The effective tax rate used to compute income taxes in the first nine months of 2018 was 172.1% compared to 14.7% in the first nine months of 2017. The significant differences between the U.S. federal statutory rate and the effective tax rate for the first nine months, including the reduction of the U.S. federal corporate income tax rate pursuant to the U.S. Tax Cuts and Jobs Act enacted in December 2017 from 35% to 21% beginning in 2018, is shown in the table provided in Note 12.
Net capitalization and other credit measures are provided in Liquidity and Capital Resources.
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 generally accepted accounting principles in the United States (“GAAP”). The Company believes the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of the 2017 Form 10-K have the greatest potential impact on our financial statements, so Tredegar considers these to be its critical accounting policies. These policies include accounting for impairment of long-lived assets and goodwill, investment accounted for under the fair value method, pension benefits and income taxes. 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. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the consistent application of these policies enables it to provide readers of the financial statements with useful and reliable information about our operating results and financial condition. Since December 31, 2017, there have been no changes in these policies that have had a material impact on results of operations or financial position. For more information on new accounting pronouncements, see Note 14.
Results of Operations
Third Quarter of 2018 Compared with the Third Quarter of 2017
Overall, sales in the third quarter of 2018 increased by 8.2% compared with the third quarter of 2017. Net sales decreased 14.8% in PE Films. Personal Care was down primarily due to lower demand for topsheet, partially offset by increased sales of elastic materials in the third quarter of 2018 versus 2017. Sales were down in Surface Protection, which the Company believes was due to customer inventory corrections. Net sales in Flexible Packaging Films increased 26.7% due to higher demand and additional production from a production line brought back into service in the second quarter of 2018. Net sales increased 20.9% in Aluminum Extrusions primarily due to higher sales volume and an increase in average selling prices as a result of the pass-through to customers of higher market-driven raw material costs. For more information on net sales and volume, see the Executive Summary.
Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales was 15.1% in the third quarter of 2018 compared to 17.8% in the third quarter of 2017. The gross profit margin in PE Films decreased primarily due to lower volume in personal care films and surface protection films, higher operating costs and quality claims against Surface Protection. 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. 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 2017 percentages have changed from the amounts disclosed in the prior year due to the retrospective adoption of ASU 2017-07, which resulted in the separate presentation of “Pension and postretirement benefits” expense in the consolidated statements of income. Historically the Company had reported a portion of its pension and postretirement benefit expenses in cost of goods sold.
As a percentage of sales, selling, general and administrative (“SG&A”) and R&D expenses were 9.7% in the third quarter of 2018, compared with 10.2% in the third quarter of last year. SG&A expenses were virtually flat year-over-year, with the lower SG&A percentage in 2018 being attributable to higher net sales in 2018 versus 2017. The 2017 percentages have changed from the amounts disclosed in the prior year due to the retrospective adoption of ASU 2017-07, which resulted in the separate presentation of “Pension and postretirement benefits” expense in the consolidated statements of income. Historically the Company had reported a portion of its pension and postretirement benefit expenses in SG&A.
Plant shutdowns, asset impairments, restructurings and other items in the third quarter of 2018 and 2017 are shown in the segment operating profit table in Note 11 and are described in detail in Note 3. A discussion of unrealized gains and losses on investments can also be found in Note 7.