Tredegar's Q3 net income down 18.2% to US$9M on operational inefficiencies, increased costs, but sales up to US$197.5M, from US$175.7M a year ago, on volume growth in film products, Bonnell Aluminum
November 2, 2010
A summary of results for manufacturing operations for the three and nine months ended September 30, 2010 and 2009 is shown below:
* Manufacturing operations includes Film Products, Aluminum Extrusions and Corporate Expenses, Interest and Taxes. See Notes to the Financial Tables included with this press release for further detail regarding the items included in the reconciliation between net income (loss) as reported under generally accepted accounting principles (GAAP) and income from manufacturing operations, a non-GAAP financial measure. In addition, Note (h) within the Notes to the Financial Tables provides the definition of income from manufacturing operations and the reasons why management presents the measure.
Nancy M. Taylor, Tredegar's president and chief executive officer, said: "We are encouraged by another quarter of volume growth. Our films business encountered an unexpected surge in customer demand in the third quarter, and we experienced operational inefficiencies and increased costs as a result. Nonetheless, I am pleased with the commitment of our employees to meet aggressive customer delivery requirements. As we enter the fourth quarter, we are cautious as customer feedback indicates a likelihood of inventory corrections."
"Our team at Bonnell Aluminum continues to focus on controlling costs, as we work through the prolonged slowdown in the nonresidential sector and explore opportunities outside of that market."
Ms. Taylor concluded: "Our strong balance sheet should allow us to continue to invest in our people, processes, and growth initiative activities, despite continuing economic uncertainty."
A summary of third quarter and year-to-date operating results for Film Products is provided below:
Third-quarter net sales (sales less freight) rose, primarily due to higher volume and higher average selling prices from the pass-through of increased resin prices. Higher volumes, most notably in packaging (typically lower-value products) and personal care materials, resulted in an unfavorable sales mix in the third quarter of 2010 compared to the third quarter of 2009. Although demand has remained strong for surface protection products used in the LCD (liquid crystal display) market, recent forecasts for that market indicate that demand may be slowing as the market experiences excess panel supply.
Operating profit from ongoing operations decreased in the third quarter of 2010 compared with the prior year. There were a number of contributing factors: higher volume in packaging products resulted in an unfavorable sales mix; operational inefficiencies resulted from a surge in customer demand and the ramp-up of new products; and planned expenditures in support of growth initiatives. The company also estimates that the change in the U.S. dollar value of currencies for operations outside the U.S. had an unfavorable impact of $781,000 in the third quarter of 2010 compared to the third quarter of 2009.
The company estimates that the impact of the quarterly lag in the pass-through of average resin costs on operating profits from ongoing operations was a positive $311,000 in the third quarter of 2010 and was a negative $1.3 million in the third quarter of 2009.
Net sales for the nine months ended September 30, 2010 increased in comparison to the same period in the prior year, primarily due to the higher volume in surface protection products and personal care materials and higher average selling prices from the pass-through of increased resin prices. Operating profit from ongoing operations for the first nine months of 2010 increased from the same period in the prior year, primarily due to higher sales volumes referenced above, partially offset by the unfavorable impact of the lag in the pass-through of higher resin costs in 2010, higher selling, general and administrative expenses, and unfavorable changes in the U.S. dollar value of currencies for operations outside the U.S. The estimated impact of the resin pass-through lag was a negative $4.6 million for the first nine months of 2010 versus a favorable $1.7 million for the first nine months of 2009. The company estimates that the change in the U.S. dollar value of currencies for operations outside the U.S. had an unfavorable impact of approximately $828,000 in the first nine months of 2010 compared to the first nine months of 2009.
Capital expenditures in Film Products were $11.2 million in the first nine months of 2010 compared with $9.1 million in the first nine months of last year. Film Products currently projects that capital expenditures will be approximately $16 million in 2010. Depreciation expense was $25.1 million in the first nine months of 2010 and $24.0 million in the first nine months of 2009, and is projected to be approximately $35 million in 2010.
A summary of third quarter and year-to-date operating results for Aluminum Extrusions, which is also referred to as Bonnell Aluminum, is provided below:
Third-quarter net sales and operating profit were favorably impacted by higher volume. Net sales in the third quarter and first nine months of 2010 increased in comparison to 2009 due to higher average selling prices driven by an increase in aluminum prices. Overall sales volume in the first nine months of 2010 was relatively consistent with the prior year period despite extremely challenging conditions in nonresidential construction that led to a decline in our volumes from this market of approximately 5%. The unfavorable change in the operating loss from ongoing operations reported for the first nine months of 2010 compared with the same period in 2009 reflects lower margins, resulting from a less favorable sales mix.
Capital expenditures for Aluminum Extrusions were $2.3 million in the first nine months of 2010 compared with $14.6 million in the same period of last year. Capital expenditures are projected to be approximately $4 million in 2010. Depreciation expense was $6.9 million in the first nine months of 2010 compared with $5.6 million in the first nine months of 2009, and is projected to be approximately $9 million in 2010.
In the first quarter of 2010, Tredegar added an additional segment, Other, comprised of the start-up operations of Bright View Technologies Corporation (Bright View) and Falling Springs, LLC (Falling Springs). We acquired the assets of Bright View, a late-stage developmental company, on February 3, 2010. Bright View is a developer and producer of high-value microstructure-based optical films for the LED (light emitting diode) and fluorescent lighting markets. Falling Springs develops, owns and operates multiple mitigation banks. Through the establishment of perpetual easements to restore, enhance and preserve wetlands, streams or other protected environmental resources, these mitigation banks create saleable credits that are used by the purchaser of credits to offset the negative environmental impacts from private and public development projects.
Net sales for this segment can fluctuate from quarter-to-quarter as Bright View is a late-stage developmental company and Falling Springs' revenue can vary based upon the timing of development projects within its markets. Operating losses from ongoing operations were $840,000 in the third quarter of 2010 and $2.9 million in the first nine months of 2010.
Corporate Expenses, Interest and Taxes
Pension expense was $408,000 in the third quarter of 2010 and $496,000 in the first nine months of 2010, an unfavorable change of $1.4 million and $3.0 million, respectively, from net pension income recognized in the comparable periods of 2009. Most of the pension impact on earnings is reflected in "Corporate expenses, net" in the net sales and operating profit by segment table. Corporate expenses, net increased in 2010 versus 2009 primarily due to the unfavorable impact of pension expense noted above and adjustments for certain performance-based incentive compensation programs.
In June 2010, we entered into a new $300 million four-year, unsecured revolving credit facility, which replaced our previous revolving credit facility that was due to expire on December 15, 2010. Interest expense, which includes the amortization of debt issue costs, increased $190,000 in the first nine months of 2010 compared to the first nine months of 2009.
The effective tax rate used to compute income taxes from manufacturing operations was 24.6% in the third quarter of 2010 compared with 36.8% in the third quarter of 2009, and 34.1% in the first nine months of 2010 compared with 35.0% for the first nine months of 2009. The decrease in the effective tax rate for manufacturing operations for 2010 versus 2009, which had a favorable impact of approximately five cents per share during the third quarter and approximately one cent per share in the first nine months, was primarily attributed to the effect on income taxes of a reduction in the estimated value of a dividend received from a foreign subsidiary, partially offset by the recognition of a reserve for an uncollectible tax indemnification receivable.
CAPITAL STRUCTURE AND ADJUSTED EBITDA
Net cash (cash and cash equivalents in excess of debt) was $60.8 million at September 30, 2010, compared with net cash of $89.5 million at December 31, 2009. In the first nine months of 2010, cash was used to repurchase 2.1 million shares of our common stock for $35.1 million and to purchase the assets of Bright View. Adjusted EBITDA, a key valuation and borrowing capacity measure, was $83.5 million in the twelve months ended September 30, 2010. Net cash and adjusted EBITDA are financial measures that are not calculated or presented in accordance with generally accepted accounting principles (GAAP). See notes to financial statements and tables for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.