form10-q.htm


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

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010

OR

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

For the transition period from
 
to
 

Commission file number 1-10258

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

Virginia
 
54-1497771
(State or Other Jurisdiction of 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 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 o  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
     
Accelerated filer
x
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 

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

The number of shares of Common Stock, no par value, outstanding as of July 30, 201031,834,608.
 


 
 

 
 
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
 
   
June 30,
2010
   
December 31,
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 52,670     $ 90,663  
Accounts and notes receivable, net of allowance for doubtful accounts and sales returns of $5,637 in 2010 and $5,299 in 2009
    93,167       74,014  
Income taxes recoverable
    3,687       4,016  
Inventories
    34,187       35,522  
Deferred income taxes
    5,912       5,750  
Prepaid expenses and other
    3,346       5,335  
Total current assets
    192,969       215,300  
Property, plant and equipment, at cost
    653,174       674,286  
Less accumulated depreciation
    441,592       443,410  
Net property, plant and equipment
    211,582       230,876  
Other assets and deferred charges
    49,823       45,561  
Goodwill and other intangibles
    105,685       104,542  
Total assets
  $ 560,059     $ 596,279  
                 
Liabilities and Shareholders' Equity
               
Current liabilities:
               
Accounts payable
  $ 60,387     $ 53,770  
Accrued expenses
    32,495       34,930  
Current portion of long-term debt
    402       451  
Total current liabilities
    93,284       89,151  
Long-term debt
    539       712  
Deferred income taxes
    52,997       59,052  
Other noncurrent liabilities
    16,662       18,292  
Total liabilities
    163,482       167,207  
Commitments and contingencies (Notes 1 and 2)
               
Shareholders' equity:
               
Common stock, no par value (issued and outstanding - 31,831,708 at June 30, 2010 and 33,887,550 at
December 31, 2009)
    7,519       41,137  
Common stock held in trust for savings restoration plan
    (1,327 )     (1,322 )
Foreign currency translation adjustment
    18,786       26,250  
Gain (loss) on derivative financial instruments
    (202 )     758  
Pension and other postretirement benefit adjustments
    (58,632 )     (60,028 )
Retained earnings
    430,433       422,277  
Total shareholders' equity
    396,577       429,072  
Total liabilities and shareholders' equity
  $ 560,059     $ 596,279  
 
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
 
   
2010
   
2009
   
2010
   
2009
 
Revenues and other items:
                       
Sales
  $ 185,031     $ 158,115     $ 360,012     $ 311,181  
Other income (expense), net
    166       488       222       1,357  
      185,197       158,603       360,234       312,538  
Costs and expenses:
                               
Cost of goods sold
    150,326       125,615       291,698       250,873  
Freight
    4,747       3,870       8,692       7,099  
Selling, general and administrative
    17,809       14,267       33,750       29,039  
Research and development
    3,299       2,999       6,901       5,511  
Amortization of intangibles
    129       30       217       60  
Interest expense
    222       184       417       388  
Asset impairments and costs associated with exit and
                               
disposal activities
    355       (149 )     411       1,482  
Goodwill impairment charge
    -       -       -       30,559  
Total
    176,887       146,816       342,086       325,011  
Income (loss) before income taxes
    8,310       11,787       18,148       (12,473 )
Income taxes
    3,350       5,300       7,406       9,857  
Net income (loss)
  $ 4,960     $ 6,487     $ 10,742     $ (22,330 )
                                 
Earnings (loss) per share:
                               
Basic
  $ .15     $ .19     $ .33     $ (.66 )
Diluted
  $ .15     $ .19     $ .33     $ (.66 )
                                 
Shares used to compute earnings (loss) per share:
                               
Basic
    32,260       33,876       32,799       33,871  
Diluted
    32,450       33,971       32,979       33,871  
                                 
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
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 10,742     $ (22,330 )
Adjustments for noncash items:
               
Depreciation
    21,716       19,663  
Amortization of intangibles
    217       60  
Goodwill impairment charge
    -       30,559  
Deferred income taxes
    (2,436 )     2,160  
Accrued pension and postretirement benefits
    349       (1,267 )
Loss on asset impairments and divestitures
    355       -  
Loss (gain) on sale of assets
    (15 )     (1,004 )
Changes in assets and liabilities, net of effects of acquisitions
               
and divestitures:
               
Accounts and notes receivable
    (21,877 )     9,732  
Inventories
    27       8,055  
Income taxes recoverable
    329       5,995  
Prepaid expenses and other
    721       2,221  
Accounts payable and accrued expenses
    5,646       (522 )
Other, net
    421       (1,333 )
Net cash provided by operating activities
    16,195       51,989  
Cash flows from investing activities:
               
Capital expenditures (including settlement of related accounts payable
               
of $1,709 in 2009)
    (7,629 )     (17,348 )
Acquisition
    (5,500 )     -  
Proceeds from the sale of assets and property disposals
    120       1,118  
Net cash used in investing activities
    (13,009 )     (16,230 )
Cash flows from financing activities:
               
Repurchases of Tredegar common stock
    (35,138 )     -  
Dividends paid
    (2,591 )     (2,717 )
Debt principal payments and financing costs
    (2,325 )     (21,098 )
Proceeds from exercise of stock options
    247       187  
Net cash used in financing activities
    (39,807 )     (23,628 )
Effect of exchange rate changes on cash
    (1,372 )     552  
Increase (decrease) in cash and cash equivalents
    (37,993 )     12,683  
Cash and cash equivalents at beginning of period
    90,663       45,975  
Cash and cash equivalents at end of period
  $ 52,670     $ 58,658  
                 
 
               
 
See accompanying notes to financial statements.
 
 
4

 
Tredegar Corporation
Consolidated Statement of Shareholders' Equity
(In Thousands, Except Share and 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, 2009
  $ 41,137     $ 422,277     $ (1,322 )   $ 26,250     $ 758     $ (60,028 )   $ 429,072  
Comprehensive income (loss):
                                                       
Net income
    -       10,742       -       -       -       -       10,742  
Other comprehensive income (loss):
                                                       
Foreign currency translation adjustment (net of tax benefit of $4,021)
    -       -       -       (7,464 )     -       -       (7,464 )
Derivative financial instruments adjustment (net of tax benefit of $585)
    -       -       -       -       (960 )     -       (960 )
Amortization of prior service costs and net gains or losses (net of tax of $785)
    -       -       -       -       -       1,396       1,396  
Comprehensive income
                                                    3,714  
Cash dividends declared ($.08 per share)
    -       (2,591 )     -       -       -       -       (2,591 )
Stock-based compensation expense & other
    1,282       -       -       -       -       -       1,282  
Issuance of common stock upon exercise of stock options (including related income tax benefits of $9)
    238       -       -       -       -       -       238  
Repurchased 2,124,700 shares of Tredegar common stock
    (35,138 )     -       -       -       -       -       (35,138 )
Tredegar common stock purchased by trust for savings restoration plan
    -       5       (5 )     -       -       -       -  
Balance June 30, 2010
  $ 7,519     $ 430,433     $ (1,327 )   $ 18,786     $ (202 )   $ (58,632 )   $ 396,577  
 
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 state fairly, in all material respects, Tredegar’s consolidated financial position as of June 30, 2010, the consolidated results of operations for the three and six months ended June 30, 2010 and 2009, the consolidated cash flows for the six months ended June 30, 2010 and 2009, and the consolidated changes in shareholders’ equity for the six months ended June 30, 2010.  All such adjustments, unless otherwise detailed in the notes to consolidated interim financial statements, are deemed to be of a normal, recurring nature.  These financial statements should be read i n 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, 2009.  The results of operations for the six months ended June 30, 2010, are not necessarily indicative of the results to be expected for the full year.

2.
Plant shutdowns, asset impairments, restructurings and other items in the second quarter of 2010 shown in the net sales and operating profit by segment table in Note 10 include:

·  
Pretax charge of $355,000 for an asset impairment in Film Products;
·  
Pretax gain of $120,000 on the sale of previously impaired equipment (included in “Other income (expense), net” in the consolidated statement of income) at our film products manufacturing facility in Pottsville, Pennsylvania;
·  
Pretax loss of $44,000 on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia; and
·  
Pretax gain of $23,000 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 10 for additional detail).

Plant shutdowns, asset impairments, restructurings and other items in the first six months of 2010 shown in the net sales and operating profit by segment table in Note 10 include:

·  
Pretax gains of $466,000 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 10 for additional detail);
·  
Pretax charge of $355,000 for an asset impairment in Film Products;
·  
Pretax gain of $120,000 on the sale of previously impaired equipment (included in “Other income (expense), net” in the consolidated statement of income) at our film products manufacturing facility in Pottsville, Pennsylvania;
·  
Pretax losses of $105,000 on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia; and
·  
Pretax charge of $56,000 for severance and other employee-related costs in connection with restructurings in Film Products.

 
6

 
Plant shutdowns, asset impairments, restructurings and other items in the second quarter of 2009 shown in the net sales and operating profit by segment 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 10 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, restructurings and other items in the first six months of 2009 shown in the net sales and operating profit by segment 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);
·  
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 10 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.

 
7

 
 
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, 2010 is as follows:
 
                   
                   
(In Thousands)
 
Severance
   
Other (a)
   
Total
 
Balance at December 31, 2009
  $ 823     $ 3,158     $ 3,981  
Changes in 2010:
                       
Charges
    56               56  
Cash spent
    (480 )     (777 )     (1,257 )
Balance at June 30, 2010
  $ 399     $ 2,381     $ 2,780  
                         
(a) Other includes primarily accrued losses on a sub-lease at a facility in Princeton, New Jersey.
 
                         
 
Results for 2009 also include a pretax gain of $404,000 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 2010 include the partial reduction of a valuation allowance of $137,000 (a reduction of the allowance of $168,000 in the first quarter and an increase of the allowance of $31,000 in the second quarter) related to expected limitations on the utilization of assumed capital losses on certain investments that was recognized in the prior years.  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.

3.
On June 21, 2010, we entered into a $300 million four-year, unsecured revolving credit facility (the “Credit Agreement”), with an option to increase that amount by an additional $75 million.  The Credit Agreement replaces our previous five-year, unsecured revolving credit facility that was due to expire on December 15, 2010.  There were no outstanding borrowings under the previous revolving credit facility when it was replaced.

 
Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted-EBITDA levels as follows:
 
     
Pricing Under Revolving Credit Agreement (Basis Points)
Indebtedness-to-Adjusted
Credit Spread
Commitment
EBITDA Ratio
Over LIBOR
Fee
> 2.0x but <= 3.0x
 250
 40
> 1.0x but <=2.0x
 225
 35
<= 1.0x
 200
 30
 
The most restrictive covenants in the Credit Agreement include:

·  
Maximum aggregate dividends over the term of the Credit Agreement of $100 million plus, beginning with the fiscal quarter ending March 31, 2010, 50% of net income;
·  
Minimum shareholders’ equity at any point during the term of the Credit Agreement of at least $300 million increased on a cumulative basis at the end of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2010, by an amount equal to 50% of net income (to the extent positive);
 
 
8

 
 
·  
Maximum indebtedness-to-adjusted EBITDA of 3.0x; and
·  
Minimum adjusted EBIT-to-interest expense of 2.5x.
 
4.
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 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 in 2009 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 2008), the resulting operating loss, possible future losses and th e 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.  This impairment charge represented the entire amount of goodwill associated with the Aluminum Extrusions reporting unit.

5.            The components of inventories are as follows:
 
 
             
   
June 30,
   
December 31,
 
(In Thousands)
 
2010
   
2009
 
Finished goods
  $ 6,553     $ 6,080  
Work-in-process
    2,475       2,740  
Raw materials
    11,174       12,249  
Stores, supplies and other
    13,985       14,453  
Total
  $ 34,187     $ 35,522  
 
6.
Basic earnings (loss) per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding.   Diluted earnings (loss) per share is computed by dividing net income or loss 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)
 
2010
   
2009
   
2010
   
2009
 
Weighted average shares outstanding used
                       
to compute basic earnings (loss) per share
    32,260       33,876       32,799       33,871  
Incremental dilutive shares attributable to stock
                               
options and restricted stock  (a)
    190       95       180       -  
Shares used to compute diluted earnings (loss)
                               
per share
    32,450       33,971       32,979       33,871  
                                 
(a) The dilutive effect of shares attributed to stock options and restricted stock is not recognized in periods in which a net loss has occurred.
 
 
                               
 
 
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, 2010 and three and six months ended June 30, 2009, 459,067, 464,317, 582,833 and 390,300, 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 $13.6 million at June 30, 2010, compared with $14.5
 
 
9

 
 
million at December 31, 2009.  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 2007, we invested $6.5 million in a privately held specialty pharmaceutical company whose strategy, capabilities and execution have evolved over time from that of a drug delivery company.  In the fourth quarter of 2008, we invested an additional $1.0 million as part of a new round of equity 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 v enture capitalists, which typically do not have controlling financial interests.  In 2008, there was a write-up of $5.6 million based on the valuation of our ownership interest implied from a new round of equity financing completed for the investee in the fourth quarter of 2008.  We recognized an additional unrealized gain of $5.1 million in the fourth quarter of 2009 for the estimated appreciation of our ownership interest upon the investee entering into an exclusive licensing agreement that included an upfront payment, additional potential milestone payments and tiered royalties on sales of any products commercialized under the license.
 
 
At June 30, 2010 and December 31, 2009, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) was $18.2 million.  On the date of our most recent investment (December 15, 2008), we believe that the amount we would be 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 specialty pharmaceutical company currently has no product sales.  Accordingly, after the latest financing an d until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk.  Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.

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, 2010, net income recorded by the specialty pharmaceutical company, as reported to us by the investee, was $9.5 million and $11.1 million, respectively, compared to net losses of $1.1 million and $3.4 million for the first three and six months of 2009, respectively.  Operating results for the second quarter and first half of 2010 included $18.3 million and $22.4 million, respectively, in licensing revenues (none in the prior year quarter or year-to-date periods).  Total assets (which included cash and cash equivalents of $37.3 million at June 30, 2010 and $22.8 million at December 31, 2009) were $33.2 million and $28.2 m illion at June 30, 2010 and December 31, 2009, respectively.

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 due to specific transactions.  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 (loss).  Gains and losses accumulated in other comprehensive income (loss) are reclassified to earnings in the periods in   
 
 
10

 
 
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, 2010 and 2009.
 
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 $9.3 million (9.8 million pounds of alum inum) at June 30, 2010 and $6.9 million (7.8 million pounds of aluminum) at December 31, 2009.

The table below summarizes the location and gross amounts of aluminum futures contract fair values in the consolidated balance sheets as of June 30, 2010 and December 31, 2009:
 
                 
   
June 30, 2010
December 31, 2009  
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
 
Derivatives Designated as Hedging Instruments            
               
Asset derivatives:
       
Prepaid expenses
     
Aluminum futures contracts
Accrued expenses
  $ 196  
and other
  $ 1,184  
Liability derivatives:
                   
Aluminum futures contracts
Accrued expenses
  $ 586       $ -  
                     
Derivatives Not Designated as Hedging Instruments    
                   
Asset derivatives:
         
Prepaid expenses
       
Aluminum futures contracts
Accrued expenses
  $ 145  
and other
  $ 614  
                     
Liability derivatives:
         
Prepaid expenses
       
Aluminum futures contracts
Accrued expenses
  $ 145  
and other
  $ 614  
 
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.

Gains associated with the aluminum extrusions business of $23,000 and $466,000 were recognized during the three and six month periods ending June 30, 2010, 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.  Losses of $779,000 and $1.4 million were recognized during the three and six month periods
 
 
11

 
 
ending June 30, 2009, respectively, for such timing differences.  The amounts are included in “Plant shutdowns, asset impairments, restructurings and other” in the net sales and operating profit by segment table in Note 10.

We had future fixed Euro-denominated contractual payments for equipment being purchased as part of our expansion of the Carthage, Tennessee aluminum extrusion manufacturing facility.  We 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 $1.6 million at December 31, 2009.  There were no foreign currency forward contracts outstanding at June 30, 2010.

The table below summarizes the location and gross amounts of foreign currency forward contract fair values in the consolidated balance sheets as of December 31, 2009 (none at June 30, 2010):
 
 
       
 
     
   
June 30, 2010
       December 31, 2009      
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
 
                 
Derivatives Designated as Hedging Instruments           
               
Asset derivatives:
       
Prepaid expenses
     
Foreign currency forward contracts
    $ -  
and other
  $ 35  
                     
Derivatives Not Designated as Hedging Instruments    
                   
Liability derivatives:
                   
Foreign currency forward contracts
    $ -  
Accrued expenses
  $ 41  
 
           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 $6.8 million at June 30, 2010, and these outstanding currency collar options will expire at quarterly intervals through December 2010.  The table below summarizes our open currency option positions at June 30, 2010:
 
         
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 2010
  $ 3,400     $ 1.27     $ 1.20  
4th Qtr 2010
    3,400       1.27       1.20  
 
 
12

 
 
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, 2010 (none as of December 31, 2009):
 
                 
 
June 30, 2010
   December 31, 2009  
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
 
                 
Derivatives Designated as Hedging Instruments
               
Asset derivatives:
Prepaid expenses
             
Foreign currency option contracts
and other
  $ 116       $ -  
                     
Liability derivatives:
Prepaid expenses
                 
Foreign currency option contracts
and other
  $ 66       $ -  
 
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.

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, 2010 and 2009 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,
 
   
2010
   
2009
   
2010
   
2009
 
Amount of pre-tax gain (loss) recognized in
                       
    other comprehensive income
  $ (928 )   $ 1,367     $ 50     $ (49 )
Location of gain (loss) reclassified from
                               
   accumulated other comprehensive income
 
Cost of
   
Cost of
                 
   into net income (effective portion)
 
     sales
   
    sales
                 
                                 
Amount of pre-tax gain (loss) reclassified
                               
   from accumulated other comprehensive
                               
   income to net income (effective portion)
  $ 140     $ (4,257 )   $ -     $ -  
 
                         
(In Thousands)
 
Cash Flow Derivative Hedges
 
   
Aluminum Futures
Contracts
   
Foreign Currency
Forwards and
Options
 
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Amount of pre-tax gain (loss) recognized in
                       
    other comprehensive income
  $ (1,088 )   $ (642 )   $ 37     $ (249 )
Location of gain (loss) reclassified from
                               
   accumulated other comprehensive income
 
Cost of
   
Cost of
                 
   into net income (effective portion)
 
     sales
   
     sales
                 
                                 
Amount of pre-tax gain (loss) reclassified
                               
   from accumulated other comprehensive
                               
   income to net income (effective portion)
  $ 485     $ (8,861 )   $ -     $ -  
 
 
13

 
 
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, 2010 and 2009.  As of June 30, 2010, we expect $236,000 of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next twelve months.  For the three and six months ended June 30, 2010 and 2009, net gains or losses realized on previously unrealized net gains or losses from hedges that had been discontinued were not material.

9.  
The components of net periodic benefit income (cost) for our pension and other post-retirement benefit programs reflected in consolidated results are shown below:
 
 
                       
   
Pension
   
Other Post-Retirement
 
   
Benefits for Three Months
   
Benefits for Three Months
 
   
Ended June 30
   
Ended June 30
 
(In Thousands)
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ (797 )   $ (783 )   $ (18 )   $ (18 )
Interest cost
    (3,288 )     (3,344 )     (122 )     (129 )
Expected return on plan assets
    5,133       5,189       -       -  
Amortization of prior service costs, gains or
                               
losses and net transition asset
    (1,092 )     (305 )     9       24  
Net periodic benefit income (cost)
  $ (44 )   $ 757     $ (131 )   $ (123 )
                                 
 
                         
   
Pension
   
Other Post-Retirement
 
   
Benefits for Six Months
   
Benefits for Six Months
 
   
Ended June 30
   
Ended June 30
 
(In Thousands)
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ (1,594 )   $ (1,566 )   $ (36 )   $ (36 )
Interest cost
    (6,577 )     (6,688 )     (243 )     (257 )
Expected return on plan assets
    10,265       10,378       -       -  
Amortization of prior service costs, gains or
                               
losses and net transition asset
    (2,182 )     (610 )     18       46  
Net periodic benefit income (cost)
  $ (88 )   $ 1,514     $ (261 )   $ (247 )
 
We contributed $129,000 to our pension plans in 2009 and expect to contribute a similar amount in 2010.  We fund our other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which were $282,000 for the year ended December 31, 2009.

10.  
In February 2010, we added a fourth segment, Other, comprised of the start-up operations of Bright View Technologies Corporation (“Bright View”) and Falling Springs, LLC (“Falling Springs”).  Bright View, whose assets were acquired on February 3, 2010, is a developer and producer of high-value microstructure-based optical films for the LED (light emitting diode) and fluorescent lighting markets.  Falling Springs develops, owns and operates multiple mitigation banks.  Through the establishment of perpetual easements to restore, enhance and preserve wetland, stream or other protected environmental resources, these mitigation banks create saleable credits that are used by the purchaser of credits to offset the negative environmental impacts from private and public development projects.  In 2 009, net sales and income (loss) from ongoing operations for Falling Springs (which were immaterial) have been included in “Corporate expense, net” and identifiable assets for this business have been included in “General corporate” in order to reflect the strategic view and structure of operations during this time period.

 
Information by business segment is reported below.  There are no accounting transactions between segments and no allocations to segments.  Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief
 
 
14

 

operating decision maker for purposes of assessing performance.  The following table presents net sales and operating profit by segment for the three and six months ended June 30, 2010 and 2009.
 
                         
      Three Months       Six Months  
      Ended June 30       Ended June 30  
(In Thousands)
 
2010
   
2009
   
2010
   
2009
 
Net Sales
                       
Film Products
  $ 126,499     $ 107,804     $ 252,367     $ 212,587  
Aluminum Extrusions
    52,671       46,441       97,470       91,495  
Other
    1,114       -       1,483       -  
Total net sales
    180,284       154,245       351,320       304,082  
Add back freight
    4,747       3,870       8,692       7,099  
Sales as shown in the Consolidated Statements of Income
  $ 185,031     $ 158,115     $ 360,012     $ 311,181  
                                 
Operating Profit (Loss)
                               
Film Products:
                               
Ongoing operations
  $ 14,604     $ 14,214     $ 32,904     $ 27,228  
Plant shutdowns, asset impairments, restructurings and other
    (279 )     149       (396 )     (660 )
                                 
Aluminum Extrusions:
                               
Ongoing operations
    235       634       (2,758 )     (1,163 )
Goodwill impairment charge
    -       -       -       (30,559 )
Plant shutdowns, asset impairments, restructurings and other
    23       (328 )     466       (1,306 )
                                 
AFBS:
                               
Gain on sale of investments in Theken Spine and Therics, LLC
    -       -       -       150  
                                 
Other:
                               
Ongoing operations
    (1,458 )     -       (2,094 )     -  
Total
    13,125       14,669       28,122       (6,310 )
Interest income
    166       175       334       434  
Interest expense
    222       184       417       388  
Gain on sale of corporate assets
    -       -       -       404  
Stock option-based compensation costs
    494       541       1,012       803  
Corporate expenses, net
    4,265       2,332       8,879       5,810  
Income (loss) before income taxes
    8,310       11,787       18,148       (12,473 )
Income taxes
    3,350       5,300       7,406       9,857  
Net income (loss)
  $ 4,960     $ 6,487     $ 10,742     $ (22,330 )
 
The following table presents identifiable assets by segment at June 30, 2010 and December 31, 2009:
 
             
   
June 30,
   
December 31,
 
(In Thousands)
 
2010
   
2009
 
Film Products
  $ 363,549     $ 371,639  
Aluminum Extrusions
    83,001       82,429  
AFBS (formerly Therics)
    1,147       1,147  
Other
    15,730       -  
Subtotal
    463,427       455,215  
General corporate
    43,962       50,401  
Cash and cash equivalents
    52,670       90,663  
Total
  $ 560,059     $ 596,279  
 
 
15

 
 

11.
The effective tax rate for the first six months of 2010 was 40.8% compared to (79.0)% for the first six months of 2009.  The significant differences between the U.S. federal statutory rate and the effective income tax rates for the six months ended June 30, 2010 and 2009 are as follows:

 
 
             
   
Percent of Income (Loss)
 
   
Before Income Taxes
 
Six Months Ended June 30
 
2010
   
2009
 
Income tax expense at federal statutory rate
    35.0       35.0  
Reserve for uncollectible tax indemnification receivable
    4.1       -  
Unremitted earnings from foreign operations
    2.9       (5.6 )
Income tax contingency accruals/reversals
    1.5       -  
State taxes, net of federal income tax benefit
    1.4       (1.7 )
Non-deductible expenses
    0.2       (0.2 )
Valuation allowance for foreign operating loss carry-forwards
    0.2       (0.5 )
Goodwill impairment charge
    -       (85.8 )
Research and development tax credit
    -       0.9  
Valuation allowance for capital loss carry-forwards
    (0.8 )     (30.0 )
Domestic production activities deduction
    (1.2 )     -  
Foreign rate differences
    (1.7 )     8.8  
Other
    (0.8 )     0.1  
               Effective income tax rate     40.8       (79.0 )
 
A reconciliation of our unrecognized uncertain tax positions for the six month periods ended June 30, 2010 and 2009 are shown below:
 
             
   
Six Months Ended
 
   
June 30
 
(In Thousands)
 
2010
   
2009
 
Balance at beginning of period
  $ 996     $ 2,553  
Increase (decrease) due to tax
               
positions taken in:
               
Current period
    34       48  
Prior period
    -       10  
Increase (decrease) due to settlements
               
with taxing authorities
    -       (1,440 )
Reductions due to lapse of statute
               
of limitations
    -       -  
Balance at end of period
  $ 1,030     $ 1,171  
 
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S.  Generally, 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 2006.  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 2006.

12.  
The Financial Accounting Standards Board (FASB) Emerging Issues Task Force issued a consensus updating accounting standards for revenue recognition for multiple-deliverable arrangements in October 2009.  The stated objective of the accounting standards update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  The revision of current FASB guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements.  The accounting standards update
 
 
16

 
will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted.  We do not expect these FASB rules to have a material impact on our financial statements and disclosures.
 
 
The FASB issued guidance in January 2010 that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for such transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update also clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for the interim periods in that year.  We do not anticipate that the adoption of these new disclosures and clarifications of existing disclosures will materially expand our current financial statement footnote disclosures.

In March 2010, the Patient Protection and Affordable Care Act (the PPACA) was signed into law, as was the Health Care and Education Reconciliation Act of 2010, which amends certain aspects of the PPACA.  Included in the provisions of these laws are changes to the taxation related to the federal subsidy available to companies that provide retiree health benefit plans that include a benefit that is at least actuarially equivalent to the benefits of Medicare Part D.  Our retiree medical plan does not include prescription drug coverage for Medicare-eligible retirees, so we are not impacted by changes to the taxation of this federal subsidy.  We are currently assessing other potential impacts, if any, that this legislation may have on future results of operations, cash flows or financial position related to our health care benefits and postretirement health care obligations.
 
 
17

 

Item2.    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 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 other factors discussed in the reports we file with or furnish 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 our 2009 Annual Report on Form 10-K (the “2009 Form 10-K”) filed with the SEC.  Readers are urged to review and consider carefully the disclosures we make in our 2009 Form 10-K.  We do not undertake to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based.

 
Executive Summary

Second-quarter 2010 net income was $5.0 million (15 cents per share) compared with $6.5 million (19 cents per share) in the second quarter of 2009.  Net income for the first six months of 2010 was $10.7 million (33 cents per share) compared with a net loss of $22.3 million (66 cents per share) in the first six months of 2009.  Results for the first six months of 2009 include a non-cash goodwill impairment charge of $30.6 million related to our aluminum extrusions business (see Note 4 on page 9).  Losses related to plant shutdowns, asset impairments, restructurings and other items are described in Note 2 on page 6.

 
18

 

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.  The following tables present Tredegar’s net sales and operating profit by segment for the second quarter and six months ended June 30, 2010 and 2009:
 
                         
      Three Months       Six Months  
      Ended June 30       Ended June 30  
(In Thousands)
 
2010
   
2009
   
2010
   
2009
 
Net Sales
                       
Film Products
  $ 126,499     $ 107,804     $ 252,367     $ 212,587  
Aluminum Extrusions
    52,671       46,441       97,470       91,495  
Other
    1,114       -       1,483       -  
Total net sales
    180,284       154,245       351,320       304,082  
Add back freight
    4,747       3,870       8,692       7,099  
Sales as shown in the Consolidated Statements of Income
  $ 185,031     $ 158,115     $ 360,012     $ 311,181  
                                 
Operating Profit (Loss)
                               
Film Products:
                               
Ongoing operations
  $ 14,604     $ 14,214     $ 32,904     $ 27,228  
Plant shutdowns, asset impairments, restructurings and other
    (279 )     149       (396 )     (660 )
                                 
Aluminum Extrusions:
                               
Ongoing operations
    235       634       (2,758 )     (1,163 )
Goodwill impairment charge
    -       -       -       (30,559 )
Plant shutdowns, asset impairments, restructurings and other
    23       (328 )     466       (1,306 )
                                 
AFBS:
                               
Gain on sale of investments in Theken Spine and Therics, LLC
    -       -       -       150  
                                 
Other:
                               
Ongoing operations
    (1,458 )     -       (2,094 )     -  
Total
    13,125       14,669       28,122       (6,310 )
Interest income
    166       175       334       434  
Interest expense
    222       184       417       388  
Gain on sale of corporate assets
    -       -       -       404  
Stock option-based compensation costs
    494       541       1,012       803  
Corporate expenses, net
    4,265       2,332       8,879       5,810  
Income (loss) before income taxes
    8,310       11,787       18,148       (12,473 )
Income taxes
    3,350       5,300       7,406       9,857  
Net income (loss)
  $ 4,960     $ 6,487     $ 10,742     $ (22,330 )
                                 
 
Film Products.  Second-quarter net sales (sales less freight) in Film Products were $126.5 million, an increase of 17.3% from $107.8 million in the second quarter of 2009, and operating profit from ongoing operations increased to $14.6 million in the second quarter of 2010 from $14.2 million in 2009.  Volume was 53.9 million pounds in the second quarter of 2010, an increase of 8.7% from 49.6 million pounds in the second quarter of 2009.

Second-quarter net sales increased primarily due to higher volumes, most notably in surface protection and personal care materials, a more favorable sales mix in the second quarter of 2010 compared to the second quarter of 2009, and increased selling prices as a result of the pass-through of higher average resin costs to customers.  Strong demand in the LCD (liquid crystal display) market continues to be the primary catalyst for increased volumes in higher-value surface protection materials.  Operating profit from ongoing operations, which continues to fluctuate quarter to quarter, increased slightly in the second quarter of 2010 compared to the prior year.  This increase was primarily due to the favorable impact of increased sales volumes in surface protection and personal care materials, partially offset by the unfavorable effect of the lag in the pass-through of higher resin costs as average resin prices continued to increase in the second quarter of 2010.  We estimate that the impact of the quarterly lag in the pass-through of average
 
 
19

 
 
resin costs on operating profits from ongoing operations was a negative $2.7 million in the second quarter of 2010 and was not significant in the second quarter of 2009.  In addition, selling, general and administrative expenses increased in the second quarter in support of key products and programs.  Operating profits in the second quarter of 2010 were also adversely affected by initial production inefficiencies associated with internal realignments to match capacity with growing customer demand.

Net sales in Film Products for the first six months of 2010 were $252.4 million, an increase of 18.7% from $212.6 million in the first six months of 2009.  Operating profit from ongoing operations was $32.9 million in the first six months of 2010, an increase of 20.8% from $27.2 million in the first six months of last year.  Volume was 108.8 million pounds in the first six months of 2010, up 10.0% from 98.9 million pounds in the first six months of 2009.

Net sales for the six months ended June 30, 2010 increased in comparison to the same period in the prior year primarily due to the higher volumes noted above.  Operating profit from ongoing operations for the first half of 2010 increased 20.8% from the same period in the prior year, primarily due to higher sales volumes in personal care and surface protection materials, partially offset by the unfavorable impact of the lag in the pass-through of higher resin costs in 2010.  The estimated impact of the resin pass-through lag was a negative $5.0 million for the first six months of 2010 versus a favorable $3.0 million for the first six months of 2009.

Capital expenditures in Film Products were $5.8 million in the first half of 2010 compared with $7.1 million in the first half of last year.  Film Products currently projects that capital expenditures will be approximately $18 million in 2010.  Depreciation expense was $16.8 million in the first half of 2010 and $15.9 million in the first half of 2009, and is projected to be approximately $35 million in 2010.

Aluminum Extrusions. Second-quarter net sales in Aluminum Extrusions were $52.7 million, an increase of 13.4% from $46.4 million in the second quarter of 2009.  Operating profit from ongoing operations was $235,000 for the second quarter of 2010, down from operating profit of $634,000 for the second quarter of 2009.  Volume increased to 24.8 million pounds in the second quarter of 2010 from 24.2 million pounds in the second quarter of 2009.

Net sales in Aluminum Extrusions for the first six months of 2010 increased 6.5% to $97.5 million from $91.5 million in the first six months of 2009.  Operating losses from ongoing operations were $2.8 million for the first six months of 2010, a $1.6 million change from operating losses of $1.2 million for the same period in 2009.  Volume was 45.9 million pounds in the first six months of 2010, down 3.7% from 47.7 million pounds in the first six months of 2009.

Net sales in the second quarter and first half of 2010 increased in comparison to 2009 due to higher average selling prices driven by an increase in aluminum prices.  Second-quarter net sales were also favorably impacted by a slight uptick in volumes.  Sales volume in the first six months of 2010 continued to be lower than volume in the comparable prior year period as extremely challenging conditions in nonresidential construction led to a decline in volumes of approximately 10% in this market segment.  The unfavorable change in the operating income from ongoing operations reported for 2010 compared with 2009 reflects lower margins resulting from a less favorable sales mix.

As described in Note 4 on page 9, 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 Aluminum Extrusions were $1.6 million in the first six months of 2010 compared with $8.5 million in the same period of last year.  Prior year capital expenditures were primarily related to the installation of a new large extrusion press at the Carthage, Tennessee manufacturing facility.  Capital expenditures are projected to be approximately $4.4 million in 2010.  Depreciation expense was
 
 
20

 
 
$4.7 million in the first half of 2010 compared with $3.8 million in the first half of 2009, and is projected to be approximately $9.1 million in 2010.

Other.   In February 2010, we reported a fourth segment, Other, comprised of the start-up operations of Bright View Technologies Corporation (“Bright View”) and Falling Springs, LLC (“Falling Springs”).  We acquired the assets of Bright View, a late-stage developmental company, on February 3, 2010.  Bright View is a developer and producer of high-value microstructure-based optical films for the LED (light emitting diode) and fluorescent lighting markets.  Falling Springs develops, owns and operates multiple mitigation banks.  Through the establishment of perpetual easements to restore, enhance and preserve wetlands, str eams or other protected environmental resources, these mitigation banks create saleable credits that are used by the purchaser of credits to offset the negative environmental impacts from private and public development projects.

Net sales for this segment can fluctuate from quarter-to-quarter as Bright View is a late-stage developmental company and Falling Springs’ revenue can vary based upon the timing of developmental projects within its market. Operating losses from ongoing operations were $1.5 million in the second quarter of 2010 and $2.1 million in the first half of 2010.

Other Items. Pension expense was $44,000 in the second quarter of 2010 and $88,000 in the first six months of 2010, an unfavorable change of $801,000 and $1.6 million, respectively, from net pension income recognized in comparable periods of 2009.  Most of the  pension impact on earnings is reflected in “Corporate expenses, net” in the net sales and operating profit by segment table.  Corporate expenses, net increased in 2010 versus 2009 primarily due to the unfavorable impact of pension expense noted above and the timing of adjustments for certain performance-based incentive compensation programs.

In June 2010, we entered into a new four-year, $300 million unsecured revolving credit facility, which replaced our previous revolving credit facility that was due to expire on December 15, 2010.  Interest expense, which includes the amortization of debt issue costs, increased $38,000 in the second quarter of 2010 compared to the second quarter of 2009.

The effective tax rate was 40.8% in the first half of 2010 compared to (79.0)% in the first half of 2009.  The significant differences between the U.S. federal statutory rate and the effective tax rate for the first six months is shown in the table provided in Note 11 on page 16.

Net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 26.

 
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” in Part II, Item 7 of our 2009 Form 10-K, 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 (expense) 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, 2009, there have been no changes in these policies that have had a material impact on results of operations or financial
 
 
21

 
 
position.  See Note 2 on page 6 for losses related to plant shutdowns, asset impairments, restructurings and other items occurring during 2010 and the comparable period in 2009.

Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) Emerging Issues Task Force issued a consensus updating accounting standards for revenue recognition for multiple-deliverable arrangements in October 2009.  The stated objective of the accounting standards update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  The revision of current FASB guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements.  The accounting standards update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted.  We do not expect these FASB rules to have a material impact on our financial statements and disclosures.

The FASB issued guidance in January 2010 that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for such transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update also clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for the interim periods in that year.  We do not anticipate that the adoption of these new disclosures and clarifications of existing disclosures will materially expand our current financial statement footnote disclosures.

In March 2010, the Patient Protection and Affordable Care Act (the PPACA) was signed into law, as was the Health Care and Education Reconciliation Act of 2010, which amends certain aspects of the PPACA.  Included in the provisions of these laws are changes to the taxation related to the federal subsidy available to companies that provide retiree health benefit plans that include a benefit that is at least actuarially equivalent to the benefits of Medicare Part D.  Our retiree medical plan does not include prescription drug coverage for Medicare-eligible retirees, so we are not impacted by changes to the taxation of this federal subsidy.  We are currently assessing other potential impacts, if any, that this legislation may have on future results of operations, c ash flows or financial position related to our health care benefits and postretirement health care obligations.

 
Results of Operations

 
Second Quarter 2010 Compared with Second Quarter 2009

Overall, sales in the second quarter of 2010 increased by 17.0% compared with 2009.   Net sales (sales less freight) increased 17.3% in Film Products primarily due to strong demand for surface protection materials, volume improvements in personal care materials and higher pricing related to the pass-through of higher average resin prices to customers.  Net sales increased 13.4% in Aluminum Extrusions due to higher average selling prices driven by an increase in average aluminum costs and slightly higher volumes.  For more information on net sales and volume, see the executive summary beginning on page 18.

 
22

 
 
Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 16.2% in the second quarter of 2010 from 18.1% in 2009.  The gross profit margin percentage decreased in Film Products primarily due to the unfavorable impact of the lag in the pass-through of higher resin costs as average resin prices continued to increase in the second quarter of 2010 and initial production inefficiencies associated with internal realignments to match capacity with growing customer demand.  Gross profit margin in Aluminum Extrusions decreased as a result of a less favorable sales mix.

As a percentage of sales, selling, general and administrative and R&D expenses were 11.4% in the second quarter of 2010, up from 10.9% in the second quarter of last year.  The increase can be attributed to higher selling, general and administrative expenses from proactively supporting key products and programs as well as the timing of accruals for certain performance-based incentive compensation programs.

 Plant shutdowns, asset impairments and restructurings in the second quarter of 2010 shown in the segment operating profit table on page 19 include:

·  
Pretax charge of $355,000 for an asset impairment in Film Products;
·  
Pretax gain of $120,000 on the sale of previously impaired equipment (included in “Other income (expense), net” in the consolidated statement of income) at our film products manufacturing facility in Pottsville, Pennsylvania;
·  
Pretax loss of $44,000 on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia; and
·  
Pretax gain of $23,000 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 10 for additional detail).

Plant shutdowns, asset impairments and restructurings in the second quarter of 2009 shown in the segment operating profit table on page 19 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 10 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.

Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $166,000 and $175,000 in the second quarters of 2010 and 2009, respectively.  Interest expense, which includes the amortization of debt issue costs, increased to $222,000 in the second quarter of 2010 from $184,000 in the prior year period.

 
23

 
 
Average debt outstanding and interest rates were as follows:
 
           
 
Three Months
 
 
Ended June 30
 
(In Millions)
2010
   
2009
 
Floating-rate debt with interest charged on a
 
rollover basis at one-month LIBOR plus a
 
credit spread:
         
Average outstanding debt balance
$ -     $ 3.8  
Average interest rate
  n/a       1.3 %
Fixed-rate and other debt:
         
Average outstanding debt balance
$ 1.0     $ 1.6  
Average interest rate
  3.6 %     2.5 %
Total debt:
             
Average outstanding debt balance
$ 1.0     $ 5.4  
Average interest rate
  3.6 %     1.7 %

The effective tax rate used to compute income taxes was 40.3% for the second quarter of 2010 compared to 45.0% for the second quarter of 2009. The change in the effective tax rate 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 the first six months is shown in the table provided in Note 11 on page 16.

 
First Six Months of 2010 Compared with First Six Months of 2009

Overall, sales in the first six months of 2010 increased by 15.7% compared with 2009.   Net sales (sales less freight) increased 18.7% in Film Products primarily due to strong demand for surface protection materials and volume improvements in personal care materials.  Net sales increased 6.5% in Aluminum Extrusions due to higher average selling prices driven by an increase in average aluminum costs.  For more information on net sales and volume, see the executive summary beginning on page 18.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 16.6% in the first six months of 2010 from 17.1% in 2009.  The gross profit margin increased in Film Products primarily due to the positive impact of increased sales volumes for higher-value surface protection materials noted above, partially offset by the unfavorable effect of the lag in the pass-through of higher average resin costs.  Consistent with the quarter-to-date period, gross margin in Aluminum Extrusions decreased primarily as a result of a less favorable sales mix.

As a percentage of sales, selling, general and administrative and R&D expenses were 11.3% in the first six months of 2010 compared to 11.1% in 2009.

Plant shutdowns, asset impairments and restructurings in the first six months of 2010 shown in the segment operating profit table on page 19 include:

·  
Pretax gains of $466,000 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 10 for additional detail);
·  
Pretax charge of $355,000 for an asset impairment in Film Products;
·  
Pretax gain of $120,000 on the sale of previously impaired equipment (included in “Other income (expense), net” in the consolidated statement of income) at our film products manufacturing facility in Pottsville, Pennsylvania;
 
 
24

 
 
·  
Pretax losses of $105,000 on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia; and
·  
Pretax charge of $56,000 for severance and other employee-related costs in connection with restructurings in Film Products.
 
Plant shutdowns, asset impairments and restructurings in the first six months of 2009 shown in the segment operating profit table on page 19 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);
·  
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 10 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.

Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $334,000 in the first six months of 2010 and $434,000 in 2009.  Interest expense, which includes the amortization of debt issue costs, was $417,000 in the first six months of 2010 compared to $388,000 for the same period in 2009.

Average debt outstanding and interest rates were as follows:
 
           
 
Six Months
 
 
Ended June 30
 
(In Millions)
2010
   
2009
 
Floating-rate debt with interest charged on a
 
rollover basis at one-month LIBOR plus a
 
credit spread:
         
Average outstanding debt balance
$ -     $ 10.0  
Average interest rate
  n/a       1.2 %
Fixed-rate and other debt:
         
Average outstanding debt balance
$ 1.1     $ 1.6  
Average interest rate
  3.4 %     2.4 %
Total debt:
             
Average outstanding debt balance
$ 1.1     $ 11.6  
Average interest rate
  3.4 %     1.4 %

The effective tax rate used to compute income taxes was 40.8% in the first six months of 2010 compared with (79.0)% in the first six months of 2009.  The significant differences between the U.S.
 
 
25

 
 
federal statutory rate and the effective tax rate for the first six months is shown in the table provided in Note 11 on page 16.

Liquidity and Capital Resources

Changes in operating assets and liabilities from December 31, 2009 to June 30, 2010 are summarized below:

·  
Accounts receivable increased $19.2 million (25.9%).
-  
Accounts receivable in Film Products increased by $9.0 million.  Days sales outstanding (“DSO”) increased to 47 at June 30, 2010 compared with 43 at December 31, 2009, which is within the range experienced over the past twelve months.
-  
Accounts receivable in Aluminum Extrusions increased by $9.2 million.  DSO was 41 at June 30, 2010 compared with 44 at December 31, 2009, which is within the range experienced over the past twelve months.
-  
Accounts receivable in Other increased $1.0 million primarily as a result of timing of sales.
·  
Inventories decreased $1.3 million (3.8%).
-  
Inventories in Film Products increased by approximately $3.2 million.  The increase can be attributed to increased demand for surface protection and personal care materials.
-  
Inventories in Aluminum Extrusions decreased by approximately $4.6 million.  The decrease can be primarily attributed to efforts to reduce inventory levels in light of current economic conditions.
·  
Net property, plant and equipment decreased $19.3 million (8.4%) due primarily to depreciation of $21.7 million, capital expenditures of $7.6 million, machinery and equipment of $3.1 million acquired as part of the Bright View transaction and a change in the value of the U.S. Dollar relative to foreign currencies (decrease of approximately $7.8 million).
·  
Goodwill and other intangibles increased by $1.1 million (1.1%) primarily due to the acquisition of the assets of Bright View, partially offset by changes in the value of the U.S. Dollar relative to foreign currencies ($1.3 million decrease).  Identifiable intangible assets purchased as a part of the acquisition were $2.4 million.  There was no goodwill recorded from the acquisition of the assets of Bright View.
·  
Other assets increased by $4.3 million (9.4%) primarily due to additional investments in mitigation banking properties and an increase in deferred debt issuance costs related to the completion of our new revolving credit facility in June 2010.
·  
Accounts payable increased by $6.6 million (12.3%).
-  
Accounts payable in Film Products increased by $7.7 million, or 28.1%, primarily due to higher sales volume and higher average resin costs.
-  
Accounts payable in Aluminum Extrusions decreased by $1.6 million, or 6.5%, due to the timing of aluminum purchases.
-  
Accounts payable increased in corporate and other segment businesses by $532,000 due to the normal volatility associated with the timing of payments.
·  
Accrued expenses decreased by $2.4 million (7.0%) primarily due to the payment of year end performance-based incentive accruals.
·  
Net deferred income tax liabilities in excess of assets decreased by $6.2 million due primarily to non-cash adjustments to deferred taxes for items included in other comprehensive income (loss). Income taxes recoverable decreased $329,000 to $3.7 million at June 30, 2010.

Cash provided by operating activities was $16.2 million in the first half of 2010 compared with $52.0 million in the first half of 2009.  The change is primarily related to volatility of working capital components.

 
26