RICHMOND, Va.--(BUSINESS WIRE)--Aug 1, 2018--Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported second-quarter financial results for the period ended June 30, 2018.

Second quarter 2018 net income was $14.7 million ($0.44 per share) compared with net income of $44.2 million ($1.34 per share) in the second quarter of 2017. Net income from ongoing operations, which excludes special items, was $11.5 million ($0.35 per share) in the second quarter of 2018 compared with $8.3 million ($0.25 per share) in the second quarter of 2017. A reconciliation of net income, a financial measure calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), to net income from ongoing operations, a non-GAAP financial measure, for the three and six months ended June 30, 2018 and 2017, is provided in Note (a) of the Notes to the Financial Tables in this press release.

Highlights for ongoing operations for the second quarter of 2018 include:

Operating profit from ongoing operations for PE Films of $8.7 million was $2.0 million lower than the second quarter of 2017 Operating profit from ongoing operations for Flexible Packaging Films was $1.3 million, which was favorable by $1.6 million versus the operating loss in the second quarter of 2017 Operating profit from ongoing operations for Bonnell Aluminum of $13.2 million was $1.4 million higher than the second quarter of 2017

John Gottwald, Tredegar’s president and chief executive officer, said, “Our PE Films segment had a solid first six months, but recent discussions with customers firmed up the timing of previously disclosed product transitions away from certain products in personal care and surface protection films. Our future earnings will be adversely impacted in a meaningful way by these transitions.”

Mr. Gottwald continued, “Terphane’s profit improvement was mainly due to lower depreciation and amortization expenses as a consequence of the impairment charge taken in the fourth quarter of last year. Bonnell Aluminum showed good profit improvement despite continued inefficiencies at our facility in Niles, Michigan.”

Mr. Gottwald further stated, “I’m especially pleased to see our debt, net of cash, at $60.7 million, which reflects a decline of approximately $55 million this year.”

OPERATIONS REVIEW

PE Films

PE Films is composed of personal care materials, surface protection films, polyethylene overwrap films and films for other markets. A summary of second-quarter and year-to-date operating results from ongoing operations for PE Films is provided below:

Second-Quarter 2018 Results vs. Second-Quarter 2017 Results

Net sales (sales less freight) in the second quarter of 2018 decreased by $7.2 million versus 2017 primarily due to lower volume in Personal Care. The sales decline in Personal Care was primarily related to lower demand for topsheet from its largest customer and, due to timing, lower sales of elastic materials in the second quarter of 2018 versus 2017. The Company believes it is making inroads with customers for new elastic products in Europe. In addition, the company is spending $25 million at its plant in Terre Haute, Indiana to expand elastics capacity to serve customers in North America, which is expected to begin production in the middle of 2019.

Sales volume in the second quarter of 2018 in Surface Protection was comparable to the prior year with strong demand for components of flat panel displays continuing through the first half of 2018. Looking forward, there are indications that sales volume in Surface Protection during the third quarter of 2018 may decline sequentially and when compared to last year due to a combination of factors. These factors include a possible inventory build-up by customers during the first half of 2018 and partial customer product transitions, which have already begun, to alternative processes or materials as further discussed in the last two paragraphs of this section.

Operating profit from ongoing operations in the second quarter of 2018 decreased by $2.0 million versus the second quarter of 2017 primarily due to:

Lower contribution to profits from personal care films, primarily due to lower volume as noted above ($2.0 million) and higher variable costs due to timing of resin pass-through ($0.3 million), partially offset by improved pricing on certain products ($0.6 million), net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($0.6 million) and lower sales, general and administrative costs ($0.5 million); Lower contribution to profits from surface protection films, primarily due to a sales return reserve for a quality claim ($1.5 million), manufacturing inefficiencies ($0.8 million) and inventory adjustments ($0.3 million), partially offset by improved mix ($0.9 million); Additional costs of $0.5 million associated with business development activities related to optical films; and Realized cost savings associated with the previously announced project to consolidate domestic manufacturing facilities in PE Films ($0.8 million).

In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produces topsheet films used as components for personal care products. Production is expected to cease at this plant by the end of 2018. The Company expects to recognize costs associated with exit and disposal activities of $7.1 million comprised of: (i) retention, severance and related costs ($3.6 million), (ii) customer-related costs ($1.1 million), and (iii) legal, asset disposal and other cash costs ($2.4 million). In addition, the Company expects non-cash asset write-offs and accelerated depreciation of $0.9 million. Net annual cash savings from consolidating operations of $1.7 million is expected. Proceeds from expected property disposals are uncertain. The Company anticipates that these activities, including property disposals, will require 12-18 months to execute, and the costs are expected to be incurred during this period. See additional information on current year-to-date costs in Note (b) in the Notes to Financial Statements.

The Company continues to anticipate a significant customer product transition in the Personal Care component of PE Films. The Company now expects that customer product transition to begin in the fourth quarter of 2018. The Company currently estimates that, when fully implemented, this will adversely impact the annual sales of the business unit by $70 million and will materially impact earnings. Ongoing discussions with this customer will determine the full implementation schedule. The loss of this business without replacement with new business could trigger an impairment of Personal Care’s long-lived assets and goodwill. As of June 30, 2018, the goodwill balance carried by Personal Care was $47 million. Personal Care has been increasing its R&D spending (an increase of $5 million in 2017 versus 2014), is investing capital, and is accelerating sales and marketing efforts to capture growth and diversify its customer base and product offerings in personal care products. The overall timing and net change in Personal Care’s revenues and profits and capital expenditures needed to support these efforts during this transition period are uncertain at this time.

The Surface Protection component of PE Films supports manufacturers of optical and other specialty substrates used in flat panel display products. These films are primarily used by customers to protect components of displays in the manufacturing and transportation process and then discarded.

The Company previously reported the risk over the next few years that a portion of its film used in surface protection applications will be made obsolete by possible future customer product transitions to less costly alternative processes or materials. The Company estimates that the customer product transitions will be fully implemented by the fourth quarter of 2019. When fully implemented, the Company estimates that the annualized adverse impact on future ongoing operating profit from this customer shift will be approximately $10 million. The Company is aggressively pursuing new surface protection products, applications and customers.

Year-To-Date 2018 Results vs. Year-To-Date 2017 Results

Net sales (sales less freight) in the first six months of 2018 decreased by $0.3 million versus 2017 primarily due to lower topsheet and elastics volume in Personal Care, partially offset by an increase in Surface Protection volume. The factors impacting sales for PE Films during the first half of 2018 versus last year are similar to the factors described above in the quarterly comparison.

Operating profit from ongoing operations in the first six months of 2018 increased by $3.0 million versus the first six months of 2017 primarily due to:

Higher contribution to profits from surface protection films, primarily due to higher volume and improved mix ($3.8 million), partially offset by a sales return reserve for a quality claim ($1.5 million); Lower contribution to profits from personal care films, primarily due to lower volume in topsheet, elastics and other products ($3.4 million), partially offset by improved pricing on certain products ($1.3 million), net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($0.9 million) and lower sales, general and administrative costs ($0.5 million); Additional costs of $0.5 million associated with business development activities related to optical films; and Realized cost savings associated with the previously announced project to consolidate domestic manufacturing facilities in PE Films ($1.8 million).

Capital Expenditures, Depreciation & Amortization

Capital expenditures in PE Films were $7.4 million in the first six months of 2018 compared to $7.8 million in the first six months of 2017. Capital expenditures are projected to be $32 million in 2018, including: $15 million of a total $25 million expected for North American capacity expansion for elastics products in Personal Care; new capacity for next generation products in Surface Protection ($6 million); and approximately $10 million for routine capital expenditures required to support operations. Depreciation expense was $7.6 million in the first six months of 2018 and $6.9 million in the first six months of 2017. Depreciation expense is projected to be $16 million in 2018.

Flexible Packaging Films

Flexible Packaging Films, which is also referred to as Terphane, produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. A summary of second quarter operating results from ongoing operations for Flexible Packaging Films is provided below:

Second-Quarter 2018 Results vs. Second-Quarter 2017 Results

Net sales and volume increased in the second quarter of 2018 compared with the second quarter of 2017 due to higher demand. Terphane was operating at full capacity utilization during the second quarter. To increase capacity, Terphane is spending approximately $1.8 million (including capital expenditures of $1 million and project expenses of $0.8 million) on a previously idled production line which was restarted in mid-June. Also during the second quarter, a nationwide trucking strike caused a disruption of shipments, lowering sales volume by approximately 0.9 million pounds.

Terphane’s operating results from ongoing operations in the second quarter of 2018 increased by $1.6 million versus the second quarter of 2017 primarily due to:

Significantly lower depreciation and amortization of $2.2 million resulting from the $101 million non-cash asset impairment loss recognized in the fourth quarter of 2017; A benefit of $0.6 million primarily from higher volume and favorable foreign currency translation of Real-denominated operating costs, partially offset by a $0.4 million loss on foreign currency forward contracts that partially hedged Real-denominated operating costs; One-time costs of $0.4 million related to the restarting of the idled production line referenced above; and Net foreign currency transaction losses of $0.5 million (losses of $0.3 million in 2018 versus gains of $0.2 million in 2017).

Terphane’s quarterly financial results have been volatile, and the Company expects continued uncertainty and volatility until industry capacity utilization and the competitive dynamics in Latin America improve.

Year-To-Date 2018 Results vs. Year-To-Date 2017 Results

Net sales and volume increased in the first six months of 2018 compared with the first six months of 2017 due to higher demand.

Terphane’s operating results from ongoing operations in the first six months of 2018 increased by $5.3 million versus the first six months of 2017 primarily due to:

Significantly lower depreciation and amortization of $4.5 million resulting from the $101 million non-cash asset impairment loss recognized in the fourth quarter of 2017; A benefit of $1.9 million primarily from higher volume and favorable foreign currency translation of Real-denominated operating costs, partially offset by a $0.4 million loss on foreign currency forward contracts that partially hedged Real-denominated operating costs; One-time costs of $0.5 million related to the restarting of the idled production line referenced above; and Net foreign currency transaction losses of $0.3 million (losses of $0.4 million in 2018 versus $0.1 million in 2017).

Capital Expenditures, Depreciation & Amortization

Capital expenditures in Terphane were $1.4 million in the first six months of 2018 compared to $1.2 million in the first six months of 2017. Terphane currently estimates that total capital expenditures in 2018 will be $5 million, including approximately $1 million to re-start the idled production line referenced above and $4 million for routine capital expenditures required to support operations. Depreciation expense was $0.4 million in the first six months of 2018 and $3.7 million in the first six months of 2017. Depreciation expense is projected to be $1.0 million in 2018. Amortization expense was $0.2 million in the first six months of 2018 and $1.5 million in the first six months of 2017, and is projected to be $0.5 million in 2018. Aggregate depreciation and amortization expense is projected at $1.5 million in 2018, down significantly from $10.5 million in 2017 due to the write-down of Terphane’s long-lived assets during the fourth quarter of 2017.

Aluminum Extrusions

Aluminum Extrusions, which includes Bonnell Aluminum and its operating divisions, AACOA and Futura, produces high-quality, soft-alloy and medium-strength aluminum extrusions primarily for the following markets: building and construction, automotive, and specialty, which consists of consumer durables, machinery and equipment, electrical and distribution end-use products.

A summary of second-quarter results from ongoing operations for Aluminum Extrusions is provided below:

Second-Quarter 2018 Results vs. Second-Quarter 2017 Results

Net sales in the second quarter of 2018 increased versus 2017 primarily due to higher sales volume and an increase in average selling prices primarily due to the pass-through to customers of higher market-driven raw material costs.

Sales volume in the second quarter of 2018 increased by 5.9% versus 2017 due to higher volume in the nonresidential building and construction and specialty markets. Higher average net selling prices, primarily attributed to an increase in aluminum market prices, had a favorable impact on net sales of $14.4 million, and higher volume improved net sales by $6.9 million. Bookings and backlog remain strong.

Operating profit from ongoing operations in the second quarter of 2018 increased by $1.4 million in comparison to the second quarter of 2017, primarily due to higher volume and inflation-related sales prices ($2.4 million), partially offset by increased operating costs, including employee-related expenses and higher depreciation ($1.0 million). Bonnell Aluminum’s Niles, Michigan facility continued to experience inefficiencies. Without these inefficiencies, the Company estimates that operating profit from ongoing operations in the second quarter of 2018 would have been higher by $1 million.

On March 8, 2018, the U.S. imposed tariffs of 10% on aluminum ingot and semi-finished aluminum imported into the U.S. from certain countries, including countries from which Bonnell Aluminum has historically sourced aluminum supplies. On April 6, 2018, the U.S. announced sanctions on certain Russian individuals and on companies controlled by those individuals, including United Company RUSAL Plc, Russia’s largest aluminum producer and a substantial supplier of primary aluminum to the U.S. market. Collectively, these events have resulted in a significant increase in the cost of aluminum ingot used by Bonnell Aluminum to make its products. The average U.S. Midwest Transaction price, the benchmark price for P1020 high-grade aluminum ingot delivered, averaged $1.24 per pound in the second quarter of 2018, up $0.28 from $0.96 per pound in the first quarter of 2017. This price has exceeded $1.35 per pound on certain days in the second quarter of 2018. In 2017, aluminum raw materials comprised 43% of Bonnell Aluminum’s average selling price when the U.S. Midwest Transaction price averaged $0.98 per pound. For the vast majority of its business, Bonnell Aluminum expects to be able to pass through higher aluminum costs to customers. However, sustained higher costs for aluminum extrusions could result in reduced demand and product substitutions in place of aluminum extrusions, which could materially and negatively affect Bonnell Aluminum’s business and results of operations. In addition, continued sanctions on RUSAL Plc could result in aluminum billet supply shortages in the U.S. aluminum extrusion market, although Bonnell does not currently anticipate any impact of such potential shortages on its access to aluminum.

Year-To-Date 2018 Results vs. Year-To-Date 2017 Results

Net sales in the first six months of 2018 increased versus 2017 primarily due to the addition of Futura and higher volume. Futura contributed $47.3 million of net sales in the first six months of 2018 versus $29.4 million for the 131 days owned during the first six months of 2017 (acquired on February 15, 2017). Excluding the impact of Futura, net sales improved due to higher sales volume and an increase in average selling prices primarily due to the pass-through to customers of higher market-driven raw material costs.

Volume on an organic basis (which excludes the impact of the Futura acquisition) in the second quarter of 2018 increased by 4.4% versus 2017 due to higher volume in the nonresidential building and construction and specialty markets. Higher average net selling prices, primarily attributed to an increase in aluminum market prices, had a favorable impact on net sales of $24.7 million, and higher volume improved net sales by $6.9 million.

Operating profit from ongoing operations in the first six months of 2018 increased by $1.8 million in comparison to the first six months of 2017. Excluding the favorable profit impact of Futura ($1.4 million), operating profit from ongoing operations increased $0.4 million, primarily due to:

Higher volume, improved mix and inflation-related sales prices ($5.1 million), partially offset by increased operating costs, including employee-related expenses and higher depreciation ($3.2 million); and Continued inefficiencies associated with the new extrusion line at the Niles, Michigan plant ($1.5 million).

Capital Expenditures, Depreciation & Amortization

Capital expenditures in Bonnell Aluminum were $5.6 million in the first six months of 2018 (including $1.1 million associated with Futura), compared to $17.7 million in the first six months of 2017. Capital expenditures in 2017 included the extrusions capacity expansion project at the facility in Niles, Michigan. Capital expenditures are projected to be $14 million in 2018, including approximately $7 million for infrastructure upgrades and expanded fabrication and machining capabilities, and approximately $7 million for routine items required to support operations. Depreciation expense was $6.6 million in the first six months of 2018 compared to $5.3 million in the first six months of 2017, and is projected to be $13 million in 2018. Amortization expense was $1.8 million in the first six months of 2018 and $1.4 million in the first six months of 2017, and is projected to be $4 million in 2018.

Corporate Expenses, Interest, Taxes & Other

Pension expense was $5.1 million in the first six months of 2018, versus $5.2 million in the first six months of 2017. The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the Net Sales and Operating Profit by Segment table. Pension expense is projected to be $10.2 million in 2018. Corporate expenses, net, increased in the first six months of 2018 versus 2017 primarily due to higher stock-based employee benefit costs and professional fees for services rendered early in the first quarter of 2018 associated with the Terphane non-cash asset impairment loss that was recognized in the fourth quarter of 2017.

Interest expense was $3.2 million in the first six months of 2018 in comparison to $2.8 million in the first six months of 2017, primarily due to higher interest rates.

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