10-K 1 tg-20191231x10k.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, 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
Name of Each Exchange on Which Registered
Common Stock
TG
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 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
 
o
Accelerated filer
x
Smaller reporting company
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o 
 
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, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter): $437,372,894*
Number of shares of Common Stock outstanding as of January 31, 2020: 33,365,039
*
In determining this figure, an aggregate of 7,037,025 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, 2019.
Documents Incorporated By Reference
Portions of the Tredegar Corporation Proxy Statement for the 2020 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, 2019
 
 
 
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
 
14-19
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 aluminum extrusions, polyethylene (“PE”) plastic films and polyester (“PET”) films. 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 Aluminum Extrusions, PE Films and Flexible Packaging Films.
Aluminum Extrusions
Aluminum Extrusions, also referred to as Bonnell Aluminum, produces high-quality, soft-alloy and medium-strength custom fabricated and finished aluminum extrusions for the building and construction, automotive and transportation, consumer durables, machinery and equipment, electrical and distribution markets. Bonnell Aluminum has manufacturing facilities located in: Newnan, Georgia; Carthage, Tennessee; Niles, Michigan; Elkhart, Indiana; and Clearfield, Utah.
Aluminum Extrusions manufactures mill (unfinished), anodized and painted (finished) and fabricated aluminum extrusions for sale directly to fabricators and distributors. It also sells branded aluminum flooring trims under its Futura TransitionsTM line and aluminum framing systems under its TSLOTSTM line. Aluminum Extrusions competes primarily on the basis of product quality, service and price. Sales are made predominantly in the United States (“U.S.”).
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 (Futura TransitionsTM)
 
 
 
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 panel frames, electronic apparatus and rigid and flexible conduits

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Aluminum Extrusions’ net sales (sales less freight) by market segment for the three years ended December 31 is shown below:
 
% of Aluminum Extrusions Net Sales by Market Segment
 
2019
 
2018
 
2017
Building and construction:
 
 
 
 
 
Nonresidential
51%
 
51%
 
51%
Residential
8%
 
8%
 
9%
Automotive
9%
 
8%
 
8%
Specialty:
 
 
 
 
 
Consumer durables
11%
 
12%
 
12%
Machinery & equipment
7%
 
7%
 
7%
Electrical
7%
 
7%
 
7%
Distribution
7%
 
7%
 
6%
 
 
 
 
 
 
Total
100%
 
100%
 
100%
In 2019, 2018 and 2017, nonresidential building and construction accounted for approximately 29%, 28% and 26% of Tredegar’s consolidated net sales, 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 annual contracts. Aluminum Extrusions believes that it has adequate supply agreements for aluminum and other required raw materials and supplies in the foreseeable future.
PE Films
PE Films manufactures plastic films, elastics and laminate materials primarily utilized in surface protection films, personal care materials, and specialty and optical lighting applications. These products are manufactured at facilities in the 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.
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 2019, 2018 and 2017, Surface Protection accounted for approximately 11%, 10% and 11%, respectively, of Tredegar’s consolidated net sales.
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, Soft Quilt, ComfortAire, ComfortFeel and FreshFeel brand names);
Elastic films and fabrics 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 2019, 2018 and 2017, Personal Care accounted for approximately 17%, 22% and 27% of Tredegar’s consolidated net sales, respectively.

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Bright View Technologies. Tredegar’s Bright View Technologies, a late stage start-up company, 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.
PE Films’ net sales by market segment over the last three years are shown below:
% of PE Films Net Sales by Market Segment *
 
2019
 
2018
 
2017
Personal Care
59%
 
68%
 
70%
Surface Protection
38%
 
30%
 
28%
Bright View Technologies
3%
 
2%
 
2%
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 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’ products are sold globally, with the top five customers, collectively, comprising 64%, 66% and 68% of its net sales in 2019, 2018 and 2017, respectively. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $59 million in 2019, $107 million in 2018 and $122 million in 2017 (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. 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. These raw materials are obtained from Brazilian and foreign suppliers at competitive prices. Flexible Packaging Films believes that there will be an adequate supply of polyester resins, PTA and MEG in the foreseeable future.
General
Intellectual Property. Tredegar considers patents, licenses and trademarks to be significant to PE Films. On December 31, 2019, PE Films held 274 patents (including 69 U.S. patents), licenses under patents owned by third parties, and 105 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, 2019, these patents had remaining terms of less than one year to 19 years.
Research and Development. Tredegar’s spending for research and development (“R&D”) activities in 2019, 2018 and 2017 was primarily related to PE Films. PE Films has technical centers in: Durham, North Carolina; Richmond, Virginia; and Terre Haute, Indiana. Flexible Packaging Films has a technical center in Bloomfield, New York. R&D spending by the Company was approximately $19.6 million, $18.7 million and $18.3 million in 2019, 2018 and 2017, respectively.

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Backlog. Overall backlog for continuing operations in Aluminum Extrusions was approximately $52.8 million at December 31, 2019 compared to approximately $67.6 million at December 31, 2018, a decrease of $14.8 million, or approximately 22%. Backlogs are not material to the operations in PE Films or Flexible Packaging Films. Net sales for Aluminum Extrusions, which the Company believes are cyclical in nature, were $529.6 million in 2019, $573.1 million in 2018 and $466.8 million in 2017.
Environmental 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 environmental laws and regulations in the other countries where it conducts business.
At December 31, 2019, 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 initiatives 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 3,000 people at December 31, 2019.
Information About Our Executive Officers. See “Directors, Executive Officers and Corporate Governance” in Part III, Item 10 of this Form 10-K.
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, the charters of the Audit, Executive Compensation, and Nominating and Governance Committees and many other of our corporate policies 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, 2019 (“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.
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 evading anti-dumping and countervailing duties, or a reduction in such duties, could adversely impact Aluminum Extrusions. Effective April 25, 2017, the anti-dumping duty and countervailing duty orders on aluminum extrusions were extended for a period of five years.  The orders will be reviewed again beginning in March 2022. Chinese and other overseas manufacturers continue to try to evade the anti-dumping and countervailing orders to avoid duties. A failure by, or the inability of, U.S. trade officials to curtail the evasion of these duties, or the potential reduction of applicable duties pursuant to annual administrative reviews of the orders by the Department of Commerce, could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.
The duty-free importation of goods allowed under USMCA could result in lower demand for aluminum extrusions made in the U.S., which could materially and negatively affect Bonnell Aluminum’s business and results of operations. In March 2018, the U.S. imposed tariffs of 10% on aluminum ingot and semi-finished aluminum imported in the U.S. from certain countries, including countries from which Bonnell Aluminum has historically sourced aluminum products.  In September 2019, the United States, Canada and Mexico entered into the United States-Mexico-Canada Agreement (“USMCA”).  As a result of the 10% tariffs on aluminum ingot imported to the U.S. and the duty-free importation of goods allowed under USMCA, aluminum extrusions made in Canada and Mexico are free of the 10% tariff and can now be imported into and sold in the U.S. at very competitive prices.  This could result in lower demand for aluminum extrusions made in the U.S., 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 launched a formal complaint at the World Trade Organization (“WTO”) 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 WTO 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 WTO rules.  The U.S. and the European Union have each rejected that interpretation.  If China is granted market economy status by the WTO, the extent to which the U.S. anti-dumping 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 anti-dumping duty investigations involving China, which could ultimately limit the level of anti-dumping 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. In June 2019, at China’s request, after certain preliminary rulings in the case went against the Chinese position, the WTO indefinitely suspended the proceedings on the Chinese WTO complaint.

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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 1,500 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.
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 19%, 21% and 26% of Tredegar’s consolidated net sales in 2019, 2018 and 2017, respectively, with net sales to P&G alone comprising approximately 6%, 10% and 13% in 2019, 2018 and 2017, 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, including as a result of customer preferences for products other than plastics, (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, (iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes, and (v) the cyclicality of the electronic display markets. 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.
PE Films anticipates that a portion of its film products used in surface protection applications could be made obsolete by possible future customer product transitions to less costly alternative processes or materials. These transitions principally relate to one customer. The full transition continues to encounter delays. The Company estimates that during the next four quarters the adverse impact on operating profit from this customer shift versus the last four quarters ended December 31, 2019 could possibly be $14 million. To offset the potential adverse impact, the Company is aggressively pursuing and making progress generating sales from new surface protection products, applications and customers.
The Company previously disclosed a significant customer product transition for the Personal Care component of PE Films.  Annual sales for this product declined from approximately $70 million in 2018 to $30 million in 2019. The Company recently extended an arrangement with this customer that is expected to generate sales of this product at approximately 2019 levels through at least 2022.  
Personal Care had approximately break-even EBITDA (earnings before interest, taxes, depreciation and amortization) from ongoing operations in 2019 as competitive pressures resulted in missed sales and margin goals. Personal Care continues to focus on new business development and cost reduction initiatives in an effort to improve profitability. There can be no assurance that such efforts will be successful or that they will offset any loss of business due to product transitions and other lost sales.
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 in its Personal Care business due to competitive forces, especially as certain personal care products move into the later stages of their product and intellectual protection 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 assurance that such efforts will be successful or that they will offset business lost from competitive dynamics or customer product transitions.
Cost saving initiatives may not achieve the results anticipated. 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 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.

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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 and changing consumer preferences for plastic products generally 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.
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 profitability 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, United Arab Emirates, Turkey, 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 extend anti-dumping duties beyond 2020 on products imported from China, India, Egypt and other countries will be successful.
General
The Company has identified material weaknesses in its internal control over financial reporting at December 31, 2017, 2018 and 2019. 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 an integral part of producing 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 for the periods referred to therein as a result of

7



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 2020 and, the Company anticipates, through the first quarter of 2021. 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 provide assurance, however, of when it will remediate all 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 provide assurance 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, 2018 or 2019, or any interim period during 2017, 2018 or 2019, 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, 2019, the plan was underfunded under U.S. generally accepted accounting principles (“GAAP”) measures by $100.4 million. Tredegar expects that it will be required to make a cash contribution of approximately $12.3 million to its underfunded pension plan in 2020, 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 $500 million revolving credit facility, which matures in June of 2024, 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.
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 aluminum (the raw material on which Aluminum Extrusions primarily depends), resin (the raw material on which PE Films primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Aluminum, resin and natural gas prices are volatile as shown in the charts in the Quantitative and Qualitative Disclosures in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurance 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.

8



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 current and future governmental regulation, including environmental laws and regulations, and could become exposed to material liabilities and costs associated with such regulation. The Company is subject to regulation by local, state, federal and foreign governmental authorities.  New laws and regulations, or changes to existing laws, including those relating to environmental matters (including global climate change and plastic products), and  privacy matters, could subject Tredegar to significant additional capital expenditures, operating expenses or other compliance costs. Moreover, future developments in federal, state, local and international laws and regulations, including environmental laws, are difficult to predict. Environmental laws and privacy restrictions have become and are expected to continue to become increasingly strict. As a result, Tredegar expects to be subject to new environmental and privacy 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 Environmental Regulation in Item 1. “Business” for a further discussion of this risk factor.
We are subject to the U.S. Foreign Corrupt Practices Act, Brazilian anti-corruption laws and similar anti-bribery
laws in other jurisdictions, which generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Although we have policies and procedures designed to facilitate compliance with these laws and regulations, our employees, contractors and agents may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could adversely affect our business and/or our reputation.
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. Approximately 19% 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. None of Tredegar’s collective bargaining agreements expire before the fourth quarter of 2021.
Our business and operations, and the operations of our suppliers, may be adversely affected by epidemics such as the recent coronavirus (or COVID-19) outbreak. We may face risks related to health epidemics or outbreaks of communicable diseases. The outbreak of such a communicable disease could result in a widespread health crisis that could adversely affect general commercial activity and the economies and financial markets of many countries. For example, the recent outbreak of the Coronavirus Disease 2019 (COVID-19), which began in China, has been declared by the World Health Organization to be a “pandemic,” has spread across the globe to many countries in which the Company does business and is impacting worldwide economic activity.
A public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities, or that such epidemic may otherwise interrupt or impair business activities. For example, a majority of protective films made by the PE Films’ Surface Protection unit are sold to customers who produce key components for flat panel displays. A significant proportion of that production and fabrication occurs in China. Although we have not had significant issues at our Surface Protection manufacturing plant in Guangzhou, China, there can be no assurance that COVID-19 will not impact our Surface Protection business as a result of the virus’ potential impact on delays in production and transportation in, and other impacts on, the flat panel display industry and its supply chain. While it is not possible at this time to estimate the impact that COVID-19 could have on our Surface Protection unit and the Company’s other business units, the continued

9



spread of COVID-19, the measures taken by the governments of countries affected, actions taken to protect employees, and the impact of the pandemic on various business activities in affected countries could adversely affect our 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 18% 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 kaléo’s performance versus expectations and changes in the valuation of guideline public companies as measured by their enterprise value-to-EBITDA multiples. Additionally, the estimated fair value of the Company’s investment in kaléo could decline. Public pressure to lower the price of pharmaceutical products and competitive pressures in the market 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. Kaléo initiated a plan in 2019 to reduce the cost structure of the Evzio product line and reallocate resources to its allergy and pediatric product lines, principally Auvi-Q. As a result, kaléo substantially reduced commercial activities associated with Evzio in 2019. See Note 4 to the Notes to Financial Statements (“Note 4”) for more information.
Rising trade tensions could cause an increase in the cost of the Company’s products or otherwise negatively impact the Company. 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, maintain the financial accuracy of its business records and maintain personally identified information of its employees. 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, or personally identified information, as a result of a cybersecurity incident or other cause, could result in substantial costs to the Company, damage to the Company’s reputation, regulatory enforcement actions and lawsuits, and could adversely affect the Company’s 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 Bonnell Aluminum, PE Films and Flexible Packaging Films manufacturing facilities have sufficient capacity to meet current production requirements. 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, 2019 are listed below:
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
PE Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
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

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 33,365,039 shares of common stock held by 1,822 shareholders of record on December 31, 2019.
The following table shows the reported high and low closing prices of Tredegar’s common stock by quarter for the past two years.
 
2019
 
2018
 
High
 
Low
 
High
 
Low
First quarter
$
19.03

 
$
15.69

 
$
20.25

 
$
15.60

Second quarter
18.43

 
15.59

 
24.60

 
16.99

Third quarter
19.78

 
15.77

 
26.25

 
20.60

Fourth quarter
23.31

 
18.74

 
21.56

 
15.00

Dividend Information
Tredegar has paid a dividend every quarter since becoming a public company in July 1989. During 2017, 2018 and the first two quarters of 2019, the Company paid quarterly dividends of 11 cents per share; for the last two quarters of 2019, the Company paid quarterly dividends of 12 cents per share.
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 2019, 2018 or 2017 under this standing authorization. The maximum number of shares remaining under this standing authorization was 1,732,003 at December 31, 2019.

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, 2019. 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-c4f0820e677d57738e9a02.jpg
*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2020 Russell Investment Group. All rights reserved.





13



Item 6.
SELECTED FINANCIAL DATA
The tables that follow present certain selected financial and segment information for the five years ended December 31, 2019.

FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
972,358

 
 
$
1,065,471

  
 
$
961,330

  
 
$
828,341

  
 
$
896,177

  
Other income (expense), net (g)
34,795

(a) 
 
30,459

(a) 
 
51,713

(a) 
 
2,381

(b) 
 
(20,113
)
 
 
1,007,153

  
 
1,095,930

  
 
1,013,043

  
 
830,722

  
 
876,064

  
Cost of goods sold (i)
767,511

(a) 
 
849,756

(a) 
 
767,550

(a) 
 
659,867

(b) 
 
715,744

(b) 
Freight
36,063

  
 
36,027

  
 
33,683

  
 
29,069

  
 
29,838

  
Selling, general & administrative expenses (i)
94,352

(a) 
 
85,283

(a) 
 
83,386

(a) 
 
73,466

(b) 
 
69,384

(b) 
Research and development expenses
19,636

  
 
18,707

  
 
18,287

  
 
19,122

  
 
16,173

  
Amortization of identifiable intangibles
13,601

  
 
3,976

  
 
6,198

  
 
3,978

  
 
4,073

  
Pension and postretirement benefits (i)
9,642

 
 
10,406

 
 
10,193

 
 
11,047

 
 
12,242

 
Interest expense
4,051

  
 
5,702

  
 
6,170

  
 
3,806

  
 
3,502

  
Asset impairments and costs associated with exit and disposal activities
4,125

(a) 
 
2,913

(a) 
 
102,488

(a) 
 
2,684

(b) 
 
3,850

(b) 
Goodwill impairment charge

 
 
46,792

(c)
 

 
 

 
 
44,465

(c)
 
948,981

  
 
1,059,562

  
 
1,027,955

  
 
803,039

  
 
899,271

  
Income (loss) before income taxes
58,172

  
 
36,368

  
 
(14,912
)
  
 
27,683

  
 
(23,207
)
  
Income tax expense (benefit)
9,913

 
 
11,526

 
 
(53,163
)
 
 
3,217

 
 
8,928

 
Net income (loss)
$
48,259

  
 
$
24,842

  
 
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
 
Diluted earnings (loss) per share
$
1.45

  
 
$
0.75

  
 
$
1.16

  
 
$
0.75

 
 
$
(0.99
)
  
Refer to Notes to Financial Tables that follow these tables.

14



FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share Data:
 
 
 
 
 
 
 
 
 
 
Equity per share (h)
$
11.29

 
$
10.70

 
$
10.41

 
$
9.44

 
$
8.35

 
Cash dividends declared per share
$
0.46

 
$
0.44

 
$
0.44

 
$
0.44

 
$
0.42

 
Weighted average common shares outstanding during the period
33,236

 
33,068

 
32,946

 
32,762

 
32,578

 
Shares used to compute diluted earnings (loss) per share during the period
33,258

 
33,092

 
32,951

 
32,775

 
32,578

 
Shares outstanding at end of period
33,365

 
33,176

 
33,017

 
32,934

 
32,682

 
Closing market price per share:
 
 
 
 
 
 
 
 
 
 
High
$
23.31

 
$
26.25

 
$
25.00

 
$
25.55

 
$
23.76

 
Low
$
15.59

 
$
15.00

 
$
14.85

 
$
11.68

 
$
12.63

 
End of year
$
22.35

 
$
15.86

 
$
19.20

 
$
24.00

 
$
13.62

 
Total return to shareholders (d)
43.8
%
 
(15.1
)%
 
(18.2
)%
 
79.4
%
 
(37.6
)%
 
Financial Position:
 
 
 
 
 
 
 
 
 
 
Total assets
$
712,668

 
$
707,373

 
$
755,743

 
$
651,162

 
$
623,260

 
Cash and cash equivalents
$
31,422

 
$
34,397

 
$
36,491

 
$
29,511

 
$
44,156

 
Debt
$
42,000

 
$
101,500

 
$
152,000

 
$
95,000

 
$
104,000

 
Shareholders’ equity (net book value)
$
376,749

 
$
354,857

 
$
343,780

 
$
310,783

 
$
272,748

 
Equity market capitalization (e)
$
745,709

 
$
526,172

 
$
633,935

 
$
790,411

 
$
445,131

 
Refer to Notes to Financial Tables that follow these tables.


15



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (f)
 
 
 
 
 
 
 
 
 
Years Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
(In thousands)
 
 
 
 
 
 
 
 
 
Aluminum Extrusions
$
529,602

 
$
573,126

 
$
466,833

 
$
360,098

 
$
375,457

PE Films
272,758

 
332,488

 
352,459

 
331,146

 
385,550

Flexible Packaging Films
133,935

 
123,830

 
108,355

 
108,028

 
105,332

Total net sales
936,295

 
1,029,444

 
927,647

 
799,272

 
866,339

Add back freight
36,063

 
36,027

 
33,683

 
29,069

 
29,838

Sales as shown in Consolidated Statements of Income
$
972,358

 
$
1,065,471

 
$
961,330

 
$
828,341

 
$
896,177

 
 
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
 
 
 
As of December 31
2019
 
2018
 
2017
 
2016
 
2015
(In thousands)
 
 
 
 
 
 
 
 
 
Aluminum Extrusions
$
265,027

 
$
281,372

 
$
268,127

 
$
147,639

 
$
136,935

PE Films
230,415

 
231,720

 
289,514

 
278,558

 
270,236

Flexible Packaging Films
74,016

 
58,964

 
49,915

 
156,836

 
146,253

Subtotal
569,458

 
572,056

 
607,556

 
583,033

 
553,424

General corporate
111,788

 
100,920

 
111,696

 
38,618

 
25,680

Cash and cash equivalents
31,422

 
34,397

 
36,491

 
29,511

 
44,156

Total
$
712,668

 
$
707,373

 
$
755,743

 
$
651,162

 
$
623,260

Refer to Notes to Financial Tables that follow these tables.

16



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
EBITDA from Ongoing Operations (l)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aluminum Extrusions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
65,683

 
 
65,479

 
 
58,524

 
 
46,967

 
 
40,131

 
Depreciation & amortization
(16,719
)
 
 
(16,866
)
 
 
(15,070
)
 
 
(9,173
)
 
 
(9,698
)
 
EBIT (m)
48,964

 
 
48,613

 
 
43,454

 
 
37,794

 
 
30,433

 
Plant shutdowns, asset impairments, restructurings and other
(561
)
(a) 
 
(505
)
(a) 
 
321

(a)
 
(741
)
(b)
 
(708
)
(b)
Trade name accelerated amortization
(10,040
)
(j)
 

 
 

 
 

 
 

 
PE Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
37,803

 
 
51,058

 
 
55,889

 
 
39,350

 
 
63,398

 
Depreciation & amortization (j)
(14,627
)
 
 
(14,877
)
 
 
(14,343
)
 
 
(13,038
)
 
 
(15,123
)
 
EBIT (m)
23,176

 
 
36,181

 
 
41,546

 
 
26,312

 
 
48,275

 
Plant shutdowns, asset impairments, restructurings and other
(475
)
(a) 
 
(5,905
)
(a) 
 
(4,905
)
(a)
 
(4,602
)
(b)
 
(4,180
)
(b)
       Goodwill impairment charge

 
 
(46,792
)
(c) 
 

 
 

 
 

 
Flexible Packaging Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
14,737

 
 
11,154

 
 
7,817

 
 
11,279

 
 
15,149

 
Depreciation & amortization
(1,517
)
 
 
(1,262
)
 
 
(10,443
)
 
 
(9,505
)
 
 
(9,697
)
 
EBIT (m)
13,220

 
 
9,892

 
 
(2,626
)
 
 
1,774

 
 
5,452

 
Plant shutdowns, asset impairments, restructurings and other

 
 
(45
)
(a) 
 
(89,398
)
(a)
 
(214
)
(b)
 
(185
)
(b)
Goodwill impairment charge

 
 

 
 

 
 

 
 
(44,465
)
(c)
Total
74,284

  
 
41,439

  
 
(11,608
)
  
 
60,323

  
 
34,622

  
Interest income
296

  
 
369

  
 
209

  
 
261

  
 
294

  
Interest expense
4,051

  
 
5,702

  
 
6,170

  
 
3,806

  
 
3,502

  
Gain (loss) on investment in kaléo accounted for under the fair value method (g)
28,482

 
 
30,600

 
 
33,800

 
 
1,600

 
 
(20,500
)
 
Loss on sale of investment property

 
 
(38
)
 
 

 
 

 
 

 
Unrealized loss on investment property

 
 
(186
)
 
 

 
 
(1,032
)
 
 

 
Stock option-based compensation expense
4,209

 
 
1,221

  
 
264

 
 
56

  
 
483

  
Corporate expenses, net (k)
36,630

(a) 
 
28,893

(a)
 
30,879

(a) 
 
29,607

(b) 
 
33,638

(b) 
Income (loss) before income taxes
58,172

 
 
36,368

 
 
(14,912
)
  
 
27,683

  
 
(23,207
)
  
Income tax expense (benefit)
9,913

 
 
11,526

 
 
(53,163
)
 
 
3,217

 
 
8,928

 
Net income (loss)
$
48,259

  
 
$
24,842

  
 
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
  
Refer to Notes to Financial Tables that follow these tables.

17



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Depreciation and Amortization
 
 
 
 
 
 
 
 
 
Years Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
(In thousands)
 
 
 
 
 
 
 
 
 
Aluminum Extrusions
$
26,759

 
$
16,866

 
$
15,070

 
$
9,173

 
$
9,698

PE Films
15,822

 
15,513

 
14,609

 
13,653

 
15,480

Flexible Packaging Films
1,517

 
1,262

 
10,443

 
9,505

 
9,697

Subtotal
44,098

 
33,641

 
40,122

 
32,331

 
34,875

General corporate (k)
186

 
163

 
155

 
141

 
107

Total depreciation and amortization expense
$
44,284

 
$
33,804

 
$
40,277

 
$
32,472

 
$
34,982

 
 
 
 
 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
 
 
 
 
Years Ended December 31
2019
 
2018
 
2017
 
2016
 
2015
(In thousands)
 
 
 
 
 
 
 
 
 
Aluminum Extrusions
$
17,855

 
$
12,966

 
$
25,653

 
$
15,918

 
$
8,124

PE Films
23,920

 
21,998

 
15,029

 
25,759

 
21,218

Flexible Packaging Films
8,866

 
5,423

 
3,619

 
3,391

 
3,489

Subtotal
50,641

 
40,387

 
44,301

 
45,068

 
32,831

General corporate
223

 
427

 
61

 
389

 

Total capital expenditures
$
50,864

 
$
40,814

 
$
44,362

 
$
45,457

 
$
32,831

Refer to Notes to Financial Tables that follow these tables.

18



NOTES TO FINANCIAL TABLES
(a)
For a description of plant shutdowns, asset impairments, restructurings and other charges for 2019, 2018, and 2017, see the plant shutdowns, asset impairments, restructurings and other tables for 2019, 2018 and 2017 in Results of Continuing Operations “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.
(b)
For a description of plant shutdowns, asset impairments, restructurings and other charges for 2016 and 2015, see “Selected Financial Data” in Part II, Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K“), Part II, Item 6.
(c)
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.
(d)
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.
(e)
Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(f)
Net sales represents gross sales less freight. The Company uses net sales as its measure of revenues from external customers at the segment level.
(g)
The gains and losses on the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income. See Note 4 to the Notes to financial statements for more details for the years 2019, 2018 and 2017.
(h)
Equity per share is computed by dividing shareholders’ equity at year end by the shares outstanding at year end.
(i)
For the years ended December 31, 2015 to 2017, the pension and postretirement benefit expenses recorded in Cost of goods sold and Selling, general and administrative expenses were reclassified to a new line item, Pension and postretirement benefits, on the consolidated statements of income, due to the retrospective adoption of Accounting Standards Update (“ASU”) 2017-07.
(j)
Depreciation and amortization (“D&A”) in 2019 for Aluminum Extrusions excludes $10.0 million for accelerated amortization of trade names as a result of a rebranding initiative. D&A in 2019, 2018, 2017, 2016 and 2015 for PE Films excludes $1.2 million, $0.6 million, $0.3 million, $0.6 million and $0.4 million, respectively, for accelerated depreciation associated with restructurings and plant closures.
(k)
Corporate depreciation and amortization is included in Corporate expenses, net, on the EBITDA from ongoing operations table above.
(l)
In the fourth quarter of 2019, the Company changed its segment measure of profit and loss from operating profit from ongoing operations to EBITDA (earnings before interest, taxes, depreciation and amortization) from ongoing operations.  EBITDA from ongoing operations is the key profitability metric used by the Company’s chief operating decision maker to assess segment financial performance. See Note 5 to the Notes to Financial Statements in this 2019 Form 10-K for additional business segment information.
(m)
EBIT (earnings before interest and taxes) from ongoing operations is a non-GAAP financial measure included in the reconciliation of segment financial information to consolidated results for the Company.  It is not intended to represent the stand-alone results for Tredegar’s ongoing operations under GAAP and should not be considered as an alternative to net income as defined by GAAP.  EBIT is a widely understood and utilized metric that is meaningful to certain investors.  We believe that including this financial metric in the reconciliation of management’s performance metric, EBITDA from ongoing operations, provides useful information to those investors that primarily utilize EBIT to analyze the Company’s core operations. 

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,” “plan,” “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 aluminum extrusions, polyethylene (“PE”) plastic films, and polyester films. Descriptions of all the Company’s businesses are provided in the Business section in Part I, Item 1 of this Form10-K.
Sales were $1.0 billion in 2019 compared to $1.1 billion in 2018. Net income was $48.3 million ($1.45 per diluted share) in 2019, compared with $24.8 million ($0.75 per diluted share) in 2018.
The 2019 results include:
An after-tax gain on the sale of the Company’s Shanghai manufacturing property of $5.9 million ($0.18 per share);

19



An after-tax dividend received from kaléo of $14.8 million ($0.45 per share); and
An unrealized after-tax gain on the Company’s investment in kaléo of $8.5 million ($0.26 per share), which is accounted for under the fair value method (see Note 4 for more details);
The 2018 results include:
An after-tax impairment of the total goodwill balance of PE Films’ Personal Care division 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 to the Notes to Financial Statements for more details; and
An unrealized after-tax gain on the Company’s investment in kaléo of $23.9 million ($0.72 per share);
Other losses associated with plant shutdowns, asset impairments and restructurings are described in Note 17 to the Notes to Financial Statements. EBITDA from ongoing operations is the measure of profit and loss used by Tredegar’s chief operating decision maker for purposes of assessing performance.
Aluminum Extrusions
A summary of operating results for Aluminum Extrusions is provided below:
 
 
 
 
Year Ended
 
Favorable/
(In thousands, except percentages)
 
 
December 31,
 
(Unfavorable)
 
 
2019
 
2018
 
% Change
Sales volume (lbs)
 
 
208,249

 
223,866

 
(7.0
)%
Net sales
 
 
$
529,602

 
$
573,126

 
(7.6
)%
Ongoing operations:
 
 
 
 
 
 
 
EBITDA
 
 
$
65,683

 
$
65,479

 
0.3
 %
Depreciation & amortization**
 
 
(16,719
)
 
(16,866
)
 
0.9
 %
EBIT*
 
 
$
48,964

 
$
48,613

 
0.7
 %
Capital expenditures
 
 
$
17,855

 
$
12,966

 
 
* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP and additional information.
**Excludes pre-tax accelerated amortization of trade names of $10.0 million in 2019. See Note 8 to the Notes to Financial Statements for more information.

Net sales in 2019 decreased versus 2018 primarily due to lower sales volume and the passthrough of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.
EBITDA from ongoing operations in 2019 increased slightly in comparison to 2018. Excluding the adverse impact of the accounting for inventories under the last in, first out method in the fourth quarter of 2019 versus 2018 ($1.5 million), EBITDA from ongoing operations increased $1.7 million despite a 7% decline in sales volume. The increase was primarily due to higher pricing ($22.8 million) and fabrication profits ($1.0 million), partially offset by lower sales volume ($8.7 million), increased labor and employee-related expenses ($7.4 million), higher supplies, maintenance, utilities and other operating costs ($2.0 million), increased freight costs ($2.0 million) and increased general and administrative expenses ($1.9 million).
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures are projected to be $23 million in 2020, including the expected initial investment for a multi-year project to migrate to a new division-wide enterprise resource planning and manufacturing excellence system ($6 million), infrastructure upgrades at the Carthage, Tennessee and Newnan, Georgia facilities ($4 million), and approximately $12 million required to support continuity of current operations. Depreciation expense is projected to be $14 million in 2020. Amortization expense is projected to be $3 million in 2020.

20



PE Films
A summary of operating results for PE Films is provided below: 
 
 
 
Year Ended
 
Favorable/
(In thousands, except percentages)
 
 
December 31,
 
(Unfavorable)
 
 
2019
 
2018
 
% Change
Sales volume (lbs)
 
 
104,497

 
123,583

 
(15.4
)%
Net sales
 
 
$
272,758

 
$
332,488

 
(18.0
)%
Ongoing operations:
 
 
 
 
 
 
 
EBITDA
 
 
$
37,803

 
$
51,058

 
(26.0
)%
Depreciation & amortization
 
 
(14,627
)
 
(14,877
)
 
1.7
 %
EBIT*
 
 
$
23,176

 
$
36,181

 
(35.9
)%
Capital expenditures
 
 
$
23,920

 
$
21,998

 
 
* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP and additional information.

Net sales in 2019 decreased by $59.7 million versus 2018 due to lower sales in Personal Care of $65 million. The decline in net sales in Personal Care was primarily due to lower volume in most product categories from competitive pressures ($48 million), including a large portion associated with the customer product transition discussed below. In addition, net sales in Personal Care were adversely impacted by pricing, mix and the decline in the value of currencies for operations outside of the U.S. relative to the U.S. Dollar.
EBITDA from ongoing operations in 2019 decreased by $13.3 million versus 2018 primarily due to:
A $6.8 million increase from Surface Protection, primarily due to higher selling prices ($6.0 million), quality claims in 2018 that did not recur in 2019 ($1.2 million), production efficiencies ($1.4 million), and favorable raw material costs ($1.9 million), partially offset by unfavorable mix (net impact of $2.0 million) and higher fixed manufacturing and general and administrative costs ($1.5 million); and
A $19.6 million decrease from Personal Care, primarily due to lower volume and unfavorable mix ($19.3 million), unfavorable pricing ($4.8 million), and production inefficiencies ($3.8 million), partially offset by the timing in the passthrough of changes in resin prices ($2.1 million), lower fixed manufacturing ($4.4 million) and selling, general and administrative costs ($1.8 million).
Customer Product Transitions in Personal Care and Surface Protection
The Company previously disclosed a significant customer product transition for the Personal Care component of PE Films.  Annual sales for this product declined from approximately $70 million in 2018 to $30 million in 2019. The Company recently extended an arrangement with this customer that is expected to generate sales of this product at approximately 2019 levels through at least 2022.
Personal Care had approximately break-even EBITDA from ongoing operations in 2019 as competitive pressures resulted in missed sales and margin goals.  Personal Care continues to focus on new business development and cost reduction initiatives in an effort to improve profitability.
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 principally relate to one customer. The full transition continues to encounter delays, resulting in higher than expected sales to this customer in 2019. The Company estimates that during 2020 the adverse impact on EBITDA from ongoing operations from this customer shift versus 2019 could possibly be $14 million. To offset the potential adverse impact, the Company is aggressively pursuing and making progress generating sales from new surface protection products, applications and customers.

21




Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures are projected to be $16 million in 2020, including: $1.5 million to complete a scale-up line in Surface Protection to improve development and speed to market for new products; $6 million for other development projects; and $8 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $15 million in 2020. There is no amortization expense for PE Films.
Flexible Packaging Films
A summary of operating results for Flexible Packaging Films is provided below:
 
 
Year Ended
 
Favorable/
(Unfavorable)
% Change
(In thousands, except percentages)
December 31,
 
2019
 
2018
 
Sales volume (lbs)
105,276

 
98,994

 
6.3
 %
Net sales
$
133,935

 
$
123,830

 
8.2
 %
Ongoing operations:
 
 
 
 
 
EBITDA
$
14,737

 
$
11,154

 
32.1
 %
Depreciation & amortization
(1,517
)
 
(1,262
)
 
(20.2
)%
EBIT*
$
13,220

 
$
9,892

 
33.6
 %
Capital expenditures
$
8,866

 
$
5,423

 
 
* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP and additional information.
Net sales in 2019 increased versus 2018 primarily due to higher sales volume and increased selling prices.
Terphane’s EBITDA from ongoing operations in 2019 increased by $3.6 million versus 2018 due to:
Higher volume ($2.6 million) and higher selling prices ($1.6 million), partially offset by higher fixed and variable costs, including costs related to a restarted line ($2.0 million);
Net favorable foreign currency translation of Real-denominated operating costs of $0.4 million; and
Foreign currency transaction gains of $1.0 million in 2019 versus losses of $0.8 million in 2018.
Projected Capital Expenditures and Depreciation & Amortization
Capital expenditures are projected to be $8 million in 2020, including $6 million for new capacity for value-added products and productivity projects and $1 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $2 million in 2020. Amortization expense is projected to be $0.4 million in 2020.
Corporate Expenses, Investments, Interest and Income Taxes
Pension expense was $9.6 million in 2019, a favorable change of $0.8 million from 2018. The impact on earnings from lower pension expense is reflected in “Corporate expenses, net” in the EBITDA from ongoing operations table in Note 5. Pension expense is projected to be $14.2 million in 2020. Corporate expenses, net, increased in 2019 versus 2018 primarily due to higher stock-based employee compensation ($1.7 million), and consulting fees ($4.1 million) related to the identification and remediation of previously disclosed material weaknesses in the Company’s internal control over financial reporting, business development activities, and implementation of new accounting guidance.
Interest expense decreased to $4.1 million in 2019 from $5.7 million in 2018, primarily due to lower average debt levels.
During 2019, the Company recognized consolidated income tax expense of $9.9 million based on pretax income of $58.2 million. During 2018, the Company recognized consolidated income tax expense of $11.5 million based on pretax income of $36.4 million. Information on the differences between the effective tax rate for income and the U.S. federal statutory rate for 2019 and 2018 are further detailed in the effective income tax rate reconciliation provided in Note 16.

22



Total debt was $42.0 million at December 31, 2019, compared to $101.5 million at December 31, 2018. Net debt (debt in excess of cash and cash equivalents) was $10.6 million at December 31, 2019, compared to $67.1 million at December 31, 2018. Net debt is calculated as follows:
(In millions)
 
December 31, 2019
 
December 31, 2018
Debt
 
$
42.0

 
$
101.5

Less: Cash and cash equivalents
 
31.4

 
34.4

Net debt
 
$
10.6

 
$
67.1

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 below.
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.
As of December 31, 2019, the Company applied the Step 0 assessment to its PE Films’ Surface Protection reporting unit and Aluminum Extrusions’ reporting units created as a result of acquisitions in 2012 (“AACOA”) and in 2017 (“Futura”), each of which had fair values significantly in excess of their carrying amounts when last tested using the quantitative impairment test. The Company's Step 0 analysis in 2019 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 2019.
Goodwill for Surface Protection, AACOA and Futura totaled $57.3 million, $13.7 million and $10.4 million, respectively, at December 31, 2019.
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 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

23



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.
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 option to account for their investment portfolios). At December 31, 2019, Tredegar’s ownership interest was approximately 18% 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 in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). 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. 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 in which such changes can be quantified.
At December 31, 2019 and 2018, 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 $95.5 million and $84.6 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 $95.5 million estimated fair value reflected in the Company’s financial statements at December 31, 2019.
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 3.27%, 4.40% and 3.72% at the end of 2019, 2018 and 2017, 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 (net of fees and plan expenses), which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was approximately 11.8% in 2019, negative 5.4% in 2018 and 10.0% in 2017. 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 6.00%, 6.50% and 6.50% in 2019, 2018 and 2017, respectively. The Company anticipates that its expected long-term return on plan assets will be 5.00% for 2020. See Note 13 for more information on expected long-term return on plan assets and asset mix.
See the Executive Summary section above for further discussion regarding the financial impact of the Company’s pension plans.

24



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 $0.9 million, $3.4 million and $2.0 million as of December 31, 2019, 2018 and 2017, 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 $0.1 million, $0.2 million and $0.1 million at December 31, 2019, 2018 and 2017, respectively ($0.1 million, $0.2 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 2016.
As of December 31, 2019 and 2018, valuation allowances relating to deferred income tax assets were $5.1 million and $24.7 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 Operations
2019 versus 2018
Revenues. Sales in 2019 decreased by 8.7% compared with 2018 due to lower sales in both Aluminum Extrusions and PE Films. Net sales decreased 7.6% in Aluminum Extrusions primarily due to lower sales volume and the passthrough of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs. Net sales decreased 18.0% in PE Films primarily due to lower volume in most product categories in Personal Care from competitive pressures. Net sales increased in Flexible Packaging Films by 8.2% primarily due to higher sales volume and increased selling prices. For more information on changes in net sales and volume, see the Executive Summary section above.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of sales) was 17.4% in 2019 versus 16.9% in 2018. The gross profit margin in Aluminum Extrusions increased primarily as a result of higher selling prices. The gross profit margins in PE Films and Flexible Packaging Films were essentially unchanged from 2018 to 2019.
For more information on changes in operating costs and expenses, see the Executive Summary section above.
Selling, General and Administrative. As a percentage of sales, selling, general and administrative and R&D expenses were 11.7% in 2019, which increased from 9.8% in 2018. The increase in selling, general and administrative and R&D expenses as a percentage of sales can be primarily attributed to lower sales for Aluminum Extrusions and PE Films. Increased spending was due to higher stock-based compensation and consulting fees due to 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.
Plant shutdowns, asset impairments, restructurings and other. Pre-tax losses associated with plant shutdowns, asset impairments, restructurings and other items in 2019 as detailed below are shown in the EBITDA from ongoing operations table in Note 5 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted. A discussion of unrealized gains and losses on investments can also be found in Note 4 and additional information on restructuring costs can be found in Note 17.

25



($ in millions)
Q1

Q2

Q3

Q4

 
2019
Aluminum Extrusions:
 
 
 
 
 
 
(Gains) losses from sale of assets, investment writedowns and other items:
 
 
 
 
 
 
 
Wind damage to roof of Elkhart, Indiana plant2
$

$

$
0.3

$
(0.4
)
 
$
(0.1
)
 
Environmental charges at Carthage Tennessee plant1


0.3

0.2

 
0.5

 
 
Total for Aluminum Extrusions
$

$

$
0.6

$
(0.2
)
 
$
0.4

 
 
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
(Gains) losses associated with plant shutdowns, asset impairments and restructurings:
 
 
 
 
 
 
 
Shanghai plant shutdown:
 
 
 
 
 
 
 
 
Asset-related expenses
$
0.2

$
0.2

$
0.2

$
0.1

 
$
0.7

 
 
Gain from sale of plant3


(6.3
)

 
(6.3
)
 
Consolidation of Personal Care manufacturing facilities - U.S. and Europe:4
 
 
 
 
 
 
 
 
Severance

0.1

0.5


 
0.6

 
 
Asset impairment

0.1



 
0.1

 
 
Product qualifications1


0.1


 
0.1

 
Lake Zurich, Illinois plant shutdown and transfer of production to new elastics lines in Terre Haute, Indiana:4
 
 
 
 
 
 
 
 
Severance

0.3

0.4

0.2

 
0.9

 
 
Asset impairment

0.2



 
0.2

 
 
Safety/quality initiative1


0.1

0.1

 
0.2

 
 
Accelerated depreciation1

0.3

0.5

0.4

 
1.2

 
 
Product qualifications1


0.1

0.1

 
0.2

 
Reserve for inventory impairment - Personal Care's Hungary facility


0.2


 
0.2

 
Other restructuring costs - severance
0.4

0.1

0.1

0.2

 
0.8

 
Write-off Personal Care production line - Guangzhou, China facility
0.4




 
0.4

Subtotal for PE Films
1.0

1.3

(4.1
)
1.1

 
(0.7
)
 
 
 
 
 
 
 
Losses from sale of assets, investment writedowns and other items:
 
 
 
 
 
 
 
Estimated excess costs associated with ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects1
0.3

0.2

0.3

0.3

 
1.1

 
 
 
 
 
 
 
 
 
 
 
Total for PE Films
$
1.3

$
1.5

$
(3.8
)
$
1.4

 
$
0.4

 
 
 
 
 
 
 
 
 
  Corporate:
 
 
 
 
 
 
 
Professional fees associated with: internal control over financial reporting; business development activities; and implementation of new accounting guidance2
$
0.9

$
2.0

$
1.6

$
0.8

 
$
5.3

 
  Accelerated recognition of stock option-based compensation5



1.3

 
1.3

 
  Environmental costs not associated with a business unit2



0.6

 
0.6

 
 
Total for Corporate
$
0.9

$
2.0

$
1.6

$
2.7

 
$
7.2

1. Included in “Cost of goods sold” in the consolidated statements of income.
2. Included in “Selling, general and administrative” in the consolidated statements of income.
3. Included in “Other income (expense), net” in the consolidated statements of income.
4. Additional information on costs associated with exit and disposal activities and other details are available in Note 17.
5. Included in “Stock option-based compensation” in the EBITDA from ongoing operations table in Note 5.

26



Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.3 million in 2019 and $0.4 million in 2018.
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.9 million and $0.3 million capitalized in 2019 and 2018, respectively), was $4.1 million in 2019, compared to $5.7 million for 2018. Average debt outstanding and interest rates were as follows:
(In millions, except percentages)
2019
 
2018
Floating-rate debt with interest charged on a rollover
 
 
 
basis at one-month LIBOR plus a credit spread:
 
 
 
Average outstanding debt balance
$
85.0

 
$
121.3

Average interest rate
4.0
%
 
3.8
%
Identifiable Assets. A summary of identifiable assets for the year ended December 31, 2019 versus 2018 is provided below: 
(In thousands)
Year Ended
December 31,
 
 
 
2019
 
2018
 
Variance
Aluminum Extrusions
$
265,027

 
$
281,372

 
$
(16,345
)
PE Films
230,415

 
231,720

 
(1,305
)
Flexible Packaging Films
74,016

 
58,964

 
15,052

      Subtotal
569,458

 
572,056

 
(2,598
)
General corporate
111,788

 
100,920

 
10,868

Cash and cash equivalents
31,422

 
34,397

 
(2,975
)
      Total
$
712,668

 
$
707,373

 
$
5,295

Identifiable assets in Aluminum Extrusions decreased at December 31, 2019 from December 31, 2018 primarily due to accelerated trade name amortization, lower accounts receivable balances due to lower sales and the timing of collections and lower inventory balances, partially offset by the addition of the right-of-use assets resulting from the implementation of the new lease accounting guidance. Identifiable assets in PE Films decreased slightly at December 31, 2019 from December 31, 2018. Identifiable assets in Flexible Packaging Films increased at December 31, 2019 from December 31, 2018 primarily due to current year capital expenditures partially offset by lower inventory balances. Identifiable assets in General corporate increased at December 31, 2019 from December 31, 2018 primarily due to the increase in the fair value of the Company’s investment in kaléo.
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 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. Net sales decreased 5.7% in PE Films primarily due to topsheet business lost from competitive pressures in Europe and Asia, 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. For more information on changes in net sales and volume, see the Segment Analysis below.
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 Aluminum Extrusions decreased primarily as a result of operating inefficiencies relating to the operation of its Niles, Michigan facility. 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.
For more information on changes in operating costs and expenses, see the Segment Analysis below.

27



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.
During 2019, the Company changed the presentation of plant shutdowns, asset impairments, restructuring and other. The table below for 2018 has been provided to be consistent with the 2019 presentation.
Plant shutdowns, asset impairments, restructurings and other. Pre-tax losses associated with plant shutdowns, asset impairments, restructurings and other items in 2018 as detailed below are shown in the EBITDA from ongoing operations table in Note 5 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted. A discussion of unrealized gains and losses on investments can also be found in Note 4 and additional information on restructuring costs can be found in Note 17.

28



($ in millions)
Q1
Q2
Q3
Q4
 
2018
Aluminum Extrusions:
 
 
 
 
 
 
Losses associated with plant shutdowns, asset impairments and restructurings:
 
 
 
 
 
 
 
Other restructuring costs - severance
$
0.1

$

$

$

 
$
0.1

 
 
 
 
 
 
 
 
 
Losses from sale of assets, investment writedowns and other items:
 
 
 
 
 
 
Aluminum Extrusions:
 
 
 
 
 
 
 
Wind damage to roof of Elkhart, Indiana plant2 


0.1


 
0.1

 
Environmental charges at Carthage, Tennessee facility1


0.2

0.1

 
0.3

Subtotal for Aluminum Extrusions


0.3

0.1

 
0.4

 
 
Total for Aluminum Extrusions
$
0.1

$

$
0.3

$
0.1

 
$
0.5

 
 
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
(Gains) losses associated with plant shutdowns, asset impairments and restructurings:
 
 
 
 
 
 
 
Shanghai plant shutdown:
 
 
 
 
 
 
 
 
Asset-related expenses