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 June 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
August 6, 1999: 37,206,569.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
<CAPTION>
June 30, Dec. 31,
1999 1998
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 19,867 $ 25,409
Accounts and notes receivable 109,696 94,341
Inventories 46,090 34,276
Income taxes recoverable 1,219 -
Deferred income taxes 8,777 8,762
Prepaid expenses and other 1,782 3,536
---------- ----------
Total current assets 187,431 166,324
---------- ----------
Property, plant and equipment, at cost 452,247 356,411
Less accumulated depreciation and amortization 211,803 200,380
---------- ----------
Net property, plant and equipment 240,444 156,031
---------- ----------
Venture capital investments 85,154 60,024
Other assets and deferred charges 39,612 41,886
Goodwill and other intangibles 153,068 32,913
---------- ----------
Total assets $ 705,709 $ 457,178
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 56,802 $ 47,551
Accrued expenses 45,798 41,071
Income taxes payable - 243
---------- ----------
Total current liabilities 102,600 88,865
Long-term debt 234,000 25,000
Deferred income taxes 24,708 24,914
Other noncurrent liabilities 8,186 8,104
---------- ----------
Total liabilities 369,494 146,883
---------- ----------
Shareholders' equity:
Common stock, no par value 98,290 95,893
Common stock held in trust for savings
restoration plan (1,212) (1,212)
Unrealized gain on available-for-sale securities 1,405 1,376
Foreign currency translation adjustment (1,573) (2,519)
Retained earnings 239,305 216,757
---------- ----------
Total shareholders' equity 336,215 310,295
---------- ----------
Total liabilities and shareholders' equity $ 705,709 $ 457,178
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Tredegar Corporation
Consolidated Statements of Income
(In Thousands)
(Unaudited)
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 194,840 $ 169,946 $ 374,381 $ 326,606
Other income (expense), net (1,277) 1,911 (1,018) 3,301
---------- ---------- ---------- ----------
Total 193,563 171,857 373,363 329,907
---------- ---------- ---------- ----------
Costs and expenses:
Cost of goods sold 153,986 134,449 294,225 257,537
Selling, general and administrative 11,149 10,136 22,522 18,976
Research and development 5,753 3,600 9,850 6,947
Amortization of intangibles 782 26 869 34
Interest 1,517 292 1,806 686
Unusual items 4,628 - 4,628 (765)
---------- ---------- ---------- ----------
Total 177,815 148,503 333,900 283,415
---------- ---------- ---------- ----------
Income before income taxes 15,748 23,354 39,463 46,492
Income taxes 5,558 8,193 13,975 14,035
---------- ---------- ---------- ----------
Net income $ 10,190 $ 15,161 $ 25,488 $ 32,457
========== ========== ========== ==========
Earnings per share:
Basic $ .28 $ .42 $ .69 $ .90
Diluted .26 .39 .65 .84
Shares used to compute earnings per share:
Basic 36,852 35,904 36,789 36,150
Diluted 38,798 38,557 38,770 38,788
Dividends per share $ .04 $ .04 $ .08 $ .07
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Six Months Ended
Ended June 30
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,488 $ 32,457
Adjustments for noncash items:
Depreciation 12,544 10,385
Amortization of intangibles 869 34
Write-off of in-process R&D acquired 3,458 -
Deferred income taxes (1,492) 588
Accrued pension income and postretirement benefits (1,837) (1,773)
Loss (gain) on sale of venture capital investments 1,183 (2,185)
Loss (gain) on equipment writedowns and divestitures 1,170 (765)
Changes in assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts and notes receivable (1,088) (4,110)
Inventories 4,350 (4,015)
Income taxes recoverable (1,219) (777)
Prepaid expenses and other 1,923 970
Accounts payable 5,596 6,994
Accrued expenses and income taxes payable 2,907 (4,185)
Other, net (1,482) (1,575)
---------- ----------
Net cash provided by operating activities 52,370 32,043
---------- ----------
Cash flows from investing activities:
Capital expenditures (23,182) (13,604)
Acquisitions (net of cash acquired of $1,097 in
1998; excludes equity issued of $11,219 in 1998) (213,665) (60,527)
Venture capital investments (31,837) (13,726)
Proceeds from the sale of venture capital investments 2,189 2,919
Proceeds from property disposals and divestitures 252 690
Other, net (126) (855)
---------- ----------
Net cash used in investing activities (266,369) (85,103)
---------- ----------
Cash flows from financing activities:
Dividends paid (2,940) (2,508)
Net increase (decrease) in borrowings 209,000 (5,000)
Repurchases of Tredegar common stock - (34,163)
Tredegar common stock purchased by trust for
savings restoration plan - (192)
Proceeds from exercise of stock options (including
related income tax benefits realized) 2,397 1,431
---------- ----------
Net cash provided by (used in) financing activities 208,457 (40,432)
---------- ----------
Increase (decrease) in cash and cash equivalents (5,542) (93,492)
Cash and cash equivalents at beginning of period 25,409 120,065
---------- ----------
Cash and cash equivalents at end of period $ 19,867 $ 26,573
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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 June 30,
1999, and the consolidated results of operations and cash flows for the
six months ended June 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 six months ended June 30, 1999, are not necessarily
indicative of the results to be expected for the full year.
2. On May 17, 1999, Tredegar acquired the assets of Exxon Chemical
Company's plastic films business ("Exxon Films") for cash consideration
of approximately $203.9 million (including estimated transaction costs
of $3.9 million). The acquisition was funded with borrowings under our
revolving credit facility. 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).
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:
o The assets of Therics, Inc. ("Therics") on April 8, 1999
o The stock of Canadian-based Exal Aluminum Inc. ("Exal") on
June 11,1998
o 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.
Therics is developing a new microfabrication technology that has
potential applications in drug delivery and a variety of other medical
markets. The company's primary focus is on commercializing its
TheriForm(TM) technology, a novel process for manufacturing tablets,
capsules and implantables with drug release profiles that are expected
to provide therapeutic advantages over currently available products.
Therics employs 43 people and is part of our Technology Group, which
already includes Molecumetics, our drug discovery subsidiary, and
Tredegar Investments, our venture capital subsidiary. We 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.
<PAGE>
Exal was acquired for $44.1 million (including transaction
costs), which was comprised of:
o Cash consideration of $32.9 million($31.8 million net of cash
acquired)
o 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.
<PAGE>
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 June 30, 1999, is as follows:
<TABLE>
Tredegar Corporation
Selected Historical and Pro Forma Financial Information
(In Thousands Except Per-Share Amounts)
<CAPTION>
Second Quarter Six Months Last 12
Ended June 30 Ended June 30 Months
--------------------- ---------------------
1999 1998 1999 1998 6/30/99
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 194,840 $ 169,946 $ 374,381 $ 326,606 $ 747,571
Net income:
Manufacturing operations $ 15,997 $ 15,112 $ 32,092 $ 29,800 $ 66,229
Technology:
Operating companies (1,593) (622) (2,140) (1,212) (3,444)
Venture capital investments (1,252) 671 (1,502) 1,103 (2,211)
Unusual items (2,962) - (2,962) 2,766 (3,387)
Discontinued operations - - - - 4,713
---------- ---------- ---------- ---------- ----------
Total $ 10,190 $ 15,161 $ 25,488 $ 32,457 $ 61,900
========== ========== ========== ========== ==========
Diluted earnings per share:
Manufacturing operations $ .41 $ .39 $ .83 $ .77 $ 1.71
Technology:
Operating companies (.04) (.02) (.06) (.03) (.09)
Venture capital investments (.03) .02 (.04) .03 (.06)
Unusual items (.08) - (.08) .07 (.09)
Discontinued operations - - - - .12
---------- ---------- ---------- ---------- ----------
Total $ .26 $ .39 $ .65 $ .84 $ 1.59
========== ========== ========== ========== ==========
EBITDA $ 31,158 $ 27,526 $ 61,063 $ 53,366 $ 123,674
As a % of net sales 16.0% 16.2% 16.3% 16.3% 16.5%
=========================================================================================
Consolidated pro forma information
for acquisitions as if they had
occurred at the beginning of 1998:
Net sales $ 208,580 $ 212,937 $ 417,676 $ 422,796 $ 846,511
EBITDA 32,945 32,259 68,745 62,191 139,472
As a % of pro forma net sales 15.8% 15.1% 16.5% 14.7% 16.5%
Manufacturing operations:
Net income 15,331 14,850 32,274 28,404 66,069
Diluted earnings per share .40 .39 .83 .73 1.71
Technology operating companies:
Net income (1,712) (2,168) (3,647) (4,148) (8,116)
Diluted earnings per share (.04) (.06) (.09) (.11) (.21)
</TABLE>
<PAGE>
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 the in-process R&D write-off
related to the Therics acquisition ($2.2 million after deferred income
tax benefits) and the write-off of equipment related to excess
packaging film capacity ($749,000 after income tax benefits).
3. The carrying value of venture capital investments was $85.2 million
($86.2 million cost basis) at June 30, 1999, and $60 million ($60.6
million cost basis) at December 31, 1998. The excess of the cost
basis over the carrying value is related to the writedown of certain
investments, partially offset by 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
venture capital investments was $98.4 million at June 30, 1999, and
$70.8 million at December 31, 1998. The venture capital portfolio is
comprised of investments in private venture capital fund limited
partnerships and early-stage technology companies with 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.
4. Comprehensive income, defined as net income and other comprehensive
income, was $11.1 million for the second quarter of 1999 and $17.8
million for the second quarter of 1998. Comprehensive income was $26.5
million for the first six months of 1999 and $33.8 million for the
first six 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.
5. The components of inventories are as follows:
<TABLE>
<CAPTION>
(In Thousands)
June 30 Dec. 31
1999 1998
-------------- --------------
<S> <C> <C>
Finished goods $8,721 $4,805
Work-in-process 3,859 3,751
Raw materials 24,137 17,690
Stores, supplies and other 9,373 8,030
-------------- --------------
Total $46,090 $34,276
============== ==============
</TABLE>
<PAGE>
6. 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:
<TABLE>
<CAPTION>
(In Thousands)
Second Quarter Six Months
Ended June 30 Ended June 30
-------------------- ---------------------
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding used
to compute basic earnings per share 36,852 35,904 36,789 36,150
Incremental shares issuable upon the
assumed exercise of stock options 1,946 2,653 1,981 2,638
---------- ---------- ---------- ----------
Shares used to compute diluted earnings
per share 38,798 38,557 38,770 38,788
========== ========== ========== ==========
</TABLE>
Incremental shares issuable upon the assumed exercise of
outstanding stock options are computed using the average market price
during the related period.
7. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
---------------------
Second Quarter 1999 Compared with Second Quarter 1998
Financial results for the quarter and year-to-date are summarized on page 7.
The improved quarterly earnings from manufacturing operations were
driven by the company's aluminum extrusion business, where profits were up 14%
due to higher volume and the acquisition of Exal Aluminum in June of last year.
Profits from Tredegar's ongoing plastic films operations were up 6% due to the
acquisition of Exxon Films (see Note 2 on page 5). Excluding the acquisition,
films profits declined. The films business continues to be adversely affected by
several factors including higher product development costs, delays in new
product introductions, start-up expenses at a new plant in Hungary, and weakness
in foreign operations.
Higher losses from technology operations were due to the inclusion of
results from Therics, which was acquired on April 8 of this year (see Note 2 on
page 5). Losses at Molecumetics, Tredegar's drug discovery subsidiary, were
lower versus last year due to higher research collaboration revenues.
Second-quarter results include an after-tax loss of $1.2 million related to
venture capital investment activities, compared to an after-tax gain of $671,000
in the same period of last year.
Second-quarter 1999 net sales increased due to acquisitions. On a pro
forma basis, net sales declined by 2% due to lower volume in Film Products and
lower selling prices, partially offset by higher volume in Aluminum Extrusions.
Lower selling prices reflect a decline in average plastic resin and aluminum
ingot costs.
The consolidated gross profit margin during the second quarter of 1999
increased slightly to 21% from 20.9% in 1998.
Selling, general and administrative (SG&A) expenses in the second
quarter of 1999 were $11.1 million, up from $10.1 million in 1998 due primarily
to acquisitions and higher spending on new products in Film Products. As a
percentage of sales, SG&A expenses decreased to 5.7% in 1999 compared with 6% in
1998.
Research and development expenses increased by $2.2 million or 60% 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 in the second quarter of 1999
by $372,000 due to a lower average cash equivalents balance (see Liquidity and
Capital Resources on page 15) and lower yields. The average tax-equivalent yield
earned was approximately 4.8% in 1999 and 5.7% in 1998. Interest expense
increased by $1.2 million due to funds borrowed on a floating-rate basis under
our revolving credit facility to acquire Exxon Films. Average debt outstanding
during the second quarter was $128.9 million (including average floating-rate
debt outstanding of $104.7 million), up from $29.2 million (all 7.2% fixed-rate
<PAGE>
debt) in the second quarter of last year. The average interest rate on debt
declined to 5.6% during the second 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 second quarter of 1999 was 5.2% (the rate as of August
10, 1999, was 5.5%). For more information, see Liquidity and Capital Resources
on page 15.
The effective tax rate excluding unusual items increased to 35.5% in
the second quarter of 1999 from 35.1% in the second quarter of 1998 due to lower
tax exempt income.
Six Months 1999 Compared with Six Months 1998
The improved earnings from manufacturing operations during the first
six months were driven by higher volume and acquisitions in our aluminum
extrusions business. Profits from ongoing plastic film operations were down due
to the adverse effect of several factors including higher product development
costs, delays in new product introductions, start-up expenses at a new plant in
Hungary, and weakness in foreign operations. The acquisition of Exxon Films on
May 17, 1999 (see Note 2 on page 5), had a positive impact on financial results.
Higher losses from technology operations were due to the acquisition of
Therics (see Note 2 on page 5). Year-to-date results include an after-tax loss
of $1.5 million related to venture capital investment activities, compared to an
after-tax gain of $1.1 million last year.
Net sales for the first six months of 1999 increased due to
acquisitions. On a pro forma basis, net sales declined by 1% due to lower volume
in Film Products and lower selling prices, partially offset by higher volume in
Aluminum Extrusions. Lower selling prices reflect a decline in average plastic
resin and aluminum ingot costs.
The consolidated gross profit margin for the first six months of 1999
increased to 21.4% from 21.1% in 1998.
Selling, general and administrative (SG&A) expenses were $22.5 million
in 1999, up from $19 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 6% in 1999 compared with 5.8% in 1998.
Research and development expenses increased by $2.9 million or 42% 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 $1.2 million due to a lower
average cash equivalents balance (see Liquidity and Capital Resources on page
15) and lower yields. The average tax-equivalent yield earned was approximately
4.9% in 1999 and 5.7% in 1998. Interest expense increased by $1.1 million due to
funds borrowed on a floating-rate basis under our revolving credit facility to
acquire Exxon Films. Average debt outstanding during the first six months of
1999 was $77.3 million (including average floating-rate debt outstanding of
$52.7 million), up from $29.6 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 5.2% (the rate as of August 10, 1999, was 5.5%).
For more information, see Liquidity and Capital Resources on page 15.
<PAGE>
The effective tax rate excluding unusual items increased to 35.5% in
the first six months of 1999 from 35.1% in 1998 due to lower tax exempt income.
Segment Results
---------------
The following tables present Tredegar's net sales and operating profit
by segment for the second quarter and six months ended June 30, 1999 and 1998.
<TABLE>
Net Sales by Segment
(In Thousands)
(Unaudited)
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Film Products $ 75,267 $ 70,711 $ 143,019 $ 145,507
Fiberlux 2,218 2,992 4,478 5,605
Aluminum Extrusions 115,435 95,076 223,119 172,798
Technology:
Molecumetics 1,920 1,167 3,765 2,667
Other - - - 29
---------- ---------- ---------- ----------
Total net sales $ 194,840 $ 169,946 $ 374,381 $ 326,606
========== ========== ========== ==========
</TABLE>
<TABLE>
Operating Profit by Segment
(In Thousands)
(Unaudited)
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Film Products:
Ongoing operations $ 12,344 $ 11,656 $ 25,548 $ 26,590
Unusual items (1,170) - (1,170) -
---------- ---------- ---------- ----------
Total Film Products 11,174 11,656 24,378 26,590
---------- ---------- ---------- ----------
Fiberlux (53) 359 (141) 542
Aluminum Extrusions 14,634 12,808 28,480 21,593
Technology:
Molecumetics (893) (971) (1,747) (1,465)
Therics (1,597) - (1,597) -
Venture capital investments (1,956) 1,046 (2,347) 1,722
Other - - - (428)
Unusual items (3,458) - (3,458) 765
---------- ---------- ---------- ----------
Total technology (7,904) 75 (9,149) 594
---------- ---------- ---------- ----------
Total operating profit 17,851 24,898 43,568 49,319
Interest income 257 629 582 1,744
Interest expense 1,517 292 1,806 686
Corporate expenses, net 843 1,881 2,881 3,885
---------- ---------- ---------- ----------
Income before income taxes 15,748 23,354 39,463 46,492
Income taxes 5,558 8,193 13,975 14,035
---------- ---------- ---------- ----------
Net income $ 10,190 $ 15,161 $ 25,488 $ 32,457
========== ========== ========== ==========
</TABLE>
<PAGE>
Selected historical and pro forma results for Film Products are
summarized below (pro forma results assume that the acquisition of Exxon Films
(see Note 2 on page 5) occurred at the beginning of 1998):
<TABLE>
Film Products
Selected Historical and Pro Forma Financial Information
(In Thousands)
-------------------------------------------------------------------
<CAPTION>
Historical Pro Forma
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Second Quarter
--------------
Net sales $ 75,267 $ 70,711 $ 89,005 $ 96,583
Operating profit 12,344 11,656 13,014 13,894
First Six Months
----------------
Net sales 143,019 145,507 186,288 195,882
Operating profit 25,548 26,590 30,890 30,572
</TABLE>
Sales and operating profit in Film Products were higher in the second
quarter of 1999 due to the acquisition of Exxon Films. Average selling prices
declined due to lower average resin costs. Excluding the acquisition, sales
volume and operating profit were down due to the adverse effects of:
o Higher product development spending
o Delays in new product introductions
o Start-up costs related to a new plant in Hungary
o Weakness in foreign operations
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 2 on page 5) occurred at the beginning of 1998):
<TABLE>
Aluminum Extrusions
Selected Historical and Pro Forma Financial Information
(In Thousands)
-------------------------------------------------------------------
<CAPTION>
Historical Pro Forma
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Second Quarter
--------------
Net sales $ 115,435 $ 95,076 $ 115,435 $ 112,202
Operating profit 14,634 12,808 14,634 13,904
First Six Months
----------------
Net sales 223,119 172,798 223,119 218,597
Operating profit 28,480 21,593 28,480 23,123
</TABLE>
Sales 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.
<PAGE>
Molecumetics operating losses decreased for the quarter due to higher
research collaboration revenues and increased for the year due to higher costs
to support related programs. See Note 2 on page 5 regarding our recent
acquisition of Therics.
Losses in the second quarter of 1999 from venture capital investment
activities of $2 million were comprised of operating expenses of $605,000 and
investment writedowns of $1.4 million. Losses in the first six months of 1999
from venture capital investment activities of $2.4 million were comprised of
operating expenses of $1.2 million and net investment losses of $1.2 million.
The venture capital portfolio is comprised of investments in private venture
capital fund limited partnerships and early-stage technology companies with 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.
<PAGE>
Liquidity and Capital Resources
-------------------------------
Tredegar's total assets increased to $705.8 million at June 30, 1999,
from $457.2 million at December 31, 1998, due to the acquisition of Exxon Films
and higher fixed assets from capital expenditures in excess of depreciation.
Total liabilities increased to $369.5 million at June 30, 1999, from $146.9
million at December 31, 1998, due mainly to borrowings related to the
acquisition of Exxon Films.
Net cash provided by operating activities in excess of capital
expenditures and dividends increased to $26.2 million in the first six months of
1999 from $15.9 million in 1998 due to favorable changes in working capital,
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 should be operational during 1999, 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).
The reasons for the decrease in cash and cash equivalents to $19.9
million at June 30, 1999, from $25.4 million at December 31, 1998, are
summarized below:
<TABLE>
<CAPTION>
(In Thousands)
Six Months
Ended June 30
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash and cash equivalents, beginning of period $ 25,409 $ 120,065
---------- ----------
Cash provided by operating activities in excess of
capital expenditures and dividends 26,248 15,931
Proceeds from the exercise of stock options 2,397 1,431
Net increase (decrease) in borrowings 209,000 (5,000)
Acquisitions (213,665) (60,527)
Repurchases of Tredegar common stock - (34,163)
New venture capital investments, net of proceeds
from disposals (29,648) (10,807)
Other, net 126 (357)
---------- ----------
Net increase (decrease) in cash and cash equivalents (5,542) (93,492)
---------- ----------
Cash and cash equivalents, end of period $ 19,867 $ 26,573
========== ==========
</TABLE>
At June 30, 1999, we had total debt of $234 million, including $214
million borrowed on a floating-rate basis under our $275 million revolving
credit facility. We believe that our current debt level (which represents 41% of
total capitalization and 1.7x pro forma EBITDA for the 12 months ended June 30,
1999) is within investment-grade guidelines. We are reviewing loan-financing
alternatives to restore the available balance under the credit facility, and we
expect to maintain our floating-rate exposure under any new loan. On August 10,
1999, 30-day rollover borrowings under the credit facility carried an interest
rate of 5.5%.
<PAGE>
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 Liquidity and Capital Resources on page 16 for information on
debt and interest-rate exposure.
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 six months of 1999 and 1998 are
presented below:
<TABLE>
Percentage of Consolidated Pretax
Income Earned by Geographic Area*
--------------------------------------
<CAPTION>
Six Months
Ended June 30
----------------------
1999 1998
---------- ----------
<S> <C> <C>
United States 58 % 66 %
Canada 17 9
Europe 9 12
Latin America 8 9
Asia 8 4
---------- ----------
Total 100 % 100 %
========== ==========
* Based on consolidated pretax income from
continuing operations excluding venture
capital activities and unusual items.
</TABLE>
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
<PAGE>
products to the U.S. dollar or the German mark and 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 recent acquisition of
Exxon Films will increase the proportion of our income earned in the U.S.
We have 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. See Note 3 on
page 8 for more information.
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 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 systems for Exxon Films are not Year 2000 compliant. We
are replacing non-compliant systems (including internal computer-based
information systems, communications equipment and shop floor machines) and
integrating the business into the enterprise-wide systems infrastructure of
Tredegar Film Products. We expect to complete all remediation efforts related to
Exxon Films by the end of 1999 at a cost of approximately $1.9 million, most of
which will be capitalized and amortized over the estimated useful life of
related assets.
<PAGE>
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.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Tredegar's Annual Meeting of Shareholders was held on May 20,
1999. The following sets forth the vote results with respect
to each of the matters voted upon at the meeting:
(a) Election of Directors
No. of No. of Votes
Nominee Votes "For" "Withheld"
Phyllis Cothran 33,346,508 518,902
Richard W. Goodrum 33,402,715 462,695
Floyd D. Gottwald, Jr. 33,333,371 532,039
There were no broker non-votes with respect to the election of
directors.
(b) Approval of Auditors
Approval of the designation of PricewaterhouseCoopers LLP as
the auditors for Tredegar for 1999:
No. of Votes No. of Votes No. of
"For" "Against" Abstentions
33,564,304 242,668 58,438
There were 1,198,653 broker non-votes with respect to the
approval of auditors.
(c) Approval of the Amended and Restated Incentive Plan
No. of Votes No. of Votes No. of
"For" "Against" Abstentions
30,608,860 2,913,765 342,785
There were 1,198,653 broker non-votes with respect to the
approval of the Amended and Restated Incentive Plan.
<PAGE>
(d) Approval of the Change of the Corporation's Name
Approval of the amendment of the Articles of Incorporation to
change Tredegar's name from "Tredegar Industries, Inc." to
"Tredegar Corporation":
No. of Votes No. of Votes No. of
"For" "Against" Abstentions
33,693,659 104,279 67,472
There were 1,198,653 broker non-votes with respect to the
approval of the change of the corporation's name.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No.
2 Asset Purchase Agreement, dated April 23, 1999, by
and between Exxon Chemical Company, a division of
Exxon Corporation, and Tredegar (filed as Exhibit 2
to Tredegar's Current Report on Form 8-K dated May
17, 1999, as amended, and incorporated herein by
reference)
3 Articles of Amendment
4 Rights Agreement, dated as of June 30, 1999, by and
between Tredegar and American Stock Trust & Transfer
Company, as Rights Agent (filed as Exhibit 99.1 to
the Registration Statement on Form 8-A, as filed with
the Securities and Exchange Commission on June 16,
1999, as amended, and incorporated herein by
reference)
27 Financial Data Schedule
(b) Reports on Form 8-K.
o Registrant filed a Form 8-K dated May 17, 1999, with respect to:
o The acquisition of Exxon Films (see further information regarding this
acquisition in Note 2 on page 5)
o The announcement of lower than expected results anticipated for
1999 due to a variety of factors affecting Film Products and
operating losses expected at Therics (acquired April 8, 1999 - see
Note 2 on page 5 for more information on Therics)
That Form 8-K was amended by Tredegar's filing of a Form 8-K/A on June
25, 1999, to include the historical and pro forma financial information
relating to the acquisition of Exxon Films and other acquisitions.
o Registrant filed a Form 8-K dated June 30, 1999, with regard to the
approval by Tredegar's Board of Directors of a Rights Agreement effective
June 30, 1999.
<PAGE>
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: August 12, 1999 /s/ N. A. Scher
-------------------------- ----------------------------------------
Norman A. Scher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1999 /s/ D. Andrew Edwards
-------------------------- ---------------------------------------
D. Andrew Edwards
Vice President, Treasurer and Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2 Asset Purchase Agreement, dated April 23, 1999, by and
between Exxon Chemical Company, a division of Exxon
Corporation, and Tredegar (filed as Exhibit 2 to Tredegar's
Current Report on Form 8-K dated May 17, 1999, as amended,
and incorporated herein by reference)
3 Articles of Amendment
4 Rights Agreement, dated as of June 30, 1999, by and between
Tredegar and American Stock Trust & Transfer Company, as
Rights Agent (filed as Exhibit 99.1 to the Registration
Statement on Form 8-A, as filed with the Securities and
Exchange Commission on June 16, 1999, as amended, and
incorporated herein by reference)
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION FOR TREDEGAR
CORPORATION AND SUBSIDIARIES EXTRACTED FROM THE BALANCE SHEET FOR THE
PERIOD ENDED MARCH 31, 1997 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,867
<SECURITIES> 0
<RECEIVABLES> 114,151
<ALLOWANCES> 4,455
<INVENTORY> 46,090
<CURRENT-ASSETS> 187,431
<PP&E> 452,257
<DEPRECIATION> 211,803
<TOTAL-ASSETS> 705,709
<CURRENT-LIABILITIES> 102,600
<BONDS> 234,000
0
0
<COMMON> 98,290
<OTHER-SE> 239,305
<TOTAL-LIABILITY-AND-EQUITY> 705,709
<SALES> 374,381
<TOTAL-REVENUES> 373,363
<CGS> 294,225
<TOTAL-COSTS> 294,225
<OTHER-EXPENSES> 37,215
<LOSS-PROVISION> 654
<INTEREST-EXPENSE> 1,806
<INCOME-PRETAX> 39,463
<INCOME-TAX> 13,975
<INCOME-CONTINUING> 25,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,488
<EPS-BASIC> .69
<EPS-DILUTED> .65
</TABLE>
