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, 1998
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 Industries, Inc.
- --------------------------------------------------------------------------------
(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, 1998: 36,142,942.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Industries, Inc.
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 23,287 $120,065
Accounts and notes receivable 94,764 69,672
Inventories 32,526 20,008
Income taxes recoverable - 294
Deferred income taxes 8,652 8,722
Prepaid expenses and other 3,596 4,369
-------- ---------
Total current assets 162,825 223,130
-------- ---------
Property, plant and equipment, at cost 349,391 283,995
Less accumulated depreciation and amortization 195,612 183,397
-------- ---------
Net property, plant and equipment 153,779 100,598
-------- ---------
Other assets and deferred charges 94,089 67,134
Goodwill and other intangibles 32,975 20,075
-------- ---------
Total assets $443,668 $410,937
======== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 51,013 $ 33,168
Accrued expenses 38,827 39,618
Income taxes payable 1,642 -
-------- ---------
Total current liabilities 91,482 72,786
Long-term debt 25,000 30,000
Deferred income taxes 27,634 22,108
Other noncurrent liabilities 8,058 13,497
-------- ---------
Total liabilities 152,174 138,391
-------- ---------
Shareholders' equity:
Common stock, no par value 93,874 115,291
Common stock held in trust for savings
restoration plan (1,212) (1,020)
Unrealized gain on available-for-sale securities 688 5,020
Foreign currency translation adjustment (3,031) (37)
Retained earnings 201,175 153,292
-------- --------
Total shareholders' equity 291,494 272,546
-------- --------
Total liabilities and shareholders' equity $443,668 $410,937
======== ========
See accompanying notes to financial statements.
2
Tredegar Industries, Inc.
Consolidated Statements of Income
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------- --------------------------
1998 1997 1998 1997
--------- -------- --------- --------
Revenues:
Net sales $ 186,638 $ 155,058 $ 513,244 $433,372
Other income (expense), net (246) 3,798 3,055 11,701
--------- -------- --------- --------
Total 186,392 158,856 516,299 445,073
--------- -------- --------- --------
Costs and expenses:
Cost of goods sold 148,309 122,403 405,880 343,658
Selling, general and administrative 9,892 9,438 28,868 26,928
Research and development 3,374 3,220 10,321 9,667
Interest 266 456 952 1,598
Unusual items - - (765) (2,250)
--------- -------- --------- --------
Total 161,841 135,517 445,256 379,601
--------- -------- --------- --------
Income from continuing operations before income taxes 24,551 23,339 71,043 65,472
Income taxes 8,591 8,202 22,626 23,034
--------- -------- --------- --------
Income from continuing operations 15,960 15,137 48,417 42,438
Income from discontinued operations 3,421 - 3,421 -
--------- -------- --------- --------
Net income $ 19,381 $ 15,137 $ 51,838 $ 42,438
========= ======== ========= =========
Earnings per share:
Basic:
Continuing operations $ .44 $ .41 $ 1.33 $ 1.15
Discontinued operations .09 - .09 -
--------- -------- --------- --------
Net income $ .53 $ .41 $ 1.42 $ 1.15
========= ======== ========= ========
Diluted:
Continuing operations $ .41 $ .38 $ 1.24 $ 1.08
Discontinued operations .09 - .09 -
--------- -------- --------- --------
Net income $ .50 $ .38 $ 1.33 $ 1.08
========= ======== ========= ========
Shares used to compute earnings per share:
Basic 36,351 36,918 36,483 36,813
Diluted 38,582 39,762 38,966 39,474
Dividends per share $ .04 $ .03 $ .11 $ .083
See accompanying notes to financial statements.
3
Tredegar Industries, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months
Ended Sept. 30
------------------
1998 1997
-------- ---------
Cash flows from operating activities:
Net income $51,838 $ 42,438
Adjustments for noncash items:
Depreciation 15,897 13,773
Amortization of intangibles 120 39
Deferred income taxes 2,043 40
Accrued pension income and postretirement
benefits (2,833) (3,129)
Gain related to discontinued operations (5,346) -
Gain on sale of technology-related investments (2,041) (9,668)
Gain on divestitures (765) (2,250)
Changes in assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts and notes receivable (4,197) (10,721)
Inventories (2,010) 2,929
Income taxes recoverable 294 1,642
Prepaid expenses and other 921 (1,169)
Accounts payable 5,852 10,517
Accrued expenses and income taxes payable (3,144) 5,569
Other, net (1,870) (227)
-------- ---------
Net cash provided by operating activities 54,759 49,783
-------- ---------
Cash flows from investing activities:
Capital expenditures (24,269) (14,640)
Acquisitions (net of cash acquired of $1,097 in
1998; excludes equity issued of $11,219 in 1998) (60,883) (13,469)
Investments (27,121) (12,987)
Proceeds from the sale of investments 2,919 10,511
Proceeds from property disposals and divestitures 740 2,637
Other, net (1,140) (314)
-------- ---------
Net cash used in investing activities (109,754) (28,262)
-------- ---------
Cash flows from financing activities:
Dividends paid (3,955) (3,069)
Repayments of debt (5,000) (5,000)
Repurchases of Tredegar common stock (36,460) (1,932)
Tredegar common stock purchased by trust for
savings restoration plan (192) (744)
Proceeds from exercise of stock options (including
related income tax benefits realized by Tredegar) 3,824 1,964
-------- ---------
Net cash used in financing activities (41,783) (8,781)
-------- ---------
(Decrease) increase in cash and cash equivalents (96,778) 12,740
Cash and cash equivalents at beginning of period 120,065 101,261
-------- ---------
Cash and cash equivalents at end of period $23,287 $114,001
======== =========
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 September
30, 1998, and the consolidated results of their operations and their
cash flows for the nine months ended September 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 related notes included in
Tredegar's Annual Report on Form 10-K for the year ended December 31,
1997. The results of operations for the nine months ended September 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. Income and earnings per share from
continuing operations, adjusted for unusual items and
technology-related investment activities affecting the comparability of
operating results, are presented below:
(In Thousands Except Per-Share Amounts)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ ------------------
1998 1997 1998 1997
-------- --------- -------- ---------
Income from continuing operations $ 15,960 $ 15,137 $ 48,417 $ 42,438
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)
-------- --------- -------- ---------
Income from continuing operations as
adjusted for unusual items 15,960 15,137 45,651 40,998
After-tax effect of technology-related net investment
(gains) losses 395 (2,117) (707) (6,187)
-------- --------- -------- ---------
Income from continuing operations as adjusted for unusual
items and technology-related investment activities $ 16,355 $ 13,020 $ 44,944 $ 34,811
======== ========= ======== =========
Diluted earnings per share from continuing operations:
As reported $ .41 $ .38 $ 1.24 $ 1.08
As adjusted for unusual items .41 .38 1.17 1.04
As adjusted for unusual items and technology-related
investment activities .42 .33 1.15 .88
5
3. Discontinued operations includes a net after-tax gain of $3.4 million
related to the reversal of an accrued liability that was established to
cover future payments to the United Mine Workers of America Combined
Benefit Fund. Tredegar was relieved of this liability, which was
incurred by its discontinued coal business, as a result of a recent
U.S. Supreme Court ruling.
4. The carrying value of technology-related investments (included in
"Other assets" in the consolidated balance sheet) was $53 million
($52.7 million cost basis) at September 30, 1998, and $33.5 million
($25.8 million cost basis) at December 31, 1997. The excess of the
carrying value over the cost basis is related to available-for-sale
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 $61.4 million at September
30, 1998, and $40.8 million at December 31, 1997.
5. Comprehensive income, defined as net income and other comprehensive
income, was $10.7 million for the third quarter of 1998 and $18.7
million for the third quarter of 1997. Comprehensive income was $44.5
million for the first nine months of 1998 and $45.6 million for the
first nine months of 1997. 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
1998 1997
-------------- --------------
Finished goods $4,723 $1,865
Work-in-process 3,778 2,340
Raw materials 16,181 9,297
Stores, supplies and other 7,844 6,506
-------------- --------------
Total $32,526 $20,008
-------------- --------------
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
------------------- ------------------
1998 1997 1998 1997
---------- -------- -------- --------
Weighted average shares outstanding used
to compute basic earnings per share 36,351 36,918 36,483 36,813
Incremental shares issuable upon the
assumed exercise of stock options 2,231 2,844 2,483 2,661
---------- -------- -------- --------
Shares used to compute diluted earnings
per share 38,582 39,762 38,966 39,474
---------- -------- -------- --------
6
Incremental shares issuable upon the assumed exercise of outstanding
stock options are computed using the average market price during the
related period.
8. 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 20.2 million shares, or 36% of its issued and outstanding
common stock, for $115.2 million ($5.69 per share). As of September 30,
1998, under a standing authorization from its board of directors,
Tredegar may purchase an additional four million shares in the open
market or in privately negotiated transactions at prices management
deems appropriate.
9. On June 11, 1998, Tredegar acquired Canada-based Exal Aluminum Inc.
("Exal"). Exal operates two 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.
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. 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 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 dates acquired.
7
Pro forma financial information with respect to these
acquisitions for the first six months of 1998 and all of 1997 was filed
on Form 8-K on August 19, 1998. Selected historical and pro forma
results for the first nine months of 1998 and all of 1997 as if the
acquisitions occurred at the beginning of 1997, are summarized below:
Tredegar Industries, Inc.
Selected Historical and Pro Forma Financial Information
(In Thousands Except Per-Share Amounts)
(Unaudited)
Nine Months
Ended Sept. 30, 1998 1997
------------------- ------------------
Histor- Pro Histor- Pro
ical Forma ical Forma
---------- -------- -------- --------
Net sales $ 513,244 $559,043 $581,004 $ 743,226
EBITDA 84,181 86,942 89,443 98,881
Depreciation 15,897 16,984 18,364 22,635
Amortization of intangibles 120 264 50 377
Capital expenditures 24,269 24,622 22,655 23,559
Net income from continuing operations as
adjusted for unusual items and
technology-related investment activities 44,944 45,234 48,124 48,613
Related diluted earnings per share 1.15 1.15 1.22 1.22
Shares used to compute diluted EPS 38,966 39,306 39,534 39,914
10. 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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Third Quarter 1998 Compared with Third Quarter 1997
Income from continuing operations for the third quarter of 1998 was $16
million or 41 cents per share, up from $15.1 million or 38 cents per share in
the third quarter of 1997 (all per share amounts in this analysis are expressed
on a diluted basis). Results for 1998 include net losses from technology-related
investment activities of $618,000 ($395,000 after income taxes or 1 cent per
share). Results for 1997 include net gains from technology-related investment
activities of $3.3 million ($2.1 million after income taxes or 5 cents per
share).
Income from continuing operations excluding unusual items and
technology-related investment activities for the third quarter of 1998 was $16.4
million or 42 cents per share, up from $13 million or 33 cents per share in the
third quarter of 1997. The improvement in quarterly earnings was driven by
Tredegar's aluminum extrusions business, where profits were up 40% due to
continued volume growth and acquisitions. Tredegar operates eight aluminum
plants in the U.S. and Canada, five of which have been acquired since May 1997
(see Note 9 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 were relatively flat due primarily to weakness in Asian
markets and higher costs related to new product introductions. See Notes 2, 4, 8
and 9 on pages 5 through 7 for further information on items affecting the
comparability of operating results and technology-related investments.
Third-quarter net sales increased 20% in 1998. Excluding revenue from
aluminum companies acquired in 1998, sales were down 3.5% for the quarter due
primarily to lower plastic film exports to Asian markets and lower selling
prices. The lower selling prices reflect a decline in plastic resin and aluminum
ingot costs and pricing pressure in Asia. Aluminum extrusion volume and contract
research revenues at Molecumetics were up for the period. In addition to
acquisitions, higher aluminum volume was driven by strength in all building and
construction markets and sales to distributors.
The gross profit margin during the third quarter of 1998 decreased to
20.5% from 21.1% in 1997 due primarily to acquisitions in Aluminum Extrusions.
The acquired businesses generally have lower margins than those realized in Film
Products. Higher contract research revenues had a positive impact on margins.
Selling, general and administrative (SG&A) expenses in the third
quarter of 1998 were $9.9 million, up from $9.4 million in 1997. As a percentage
of sales, SG&A expenses declined to 5.3% in 1998 compared with 6.1% in 1997. The
company's savings plan restoration charges were lower by $1.3 million due to a
decrease in Tredegar's stock price during the third quarter of 1998 compared to
an increase for the same period in 1997.
Research and development expenses increased by $154,000 or 5% due to
higher spending at Molecumetics.
9
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, decreased in the third quarter of 1998 by
$1.1 million to $218,000 due to a lower average cash equivalents balance (see
Liquidity and Capital Resources on page 13). The average tax-equivalent yield
earned on cash equivalents was approximately 5.6% in 1998 and 5.7% in 1997.
Interest expense decreased by $190,000 during the period due primarily to higher
capitalized interest from higher capital expenditures and lower average debt
outstanding.
The effective tax rate, excluding unusual items and technology-related
investment activities, was approximately 35% in the third 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.
Nine Months 1998 Compared with Nine Months 1997
Income from continuing operations for the first nine months of 1998 was
$48.4 million or $1.24 per share, up from $42.4 million or $1.08 per share in
the first nine 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 include net gains from
technology-related investment activities of $1.1 million ($707,000 after income
taxes or 2 cents per share) in 1998 and $9.7 million ($6.2 million after income
taxes or 16 cents per share) in 1997.
Income from continuing operations excluding unusual items and
technology-related investment activities for the first nine months of 1998 was
$44.9 million or $1.15 per share, up from $34.8 million or 88 cents per share in
the first nine months of 1997. Continued volume growth and acquisitions in
Aluminum Extrusions, higher profits in Film Products and higher contract
research revenues at Molecumetics drove the improved operating earnings. Film
Products profit improved in most markets except Asia, where year-to-date profits
have declined by approximately $3 million. See Notes 2, 4, 8 and 9 on pages 5
through 7 for further information on items affecting the comparability of
operating results and technology-related investments.
Net sales increased 18% in the first nine months of 1998 compared to
1997. Excluding revenue from aluminum companies acquired in 1998, sales were
down slightly for the period due primarily to lower plastic film exports to
Asian markets and lower selling prices. The lower selling prices reflect a
decline in plastic resin and aluminum ingot costs and pricing pressure in Asia.
Aluminum extrusion volume and contract research revenues at Molecumetics were up
for the period. In addition to acquisitions, higher aluminum volume was driven
by strength in all building and construction markets and sales to distributors.
The gross profit margin during the first nine months of 1998 was 20.9%,
up from 20.7% in 1997 due primarily to material efficiencies in nonwoven film
laminates, partially offset by the impact of acquisitions in Aluminum
Extrusions. The acquired businesses generally have lower margins than those
generated by Film Products. Higher contract research revenues also had a
positive impact on margins.
10
Selling, general and administrative (SG&A) expenses in the first nine
months of 1998 were $28.9 million, up from $26.9 million in 1997. As a
percentage of sales, SG&A expenses declined to 5.6% in 1998 compared with 6.2%
in 1997. The company's savings plan restoration charges were lower by $1.2
million due to a decrease in Tredegar's stock price for the first nine months of
1998 compared to an increase for the same period in 1997.
Research and development expenses increased by $654,000 or 7% due to
higher spending at Molecumetics.
Interest income, which is included in "Other income (expense), net" in
the consolidated statements of income, decreased in the first nine months of
1998 by $1.7 million or 46% due to a lower average cash equivalents balance (see
Liquidity and Capital Resources on page 13). The average tax-equivalent yield
earned on cash equivalents was approximately 5.7% in 1998 and 1997. Interest
expense decreased by $646,000 during the period due primarily to higher
capitalized interest from higher capital expenditures, the 1997 writeoff 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 approximately 35% in the first nine 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.
11
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, 1998 and
1997.
Net Sales by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------- -------------------
1998 1997 1998 1997
---------- -------- --------- ---------
Film Products and Fiberlux $ 72,878 $ 78,046 $ 223,990 $231,703
Aluminum Extrusions 112,440 75,401 285,238 198,938
Technology:
Molecumetics 1,320 1,117 3,987 1,333
Other - 494 29 1,398
---------- --------- --------- ---------
Total net sales $186,638 $155,058 $ 513,244 $433,372
========== ========= ========= =========
Operating Profit by Segment
(In Thousands)
(Unaudited)
Third Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
------------------- ------------------
1998 1997 1998 1997
---------- -------- -------- --------
Film Products and Fiberlux $ 13,131 $ 12,985 $ 40,263 $ 36,499
Aluminum Extrusions 13,557 9,690 35,150 25,461
Technology:
Molecumetics (995) (609) (2,460) (3,768)
Investments (618) 3,309 1,104 9,668
Other - (201) (428) (267)
Unusual items - - 765 -
---------- -------- -------- --------
(1,613) 2,499 (1,019) 5,633
---------- -------- -------- --------
Divested operations:
Unusual items - - - 2,250
---------- -------- -------- --------
- - - 2,250
---------- -------- -------- --------
Total operating profit 25,075 25,174 74,394 69,843
Interest income 218 1,276 1,962 3,636
Interest expense 266 456 952 1,598
Corporate expenses, net 476 2,655 4,361 6,409
---------- -------- -------- --------
Income from continuing operations before
income taxes 24,551 23,339 71,043 65,472
Income taxes 8,591 8,202 22,626 23,034
---------- -------- -------- --------
Income from continuing operations 15,960 15,137 48,417 42,438
Income from discontinued operations 3,421 - 3,421 -
---------- -------- -------- --------
Net income $ 19,381 $15,137 $51,838 $42,438
========== ======== ======== ========
12
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 and losses 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 third quarter and first nine
months of 1998 due to lower plastic film exports to The Procter & Gamble Company
("P&G") in Asia and lower selling prices reflecting lower plastic resin costs
and pricing pressure in Asia, partially offset by:
- Sales of new products supplied to P&G and others in North America
- Higher volume of Vispore(R) film (primarily used for ground cover
applications)
- Higher volume of plastic films manufactured and sold by the company's
operations in Europe (primarily permeable film supplied to P&G for
feminine pads)
Changes in operating profit for the third quarter and the first nine months
of 1998 compared to 1997 were driven by the factors noted above, and were
adversely impacted by:
- Higher costs related to new product introductions
- Start-up costs for a new production site in China
Profits in the first nine months of 1998 also improved for plastic film
operations in Latin America. Operating profit increased at Fiberlux during the
third quarter and first nine months of 1998 due to higher sales.
Sales in Aluminum Extrusions increased during the third quarter and
first nine months of 1998 due to acquisition-related volume (see Note 9 on page
7) as well as strength in all building and construction markets and sales to
distributors. Excluding acquisitions, volume was up 5% in the third quarter and
4% in the first nine months of the year. Operating profit increased during the
third quarter and first nine months of 1998 due to higher volume, related lower
unit conversion costs and acquisitions.
Excluding results of investment activities and unusual items,
technology segment losses increased by $185,000 during the third quarter of 1998
due to start-up expenses relating to new contract research programs at
Molecumetics. Technology segment losses decreased by $1.1 million during the
first nine months of 1998 due to higher contract research revenues.
Liquidity and Capital Resources
Tredegar's total assets increased to $443.7 million at September 30,
1998, from $410.9 million at December 31, 1997, due mainly to the impact of the
acquisitions in Canada, an increase in technology-related investments, partially
offset by a decrease in cash and cash equivalents (see further discussion
below). Total liabilities increased to $152.2 million at September 30, 1998,
from $138.4 million at December 31, 1997, due primarily to acquisitions,
partially offset by lower debt outstanding and the reversal of an accrued
liability related to discontinued operations (see Note 3 on page 6).
13
Net cash provided by operating activities in excess of capital
expenditures and dividends decreased to $26.5 million in the first nine months
of 1998 from $32.1 million in 1997 due primarily to higher capital expenditures
for manufacturing and research operations and higher dividends, 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 purchased for the manufacture of new products. The
China facility, which produces disposable films 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 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). Higher capital expenditures at Molecumetics relate to the
expansion of its research lab in Bellevue, Washington.
The reasons for the decrease in cash and cash equivalents to $23.3
million at September 30, 1998, from $120.1 million at December 31, 1997, are
summarized below:
(In Thousands)
Cash and cash equivalents balance, December 31, 1997 $120,065
---------
Cash provided by operating activities in excess of
capital expenditures and dividends 26,535
Proceeds from the exercise of stock options (including
related income tax benefits realized by Tredegar) 3,824
Acquisitions (60,883)
Repurchases of Tredegar common stock (36,460)
New technology-related investments, net of proceeds
from disposals (24,202)
Repayments of debt (5,000)
Other, net (592)
---------
Net uses of cash (96,778)
---------
Cash and cash equivalents balance, September 30, 1998 $ 23,287
=========
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.
14
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 $22 million and $21.7 million of its consolidated
pretax income from continuing operations (excluding technology investment
activities and unusual items) for the first nine months of 1998 and 1997,
respectively, relates to such sales. Tredegar's estimate of the percentage of
consolidated pretax income earned by geographic area for the first nine months
of 1998 and 1997 is as follows:
Estimated % of Consolidated Pretax
Income Earned by Geographic Area*
Nine Months
Ended Sept. 30
------------------
1998 1997
-------- --------
United States 68 % 60 %
Europe 11 12
Latin America 9 10
Canada 7 7
Asia 5 11
-------- --------
Total 100 % 100 %
======== ========
*Based on consolidated pretax income from
continuing operations excluding
technology activities and unusual items.
Tredegar attempts to match the pricing and cost of its products in the
same currency and generally views 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.
At September 30, 1998, Tredegar had cash and cash equivalents of $23.3
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
September 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.
15
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 began 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 9 on page
7). Remediation efforts for the 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 Tredegar does not track those costs. 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
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.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No.
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant filed a Form 8-K on June 23,
1998, and an amended current report on Form 8-K on August 19,
1998, with respect to the acquisition of Exal Aluminum Inc.
(see further information regarding this acquisition in Note 9
on page 7).
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: November 13, 1998 /s/ N. A. Scher
---------------------- -------------------------------------------
Norman A. Scher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 /s/ D. Andrew Edwards
------------------------ --------------------------------------------
D. Andrew Edwards
Corporate Controller and Treasurer
(Principal Accounting Officer)
18
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
19
5
1,000
9-MOS
DEC-31-1998
SEP-30-1998
23,287
0
98,490
3,726
32,526
162,825
349,391
195,612
443,668
91,482
25,000
0
0
93,875
197,619
443,668
513,244
516,299
405,880
405,880
38,160
264
952
71,043
22,626
48,417
3,421
0
0
51,838
1.42
1.33
