quarter Six Months
Ended June 30 Ended June 30
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Weighted average shares outstanding used
to compute basic earnings per share 35,904 36,789 36,150 36,759
Incremental shares issuable upon the
assumed exercise of stock options 2,653 2,598 2,638 2,550
--------- --------- --------- ---------
Shares used to compute diluted earnings
per share 38,557 39,387 38,788 39,309
========= ========= ========= =========
Incremental shares issuable upon the assumed exercise of
outstanding stock options is computed using the average market price
during the related period.
7. On February 13, 1998, Tredegar completed a "Dutch auction" tender offer
in which it repurchased 1,508,772 shares of its common stock for $32.7
million or $21.67 per share (excluding transaction costs). Since
becoming an independent company in 1989, Tredegar has repurchased a
total of 20.1 million shares, or 36% of its issued and outstanding
common stock, for $112.9 million ($5.61 per share). As of June 30,
1998, under a standing authorization from its board of directors,
6
Tredegar may purchase an additional 4.1 million shares in the open
market or in privately negotiated transactions at prices management
deems appropriate.
8. On June 11, 1998, Tredegar acquired Canada-based Exal Aluminum Inc.
("Exal"). Exal operates two aluminum extrusion plants in Pickering,
Ontario and Aurora, Ontario. The two plants collectively generated
sales of approximately $94 million in 1997 and $4.5 million for the
period from June 11 through June 30, 1998. Both facilities manufacture
extrusions for distribution, transportation, electrical, machinery and
equipment, and building and construction markets. The Pickering
facility also produces aluminum logs and billet for internal use and
for sale to customers. Tredegar filed a Form 8-K on June 23, 1998, with
respect to the acquisition of Exal.
On February 6, 1998, Tredegar acquired two Canada-based
aluminum extrusion and fabrication plants from Reynolds Metals Company
("Reynolds"). The plants are located in Ste-Therese, Quebec, and
Richmond Hill, Ontario. The two plants collectively generated sales of
approximately $55 million in 1997 and $23.7 million for the period from
February 6 through June 30, 1998. Both facilities manufacture products
used primarily in building and construction, transportation,
electrical, machinery and equipment, and consumer durables markets.
On May 30, 1997, Tredegar acquired an aluminum extrusion and
fabrication plant in El Campo, Texas, from Reynolds. The El Campo
facility, which had sales of $21.6 million for the six months ended
June 30, 1998 and $3.2 million for the period May 30 through June 30,
1997, extrudes and fabricates products used primarily in
transportation, electrical and consumer durables markets.
These acquisitions were accounted for using the purchase
method. No goodwill arose from the acquisitions of the former Reynolds
plants since the estimated fair value of the identifiable net assets
acquired equaled the purchase price. Goodwill (the excess of the
purchase price over the estimated fair value of identifiable net assets
acquired) of $13 million was recorded on the acquisition of Exal and is
being amortized on a straight-line basis over 40 years. The operating
results for the five plants have been included in the consolidated
statements of income since the date acquired.
Pro forma financial information with respect to these
acquisitions required by Item 7 of Form 8-K will be filed not later
than August 21, 1998 (60 days from the date the Current Report on Form
8-K was required to be filed for the Exal acquisition).
9. The Financial Accounting Standards Board has issued new standards
affecting the accounting for derivative instruments and hedging
activities and disclosures of information about business segments,
pensions and other postretirement benefits. These standards are not
expected to significantly change Tredegar's operating results,
financial condition or disclosures when adopted. Each of the new
standards will be adopted in the fourth quarter of 1998, except for the
derivatives and hedging standard which will be adopted in the first
quarter of 2000.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Second Quarter 1998 Compared with Second Quarter 1997
Net income for the second quarter of 1998 was $15.2 million or 39 cents
per share, down from $16.3 million or 42 cents per share in the second quarter
of 1997 (all per share amounts in this analysis are expressed on a diluted
basis). Results for 1997 include an unusual gain of $2.25 million ($1.4 million
after income taxes or 4 cents per share) related to the redemption of preferred
stock received in connection with the 1996 divestiture of Molded Products (see
Note 2 on page 5). In addition, results for 1998 and 1997 include net gains from
technology-related investment activities of $1 million ($671,000 after income
taxes or 2 cents per share) and $4.5 million ($2.9 million after income taxes or
7 cents per share), respectively.
Net income excluding unusual items and technology-related investment
activities for the second quarter of 1998 was $14.5 million or 37 cents per
share, up from $12 million or 31 cents per share in the second quarter of 1997.
The improved operating earnings were driven by continued volume growth and
acquisitions in Tredegar's aluminum extrusion business, where profits were up
41%. Tredegar operates eight aluminum plants in the U.S. and Canada, five of
which have been acquired since May 1997 (see Note 8 on page 7). Lower losses at
Molecumetics, Tredegar's drug discovery subsidiary, also contributed to the
improved results. Profits in the company's plastics operations declined 4% due
primarily to weakness in Asian markets and higher costs related to new product
introductions. See Notes 2, 3, 7 and 8 on pages 5 through 7 for further
information on items affecting the comparability of operating results and
technology-related investments.
Second-quarter net sales increased 17% in 1998. Excluding revenue from
aluminum acquisitions, sales were down 3% for the quarter due primarily to lower
volume of plastic film exported to Asian markets and lower selling prices
reflecting a decline in plastic resin and aluminum ingot costs and pricing
pressure in Asia, partially offset by higher aluminum extrusion volume and
collaboration revenues at Molecumetics. Higher aluminum extrusions volume was
driven by strength in all building and construction markets and sales to
distributors.
The gross profit margin during the second quarter of 1998 decreased to
20.9% from 21.2% in 1997 due primarily to lower margins in Film Products from
lower volume and pricing pressure in Asian markets and higher costs related to
new product introductions, partially offset by higher volume and margins in
Aluminum Extrusions and higher contract research revenues. Contract research
revenues help to support research and development programs at Molecumetics.
Selling, general and administrative expenses in the second quarter of
1998 increased to $10.2 million from $8.9 million in 1997, but as a percentage
of sales declined to 6% in 1998 compared with 6.2% in 1997.
Research and development expenses increased by $419,000 or 13% due to
higher spending at Molecumetics and Film Products.
8
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, decreased in the second quarter of 1998
by $580,000 or 48% due to a lower average cash equivalents balance (see
Liquidity and Capital Resources on page 12). The average tax-equivalent yield
earned on cash equivalents was approximately 5.7% in 1998 and 5.9% in 1997.
Tredegar's 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 Tredegar's investment policy are safety of principal and
liquidity. Interest expense decreased by $329,000 during the period due
primarily to higher capitalized interest from higher capital expenditures, the
writeoff in 1997 of deferred financing costs related to the refinancing of
Tredegar's revolving credit facility, and lower average debt outstanding.
The effective tax rate excluding unusual items and technology-related
investment activities was 35% in the second quarters of 1998 and 1997, as the
impact of a decline in average tax-exempt investments was offset by a lower
effective state income tax rate.
Six Months 1998 Compared with Six Months 1997
Net income for the first six months of 1998 was $32.5 million or 84
cents per share, up from $27.3 million or 69 cents per share in the first six
months of 1997. Results for 1998 include an unusual gain of $765,000 ($2.8
million after income taxes or 7 cents per share) on the sale of APPX Software on
January 16, 1998. Results for 1997 include an unusual gain of $2.25 million
($1.4 million after income taxes or 4 cents per share) related to the redemption
of preferred stock received in connection with the 1996 divestiture of Molded
Products. In addition, results for 1998 and 1997 include net gains from
technology-related investment activities of $1.7 million ($1.1 million after
income taxes or 3 cents per share) and $6.4 million ($4.1 million after income
taxes or 10 cents per share), respectively.
Net income excluding unusual items and technology-related investment
activities for the first six months of 1998 was $28.6 million or 74 cents per
share, up from $21.8 million or 55 cents per share in the first six months of
1997. The improved operating earnings were driven by continued volume growth and
acquisitions in Aluminum Extrusions, higher profits in Film Products and higher
collaboration revenues supporting research and development programs at
Molecumetics. The increase in profits in Film Products was driven by higher
volume and efficiencies in nonwoven film laminates, higher shipments of
Vispore(R) film and higher volume and profit related to European and Latin
American operations, partially offset by weakness in Asian markets and higher
costs related to new product introductions. See Notes 2, 3, 7 and 8 on pages 5
through 7 for further information on items affecting the comparability of
operating results and technology-related investments.
Net sales increased 17% in the first six months of 1998 compared to
1997. Excluding revenue from aluminum acquisitions, sales were up slightly for
the year due primarily to higher volume in Aluminum Extrusions, higher volume in
Film Products in all markets except Asia and collaboration revenues at
Molecumetics, partially offset by lower selling prices reflecting a decline in
plastic resin and aluminum ingot costs and pricing pressure in Asia. Higher
aluminum extrusions volume was driven by strength in all building and
construction markets and sales to distributors.
The gross profit margin during the first six months of 1998 increased
to 21.1% from 20.5% in 1997 due primarily to higher volume and margins in
Aluminum Extrusions, efficiencies in nonwoven film laminates and higher contract
research revenues at Molecumetics, partially offset by lower margins in Film
9
Products from lower volume and pricing pressure in Asian markets and higher
costs related to new product introductions.
Selling, general and administrative expenses in the first six months of
1998 increased to $19 million from $17.5 million in 1997, but as a percentage of
sales declined to 5.8% in 1998 compared with 6.3% in 1997.
Research and development expenses increased by $500,000 or 8% due to
higher spending at Molecumetics and Film Products.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, decreased in the first six months of 1998
by $616,000 or 26% due to a lower average cash equivalents balance (see
Liquidity and Capital Resources on page 12). The average tax-equivalent yield
earned on cash equivalents was approximately 5.7% in 1998 and 1997. Interest
expense decreased by $456,000 during the period due primarily to higher
capitalized interest from higher capital expenditures, the writeoff in 1997 of
deferred financing costs related to the refinancing of Tredegar's revolving
credit facility, and lower average debt outstanding.
The effective tax rate excluding unusual items and technology-related
investment activities was 35% in the first six months of 1998 and 1997, as the
impact of a decline in average tax-exempt investments was offset by a lower
effective state income tax rate.
10
Segment Results
The following tables present Tredegar's net sales and operating profit
by segment for the second quarter and six months ended June 30, 1998 and 1997.
Net Sales by Segment
(In Thousands)
(Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Film Products and Fiberlux $ 73,703 $ 78,220 $ 151,112 $ 153,657
Aluminum Extrusions 95,076 66,042 172,798 123,537
Technology:
Molecumetics 1,167 216 2,667 216
Other - 491 29 904
--------- --------- --------- ---------
Total net sales $ 169,946 $ 144,969 $ 326,606 $ 278,314
========= ========= ========= =========
Operating Profit by Segment
(In Thousands)
(Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Film Products and Fiberlux $ 12,015 $ 12,546 $ 27,132 $ 23,514
Aluminum Extrusions 12,808 9,069 21,593 15,771
Technology:
Molecumetics (971) (1,494) (1,465) (3,159)
Investments 1,046 4,474 1,722 6,359
Other - (24) (428) (66)
Unusual items - - 765 -
--------- --------- --------- ---------
75 2,956 594 3,134
--------- --------- --------- ---------
Divested operations:
Unusual items - 2,250 - 2,250
--------- --------- --------- ---------
- 2,250 - 2,250
--------- --------- --------- ---------
Total operating profit 24,898 26,821 49,319 44,669
Interest income 629 1,209 1,744 2,360
Interest expense 292 621 686 1,142
Corporate expenses, net 1,881 2,158 3,885 3,754
--------- --------- --------- ---------
Income before income taxes 23,354 25,251 46,492 42,133
Income taxes 8,193 8,904 14,035 14,832
--------- --------- --------- ---------
Net income $ 15,161 $ 16,347 $ 32,457 $ 27,301
========= ========= ========= =========
11
Results for 1998 include an unusual gain of $765,000 ($2.8 million
after income taxes) on the sale of APPX Software on January 16, 1998. Results
for 1997 include an unusual gain of $2.25 million ($1.4 million after income
taxes) related to the redemption of preferred stock received in connection with
the 1996 divestiture of Molded Products. The "Investments" category for 1998 and
1997 is comprised of net gains from technology-related investment activities.
See Note 2 on page 5 for further information on items affecting the
comparability of operating results.
Sales in Film Products declined during the second quarter of 1998 due
primarily to lower volume of plastic film exported to The Procter & Gamble
Company ("P&G") in Asia and lower selling prices reflecting a decline in plastic
resin costs and pricing pressure in Asia. Sales during the first six months of
1998 increased due to higher volume of nonwoven film laminates supplied to P&G
for diapers, higher volume of Vispore(R) film and higher volume of plastic films
manufactured and sold by the company's operations in Latin America and Europe,
partially offset by lower volume of plastic film exported to P&G in Asia and
lower selling prices reflecting a decline in plastic resin costs and pricing
pressure in Asia. Changes in operating profit for the second quarter and the
first six months of 1998 compared to 1997 were driven by the volume changes and
pricing pressures in the areas noted above, as well as higher costs related to
new product introductions, start-up costs for a new production site in China and
the adverse impact of the strong U.S. Dollar on profit generated by European
operations. Operating profit increased at Fiberlux during the second quarter and
first six months of 1998 due to higher sales.
Sales in Aluminum Extrusions increased during the second quarter and
first six months of 1998 due to acquisition-related volume (see Note 8 on page
7) as well as strength in all building and construction markets and sales to
distributors. Excluding acquisitions, volume was up 4% in the second quarter and
the first six months of the year. Operating profit increased during the second
quarter and first six months of 1998 due to higher volume, related lower unit
conversion costs and acquisitions.
Excluding net gains from investment activities and unusual items,
technology segment losses decreased by $547,000 and $1.3 million during the
second quarter and first six months of 1998, respectively, due to revenues
generated from drug development partnerships at Molecumetics.
Liquidity and Capital Resources
Tredegar's total assets increased to $443.1 million at June 30, 1998,
from $410.9 million at December 31, 1997, due mainly to the impact of the
acquisitions in Canada, higher accounts receivable and inventories supporting
higher sales and an increase in technology-related investments (see Note 3 on
page 5), partially offset by a decrease in cash and cash equivalents (see
further discussion below). Total liabilities increased to $161 million at June
30, 1998, from $138.4 million at December 31, 1997, due primarily to the
acquisitions and higher accounts payable supporting higher sales, partially
offset by lower debt outstanding.
Net cash provided by operating activities in excess of capital
expenditures and dividends decreased to $15.9 million in the first six months of
1998 from $25.9 million in 1997 due primarily to higher capital expenditures at
Film Products and Molecumetics and higher working capital supporting higher
sales, partially offset by improved operating results. Higher capital
expenditures in Film Products are related to the new facility near Guangzhou,
China, capacity expansion in Brazil and machinery and equipment added for the
manufacture of new products. The China facility, which produces disposable films
12
for hygiene products marketed in the region, began commercial production in the
second quarter of 1998. Film Products is beginning construction of a new
production site near Budapest, Hungary, which should be operational in mid-1999.
The Hungary facility will produce disposable films for hygiene products marketed
in Eastern Europe. Higher capital expenditures at Molecumetics relate to the
expansion of its research lab in Bellevue, Washington.
The decrease in cash and cash equivalents to $26.6 million at June 30,
1998, from $120.1 million at December 31, 1997, was due to cash used for
acquisitions in Canada ($60.5 million, excluding equity issued of $11.2
million), the repurchase of Tredegar common stock ($34.2 million), cash used for
technology-related investments ($10.8 million, net of proceeds from the sale of
investments), cash used to paydown debt ($5 million) and other net uses
($300,000), partially offset by the $15.9 million of excess cash generated
during the first six months of 1998 and proceeds from the exercise of stock
options ($1.4 million).
Quantitative and Qualitative Disclosures About Market Risk
Tredegar has exposure, among others, to the volatility of polyethylene
resin prices, aluminum ingot and scrap prices, foreign currencies, emerging
markets, interest rates and technology stocks. Changes in resin prices, and the
timing thereof, could have a significant impact on profit margins in Film
Products; however, such 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, Tredegar enters 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 its exposure to
aluminum price volatility under these fixed-price arrangements, which generally
have a duration of not more than 12 months, the company enters into a
combination of forward purchase commitments and futures contracts to acquire
aluminum, based on the scheduled deliveries.
Tredegar sells to customers in foreign markets through its foreign
operations and through export sales from its plants in the U.S. Tredegar
estimates that approximately $15.1 million and $14.6 million of its consolidated
pretax income for the first six months of 1998 and 1997, respectively, relates
to such sales, of which (i) $6.9 million and $9 million, respectively, relates
to income generated from sales and costs denominated in, or indexed to, U.S.
Dollars (primarily income earned on export sales out of the U.S. to Asia ($3
million and $4.6 million, respectively) and Latin America ($1.9 million in each
period)), (ii) $4.7 million and $4.1 million, respectively, relates to income
generated from sales and costs primarily denominated in German Marks and Dutch
Guilders, (iii) $2 million and $1.5 million, respectively, relates to income
generated from sales and costs denominated in the currencies of Brazil and
Argentina and (iv) $1.5 million relates to income generated from Canadian
operations acquired in 1998 (see Note 8 on page 7). Tredegar's exposure to the
relationship between the Canadian Dollar and U.S. Dollar has increased
significantly with its recent acquisitions in Canada; however, the company
believes that this exposure has been substantially neutralized by U.S.
Dollar-based spread (the difference between selling prices and aluminum costs)
generated from its Canadian casting operations and sales exported from Canada to
13
the U.S. Generally, Tredegar views the volatility of foreign currencies and
emerging markets as part of the overall risk of operating in such environments
and, accordingly, adjusts the required rate of return on such investments.
At June 30, 1998, Tredegar had cash and cash equivalents of $26.6
million and debt of $25 million. Debt outstanding consisted of a note with
interest payable semi-annually at 7.2% per year. Annual principal payments of $5
million are due each June through 2003. Tredegar also has a revolving credit
facility that permits borrowings of up to $275 million (no amounts borrowed at
June 30, 1998). The facility matures on July 9, 2002.
Tredegar has 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. Investments in
non-public companies are illiquid and the investments in public companies are
subject to the volatility of equity markets and technology stocks.
Year 2000 Information Technology Issues
The century date compliance problem, which is commonly referred to as
the "Year 2000" problem, will affect many computers and other electronic devices
that are not programmed to properly recognize dates starting with January 1,
2000. This could result in system failures or miscalculations. The potential
impact of such failures include, among others, an inability to order raw
materials, manufacture products, ship products and be paid for the products on a
timely basis.
Since 1996, Tredegar has been actively planning and responding to the
Year 2000 problem. Year 2000 reviews have and will continue to be made to
Tredegar's Executive Committee and senior management. Periodic reviews with the
Board of Directors will begin in August 1998.
Tredegar's Year 2000 compliance efforts are focused on internal
computer-based information systems, external electronic interfaces and
communication equipment, shop floor machines and other manufacturing and
research process control devices. Remediation of systems requiring changes
should be completed by the end of 1998, except for revisions to a small portion
of certain software programs and the replacement of certain software for the
four aluminum extrusion plants recently acquired in Canada (see Note 8 on page
7). Remediation efforts for exceptions will extend into 1999. Testing of systems
began in mid-1998 and will continue through 1999. Tredegar does not believe
contingency plans are necessary for internal systems at this time. The company
is also actively evaluating the Year 2000 capabilities of parties with whom
Tredegar has key business relationships (suppliers, customers and banks, for
example). Contingency plans will be developed for these relationships as needed.
Work to fix the Year 2000 problem is being performed largely by internal
personnel, and the incremental costs associated with correcting the problem are
not expected to have a material adverse effect on the company's operating
results or financial condition.
While Tredegar believes that it is taking the necessary steps to
resolve its Year 2000 issues in a timely manner, there can be no assurance that
there will be no Year 2000 problems. If any such problems occur, Tredegar will
work to solve them as quickly as possible. At present, Tredegar does not expect
that any such problems will have a material adverse effect on its business. The
14
failure, however, of a major customer or supplier to be Year 2000 compliant
could have a material adverse effect on Tredegar.
New Accounting Standards
The Financial Accounting Standards Board has issued new standards
affecting the accounting for derivative instruments and hedging activities and
disclosures of information about business segments, pensions and other
postretirement benefits. These standards are not expected to significantly
change Tredegar's operating results, financial condition or disclosures when
adopted. Each of the new standards will be adopted in the fourth quarter of
1998, except for the derivatives and hedging standard which will be adopted in
the first quarter of 2000.
15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Tredegar's Annual Meeting of Shareholders was held on May 20,
1998. The following sets forth the vote results (adjusted for
the three-for-one stock split payable on July 1, 1998, to
shareholders of record on June 15, 1998) with respect to each
of the matters voted upon at the meeting:
(a) Election of Directors
No. of No. of Votes
Nominee Votes "For" "Withheld"
------- ----------- ----------
John D. Gottwald 32,595,162 81,720
Andre B. Lacy 32,563,842 113,040
Emmett J. Rice 32,537,979 138,903
Thomas G. Slater, Jr. 32,521,608 155,274
There were no broker non-votes with respect to the election of
directors.
(b) Approval of Auditors
Approval of the designation of PricewaterhouseCoopers LLP
(formerly Coopers & Lybrand L.L.P.) as the auditors for
Tredegar for 1998:
No. of Votes No. of Votes No. of
"For" "Against" Abstentions
32,693,289 188,184 65,409
There were no broker non-votes with respect to the approval of
auditors.
(c) Approval of Directors' Stock Plan
No. of Votes No. of Votes No. of
"For" "Against" Abstentions
28,646,178 4,001,664 299,040
There were no broker non-votes with respect to the approval of
the Directors' Stock Plan.
16
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No.
3.1 Articles of Amendment
3.2 Amended By-laws
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant filed a Form 8-K on June 23,
1998, with respect to the acquisition of Exal Aluminum Inc.
(see further information regarding this acquisition in Note 8
on page 7). Pro forma financial information with respect to
the acquisition required by Item 7 of Form 8-K will be filed
not later than August 21, 1998 (60 days from the date the
Current Report on Form 8-K was required to be filed).
17
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 Industries, Inc.
(Registrant)
Date: August 12, 1998 /s/ N. A. Scher
-------------------- ---------------------------------------
Norman A. Scher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1998 /s/ D. Andrew Edwards
-------------------- ---------------------------------------
D. Andrew Edwards
Corporate Controller and Treasurer
(Principal Accounting Officer)
18
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Amendment
3.2 Amended By-laws
27 Financial Data Schedule
19