SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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 September 30, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
/ / OF THE SECURITIES EXCHANGE ACT OF 1934
- ----
For the transition period from to
-------------------- --------------------
Commission file number 1-10258
Tredegar Corporation
- -------------------------------------------------------------------------------
(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
----- -----
The number of shares of Common Stock, no par value, outstanding as of
October 31, 1999: 37,261,900.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 19,434 $ 25,409
Accounts and notes receivable 118,962 94,341
Inventories 46,264 34,276
Deferred income taxes 8,755 8,762
Prepaid expenses and other 2,085 3,536
Total current assets 195,500 166,324
Property, plant and equipment, at cost 459,755 356,411
Less accumulated depreciation and amortization 218,715 200,380
Net property, plant and equipment 241,040 156,031
Venture capital investments 107,876 60,024
Other assets and deferred charges 39,955 41,886
Goodwill and other intangibles 153,936 32,913
--------- ---------
Total assets $ 738,307 $ 457,178
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 61,200 $ 47,551
Accrued expenses 43,604 41,071
Income taxes payable 163 243
-------- --------
Total current liabilities 104,967 88,865
Long-term debt 250,000 25,000
Deferred income taxes 25,956 24,914
Other noncurrent liabilities 7,997 8,104
-------- --------
Total liabilities 388,920 146,883
-------- --------
Shareholders' equity:
Common stock, no par value 98,972 95,893
Common stock held in trust for savings
restoration plan (1,212) (1,212)
Unrealized gain on available-for-sale security 3,125 1,376
Foreign currency translation adjustment (1,630) (2,519)
Retained earnings 250,132 216,757
-------- --------
Total shareholders' equity 349,387 310,295
-------- --------
Total liabilities and shareholders' equity $738,307 $ 457,178
======== ========
See accompanying notes to financial statements.
2
Tredegar Corporation
Consolidated Statements of Income
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ ---------------------
1999 1998 1999 1998
-------- -------- -------- ----------
Revenues:
Net sales $215,911 $186,638 $590,292 $513,244
Other income (expense), net (3,889) (246) (4,907) 3,055
-------- -------- -------- --------
Total 212,022 186,392 585,385 516,299
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 171,389 148,223 465,614 405,760
Selling, general and administrative 11,991 9,892 34,513 28,868
Research and development 5,969 3,374 15,819 10,321
Amortization of intangibles 1,275 86 2,144 120
Interest 3,047 266 4,853 952
Unusual items (712) - 3,916 (765)
--------- -------- --------- --------
Total 192,959 161,841 526,859 445,256
--------- -------- --------- --------
Income before income taxes 19,063 24,551 58,526 71,043
Income taxes 6,748 8,591 20,723 22,626
--------- -------- --------- --------
Income from continuing operations 12,315 15,960 37,803 48,417
Income from discontinued operations - 3,421 - 3,421
-------- -------- -------- --------
Net income $ 12,315 $19,381 $ 37,803 $ 51,838
======== ======= ======== ========
Earnings per share:
Basic:
Continuing operations $ .33 $ .44 $ 1.02 $ 1.33
Discontinued operations - .09 - .09
------- ------- -------- --------
Net income $ .33 $ .53 $ 1.02 $ 1.42
======= ======= ======== ========
Diluted:
Continuing operations $ .32 $ .41 $ .97 $ 1.24
Discontinued operations - .09 - .09
------- ------- -------- --------
Net income $ .32 $ .50 $ .97 $ 1.33
======= ======= ======== ========
Shares used to compute earnings per share:
Basic 37,098 36,351 36,893 36,483
Diluted 38,718 38,582 38,754 38,966
Dividends per share $ .04 $ .04 $ .12 $ .11
See accompanying notes to financial statements.
3
Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
Ended Sept. 30
-------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 37,803 $ 51,838
Adjustments for noncash items:
Depreciation 20,146 15,897
Amortization of intangibles 2,144 120
Write-off of in-process R&D acquired and other intangibles 3,725l -
Deferred income taxes (1,071) 2,043
Accrued pension income and postretirement benefit (2,331) (2,833)
Loss (gain) on sale of venture capital investments 4,994 (2,041)
Loss (gain) on equipment writedowns and divestitures 458 (765)
Gain related to discontinued operations - (5,346)
Changes in assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts and notes receivable (10,208) (4,197)
Inventories 4,806 (2,010)
Income taxes recoverable - 294
Prepaid expenses and other 1,624 921
Accounts payable 10,502 5,852
Accrued expenses and income taxes payable 1,347 (3,144)
Other, net (2,117) (1,870)
--------- ---------
Net cash provided by operating activities 71,822 54,759
--------- ---------
Cash flows from investing activities:
Capital expenditures (32,792) (24,269)
Acquisitions (net of cash acquired of $1,097 in
1998; excludes equity issued of $11,219 in 1998) (215,227) (60,883)
Venture capital investments (55,727) (27,121)
Proceeds from the sale of venture capital investment 2,234 2,919
Proceeds from property disposals and divestitures 905 740
Other, net (841) (1,140)
--------- ---------
Net cash used in investing activities (301,448) (109,754)
--------- ---------
Cash flows from financing activities:
Dividends paid (4,428) (3,955)
Net increase (decrease) in borrowings 225,000 (5,000)
Repurchases of Tredegar common stock - (36,460)
Tredegar common stock purchased by trust for
savings restoration plan - (192)
Proceeds from exercise of stock options (including
related income tax benefits realized) 3,079 3,824
--------- ---------
Net cash provided by (used in) financing activit 223,651 (41,783)
--------- ---------
Increase (decrease) in cash and cash equivalents (5,975) (96,778)
Cash and cash equivalents at beginning of period 25,409 120,065
--------- ---------
Cash and cash equivalents at end of period $ 19,434 $ 23,287
========= =========
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, 1999, and the consolidated results of operations and cash flows for
the nine months ended September 30, 1999 and 1998. 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, 1998. The results
of operations for the nine months ended September 30, 1999, are not
necessarily indicative of the results to be expected for the full year.
2. On October 20, 1999, Tredegar borrowed $250 million under a new term
loan agreement dated October 13, 1999. A portion of the term loan
proceeds ($230 million) was used to repay all of the outstanding
borrowings under our revolving credit facility. The balance ($20
million) was invested in cash equivalents, and is expected to be used
in the next twelve months to fund capital expenditures and venture
capital investment opportunities. The revolving credit facility permits
borrowings of up to $275 million (no amounts borrowed at November 12,
1999) and matures on July 9, 2002. Tredegar also has a note payable
with a remaining balance of $20 million. Total debt due and outstanding
at November 12, 1999 is summarized below:
Debt Due and Outstanding at Nov. 12, 1999
-----------------------------------------
(Dollars in Thousands)
Total
Year Note Term Debt
Due Payable Loan Due
-------- ------- -------- --------
2000 $ 5,000 $ - $ 5,000
2001 5,000 - 5,000
2002 5,000 - 5,000
2003 5,000 50,000 55,000
2004 - 75,000 75,000
2005 - 125,000 125,000
---------------------------------------
Total $20,000 $250,000 $270,000
5
Interest is payable on the note semi-annually at 7.2% per
year. The term loan and revolving credit agreements provide for
interest to be charged at a base rate (generally the London Interbank
Offered Rate ("LIBOR")) plus a spread that is dependent on our
quarterly debt-to-total capitalization ratio. The fully-borrowed spread
over LIBOR charged at the various debt-to-total capitalization levels
are as follows:
Fully-Borrowed Spread Over LIBOR
Under Credit Agreements (Basis Points)
--------------------------------------
Debt-to-Total Term
Capitalization Ratio Revolver Loan
-------------------- -------- -----
Greater than 55% and less than or equal to 60% 50.0 100.0
Greater than 50% and less than or equal to 55% 50.0 87.5
Greater than 40% and less than or equal to 50% 37.5 75.0
Greater than 35% and less than or equal to 40% 37.5 62.5
Greater than 30% and less than or equal to 35% 30.0 62.5
Less than or
equal to 30% 30.0 50.0
The interest rate on the $250 million term loan for the 92-day
period from October 20, 1999 to January 20, 2000, is 7%, and will float
thereafter based on the interest period selected, LIBOR and the
applicable spread over LIBOR. Our loan agreements permit a maximum
debt-to-total capitalization ratio of 60%.
3. On September 24, 1999, Tredegar announced that its board of directors
is evaluating alternative financing and structural options for its
technology group, including a possible spin-off of the unit into an
independent company. The technology group was formed in 1992 and
includes Molecumetics, Ltd.,Therics, Inc. and Tredegar Investments,
Inc. Molecumetics, based in Seattle, Washington, is a drug discovery
company dedicated to the identification of small-molecule drug
candidates for license and development by pharmaceutical and
biotechnology company partners, which currently include Bristol-Myers
Squibb Company, Asahi Chemical Industries, Teijin Limited, ChoongWae
Pharma and Pharmacia & Upjohn Company. Therics, based in Princeton,
New Jersey, was acquired on April 8, 1999 (see Note 4), and is
developing microfabrication technology that has potential applications
in drug delivery and other medical markets. Tredegar Investments,
also based in Seattle, is our venture capital subsidiary.
The carrying value of venture capital investments was $107.9
million($110.1 million cost basis) at September 30, 1999, and $60
million ($60.6 million cost basis) at December 31, 1998. The estimated
net asset value of venture capital investments at September 30, 1999
and December 31, 1998, were as follows:
(In Thousands Except Per-Share Data)
Sept. 30, Dec. 31,
1999 1998
Estimated fair value of venture capital investments $138,514 $ 70,841
Estimated income taxes on assumed disposal at
fair value (10,221) (3,681)
-------- --------
Net asset value of venture capital investments $128,293 $ 67,160
======== ========
Net asset value of venture capital investments
per Tredegar common share $ 3.45 $ 1.83
======== ========
6
The change in net asset value for venture capital investments
related to investment activities and portfolio performance for the nine
months ended September 30, 1999 and 1998, is summarized below:
(In Thousands)
Nine Months
Ended Sept. 30
1999 1998
--------- ---------
Net realized gains, losses, writedowns and related
operating expenses for venture capital investments
reflected in consolidated statements of income $ (6,767) $ 1,104
Change in unrealized appreciation of venture
capital investments 22,554 (5,608)
Pretax change in venture capital net asset value
related to investment activities 15,787 (4,504)
Provision for income taxes 5,683 (1,621)
Net change in venture capital net asset value
related to investment activities $ 10,104 $(2,883)
The venture capital portfolio is comprised of 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 merged with other public companies or registered shares in
initial public offerings. As a result of these investments, we have
direct or indirect ownership stakes in more than 150 technology-based
start-up companies, primarily in the communications, information
technology and life sciences industries. The portfolio has an overall
weighted average age of 1.6 years. Most liquidation opportunities are
not expected for several years and will depend on many factors,
including market conditions.
The fair value of securities of public companies is determined
based on closing price quotations. We estimate the fair value of
securities of private companies using the indicative value from the
latest round of financing, and reduce this amount if events subsequent
to the financing imply a lower valuation. The fair value of ownership
interests in private venture capital funds is based on our estimate of
our distributable share of fund net assets using the general partners'
estimate of fair value of securities held by the funds and fund
formulas for allocating profits, losses and distributions. Because of
the inherent uncertainty associated with the valuation of restricted
securities or securities for which there is no public market, estimates
of fair value may differ significantly from the value that would have
been used had a ready market for the securities existed.
4. On May 17, 1999, Tredegar acquired the assets of Exxon Chemical
Company's plastic films business ("Exxon Films") for cash consideration
of approximately $205 million (including estimated transaction costs of
$2.9 million). The acquisition was funded with borrowings under our
revolving credit facility, and has since been refinanced by our new
term loan (see Note 2). During the 12 months ended March 31, 1999,
Exxon Films had pro forma revenues of $111 million and generated pro
forma EBITDA (earnings before interest, taxes, depreciation and
amortization and excluding potential synergies) of $24.6 million. The
asset-purchase structure, unlike a stock-purchase transaction, allows
Tredegar to deduct for tax purposes over time the full value of
depreciable fixed assets and intangibles (goodwill).
7
Tredegar expects that, by 2001, the annual ongoing benefits
from synergies (cost reductions, efficiencies and technology
enhancements expected from the integration of Exxon Films into existing
operations) will range from $7 - $9 million.
In addition to Exxon Films, Tredegar acquired:
- - The assets of Therics, Inc. ("Therics") on April 8, 1999
- - The stock of Canadian-based Exal Aluminum Inc. ("Exal") on June 11,1998
- - Two Canadian-based aluminum extrusion and fabrication plants from
Reynolds Metals Company ("Reynolds") on February 6, 1998
The assets of Therics were acquired for cash consideration of
$13.6 million (including transaction costs). Before the acquisition,
Tredegar owned approximately 19% of Therics. Upon the final liquidation
of the former Therics, Tredegar will have paid approximately $10.2
million to effectively acquire the remaining 81% ownership interest.
Tredegar recognized a nonrecurring charge of $3.5 million (classified
in unusual items in the consolidated statements of income) in the
second quarter of 1999 related to the write-off of acquired in-process
research and development. The amount of the charge was determined
through an independent, third-party analysis.
Exal was acquired for $44.1 million (including transaction
costs), which was comprised of:
- - Cash consideration of $32.9 million($31.8 million net of cash acquired)
380,172 shares of Class I non-voting preferred shares of Tredegar's Bon
L Canada subsidiary (the "Class I Shares")
The Class I Shares are exchangeable into shares of Tredegar
common stock on a one-for-one basis. Each Class I Share is economically
equivalent to one share of Tredegar common stock and accordingly
accounted for in the same manner. Tredegar funded the cash portion of
the purchase price with available cash on hand. Exal operates aluminum
extrusion plants in Pickering, Ontario and Aurora, Ontario. 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.
The former Reynolds plants in Canada were acquired for cash
consideration of $29.1 million (including transaction costs) using
available cash on hand. The plants are located in Ste-Therese, Quebec,
and Richmond Hill, Ontario. Both facilities manufacture extruded and
fabricated aluminum products used primarily in building and
construction, transportation, electrical, machinery and equipment, and
consumer durables markets.
8
Each acquisition was accounted for using the purchase method,
and related operating results have been included in Tredegar's
consolidated statements of income since the dates acquired. Detailed
pro forma financial information for these acquisitions through March
31, 1999, were included in our Form 8-K/A filed on June 25, 1999.
Selected historical and pro forma financial information for Tredegar
through September 30, 1999, is as follows:
Tredegar Corporation
Selected Historical and Pro Forma Financial Information
(In Thousands Except Per-Share Amounts)
Third Quarter Nine Months Last 12
Ended Sept. 30 Ended Sept. 30 Months
1999 1998 1999 1998 9/30/99
-------- --------- -------- -------- ---------
Net sales:
Manufacturing operations $214,190 $ 185,318 $584,806 $509,228 $ 769,627
Technology operating companies 1,721 1,320 5,486 4,016 7,217
Net income:
Manufacturing operations $ 16,496 $ 16,990 $ 48,588 $ 46,792 $ 65,733
Technology Group:
Operating companies (1,808) (635) (3,948) (1,848) (4,616)
Venture capital investments (2,829) (395) (4,331) 707 (4,644)
Unusual items 456 - (2,506) 2,766 (2,931)
Discontinued operations - 3,421 - 3,421 1,292
-------- --------- -------- -------- ---------
Total $ 12,315 $ 19,381 $ 37,803 $ 51,838 $ 54,834
======== ========= ======== ======== =========
Diluted earnings per share:
Manufacturing operations $ .43 $ .44 $ 1.25 $ 1.20 $ 1.70
Technology Group:
Operating companies (.05) (.02) (.10) (.05) (.12)
Venture capital investments (.07) (.01) (.11) .02 (.12)
Unusual items .01 - (.07) .07 (.07)
Discontinued operations - .09 - .09 .03
-------- --------- -------- -------- ---------
Total $ .32 $ .50 $ .97 $ 1.33 $ 1.42
======== ========= ======== ======== =========
EBITDA - manufacturing operations $ 36,464 $ 31,547 $ 99,711 $ 86,317 $ 132,043
As a % of related net sales 17.0% 17.0% 17.1% 17.0% 17.2%
Loss before deprec. & amortiz. for
technology operating companies (2,085) (732) (4,269) (2,136) (4,805)
================================================================================================
Consolidated pro forma information for
acquisitions as if they had occurred
at the beginning of 1998:
Net sales:
Manufacturing operations $214,190 $ 212,669 $628,075 $632,753 $ 841,141
Tech. operating companies 1,721 1,344 5,512 4,056 7,268
EBITDA - manufacturing oper. 36,464 37,721 109,185 104,950 147,319
As a % of pro forma net sales 17.0% 17.7% 17.4% 16.6% 17.5%
Loss before deprec. & amortiz. for
tech. operating companies (2,085) (2,600) (6,061) (7,638) (8,589)
Manufacturing operations:
Net income 16,496 16,936 48,770 45,340 65,629
Diluted earnings per share .43 .44 1.26 1.15 1.69
Technology operating companies:
Net loss (1,808) (2,160) (5,455) (6,308) (7,764)
Diluted loss per share (.05) (.06) (.14) (.16) (.20)
9
Pro forma results assume that Tredegar made the acquisitions
at the beginning of 1998. Excluded from the pro forma results are
synergies expected from the integration of acquired and existing
operations. Accordingly, the pro forma financial information does not
purport to be indicative of the future results or the financial
position of Tredegar or the net income and financial position that
would actually have been attained had the pro forma transactions
occurred on the dates or for the periods indicated.
Unusual items in 1999 include:
- A third-quarter gain of $712,000 on the sale of corporate real
estate ($456,000 after income taxes)
- A second quarter charge of $3.5 million for the write-off of
in-process R&D related to the Therics acquisition ($2.2 million
after deferred income tax benefits)
- A second quarter charge of $1.2 million for the write-off of
equipment related to excess packaging film capacity ($749,000 after
income tax benefits)
Unusual items in 1998 include a first-quarter pretax gain of
$765,000 on the sale of APPX Software. Income taxes in 1998 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. Discontinued operations in 1998 include an after-tax
gain of $3.4 million related to the reversal of an accrued liability
that we established to cover future payments to the United Mine Workers
of America Combined Benefit Fund. We were relieved of this liability,
which was incurred by the divested coal business.
5. Comprehensive income, defined as net income and other comprehensive
income, was $14 million for the third quarter of 1999 and $10.7 million
for the third quarter of 1998. Comprehensive income was $40.4 million
for the first nine months of 1999 and $44.5 million for the first nine
months of 1998. 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.
6. The components of inventories are as follows:
(In Thousands)
Sept. 30 Dec. 31
1999 1998
-------------- --------------
Finished goods $8,130 $4,805
Work-in-process 4,202 3,751
Raw materials 24,276 17,690
Stores, supplies and other 9,656 8,030
-------------- --------------
Total $46,264 $34,276
============== ==============
10
7. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted
average common and potentially dilutive common equivalent shares
outstanding, determined as follows:
(In Thousands)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
---------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
Weighted average shares outstanding used
to compute basic earnings per share 37,098 36,351 36,893 36,483
Incremental shares issuable upon the
assumed exercise of stock options 1,620 2,231 1,861 2,483
------ ------ ------ ------
Shares used to compute diluted earnings
per share 38,718 38,582 38,754 38,966
====== ====== ====== ======
Incremental shares issuable upon the assumed exercise of
outstanding stock options are computed using the average market price
during the related period.
8. The Financial Accounting Standards Board has issued a new standard
affecting the accounting for derivative instruments and hedging
activities. This standard is not expected to significantly change our
operating results, financial condition or disclosures. The new standard
will be adopted in the first quarter of 2001.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Third Quarter 1999 Compared with Third Quarter 1998
Financial results for the quarter and year-to-date are summarized on
page 9.
Earnings from manufacturing operations decreased to 43 cents per
diluted share in the third quarter of 1999 from 44 cents per diluted share in
1998. Excluding the results from the plastic films operations acquired from
Exxon Chemical Company (see Note 4 on page 7), profits in our films business
declined and continue to be adversely affected by lower volume, higher product
development costs, delays in new product introductions and weakness in
international markets. Profits were up 4% in the company's aluminum extrusion
business as continued volume growth was partially offset by higher aluminum
costs.
On September 24, 1999, Tredegar announced that its board of directors
is evaluating alternative financing and structural options for its technology
group, including a possible spin-off of the unit into an independent company.
See Note 3 on page 6 for more information.
Third-quarter 1999 net sales increased primarily due to acquisitions.
On a pro forma basis, net sales increased by 1% due to higher volume and sales
from the plastic films plants acquired from Exxon and higher volume and sales in
Aluminum Extrusions.
The consolidated gross profit margin during the third quarter of 1999
and 1998 was 20.6%.
Selling, general and administrative (SG&A) expenses in the third
quarter of 1999 were $12 million, up from $9.9 million in 1998 due primarily to
acquisitions and higher spending on new products in Film Products. As a
percentage of sales, SG&A expenses increased to 5.6% in 1999 compared with 5.3%
in 1998.
Research and development expenses increased by $2.6 million or 77% due
to the acquisition of Therics and higher spending at Molecumetics.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, increased slightly in the third quarter
of 1999 (up $92,000). The average tax-equivalent yield earned was approximately
5.1% in 1999 and 5.6% in 1998. Interest expense increased by $2.8 million due to
funds borrowed on a floating-rate basis under our revolving credit facility to
acquire Exxon Films (see Note 2 on page 5 and Note 4 on page 7), partially
offset by higher capitalized interest resulting from higher capital
expenditures. Average debt outstanding during the third quarter was $238.6
million (including average floating-rate debt outstanding of $218.6 million), up
from $25 million (all 7.2% fixed-rate debt) in the third quarter of last year.
The average interest rate on debt declined to 5.7% during the third quarter of
1999 from 7.2% in 1998 due to a higher proportion of floating-rate debt. The
average interest rate on floating-rate debt in the third quarter of 1999 was
5.6% (the rate as of November 12, 1999, was 7% - see Note 2 on page 5).
12
The effective tax rate excluding unusual items increased to 35.4% in
the third quarter of 1999 from 35% in the third quarter of 1998.
Nine Months 1999 Compared with Nine Months 1998
The improved earnings from manufacturing operations during the first
nine months ($1.25 per diluted share in 1999 versus $1.20 per diluted share in
1998) were driven by higher volume and acquisitions in our aluminum extrusions
business and the acquisition of Exxon Films (see Note 4 on page 7). Excluding
the results from the plastic films operations acquired from Exxon, profits in
the films business declined and continue to be adversely affected by lower
volume, higher product development costs, delays in new product introductions
and weakness in international markets. See Note 3 on page 6 regarding our recent
announcement concerning the technology group.
Net sales for the first nine months of 1999 increased due to
acquisitions. On a pro forma basis, net sales declined by less than 1% due to
lower average selling prices in Film Products and Aluminum Extrusions, partially
offset by higher pro forma volume in Film Products and higher pro forma volume
and sales in Aluminum Extrusions. Lower selling prices reflect lower average
plastic resin and aluminum costs. Higher volume on a pro forma basis in Film
Products was due to the plastic films operations acquired from Exxon.
The consolidated gross profit margin for the first nine months of 1999
increased to 21.1% from 20.9% in 1998.
Selling, general and administrative (SG&A) expenses were $34.5 million
in 1999, up from $28.9 million in 1998 due primarily to acquisitions and higher
spending on new products in Film Products. As a percentage of sales, SG&A
expenses increased to 5.8% in 1999 compared with 5.6% in 1998.
Research and development expenses increased by $5.5 million or 53% due
to the acquisition of Therics and higher spending at Molecumetics.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, decreased by $1.1 million due to a lower
average cash equivalents balance (see Liquidity and Capital Resources on page
16) and lower yields. The average tax-equivalent yield earned was approximately
4.9% in 1999 and 5.7% in 1998. Interest expense increased by $3.9 million due to
funds borrowed on a floating-rate basis under our revolving credit facility to
acquire Exxon Films (see Note 2 on page 5 and Note 4 on page 7). Average debt
outstanding during the first nine months of 1999 was $130.8 million (including
average floating-rate debt outstanding of $107.8 million), up from $28.1 million
(all 7.2% fixed-rate debt) last year. The average interest rate on debt declined
to 5.8% in 1999 from 7.2% in 1998 due to a higher proportion of floating-rate
debt. The average interest rate on floating-rate debt in 1999 was 5.5% (the rate
as of November 12, 1999, was 7% - see Note 2 on page 5).
The effective tax rate excluding unusual items increased to 35.4% in
the first nine months of 1999 from 35% in 1998 due to lower tax exempt income.
13
Segment Results
The following tables present Tredegar's net sales and operating profit
by segment for the third quarter and nine months ended September 30, 1999 and
1998.
Net Sales by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Film Products $ 93,548 $ 69,885 $236,567 $215,392
Fiberlux 2,620 2,993 7,098 8,598
Aluminum Extrusions 118,022 112,440 341,141 285,238
Technology:
Molecumetics 1,626 1,320 5,391 3,987
Therics 95 - 95 -
Other - - - 29
-------- --------- -------- --------
Total net sales $215,911 $ 186,638 $590,292 $513,244
======== ========= ======== ========
Operating Profit by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Film Products:
Ongoing operations $ 16,235 $ 12,621 $ 41,783 $ 39,211
Unusual items - - (1,170) -
-------- --------- -------- --------
Total Film Products 16,235 12,621 40,613 39,211
-------- --------- -------- --------
Fiberlux 160 510 19 1,052
Aluminum Extrusions 14,107 13,557 42,587 35,150
Technology:
Molecumetics (1,078) (995) (2,825) (2,460)
Therics (1,746) - (3,343) -
Venture capital investments (4,420) (618) (6,767) 1,104
Other - - - (428)
Unusual items - - (3,458) 765
-------- --------- -------- --------
Total technology (7,244) (1,613) (16,393) (1,019)
-------- --------- -------- --------
Total operating profit 23,258 25,075 66,826 74,394
Interest income 310 218 892 1,962
Interest expense 3,047 266 4,853 952
Corporate expenses, net * 1,458 476 4,339 4,361
-------- --------- -------- --------
Income before income taxes 19,063 24,551 58,526 71,043
Income taxes 6,748 8,591 20,723 22,626
-------- --------- -------- --------
Net income from continuing operations $ 12,315 $ 15,960 $ 37,803 $ 48,417
======== ========= ======== ========
* Includes a pretax gain of $712 on the sale of corporate real estate in the
third quarter and nine months ended September 30, 1999.
14
Selected historical and pro forma results for Film Products are
summarized below (pro forma results assume that the acquisition of Exxon Films
(see Note 4 on page 7) occurred at the beginning of 1998):
Film Products
Selected Historical and Pro Forma Financial Information
(In Thousands)
Historical Pro Forma
----------------- ----------------
1999 1998 1999 1998
------- -------- ------- --------
Third Quarter
- -------------
Net sales $ 93,548 $ 69,885 $93,548 $ 97,236
Operating profit 16,235 12,621 16,235 16,349
First Nine Months
- -----------------
Net sales 236,567 215,392 279,836 293,118
Operating profit 41,783 39,211 47,125 46,921
Sales and operating profit in Film Products were higher in 1999 due to
the acquisition of Exxon Films. Excluding the acquisition, sales volume and
operating profit were down due to the adverse effects of:
- - Higher product development spending
- - Delays in new product introductions
- - Weakness in international markets, particularly emerging markets
Selected historical and pro forma results for Aluminum Extrusions are
summarized below (pro forma results assume that acquisitions in 1998 in this
segment (see Note 4 on page 7) occurred at the beginning of 1998):
Aluminum Extrusions
Selected Historical and Pro Forma Financial Information
(In Thousands)
Historical Pro Forma
------------------ ----------------
1999 1998 1999 1998
-------- --------- -------- --------
Third Quarter
- -------------
Net sales $118,022 $ 112,440 $118,022 $112,440
Operating profit 14,107 13,557 14,107 13,557
First Nine Months
- -----------------
Net sales 341,141 285,238 341,141 331,037
Operating profit 42,587 35,150 42,587 36,680
Sales volume and operating profit in Aluminum Extrusions increased in
1999 due to acquisitions, strong demand for architectural and commercial
extrusions and a high percentage of mill finish product which maximized the
utilization of press capacity. Operating results were adversely affected by
press and furnace repairs and resulting downtime at the El Campo, Texas
facility, and expenses and disruption associated with the second phase of the
press modernization project at the Newnan, Georgia plant. Operating results in
the third quarter were hurt by a lag between selling price increases and rapidly
rising aluminum costs.
15
Molecumetics operating losses increased during 1999 due to higher costs
to support related programs. See Note 4 on page 7 regarding the acquisition of
Therics, and Note 3 on page 6 for additional information concerning Tredegar's
technology group.
Liquidity and Capital Resources
Tredegar's total assets increased to $738.3 million at September 30,
1999, from $457.2 million at December 31, 1998, due to the acquisition of Exxon
Films, higher fixed assets from capital expenditures in excess of depreciation
and venture capital investments. Total liabilities increased to $388.9 million
at September 30, 1999, from $146.9 million at December 31, 1998, due mainly to
borrowings related to the acquisition of Exxon Films, capital expenditures and
venture capital investments.
Net cash provided by operating activities in excess of capital
expenditures and dividends increased to $34.6 million in the first nine months
of 1999 from $26.5 million in 1998 due to higher cash flow from operating
activities, partially offset by higher capital expenditures. Higher capital
expenditures in Film Products are related to the new facility near Budapest,
Hungary, and machinery and equipment purchased for the manufacture of new
products (breathable and elastomeric films that are partially replacing
conventional diaper backsheet and other diaper components in order to improve
comfort and fit). The Hungarian facility, which is now operational, produces
disposable films for hygiene products marketed in Eastern Europe. Higher capital
expenditures in Aluminum Extrusions relate to the second phase of a
modernization program at the plant in Newnan, Georgia (the first phase was
completed in 1996).
The reasons for the decrease in cash and cash equivalents to $19.4
million at September 30, 1999, from $25.4 million at December 31, 1998, are
summarized below:
Nine Months
Ended Sept. 30
-------------------
1999 1998
-------- ---------
Cash and cash equivalents, beginning of period $ 25,409 $120,065
Cash provided by operating activities in excess of
capital expenditures and dividends 34,602 26,535
Proceeds from the exercise of stock options 3,079 3,824
Net increase (decrease) in borrowings 225,000 (5,000)
Acquisitions (215,227) (60,883)
Repurchases of Tredegar common stock - (36,460)
New venture capital investments, net of proceeds
from disposals (53,493) (24,202)
Other, net 64 (592)
--------- --------
Net increase (decrease) in cash and cash equivalents (5,975) (96,778)
--------- --------
Cash and cash equivalents, end of period $ 19,434 $ 23,287
========= ========
16
Quantitative and Qualitative Disclosures About Market Risk
Tredegar has exposure to the volatility of interest rates, polyethylene
and polypropylene resin prices, aluminum ingot and scrap prices, foreign
currencies, emerging markets and technology stocks.
See Note 2 on page 5 regarding credit agreements and interest rate
exposures.
Changes in resin prices, and the timing of those changes, could have a
significant impact on profit margins in Film Products; however, those changes
are generally followed by a corresponding change in selling prices. Profit
margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot
and scrap prices but are also generally followed by a corresponding change in
selling prices; however, there is no assurance that higher ingot costs can be
passed along to customers.
In the normal course of business, we enter into fixed-price forward
sales contracts with certain customers for the sale of fixed quantities of
aluminum extrusions at scheduled intervals. In order to hedge our exposure to
aluminum price volatility under these fixed-price arrangements, which generally
have a duration of not more than 12 months, we enter into a combination of
forward purchase commitments and futures contracts to acquire aluminum, based on
the scheduled deliveries.
We sell to customers in foreign markets through our foreign operations
and through exports from U.S. plants. The percentage of consolidated pretax
income earned by geographic area for the first nine months of 1999 and 1998 are
presented below:
Percentage of Consolidated Pretax
Income Earned by Geographic Area*
Nine Months
Ended Sept. 30
----------------
1999 1998
------ ------
United States 57 % 68 %
Canada 19 7
Europe 9 11
Latin America 8 9
Asia 7 5
------ ------
Total 100 % 100 %
====== ======
*Based on consolidated pretax income from continuing operations
excluding venture capital activities and unusual items.
We attempt to match the pricing and cost of our products in the same
currency and generally view the volatility of foreign currencies and emerging
markets, and the corresponding impact on earnings and cash flow, as part of the
overall risk of operating in a global environment. Exports from the U.S. are
generally denominated in U.S. dollars. Our foreign operations in emerging
markets have agreements with certain customers that index the pricing of our
products to the U.S. dollar, the German mark or the euro. Our foreign currency
exposure on income from foreign operations in Europe primarily relates to the
German mark and 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, will increase the proportion of our income earned in the
U.S.
See Note 3 on page 6 regarding Tredegar's technology group.
17
Year 2000 Information Technology Issues0
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 secure raw
materials, manufacture products, ship products and be paid for products on a
timely basis.
Since 1996, we have been actively planning and responding to the Year
2000 problem. Year 2000 reviews have been and will continue to be made to our
Executive Committee and senior management. Periodic reviews with the Board of
Directors began in August 1998.
Our 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 was completed at the end of
1998, except for revisions to a small portion of certain software programs, the
replacement of certain software for the four aluminum extrusion plants recently
acquired in Canada, and computer systems related to the acquisition of Exxon
Films discussed below. Remediation efforts for the exceptions have extended into
1999. Testing of systems began in mid-1998 and will continue through 1999. We do
not believe contingency plans are necessary for internal systems at this time.
We are also actively evaluating the Year 2000 capabilities of parties with whom
we have 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 we do not track those costs. The incremental costs associated with
correcting the problem are not expected to have a material adverse effect on our
operating results, financial condition or cash flows.
The computer hardware, software systems and communications equipment
related to Exxon Films have been replaced and are now Year 2000 compliant. This
business has been integrated into the enterprise-wide systems infrastructure of
Tredegar Film Products. We estimate that the cost of all remediation efforts
related to Exxon Films is approximately $1.9 million, most of which is being
capitalized and amortized over the estimated useful life of related assets.
While we believe that we are taking the necessary steps to resolve our
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, we will work to solve them
as quickly as possible. At present, we do not expect that any such problems will
have a material adverse effect on our businesses. The failure, however, of a
major customer or supplier to be Year 2000-compliant could have a material
adverse effect on our businesses.
18
New Accounting Standards
The Financial Accounting Standards Board has issued a new standard
affecting the accounting for derivative instruments and hedging activities. This
standard is not expected to significantly change our operating results,
financial condition or disclosures. The new standard will be adopted in the
first quarter of 2001.
19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No.
4 Credit Agreement, dated October 13, 1999, among Tredegar
Corporation, the banks named therein, Bank of America,
N.A. as Administrative Agent, The Bank of New York and
Crestar Bank as Co-Documentation Agents
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed for
the quarter ended September 30, 1999.
20
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, 1999 /s/ N. A. Scher
------------------------- --------------------------------------------
Norman A. Scher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 /s/ D. Andrew Edwards
------------------------- --------------------------------------------
D. Andrew Edwards
Vice President, Treasurer and Controller
(Principal Accounting Officer)
21
EXHIBIT INDEX
Exhibit No. Description
4 Credit Agreement, dated October 13, 1999, among Tredegar
Corporation, the banks named therein, Bank of America, N.A. as
Administrative Agent, The Bank of New York and Crestar Bank as
Co-Documentation Agents
27 Financial Data Schedule