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30Y E A R
2018 Annual Report
2015
2016
2017
2018
2013
2015
2015
2016
2017
2018
1200
1000
800
600
400
200
0
50
($ in Millions)
40
30
20
10
0
Tredegar Net Sales*
$1,029
$928
$866
$799
2015
2016
2017
2018
400
300
200
100
0
100
80
Personal Care Net Sales*
$402
60
$368
40
20
0
$288
$241
$246
$227
2015
2016
2017
2018
2015
2016
2017
2018
2013
2014
2015
2016
2017
2018
Bonnell Operating Profit
from Ongoing Operations
Tredegar Adjusted
EBITDA*
$49
$44
$38
$30
$101
$95
$90
$69
2015
2016
2017
2018
2015
2016
2017
2018
* See Appendix for footnotes. All statements other than statements of historical facts contained in this letter, including
statements regarding our plans, objectives and goals, and future events or results, are forward-looking statements.
See “Forward-looking and Cautionary Statements” on page 20 of the accompanying Annual Report on Form 10-K.
Dear Shareholders,
Most weeks I email a number of quotes to my team. Hopefully the messages
associated with respected authors resonate more powerfully than words from
an old guy they see walking the halls. I offer the following quote as a prelude
to a less than fascinating study of charts that track Tredegar’s recent history:
“Life can only be understood backwards, but it must be lived forwards.”
Soren Kierkegaard
“Backwards”
for this customer’s benefit have
substantially over the past four
Please take a moment to review
charts 1–4 on the opposite page.
been shuttered, written down or
years (see chart 3). This profit
are at risk. All of this has been
growth has essentially offset
disclosed and discussed over the
the profit decline in Personal
Personal Care
years in 10Qs, 10Ks and annual
Care. The Bonnell team has
Wow! While Tredegar’s overall
meetings, but there are two key
performed well!
sales have increased about $160
takeaways: 1) overreliance on
million since 2015, Personal
one customer is very risky for
Care’s have continued a long
owners and employees; and
downward trend (see charts 1
2) when a customer focuses
and 2). In fact, Personal Care’s
on commoditization of supply,
sales are down about $175 million
it is wise to invest elsewhere,
since 2013. What happened?
In short, we failed to satisfy
preferably in specialty products
that add value for a number
our largest customer’s needs.
of customers.
Tredegar lost all of its elastics
Bonnell
EBITDA
Adjusted EBITDA is a good
measure of overall performance.
This metric looks at profits
excluding interest expenses,
taxes, depreciation and
amortization (non-cash expenses)
and discrete special items. It’s
commonly used by lenders
and investment bankers as
business with this customer (two
major products manufactured
at two locations), lost its supply
position for topsheets in various
geographies, and saw its position
in other product categories
with this customer decline.
Consequently, plants started up
Tredegar has invested in our
a borrowing and enterprise
aluminum extrusion unit during
valuation metric. Adjusted
the current U.S. economic
EBITDA provides an especially
expansion, including two
good overview for Tredegar in
acquisitions. The 2017 acquisition
2018, because the recent change
of Futura has been a valuable
in tax rates and shifts in our
contributor this year. Bonnell’s
non-cash expenses have been
operating profits have grown
significant (see chart 4).
1
Tredegar Consolidated Net Debt Trends 12/31/14–12/31/18
(Total debt Less Cash & Equivalents)
200
150
100
50
0
12/31/14
1/31/15
2/28/15
3/31/15
4/30/15
5/31/15
6/30/15
7/31/15
8/31/15
9/30/15
10/31/15
11/30/15
12/31/15
1/31/16
2/29/16
3/31/16
4/30/16
5/31/16
6/30/16
7/31/16
8/31/16
9/30/16
10/31/16
11/30/16
12/31/16
1/31/17
2/28/17
3/31/17
4/30/17
5/31/17
6/30/17
7/30/17
8/31/17
9/30/17
10/31/17
11/31/17
12/31/17
1/31/18
2/28/18
3/31/18
4/30/18
5/31/18
6/30/18
7/31/18
8/31/18
9/30/18
10/31/18
11/30/18
12/31/18
Tredegar Consolidated Net Debt Trends*
(Total Debt Less Cash & Equivalents)
Futura Acquisition
02/15/17 for $88
$200
$150
$100
Net Debt as of
12/31/14: $87
$50
Net Debt as of
12/31/18: $67
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
A full reconciliation of the
“Forwards”
changes by each business unit
as well as corporate and other
expenses, like pension, would
put you to sleep. Tredegar’s story
boils down to an improvement in
adjusted EBITDA of $11 million
since 2015, with Bonnell’s robust
growth offsetting Personal Care’s
Tomorrow is a mystery. I try
to refrain from pretending
otherwise. Nevertheless, given
our frequent disclosures about
the certainty of continued losses
of large chunks of sales in our
polyethylene film segment, I offer
sharp decline and two other units
the following:
Similarly, we expect our profits to
decline in Surface Protection in
2019 due to the continuation of a
customer’s shift to an alternative
solution. However, we are seeing
strong interest in our new
products and new customers are
contributing at a meaningfully
greater rate as time marches on.
Consequently, I am optimistic
(Terphane and Surface Protection)
The erosion of our Personal Care
that this unit will resume growth
up modestly.
Net Debt
I include this chart to simply
remind everyone that our balance
sheet is very strong, and we have
generated cash at a rate that
exceeds capital reinvestment,
dividends and acquisitions over
recent years. In 2018, Tredegar’s
net debt dropped $48 million (see
chart above).
business will continue in 2019.
in 2020.
We expect ongoing operating
profit for this unit to be in the
red for the next two years.
Investments in new elastics lines
and R&D in support of all hygiene
product lines will hopefully turn
this unit around, such that we
will return to profitability in a
reasonable timeframe and build a
growing specialty business with a
diversified customer base.
Strategic Shifts
All five business units have
made significant changes in
their strategies over the past
three years. Business plan titles
(themes) include names like
“Beacon,” “Polaris,” and “Everest.”
These shifts all emphasize
increasing the value we provide
our customers, strong investment
in new products and customer
diversification.
2
So, what does all this boil down
track record. Having served on
Thank you
to? The future will always
Tredegar’s board for about two
be a mystery, but I offer two
years, John should hit the ground
generalizations. First, just as we
running. We are fortunate to
experienced a significant earnings
have a leader of his caliber
setback in 2016 in large part due
and experience.
I owe a huge debt of gratitude
to a long list of people who have
stepped up to support me and
Tredegar over the years. Our
employees, my team and my
to a loss of business in Personal
Care, I expect 2019 earnings to
be weaker than 2018. Second, as
the strategies, investments, new
products and new customers gain
momentum, I am hopeful we will
have established a platform for
good growth. This hope is in some
part based on recent momentum
we have seen in Terphane and
improved prospects for Bright
View, resulting from a shift to new
products and applications.
Leadership
I am looking forward to my role
on the Board after transitioning
from CEO this spring. I feel
extraordinarily good about our
new CEO, John Steitz. John is a
humble man with an outstanding
set of skills and an exemplary
I regret that John’s first year
bosses, the directors, have made
involves a slowdown in the PE
my job a pleasure. I tip my hat to
Films segment. However, I am
all Tredegar colleagues, with
very comfortable that John and
a special thanks to John Steitz for
our leadership teams will build
stepping up and Bill Gottwald for
his guidance, wisdom and patience.
In conclusion, I’d like to
acknowledge that in July, Tredegar
will celebrate its 30th year as an
independent public company.
Seems like just yesterday I was
ringing a bell on Wall Street. Time
is a frightening, relentless illusion
through which we learn.
on the progress in place. The
strategies provide pathways
for value creation. Our people
are talented and motivated.
The balance sheet provides
flexibility. Tredegar has generated
outstanding cash flow through
many initiatives, including
much improved working
capital. This should continue.
Of particular comfort to me is
Tredegar’s enhanced governance.
Our outstanding board and
management teams are fully
John D. Gottwald
empowered through a culture
President and Chief Executive Officer
and formal guidelines that ensure
openness and transparency. But…
the future is a mystery!
3
Financial Highlights
FINANCIAL SUMMARY
Years Ended December 31
(In millions, except per-share data)
NET INCOME AND DILUTED EARNINGS PER SHARE
Net income as reported (continuing ops)
After-tax effects of:
PE Films goodwill impairment
Terphane asset impairment loss
Tax benefit from Terphane worthless stock deductions
Unrealized gain associated with investment in kaléo
(Gains) losses associated with plant shutdowns, other asset impairments
and restructurings
(Gains) losses from sale of assets and other
Income from ongoing operations1
Diluted earnings per share as reported (continuing ops)
After-tax effects per diluted share of:
PE Films goodwill impairment
Terphane asset impairment loss
Tax benefit from Terphane worthless stock deductions
Unrealized gain associated with investment in kaléo
(Gains) losses associated with plant shutdowns, other asset impairments
and restructurings
(Gains) losses from sale of assets and other
2018
2017
$ 24.8
$ 38.3
38.2
—
—
(23.9)
3.8
4.4
$ 47.3
$
.75
1.15
—
—
(.72)
.12
.13
—
87.2
(61.4)
(24.0)
1.3
(11.3)
$ 30.1
$ 1.16
—
2.65
(1.86)
(.73)
.04
(.35)
Diluted earnings per share from ongoing operations1
$ 1.43
$
.91
ONGOING OPERATIONS
PE Films:
Net sales2
Ongoing operating profit
Adjusted EBITDA3
Depreciation and amortization
Capital expenditures
Flexible Packaging Films:
Net sales2
Ongoing operating profit
Adjusted EBITDA3
Depreciation and amortization
Capital expenditures
Aluminum Extrusions:
Net sales2
Ongoing operating profit
Adjusted EBITDA3
Depreciation and amortization
Capital expenditures
FINANCIAL POSITION AND OTHER DATA
Net Debt4
Cash dividends declared per share
Shares outstanding at end of period
Shares used to compute diluted earnings (loss) per share
See appendix for footnotes.
$ 332.5
36.2
51.1
15.5
22.0
123.8
9.9
11.2
1.3
5.4
573.1
48.6
65.5
16.9
13.0
67.1
.44
33.2
33.1
$ 352.5
41.5
55.9
14.6
15.0
108.4
(2.6)
7.8
10.4
3.6
466.8
43.5
58.5
15.1
25.7
115.5
.44
33.0
33.0
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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
(State or other jurisdiction
of incorporation or organization)
1100 Boulders Parkway,
Richmond, Virginia
(Address of principal executive offices)
54-1497771
(I.R.S. Employer
Identification No.)
23225
(Zip Code)
Registrant’s telephone number, including area code: 804-330-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark 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 at least the past
90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K
.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Accelerated filer
Smaller reporting company
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2018 (the last business day of the registrant’s most
recently completed second fiscal quarter): $608,660,223*
Number of shares of Common Stock outstanding as of January 31, 2019: 33,176,024 (33,189,073 as of June 30, 2018)
*
In determining this figure, an aggregate of 7,288,638 shares of Common Stock beneficially owned by Floyd D. Gottwald, Jr., John D. Gottwald, William M. Gottwald and the members of their immediate
families has been excluded because the shares are deemed to be held by affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange on June 30, 2018.
Documents Incorporated By Reference
Portions of the Tredegar Corporation Proxy Statement for the 2019 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
Index to Annual Report on Form 10-K
Year Ended December 31, 2018
Business
Part I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Item 3.
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Tredegar’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Page
1-4
5-10
11
11
11
11
12-13
14-19
20-42
42
42
42
42-45
45
46
47
47
47
47
48-98
98
Item 1.
BUSINESS
Description of Business
PART I
Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in
the manufacture of polyethylene (“PE”) plastic films, polyester (“PET”) films and aluminum extrusions. Unless the context
requires otherwise, all references herein to “Tredegar,” “the Company,” “we,” “us” or “our” are to Tredegar Corporation and its
consolidated subsidiaries.
The Company's reportable business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions.
PE Films
PE Films manufactures plastic films, elastics and laminate materials primarily utilized in personal care materials, surface
protection films, and specialty and optical lighting applications. These products are manufactured at facilities in the United
States (“U.S.”), The Netherlands, Hungary, China, Brazil and India. PE Films competes in all of its markets on the basis of
product innovation, quality, service and price.
Personal Care. Tredegar’s Personal Care unit is a global supplier of apertured, elastic and embossed films, laminate materials,
and polyethylene and polypropylene overwrap films for personal care markets, including:
• Apertured film and laminate materials for use as topsheet in feminine hygiene products, baby diapers and adult
incontinence products (including materials sold under the Sure&Soft™, ComfortAire™, ComfortFeel™ and FreshFeel™
brand names);
• Elastic materials for use as components for baby diapers, adult incontinence products and feminine hygiene products
(including components sold under the ExtraFlex™ and FlexAire™ brand names);
• Three-dimensional apertured film transfer layers for baby diapers and adult incontinence products sold under the
AquiSoft™, AquiDry® and AquiDry Plus™ brand names;
• Thin-gauge films that are readily printable and convertible on conventional processing equipment for overwrap for
bathroom tissue and paper towels; and
•
Polypropylene films for various industrial applications, including tape and automotive protection.
In 2018, 2017 and 2016, personal care materials accounted for approximately 22%, 27% and 30% of Tredegar’s
consolidated net sales (sales less freight) from continuing operations, respectively.
Surface Protection. Tredegar’s Surface Protection unit produces single- and multi-layer surface protection films sold under the
UltraMask®, ForceField™, ForceField PEARL® and Pearl A™ brand names. These films are used in high-technology
applications, most notably protecting high-value components of flat panel displays used in televisions, monitors, notebooks,
smart phones, tablets, e-readers, automobiles and digital signage, during the manufacturing and transportation process. In
2018, 2017 and 2016, surface protection films accounted for approximately 10%, 11% and 11%, respectively, of Tredegar’s
consolidated net sales from continuing operations.
Bright View Technologies. Tredegar’s Bright View Technologies unit designs and manufactures a range of advanced film-
based components that provide specialized functionality for the global engineered optics market. By leveraging multiple
platforms, including film capabilities and its patented microstructure technology, Bright View Technologies offers high
performance solutions for a variety of LED-based applications such as lighting, consumer electronics, automotive, and other
optical management markets.
1
PE Films’ net sales by market segment over the last three years is shown below:
% of PE Films Net Sales by Market Segment *
Personal Care
Surface Protection
Bright View
Total
2018
68%
30%
2%
100%
2017
70%
28%
2%
100%
2016
72%
25%
3%
100%
* See previous discussion by market segment for comparison of net sales to the Company’s consolidated net
sales for each of the years presented.
Raw Materials. The primary raw materials used by PE Films in films are low density, linear low density and high density
polyethylene and polypropylene resins. These raw materials are obtained from domestic and foreign suppliers at competitive
prices. PE Films believes that there will be an adequate supply of polyethylene and polypropylene resins in the foreseeable
future. PE Films also buys polypropylene-based nonwoven fabrics based on the resins previously noted and styrenic block
copolymers, and it believes there will be an adequate supply of these raw materials in the foreseeable future.
Customers. PE Films sells to many branded product producers throughout the world, with the top five customers, collectively,
comprising 66%, 68% and 69% of its net sales in 2018, 2017 and 2016, respectively. Its largest customer is The Procter &
Gamble Company (“P&G”). Net sales to P&G totaled $107 million in 2018, $122 million in 2017 and $129 million in 2016
(these amounts include film sold to third parties that converted the film into materials used with products manufactured by
P&G). For additional information, see “Item 1A. Risk Factors”.
Flexible Packaging Films
Flexible Packaging Films is comprised of Terphane Holdings LLC (“Terphane”). Flexible Packaging Films produces
PET-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. These differentiated, high-value films are primarily
manufactured in Brazil and sold in Latin America and the U.S. under the Terphane® and Sealphane® brand names. Major end
uses include food packaging and industrial applications. In 2018, 2017 and 2016, Flexible Packaging Films accounted for
approximately 12%, 12% and 14%, respectively, of Tredegar’s consolidated net sales from continuing operations. Flexible
Packaging Films competes in all of its markets on the basis of product quality, service and price.
Raw Materials. The primary raw materials used by Flexible Packaging Films to produce polyester resins are purified
terephthalic acid (“PTA”) and monoethylene glycol (“MEG”). Flexible Packaging Films also purchases additional polyester
resins directly from suppliers. All of these raw materials are obtained from domestic Brazilian suppliers and foreign suppliers
at competitive prices, and Flexible Packaging Films believes that there will be an adequate supply of polyester resins as well as
PTA and MEG in the foreseeable future.
Aluminum Extrusions
The William L. Bonnell Company, Inc., known in the industry as Bonnell Aluminum, and its operating divisions,
AACOA, Inc. and Futura Industries Corporation (“Futura”) (together “Aluminum Extrusions”), produce high-quality, soft-alloy
and medium-strength aluminum extrusions primarily for building and construction, automotive, consumer durables, machinery
and equipment, electrical and distribution markets. Aluminum Extrusions manufactures mill (unfinished), anodized and
painted (finished) and fabricated aluminum extrusions for sale directly to fabricators and distributors. It also sells branded
flooring trims and aluminum framing systems through its Futura operating division. Aluminum Extrusions competes primarily
on the basis of product quality, service and price. Sales are made predominantly in the U.S.
2
The end-uses in each of Aluminum Extrusions’ primary market segments include:
Major Markets
End-Uses
Building & construction - nonresidential
Building & construction - residential
Automotive
Consumer durables
Machinery & equipment
Commercial windows and doors, curtain walls, storefronts
and entrances, walkway covers, ducts, louvers and vents,
office wall panels, partitions and interior enclosures,
acoustical walls and ceilings, point of purchase displays,
pre-engineered structures, and flooring trims
Shower and tub enclosures, railing and support systems,
venetian blinds, swimming pools and storm shutters
Automotive and light truck structural components, spare
parts, after-market automotive accessories, grills for heavy
trucks, travel trailers and recreation vehicles
Furniture, pleasure boats, refrigerators and freezers,
appliances and sporting goods
Material handling equipment, conveyors and conveying
systems, medical equipment, and aluminum framing
systems (TSLOTSTM)
Distribution (metal service centers specializing in stock and
release programs and custom fabrications to small
manufacturers)
Various custom profiles including storm shutters, pleasure
boat accessories, theater set structures and various standard
profiles (including rod, bar, tube and pipe)
Electrical
Lighting fixtures, solar panels, electronic apparatus and
rigid and flexible conduits
Aluminum Extrusions’ net sales by market segment over the last three years is shown below:
% of Aluminum Extrusions Net Sales by Market Segment*
Building and construction:
Nonresidential
Residential
Automotive
Specialty:
Consumer durables
Machinery & equipment
Electrical
Distribution
2018
51%
8%
8%
12%
7%
7%
7%
2017
51%
9%
8%
12%
7%
7%
6%
2016
59%
6%
9%
11%
6%
3%
6%
Total
*Includes Futura as of its acquisition date of February 15, 2017.
100%
100%
100%
In 2018, 2017 and 2016, nonresidential building and construction accounted for approximately 28%, 26% and 27% of
Tredegar’s consolidated net sales from continuing operations, respectively.
Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and
various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term
contracts. Aluminum Extrusions believes that it has adequate supply agreements for aluminum and other required raw
materials and supplies in the foreseeable future.
3
General
Intellectual Property. Tredegar considers patents, licenses and trademarks to be significant to PE Films. On December 31,
2018, PE Films held 273 patents (including 63 U.S. patents), licenses under patents owned by third parties, and 109 registered
trademarks (including 8 U.S. registered trademarks). Flexible Packaging Films held 1 U.S. patent and 14 registered trademarks
(including 2 U.S. registered trademarks). Aluminum Extrusions held no U.S. patents and 2 U.S. registered trademarks. On
December 31, 2018, these patents had remaining terms in the range of 1 to 20 years.
Research and Development. Tredegar’s spending for research and development (“R&D”) activities in 2018, 2017 and 2016
was primarily related to PE Films. PE Films has technical centers in Durham, North Carolina; Richmond, Virginia; and Terre
Haute, Indiana. Flexible Packaging has a technical center in Bloomfield, New York. R&D spending by the Company was
approximately $18.7 million, $18.3 million and $19.1 million in 2018, 2017 and 2016, respectively.
Backlog. Backlogs are not material to the operations in PE Films or Flexible Packaging Films. Overall backlog for continuing
operations in Aluminum Extrusions was approximately $67.6 million at December 31, 2018 compared to approximately $46.2
million at December 31, 2017, an increase of $21.4 million, or approximately 46%. Net sales for Aluminum Extrusions, which
the Company believes is cyclical in nature, were $573.1 million in 2018, $466.8 million in 2017 and $360.1 million in 2016.
Government Regulation. U.S. laws concerning the environment to which the Company’s domestic operations are or may be
subject include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the
Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), regulations promulgated under these
acts, and other federal, state or local laws or regulations governing environmental matters. Compliance with these laws is an
important consideration because Tredegar uses hazardous materials in some of its operations, is a generator of hazardous waste,
and wastewater from the Company’s operations is discharged to various types of wastewater management systems. Under
CERCLA and other laws, Tredegar may be subject to financial exposure for costs associated with waste management and
disposal, even if the Company fully complies with applicable environmental laws.
The U.S. Environmental Protection Agency has adopted regulations under the Clean Air Act relating to emissions of
carbon dioxide and other greenhouse gases (“GHG”), including mandatory reporting and permitting requirements. Several of
the Company’s manufacturing operations result in emissions of carbon dioxide or GHG and are subject to the current GHG
regulations. The Company’s compliance with these regulations has yet to require significant expenditures. The cost of
compliance with any future GHG legislation or regulations is not presently determinable, but Tredegar does not anticipate
compliance to have a material adverse effect on its consolidated financial condition, results of operations and cash flows based
on information currently available.
Tredegar is also subject to the governmental regulations in the countries where it conducts business.
At December 31, 2018, the Company believes that it was in material compliance with all applicable environmental laws,
regulations and permits in the U.S. and other countries where it conducts business. Environmental standards tend to become
more stringent over time. In addition, consumer preferences, ongoing health, safety and environmental studies on plastics and
resins and other related legislative initiatives may adversely affect Tredegar’s business. In order to maintain substantial
compliance with such standards, the Company may be required to incur additional expenditures, the amounts and timing of
which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing
facilities. Furthermore, failure to comply with current or future laws and regulations could subject Tredegar to substantial
penalties, fines, costs and expenses.
Employees. Tredegar employed approximately 3,200 people at December 31, 2018.
Available Information and Corporate Governance Documents. Tredegar’s Internet address is www.tredegar.com. The
Company makes available, free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information filed electronically
with the SEC can be accessed on its website at www.sec.gov. In addition, the Company’s Corporate Governance Guidelines,
Code of Conduct and the charters of the Audit, Executive Compensation, and Nominating and Governance Committees are
available on Tredegar’s website and are available in print, without charge, to any shareholder upon request by contacting
Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225. The information on or that can be
accessed through the Company’s website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K for
the year ended December 31, 2018 (“Form 10-K”) or incorporated into other filings it makes with the SEC.
4
Item 1A. RISK FACTORS
There are a number of risks and uncertainties that could have a material adverse effect on the Company’s consolidated
financial condition, results of operations, or cash flows. The following risk factors should be considered, in addition to the
other information included in this Form 10-K, when evaluating Tredegar and its businesses.
PE Films
•
•
•
PE Films is highly dependent on sales associated with its top five customers, the largest of which is P&G. PE Films’
top five customers comprised approximately 21%, 26% and 29% of Tredegar’s consolidated net sales, in 2018, 2017 and
2016, respectively, with net sales to P&G alone comprising approximately 10%, 13% and 16% in 2018, 2017 and 2016,
respectively. The loss or significant reduction of sales associated with one or more of these customers without
replacement by new business could have a material adverse effect on the Company. Other factors that could adversely
affect the business include, by way of example, (i) failure by a key customer to achieve success or maintain share in
markets in which they sell products containing PE Films’ materials, (ii) key customers using products developed by others
that replace PE Films’ business with such customer, (iii) delays in a key customer rolling out products utilizing new
technologies developed by PE Films and (iv) operational decisions by a key customer that result in component
substitution, inventory reductions and similar changes. While PE Films is undertaking efforts to expand its customer
base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and
profits associated with these large customers.
In recent years, PE Films lost substantial sales volume due to product transitions and incurred other sales losses
associated with various customers. During October 2018, the Personal Care component of PE Films completed
negotiations with a 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 and business.
Personal Care has increased its annual R&D spending by approximately $5 million since 2014, reaching $12 million in
2018. 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, but there can be no assurance that such efforts
will be successful or that they will offset any loss of business due to product transitions.
The Personal Care component of PE Films had operating profit from ongoing operations plus depreciation and
amortization in the fourth quarter of 2018 of $3.1 million. As a result of the decline in sales from the significant product
transition discussed above, the Company expects operating profit from ongoing operations plus depreciation and
amortization for this component of approximately negative $1.5 million during the first half of 2019. Personal Care
projects its operating profit from ongoing operations plus depreciation and amortization to turn positive in the second half
of 2019 assuming production and sales growth targets are achieved.
PE Films also anticipates that a portion of its film used in surface protection applications will be made obsolete by future
customer product transitions to less costly alternative processes or materials. These transitions could possibly be fully
implemented by the fourth quarter of 2019. When fully implemented, the Company estimates that the annualized adverse
impact on future operating profit from this customer shift will be approximately $11 million. In response, the Company is
aggressively pursuing new surface protection products, applications and customers, but there can be no assurance that
such efforts will be successful or that they will offset any loss of business due to product transitions.
PE Films and its customers operate in highly competitive markets. PE Films competes on product innovation, quality,
price and service, and its businesses and their customers operate in highly competitive markets. Global market conditions
continue to exacerbate the Company’s exposure to margin compression due to competitive forces, especially as certain
products move into the later stages of their product life cycles. In addition, the changing dynamics of consumer products
retailing, including the impact of on-line retailers such as Amazon, is creating price and margin pressure on the customers
of PE Films’ personal care business. While PE Films continually works to identify new business opportunities with new
and existing customers, primarily through the development of new products with improved performance and/or cost
characteristics, there can be no assurances that such efforts will be successful or that they will offset business lost from
competitive dynamics or customer product transitions.
Our cost saving initiatives may not achieve the results we anticipate. PE Films has undertaken and will continue to
undertake cost reduction initiatives to consolidate certain production, improve operating efficiencies and generate cost
savings. PE Films cannot be certain that it will be able to complete these initiatives as planned or that the estimated
operating efficiencies or cost savings from such activities will be fully realized or maintained over time. In addition, PE
5
•
•
•
Films may not be successful in moving production to other facilities or timely qualifying new production equipment.
Failure to complete these initiatives could adversely affect PE Films’ financial condition, results of operations and cash
flows.
Failure of PE Films’ customers, who are subject to cyclical downturns, to achieve success or maintain market share
could adversely impact PE Films’ sales and operating margins. PE Films’ plastic films serve as components for, or are
used in the production of, various consumer products sold worldwide. A customer’s ability to successfully develop,
manufacture and market those products is integral to PE Films’ success. Also, consumers of premium products made with
or using PE Films’ components may shift to less premium or less expensive products, reducing the demand for PE Films’
plastic films. Cyclical downturns may negatively affect businesses that use PE Films’ plastic film products, which could
adversely affect sales and operating margins.
The Company’s inability to protect its intellectual property rights or its infringement of the intellectual property rights
of others could have a material adverse impact on PE Films. PE Films operates in an industry where its significant
customers and competitors have substantial intellectual property portfolios. The continued success of PE Films’ business
depends on its ability not only to protect its own technologies and trade secrets, but also to develop and sell new products
that do not infringe upon existing patents or threaten existing customer relationships. Intellectual property litigation is
very costly and could result in substantial expense and diversions of Company resources, both of which could adversely
affect its consolidated financial condition, results of operations and cash flows. In addition, there may be no effective
legal recourse against infringement of the Company’s intellectual property by third parties, whether due to limitations on
enforcement of rights in foreign jurisdictions or as a result of other factors.
An unstable economic environment could have a disruptive impact on PE Films’ supply chain. Certain raw materials
used in manufacturing PE Films’ products are sourced from single suppliers, and PE Films may not be able to quickly or
inexpensively re-source from other suppliers. The risk of damage or disruption to its supply chain may increase if and
when different suppliers consolidate their product portfolios, experience financial distress or disruption of manufacturing
operations (such as, for example, the impact of hurricanes on petrochemical production). Failure to take adequate steps to
effectively manage such events, which are intensified when a product is procured from a single supplier or location, could
adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, as well as require
additional resources to restore its supply chain.
Flexible Packaging Films
•
•
Overcapacity in Latin American polyester film production and a history of uncertain economic conditions in Brazil
could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films.
Competition in Brazil, Terphane’s primary market, has been exacerbated by global overcapacity in the polyester industry
generally, and by particularly acute overcapacity in Latin America. Additional PET capacity from a competitor in Latin
America came on line in 2017. These factors have resulted in significant competitive pricing pressures and U.S. Dollar
equivalent margin compression.
For flexible packaging films produced in Brazil, costs for operations in Brazil have been adversely impacted by inflation
in Brazil that is higher than in the U.S. Flexible Packaging Films is exposed to additional foreign exchange translation
risk because almost 90% of Flexible Packaging Films’ Brazilian sales are quoted or priced in U.S. Dollars while a large
part of its Brazilian costs are quoted or priced in Brazilian Real. This mismatch, together with a variety of economic
variables impacting currency exchange rates, causes volatility that could negatively or positively impact operating profit
for Flexible Packaging Films. While Flexible Packaging Films hedges this exposure on a short-term basis with foreign
exchange forward rate contracts, the exposure continues to exist beyond the hedging periods.
Governmental failure to extend anti-dumping duties in Brazil on imported products or prevent competitors from
circumventing such duties could adversely impact Flexible Packaging Films. In recent years, excess global capacity in
the industry has led to increased competitive pressures from imports into Brazil. The Company believes that these
conditions have shifted the competitive environment from a regional to a global landscape and have driven price
convergence and lower product margins for Flexible Packaging Films. Favorable anti-dumping rulings or countervailing
duties are in effect for products imported from China, Egypt, India, Mexico, UAE and Turkey. In January 2018, the
Brazilian government opened new anti-dumping investigations for products imported from Peru and Bahrain.
Competitors not currently subject to anti-dumping duties may choose to utilize their excess capacity by selling product in
Brazil, which may result in pricing pressures that Flexible Packaging Films may not be able to offset with cost savings
measures and/or manufacturing efficiency initiatives. There can be no assurance that efforts to impose anti-dumping
constraints on products imported to Brazil from Peru and Bahrain, or to extend duties beyond 2020 on products imported
from certain other countries, will be successful.
6
Aluminum Extrusions
•
•
•
•
•
•
Sales volume and profitability of Aluminum Extrusions is cyclical and seasonal and highly dependent on economic
conditions of end-use markets in the U.S., particularly in the construction sector. Aluminum Extrusions’ end-use
markets can be cyclical and subject to seasonal swings in volume. Because of the capital intensive nature and level of
fixed costs inherent in the aluminum extrusions business, the percentage drop in operating profits in a cyclical downturn
will likely exceed the percentage drop in volume. In addition, during an economic slowdown, excess industry capacity
often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers.
Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse
effects on profitability from pricing and margin pressure and higher bad debts (including a greater chance of loss
associated with customers defaulting on fixed-price forward sales contracts) that usually accompany a downturn. In
addition, higher energy costs can further reduce profits unless offset by price increases or cost reductions and productivity
improvements.
Failure to prevent competitors from circumventing anti-dumping and countervailing duties, or a reduction in such
duties, could adversely impact Aluminum Extrusions. As of April 2017, the antidumping duty and countervailing duty
orders on aluminum extrusions from China will remain in place until the next five-year review of the orders. Chinese and
other overseas manufacturers continue to try to circumvent the antidumping and countervailing orders to avoid duties. A
failure by, or the inability of, U.S. trade officials to curtail efforts to circumvent these duties, or the potential reduction of
applicable duties pursuant to annual reviews of the orders, could have a material adverse effect on the financial condition,
results of operations and cash flows of Aluminum Extrusions.
The imposition of tariffs or duties on imported aluminum products could significantly increase the price of Aluminum
Extrusions’ main raw material, which could adversely impact demand for its products. In March 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. These tariffs have
increased the cost of aluminum ingot used by Bonnell Aluminum to make its products. 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.
Competition from China could increase significantly if China is granted market economy status by the World Trade
Organization. China has launched a formal complaint at the World Trade Organization challenging its non-market
economy status, claiming that as of December 11, 2016, China’s transition period as a non-market economy under its
Accession Protocol to the World Trade Organization ended. China believes with respect to all Chinese-made products
that it should receive market economy status and the rights attendant to that status under World Trade Organization rules.
The U.S. and the European Union have each rejected that interpretation. If China is granted market economy status, the
extent to which the U.S. antidumping laws will be able to limit unfair trade practices from China will likely be limited
because the U.S. government will be forced to utilize Chinese prices and costs that do not reflect market principles in
antidumping duty investigations involving China, which could ultimately limit the level of antidumping duties applied to
unfairly traded Chinese imports. The volume of unfairly traded imports of Chinese aluminum extrusions could increase
as a result and this, in turn, would likely create substantial pricing pressure on Aluminum Extrusions’ products and could
have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.
The markets for Aluminum Extrusions’ products are highly competitive with product quality, service, delivery
performance and price being the principal competitive factors. Aluminum Extrusions has approximately 1,400
customers that are in a variety of end-use markets within the broad categories of building and construction, distribution,
automotive and other transportation, machinery and equipment, electrical and consumer durables. No single customer
exceeds 4% of Aluminum Extrusions’ net sales. Future success and prospects depend on Aluminum Extrusions’ ability to
provide superior service, high quality products, timely delivery and competitive pricing to retain existing customers and
participate in overall industry cross-cycle growth. Failure in any of these areas could lead to a loss of customers, which
could have an adverse material effect on the financial condition, results of operations and cash flows of Aluminum
Extrusions.
Aluminum Extrusions may not have sufficient capacity to meet its growth targets and service all of its customers.
Aluminum Extrusions’ ability to grow and service existing customers is closely tied to having sufficient capacity. In
recent years, increased demand, primarily from the nonresidential building and construction sector, has substantially
increased Aluminum Extrusions’ average capacity utilization.
7
General
•
The Company has identified material weaknesses in its internal control over financial reporting at December 31, 2017
and 2018. The Company’s failure to establish and maintain effective internal control over financial reporting and to
maintain effective disclosure controls and procedures increases the risk of a material misstatement in its consolidated
financial statements, and its failure to meet its reporting and financial obligations, which in turn could have a negative
impact on its financial condition.
Maintaining effective internal control over financial reporting is necessary for the Company to produce reliable financial
statements. As discussed in Item 9A. “Controls and Procedures,” the Company’s management concluded that the
Company’s internal control over financial reporting was not effective as of December 31, 2017 or December 31, 2018, as
a result of certain deficiencies that were determined to constitute material weaknesses in the Company’s internal control
over financial reporting.
Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is
defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or
detected on a timely basis. Under the criteria set forth in Internal Control - Integrated Framework 2013 issued by the
Committee of Sponsoring Organizations of the Treadway Commission, a material weakness in the design of monitoring
controls indicates that the Company has not sufficiently developed and/or documented internal controls by which
management can review and oversee the Company’s financial information to detect and correct material errors or that the
personnel responsible for performing the review did not have the sufficient skill set or knowledge of the subject matter to
perform a proper assessment.
As discussed in Item 9A. “Controls and Procedures,” to remediate the material weaknesses, the Company, with the
assistance of its outside consultant, is in the process of implementing certain changes to its internal controls and
reviewing the entire control environment to help ensure that there are no other material weaknesses. The Company
believes that its remediation plan will be sufficient to remediate the identified material weaknesses and strengthen its
internal control over financial reporting. However, remediation of the identified material weaknesses and strengthening
the Company’s internal control environment will require a substantial effort throughout 2019, and those efforts may
extend beyond 2019. As the Company continues to evaluate and work to improve its internal control over financial
reporting and disclosure controls and procedures, management may determine to take additional measures to address
control deficiencies or determine to modify the remediation plan. The Company cannot assure you, however, when it will
remediate such weaknesses, nor can it be certain of whether additional actions will be required or the costs of any such
actions. Moreover, the Company cannot assure you that additional material weaknesses will not arise in the future.
While the material weaknesses discussed in Item 9A. “Controls and Procedures” did not result in material misstatements
of the Company’s financial statements as of and for the year ended December 31, 2017 or December 31, 2018, or any
interim period during 2017 or 2018, any failure to remediate the material weaknesses, or the development of new material
weaknesses in its internal control over financial reporting, could result in material misstatements in the Company’s
consolidated financial statements and cause it to fail to meet its reporting and financial obligations, which in turn could
have a negative impact on its financial condition.
•
•
Tredegar has an underfunded defined benefit (pension) plan. Tredegar sponsors a pension plan that covers certain
hourly and salaried employees in the U.S. The plan was substantially frozen to new participants in 2007, and frozen to
benefit accruals for active participants in 2014. As of December 31, 2018, the plan was underfunded under U.S.
generally accepted accounting principles (“GAAP”) measures by $81.9 million. Tredegar expects that it will be required
to make a cash contribution of approximately $8.1 million to its underfunded pension plan in 2019, and may be required
to make higher cash contributions in future periods depending on the level of interest rates and investment returns on plan
assets.
Noncompliance with any of the covenants in the Company’s $400 million revolving credit facility, which matures in
March of 2021, could result in all debt under the agreement outstanding at such time becoming due and limiting its
borrowing capacity, which could have a material adverse effect on consolidated financial condition and liquidity. The
credit agreement governing Tredegar’s revolving credit facility contains restrictions and financial covenants that, if
violated, could restrict the Company’s operational and financial flexibility. Failure to comply with these covenants could
result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at
such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition
and liquidity.
8
•
•
•
Tredegar’s performance is influenced by costs incurred by its operating companies, including, for example, the cost of
raw materials and energy. These costs include, without limitation, the cost of resin (the raw material on which PE Films
primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), aluminum
(the raw material on which Aluminum Extrusions primarily depends), natural gas (the principal fuel necessary for
Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin, aluminum and natural gas prices are volatile
as shown in the charts in the Quantitative and Qualitative Disclosures section. The Company attempts to mitigate the
effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that
higher prices can effectively be passed through to customers or that Tredegar will be able to offset fully or on a timely
basis the effects of higher raw material and energy costs through price increases or pass-through arrangements. Further,
the Company’s cost control efforts may not be sufficient to offset any increases in raw material, energy or other costs.
Tredegar may not be able to successfully integrate strategic acquisitions. Acquisitions involve special risks, including,
without limitation, meeting revenue, margin, working capital and capital expenditure expectations that substantially drive
valuation, diversion of management’s time and attention from existing businesses, the potential assumption of
unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving
anticipated operational improvements. Acquired businesses may not achieve expected results.
Tredegar is subject to various environmental laws and regulations and could become exposed to material liabilities
and costs associated with such laws. The Company is subject to various environmental obligations and could become
subject to additional obligations in the future. Changes in environmental laws and regulations, or their application,
including those relating to global climate change and plastic products, could subject Tredegar to significant additional
capital expenditures and operating expenses. Moreover, future developments in federal, state, local and international
environmental laws and regulations are difficult to predict. Environmental laws have become and are expected to
continue to become increasingly strict. As a result, Tredegar expects to be subject to new environmental laws and
regulations. However, any such changes are uncertain and, therefore, it is not possible for the Company to predict with
certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with
respect to any such changes. See Government Regulation in “Item 1. Business” for a further discussion of this risk
factor.
• Material disruptions at one of the Company’s major manufacturing facilities could negatively impact financial results.
Tredegar believes its facilities are operated in compliance with applicable local laws and regulations and that the
Company has implemented measures to minimize the risks of disruption at its facilities. Such a disruption could be a
result of any number of events: an equipment failure with repairs requiring long lead times, labor stoppages or shortages,
cybersecurity attacks, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe
weather conditions. A material disruption in one of the Company’s operating locations could negatively impact
production and its consolidated financial condition, results of operations and cash flows.
•
•
An inability to renegotiate the Company’s collective bargaining agreements could adversely impact its consolidated
financial condition, results of operations and cash flows. Some of the Company’s employees are represented by labor
unions under various collective bargaining agreements with varying durations and expiration dates. Tredegar may not be
able to satisfactorily renegotiate collective bargaining agreements when they expire, which could result in strikes or work
stoppages or higher labor costs. In addition, existing collective bargaining agreements may not prevent a strike or work
stoppage at the Company’s facilities in the future. Any such work stoppages (or potential work stoppages) could
negatively impact Tredegar’s ability to manufacture its products and adversely affect its consolidated financial condition,
results of operations and cash flows.
Tredegar’s valuation of its $7.5 million cost-basis investment in kaléo is volatile and uncertain. Tredegar uses the fair
value method to account for its fully-diluted ownership interest of approximately 20% in kaleo, Inc. (“kaléo”), a privately
held specialty pharmaceutical company. There is no active secondary market for buying or selling stock in kaléo. The
Company’s fair value estimates can fluctuate materially between reporting periods, primarily due to variances in its
performance versus expectations and changes in the valuation of guideline public companies as measured by their
enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. Additionally, the
estimated fair value of the Company’s investment in kaléo could decline. Kaléo’s first product, an epinephrine auto-
injector, was licensed to Sanofi-Aventis U.S. LLC (“Sanofi”) in 2009. Sanofi commenced commercial sales in the first
quarter of 2013. Kaléo subsequently developed and commenced commercial sales of its second product, a naloxone auto-
injector (“Evzio”), in the third quarter of 2014. Public pressure to lower the price of pharmaceutical products continues to
mount, which could affect the price at which kaléo sells its products. The U.S. Department of Justice began an
investigation of kaléo’s Evzio business in 2018, the impact of which on kaléo and on the value of the Company’s interest
in kaléo cannot yet be estimated with any certainty. See Note 4 to the Notes to Financial Statements (“Note 4”) for more
information.
9
•
•
Rising trade tensions. A significant portion of the Company’s business involves imports to and from the U.S. and other
countries where the Company produces and sells its products. Trade tensions have been rising between the U.S. and other
countries, particularly China. An increase in tariffs and other trade barriers between the U.S. and China, or between the
U.S. and other countries, could cause an increase in the cost of the Company’s products or otherwise negatively impact
the production and sale of the Company’s products in world markets.
A failure in the Company’s information technology systems as a result of cybersecurity attacks or other causes could
negatively affect Tredegar’s business. The Company depends on information technology (“IT”) to record and process
customers' orders, manufacture and ship products in a timely manner, secure its production processes and know-how, and
maintain the financial accuracy of its business records. An IT system failure due to computer viruses, internal or external
security breaches, cybersecurity attacks, or other malicious causes could disrupt our operations and prevent us from being
able to process transactions with our customers, operate our manufacturing facilities and properly report transactions in a
timely manner. Increased global IT security threats and cyber-crime pose a potential risk to the security and availability of
the Company’s IT systems, networks, and services, including those that are managed, hosted, provided, or used by third
parties, as well as to the confidentiality, availability, and integrity of the Company’s data. To date, interruptions of the
Company’s IT systems have been infrequent and have not had a material impact on the Company’s operations. A
significant protracted failure of or security breach of the IT systems, networks, or service providers the Company relies
upon, or a loss or disclosure of business or other sensitive information, as a result of a cybersecurity incident or other
cause, could result in damage to the Company’s reputation and legal challenges, and adversely affect our results of
operations, financial condition or cash flows.
10
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
General
Most of the improved real property and the other assets used in the Company’s operations are owned. Certain of the
owned property is subject to an encumbrance under the Company’s revolving credit facility (see Note 11 for more information).
Tredegar considers the manufacturing facilities, warehouses and other properties and assets that it owns or leases to be in
generally good condition. Capacity utilization at its various manufacturing facilities can vary with product mix and normal
fluctuations in sales levels. The Company believes that its PE Films and Flexible Packaging Films manufacturing facilities
have sufficient capacity to meet current production requirements. Bonnell Aluminum’s average capacity utilization during the
fourth quarter of 2018 was in excess of 90%. Tredegar’s corporate headquarters, which is leased, is located at 1100 Boulders
Parkway, Richmond, Virginia 23225.
The Company’s principal manufacturing plants and facilities as of December 31, 2018 are listed below:
PE Films
Locations in the U.S.
Lake Zurich, Illinois
Durham, North Carolina (technical
center and production facility)
(leased)
Pottsville, Pennsylvania
Richmond, Virginia (technical center)
(leased)
Terre Haute, Indiana (technical center
and production facility)
Flexible Packaging Films
Locations Outside the U.S.
Guangzhou, China
Kerkrade, The Netherlands
Pune, India
Rétság, Hungary
São Paulo, Brazil
Principal Operations
Production of plastic films,
elastics and laminate materials
Locations in the U.S.
Locations Outside the U.S.
Principal Operations
Bloomfield, New York (technical center
Cabo de Santo Agostinho, Brazil
Production of PET-based films
and production facility)
Principal Operations
Production of aluminum
extrusions, fabrication and
finishing
Aluminum Extrusions
Locations in the U.S.
Carthage, Tennessee
Elkhart, Indiana
Newnan, Georgia
Niles, Michigan
Clearfield, Utah (leased)
Item 3.
LEGAL PROCEEDINGS
None.
Item 4.
MINE SAFETY DISCLOSURES
None.
11
PART II
Item 5.
MARKET FOR TREDEGAR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices of Common Stock and Shareholder Data
Tredegar’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “TG”. There
were 33,176,024 shares of common stock held by 1,948 shareholders of record on December 31, 2018.
The following table shows the reported high and low closing prices of Tredegar’s common stock by quarter for the past
two years.
First quarter
Second quarter
Third quarter
Fourth quarter
2018
2017
High
Low
High
Low
$
20.25
$
15.60
$
25.00
$
24.60
26.25
21.56
16.99
20.60
15.00
17.65
18.35
20.20
16.50
14.90
14.85
18.20
The closing price of Tredegar’s common stock on March 11, 2019 was $17.21.
Dividend Information
Tredegar has paid a dividend every quarter since becoming a public company in July 1989. During the past three years,
the Company paid quarterly dividends of 11 cents per share in each quarter of 2016, 2017 and 2018.
All decisions with respect to the declaration and payment of dividends will be made by the Board of Directors (“Board”)
in its sole discretion based upon earnings, financial condition, anticipated cash needs, restrictions in the Company’s revolving
credit facility and other such considerations as the Board deems relevant. See Note 11 for the restrictions on the payment of
dividends contained in the Company’s revolving credit agreement related to aggregate dividends permitted.
Issuer Purchases of Equity Securities
On January 7, 2008, Tredegar announced that its Board approved a share repurchase program whereby management is
authorized at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of the
Company’s outstanding common stock. The authorization has no time limit. Tredegar did not repurchase any shares in the
open market or otherwise in 2018, 2017 or 2016 under this standing authorization. The maximum number of shares remaining
under this standing authorization was 1,732,003 at December 31, 2018.
12
Comparative Tredegar Common Stock Performance
The following graph compares cumulative total shareholder returns for Tredegar, the S&P SmallCap 600 Stock Index (an
index comprised of companies with market capitalizations similar to Tredegar) and the Russell 2000 Index for the five years
ended December 31, 2018. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Tredegar Corporation, the S&P SmallCap 600 Index, and the Russell 2000 Index
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2019 Russell Investment Group. All rights reserved.
Quarterly Information
Tredegar does not generate or distribute quarterly reports to its shareholders. Information on quarterly results can be
obtained from the Company’s website, www.tredegar.com. In addition, Tredegar files quarterly, annual and other information
electronically with the SEC, which can be accessed on its website at www.sec.gov.
13
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-looking and Cautionary Statements
Some of the information contained in this Form 10-K may constitute “forward-looking statements” within the meaning of
the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When using the words “believe,”
“estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, Tredegar does so to identify forward-
looking statements. Such statements are based on then current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is
possible that actual results and financial condition may differ, possibly materially, from the anticipated results and financial
condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on
these forward-looking statements. For risks and important factors that could cause actual results to differ from expectations,
refer to the reports that Tredegar files with or furnishes the SEC from time-to-time, including the risks and important factors set
forth in “Risk Factors” in Part I, Item 1A of this Form 10-K. Readers are urged to review and consider carefully the disclosures
Tredegar makes in the reports Tredegar files with or furnishes to the SEC. Tredegar does not undertake, and expressly
disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change
in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law.
General
Executive Summary
Tredegar is a manufacturer of polyethylene (“PE”) plastic films, polyester films, and aluminum extrusions. Descriptions
of all the Company’s businesses are provided in the Business section.
Sales were $1.1 billion in 2018 compared to $961.3 million in 2017. Net income was $24.8 million ($0.75 per diluted
share) in 2018, compared with $38.3 million ($1.16 per diluted share) in 2017.
The 2018 results include:
• An after-tax impairment of the total goodwill balance of PE Films’ Personal Care division was recorded in the amount
of $38.2 million ($1.15 per share after-tax). See the Customer Product Transitions in Personal Care and Surface
Protection section below and Note 8 for more details; and
• An unrealized after-tax gain on the Company’s investment in kaléo of $23.9 million ($0.72 per share), which is
accounted for under the fair value method (see Note 4 for more details);
The 2017 results include:
• An unrealized after-tax gain on the Company’s investment in kaléo of $24.0 million ($0.73 per share);
• An after-tax gain of $11.9 million ($0.36 per share) from the settlement of an escrow agreement related to the
Terphane acquisition in 2011 (see Note 17 for more details);
• An income tax benefit of $61.4 million ($1.86 per share) associated with the write-off of the stock basis of Terphane
Limitada, Terphane’s Brazilian subsidiary, and Terphane’s U.S. subsidiary, Terphane Inc., computed at the 35% U.S.
corporate federal income tax rate in effect in 2017 ($56.6 million ($1.72 per share) when reduced for the deductions
applicable to the 21% U.S. corporate federal income tax rate effective in 2018 under the Tax Cuts and Jobs Act (the
“TCJA”)) (see Note 16 for more details);
• An income tax benefit from the adjustment of deferred income tax liabilities as a result of the reduction of U.S. federal
corporate income tax rates effective in 2018 and other law changes of $4.4 million ($0.13 per share) (see Note 16 for
more details); and
• An after-tax write-down of the assets of Flexible Packaging Films of $87.2 million ($2.65 per share) (see Note 17 for
more details).
Other losses associated with plant shutdowns, asset impairments and restructurings and gains and losses on the sale of
assets, and other items are described in Note 17. Net sales (sales less freight) and operating profit from ongoing operations are
the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing
performance. See the table in Note 5 for a presentation of Tredegar’s net sales and operating profit by segment for the years
ended December 31, 2018 and 2017.
20
PE Films
A summary of operating results for PE Films is provided below:
(In thousands, except percentages)
Sales volume (lbs)
Net sales
Operating profit from ongoing operations
Year Ended
December 31
2018
2017
123,583
332,488
36,181
$
$
138,999
352,459
41,546
$
$
Favorable/
(Unfavorable)
% Change
(11.1)%
(5.7)%
(12.9)%
Net sales in 2018 decreased by $20.0 million versus 2017 primarily due to:
• The volume decline in Personal Care was primarily related to topsheet business lost from competitive pressures in
North America, Europe and Asia, including at the Shanghai, China, facility that was shut down in the fourth
quarter of 2018. A small portion of the volume decline was associated with the start of the previously disclosed
customer product transition discussed below. Volume for elastics products in Personal Care increased year-over-
year.
•
Slightly lower sales in Surface Protection caused by lower volume and the adverse impact of quality claims,
partially offset by higher volume-based selling prices.
Operating profit from ongoing operations in 2018 decreased by $5.4 million versus 2017 primarily due to:
• Lower contribution to profits from Personal Care, primarily due to lower volume and unfavorable product mix
($9.3 million), partially offset by volume-based higher selling pricing ($2.2 million), lower fixed and selling,
general and administrative costs ($1.1 million), the timing of resin cost passthroughs ($0.7 million), productivity
improvements ($0.3 million) and net favorable impact from the change in U.S. Dollar value of currencies for
operations outside of the U.S. ($0.8 million);
• Lower contribution to profits from Surface Protection, primarily due to lower volumes and unfavorable product
mix ($4.1 million), the adverse impact of quality claims ($1.3 million), higher fixed and other manufacturing costs
($1.6 million), higher research and development spending and selling, general and administrative costs ($0.4
million) and higher freight costs ($0.5 million), partially offset by volume-based higher selling prices ($4.4
million); and
• Realized cost savings associated with the North American consolidation of our PE Films manufacturing facilities
completed in 2017 ($2.4 million).
In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produced topsheet
films used as components for personal care products. Production ceased at this plant during the fourth quarter of 2018. 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 $5.0 million) and other details are available in Note 17.
Customer Product Transitions in Personal Care and Surface Protection
During October 2018, the Personal Care component of PE Films completed negotiations with a 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 and business.
Personal Care has increased its annual R&D spending by approximately $5 million since 2014, reaching $12 million in
2018. Personal Care is also investing capital and is accelerating sales and marketing efforts to capture growth and diversify its
customer base and product offerings.
The Personal Care component of PE Films had operating profit from ongoing operations plus depreciation and
amortization in the fourth quarter of 2018 of $3.1 million. As a result of the decline in sales from the significant product
transition discussed above, the Company expects operating profit from ongoing operations plus depreciation and amortization
for this component of approximately negative $1.5 million during the first half of 2019. Personal Care projects its operating
21
profit from ongoing operations plus depreciation and amortization to turn positive in the second half of 2019 assuming
production and sales growth targets are achieved.
Because of the significance of the customer transition discussed above, the Company performed an asset recoverability
test and goodwill impairment analysis for the Personal Care component of PE Films. The Company’s analysis concluded that
the fair value of the Personal Care reporting unit was less than its carrying value. Accordingly, the goodwill associated with
Personal Care of $46.8 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 processes and then discarded.
The Company previously reported the risk that a portion of its film products used in surface protection applications will
be made obsolete by possible future customer product transitions to less costly alternative processes or materials. These
transitions could possibly be fully implemented by the fourth quarter of 2019. 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.
Capital Expenditures and Depreciation
Capital expenditures in PE Films were $22.0 million in 2018 compared to $15.0 million in 2017. The Company’s business
plans for 2019 include projected capital expenditures of approximately $45 million including: $12 million of a total $25 million
needed to complete the North American capacity expansion for elastics products and $9 million for other projects to support
next generation elastics in Personal Care; $5 million in Personal Care in support of topsheet products; $4 million for a new
scale-up line in Surface Protection to improve development and speed to market for new products; $5 million for other
development projects; and $10 million for capital expenditures required to support continuity of current operations.
From 2016 to 2018, the Company spent annually on average approximately $15 million less than originally planned for
capital expenditures. Actual capital expenditures in 2019 will depend on approval of specific capital project requests and will
consider progress towards replacing lost business with new products and business in Personal Care.
Depreciation expense was $15.4 million in 2018 and $14.5 million in 2017. Depreciation expense is projected to be $16
million in 2019.
Flexible Packaging Films
A summary of operating results for Flexible Packaging Films is provided below:
(In thousands, except percentages)
Sales volume (lbs)
Net sales
Operating profit (loss) from ongoing operations
$
$
2018
2017
98,994
123,830
9,892
$
$
89,325
108,355
(2,626)
Year Ended
December 31
Favorable/
(Unfavorable)
% Change
10.8%
14.3%
n/a
Net sales in 2018 increased versus 2017 primarily due to higher sales volume and increased selling prices associated with
the pass-through of higher resin costs. The higher sales volume was supported by increased production capacity for Brazilian
operations resulting from the re-start in June 2018 of a previously idled production line.
Terphane had operating profit from ongoing operations in 2018 of $9.9 million versus an operating loss from ongoing
operations in 2017 of $2.6 million. The resulting favorable change of $12.5 million for the period was primarily due to:
•
Significantly lower depreciation and amortization of $8.9 million resulting from the $101 million non-cash asset
impairment loss recognized in the fourth quarter of 2017;
• A benefit from higher volume ($5.5 million) and favorable tax incentives ($1.3 million), partially offset by the
unfavorable impact of mix and higher resin costs, net of higher selling prices ($2.2 million);
22
• Higher fixed and other manufacturing costs and selling, general and administrative costs, primarily related to
higher volume ($2.0 million);
•
Favorable foreign currency translation of Real-denominated operating costs ($3.2 million), which was offset by a
$1.7 million loss on foreign currency forward contracts that partially hedged Real-denominated operating costs;
and
• Unfavorable net foreign currency transaction impact ($0.6 million) resulting from foreign currency transaction
losses of $0.8 million in 2018 and losses of $0.2 million in 2017.
Capital Expenditures, Depreciation & Amortization
Capital expenditures in Flexible Packaging were $5.4 million in 2018 compared to $3.6 million in 2017. Capital
expenditures are projected to be $13 million in 2019, including $7 million for new capacity for value-added products and
productivity projects and $6 million for capital expenditures required to support continuity of current operations. Depreciation
expense was $0.8 million in 2018 and $7.5 million in 2017. Depreciation expense is projected to be $1 million in 2019.
Amortization expense was $0.4 million in 2018 and $3.0 million in 2017, and is projected to be $0.5 million in 2019.
Depreciation and amortization expense projections in 2018 were significantly lower than 2017 due to the non-cash write-down
of Terphane’s long-lived assets during the fourth quarter of 2017.
Aluminum Extrusions
A summary of operating results for Aluminum Extrusions is provided below:
(In thousands, except percentages)
Sales volume (lbs)*
Net sales
Operating profit from ongoing operations
2018
190,696
573,126
48,613
$
$
2017
176,269
466,833
43,454
$
$
Year Ended
December 31
Favorable/
(Unfavorable)
% Change
8.2%
22.8%
11.9%
*Sales volume for the years ended December 31, 2018 and 2017 excludes sales volume of 33,170 lbs. and 23,166 lbs., respectively,
associated with Futura, which was acquired on February 15, 2017.
Net sales in 2018 increased versus 2017 primarily due to higher volume and an increase in average selling prices from the
pass-through of higher market-driven raw material costs. Futura contributed $102.5 million of net sales in 2018 versus $71.0
million for the 10½ months owned during 2017. Excluding the impact of Futura, the increase in net sales was the result of
higher sales volume ($32.4 million), an increase in average selling prices as noted above ($31.7 million) and improved mix
($10.8 million).
Volume on an organic basis, (which excludes the impact of the Futura acquisition) increased by 8.2% in 2018 versus 2017
due to higher volume in all of Aluminum Extrusion’s primary markets. Overall average capacity utilization during the fourth
quarter of 2018 was in excess of 90%. Bookings and backlog at the end of 2018 remained strong.
Operating profit from ongoing operations in 2018 increased by $5.2 million in comparison to 2017. Excluding the
favorable profit impact of owning Futura for a full twelve-month period ($2.8 million) and the benefit for inventories accounted
for under the LIFO method in the fourth quarter of 2018, as noted above ($2.3 million), operating profit from ongoing
operations increased $0.1 million, primarily due to:
• Higher volume ($5.1 million) and favorable mix ($5.8 million), which were offset by higher employee-related
costs ($5.2 million), higher supplies and maintenance ($2.3 million), higher freight ($1.7 million), higher utilities,
primarily in the first quarter of 2018 at the Newnan, Georgia facility ($0.9 million), and higher depreciation ($0.9
million).
The Company continues to focus on fixing inefficiencies associated with the new extrusion line at its Niles, Michigan
plant and estimates that operating profit from ongoing operations in 2018 would have been higher by $3 million if not for these
inefficiencies. These inefficiencies are reflected in the higher costs noted above.
Capital Expenditures and Depreciation & Amortization
Capital expenditures for Aluminum Extrusions were $13.0 million in 2018 compared to $25.7 million in 2017. Capital
expenditures are projected to be $18 million in 2019, including approximately $9 million for infrastructure upgrades at the
23
Carthage, Tennessee facility and other productivity improvement projects, and approximately $8 million for capital
expenditures required to support continuity of current operations. Depreciation expense was $13.4 million in 2018 compared to
$11.9 million in 2017 and is projected to be $13 million in 2019. Amortization expense was $3.4 million in 2018 and $3.1
million in 2017 and is projected to be $4 million in 2019.
Corporate Expenses, Investments, Interest and Income Taxes
Pension expense was $10.3 million in 2018, an unfavorable change of $0.2 million from 2017. Most of the impact on
earnings from lower pension expense is reflected in “Corporate expenses, net” in the Operating Profit table in Note 5. Pension
expense is projected to be $9.6 million in 2019. Corporate expenses, net, decreased in 2018 versus 2017 primarily due to lower
business development and environmental costs, partially offset by higher stock-based employee benefit costs.
Interest expense decreased to $5.7 million in 2018 from $6.2 million in 2017, primarily due to lower average debt levels,
partially offset by higher interest rates in 2018.
During 2018, the Company recognized consolidated income tax expense of $11.5 million based on pretax income of
$36.4 million. During 2017, the Company recognized a consolidated income tax benefit of $53.2 million based on pretax loss
of $14.9 million. Information on the significant differences between the effective tax rate for income and the U.S. federal
statutory rate for 2018 and 2017 are further detailed in the effective income tax rate reconciliation provided in Note 16.
Total debt was $101.5 million at December 31, 2018, compared to $152.0 million at December 31, 2017. Net debt (debt
in excess of cash and cash equivalents) was $67.1 million at December 31, 2018, compared to $115.5 million at December 31,
2017. The decline in net debt includes the impact of U.S. federal income tax refunds of $26 million received in 2018. Net debt
is calculated as follows:
(In millions)
Debt
Less: Cash and cash equivalents
Net debt
December 31, 2018
December 31, 2017
$
$
101.5
$
34.4
67.1
$
152.0
36.5
115.5
Net debt, a financial measure that is not calculated or presented in accordance with GAAP, is not intended to represent
debt as defined by GAAP, but is utilized by management in evaluating financial leverage and equity valuation. The Company
believes that investors also may find net debt helpful for the same purposes. Consolidated net capitalization and other credit
measures are provided in the Financial Condition section.
Critical Accounting Policies
In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of
results of operations and financial position in the preparation of financial statements in conformity with GAAP. Actual results
could differ significantly from those estimates under different assumptions and conditions. The Company believes the
following discussion addresses its critical accounting policies. These policies require management to exercise judgments that
are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.
Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill
The Company assesses its long-lived identifiable assets for impairment when events or circumstances indicate that their
carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when the
Company does not believe the carrying value of the long-lived asset(s) will be recoverable. Tredegar also reassesses the useful
lives of its long-lived assets based on changes in the business and technologies.
The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be
recoverable, or, at a minimum, on an annual basis (December 1st of each year). When assessing goodwill for impairment,
accounting guidance allows the Company to first perform a qualitative assessment about the likelihood of the carrying value of
a reporting unit exceeding its fair value, referred to as the "Step 0" assessment. The Step 0 assessment requires the evaluation of
certain qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors and overall
financial performance, as well as company and reporting unit factors. If the Company's Step 0 analysis indicates that it is more
likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company would perform a
quantitative impairment test.
24
As of December 31, 2018, the Company applied the Step 0 assessment to its PE Films’ Surface Protection operating unit
and Aluminum Extrusions’ AACOA operating unit, which both had fair values significantly in excess of their carrying amounts
when tested in 2017. The Company's Step 0 analysis in 2018 of the reporting units concluded that it is not more likely than not
that the fair value of the reporting unit is less than its carrying amount. Therefore, the quantitative goodwill impairment test for
these reporting units was not necessary in 2018.
Goodwill for Surface Protection and AACOA totaled $57.3 million and $13.7 million, respectively, at December 31,
2018. The goodwill of AACOA is associated with its October 2012 acquisition.
Goodwill in the amount of $10.4 million from Aluminum Extrusions acquisition of Futura in February 2017, was tested
for impairment at the annual testing date, with the estimated fair value of this reporting unit exceeding the carrying value of its
net assets at December 1, 2018.
In assessing the recoverability of goodwill and long-lived identifiable assets, the Company primarily estimates fair value
using discounted cash flow analysis and comparative enterprise value-to-EBITDA (earnings before interest, taxes, depreciation
and amortization) multiples. These calculations require management to make assumptions regarding estimated future cash
flows, discount rates and other factors to determine if an impairment exists. If these estimates or their related assumptions
change in the future, the Company may be required to record additional impairment charges.
All goodwill associated with PE Films’ Personal Care operating unit, in the amount of $46.8 million ($38.2 million after
deferred income tax benefits), was impaired in the third quarter of 2018. The goodwill impairment charge was recognized upon
the completion of an asset recoverability test and impairment analysis performed as of September 30, 2018. This non-
operating, non-cash charge, as computed under GAAP, resulted from the expectation of a significant customer transition. The
Company performed an asset recoverability test and impairment analysis using projections under various business planning
scenarios and concluded that the fair value of the Personal Care reporting unit was less than its carrying value.
In 2017, Flexible Packaging Films recorded a charge for the impairment of assets in the amount of $101 million. As part
of this write-down, trade names, customer relationships and proprietary technology were impaired by $4.0 million, $9.4 million
and $4.1 million, respectively; the remaining part of the write-down was related to property, plant and equipment.
In addition to the impairment of Terphane’s assets in 2017, based upon assessments performed as to the recoverability of
other long-lived identifiable assets, the Company recorded an asset impairment loss for continuing operations of $2.9 million,
$1.2 million and $0.6 million in 2018, 2017 and 2016, respectively.
Investment Accounted for Under the Fair Value Method
In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaléo (formerly
Intelliject, Inc.), a privately held specialty pharmaceutical company. This investment is accounted for under the fair value
method. At the time of the initial investment, the Company elected the fair value option of accounting since its investment
objectives were similar to those of venture capitalists, which typically do not have controlling financial interests (venture
capital funds generally use the fair value method to account for their investment portfolios). At December 31, 2018, Tredegar’s
ownership interest was approximately 20% on a fully diluted basis.
The Company considers its investment in kaléo to be a Level 3 investment under the hierarchy described in GAAP. The
Company discloses the level of its investments within the fair value hierarchy in which fair value measurements for its
investments, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level
1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). The Company believes that its
fair value estimates will continue to be based upon Level 3 inputs since there is no secondary market for Tredegar’s ownership
and a new round of equity financing that would establish a Level 1 fair value is not likely needed. See Note 4 for more
information on valuation methods used. Adjustments to the estimated fair value of this investment will be made in the period
upon which such changes can be quantified.
At December 31, 2018 and 2017, the fair value of the Company’s investment in kaléo (also the carrying value, which is
separately stated in the consolidated balance sheets) was estimated at $84.6 million and $54.0 million, respectively. The
ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event
occurs, and the ultimate value could be materially different from the $84.6 million estimated fair value reflected in the
Company’s financial statements at December 31, 2018.
25
Pension Benefits
Tredegar sponsors noncontributory defined benefit (pension) plans in its continuing operations that have resulted in
varying amounts of net pension income or expense, as developed from actuarial valuations. Inherent in these valuations are
key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. The
Company is required to consider current market conditions, including changes in interest rates and plan asset investment
returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing
market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of net pension income or expense recorded in future periods.
The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when
applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments
determined by using the AA-rated bond yield curve. In general, the pension liability increases as the discount rate decreases
and vice versa. The weighted average discount rate utilized was 4.40%, 3.72% and 4.29% at the end of 2018, 2017 and 2016,
respectively, with changes between periods due to changes in market interest rates. Pay for active participants of the plan was
frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting
employees for service, thereby freezing all future benefits under the plan.
A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual
plan assets will also serve to increase the amount of pension expense. The total return on plan assets, which is primarily
affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was
approximately negative 3.9% in 2018 and positive 11.6% and 7.9% in 2017 and 2016, respectively. The expected long-term
return on plan assets relating to continuing operations, which is estimated by asset class and generally based on inflation-
adjusted historical returns, volatilities, risk premiums and managed asset premiums, was 6.50%, 6.50% and 7.00% in 2018,
2017 and 2016, respectively. The Company anticipates that its expected long-term return on plan assets will be 6.00% for
2019. See Note 13 for more information on expected long-term return on plan assets and asset mix.
See the Executive Summary for further discussion regarding the financial impact of the Company’s pension plans.
Income Taxes
On a quarterly basis, Tredegar reviews its judgments regarding uncertain tax positions and the likelihood that the benefits
of a deferred income tax asset will be realized. As circumstances change, the Company reflects in earnings any adjustments to
unrecognized benefits for uncertain tax positions and valuation allowances for deferred income tax assets.
For financial reporting purposes, unrecognized tax benefits on uncertain tax positions were $3.4 million, $2.0 million and
$3.3 million as of December 31, 2018, 2017 and 2016, respectively. Tax payments resulting from the successful challenge by
the taxing authority on uncertain tax positions taken by Tredegar would possibly result in the payment of interest and penalties.
Accordingly, the Company also accrues for possible interest and penalties on uncertain tax positions. The balance of accrued
interest and penalties on deductions taken relating to uncertain tax positions was $0.2 million, $0.1 million and $0.1 million at
December 31, 2018, 2017 and 2016, respectively ($0.2 million, $0.1 million and $0.1 million, respectively, net of
corresponding U.S. federal and state income tax benefits). Accruals for possible interest and penalties on uncertain tax
positions are reflected in income tax expense for financial reporting purposes.
Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions
outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations
by tax authorities for years before 2014.
As of December 31, 2018 and 2017, valuation allowances relating to deferred income tax assets were $24.7 million and
$28.5 million, respectively. For more information on deferred income tax assets and liabilities, see Note 16.
Refer to the section Recently Issued Accounting Standards in Note 1 for information concerning the effect of recently
issued accounting pronouncements.
Recently Issued Accounting Standards
Results of Continuing Operations
2018 versus 2017
Revenues. Sales in 2018 increased by 10.8% compared with 2017 due to higher sales in all segments, except PE Films. Net
sales decreased 5.7% in PE Films primarily due to topsheet business lost from competitive pressures in Europe and Asia,
26
including at the Shanghai, China, facility that was recently shut down. Net sales increased in Flexible Packaging Films by
14.3% primarily due to higher sales volume, increased selling prices associated with the pass-through of higher resin costs and
increased production capacity from an idle line that was restarted in June 2018. Net sales increased 22.8% in Aluminum
Extrusions primarily due to a full year of sales by Futura (acquired February 15, 2017), higher volume and an increase in
average selling prices from the pass-through of higher market-driven raw material costs. For more information on changes in
net sales and volume, see the Executive Summary.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of
sales) was 16.9% in 2018 versus 16.7% in 2017. The gross profit margin in PE Films decreased due to lower volume, as
discussed above, unfavorable product mix and increased operating costs, partially offset by the realized cost savings of a
restructuring completed in 2017. The gross profit margin in Flexible Packaging Films increased due to significantly lower
depreciation and amortization costs in 2018 compared to 2017, resulting from the $101 million non-cash asset impairment
charge recognized in the fourth quarter of 2017, higher production primarily from the restart of an idle line in June 2018, and
higher overall demand. The gross profit margin in Aluminum Extrusions decreased primarily as a result of operating
inefficiencies relating to the operation of its Niles, Michigan facility.
For more information on changes in operating costs and expenses, see the Executive Summary.
Selling, General and Administrative. As a percentage of sales, selling, general and administrative and R&D expenses were
9.8% in 2018, which decreased from 10.6% in 2017. The decrease in selling, general and administrative and R&D expenses as
a percentage of sales can be primarily attributed to higher sales as a result of the acquisition of Futura and the restart of a
production line by Flexible Packaging Films, overall higher demand at Aluminum Extrusions and higher selling prices
primarily due to the pass-through to customers of higher market-driven raw material costs.
Please note that the 2017 and 2016 percentages in the Operating Costs and Expenses and Selling, General and Administrative
sections (above and in 2017 versus 2016 below) have changed from the amounts disclosed in the prior year due to the
retrospective adoption of FASB’s Accounting Standards Update (“ASU”) 2017-07, which resulted in the separate presentation
of “Pension and postretirement benefits” expense in the consolidated statements of income. Historically the Company had
reported a portion of its pension and postretirement benefit expenses in cost of goods sold and selling, general and
administrative expenses.
Plant shutdowns, asset impairments, restructurings and other. Plant shutdowns, asset impairments, restructurings and other
items in 2018 are shown in the segment operating profit table in Note 5 and are described in detail in Note 17. A discussion of
unrealized gains and losses on investments can also be found in Note 4.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated
statements of income, was $0.4 million in 2018 and $0.2 million in 2017.
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.3 million and $0.4
million capitalized in 2018 and 2017, respectively), was $5.7 million in 2018, compared to $6.2 million for 2017. Average debt
outstanding and interest rates were as follows:
(In millions, except percentages)
2018
2017
Floating-rate debt with interest charged on a rollover
basis at one-month LIBOR plus a credit spread:
Average outstanding debt balance
Average interest rate
Fixed-rate and other debt:
Average outstanding debt balance
Average interest rate
Total debt:
Average outstanding debt balance
Average interest rate
$
$
$
121.3
$
175.0
3.8%
3.0%
— $
n/a
—
n/a
121.3
$
175.0
3.8%
3.0%
27
Identifiable Assets. A summary of identifiable assets for the year ended December 31, 2018 versus 2017 is provided below:
(In thousands)
PE Films
Flexible Packaging Films
Aluminum Extrusions
Subtotal
General corporate
Cash and cash equivalents
Total
Year Ended
December 31
2018
231,720
58,964
281,372
572,056
100,920
34,397
707,373
$
$
2017
289,514
49,915
268,127
607,556
111,696
36,491
755,743
$
$
Variance
(57,794)
9,049
13,245
(35,500)
(10,776)
(2,094)
(48,370)
$
$
Identifiable assets in PE Films decreased at December 31, 2018 from December 31, 2017 primarily due to the $46.8
million write-off of goodwill in the Personal Care component of PE Films. For more information, see the PE Films section of
the Executive Summary. Identifiable assets in Flexible Packaging Films increased at December 31, 2018 from December 31,
2017 primarily due to current year capital expenditures and higher inventory balances to support increased demand.
Identifiable assets in Aluminum Extrusions increased at December 31, 2018 from December 31, 2017 primarily due to current
year capital expenditures, higher accounts receivable balances due to the timing of collections and higher inventory balances.
Identifiable assets in General corporate decreased at December 31, 2018 from December 31, 2017 due to a decrease in income
taxes recoverable.
2017 versus 2016
Revenues. Sales in 2017 increased by 16.1% compared with 2016 due to higher sales in all segments and, in particular, from
the acquisition of Futura by Aluminum Extrusions in February 2017. Net sales increased 6.4% in PE Films primarily due to
increased volume and favorable sales mix for surface protection films, acquisition distribution layer materials and overwrap
products. Net sales were relatively flat in Flexible Packaging Films (0.3% increase). Net sales increased 29.6% in Aluminum
Extrusions primarily due to the acquisition of Futura, higher sales volume, improved product mix, and an increase in average
selling prices primarily due to the pass-through to customers of higher market-driven raw material costs.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of
sales) was 16.7% in 2017 and 16.8% in 2016. The gross profit margin in PE Films increased due to higher revenue, as
discussed above, the realized cost savings of a restructuring completed in 2017, productivity efficiencies in surface protection
films and personal care, and a favorable LIFO inventory adjustment. The gross profit margin in Flexible Packaging Films
decreased primarily as a result of lower production primarily due to numerous intermittent power outages at Terphane’s Cabo,
Brazil plant, during the third quarter, higher raw material and other costs related to adverse impact of high inflation in Brazil,
partially offset by lower foreign currency transaction losses in 2017 versus 2016. The gross profit margin in Aluminum
Extrusions increased slightly due to higher sales volume and improved product mix noted above, partially offset by increased
operating costs, disruptions to normal plant production associated with the startup of a new press at the Niles, Michigan plant
and an unfavorable LIFO adjustment.
Selling, General and Administrative. As a percentage of sales, selling, general and administrative and R&D expenses were
10.6% in 2017, which decreased from 11.2% in 2016. The decrease in selling, general and administrative and R&D expenses
as a percentage of sales can be primarily attributed to higher sales as a result of the acquisition of Futura.
Plant shutdowns, asset impairments, restructurings and other. Plant shutdowns, asset impairments, restructurings and other
items in 2017 are shown in the segment operating profit table in Note 5 and are described in detail in Note 17. A discussion of
unrealized gains and losses on investments can also be found in Note 4.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated
statements of income, was $0.2 million in 2017 and $0.3 million in 2016.
28
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.4 million and $0.3
million capitalized in 2017 and 2016, respectively), was $6.2 million in 2017, compared to $3.8 million for 2016. In February
2017, the Company borrowed $87 million under its revolving credit agreement to fund the acquisition of Futura. Interest
expense in 2016 included the write-off of $0.2 million in unamortized loan fees from Tredegar’s revolving credit facility that
was refinanced in the first quarter of 2016. Average debt outstanding and interest rates were as follows:
(In millions, except percentages)
2017
2016
Floating-rate debt with interest charged on a rollover
basis at one-month LIBOR plus a credit spread:
Average outstanding debt balance
Average interest rate
Fixed-rate and other debt:
Average outstanding debt balance
Average interest rate
Total debt:
Average outstanding debt balance
Average interest rate
$
$
$
175.0
$
103.5
3.0%
2.3%
— $
n/a
—
n/a
175.0
$
103.5
3.0%
2.3%
Identifiable Assets. A summary of identifiable assets for the year ended December 31, 2017 versus 2016 is provided below:
(In thousands)
PE Films
Flexible Packaging Films
Aluminum Extrusions
Subtotal
General corporate
Cash and cash equivalents
Total
Year Ended
December 31
2017
289,514
49,915
268,127
607,556
111,696
36,491
755,743
$
$
2016
278,558
156,836
147,639
583,033
38,618
29,511
651,162
$
$
Variance
10,956
(106,921)
120,488
24,523
73,078
6,980
104,581
$
$
Identifiable assets in PE Films increased at December 31, 2017 from December 31, 2016 primarily due to higher property,
plant and equipment balances as a result of higher current year capital expenditures. Identifiable assets in Flexible Packaging
Films decreased at December 31, 2017 from December 31, 2016 due to the impairment of assets recognized during the fourth
quarter of 2017. Identifiable assets in Aluminum Extrusions increased at December 31, 2017 from December 31, 2016
primarily due to the acquisition of Futura and higher property, plant and equipment balances as a result of current year capital
expenditures, higher accounts receivable balances due to the timing of collections and higher inventory balances. Identifiable
assets in General corporate increased at December 31, 2017 from December 31, 2016 due to an increase in income taxes
recoverable and an increase in the value of the Company’s investment in kaléo.
Segment Analysis. A summary of operating results for 2017 versus 2016 for each of the Company’s reporting segments is
shown below.
PE Films
A summary of operating results for PE Films is provided below:
(In thousands, except percentages)
Sales volume (lbs)
Net sales
Operating profit from ongoing operations
Year Ended
December 31
2017
2016
138,999
352,459
41,546
$
$
139,020
331,146
26,312
Favorable/
(Unfavorable)
% Change
— %
6.4 %
57.9 %
$
$
29
Net sales in 2017 increased by $21.3 million versus 2016 primarily due to:
• Higher sales from surface protection films ($15.1 million), primarily due to higher volume and a favorable sales
mix; and
• Higher volume for acquisition distribution layer materials and overwrap products, and a favorable sales mix in
personal care materials ($12.0 million), partially offset by volume reductions from the winding down of known
lost business in personal care that was substantially completed by the end of 2016 ($6.2 million).
Operating profit from ongoing operations in 2017 increased by $15.2 million versus 2016 primarily due to:
• Higher contribution to profits from surface protection films ($12.3 million), primarily due to higher volume, a
favorable sales mix, and production efficiencies;
• Higher contribution to profits from personal care materials, primarily due to improved volume, production
efficiencies and favorable pricing ($7.3 million), partially offset by known lost business ($2.1 million);
• A benefit for inventories accounted for under the LIFO method of $1.1 million in 2017 versus a charge of $0.9
million in 2016; and
• Higher net general, selling and plant expenses ($7.3 million), primarily associated with strategic hires and an
increase in employee incentive costs, partially offset by realized cost savings of $3.1 million associated with the
North American facility consolidation.
Restructuring
In July 2015, the Company began a consolidation of its domestic production for PE Films by restructuring the operations
in its manufacturing facility in Lake Zurich, Illinois. This restructuring was completed in the third quarter of 2017, with
expected annualized savings excluding depreciation expenses of $6.0 million. Total expenses associated with the restructuring
were $0.8 million in 2017 (included in “Cost of goods sold” in the consolidated statements of income) and the total expenses
for the project since inception were $7.3 million. Cash expenditures for the North American facility consolidation project were
$1.9 million in 2017, which includes capital expenditures of $0.1 million. Total cash expenditures for the project since
inception were $16.0 million, which includes $11.2 million for capital expenditures.
Capital Expenditures and Depreciation
Capital expenditures in PE Films were $15.0 million in 2017 compared to $25.8 million in 2016. Depreciation expense
was $14.5 million in 2017 and $13.5 million in 2016.
Flexible Packaging Films
A summary of operating results for Flexible Packaging Films is provided below:
(In thousands, except percentages)
Sales volume (lbs)
Net sales
Operating profit (loss) from ongoing operations
$
$
2017
2016
89,325
108,355
$
(2,626) $
89,706
108,028
1,774
Year Ended
December 31
Favorable/
(Unfavorable)
% Change
(0.4)%
0.3 %
n/a
Net sales and sales volume in 2017 were relatively flat compared to 2016, and adversely impacted by production issues
due to intermittent power outages at Terphane’s Cabo de Santo Agostinho, Brazil plant during the third quarter.
Terphane had an operating loss from ongoing operations in 2017 of $2.6 million versus an operating profit from ongoing
operations in 2016 of $1.8 million. The resulting unfavorable change of $4.4 million for the period was primarily due to:
• Lower production, primarily due to numerous intermittent power outages during the third quarter ($0.5 million),
and lower average sales price ($1.6 million), partially offset by a favorable sales mix ($1.5 million);
• Higher raw material costs of $1.8 million in 2017 that could not be passed through to customers due to
competitive pressures versus a benefit from lower raw material costs of $1.2 million in 2016;
•
Foreign currency transaction losses primarily associated with U.S. Dollar denominated export sales in Brazil of
$0.2 million in 2017 versus foreign currency transaction losses of $3.5 million in 2016;
30
• Higher costs and expenses of $3.2 million primarily related to the adverse impact of high inflation in Brazil and
the appreciation by approximately 9% of the average exchange rate for the Brazilian Real relative to the U.S.
Dollar; and
• Higher depreciation and amortization costs ($0.9 million).
Terphane Asset Impairment Loss and Worthless Stock Deduction
The Company acquired Terphane in October 2011, and since that time Terphane’s selling prices, margins and overall
performance have been adversely impacted by excess industry capacity, particularly in Latin America, and by a period of poor
economic conditions in Brazil. Moreover, significant additional capacity came on-line late in the third quarter of 2017 from a
competitor in Latin America. As a result, Terphane has struggled with profitability and incurred operating losses from ongoing
operations in two of the last five years, including an operating loss of $2.6 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.
During the fourth quarter of 2017, in conjunction with annual business planning as well as valuation activities and other
efforts, the Company determined that the carrying value of Terphane’s remaining long-lived assets were impaired (Terphane’s
goodwill was written off in 2015). Accordingly, the Company wrote down these assets based on an enterprise valuation for all
of Terphane of approximately $30 million. This write-down resulted in a non-cash asset impairment loss recognized during the
fourth quarter of 2017 of $101 million ($87 million after non-cash tax benefits).
Also during the fourth quarter of 2017, as a result of the valuation activities referred to above, the Company claimed an
ordinary loss for U.S. federal and state income tax purposes of $153 million for the write-off of the stock basis of Terphane
Limitada (Terphane’s Brazilian subsidiary). The Terphane Limitada worthless stock deduction resulted in an overall reduction
of Tredegar’s U.S. income tax liability of approximately $49 million. The full net tax benefit expected from the Terphane
Limitada worthless stock deduction was accrued during the fourth quarter of 2017 and reflected as a reduction to Tredegar’s
consolidated income tax expense. During the second quarter of 2017, the Company recognized a worthless stock deduction for
Terphane, Inc. (Terphane’s U.S. subsidiary), which resulted in an income tax benefit recognized of $8.1 million.
Capital Expenditures, Depreciation & Amortization
Capital expenditures in Flexible Packaging were $3.6 million in 2017 compared to $3.4 million in 2016. Depreciation
expense was $7.5 million in 2017 and $6.7 million in 2016. Amortization expense was $3.0 million in 2017 and $2.8 million in
2016.
Aluminum Extrusions
A summary of operating results for Aluminum Extrusions, including the results of Futura (except sales volume) since its
date of acquisition, is provided below:
Year Ended
December 31
2017
(In thousands, except percentages)
176,269
Sales volume (lbs)*
466,833
Net sales
43,454
Operating profit from ongoing operations
*Excludes sales volume for Futura, which was acquired on February 15, 2017.
$
$
$
$
2016
172,986
360,098
37,794
Favorable/
(Unfavorable)
% Change
1.9%
29.6%
15.0%
Net sales in 2017 increased versus 2016 primarily due to the addition of Futura. Futura contributed net sales of $71.0
million in 2017. Excluding the impact of Futura, net sales improved due to higher sales volume, improved product mix, 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 2017 increased by 1.9% versus 2016.
Higher volume in specialty and automotive & light truck markets were the primary drivers.
Operating profit in 2017 increased by $5.7 million versus 2016. Excluding the favorable profit impact of Futura ($8.2
million), operating profit decreased $2.5 million, primarily due to:
• Higher volume and inflation-related sales prices ($7.3 million benefit);
31
•
Increased operating costs, including utilities and employee-related expenses and higher depreciation ($3.9
million);
• Higher costs associated with the startup of the new press at the Niles, Michigan plant, resulting from disruptions
to normal plant production ($4.3 million); and
•
A charge for inventories accounted for under the LIFO method of $1.3 million in 2017 versus a benefit of $0.5
million in 2016.
Cast House Explosion
On June 29, 2016, the Bonnell Aluminum plant in Newnan, Georgia suffered an explosion in the casting department,
causing significant damage to the cast house and related equipment. The Company completed the process of replacing the
damaged casting equipment, and the cast house resumed production in the third quarter of 2017.
During 2017, Bonnell incurred $5.6 million of additional operational expenses as a result of the explosion; $5.5 million of
this amount was fully offset by insurance recoveries. Also, $0.6 million of additional operational expenses incurred in 2016
that were previously considered not reasonably assured of being covered by insurance recoveries were recovered. Each of
these amounts is recorded in “Plant shutdowns, asset impairments, restructurings and other” in the Operating Profit table in
Note 5 and in “Cost of goods sold” in the Consolidated Statements of Income. In the fourth quarter of 2017, all remaining
insurance claims associated with this matter were settled, and a gain on involuntary conversion of the old cast house of $5.3
million was recorded in “Other income (expense), net” in the Consolidated Statements of Income and in “Plant shutdowns,
asset impairments, restructurings and other” in the Operating Profit table in Note 5.
Capital Expenditures and Depreciation & Amortization
Capital expenditures for Aluminum Extrusions were $25.7 million in 2017 compared to $15.9 million in 2016.
Depreciation expense was $11.9 million in 2017, which included $2.9 million from the addition of Futura, compared to $8.1
million in 2016. Amortization expense was $3.1 million in 2017, which included $2.1 million from the addition of Futura, and
$1.0 million in 2016.
Assets and Liabilities
Financial Condition
Tredegar’s management continues to focus on improving working capital management. Measures such as days sales
outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used by the Company to
evaluate changes in working capital. Significant changes in assets and liabilities from December 31, 2017 to December 31,
2018 are summarized below:
• Accounts and other receivables increased $4.6 million (3.8%).
• Accounts and other receivables in PE Films decreased by $5.0 million due mainly to lower net sales for certain
Personal Care products, a focus on collection efforts, the use of supply chain financing arrangements and the timing
of cash receipts. DSO (computed using trailing 12 months net sales and a rolling 12-month average of accounts and
other receivables balances) was approximately 43.2 days in 2018 and 48.4 days in 2017.
• Accounts and other receivables in Flexible Packaging Films decreased by $2.9 million primarily due to the
negotiation of shorter payments terms with certain customers, the use of supply chain financing arrangements and the
timing of cash receipts. DSO was approximately 43.7 days in 2018 and 53.2 days in 2017.
• Accounts and other receivables in Aluminum Extrusions increased by $12.5 million primarily due to higher prices
resulting from the pass-through of higher metal costs. DSO was approximately 44.6 days in 2018 and 43.3 days in
2017.
•
Inventories increased $6.9 million (7.9%).
•
•
Inventories in PE Films decreased by $5.7 million primarily due to lower sales and the timing of raw material
purchases. DIO (computed using trailing 12 months costs of goods sold calculated on a first-in, first-out basis and a
rolling 12-month average of inventory balances calculated on the first-in, first-out basis) was approximately 54.9
days in 2018 and 55.0 days in 2017.
Inventories in Flexible Packaging Films increased by $9.5 million primarily due to a higher production level leading
to more finished goods on hand and higher levels of raw materials to support increased production, and the impact of
32
the change in the value of the U.S. Dollar relative to the Brazilian real. DIO was approximately 77.9 days in 2018
and 70.1 days in 2017.
•
Inventories in Aluminum Extrusions increased by $3.2 million primarily due to an increase in raw material prices and
the timing of purchases. DIO was approximately 33.5 days in 2018 and 32.6 days in 2017.
• Net property, plant and equipment increased by $5.3 million (2.4%) due primarily to capital expenditures of $40.8 million,
offset by depreciation of $29.8 million and a change in the value of the U.S. dollar relative to foreign currencies ($5.2
million decrease).
•
Identifiable intangible assets decreased by $4.3 million (10.5%) primarily due to amortization expense of $4.0 million.
• Goodwill decreased by $46.8 million (36.5%) due to the write-off of all of the goodwill related to the Personal Care
component of PE Films.
• Accounts payable increased by $4.4 million (4.0%).
• Accounts payable in PE Films decreased by $5.6 million primarily due to lower planned production and the normal
volatility associated with the timing of payments. DPO (computed using trailing 12 months costs of goods sold
calculated on a first-in, first-out basis and a rolling 12-month average of accounts payable balances) was
approximately 43.7 days in 2018 and 40.6 days in 2017.
• Accounts payable in Flexible Packaging Films increased by $3.4 million, due to higher production levels and
inventory levels to meet market demand and the normal volatility associated with the timing of payments. DPO was
approximately 51.9 days in 2018 and 42.8 days in 2017.
• Accounts payable in Aluminum Extrusions increased by $5.5 million, primarily due to higher volume, an increase in
metal prices, negotiation of longer payment terms and the normal volatility associated with the timing of payments.
DPO was approximately 49.7 days in 2018 and 48.0 days in 2017.
• Accrued expenses increased by $0.1 million (0.1%) from December 31, 2017 due to normal fluctuations in the accrual
accounts.
• Net noncurrent deferred income tax assets in excess of noncurrent deferred income tax liabilities decreased by $11.1 million
primarily due to numerous changes between years in the balance of the components shown in the December 31, 2018 and
2017 schedule of deferred income tax assets and liabilities provided in Note 16. The Company had a current income tax
receivable of $6.8 million at December 31, 2018 compared to a current income tax receivable of $32.1 million at December
31, 2017. The change is primarily due to timing of tax payments and refunds from net operating losses and tax credits
carried back to prior years.
33
On March 1, 2016, the Company entered into a five-year, $400 million secured revolving credit agreement that expires on
March 1, 2021 (“revolving credit agreement”). Net capitalization and indebtedness as defined under the revolving credit
agreement as of December 31, 2018 were as follows:
Net Capitalization and Indebtedness as of December 31, 2018
(In thousands)
Net capitalization:
Cash and cash equivalents
Debt:
$400 million revolving credit agreement maturing March 1, 2021
Other debt
Total debt
Debt net of cash and cash equivalents
Shareholders’ equity
Net capitalization
Indebtedness as defined in revolving credit agreement:
Total debt
Face value of letters of credit
Capital lease
Other
Indebtedness
$
34,397
101,500
—
101,500
67,103
354,857
421,960
101,500
2,686
29
—
$
$
$
104,215
The credit spread and commitment fees charged on the unused amount under our revolving credit agreement at various
indebtedness-to-adjusted EBITDA levels are as follows:
Pricing Under Revolving Credit Agreement (Basis Points)
Indebtedness-to-Adjusted EBITDA Ratio
> 3.5x but <= 4.0x
> 3.0x but <= 3.5x
> 2.0x but <= 3.0x
> 1.0x but <= 2.0x
<= 1.0x
Credit Spread
Over LIBOR
Commitment
Fee
250
225
200
175
150
45
40
35
30
25
At December 31, 2018, the interest rate on debt under the revolving credit agreement existing at that date was priced at
one-month LIBOR plus the applicable credit spread of 150 basis points. Under the revolving credit agreement, borrowings are
permitted up to $400 million, and approximately $298 million was available to borrow at December 31, 2018, based upon the
most restrictive covenant within the revolving credit agreement.
As of December 31, 2018, Tredegar was in compliance with all financial covenants outlined in its revolving credit
agreement. Noncompliance with any of the debt covenants may have a material adverse effect on financial condition or
liquidity in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the
lenders. Renegotiation of the covenant(s) through an amendment to the revolving credit agreement may effectively cure the
noncompliance, but may have an effect on financial condition or liquidity depending upon how the amended covenant is
renegotiated.
The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the
revolving credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and
adjusted EBIT as defined in the revolving credit agreement are not intended to represent net income or cash flow from
operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.
34
Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and Interest Coverage Ratio as Defined in the Revolving
Credit Agreement Along with Related Most Restrictive Covenants
As of and for the Twelve Months Ended December 31, 2018 (In thousands)
Computations of adjusted EBITDA and adjusted EBIT as defined in revolving credit agreement for the twelve months ended
December 31, 2018
Net income
Plus:
After-tax losses related to discontinued operations
Total income tax expense for continuing operations
Interest expense
Depreciation and amortization expense for continuing operations
All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing
operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset
impairments and/or restructurings (cash-related of $7,774)
Charges related to stock option grants and awards accounted for under the fair value-based method
Losses related to the application of the equity method of accounting
Losses related to adjustments in the estimated fair value of assets accounted for under the fair value
method of accounting
Minus:
After-tax income related to discontinued operations
Total income tax benefits for continuing operations
Interest income
All non-cash gains and income, plus cash gains and income in excess of $10,000, for continuing
operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset
impairments and/or restructurings
Income related to changes in estimates for stock option grants and awards accounted for under the fair
value-based method
Income related to the application of the equity method of accounting
Income related to adjustments in the estimated fair value of assets accounted for under the fair value
method of accounting
Plus cash dividends declared on investments accounted for under the equity method of accounting
Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset
dispositions
Adjusted EBITDA as defined in revolving credit agreement
Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions
and asset dispositions)
Adjusted EBIT as defined in revolving credit agreement
$
24,842
—
11,526
5,702
33,804
55,160
1,221
—
—
—
—
(369)
(250)
—
—
(30,600)
—
—
101,036
(33,804)
67,232
$
Computations of leverage and interest coverage ratios as defined in revolving credit agreement at December 31, 2018:
Leverage ratio (indebtedness-to-adjusted EBITDA)
Interest coverage ratio (adjusted EBIT-to-interest expense)
Most restrictive covenants as defined in revolving credit agreement:
Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the
revolving credit agreement ($100,000 plus 50% of net income generated for each quarter beginning
January 1, 2016)
Maximum leverage ratio permitted
Minimum interest coverage ratio permitted
1.03x
11.79x
$ 169,844
4.00x
2.50x
35
Tredegar is obligated to make future payments under various contracts as set forth below:
(In millions)
Debt:
2019
2020
2021
2022
2023
Remainder
Total
Payments Due by Period
Principal payments
$
— $
— $
101.5
$
— $
— $
— $
101.5
Estimated interest expense
Estimated contributions required: (1)
Defined benefit plans
Other postretirement benefits
Capital expenditure commitments
Leases
Estimated obligations relating to
uncertain tax positions (2)
Other (3)
Total
4.2
4.2
0.7
—
—
—
9.1
8.3
0.5
14.1
4.5
—
1.1
12.0
12.2
14.8
12.9
18.8
0.5
—
4.0
—
—
0.5
—
3.6
—
—
0.5
—
2.4
—
—
0.5
—
1.2
—
—
2.2
—
2.6
2.9
—
79.0
4.7
14.1
18.3
2.9
1.1
$
32.7
$
20.7
$
118.5
$
17.7
$
14.6
$
26.5
$
230.7
(1)
Estimated minimum required contributions for defined benefit plans and benefit payments for other postretirement plans are based on actuarial estimates
using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases and health care cost trends. The
expected defined benefit plan contribution estimates for 2019 through 2028 were determined under provisions of the Pension Protection Act of 2006
using the preliminary assumptions chosen by Tredegar for the 2019 plan year. Tredegar has determined that it is not practicable to present defined
benefit contributions and other postretirement benefit payments beyond 2028.
(2) Amounts for which reasonable estimates about the timing of payments cannot be made are included in the remainder column.
(3)
Includes contractual severance and other miscellaneous contractual arrangements.
From time to time, the Company enters into transactions with third parties in connection with the sale of assets or
businesses in which it agrees to indemnify the buyers or third parties involved in the transaction, or the sellers or third parties
involved in the transaction agree to indemnify Tredegar, for certain liabilities or risks related to the assets or business. Also, in
the ordinary course of business, the Company may enter into agreements with third parties for the sale of goods or services that
may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification
would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement.
Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket.
For these reasons, the Company is unable to estimate the maximum potential amount of the potential future liability under the
indemnity provisions of these agreements. Tredegar does, however, accrue for losses for any known contingent liability,
including those that may arise from indemnification provisions, when future payment is probable and the amount is reasonably
estimable. The Company discloses contingent liabilities if the probability of loss is reasonably possible and material.
At December 31, 2018, Tredegar had cash and cash equivalents of $34.4 million, including funds held in locations outside
the U.S. of $31.1 million. Tredegar’s policy is to accrue U.S. federal income taxes on unremitted earnings of all foreign
subsidiaries where required. However, due to changes in the taxation of dividends under TCJA, Tredegar will only record U.S.
federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any
potential tax on future distributions from its foreign subsidiaries. Prior to the second quarter of 2016, deferred U.S. federal
income taxes had not been recorded for the undistributed earnings for Terphane Limitada because the Company had intended to
permanently reinvest these earnings. During 2016, Terphane Limitada paid dividends totaling $13.3 million to the Company.
Because of the accumulation of significant losses related to foreign currency translations at Terphane Limitada, there were no
unrecorded deferred income tax liabilities associated with the U.S. federal income taxes and foreign withholding taxes on
Terphane Limitada’s undistributed earnings as of December 31, 2018 and December 31, 2017.
The Company believes that existing borrowing availability, current cash balances and cash flow from operations will be
sufficient to satisfy working capital, capital expenditure and dividend requirements for at least the next twelve months.
Shareholders’ Equity
At December 31, 2018, Tredegar had 33,176,024 shares of common stock outstanding and a total market capitalization of
$526.2 million, compared with 33,017,422 shares of common stock outstanding and a total market capitalization of $633.9
million at December 31, 2017.
Tredegar did not repurchase any shares on the open market in 2018, 2017 or 2016 under its approved share repurchase
program.
36
Cash Flows
The discussion in this section supplements the information presented in the Consolidated Statements of Cash Flows.
Cash provided by operating activities was $97.8 million in 2018 compared with $88.2 million in 2017. The increase is
primarily due to higher operating profit before depreciation and amortization from ongoing operations ($5.6 million) and the
net of income tax refunds received in 2018 over income tax payments made in the same period in 2017 ($33.2 million),
primarily offset by higher working capital and larger pension contributions in 2018 versus 2017 ($29.3 million).
Cash used in investing activities was $34.1 million in 2018 compared with $125.6 million in 2017. Cash used in
investing activities primarily represents the acquisition of Futura in 2017 for $87.1 million and capital expenditures, which
were $40.8 million and $44.4 million in 2018 and 2017, respectively. Additionally, in the first quarter of 2018, the Company
received $5 million from escrowed funds related to an earnout from the acquisition of Futura, of which $4.3 million was
classified in cash flows for investing activities.
Net cash flow used in financing activities was $64.1 million in 2018, primarily due to net repayments under the revolving
credit agreement of $50.5 million and the payment of regular quarterly dividends aggregating for the year to $14.6 million
($0.44 per share annually), partially offset by the proceeds from the exercise of stock options and other financing activities of
$1.0 million. Cash provided by financing activities was $43.2 million in 2017, including net borrowings under the revolving
credit agreement of $57.0 million. These net borrowings plus cash provided by operating activities of $88.2 million in 2017
were used to fund the acquisition of Futura for $87.1 million and regular quarterly dividends aggregating for the year to $14.5
million ($0.44 per share annually).
Quantitative and Qualitative Disclosures about Market Risk
Tredegar has exposure to the volatility of interest rates, polyethylene, polypropylene and polyester resin prices, PTA and
MEG prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the Assets and
Liabilities section regarding interest rate exposures related to borrowings under the revolving credit agreement.
Changes in polyethylene resin prices, and the timing of those changes, could have a significant impact on profit margins
in PE Films. Changes in polyester resin, PTA and MEG prices, and the timing of those changes, could have a significant
impact on profit margins in Flexible Packaging Films. Profit margins in Aluminum Extrusions are sensitive to fluctuations in
aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate its
casting furnaces). There is no assurance of the Company’s ability to pass through higher raw material and energy costs to its
customers.
See the Executive Summary and the Results of Continuing Operations sections for discussion regarding the impact of
the lag in the pass-through of resin price changes.
37
The volatility of average quarterly prices of low density polyethylene resin in the U.S. (a primary raw material for PE
Films products) is shown in the chart below:
Source: Quarterly averages computed by Tredegar using monthly data provided by IHS, Inc. In January 2015, IHS reflected a 21 cents per pound non-market adjustment based
on their estimate of the growth of discounts in prior periods. The 4th quarter 2014 average rate of $1.09 per pound is shown on a pro forma basis as if the non-market
adjustment was made in the fourth quarter of 2014.
Polyethylene resin prices in Europe, Asia and South America have exhibited similar long-term trends. The price of resin
is driven by several factors, including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating
resin prices, PE Films has index-based pass-through raw material cost agreements for the majority of its business. However,
under certain agreements, changes in resin prices are not passed through for an average period of 90 days (see the Executive
Summary and the Results of Continuing Operations sections for more information). Pricing on the remainder of the business
is based upon raw material costs and supply/demand dynamics within the markets in which the Company operates.
Polyester resins, MEG and PTA used by Flexible Packaging Films in Brazil are primarily purchased domestically, with
other sources available, mostly from Asia and the U.S. Given the nature of these products as commodities, pricing is derived
from Asian pricing indexes. The volatility of the average quarterly prices for polyester fibers in Asia, which is representative of
polyester resin (a primary raw material for polyester film products) prices, is shown in the chart below:
Source: Quarterly averages computed by Tredegar using monthly data from CMAI Global Index data.
38
The volatility of average quarterly prices of PTA and MEG in Asia (raw materials used in the production of polyester
resins produced by Flexible Packaging Films) is shown in the chart below:
Source: Quarterly averages computed by Tredegar using monthly data from CMAI Global Index data.
In the normal course of business, Aluminum Extrusions 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 (see the chart below) 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 or hedge aluminum, based on the scheduled deliveries. See Note 9 for more information. The volatility of quarterly
average aluminum prices is shown in the chart below:
Source: Quarterly averages computed by Tredegar using daily Midwest average prices provided by Platts.
From time-to-time, Aluminum Extrusions hedges a portion of its exposure to natural gas price volatility by entering into
fixed-price forward purchase contracts with its natural gas suppliers. The Company estimates that, in an unhedged situation,
every $1 per mmBtu per month change in the market price of natural gas has a $102,000 impact on the continuing monthly
operating profit for U.S. operations in Aluminum Extrusions. There is an energy surcharge for Aluminum Extrusions in the
U.S. that is applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu.
39
The volatility of quarterly average natural gas prices is shown in the chart below:
Source: Quarterly averages computed by Tredegar using monthly NYMEX settlement prices.
Tredegar sells to customers in foreign markets through its foreign operations and through exports from U.S. plants. The
percentage of sales and total assets for manufacturing operations related to foreign markets for 2018, 2017 and 2016 are as
follows:
Tredegar Corporation—Continuing Operations
Percentage of Net Sales and Total Assets Related to Foreign Markets
2018
% of Total
Net Sales *
Exports
From
U.S.
Foreign
Oper-
ations
Canada
Europe
Latin America**
Asia
Total % exposure to foreign
markets
5
1
1
7
14
—
8
10
1
19
% Total
Assets -
Foreign
Oper-
ations *
—
6
8
4
2017
% of Total
Net Sales *
Exports
From
U.S.
Foreign
Oper-
ations
5
1
2
9
—
9
9
2
20
2016
% of Total
Net Sales *
Exports
From
U.S.
Foreign
Oper-
ations
6
1
—
9
16
—
10
11
3
24
% Total
Assets -
Foreign
Oper-
ations *
—
6
7
5
18
% Total
Assets -
Foreign
Oper-
ations *
—
6
21
6
33
18
17
*
**
The percentages for foreign markets are relative to Tredegar’s consolidated net sales and total assets from continuing operations.
In 2017, Flexible Packaging Films’ recorded a charge for the impairment of assets in the amount of $101 million. See Terphane Asset
Impairment Loss and Worthless Stock Deduction in Flexible Packaging Films in the Executive Summary section for more details.
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 (for additional information, see trends for the Euro, Brazilian Real and Chinese Yuan in
the charts on the following page). Exports from the U.S. are generally denominated in U.S. Dollars. The Company’s foreign
currency exposure on income from continuing foreign operations relates to the Euro, the Chinese Yuan, the Hungarian Forint,
the Brazilian Real and the Indian Rupee.
PE Films is generally able to match the currency of its sales and costs for its product lines. For flexible packaging
films produced in Brazil, selling prices and key raw material costs are principally determined in U.S. Dollars and are impacted
by local economic conditions. Competition in Brazil, Terphane’s primary market, has been exacerbated by global overcapacity
in the polyester industry generally, and by particularly acute overcapacity in Latin America. Additional PET capacity from a
competitor in Latin America came on line in September 2017. These factors have resulted in significant competitive pricing
40
pressures and U.S. Dollar equivalent margin compression. Moreover, variable conversion, fixed conversion and sales, general
and administrative costs for operations in Brazil have been adversely impacted by inflation in Brazil that is higher than in the
U.S. Flexible Packaging Films is exposed to additional foreign exchange translation risk (its functional currency is the
Brazilian Real) because almost 90% of Flexible Packaging Films business unit in Brazil, Terphane Limitada's (“Terphane
Ltda.”) sales are quoted or priced in U.S. Dollars, while a large majority of its Brazilian costs are quoted or priced in Brazilian
Real. This mismatch, together with a variety of economic variables impacting currency exchange rates, causes volatility that
could negatively or positively impact operating profit for Flexible Packaging Films.
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the
financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the
net mismatch translation exposure between Terphane Ltda.’s U.S. Dollar quoted or priced sales and underlying Brazilian Real
quoted or priced operating costs (excluding depreciation and amortization) is annual net costs of R$125 million. Terphane
Ltda. has outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars to hedge
its exposure. See Note 8 for more information on outstanding hedging contracts and this hedging program.
Tredegar estimates that the change in the value of foreign currencies relative to the U.S. Dollar on PE Films had a
favorable impact on operating profit from ongoing operations in PE Films of $0.8 million in 2018 compared to 2017 and an
unfavorable impact on operating profit from ongoing operations of $0.3 million in 2017 compared with 2016.
Trends for the Euro are shown in the chart below:
Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.
41
Trends for the Brazilian Real and Chinese Yuan are shown in the chart below:
Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion of Quantitative and Qualitative Disclosures about Market Risk in Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Supplementary Data for references to the report of the independent
registered public accounting firm, the consolidated financial statements and selected quarterly financial data.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Update on Prior Period Disclosure Controls and Procedures and Internal Control Over Financial Reporting
On November 1, 2018, the Company filed a Current Report on Form 8-K (the “November Form 8-K”) to disclose that,
on October 26, 2018, its former independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), and the
Company concluded that the control deficiencies listed in the November Form 8-K constituted material weaknesses in the
Company’s internal control over financial reporting. As a result of the material weaknesses disclosed therein, the November
Form 8-K also indicated that Management’s Report on Internal Control Over Financial Reporting and the Evaluation of
Disclosure Controls and Procedures included in Item 9A. “Controls and Procedures” of the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2017 and PwC’s opinion relating to the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2017 should no longer be relied upon, and that the items pertaining to
controls and procedures in certain previous filings should no longer be relied upon. Management determined that deficiencies
in internal control over financial reporting, including those described in the November Form 8-K, were pervasive throughout
42
the Company’s internal control over financial reporting. For further information on matters referred to in this paragraph, see
the November Form 8-K and Item 4. “Controls and Procedures” of the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2018.
The material weaknesses identified did not result in a material misstatement of the Company’s financial statements for
the year ended December 31, 2017 or any interim period during 2017.
Evaluation of Disclosure Controls and Procedures as of December 31, 2018
In connection with the preparation of this Form 10-K, pursuant to Rule 13a-15(b) under the Exchange Act, the
Company carried out an evaluation, with the participation of its management, including its Chief Executive Officer (principal
executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of disclosure controls and
procedures (as defined under Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of December 31, 2018.
Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, because
of the material weaknesses in internal control over financial reporting discussed below, the Company’s disclosure controls and
procedures were not effective as of December 31, 2018, to ensure: (i) that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting as of December 31, 2018
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control
over financial reporting is a process designed by or under the supervision of the Company’s Chief Executive Officer and Chief
Financial Officer, and overseen by the Board of Directors, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of published financial statements for external purposes in accordance with U.S. GAAP and
includes policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in
accordance with the authorization of its management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of the Company’s consolidated financial statements would be prevented or detected. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting
using the criteria in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “2013 COSO Framework”). As a result of this evaluation, management concluded that the
Company’s internal control over financial reporting was not effective as of December 31, 2018, because of the material
weaknesses in internal control over financial reporting discussed below.
• Control Environment: The Company did not have a sufficient number of trained resources with assigned
responsibility and accountability for the design, operation and documentation of internal control over financial
reporting in accordance with the 2013 COSO Framework.
43
• Risk Assessment: The Company did not have an effective risk assessment process that defined clear financial
reporting objectives and evaluated risks, including fraud risks, and risks resulting from changes in the external
environment and business operations, at a sufficient level of detail to identify all relevant risks of material
misstatement across the entity.
Information and Communication: The Company did not have an effective information and communication
process that identified and assessed the source of and controls necessary to ensure the reliability of information
used in financial reporting and that communicates relevant information about roles and responsibilities for
internal control over financial reporting.
•
• Monitoring Activities: The Company did not have effective monitoring activities to assess the operation of
internal control over financial reporting, including the continued appropriateness of control design and level of
documentation maintained to support control effectiveness.
• Control Activities: As a consequence of the material weaknesses described above, internal control deficiencies
related to the design and operation of process-level controls and general information technology controls were
determined to be pervasive throughout the Company’s financial reporting processes.
While these material weaknesses did not result in material misstatements of the Company’s financial statements as of
and for the year ended December 31, 2018, these material weaknesses create a reasonable possibility that a material
misstatement of account balances or disclosures in annual or interim consolidated financial statements may not be prevented or
detected in a timely manner. Accordingly, the Company concluded that the deficiencies represent material weaknesses in its
internal control over financial reporting and its internal control over financial reporting was not effective as of December 31,
2018.
The Company’s independent registered public accounting firm, KPMG LLP, which audited the 2018 consolidated
financial statements included in this Form 10-K, has expressed an adverse opinion on the operating effectiveness of the
Company's internal control over financial reporting. KPMG LLP's report appears on pages 50-51 of this Form 10-K.
Remediation Plan
The Company’s remediation efforts are ongoing and it will continue its initiatives to implement and document policies
and procedures, and strengthen the Company’s internal control environment. Remediation of the identified material
weaknesses and strengthening the Company’s internal control environment will require a substantial effort throughout 2019,
and those efforts may extend beyond 2019. The Company will test the design, implementation and operating effectiveness of its
internal control over financial reporting, including any new controls implemented and remediation of existing controls, in
future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have
operated for a sufficient period of time and management has concluded, through testing, that these controls are operating
effectively.
To remediate the material weaknesses described above, the Company plans to pursue the following remediation steps:
1. Perform a comprehensive financial risk assessment and internal control gap analysis to ensure that all relevant
risks of material misstatement to the Company’s financial statements are identified and that the Company’s
internal controls are sufficient to address those risks.
2. Review and update, as necessary, documentation of relevant processes, policies and procedures, and design of
relevant controls, with respect to the Company’s internal control over financial reporting. The Company intends to
implement any necessary changes as a result of deficiencies identified in its relevant processes, policies and
procedures as promptly as practical and to satisfy documentation requirements under Section 404 of the Sarbanes-
Oxley Act.
3. Seek to ensure that the Company’s internal control over financial reporting is properly designed, implemented,
operating effectively, and appropriately documented by (i) enhancing the design of existing control activities and/
or implementing additional control activities, as needed, (ii) monitoring the operating effectiveness of those
controls, and (iii) ensuring that sufficient documentation exists to evidence the design, implementation, and
operation of those controls.
4. Evaluate and enhance the Company’s monitoring activities to ensure the components of internal control under the
2013 COSO Framework are present, functioning, and able to be appropriately evidenced.
5. Design, execute and monitor a plan, with appropriate executive sponsorship, and with the assistance of outside
consultants, to enhance the Company’s internal control over financial reporting and accomplish the goals of the
remediation plan as set forth above.
44
6. Continue to seek, train and retain individuals that have the appropriate skills and experience related to designing,
operating and documenting internal controls.
The Company has hired an internationally recognized accounting firm as its outside consultant, to assist in achieving
the objectives described above. The Company believes that its remediation plan will be sufficient to remediate the identified
material weaknesses and strengthen its internal control over financial reporting. As the Company continues to evaluate, and
works to improve, its internal control over financial reporting, management may determine that additional measures to address
control deficiencies or modifications to the remediation plan are necessary. The Company cannot assure you, however, when it
will remediate such weaknesses, nor can it be certain whether additional actions will be required or the costs of any such
actions. Moreover, the Company cannot assure you that additional material weaknesses will not arise in the future.
Changes in Internal Control Over Financial Reporting
The Company is in the process of implementing certain changes in its internal controls to remediate the material weaknesses
described above. The implementation of the material aspects of this plan will begin in the second quarter of 2019. Except for
the identification of the material weaknesses described above, which originated in prior periods, there has been no change in
the Company’s internal control over financial reporting during the quarter ended December 31, 2018, that has materially
affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
45
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors and persons nominated to become directors of Tredegar to be included in the Proxy
Statement under the headings “Proposal 1: Election of Directors” and “Tredegar’s Board of Directors” is incorporated herein by
reference.
The information concerning corporate governance to be included in the Proxy Statement under the headings “Board
Meetings, Meetings of Non-Management Directors and the Board Committees” and “Corporate Governance” is incorporated
herein by reference.
The information to be included in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance” is incorporated herein by reference.
Set forth below are the names, ages and titles of the Company’s executive officers:
Name
John D. Gottwald
D. Andrew Edwards
Michael J. Schewel
Age
Title
64 President and Chief Executive Officer
60 Vice President and Chief Financial Officer
65 Vice President, General Counsel and Corporate Secretary
John D. Gottwald. Mr. Gottwald was elected President and Chief Executive Officer on August 18, 2015. From June 26, 2015
until August 17, 2015, he served as interim President and Chief Executive Officer. He previously served as the Company’s
President and Chief Executive Officer from March 1, 2006 until January 31, 2010, and as the Company’s Chairman of the
Board from September 2001 until February 2008. Mr. Gottwald also served as the Company’s President and Chief Executive
Officer from July 1989 until September 2001.
D. Andrew Edwards. Mr. Edwards was elected Vice President and Chief Financial Officer effective July 20, 2015. He
previously served as the Chief Financial Officer of United Sporting Companies, Inc., a wholesale distributor of outdoor
sporting goods, from February 2013 until July 2015 and as Vice President, Controller and Chief Accounting Officer of Owens
& Minor, Inc., a distributor of acute medical products, from April 2010 to February 2013 and as Acting Chief Financial Officer
of Owens & Minor, Inc. from March 2012 to February 2013. Mr. Edwards also served as Vice President, Finance, of Owens &
Minor, Inc. from December 2009 until April 2010. Mr. Edwards previously served as the Company’s Vice President, Chief
Financial Officer and Treasurer from August 2003 to December 2009 and as the Company’s Vice President, Finance from
November 1998 to August 2003. Mr. Edwards also served as the Company’s Treasurer from May 1997 to December 2009 and
as the Company’s Controller from October 1992 until July 2000.
Michael J. Schewel. Mr. Schewel was elected Vice President, General Counsel and Corporate Secretary effective May 9,
2016. He was previously a partner with the law firm of McGuire Woods, LLP from 1986 until May 2016, except for four years
from 2002 until 2006 when he served as Secretary of Commerce and Trade for the Commonwealth of Virginia.
On February 28, 2019, the Company announced that John D. Gottwald was retiring as its president and chief executive
officer effective immediately after the filing of this Annual Report on Form 10-K. He will continue to be a member of
Tredegar’s board of directors. Tredegar’s board of directors elected John M. Steitz to succeed Mr. Gottwald as president and
chief executive officer effective upon Mr. Gottwald’s retirement. Mr. Steitz has been a director of Tredegar since 2017.
Tredegar has adopted a Code of Conduct that applies to all of its directors, officers and employees (including its chief
executive officer, chief financial officer and principal accounting officer) and has posted the Code of Conduct on its website.
All amendments to or waivers from any provision of the Company’s Code of Conduct applicable to the chief executive officer,
chief financial officer and principal accounting officer will be disclosed on the Company’s website. The Company’s internet
address is www.tredegar.com.
46
Item 11.
EXECUTIVE COMPENSATION
The information to be included in the Proxy Statement under the headings “Compensation of Directors,” “Board
Meetings, Meetings of Non-Management Directors and Board Committees—Executive Compensation Committee Interlocks
and Insider Participation,” “Compensation Discussion and Analysis,” “Executive Compensation Committee Report” and
“Compensation of Executive Officers” is incorporated herein by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information to be included in the Proxy Statement under the heading “Stock Ownership” is incorporated herein by
reference. The following table summarizes information with respect to equity compensation plans under which securities are
authorized for issuance as of December 31, 2018.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Column (a)
Column (b)
Column (c)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights*
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans,
Excluding Securities
Reflected in Column (a)
1,319,561
—
1,319,561
$
$
19.69
—
19.69
1,548,917
—
1,548,917
*
Includes performance stock units that give the holder the right to receive shares of Tredegar common stock upon the satisfaction of certain performance criteria.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information to be included in the Proxy Statement under the headings “Certain Relationships and Related
Transactions”, “Tredegar’s Board of Directors” and “Board Meetings, Meetings of Non-Management Directors and Board
Committees” is incorporated herein by reference.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is incorporated herein by reference:
•
•
Information on accounting fees and services to be included in the Proxy Statement under the heading “Audit and
Non-Audit Fees;” and
Information on the Audit Committee’s procedures for pre-approving certain audit and non-audit services to be
included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and
Board Committees—Audit Committee Matters.”
47
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
List of documents filed as a part of the report:
(1)
Financial statements:
Tredegar Corporation
Index to Financial Statements and Supplementary Data
Auditors’ Opinions:
Reports of Independent Registered Public Accounting Firm - KPMG LLP
Report of Independent Registered Public Accounting Firm -
PricewaterhouseCoopers LLP
Financial Statements:
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income for the Years Ended December 31, 2018,
2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31,
2018, 2017 and 2016
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2018, 2017 and 2016
Notes to Financial Statements
(2)
Financial statement schedules:
None
(3)
Exhibits:
See Exhibit Index on pages
:
99-101
Page
49
52
53
54
55
56
57
58-98
48
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Tredegar Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Tredegar Corporation and subsidiaries (the Company) as of
December 31, 2018, the related consolidated statements of income, comprehensive income (loss), cash flows, and shareholders’
equity for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 18, 2019 expressed an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for
revenue in 2018 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
Richmond, Virginia
March 18, 2019
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Tredegar Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Tredegar Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses,
described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, the related consolidated statements of
income, comprehensive income (loss), cash flows, and shareholders’ equity for the year ended December 31, 2018, and the
related notes (collectively, the consolidated financial statements), and our report dated March 18, 2019 expressed an
unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. Material weaknesses related to an ineffective control environment resulting from an
insufficient number of trained resources, ineffective risk assessment, ineffective information and communication, and
ineffective monitoring activities resulting in ineffective control activities related to the design and operation of process-level
controls and general information technology controls across all financial reporting processes have been identified and included
in management’s assessment. The material weaknesses were considered in determining the nature, timing, and extent of audit
tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting as of December 31, 2018. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
50
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Richmond, Virginia
March 18, 2019
51
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tredegar Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Tredegar Corporation and its subsidiaries (the “Company”) as
of December 31, 2017, and the related consolidated statements of income, of comprehensive income (loss), of shareholders’
equity, and of cash flows for each of the two years in the period ended December 31, 2017, including the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2017 in conformity with accounting
principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
pension and postretirement benefits in 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 21, 2018, except for the change in the manner in which the Company accounts for pension and postretirement benefits
discussed in Note 1 to the consolidated financial statements, as to which the date is March 18, 2019
We served as the Company's auditor from 1989 to 2018.
52
CONSOLIDATED BALANCE SHEETS
Tredegar Corporation and Subsidiaries
December 31
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Accounts and other receivables, net of allowance for doubtful accounts and sales returns
of $2,937 in 2018 and $3,304 in 2017
Income taxes recoverable
Inventories
Prepaid expenses and other
Total current assets
Property, plant and equipment, at cost:
Land and land improvements
Buildings
Machinery and equipment
Total property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
Investment in kaléo (cost basis of $7,500)
Identifiable intangible assets, net
Goodwill
Deferred income tax assets
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt
Pension and other postretirement benefit obligations, net
Deferred income tax liabilities
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Notes 15 and 18)
Shareholders’ equity:
Common stock (no par value):
Authorized 150,000,000 shares;
Issued and outstanding—33,176,024 shares in 2018 and 33,017,422 in 2017
(including restricted stock)
Common stock held in trust for savings restoration plan (72,883 shares in 2018 and
71,309 in 2017)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment
Gain (loss) on derivative financial instruments
Pension and other postretirement benefit adjustments
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to financial statements.
53
2018
2017
$
34,397
$
36,491
124,727
6,783
93,810
9,564
269,281
8,772
101,332
682,968
793,072
(564,703)
228,369
84,600
36,295
81,404
3,412
4,012
707,373
112,758
42,495
155,253
101,500
88,124
—
7,639
352,516
$
$
120,135
32,080
86,907
8,224
283,837
8,723
101,271
660,898
770,892
(547,801)
223,091
54,000
40,552
128,208
16,636
9,419
755,743
108,391
42,433
150,824
152,000
98,837
2,123
8,179
411,963
38,892
34,747
(1,559)
(1,528)
(96,940)
(1,601)
(81,446)
497,511
354,857
707,373
$
(86,178)
459
(90,950)
487,230
343,780
755,743
$
$
$
CONSOLIDATED STATEMENTS OF INCOME
Tredegar Corporation and Subsidiaries
Years Ended December 31
(In thousands, except per-share data)
Revenues and other:
Sales
Other income (expense), net
Costs and expenses:
Cost of goods sold
Freight
Selling, general and administrative
Research and development
Amortization of identifiable intangibles
Pension and postretirement benefits
Interest expense
Asset impairments and costs associated with exit and disposal
activities
Goodwill impairment charge
Total
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Earnings per share:
Basic
Diluted
See accompanying notes to financial statements.
2018
2017
2016
$
1,065,471
$
961,330
$
828,341
30,459
51,713
1,095,930
1,013,043
2,381
830,722
849,756
767,550
659,867
36,027
85,283
18,707
3,976
10,406
5,702
2,913
46,792
1,059,562
36,368
11,526
24,842
$
33,683
83,386
18,287
6,198
10,193
6,170
102,488
—
1,027,955
(14,912)
(53,163)
38,251
0.75
0.75
$
$
1.16
1.16
$
$
$
$
$
$
29,069
73,466
19,122
3,978
11,047
3,806
2,684
—
803,039
27,683
3,217
24,466
0.75
0.75
54
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Tredegar Corporation and Subsidiaries
Years Ended December 31
(In thousands, except per-share data)
Net income
Other comprehensive income (loss):
Unrealized foreign currency translation adjustment (net of tax of $281
in 2018, tax benefit of $371 in 2017 and tax benefit of $729 in 2016)
Derivative financial instruments adjustment (net of tax benefit of $503
in 2018, net of tax of $111 in 2017 and tax of $727 in 2016)
Pension & other postretirement benefit adjustments:
Net gains (losses) and prior service costs (net of tax benefit of
$319 in 2018, tax benefit of $2,518 in 2017 and tax benefit of
$1,874 in 2016)
Amortization of prior service costs and net gains or losses (net of
tax of $3,028 in 2018, tax of $4,234 in 2017 and tax of $4,398
in 2016)
Other comprehensive income (loss)
Comprehensive income (loss)
See accompanying notes to financial statements.
2018
2017
2016
$
24,842
$
38,251
$
24,466
(10,762)
7,792
18,837
(2,060)
(404)
1,236
(1,118)
(8,634)
(3,288)
10,622
(3,318)
21,524
$
7,811
6,565
$
44,816
$
8,700
25,485
49,951
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
Tredegar Corporation and Subsidiaries
Years Ended December 31
(In thousands)
Cash flows from operating activities:
Net income
Adjustments for noncash items:
Depreciation
Amortization of identifiable intangibles
Goodwill impairment charge
Deferred income taxes
Accrued pension and postretirement benefits
(Gain) loss on investment in kaléo accounted for under the fair
value method
Loss on asset impairments
(Gain) loss on sale of assets
Gain from insurance recoveries
Changes in assets and liabilities:
Accounts and other receivables
Inventories
Income taxes recoverable/payable
Prepaid expenses and other
Accounts payable and accrued expenses
Pension and postretirement benefit plan contributions
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions, net of cash acquired
Return of escrowed funds relating to acquisition earn-out
Net proceeds from the sale of investment property
Insurance proceeds from cast house explosion
Proceeds from the sale of assets and other
Net cash used in investing activities
Cash flows from financing activities:
Borrowings
Debt principal payments
Dividends paid
Debt financing costs
Proceeds from exercise of stock options and other
Net cash provided by (used in) financing activities:
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest payments
Income tax payments (refunds), net
See accompanying notes to financial statements.
$
$
$
56
2018
2017
2016
$
24,842
$
38,251
$
24,466
29,828
3,976
46,792
8,626
10,406
(30,600)
223
(46)
—
(11,883)
(9,577)
25,018
(1,924)
5,571
(8,907)
5,449
97,794
(40,814)
—
4,250
1,384
—
1,098
(34,082)
76,750
(127,250)
(14,592)
—
1,004
(64,088)
(1,718)
(2,094)
36,491
34,397
$
34,079
6,198
—
(36,414)
10,193
(33,800)
101,282
553
(5,261)
(10,566)
(9,128)
(24,449)
(784)
21,123
(5,829)
2,767
88,215
(44,362)
(87,110)
—
—
5,739
129
(125,604)
190,750
(133,750)
(14,532)
—
695
43,163
1,206
6,980
29,511
36,491
5,421
$
(24,020) $
5,808
9,193
$
$
$
28,494
3,978
—
(3,689)
11,047
(1,600)
1,436
(220)
(1,634)
92
1,127
(7,061)
(1,914)
161
(8,061)
2,250
48,872
(45,457)
—
—
—
1,156
2,308
(41,993)
96,750
(105,750)
(14,456)
(2,606)
2,313
(23,749)
2,225
(14,645)
44,156
29,511
3,074
15,406
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Tredegar Corporation and Subsidiaries
(In thousands, except share and per-share data)
Shares
Amount
Common Stock
Accumulated Other Comprehensive
Income (Loss)
Trust for
Savings
Restora-
tion Plan
Foreign
Currency
Trans-
lation
Retained
Earnings
Gain
(Loss) on
Derivative
Financial
Instruments
Pension &
Other Post-
retirement
Benefit
Adjust.
Total
Share-
holders’
Equity
32,682,162
$ 29,467
$453,467
$ (1,467) $(112,807) $
(373) $
(95,539) $ 272,748
—
—
—
—
—
—
—
—
(30)
—
18,837
—
—
—
—
—
—
—
Balance at January 1, 2016
Net loss
Foreign currency translation adjustment (net of tax
benefit of $729)
Derivative financial instruments adjustment (net of tax
of $727)
Net gains or losses and prior service costs (net of tax
benefit of $1,874)
Amortization of prior service costs and net gains or
losses (net of tax of $4,398)
Cash dividends declared ($0.44 per share)
—
—
—
—
—
—
—
—
—
—
—
24,466
—
—
—
—
— (14,456)
Stock-based compensation expense
127,169
1,461
Issued upon exercise of stock options (including related
income tax of $1,109) & other
124,476
1,079
Tredegar common stock purchased by trust for savings
restoration plan
—
—
—
—
30
Balance at December 31, 2016
32,933,807
32,007
463,507
(1,497)
(93,970)
Net income
Foreign currency translation adjustment (net of tax
benefit of $371)
Derivative financial instruments adjustment (net of tax
of $111)
Net gains or losses and prior service costs (net of tax
benefit of $2,518)
Amortization of prior service costs and net gains or
losses (net of tax of $4,234)
Cash dividends declared ($0.44 per share)
Stock-based compensation expense
Issued upon exercise of stock options & other
Cumulative effect adjustment for adoption of stock-
based compensation accounting guidance
Tredegar common stock purchased by trust for savings
restoration plan
—
—
—
—
—
—
—
—
—
—
—
38,251
—
—
—
—
— (14,532)
49,475
34,140
2,018
695
—
—
27
—
—
—
(27)
31
—
—
—
—
—
—
—
—
(31)
—
7,792
—
—
—
—
—
—
—
Balance at December 31, 2017
33,017,422
34,747
487,230
(1,528)
(86,178)
24,842
—
—
Net income
Foreign currency translation adjustment (net of tax of
$281)
Derivative financial instruments adjustment (net of tax
benefit of $503)
Net gains or losses and prior service costs (net of tax
benefit of $319)
Amortization of prior service costs and net gains or
losses (net of tax of $3,028)
Cash dividends declared ($0.44 per share)
Stock-based compensation expense
Issued upon exercise of stock options & other
Tredegar common stock purchased by trust for savings
restoration plan
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (14,592)
102,762
55,840
3,141
1,004
—
—
—
—
31
— (10,762)
—
—
—
—
—
—
(31)
—
—
—
—
—
—
—
—
—
1,236
—
—
—
—
—
—
863
—
—
(404)
—
—
—
—
—
—
459
—
—
(2,060)
—
—
—
—
—
—
—
—
—
24,466
18,837
1,236
(3,288)
(3,288)
8,700
—
—
—
—
8,700
(14,456)
1,461
1,079
—
(90,127)
310,783
—
—
—
38,251
7,792
(404)
(8,634)
(8,634)
7,811
—
—
—
—
7,811
(14,532)
2,018
695
—
—
(90,950)
343,780
—
—
—
24,842
(10,762)
(2,060)
(1,118)
(1,118)
10,622
—
—
—
—
10,622
(14,592)
3,141
1,004
—
Balance at December 31, 2018
33,176,024
$ 38,892
$497,511
$ (1,559) $ (96,940) $
(1,601) $
(81,446) $ 354,857
See accompanying notes to financial statements.
57
NOTES TO FINANCIAL STATEMENTS
Tredegar Corporation and Subsidiaries
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations. Tredegar Corporation and subsidiaries (collectively “Tredegar,” “the Company,”
“we,” “us” or “our”) are primarily engaged in the manufacture of polyethylene films, polyester films and aluminum extrusions,
which are reported for business segment purposes under PE Films, Flexible Packaging Films (also referred to as Terphane) and
Aluminum Extrusions (also referred to as Bonnell Aluminum), respectively. More information on the Company’s business
segments is provided in Note 5. See Notes 10 and 17 regarding restructurings.
Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its
majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting
principles (“GAAP”) requires Tredegar to make estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.
Certain amounts for the prior years have been reclassified to conform to current year presentation. For the years ended
December 31, 2017 and 2016, the pension and postretirement benefit expenses recorded in Cost of goods sold and Selling,
general and administrative have been reclassified to a new line item, Pension and postretirement benefits, on the consolidated
statements of income, due to the retrospective adoption of ASU 2017-07.
Fiscal Year End. The Company operates on a calendar fiscal year except the Aluminum Extrusions segment, which operates
on a 52/53-week fiscal year basis. References to Aluminum Extrusions for 2018, 2017 and 2016 relate to the 53-week fiscal
year ended December 30, 2018 and the 52-week fiscal years ended December 24, 2017 and December 26, 2016, respectively.
The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated
financial results.
Foreign Currency Translation. The financial statements of subsidiaries located outside the U.S., where the local currency is
the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities
and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of
these financial statements are reflected as a separate component of shareholders’ equity. There are no operating subsidiaries
located outside the U.S. where the U.S. Dollar is the functional currency.
Transaction and remeasurement gains or losses included in income were losses of $0.5 million, $0.8 million and $3.6
million in 2018, 2017 and 2016, respectively. These amounts do not include the effects between reporting periods that
exchange rate changes have on income of the locations outside the U.S. that result from translation into U.S. Dollars.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and
highly liquid investments with original maturities of three months or less. At December 31, 2018 and 2017, Tredegar had cash
and cash equivalents of $34.4 million and $36.5 million, respectively, including funds held in locations outside the U.S. of
$31.1 million and $32.7 million, respectively.
The Company’s policy permits investment of excess cash in marketable securities that have the highest credit ratings and
maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.
Accounts and Other Receivables. Accounts receivable are stated at the amount invoiced to customers less allowances for
doubtful accounts and sales returns. Accounts receivable are non-interest bearing and arise from the sale of product to
customers under typical industry trade terms. Notes receivable are not significant. Past due amounts are determined based on
established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on an
assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current
economic conditions. Other receivables include value-added taxes related to certain foreign subsidiaries and other
miscellaneous receivables due within one year. For certain customers, the Company has arrangements in place with financial
institutions whereby certain customer receivables are sold to the financial institution at a discount and without recourse. Upon
sale, the associated receivable is derecognized and the discount is recognized.
Inventories. Inventories are stated at the lower of cost or market, with cost determined using the last-in, first-out (“LIFO”), the
weighted average cost or the first-in, first-out method. Cost elements included in work-in-process and finished goods
inventories are raw materials, direct labor and manufacturing overhead. Finished goods, work-in-process, raw materials and
58
supplies, stores and other inventory are reviewed to determine if inventory quantities are in excess of forecasted usage or if they
have become obsolete.
Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation
costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and
betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and
accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses
thereon are included in income.
Capital expenditures for property, plant and equipment include capitalized interest. Capitalized interest included in
capital expenditures for property, plant and equipment was $0.3 million, $0.4 million and $0.3 million in 2018, 2017 and 2016,
respectively.
Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets that,
except for isolated exceptions, range from 5 to 40 years for buildings and land improvements and 2 to 20 years for machinery
and equipment.
Investments in Private Entities with Less Than or Equal to 50% Voting Ownership Interest. The Company accounts for its
investments in private entities where its voting ownership is less than or equal to 50% based on the facts and circumstances
surrounding the investment.
For those investments measured at fair value, GAAP requires disclosure of the level within the fair value hierarchy in
which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets
for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs
(Level 3).
Goodwill and Identifiable Intangibles. The excess of the purchase price over the fair value of identifiable net assets of acquired
companies is allocated to goodwill. The Company assesses goodwill for impairment when events or circumstances indicate
that the carrying value may not be recoverable or, at a minimum, on an annual basis (December 1st of each year). When
assessing goodwill for impairment, accounting guidance allows the Company to first perform a qualitative assessment about the
likelihood of the carrying value of a reporting unit exceeding its fair value, referred to as the "Step 0" assessment. The Step 0
assessment requires the evaluation of certain qualitative factors, including macroeconomic conditions, industry and market
considerations, cost factors and overall financial performance, as well as company and reporting unit factors. If the Company's
Step 0 analysis indicates that it is more likely than not that the fair value of a reporting unit is less than the carrying amount,
then the Company would perform a quantitative impairment test.
The Company’s significant operating units in PE Films include Personal Care and Surface Protection. There are three
operating units in Aluminum Extrusions: Bonnell Aluminum, AACOA and Futura. Each of these reporting units has separately
identifiable operating net assets (operating assets including goodwill and identifiable intangible assets net of operating
liabilities).
The Company recorded a goodwill impairment charge of $46.8 million ($38.2 million after taxes) to write off the
goodwill associated with the Personal Care reporting unit of PE Films in the third quarter of 2018. See Note 8 for additional
details.
The Company estimates the fair value of its reporting units using discounted cash flow analysis and comparative
enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. Goodwill of Aluminum
Extrusions operating unit, Futura, in the amount of $10.4 million was tested for impairment at the annual testing date, with the
estimated fair value of this reporting unit exceeding the carrying value of its net assets at December 1, 2018. The Surface
Protection reporting unit of PE Films and the AACOA, Inc. (“AACOA”) reporting unit of Aluminum Extrusions had goodwill
in the amounts of $57.3 million and $13.7 million, respectively, at December 1, 2018. The goodwill in Aluminum Extrusions is
associated with the October 2012 acquisition of AACOA and the February 2017 acquisition of Futura Industries Corporation
(“Futura”).
As of December 31, 2018, the Company applied the Step 0 assessment to Surface Protection and AACOA, which both
had fair values significantly in excess of their carrying amounts when tested in 2017. The Company's Step 0 analysis in 2018
of the reporting units concluded that it is not more likely than not that the fair values of the reporting units are less than their
carrying amounts. Therefore, the quantitative goodwill impairment test for these reporting units was not necessary in 2018.
59
Indefinite-lived identifiable intangible assets are assessed for impairment when events or circumstances indicate that the
carrying value may not be recoverable. The Company estimates the fair value of its trade names using a relief-from-royalty
method that relies upon a corresponding discounted cash flow analysis.
For AACOA and Futura, the indefinite-lived identifiable intangible assets for each were assessed for indicators of
impairment at the annual testing date. No indicators of impairment were identified.
Based on a valuation analysis conducted in the fourth quarter of 2017, Terphane recorded an impairment of its assets.
Indefinite-lived trade names for Terphane were written down by $4.0 million to $2.4 million and were assigned estimated
useful lives of 5 to 13 years. Also, Terphane recorded a reduction of the carrying value of definite-lived identifiable intangible
assets in the amount of $14.0 million.
Additional disclosure of Tredegar goodwill and identifiable intangible assets and the impairments recorded in 2017 are
included in Note 8.
Impairment of Long-Lived Assets. The Company reviews long-lived assets for possible impairment when events indicate that
an impairment may exist. For assets that are held and used in operations, if events indicate that an asset may be impaired, the
Company estimates the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual
disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows.
If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset group, an impairment loss is
calculated. Measurement of the impairment loss is the amount by which the carrying amount exceeds the estimated fair value
of the asset group.
During the fourth quarter of 2017, in conjunction with annual business planning as well as valuation activities (including
the use of discounted cash flow and comparative enterprise value-to-EBITDA multiple methods) and other efforts, the
Company determined that the carrying value of Terphane’s remaining long-lived assets were impaired. Accordingly, the
Company wrote down these assets based on an enterprise valuation for all of Terphane of approximately $30 million. This
write-down resulted in a non-cash asset impairment loss recognized during the fourth quarter of 2017 of $101 million ($87
million after non-cash tax benefits). See Note 17 for more information on this impairment.
Assets that are held for sale are reported at the lower of their carrying amount or estimated fair value less cost to sell, with
an impairment loss recognized for any write-down required.
Pension Costs and Postretirement Benefit Costs Other than Pensions. Pension costs and postretirement benefit costs other
than pensions have been accrued over the period employees provided service to Tredegar. Liabilities and expenses for pension
plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions,
including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several
assumptions relating to the employee workforce. The Company recognizes the funded status of its pension and other
postretirement plans in the accompanying consolidated balance sheets. Tredegar’s policy is to fund its pension plans at
amounts not less than the minimum requirements of the Employee Retirement Income Security Act (“ERISA”) of 1974 and to
fund postretirement benefits other than pensions when claims are incurred.
Revenue Recognition. Revenue from the sale of products, which is shown net of estimated sales returns and allowances, is
recognized at a point in time when control has passed to the customer. Control passes to the customer generally when the
customer takes physical possession or when title passes if defined separately in the sales agreement. Amounts billed to
customers related to freight are classified as sales in the accompanying consolidated statements of income. The cost of freight is
classified as a separate line in the accompanying consolidated statements of income. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific revenue-producing transaction between Tredegar and its
customers (such as value-added taxes) are accounted for on a net basis and therefore excluded from revenues. See Note 5 for
disaggregation of revenue by segment and type. See Note 6 for a table showing accounts and other receivables, net of
allowance for bad debts and sales returns.
For the year ended December 31, 2018, the Company had no material bad-debt expense and there were no material
contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of December 31,
2018. Payment terms start from the date of satisfaction of the performance obligation and vary from COD (cash on delivery) to
120 days. The Company’s contracts generally include one performance obligation, which is satisfied at a point in time.
For the year ended December 31, 2018, revenue recognized from performance obligations related to prior periods (for
example, changes in transaction price), was not material.
60
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding i)
revenue pertaining to contracts that have an original expected duration of one year or less, ii) contracts where revenue is
recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to
materially impact the Company’s financial results.
Research & Development (“R&D”) Costs. R&D costs are expensed as incurred and include primarily salaries, wages,
employee benefits, equipment depreciation, facility costs and the cost of materials consumed relating to R&D efforts. R&D
costs include a reasonable allocation of indirect costs.
Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for
financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences
between the financial reporting and tax bases of assets and liabilities (see Note 16). Tredegar’s policy is to accrue U.S. federal
income taxes to the extent required under GAAP on unremitted earnings of all foreign subsidiaries where required. However,
due to changes in the taxation of dividends under the Tax Cuts and Jobs Act (the “TCJA”) enacted by the U.S. government in
December 2017, Tredegar only records U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where
Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries. Prior to the
second quarter of 2016, deferred U.S. federal income taxes had not been recorded for the undistributed earnings for Terphane
Limitada because the Company had intended to permanently reinvest these earnings. Due to concerns about the political and
economic conditions in Brazil, Terphane Limitada began making cash distributions to the Company. During 2016, Terphane
Limitada paid dividends totaling $13.3 million to the Company. Because of the accumulation of significant losses related to
foreign currency translations at Terphane Limitada, there were no unrecorded deferred income tax liabilities associated with the
U.S. federal income taxes and foreign withholding taxes on Terphane Limitada’s undistributed earnings as of December 31,
2018 and December 31, 2017.
A valuation allowance is recorded in the period when the Company determines that it is more likely than not that all or a
portion of deferred income tax assets may not be realized. The establishment and removal of a valuation allowance requires the
Company to consider all positive and negative evidence and make a judgmental decision regarding the amount of valuation
allowance required as of a reporting date. The benefit of an uncertain tax position is included in the accompanying financial
statements when the Company determines that it is more likely than not that the position will be sustained, based on the
technical merits of the position, if the taxing authority examines the position and the dispute is litigated. This determination is
made on the basis of all the facts, circumstances and information available as of the reporting date.
Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common
equivalent shares outstanding, determined as follows:
Weighted average shares outstanding used to compute
basic earnings per share
Incremental shares attributable to stock options and
restricted stock
2018
2017
2016
33,067,800
32,945,961
32,761,793
24,674
5,327
13,279
Shares used to compute diluted earnings per share
33,092,474
32,951,288
32,775,072
Incremental shares attributable to stock options and restricted stock are computed using the average market price during
the related period. The average out-of-the-money options to purchase shares that were excluded from the calculation of
incremental shares attributable to stock options and restricted stock were 726,475 in 2018 and 397,669 in 2017 and 128,200 in
2016.
Stock-Based Employee Compensation Plans. Compensation expense is recorded on all share-based awards using its calculated
fair value over the requisite service period under the graded-vesting method. The fair value of stock option awards was
estimated as of the grant date using the Black-Scholes options-pricing model. The fair value of restricted stock awards was
estimated as of the grant date using the closing stock price on that date.
61
The assumptions used in this model for valuing Tredegar stock options granted in 2018 and 2017 (no grants in 2016) were
as follows:
Dividend yield
Weighted average volatility percentage
Weighted average risk-free interest rate
Holding period (years):
Officers
Management
2018
2017
2.3%
38.3%
2.8%
5
5
1.9%
38.3%
1.8%
5
5
Weighted average exercise price at date of grant (also
weighted average market price at date of grant):
Officers
Management
$
$
19.35
19.35
$
$
15.65
15.65
The dividend yield is the actual dividend yield on Tredegar’s common stock at the date of grant, which the Company
believes is a reasonable estimate of the expected yield during the holding period. The expected volatility is based on the
historical volatility of Tredegar’s common stock using a sequential period of historical data equal to the expected holding
period of the option. The Company has no reason to believe that future volatility for this period is likely to differ from the past.
The assumed risk-free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate
for the expected holding period.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Account Standards Update (“ASU”) 2016-09,
which amended guidance to simplify several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The Company adopted the new guidance in the first quarter of 2017. Under the new guidance, excess tax benefits
related to equity compensation were recognized in income tax expense (benefit) in the consolidated statements of income rather
than in accumulated other comprehensive income in the consolidated balance sheets and were applied on a prospective basis. If
these amounts had been included in the consolidated statements of income in previous years, net income would have been
reduced by $1.1 million in 2016. Changes to the statements of cash flows related to the classification of excess tax benefits and
employee taxes paid for share-based payment arrangements were implemented on a retrospective basis. In addition, the
updated guidance allows the Company to make an accounting policy election to account for forfeitures as they occur.
Previously, the Company was required to estimate forfeitures at the grant date, accounting for estimated forfeitures over the
requisite service period.
Tredegar stock options granted during 2018 and 2017 (no grants in 2016), and related estimated fair value at the date of
grant, are as follows:
Stock options granted (number of shares):
Officers
Management
Total
Estimated weighted average fair value of options per share
at date of grant:
Officers
Management
Total estimated fair value of stock options granted (in
thousands)
2018
2017
425,228
25,855
451,083
151,992
57,559
209,551
$
$
$
5.87
5.87
2,648
$
$
$
4.69
4.69
983
Additional disclosure of Tredegar stock options is included in Note 12.
Financial Instruments. Tredegar uses derivative financial instruments for the purpose of hedging aluminum price volatility and
currency exchange rate exposures that exist as part of transactions associated with ongoing business operations. The
Company’s derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the
accompanying balance sheet at fair value. A change in the fair value of the derivative that is highly effective and that is
designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other
62
comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of cash
flows of the hedged transaction. Such gains and losses are reported on the same line as the underlying hedged item, and the
cash flows related to financial instruments are classified in the consolidated statements of cash flows in a manner consistent
with those of the transactions being hedged. Any hedge ineffectiveness (which represents the amount by which the changes in
the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current
period earnings. The amount of gains and losses recognized for hedge ineffectiveness were not material in 2018, 2017 and
2016.
The Company’s policy requires that it formally document all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also
formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging
transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has
ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively.
As a policy, Tredegar does not engage in speculative or leveraged transactions, nor does it hold or issue financial
instruments for trading purposes. Additional disclosure of the utilization of derivative hedging instruments is included in Note
9.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as net income or loss as adjusted by other
comprehensive income or loss items. Other comprehensive income (loss) includes changes in foreign currency translation
adjustments, unrealized gains and losses on derivative financial instruments, prior service costs and net gains or losses from
pension and other postretirement benefit plans arising during the period and amortization of these prior service costs and net
gain or loss adjustments, all recorded net of deferred income taxes.
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the year
ended December 31, 2018:
(In thousands)
Foreign currency
translation
adjustment
Gain (loss) on
derivative financial
instruments
Pension and other
post-retirement
benefit adjustments
Total
Beginning balance, January 1, 2018
$
(86,178) $
459
$
(90,950) $ (176,669)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
(10,762)
(2,978)
(1,118)
(14,858)
—
918
10,622
11,540
Net other comprehensive income (loss) -
current period
(10,762)
Ending balance, December 31, 2018
$
(96,940) $
(2,060)
(1,601) $
9,504
(3,318)
(81,446) $ (179,987)
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the year
ended December 31, 2017:
(In thousands)
Foreign currency
translation
adjustment
Gain (loss) on
derivative financial
instruments
Pension and other
post-retirement
benefit adjustments
Total
Beginning balance, January 1, 2017
$
(93,970) $
863
$
(90,127) $ (183,234)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
Net other comprehensive income (loss) -
current period
7,792
—
7,792
Ending balance, December 31, 2017
$
(86,178) $
538
(942)
(8,634)
(304)
7,811
6,869
(404)
459
$
(823)
6,565
(90,950) $ (176,669)
63
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income during 2018 are
summarized as follows:
Amount reclassified
from other
comprehensive income
(loss)
Location of gain (loss)
reclassified from accumulated
other comprehensive income
(loss) to net income (loss)
(In thousands)
Gain (loss) on derivative financial instruments:
Aluminum future contracts, before taxes
Foreign currency forward contracts, before taxes
Foreign currency forward contracts, before taxes
Total, before taxes
Income tax expense (benefit)
Total, net of tax
Amortization of pension and other post-retirement benefits:
Actuarial gain (loss) and prior service costs, before taxes
Income tax expense (benefit)
Total, net of tax
$
$
$
$
1,069 Cost of goods sold
62 Cost of goods sold
Selling, general and
administrative
(1,796)
(665)
253
(918)
Income taxes
(a)
Income taxes
(13,650)
(3,028)
(10,622)
(a) This component of accumulated other comprehensive income is included in the computation of net periodic pension
cost (see Note 13 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income during 2017 are
summarized as follows:
(In thousands)
Gain (loss) on derivative financial instruments:
Aluminum future contracts, before taxes
Foreign currency forward contracts, before taxes
Foreign currency forward contracts, before taxes
Total, before taxes
Income tax expense (benefit)
Total, net of tax
Amortization of pension and other post-retirement benefits:
Actuarial gain (loss) and prior service costs, before taxes
Income tax expense (benefit)
Total, net of tax
Amount reclassified
from other
comprehensive income
(loss)
Location of gain (loss)
reclassified from accumulated
other comprehensive income
(loss) to net income
$
$
$
$
1,210 Cost of goods sold
62 Cost of goods sold
Selling, general and
administrative
Income taxes
(43)
1,229
287
942
(a)
Income taxes
(12,045)
(4,234)
(7,811)
(a) This component of accumulated other comprehensive income is included in the computation of net periodic pension
cost (see Note 13 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income during 2016 are
summarized as follows:
64
(In thousands)
Gain (loss) on derivative financial instruments:
Aluminum future contracts, before taxes
Foreign currency forward contracts, before taxes
Total, before taxes
Income tax expense (benefit)
Total, net of tax
Amortization of pension and other post-retirement benefits:
Actuarial gain (loss) and prior service costs, before taxes
Income tax expense (benefit)
Total, net of tax
Amount reclassified
from other
comprehensive income
(loss)
Location of gain (loss)
reclassified from accumulated
other comprehensive income
(loss) to net income
$
$
$
$
(1,630) Cost of goods sold
62 Cost of goods sold
(1,568)
(579)
(989)
(13,098)
(4,398)
(8,700)
Income taxes
(a)
Income taxes
(a) This component of accumulated other comprehensive income is included in the computation of net periodic pension
cost (see Note 13 for additional detail).
Recently Issued Accounting Standards.
ASU 2014-09, REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606)
In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue
recognition. The revised revenue standard contains principles that an entity will apply to direct the measurement of revenue and
timing of when it is recognized. The core principle of the guidance is that the recognition of revenue should depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled
in exchange for those goods and services. To achieve that core principle, an entity will utilize a principle-based five-step
approach model. The converged standard also includes more robust disclosure requirements which requires entities to provide
sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. In March 2016, amended guidance was issued regarding
clarifying the implementation guidance on principal versus agent considerations and in April 2016, clarifying guidance was
issued relating to identifying performance obligations and licensing implementation. The Company adopted the new standard
effective January 1, 2018, using the modified retrospective approach applied to all contracts as of the date of adoption.
Comparative periods have not been adjusted and continue to be reported under the accounting standards in effect for those
periods. The adoption of ASU 2014-09, as amended, had no material impact on the Company’s consolidated financial position,
results of operations, equity or cash flows upon adoption. The Company has included the disclosures required by ASU
2014-09.
ASU 2016-01, FINANCIAL INSTRUMENTS (SUBTOPIC 825-10)
In January 2016, the FASB issued amended guidance associated with accounting for equity investments measured at
fair value. The amended guidance requires all equity investments to be measured at fair value with changes in the fair value
recognized through net income (other than those accounted for under equity method of accounting or those that result in
consolidation of the investee or those without a readily determinable fair value). The amended guidance also requires an entity
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from
a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to
disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and
the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The Company
adopted this amended guidance in the first quarter of 2018 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
65
ASU 2016-02, LEASES (TOPIC 842)
In February 2016, the FASB issued a revised standard on lease accounting. Lessees will need to recognize virtually all
of their leases with a term longer than 12 months on the balance sheet, by recording a right-of-use (“ROU”) asset and lease
liability. The revised standard requires additional analysis of the components of a transaction to determine if a right-of-use
asset is embedded in the transaction that needs to be treated as a lease. Substantial additional disclosures are also required by
the revised standard. The revised standard is effective for the Company for fiscal years beginning after December 31, 2018,
including the interim periods within those fiscal years. A modified retrospective transition approach which requires a
cumulative-effect adjustment to the opening balance of retained earnings on the effective date is required for leases existing at,
or entered into after, the effective date, with certain practical expedients available. The Company expects to use certain
transition practical expedients that will allow it to elect to not reassess: i) whether expired or existing contracts contain leases
under the new definition of a lease; ii) lease classification for expired or existing leases; and iii) whether previously capitalized
initial direct costs would qualify for capitalization under Topic 842. The Company has substantially completed its evaluations
of the impacts of the accounting and disclosure requirements on its business processes, controls and systems and does not
expect that this standard will have a material effect on its consolidated financial statements. The Company has a process in
place to analyze the impact of the standard, and the related guidance issued, on all leases throughout the Company. This process
includes reviewing all active leases, which have been identified. The most significant impact of the new standard will be the
recognition of new ROU assets and lease liabilities for real estate, office equipment and vehicle operating leases. Upon
adoption, the Company will recognize operating lease liabilities with corresponding ROU assets calculated based on the present
value of the remaining minimum rental payments for existing operating leases.
ASU 2016-16, INCOME TAXES (TOPIC 740)
In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an
intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of
adoption. The Company adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on
the Company’s consolidated financial statements.
ASU 2017-04, INTANGIBLES - GOODWILL AND OTHER (TOPIC 350)
In January 2017, the FASB issued amended guidance that eliminates the requirement to determine the fair value of
individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new
guidance, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying
amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December
15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment
testing performed after January 1, 2017. The Company elected to early adopt for goodwill impairment testing starting in the
third quarter of 2018.
ASU 2017-07, COMPENSATION - RETIREMENT BENEFITS (TOPIC 715)
In March 2017, the FASB issued final guidance on the presentation of net periodic pension and postretirement benefit
cost (net benefit cost). Previously, net benefit cost was reported as an employee cost within operating income. This new
guidance requires the bifurcation of net periodic pension and postretirement benefit costs. Service cost will be part of operating
income (and is the only piece eligible to be capitalized). All other components will be shown outside of operations. The new
standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and should be applied on
a retrospective basis, except for the amendments related to capitalization of benefit cost, which should be applied on a
prospective basis. The Company adopted this amended guidance in the first quarter of 2018 by separately presenting “Pension
and postretirement benefits” expense in its consolidated statements of income.
ASU 2017-12, DERIVATIVES AND HEDGING (TOPIC 815)
In August 2017, the FASB issued amended guidance on the accounting for hedging activities. The amended guidance
makes more hedging strategies qualify for hedge accounting. After initial qualification, the amended guidance permits a
qualitative effectiveness assessment for certain hedges instead of a quantitative test, if the company can reasonably support an
expectation of effectiveness throughout the term of the hedge. The amended guidance is effective for annual and interim
periods beginning after January 1, 2019, but may be adopted immediately. The adoption should be on a cumulative effect basis
66
and applied prospectively. The Company is currently evaluating the amended guidance but does not expect there to be an
impact of adopting this guidance on the Company’s consolidated financial statements.
2
ACQUISITIONS
On February 15, 2017, Bonnell Aluminum acquired 100% of the stock of Futura Industries Corporation (“Futura”) on a
net debt-free basis for approximately $92 million (the “Initial Purchase Price”). The amount actually funded in cash at the
transaction date was approximately $87.0 million (the “Initial Cash Funding”), which was the Initial Purchase Price net of
preliminary closing adjustments for working capital and seller transaction-related obligations assumed and subsequently paid
by Bonnell Aluminum. In addition, the Company was refunded $5 million in the first quarter of 2018 since Futura did not meet
certain performance requirements for the 2017 fiscal year (“Earnout Provision”). The acquisition, which was funded using
Tredegar’s revolving credit facility, was treated as an asset purchase for U.S. federal income tax purposes.
Futura, headquartered in Clearfield, Utah, with a national sales presence and particular strength in the western U.S.,
designs and manufactures a wide range of extruded aluminum products, including branded flooring trims and TSLOTSTM, as
well as OEM (original equipment manufacturer) components for truck grills, solar panels, fitness equipment and other
applications. As a result of this transaction, Futura is now a wholly-owned subsidiary of the William L. Bonnell Company, Inc.
(which is a wholly-owned subsidiary of Tredegar) and operates as a division of Bonnell Aluminum, and its results of operations
are included in Tredegar’s consolidated financial statements from the date of acquisition.
Under the terms of the transaction, $5 million of the Initial Cash Funding was placed in escrow (the “Earnout Escrow”)
and was returned to Bonnell Aluminum because Futura did not achieve a targeted EBITDA level (as defined in the Stock
Purchase Agreement) for the last eleven months of the fiscal year ended December 2017. At the acquisition date, the Company
performed a probability weighted assessment in order to determine the fair value of this contingent asset. The assessment
estimated a fair value of $4.3 million and a receivable (“Initial Earnout Receivable”) was recorded by Bonnell Aluminum. In
the second quarter of 2017, the Company updated its valuation of this contingent asset, which resulted in a fair value of $5.0
million. The receivable was increased to $5.0 million, and $0.7 million was recognized as income in the second quarter of
2017 in Other income (expense), net in the Consolidated Statements of Income.
The net purchase price for financial reporting purposes was set at approximately $82.9 million (the “Adjusted Net
Purchase Price”), which was the Initial Cash Funding less the Initial Earnout Receivable and the net settlement of certain post-
closing adjustments of $0.1 million paid to the seller during the second quarter of 2017. Adjustments to the purchase price
were made retrospectively as if the accounting had been completed on the acquisition date. Based upon management’s
valuation of the fair value of tangible and identifiable intangible assets acquired (net of cash acquired) and liabilities assumed,
the allocation of the Adjusted Net Purchase Price is as follows:
(In thousands)
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant & equipment
Identifiable intangible assets:
Customer relationships
Trade names
Trade payables & accrued expenses
Total identifiable net assets
Adjusted Net Purchase Price
Goodwill
$
$
6,680
10,342
240
32,662
24,000
6,700
(8,135)
72,489
82,860
10,371
The goodwill and identifiable intangible asset balances associated with this acquisition will be deductible for tax
purposes on a straight-line basis over a period of approximately 15 years. For financial reporting purposes, customer
relationships are being amortized over 12 years and trade names are being amortized over 13 years. Goodwill is not subject to
amortization for financial reporting purposes.
67
For the year ended December 31, 2017, Tredegar’s consolidated results of operations and its Aluminum Extrusions
business segment included the following Futura results for the 10.5 months owned: sales of $71.0 million, operating profit from
ongoing operations of $8.2 million, depreciation and amortization of $5.0 million, and capital expenditures of $2.5 million.
The following unaudited supplemental pro forma data presents Tredegar’s consolidated sales, net income and related
earnings per share as if the acquisition of Futura had been consummated at the beginning of 2016, and is not necessarily
indicative of the Company’s financial performance if the acquisition had actually been consummated as of that date, or of
future performance. The supplemental unaudited pro forma measures for the years ended December 31, 2017 and 2016 are
presented below:
Tredegar Pro Forma Results with Futura Acquisition
(In thousands, except per-share data)
Sales
Net income
Earnings per share:
Basic
Diluted
2017
2016
$ 968,340
$ 904,877
$ 37,974
$
$
1.15
1.15
$
$
$
27,805
0.85
0.85
Futura’s pre-acquisition results for the period from January 1 to February 14, 2017, and therefore the pro forma
information for 2017 presented above, were adversely impacted by significant disruptions to manufacturing operations and
sales caused by the renovation of its anodizing line. The actual accretion to Tredegar’s diluted earnings per share from Futura
since the acquisition date was 12 cents per share for 2017.
The Company’s pro forma net income was computed for the periods shown as: (i) the Company’s reported net income,
plus (ii) Futura’s historical pre-acquisition period earnings before interest, taxes, depreciation and amortization and excluding
one-time purchase accounting and transaction-related expenses, minus (iii) the pro forma pre-acquisition period depreciation
and amortization for Futura under purchase accounting for the Company, minus (iv) the pro forma pre-acquisition period
interest expense for the Company applied at an annual rate of 3.0% to the $87.0 million Initial Cash Funding, minus (v) the pro
forma pre-acquisition period income taxes applied at a rate of 39.1% to the pro forma pre-acquisition earnings before income
taxes computed from items (ii) through (iv).
3 OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
(In thousands)
Gain (loss) on investment in kaléo accounted for under fair
value method
Gain associated with the settlement of an escrow agreement
related to Terphane, acquired in October 2011
Gain from insurance recoveries
Unrealized loss on investment property
Other
Total
2018
2017
2016
$
30,600
$
33,800
$
1,600
—
—
(186)
45
11,856
5,261
—
796
$
30,459
$
51,713
$
—
1,902
(1,032)
(89)
2,381
See Note 17 for more details on the items broken out separately in the table above.
68
4
INVESTMENTS
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaleo, Inc. (“kaléo”),
a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening
medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together,
represents on a fully-diluted basis an approximate 20% interest in kaléo. Tredegar accounts for its investment in kaléo under the
fair value method. At the time of the initial investment, the Company elected the fair value option of accounting since its
investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.
Kaléo’s stock is not publicly traded.
The estimated fair value of the Company’s investment was $84.6 million as of December 31, 2018 and $54.0 million
as of December 31, 2017. The Company recognized unrealized gains on its investment in kaléo of $30.6 million ($23.9 million
after taxes) and $33.8 million ($24.0 million after taxes) in 2018 and 2017, respectively. Unrealized gains or losses associated
with the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of
income and separately stated in the segment operating profit table in Note 5.
Kaléo has transitioned from a company with net losses in 2017 to a company with net income in 2018. Tredegar’s
assessment of kaléo’s risk profile has improved during this transition resulting in a lower discount rate versus a year ago that is
applied to kaléo’s projected unlevered after-tax cash flows to estimate kaléo’s enterprise value (“EV”) (the “DCF Method”) and
the Company’s underlying share of kaléo’s equity value. Moreover, with net income as well as earnings before interest, taxes,
depreciation and amortization (“EBITDA”), the EV of kaléo can also be estimated by applying the EV-to-adjusted EBITDA
multiple of guideline public companies to kaléo’s most recent trailing 12-month adjusted EBITDA (the “EBITDA Multiple
Method”).
The Company estimates the fair value of its investment in kaléo by: (i) computing the weighted average estimated EV
utilizing both the DCF Method and EBITDA Multiple Method (including adjustments for any surplus or deficient working
capital and estimates of contingent liabilities), (ii) adding cash and cash equivalents, (iii) subtracting interest-bearing debt, (iv)
subtracting a private company liquidity discount estimated at 15% of the net result of (i) through (iii) and (v) applying
liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (iv).
The Company’s estimate of kaléo’s EV as of December 31, 2018 was determined by weighting the EBITDA Multiple
Method by 80% and the DCF Method by 20%. The heavier weighting towards the EBITDA Multiple Method was due to its
heuristic nature and kaléo’s transition and actual performance in 2018, versus the hypothetical nature of the projections used in
the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market
growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns,
wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses,
income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition,
there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to
kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation
method applied.
The table below provides a sensitivity analysis of the estimated fair value of the Company’s investment in kaléo for
changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF
Method.
($ Millions)
EV-to-Adjusted EBITDA Multiple
Weighting
to DCF
Method
7.6x
8.6x
9.6x
10.6x
11.6x
50% $
76.3 $
81.2 $
86.1 $
91.0 $
40% $
73.8 $
79.7 $
85.6 $
91.5 $
30% $
71.4 $
78.3 $
85.1 $
92.0 $
95.9
97.3
98.8
20% $
69.0 $
76.8 $
84.6 $
92.5 $ 100.3
10% $
66.5 $
75.4 $
84.2 $
93.0 $ 101.8
—% $
64.1 $
73.9 $
83.7 $
93.5 $ 103.3
69
The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a
liquidity event occurs, and the ultimate value could be materially different from the $84.6 million estimated fair value reflected
in the Company’s financial statements at December 31, 2018.
On April 2, 2007, Tredegar invested $10.0 million in Harbinger Capital Partners Special Situations Fund, L.P. (the
“Harbinger Fund”), a private investment fund that is subject to limitations on withdrawal. There is no secondary market for
interests in the fund. The Company’s investment in the Harbinger Fund, which represents less than 1% of its total partnership
capital, is accounted for under the cost method. The December 31, 2018 and 2017 carrying values in the consolidated balance
sheets (included in “Other assets and deferred charges”) were $1.3 million and $1.7 million, respectively. The carrying value at
December 31, 2018 reflected Tredegar’s cost basis in its investment in Harbinger, net of total withdrawal proceeds received and
losses. Based on an observable price change, the Company recorded a loss of $0.5 million in 2018 (none in 2017 or 2016). No
withdrawal proceeds were received in 2018, 2017 or 2016. The timing and amount of future installments of withdrawal
proceeds, which commenced in August 2010, was not known as of December 31, 2018. The Company has determined that
there is no readily determinable fair value for the Harbinger Fund and has elected to record its investment in the Harbinger
Fund at cost, less impairment, adjusted for observable price changes. Gains on the Company’s investment in the Harbinger
Fund will be recognized when there are positive observable price changes, including when the amounts expected to be collected
from any withdrawal from the investment are known, which will likely be when cash in excess of the remaining carrying value
is received. Losses will be recognized when management believes through observable methods that it is probable that future
withdrawal proceeds will not exceed the remaining carrying value.
In 2018, Tredegar sold all its remaining interest in investment property it had held in Alleghany and Bath counties,
Virginia. The total loss recorded on this investment property in 2018 was $0.2 million ($0.2 million after taxes). In 2016, the
Company recorded an unrealized loss on this investment property of $1.0 million ($0.7 million after taxes) as a reduction in the
estimated fair value of the investment that was not expected to be temporary. The Company’s carrying value in this investment
property (included in “Other assets and deferred charges” on the consolidated balance sheets) was $1.6 million at December 31,
2017.
5
BUSINESS SEGMENTS
The Company's business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions. PE Films is
comprised of the following operating segments: personal care materials, surface protection films, and LED-based products.
Flexible Packaging Films is comprised of the Company’s polyester films business, Terphane Holdings LLC (“Terphane”).
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.
Information by business segment and geographic area for the last three years is provided below. There were no
accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit
from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker (Tredegar’s
President and Chief Executive Officer) for purposes of assessing performance. PE Films’ net sales to The Procter & Gamble
Company (“P&G”) totaled $106.5 million in 2018, $122.4 million in 2017 and $129.1 million in 2016. These amounts include
plastic film sold to others that convert the film into materials used with products manufactured by P&G.
(In thousands)
PE Films
Flexible Packaging Films
Aluminum Extrusions
Total net sales
Add back freight
Sales as shown in consolidated statements of income
Net Sales
70
2018
332,488
123,830
573,126
1,029,444
36,027
1,065,471
$
$
$
$
2017
352,459
108,355
466,833
927,647
33,683
961,330
$
$
2016
331,146
108,028
360,098
799,272
29,069
828,341
Operating Profit
2018
2017
2016
$
$
36,181
(5,905)
(46,792)
$
41,546
(4,905)
—
(In thousands)
PE Films:
Ongoing operations
Plant shutdowns, asset impairments, restructurings and other (a)
Goodwill impairment charge
Flexible Packaging Films:
Ongoing operations
Plant shutdowns, asset impairments, restructurings and other (a)
Aluminum Extrusions:
Ongoing operations
Plant shutdowns, asset impairments, restructurings and other (a)
Total
Interest income
Interest expense
Gain on investment in kaléo accounted for under the fair value
method (a)
Loss on sale of investment property (a)
Unrealized loss on investment property (a)
Stock option-based compensation expense
Corporate expenses, net (a)
Income (loss) before income taxes
Income tax expense (benefit) (a)
Net income (loss)
(In thousands)
PE Films
Flexible Packaging Films
Aluminum Extrusions
Subtotal
General corporate (b)
Cash and cash equivalents (d)
Total
26,312
(4,602)
—
1,774
(214)
37,794
(741)
60,323
261
3,806
1,600
—
1,032
56
29,607
27,683
3,217
24,466
9,892
(45)
48,613
(505)
41,439
369
5,702
30,600
(38)
186
1,221
28,893
36,368
11,526
(2,626)
(89,398)
43,454
321
(11,608)
209
6,170
33,800
—
—
264
30,879
(14,912)
(53,163)
38,251
$
2018
231,720
58,964
281,372
572,056
100,920
34,397
707,373
$
$
2017
289,514
49,915
268,127
607,556
111,696
36,491
755,743
$
$
$
24,842
$
Identifiable Assets
(In thousands)
PE Films
Flexible Packaging Films
Aluminum Extrusions
Subtotal
General corporate
Total
See footnotes following the tables.
Depreciation and Amortization
Capital Expenditures
2018
15,513
1,262
16,866
33,641
163
33,804
$
$
2017
14,609
10,443
15,070
40,122
155
40,277
$
$
2016
13,653
9,505
9,173
32,331
141
32,472
$
$
2018
21,998
5,423
12,966
40,387
427
40,814
$
$
2017
15,029
3,619
25,653
44,301
61
44,362
$
$
2016
25,759
3,391
15,918
45,068
389
45,457
$
$
71
(In thousands)
United States
Exports from the United States to:
Asia
Canada
Europe
Latin America
Operations outside the United States:
Brazil
The Netherlands
Hungary
China
India
Total (c)
(In thousands)
United States (b)
Operations outside the United States:
Brazil
China
Hungary
The Netherlands
India
General corporate (b)
Cash and cash equivalents (d)
Total
(In thousands)
PE Films:
Personal care materials
Surface protection films
LED lighting products & other films
Subtotal
Flexible Packaging Films
Aluminum Extrusions:
Nonresidential building & construction
Consumer durables
Automotive
Machinery & equipment
Distribution
Residential building & construction
Electrical
Subtotal
Total
Net Sales by Geographic Area (d)
2018
691,232
$
2017
584,066
$
2016
475,734
$
75,904
51,984
6,203
12,106
101,217
45,667
33,512
7,814
3,805
1,029,444
$
Identifiable Assets
by Geographic Area (d)
2018
454,178
$
2017
475,844
$
52,796
21,610
23,615
15,020
4,837
100,920
34,397
707,373
$
49,536
28,833
28,573
17,423
7,347
111,696
36,491
755,743
$
84,846
46,505
8,505
15,199
87,155
54,380
24,727
12,199
10,065
927,647
$
73,220
45,683
7,348
5,561
90,571
54,352
24,207
14,390
8,206
799,272
Property, Plant & Equipment,
Net by Geographic Area (d)
2018
166,550
$
2017
156,054
16,072
19,213
15,436
6,005
3,692
1,401
n/a
228,369
$
13,396
23,273
18,230
6,423
4,628
1,087
n/a
223,091
$
$
$
Net Sales by Product Group
2018
2017
2016
$
$
227,090
98,126
7,272
332,488
123,830
289,572
66,416
48,037
41,899
40,924
43,943
42,335
573,126
1,029,444
$
$
246,416
99,079
6,964
352,459
108,355
239,713
54,126
38,261
33,450
30,202
40,354
30,727
466,833
927,647
$
$
238,213
84,013
8,920
331,146
108,028
212,863
39,293
34,700
20,872
20,506
20,252
11,612
360,098
799,272
See footnotes following the tables and a reconciliation of net sales to sales as shown in the Consolidated Statements of Income in the
first table of this Note 5.
72
(a) See Notes 1, 3, 4 and 17 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, gains
or losses from sale of assets, gains or losses on an investment accounted for under the fair value method and other items.
(b) The balance sheets include the funded status of each of the Company’s defined benefit pension and other postretirement plans. The funded status of
the Company’s defined benefit pension plan was a net liability of $81.9 million and $91.8 million as of December 31, 2018 and 2017, respectively.
See Note 13 for more information on the Company’s pension and other postretirement plans.
(c) The difference between total consolidated sales as reported in the consolidated statements of income and segment, geographic and product group net
(d)
sales reported in this note is freight of $36.0 million in 2018, $33.7 million in 2017 and $29.1 million in 2016.
Information on exports and foreign operations are provided on the previous page. Cash and cash equivalents includes funds held in locations outside
the U.S. of $31.1 million and $32.7 million at December 31, 2018 and 2017, respectively. Export sales relate almost entirely to PE Films. Operations
outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible
Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in
Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in
Asia. The facility in Shanghai was shut down in the fourth quarter of 2018.
6
ACCOUNTS AND OTHER RECEIVABLES
As of December 31, 2018 and 2017, accounts receivable and other receivables, net, were $124.7 million and $120.1
million, respectively, made up of the following:
(In thousands)
Customer receivables
Other accounts and notes receivable
Total accounts and other receivables
Less: Allowance for bad debts and sales returns
Total accounts and other receivables, net
2018
122,182
5,482
127,664
(2,937)
124,727
$
$
2017
113,556
9,883
123,439
(3,304)
120,135
$
$
A reconciliation of the beginning and ending balances of the allowance for doubtful accounts and sales returns for the
three years ended December 31, 2018 is as follows:
(In thousands)
Balance, beginning of year
Charges to expense
Recoveries
Write-offs and settlements
Foreign exchange and other
Balance, end of year
2018
2017
2016
3,304
553
(56)
(710)
(154)
2,937
$
$
3,102
2,369
(857)
(1,322)
12
3,304
$
$
3,746
1,410
(32)
(2,167)
145
3,102
$
$
7
INVENTORIES
Inventories consist of the following:
(In thousands)
Finished goods
Work-in-process
Raw materials
Stores, supplies and other
Total
2018
2017
$
$
24,938
15,648
33,741
19,483
93,810
$
$
20,281
11,958
35,909
18,759
86,907
Inventories stated on the LIFO basis amounted to $18.2 million at December 31, 2018 and $21.9 million at December 31,
2017, which were below replacement costs by $16.4 million at December 31, 2018 and $15.9 million at December 31, 2017.
During 2018 and 2017, certain PE Films inventories accounted for on a LIFO basis declined, which resulted in cost of goods
sold being stated at below current costs by $0.3 million and $1.5 million, respectively.
73
8 GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
The components of goodwill and identifiable intangibles at December 31, 2018 and 2017, and related amortization
periods for continuing operations are as follows:
(In thousands)
Goodwill
Identifiable intangible assets:
Customer relationships (cost basis of $29,568
in 2018 and $29,647 in 2017)
Proprietary technology (cost basis of $6,185 in
2018 and $6,203 in 2017)
Trade names (cost basis of $13,690 in 2018 and
$13,887 in 2017)
Total carrying value of identifiable
intangibles
Total carrying value of goodwill and identifiable
intangible assets
(a) Includes $4.8 million of trade names with an indefinite life.
2018
2017
Amortization Periods
$
81,404
$
128,208 Not amortized
22,785
25,444
10-12 years
1,093
12,417
36,295
1,700 Not more than 15 years
13,408
5 - 13 years(a)
40,552
$
117,699
$
168,760
A reconciliation of the beginning and ending balance of goodwill for each of the two years in the period ended
December 31, 2018 is as follows:
(In thousands)
Net carrying value of goodwill at January 1, 2017
Acquisitions
Increase (decrease) due to foreign currency translation
Net carrying value of goodwill at December 31, 2017
Goodwill impairment charge
Increase (decrease) due to foreign currency translation
Net carrying value of goodwill at December 31, 2018
$
PE Films
Aluminum
Extrusions
Total
$
104,126
$
13,696
$
117,822
—
16
104,142
(46,792)
(12)
57,338
10,370
—
24,066
—
—
$
24,066
$
10,370
16
128,208
(46,792)
(12)
81,404
The goodwill of PE Films is carried by its Surface Protection component in the amount $57.3 million as of December 31,
2018. The goodwill of Aluminum Extrusions is carried by its AACOA and Futura (which was acquired on February 15, 2017)
components in the amounts of $13.7 million and $10.4 million, respectively, as of December 31, 2018.
The Company recorded a goodwill impairment charge of $46.8 million ($38.2 million after taxes) for goodwill associated
with the acquisition of certain components of PE Films. During the third quarter of 2018, the Company performed a goodwill
impairment analysis related to the Personal Care component of PE Films. This review was undertaken as a result of the
expected loss of business from a key customer and revised projections for PE Films. Based on an evaluation of projections
under various business planning scenarios, the Company concluded that the fair value of the Personal Care component of PE
Films was less than its carrying value.
74
A reconciliation of the beginning and ending balance of identifiable intangibles for each of the two years in the period
ended December 31, 2018 is as follows:
(In thousands)
PE Films:
Net carrying value at January 1, 2017
Amortization expense
Net carrying value at December 31, 2017
Amortization expense
Net carrying value at December 31, 2018
Flexible Packaging Films:
Net carrying value at January 1, 2017
Amortization expense
Increase (decrease) due to foreign currency
translation
Impairment loss
Net carrying value at December 31, 2017
Amortization expense
Increase (decrease) due to foreign currency
translation
Net carrying value at December 31, 2018
Aluminum Extrusions:
Net carrying value at January 1, 2017
Additions related to acquisition of Futura
Amortization expense
Net carrying value at December 31, 2017
Amortization expense
Net carrying value at December 31, 2018
Total net carrying value of identifiable intangibles at
December 31, 2018
$
$
$
$
$
$
$
Customer
Relationships
Proprietary
Technology
Trade Names
Total
— $
—
—
—
— $
$
12,084
(1,793)
(16)
(9,444)
831
(82)
$
$
$
959
(114)
845
(115)
730
5,574
(1,161)
(2)
(4,051)
360
(55)
— $
—
—
—
— $
6,375
$
—
(33)
(4,005)
2,337
(299)
(88)
661
$
(17)
288
$
(176)
1,862
$
2,760
$
1,049
$
4,800
$
24,000
(2,147)
24,613
(2,489)
22,124
22,785
$
$
—
(554)
495
(420)
75
1,093
$
$
6,700
(429)
11,071
(516)
10,555
12,417
$
$
959
(114)
845
(115)
730
24,033
(2,954)
(51)
(17,500)
3,528
(436)
(281)
2,811
8,609
30,700
(3,130)
36,179
(3,425)
32,754
36,295
During the fourth quarter of 2017, in conjunction with annual business planning as well as valuation activities and other
efforts, the Company determined that the carrying value of Terphane’s remaining long-lived assets were impaired (Terphane’s
goodwill was written off in 2015). Accordingly, the Company wrote down these assets based on an enterprise valuation for all
of Terphane of approximately $30 million. This write-down resulted in a non-cash asset impairment loss recognized during the
fourth quarter of 2017 of $101 million ($87 million after non-cash tax benefits). As part of this write-down, customer
relationships, proprietary technology and trade names were impaired by $9.4 million, $4.1 million and $4.0 million,
respectively, reducing their values to $0.8 million, $0.4 million and $2.4 million, respectively. The remaining part of this write-
down was related to property, plant and equipment. Also, Terphane’s trade names were assigned estimated useful lives of 5 to
13 years, a change from the previous designation of an indefinite life.
Amortization expense for continuing operations over the next five years is expected to be as follows:
Year
2019
2020
2021
2022
2023
Amount
(In thousands)
3,585
3,585
3,585
3,450
2,824
$
75
9
FINANCIAL INSTRUMENTS
Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales
contracts in Aluminum Extrusions and exposure from currency volatility that exist as part of ongoing business operations
(primarily in Flexible Packaging Films). These derivative financial instruments are designated as and qualify as cash flow
hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on
the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty
can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain
customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin
exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions
enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the
scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments
generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future
purchases of aluminum to meet fixed-price forward sales contract obligations was $25.4 million (22.5 million pounds of
aluminum) at December 31, 2018 and $8.2 million (8.0 million pounds of aluminum) at December 31, 2017.
The table below summarizes the location and gross amounts of aluminum derivative contract fair values (Level 2) in the
consolidated balance sheets as of December 31, 2018 and 2017:
(In thousands)
Derivatives Designated as Hedging Instruments
Asset derivatives:
Aluminum futures contracts
Liability derivatives:
Aluminum futures contracts
Derivatives Not Designated as Hedging Instruments
Asset derivatives:
Aluminum futures contracts
Liability derivatives:
Aluminum futures contracts
Net asset (liability)
December 31, 2018
December 31, 2017
Balance Sheet
Account
Fair
Value
Balance Sheet
Account
Fair
Value
Prepaid expenses
and other
$
20
Prepaid expenses
and other
$
578
Prepaid expenses
and other
(1,650)
Prepaid expenses
and other
Prepaid expenses
and other
Prepaid expenses
and other
Prepaid expenses
and other
—
Prepaid expenses
and other
—
(1,630)
$
$
$
$
(16)
—
—
562
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its
aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related
aluminum futures and/or forward contracts through the date of cancellation.
76
The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in
the consolidated balance sheets as of December 31, 2018 and 2017:
(In thousands)
Derivatives Designated as Hedging Instruments
Asset derivatives:
Foreign currency forward contracts
Liability derivatives:
Foreign currency forward contracts
Derivatives Not Designated as Hedging Instruments
Asset derivatives:
Foreign currency forward contracts
Liability derivatives:
Foreign currency forward contracts
Net asset (liability)
December 31, 2018
December 31, 2017
Balance Sheet
Account
Fair
Value
Balance Sheet
Account
Fair
Value
Prepaid expenses
and other
$
37
Accrued
Expenses
Accrued
Expenses
Accrued
Expenses
(1,090)
$
$
—
—
(1,053)
Accrued
Expenses
Accrued
Expenses
Accrued
Expenses
Accrued
Expenses
$
—
(558)
—
—
(558)
$
$
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial
statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net
mismatch translation exposure between Flexible Packaging Films business unit in Brazil, Terphane Limitada's (“Terphane
Ltda.”) U.S. Dollar quoted or priced sales and underlying Brazilian Real (“R$”) quoted or priced operating costs (excluding
depreciation and amortization) is annual net costs of R$125 million. Terphane Ltda. has the following outstanding foreign
exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
USD Notional
Amount (000s)
Average Forward
Rate Contracted on
USD/BRL
R$ Equivalent
Amount (000s)
Applicable Month
Estimated % of
Terphane Ltda. R$
Operating Cost
Exposure Hedged
$2,025
$2,025
$2,025
$2,025
$2,025
$2,025
$1,800
$1,800
$1,800
$1,800
$1,800
$1,800
$22,950
3.6442
3.6527
3.6593
3.6690
3.6795
3.6904
3.8826
3.8950
3.9070
3.9203
3.9331
3.9455
3.7826
R$7,380
R$7,397
R$7,410
R$7,430
R$7,451
R$7,473
R$6,989
R$7,011
R$7,033
R$7,056
R$7,080
R$7,102
R$86,812
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
73%
75%
70%
72%
73%
72%
65%
68%
66%
67%
67%
73%
70%
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Limitada's
forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with
these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and
decreasing the net exposure to Brazilian Real in the consolidated statements of income. The net fair value of the open forward
contracts was a negative $0.9 million as of December 31, 2018.
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet,
including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any
forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any aluminum futures
contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most
credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial
institutions.
77
The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash
flow hedges and described in the previous paragraphs for years ended December 31, 2018, 2017, and 2016 is summarized in
the tables below:
(In thousands)
Years Ended December 31,
Amount of pre-tax gain (loss)
recognized in other comprehensive
income
Location of gain (loss) reclassified from
accumulated other comprehensive
income into net income (effective
portion)
Amount of pre-tax gain (loss)
reclassified from accumulated other
comprehensive income to net income
(effective portion)
Cash Flow Derivative Hedges
Aluminum Futures Contracts
2018
2017
2016
$
(1,123) $
1,501
$
394
Cost of
goods sold
Cost of
goods sold
Cost of
goods sold
$
1,069
$
1,210
$
(1,630)
Cash Flow Derivative Hedges
Foreign Currency Forward Contracts
2018
2017
2016
(In thousands)
Years Ended December 31,
Amount of pre-tax gain (loss)
recognized in other comprehensive
income
Location of gain (loss) reclassified from
accumulated other comprehensive
income into net income (effective
portion)
Amount of pre-tax gain (loss)
reclassified from accumulated other
comprehensive income to net income
(effective portion)
$
— $
(2,105) $
— $
(561) $
—
Cost of
goods sold
Selling,
general &
admin
Cost of
goods sold
Selling,
general &
admin
Cost of
goods sold
$
62 $
(1,796) $
62 $
(43) $
62
Gains and losses on the ineffective portion of derivative instruments or derivative instruments that were not designated as
hedging instruments were not material in 2018, 2017 and 2016. For the years ended December 31, 2018, 2017 and 2016,
unrealized net losses from hedges that were discontinued were not material. As of December 31, 2018, the Company expected
$1.1 million of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income to be
reclassified to earnings within the next 12 months.
78
10 ACCRUED EXPENSES
Accrued expenses consist of the following:
(In thousands)
Vacation
Incentive compensation
Payrolls, related taxes and medical and other benefits
Workers’ compensation and disabilities
Derivative contract liability
Accrued utilities
Accrued freight
Environmental liabilities (current)
Customer rebates
Accrued severance
Other
Total
2018
2017
$
8,946
$
6,979
6,600
4,048
2,720
2,420
2,091
1,990
1,476
637
4,588
8,575
7,958
6,034
3,746
558
2,177
1,581
3,110
1,929
783
5,982
$
42,495
$
42,433
A reconciliation of the beginning and ending balances of accrued expenses associated with asset impairments and costs
related to exit and disposal activities for each of the three years in the period ended December 31, 2018 is as follows:
(In thousands)
Severance(a)
Asset
Impairments(b)
Other(c)
Total
Balance at January 1, 2016
$
1,462
$
— $
405
$
1,867
For the year ended December 31, 2016:
Charges
Cash spend
Charges against assets
Balance at December 31, 2016
For the year ended December 31, 2017:
Charges
Cash spend
Charges against assets
Balance at December 31, 2017
For the year ended December 31, 2018:
Charges
Cash spend
Charges against assets
Reversed to income
1,535
(1,143)
—
1,854
589
(1,816)
—
627
2,654
(2,665)
—
—
Balance at December 31, 2018
$
616
$
603
—
(603)
—
101,595
—
(101,595)
—
233
—
(141)
(92)
— $
546
(397)
—
554
304
(382)
—
476
118
(434)
—
—
160
$
2,684
(1,540)
(603)
2,408
102,488
(2,198)
(101,595)
1,103
3,005
(3,099)
(141)
(92)
776
(a) Severance primarily includes severance payments associated with the consolidation of North American PE Films manufacturing
facilities in 2016 and 2017 and with the shutdown of the PE Films Shanghai, China facility in 2018.
(b) Asset impairments in 2017 primarily related to the Flexible Packaging Films’ impairment of $101 million.
(c) Other primarily includes other shutdown-related costs associated with the shutdown and sale of the Company’s aluminum extrusions
manufacturing facility in Kentland, Indiana.
See Note 17 for more information on plant shutdowns, asset impairments and restructurings of continuing operations.
11 DEBT AND CREDIT AGREEMENTS
On March 1, 2016, Tredegar entered into a $400 million five-year, secured revolving credit facility (“Credit Agreement”),
with an option to increase that amount by $50 million.
79
Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged
on the unused amount under the Credit Agreement at various indebtedness-to-adjusted EBITDA levels as follows:
Pricing Under Credit Revolving Agreement (Basis Points)
Indebtedness-to-Adjusted EBITDA Ratio
> 3.5x but <= 4.0x
> 3.0x but <= 3.5x
> 2.0x but <= 3.0x
> 1.0x but <= 2.0x
<= 1.0x
Credit Spread
Over LIBOR
Commitment
Fee
250
225
200
175
150
45
40
35
30
25
At December 31, 2018, the interest cost on debt borrowed under the Credit Agreement was priced at one-month LIBOR
plus the applicable credit spread of 150 basis points.
The most restrictive covenants in the Credit Agreement include:
• Maximum indebtedness-to-adjusted EBITDA (“Leverage Ratio:) of 4.00x;
• Minimum adjusted EBIT-to-interest expense of 2.50x; and
• Maximum aggregate distributions to shareholders over the term of the Credit Agreement of $100 million plus,
beginning with the fiscal quarter ended March 31, 2016, 50% of net income and, at a Leverage Ratio of equal to
or greater than 3.00x, a limitation on such payments for the succeeding quarter at the greater of (i) $4 million and
(ii) 50% of consolidated net income for the most recent fiscal quarter, and, at a Leverage Ratio of equal to
or greater than 3.50x, the prevention of such payments for the succeeding quarter unless the fixed charge coverage
ratio is equal to or greater than 1.20x.
The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including
equity in certain material first-tier foreign subsidiaries.
At December 31, 2018, based upon the most restrictive covenant within the Credit Agreement, available credit under the
Credit Agreement was approximately $298 million. Total debt due and outstanding at December 31, 2018 is summarized
below:
Debt Due and Outstanding at December 31, 2018
(In thousands)
Credit
Agreement
Other
Total Debt
Due
$
— $
—
101,500
—
—
— $
—
—
—
—
—
—
101,500
—
—
$
101,500
$
— $
101,500
Year Due
2019
2020
2021
2022
2023
Total
Tredegar believes that it was in compliance with all of its debt covenants as of December 31, 2018. Noncompliance with
any of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such
noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the
covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on
financial condition or liquidity depending upon how the covenant is renegotiated.
12 STOCK OPTION AND STOCK AWARD PLANS
Tredegar has one equity incentive plan under which stock options may be granted to purchase a specified number of
shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10
years. One stock option grant was made in 2018, with cliff vesting after two years. Two stock option grants were made in
2017, with one cliff vesting after two years and the other cliff vesting after three years. No stock options were granted in 2016.
80
The option plan also permits the grant of stock appreciation rights (“SARs”), stock, restricted stock, stock unit awards and
incentive awards. Restricted stock grants ordinarily vest three years from the date of grant based upon continued employment.
Stock unit awards vest upon the achievement of certain performance targets. No SARs have been granted since 1992 and none
are currently outstanding.
A summary of stock options outstanding at December 31, 2018, 2017 and 2016, and changes during those years, is
presented below:
Number of
Options
Range
Weighted
Average
Option Exercise Price/Share
Outstanding at January 1, 2016
881,513
$
17.13
Granted
Forfeited and expired
Exercised
Outstanding at December 31, 2016
Granted
Forfeited and expired
Exercised
Outstanding at December 31, 2017
Granted
Forfeited and expired
Exercised
—
(246,394)
(134,200)
500,919
209,551
(60,685)
(41,265)
608,520
451,083
(96,089)
(73,398)
Outstanding at December 31, 2018
890,116
$
—
17.13
17.13
17.13
15.65
17.13
19.84
15.65
19.35
15.65
15.65
15.65
to
to
to
to
to
to
to
to
to
to
to
to
to
$
30.01
$
—
30.01
19.84
30.01
15.65
30.01
19.84
24.84
19.35
24.84
22.49
$
24.84
$
20.22
—
18.90
17.23
21.67
15.65
21.42
19.84
19.75
19.35
19.58
18.15
19.69
The following table summarizes additional information about stock options outstanding and exercisable at December 31,
2018:
Options Outstanding at December 31, 2018
Options Exercisable at December 31, 2018
Range of
Exercise Prices
— to
$
$
15.01
17.51
20.01
to
to
to
Total
15.00
17.50
20.00
25.00
Shares
—
163,641
516,883
209,592
890,116
Weighted Average
Remaining
Contractual
Life (Years)
Exercise
Price
Aggregate
Intrinsic Value
(In thousands)
Shares
Weighted
Average
Exercise
Price
Aggregate
Intrinsic Value
(In thousands)
0.0
5.4
5.9
4.5
5.5
$
— $
15.65
19.36
23.69
—
34,365
—
—
— $
— $
—
65,800
209,592
—
19.40
23.69
$
19.69
$
34,365
275,392
$
22.66
$
—
—
—
—
—
81
The following table summarizes additional information about unvested restricted stock outstanding at December 31,
2018, 2017 and 2016:
Unvested Restricted Stock
Maximum Unvested Restricted Stock Units Issuable
Upon Satisfaction of Certain Performance Criteria
Number
of Shares
Weighted Avg.
Grant Date
Fair Value/
Share
Grant Date
Fair Value
(In thousands)
Number
of Shares
Weighted Avg.
Grant Date
Fair Value/
Share
Grant Date
Fair Value
(In thousands)
Outstanding at January 1, 2016
132,353
$
21.19
$
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Vested
Forfeited
Outstanding at December 31, 2017
Granted
Vested
Forfeited
144,546
(52,167)
(17,377)
207,355
107,362
(50,154)
(57,887)
206,676
119,915
(64,702)
(17,153)
13.47
21.56
18.97
15.90
18.29
19.72
16.16
16.15
17.39
18.31
15.84
Outstanding at December 31, 2018
244,736
$
16.20
$
2,805
1,947
(1,125)
(330)
3,297
1,964
(989)
(935)
3,337
2,085
(1,185)
(272)
3,965
167,128
$
22.04
$
136,986
—
(65,685)
238,429
46,205
—
(112,501)
172,133
61,227
—
(48,651)
184,709
11.34
—
20.24
16.39
17.38
—
17.73
15.78
17.35
—
13.23
$
16.97
$
3,684
1,553
—
(1,329)
3,908
803
—
(1,995)
2,716
1,062
—
(644)
3,134
The total intrinsic value of stock options exercised was $0.4 million in 2018, $0.2 million in 2017 and $0.2 million in
2016. The grant-date fair value of stock option-based awards vested was $0.1 million in 2018, $0.4 million in 2017 and $0.4
million in 2016. As of December 31, 2018, there was unrecognized compensation cost of $2.0 million related to stock option-
based awards and $1.8 million related to non-vested restricted stock and other stock-based awards. This cost is expected to be
recognized over the remaining weighted average period of 1.2 years for stock option-based awards and 1.3 years for non-vested
restricted stock and other stock-based awards.
Stock options exercisable totaled 275,392 shares at December 31, 2018 and 385,658 shares at December 31, 2017. Stock
options available for grant totaled 1,548,917 shares at December 31, 2018.
82
13 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees.
The plans for salaried and hourly employees currently in effect is based on a formula using the participant’s years of service and
compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants and pay for
active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no
longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.
In addition to providing pension benefits, the Company provides postretirement life insurance and health care benefits for
certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees
hired on or before January 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. The Company
eliminated prescription drug coverage for Medicare-eligible retirees as of January 1, 2006. Consequently, Tredegar is not
eligible for any federal subsidies.
The following tables reconcile the changes in benefit obligations and plan assets in 2018 and 2017, and reconcile the
funded status to prepaid or accrued cost at December 31, 2018 and 2017:
(In thousands)
Change in benefit obligation:
Pension Benefits
Other Post-
Retirement Benefits
2018
2017
2018
2017
Benefit obligation, beginning of year
$
318,123
$
303,126
$
7,704
$
7,436
Service cost
Interest cost
Effect of actuarial (gains) losses related to the
following:
Discount rate change
Retirement rate assumptions and mortality
table adjustments
Other
Plan participant contributions
Benefits paid
Benefit obligation, end of year
Change in plan assets:
Plan assets at fair value, beginning of year
Actual return on plan assets
Employer contributions
Plan participant contributions
Benefits paid
Plan assets at fair value, end of year
Funded status of the plans
Amounts recognized in the consolidated balance
sheets:
Accrued expenses (current)
Pension and other postretirement benefit
obligations, net
Net amount recognized
17
11,442
194
12,575
(23,653)
21,055
(914)
(2,326)
—
(15,449)
287,240
226,354
(14,148)
8,610
$
$
—
(15,449)
205,367
$
(81,873) $
(2,145)
(1,921)
—
(14,761)
318,123
214,559
21,034
5,522
—
(14,761)
226,354
(91,769)
$
$
$
$
36
271
(546)
6
(285)
656
(953)
6,889
$
— $
—
297
656
(953)
— $
(6,889) $
182
$
182
$
456
$
81,691
91,587
6,433
81,873
$
91,769
$
6,889
$
$
$
$
$
$
$
33
301
471
15
(245)
646
(953)
7,704
—
—
307
646
(953)
—
(7,704)
457
7,247
7,704
83
Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations for
continuing operations, and the components of net periodic benefit income or cost for continuing operations, are as follows:
(In thousands, except percentages)
Weighted-average assumptions used to
determine benefit obligations:
Pension Benefits
Other Post-
Retirement Benefits
2018
2017
2016
2018
2017
2016
Discount rate
4.40%
3.72%
4.29%
4.37%
3.69%
4.24%
Expected long-term return on plan
assets
Weighted-average assumptions used to
determine net periodic benefit cost:
6.00%
6.50%
6.50%
n/a
n/a
n/a
Discount rate
3.72%
4.29%
4.55%
3.69%
4.24%
4.49%
Expected long-term return on plan
assets
Components of net periodic benefit cost:
6.50%
6.50%
7.00%
n/a
n/a
n/a
Service cost
$
17
$
194
$
231
$
Interest cost
Expected return on plan assets
Amortization of prior service costs
and gains or losses
11,442
(15,011)
12,575
(14,955)
13,323
(15,980)
Net periodic benefit cost
$ 10,342
$ 10,134
$ 10,886
$
64
$
13,894
12,320
13,312
(243)
$
36
271
—
33
301
—
(275)
59
$
$
38
337
—
(214)
161
Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined
using assumptions at the end of each year. The amount of the accumulated benefit obligation is the same as the projected
benefit obligation. At December 31, 2018, the effect of a 1% change in the health care cost trend rate assumptions would not
impact the post-retirement obligation.
Expected benefit payments for continuing operations over the next five years and in the aggregate for 2024-2028 are as
follows:
(In thousands)
2019
2020
2021
2022
2023
2024—2028
Pension
Benefits
$
16,826
$
17,337
17,713
18,048
18,268
92,435
Other Post-
Retirement
Benefits
456
458
461
463
461
2,236
Amounts recorded in 2018, 2017 and 2016 in accumulated other comprehensive income, before related deferred income
taxes, consist of:
(In thousands)
Prior service cost (benefit)
Net actuarial (gain) loss
2018
Pension
2017
2016
2018
2017
2016
Other Post-Retirement
$
— $
5
$
10
$
— $
— $
132,751
144,377
145,782
(1,821)
(1,238)
—
(1,756)
84
Pension expense is expected to be $9.6 million in 2019. The amounts in accumulated other comprehensive income,
before related deferred income taxes, that are expected to be recognized as components of net periodic benefit or cost during
2019 are as follows:
(In thousands)
Prior service cost (benefit)
Net actuarial (gain) loss
Pension
$
— $
10,916
Other Post-
Retirement
—
(230)
The percentage composition of assets held by pension plans for continuing operations at December 31, 2018, 2017 and
2016 are as follows:
Pension plans related to continuing operations:
Fixed income securities
Large/mid-capitalization equity securities
Small-capitalization equity securities
International and emerging market equity securities
Total equity securities
Private equity and hedge funds
Other assets
Total for continuing operations
% Composition of Plan Assets
at December 31,
2018
2017
2016
8.6%
7.7%
8.0%
18.2
6.8
16.0
41.0
42.3
8.1
19.0
6.4
15.1
40.5
44.6
7.2
14.7
5.3
11.5
31.5
48.4
12.1
100.0%
100.0%
100.0%
Tredegar’s targeted allocation percentage for pension plan assets and the expected long-term rate of return on assets used
to determine its benefit obligation at December 31, 2018, are as follows:
Pension plans related to continuing operations:
Fixed income securities
Large/mid-capitalization equity securities
Small-capitalization equity securities
International and emerging market equity securities
Total equity securities
Private equity and hedge funds
Total for continuing operations
Target %
Composition of
Plan Assets *
Expected Long-
term Return %
12.0%
3.2%
19.0
6.0
18.0
43.0
45.0
100.0%
6.1
6.6
7.3
6.7
6.1
6.0%
*
Target percentages for the composition of plan assets represents a neutral position within the approved
range of allocations for such assets.
Expected long-term returns are estimated by asset class and generally are based on inflation-adjusted historical returns,
volatilities, risk premiums and managed asset premiums. The portfolio of fixed income securities is structured with maturities
that generally match estimated benefit payments over the next 1-2 years. The other assets category is primarily comprised of
cash and contracts with insurance companies. The Company’s primary investment objective is to maximize total return with a
strong emphasis on the preservation of capital, and it believes that over the long-term a diversified portfolio of fixed income
securities, equity securities, hedge funds and private equity funds has a better risk-return profile than fixed income securities
alone. The average remaining duration of benefit payments for the pension plans is about 11 years. The Company expects its
required contributions to be approximately $8.1 million in 2019.
85
Estimates of the fair value of assets held by the Company’s pension plan are provided by unaffiliated third parties.
Investments in private equity and hedge funds and certain fixed income securities by the Company’s pension plan are measured
at NAV, which is a practical expedient for measuring fair value. These assets are therefore excluded from the fair value
hierarchy for each of the years presented. At December 31, 2018 and 2017, the pension plan assets are categorized by level
within the fair value measurement hierarchy as follows:
(In thousands)
Balances at December 31, 2018
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Large/mid-capitalization equity securities
$
37,323
$
37,323
$
Small-capitalization equity securities
International and emerging market equity securities
Fixed income securities
Other assets
Total plan assets at fair value
Private equity and hedge funds
Contracts with insurance companies
Total plan assets, December 31, 2018
Balances at December 31, 2017
Large/mid-capitalization equity securities
Small-capitalization equity securities
International and emerging market equity securities
Fixed income securities
Other assets
Total plan assets at fair value
Private equity and hedge funds
Contracts with insurance companies
Total plan assets, December 31, 2017
$
$
$
$
$
13,880
32,931
17,769
6,779
13,880
13,389
5,886
6,779
— $
—
19,542
11,883
—
108,682
$
77,257
$
31,425
$
86,786
9,899
205,367
42,920
$
42,920
$
14,477
34,153
17,513
5,822
14,477
16,409
5,374
5,822
— $
—
17,744
12,139
—
114,885
$
85,002
$
29,883
$
100,974
10,495
226,354
—
—
—
—
—
—
—
—
—
—
—
—
Tredegar also has a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005,
further participation in this plan was terminated and benefit accruals for existing participants were frozen. The plan was
designed to restore all or a part of the pension benefits that would have been payable to designated participants from the
principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation
relating to this unfunded plan was $2.0 million at December 31, 2018 and $2.2 million at December 31, 2017. Pension expense
recognized for this plan was $0.1 million in 2018, $0.1 million in 2017 and $0.1 million in 2016. This information has been
included in the preceding pension benefit tables.
Approximately 72 employees at the Company’s film products manufacturing facility in Kerkrade, The Netherlands are
covered by a collective bargaining agreement that includes participation in a multi-employer pension plan. Pension expense
recognized for participation in this plan, which is equal to required contributions, was $0.4 million in 2018, $0.4 million in
2017 and $0.4 million in 2016. This information has been excluded from the preceding pension benefit tables.
14 SAVINGS PLAN
Tredegar has a savings plan that allows eligible employees to voluntarily contribute a percentage of their compensation,
up to Internal Revenue Service (“IRS”) limitations. The provisions of the savings plan provided the following benefits for
salaried and certain hourly employees:
• The Company makes matching contributions to the savings plan of $1 for every $1 an employee contributes per pay
period up to a maximum of 5% of eligible compensation.
• The savings plan includes immediate vesting of matching contributions and automatic enrollment at 3% of eligible
compensation unless the employee opts out or elects a different percentage.
86
The Company also has a non-qualified plan that restores matching benefits for employees suspended from the savings
plan due to certain limitations imposed by income tax regulations (“restoration plan”). Charges recognized for these plans were
$3.7 million in 2018, $3.5 million in 2017 and $3.2 million in 2016. The Company’s liability under the restoration plan was
$1.0 million at December 31, 2018 (consisting of 65,280 phantom shares of common stock) and $1.3 million at December 31,
2017 (consisting of 65,548 phantom shares of common stock) and valued at the closing market price on those dates.
The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of the Company’s common stock in
1998 for $0.2 million and 46,671 shares of its common stock in 1997 for $1.0 million, as a partial hedge against the phantom
shares held in the restoration plan. There have been no shares purchased since 1998 except for re-invested dividends. The cost
of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.
15 RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS
Rental expense for continuing operations was $5.2 million in 2018, $4.4 million in 2017 and $2.9 million in 2016. Rental
commitments under all noncancellable leases for continuing operations as of December 31, 2018, are as follows:
(In thousands)
2019
2020
2021
2022
2023
Remainder
$
4,445
4,007
3,591
2,391
1,245
2,630
Total minimum lease payments
$
18,309
Contractual obligations for plant construction and purchases of real property and equipment amounted to $14.1 million at
December 31, 2018.
16
INCOME TAXES
The U.S. Tax Cuts and Jobs Act (“TCJA”) makes broad and complex changes to the U.S. tax code, including, but not
limited to: (i) reducing the U.S. federal corporate income tax rate from 35% to 21%; (ii) requiring companies to pay a one-time
transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on
dividends from foreign subsidiaries; (iv) creating new taxes on certain foreign earnings; (v) eliminating certain deductions; and
(vi) providing the option to full expensing of qualified property.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax
effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA
enactment date for companies to complete the accounting under Accounting Standards Codification No. 740 (“ASC 740”). In
accordance with SAB 118, a company must reflect the income tax effects of a company’s accounting for those tax effects of the
TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain tax effects of
the TCJA is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. If a company cannot determine a reasonable estimate to be included in the financial statements, it should continue
to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of the
TCJA.
The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA in 2017 and
throughout 2018. At December 31, 2017, the Company had not completed its accounting for all the enactment-date income tax
effects of the TCJA under ASC 740, Income Taxes as described below. At December 31, 2018, the Company has now
completed its accounting for the enactment-date income tax effects of the TCJA.
Item (i) above was completed in 2017 and resulted in a non-cash deferred income tax benefit in the fourth quarter of
2017 of $3.9 million to adjust applicable deferred income tax assets and liabilities for the change in the U.S. federal corporate
rate. Income tax accruals on U.S. income in 2018 and future periods will apply the new 21% U.S. federal income tax rate.
Item (ii) was not completed in 2017. The Company did not accrue any deemed repatriation taxes on unremitted earnings
of its foreign subsidiaries in 2017 since its preliminary assessment indicated that such foreign subsidiaries had no net
cumulative unremitted earnings due to historical repatriation. Upon further analysis of the TCJA and notices and regulations
issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, the Company finalized its
87
calculations of the deemed repatriation tax liability in 2018 and concluded once again that the Company would not owe any
transition tax and that no adjustment was required in 2018.
The application of the new Global Intangible (“GILTI”) tax rules to the Company, which is part of item (iv), was not
completed in 2017. The rules are complex, and under GAAP the Company is allowed to make a policy choice of either: (a)
treating taxes due on future U.S. inclusions in taxable income relate to GILTI as current period expense when incurred (the
“period cost method”), or (b) factoring such amounts into the Company’s measurement of its deferred income taxes (the
“deferred method”). The Company was not able to complete its analysis of these rules and could not reasonably estimate the
effect of this provision of the TCJA in 2017. Accordingly, the Company did not make any adjustments related to the potential
GILTI tax in its 2017 financial statements and did not make a policy decision whether to record deferred income taxes on
GiLTI. After further consideration in 2018, the Company elected to account for GILTI in the year the tax was incurred. In
2018, application of the GILTI provisions did not result in any additional U.S. income tax.
Income (loss) before income taxes and income tax expense (benefit) are as follows:
$
$
$
(In thousands)
Income (loss) before income taxes:
Domestic
Foreign
Total
Current income tax expense (benefit):
Federal
State
Foreign
Total
Deferred income tax expense (benefit):
Federal
State
Foreign
Total
2018
2017
2016
17,663
18,705
36,368
$
$
$
67,549
(82,461)
(14,912) $
(187) $
815
2,090
2,718
8,708
364
(264)
8,808
(20,560) $
800
3,247
(16,513)
(23,302)
(949)
(12,399)
(36,650)
(53,163) $
26,284
1,399
27,683
4,302
(709)
3,255
6,848
(2,505)
1,396
(2,522)
(3,631)
3,217
Total income tax expense (benefit)
$
11,526
$
88
The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing
operations are as follows:
2018
2017
2016
(In thousands, except percentages)
Income tax expense (benefit) at federal statutory rate
Amount
7,638
$
%
21.0
$
%
Amount
%
35.0
$
9,689
35.0
U.S. tax on foreign branch income
Foreign rate differences
Non-deductible goodwill and asset impairment loss
Tax contingency accruals and tax settlements
Valuation allowance for capital loss carryforwards
State taxes, net of federal income tax benefit
Non-deductible expenses
Stock-based compensation
Unremitted earnings from foreign operations
Worthless stock deductions
Impact of U.S. Tax Cuts and Jobs Act
Settlement of Terphane acquisition escrow
Increase in value of kaléo investment held abroad
Domestic production activities deduction
Remitted earnings from foreign operations
Changes in estimates related to prior year tax provision
Research and development tax credit
Valuation allowance due to foreign losses and impairments
Foreign derived intangible income deduction
Brazilian tax incentive
Income tax expense (benefit) at effective income tax rate
$
1,901
1,805
1,801
773
553
520
322
175
126
—
—
—
—
—
5.2
5.0
5.1
2.1
1.5
1.4
0.9
0.5
0.3
—
—
—
—
—
—
(303)
(420)
(975)
(1,050)
(1,340)
11,526
—
(0.8)
(1.2)
(2.7)
(2.9)
(3.7)
31.7
Amount
(5,219)
—
434
656
2,546
228
(420)
83
—
(17.1)
(1.5)
2.8
(0.6)
(4.4)
(2.9)
(1.3)
—
(61,413) 411.9
(4,433)
29.7
(4,200)
(2,326)
—
28.2
15.6
199
—
—
—
320
(375)
—
(2.1)
2.5
20,757 (139.3)
—
—
—
499
13
104
267
647
396
—
1.8
—
0.4
1.0
2.3
1.4
—
(256)
—
—
—
(197)
(735)
(6,574)
330
(550)
(416)
—
—
(0.9)
—
—
—
(0.7)
(2.7)
(23.7)
1.2
(2.0)
(1.5)
—
—
—
$ (53,163) 356.5
—
—
$
3,217
11.6
Income taxes from continuing operations in 2018 were primarily impacted by not recording a tax benefit on a portion of
the PE Films Personal Care goodwill impairment charge, the additional tax impact of Tredegar’s Brazilian subsidiaries being
included in its US consolidated tax return as foreign branches as well as the tax impact of the local statutory tax rates of
Tredegar’s foreign subsidiaries being higher than the current US tax rate of 21%. These increases to income tax expense were
offset by recording a tax benefit on a portion of foreign losses and impairments, by the tax benefit of the foreign derived
intangible income deduction under the TCJA, and by the benefit of tax incentives in Brazil.
During 2017, the Company completed a plan to liquidate for tax purposes one of its domestic subsidiaries, which allowed
it to claim an income tax benefit on the write-off of the stock basis of Terphane, Inc. (Terphane’s U.S. affiliate) on its 2017 U.S.
federal income tax return. The Company recorded an income tax benefit during the second quarter of 2017 of $8.1 million
related to this worthless stock deduction, net of valuation allowances and accrual for uncertain tax positions. Also, during the
fourth quarter of 2017, as a result of valuation activities and other efforts, the Company claimed an ordinary loss for U.S.
federal and state income tax purposes of $153 million for the write-off of the stock basis of Terphane Limitada (Terphane’s
Brazilian entity). The full tax benefit accrued for the Terphane Limitada worthless stock deduction at the 35% U.S. corporate
income tax rate applicable for 2017 was approximately $54 million. This benefit was reduced by $4.8 million in conjunction
with the TCJA for the portion of the deduction that is expected to be applied to income generated after 2017 where the new
U.S. federal corporate income tax rate of 21% is applicable. The significant foreign rate difference for 2017 is primarily due to
the difference between Hungary’s income tax rate of 9% and the U.S. federal corporate income tax rate of 35%.
Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However,
due to changes in the taxation of dividends under TCJA, Tredegar will only record U.S. federal income taxes on unremitted
earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from
its foreign subsidiaries. Prior to the second quarter of 2016, deferred U.S. federal income taxes had not been recorded for the
undistributed earnings for Terphane Limitada because the Company had intended to permanently reinvest these earnings. Due
to concerns about the political and economic conditions in Brazil, Terphane Limitada began making cash distributions to the
89
Company in 2016. During the second quarter of 2016, Terphane Limitada paid a dividend of $10.7 million to the Company.
During the second quarter of 2017, the Company recognized a net tax benefit of $0.4 million associated with additional U.S.
tax related to this repatriation of cash from Brazil offset by the reversal of related tax contingencies. Because of the
accumulation of significant losses related to foreign currency translations at Terphane Limitada, there were no deferred income
tax liabilities associated with the U.S. federal income taxes and foreign withholding taxes on Terphane Limitada’s undistributed
earnings as of and December 31, 2018 and 2017.
Income taxes in 2016 included the recognition of an additional valuation allowance of $0.3 million related to expected
limitations on the utilization of assumed capital losses on certain investments. In 2016, the difference between the federal
statutory rate and the effective tax rate is primarily driven by the $6.4 million tax benefit from excess foreign tax credits related
to the repatriation of cash from Brazil discussed above.
The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social
contribution on income). Terphane’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that
allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These
incentives produce a current tax rate of 15.25% for Terphane (6.25% of income tax and 9.0% social contribution on income).
The incentives have been granted for a 10-year period, which has a commencement date of January 1, 2015 and will expire at
the end of 2024. The benefit from the tax incentives was $1.3 million in 2018 and was immaterial for 2017 and 2016.
Deferred income tax liabilities and deferred income tax assets at December 31, 2018 and 2017, are as follows:
(In thousands)
Deferred income tax liabilities:
2018
2017
Amortization of goodwill and identifiable intangibles
$
13,416
$
22,739
Foreign currency translation gain adjustment
Excess of carrying value over tax basis of investment in kaléo
Derivative financial instruments
Other
Total deferred income tax liabilities
Deferred income tax assets:
Depreciation
Pensions
Employee benefits
Excess capital losses
Inventory
Asset write-offs, divestitures and environmental accruals
Tax benefit on U.S. federal, state and foreign NOL and credit
carryforwards
Timing adjustment for unrecognized tax benefits on uncertain tax
positions, including portion relating to interest and penalties
Allowance for doubtful accounts
Derivative financial instruments
Other
Deferred income tax assets before valuation allowance
Less: Valuation allowance
Total deferred income tax assets
Net deferred income tax (assets) liabilities
Amounts recognized in the consolidated balance sheets:
Deferred income tax assets (noncurrent)
Deferred income tax liabilities (noncurrent)
Net deferred income tax assets (liabilities)
$
$
$
300
15,131
—
184
433
8,602
167
—
29,031
31,941
2,399
17,153
6,676
1,519
3,644
1,200
4,917
19,626
6,842
4,695
2,884
1,754
23,507
33,384
267
382
432
—
184
406
—
261
57,179
24,736
32,443
(3,412) $
74,953
28,499
46,454
(14,513)
3,412
—
3,412
$
$
16,636
2,123
14,513
Except as noted below, the Company believes that it is more likely than not that future taxable income will exceed future
tax-deductible amounts thereby resulting in the realization of deferred income tax assets. The Company has estimated gross
90
federal, state and foreign tax credits and net operating loss carryforwards of $23.5 million and $33.4 million at December 31,
2018 and 2017, respectively. The U.S. federal tax credits will expire in between 2026 and 2037. The U.S. federal net operating
loss carryforwards were fully utilized in 2018. The majority of the foreign net operating loss carryforwards do not expire. The
U.S. state carryforwards expire at different points over the next 9 to 20 years.
Valuation allowances of $7.7 million, $8.5 million and $1.5 million at December 31, 2018, 2017 and 2016, respectively, are
recorded against the tax benefit on U.S. federal, state and foreign tax credits and net operating loss carryforwards generated by
certain foreign and domestic subsidiaries that may not be recoverable in the carryforward period. The valuation allowance for
excess capital losses from investments and other related items was $1.2 million, $4.4 million and $11.2 million at
December 31, 2018, 2017 and 2016, respectively. The current year balance decreased primarily due to the expiration of a
portion of the capital loss carryforwards. The amount of the deferred income tax asset considered realizable, however, could be
adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. Tredegar
continues to evaluate opportunities to utilize capital loss carryforwards prior to their expiration at various dates in the future.
As circumstances and events warrant, allowances will be reversed when it is more likely than not that future taxable income
will exceed deductible amounts, thereby resulting in the realization of deferred income tax assets. The valuation allowance for
asset impairments in foreign jurisdictions where the Company believes it is more likely than not that the deferred income tax
asset will not be realized was $15.8 million and $15.6 million at December 31, 2018 and 2017, respectively (none in 2016).
A reconciliation of the Company’s unrecognized uncertain tax positions since January 1, 2016, is shown below:
(In thousands)
Balance at beginning of period
Increase (decrease) due to tax positions taken in:
Current period
Prior period
Increase (decrease) due to settlements with taxing authorities
Reductions due to lapse of statute of limitations
Balance at end of period
$
Years Ended December 31,
2018
2017
2016
$
1,962
$
3,315
$
4,049
13
1,430
—
(44)
3,361
$
27
(532)
(51)
(797)
1,962
$
1,151
43
(1,706)
(222)
3,315
Additional information related to unrecognized uncertain tax positions since January 1, 2016 is summarized below:
(In thousands)
Gross unrecognized tax benefits on uncertain tax positions (reflected in
current income tax, other noncurrent liability accounts, or deferred tax
assets in the balance sheet)
Deferred income tax assets related to unrecognized tax benefits on
uncertain tax positions (reflected in deferred income tax accounts in the
balance sheet)
Net unrecognized tax benefits on uncertain tax positions, which would
impact the effective tax rate if recognized
Interest and penalties accrued on deductions taken relating to uncertain tax
positions (approximately $107, $(1) and $(262) reflected in income tax
expense in the income statement in 2018, 2017 and 2016, respectively,
with the balance shown in current income tax and other noncurrent
liability accounts in the balance sheet)
Related deferred income tax assets recognized on interest and penalties
Interest and penalties accrued on uncertain tax positions net of related
deferred income tax benefits, which would impact the effective tax rate if
recognized
Total net unrecognized tax benefits on uncertain tax positions reflected in
the balance sheet, which would impact the effective tax rate if
recognized
Years Ended December 31,
2018
2017
2016
$
3,361
$
1,962
$
3,315
(211)
(153)
(345)
3,150
1,809
2,970
243
(56)
136
(32)
135
(49)
187
104
86
$
3,337
$
1,913
$
3,056
91
Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions
outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations
by tax authorities for years before 2014. The Company anticipates that it is reasonably possible that Federal and state income
tax audits or statutes may settle or close within the next 12 months, which could result in the recognition of up to approximately
$3.2 million of the balance of unrecognized tax positions, including any payments that may be made.
17 LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS,
UNUSUAL ITEMS, GAINS FROM SALE OF ASSETS AND OTHER ITEMS
Losses associated with plant shutdowns, asset impairments, restructurings and other charges in 2018 (as shown in the
segment operating profit table in Note 5) totaled $6.5 million ($5.9 million after taxes), and unless otherwise noted below, are
also included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of
income. Results in 2018 included:
• Quarterly charges associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which
includes categories of expenses shown in the table below (Accelerated depreciation and a portion of Other facility
consolidation-related costs and Severance & employee related expenses, as noted in the table below, are included in
“Cost of goods sold” in the consolidated statements of income):
($ in millions)
Severance & employee related expenses
Accelerated depreciation
Other facility consolidation-related costs
Total
Amount included in “Cost of goods
sold” in the consolidated statements of
income
Note: BT = before taxes; AT = after taxes
—
—
—
—
1st Quarter
AT
BT
2nd Quarter
AT
BT
3rd Quarter
AT
BT
4th Quarter
AT
BT
2018
BT
— 0.4
0.4
1.3
1.3
0.5
0.5
2.2
AT
2.2
— 0.1
0.1
0.4
0.4
0.1
0.1
0.6
0.6
— 0.1
— 0.6
0.1
0.6
0.1
1.8
0.1
1.8
0.3
0.9
0.3
0.9
0.5
3.3
0.5
3.3
—
— 0.2
0.2
0.7
0.7
0.3
0.3
1.2
1.2
• Quarterly charges related to estimated excess costs associated with the ramp-up of new product offerings and
additional expenses related to strategic capacity expansion projects by PE Films of $1.0 million ($0.9 million after
taxes), $0.6 million ($0.5 million after taxes), $0.2 million ($0.1 million after taxes) and $0.3 million ($0.2 million
after taxes) for the first, second, third and fourth quarter, respectively (included in “Cost of goods sold” in the
consolidated statements of income);
• Quarterly charges for professional fees associated with the Terphane Limitada worthless stock deduction, the
impairment of assets of Flexible Packaging Films, determining the effect of the new U.S. federal income tax law, and
a market study for PE Films of $0.3 million ($0.2 million after taxes), $0.4 million ($0.3 million after taxes) and $0.1
million ($0.1 million after taxes) for the first, third and fourth quarter, respectively (included in “Selling, general and
administrative expenses” in the consolidated statements of income);
• Quarterly charges for severance and other employee-related costs associated with restructurings in PE Films of $0.1
million ($0.1 million after taxes), $0.3 million ($0.2 million after taxes) and $0.3 million ($0.3 million after taxes) for
the first, third and fourth quarter, respectively, and in Aluminum Extrusions of $0.1 million ($0.1 million after taxes)
in the first quarter;
• A fourth quarter charge of $0.5 million ($0.4 million after taxes) associated with business development projects
(included in “Selling, general and administrative expense” in the consolidated statements of income and “Corporate
expenses, net” in the statement of net sales and operating profit by segment);
• A fourth quarter charge of $0.5 million ($0.4 million after taxes) for professional fees associated with the
implementation of new accounting guidance and analysis and revisions to the Company’s internal control over
financial reporting (included in “Selling, general and administrative expenses” in the consolidated statements of
income);
92
• A fourth quarter benefit of $0.3 million ($0.2 million after taxes) (included in “Other income (expense), net” in the
consolidated statements of income) from the reversal of a PE Films’ contingent liability related to the acquisition of
Bright View Technologies;
• A fourth quarter charge of $0.1 million ($0.1 million after taxes) and a third quarter charge of $0.2 million ($0.1
million after taxes) related to expected future environmental costs at the aluminum extrusions manufacturing facility
in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income);
• A third quarter charge of $0.1 million ($0.1 million after taxes) related to wind damage that occurred in the third
quarter of 2018 at the aluminum extrusions manufacturing facility in Elkhart, Indiana (included in “Selling, general
and administrative expenses” in the consolidated statements of income); and
• A fourth quarter charge of $0.1 million ($0.1 million after taxes) related to a fire that occurred in the fourth quarter of
2018 at the PE Films facility in Rétság, Hungary (included in “Selling, general and administrative expenses” in the
condensed consolidated statements of income).
Results in 2018 include a net unrealized gain on the Company’s investment in kaléo (included in “Other income
(expense), net” in the consolidated statements of income) of $30.6 million ($23.9 million after taxes). Losses on the
Company’s investment in the Harbinger Fund of $0.2 million ($0.1 million after taxes), $0.1 million ($0.1 million after taxes)
and $0.2 million ($0.2 million after taxes) were recognized in the second, third and fourth quarters of 2018, respectively
(included in “Other income (expense), net” in the consolidated statements of income). See Note 4 for additional information on
investments.
In the third quarter of 2018, the Company recorded a goodwill impairment charge of $46.8 million ($38.2 million after
taxes) for goodwill associated with the acquisition of certain components of PE Films. See Note 8 for additional details.
The Company recorded an unrealized loss on its investment property in Alleghany and Bath Counties, Virginia
(included in “Other income (expense), net” in the consolidated statements of income) of $0.2 million ($0.2 million after taxes)
in the third quarter of 2018. This loss was recognized when the property was sold in the fourth quarter of 2018.
In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produces plastic
films used as components for personal care products (“Shanghai transition”). Production ceased at this plant during the fourth
quarter of 2018. The Company expects to recognize costs associated with exit and disposal activities of $5.0 million, down
from an initial amount of $7.1 million, comprised of: (i) retention, severance and related costs ($2.9 million), (ii) customer-
related costs ($0.5 million), and (iii) legal, asset disposal and other cash costs ($1.6 million). In addition, the Company expects
non-cash asset write-offs and accelerated depreciation of $0.6 million, down from an initial amount 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.
Total expenses associated with the Shanghai transition were $3.3 million ($3.3 million after taxes) in 2018, ($2.1
million included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” and $1.2
million included in “Cost of goods sold” in the consolidated statements of income). Cash expenditures were $2.5 million in
2018.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations
in 2017 (as shown in the segment operating profit table in Note 5) totaled $94.0 million ($79.2 million after taxes), and unless
otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities” in the
consolidated statements of income. Results in 2017 included:
• A fourth quarter charge of $101.3 million ($87.2 million after taxes) related to the impairment of assets at Flexible
Packaging Films. During the fourth quarter of 2017, in conjunction with annual business planning as well as
valuation activities and other efforts, the Company determined that the carrying value of Terphane’s remaining long-
lived assets were impaired (Terphane’s goodwill was written off in 2015). Accordingly, the Company wrote down
these assets based on an enterprise valuation for all of Terphane of approximately $30 million;
•
Second quarter income of $11.9 million ($11.9 million after taxes) related to the settlement of an escrow arrangement
established upon the acquisition of Terphane Holdings, LLC in 2011 (included in “Other income (expense), net” in
the consolidated statements of income). In settling the escrow arrangement, the Company assumed the risk of the
claims (and associated legal fees) against which the escrow previously secured the Company. While the ultimate
amount of such claims is unknown, the Company believes that it is reasonably possible that it could be liable for
some portion of these claims, and currently estimates the amount of such future claims at approximately $3.5 million;
93
•
First quarter charges of $3.3 million ($2.0 million after taxes) related to the acquisition of Futura, i) associated with
accounting adjustments of $1.7 million made to the value of inventory sold by Aluminum Extrusions after its
acquisition of Futura (included in “Cost of goods sold” in the consolidated statements of income), ii) acquisition
costs of $1.5 million and, iii) integration costs of $0.1 million (included in “Selling, general and administrative
expenses” in the consolidated statements of income), offset in the second quarter by pretax income of $0.7 million
($0.5 million after taxes) related to the fair valuation of an earnout provision (included in “Other income (expense),
net” in the consolidated statements of income);
• Quarterly charges related to estimated excess costs associated with the ramp-up of new product offerings and
additional expenses related to strategic capacity expansion projects by PE Films of $1.4 million ($1.3 million after
taxes), $0.9 million ($0.8 million after taxes), $0.6 million ($0.5 million after taxes) and $0.6 million ($0.6 million
after taxes) for the first, second, third and fourth quarter, respectively, and by Aluminum Extrusions of $0.3 million
($0.2 million after taxes), $0.1 million (less than $0.1 million after taxes) and $0.1 million (less than $0.1 million
after taxes) for the first, second, and third quarters, respectively (included in “Cost of goods sold” in the consolidated
statements of income);
• A third quarter charge of $0.2 million ($0.1 million after taxes) associated with the consolidation of domestic PE
Films’ manufacturing facilities for other facility consolidation-related expenses, a second quarter charge of $0.3
million ($0.2 million after taxes), which includes accelerated depreciation of $0.1 million (included in “Cost of goods
sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.2 million
($0.1 million is included in “Cost of goods sold” in the consolidated statements of income), offset by a reversal of
severance and other employee-related costs of $0.3 million ($0.2 million after taxes) and a first quarter charge of $0.7
million ($0.4 million after taxes), which includes severance and other employee-related costs of $0.2 million, asset
impairments of $0.1 million, accelerated depreciation of $0.1 million (included in “Cost of goods sold” in the
consolidated statements of income) and other facility consolidation-related expenses of $0.3 million ($0.2 million is
included in “Cost of goods sold” in the consolidated statements of income);
•
Fourth quarter net gain of $5.1 million ($3.2 million after taxes), related to the explosion that occurred in the second
quarter of 2016 at the aluminum extrusions manufacturing facility in Newnan, Georgia, which includes the
recognition of a gain on the involuntary conversion of an asset of $5.3 million for insurance proceeds used for the
replacement of capital equipment (included in “Other income (expense), net” in the consolidated statements of
income), partially offset by excess production costs of $0.2 million ($0.1 million after taxes) (included in “Cost of
goods sold” in the consolidated statements of income); a second quarter net gain on the expected recovery of excess
production costs of $0.9 million ($0.6 million after taxes) incurred in prior periods for which recovery from insurance
carriers was not previously considered to be reasonably assured (included in “Cost of goods sold” in the consolidated
statements of income); and a first quarter net loss of $0.4 million ($0.2 million after taxes), which includes $0.3
million for other costs for which recovery from insurance carriers was not considered to be reasonably assured
(reversed in the second quarter) and legal and consulting fees of $0.1 million (included in “Selling, general and
administrative expenses” in the consolidated statements of income);
• A fourth quarter charge of $1.5 million ($1.0 million after taxes) and a first quarter charge of $0.4 million ($0.2
million after taxes) related to expected future environmental costs at the aluminum extrusions manufacturing
facilities in Carthage, Tennessee and Newnan, Georgia (included in “Cost of goods sold” in the consolidated
statements of income);
• A fourth quarter charge of $0.8 million ($0.5 million after taxes) at Corporate related to expected future
environmental costs at various shutdown facilities (included in “Cost of goods sold” in the consolidated statements of
income);
• A fourth quarter charge of $1.3 million ($0.8 million after taxes), a third quarter charge of $0.2 million ($0.1 million
after taxes), a second quarter charge of $0.6 million ($0.4 million after taxes), and a first quarter charge of $0.3
million ($0.2 million after taxes), associated with business development projects (included in “Selling, general and
administrative expense” in the consolidated statements of income and “Corporate expenses, net” in the statement of
net sales and operating profit by segment);
• A fourth quarter charge of $0.1 million (less than $0.1 million after taxes) and a third quarter charge of $0.1 million
(less than $0.1 million after taxes) for severance and other employee-related costs associated with restructurings in
PE Films, and a fourth quarter charge of $0.1 million ($0.1 million after taxes) for severance and other employee-
related costs associated with restructurings in Aluminum Extrusions and a fourth quarter charge of $0.1 million ($0.1
million after taxes) and a first quarter charge of $0.3 million ($0.2 million after taxes) for severance and other
employee-related costs associated with restructurings in Corporate (included in “Corporate expenses, net” in the
statement of net sales and operating profit by segment);
94
•
Fourth quarter charges of $0.4 million ($0.2 million after taxes) for professional fees associated with the Terphane
Limitada worthless stock deduction and impairment of assets of Flexible Packaging Films;
• A fourth quarter charge of $0.3 million ($0.3 million after taxes) associated with asset impairments at PE Films’
Hungary facility; and
• A third quarter charge of $0.2 million ($0.1 million after taxes) associated with the settlement of customer claims and
other costs related to the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana.
Results in 2017 include a net unrealized gain on the Company’s investment in kaléo (included in “Other income
(expense), net” in the consolidated statements of income) of $33.8 million ($24.0 million after taxes). See Note 4 for additional
information on investments.
Total expenses associated with the North American facility consolidation project were $0.8 million ($0.5 million after
taxes) in 2017 (included in “Cost of goods sold” in the consolidated statements of income) and the total expenses for the project
since inception were $7.3 million. Cash expenditures for the restructuring were $1.9 million in 2017, which included capital
expenditures of $0.1 million. Total cash expenditures since project inception were $16.0 million through December 31, 2017,
which includes $11.2 million for capital expenditures. Additional cash payments for remaining accrued costs of $0.4 million
were paid in 2018.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations
in 2016 (as shown in the segment operating profit table in Note 5) totaled $6.1 million ($3.9 million after taxes), and unless
otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities” in the
consolidated statements of income. Results in 2016 included:
•
Fourth quarter net loss $0.7 million ($0.4 million after taxes), related to the explosion that occurred in the second
quarter of 2016 at the aluminum extrusions manufacturing facility in Newnan, Georgia, which consists of excess
production costs for which recovery from insurance is not assured of $0.6 million ($0.4 million after taxes) (included
in “Cost of goods sold” in the consolidated statements of income) and legal and consulting fees of $0.1 million ($0.1
million after taxes) (included in “Selling, general and administrative expenses” in the consolidated statements of
income), third quarter net income of $1.7 million ($1.1 million after taxes), which includes the recognition of a gain
of $1.9 million ($1.2 million after taxes) for a portion of the insurance recoveries approved by the insurer to begin the
replacement of capital equipment, offset by the impairment of equipment damaged by the explosion of $0.3 million
($0.2 million after taxes) (net amount included in “Other income (expense), net” in the consolidated statements of
income), and the reversal of an accrual for other costs related to the explosion not recoverable from insurance of $0.1
million ($0.0 million after taxes) (included in “Selling, general and administrative expenses” in the consolidated
statements of income), and second quarter net loss of $0.6 million ($0.4 million after taxes) for other costs related to
the explosion not recoverable from insurance (included in “Selling, general and administrative expenses” in the
consolidated statements of income);
• Quarterly charges associated with the consolidation of domestic PE Films’ manufacturing facilities, which includes
categories of expenses shown in the table below (Accelerated depreciation and a portion of Other facility
consolidation-related costs as noted in the table below are included in “Cost of goods sold” in the consolidated
statements of income):
($ in millions)
Severance
Asset impairments
Accelerated depreciation
Other facility consolidation-related costs
Total
Other facility consolidation-related costs
included in “Cost of goods sold” in the
consolidated statements of income
Note: BT = before taxes; AT = after taxes
1st Quarter
AT
BT
2nd Quarter
AT
BT
3rd Quarter
AT
BT
4th Quarter
AT
BT
2016
BT
AT
0.3
0.3
0.1
0.5
1.1
0.2
0.2
0.1
0.3
0.7
0.4
0.1
0.1
0.8
1.3
0.2
0.1
0.1
0.5
0.9
0.3
0.1
0.1
0.6
1.1
0.2
—
0.1
0.4
0.7
0.3
—
0.3
0.2
0.8
0.2
1.2
— 0.4
0.2
0.6
0.1
0.5
2.0
4.3
0.8
0.3
0.4
1.3
2.8
0.4
0.2
0.7
0.4
0.4
0.2
0.2
0.1
1.6
1.0
95
• A fourth quarter charge of $0.6 million ($0.4 million after taxes) associated with the acquisition of Futura by Bonnell
Aluminum (included in “Selling, general and administrative expenses” in the consolidated statements of income);
• A fourth quarter charge of $0.5 million ($0.3 million after taxes) related to expected future environmental costs at the
aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the
consolidated statements of income);
• A first quarter charge of $0.4 million ($0.2 million after taxes) associated with a non-recurring business development
project (included in “Selling, general and administrative expense” in the consolidated statements of income and
“Corporate expenses, net” in the statement of net sales and operating profit by segment);
• A third quarter charge of $0.3 million ($0.2 million after taxes) for severance and other employee-related costs
associated with restructurings in PE Films ($0.1 million) ($0.1 million after taxes) and Corporate ($0.2 million) ($0.1
million after taxes) (included in “Corporate expenses, net” in the statement of net sales and operating profit by
segment);
• A fourth quarter charge of $0.3 million ($0.2 million after taxes) related to contingencies associated with the
application of prior period Brazilian value-added tax credits in Flexible Packaging Films (included in “Cost of goods
sold” in the consolidated statements of income);
• A fourth quarter charge of $0.2 million ($0.1 million after taxes) associated with asset impairments in PE Films;
• A fourth quarter gain of $0.1 million ($0.0 million after taxes) related to contractual indemnifications associated with
the anticipated settlement of a Terphane pre-acquisition contingency (included in “Other income (expense), net” in
the consolidated statements of income); and
• A fourth quarter gain of $0.1 million ($0.1 million after taxes) associated with the shutdown of the aluminum
extrusions manufacturing facility in Kentland, Indiana, which includes a pretax gain of $0.2 million ($0.1 million
after taxes) related to the sale of the property, partially offset by pretax charges of $0.1 million ($0.0 million after
taxes) associated with the shutdown of this facility and a third quarter charge of $0.3 million ($0.2 million after
taxes) associated with shutdown costs.
Results in 2016 include a net unrealized gain on the Company’s investment in kaléo (included in “Other income
(expense), net” in the consolidated statements of income) of $1.6 million ($1.2 million after taxes). The Company recorded an
unrealized loss on its investment property in Alleghany and Bath Counties, Virginia (included in “Other income (expense), net”
in the consolidated statements of income) of $1.0 million ($0.7 million after taxes) in the fourth quarter of 2016. See Note 4
for additional information on investments.
18 CONTINGENCIES
Tredegar is involved in various stages of investigation and remediation relating to environmental matters at certain current
and former plant locations. Where the Company has determined the nature and scope of any required environmental
remediation activity, estimates of cleanup costs have been obtained and accrued. As efforts continue to maintain compliance
with applicable environmental laws and regulations, additional contingencies may be identified. If additional contingencies are
identified, the Company’s practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of
the cost of remediation, and perform remediation. The Company does not believe that additional costs that could arise from
those activities will have a material adverse effect on its financial position. However, those costs could have a material adverse
effect on its financial condition, results of operations and cash flows at that time.
The Company is involved in various other legal actions arising in the normal course of business. After taking into
consideration the relevant information, the Company believes that it has sufficiently accrued for probable losses and that the
actions will not have a material adverse effect on its financial position. However, the resolution of the actions in a future period
could have a material adverse effect on quarterly or annual operating results at that time.
From time to time, the Company enters into transactions with third parties in connection with the sale of assets or
businesses in which it agrees to indemnify the buyers or third parties involved in the transaction, or in which the sellers or third
parties involved in the transaction agree to indemnify Tredegar, for certain liabilities or risks related to the assets or business.
Also, in the ordinary course of its business, the Company may enter into agreements with third parties for the sale of goods or
services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for
indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable
agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a
deductible or basket. For these reasons, Tredegar is unable to estimate the maximum amount of the potential future liability
under the indemnity provisions of these agreements. The Company does, however, accrue for losses for any known contingent
96
liability, including those that may arise from indemnification provisions, when future payment is probable and the amount is
reasonably estimable. The Company discloses contingent liabilities if the probability of loss is reasonably possible and
material.
In 2011, Tredegar was notified by U.S. Customs and Border Protection (“U.S. Customs”) that certain film products
exported by Terphane Ltda. to the U.S. since November 6, 2008 could be subject to duties associated with an anti-dumping
duty order on imported PET films from Brazil. The Company contested the applicability of these anti-dumping duties to the
films exported by Terphane Ltda., and it filed a request with the U.S. Department of Commerce (“Commerce”) for clarification
about whether the film products at issue are within the scope of the anti-dumping duty order. In December 2014, the U.S.
International Trade Commission separately voted to revoke the anti-dumping duty order on imported PET films from Brazil.
On February 20, 2015, certain U.S. producers of PET films filed a summons with the U.S. Court of International Trade to
appeal the determination by the U.S. International Trade Commission. After lengthy litigation, on June 19, 2018, the U.S.
Court of International Trade ruled in favor of Terphane Ltda. by upholding the determination by Commerce that Terphane
Ltda.’s films are outside the scope of the anti-dumping duty order. The plaintiffs chose not to appeal the U.S. Court of
International Trade’s opinion affirming Commerce’s scope ruling. On September 4, 2018, the plaintiffs filed to dismiss their
appeal of the December 2014 decision that revoked the anti-dumping duty order on PET films from Brazil. The U.S. Court of
International Trade issued an Order of Dismissal on September 5, 2018. The litigation has now ended.
97
19 SELECTED QUARTERLY FINANCIAL DATA
Tredegar Corporation and Subsidiaries
(In Thousands, Except Per-Share Amounts)
(Unaudited)
For the year ended December 31, 2018
Sales
Gross profit
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Shares used to compute earnings (loss) per share:
Basic
Diluted
For the year ended December 31, 2017
Sales
Gross profit
Net income
Earnings per share:
Basic
Diluted
Shares used to compute earnings per share:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
258,711
46,732
18,165
0.55
0.55
32,982
32,988
221,026
32,959
3,703
0.11
0.11
32,920
32,957
$
$
$
$
$
$
$
$
263,759
44,652
14,722
0.45
0.44
33,074
33,108
247,347
44,149
44,204
1.34
1.34
32,961
33,051
267,294
$
275,707
40,478
(34,201) $
47,826
26,157
(1.03) $
(1.03) $
33,110
33,110
247,121
43,992
8,274
0.25
0.25
32,954
32,954
$
$
$
$
0.79
0.79
33,103
33,112
245,836
38,998
(17,929)
(0.54)
(0.54)
32,948
32,949
The 2017 Gross profit amounts have changed from the amounts disclosed in the prior year due to the retrospective
adoption of ASU 2017-07, which resulted in the separate presentation of “Pension and postretirement benefits” expense in the
consolidated statements of income. Historically the Company had reported a portion of its pension and postretirement benefit
expenses in cost of goods sold, a component used in the calculation of Gross profit.
Item 16. FORM 10-K SUMMARY
Not Applicable.
98
EXHIBIT INDEX
2.1
2.2
2.3
3.1
3.1.1
3.1.2
3.1.3
3.2
4.1
4.1.1
4.1.2
10.1
*10.2
Stock Purchase Agreement, made as of October 1, 2012, by and among The William L. Bonnell Company, Inc.,
AACOA, Inc., the shareholders of AACOA, Inc., and Daniel G. Formsma, as the representative of the shareholders
of AACOA, Inc. (filed as Exhibit 2.1 to Tredegar Corporation’s (“Tredegar’s”) Current Report on Form 8-K (File
No. 1-10258), filed on October 3, 2012, and incorporated herein by reference). (Schedules and exhibits have been
omitted pursuant to Item 601(b)(2) of Regulation S-K. Tredegar agrees to furnish supplementally to the Securities
and Exchange Commission a copy of any omitted exhibit or schedule upon request)
Membership Interest Purchase Agreement, dated as of October 14, 2011, by and among TAC Holdings, LLC,
Gaucho Holdings B.V. and Tredegar Film Products Corporation (filed as Exhibit 2.1 to Tredegar’s Current Report
on Form 8-K (File No. 1-10258), filed on October 19, 2011, and incorporated herein by reference). (Schedules and
exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Tredegar agrees to furnish supplementally
to the Securities and Exchange Commission a copy of any omitted exhibit or schedule upon request)
Stock Purchase Agreement, dated as of February 1, 2017, by and among Futura Industries Corporation, Futura
Corporation, Susan D. Johnson, The Susan D. Johnson Trust, Ken Wells, The William L. Bonnell Company, Inc.,
and, in his capacity as Sellers’ Representative, Brent F. Lloyd (filed as Exhibit 2.1 of Tredegar’s Current Report on
Form 8-K (File No. 1-10258), filed on February 2, 2017, and incorporated herein by reference). (Schedules and
exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Tredegar agrees to furnish
supplementally to the Securities and Exchange Commission a copy of any omitted exhibit or schedule upon
request.)
Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.1 to Tredegar’s Annual Report on
Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and incorporated herein by reference)
Articles of Amendment to Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.3 to
Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and
incorporated herein by reference)
Articles of Amendment to Amended and Restated Articles of Incorporation of Tredegar, as of May 24, 2013 (filed
as Exhibit 3.1 to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on May 29, 2013 and
incorporated herein by reference)
Articles of Amendment to Amended and Restated Articles of Incorporation of Tredegar Corporation, as of May 4,
2016 (filed as Exhibit 3.1 to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on May 6, 2016, and
incorporated herein by reference).
Amended and Restated Bylaws of Tredegar (filed as Exhibit 3.1 to Tredegar’s Current Report on Form 8-K (File
No. 1-10258), filed on February 24, 2017, and incorporated herein by reference)
Credit Agreement, dated as of March 1, 2016, among Tredegar Corporation, as borrower, the lenders named therein,
JPMorgan Chase Bank, N.A., as administrative agent, SunTrust Bank, Citizens Bank of Pennsylvania and PNC
Bank, National Association, as co-syndication agents, and U.S. Bank National Association, BMO Harris Bank,
N.A., Bank of America, N.A. and Wells Fargo Bank, National Association, as co-documentation agents, and the
other lenders party thereto (filed as Exhibit 4.1 to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed
on March 3, 2016, and incorporated herein by reference).
Guaranty, dated as of March 1, 2016, by and among the subsidiaries of Tredegar Corporation listed on the signature
pages thereto in favor of JPMorgan Chase Bank, N.A., as administrative agent, for the ratable benefit of the Holders
of Guaranteed Obligations (as defined therein) (filed as Exhibit 4.2 to Tredegar’s Current Report on Form 8-K (File
No. 1-10258), filed on March 3, 2016, and incorporated herein by reference).
Pledge and Security Agreement, dated as of March 1, 2016, by and among Tredegar Corporation and the
subsidiaries of Tredegar Corporation listed on the signature pages thereto and JPMorgan Chase Bank, N.A., as
administrative agent, for the ratable benefit of the Secured Parties (as defined therein) (filed as Exhibit 4.3 to
Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on March 3, 2016, and incorporated herein by
reference).
Reorganization and Distribution Agreement, dated as of June 1, 1989, between Tredegar and Ethyl Corporation
(filed as Exhibit 10.1 to Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December
31, 2004, and incorporated herein by reference)
Employee Benefits Agreement, dated as of June 1, 1989, between Tredegar and Ethyl Corporation (filed as Exhibit
10.2 to Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and
incorporated herein by reference)
99
10.3
10.4
*10.5
Tax Sharing Agreement, dated as of June 1, 1989, between Tredegar and Ethyl Corporation (filed as Exhibit 10.3 to
Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and
incorporated herein by reference)
Indemnification Agreement, dated as of June 1, 1989, between Tredegar and Ethyl Corporation (filed as Exhibit
10.4 to Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and
incorporated herein by reference)
Tredegar Industries, Inc. Retirement Benefit Restoration Plan (filed as Exhibit 10.7 to Tredegar’s Annual Report on
Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and incorporated herein by reference)
*10.5.1 Amendment to the Tredegar Industries, Inc. Retirement Benefit Restoration Plan (filed as Exhibit 10.7.1 to
Tredegar’s Annual Report on Form 10-K (File No. 1-10258) for the year ended December 31, 2004, and
incorporated herein by reference)
*10.6
Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan (filed as Exhibit 10.6 to Tredegar’s Annual Report
on Form 10-K (File No. 1-10258) for the year ended December 31, 2013, and incorporated herein by reference)
*10.6.1 Resolutions of the Executive Committee of the Board of Directors of Tredegar Corporation adopted on December
28, 2004 (effective as of December 31, 2004) amending the Tredegar Corporation Retirement Savings Plan Benefit
Restoration Plan (filed as Exhibit 10.9.1 to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on
December 30, 2004, and incorporated herein by reference)
*10.7
*10.8
*10.9
*10.10
10.11
*10.12
Tredegar 2004 Equity Incentive Plan as Amended and Restated Effective March 27, 2009 (filed as Annex 1 to
Tredegar’s Definitive Proxy Statement on Schedule 14A (File No. 1-10258) filed on April 14, 2009 and
incorporated herein by reference)
Form of Notice of Nonstatutory Stock Option Grant and Nonstatutory Stock Option Terms and Conditions (filed as
Exhibit 10.3 to Tredegar’s Current Report on Form 8-K (File No. 1-10258) filed on February 27, 2013, and
incorporated herein by reference)
Form of Notice of Stock Unit Award and Stock Unit Award Terms and Conditions (filed as Exhibit 10.1 to
Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on March 1, 2016, and incorporated herein by
reference)
Form of Notice of Stock Award and Stock Award Terms and Conditions (filed as Exhibit 10.2 to Tredegar’s Current
Report on Form 8-K (File No. 1-10258), filed on March 1, 2016, and incorporated herein by reference)
Agreement, dated as of February 19, 2014, by and among Tredegar Corporation, John D. Gottwald, William M.
Gottwald and Floyd D. Gottwald, Jr. (filed as Exhibit 10.1 to Tredegar’s Current Report on Form 8-K (File No.
1-10258), filed on February 20, 2014, and incorporated herein by reference)
Severance Agreement with D. Andrew Edwards, dated June 25, 2015 (filed as Exhibit 10.3 to Tredegar’s Current
Report on Form 8-K (file No. 1-10258) filed on June 29, 2015, and incorporated herein by reference)
*10.12.1 First Amendment to Severance Agreement with D. Andrew Edwards, dated February 25, 2016 (filed as Exhibit 10.3
to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on March 1, 2016, and incorporated herein by
reference)
*10.13
*10.14
*10.15
+21
+23.1
+23.2
+31.1
Severance Agreement with Michael J. Schewel, dated May 9, 2016 (filed as Exhibit 10.17 to Tredegar’s Annual
Report on Form 10-K/A (File No. 1-10258) for the year ended December 31, 2016, and incorporated herein by
reference)
Tredegar Corporation 2018 Equity Incentive Plan (filed as Annex A to Tredegar’s Definitive Proxy Statement on
Schedule 14A (File No. 1-10258) filed on March 22, 2018, and incorporated herein by reference)
Form of Notice of Nonstatutory Stock Option Grant and Nonstatutory Stock Option Terms and Conditions (filed as
Exhibit 10.1 to Tredegar’s Current Report on Form 8-K (File No. 1-10258), filed on May 7, 2018, and incorporated
herein by reference)
Subsidiaries of Tredegar
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Consent of PricewaterhouseCoopers, LLP, Independent Registered Public Accounting Firm
Certification of John D. Gottwald, President and Chief Executive Officer of Tredegar Corporation, pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
100
+31.2
+32.1
+32.2
Certification of D. Andrew Edwards, Vice President and Chief Financial Officer (Principal Financial Officer) of
Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of John D. Gottwald, President and Chief Executive Officer of Tredegar Corporation, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of D. Andrew Edwards, Vice President and Chief Financial Officer (Principal Financial Officer) of
Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
+101
XBRL Instance Document and Related Items
*
+
Denotes compensatory plans or arrangements or management contracts.
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 18, 2019
TREDEGAR CORPORATION
(Registrant)
By
/s/ John D. Gottwald
John D. Gottwald
President and Chief Executive Officer
101
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 18, 2019.
Signature
Title
/s/ John D. Gottwald
(John D. Gottwald)
/s/ D. Andrew Edwards
(D. Andrew Edwards)
/s/ Frasier W. Brickhouse, II
(Frasier W. Brickhouse, II)
/s/ William M. Gottwald
(William M. Gottwald)
/s/ George C. Freeman, III
(George C. Freeman, III)
/s/ Kenneth R. Newsome
(Kenneth R. Newsome)
/s/ Gregory A. Pratt
(Gregory A. Pratt)
/s/ Thomas G. Snead, Jr.
(Thomas G. Snead, Jr.)
/s/ John M. Steitz
(John M. Steitz)
/s/ Carl E. Tack, III
(Carl E. Tack, III)
/s/ Anne G. Waleski
(Anne G. Waleski)
President, Chief Executive Officer and Director
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial Officer)
Corporate Treasurer and Controller
(Principal Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
102
APPENDIX – FOOTNOTES
1 Operating profit (loss) from ongoing operations is used by management to assess profitability. A reconciliation of
operating profit (loss) from ongoing operations to net income by segment is shown below:
(In millions)
PE Films:
Operating profit from ongoing operations
Plant shutdowns, asset impairments and restructurings, gain
from sale of assets and other items
Goodwill Impairment charge
Flexible Packaging Films:
Operating profit (loss) from ongoing operations
Terphane asset impairment loss
Plant shutdowns, other asset impairments and restructurings,
gain from sale of assets and other items
Aluminum Extrusions:
Operating profit (loss) from ongoing operations
Plant shutdowns, asset impairments and restructurings, gain
from sale of assets and other items
Total
Interest income
Interest expense
Unrealized loss on investment property
Unrealized gain associated with the investment in kaléo
Stock option-based compensation expense
Corporate expenses, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Years Ended December 31,
2018
2017
$
36.2
$
41.5
(5.9)
(46.8)
9.9
-
(0.1)
48.6
(4.9)
-
(2.6)
(101.3)
11.9
43.5
(0.5)
41.4
0.4
5.7
(0.2)
30.6
1.2
28.9
36.3
11.5
24.8
$
0.3
(11.6)
0.2
6.2
-
33.8
0.3
30.9
(14.9)
(53.2)
38.3
$
The after-tax effects of losses associated with plant shutdowns, asset impairments and restructurings and gains or
losses from the sale of assets and other items (which includes unrealized gains and losses on non-operating
investments) have been presented separately and removed from earnings per share as reported under generally
accepted accounting principles in the United States (GAAP) to determine Tredegar’s presentation of earnings per
share from ongoing operations. Earnings per share from ongoing operations is a key financial and analytical
measure used by Tredegar to gauge the operating performance of its ongoing operations. It is not intended to
represent the stand-alone results for Tredegar’s ongoing operations under GAAP and should not be considered as
an alternative to earnings per share as defined by GAAP. It excludes items that Tredegar believes do not relate to
its ongoing operations. Reconciliations of net income to as reported under GAAP to net income from ongoing
operations and diluted earnings per share under GAAP to diluted earnings per share from ongoing operations are
shown below:
(In millions)
Net income
After-tax effects of:
Terphane asset impairment loss
Tax benefit from Terphane worthless stock deductions
Unrealized gain associated with the investment in kaléo
(Gains) losses associated with plant shutdowns, asset impairments
and restructurings
(Gains) losses from sale of assets and other
Goodwill impairment charge
Net income from ongoing operations
Diluted earnings per share as reported
After tax effects per diluted share of:
Terphane asset impairment loss
Tax benefit from Terphane worthless stock deductions
Unrealized gain associated with investment in kaléo
(Gains) losses associated with plant shutdowns, other asset impairments
and restructurings
(Gains) losses from sale of assets and other
Goodwill impairment charge
Diluted earnings per share from ongoing operations
Years Ended December 31,
2018
$
24.8
2017
$
38.3
-
-
(23.9)
87.2
(61.4)
(24.0)
3.8
4.4
38.2
47.3
$
1.3
(11.3)
-
30.1
$
Years Ended December 31,
2018
$ 0.75
2017
$ 1.16
- 2.65
- (1.86)
(0.72) (0.73)
0.12
0.04
0.13 (0.35)
-
1.15
$ 0.91
$ 1.43
APPENDIX – FOOTNOTES, CONTINUED
2 Net sales is the measure of sales use by management to assess performance. It is not intended to represent revenue
as defined by GAAP. Net sales includes freight charges as a reduction from revenue and is the measure used by
management to evaluate sales. A reconciliation of sales as reported on the consolidated statements of income to
net sales reported for segment purposes is presented below.
(In millions)
Flexible
Packaging
Films
Aluminum
Extrusions
PE Films
Consolidated
Personal Care
Year Ended December 31, 2018
Sales
Less: Freight
$
342.4
9.9
$
130.2
6.3
$
592.9
19.8
$
1,065.5
36.0
$
236.2
9.1
Net sales
$
332.5
$
123.8
$
573.1
$
1,029.4
$
227.1
Year Ended December 31, 2017
Sales
Less: Freight
$
364.7
12.2
$
114.1
5.7
$
482.5
15.7
$
961.3
33.7
$
258.2
11.7
Net sales
$
352.5
$
108.3
$
466.8
$
927.6
$
246.4
Year Ended December 31, 2016
Sales
Less: Freight
$
343.0
11.9
$
113.7
5.6
$
371.7
11.6
$
828.3
29.1
$
251.9
11.4
Net sales
$
331.1
$
108.0
$
360.1
$
799.2
$
240.6
Year Ended December 31, 2015
Sales
Less: Freight
$
397.2
11.7
$
110.8
5.5
$
388.1
12.7
$
896.1
29.8
$
294.4
6.7
Net sales
$
385.5
$
105.3
$
375.5
$
866.3
$
287.8
Year Ended December 31, 2014
Sales
Less: Freight
$
475.1
10.8
$
119.4
5.1
$
357.3
12.9
$
951.8
28.8
$
374.0
6.5
Net sales
$
464.3
$
114.3
$
344.3
$
923.0
$
367.5
Year Ended December 31, 2013
Sales
Less: Freight
$
508.1
12.7
$
130.9
5.1
$
320.4
10.9
$
959.3
28.6
$
393.7
7.9
Net sales
$
495.4
$
125.8
$
309.5
$
930.7
$
401.6
APPENDIX – FOOTNOTES, CONTINUED
3 Ongoing earnings before interest, income taxes and depreciation and amortization (“EBITDA”) by business
segment represents operating profit (loss) from ongoing operations plus depreciation and amortization by business
segment. Both ongoing operating profit (loss) and EBITDA from ongoing operations are used by Tredegar
management to measure segment performance.
A reconciliation of operating profit (loss) from ongoing operations to ongoing EBITDA is shown below.
(In millions)
PE
Films
Flexible
Packaging
Films
Aluminum
Extrusions
Less:
Corporate
Overhead
Total
Year Ended December 31, 2018
Operating profit (loss) from ongoing operations
Add back depreciation & amortization
Less accelerated depreciation associated with plant consolidation (0.6)
Adjusted EBITDA
$ 36.2 $ 9.9 $ 48.6 $ (26.8) $ 67.9
15.5 1.3 16.9 0.2 33.8
- - - (0.6)
$ 51.1 $ 11.2 $ 65.5 $ (26.7) $ 101.0
Year Ended December 31, 2017
Operating profit (loss) from ongoing operations
Add back depreciation & amortization
Less accelerated depreciation associated with plant consolidation (0.3)
Adjusted EBITDA
$ 41.5 $ (2.6) $ 43.5 $ (26.9) $ 55.4
14.7 10.4 15.0 0.2 40.3
- - - (0.3)
$ 55.9 $ 7.8 $ 58.5 $ (26.8) $ 95.4
Year Ended December 31, 2016
Operating profit (loss) from ongoing operations
Add back depreciation & amortization
Less accelerated depreciation associated with plant consolidation (0.6)
Adjusted EBITDA
$ 26.3 $ 1.8 $ 37.8 $ (29.1) $ 36.8
13.6 9.5 9.2 0.1 32.5
- - - (0.6)
$ 39.3 $ 11.3 $ 47.0 $ (28.9) $ 68.7
Year Ended December 31, 2015
Operating profit (loss) from ongoing operations
Add back depreciation & amortization
Less accelerated depreciation associated with plant consolidation (0.4)
Adjusted EBITDA
$ 48.3 $ 5.5 $ 30.4 $ (28.7) $ 55.5
15.5 9.7 9.7 0.1 35.0
- - - (0.4)
$ 63.4 $ 15.2 $ 40.1 $ (28.6) $ 90.1
4 Net debt is a non-GAAP financial measure that is not intended to represent debt as defined by GAAP, but is
utilized by management in evaluating financial leverage and equity valuation. A calculation of net debt is shown
below:
(In millions)
Debt
Less: Cash and cash equivalents
Net debt
2018
$ 101.5
34.4
$ 67.1
2017
$ 152.0
36.5
$ 115.5
December 31,
2016
$ 95.0
29.5
$ 65.5
2015
$ 104.0
44.2
$ 59.8
2014
$ 137.3
50.1
$ 87.2
5 Due to rounding, numbers presented throughout this presentation may not add up precisely to the totals provided
and percentages may not precisely reflect the absolute figures.
Corporate Information
CORPORATE OFFICERS AND OPERATING COMPANY MANAGEMENT
John D. Gottwald
President and
Chief Executive Officer
D. Andrew Edwards
Vice President and
Chief Financial Officer
Michael J. Schewel
Vice President, General Counsel
and Corporate Secretary
W. Brook Hamilton
President, Bonnell Aluminum
Jose Bosco Silveira, Jr.
President, Flexible
Packaging Films
DIRECTORS
William M. Gottwald
Chairman of the Board
Tredegar Corporation
Retired
Albemarle Corporation
George C. Freeman, III 3, 4, 5
President and
Chief Executive Officer
Universal Corporation
John D. Gottwald2
President and
Chief Executive Officer
Tredegar Corporation
Jennifer Aspell
President,
Bright View Technologies
Arijit (Bapi) DasGupta
President, Surface Protection
J. Stephen Prince
President, Personal Care
PE Films
Kenneth R. Newsome2, 3, 5
President and
Chief Executive Officer
Markel Food Group
John M. Steitz2
Incoming President and Chief
Executive Officer
Tredegar Corporation
Gregory A. Pratt1, 4, 5
Chairman of the Board
Carpenter Technology
Corporation
Thomas G. Snead, Jr.1, 5
Retired
Wellpoint, Inc.
Carl E. Tack, III1, 4, 5
Clinical Professor
Mason School of Business
College of William and Mary
Anne G. Waleski1, 3, 5
Executive Vice President
Markel Corporation
1) Audit Committee
2) Executive Committee
3) Executive Compensation
Committee
4) Nominating and Governance
Committee
5) Independent Director
SHAREHOLDER INFORMATION
CORPORATE
HEADQUARTERS
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 804-330-1000
Website: www.tredegar.com
NUMBER OF EMPLOYEES
3,200
STOCK LISTING
New York Stock Exchange
Ticker Symbol: TG
Additional shareholder
information is available
on the investor section
of the Tredegar website
@ www.tredegar.com/
investors/IR.
OPERATING COMPANY LOCATIONS
Domestic Manufacturing
International Manufacturing
Technical Centers
PE FILMS
Division Headquarters
Richmond, Virginia
Lake Zurich, Illinois
Terre Haute, Indiana
Durham, North Carolina
Pottsville, Pennsylvania
FLEXIBLE PACKAGING
Division Headquarters
São Paulo, Brazil
ALUMINUM EXTRUSIONS
Division Headquarters
Newnan, Georgia
Bloomfield, New York
Newnan, Georgia
Elkhart, Indiana
Niles, Michigan
Carthage, Tennessee
Clearfield, Utah
Guangzhou, China
Kerkrade, Netherlands
Pune, India
Rétság, Hungary
São Paulo, Brazil
Cabo de Santo
Agostinho, Brazil
Durham, North Carolina
Richmond, Virginia
Terre Haute, Indiana
Bloomfield, New York
Cabo de Santo
Agostinho, Brazil
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
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