10-K 1 tg-20181231x10k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
x
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
 
54-1497771
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1100 Boulders Parkway,
Richmond, Virginia
 
23225
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 804-330-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
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  x
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  x
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  x 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  x    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 x.
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
 
o
Accelerated filer
x
Smaller reporting company
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Emerging growth company
 
o
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  x
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
 
 
 
Page
 
 
 
 
Part I
 
 
 
Item 1.
Business
 
1-4
Item 1A.
Risk Factors
 
5-10
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceedings
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Part II
 
 
 
Item 5.
Market for Tredegar’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
12-13
Item 6.
Selected Financial Data
 
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
 
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
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
 
 
 





PART I
Item 1.
BUSINESS
Description of Business
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 *
 
2018
 
2017
 
2016
Personal Care
68%
 
70%
 
72%
Surface Protection
30%
 
28%
 
25%
Bright View
2%
 
2%
 
3%
Total
100%
 
100%
 
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
  
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
 
 
 
Building & construction - residential
 
Shower and tub enclosures, railing and support systems, venetian blinds, swimming pools and storm shutters
 
 
 
Automotive
  
Automotive and light truck structural components, spare parts, after-market automotive accessories, grills for heavy trucks, travel trailers and recreation vehicles
 
 
 
Consumer durables
  
Furniture, pleasure boats, refrigerators and freezers, appliances and sporting goods
 
 
 
Machinery & equipment
  
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*
 
2018
 
2017
 
2016
Building and construction:
 
 
 
 
 
Nonresidential
51%
 
51%
 
59%
Residential
8%
 
9%
 
6%
Automotive
8%
 
8%
 
9%
Specialty:
 
 
 
 
 
Consumer durables
12%
 
12%
 
11%
Machinery & equipment
7%
 
7%
 
6%
Electrical
7%
 
7%
 
3%
Distribution
7%
 
6%
 
6%
 
 
 
 
 
 
Total
100%
 
100%
 
100%
*Includes Futura as of its acquisition date of February 15, 2017.
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.
  
Locations Outside the U.S.
  
Principal Operations
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)
  
Guangzhou, China
Kerkrade, The Netherlands
Pune, India
Rétság, Hungary
São Paulo, Brazil
  
Production of plastic films, elastics and laminate materials
Flexible Packaging Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
Bloomfield, New York (technical center and production facility)

  
Cabo de Santo Agostinho, Brazil
  
Production of PET-based films
Aluminum Extrusions
Locations in the U.S.
  
 
  
Principal Operations
Carthage, Tennessee
Elkhart, Indiana
Newnan, Georgia
Niles, Michigan
Clearfield, Utah (leased)
  
 
  
Production of aluminum extrusions, fabrication and finishing
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.
 
2018
 
2017
 
High
 
Low
 
High
 
Low
First quarter
$
20.25

 
$
15.60

 
$
25.00

 
$
16.50

Second quarter
24.60

 
16.99

 
17.65

 
14.90

Third quarter
26.25

 
20.60

 
18.35

 
14.85

Fourth quarter
21.56

 
15.00

 
20.20

 
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


chart-a6f3d8d3ad7755fdacc.jpg
*$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



Item 6.
SELECTED FINANCIAL DATA
The tables that follow present certain selected financial and segment information for the five years ended December 31, 2018.

FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2018
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
1,065,471

 
 
$
961,330

  
 
$
828,341

  
 
$
896,177

  
 
$
951,826

  
Other income (expense), net (k)
30,459

(a) 
 
51,713

(b) 
 
2,381

(c) 
 
(20,113
)
 
 
(6,697
)
(f) 
 
1,095,930

  
 
1,013,043

  
 
830,722

  
 
876,064

  
 
945,129

  
Cost of goods sold (m)
849,756

(a) 
 
767,550

(b) 
 
659,867

(c) 
 
715,744

(e) 
 
772,897

(f) 
Freight
36,027

  
 
33,683

  
 
29,069

  
 
29,838

  
 
28,793

  
Selling, general & administrative expenses (m)
85,283

(a) 
 
83,386

(b) 
 
73,466

(c) 
 
69,384

(e) 
 
68,110

 
Research and development expenses
18,707

  
 
18,287

  
 
19,122

  
 
16,173

  
 
12,147

  
Amortization of identifiable intangibles
3,976

  
 
6,198

  
 
3,978

  
 
4,073

  
 
5,395

  
Pension and postretirement benefits (m)
10,406

 
 
10,193

 
 
11,047

 
 
12,242

 
 
6,632

 
Interest expense
5,702

  
 
6,170

  
 
3,806

  
 
3,502

  
 
2,713

  
Asset impairments and costs associated with exit and disposal activities
2,913

(a) 
 
102,488

(b) 
 
2,684

(c) 
 
3,850

(e) 
 
3,026

(f) 
Goodwill impairment charge
46,792

(d)
 

 
 

 
 
44,465

(d)
 

  
 
1,059,562

  
 
1,027,955

  
 
803,039

  
 
899,271

  
 
899,713

  
Income (loss) from continuing operations before income taxes
36,368

  
 
(14,912
)
  
 
27,683

  
 
(23,207
)
  
 
45,416

  
Income tax expense (benefit)
11,526

 
 
(53,163
)
 
 
3,217

 
 
8,928

 
 
9,387

 
Income (loss) from continuing operations
24,842

  
 
38,251

  
 
24,466

  
 
(32,135
)
  
 
36,029

 
Income (loss) from discontinued operations, net of tax

 
 

 
 

 
 

 
 
850

(g) 
Net income (loss)
$
24,842

  
 
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
  
 
$
36,879

 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.75

  
 
$
1.16

  
 
$
0.75

  
 
$
(0.99
)
 
 
$
1.11

  
Discontinued operations

 
 

 
 

 
 

 
 
0.02

(g) 
Net income (loss)
$
0.75

  
 
$
1.16

  
 
$
0.75

  
 
$
(0.99
)
 
 
$
1.13

  
Refer to Notes to Financial Tables that follow these tables.

14



FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share Data:
 
 
 
 
 
 
 
 
 
 
Equity per share (l)
$
10.70

 
$
10.41

 
$
9.44

 
$
8.35

 
$
11.47

 
Cash dividends declared per share
$
0.44

 
$
0.44

 
$
0.44

 
$
0.42

 
$
0.34

 
Weighted average common shares outstanding during the period
33,068

 
32,946

 
32,762

 
32,578

 
32,302

 
Shares used to compute diluted earnings (loss) per share during the period
33,092

 
32,951

 
32,775

 
32,578

 
32,554

 
Shares outstanding at end of period
33,176

 
33,017

 
32,934

 
32,682

 
32,422

 
Closing market price per share:
 
 
 
 
 
 
 
 
 
 
High
$
26.25

 
$
25.00

 
$
25.55

 
$
23.76

 
$
28.45

 
Low
$
15.00

 
$
14.85

 
$
11.68

 
$
12.63

 
$
16.76

 
End of year
$
15.86

 
$
19.20

 
$
24.00

 
$
13.62

 
$
22.49

 
Total return to shareholders (h)
(15.1
)%
 
(18.2
)%
 
79.4
%
 
(37.6
)%
 
(20.8
)%
 
Financial Position:
 
 
 
 
 
 
 
 
 
 
Total assets
$
707,373

 
$
755,743

 
$
651,162

 
$
623,260

 
$
788,626

 
Cash and cash equivalents
$
34,397

 
$
36,491

 
$
29,511

 
$
44,156

 
$
50,056

 
Debt
$
101,500

 
$
152,000

 
$
95,000

 
$
104,000

 
$
137,250

 
Shareholders’ equity (net book value)
$
354,857

 
$
343,780

 
$
310,783

 
$
272,748

 
$
372,029

 
Equity market capitalization (i)
$
526,172

 
$
633,935

 
$
790,411

 
$
445,131

 
$
729,173

 
Refer to Notes to Financial Tables that follow these tables.


15



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (j)
 
 
 
 
 
 
 
 
 
Years Ended December 31
2018
 
2017
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
332,488

 
$
352,459

 
$
331,146

 
$
385,550

 
$
464,339

Flexible Packaging Films
123,830

 
108,355

 
108,028

 
105,332

 
114,348

Aluminum Extrusions
573,126

 
466,833

 
360,098

 
375,457

 
344,346

Total net sales
1,029,444

 
927,647

 
799,272

 
866,339

 
923,033

Add back freight
36,027

 
33,683

 
29,069

 
29,838

 
28,793

Sales as shown in Consolidated Statements of Income
$
1,065,471

 
$
961,330

 
$
828,341

 
$
896,177

 
$
951,826

 
 
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
 
 
 
As of December 31
2018
 
2017
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
231,720

 
$
289,514

 
$
278,558

 
$
270,236

 
$
283,606

Flexible Packaging Films
58,964

 
49,915

 
156,836

 
146,253

 
262,604

Aluminum Extrusions
281,372

 
268,127

 
147,639

 
136,935

 
143,328

Subtotal
572,056

 
607,556

 
583,033

 
553,424

 
689,538

General corporate
100,920

 
111,696

 
38,618

 
25,680

 
49,032

Cash and cash equivalents
34,397

 
36,491

 
29,511

 
44,156

 
50,056

Total
$
707,373

 
$
755,743

 
$
651,162

 
$
623,260

 
$
788,626

Refer to Notes to Financial Tables that follow these tables.

16



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31
2018
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
$
36,181

 
 
$
41,546

  
 
$
26,312

  
 
$
48,275

  
 
$
60,971

  
Plant shutdowns, asset impairments, restructurings and other
(5,905
)
(a) 
 
(4,905
)
(b)
 
(4,602
)
(c) 
 
(4,180
)
(e) 
 
(12,236
)
(f) 
       Goodwill impairment charge
(46,792
)
(d)
 

 
 

 
 

 
 

 
Flexible Packaging Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
9,892

 
 
(2,626
)
 
 
1,774

 
 
5,453

 
 
(2,917
)
 
Plant shutdowns, asset impairments, restructurings and other
(45
)
(a) 
 
(89,398
)
(b)
 
(214
)
(c)
 
(185
)
(e) 
 
(591
)
(f) 
Goodwill impairment charge

 
 

 
 

 
 
(44,465
)
(d)
 

 
Aluminum Extrusions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
48,613

  
 
43,454

  
 
37,794

  
 
30,432

  
 
25,664

 
Plant shutdowns, asset impairments, restructurings and other
(505
)
(a) 
 
321

(b)
 
(741
)
(c) 
 
(708
)
(e) 
 
(976
)
(f) 
Total
41,439

  
 
(11,608
)
  
 
60,323

  
 
34,622

  
 
69,915

  
Interest income
369

  
 
209

  
 
261

  
 
294

  
 
588

  
Interest expense
5,702

  
 
6,170

  
 
3,806

  
 
3,502

  
 
2,713

  
Gain (loss) on investment in kaléo accounted for under the fair value method (k)
30,600

 
 
33,800

 
 
1,600

 
 
(20,500
)
 
 
2,000

 
Gain (loss) on sale of investment property
(38
)
 
 

 
 

 
 

 
 
1,208

(f) 
Unrealized loss on investment property
186

 
 

 
 
1,032

 
 

 
 

 
Stock option-based compensation expense
1,221

 
 
264

  
 
56

 
 
483

  
 
1,272

  
Corporate expenses, net
28,893

(a) 
 
30,879

(b)
 
29,607

(c) 
 
33,638

(e) 
 
24,310

(f) 
Income (loss) from continuing operations before income taxes
36,368

 
 
(14,912
)
 
 
27,683

  
 
(23,207
)
  
 
45,416

  
Income tax expense (benefit)
11,526

 
 
(53,163
)
 
 
3,217

 
 
8,928

 
 
9,387

 
Income (loss) from continuing operations
24,842

  
 
38,251

  
 
24,466

  
 
(32,135
)
  
 
36,029

 
Income (loss) from discontinued operations, net of tax

 
 

 
 

 
 

 
 
850

(g)
Net income (loss)
$
24,842

  
 
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
  
 
$
36,879

  
Refer to Notes to Financial Tables that follow these tables.

17



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

Depreciation and Amortization
 
 
 
 
 
 
 
 
 
Years Ended December 31
2018
 
2017
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
15,513

 
$
14,609

 
$
13,653

 
$
15,480

 
$
21,399

Flexible Packaging Films
1,262

 
10,443

 
9,505

 
9,697

 
9,331

Aluminum Extrusions
16,866

 
15,070

 
9,173

 
9,698

 
9,974

Subtotal
33,641

 
40,122

 
32,331

 
34,875

 
40,704

General corporate
163

 
155

 
141

 
107

 
114

Total depreciation and amortization expense
$
33,804

 
$
40,277

 
$
32,472

 
$
34,982

 
$
40,818

 
 
 
 
 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
 
 
 
 
Years Ended December 31
2018
 
2017
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
21,998

 
$
15,029

 
$
25,759

 
$
21,218

 
$
17,000

Flexible Packaging Films
5,423

 
3,619

 
3,391

 
3,489

 
21,806

Aluminum Extrusions
12,966

 
25,653

 
15,918

 
8,124

 
6,092

Subtotal
40,387

 
44,301

 
45,068

 
32,831

 
44,898

General corporate
427

 
61

 
389

 

 

Total capital expenditures
$
40,814

 
$
44,362

 
$
45,457

 
$
32,831

 
$
44,898

Refer to Notes to Financial Tables that follow these tables.

18



NOTES TO FINANCIAL TABLES
(a)
Plant shutdowns, asset impairments, restructurings and other charges for 2018 include charges of $3.3 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related costs of $2.2 million ($0.4 million included in “Cost of goods sold” in the consolidated statements of income), accelerated depreciation of $0.6 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.5 million ($0.1 million included in “Cost of goods sold” in the consolidated statements of income); charges of $2.0 million for estimated excess costs associated with the ramp-up of new product offerings and additional expenses for strategic capacity expansion projects (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.8 million 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 (included in “Selling, general and administrative expense” in the consolidated statements of income); charges of $0.8 million for severance and other employee-related costs associated with restructurings in PE Films ($0.7 million) and Aluminum Extrusions ($0.1 million); charges of $0.5 million associated with a business development projects (included in “Selling, general and administrative” in the consolidated statements of income); charges of $0.3 million related to expected environmental costs at certain Aluminum Extrusions manufacturing facilities (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.5 million for professional fees associated with the implementation of new accounting guidance and analysis and revision to the Company’s internal control over financial reporting (included in “Selling, general and administrative” in the consolidated statements of income); income of $0.3 million from the reversal of a PE Films’ contingent liability related to the acquisition of Bright View Technologies (included in “Other income (expense), net” in the consolidated statements of income); charges of $0.1 million 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 expense” in the consolidated statements of income); and charges of $0.1 million related to a fire that occurred in the fourth quarter of 2018 at the PE Films facility in Retsag, Hungary (included in “Selling, general and administrative expense” in the consolidated statements of income).
(b)
Plant shutdowns, asset impairments, restructurings and other charges for 2017 include charges of $101.3 million related to the impairment of assets of Flexible Packaging Films; income of $11.9 million related to the settlement of an escrow arrangement established upon the acquisition of Terphane in 2011 (included in “Other income (expense), net” in the consolidated statements of income); charges of $3.3 million related to the acquisition of Futura ($1.7 million included in “Cost of goods sold” and $1.6 million included in “Selling, general and administrative expense” in the consolidated statements of income), offset by pretax income of $0.7 million related to the fair valuation of an earnout provision (included in “Other income (expense), net” in the condensed consolidated statements of income); charges of $4.1 million for estimated excess costs associated with the ramp-up of new product offerings and additional expenses for strategic capacity expansion projects (included in “Cost of goods sold” in the consolidated statements of income); income of $5.6 million related to the explosion that occurred in the second quarter of 2016 at the aluminum extrusions manufacturing facility in Newnan, Georgia, including the recognition of a gain of $5.3 million for a portion of the insurance recoveries received from the insurer for the replacement of capital equipment, plus the recovery of excess production costs incurred in 2016 for which recovery from insurance carriers was not previously considered to be reasonably assured, net of other nonrecoverable costs, of $0.3 million ($0.4 million benefit included in “Cost of goods sold” in the consolidated statements of income and $0.1 million charge included in “Selling, general and administrative expenses” in the consolidated statements of income); charges of $0.8 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes asset impairments of $0.1 million, accelerated depreciation of $0.3 million and other facility consolidation-related expenses of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income) offset by income of $0.1 million related to a reduction of severance and other employee-related accrued costs; charges of $2.4 million associated with business development projects (included in “Selling, general and administrative” in the consolidated statements of income); charges of $1.9 million related to expected future environmental costs at certain Aluminum Extrusions manufacturing facilities (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.8 million at Corporate related to expected future environmental costs at various shutdown facilities (included in “Cost of goods sold” in the consolidated statements of income); charge of $0.7 million for severance and other employee-related costs associated with restructurings in PE Films ($0.2 million), Aluminum Extrusions ($0.1 million) and Corporate ($0.4 million, included in “Corporate expenses, net” in the statements of net sales and operating profit by segment); charges of $0.4 million for professional fees associated with the Terphane Limitada worthless stock deduction and impairment of assets of Flexible Packaging Films; charges of $0.3 million associated with asset impairments in PE Films; and charges of $0.2 million associated with the settlement of customer claims and the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana.
(c)
Plant shutdowns, asset impairments, restructurings and other charges for 2016 include income of $0.4 million 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 of $1.9 million 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 (net amount included in “Other income (expense), net” in the consolidated statements of income) and other costs related to the explosion that are not recoverable from insurance of $0.6 million (included in “Selling, general and administrative”) and excess production costs for which recovery from insurance is not assured of $0.6 million (included in “Cost of goods sold” in the consolidated statements of income); charges of $4.3 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes severance and other employee-related costs of $1.2 million, asset impairments of $0.4 million, accelerated depreciation of $0.6 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $2.0 million ($1.6 million is included in “Cost of goods sold” in the consolidated statements of income); charges of $0.4 million associated with a business development project included in “Selling, general and administrative” in the consolidated statements of income); charges of $0.3 million for severance and other employee-related costs associated with restructurings in PE Films ($0.1 million) and Corporate ($0.2 million); charges of $0.6 million associated with the acquisition of Futura (included in “Selling, general and administrative” in the consolidated statements of income); charges of $0.5 million related to expected future environmental costs at the Company’s aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.3 million related to the settlement of a tax dispute in the Flexible Packaging Films segment (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.2 million associated with asset impairments in PE Films; gain of $0.1 million from the settlement of a Terphane pre-acquisition contingency (included in “Other income (expense), net” in the consolidated statements of income); charge of $0.1 million from the sale of the aluminum extrusions manufacturing facility in Kentland, Indiana, which includes a pretax gain of $0.2 million, related to the sale of property, offset by pretax charges of $0.3 million associated with the shutdown of this facility.
(d)
Results for 2018 included a goodwill impairment charge of $46.8 million ($38.2 million after taxes) recognized in PE Films in the third quarter of 2018 upon completion of an impairment analysis performed as of September 30, 2018. Results for 2015 included a goodwill impairment charge of $44.5 million ($44.5 million after taxes) recognized in Flexible Packaging Films in the third quarter of 2015 upon completion of an impairment analysis performed as of September 30, 2015.
(e)
Plant shutdowns, asset impairments, restructurings and other charges for 2015 include charges of $3.9 million (included in “Selling, general and administrative” in the consolidated statements of income) for severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers; charges of $2.2 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes severance and other employee-related costs of $0.8 million, asset impairments of $0.4 million, accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.6 million ($0.1 million is included in “Cost of goods sold” in the consolidated statements of income); charge of $2.2 million for severance and other employee-related costs associated with restructurings in PE Films ($2.0 million) ($0.4 million included in “Selling, general and administrative expense” in the consolidated statement of income), Flexible Packaging Films ($0.2 million), Aluminum Extrusions ($35,000) and Corporate ($26,000); charges of $1.0 million associated with a business development project (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.4 million associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana; and charges of $0.3 million 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).
(f)
Plant shutdowns, asset impairments, restructurings and other for 2014 include a charge of $10.0 million (included in “Other income (expense), net” in the consolidated statements of income) associated with the one-time, lump sum license payment to 3M Company (“3M”) after the Company settled all litigation issues associated with a patent infringement complaint; charges of $2.3 million for severance and other employee-related costs in connection with restructurings in PE Films ($1.7 million), Flexible Packaging Films ($0.6 million) and Aluminum Extrusions ($31,000); charges of $0.9 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income); charges of $0.7 million associated with the shutdown of the film products manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.4 million and asset impairment and other shutdown-related charges of $0.3 million; gain of $0.1 million related to the sale of previously shutdown film products manufacturing facility in LaGrange, Georgia (included in “Other income (expense), net” in the consolidated statements of income); and charges of $54,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. The unrealized loss of $0.8 million on the Company’s investment in Harbinger Capital Partners Special Situations Fund L.P. (“Harbinger”) and the gain of $1.2 million on sale on a portion the Company’s investment property in Alleghany and Bath County, Virginia in 2014 are included in “Other income (expense), net” in the consolidated statements of income.
(g)
On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada. All historical results for this business have been reflected as discontinued operations. In 2014, accruals for indemnifications under the purchase agreement were adjusted, resulting in income from discontinued operations of $0.9 million.
(h)
Total return to shareholders is defined as the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.
(i)
Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(j)
Net sales represent gross sales less freight. Net sales is the measure used by the chief operating decision maker for purposes of assessing performance.
(k)
The gains and losses on the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income.
(l)
Equity per share is computed by dividing shareholders’ equity at year end by the shares outstanding at end of period.
(m)
For the years ended December 31, 2014 to 2017, 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.

19



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.
Executive Summary
General
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)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2018
 
2017
 
% Change
Sales volume (lbs)
123,583

 
138,999

 
(11.1
)%
Net sales
$
332,488

 
$
352,459

 
(5.7
)%
Operating profit from ongoing operations
$
36,181

 
$
41,546

 
(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)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2018
 
2017
 
% Change
Sales volume (lbs)
98,994

 
89,325

 
10.8
%
Net sales
$
123,830

 
$
108,355

 
14.3
%
Operating profit (loss) from ongoing operations
$
9,892

 
$
(2,626
)
 
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)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2018
 
2017
 
% Change
Sales volume (lbs)*
190,696

 
176,269

 
8.2
%
Net sales
$
573,126

 
$
466,833

 
22.8
%
Operating profit from ongoing operations
$
48,613

 
$
43,454

 
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)
 
December 31, 2018
 
December 31, 2017
Debt
 
$
101.5

 
$
152.0

Less: Cash and cash equivalents
 
34.4

 
36.5

Net debt
 
$
67.1

 
$
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.
Recently Issued Accounting Standards
Refer to the section Recently Issued Accounting Standards in Note 1 for information concerning the effect of recently issued accounting pronouncements.
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
$
121.3

 
$
175.0

Average interest rate
3.8
%
 
3.0
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
121.3

 
$
175.0

Average interest rate
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)
Year Ended
December 31
 
 
 
2018
 
2017
 
Variance
PE Films
$
231,720

 
$
289,514

 
$
(57,794
)
Flexible Packaging Films
58,964

 
49,915

 
9,049

Aluminum Extrusions
281,372

 
268,127

 
13,245

      Subtotal
572,056

 
607,556

 
(35,500
)
General corporate
100,920

 
111,696

 
(10,776
)
Cash and cash equivalents
34,397

 
36,491

 
(2,094
)
      Total
$
707,373

 
$
755,743

 
$
(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
$
175.0

 
$
103.5

Average interest rate
3.0
%
 
2.3
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
175.0

 
$
103.5

Average interest rate
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)
Year Ended
December 31
 
 
 
2017
 
2016
 
Variance
PE Films
$
289,514

 
$
278,558

 
$
10,956

Flexible Packaging Films
49,915

 
156,836

 
(106,921
)
Aluminum Extrusions
268,127

 
147,639

 
120,488

      Subtotal
607,556

 
583,033

 
24,523

General corporate
111,696

 
38,618

 
73,078

Cash and cash equivalents
36,491

 
29,511

 
6,980

      Total
$
755,743

 
$
651,162

 
$
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)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)
138,999

 
139,020

 
 %
Net sales
$
352,459

 
$
331,146

 
6.4
 %
Operating profit from ongoing operations
$
41,546

 
$
26,312

 
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)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)
89,325

 
89,706

 
(0.4
)%
Net sales
$
108,355

 
$
108,028

 
0.3
 %
Operating profit (loss) from ongoing operations
$
(2,626
)
 
$
1,774

 
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: 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)*
176,269

 
172,986

 
1.9
%
Net sales
$
466,833

 
$
360,098

 
29.6
%
Operating profit from ongoing operations
$
43,454

 
$
37,794

 
15.0
%
*Excludes sales volume for Futura, which was acquired on February 15, 2017.
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);

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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.

Financial Condition
Assets and Liabilities
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

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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.

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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
$
34,397

Debt:
 
$400 million revolving credit agreement maturing March 1, 2021
101,500

Other debt

Total debt
101,500

Debt net of cash and cash equivalents
67,103

Shareholders’ equity
354,857

Net capitalization
$
421,960

Indebtedness as defined in revolving credit agreement:
 
Total debt
$
101,500

Face value of letters of credit
2,686

Capital lease
29

Other

Indebtedness
$
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
Credit Spread
Over LIBOR
 
Commitment
Fee
> 3.5x but <= 4.0x
250

 
45

> 3.0x but <= 3.5x
225

 
40

> 2.0x but <= 3.0x
200

 
35

> 1.0x but <= 2.0x
175

 
30

<= 1.0x
150

 
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.

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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
$
24,842

Plus:
 
After-tax losses related to discontinued operations

Total income tax expense for continuing operations
11,526

Interest expense
5,702

Depreciation and amortization expense for continuing operations
33,804

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)
55,160

Charges related to stock option grants and awards accounted for under the fair value-based method
1,221

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
(369
)
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
(250
)
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
(30,600
)
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
101,036

Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions and asset dispositions)