10-Q 1 tg-20190630x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
Trading Symbol(s)
Name of each exchange on which registered
Common stock, no par value
TG
New York Stock Exchange
 
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 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 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.
Large accelerated filer
 
¨
Accelerated filer
x
Smaller reporting company
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨ 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of Common Stock, no par value, outstanding as of August 2, 2019: 33,353,082




PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,660

 
$
34,397

Restricted cash
5,109

 

Accounts and other receivables, net of allowance for doubtful accounts and sales returns of $3,206 in 2019 and $2,937 in 2018
116,370

 
124,727

Income taxes recoverable
2,923

 
6,783

Inventories
93,359

 
93,810

Prepaid expenses and other
8,501

 
9,564

Total current assets
260,922

 
269,281

Property, plant and equipment, at cost
795,045

 
793,072

Less accumulated depreciation
(559,330
)
 
(564,703
)
Net property, plant and equipment
235,715

 
228,369

Right-of-use leased assets
19,610

 

Investment in kaléo (cost basis of $7,500)
91,200

 
84,600

Identifiable intangible assets, net
34,530

 
36,295

Goodwill
81,404

 
81,404

Deferred income taxes
1,343

 
3,412

Other assets
5,376

 
4,012

Total assets
$
730,100

 
$
707,373

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
106,871

 
$
112,758

Accrued expenses
46,479

 
42,495

Lease liability, short-term
2,650

 

Total current liabilities
156,000

 
155,253

Lease liability, long-term
18,526

 

Long-term debt
73,000

 
101,500

Pension and other postretirement benefit obligations, net
83,965

 
88,124

Deferred income taxes
4,402

 

Other noncurrent liabilities
5,931

 
7,639

Total liabilities
341,824

 
352,516

Shareholders’ equity:
 
 
 
Common stock, no par value (issued and outstanding - 33,353,082 shares at June 30, 2019 and 33,176,024 shares at December 31, 2018)
41,227

 
38,892

Common stock held in trust for savings restoration plan (73,853 shares at June 30, 2019 and 72,883 shares at December 31, 2018)
(1,575
)
 
(1,559
)
Accumulated other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(97,223
)
 
(96,940
)
Gain (loss) on derivative financial instruments
(1,333
)
 
(1,601
)
Pension and other post-retirement benefit adjustments
(77,289
)
 
(81,446
)
Retained earnings
524,469

 
497,511

Total shareholders’ equity
388,276

 
354,857

Total liabilities and shareholders’ equity
$
730,100

 
$
707,373


2



See accompanying notes to financial statements.

3



Tredegar Corporation
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues and other items:
 
 
 
 
 
 
 
Sales
$
248,248

 
$
263,759

 
$
496,714

 
$
522,470

Other income (expense), net
7,096

 
5,857

 
24,206

 
14,089

 
255,344

 
269,616

 
520,920

 
536,559

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
192,581

 
210,667

 
393,235

 
413,856

Freight
8,887

 
8,440

 
17,907

 
17,229

Selling, general and administrative
23,864

 
20,946

 
45,875

 
42,775

Research and development
5,451

 
4,646

 
9,936

 
8,957

Amortization of identifiable intangibles
890

 
1,025

 
1,782

 
2,054

Pension and postretirement benefits
2,416

 
2,578

 
4,831

 
5,156

Interest expense
1,263

 
1,577

 
2,495

 
3,221

Asset impairments and costs associated with exit and disposal activities, net of adjustments
1,075

 
468

 
2,131

 
590

Total
236,427

 
250,347

 
478,192

 
493,838

Income before income taxes
18,917

 
19,269

 
42,728

 
42,721

Income taxes
4,440

 
4,547

 
8,467

 
9,834

Net income
$
14,477

 
$
14,722

 
$
34,261

 
$
32,887

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.45

 
$
1.03

 
$
1.00

Diluted
$
0.44

 
$
0.44

 
$
1.03

 
$
1.00

Shares used to compute earnings per share:
 
 
 
 
 
 
 
Basic
33,270

 
33,074

 
33,197

 
33,028

Diluted
33,278

 
33,108

 
33,203

 
33,048

Dividends per share
$
0.11

 
$
0.11

 
$
0.22

 
$
0.22

See accompanying notes to financial statements.


4



Tredegar Corporation
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)

 
Three Months Ended June 30,
 
2019
 
2018
Net income
$
14,477

 
$
14,722

  Other comprehensive income (loss):
 
 
 
Unrealized foreign currency translation adjustment (net of tax of $0 in 2019 and tax of $0 in 2018)
507

 
(10,811
)
Derivative financial instruments adjustment (net of tax benefit of $134 in 2019 and tax of $164 in 2018)
621

 
(905
)
Amortization of prior service costs and net gains or losses (net of tax of $593 in 2019 and tax of $761 in 2018)
2,079

 
2,611

Other comprehensive income (loss)
3,207

 
(9,105
)
Comprehensive income (loss)
$
17,684

 
$
5,617

 
 
 
 
 
Six Months Ended June 30,
 
2019
 
2018
Net income
$
34,261

 
$
32,887

  Other comprehensive income (loss):
 
 
 
Unrealized foreign currency translation adjustment (net of tax of $0 in 2019 and tax benefit of $0 in 2018)
(283
)
 
(8,905
)
Derivative financial instruments adjustment (net of tax benefit of $51 in 2019 and tax of $20 in 2018)
268

 
(1,190
)
Amortization of prior service costs and net gains or losses (net of tax of $1,185 in 2019 and tax of $1,523 in 2018)
4,158

 
5,223

Other comprehensive income (loss)
4,143

 
(4,872
)
Comprehensive income (loss)
$
38,404

 
$
28,015

See accompanying notes to financial statements.


5



Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
34,261

 
$
32,887

Adjustments for noncash items:
 
 
 
Depreciation
14,465

 
14,688

Amortization of identifiable intangibles
1,782

 
2,054

Amortization of right-of-use lease asset
1,270

 

Deferred income taxes
5,339

 
8,996

Accrued pension and post-retirement benefits
4,831

 
5,156

(Gain)/loss on investment in kaléo accounted for under the fair value method
(6,600
)
 
(14,000
)
(Gain)/loss on asset impairments and divestitures
522

 

Net (gain)/loss on disposal of assets
(11
)
 
(109
)
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Accounts and other receivables
8,471

 
(15,205
)
Inventories
702

 
(810
)
Income taxes recoverable/payable
3,860

 
26,277

Prepaid expenses and other
1,081

 
(2,057
)
Accounts payable and accrued expenses
(566
)
 
13,879

Lease liability
(1,306
)
 

Pension and postretirement benefit plan contributions
(3,648
)
 
(2,912
)
Other, net
4,043

 
2,926

Net cash provided by operating activities
68,496

 
71,770

Cash flows from investing activities:
 
 
 
Capital expenditures
(24,251
)
 
(14,528
)
Return of escrowed funds relating to acquisition earn-out

 
4,250

Proceeds from the sale of assets and other
22

 
1,095

Net cash used in investing activities
(24,229
)
 
(9,183
)
Cash flows from financing activities:
 
 
 
Borrowings
30,000

 
28,000

Debt principal payments
(58,500
)
 
(57,000
)
Dividends paid
(7,320
)
 
(7,293
)
Debt financing costs
(1,757
)
 

Proceeds from exercise of stock options and other
(854
)
 
926

Net cash used in financing activities
(38,431
)
 
(35,367
)
Effect of exchange rate changes on cash
(464
)
 
(1,390
)
Increase in cash, cash equivalents and restricted cash
5,372

 
25,830

Cash, cash equivalents and restricted cash at beginning of period
34,397

 
36,491

Cash, cash equivalents and restricted cash at end of period
$
39,769

 
$
62,321

See accompanying notes to financial statements.


6



Tredegar Corporation
Consolidated Statement of Shareholders’ Equity
(In Thousands, Except Share and Per Share Data)
(Unaudited)

The following summarizes the changes in shareholders’ equity for the six month period ended June 30, 2019:
 
 
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
Common
Stock
 
Retained
Earnings
 
Trust for
Savings
Restoration
Plan
 
Foreign
Currency
Translation
 
Gain
(Loss) on
Derivative
Financial
Instruments
 
Pension &
Other
Post-retirement
Benefit
Adjustment
 
Total
Shareholders’
Equity
Balance at January 1, 2019
$
38,892

 
$
497,511

 
$
(1,559
)
 
$
(96,940
)
 
$
(1,601
)
 
$
(81,446
)
 
$
354,857

Net income

 
34,261

 

 

 

 

 
34,261

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment (net of tax of $0)

 

 

 
(283
)
 

 

 
(283
)
Derivative financial instruments adjustment (net of tax benefit of $51)

 

 

 

 
268

 

 
268

Amortization of prior service costs and net gains or losses (net of tax of $1,185)

 

 

 

 

 
4,158

 
4,158

Cash dividends declared ($0.22 per share)

 
(7,320
)
 

 

 

 

 
(7,320
)
Stock-based compensation expense
3,189

 

 

 

 

 

 
3,189

Issued upon exercise of stock options & other
(854
)
 

 

 

 

 

 
(854
)
Tredegar common stock purchased by trust for savings restoration plan

 
16

 
(16
)
 

 

 

 

Balance at June 30, 2019
$
41,227

 
$
524,468

 
$
(1,575
)
 
$
(97,223
)
 
$
(1,333
)
 
$
(77,288
)
 
$
388,276



7



The following summarizes the changes in shareholders’ equity for the six month period ended June 30, 2018:
 
 
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
Common
Stock
 
Retained
Earnings
 
Trust for
Savings
Restoration
Plan
 
Foreign
Currency
Translation
 
Gain
(Loss) on
Derivative
Financial
Instruments
 
Pension &
Other
Post-retirement
Benefit
Adjustment
 
Total
Shareholders’
Equity
Balance at January 1, 2018
$
34,747

 
$
487,230

 
$
(1,528
)
 
$
(86,178
)
 
$
459

 
$
(90,950
)
 
$
343,780

Net income

 
32,887

 

 

 

 

 
32,887

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment (net of tax of $0)

 

 

 
(8,905
)
 

 

 
(8,905
)
Derivative financial instruments adjustment (net of tax of $20)

 

 

 

 
(1,190
)
 

 
(1,190
)
Amortization of prior service costs and net gains or losses (net of tax of $1,523)

 

 

 

 

 
5,223

 
5,223

Cash dividends declared ($0.22 per share)

 
(7,293
)
 

 

 

 

 
(7,293
)
Stock-based compensation expense
1,981

 

 

 

 

 

 
1,981

Issued upon exercise of stock options & other
926

 

 

 

 

 

 
926

Tredegar common stock purchased by trust for savings restoration plan

 
16

 
(16
)
 

 

 

 

Balance at June 30, 2018
$
37,654

 
$
512,840

 
$
(1,544
)
 
$
(95,083
)
 
$
(731
)
 
$
(85,727
)
 
$
367,409

See accompanying notes to financial statements.


8



TREDEGAR CORPORATION
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
 
1
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of June 30, 2019, the consolidated results of operations for the three and six months ended June 30, 2019 and 2018, the consolidated cash flows for the six months ended June 30, 2019 and 2018, and the consolidated changes in shareholders’ equity for the six months ended June 30, 2019 and 2018, in accordance with U.S. generally accepted accounting principles (“GAAP”). All such adjustments, unless otherwise detailed in the notes to the consolidated interim financial statements, are deemed to be of a normal, recurring nature.
The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis.  As such, the fiscal second quarter for 2019 and 2018 for this segment references 13-week periods ended June 30, 2019 and June 24, 2018, respectively.  The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated financial results.
The financial position data as of December 31, 2018 that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2018 Form 10-K. The results of operations for the three and six months ended June 30, 2019, are not necessarily indicative of the results to be expected for the full year. Certain prior year balances have been reclassified to conform with current year presentation.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the consolidated statements of cash flows:
 
 
June 30,
 
December 31,
(In thousands)
2019
 
2018
Cash and cash equivalents
$
34,660

 
$
34,397

Restricted cash
5,109

 

      Total cash, cash equivalents and restricted cash
$
39,769

 
$
34,397

Restricted cash as of June 30, 2019 consists of a deposit received in the second quarter of 2019 for the sale of the PE Films idle manufacturing facility in Shanghai, China, which sale closed in the third quarter of 2019. An amount offsetting the deposit is recorded as a current liability in accrued expenses. Chinese government regulations limit the use of these funds to the purposes of the liquidating entity until the completion of the liquidation process, which the Company expects to be concluded within the next twelve months.
2
REVENUE RECOGNITION
As of June 30, 2019 and December 31, 2018, accounts receivable and other receivables, net, were $116.4 million and $124.7 million, respectively, made up of the following:

9



 
 
June 30,
 
December 31,
(In thousands)
2019
 
2018
Customer receivables
$
115,522

 
$
122,182

Other accounts and notes receivable
4,054

 
5,482

      Total accounts and other receivables
119,576

 
127,664

Less: Allowance for bad debts and sales returns
(3,206
)
 
(2,937
)
Total accounts and other receivables, net
$
116,370

 
$
124,727

For the three and six months ended June 30, 2019, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of June 30, 2019. Payment terms start from the date of satisfaction of the performance obligation and vary from COD (cash on delivery) to 120 days. The Company’s contracts generally include one performance obligation, which is satisfied at a point in time.
For the three and six months ended June 30, 2019, revenue recognized from performance obligations related to prior periods (for example, changes in transaction price), was not material.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding i) revenue pertaining to contracts that have an original expected duration of one year or less, ii) contracts where revenue is recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to materially impact the Company’s financial results. 
3
GAINS AND LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS, SALES OF ASSETS AND OTHER ITEMS
Plant shutdowns, asset impairments, restructurings, sales of assets and other items are shown in the net sales and operating profit by segment table in Note 11 and are also included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted below.
Plant shutdowns, asset impairments, restructurings and other items in the second quarter of 2019 include:
Pretax charges of $2.0 million for professional fees associated with remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting, business development activities, and implementation of new accounting guidance (included in “Selling, general and administrative expenses” in the consolidated statements of income);
Pretax charges of $1.0 million associated with the consolidation of certain PE Films manufacturing activities in the U.S. and Europe for its Personal Care business component, including the eventual shutdown of the facility in Lake Zurich, Illinois and the transfer of its production of elastics materials to the new elastics production lines in Terre Haute, Indiana.  The pretax charges are comprised of severance and other employee-related accrued costs of $0.4 million ($0.3 million for Lake Zurich), asset impairments of $0.3 million ($0.2 million for Lake Zurich) and accelerated depreciation of $0.3 million for Lake Zurich (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.1 million for severance and other employee-related costs associated with other restructuring activities in PE Films;
Pretax charges of $0.2 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $0.3 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of other facility-related costs.
Plant shutdowns, asset impairments, restructurings and other items in the first six months of 2019 include:
Pretax charges of $2.9 million for professional fees associated with remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting, business development activities, and implementation of new accounting guidance (included in “Selling, general and administrative expenses” in the consolidated statements of income);

10



Pretax charges of $1.0 million associated with the consolidation of certain PE Films manufacturing activities in the U.S. and Europe for its Personal Care business component, including the eventual shutdown of the facility in Lake Zurich, Illinois and the transfer of its production of elastics materials to the new elastics production lines in Terre Haute, Indiana.  The pretax charges are comprised of severance and other employee-related accrued costs of $0.4 million ($0.3 million for Lake Zurich), asset impairments of $0.3 million ($0.2 million for Lake Zurich) and accelerated depreciation of $0.3 million for Lake Zurich (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.4 million for the write-off of a Personal Care production line at PE Films’ Guangzhou, China facility;
Pretax charges of $0.5 million for severance and other employee-related costs associated with restructurings in PE Films;
Pretax charges of $0.4 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $0.5 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of other facility-related costs.
Plant shutdowns, asset impairments, restructurings and other items in the second quarter of 2018 include:
Pretax charges of $0.6 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $0.7 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related accrued costs of $0.4 million, accelerated depreciation of $0.1 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.2 million.
Plant shutdowns, asset impairments, restructurings and other items in the first six months of 2018 include:
Pretax charges of $1.5 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.3 million for professional fees associated with the Terphane Limitada worthless stock deduction, the impairment of assets of Flexible Packaging Films and determining the effect of the new U.S. federal income tax law (included in “Selling, general and administrative expenses” in the consolidated statements of income); and
Pretax charges of $0.7 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related accrued costs of $0.4 million, accelerated depreciation of 0.1 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.2 million.
Results on the Company’s investment in kaléo, Inc. (“kaléo”), which is accounted for under the fair value method, in the second quarter and first six months of 2019 included gains of $7.1 million ($5.6 million after taxes) and $24.2 million ($19.9 million after taxes), which included a $17.6 million dividend, respectively, compared to gains of $5.8 million ($4.5 million after taxes) and $14.0 million ($10.9 million after taxes) in the second quarter and first six months of 2018, respectively (included in “Other income (expense), net” in the consolidated statements of income). See Note 7 for additional information on investments.
The Company plans to close its PE Films manufacturing facility in Lake Zurich, Illinois, which produces elastic materials. Production at the Lake Zurich plant is expected to cease during the fourth quarter of 2019 with product transfers to the new elastic production line at Terre Haute, Indiana. As a result of this plant closure, the Company expects to recognize pre-tax cash costs of $7.6 million associated with these activities comprised of (i) customer-related costs ($0.7 million), (ii) severance and other employee related costs ($1.8 million), and (iii) asset disposal and other cash costs ($5.1 million).  In addition, the Company expects non-cash asset write-offs and accelerated depreciation of $1.6 million.  Proceeds from the expected sale of Lake Zurich’s real property are estimated at approximately $5 million. The Company anticipates that these activities will be completed by the end of 2020.

11



The Company plans to consolidate the production of certain PE Films personal care products in Europe over the next twelve months. As a result of this consolidation, the Company expects to recognize pre-tax cash costs of $1.7 million, primarily for severance and customer-related costs.
In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produced plastic films used as components for personal care products (“Shanghai transition”).  Production ceased at this plant during the fourth quarter of 2018.  Total expenses associated with the Shanghai transition are $3.8 million since project inception. Cash expenditures were $0.3 million and $0.5 million in the three and six months ended June 30, 2019, respectively, and $3.0 million since project inception. An additional $0.5 million of cash expenditures is expected to be needed to complete the project, primarily for severance and other employee related costs. Proceeds from the sale of the plant facilities, which occurred in the third quarter of 2019, are expected to be $6.5 million, net of related expenses.
A reconciliation of the beginning and ending balances of accrued expenses associated with exit and disposal activities and charges associated with asset impairments and reported as “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income for the six months ended June 30, 2019 is as follows:
(In thousands)
Severance (a)
 
Asset Impairments
 
Other (b)
 
Total
Balance at January 1, 2019
$
616

 
$

 
$
160

 
$
776

Changes in 2019:
 
 
 
 
 
 
Charges
968

 
695

 
468

 
2,131

Cash payments
(677
)
 

 
(523
)
 
(1,200
)
Charges against assets

 
(695
)
 

 
(695
)
Reversed to income

 

 

 

Balance at June 30, 2019
$
907

 
$

 
$
105

 
$
1,012

(a) Severance cash spent primarily includes severance payments associated with PE Films’ exit and disposal activities.
(b) Other primarily includes other restructuring costs associated with the Shanghai plant shutdown.






















12



4
INVENTORIES
The components of inventories are as follows:
 
 
June 30,
 
December 31,
(In thousands)
2019
 
2018
Finished goods
$
28,755

 
$
24,938

Work-in-process
14,957

 
15,648

Raw materials
29,745

 
33,741

Stores, supplies and other
19,902

 
19,483

Total
$
93,359

 
$
93,810

 
5
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Weighted average shares outstanding used to compute basic earnings per share
33,270

 
33,074

 
33,197

 
33,028

Incremental dilutive shares attributable to stock options and restricted stock
8

 
34

 
6

 
20

Shares used to compute diluted earnings per share
33,278

 
33,108

 
33,203

 
33,048

Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. For the three and six months ended June 30, 2019, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 1,474,762 and 1,225,333, respectively. For the three and six months ended June 30, 2018, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 215,903 and 264,868, respectively.

6
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2019:
(In thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2019
$
(96,940
)
 
$
(1,601
)
 
$
(81,446
)
 
$
(179,987
)
Other comprehensive income (loss) before reclassifications
(283
)
 
(1,218
)
 

 
(1,501
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
1,486

 
4,158

 
5,644

Net other comprehensive income (loss) - current period
(283
)
 
268

 
4,158

 
4,143

Ending balance, June 30, 2019
$
(97,223
)
 
$
(1,333
)
 
$
(77,288
)
 
$
(175,844
)
    
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2018:

13



(In Thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2018
$
(86,178
)
 
$
459

 
$
(90,950
)
 
$
(176,669
)
Other comprehensive income (loss) before reclassifications
(8,905
)
 
(829
)
 

 
(9,734
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
(361
)
 
5,223

 
4,862

Net other comprehensive income (loss) - current period
(8,905
)
 
(1,190
)
 
5,223

 
(4,872
)
Ending balance, June 30, 2018
$
(95,083
)
 
$
(731
)
 
$
(85,727
)
 
$
(181,541
)

14



Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the three months ended June 30, 2019 are summarized as follows:
(In Thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
(606
)
 
Cost of sales
Foreign currency forward contracts, before taxes
(369
)
 
Selling, general & administrative
Foreign currency forward contracts, before taxes
16

 
Cost of sales
Total, before taxes
(959
)
 
 
Income tax expense (benefit)
(131
)
 
Income taxes
Total, net of tax
$
(828
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(2,672
)
 
(a)
Income tax expense (benefit)
(593
)
 
Income taxes
Total, net of tax
$
(2,079
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the six months ended June 30, 2019 are summarized as follows:
(In thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
(1,223
)
 
Cost of sales
Foreign currency forward contracts, before taxes
(560
)
 
Selling, general & administrative
Foreign currency forward contracts, before taxes
31

 
Cost of sales
Total, before taxes
(1,752
)
 
 
Income tax expense (benefit)
(266
)
 
Income taxes
Total, net of tax
$
(1,486
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(5,343
)
 
(a)
Income tax expense (benefit)
(1,185
)
 
Income taxes
Total, net of tax
$
(4,158
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the three months ended June 30, 2018 are summarized as follows:

15



(In Thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
712

 
Cost of sales
Foreign currency forward contracts, before taxes
(378
)
 
Selling, general & administrative
Foreign currency forward contracts, before taxes
16

 
Cost of sales
Total, before taxes
350

 
 
Income tax expense (benefit)
142

 
Income taxes
Total, net of tax
$
208

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(3,372
)
 
(a)
Income tax expense (benefit)
(761
)
 
Income taxes
Total, net of tax
$
(2,611
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the six months ended June 30, 2018 are summarized as follows:
(In thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
944

 
Cost of sales
Foreign currency forward contracts, before taxes
(419
)
 
Selling, general & adminstrative
Foreign currency forward contracts, before taxes
31

 
Cost of sales
Total, before taxes
556

 
 
Income tax expense (benefit)
195

 
Income taxes
Total, net of tax
$
361

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(6,746
)
 
(a)
Income tax expense (benefit)
(1,523
)
 
Income taxes
Total, net of tax
$
(5,223
)
 
 
 
 
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).

7
INVESTMENTS
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate 20% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value option. At the time of the initial investment, the Company elected the fair

16



value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.
The estimated fair value of the Company’s investment was $91.2 million as of June 30, 2019 and $84.6 million as of December 31, 2018. The Company recognized a dividend from and net appreciation on its investment in kaléo of $7.1 million ($5.6 million after taxes) and $24.2 million ($19.9 million after taxes) in the second quarter and first six months of 2019, respectively, including a $17.6 million cash dividend declared by kaléo on March 29, 2019 and paid on April 30, 2019. Future dividends are subject to the discretion of kaléo’s board of directors. Amounts recognized associated with the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 11.
The Company estimates the fair value of its investment in kaléo by: (i) computing the weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow method (the “DCF Method”) and the application of a market multiple to earnings before interest, taxes, depreciation and amortization (the “EBITDA Multiple Method”), (ii) applying adjustments for any surplus or deficient working capital and estimates of contingent liabilities, (iii) adding cash and cash equivalents, (iv) subtracting interest-bearing debt, (v) subtracting a private company liquidity discount estimated at 15% of the net result of (i) through (iv), and (vi) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (v).
The Company’s estimate of kaléo’s EV as of June 30, 2019 was determined by weighting the EBITDA Multiple Method by 80% and the DCF Method by 20%, which was consistent with the weighting applied at December 31, 2018. The heavier weighting towards the EBITDA Multiple Method was due to its heuristic nature versus the hypothetical nature of the projections used in the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns, wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses, income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation method applied.
The table below provides a sensitivity analysis of the estimated fair value at June 30, 2019, of the Company’s investment in kaléo for changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF Method.
($ Millions)
 
EV-to-Adjusted EBITDA Multiple
 
 
5.1 x

6.1 x

7.1 x

8.1 x

9.1 x

Weighting to DCF Method
50
%
$
75.4

$
83.3

$
91.2

$
99.1

$
107.0

40
%
$
72.3

$
81.7

$
91.2

$
100.7

$
110.2

30
%
$
69.1

$
80.1

$
91.2

$
102.3

$
113.3

20
%
$
65.9

$
78.6

$
91.2

$
103.8

$
116.5

10
%
$
62.7

$
77.0

$
91.2

$
105.4

$
119.6

0
%
$
59.6

$
75.4

$
91.2

$
107.0

$
122.8


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 $91.2 million estimated fair value reflected in the Company’s financial statements at June 30, 2019.

8
DERIVATIVE FINANCIAL INSTRUMENTS
Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exist as part of ongoing business operations (primarily in Flexible Packaging Films). These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.

17



In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $19.8 million (18.0 million pounds of aluminum) at June 30, 2019 and $25.4 million (22.5 million pounds of aluminum) at December 31, 2018.
The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
December 31, 2018
(In thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
Asset derivatives:
Aluminum futures contracts
Accrued expenses
 
$

 
Accrued expenses
 
$
20

Liability derivatives:
Aluminum futures contracts
Accrued expenses
 
(1,845
)
 
Accrued expenses
 
$
(1,650
)
Net asset (liability)
 
 
$
(1,845
)
 
 
 
$
(1,630
)
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation.

18



The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the consolidated balance sheets as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
December 31, 2018
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
Asset derivatives:
Foreign currency forward contracts
Prepaid expenses and other
 
$
198

 
Prepaid expenses and other
 
$
37

Liability derivatives:
Foreign currency forward contracts
Accrued expenses
 
(651
)
 
Accrued expenses
 
(1,090
)
Net asset (liability)
 
 
$
(453
)
 
 
 
$
(1,053
)
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure between Flexible Packaging Films business unit in Brazil, Terphane Ltda.'s (“Terphane Ltda.”) U.S. Dollar quoted or priced sales and underlying Brazilian Real (“R$”) quoted or priced operating costs (excluding depreciation and amortization) is annual net costs of R$125 million. Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
USD Notional Amount (000s)
Average Forward Rate Contracted on USD/BRL
R$ Equivalent Amount (000s)
Applicable Month
Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged
 
 
 
 
 
$1,800
3.8826
R$6,989
Jul-19
65%
$1,800
3.8950
R$7,011
Aug-19
68%
$1,800
3.9070
R$7,033
Sep-19
66%
$1,800
3.9203
R$7,056
Oct-19
67%
$1,800
3.9331
R$7,080
Nov-19
67%
$1,800
3.9455
R$7,102
Dec-19
73%
$1,400
3.8256
R$5,356
Jan-20
51%
$1,400
3.8331
R$5,366
Feb-20
52%
$1,400
3.8377
R$5,373
Mar-20
49%
$1,400
3.8456
R$5,384
Apr-20
50%
$1,400
3.8539
R$5,395
May-20
51%
$1,400
3.8621
R$5,407
Jun-20
50%
$1,400
3.8727
R$5,422
Jul-20
48%
$1,400
3.8850
R$5,439
Aug-20
50%
$1,400
3.8964
R$5,455
Sep-20
49%
$1,400
3.9079
R$5,471
Oct-20
50%
$1,400
3.9187
R$5,486
Nov-20
50%
$1,400
3.9306
R$5,503
Dec-20
54%
$27,600
3.8887
R$107,328
 
56%
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Ltda.’s forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and decreasing the net exposure to Brazilian Real in the consolidated statements of income. The net fair value of the open forward contracts was a negative $0.5 million as of June 30, 2019.
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any

19



aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial institutions.
The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three and six month periods ended June 30, 2019 and 2018 is summarized in the table below:
(In thousands)
Cash Flow Derivative Hedges
 
Three Months Ended June 30,
 
Aluminum Futures Contracts
 
Foreign Currency Forwards
 
2019
 
2018
 
2019
2019
 
2018
 
2018
Amount of pretax gain (loss) recognized in other comprehensive income (loss)
$
(1,192
)
 
$
1,457

 
$

$
719

 
$

 
(1,849
)
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)
Cost of
sales

 
Cost of
sales

 
Cost of
sales

Selling, general & admin

 
Cost of
sales

 
Selling, general & admin
Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income effective portion)
$
(606
)
 
$
712

 
$
16

$
(369
)
 
$
16

 
(378
)
 
Six Months Ended June 30,
 
Aluminum Futures Contracts
 
Foreign Currency Forwards
 
2019
 
2018
 
2019
2019
 
2018
 
2018
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)
$
(1,438
)
 
$
1,065

 
$

$
(97
)
 
$

 
(1,679
)
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)
Cost of
sales

 
Cost of
sales

 
Cost of
sales

Selling, general & admin

 
Cost of
sales

 
Selling, general & admin
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)
$
(1,223
)
 
$
944

 
$
31

$
(560
)
 
$
31

 
(419
)
As of June 30, 2019, the Company expects $1.3 million of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three and six month periods ended June 30, 2019 and 2018, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
 

20



9
PENSION AND OTHER POSTRETIREMENT BENEFITS
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees currently in effect is based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.
The components of net periodic benefit cost for the pension and other postretirement benefit programs reflected in the consolidated statements of income are shown below:
 
Pension Benefits
 
Other PostRetirement Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Service cost
$

 
$
5

 
$
8

 
$
10

Interest cost
3,068

 
2,882

 
73

 
69

Expected return on plan assets
(3,404
)
 
(3,761
)
 

 

Amortization of prior service costs, (gains) losses and net transition asset
2,730

 
3,428

 
(57
)
 
(54
)
Net periodic benefit cost
$
2,394

 
$
2,554

 
$
24

 
$
25

 
Pension Benefits
 
Other Post-Retirement Benefits
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Service cost
$

 
$
10

 
$
16

 
$
20

Interest cost
6,135

 
5,764

 
146

 
138

Expected return on plan assets
(6,808
)
 
(7,522
)
 

 

Amortization of prior service costs, (gains) losses and net transition asset
5,459

 
6,856

 
(115
)
 
(108
)
Net periodic benefit cost
$
4,786

 
$
5,108

 
$
47

 
$
50

Pension and other postretirement liabilities were $84.6 million and $88.8 million at June 30, 2019 and December 31, 2018, respectively ($0.6 million included in “Accrued expenses” at June 30, 2019 and December 31, 2018, with the remainder included in “Pension and other postretirement benefit obligations, net” in the consolidated balance sheets). The Company’s required contributions are expected to be $8.1 million in 2019. Contributions to the pension plan during the first six months of 2019 were $3.6 million. Tredegar funds its other postretirement benefits (life insurance and health benefits) on a claims-made basis; for 2019, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2018, or $0.3 million.
 
10
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Gain on investment in kaléo accounted for under fair value method
$
7,100

 
$
5,800

 
$
24,182

 
$
14,000

Other
(4
)
 
57

 
24

 
89

Total
$
7,096

 
$
5,857

 
$
24,206

 
$
14,089

The gain on investment in kaléo accounted for under fair value method shown above for the six months ended June 30, 2019, includes a cash dividend of $17.6 million from kaléo. See Note 7 for more details on the investment in kaléo.


21



11
BUSINESS SEGMENTS
The Company’s business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.
The following table presents net sales and operating profit by segment for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Net Sales
 
 
 
 
 
 
 
PE Films
$
69,161

 
$
82,457

 
$
135,941

 
$
175,707

Flexible Packaging Films
33,443

 
28,304

 
67,062

 
56,741

Aluminum Extrusions
136,757

 
144,558

 
275,804

 
272,793

Total net sales
239,361

 
255,319

 
478,807

 
505,241

Add back freight
8,887

 
8,440

 
17,907

 
17,229

Sales as shown in the Consolidated Statements of Income
$
248,248

 
$
263,759

 
$
496,714

 
$
522,470

Operating Profit (Loss)
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
Ongoing operations
$
7,766

 
$
8,678

 
$
10,717

 
$
22,712

Plant shutdowns, asset impairments, restructurings and other
(1,523
)
 
(1,135
)
 
(2,901
)
 
(2,187
)
Flexible Packaging Films:
 
 
 
 
 
 
 
Ongoing operations
2,517

 
1,294

 
5,377

 
3,008

Plant shutdowns, asset impairments, restructurings and other

 

 

 

Aluminum Extrusions:
 
 
 
 
 
 
 
Ongoing operations
14,518

 
13,156

 
26,603

 
23,355

Plant shutdowns, asset impairments, restructurings and other
(17
)
 
(46
)
 
(57
)
 
(99
)
Total
23,261

 
21,947

 
39,739

 
46,789

Interest income
48

 
228

 
107

 
284

Interest expense
1,263

 
1,577

 
2,495

 
3,221

Gain (loss) on investment in kaléo accounted for under fair value method
7,100

 
5,800

 
24,182

 
14,000

Stock option-based compensation costs
898

 
305

 
1,313

 
391

Corporate expenses, net
9,331

 
6,824

 
17,492

 
14,740

Income (loss) before income taxes
18,917

 
19,269

 
42,728

 
42,721

Income taxes (benefit)
4,440

 
4,547

 
8,467

 
9,834

Net income (loss)
$
14,477

 
$
14,722

 
$
34,261

 
$
32,887


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The following table presents identifiable assets by segment at June 30, 2019 and December 31, 2018:
(In thousands)
June 30, 2019
 
December 31, 2018
PE Films
$
232,316

 
$
231,720

Flexible Packaging Films
63,826

 
58,964

Aluminum Extrusions
288,715

 
281,372

Subtotal
584,857

 
572,056

General corporate
105,474

 
100,920

Cash, cash equivalents and restricted cash
39,769

 
34,397

Total
$
730,100

 
$
707,373


The following tables disaggregate the Company’s revenue by geographic area and product group for the three and six months ended June 30, 2019 and 2018:
Net Sales by Geographic Area (a)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
United States
$
162,788

 
$
171,185

 
$
335,042

 
$
330,747

Exports from the United States to:
 
 
 
 
 
 
 
Asia
24,513

 
18,884

 
38,006

 
42,476

Canada
5,872

 
14,239

 
9,477

 
27,537

Europe
1,517

 
1,697

 
2,877

 
3,519

Latin America
2,670

 
3,654

 
5,537

 
6,706

Operations outside the United States:
 
 
 
 
 
 
 
Brazil
27,582

 
23,659

 
55,721

 
46,811

The Netherlands
8,450

 
11,394

 
18,037

 
23,322

Hungary
5,162

 
8,519

 
11,996

 
17,337

China

 
1,692

 
230

 
3,966

India
807

 
396

 
1,884

 
2,820

Total
$
239,361

 
$
255,319

 
$
478,807

 
$
505,241


23



Net Sales by Product Group
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
PE Films:
 
 
 
 
 
 
 
Personal care materials
37,956

 
55,985

 
82,812

 
117,629

Surface protection films
29,253

 
24,918

 
49,142

 
54,733

LED lighting products & other films
1,952

 
1,555

 
3,987

 
3,345

Subtotal
69,161

 
82,458

 
135,941

 
175,707

Flexible Packaging Films
33,443

 
28,304

 
67,062

 
56,741

Aluminum Extrusions:
 
 
 
 
 
 
 
Nonresidential building & construction
69,019

 
72,442

 
138,657

 
137,629

Consumer durables
16,381

 
17,161

 
31,926

 
32,309

Distribution
8,739

 
12,031

 
17,312

 
22,961

Automotive
12,496

 
11,157

 
25,123

 
20,787

Residential building & construction
10,278

 
12,343

 
21,950

 
21,813

Machinery & equipment
9,471

 
9,867

 
19,394

 
19,144

Electrical
10,373

 
9,556

 
21,442

 
18,150

Subtotal
136,757

 
144,557

 
275,804

 
272,793

Total
239,361

 
255,319

 
478,807

 
505,241

See the previous page for a reconciliation of net sales to sales (as shown in the consolidated statements of income).
(a)
Export sales relate primarily to PE Films. Operations outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia.

12
INCOME TAXES
Tredegar recorded tax expense of $8.5 million on pretax net income of $42.7 million in the first six months of 2019. Therefore, the effective tax rate in the first six months of 2019 was 19.8%, compared to 23.0% in the first six months of 2018. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first six months of the year. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the six months ended June 30, 2019 and 2018 are as follows:
(In thousands, except percentages)
2019
 
2018
Six Months Ended June 30,
Amount
 
%
 
Amount
 
%
Income tax expense at federal statutory rate
$
8,972

 
21.0

 
$
8,971

 
21.0

U.S. Tax on Foreign Branch Income
1,808

 
5.0

 
736

 
1.7

Foreign rate differences
1,191

 
3.3

 
669

 
1.6

State taxes, net of federal income tax benefit
468

 
1.1

 
537

 
1.2

Non-deductible expenses
217

 
0.6

 
123

 
0.3

Changes in estimates related to prior year tax provision
152

 
0.4

 
(34
)
 
(0.1
)
Valuation allowance for capital loss carry-forwards

 

 
91

 
0.2

Stock-based compensation
(141
)
 
(0.4
)
 
176

 
0.4

Tax contingency accruals and tax settlements
(154
)
 
(0.4
)
 
100

 
0.2

Research and development tax credit
(255
)
 
(0.7
)
 
(188
)
 
(0.4
)
Foreign Derived Intangible Income (FDII)
(445
)
 
(1.2
)
 
(309
)
 
(0.7
)
Tax impact of dividend received
(919
)
 
(2.2
)
 

 

Foreign tax incentives
(1,074
)
 
(3.0
)
 
(655
)
 
(1.5
)
Valuation allowance due to foreign losses and impairments
(1,353
)
 
(3.7
)
 
(383
)
 
(0.9
)
Effective income tax rate
$
8,467

 
19.8

 
$
9,834

 
23.0


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Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.
The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $1.1 million and $0.7 million in the first six months of 2019 and 2018, respectively.
Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.
The Company includes tax-related interest and penalties in income tax expense. As of June 30, 2019, $0.2 million of interest and penalties are accrued as a tax liability. During the first half of 2019, a minimal amount of net interest income was recorded.
13
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements adopted in 2019:
ASU 2016-02, LEASES (TOPIC 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued a revised standard on lease accounting. Lessees will need to recognize virtually all of their leases with a term longer than 12 months on the balance sheet, by recording a right-of-use (“ROU”) asset and lease liability. The revised standard requires additional analysis of the components of a transaction to determine if a right-of-use asset is embedded in the transaction that needs to be treated as a lease. Substantial additional disclosures are also required by the revised standard. The revised standard is effective for the Company for fiscal years beginning after December 31, 2018, including the interim periods within those fiscal years. A modified retrospective transition approach which requires a cumulative-effect adjustment to the opening balance of retained earnings on the effective date is required for leases existing at, or entered into after, the effective date, with certain practical expedients available. The Company elected to use certain transition practical expedients that allow it to elect to not reassess: i) whether expired or existing contracts contain leases under the new definition of a lease; ii) lease classification for expired or existing leases; and iii) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. The Company adopted the new guidance in the first quarter of 2019, electing the modified retrospective transition approach. The adoption did not have a material effect on the Company’s consolidated financial statements. The most significant impact of the new standard was the recognition of new ROU assets of approximately $21 million and lease liabilities of approximately $22 million for real estate, office equipment and vehicle operating leases.
ASU 2017-12, DERIVATIVES AND HEDGING (TOPIC 815)
In August 2017, the FASB issued amended guidance on the accounting for hedging activities. The amended guidance makes more hedging strategies qualify for hedge accounting. After initial qualification, the amended guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, if the company can reasonably support an expectation of effectiveness throughout the term of the hedge. The amended guidance is effective for annual and interim periods beginning after January 1, 2019, but may be adopted immediately. The Company adopted the amended guidance in the first quarter of 2019 and there was no impact from adoption on the Company’s consolidated financial statements.
ASU 2018-2, REPORTING COMPREHENSIVE INCOME (TOPIC 220)
In February 2018, the FASB issued ASU 2018-2 to provide entities an option to reclassify certain “stranded tax effects” resulting from the recent U.S. tax reform from accumulated other comprehensive income (AOCI) to retained earnings. This new standard takes effect for all entities in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has elected to not reclassify the income tax effects resulting from tax reform from AOCI to retained earnings.


25



Accounting Standards Not Yet Implemented:
ASU 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES (TOPIC 326)
In June 2016, the FASB issued ASU 2016-13 related to the measurement of credit losses on financial instruments. The pronouncement replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through net income. This standard is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for fiscal years, and interim periods therein, beginning after December 15, 2018. The Company is in the process of evaluating the guidance and expects to adopt ASU 2016-13 in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
ASU 2018-13, FAIR VALUE MEASUREMENT (TOPIC 820)
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all companies for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for all amendments. Further, a company may elect to early adopt the removal or modification of disclosures immediately and delay adoption of the new disclosure requirements until the effective date. The Company plans to adopt all disclosure requirements in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
14
LEASES
Tredegar has various lease agreements with terms up to 12 years, including leases of real estate, office equipment and vehicles. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company has elected to not record short-term leases with an original lease term of one year or less in the consolidated balance sheet. To the extent such leases contain renewal options that the Company intends to exercise, the related ROU asset and lease liability are included in the consolidated balance sheet. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
Operating leases are included in “Right-of-use lease assets”, “Lease liabilities - short-term” and “Lease liabilities - long-term” on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates, adjusted for term and geographic location using country-based swap rates. From reviewing the lease contracts in the implementation effort, the Company found no instance where it could readily determine the rate implicit in the lease.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Depending upon the specific use of the ROU asset, lease expense is included in the “Cost of goods sold”, “Freight”, “Selling, general and administrative”, and “Research and development” line items on the consolidated statements of income. Lease income is not material to the results of operations for the three and six months ended June 30, 2019.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of June 30, 2019.

26