UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

 

 

(Mark One)

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended   June 30, 2008

 

 

OR

 

 

o

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

 

(I.R.S. Employer

Incorporation or Organization)

 

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

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

     Large accelerated filer o

 

Accelerated filer x

       Non-accelerated filer o

  (Do not check if a smaller reporting company)

Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

          The number of shares of Common Stock, no par value, outstanding as of July 29, 2008: 33,675,365.




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

June 30,
2008

 

Dec. 31,
2007

 

 

 


 


 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,509

 

$

48,217

 

Accounts and notes receivable, net of allowance for doubtful
accounts and sales returns of $5,993 in 2008 and $5,198 in
2007

 

 

120,771

 

 

97,064

 

Income taxes recoverable

 

 

10,260

 

 

323

 

Inventories

 

 

36,715

 

 

48,666

 

Deferred income taxes

 

 

9,492

 

 

9,172

 

Prepaid expenses and other

 

 

7,418

 

 

4,077

 

Current assets of discontinued operation

 

 

 

 

37,750

 

 

 



 



 

Total current assets

 

 

233,165

 

 

245,269

 

 

 



 



 

Property, plant and equipment, at cost

 

 

665,837

 

 

637,688

 

Less accumulated depreciation

 

 

402,264

 

 

368,605

 

 

 



 



 

Net property, plant and equipment

 

 

263,573

 

 

269,083

 

 

 



 



 

Other assets and deferred charges

 

 

120,229

 

 

116,759

 

Goodwill and other intangibles

 

 

136,164

 

 

135,907

 

Noncurrent assets of discontinued operation

 

 

 

 

17,460

 

 

 



 



 

Total assets

 

$

753,131

 

$

784,478

 

 

 



 



 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

71,602

 

$

67,161

 

Accrued expenses

 

 

37,822

 

 

33,676

 

Current portion of long-term debt

 

 

585

 

 

540

 

Current liabilities of discontinued operation

 

 

 

 

17,152

 

 

 



 



 

Total current liabilities

 

 

110,009

 

 

118,529

 

 

 



 



 

Long-term debt

 

 

56,397

 

 

81,516

 

Deferred income taxes

 

 

83,247

 

 

68,625

 

Other noncurrent liabilities

 

 

15,910

 

 

15,662

 

Noncurrent liabilities of discontinued operation

 

 

 

 

8,818

 

 

 



 



 

Total liabilities

 

 

265,563

 

 

293,150

 

 

 



 



 

Commitments and contingencies (Notes 1 and 2)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, no par value

 

 

38,602

 

 

51,444

 

Common stock held in trust for savings
restoration plan

 

 

(1,308

)

 

(1,303

)

Foreign currency translation adjustment

 

 

33,482

 

 

40,610

 

Gain (loss) on derivative financial instruments

 

 

1,383

 

 

(1,204

)

Pension and other postretirement benefit adjustments

 

 

872

 

 

(3,767

)

Retained earnings

 

 

414,537

 

 

405,548

 

 

 



 



 

Total shareholders’ equity

 

 

487,568

 

 

491,328

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

753,131

 

$

784,478

 

 

 



 



 

See accompanying notes to financial statements.

2



Tredegar Corporation
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Revenues and other items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

234,008

 

$

234,882

 

$

462,488

 

$

479,769

 

Other income (expense), net

 

 

663

 

 

160

 

 

1,220

 

 

453

 

 

 



 



 



 



 

 

 

 

234,671

 

 

235,042

 

 

463,708

 

 

480,222

 

 

 



 



 



 



 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

196,249

 

 

194,597

 

 

390,488

 

 

397,249

 

Freight

 

 

5,797

 

 

5,210

 

 

10,898

 

 

10,265

 

Selling, general and administrative

 

 

14,288

 

 

16,160

 

 

30,774

 

 

32,877

 

Research and development

 

 

2,851

 

 

2,130

 

 

5,334

 

 

4,072

 

Amortization of intangibles

 

 

31

 

 

38

 

 

63

 

 

75

 

Interest expense

 

 

557

 

 

557

 

 

1,438

 

 

1,381

 

Asset impairments and costs associated with exit and
disposal activities

 

 

1,219

 

 

125

 

 

5,159

 

 

858

 

 

 



 



 



 



 

Total

 

 

220,992

 

 

218,817

 

 

444,154

 

 

446,777

 

 

 



 



 



 



 

Income from continuing operations
before income taxes

 

 

13,679

 

 

16,225

 

 

19,554

 

 

33,445

 

Income taxes

 

 

4,814

 

 

5,661

 

 

6,904

 

 

11,746

 

 

 



 



 



 



 

Income from continuing operations

 

 

8,865

 

 

10,564

 

 

12,650

 

 

21,699

 

Income (loss) from discontinued operations

 

 

(207

)

 

(629

)

 

(930

)

 

(1,431

)

 

 



 



 



 



 

Net income

 

$

8,658

 

$

9,935

 

$

11,720

 

$

20,268

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.26

 

$

.27

 

$

.37

 

$

.55

 

Discontinued operations

 

 

(.01

)

 

(.02

)

 

(.03

)

 

(.04

)

 

 



 



 



 



 

Net income

 

$

.25

 

$

.25

 

$

.34

 

$

.51

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.26

 

$

.27

 

$

.37

 

$

.55

 

Discontinued operations

 

 

(.01

)

 

(.02

)

 

(.03

)

 

(.04

)

 

 



 



 



 



 

Net income

 

$

.25

 

$

.25

 

$

.34

 

$

.51

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,997

 

 

39,402

 

 

34,231

 

 

39,337

 

Diluted

 

 

34,211

 

 

39,584

 

 

34,445

 

 

39,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

.04

 

$

.04

 

$

.08

 

$

.08

 

See accompanying notes to financial statements.

3



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

 

 

 

 

 

 

 

 

 

 

Six Months
Ended June 30

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

11,720

 

$

20,268

 

Adjustments for noncash items:

 

 

 

 

 

 

 

Depreciation

 

 

22,379

 

 

22,785

 

Amortization of intangibles

 

 

63

 

 

75

 

Deferred income taxes

 

 

7,123

 

 

(2,528

)

Accrued pension and postretirement benefits

 

 

(2,825

)

 

(897

)

Loss on asset impairments and divestitures

 

 

3,337

 

 

338

 

Changes in assets and liabilities, net of effects of acquisitions and divestitures:

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

(25,162

)

 

(24,774

)

Inventories

 

 

15,913

 

 

2,323

 

Income taxes recoverable

 

 

(9,803

)

 

5,710

 

Prepaid expenses and other

 

 

828

 

 

1,658

 

Accounts payable and accrued expenses

 

 

2,086

 

 

11,343

 

Other, net

 

 

2,180

 

 

719

 

 

 



 



 

Net cash provided by operating activities

 

 

27,839

 

 

37,020

 

 

 



 



 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,461

)

 

(12,070

)

Investment in Harbinger in 2007 ($10 million) and real estate in 2008 and 2007

 

 

(1,722

)

 

(11,056

)

Proceeds from the sale of the aluminum extrusions business in Canada (net of cash included in sale and transaction costs)

 

 

23,616

 

 

 

Proceeds from the sale of assets and property disposals & reimbursements from customers for purchases of equipment in 2007

 

 

248

 

 

3,842

 

 

 



 



 

Net cash provided by (used in) investing activities

 

 

11,681

 

 

(19,284

)

 

 



 



 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(2,736

)

 

(3,163

)

Debt principal payments

 

 

(47,209

)

 

(30,341

)

Borrowings

 

 

22,000

 

 

 

Repurchases of Tredegar common stock

 

 

(12,904

)

 

 

Proceeds from exercise of stock options

 

 

 

 

6,437

 

 

 



 



 

Net cash used in financing activities

 

 

(40,849

)

 

(27,067

)

 

 



 



 

Effect of exchange rate changes on cash

 

 

1,621

 

 

830

 

 

 



 



 

Decrease in cash and cash equivalents

 

 

292

 

 

(8,501

)

Cash and cash equivalents at beginning of period

 

 

48,217

 

 

40,898

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

48,509

 

$

32,397

 

 

 



 



 

See accompanying notes to financial statements.

4



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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

Common
Stock

 

Retained
Earnings

 

Trust for
Savings
Restora-
tion Plan

 

Foreign
Currency
Trans-
lation

 

Gain
(Loss) on
Derivative
Financial
Instruments

 

Pension &
Other Post-
retirement
Benefit
Adjust.

 

Total
Share-
holders’
Equity

 

















Balance December 31, 2007

 

$

51,444

 

$

405,548

 

$

(1,303

)

$

40,610

 

$

(1,204

)

$

(3,767

)

$

491,328

 
























Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,720

 

 

 

 

 

 

 

 

 

 

11,720

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment (net of tax of $3,840)

 

 

 

 

 

 

 

 

7,164

 

 

 

 

 

 

7,164

 

Reclassification of foreign currency translation gain realized on the sale of the aluminum extrusions business in Canada (net of tax of $7,696)

 

 

 

 

 

 

 

 

(14,292

)

 

 

 

 

 

(14,292

)

Derivative financial instruments adjustment (net of tax of $1,616)

 

 

 

 

 

 

 

 

 

 

2,587

 

 

 

 

2,587

 

Amortization of prior service costs and net gains or losses (net of tax of $130)

 

 

 

 

 

 

 

 

 

 

 

 

(232

)

 

(232

)

Reclassification of net actuarial losses and prior service costs realized on the sale of the aluminum extrusions business in Canada (net of tax of $1,799)

 

 

 

 

 

 

 

 

 

 

 

 

4,871

 

 

4,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,818

 

Cash dividends declared ($.08 per share)

 

 

 

 

(2,736

)

 

 

 

 

 

 

 

 

 

(2,736

)

Stock-based compensation expense & other

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

62

 

Repurchases of Tredegar common stock

 

 

(12,904

)

 

 

 

 

 

 

 

 

 

 

 

(12,904

)

Tredegar common stock purchased by trust for savings restoration plan

 

 

 

 

5

 

 

(5

)

 

 

 

 

 

 

 

 
























Balance June 30, 2008

 

$

38,602

 

$

414,537

 

$

(1,308

)

$

33,482

 

$

1,383

 

$

872

 

$

487,568

 
























See accompanying notes to financial statements.

5



TREDEGAR CORPORATION
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)

 

 

1.

In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and Subsidiaries (“Tredegar,” “we,” “us” or “our”) contain all adjustments necessary to present fairly, in all material respects, Tredegar’s consolidated financial position as of June 30, 2008, the consolidated results of operations for the three and six months ended June 30, 2008 and 2007, the consolidated cash flows for the six months ended June 30, 2008 and 2007, and the consolidated changes in shareholders’ equity for the six months ended June 30, 2008. All such adjustments are deemed to be of a normal, recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Tredegar’s Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the six months ended June 30, 2008, are not necessarily indicative of the results to be expected for the full year.

 

 

2.

Plant shutdowns, asset impairments and restructurings in the second quarter of 2008 shown in the segment operating profit table in Note 8 include:


 

 

 

 

A pretax charge of $854,000 for asset impairments in Film Products;

 

 

 

 

Pretax charges of $365,000 for severance and other employee-related costs in connection with restructurings in Film Products ($90,000) and Aluminum Extrusions ($275,000); and

 

 

 

 

A pretax charge of $105,000 related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).

 

 

 

 

          Plant shutdowns, asset impairments and restructurings in the second quarter of 2007 shown in the segment operating profit table in Note 8 include:


 

 

 

 

A pretax charge of $99,000 for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; and

 

 

 

 

A pretax charge of $26,000 related to the shutdown of the films manufacturing facility in LaGrange, Georgia.

 

 

 

 

          Plant shutdowns, asset impairments and restructurings in the first six months of 2008 shown in the segment operating profit table in Note 8 include:

 

 

 


 

 

 

 

Pretax charges of $2.7 million for severance and other employee-related costs in connection with restructurings in Film Products ($2.2 million) and Aluminum Extrusions ($510,000);

 

 

 

 

Pretax charges of $2.5 million for asset impairments in Film Products; and

 

 

 

 

A pretax charge of $105,000 related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).

 

 

 

 

          The severance in Film Products includes a reduction in workforce (approximately 6% of Film Products’ total employees) that is expected to save $2.6 million in 2008 and $4.2 million on an annualized basis.

6



 

 

 

 

          Plant shutdowns, asset impairments and restructurings in the first six months of 2007 shown in the segment operating profit table in Note 8 include:

 

 

 

 

A pretax charge of $366,000 related to the estimated loss on the sub-lease of a portion of the AFBS, Inc. (formerly know as Therics, Inc.) facility in Princeton, New Jersey;

 

 

 

 

A pretax charge of $338,000 for asset impairments relating to machinery and equipment in Film Products;

 

 

 

 

A pretax charge of $99,000 for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; and

 

 

 

 

A pretax charge of $55,000 related to the shutdown of the films manufacturing facility in LaGrange, Georgia.

 

 

 

 

          On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada for a purchase price of $25.5 million to an affiliate of H.I.G. Capital. The purchase price is subject to adjustment based upon the actual working capital of the business at the time of sale. The final purchase price is estimated at $24.6 million, with the decline from the amount estimated at February 12, 2008 due to the excess of estimated working capital over actual working capital. We recognized a charge of $1.1 million ($430,000 after taxes) in the first quarter of 2008 and $207,000 ($207,000 after taxes) in the second quarter of 2008, which were in addition to the asset impairment charges recognized in 2007, to adjust primarily for differences in the carrying value of assets and liabilities and related tax benefits associated with the business sold since December 31, 2007. The remaining after-tax loss for discontinued operations in 2008 of $293,000 relates to the loss recognized in the first quarter from operations up through the date of sale. Tredegar expects to realize cash income tax benefits in 2008 from the sale of approximately $12 million. All historical results for this business have been reflected as discontinued operations in the accompanying financial statements and tables, except cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.

 

 

 

 

          A reconciliation of the beginning and ending balances of accrued expenses associated with plant shutdowns and divestitures for the six months ended June 30, 2008 is as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(In Thousands)

 

Severance

 

Asset
Impairments

 

Accelerated
Depreciation (a)

 

Other (b)

 

Total

 


















Balance at December 31, 2007

 

$

363

 

$

 

$

 

$

5,838

 

$

6,201

 

Changes in 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

 

2,655

 

 

855

 

 

1,649

 

 

100

 

 

5,259

 

Cash spent

 

 

(1,975

)

 

 

 

 

 

(784

)

 

(2,759

)

Charged against assets

 

 

 

 

(855

)

 

(1,649

)

 

 

 

(2,504

)


















Balance at June 30, 2008

 

$

1,043

 

$

 

$

 

$

5,154

 

$

6,197

 



 

 

 

(a) Represents depreciation accelerated due to plant shutdowns based on a remaining useful life of less than one year.

 

 

 

(b) Other includes primarily accrued losses on a sub-lease at a facility in Princeton, New Jersey.

7



 

 

3.

The components of other comprehensive income or loss are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 





(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











Net income

 

$

8,658

 

$

9,935

 

$

11,720

 

$

20,268

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustment arising during period

 

 

2,811

 

 

5,796

 

 

7,164

 

 

7,834

 

Reclassification adjustment of foreign currency translation gain included in income (related to sale of aluminum extrusions business in Canada - see Note 2)

 

 

 

 

 

 

(14,292

)

 

 

 

 













Foreign currency translation adjustment

 

 

2,811

 

 

5,796

 

 

(7,128

)

 

7,834

 

 

 













Derivative financial instrument adjustment

 

 

(590

)

 

198

 

 

2,587

 

 

431

 

Pension and other post-retirement benefit adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service costs and net gains or losses

 

 

(116

)

 

299

 

 

(232

)

 

594

 

Reclassification of net actuarial losses and prior service costs (related to sale of aluminum extrusions business in Canada - see Note 2)

 

 

 

 

 

 

4,871

 

 

 

 

 













Pension and other post-retirement benefit adjustment

 

 

(116

)

 

299

 

 

4,639

 

 

594

 















Comprehensive income

 

$

10,763

 

$

16,228

 

$

11,818

 

$

29,127

 
















 

 

4.

The components of inventories are as follows:


 

 

 

 

 

 

 

 







(In Thousands)

 

June 30
2008

 

Dec. 31
2007

 







Finished goods

 

$

7,944

 

$

10,004

 

Work-in-process

 

 

1,758

 

 

3,624

 

Raw materials

 

 

12,319

 

 

19,369

 

Stores, supplies and other

 

 

14,694

 

 

15,669

 









Total

 

$

36,715

 

$

48,666

 










 

 

5.

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 





(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











Weighted average shares outstanding used to compute basic earnings (loss) per share

 

 

33,997

 

 

39,402

 

 

34,231

 

 

39,337

 

Incremental shares attributable to stock options and restricted stock

 

 

214

 

 

182

 

 

214

 

 

200

 















Shares used to compute diluted earnings (loss) per share

 

 

34,211

 

 

39,584

 

 

34,445

 

 

39,537

 
















 

 

 

          Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During the three and six months ended

8



 

 

 

June 30, 2008 and three and six months ended June 30, 2007, 158,507, 689,697, 52,845 and 61,125, respectively, of average out-of-the-money options to purchase shares were excluded from the calculation of incremental shares attributable to stock options and restricted stock.

 

 

6.

Our investment in Harbinger Capital Partners Special Situations Fund, L.P. had a reported capital account value of $31.8 million at June 30, 2008, compared with $23.0 million at December 31, 2007. This investment has a carrying value in Tredegar’s balance sheet of $10 million (included in “Other assets and deferred charges”), which represents the amount invested on April 2, 2007.

 

 

 

          During the third quarter of 2007, we invested $6.5 million in a privately held drug delivery company representing ownership on a fully diluted basis of approximately 23%. The company is developing and commercializing state of the art drug delivery systems designed to improve patient compliance and outcomes. The investment is accounted for under the fair value method. We elected the fair value option over the equity method of accounting since our investment objectives are similar to those of venture capitalists, which typically do not have controlling financial interests (venture capital funds use the fair value method to account for their investment portfolios). At June 30, 2008, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) equaled the amount invested.

 

 

 

          On the date of our investment (August 31, 2007), we believed that the amount we paid for our ownership interest and liquidation preferences was based on Level 2 inputs, including investments by other investors. Subsequent to August 31, 2007, and until the next round of financing, we believe fair value estimates drop to Level 3 inputs since there is no secondary market for our ownership interest. In addition, the company currently has no product sales. Accordingly, after the latest financing and until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. As a result, an increase in our estimate of the fair value of our ownership interest is unlikely unless a significant new round of financing, merger or initial public offering indicates a higher value. However, if the company does not meet its development and commercialization milestones and there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus plans as of August 31, 2007, or a new round of financing or other significant financial transaction indicates a lower value, then our estimate of the fair value of our ownership interest in the company is likely to decline.

 

 

 

          Had we not elected to account for our investment under the fair value method, we would have been required to use the equity method of accounting. We were not allocated any profits or losses for the year ended December 31, 2007 based on the formulas contained in the company’s operating agreement. We estimate that our allocation of losses for the first and second quarter of 2008 (based on the formulas contained in the company’s operating agreement) was approximately $940,000 and $1.5 million, respectively.

9



 

 

 

          The condensed balance sheets for the drug delivery company at June 30, 2008 and December 31, 2007 and related condensed statements of income for the first and second quarters of 2008 and the year and four months ended December 31, 2007, adjusted on a purchase accounting basis to the valuation implied by the latest round of financing in August-September 2007, are provided below:


 

 

 

 

 

 

 

 

 

 

 

 

















(Unaudited)

 

6/30/08

 

12/31/07

 

 

 

6/30/08

 

12/31/07

 













Assets

 

 

 

 

 

 

 

Liabilities & Members’ Equity

 

 

 

 

 

 

 

Cash & cash equivalents

 

$

4,179

 

$

6,781

 

Liabilities

 

$

1,802

 

$

1,494

 

Other tangible assets

 

 

1,040

 

 

1,253

 

Contributed capital

 

 

12,354

 

 

12,354

 

Identifiable intangibles (15 year life)

 

 

3,747

 

 

3,901

 

Net equity appreciation implied from purchase accounting adjustments

 

 

12,805

 

 

12,805

 

Goodwill

 

 

10,194

 

 

10,194

 

Accumulated losses

 

 

(7,801

)

 

(4,524

)













Total assets

 

$

19,160

 

$

22,129

 

Total liabilities & members’ equity

 

$

19,160

 

$

22,129

 


















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr. ’08

 

1st Qtr. ’08

 

2007

 

Sept.-Dec. ’07

 











Revenues & Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

     

$

     

$

     

$

 

Costs & expenses

 

 

1,834

 

 

1,443

 

 

2,445

 

 

800

 











Net loss

 

$

(1,834

)

$

(1,443

)

$  

(2,445

)

$

(800

)

 

 




 

 

7.

The components of net periodic benefit income (cost) for our pension and other post-retirement benefit programs reflected in consolidated results for continuing operations are shown below:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

Pension
Benefits for 3 Months
Ended June 30

 

Other Post-Retirement
Benefits for 3 Months
Ended June 30

 

 

 


 



(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











Service cost

 

$

(1,053

)

$

(1,066

)

$

(18

)

$

(34

)

Interest cost

 

 

(3,055

)

 

(2,858

)

 

(128

)

 

(103

)

Expected return on plan assets

 

 

5,486

 

 

5,096

 

 

 

 

 

Amortization of prior service costs, gains or losses and net transition asset

 

 

181

 

 

(439

)

 

 

 

(4

)











Net periodic benefit income (cost)

 

$

1,559

 

$

733

 

$

(146

)

$

(141

)
















 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

Pension
Benefits for 6 Months
Ended June 30

 

Other Post-Retirement
Benefits for 6 Months
Ended June 30

 

 

 


 



(In Thousands)

 

 

2008

 

 

2007

 

 

2008

 

 

2007

 















Service cost

 

$

(2,105

)

$

(2,131

)

$

(36

)

$

(55

)

Interest cost

 

 

(6,110

)

 

(5,717

)

 

(257

)

 

(254

)

Expected return on plan assets

 

 

10,971

 

 

10,192

 

 

 

 

 

Amortization of prior service costs, gains or losses and net transition asset

 

 

362

 

 

(878

)

 

 

 

 















Net periodic benefit income (cost)

 

$

3,118

 

$

1,466

 

$

(293

)

$

(309

)
















 

 

 

          As a result of adopting a required new accounting standard at the end of 2006, beginning in 2007 the service cost, interest cost, employee contributions, other and expected return on plan assets components of net periodic benefit income or cost are included in the consolidated balance sheet with the assets and liabilities comprising the funded status of our pension and other post-retirement benefit plans, which are included in “Other assets and deferred charges” and “Other noncurrent liabilities”. The amortization component of net periodic benefit income or cost is reflected in other comprehensive income or loss (net of related income taxes), which is included directly in shareholder’s equity.

10



 

 

 

          We contributed approximately $167,000 to our pension plans for continuing operations in 2007 and expect to contribute a similar amount in 2008. We fund our other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which were $441,000 for the year ended December 31, 2007.

 

 

8.

Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. There have been no significant changes to identifiable assets by segment since December 31, 2007, except for working capital fluctuations resulting from changes in business conditions or seasonal factors, changes caused by movement of foreign exchange rates and changes in property, plant and equipment due to capital expenditures, depreciation, asset impairments and other activity, which are described under Item 2 of Part I of this report. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.

Tredegar Corporation
Net Sales and Operating Profit by Segment
(In Thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

135,529

 

$

130,260

 

$

267,843

 

$

266,321

 

Aluminum Extrusions

 

 

92,682

 

 

99,412

 

 

183,747

 

 

203,183

 

 

 



 



 



 



 

Total net sales

 

 

228,211

 

 

229,672

 

 

451,590

 

 

469,504

 

Add back freight

 

 

5,797

 

 

5,210

 

 

10,898

 

 

10,265

 

 

 



 



 



 



 

Sales as shown in the Consolidated Statements of Income

 

$

234,008

 

$

234,882

 

$

462,488

 

$

479,769

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

13,479

 

$

13,762

 

$

24,265

 

$

30,582

 

Plant shutdowns, asset impairments and restructurings

 

 

(944

)

 

(26

)

 

(4,649

)

 

(393

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

2,406

 

 

5,329

 

 

3,948

 

 

9,978

 

Plant shutdowns, asset impairments and restructurings

 

 

(380

)

 

(99

)

 

(615

)

 

(99

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructurings

 

 

 

 

 

 

 

 

(366

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

14,561

 

 

18,966

 

 

22,949

 

 

39,702

 

Interest income

 

 

188

 

 

283

 

 

446

 

 

671

 

Interest expense

 

 

557

 

 

557

 

 

1,438

 

 

1,381

 

Stock option-based compensation costs

 

 

278

 

 

198

 

 

338

 

 

467

 

Corporate expenses, net

 

 

235

 

 

2,269

 

 

2,065

 

 

5,080

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

13,679

 

 

16,225

 

 

19,554

 

 

33,445

 

Income taxes

 

 

4,814

 

 

5,661

 

 

6,904

 

 

11,746

 

 

 



 



 



 



 

Income from continuing operations

 

 

8,865

 

 

10,564

 

 

12,650

 

 

21,699

 

Income (loss) from discontinued operations

 

 

(207

)

 

(629

)

 

(930

)

 

(1,431

)

 

 



 



 



 



 

Net income

 

$

8,658

 

$

9,935

 

$

11,720

 

$

20,268

 

 

 



 



 



 



 

11



 

 

9.

The effective tax rate used to compute income taxes from continuing operations was 35.2% in the second quarter of 2008 compared with 34.9% in the second quarter of 2007, and 35.3% in the first six months of 2008 compared with 35.1% in the first six months of 2007. The increase in the effective tax rate for continuing operations for 2008 versus 2007 was mainly due to higher effective tax rates for operations outside of the U.S. and expiration at December 31, 2007 of the research & development tax credit, partially offset by a lower state income tax effective rate and lower valuation allowances for capital loss carry-forwards.

 

 

 

          A reconciliation of our unrecognized uncertain tax positions since December 31, 2007, is shown below:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





















 

 

Balance at
Dec. 31,
2007

 

 

 

 

 

Increase
(Decrease)
Due to
Settlements
with
Taxing
Authorities

 

Reductions
Due to
Lapse of
Statute of
Limitations

 

Balance at
June 30,
2008

 

Increase (Decrease)
Due to Tax Positions
Taken in


Current
Period

 

Prior
Period


Gross unrecognized tax benefits on uncertain tax positions (reflected in current income tax and other noncurrent liability accounts in the balance sheet)

 

$

3,268

 

$

96

 

$

 

$

(31

)

$

 

$

3,333

 

Deferred income tax assets related to unrecognized tax benefits on uncertain tax positions for which ultimate deductibility is highly certain but for which the timing of the deduction is uncertain (reflected in deferred income tax accounts in the balance sheet)

 

 

(2,325

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,358

)





















Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rate if recognized

 

 

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

975

 





















Interest and penalties accrued on deductions taken relating to uncertain tax positions with the balance shown in current income tax and other noncurrent liability accounts in the balance sheet

 

 

1,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,351

 

Related deferred income tax assets recognized on interest and penalties

 

 

(436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(494

)





















Interest and penalties accrued on uncertain tax positions net of related deferred income tax benefits, which would impact the effective tax rate if recognized

 

 

759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

857

 





















Total net unrecognized tax benefits on uncertain tax positions reflected in the balance sheet, which would impact the effective tax rate if recognized

 

$

1,702

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,832

 






















 

 

 

          We anticipate that by December 31, 2008, we will settle several disputed issues raised by the IRS during its examination of our U.S. income tax returns for 2001-2003, the most significant of which regards the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes. It is reasonably possible that a settlement with the IRS for the disputed issues would cost us $1.4 million, which would be applied against the balance of unrecognized tax benefits.

 

 

 

          Tredegar and its subsidiaries file income tax returns in U.S., state and foreign jurisdictions. Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2001. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2004.

12



 

 

10.

The table below summarizes share repurchase activity by month for 2008:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


















Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
Per Share
Before
Broker
Commissions

 

 

 

 

 

 

 

Maximum
Number of
Shares at End
of Period
That May Yet
be Purchased
Under January
2008 Program

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares
Purchased as Part of:


August 2006
Program (a)

 

January 2008
Program (b)













January 2008

 

 

66,500

 

$

15.86

 

 

66,500

 

 

 

 

5,000,000

 

February 2008

 

 

16,300

 

 

15.38

 

 

 

 

16,300

 

 

4,983,700

 

March 2008

 

 

386,500

 

 

15.44

 

 

 

 

402,800

 

 

4,597,200

 

April 2008

 

 

 

 

 

 

 

 

402,800

 

 

4,597,200

 

May 2008

 

 

311,800

 

 

14.84

 

 

 

 

714,600

 

 

4,285,400

 

June 2008

 

 

69,400

 

 

14.23

 

 

 

 

784,000

 

 

4,216,000

 



















 

 

 

(a) On August 8, 2006, our board of directors approved a share repurchase program authorizing management at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of our outstanding common stock.

 

 

 

(b) On January 7, 2008, our board of directors approved a share repurchase program authorizing management at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of our outstanding common stock. This share repurchase program replaces Tredegar’s previous share repurchase authorization described in (a) above.

 

 

11.

The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 addresses concerns that the disclosures required by SFAS No. 133 do not provide adequate information about the impact derivative instruments can have on an entity’s financial position, results of operations and cash flows. SFAS 161 amends and expands the disclosures required by SFAS 133 so that they provide an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments affect an entity’s financial position, financial performance, and cash flows. The new disclosure guidance will apply to all interim and annual reporting periods for which a balance sheet and income statement are presented. SFAS 161 is effective for both interim and annual reporting periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not believe that the adoption of SFAS 161 will have a material impact on our financial statements and related disclosures.

13



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking and Cautionary Statements

          Some of the information contained in this quarterly report on Form 10-Q may constitute “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. When we use words such as “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, we do so to identify forward-looking statements. Such statements are based on our 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. Unless the context requires otherwise, all references herein to “Tredegar,” “we,” “us” or “our” are to Tredegar Corporation and its consolidated subsidiaries.

Executive Summary

          Second-quarter 2008 income from continuing operations was $8.9 million (26 cents per share) compared with $10.6 million (27 cents per share) in the second quarter of 2007. Income from continuing operations for the first six months of 2008 was $12.7 million (37 cents per share) compared with $21.7 million (55 cents per share) in the first six months of 2007. Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6. The following tables present Tredegar’s net sales and operating profit by segment for the second quarter and six months ended June 30, 2008 and 2007:

Tredegar Corporation
Net Sales and Operating Profit by Segment
(In Thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

135,529

 

$

130,260

 

$

267,843

 

$

266,321

 

Aluminum Extrusions

 

 

92,682

 

 

99,412

 

 

183,747

 

 

203,183

 

 

 



 



 



 



 

Total net sales

 

 

228,211

 

 

229,672

 

 

451,590

 

 

469,504

 

Add back freight

 

 

5,797

 

 

5,210

 

 

10,898

 

 

10,265

 

 

 



 



 



 



 

Sales as shown in the Consolidated Statements of Income

 

$

234,008

 

$

234,882

 

$

462,488

 

$

479,769

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

13,479

 

$

13,762

 

$

24,265

 

$

30,582

 

Plant shutdowns, asset impairments and restructurings

 

 

(944

)

 

(26

)

 

(4,649

)

 

(393

)

 

Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

2,406

 

 

5,329

 

 

3,948

 

 

9,978

 

Plant shutdowns, asset impairments and restructurings

 

 

(380

)

 

(99

)

 

(615

)

 

(99

)

 

AFBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructurings

 

 

 

 

 

 

 

 

(366

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

14,561

 

 

18,966

 

 

22,949

 

 

39,702

 

Interest income

 

 

188

 

 

283

 

 

446

 

 

671

 

Interest expense

 

 

557

 

 

557

 

 

1,438

 

 

1,381

 

Stock option-based compensation costs

 

 

278

 

 

198

 

 

338

 

 

467

 

Corporate expenses, net

 

 

235

 

 

2,269

 

 

2,065

 

 

5,080

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

13,679

 

 

16,225

 

 

19,554

 

 

33,445

 

Income taxes

 

 

4,814

 

 

5,661

 

 

6,904

 

 

11,746

 

 

 



 



 



 



 

Income from continuing operations

 

 

8,865

 

 

10,564

 

 

12,650

 

 

21,699

 

Income (loss) from discontinued operations

 

 

(207

)

 

(629

)

 

(930

)

 

(1,431

)

 

 



 



 



 



 

Net income

 

$

8,658

 

$

9,935

 

$

11,720

 

$

20,268

 

 

 



 



 



 



 

14



          Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance.

Film Products. Second-quarter net sales in Film Products were $135.5 million, up 4.0% from $130.3 million in the second quarter of 2008, while operating profit from ongoing operations decreased to $13.5 million in the second quarter of 2008 from $13.8 million in 2007. Volume was 56.8 million pounds in the second quarter of 2008, down 6% from 60.4 million pounds in the second quarter of 2007.

          Net sales in Film Products for the first six months of 2008 were $267.8 million, up slightly from $266.3 million in the first six months of 2007. Operating profit from ongoing operations was $24.3 million in the first six months of 2008, down 20.6% from $30.6 million in the first six months of last year. Volume was 114.8 million pounds in the first six months of 2008, down 8.7% from 125.7 million pounds in the first six months of 2007.

          Volume was down in the second quarter and first half of 2008 compared with the same periods last year primarily due to a decrease in sales of lower value surface protection films, personal care materials and packaging materials. Net sales increased due to appreciation of the U.S. dollar value of currencies for operations outside of the U.S. and higher selling prices from the pass-through of higher resin costs, partially offset by the decline in volume.

          Operating profit from ongoing operations decreased in the second quarter and first half of 2008 versus the same periods in 2007 due primarily to competitive pressures, particularly for personal care materials, packaging materials and lower value surface protection films. In addition, operating profit benefited from appreciation of the U.S. dollar value of currencies for operations outside of the U.S. (the favorable impact from currency rate changes was approximately $1.3 million and $2.5 million in the second quarter and first six months of 2008, respectively) but was adversely affected by the lag in the pass-through of increases in resin costs (unfavorable impact estimated of $2 million and $3.2 million in the second quarter and first six months of 2008, respectively). Higher energy costs also had an adverse impact on results. Unfavorable variances were partially offset by cost reduction efforts. Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days.

          Operating profits in Film Products continue to fluctuate from quarter-to-quarter. Competitive pressures, particularly for personal care materials, packaging materials and lower value surface protection films, have had an adverse impact on volume and profits. Future operating profit levels in Film Products will depend on our ability to deliver product innovations, reduce costs and pass-through unprecedented increases in resin prices and energy costs. During the first quarter of 2008, we announced a restructuring that included a 6% reduction of Film Products’ workforce that is expected to save $2.6 million in 2008 and $4.2 million on an annualized basis.

          Capital expenditures in Film Products were $7.1 million in the first six months of 2008 compared with $8.7 million in the first six months of last year, and are projected to be approximately $25 million in 2008. Depreciation expense was $17.8 million in the first six months of 2008 compared with $16.5 million in the first six months of last year, and is projected to be approximately $34 million in 2008.

Aluminum Extrusions. Second-quarter net sales from continuing operations in Aluminum Extrusions were $92.7 million, down 6.7% from $99.4 million in the second quarter of 2007. Operating profit from ongoing U.S. operations decreased to $2.4 million in the second quarter of 2008, down 55% from $5.3 million in the second quarter of 2007. Volume from continuing operations decreased to 35.4 million

15



pounds in the second quarter of 2008, down 14.7% from 41.5 million pounds in the second quarter of 2007.

          Net sales in Aluminum Extrusions for the first six months of 2008 were $183.7 million, down 9.6% from $203.2 million in the first six months of 2007. Operating profit from ongoing U.S. operations was $3.9 million in the first six months of 2008, down 61% from $10.0 million in the first six months of last year. Volume was 72.5 million pounds in the first six months of 2008, down 13.6% from 83.9 million pounds in the first six months of 2007.

          The decreases in net sales and ongoing operating profit from continuing operations in the second quarter and first half of 2008 compared with the same periods last year were mainly due to lower volume. Higher charges for bad debts also had an adverse impact on profits (bad debt charges increased by approximately $700,000 in the second quarter and $850,000 in the first half of 2008 versus last year). Shipments declined in most markets. Higher natural gas costs were mostly offset by an energy surcharge.

          Capital expenditures for continuing operations in Aluminum Extrusions were $3.3 million in the first half of 2008 compared with $2.8 million in the first half of last year, and are projected to be approximately $18 million in 2008. In January 2008, Tredegar announced plans to spend approximately $24 million over the following 18 months to expand the capacity at its plant in Carthage, Tennessee. In 2007, approximately 65% of the sales of aluminum extrusions from operations in the U.S. were related to non-residential construction, and this additional capacity will increase Tredegar’s capabilities in this sector. Depreciation expense was $4.0 million in the first half of 2008 compared with $4.2 million in the first half of last year, and is projected to be approximately $7.8 million in 2008.

          On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada for a purchase price of $25.5 million to an affiliate of H.I.G. Capital. The purchase price is subject to adjustment based upon the actual working capital of the business at the time of sale. The final purchase price is estimated at $24.6 million, with the decline from the amount estimated at February 12, 2008 due to the excess of estimated working capital over actual working capital. Tredegar expects to realize cash income tax benefits in 2008 from the sale of approximately $12 million. All historical results for this business have been reflected as discontinued operations in the accompanying financial tables.

          Other Items. Net pension income from continuing operations was $1.6 million in the second quarter and $3.1 million in the first six months of 2008, a favorable change of $826,000 (2 cents per share after taxes) and $1.7 million (3 cents per share after taxes), respectively, from amounts recognized in the comparable periods of 2007. Most of the favorable changes relate to a pension plan that is reflected in “Corporate expenses, net” in the operating profit by segment table. We contributed approximately $167,000 to our pension plans for continuing operations in 2007 and expect to contribute a similar amount in 2008. Corporate expenses, net also declined due to adjustments to accruals for certain performance-based compensation programs.

          Interest expense was $557,000 in the second quarters of 2008 and 2007, and $1.4 million in the first half of 2008 and 2007, with higher average debt levels offset by lower average interest rates.

          The effective tax rate used to compute income taxes from continuing operations was 35.2% in the second quarter of 2008 compared with 34.9% in the second quarter of 2007, and 35.3% in the first six months of 2008 compared with 35.1% in the first six months of 2007. The increase in the effective tax rate for continuing operations for 2008 versus 2007 was mainly due to higher effective tax rates for operations outside of the U.S. and expiration at December 31, 2007 of the research & development tax credit, partially offset by a lower state income tax effective rate and lower valuation allowances for capital loss carry-forwards.

16



          Our investment in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”) had a reported capital account value of $31.8 million at June 30, 2008, compared with $23.0 million at December 31, 2007. This investment has a carrying value in our balance sheet of $10 million, which represents the amount invested on April 2, 2007.

          We repurchased 381,200 shares of our stock during the second quarter bringing total repurchases to 5.7 million shares over the last twelve months ended June 30, 2008. Additional information on net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 21.

Critical Accounting Policies

          In the ordinary course of business, we make 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. We believe 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 our Annual Report on Form 10-K for the year ended December 31, 2007, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our 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. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition. Since December 31, 2007, there have been no changes in these policies that have had a material impact on results of operations or financial position. See Note 2 on page 6 for losses related to plant shutdowns, asset impairments and restructurings occurring during the second quarter and first six months of 2008 and the comparable periods in 2007.

Recently Issued Accounting Standards

          The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 addresses concerns that the disclosures required by SFAS No. 133 do not provide adequate information about the impact derivative instruments can have on an entity’s financial position, results of operations and cash flows. SFAS 161 amends and expands the disclosures required by SFAS 133 so that they provide an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments affect an entity’s financial position, financial performance, and cash flows. The new disclosure guidance will apply to all interim and annual reporting periods for which a balance sheet and income statement are presented. SFAS 161 is effective for both interim and annual reporting periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not believe that the adoption of SFAS 161 will have a material impact on our financial statements and related disclosures.

17



Results of Operations

Second Quarter 2008 Compared with Second Quarter 2007

          Overall, sales in the second quarter of 2008 decreased slightly compared with 2007. Net sales (sales less freight) increased 4.0% in Film Products primarily due to appreciation of the U.S. dollar value of currencies for operations outside of the U.S. and higher selling prices from the pass-through of higher resin costs, partially offset by the decline in volume. Volume was down in the second quarter compared with last year primarily due to a decrease in sales of lower value surface protection films, personal care materials and packaging materials. Net sales decreased 6.7% in Aluminum Extrusions due to lower volume partially offset by the pass-through of higher average aluminum costs. Shipments declined in most markets. For more information on net sales and volume, see the executive summary beginning on page 14.

          Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 13.7% in the second quarter of 2008 from 14.9% in 2007. The gross profit margin decreased in Film Products and Aluminum Extrusions primarily because of the decline in volume noted above.

          As a percentage of sales, selling, general and administrative and R&D expenses were 7.3% in the second quarter of 2008, down from 7.8% in the second quarter of last year. The decrease is primarily due to higher pension income, reductions to accruals for certain performance-based compensation programs and lower selling, general and administrative expenses in Film Products from cost reduction efforts.

          Plant shutdowns, asset impairments and restructurings in the second quarter of 2008 shown in the segment operating profit table on page 14 include:

 

 

A pretax charge of $854,000 for asset impairments in Film Products;

 

 

Pretax charges of $365,000 for severance and other employee-related costs in connection with restructurings in Film Products ($90,000) and Aluminum Extrusions ($275,000); and

 

 

A pretax charge of $105,000 related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).

          See the executive summary beginning on page 14 for information on our cost reduction efforts.

          Plant shutdowns, asset impairments and restructurings in the second quarter of 2007 shown in the segment operating profit table on page 14 include:

 

 

A pretax charge of $99,000 for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; and

 

 

A pretax charge of $26,000 related to the shutdown of the films manufacturing facility in LaGrange, Georgia.

18



          Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $188,000 in the second quarter of 2008 and $283,000 in 2007. Interest expense was $557,000 in both the second quarters of 2008 and 2007 as higher average debt levels were offset by lower average interest rates. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 









 

 

Three Months
Ended June 30

 

 

 


 

(In Millions)

 

2008

 

2007

 







Floating-rate debt with interest charged on a rollover basis at one-month LIBOR:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

51.1

 

$

39.6

 

Average interest rate

 

 

3.4

%

 

6.1

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

2.0

 

$

2.2

 

Average interest rate

 

 

4.3

%

 

3.3

%









Total debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

53.1

 

$

41.8

 

Average interest rate

 

 

3.4

%

 

6.0

%









          The effective tax rate used to compute income taxes from continuing operations was 35.2% in the second quarter of 2008 compared with 34.9% in the second quarter of 2007. The increase in the effective tax rate for continuing operations for 2008 versus 2007 was mainly due to higher effective tax rates for operations outside of the U.S. and expiration at December 31, 2007 of the research & development tax credit, partially offset by a lower state income tax effective rate and lower valuation allowances for capital loss carry-forwards.

First Six Months of 2008 Compared with First Six Months of 2007

          Overall, sales in the first six months of 2008 decreased by 3.6% compared with 2007. Net sales (sales less freight) increased slightly in Film Products primarily due to appreciation of the U.S. dollar value of currencies for operations outside of the U.S. and higher selling prices from the pass-through of higher resin costs, partially offset by a decrease in volume of lower value surface protection films, personal care materials and packaging materials. Net sales decreased 9.6% in Aluminum Extrusions due to lower volume, which decreased 13.6% to 72.5 million pounds in the first six months of 2008 compared with 83.9 million pounds in the first six months of 2007. Shipments declined in most markets. For more information on net sales and volume, see the executive summary beginning on page 14.

          Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 13.2% in the first six months of 2008 from 15.1% in 2007. The gross profit margin decreased in Film Products and Aluminum Extrusions primarily because of the decline in volume noted above.

          As a percentage of sales, selling, general and administrative and R&D expenses were 7.8% in the first six months of 2008, slightly higher than the 7.7% in 2007. Higher selling, general and administrative expenses as a percentage of net sales in Aluminum Extrusions due to a decline in sales was partially offset by higher pension income and reductions to accruals for certain performance-based compensation programs.

19



          Plant shutdowns, asset impairments and restructurings in the first six months of 2008 shown in the segment operating profit table on page 14 include:

 

 

Pretax charges of $2.7 million for severance and other employee-related costs in connection with restructurings in Film Products ($2.2 million) and Aluminum Extrusions ($510,000);

 

 

Pretax charges of $2.5 million for asset impairments in Film Products; and

 

 

A pretax charge of $105,000 related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).

          See the executive summary beginning on page 14 for information on our cost reduction efforts.

          Plant shutdowns, asset impairments and restructurings in the first six months of 2007 shown in the segment operating profit table on page 14 include:

 

 

A pretax charge of $366,000 related to the estimated loss on the sub-lease of a portion of the AFBS, Inc. (formerly know as Therics, Inc.) facility in Princeton, New Jersey;

 

 

A pretax charge of $338,000 for asset impairments relating to machinery and equipment in Film Products;

 

 

A pretax charge of $99,000 for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; and

 

 

A pretax charge of $55,000 related to the shutdown of the films manufacturing facility in LaGrange, Georgia.

          Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $446,000 in the first six months of 2008 and $671,000 in 2007. Interest expense was $1.4 million in both the first six months of 2008 and 2007 as higher average debt levels were offset by lower average interest rates. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 









 

 

Six Months
Ended June 30

 

 

 


 

(In Millions)

 

2008

 

2007

 







Floating-rate debt with interest charged on a rollover basis at one-month LIBOR:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

60.3

 

$

45.4

 

Average interest rate

 

 

4.1

%

 

6.1

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

2.0

 

$

2.3

 

Average interest rate

 

 

4.0

%

 

4.1

%









Total debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

62.3

 

$

47.7

 

Average interest rate

 

 

4.1

%

 

6.0

%









          The effective tax rate used to compute income taxes from continuing operations was 35.3% in the first six months of 2008 compared with 35.1% in the first six months of 2007. The increase in the effective tax rate for continuing operations for 2008 versus 2007 was mainly due to higher effective tax rates for operations outside of the U.S. and expiration at December 31, 2007 of the research & development tax credit, partially offset by a lower state income tax effective rate and lower valuation allowances for capital loss carry-forwards.

20



Liquidity and Capital Resources

          Changes in operating assets and liabilities from December 31, 2007 to June 30, 2008 are summarized below:

 

 

 

Accounts receivable increased $23.7 million (24.4%).

 

 

 

 

Accounts receivable in Film Products increased by $9.0 million. Days sales outstanding (“DSO”) increased to 50 at June 30, 2008 compared with 45 at December 31, 2007 and 49 days at June 30, 2007.

 

 

 

 

Accounts receivable for continuing operations in Aluminum Extrusions increased by $14.7 million. DSO was 41 at June 30, 2008 compared with 40 at December 31, 2007, within the range experienced over the last twelve months.

 

 

 

Inventories declined $12.0 million (24.6%).

 

 

 

 

Inventories in Film Products decreased by approximately $6.4 million. Inventory days decreased to 36 at June 30, 2008 compared with 43 days at December 31, 2007, primarily due to the planned shutdown for maintenance of a manufacturing facility and overall efforts to reduce inventory levels.

 

 

 

 

Inventories for continuing operations of Aluminum Extrusions decreased by approximately $5.6 million. Inventory days decreased to 21 at June 30, 2008 compared with 35 at December 31, 2007, primarily due to cyclical fluctuations.

 

 

 

Net property, plant and equipment was down $5.5 million or 2.0% due primarily to depreciation for continuing operations of $21.9 million compared with capital expenditures of $10.4 million and machinery and equipment asset impairments in Film Products of $2.1 million, partially offset by appreciation of foreign currencies relative to the U.S. Dollar (favorable impact of $8.1 million).

 

 

 

Accounts payable increased by $4.4 million (6.6%).

 

 

 

 

Accounts payable in Film Products increased by $2.7 million. Accounts payable days were 31 at June 30, 2008 compared with 30 at December 31, 2007, within the range experienced over the last twelve months.

 

 

 

 

Accounts payable for continuing operations in Aluminum Extrusions increased by $6.0 million. Accounts payable days decreased to 35 at June 30, 2008 from 37 at December 31, 2007, primarily due to cyclical fluctuations.

 

 

 

 

Accounts payable decreased at corporate by $4.3 million due primarily to $3.4 million payable at December 31, 2007 to a securities broker relating to our repurchase of Tredegar common stock (no balance was outstanding for this item at June 30, 2008).

 

 

 

Accrued expenses increased by $4.1 million (12.3%) due primarily to timing of payments.

 

 

 

Net deferred income tax liabilities in excess of assets increased by $14.3 million and income taxes recoverable increased by $9.8 million due primarily to the movement between these line items in the balance sheet of tax benefits of approximately $12 million that are expected to be realized in cash in 2008 relating to the sale of the aluminum extrusions business in Canada (see Note 2 on page 6 for more information regarding the sale).

          Cash provided by operating activities was $27.8 million in the first half of 2008 compared with $37.0 million in the first half of 2007. The change is primarily related to lower net income and normal volatility of working capital components.

          Cash provided by investing activities was $11.7 million in the first half of 2008, compared with cash used in investing activities of $19.3 million in the first half of 2007. The change between periods is primarily due to proceeds received in 2008 from the sale of the aluminum extrusions business in Canada of $23.6 million and the $10.0 million invested in Harbinger in the first half of 2007.

21



          Net cash flow used in financing activities was $40.8 million in the first half of 2008 and related to net repayments on our revolving credit facility with excess cash flow of $25 million, the payment of regular quarterly dividends of $2.7 million (4 cents per share per quarter) and repurchases of Tredegar common stock ($12.9 million; see more information in Note 10 on page 13).

          Further information on cash flows for the six months ended June 30, 2008 and 2007 are provided in the consolidated statements of cash flows on page 4.

          Net capitalization and indebtedness as defined under our revolving credit agreement as of June 30, 2008 are as follows:

 

 

 

 

 






Net Capitalization and Indebtedness as of June 30, 2008
(In Thousands)

 





 

Net capitalization:

 

 

 

 

Cash and cash equivalents

 

$

48,509

 

Debt:

 

 

 

 

$300 million revolving credit agreement maturing
December 15, 2010

 

 

55,000

 

Other debt

 

 

1,982

 

 

 



 

Total debt

 

 

56,982

 

 

 



 

Debt net of cash and cash equivalents

 

 

8,473

 

Shareholders’ equity

 

 

487,568

 

 

 



 

Net capitalization

 

$

496,041

 

 

 



 

Indebtedness as defined in revolving credit agreement:

 

 

 

 

Total debt

 

$

56,982

 

Face value of letters of credit

 

 

5,457

 

 

 



 

Indebtedness

 

$

62,439

 






          Under the revolving credit agreement, borrowings are permitted up to $300 million, and $244 million was available to borrow at June 30, 2008. The credit spread and commitment fees charged on the unused amount under the revolving credit agreement at various indebtedness-to-adjusted EBITDA levels are as follows:

 

 

 

 

 

 







Pricing Under Revolving Credit Agreement (Basis Points)

 



Indebtedness-to-Adjusted
EBITDA Ratio

 

Credit Spread
Over LIBOR

 

Commitment
Fee

 







> 2.50x but <= 3x

 

125

 

25

 

> 1.75x but <= 2.50x

 

100

 

20

 

> 1x but <=1.75x

 

87.5

 

17.5

 

<= 1x

 

75

 

15

 







          At June 30, 2008, the interest rate on debt under the revolving credit agreement was priced at one-month LIBOR plus the applicable credit spread of 75 basis points.

22



          The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the revolving credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the revolving credit agreement are not intended to represent cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.

 

 

 

 

 






Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and
Interest Coverage Ratio as Defined in Revolving Credit Agreement Along with Related Most
Restrictive Covenants
As of and for the Twelve Months Ended June 30, 2008 (In Thousands)

 






Computations of adjusted EBITDA and adjusted EBIT as defined in revolving credit agreement for the twelve months ended June 30, 2008:

 

 

 

 

Net income

 

$

6,701

 

Plus:

 

 

 

 

After-tax losses related to discontinued operations

 

 

19,180

 

Total income tax expense for continuing operations

 

 

19,524

 

Interest expense

 

 

2,778

 

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

 

 

849

 

Losses related to the application of the equity method of accounting

 

 

 

Depreciation and amortization expense for continuing operations

 

 

43,685

 

All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $5,715)

 

 

10,726

 

Minus:

 

 

 

 

After-tax income related to discontinued operations

 

 

 

Total income tax benefits for continuing operations

 

 

 

Interest income

 

 

(987

)

All non-cash gains and income, plus cash gains and income not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (all cash-related)

 

 

(2,699

)

Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions

 

 

 

 

 



 

Adjusted EBITDA as defined in revolving credit agreement

 

 

99,757

 

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

 

 

(43,685

)

 

 



 

Adjusted EBIT as defined in revolving credit agreement

 

$

56,072

 

 

 



 

Shareholders’ equity at June 30, 2008

 

$

487,568

 

Computations of leverage and interest coverage ratios as defined in revolving credit agreement:

 

 

 

 

Leverage ratio (indebtedness-to-adjusted EBITDA)

 

 

.63

x

Interest coverage ratio (adjusted EBIT-to-interest expense)

 

 

20.18

x

Most restrictive covenants as defined in revolving credit agreement:

 

 

 

 

Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the revolving credit agreement ($100,000 plus 50% of net income generated after October 1, 2005)

 

$

133,030

 

Minimum adjusted shareholders’ equity permitted ($315,000 plus 50% of net income generated, to the extent positive, after July 1, 2007)

 

$

327,539

 

Maximum leverage ratio permitted:

 

 

 

 

Ongoing

 

 

3.00

x

Pro forma for acquisitions

 

 

2.50

x

Minimum interest coverage ratio permitted

 

 

2.50

x






23



          Noncompliance with any one or more of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant(s) through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.

          We believe that the borrowing availability under our revolving credit agreement, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

          Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the liquidity and capital resources section beginning on page 21 regarding credit agreements and interest rate exposures.

          Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate our casting furnaces). There is no assurance of our ability to pass through higher raw material and energy costs to our customers.

          See the executive summary beginning on page 14 for discussion regarding the impact of the lag in the pass-through of resin price changes. The volatility of average quarterly prices of low density polyethylene resin in the U.S. (a primary raw material for Film Products) is shown in the chart below.

Quarterly Average U.S. Large Buyer Price for Low Density Polyethylene Resin
(Cents Per Pound)

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using monthly data provided by Chemical Data Inc. (“CDI”). In January 2005, CDI reflected a 4 cents per pound non-market adjustment based on their estimate of the growth of discounts over the 2000 to 2003 period. The 4th quarter 2004 average rate of 67 cents per pound is shown on a pro forma basis as if the non-market adjustment was made in October 2004.

          Resin prices in Europe, Asia and South America have exhibited similar trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days.

24



          In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries.

Quarterly Average Price of Aluminum
(U.S. Midwest Spot Price - Cents Per Pound)

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

          In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $95,000 impact on the continuing monthly operating profit for our U.S. operations in Aluminum Extrusions. In September 2005, we announced an energy surcharge for our aluminum extrusions business in the U.S. to be applied when the NYMEX natural gas price is in excess of $8.85 per mmBtu. During the first six months of 2008, significantly higher natural gas costs were mostly offset by this energy surcharge.

Quarterly Average Price of Natural Gas
(NYMEX Settlement Prices - $ Per mmBtu)

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using monthly NYMEX settlement prices.

25



          We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for continuing manufacturing operations related to foreign markets for the first six months of 2008 and 2007 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 















Percentage of Net Sales from Continuing Manufacturing
Operations Related to Foreign Markets*

 


 

 

 

Six Months Ended June 30

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

 

 

Exports
From U.S.

 

Foreign
Operations

 

Exports
From U.S.

 

Foreign
Operations

 

 

 


 


 


 


 

Canada

 

 

5

%

 

%

 

4

%

 

%

Europe

 

 

1

 

 

18

 

 

1

 

 

16

 

Latin America

 

 

 

 

3

 

 

 

 

3

 

Asia

 

 

2

 

 

7

 

 

5

 

 

6

 















Total

 

 

8

%

 

28

%

 

10

%

 

25

%















          * Based on consolidated net sales from continuing manufacturing operations (excludes AFBS).

          We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies (see trends for the Euro and Chinese Yuan in the chart below) and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from continuing foreign operations relates to the Euro, the Chinese Yuan, the Hungarian Forint and the Brazilian Real.

          In Film Products, where we are typically able to match the currency of our sales and costs, we estimate that the change in value of foreign currencies relative to the U.S. Dollar had a positive impact on operating profit of approximately $1.3 million in the second quarter of 2008 compared with the second quarter of 2007, and approximately $2.5 million in the first six months of 2008 compared with the first six months of 2007.

          Trends for the Euro and Chinese Yuan are shown in the chart below:

Quarterly Average Exchange Rates of Euro & Chinese Yuan Relative to the U.S. Dollar

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

26



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

          See Note 10 on page 13 for the information required by this item.

Item 4. Controls and Procedures.

          Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

          There has been no change in our internal control over financial reporting during the quarter ended June 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A. Risk Factors.

          There are a number of risks and uncertainties that can have a material effect on the operating results of our businesses and our financial condition. These risk factors have not changed materially since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 4. Submission of Matters to a Vote of Security Holders.

          Tredegar’s Annual Meeting of Shareholders was held on May 8, 2008. The following sets forth the vote results with respect to each of the matters voted upon by shareholders at the meeting:

 

 

(a)

Election of Directors


 

 

 

 

 

 

 

 

 

 

 

Nominee

 

Number of
Votes For

 

Number of
Votes
Withheld

 

Broker
Non-Votes

 


 


 


 


 

George A. Newbill

 

 

31,634,067

 

577,700

 

 

0

 

 

Norman A. Scher

 

 

24,999,247

 

7,212,520

 

 

0

 

 

R. Gregory Williams

 

 

25,042,930

 

7,168,837

 

 

0

 

 


 

 

 

Horst R. Adam did not stand for re-election to Tredegar’s Board upon the expiration of his current term at the 2008 annual meeting. The term of office for the following directors continued after the annual meeting and such directors were not up for election at the annual meeting:

 

 

 

Austin Brockenbrough, III

 

Donald T. Cowles

27



 

 

 

John D. Gottwald

 

William M. Gottwald

 

Richard L. Morrill

 

Thomas G. Slater, Jr.

 

 

(b)

Ratification of Appointment of PricewaterhouseCoopers LLP

 

 

 

Ratification of appointment of PricewaterhouseCoopers LLP as Tredegar’s independent registered public accounting firm for the fiscal year ending December 31, 2008:


 

 

 

 

 

 

 

Number of Votes

 

Number of Votes

 

Number of

 

Number of

For

 

Against

 

Abstentions

 

Broker Non-Votes


 


 


 


32,057,805

 

145,069

 

74,708

 

0

Item 6. Exhibits.

 

 

 

Exhibit Nos.

 

 


 

 

 

 

 

31.1

 

Certification of John D. Gottwald, President and Chief Executive Officer (Principal Executive Officer) of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of D. Andrew Edwards, Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of John D. Gottwald, President and Chief Executive Officer (Principal Executive Officer) of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of D. Andrew Edwards, Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

28



SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

Tredegar Corporation

 

 

 

(Registrant)

 

 

 

 

Date:

 August 6, 2008

 

/s/ D. Andrew Edwards

 

 

 


 

 

 

D. Andrew Edwards

 

 

 

Vice President, Chief Financial Officer and

 

 

 

Treasurer

 

 

 

(Principal Financial and Accounting Officer)

29



EXHIBIT 31.1

Section 302 Certification

I, John D. Gottwald, certify that:

(1)          I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 of Tredegar Corporation;

(2)          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

 

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

(5)          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

(a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

Date: August 6, 2008

 

 

 

 

/s/ John D. Gottwald

 


 

John D. Gottwald

 

President and Chief Executive Officer

 

(Principal Executive Officer)

30



EXHIBIT 31.2

Section 302 Certification

I, D. Andrew Edwards, certify that:

(1)          I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 of Tredegar Corporation;

(2)          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

 

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

(5)          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

(a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

Date: August 6, 2008

 

 

 

 

/s/ D. Andrew Edwards

 


 

D. Andrew Edwards

 

Vice President, Chief Financial Officer and Treasurer

 

(Principal Financial Officer)

31



EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report on Form 10-Q of Tredegar Corporation (the “Company”) for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John D. Gottwald, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1)          the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2)          the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ John D. Gottwald

 


 

John D. Gottwald

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

August 6, 2008

 

32



EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report on Form 10-Q of Tredegar Corporation (the “Company”) for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, D. Andrew Edwards, Vice President, Ch