Tredegar Reports Third-Quarter 2018 Results
Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported third-quarter financial results for the period ended September 30, 2018.
The Company recognized a net loss of $34.2 million ($1.03 per share) in the third quarter of 2018 compared with net income of $8.3 million ($0.25 per share) in the third quarter of 2017. Results for the third quarter of 2018 included a goodwill impairment loss for the Personal Care component of PE Films ($38.2 million after taxes or $1.15 per share). Net income from ongoing operations, which excludes special items, was $8.6 million ($0.26 per share) in the third quarter of 2018 compared with $9.4 million ($0.28 per share) in the third quarter of 2017. A reconciliation of net income (loss), 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 nine months ended September 30, 2018 and 2017, is provided in Note (a) of the Notes to the Financial Tables in this press release.
Third Quarter Financial Results Highlights
- Operating profit from ongoing operations for PE Films of $4.1 million was $7.1 million lower than the third quarter of 2017
- Operating profit from ongoing operations for Flexible Packaging Films was $3.6 million, which was favorable by $4.7 million versus the operating loss in the third quarter of 2017
- Operating profit from ongoing operations for Bonnell Aluminum of $11.7 million was $0.9 million lower than the third quarter of 2017
John Gottwald, Tredegar’s president and chief executive officer, said, “Tredegar has provided disclosures over the past three years related to significant risks of lost business in the Personal Care and Surface Protection business units of our PE Films segment, and both of these exposures have become clearer this quarter. We anticipate pre-tax operating profit in 2019 to be impacted by $21 million or more. Furthermore, Personal Care’s goodwill of $47 million has been written off. Both business units have increased R&D and capital spending to develop new customers and products. It is premature to forecast the impact of these efforts.”
PE Films is composed of personal care materials, surface protection films, polyethylene overwrap films and films for other markets. A summary of third-quarter and year-to-date operating results from ongoing operations for PE Films, which does not include the goodwill impairment discussed in the Customer Product Transitions in Personal Care and Surface Protection section, is provided below:
|Three Months Ended||
|Nine Months Ended||
|(In Thousands, Except Percentages)||September 30,||September 30,|
|Sales volume (lbs)||29,597||34,701||(14.7)%||94,519||103,923||(9.0)%|
|Operating profit from ongoing operations||$||4,145||$||11,251||(63.2)%||$||26,857||$||30,965||(13.3)%|
Third-Quarter 2018 Results vs. Third-Quarter 2017 Results
Net sales (sales less freight) in the third quarter of 2018 decreased by $13.3 million versus 2017 primarily due to lower volume in Personal Care and Surface Protection. The volume decline in Personal Care was primarily related to lower demand for topsheet. Volume for elastics and acquisition distribution layer materials increased year-over-year.
Net sales in Surface Protection declined in the third quarter of 2018 versus 2017 (which had particularly strong sales) primarily due to lower volume that the Company believes was due to customer inventory corrections and the previously disclosed customer product transitions to alternative processes or materials, as further discussed in the Customer Product Transitions in Personal Care and Surface Protection section.
Operating profit from ongoing operations in the third quarter of 2018 decreased by $7.1 million versus the third quarter of 2017 primarily due to:
- Lower contribution to profits from surface protection films, primarily due to lower net sales as noted above ($1.9 million, of which $0.3 million, the Company estimates, is related to customer product transitions), a sales return reserve for a quality claim ($2.4 million) and related higher production costs ($0.9 million), higher freight costs ($0.5 million) and higher research and development spending ($0.6 million);
- Lower contribution to profits from personal care films, primarily due to lower volume as noted above, net of a favorable product mix ($2.2 million), partially offset by improved pricing on certain products ($0.7 million), and net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($0.1 million); and
- Realized cost savings associated with the North American consolidation of our PE Films manufacturing facilities completed in 2017 ($0.5 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 during the fourth quarter of 2018, and net annual cash savings from consolidating operations is projected at $1.7 million. Additional information on costs associated with exit and disposal activities (currently estimated at $7.1 million) and other details are available in Note (b) in the Notes to the Financial Tables in this press release and in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 (“Form 10-Q”).
Customer Product Transitions in Personal Care and Surface Protection
During October 2018, the Personal Care component of PE Films completed negotiations with its customer regarding a previously disclosed significant product transition. The total annual sales that will be adversely impacted by this product transition is approximately $70 million. During 2019, the Company expects sales for the product of $30 to $35 million with the potential for no sales thereafter. Any actions that the Company takes to reduce fixed costs to partially mitigate the decline in variable contribution that will accompany the decline in sales will depend on the level of success that Personal Care has with replacing the lost business with new products. The adverse operating profit impact of the estimated $35 to $40 million decline in sales in 2019 is not clear, although the Company believes that it will be in excess of $10 million.
Personal Care has increased its R&D spending, reaching an amount in 2017 approximately $5 million higher than in 2014. R&D spending in 2018 is expected to be at approximately the same level as 2017. Personal Care is also investing capital and is accelerating sales and marketing efforts to capture growth and diversify its customer base and product offerings in personal care products.
Because of the significance of the customer transition discussed above, the Company performed a goodwill impairment analysis of the Personal Care component of PE Films using projections under various business planning scenarios. The impairment analysis concluded that the value of Personal Care was less than the carrying value of underlying working capital and long-lived net assets. Accordingly, the goodwill associated with Personal Care of $47 million ($38.2 million after deferred income tax benefits) was written off during the third quarter of 2018.
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 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 anticipates that the customer product transitions will be fully implemented by the fourth quarter of 2019. The Company estimates that the adverse operating profit impact of surface protection transitions in the third quarter of 2018 was $0.3 million. When fully implemented, the Company estimates that the annualized adverse impact on future operating profit from this customer shift will be approximately $11 million. The Company is aggressively pursuing new surface protection products, applications and customers.