form10q.htm


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 June 30, 2009

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
¨
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
 
to
 

Commission file number 1-10258

Tredegar Corporation
(Exact Name of Registrant as Specified in Its Charter)

Virginia
 
54-1497771
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

1100 Boulders Parkway
Richmond, Virginia
 
 
23225
(Address of Principal Executive Offices)
 
(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨  No ¨

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 ¨  No  x

The number of shares of Common Stock, no par value, outstanding as of July 31, 2009: 33,984,527.
 


 
 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

Tredegar Corporation
Consolidated Balance Sheets
 
(In Thousands)
 
(Unaudited)
 
             
   
June 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 58,658     $ 45,975  
Accounts and notes receivable, net of allowance for doubtful accounts and sales returns of $4,065 in 2009 and $3,949 in 2008
    81,933       91,400  
Income taxes recoverable
    6,554       12,549  
Inventories
    29,159       36,809  
Deferred income taxes
    5,198       7,654  
Prepaid expenses and other
    3,114       5,374  
Total current assets
    184,616       199,761  
Property, plant and equipment, at cost
    652,714       640,492  
Less accumulated depreciation
    419,991       403,622  
Net property, plant and equipment
    232,723       236,870  
Other assets and deferred charges
    40,723       38,926  
Goodwill and other intangibles
    104,428       135,075  
Total assets
  $ 562,490     $ 610,632  
                 
Liabilities and Shareholders' Equity
               
Current liabilities:
               
Accounts payable
  $ 48,061     $ 54,990  
Accrued expenses
    35,427       38,349  
Current portion of long-term debt
    644       529  
Total current liabilities
    84,132       93,868  
Long-term debt
    960       22,173  
Deferred income taxes
    48,520       45,152  
Other noncurrent liabilities
    26,530       29,023  
Total liabilities
    160,142       190,216  
Commitments and contingencies (Notes 1 and 2)
               
Shareholders' equity:
               
Common stock, no par value
    41,744       40,719  
Common stock held in trust for savings restoration plan
    (1,318 )     (1,313 )
Foreign currency translation adjustment
    24,056       23,443  
Loss on derivative financial instruments
    (1,742 )     (6,692 )
Pension and other postretirement benefit adjustments
    (64,397 )     (64,788 )
Retained earnings
    404,005       429,047  
Total shareholders' equity
    402,348       420,416  
Total liabilities and shareholders' equity
  $ 562,490     $ 610,632  
 
See accompanying notes to financial statements.

 
2

 

Tredegar Corporation
 
Consolidated Statements of Income
 
(In Thousands, Except Per Share Data)
 
(Unaudited)
 
                         
    Three Months     Six Months  
   
Ended June 30
   
Ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Revenues and other items:
                       
Sales
  $ 158,115     $ 234,008     $ 311,181     $ 462,488  
Other income (expense), net
    488       663       1,357       1,220  
      158,603       234,671       312,538       463,708  
Costs and expenses:
                               
Cost of goods sold
    125,615       196,249       250,873       390,488  
Freight
    3,870       5,797       7,099       10,898  
Selling, general and administrative
    14,267       14,288       29,039       30,774  
Research and development
    2,999       2,851       5,511       5,334  
Amortization of intangibles
    30       31       60       63  
Interest expense
    184       557       388       1,438  
Asset impairments and costs associated with exit and disposal activities
    (149 )     1,219       1,482       5,159  
Goodwill impairment charge
    -       -       30,559       -  
Total
    146,816       220,992       325,011       444,154  
Income (loss) from continuing operations before income taxes
    11,787       13,679       (12,473 )     19,554  
Income taxes
    5,300       4,814       9,857       6,904  
Income (loss) from continuing operations
    6,487       8,865       (22,330 )     12,650  
Loss from discontinued operations
    -       (207 )     -       (930 )
Net income (loss)
  $ 6,487     $ 8,658     $ (22,330 )   $ 11,720  
                                 
Earnings (loss) per share:
                               
Basic:
                               
Continuing operations
  $ .19     $ .26     $ (.66 )   $ .37  
Discontinued operations
    -       (.01 )     -       (.03 )
Net income (loss)
  $ .19     $ .25     $ (.66 )   $ .34  
                                 
Diluted:
                               
Continuing operations
  $ .19     $ .26     $ (.66 )   $ .37  
Discontinued operations
    -       (.01 )     -       (.03 )
Net income (loss)
  $ .19     $ .25     $ (.66 )   $ .34  
                                 
Shares used to compute earnings (loss) per share:
                               
Basic
    33,876       33,997       33,871       34,231  
Diluted
    33,971       34,211       33,871       34,445  
                                 
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
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income (loss)
  $ (22,330 )   $ 11,720  
Adjustments for noncash items:
               
Depreciation
    19,663       22,379  
Amortization of intangibles
    60       63  
Goodwill impairment charge
    30,559       -  
Deferred income taxes
    2,160       7,123  
Accrued pension and postretirement benefits
    (1,267 )     (2,825 )
Loss on asset impairments and divestitures
    -       3,337  
Gain on sale of assets
    (1,004 )     -  
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
               
Accounts and notes receivable
    9,732       (25,162 )
Inventories
    8,055       15,913  
Income taxes recoverable
    5,995       (9,803 )
Prepaid expenses and other
    2,221       828  
Accounts payable and accrued expenses
    (522 )     2,086  
Other, net
    (1,333 )     2,180  
Net cash provided by operating activities
    51,989       27,839  
Cash flows from investing activities:
               
Capital expenditures (including settlement of related accounts payable of $1,709 in 2009)
    (17,348 )     (10,461 )
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
    1,118       248  
Investments
    -       (1,722 )
Net cash provided by (used in) investing activities
    (16,230 )     11,681  
Cash flows from financing activities:
               
Dividends paid
    (2,717 )     (2,736 )
Debt principal payments
    (21,098 )     (47,209 )
Borrowings
    -       22,000  
Repurchases of Tredegar common stock
    -       (12,904 )
Proceeds from exercise of stock options and other
    187       -  
Net cash used in financing activities
    (23,628 )     (40,849 )
Effect of exchange rate changes on cash
    552       1,621  
Increase in cash and cash equivalents
    12,683       292  
Cash and cash equivalents at beginning of period
    45,975       48,217  
Cash and cash equivalents at end of period
  $ 58,658     $ 48,509  

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, 2008
  $ 40,719     $ 429,047     $ (1,313 )   $ 23,443     $ (6,692 )   $ (64,788 )   $ 420,416  
Comprehensive income (loss):
                                                       
Net income (loss)
    -       (22,330 )     -       -       -       -       (22,330 )
Other comprehensive income (loss):
                                                       
Foreign currency translation adjustment (net of tax of $337)
    -       -       -       613       -       -       613  
Derivative financial instruments adjustment (net of tax of $3,019)
    -       -       -       -       4,950       -       4,950  
Amortization of prior service costs and net gains or losses (net of tax of $220)
    -       -       -       -       -       391       391  
Comprehensive income (loss)
                                                    (16,376 )
Cash dividends declared ($.08 per share)
    -       (2,717 )     -       -       -       -       (2,717 )
Stock-based compensation expense & other
    1,025       -       -       -       -       -       1,025  
Tredegar common stock purchased by trust for savings restoration plan
    -       5       (5 )     -       -       -       -  
Balance June 30, 2009
  $ 41,744     $ 404,005     $ (1,318 )   $ 24,056     $ (1,742 )   $ (64,397 )   $ 402,348  

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, 2009, the consolidated results of operations for the three and six months ended June 30, 2009 and 2008, the consolidated cash flows for the six months ended June 30, 2009 and 2008, and the consolidated changes in shareholders’ equity for the six months ended June 30, 2009.  All such adjustments are deemed to be of a normal, recurring nature.  The preparation of these interim financial statements also includes an evaluation of subsequent events through August 4, 2009, which is the date that the financial statements were issued.  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, 2008.  The results of operations for the six months ended June 30, 2009, 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 2009 shown in the segment operating profit table in Note 10 include:

 
·
Pretax losses of $779,000 for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income, see Note 8 on page 11 for additional detail);
 
·
Pretax gain of $276,000 related to the reduction of future environmental costs expected to be incurred by Aluminum Extrusions (included in “Cost of goods sold” in the consolidated statements of income);
 
·
Pretax gain of $175,000 on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); and
 
·
Pretax gain of $149,000 related to the reversal to income of certain inventory impairment accruals in Film Products.

Plant shutdowns, asset impairments and restructurings in the second quarter of 2008 shown in the segment operating profit table in Note 10 include:

 
·
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
 
·
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 first six months of 2009 shown in the segment operating profit table in Note 10 include:

 
·
Pretax charges of $1.6 million for severance and other employee-related costs in connection with restructurings in Film Products ($1.1 million), Aluminum Extrusions ($369,000) and corporate headquarters ($178,000, included in “Corporate expenses, net” in the net sales and operating profit by segment table in Note 10);

 
6

 

 
·
Pretax losses of $1.4 million for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income, see Note 8 on page 11 for additional detail);
 
·
Pretax gain of $276,000  related to the reduction of future environmental costs expected to be incurred by Aluminum Extrusions (included in “Cost of goods sold” in the consolidated statements of income);
 
·
Pretax gain of $275,000 on the sale of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown films manufacturing facility in LaGrange, Georgia;
 
·
Pretax gain of $175,000 on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); and
 
·
Pretax gain of $149,000 related to the reversal to income of certain inventory impairment accruals in Film Products.

Plant shutdowns, asset impairments and restructurings in the first six months of 2008 shown in the segment operating profit table in Note 10 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
 
·
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 reduction in workforce in Film Products in 2009 (approximately 50 people) is expected to save $1.4 million in 2009 and $2.5 million on an annualized basis.  The reduction in workforce in Film Products in 2008 (approximately 90 people) is expected to save $4.2 million on an annualized basis.

Results for 2009 also include a pretax gain of $404,000 ($257,000 after tax) on the sale of corporate real estate in the first quarter.  This gain is included in “Other income (expenses), net” in the consolidated statements of income.

Income taxes for the first six months of 2009 include the recognition of a valuation allowance of $3.7 million ($1.8 million in the second quarter) related to the expected limitations on the utilization of assumed capital losses on certain investments.

On February 12, 2008, we sold our aluminum extrusions business in Canada for approximately $25 million to an affiliate of H.I.G. 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 was 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 from operations up through the date of sale.  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 the loss from discontinued operations are presented below:
 
 
7

 
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
(In Thousands)
 
2009
   
2008
   
2009
   
2008
 
Loss from operations before income taxes
  $ -     $ -     $ -     $ (391 )
Income tax cost (benefit) on operations
    -       -       -       (98 )
      -       -       -       (293 )
Loss associated with asset impairments and disposal activities
    -       (207 )     -       (1,337 )
Income tax cost (benefit) on asset impairments and costs associated with disposal activities
    -       -       -       (700 )
      -       (207 )     -       (637 )
Loss from discontinued operations
  $ -     $ (207 )   $ -     $ (930 )


A reconciliation of the beginning and ending balances of accrued expenses associated with asset impairments and exit and disposal activities for the six months ended June 30, 2009 is as follows:

(In Thousands)
 
Severance
   
Long-Lived Asset Impairments
   
Other (a)
   
Total
 
Balance at December 31, 2008
  $ 431     $ -     $ 4,491     $ 4,922  
Changes in 2009:
                               
Charges
    1,631       -       -       1,631  
Cash spent
    (850 )     -       (645 )     (1,495 )
Charged against assets
    -       -       -       -  
Balance at June 30, 2009
  $ 1,212     $ -     $ 3,846     $ 5,058  
 
(a)       Other primarily includes accrued losses on a sub-lease at a facility in Princeton, New Jersey.

3.
We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year).  Our reporting units include Film Products and Aluminum Extrusions, each of which may have separately identifiable operating net assets (operating assets including goodwill and intangible assets net of operating liabilities).  We estimate the fair value of our reporting units using discounted cash flow analysis and comparative enterprise value-to-EBITDA multiples.  Based on the severity of the economic downturn and its impact on the sales volumes of our aluminum extrusions business (a 36.8% decline in sales volume in the first quarter of 2009 compared with the first quarter of 2008), the resulting first quarter operating loss (see Note 10), possible future losses and the uncertainty in the amount and timing of an economic recovery, we determined that impairment indicators existed.  Upon completing the impairment analysis as of March 31, 2009, a goodwill impairment charge of $30.6 million ($30.6 million after tax) was recognized in Aluminum Extrusions in the first quarter of 2009.  This was the entire amount of goodwill associated with the Aluminum Extrusions reporting unit and an anomalous write-off under U.S. GAAP since the decline in the estimated fair value below the carrying value of the operating net assets of Aluminum Extrusions was far less than $30.6 million.  The goodwill of Film Products will be tested for impairment at the annual testing date unless there is an indicator of impairment identified at an earlier date.

 
8

 

4.
The components of other comprehensive income or loss are as follows:
 
   
Three Months
   
Six Months
 
   
Ended June 30
   
Ended June 30
 
(In Thousands)
 
2009
   
2008
   
2009
   
2008
 
Net income (loss)
  $ 6,487     $ 8,658     $ (22,330 )   $ 11,720  
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustment:
                               
Unrealized foreign currency translation adjustment arising during period
    5,236       2,811       613       7,164  
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
    5,236       2,811       613       (7,128 )
Derivative financial instrument adjustment
    3,466       (590 )     4,950       2,587  
Pension and other post-retirement benefit adjustment:
                               
Amortization of prior service costs and net gains or losses
    196       (116 )     391       (232 )
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
    196       (116 )     391       4,639  
Comprehensive income (loss)
  $ 15,385     $ 10,763     $ (16,376 )   $ 11,818  


5.             The components of inventories are as follows:

   
June 30
   
Dec. 31
 
(In Thousands)
 
2009
   
2008
 
Finished goods
  $ 5,944     $ 7,470  
Work-in-process
    1,478       2,210  
Raw materials
    7,819       14,264  
Stores, supplies and other
    13,918       12,865  
Total
  $ 29,159     $ 36,809  


6.
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
   
Six Months
 
   
Ended June 30
   
Ended June 30
 
(In Thousands)
 
2009
   
2008
   
2009
   
2008
 
Weighted average shares outstanding used to compute basic earnings (loss) per share
    33,876       33,997       33,871       34,231  
Incremental dilutive shares attributable to stock options and restricted stock
    95       214       -       214  
Shares used to compute diluted earnings (loss) per share
    33,971       34,211       33,871       34,445  
 
 
9

 

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 June 30, 2009 and three and six months ended June 30, 2008, 582,833, 390,300, 158,507 and 689,697, respectively, of anti-dilutive options to purchase shares were excluded from the calculation of incremental shares attributable to stock options and restricted stock.

7.
Our investment in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”) had a reported capital account value of $11.1 million at June 30, 2009, compared with $10.1 million at December 31, 2008.  This investment has a carrying value in Tredegar’s balance sheet (included in “Other assets and deferred charges”) of $10.0 million, which represents the amount invested on April 2, 2007.

During the third quarter of 2008, we sold our investments in Theken Spine and Therics, LLC.  In 2009, we recognized a gain of $150,000 in the first quarter for a post-closing adjustment related to the sale (included in “Other income (expense), net” in the consolidated statements of income).  AFBS, Inc. (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 2007, we invested $6.5 million in a privately held drug delivery company.  In the fourth quarter of 2008, we invested an additional $1.0 million as part of a new round of financing completed by the investee.  The company is developing and commercializing state of the art drug delivery systems designed to improve patient compliance and outcomes, and our ownership interest on a fully diluted basis is approximately 21%.  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.  At June 30, 2009, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) was $13.1 million.  The fair value of our investment, which exceeds the amount of cash invested by $5.6 million, was based on our estimate of the value of our ownership interest.

On the date of our most recent investment (December 15, 2008), we believe 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 December 15, 2008, 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 primarily will 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 or significant favorable event versus plans 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 December 15, 2008, 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.  For the three and six months ended June 30, 2009, net losses recorded by the drug company, as reported to us by the investee, were $1.1 million and $3.4 million, respectively, compared to net losses of $1.8 million and $3.1 million for the three and six months ended June 30, 2008, respectively.  Total assets (which included cash and cash equivalents of $1.4 million at June 30, 2009 and $5.5 million at December 31, 2008) were $4.3 million and $8.4 million at June 30, 2009 and December 31, 2008, respectively.

 
10

 

On December 31, 2008, the privately held drug company was converted from a limited liability company taxed as a pass-through entity (partnership) to a corporation.  Substantially all shareholder rights from the limited liability company carried over in the conversion. Our allocation of losses for tax purposes as a pass-through entity in 2008 was approximately $4.8 million.

8.
We use derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and currency exchange rate exposures that exist as part of ongoing business operations primarily in Film Products.  Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value.  A change in the fair value of derivatives that are highly effective as and that are designated and qualify as cash flow hedges are recorded in other comprehensive income.  Gains and losses accumulated in other comprehensive income are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction.  Such gains and losses are reported on the same line as the underlying hedged item.  Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings.  The amount of gains and losses recognized for hedge ineffectiveness was not material to the three and six month periods ended June 30, 2009 and 2008.

The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs.  If individual derivative instruments with the same counterparty can be settled on a net basis, we record the corresponding derivative fair values as a net asset or net liability.

In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals.  In order to hedge our margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments.  The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $15.4 million (16.7 million pounds of aluminum) at June 30, 2009 and $28.1 million (23.8 million pounds of aluminum) at December 31, 2008.

 
11

 

The table below summarizes the location and gross amounts of aluminum futures contract fair values in the consolidated balance sheets as of June 30, 2009 and December 31, 2008:
 
(In Thousands)
 
June 30, 2009
   
December 31, 2008
 
   
Balance Sheet
   
Fair
   
Balance Sheet
   
Fair
 
   
Account
   
Value
   
Account
   
Value
 
                                 
Derivatives Designated as Hedging Instruments
                               
Under SFAS No. 133
                               
Liability derivatives:
                               
Aluminum futures contracts (before margin deposits)
 
Accrued expenses
    $ 2,607    
Accrued expenses
    $ 11,042  
                                 
Derivatives Not Designated as Hedging
                               
Instruments Under SFAS No. 133
                               
                                 
Asset derivatives:
                               
Aluminum futures contracts (before margin deposits)
 
Accrued expenses
    $ -    
Accrued expenses
    $ 973  
                                 
Liability derivatives:
                               
Aluminum futures contracts (before margin deposits)
 
Accrued expenses
    $ -    
Accrued expenses
    $ 973  

In the event that a counterparty to an aluminum fixed-price forward sale contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate us for any losses on the related aluminum futures and/or forward purchase contracts through the date of cancellation.  The offsetting asset and liability positions included in the table above are associated with the unwinding of aluminum futures contracts that relate to such cancellations.

Our aluminum futures brokers contractually require assets to be posted as collateral for unrealized losses in excess of a contractually defined credit limit.  Due to recent significant reductions in aluminum prices on the London Metal Exchange (LME) (see chart on page 31), we were required to post margin deposits of $4.0 million at December 31, 2008 on LME futures losses (no deposits required at June 30, 2009).  These amounts are recorded as an offset to the fair value of unrealized aluminum futures contract losses included in “Accrued expenses” in the consolidated balance sheets.

Losses associated with the aluminum extrusions business of $779,000 ($485,000 after tax) and $1.4 million ($863,000 after tax) were recognized during the three and six month periods ending June 30, 2009, respectively, for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from delayed fulfillment by customers of fixed-price forward purchase commitments.  Such timing differences are included in “Plant shutdowns, assets impairments, restructurings and other” in the net sales and operating profit by segment table in Note 10.  Timing differences prior to 2009 have not been significant.

We have future fixed Euro-denominated contractual payments for equipment being purchased as part of our expansion of the Carthage, Tennessee aluminum extrusion manufacturing facility.  We have used a fixed rate Euro forward contract with various settlement dates to hedge exchange rate exposure on these obligations.  The notional amount of this foreign currency forward was $2.9 million at June 30, 2009 and $4.2 million at December 31, 2008.

 
12

 

The table below summarizes the location and gross amounts of foreign currency forward contract fair values in the consolidated balance sheets as of June 30, 2009 and December 31, 2008:

(In Thousands)
 
June 30, 2009
   
December 31, 2008
 
   
Balance Sheet
   
Fair
   
Balance Sheet
   
Fair
 
   
Account
   
Value
   
Account
   
Value
 
                                 
Derivatives Designated as Hedging Instruments
                               
Under SFAS No. 133
                               
Asset derivatives:
                               
Foreign currency forward contracts
 
Prepaid expenses and other
    $ 74    
Prepaid expenses and other
    $ 56  


           We receive Euro-based royalty payments relating to our operations in Europe.  We use zero-cost collar currency options to hedge a portion of our exposure to changes in cash flows due to variability in U.S. Dollar and Euro exchange rates.  The outstanding notional amount on these collars was $7.0 million at June 30, 2009, and these outstanding currency collar options will expire at quarterly intervals through December 2009.  There were no derivatives outstanding at December 31, 2008 related to the hedging of royalty payments with currency options.  The table below summarizes our open currency option positions at June 30, 2009:

         
U.S. Dollar Equivalent Strike Prices of Options Bought and Sold on USD/EUR
 
Period Covered by Contract
 
Notional Amount (In Thousands)
   
Call Options Sold
   
Put Options Bought
 
3rd Qtr 2009
  $ 3,500     $ 1.39     $ 1.28  
4th Qtr 2009
    3,500       1.39       1.28  


The table below summarizes the location and gross amounts of foreign currency option contract fair values in the consolidated balance sheets as of June 30, 2009 and December 31, 2008:
 
(In Thousands)
 
June 30, 2009
   
December 31, 2008
 
   
Balance Sheet
   
Fair
   
Balance Sheet
   
Fair
 
   
Account
   
Value
   
Account
   
Value
 
                                 
Derivatives Designated as Hedging Instruments
                               
Under SFAS No. 133
                               
                                 
Asset derivatives:
                               
Foreign currency option contracts
 
Accrued expenses
    $ 23    
Not Applicable
 
                                 
Liability derivatives:
                               
Foreign currency option contracts
 
Accrued expenses
    $ 189    
Not Applicable
 


Our derivative contracts involve elements of credit and market risk, including the risk of dealing with counterparties and their ability to meet the terms of the contracts.  The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our aluminum futures contracts are major financial institutions.  Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers.  The counterparty to our foreign currency futures and zero-cost collar contracts are major financial institutions.

 
13

 

The effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three and six month periods ended June 30, 2009 and 2008 is summarized in the tables below:
 
(In Thousands)
 
Cash Flow Derivative Hedges
 
   
Aluminum Futures Contracts
   
Foreign Currency Forwards and Options
 
Three Months Ended June 30,
 
2009
   
2008
   
2009
   
2008
 
Amount of pre-tax gain (loss) recognized in other comprehensive income
  $ 1,367     $ 372     $ (49 )   $ -  
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion)
 
Cost of sales
   
Cost of sales
   
Not Applicable
 
                                 
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income to net income (effective portion)
  $ (4,257 )   $ 1,170    
Not Applicable
 

(In Thousands)
 
Cash Flow Derivative Hedges
 
   
Aluminum Futures Contracts
   
Foreign Currency Forwards and Options
 
Six Months Ended June 30,
 
2009
   
2008
   
2009
   
2008
 
Amount of pre-tax gain (loss) recognized in other comprehensive income
  $ (642 )   $ 5,378     $ (249 )   $ -  
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion)
 
Cost of sales
   
Cost of sales
   
Not Applicable
 
                                 
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income to net income (effective portion)
  $ (8,861 )   $ 1,131    
Not Applicable
 

Gains and losses on the ineffective portion of derivative instruments or derivative instruments that were not designated as hedging instruments were immaterial for the three and six months ended June 30, 2009 and 2008.  As of June 30, 2009, we expect $1.4 million of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income to be reclassified to earnings within the next twelve months.  For the three and six month periods ended June 30, 2009 and 2008, we had not realized any unrealized net gains or losses from hedges that had been discontinued.

 
14

 

9.
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 Three Months Ended June 30
   
Other Post-Retirement Benefits for Three Months Ended June 30
 
(In Thousands)
 
2009
   
2008
   
2009
   
2008
 
Service cost
  $ (783 )   $ (1,053 )   $ (18 )   $ (18 )
Interest cost
    (3,344 )     (3,055 )     (129 )     (128 )
Expected return on plan assets
    5,189       5,486       -       -  
Amortization of prior service costs, gains or losses and net transition asset
    (305 )     181       24       -  
Net periodic benefit income (cost)
  $ 757     $ 1,559     $ (123 )   $ (146 )

 
   
Pension Benefits for Six Months Ended June 30
   
Other Post-Retirement Benefits for Six Months Ended June 30
 
(In Thousands)
 
2009
   
2008
   
2009
   
2008
 
Service cost
  $ (1,566 )   $ (2,105 )   $ (36 )   $ (36 )
Interest cost
    (6,688 )     (6,110 )     (257 )     (257 )
Expected return on plan assets
    10,378       10,971       -       -  
Amortization of prior service costs, gains or losses and net transition asset
    (610 )     362       46       -  
Net periodic benefit income (cost)
  $ 1,514     $ 3,118     $ (247 )   $ (293 )

We contributed approximately $122,000 to our pension plans for continuing operations in 2008.  We expect to contribute $2.3 million in 2009, which is $2.1 million lower than previously expected.  During 2008, the fair value of the assets of our pension plans declined by approximately $89.6 million to $194.5 million in December 31, 2008, due mainly to the drop in global stock prices and benefit payments to retirees of $10.2 million.  We fund our other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which were $243,000 for the year ended December 31, 2008.

10.
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, 2008, except for the goodwill impairment charge relating to Aluminum Extrusions described in Note 3, and 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.
 
 
15

 
 
Tredegar Corporation
 
Net Sales and Operating Profit by Segment
 
(In Thousands)
 
(Unaudited)
 
                         
   
Three Months
   
Six Months
 
   
Ended June 30
   
Ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales
                       
Film Products
  $ 107,804     $ 135,529     $ 212,587     $ 267,843  
Aluminum Extrusions
    46,441       92,682       91,495       183,747  
Total net sales
    154,245       228,211       304,082       451,590  
Add back freight
    3,870       5,797       7,099       10,898  
Sales as shown in the Consolidated Statements of Income
  $ 158,115     $ 234,008     $ 311,181     $ 462,488  
                                 
Operating Profit (Loss)
                               
Film Products:
                               
Ongoing operations
  $ 14,214     $ 13,479     $ 27,228     $ 24,265  
Plant shutdowns, asset impairments, restructurings and other
    149       (944 )     (660 )     (4,649 )
                                 
Aluminum Extrusions:
                               
Ongoing operations
    634       2,406       (1,163 )     3,948  
Goodwill impairment charge
    -       -       (30,559 )     -  
Plant shutdowns, asset impairments, restructurings and other
    (328 )     (380 )     (1,306 )     (615 )
                                 
AFBS:
                               
Gain on sale of investments in Theken Spine and Therics, LLC
    -       -       150       -  
                                 
Total
    14,669       14,561       (6,310 )     22,949  
Interest income
    175       188       434       446  
Interest expense
    184       557       388       1,438  
Gain on sale of corporate assets
    -       -       404       -  
Stock option-based compensation costs
    541       278       803       338  
Corporate expenses, net
    2,332       235       5,810       2,065  
Income (loss) from continuing operations before income taxes
    11,787       13,679       (12,473 )     19,554  
Income taxes
    5,300       4,814       9,857       6,904  
Income (loss) from continuing operations
    6,487       8,865       (22,330 )     12,650  
Loss from discontinued operations
    -       (207 )     -       (930 )
Net income (loss)
  $ 6,487     $ 8,658     $ (22,330 )   $ 11,720  

11.
The effective tax rate for the second quarter of 2009 was 45.0% compared to 35.2% for the second quarter of 2008.  The increase in the effective tax rate for continuing operations for the second quarter reflects the change in income taxes during the second quarter to adjust the effective tax rate for the first six months of the year to the rate estimated for the entire year.

 
16

 

The significant differences between the U.S. federal statutory rate and the effective income rate for continuing operations for the six month periods ended June 30, 2009 and 2008 are as follows:
 
   
Percent of Income (Loss) Before Income Taxes for
 
   
Continuing Operations
 
Six Months Ended June 30
 
2009
   
2008
 
Income tax expense at federal statutory rate
    35.0       35.0  
Goodwill impairment charge
    (85.8 )     -  
Valuation allowance for capital loss carry-forwards
    (30.0 )     (4.7 )
Unremitted earnings from foreign operations
    (5.6 )     7.4  
State taxes, net of federal income tax benefit
    (1.7 )     0.4  
Valuation allowance for foreign operating loss carry-forwards
    (0.5 )     1.0  
Non-deductible expenses
    (0.2 )     0.2  
Research and development tax credit
    0.9       -  
Foreign rate differences
    8.8       (4.1 )
Other
    0.1       0.1  
Effective income tax rate
    (79.0 )     35.3  
 
A reconciliation of our unrecognized uncertain tax positions since December 31, 2008, is shown below:
 
(In Thousands)
                   
Increase
             
                     
(Decrease)
             
         
Increase (Decrease)
   
Due to
   
Reductions
       
         
Due to Tax Positions
   
Settlements
   
Due to
       
   
Balance at
   
Taken in
   
with
   
Lapse of
   
Balance at
 
   
January 1,
   
Current
   
Prior
   
Taxing
   
Statute of
   
June 30,
 
   
2009
   
Period
   
Period
   
Authorities
   
Limitations
   
2009
 
Gross unrecognized tax benefits on uncertain tax positions (reflected in current income tax and other noncurrent liability accounts in the balance sheet)
  $ 2,553     $ 48     $ 10     $ (1,440 )   $ -     $ 1,171  
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)
    (1,828 )                                     (439 )
Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rate if recognized
    725                                       732  
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
    1,303                                       728  
Related deferred income tax assets recognized on interest and penalties
    (476 )                                     (269 )
Interest and penalties accrued on uncertain tax positions net of related deferred income tax benefits, which would impact the effective tax rate if recognized
    827                                       459  
Total net unrecognized tax benefits on uncertain tax positions reflected in the balance sheet, which would impact the effective tax rate if recognized
  $ 1,552                                     $ 1,191  
 
In the second quarter of 2009, we settled 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 regarded the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes.  The settlement with the IRS for the disputed issues cost us approximately $1.0 million, which is lower than the previous estimate of $1.3 million and was applied against the balance of unrecognized tax benefits.

Tredegar and its subsidiaries file income tax returns in U.S., state and foreign jurisdictions.  Except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2005.  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.

 
17

 

12.
The Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 132(R)-1, Employees’ Disclosures about Postretirement Benefit Plan Assets (FSP No. FAS 132(R)-1).  FSP No. FAS 132(R)-1 amends Statement of Financial Accounting Standards No. 132(R), Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, to include objectives for disclosing information about postretirement benefit plan assets, thereby addressing financial statement user concerns regarding the lack of transparency previously surrounding such disclosures.  Disclosures are intended to provide users with an understanding of (1) how investment allocation decisions are made, including an understanding of investment policies and strategies, (2) major classes of plan assets, (3) the inputs and valuation techniques used to measure fair value of plan assets, (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets, and (5) significant concentrations of risk within plan assets.  FSP No. FAS 132(R)-1 is effective for annual periods ending after December 15, 2009.  We do not believe that the adoption of FSP No. FAS 132(R)-1 will have a material impact on our financial statements and related disclosures.

In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (SFAS No. 166).  SFAS No. 166 clarifies the information that an entity must provide in its financial statements surrounding a transfer of financial assets and the effect of the transfer on its financial position, financial performance, and cash flows. This Statement is effective as of the beginning of the annual period beginning after November 15, 2009. We do expect SFAS No. 166 to have a material impact on our financial statements and disclosures.

The FASB also issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (SFAS No. 167) in June 2009. SFAS No. 167 clarifies and improves financial reporting by entities involved with variable interest entities. This Statement is effective as of the beginning of the annual period beginning after November 15, 2009. We are currently evaluating the impact of SFAS No. 167 on our financial statements.

In June 2009, the FASB issued Financial Accounting Standard No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (SFAS No. 168). In addition in June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Topic 205 – Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (ASU 2009-1). Both SFAS No. 168 and ASU 2009-1 recognize the FASB Accounting Standards CodificationTM as the source of authoritative U.S. generally accepted accounting principles to be utilized by non-governmental entities. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009.

 
18

 

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 the words “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.  It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  Factors that could cause actual results to differ from expectations include, without limitation: Film Products is highly dependent on sales to one customer — The Procter & Gamble Company; growth of Film Products depends on its ability to develop and deliver new products at competitive prices; sales volume and profitability of continuing operations in Aluminum Extrusions are cyclical and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction, distribution and transportation industries, and are also subject to seasonal slowdowns; our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations; our future performance is influenced by costs incurred by our operating companies including, for example, the cost of energy and raw materials; and the factors discussed in the reports Tredegar files with or furnishes to the Securities and Exchange Commission (the SEC) from time-to-time, including the risks and important factors set forth in additional detail in “Risk Factors” in Part I, Item 1A of Tredegar’s 2008 Annual Report on Form 10-K (2008 Form 10-K) filed with the SEC.  Readers are urged to review and consider carefully the disclosures Tredegar makes in its 2008 Form 10-K.  Tredegar does not undertake to update any forward-looking statement made in its interim filings with the SEC to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based.

Executive Summary

Second-quarter 2009 income from continuing operations was $6.5 million (19 cents per share) compared with $8.9 million (26 cents per share) in the second quarter of 2008.  Losses from continuing operations for the first six months of 2009 was $22.3 million (66 cents per share) compared with income from continuing operations of $12.7 million (37 cents per share) in the first six months of 2008.  Losses related to plant shutdowns, asset impairments and restructurings are described in Note 2 on page 6.

 
19

 

The following tables present Tredegar’s net sales and operating profit by segment for the second quarter and six months ended June 30, 2009 and 2008:

Tredegar Corporation
 
Net Sales and Operating Profit by Segment
 
(In Thousands)
 
(Unaudited)
 
                         
   
Three Months
   
Six Months
 
   
Ended June 30
   
Ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales
                       
Film Products
  $ 107,804     $ 135,529     $ 212,587     $ 267,843  
Aluminum Extrusions
    46,441       92,682       91,495       183,747  
Total net sales
    154,245       228,211       304,082       451,590  
Add back freight
    3,870       5,797       7,099       10,898  
Sales as shown in the Consolidated Statements of Income
  $ 158,115     $ 234,008     $ 311,181     $ 462,488  
                                 
Operating Profit (Loss)
                               
Film Products:
                               
Ongoing operations
  $ 14,214     $ 13,479     $ 27,228     $ 24,265  
Plant shutdowns, asset impairments, restructurings and other
    149       (944 )     (660 )     (4,649 )
                                 
Aluminum Extrusions:
                               
Ongoing operations
    634       2,406       (1,163 )     3,948  
Goodwill impairment charge
    -       -       (30,559 )     -  
Plant shutdowns, asset impairments, restructurings and other
    (328 )     (380 )     (1,306 )     (615 )
                                 
AFBS:
                               
Gain on sale of investments in Theken Spine and Therics, LLC
    -       -       150       -  
                                 
Total
    14,669       14,561       (6,310 )     22,949  
Interest income
    175       188       434       446  
Interest expense
    184       557       388       1,438  
Gain on sale of corporate assets
    -       -       404       -  
Stock option-based compensation costs
    541       278       803       338  
Corporate expenses, net
    2,332       235       5,810       2,065  
Income (loss) from continuing operations before income taxes
    11,787       13,679       (12,473 )     19,554  
Income taxes
    5,300       4,814       9,857       6,904  
Income (loss) from continuing operations
    6,487       8,865       (22,330 )     12,650  
Loss from discontinued operations
    -       (207 )     -       (930 )
Net income (loss)
  $ 6,487     $ 8,658     $ (22,330 )   $ 11,720  
 
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 $107.8 million, down 20.5% from $135.5 million in the second quarter of 2008, while operating profit from ongoing operations increased to $14.2 million in the second quarter of 2009 from $13.5 million in 2008.  Volume was 49.6 million pounds in the second quarter of 2009, down 12.7% from 56.8 million pounds in the second quarter of 2008.

Net sales in Film Products for the first six months of 2009 were $212.6 million, a decrease of 20.6% from $267.8 million in the first six months of 2008.  Operating profit from ongoing operations was $27.2 million in the first six months of 2009, an increase of 12.2% from $24.3 million in the first six months of last year.  Volume was 98.9 million pounds in the first six months of 2009, down 13.8% from 114.8 million pounds in the first six months of 2008.

Net sales declined due to lower volume across all market segments, most notably personal care and surface protection materials, the unfavorable impact of changes in the U.S. dollar value of currencies for operations outside the U.S. and the impact of lower selling prices from the pass-through of lower resin costs.  We believe volume declines in both periods were primarily driven by the economic downturn and customer inventory adjustments.

 
20

 

Operating profit from ongoing operations increased in the second quarter and first half of 2009 versus the same periods in 2008 as cost reduction efforts, productivity gains and the favorable impact of the lag in the pass-through of lower average resin costs more than offset lower volumes and the unfavorable effect of currency changes.  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.  Film Products estimates that the impact of the lag in the pass-through of changes in average resin costs on operating profit was not significant in the second quarter of 2009 and a negative $2.0 million in the second quarter of 2008.  The estimated impact of the resin pass-through lag was a positive $3.0 million in the first half of 2009 and a negative $3.2 million in the first half of 2008.  The company estimates that changes in the U.S. dollar value of currencies for operations outside of the U.S. had an unfavorable impact on operating profit of $1.1 million in the second quarter of 2009 compared with the second quarter of 2008, and an unfavorable impact of approximately $1.5 million in the first six months of 2009 compared with the same period of 2008.

We continue to be very focused on reducing costs.  We recognized severance and other employee-related costs of $1.1 million relating to a reduction in Film Products’ workforce in the first quarter of 2009 (approximately 50 people) that is expected to save $1.4 million in 2009 and $2.5 million on an annualized basis.  During 2008, we recognized restructuring and asset impairment charges of $3.7 million, including charges relating to a reduction of the Film Products’ workforce (approximately 90 people) that is expected to save $4.2 million on an annualized basis.

Capital expenditures in Film Products were $7.1 million in both the first half of 2009 and 2008, and are projected to be approximately $20 million in 2009.  Depreciation expense was $15.9 million in the first six months of 2009 compared with $17.8 million in the first six months of last year, and is projected to be approximately $33 million in 2009.

Aluminum Extrusions. Second-quarter net sales from continuing operations in Aluminum Extrusions were $46.4 million, down 49.9% from $92.7 million in the second quarter of 2008.  Operating income from ongoing operations was $634,000 for the second quarter of 2009, a 73.6% decline from operating profit of $2.4 million for the second quarter of 2008.  Volume from continuing operations decreased to 24.2 million pounds in the second quarter of 2009, down 31.7% from 35.4 million pounds in the second quarter of 2008.

Net sales in Aluminum Extrusions for the first six months of 2009 declined 50.2% to $91.5 million from $183.7 million in the first six months of 2008.  Operating losses from ongoing operations were $1.2 million for the first six months of 2009, a $5.1 million decline from operating profits of $3.9 million for the same period in 2008.  Volume was 47.7 million pounds in the first six months of 2009, down 34.3% from 72.5 million pounds in the first six months of 2008.

The net sales declines in the second quarter and first half of 2009 compared with the prior year were primarily due to lower sales volume as weak market conditions led to lower shipments in all markets and lower average selling prices driven by lower average aluminum costs.  Shipments for non-residential construction, which comprised approximately 72% of total volume in 2008, declined by approximately 32% during the first half of 2009 compared to the first half of 2008.  The decrease in operating profit from ongoing operations in the second quarter and the reported operating loss from ongoing operations in the first half of the year were also primarily driven by lower sales volumes.

 
21

 

As described in Note 3 on page 8, we recognized a non-cash goodwill impairment charge of $30.6 million ($30.6 million after tax) in Aluminum Extrusions in the first quarter of 2009.

Capital expenditures for continuing operations in Aluminum Extrusions were $8.5 million in the first half of 2009 compared with $3.3 million in the first half of last year.  Capital expenditures are projected to be approximately $19 million in 2009, of which $15.4 million relates to the 18-month project to expand the capacity at the Carthage, Tennessee manufacturing facility.  This new capacity will be dedicated to serving customers in the non-residential construction sector.  Depreciation expense was $3.8 million in the first half of 2009 compared with $4.0 million in the first half of last year, and is projected to be approximately $8 million in 2009.

Other Items. Net pension income from continuing operations was $757,000 in the second quarter and $1.5 million in the first six months of 2009, an unfavorable change of $843,000 and $1.6 million, respectively, from amounts recognized in the comparable periods of 2008.  We contributed approximately $122,000 to our pension plans in 2008.  We expect to contribute $2.3 million in 2009, which is $2.1 million lower than previously expected.  During 2008, the fair value of the assets of our pension plans declined by approximately $89.6 million to $194.5 million at December 31, 2008, due mainly to the drop in global stock prices and benefit payments to retirees of $10.2 million.  Corporate expenses, net in the second quarter and first six months of 2009 also increased in comparison to 2008 due to adjustments made in the prior year to accruals for certain performance-based compensation programs.

Interest expense was $184,000 and $388,000 in the second quarter and first half of 2009, respectively, a decrease from $557,000 and $1.4 million in the second quarter and first half of last year, respectively, primarily due to lower average debt levels and lower average interest rates.

The effective tax rates used to compute income taxes from continuing operations was 45.0% for the second quarter of 2009 compared to 35.2% for the second quarter of 2008, and (79.0)% in the first six months of 2009 compared with 35.3% in the first six months of 2008. The change in the effective tax rate for continuing operations for the second quarter reflects the impact to income taxes during the second quarter to adjust the effective tax rate for the first six months of the year to the rate estimated for the entire year.  The significant differences between the U.S. federal statutory rate and the effective tax rate for continuing operations for the first six months is shown in the table provided in Note 11 on page 17.

Our investment in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”) had a reported capital account value of $11.1 million at June 30, 2009, compared with $10.1 million at December 31, 2008.  This investment has a carrying value in Tredegar’s balance sheet of $10.0 million (included in “Other assets and deferred charges”), which represents the amount invested on April 2, 2007.

Net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 27.

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, 2008, 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, 2008, 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, restructurings and other occurring during 2009 and the comparable period in 2008.

 
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Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 132(R)-1, Employees’ Disclosures about Postretirement Benefit Plan Assets (FSP No. FAS 132(R)-1).  FSP No. FAS 132(R)-1 amends Statement of Financial Accounting Standards No. 132(R), Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, to include objectives for disclosing information about postretirement benefit plan assets, thereby addressing financial statement user concerns regarding the lack of transparency previously surrounding such disclosures.  Disclosures are intended to provide users with an understanding of (1) how investment allocation decisions are made, including an understanding of investment policies and strategies, (2) major classes of plan assets, (3) the inputs and valuation techniques used to measure fair value of plan assets, (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets, and (5) significant concentrations of risk within plan assets.  FSP No. FAS 132(R)-1 is effective for annual periods ending after December 15, 2009.  We do not believe that the adoption of FSP No. FAS 132(R)-1 will have a material impact on our financial statements and related disclosures.

In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (SFAS No. 166).  SFAS No. 166 clarifies the information that an entity must provide in its financial statements surrounding a transfer of financial assets and the effect of the transfer on its financial position, financial performance, and cash flows. This Statement is effective as of the beginning of the annual period beginning after November 15, 2009. We do expect SFAS No. 166 to have a material impact on our financial statements and disclosures.

The FASB also issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (SFAS No. 167) in June 2009. SFAS No. 167 clarifies and improves financial reporting by entities involved with variable interest entities. This Statement is effective as of the beginning of the annual period beginning after November 15, 2009. We are currently evaluating the impact of SFAS No. 167 on our financial statements.

In June 2009, the FASB issued Financial Accounting Standard No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (SFAS No. 168). In addition in June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Topic 205 – Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (ASU 2009-1). Both SFAS No. 168 and ASU 2009-1 recognize the FASB Accounting Standards CodificationTM as the source of authoritative U.S. generally accepted accounting principles to be utilized by non-governmental entities. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009.

 
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Results of Operations

Second Quarter 2009 Compared with Second Quarter 2008

Overall, sales in the second quarter of 2009 decreased by 32.4% compared with 2008.   Net sales (sales less freight) decreased 20.5% in Film Products primarily due a lower volume in most markets and the unfavorable impact of currency exchange rate changes.  In addition, second quarter sales in 2008 include the impact of higher selling prices that resulted from the pass-through of increased resin costs.  Net sales decreased 49.9% in Aluminum Extrusions due to lower volume and lower average selling prices driven by lower average aluminum costs.  Volumes in Aluminum Extrusions decreased 31.7% to 24.2 million pounds in the second quarter of 2009 compared with 35.4 million pounds in the second quarter of 2008.  Shipments declined in all markets.  For more information on net sales and volume, see the executive summary beginning on page 19.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales increased to 18.1% in the second quarter of 2009 from 13.7 % in 2008.  The gross profit margin increased in Film Products primarily due to cost reduction efforts, productivity gains and the positive impact of the lag in the pass-through of lower average resin costs.  Gross profit margin in Aluminum Extrusions decreased as a result of volume declines noted above.

As a percentage of sales, selling, general and administrative and R&D expenses were 10.9% in the second quarter of 2009, up from 7.3% in the second quarter of last year.  The increase is primarily due to the decline in sales noted above.

Plant shutdowns, asset impairments and restructurings in the second quarter of 2009 shown in the segment operating profit table on page 20 include:

 
·
Pretax losses of $779,000 for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income, see Note 8 on page 11 for additional detail);
 
·
Pretax gain of $276,000 related to the reduction of future environmental costs expected to be incurred by Aluminum Extrusions (included in “Cost of goods sold” in the consolidated statements of income);
 
·
Pretax gain of $175,000 on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); and
 
·
Pretax gain of $149,000 related to the reversal to income of certain inventory impairment accruals in Film Products.

See the executive summary beginning on page 19 for information on our cost reduction efforts.

Plant shutdowns, asset impairments and restructurings in the second quarter of 2008 shown in the segment operating profit table on page 20 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).

Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $175,000 in the second quarter of 2009 and $188,000 in 2008.  Interest expense was $184,000 and $557,000 in the second quarters of 2009 and 2008, respectively, due to reduced average debt levels and lower average interest rates.  Average debt outstanding and interest rates were as follows:

 
24

 
 
   
Three Months
 
   
Ended June 30
 
(In Millions)
 
2009
   
2008
 
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:
           
Average outstanding debt balance
  $ 3.8     $ 51.1  
Average interest rate
    1.3 %     3.4 %
Fixed-rate and other debt:
               
Average outstanding debt balance
  $ 1.6     $ 2.0  
Average interest rate
    2.5 %     4.3 %
Total debt:
               
Average outstanding debt balance
  $ 5.4     $ 53.1  
Average interest rate
    1.7 %     3.4 %


The effective tax rate used to compute income taxes from continuing operations was 45.0% for the second quarter of 2009 compared to 35.2% for the second quarter of 2008. The change in the effective tax rate for continuing operations for the second quarter reflects the impact to income taxes during the second quarter to adjust the effective tax rate for the first six months of the year to the rate estimated for the entire year.  The significant differences between the U.S. federal statutory rate and the effective tax rate for continuing operations for the first six months is shown in the table provided in Note 11 on page 17.

First Six Months of 2009 Compared with First Six Months of 2008

Overall, sales in the first six months of 2009 decreased by 32.7% compared with 2008.   Net sales (sales less freight) decreased 20.6% in Film Products primarily due to lower volumes in most markets and the appreciation of the U.S. dollar value of currencies for operations outside of the U.S.  Net sales decreased 50.2% in Aluminum Extrusions due to lower volume and lower average selling prices driven by lower average aluminum costs, which decreased 34.3% to 47.7 million pounds in the first six months of 2009 compared with 72.5 million pounds in the first six months of 2008.  Shipments declined in all markets.  For more information on net sales and volume, see the executive summary beginning on page 19.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales increased to 17.1% in the first six months of 2009 from 13.2% in 2008.  The gross profit margin increased in Film Products and decreased in Aluminum Extrusions primarily because of the same factors noted above for the quarter-to-date period.

As a percentage of sales, selling, general and administrative and R&D expenses were 11.1% in the first six months of 2009, an increase from 7.8% in 2008.  Higher selling, general and administrative expenses as a percentage of net sales were primarily due to the decline in sales volumes note above.

Plant shutdowns, asset impairments and restructurings in the first six months of 2009 shown in the segment operating profit table on page 20 include:

 
25

 
 
 
·
Pretax charges of $1.6 million for severance and other employee-related costs in connection with restructurings in Film Products ($1.1 million), Aluminum Extrusions ($369,000) and corporate headquarters ($178,000, included in “Corporate expenses, net” in the net sales and operating profit by segment table in Note 10);
 
·
Pretax losses of $1.4 million for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income, see Note 8 on page 11 for additional detail);
 
·
Pretax gain of $276,000 related to the reduction of future environmental costs expected to be incurred by Aluminum Extrusions (included in “Cost of goods sold” in the consolidated statements of income);
 
·
Pretax gain of $275,000 on the sale of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown films manufacturing facility in LaGrange, Georgia;
 
·
Pretax gain of $175,000 on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); and
 
·
Pretax gain of $149,000 related to the reversal to income of certain inventory impairment accruals in Film Products.

See the executive summary beginning on page 19 for information on our cost reduction efforts.

Plant shutdowns, asset impairments and restructurings in the first six months of 2008 shown in the segment operating profit table on page 20 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).

Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $434,000 in the first six months of 2009 and $446,000 in 2008.  Interest expense was $388,000 in the first six months of 2009 compared to $1.4 million for the same period in 2008 due to lower average debt balances as well as lower average interest rates.  Average debt outstanding and interest rates were as follows:

   
Six Months
 
   
Ended June 30
 
(In Millions)
 
2009
   
2008
 
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:
           
Average outstanding debt balance
  $ 10.0     $ 60.3  
Average interest rate
    1.2 %     4.1 %
Fixed-rate and other debt:
               
Average outstanding debt balance
  $ 1.6     $ 2.0  
Average interest rate
    2.4 %     4.0 %
Total debt:
               
Average outstanding debt balance
  $ 11.6     $