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


FORM 10-Q

 

 

(Mark One)

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

x

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2008

 

 

 

OR

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

o

OF THE SECURITIES EXCHANGE ACT OF 1934


 

For the transition period from _______________________________ to _______________________________

 

Commission file number 1-10258

 

Tredegar Corporation


(Exact Name of Registrant as Specified in Its Charter)


 

 

 

 

Virginia

 

 

54-1497771


 

 


(State or Other Jurisdiction of
Incorporation or Organization)

 

 

(I.R.S. Employer
Identification No.)

 

 

 

 

1100 Boulders Parkway

 

 

Richmond, Virginia

 

23225


 


(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (804) 330-1000

          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 October 27, 2008: 33,903,507.




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 

 

 

 

 

 

 

 

 

 

Sept 30,
2008

 

Dec. 31,
2007

 

 

 


 


 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,624

 

$

48,217

 

Accounts and notes receivable, net of allowance for doubtful accounts and sales returns of $4,190 in 2008 and $5,198 in 2007

 

 

114,523

 

 

97,064

 

Income taxes recoverable

 

 

14,001

 

 

323

 

Inventories

 

 

34,823

 

 

48,666

 

Deferred income taxes

 

 

8,704

 

 

9,172

 

Prepaid expenses and other

 

 

5,193

 

 

4,077

 

Current assets of discontinued operation

 

 

 

 

37,750

 

 

 



 



 

Total current assets

 

 

223,868

 

 

245,269

 

 

 



 



 

Property, plant and equipment, at cost

 

 

650,569

 

 

637,688

 

Less accumulated depreciation

 

 

400,655

 

 

368,605

 

 

 



 



 

Net property, plant and equipment

 

 

249,914

 

 

269,083

 

 

 



 



 

Other assets and deferred charges

 

 

126,303

 

 

116,759

 

Goodwill and other intangibles

 

 

135,321

 

 

135,907

 

Noncurrent assets of discontinued operation

 

 

 

 

17,460

 

 

 



 



 

Total assets

 

$

735,406

 

$

784,478

 

 

 



 



 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

76,057

 

$

67,161

 

Accrued expenses

 

 

39,352

 

 

33,676

 

Current portion of long-term debt

 

 

540

 

 

540

 

Current liabilities of discontinued operation

 

 

 

 

17,152

 

 

 



 



 

Total current liabilities

 

 

115,949

 

 

118,529

 

 

 



 



 

Long-term debt

 

 

27,994

 

 

81,516

 

Deferred income taxes

 

 

87,320

 

 

68,625

 

Other noncurrent liabilities

 

 

15,857

 

 

15,662

 

Noncurrent liabilities of discontinued operation

 

 

 

 

8,818

 

 

 



 



 

Total liabilities

 

 

247,120

 

 

293,150

 

 

 



 



 

Commitments and contingencies (Notes 1 and 2)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, no par value

 

 

39,360

 

 

51,444

 

Common stock held in trust for savings restoration plan

 

 

(1,310

)

 

(1,303

)

Foreign currency translation adjustment

 

 

26,826

 

 

40,610

 

Gain (loss) on derivative financial instruments

 

 

(2,272

)

 

(1,204

)

Pension and other postretirement benefit adjustments

 

 

1,419

 

 

(3,767

)

Retained earnings

 

 

424,263

 

 

405,548

 

 

 



 



 

Total shareholders’ equity

 

 

488,286

 

 

491,328

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

735,406

 

$

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 Sept 30

 

Nine Months
Ended Sept 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Revenues and other items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

228,709

 

$

234,352

 

$

691,197

 

$

714,121

 

Other income (expense), net

 

 

7,709

 

 

(1,986

)

 

8,929

 

 

(1,533

)

 

 



 



 



 



 

 

 

 

236,418

 

 

232,366

 

 

700,126

 

 

712,588

 

 

 



 



 



 



 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

195,438

 

 

192,864

 

 

585,926

 

 

590,113

 

Freight

 

 

5,450

 

 

5,191

 

 

16,348

 

 

15,456

 

Selling, general and administrative

 

 

13,602

 

 

16,396

 

 

44,376

 

 

49,273

 

Research and development

 

 

3,027

 

 

2,375

 

 

8,361

 

 

6,447

 

Amortization of intangibles

 

 

30

 

 

37

 

 

93

 

 

112

 

Interest expense

 

 

483

 

 

628

 

 

1,921

 

 

2,009

 

Asset impairments and costs associated with exit and disposal activities

 

 

 

 

1,713

 

 

5,159

 

 

2,571

 

 

 



 



 



 



 

Total

 

 

218,030

 

 

219,204

 

 

662,184

 

 

665,981

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

18,388

 

 

13,162

 

 

37,942

 

 

46,607

 

Income taxes

 

 

7,310

 

 

6,967

 

 

14,214

 

 

18,713

 

 

 



 



 



 



 

Income from continuing operations

 

 

11,078

 

 

6,195

 

 

23,728

 

 

27,894

 

Income (loss) from discontinued operations

 

 

 

 

(24,571

)

 

(930

)

 

(26,002

)

 

 



 



 



 



 

Net income (loss)

 

$

11,078

 

$

(18,376

)

$

22,798

 

$

1,892

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.33

 

$

.16

 

$

.70

 

$

.71

 

Discontinued operations

 

 

 

 

(.63

)

 

(.03

)

 

(.66

)

 

 



 



 



 



 

Net income (loss)

 

$

.33

 

$

(.47

)

$

.67

 

$

.05

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.33

 

$

.16

 

$

.69

 

$

.71

 

Discontinued operations

 

 

 

 

(.63

)

 

(.03

)

 

(.66

)

 

 



 



 



 



 

Net income (loss)

 

$

.33

 

$

(.47

)

$

.66

 

$

.05

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,672

 

 

38,985

 

 

34,042

 

 

39,219

 

Diluted

 

 

33,903

 

 

39,119

 

 

34,262

 

 

39,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

.04

 

$

.04

 

$

.12

 

$

.12

 

See accompanying notes to financial statements.

3



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

 

 

 

 

 

 

 

 

 

 

Nine Months
Ended Sept 30

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

22,798

 

$

1,892

 

Adjustments for noncash items:

 

 

 

 

 

 

 

Depreciation

 

 

32,844

 

 

34,440

 

Amortization of intangibles

 

 

93

 

 

112

 

Deferred income taxes

 

 

17,515

 

 

(6,691

)

Accrued pension and postretirement benefits

 

 

(3,354

)

 

(1,297

)

Gain on the write-up of an investment accounted for under the fair value method

 

 

(5,000

)

 

 

Gain on sale of assets

 

 

(2,500

)

 

 

Loss on asset impairments and divestitures

 

 

3,337

 

 

29,983

 

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

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

(22,101

)

 

(15,880

)

Inventories

 

 

16,430

 

 

8,868

 

Income taxes recoverable

 

 

(13,544

)

 

6,972

 

Prepaid expenses and other

 

 

(1,600

)

 

886

 

Accounts payable and accrued expenses

 

 

12,120

 

 

14,791

 

Other, net

 

 

3,359

 

 

314

 

 

 



 



 

Net cash provided by operating activities

 

 

60,397

 

 

74,390

 

 

 



 



 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(13,849

)

 

(15,919

)

Investment in Harbinger ($10 million) and a drug delivery company ($6.5 million) in 2007 and real estate in 2008 and 2007

 

 

(2,059

)

 

(22,631

)

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

 

 

3,682

 

 

4,093

 

 

 



 



 

Net cash provided by (used in) investing activities

 

 

11,390

 

 

(34,457

)

 

 



 



 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(4,090

)

 

(4,701

)

Debt principal payments

 

 

(75,657

)

 

(33,367

)

Borrowings

 

 

22,000

 

 

15,000

 

Repurchases of Tredegar common stock, including settlement of $3,368 in 2008 and net of settlement payable of $2,307 in 2007

 

 

(19,792

)

 

(26,705

)

Proceeds from exercise of stock options

 

 

4,069

 

 

6,470

 

 

 



 



 

Net cash used in financing activities

 

 

(73,470

)

 

(43,303

)

 

 



 



 

Effect of exchange rate changes on cash

 

 

90

 

 

1,418

 

 

 



 



 

Decrease in cash and cash equivalents

 

 

(1,593

)

 

(1,952

)

Cash and cash equivalents at beginning of period

 

 

48,217

 

 

40,898

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

46,624

 

$

38,946

 

 

 



 



 

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

 

 

 

 

22,798

 

 

 

 

 

 

 

 

 

 

22,798

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment (net of tax of $259)

 

 

 

 

 

 

 

 

508

 

 

 

 

 

 

508

 

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 $667)

 

 

 

 

 

 

 

 

 

 

(1,068

)

 

 

 

(1,068

)

Amortization of prior service costs and net gains or losses (net of tax of $178)

 

 

 

 

 

 

 

 

 

 

 

 

315

 

 

315

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,132

 

Cash dividends declared ($.12 per share)

 

 

 

 

(4,090

)

 

 

 

 

 

 

 

 

 

(4,090

)

Issued upon exercise of stock options (including related income tax benefits of $71) & other

 

 

4,341

 

 

 

 

 

 

 

 

 

 

 

 

4,341

 

Repurchases of Tredegar common stock

 

 

(16,425

)

 

 

 

 

 

 

 

 

 

 

 

(16,425

)

Tredegar common stock purchased by trust for savings restoration plan

 

 

 

 

7

 

 

(7

)

 

 

 

 

 

 

 

 
























Balance September 30, 2008

 

$

39,360

 

$

424,263

 

$

(1,310

)

$

26,826

 

$

(2,272

)

$

1,419

 

$

488,286

 
























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 September 30, 2008, the consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, the consolidated cash flows for the nine months ended September 30, 2008 and 2007, and the consolidated changes in shareholders’ equity for the nine months ended September 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 nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for the full year.

 

 

2.

There were no plant shutdowns, asset impairments and restructurings in the third quarter of 2008. Plant shutdowns, asset impairments and restructurings in the third quarter of 2007 shown in the segment operating profit table in Note 8 include (total of $1.1 million after taxes or 3 cents per share):

 

 

 

A pretax charge of $1.2 million related to the estimated loss on the sub-lease of a portion of the AFBS (formerly Therics) facility in Princeton, New Jersey;

 

 

 

 

A pretax charge of $493,000 for severance and other employee-related costs in Aluminum Extrusions; and

 

 

 

 

A pretax charge of $42,000 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 first nine months of 2008 shown in the segment operating profit table in Note 8 include (total of $3.8 million after taxes or 11 cents per share):

 

 

 

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.

 

 

 

           Plant shutdowns, asset impairments and restructurings in the first nine months of 2007 shown in the segment operating profit table in Note 8 include (total of $1.7 million after taxes or 4 cents per share):

 

 

 

A pretax charge of $1.6 million related to the estimated loss on the sub-lease of a portion of the AFBS (formerly Therics) facility in Princeton, New Jersey;

6



 

 

 

 

A pretax charge of $592,000 for severance and other employee-related costs in Aluminum Extrusions;

 

 

 

 

Pretax charges of $338,000 for asset impairments in Film Products;

 

 

 

 

A pretax charge of $55,000 for costs related to the shutdown of the films manufacturing facility in LaGrange, Georgia; and

 

 

 

 

A pretax charge of $42,000 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).

 

 

 

 

           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. The components of income (loss) from discontinued operations are presented below:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

Third Quarter Ended
September 30

 

Nine Months Ended
September 30

 

 

 


 



(In thousands)

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income taxes

 

$

 

$

(2,766

)

$

(391

)

$

(5,990

)

Income tax cost (benefit) on operations

 

 

 

 

(981

)

 

(98

)

 

(2,091

)















 

 

 

 

 

(1,785

)

 

(293

)

 

(3,899

)















Loss associated with asset impairments and disposal activities

 

 

 

 

(27,612

)

 

(1,337

)

 

(27,612

)

Income tax cost (benefit) on asset impairments and costs associated with disposal activities

 

 

 

 

(4,826

)

 

(700

)

 

(5,509

)















 

 

 

 

 

(22,786

)

 

(637

)

 

(22,103

)















Income (loss) from discontinued operations

 

$

 

$

(24,571

)

$

(930

)

$

 (26,002

)















          A reconciliation of the beginning and ending balances of accrued expenses associated with plant shutdowns and divestitures for the nine months ended September 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

 

 

 

 

5,159

 

Cash spent

 

 

(1,994

)

 

 

 

 

 

(1,021

)

 

(3,015

)

Charged against assets

 

 

 

 

(855

)

 

(1,649

)

 

 

 

(2,504

)


















Balance at September 30, 2008

 

$

1,024

 

$

 

$

 

$

4,817

 

$

5,841

 



















 

 

 

 

(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 Sept 30

 

Nine Months
Ended Sept 30

 

 

 





(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











Net income (loss)

 

$

11,078

 

$

(18,376

)

$

22,798

 

$

1,892

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustment arising during period

 

 

(6,656

)

 

7,380

 

 

508

 

 

15,214

 

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

 

 

(6,656

)

 

7,380

 

 

(13,784

)

 

15,214

 

 

 













Derivative financial instrument adjustment

 

 

(3,655

)

 

(1,486

)

 

(1,068

)

 

(1,055

)

Pension and other post-retirement benefit adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service costs and net gains or losses

 

 

547

 

 

328

 

 

315

 

 

922

 

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

 

 

547

 

 

328

 

 

5,186

 

 

922

 















Comprehensive income (loss)

 

$

1,314

 

$

(12,154

)

$

13,132

 

$

16,973

 
















 

 

4.

The components of inventories are as follows:


 

 

 

 

 

 

 

 







(In Thousands)

 

Sept 30
2008

 

Dec 31
2007

 







Finished goods

 

$

8,519

 

$

10,004

 

Work-in-process

 

 

917

 

 

3,624

 

Raw materials

 

 

11,294

 

 

19,369

 

Stores, supplies and other

 

 

14,093

 

 

15,669

 









Total

 

$

34,823

 

$

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 Sept 30

 

Nine Months
Ended Sept 30

 

 

 





(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











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

 

33,672

 

38,985

 

34,042

 

39,219

 

Incremental shares attributable to stock options and restricted stock

 

231

 

134

 

220

 

177

 











Shares used to compute diluted earnings (loss) per share

 

33,903

 

39,119

 

34,262

 

39,396

 











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

8



 

 

 

September 30, 2008 and three and nine months ended September 30, 2007, 336,850, 519,246, 211,075 and 111,108, 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 $17.2 million at September 30, 2008, compared with $23.0 million at December 31, 2007. This investment has a carrying value in our 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 2008, we recognized a gain of $1.5 million ($965,000 after taxes or 3 cents per share) from the sale of our investments in Theken Spine and Therics, LLC. This gain is included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 8. AFBS (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar.

 

 

 

          During the third quarter of 2008, we recognized gains on the sale of corporate assets of $1 million ($626,000 after taxes or 2 cents per share), including a realized gain on the sale of equity securities ($509,000) and a realized gain on the sale of corporate real estate ($492,000). These gains are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 8.

 

 

 

          During the third quarter of 2007, we recognized a loss from the write-down of an investment of $2.1 million ($1.3 million after taxes or 3 cents per share), which is included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 8.

 

 

 

          Income taxes in the first nine months of 2008 include the reversal of a valuation allowance recognized in the third quarter of 2007 of $1.1 million (3 cents per share) that originally related to expected limitations on the utilization of assumed capital losses on certain investments. The portion of this 2007 valuation allowance reversed in the third quarter of 2008 was $150,000 (1 cent per share).

 

 

 

          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 21%. 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 September 30, 2008, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) was written up by $5 million ($3.2 million after taxes or 9 cents per share) to $11.5 million based on the valuation of our ownership interest implied from the term sheet for a new round of equity financing led by a new investor. The unrealized gain from the $5 million write-up is included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 8.

 

 

 

          On the date of our initial investment (August 31, 2007) and the date of the recent term sheet for the new round of equity financing, we believe that the value of our ownership interest and liquidation preferences was based on Level 2 inputs, including investments by other

9



 

 

 

investors. Subsequently, and until the next round of financing or term sheet indicative of the pricing for the next round, 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, term sheet indicative of the pricing for 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 in the future unless a significant new round of financing, term sheet indicative of the pricing for the next 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 since the last valuation, then our new 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 third quarter and first nine months of 2008 (based on the formulas contained in the company’s operating agreement) was approximately $1.5 million and $3.9 million, respectively.

 

 

 

          The condensed balance sheets for the drug delivery company at September 30, 2008 and December 31, 2007 and related condensed statements of income for the third quarter and first nine months 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:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 















(Unaudited)

 

9/30/08

 

12/31/07

 

 

 

 

9/30/08

 

12/31/07

 















Assets

 

 

 

 

 

 

 

 

Liabilities & Members’ Equity

 

 

 

 

 

 

 

Cash & cash equivalents

 

$

2,731

 

$

6,781

 

 

Liabilities

 

$

2,506

 

$

1,494

 

Other tangible assets

 

 

1,222

 

 

1,253

 

 

Contributed capital

 

 

12,354

 

 

12,354

 

Identifiable intangibles (15 year life)

 

 

3,680

 

 

3,901

 

 

Net equity appreciation implied from purchase accounting

 

 

 

 

 

 

 

Goodwill

 

 

10,194

 

 

10,194

 

 

adjustments

 

 

12,805

 

 

12,805

 

 

 

 

 

 

 

 

 

 

Accumulated losses

 

 

(9,838

)

 

(4,524

)




















Total assets

 

$

17,827

 

$

22,129

 

 

Total liabilities & members’ equity

 

$

17,827

 

$

22,129

 





















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Qtr. ‘08

 

9 Mos. ‘08

 

2007

 

Sept.-Dec. ‘07

 

 











 

Revenues & Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

 

$

 

$

 

 

Costs & expenses

 

 

2,124

 

 

5,314

 

 

2,445

 

 

800

 

 















 

Net loss

 

$

(2,124

)

$

(5,314

)

$

(2,445

)

$

(800

)

 
















10



 

 

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 Sept 30

 

Other Post-Retirement
Benefits for 3 Months
Ended Sept 30

 

 

 


 



(In Thousands)

 

2008

 

2007

 

2008

 

2007

 


Service cost

 

$

(480

)

$

(1,043

)

$

(18

)

$

(24

)

Interest cost

 

 

(3,572

)

 

(2,868

)

 

(105

)

 

(124

)

Expected return on plan assets

 

 

5,523

 

 

5,087

 

 

 

 

 

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

 

 

(854

)

 

(486

)

 

35

 

 

 















Net periodic benefit income (cost)

 

$

617

 

$

690

 

$

(88

)

$

(148

)















 















 

 

Pension
Benefits for 9 Months
Ended Sept 30

 

Other Post-Retirement
Benefits for 9 Months
Ended Sept 30

 

 

 


 



(In Thousands)

 

2008

 

2007

 

2008

 

2007

 











Service cost

 

$

(2,586

)

$

(3,174

)

$

(53

)

$

(79

)

Interest cost

 

 

(9,681

)

 

(8,585

)

 

(363

)

 

(378

)

Expected return on plan assets

 

 

16,495

 

 

15,279

 

 

 

 

 

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

 

 

(493

)

 

(1,365

)

 

35

 

 

 















Net periodic benefit income (cost)

 

$

3,735

 

$

2,155

 

$

(381

)

$

(457

)
















 

 

 

          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 shareholders’ equity.

 

 

 

          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.

 

 

 

          At September 30, 2008, the fair value of the assets of our pension plans was estimated at $235 million, down from $284 million at December 31, 2007. The significant decline was mainly due to the drop in global stock prices and benefit payments to retirees of approximately $2.4 million per quarter. The projected benefit obligation at December 31, 2008 is approximately $202 million at a discount rate of 6.75% and $197 million at a discount rate of 7.0%. Subsequent to September 30, 2008, global stock prices continued to decline which likely resulted in a decline in the value of our pension assets below the projected pension obligation. Based on global stock market valuations in October 2008, the minimum required contribution to our pension plans in 2009 is estimated at $5 to $10 million and the corresponding decline in net pension income in 2009 compared with 2008 is estimated at $500,000 to $2 million. The actual contribution required for 2009 and the pension income or expense for 2009 will be based on pension asset and liability valuation information as of December 31, 2008.

11



 

 

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 Sept 30

 

Nine Months
Ended Sept 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

131,187

 

$

134,064

 

$

399,030

 

$

400,385

 

Aluminum Extrusions

 

 

92,072

 

 

95,097

 

 

275,819

 

 

298,280

 

 

 



 



 



 



 

Total net sales

 

 

223,259

 

 

229,161

 

 

674,849

 

 

698,665

 

Add back freight

 

 

5,450

 

 

5,191

 

 

16,348

 

 

15,456

 

 

 



 



 



 



 

Sales as shown in the Consolidated Statements of Income

 

$

228,709

 

$

234,352

 

$

691,197

 

$

714,121

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

10,454

 

$

15,926

 

$

34,719

 

$

46,508

 

Plant shutdowns, asset impairments and restructurings

 

 

 

 

 

 

(4,649

)

 

(393

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

3,861

 

 

3,897

 

 

7,809

 

 

13,875

 

Plant shutdowns, asset impairments and restructurings

 

 

 

 

(535

)

 

(615

)

 

(634

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of investments in Theken Spine and Therics, LLC

 

 

1,499

 

 

 

 

1,499

 

 

 

Restructurings

 

 

 

 

(1,220

)

 

 

 

(1,586

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

15,814

 

 

18,068

 

 

38,763

 

 

57,770

 

Interest income

 

 

209

 

 

289

 

 

655

 

 

960

 

Interest expense

 

 

483

 

 

628

 

 

1,921

 

 

2,009

 

Gain on sale of corporate assets

 

 

1,001

 

 

 

 

1,001

 

 

 

Gain on investment accounted for under the fair value method

 

 

5,000

 

 

 

 

5,000

 

 

 

Loss from write-down of investment

 

 

 

 

2,095

 

 

 

 

2,095

 

Stock option-based compensation costs

 

 

178

 

 

236

 

 

516

 

 

701

 

Corporate expenses, net

 

 

2,975

 

 

2,236

 

 

5,040

 

 

7,318

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

18,388

 

 

13,162

 

 

37,942

 

 

46,607

 

Income taxes

 

 

7,310

 

 

6,967

 

 

14,214

 

 

18,713

 

 

 



 



 



 



 

Income from continuing operations

 

 

11,078

 

 

6,195

 

 

23,728

 

 

27,894

 

Income (loss) from discontinued operations

 

 

 

 

(24,571

)

 

(930

)

 

(26,002

)

 

 



 



 



 



 

Net income (loss)

 

$

11,078

 

$

(18,376

)

$

22,798

 

$

1,892

 

 

 



 



 



 



 

12



 

 

9.

The effective tax rate used to compute income taxes from continuing operations was 39.7% in the third quarter of 2008 compared with 52.9% in the third quarter of 2007, and 37.5% in the first nine months of 2008 compared with 40.1% in the first nine months of 2007. The decrease in the effective tax rate during the third quarter of 2008 versus last year was mainly due to the adjustment of income taxes during the third quarter of each year to the rate that results in a year-to-date effective tax rate that is equal to the rate estimated for that entire year. The decrease in the effective tax rate for continuing operations for the first nine months of 2008 versus 2007 was primarily due to the reversal in 2008 of $1.1 million of valuation allowances on capital loss carry-forwards recognized in 2007 (see Note 6 for more information), partially offset by higher effective tax rates for operations outside of the U.S., lower income tax benefits expected for the Domestic Production Activities Deduction and expiration at December 31, 2007 of the research & development tax credit.

 

 

 

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


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

Balance at
Dec. 31,
2007

 

Increase (Decrease)
Due to Tax Positions
Taken in

 

Increase
(Decrease)
Due to
Settlements
with
Taxing
Authorities

 

Reductions
Due to
Lapse of
Statute of
Limitations

 

Balance at
Sept. 30,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

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

 

$

144

 

$

 

$

(31

)

$

(8

)

$

3,373

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,375

)





















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

 

 

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

998

 





















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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,427

 

Related deferred income tax assets recognized on interest and penalties

 

 

(436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(522

)





















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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

905

 





















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

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,903

 






















 

 

 

          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 or for 2004. 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 2005.

13



 

 

10.

The table below summarizes share repurchase activity by month through September 30, 2008:


 

 

 

 

 

 

 

 

 

 

 

 

 














 

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
Per Share
Before
Broker
Commissions

 

Total Number of Shares
Purchased as Part of:

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

August 2006
Program (a)

 

January 2008
Program (b)

 

 

Period

 

 

 

 

 

 














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

 

July 2008

 

253,600

 

 

13.87

 

 

1,037,600

 

3,962,400

 

August 2008

 

 

 

 

 

1,037,600

 

3,962,400

 

September 2008

 

 

 

 

 

1,037,600

 

3,962,400

 















 

 

 

(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.

14



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

          Third-quarter 2008 income from continuing operations was $11.1 million (33 cents per share) compared with $6.2 million (16 cents per share) in the third quarter of 2007. Income from continuing operations for the first nine months of 2008 was $23.7 million (69 cents per share) compared with $27.9 million (71 cents per share) in the first nine months of 2007. Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6. Gains and losses from the sale of assets and other special items are described in Note 6 on page 9. The following tables present Tredegar’s net sales and operating profit by segment for the third quarter and nine months ended September 30, 2008 and 2007:

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended Sept 30

 

Nine Months
Ended Sept 30

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

131,187

 

$

134,064

 

$

399,030

 

$

400,385

 

Aluminum Extrusions

 

 

92,072

 

 

95,097

 

 

275,819

 

 

298,280

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

 

223,259

 

 

229,161

 

 

674,849

 

 

698,665

 

Add back freight

 

 

5,450

 

 

5,191

 

 

16,348

 

 

15,456

 

 

 



 



 



 



 

Sales as shown in the Consolidated Statements of Income

 

$

228,709

 

$

234,352

 

$

691,197

 

$

714,121

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

10,454

 

$

15,926

 

$

34,719

 

$

46,508

 

Plant shutdowns, asset impairments and restructurings

 

 

 

 

 

 

(4,649

)

 

(393

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

3,861

 

 

3,897

 

 

7,809

 

 

13,875

 

Plant shutdowns, asset impairments and restructurings

 

 

 

 

(535

)

 

(615

)

 

(634

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of investments in Theken Spine and Therics, LLC

 

 

1,499

 

 

 

 

1,499

 

 

 

Restructurings

 

 

 

 

(1,220

)

 

 

 

(1,586

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

15,814

 

 

18,068

 

 

38,763

 

 

57,770

 

Interest income

 

 

209

 

 

289

 

 

655

 

 

960

 

Interest expense

 

 

483

 

 

628

 

 

1,921

 

 

2,009

 

Gain on sale of corporate assets

 

 

1,001

 

 

 

 

1,001

 

 

 

Gain on investment accounted for under the fair value method

 

 

5,000

 

 

 

 

5,000

 

 

 

Loss from write-down of investment

 

 

 

 

2,095

 

 

 

 

2,095

 

Stock option-based compensation costs

 

 

178

 

 

236

 

 

516

 

 

701

 

Corporate expenses, net

 

 

2,975

 

 

2,236

 

 

5,040

 

 

7,318

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

18,388

 

 

13,162

 

 

37,942

 

 

46,607

 

Income taxes

 

 

7,310

 

 

6,967

 

 

14,214

 

 

18,713

 

 

 



 



 



 



 

Income from continuing operations

 

 

11,078

 

 

6,195

 

 

23,728

 

 

27,894

 

Income (loss) from discontinued operations

 

 

 

 

(24,571

)

 

(930

)

 

(26,002

)

 

 



 



 



 



 

Net income (loss)

 

$

11,078

 

$

(18,376

)

$

22,798

 

$

1,892

 

 

 



 



 



 



 

15



          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. Net sales (sales less freight) in Film Products were down 2.2% in the third quarter of 2008 compared with 2007, while operating profit from ongoing operations decreased 34% in the same period. Volume was 56.1 million pounds in the third quarter of 2008, down 6.5% from 60.0 million pounds in the third quarter of 2007.

          Net sales in Film Products for the first nine months of 2008 were down slightly from the first nine months of 2007. Operating profit from ongoing operations was down 25.4% in the first nine months of 2008 versus 2007. Volume was 170.8 million pounds in the first nine months of 2008, down 8.0% from 185.7 million pounds in the first nine months of 2007.

          Volume was down in the third quarter and first nine months of 2008 compared with last year due primarily to competitive pressures, particularly for personal care and surface protection materials. Net sales declined compared to last year due to lower volume, partially offset by 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.

          Operating profit from ongoing operations decreased in the third quarter and first nine months of 2008 versus 2007 due primarily to lower volume and a lag in the pass-through of higher resin costs, partially offset by cost reduction efforts and the benefit from appreciation of the U.S. dollar value of currencies for operations outside of the U.S. 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. The estimated resin lag was an unfavorable $4 million in the third quarter of 2008, an unfavorable $7.2 million for the first nine months of 2008, an unfavorable $1 million for the third quarter of 2007 and an unfavorable $500,000 for the first nine months of 2007. We estimate that the change in value of foreign currencies relative to the U.S. Dollar had a positive impact on operating profit of $1.3 million in the third quarter of 2008 compared with the third quarter of 2007, and $3.7 million in the first nine months of 2008 compared with the first nine months of 2007.

          Future operating profit levels in films will depend on our ability to deliver product innovations, reduce costs and manage the business under significantly greater global economic uncertainty.

          Capital expenditures in Film Products were $9.5 million in the first nine months of 2008 compared with $11.7 million in the first nine months of last year, and are projected to be approximately $15 million in 2008. Depreciation expense was $26.3 million in the first nine months of 2008 compared with $25 million in the first nine months of last year, and is projected to be approximately $35 million in 2008.

Aluminum Extrusions. Net sales from continuing operations in Aluminum Extrusions were down 3.2% in the third quarter of 2008 compared with 2007, while operating profit from ongoing U.S. operations was flat for the same period. Volume from continuing operations decreased to 35.3 million pounds in the third quarter of 2008, down 11.1% from 39.7 million pounds in the third quarter of 2007.

          Net sales in Aluminum Extrusions for the first nine months of 2008 were down 7.5% from the first nine months of 2007. Operating profit from ongoing U.S. operations in the first nine months of 2008 was down 44% versus last year. Volume was 107.9 million pounds in the first nine months of 2008, down 12.7% from 123.6 million pounds in the first nine months of 2007.

16



          The decreases in net sales in the third quarter and first nine months of 2008 compared with last year was mainly due to lower volume, partially offset by higher selling prices from the pass-through of higher average aluminum costs. Shipments declined in most markets. Operating profit from ongoing U.S. operations was flat during the third quarter of 2008 compared with last year as a favorable change of $1 million in insurance costs offset the adverse impact of the decline in volume. Operating profit from ongoing U.S. operations declined during the first nine months of 2008 compared with last year mainly due to lower volume. We continue to be very focused on reducing costs in light of the decline in volume and market conditions.

          Capital expenditures for continuing operations in Aluminum Extrusions were $4.3 million in the first nine months of 2008 compared with $3.5 million in the first nine months of last year, and are projected to be approximately $11 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 the first nine months of 2008, approximately 70% 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 $6.0 million in the first nine months of 2008 compared with $6.3 million in the first nine months of last year, and is projected to be approximately $8.1 million in 2008.

          On February 12, 2008, we sold our 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 expect 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.

          Other Items. Net pension income from continuing operations was $617,000 in the third quarter and $3.7 million in the first nine months of 2008, an unfavorable change of $73,000 and favorable change of $1.6 million (3 cents per share after taxes), respectively, from amounts recognized in the comparable periods of 2007. Most of the favorable change in the first nine months of 2008 relate to a pension plan that is reflected in “Corporate expenses, net” in the segment operating profit table on page 15. 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 for the first nine months of 2008 compared with last year also declined due to lower costs for certain performance-based compensation programs.

          At September 30, 2008, the fair value of the assets of our pension plans was estimated at $235 million, down from $284 million at December 31, 2007. The significant decline was mainly due to the drop in global stock prices and benefit payments to retirees of approximately $2.4 million per quarter. The projected benefit obligation at December 31, 2008 is approximately $202 million at a discount rate of 6.75% and $197 million at a discount rate of 7.0%. Subsequent to September 30, 2008, global stock prices continued to decline which likely resulted in a decline in the value of our pension assets below the projected pension obligation. Based on global stock market valuations in October 2008, the minimum required contribution to our pension plans in 2009 is estimated at $5 to $10 million and the corresponding decline in net pension income in 2009 compared with 2008 is estimated at $500,000 to $2 million. The actual contribution required for 2009 and the pension income or expense for 2009 will be based on pension asset and liability valuation information as of December 31, 2008.

          Interest expense declined slightly in the third quarter and first nine months of 2008 compared with last year as higher average debt levels were offset by lower average interest rates.

17



          The effective tax rate used to compute income taxes from continuing operations was 39.7% in the third quarter of 2008 compared with 52.9% in the third quarter of 2007, and 37.5% in the first nine months of 2008 compared with 40.1% in the first nine months of 2007. The decrease in the effective tax rate during the third quarter of 2008 versus last year was mainly due to the adjustment of income taxes during the third quarter of each year to the rate that results in a year-to-date effective tax rate that is equal to the rate estimated for that entire year. The decrease in the effective tax rate for continuing operations for the first nine months of 2008 versus 2007 was primarily due to the reversal in 2008 of $1.1 million of valuation allowances on capital loss carry-forwards recognized in 2007 (see Note 6 on page 9 for more information), partially offset by higher effective tax rates for operations outside of the U.S., lower income tax benefits expected for the Domestic Production Activities Deduction and expiration at December 31, 2007 of the research & development tax credit.

          Our investment in Harbinger Capital Partners Special Situations Fund, L.P. had a reported capital account value of $17.2 million at September 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.

          Our share repurchases in 2008 are summarized in Note 10 on page 14. Additional information on net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 22.

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. Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6. Gains and losses from the sale of assets and other special items are described in Note 6 on page 9.

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

18



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.

Results of Operations

Third Quarter 2008 Compared with Third Quarter 2007

          Overall, sales in the third quarter of 2008 decreased 2.4% compared with 2007. Net sales (sales less freight) decreased 2.2% in Film Products primarily due to lower volume, partially offset by 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. Volume was down in the third quarter compared with last year primarily due to competitive pressures, particularly for personal care materials. Net sales decreased 3.2% in Aluminum Extrusions due to lower volume partially offset by higher selling prices from 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 15.

          Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 12.2% in the third quarter of 2008 from 15.5% in 2007. The gross profit margin decreased in Film Products and Aluminum Extrusions primarily because of the decline in volume noted above. In addition, the gross profit margin in Film Products was adversely impacted by a lag in the pass-through of higher resin costs, partially offset by cost reduction efforts.

          As a percentage of sales, selling, general and administrative and R&D expenses were 7.3% in the third quarter of 2008, down from 8.0% in the third quarter of last year. The decrease is primarily due to lower selling, general and administrative expenses in Film Products from cost reduction efforts.

          Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6. Gains and losses from the sale of assets and other special items are described in Note 6 on page 9.

          Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $209,000 in the third quarter of 2008 and $289,000 in 2007. Interest expense declined slightly in third quarter of 2008 compared with last year as higher average debt levels were offset by lower average interest rates. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 





 

 

Three Months
Ended Sept 30

 

 

 



(In Millions)

 

2008

 

2007

 







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

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

42.4

 

$

30.9

 

Average interest rate

 

 

3.2

%

 

6.2

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

1.8

 

$

2.2

 

Average interest rate

 

 

4.5

%

 

3.7

%









Total debt:

 

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

44.2

 

$

33.1

 

Average interest rate

 

 

3.3

%

 

6.0

%









19



          The effective tax rate used to compute income taxes from continuing operations was 39.7% in the third quarter of 2008 compared with 52.9% in the third quarter of 2007, and 37.5% in the first nine months of 2008 compared with 40.1% in the first nine months of 2007. The decrease in the effective tax rate during the third quarter of 2008 versus last year was mainly due to the adjustment of income taxes during the third quarter of each year to the rate that results in a year-to-date effective tax rate that is equal to the rate estimated for that entire year. The decrease in the effective tax rate for continuing operations for the first nine months of 2008 versus 2007 was primarily due to the reversal in 2008 of $1.1 million of valuation allowances on capital loss carry-forwards recognized in 2007 (see Note 6 on page 9 for more information), partially offset by higher effective tax rates for operations outside of the U.S., lower income tax benefits expected for the Domestic Production Activities Deduction and expiration at December 31, 2007 of the research & development tax credit.

First Nine Months of 2008 Compared with First Nine Months of 2007

          Overall, sales in the first nine months of 2008 decreased by 3.2% compared with 2007. Net sales (sales less freight) decreased slightly in Film Products primarily due to lower volume, partially offset by 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. Volume was down in the first nine months of 2008 compared with last year due primarily to competitive pressures, particularly for personal care materials and surface protection films. Net sales decreased 7.5% in Aluminum Extrusions due to lower volume partially offset by higher selling prices from 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 15.

          Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 12.9% in the first nine months of 2008 from 15.2% in 2007. The gross profit margin decreased in Film Products and Aluminum Extrusions primarily because of the decline in volume noted above. In addition, the gross profit margin in Film Products was adversely impacted by a lag in the pass-through of higher resin costs, partially offset by cost reduction efforts.

          As a percentage of sales, selling, general and administrative and R&D expenses were 7.6% in the first nine months of 2008, a decrease from 7.8% in 2007. The decrease is primarily due to higher pension income, lower costs for certain performance-based compensation programs and lower selling, general and administrative expenses in Film Products from cost reduction efforts.

          Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6. Gains and losses from the sale of assets and other special items are described in Note 6 on page 9.

20



          Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $655,000 in the first nine months of 2008 and $960,000 in 2007. Interest expense declined slightly in the first nine months of 2008 versus 2007 as higher average debt levels were offset by lower average interest rates. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 





 

 

Nine Months
Ended Sept 30

 

 

 



(In Millions)

 

2008

 

2007

 







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

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

54.3

 

$

40.5

 

Average interest rate

 

 

3.9

%

 

6.1

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

1.9

 

$

2.3

 

Average interest rate

 

 

4.1

%

 

3.9

%









Total debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

56.2

 

$

42.8

 

Average interest rate

 

 

3.9

%

 

6.0

%









          The effective tax rate used to compute income taxes from continuing operations was 37.5% in the first nine months of 2008 compared with 40.1% in the first nine months of 2007. The decrease in the effective tax rate for continuing operations for the first nine months of 2008 versus 2007 was primarily due to the reversal in 2008 of $1.1 million of valuation allowances on capital loss carry-forwards recognized in 2007 (see Note 6 on page 9 for more information), partially offset by higher effective tax rates for operations outside of the U.S., lower income tax benefits expected for the Domestic Production Activities Deduction and expiration at December 31, 2007 of the research & development tax credit.

21



Liquidity and Capital Resources

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

 

 

 

Accounts receivable increased $17.5 million (18.0%).

 

 

 

 

Accounts receivable in Film Products increased by $2.8 million. Days sales outstanding (“DSO”) increased to 47 at September 30, 2008 compared with 45 at December 31, 2007, and was within the range experienced over the last twelve months.

 

 

 

 

Accounts receivable for continuing operations in Aluminum Extrusions increased by $14.7 million. DSO was 43 at September 30, 2008 compared with 40 at December 31, 2007, and was within the range experienced over the last twelve months.

 

 

 

Inventories declined $13.8 million (28.4%).

 

 

 

 

Inventories in Film Products decreased by approximately $5.7 million. Inventory days decreased to 36 at September 30, 2008 compared with 43 days at December 31, 2007, primarily due to an overall effort to reduce inventory levels.

 

 

 

 

Inventories for continuing operations in Aluminum Extrusions decreased by approximately $8.1 million. Inventory days decreased to 19 at September 30, 2008 compared with 35 at December 31, 2007, primarily due to cyclical fluctuations and an overall effort to reduce inventory levels.

 

 

 

Net property, plant and equipment was down $19.2 million or 7.1% due primarily to depreciation for continuing operations of $32.3 million compared with capital expenditures of $13.8 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 $1.4 million).

 

 

 

Accounts payable increased by $8.9 million (13.2%).

 

 

 

 

Accounts payable in Film Products increased by $2.0 million. Accounts payable days were 30 at September 30, 2008 compared with 30 at December 31, 2007, and were within the range experienced over the last twelve months.

 

 

 

 

Accounts payable for continuing operations in Aluminum Extrusions increased by $11.3 million. Accounts payable days increased to 41 at September 30, 2008 from 37 at December 31, 2007, primarily due to cyclical fluctuations and improved payable terms with suppliers.

 

 

 

 

Accounts payable decreased at corporate by $4.4 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 September 30, 2008).

 

 

 

Accrued expenses increased by $5.7 million (16.9%) due primarily to timing of payments.

 

 

 

Net deferred income tax liabilities in excess of assets increased by $19.2 million and income taxes recoverable increased by $13.7 million due primarily to the movement between these line items in the balance sheet.

          Cash provided by operating activities was $60.4 million in the first nine months of 2008 compared with $74.4 million in the first nine months of 2007. The change is primarily related to normal volatility of working capital components and lower income from continuing operations.

          Cash provided by investing activities was $11.4 million in the first nine months of 2008, compared with cash used in investing activities of $34.5 million in the first nine months 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 investments and purchases of real estate of $2.1 million in 2008, down from $22.6 million last year.

22



          Net cash flow used in financing activities was $73.5 million in the first nine months of 2008 and related to net repayments on our revolving credit facility with excess cash flow of $53.7 million, the payment of regular quarterly dividends of $4.1 million (4 cents per share per quarter) and repurchases of Tredegar common stock ($19.8 million including settlement of $3.4 million; see more information in Note 10 on page 14), partially offset by proceeds from the exercise of stock options of $4.1 million.

          Further information on cash flows for the nine months ended September 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 September 30, 2008 are as follows:

 

 

 

 

 






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


Net capitalization:

 

 

 

 

Cash and cash equivalents

 

$

46,624

 

Debt:

 

 

 

 

$300 million revolving credit agreement maturing December 15, 2010

 

 

27,000

 

Other debt

 

 

1,535

 

 

 



 

Total debt

 

 

28,535

 

 

 



 

Debt net of cash and cash equivalents

 

 

(18,089

)

Shareholders’ equity

 

 

488,286

 

 

 



 

Net capitalization

 

$

470,197

 

 

 



 

Indebtedness as defined in revolving credit agreement:

 

 

 

 

Total debt

 

$

28,535

 

Face value of letters of credit

 

 

5,458

 

Liabilities relating to derivative financial instruments

 

 

3,862

 

 

 



 

Indebtedness

 

$

37,855

 






          Under the revolving credit agreement, borrowings are permitted up to $300 million, and $242 million was available to borrow at September 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 September 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.

23



          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 September 30, 2008 (In Thousands)


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

 

 

 

 

Net income

 

$

36,155

 

Plus:

 

 

 

 

After-tax losses related to discontinued operations

 

 

 

Total income tax expense for continuing operations

 

 

19,867

 

Interest expense

 

 

2,633

 

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

 

 

793

 

Losses related to the application of the equity method of accounting

 

 

 

Depreciation and amortization expense for continuing operations

 

 

43,581

 

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 $3,960)

 

 

6,876

 

Minus:

 

 

 

 

After-tax income related to discontinued operations

 

 

(5,391

)

Total income tax benefits for continuing operations

 

 

 

Interest income

 

 

(907

)

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 (cash-related of $5,199)

 

 

(10,199

)

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

 

 

 

 

 



 

Adjusted EBITDA as defined in revolving credit agreement

 

 

93,408

 

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

 

 

(43,581

)

 

 



 

Adjusted EBIT as defined in revolving credit agreement

 

$

49,827

 

 

 



 

Shareholders’ equity at September 30, 2008

 

$

488,286

 

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

 

 

 

 

Leverage ratio (indebtedness-to-adjusted EBITDA)

 

 

.41x

 

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

 

 

18.92x

 

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)

 

$

138,569

 

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

 

$

333,078

 

Maximum leverage ratio permitted:

 

 

 

 

Ongoing (2.75x effective January 1, 2009)

 

 

3.00x

 

Pro forma for acquisitions

 

 

2.50x

 

Minimum interest coverage ratio permitted

 

 

2.50x

 






24



          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 22 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 15 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.

(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.

25



          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.

(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 nine months of 2008, significantly higher natural gas costs were mostly offset by this energy surcharge.

(LINE GRAPH)

 

 

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

26



          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 nine months of 2008 and 2007 are as follows:

 

 

 

 

 

 

 

 

 

 


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

 


 

 

Nine Months Ended Sept 30

 

 

 


 

 

2008

 

2007

 

 

 


 


 

 

Exports
From U.S.

 

Foreign
Operations

 

Exports
From U.S.

 

Foreign
Operations

 

 

 


 


 


 



Canada

 

5

%

%

5

%

%

Europe

 

1

 

18

 

1

 

16

 

Latin America

 

 

3

 

 

3

 

Asia

 

2

 

8

 

4

 

6

 











Total