10-Q
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 September 30, 2015
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  x    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
 
x
Accelerated filer
 
¨
 
 
 
 
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  ¨    No  x
The number of shares of Common Stock, no par value, outstanding as of November 4, 2015: 32,679,712.




PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
46,609

 
$
50,056

Accounts and other receivables, net of allowance for doubtful accounts and sales returns of $2,922 in 2015 and $2,610 in 2014
108,030

 
113,341

Income taxes recoverable
366

 
877

Inventories
65,511

 
74,308

Deferred income taxes
8,120

 
8,877

Prepaid expenses and other
7,265

 
8,283

Total current assets
235,901

 
255,742

Property, plant and equipment, at cost
750,066

 
790,622

Less accumulated depreciation
(521,931
)
 
(520,665
)
Net property, plant and equipment
228,135

 
269,957

Goodwill and other intangibles, net
153,816

 
215,129

Other assets and deferred charges
46,502

 
47,798

Total assets
$
664,354

 
$
788,626

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,464

 
$
94,131

Accrued expenses
35,093

 
32,049

Total current liabilities
112,557

 
126,180

Long-term debt
134,000

 
137,250

Deferred income taxes
27,259

 
39,255

Other noncurrent liabilities
108,788

 
113,912

Total liabilities
382,604

 
416,597

Commitments and contingencies (Notes 1 and 15)

 

Shareholders’ equity:
 
 
 
Common stock, no par value (issued and outstanding - 32,673,712 at September 30, 2015 and 32,422,082 at December 31, 2014)
29,297

 
24,364

Common stock held in trust for savings restoration plan (67,155 shares at September 30, 2015 and 66,255 shares at December 31, 2014)
(1,459
)
 
(1,440
)
Accumulated other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(111,892
)
 
(47,270
)
Gain (loss) on derivative financial instruments
(1,140
)
 
656

Pension and other post-retirement benefit adjustments
(95,986
)
 
(103,581
)
Retained earnings
462,930

 
499,300

Total shareholders’ equity
281,750

 
372,029

Total liabilities and shareholders’ equity
$
664,354

 
$
788,626

See accompanying notes to financial statements.

2



Tredegar Corporation
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues and other items:
 
 
 
 
 
 
 
Sales
$
223,772

 
$
240,429

 
$
679,188

 
$
712,607

Other income (expense), net
147

 
3,912

 
379

 
(6,318
)
 
223,919

 
244,341

 
679,567

 
706,289

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
182,442

 
198,121

 
555,627

 
580,899

Freight
7,862

 
7,726

 
22,930

 
20,897

Selling, general and administrative
14,709

 
16,902

 
53,680

 
51,733

Research and development
3,774

 
3,012

 
11,926

 
9,003

Amortization of intangibles
990

 
1,415

 
3,113

 
4,237

Interest expense
901

 
590

 
2,679

 
1,751

Asset impairments and costs associated with exit and disposal activities, net of adjustments
2,117

 
461

 
2,342

 
2,652

Goodwill impairment charge
44,465

 

 
44,465

 

Total
257,260

 
228,227

 
696,762

 
671,172

Income (loss) from continuing operations before income taxes
(33,341
)
 
16,114

 
(17,195
)
 
35,117

Income taxes from continuing operations
3,382

 
5,369

 
9,064

 
12,141

Income (loss) from continuing operations
(36,723
)
 
10,745

 
(26,259
)
 
22,976

Income (loss) from discontinued operations, net of tax

 
850

 

 
850

Net income (loss)
$
(36,723
)
 
$
11,595

 
$
(26,259
)
 
$
23,826

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
(1.13
)
 
$
0.33

 
$
(0.81
)
 
$
0.71

Discontinued operations

 
0.03

 

 
0.03

Net income (loss)
$
(1.13
)
 
$
0.36

 
$
(0.81
)
 
$
0.74

Diluted
 
 
 
 
 
 
 
Continuing operations
$
(1.13
)
 
$
0.33

 
$
(0.81
)
 
$
0.70

Discontinued operations

 
0.03

 

 
0.03

Net income (loss)
$
(1.13
)
 
$
0.36

 
$
(0.81
)
 
$
0.73

Shares used to compute earnings (loss) per share:
 
 
 
 
 
 
 
Basic
32,605

 
32,319

 
32,566

 
32,291

Diluted
32,605

 
32,507

 
32,566

 
32,589

Dividends per share
$
0.11

 
$
0.09

 
$
0.31

 
$
0.25

See accompanying notes to financial statements.


3



Tredegar Corporation
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
2015
 
2014
Net income (loss)
$
(36,723
)
 
$
11,595

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment (net of tax benefit of $122 in 2015 and tax benefit of $2,560 in 2014)
(35,526
)
 
(19,880
)
Derivative financial instruments adjustment (net of tax benefit of $92 in 2015 and tax benefit of $31 in 2014)
(155
)
 
(56
)
Amortization of prior service costs and net gains or losses (net of tax of $1,478 in 2015 and $842 in 2014)
2,550

 
1,469

Other comprehensive income (loss)
(33,131
)
 
(18,467
)
Comprehensive income (loss)
$
(69,854
)
 
$
(6,872
)
 
 
 
 
 
Nine Months Ended September 30,
 
2015
 
2014
Net income (loss)
$
(26,259
)
 
$
23,826

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment (net of tax benefit of $1,506 in 2015 and tax benefit of $2,310 in 2014)
(64,622
)
 
(10,640
)
Derivative financial instruments adjustment (net of tax benefit of $1,082 in 2015 and tax of $136 in 2014)
(1,796
)
 
217

Amortization of prior service costs and net gains or losses (net of tax of $4,402 in 2015 and $2,836 in 2014)
7,595

 
4,949

Other comprehensive income (loss)
(58,823
)
 
(5,474
)
Comprehensive income (loss)
$
(85,082
)
 
$
18,352

See accompanying notes to financial statements.


4



Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(26,259
)
 
$
23,826

Adjustments for noncash items:
 
 
 
Depreciation
23,932

 
26,571

Amortization of intangibles
3,113

 
4,237

Goodwill impairment charge
44,465

 

Deferred income taxes
(7,526
)
 
(4,063
)
Accrued pension and post-retirement benefits
9,358

 
5,265

Loss on investment accounted for under the fair value method

 
(2,900
)
Loss on asset impairments and divestitures
319

 
993

Net gain on disposal of assets
(11
)
 
(919
)
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Accounts and other receivables
(4,725
)
 
(22,274
)
Inventories
1,205

 
(1,885
)
Income taxes recoverable/payable
184

 
(1,993
)
Prepaid expenses and other
(1,141
)
 
535

Accounts payable and accrued expenses
(9,028
)
 
7,940

Other, net
(544
)
 
1,898

Net cash provided by operating activities
33,342

 
37,231

Cash flows from investing activities:
 
 
 
Capital expenditures
(23,382
)
 
(32,587
)
Proceeds from the sale of assets and other
949

 
5,053

Net cash used in investing activities
(22,433
)
 
(27,534
)
Cash flows from financing activities:
 
 
 
Borrowings
88,000

 
67,250

Debt principal payments and financing costs
(91,328
)
 
(67,528
)
Dividends paid
(10,130
)
 
(8,090
)
Proceeds from exercise of stock options and other
2,794

 
(106
)
Net cash used in financing activities
(10,664
)
 
(8,474
)
Effect of exchange rate changes on cash
(3,692
)
 
(1,910
)
Increase (decrease) in cash and cash equivalents
(3,447
)
 
(687
)
Cash and cash equivalents at beginning of period
50,056

 
52,617

Cash and cash equivalents at end of period
$
46,609

 
$
51,930

See accompanying notes to financial statements.


5



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
Restoration
Plan
 
Foreign
Currency
Translation
 
Gain
(Loss) on
Derivative
Financial
Instruments
 
Pension &
Other
Post-retirement
Benefit
Adjust.
 
Total
Shareholders’
Equity
Balance at January 1, 2015
$
24,364

 
$
499,300

 
$
(1,440
)
 
$
(47,270
)
 
$
656

 
$
(103,581
)
 
$
372,029

Net income

 
(26,259
)
 

 

 

 

 
(26,259
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment (net of tax benefit of $1,506)

 

 

 
(64,622
)
 

 

 
(64,622
)
Derivative financial instruments adjustment (net of tax benefit of $1,082)

 

 

 

 
(1,796
)
 

 
(1,796
)
Amortization of prior service costs and net gains or losses (net of tax of $4,402)

 

 

 

 

 
7,595

 
7,595

Cash dividends declared ($0.31 per share)

 
(10,130
)
 

 

 

 

 
(10,130
)
Stock-based compensation expense
3,244

 

 

 

 

 

 
3,244

Issued upon exercise of stock options & other
1,689

 

 

 

 

 

 
1,689

Tredegar common stock purchased by trust for savings restoration plan

 
19

 
(19
)
 

 

 

 

Balance at September 30, 2015
$
29,297

 
$
462,930

 
$
(1,459
)
 
$
(111,892
)
 
$
(1,140
)
 
$
(95,986
)
 
$
281,750

See accompanying notes to financial statements.


6



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 its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of September 30, 2015, the consolidated results of operations for the three and nine months ended September 30, 2015 and 2014, the consolidated cash flows for the nine months ended September 30, 2015 and 2014, and the consolidated changes in shareholders’ equity for the nine months ended September 30, 2015. All such adjustments, unless otherwise detailed in the notes to the consolidated interim financial statements, are deemed to be of a normal, recurring nature. The financial position data as of December 31, 2014 that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”) but does not include all disclosures required by United States generally accepted accounting principles (“U.S. GAAP”). These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2014 Form 10-K. The results of operations for the three and nine months ended September 30, 2015, are not necessarily indicative of the results to be expected for the full year.
 
2.
On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada for approximately $25.0 million. All historical results for this business have been reflected as discontinued operations; however, cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows. Accruals for indemnifications under the purchase agreement related to environmental matters were adjusted in the third quarter and first nine months of 2014, resulting in income from discontinued operations of $0.9 million ($0.9 million after taxes) for both periods (none in the third quarter and the first nine months of 2015, respectively).
 
3.
The Company assesses 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). Goodwill is assessed for impairment at the reporting unit level, and Tredegar’s reporting units are PE Films, PET Films and AACOA. The Company estimates the fair value of its reporting units using discounted cash flow analysis and comparative enterprise value-to-EBIDTA multiples. The operations of PET Films, which is also referred to as Flexible Packaging Films or Terphane, continue to be adversely impacted by competitive pressures that are primarily related to ongoing unfavorable economic conditions in its primary market of Brazil and excess global capacity in the industry. The Company believes that these conditions have shifted the competitive environment from a regional to a global landscape and have driven price convergence and lower product margins for Terphane in Brazil. While recent favorable anti-dumping rulings have been issued against China, Egypt and India, authorities in Brazil have initiated new investigations of dumping against Peru and Bahrain. In light of market trends, increased economic uncertainty and continued dumping activity in Brazil, the Company reassessed its projections for the timing and extent of a market recovery for Terphane in the third quarter of 2015.

The Company’s assessment of future prospects and timing of a recovery under these conditions indicate that its current enterprise value is less than approximately $120 million (PET Films’ net assets excluding goodwill), the minimum value needed to have avoided a full write-off of its goodwill. Accordingly, a goodwill impairment charge of $44.5 million ($44.5 million after taxes) was recognized in PET Films in the third quarter of 2015. This impairment charge represents the entire amount of goodwill associated with the PET Films reporting unit. The goodwill of PE Films and AACOA will be tested for impairment at the annual testing date unless there is an indicator of impairment identified at an earlier date.

4.
Plant shutdowns, asset impairments, restructurings and other charges are shown in the net sales and operating profit by segment table in Note 11, and unless otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income.
Plant shutdowns, asset impairments, restructurings and other charges in the third quarter of 2015 include:
Pretax charges of $1.2 million associated with the consolidation of domestic polyethylene (“PE”) films manufacturing facilities, which includes severance and other employee-related costs of $0.3 million, asset impairments of $0.3 million, accelerated depreciation of $0.2 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.3 million ($46,000 is included in “Cost of goods sold” in the consolidated statements of income);

7



Pretax charges of $0.9 million for severance and other employee-related costs associated with restructurings in PE Films ($0.9 million), Aluminum Extrusions ($35,000) and Corporate ($26,000; included in “Corporate expenses, net” in the statement of net sales and operating profit by segment included in Note 11); and
Pretax charges of $0.3 million associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana.
Plant shutdowns, asset impairments, restructurings and other charges in the first nine months of 2015 include:
Pretax charges of $3.9 million (included in “Selling, general and administrative expense” in the consolidated statements of income and “Corporate expenses, net” in the statement of net sales and operating profit by segment included in Note 11) for severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers;
Pretax charges of $1.2 million associated with the consolidation of domestic PE films manufacturing facilities, which includes severance and other employee-related costs of $0.3 million, asset impairments of $0.3 million, accelerated depreciation of $0.2 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.3 million ($46,000 is included in “Cost of goods sold” in the consolidated statements of income);
Pretax charge of $1.1 million for severance and other employee-related costs associated with restructurings in PE Films ($0.9 million), Flexible Packaging Films ($0.2 million), Aluminum Extrusions ($35,000) and Corporate ($26,000; included in “Corporate expenses, net” in the statement of net sales and operating profit by segment included in Note 11);
Pretax charges of $0.3 million associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana.
Plant shutdowns, asset impairments, restructurings and other charges in the third quarter of 2014 include:
Pretax charges of $0.4 million associated with severance and other employee-related costs associated with restructurings in Flexible Packaging Films ($0.3 million), PE Films ($0.1 million) and Aluminum Extrusions ($31,000);
Pretax charges of $75,000 related to expected future environmental costs at the Company’s aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $37,000 associated with the shutdown of the PE films manufacturing facility in Red Springs, North Carolina; and
Pretax charges of $20,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana.
Plant shutdowns, asset impairments, restructurings and other charges in the first nine months of 2014 include:
Pretax charge of $10 million associated with a one-time, lump sum license payment to 3M after the Company settled all litigation issues associated with a patent infringement complaint (see Note 15 for additional detail on this legal matter);
Pretax charges of $1.8 million associated with severance and other employee-related costs associated with restructurings in PE Films ($1.5 million), Flexible Packaging Films ($0.3 million) and Aluminum Extrusions ($31,000);
Pretax charges of $0.8 million associated with the shutdown of the PE films manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.5 million and asset impairment and other shutdown-related charges of $0.3 million;
Pretax charges of $0.2 million related to expected future environmental costs at the Company’s aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $43,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana.
Results in the third quarter and first nine months of 2014 include unrealized gains on the Company’s investment in kaleo, Inc (“kaléo”), which is accounted for under the fair value method (included in “Other income (expense), net” in the consolidated statements of income), of $4.0 million ($2.5 million after taxes) and $2.9 million ($1.8 million after

8



taxes), respectively. Unrealized losses (included in “Other income (expense), net” in the consolidated statements of income and “Corporate expenses, net” in the statement of net sales and operating profit by segment) on the Company’s investment in the Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”), which is accounted for under the cost method, of $0.2 million ($0.1 million after taxes) and $0.8 million ($0.5 million after taxes) in the third quarter and first nine months of 2014, respectively, as a result of a reduction in the value of the investment that is not expected to be temporary. The Company realized a gain (included in “Other income (expense), net” in the consolidated statements of income) of $1.2 million ($0.8 million after taxes) on the sale of a portion of its investment property in Alleghany and Bath counties in Virginia in the second quarter of 2014. See Note 8 for additional information on investments.
A reconciliation of the beginning and ending balances of accrued expenses associated with “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income for the nine months ended September 30, 2015 is as follows:
(In Thousands)
Severance
 
Asset Impairments
 
Other (a)
 
Total
Balance at January 1, 2015
$
246

 
$

 
$
201

 
$
447

Changes in 2015:
 
 
 
 
 
 
 
Charges
1,451

 
319

 
572

 
2,342

Cash spent
(558
)
 

 
(365
)
 
(923
)
Charges against assets

 
(319
)
 

 
(319
)
Balance at September 30, 2015
$
1,139

 
$

 
$
408

 
$
1,547

(a)
Other includes other facility consolidation-related costs associated with the consolidation of North American PE Films manufacturing facilities and other shutdown-related costs associated with the shutdown of the Company’s aluminum extrusions manufacturing facility in Kentland, Indiana.

In July 2015, the Company announced its intention to consolidate its domestic production for PE Films by restructuring the operations in its manufacturing facility in Lake Zurich, Illinois. Efforts to transition domestic production from the Lake Zurich manufacturing facility will require various machinery upgrades and equipment transfers to its other manufacturing facilities. Given PE Films’ focus on maintaining product quality and customer satisfaction, the Company anticipates that these activities will require 21-24 months to execute.

The Company expects to recognize costs associated with the exit and disposal activities of approximately $4-5 million over a 21-24 month period. Estimated exit and disposal costs include severance charges and other employee-related expenses arising from the termination of employees of approximately $2-3 million and equipment transfers and other facility consolidation-related costs of approximately $2 million. During the same period of time, operating expenses will include the acceleration of approximately $3 million of non-cash depreciation expense for certain machinery and equipment at the Lake Zurich manufacturing facility.

Total estimated cash expenditures of $13-14 million over a 21-24 month period include the following:
Cash outlays associated with previously discussed exit and disposal expenses of approximately $4 million;
Capital expenditures associated with equipment upgrades at other film products manufacturing facilities in the United States of approximately $8 million;
Cash incentives of approximately $1 million in connection with meeting safety and quality standards while production ramps down at the Lake Zurich manufacturing facility; and
Additional operating expenses of approximately $1 million associated with customer product qualifications on upgraded and transferred production lines.

5.
The components of inventories are as follows:
 
 
September 30,
 
December 31,
(In Thousands)
2015
 
2014
Finished goods
$
12,950

 
$
17,559

Work-in-process
9,291

 
10,089

Raw materials
22,070

 
25,227

Stores, supplies and other
21,200

 
21,433

Total
$
65,511

 
$
74,308

 

9



6.
Basic earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In Thousands)
2015
 
2014
 
2015
 
2014
Weighted average shares outstanding used to compute basic earnings per share
32,605

 
32,319

 
32,566

 
32,291

Incremental dilutive shares attributable to stock options and restricted stock

 
188

 

 
298

Shares used to compute diluted earnings per share
32,605

 
32,507

 
32,566

 
32,589

Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. The Company had a net loss from continuing operations for the three and nine months ended September 30, 2015, so there is no dilutive impact for such shares. If the Company had reported net income from continuing operations for the three and nine months ended September 30, 2015, average out-of-the-money options to purchase shares that would have been excluded from the calculation of incremental shares attributable to stock options and restricted stock were 735,248 and 482,568, respectively. For the three and nine months ended September 30, 2014, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 343,656 and 228,533, respectively.
 
7.
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2015:
(In Thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2015
$
(47,270
)
 
$
656

 
$
(103,581
)
 
$
(150,195
)
Other comprehensive income (loss) before reclassifications
(64,622
)
 
(2,930
)
 

 
(67,552
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
1,134

 
7,595

 
8,729

Net other comprehensive income (loss) - current period
(64,622
)
 
(1,796
)
 
7,595

 
(58,823
)
Ending balance, September 30, 2015
$
(111,892
)
 
$
(1,140
)
 
$
(95,986
)
 
$
(209,018
)

The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2014:
(In Thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2014
$
(19,205
)
 
$
765

 
$
(71,848
)
 
$
(90,288
)
Other comprehensive income (loss) before reclassifications
(10,640
)
 
433

 

 
(10,207
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
(216
)
 
4,949

 
4,733

Net other comprehensive income (loss) - current period
(10,640
)
 
217

 
4,949

 
(5,474
)
Ending balance, September 30, 2014
$
(29,845
)
 
$
982

 
$
(66,899
)
 
$
(95,762
)


10



Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the three months ended September 30, 2015 are summarized as follows:
(In Thousands)
Amount
reclassified from
other
comprehensive
income
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
(1,338
)
 
Cost of sales
Foreign currency forward contracts, before taxes
15

 
Cost of sales
Total, before taxes
(1,323
)
 
 
Income tax expense (benefit)
(498
)
 
Income taxes
Total, net of tax
$
(825
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(4,028
)
 
(a)
Income tax expense (benefit)
(1,478
)
 
Income taxes
Total, net of tax
$
(2,550
)
 
 
(a)
This component of accumulated other comprehensive income is included in the computation of net periodic pension cost (see Note 10 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the nine months ended September 30, 2015 are summarized as follows:
:
(In Thousands)
Amount
reclassified from
other
comprehensive
income
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
(1,867
)
 
Cost of sales
Foreign currency forward contracts, before taxes
46

 
Cost of sales
Total, before taxes
(1,821
)
 
 
Income tax expense (benefit)
(687
)
 
Income taxes
Total, net of tax
$
(1,134
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(11,997
)
 
(a)
Income tax expense (benefit)
(4,402
)
 
Income taxes
Total, net of tax
$
(7,595
)
 
 
(a)
This component of accumulated other comprehensive income is included in the computation of net periodic pension cost (see Note 10 for additional detail).


11



Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the three months ended September 30, 2014 are summarized as follows:
(In Thousands)
Amount
reclassified from
other
comprehensive
income
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
300

 
Cost of sales
Foreign currency forward contracts, before taxes

 
 
Total, before taxes
300

 
 
Income tax expense (benefit)
113

 
Income taxes
Total, net of tax
$
187

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(2,311
)
 
(a)
Income tax expense (benefit)
(842
)
 
Income taxes
Total, net of tax
$
(1,469
)
 
 
(a)
This component of accumulated other comprehensive income is included in the computation of net periodic pension cost (see Note 10 for additional detail).

Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the nine months ended September 30, 2014 are summarized as follows:

(In Thousands)
Amount
reclassified from
other
comprehensive
income
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
346

 
Cost of sales
Foreign currency forward contracts, before taxes

 
 
Total, before taxes
346

 
 
Income tax expense (benefit)
130

 
Income taxes
Total, net of tax
$
216

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(7,785
)
 
(a)
Income tax expense (benefit)
(2,836
)
 
Income taxes
Total, net of tax
$
(4,949
)
 
 
(a)
This component of accumulated other comprehensive income is included in the computation of net periodic pension cost (see Note 10 for additional detail).

8.
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company. The mission of kaléo is to set a new standard in life-saving personal medical products designed to enable superior treatment outcomes, improved cost effectiveness and intuitive patient administration. Tredegar’s ownership interest on a fully diluted basis is approximately 20%, and the investment is accounted for under the fair value method. At the time of the initial investment, the Company elected the fair value option over the equity method of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.

12



The estimated fair value of the investment in kaléo (also the carrying value, which is included in “Other assets and deferred charges” in the consolidated balance sheet) was $39.1 million at September 30, 2015 and December 31, 2014, respectively. In 2009, kaléo licensed exclusive rights to sanofi-aventis U.S. LLC (Sanofi) to commercialize an epinephrine auto-injector in the U.S. and Canada.  Sanofi began manufacturing and distributing the epinephrine auto-injector, under the names Auvi-Q® in the U.S. and Allerject® in Canada, in 2013.  Sanofi announced on October 28, 2015 a voluntary recall of all Auvi-Q and Allerject epinephrine injectors currently on the market.  The adverse impact that this recall will have on the estimated fair value of the Company’s investment in kaléo is unknown at this time.
The fair value estimates are based upon significant unobservable (Level 3) inputs since there is no secondary market for the Company’s ownership interest. Accordingly, 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, corresponding 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 the Company’s investment in kaléo will be made in the period during which changes can be quantified.
The Company recognized an unrealized gain on its investment in kaléo (included in “Other income (expense), net” in the consolidated statements of income) of $4.0 million and $2.9 million in the third quarter and first nine months of 2014, respectively (none in the third quarter and first nine months of 2015). The unrealized gain in the third quarter of 2014 can be primarily attributed to favorable changes for the passage of time as cash flows associated with achieving product development and commercialization milestones are discounted at 45% for their high degree of risk. In addition to the passage of time for discounted cash flows, the prior-year-to-date change in the fair value of kaléo reflected the impact of a lower weighted average cost of capital used to discount cash flow projections and adjustments to the amount and timing of cash flows associated with achieving product development and commercialization milestones.
The fair market valuation of the Company’s interest in kaléo is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk associated with meeting development and commercialization milestones as anticipated. The weighted average cost of capital used in the fair market valuation of Tredegar’s interest in kaléo was 45% at September 30, 2015 and December 31, 2014. At September 30, 2015, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have increased the fair value of the interest in kaléo by approximately $6 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the interest by approximately $5 million.

13



Had the Company not elected to account for its investment under the fair value method, it would have been required to use the equity method of accounting. The condensed balance sheets for kaléo at September 30, 2015 and December 31, 2014 and condensed statement of operations for the three and nine months ended September 30, 2015 and 2014, as reported to the Company by kaléo, are provided below:
(In Thousands)
September 30, 2015
 
December 31, 2014
 
 
September 30, 2015
 
December 31, 2014
Assets:
 
 
 
 
Liabilities & Equity:
 
 
 
Cash & short-term investments
$
95,720

 
$
117,589

 
 
 
 
 
Restricted cash
8,182

 
14,498

 
Other current liabilities
$
8,192

 
$
8,123

Other current assets
36,991

 
17,916

 
Other noncurrent liabilities
1,181

 
1,247

Property & equipment
8,955

 
10,824

 
Long term debt, net (a)
147,161

 
146,629

Patents
2,790

 
2,702

 
Redeemable preferred stock
23,675

 
22,946

Other long-term assets (a)
669

 
15

 
Equity
(26,902
)
 
(15,401
)
Total assets
$
153,307

 
$
163,544

 
Total liabilities & equity
$
153,307

 
$
163,544

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues & Expenses:
 
 
 
 
 
 
 
Revenues
$
28,084

 
$
11,560

 
$
43,002

 
$
18,528

Cost of goods sold
(3,438
)
 
(576
)
 
(8,575
)
 
(576
)
Expenses and other, net (b)
(17,337
)
 
(13,832
)
 
(45,727
)
 
(36,806
)
Income tax benefit (expense)

 
1,074

 
(4
)
 
7,205

Net income (loss)
$
7,309

 
$
(1,774
)
 
$
(11,304
)
 
$
(11,649
)
(a) Certain immaterial prior year balances have been reclassified to conform with current year presentation.
(b) “Expenses and other, net” includes selling, general and administrative expense, research and development expense, interest expense and other income (expense), net.

The Company’s investment in the Harbinger Fund had a carrying value (included in “Other assets and deferred charges”) of $1.7 million and $1.8 million at September 30, 2015 and December 31, 2014, respectively. The carrying value at September 30, 2015 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received and unrealized losses. The Company recorded unrealized losses of $0.2 million and $0.8 million in the third quarter and first nine months of 2014, respectively, on its investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income) as a result of a reduction in the value of the investment that is not expected to be temporary (none in the third quarter and first nine months of 2015). Withdrawal proceeds were $0.1 million and $0.2 million in the first nine months of 2015 and 2014, respectively. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of September 30, 2015. Gains on the Company’s investment in the Harbinger Fund will be recognized when the amounts expected to be collected from any withdrawal from the investment are known, which will likely be when cash in excess of the remaining carrying value is received. Losses will be recognized when management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.
Tredegar has investment property in Alleghany and Bath Counties, Virginia. The Company realized a gain (included in “Other income (expense), net” in the consolidated statements of income) of $1.2 million ($0.8 million after taxes) on the sale of a portion of this investment property in the second quarter of 2014. The carrying value in this investment property (included in “Other assets and deferred charges” on the consolidated balance sheets) was $2.6 million at September 30, 2015 and December 31, 2014.
9.
The Company uses 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 specified transactions. When possible, derivative financial instruments utilized by Tredegar 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 and that are designated and qualify as cash flow hedges is recorded in other comprehensive income (loss). Gains and losses reported in other comprehensive income (loss) 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

14



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 nine month periods ended September 30, 2015 and 2014.
The fair value of derivative instruments recorded on the consolidated balance sheets is based upon Level 2 inputs within the corresponding commodity or foreign currency markets. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, the Company enters 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 the margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, the Company enters 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 $20.5 million (21.8 million pounds of aluminum) at September 30, 2015 and $8.6 million (7.8 million pounds of aluminum) at December 31, 2014.
The table below summarizes the location and gross amounts of aluminum futures contract fair values in the consolidated balance sheets as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
Asset derivatives:
Aluminum futures contracts
Accrued expenses
 
$

 
Accrued expenses
 
$
82

Liability derivatives:
Aluminum futures contracts
Accrued expenses
 
$
(3,069
)
 
Accrued expenses
 
$
(318
)
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
Asset derivatives:
Aluminum futures contracts
Accrued expenses
 
$

 
Accrued expenses
 
$
7

Liability derivatives:
Aluminum futures contracts
Accrued expenses
 
$

 
Accrued expenses
 
$
(7
)
Net asset (liability)
 
 
$
(3,069
)
 
 
 
$
(236
)
In the event that the counterparty to an aluminum fixed-price forward sales contract chooses to not take delivery of its aluminum extrusions, the customer is contractually obligated to compensate the Company for any losses on the related aluminum futures and/or forward purchase contracts through the date of cancellation. The offsetting asset and liability positions for derivatives not designated as hedging instruments are associated with the unwinding of aluminum futures contracts that relate to such cancellations.
Flexible Packaging Films utilized future fixed Euro-denominated contractual payments for equipment being purchased as part of our multi-year capacity expansion project at our film products manufacturing facility in Cabo de Santo Agostinho, Brazil. The Company used fixed-rate Euro forward contracts with various settlement dates to hedge exchange rate exposure on these obligations. The Company did not have any outstanding fixed-rate forward contracts as of September 30, 2015 or December 31, 2014.
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to our foreign currency futures and zero-cost collar contracts are major financial institutions.

15



The effect on net income and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three and nine month periods ended September 30, 2015 and 2014 is summarized in the table below:
(In Thousands)
Cash Flow Derivative Hedges
 
Aluminum Futures
Contracts
 
Foreign Currency
Forwards
 
Three Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Amount of pre-tax gain (loss) recognized in other comprehensive income
$
(1,570
)
 
$
320

 
$

 
$
(112
)
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion)
Cost of
sales

 
Cost of
sales

 
Cost of
sales

 
 
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income to net income (effective portion)
$
(1,338
)
 
$
300

 
$
15

 
$

 
Aluminum Futures
Contracts
 
Foreign Currency
Forwards
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Amount of pre-tax gain (loss) recognized in other comprehensive income
$
(4,699
)
 
$
817

 
$

 
$
(117
)
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion)
Cost of
sales

 
Cost of
sales

 
Cost of
sales

 
 
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income to net income (effective portion)
$
(1,867
)
 
$
346

 
$
46

 
$

As of September 30, 2015, the Company expects $1.9 million of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three and nine month periods ended September 30, 2015 and 2014, net gains or losses realized on previously unrealized net gains or losses from hedges that had been discontinued were not significant.
 

16



10.
The Company sponsors noncontributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants, and based on plan changes announced in 2006, pay for active plan participants was frozen as of December 31, 2007. Beginning in the first quarter of 2014, with the exception of plan participants at two of Tredegar’s U.S. manufacturing facilities, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing future benefits under the plan.

The components of net periodic benefit cost for our pension and other post-retirement benefit programs reflected in consolidated results are shown below:
 
Pension Benefits
 
Other Post-Retirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
(In Thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
110

 
$
109

 
$
9

 
$
13

Interest cost
3,288

 
3,365

 
77

 
93

Expected return on plan assets
(4,413
)
 
(4,610
)
 

 

Amortization of prior service costs, gains or losses and net transition asset
4,094

 
2,388

 
(65
)
 
(76
)
Net periodic benefit cost
$
3,079

 
$
1,252

 
$
21

 
$
30

 
Pension Benefits
 
Other Post-Retirement Benefits
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
398

 
$
758

 
$
33

 
$
39

Interest cost
9,913

 
10,048

 
244

 
279

Expected return on plan assets
(13,227
)
 
(13,726
)
 

 

Amortization of prior service costs, (gains) losses and net transition asset
12,142

 
8,016

 
(145
)
 
(230
)
Curtailment charge

 
81

 

 

Net periodic benefit cost
$
9,226

 
$
5,177

 
$
132

 
$
88

Pension and other post-retirement liabilities were $99.5 million and $104.8 million at September 30, 2015 and December 31, 2014, respectively ($0.6 million included in “Accrued expenses” at September 30, 2015 and December 31, 2014, with the remainder included in “Other noncurrent liabilities” in the consolidated balance sheets). The Company’s required contributions are expected to be approximately $2.4 million in 2015. At September 30, 2015, current year contributions to the underfunded pension plan were $2.3 million. Tredegar funds its other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which the Company anticipates will be consistent with amounts paid for the year ended December 31, 2014, or $0.3 million.
 
11.
Tredegar has historically reported two business segments, Film Products and Aluminum Extrusions. In the third quarter of 2015, the Company divided Film Products into two separate operating segments, PE Films and Flexible Packaging Films. PE Films is comprised of personal care materials, surface protection films, polyethylene overwrap films and films for other markets, and Flexible Packaging Films is comprised of the Company’s polyester films business, Terphane Holdings, LLC (“Terphane”), that was acquired by Film Products in October 2011. As part of its transition to a new executive leadership team, the Company’s management has decided to discontinue its efforts to integrate Terphane with its other film products operations. In separating PE Films and Flexible Packaging Films, the Company’s management believes that it will be able to more effectively manage the distinct opportunities and challenges that each of these businesses face. Therefore, the Company's business segments are now PE Films, Flexible Packaging Films and Aluminum Extrusions. All historical results for PE Films and Flexible Packaging Films have been separately presented to conform with the new presentation of segments.

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 operating decision maker for purposes of assessing performance.
    
    


17



The following table presents net sales and operating profit by segment for the three and nine month periods ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
2015
 
2014
 
2015
 
2014
Net Sales
 
 
 
 
 
 
 
PE Films
$
93,943

 
$
115,155

 
$
292,259

 
$
354,892

Flexible Packaging Films
27,155

 
27,943

 
77,339

 
83,382

Aluminum Extrusions
94,812

 
89,605

 
286,660

 
253,436

Total net sales
215,910

 
232,703

 
656,258

 
691,710

Add back freight
7,862

 
7,726

 
22,930

 
20,897

Sales as shown in the Consolidated Statements of Income
223,772

 
240,429

 
679,188

 
712,607

Operating Profit
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
Ongoing operations
9,745

 
14,471

 
35,849

 
47,174

Plant shutdowns, asset impairments, restructurings and other
(2,044
)
 
(113
)
 
(2,051
)
 
(12,281
)
Flexible Packaging Films:
 
 
 
 
 
 
 
Ongoing operations
4,102

 
(1,265
)
 
1,793

 
(2,283
)
Plant shutdowns, asset impairments, restructurings and other

 
(297
)
 
(185
)
 
(297
)
Goodwill impairment charge
(44,465
)
 

 
(44,465
)
 

Aluminum Extrusions:
 
 
 
 
 
 
 
Ongoing operations
7,272

 
5,752

 
20,863

 
18,563

Plant shutdowns, asset impairments, restructurings and other
(331
)
 
(126
)
 
(364
)
 
(300
)
Total
(25,721
)
 
18,422

 
11,440

 
50,576

Interest income
76

 
117

 
247

 
419

Interest expense
901

 
590

 
2,679

 
1,751

Gain (loss) on investment accounted for under fair value method

 
4,000

 

 
2,900

Gain on sale of investment property

 

 

 
1,208

Stock option-based compensation costs
73

 
358

 
571

 
944

Corporate expenses, net
6,722

 
5,477

 
25,632

 
17,291

Income (loss) from continuing operations before income taxes
(33,341
)
 
16,114

 
(17,195
)
 
35,117

Income taxes from continuing operations
3,382

 
5,369

 
9,064

 
12,141

Income (loss) from continuing operations
(36,723
)
 
10,745

 
(26,259
)
 
22,976

Income (loss) from discontinued operations, net of tax

 
850

 

 
850

Net income (loss)
$
(36,723
)
 
$
11,595

 
$
(26,259
)
 
$
23,826

The following table presents identifiable assets by segment at September 30, 2015 and December 31, 2014:
(In Thousands)
September 30, 2015
 
December 31, 2014
PE Films
$
274,180

 
$
283,606

Flexible Packaging Films
149,510

 
262,604

Aluminum Extrusions
145,717

 
143,328

Subtotal
569,407

 
689,538

General corporate
48,338

 
49,032

Cash and cash equivalents
46,609

 
50,056

Total
$
664,354

 
$
788,626


18




12.
Tredegar recorded a tax expense of $9.1 million on pre-tax net losses from continuing operations of $17.2 million in the first nine months of 2015 due to a non-deductible goodwill impairment charge of $44.5 million. Therefore, the effective tax rate from continuing operations in the first nine months of 2015 was (52.7)%, compared to 34.6% in the first nine months of 2014. The significant differences between the U.S. federal statutory rate and the effective income tax rate from continuing operations for the nine months ended September 30, 2015 and 2014 are as follows, with impact of such items in 2015 being reversed as a result of current-year pre-tax net losses from continuing operations:
 
Percent of Income
Before Income Taxes
Nine Months Ended September 30,
2015
 
2014
Income tax expense at federal statutory rate
35.0

 
35.0

Domestic production activities deduction
5.1

 
(2.1
)
Changes in estimates related to prior year tax provision
2.9

 
(0.4
)
Foreign rate differences
2.8

 
(1.2
)
Valuation allowance for capital loss carry-forwards
1.8

 
(0.2
)
Foreign tax incentives

 
(0.1
)
Valuation allowance for foreign operating loss carry-forwards
(1.0
)
 
(1.1
)
Non-deductible expenses
(1.7
)
 
0.2

Unremitted earnings from foreign operations
(2.0
)
 
1.2

State taxes, net of federal income tax benefit
(2.4
)
 
1.6

Income tax contingency accruals and tax settlements
(2.8
)
 
1.8

Goodwill impairment charge
(90.5
)
 

Other
0.1

 
(0.1
)
Effective income tax rate from continuing operations
(52.7
)
 
34.6

In 2014, the Brazilian federal statutory income tax rate was a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These incentives produced a current effective tax rate of 15.25% for Terphane Ltda. (6.25% of income tax and 9.0% social contribution on income). These incentives had previously expired at the end of 2014. In September 2015, the local Brazilian authorities renewed these tax incentives. The incentives have been granted for a 10-year period, which has a retroactive commencement date of January 1, 2015. The benefit from tax incentives was $0.1 million (0 cents per share) in the first nine months of 2014 (none in the first nine months of 2015).
In connection with its capacity expansion project in Brazil, the Company paid certain social taxes associated with the purchase of machinery and equipment and construction of buildings and other long-term assets. Payments of these taxes in Brazil were included in “Net cash used in investing activities” given the nature of the underlying use of cash (e.g. the purchase of property, plant and equipment). The Company can recover tax credits associated with the purchase of machinery and equipment at different points over a period up to 24 months. Once the machinery and equipment was placed into service in the fourth quarter of 2014, the Company started applying these tax credits against various other taxes due in Brazil, with their recovery being reflected as cash received from investing activities, consistent with the classification of the original payments.
Income taxes in 2015 included a partial reversal of a valuation allowance of $0.3 million related to the expected limitations on the utilization of assumed capital losses on certain investments that were recognized in prior years. Income taxes in 2014 included the partial reversal of a valuation allowance of $0.1 million related to the expected limitations on the utilization of assumed capital losses on certain investments. The Company has a valuation allowance for excess capital losses from investments and other related items of $11.1 million at September 30, 2015. Tredegar continues to evaluate opportunities to utilize these loss carryforwards prior to their expiration at various dates in the future. As events and circumstances warrant, allowances will be reversed when it is more likely than not that future taxable income will exceed deductible amounts, thereby resulting in the realization of deferred tax assets.
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. With few exceptions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2012.


19



13.
On March 31, 2015, Tredegar entered into Amendment No. 2 (the “Amendment”) to its $350 million five-year, unsecured revolving credit facility (as amended, the “Credit Agreement”) dated as of April 23, 2012. The Amendment removes the negative covenant prohibiting Consolidated Stockholders’ Equity, at any time, to be less than $320 million increased on a cumulative basis at the end of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2012, by an amount equal to 50% of Consolidated Net Income (to the extent positive) for the fiscal quarter then ended.
14.
Pursuant to the Second Amended and Restated Rights Agreement (the “Rights Agreement”), dated as of November 18, 2013, with Computershare Trust Company, N.A., as Rights Agent, one purchase right (a “Right”) was attached to each outstanding share of the Company’s Common Stock.  Each Right entitled the registered holder to purchase from Tredegar one one-hundredth of a share of our Series A Participating Cumulative Preferred Stock (the “Preferred Stock”) at an exercise price of $150, subject to adjustment. Unless otherwise noted in the Rights Agreement, the Rights would have become exercisable, if not earlier redeemed, only if a person or group (i) acquired beneficial ownership of 20% or more of the outstanding shares of our Common Stock or (ii) commenced, or publicly disclosed an intention to commence, a tender offer or exchange offer that would have resulted in beneficial ownership by a person or group of 20% or more of the outstanding shares of our Common Stock. 
 
On February 19, 2014, the Company’s Board of Directors authorized the termination of the Rights Agreement and the redemption of all of the outstanding Rights, at a redemption price of $.01 per Right to be paid in cash to shareholders of record as of the close of business on March 3, 2014. The corresponding redemption payment of $0.3 million was made in the first quarter of 2014.
15.
In November 2009, 3M filed a patent infringement complaint in the United States District Court for the District of Minnesota (“Minnesota District Court”) against the Company’s film products business. The complaint alleged infringement upon elastic film technology patents held by 3M and sought unspecified compensatory and enhanced damages associated with our sales of certain elastic film product lines, which include our FabriFlex™ and FlexFeel™ family of products.
The Company and 3M settled all pending matters between the parties related to the patent infringement lawsuits filed by 3M. While the Company is confident in its position on the issues, because of the inherent risks associated with litigating patent lawsuits and the significant legal expenses expected to be incurred, the Company, without any admission of wrongdoing or fault of any kind, entered into a non-exclusive worldwide license agreement with 3M on June 26, 2014 for certain elastic film products, and on June 30, 2014, made a one-time, lump-sum payment of $10 million to 3M.
In 2011, Tredegar was notified by U.S. Customs and Border Protection (“U.S. Customs”) that certain film products exported by Terphane to the U.S. since November 6, 2008 could be subject to duties associated with an antidumping duty order on imported PET films from Brazil.  The Company contested the applicability of these antidumping duties to the films exported by Terphane, and it filed a request with the U.S. Department of Commerce (“Commerce”) for clarification about whether the film products at issue are within the scope of the antidumping duty order.  On January 8, 2013, Commerce issued a scope ruling confirming that the films are not subject to the order, provided that Terphane can establish to the satisfaction of U.S. Customs that the performance enhancing layer on those films is greater than 0.00001 inches thick.  The films at issue are manufactured to specifications that exceed that threshold.  On February 6, 2013, certain U.S. producers of PET film filed a summons with the U.S. Court of International Trade to appeal the scope ruling from Commerce.  If U.S. Customs ultimately were to require the collection of anti-dumping duties because Commerce’s scope ruling was overturned on appeal, or otherwise, indemnifications for related liabilities are specifically provided for under the purchase agreement pursuant to which the Company acquired Terphane. In December 2014, the U.S. International Trade Commission voted to revoke the anti-dumping duty order on imported PET films from Brazil. The revocation, as a result of the vote by the U.S. International Trade Commission, was effective as of November 2013. On February 20, 2015, certain U.S. producers of PET films filed a summons with the U.S. Court of International Trade to appeal the determination by the U.S. International Trade Commission.



20



16.
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) issued their converged standard on revenue recognition. The revised revenue standard contains principles that an entity will apply to direct the measurement of revenue and timing of when it is recognized. The core principle of the guidance is that the recognition of revenue should depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity will utilize a principle-based five-step approach model. The converged standard also includes more robust disclosure requirements which will require entities to provide sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB delayed the effective date of this revised standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The converged standard can be adopted either retrospectively or through the use of a practical expedient. The Company is still assessing the impact of this new guidance.
In June 2014, the FASB issued a new standard to eliminate the concept of development stage entities and all related specified presentation and reporting requirements under U.S. GAAP. In addition, the amended standard eliminated the scope exception for development stage entities when evaluating the sufficiency of equity at risk for a variable interest entity (“VIE”), thereby changing consolidation conclusions in some situations. Except for the elimination of the scope exception for development stage entities when evaluating the sufficiency of equity at risk for a VIE, the revised guidance is effective for annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. The amendments to the consolidation guidance are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The new standard is not expected to impact the Company.
In April 2015, the FASB issued new guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that corresponding debt liability, consistent with debt discounts, rather than as a deferred charge (e.g. an asset). The new guidance did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB issued updated guidance that stated in the absence of authoritative guidance, debt issuance costs associated with line-of-credit arrangements could continue to be deferred and presented as an asset over the corresponding amortization period. The new guidance will be effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The guidance requires that all prior period balance sheets be adjusted retrospectively, and early adoption is permitted. The Company expects to adopt the guidance by the first quarter of 2016. Deferred debt issuance costs associated with the Company’s Credit Agreement were $0.9 million and $1.1 million (included in “Other assets and deferred charges” in the consolidated balance sheet) at September 30, 2015 and December 31, 2014, respectively. The Company does not anticipate that this guidance will impact its consolidated balance sheet as its current debt issuance costs are associated with a revolving line of credit.
In May 2015, the FASB issued new guidance for investments measured at net asset value (“NAV”). Under the new guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate diversity in practice that currently exists with respect to the categorization of these investments. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public business entities. Early adoption is permitted, including for financial statement periods that have not yet been issued. The Company is currently assessing the impact of this new guidance on its disclosures.
In July 2015, the FASB issued new guidance for the measurement of inventories. Inventories within the scope of the revised guidance should be measured at the lower of cost or net realizable value. The previous guidance dictated that inventory should be measured at the lower of cost or market, with market either replacement cost, net realizable value or net realizable value less an approximation of normal profit margin. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventories measured using LIFO or the retail inventory method. The amended guidance is effective for fiscal years beginning after December 31, 2016, including the interim periods within those fiscal years. The amendments should be applied prospectively, with early adoption permitted. The Company is still assessing the impact of this revised guidance.
In September 2015, the FASB issued new guidance associated with accounting for adjustments to provisional amounts recognized in a business combination. To simplify the accounting for adjustments made to provisional amounts, the updated standard requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is

21



required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. An entity is also required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The revised guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to adjustments to provisional amounts that occur after adoption. The Company will apply this guidance in accounting for future business combinations.




22



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 (“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 using the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, Tredegar does so to identify forward-looking statements. Such statements are based on 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 actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ from expectations include, without limitation: acquired businesses, including Terphane Holdings LLC (“Terphane”) and AACOA, Inc. (“AACOA”), may not achieve expected levels of revenue, profit, productivity or otherwise perform as expected; acquisitions, including the acquisitions of Terphane and AACOA, involve special risks, including without limitation, diversion of management’s time and attention to the Company’s existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements; PE Films is highly dependent on sales to one customer — The Procter & Gamble Company (“P&G”) and PE Films may not be able to mitigate the impact of the expected decline in net sales to P&G on operating profit from ongoing operations; growth of PE Films 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 building and construction sector, and are also subject to seasonal slowdowns; Aluminum Extrusions’ efforts to expand product offerings and broaden its customer base may not be successful; substantial international operations subject Tredegar to risks of doing business in countries outside the U.S., which could adversely affect Tredegar’s business, financial condition and results of operations; future performance is influenced by costs incurred by Tredegar’s operating companies, including, for example, the cost of energy and raw materials; and the other 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 2014 Annual Report on Form 10-K (the “2014 Form 10-K”) filed with the SEC. Readers are urged to review and carefully consider the disclosures Tredegar makes in its filings with the SEC, including the 2014 Form 10-K. Tredegar does not undertake, and expressly disclaims any duty, 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, except as required by applicable law.
References herein to “Tredegar,” “the Company,” “we,” “us” and “our” are to Tredegar Corporation and its subsidiaries, collectively, unless the context otherwise indicates or requires.
Executive Summary
Third-quarter 2015 net losses from continuing operations were $36.7 million ($1.13 per share) compared with net income from continuing operations of $10.7 million (33 cents per share) in the third quarter of 2014. Net losses from continuing operations were $26.3 million (81 cents per share) in first nine months of 2015, and net income from continuing operations was $23.0 million (70 cents per share) in the first nine months of 2014. Losses related to plant shutdowns, asset impairments, restructurings and other items are described in Note 4 on page 7. Net sales (sales less freight) and operating profit (loss) 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.
Tredegar has historically reported two business segments, Film Products and Aluminum Extrusions. In the third quarter of 2015, the Company divided Film Products into two separate operating segments, PE Films and Flexible Packaging Films. PE Films is comprised of personal care materials, surface protection films, polyethylene overwrap films and films for other markets, and Flexible Packaging Films is comprised of the Company’s polyester films business, Terphane, that was acquired by Film Products in October 2011. As part of its transition to a new executive leadership team, the Company’s management has decided to discontinue its efforts to integrate Terphane with its other film products operations. In separating PE Films and Flexible Packaging Films, the Company’s management believes that it will be able to more effectively manage the distinct opportunities and challenges that each of these businesses face. Therefore, the Company's business segments are now PE Films, Flexible Packaging Films and Aluminum Extrusions. All historical results for PE Films and Flexible Packaging Films have been separately presented to conform with the new presentation of segments.

23





The following table presents Tredegar’s net sales and operating profit by segment for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
2015
 
2014
 
2015
 
2014
Net Sales
 
 
 
 
 
 
 
PE Films
$
93,943

 
$
115,155

 
$
292,259

 
$
354,892

Flexible Packaging Films
27,155

 
27,943

 
77,339

 
83,382

Aluminum Extrusions
94,812

 
89,605

 
286,660

 
253,436

Total net sales
215,910

 
232,703

 
656,258

 
691,710

Add back freight
7,862

 
7,726

 
22,930

 
20,897

Sales as shown in the Consolidated Statements of Income
223,772

 
240,429

 
679,188

 
712,607

Operating Profit
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
Ongoing operations
9,745

 
14,471

 
35,849

 
47,174

Plant shutdowns, asset impairments, restructurings and other
(2,044
)
 
(113
)
 
(2,051
)
 
(12,281
)
Flexible Packaging Films:
 
 
 
 
 
 
 
Ongoing operations
4,102

 
(1,265
)
 
1,793

 
(2,283
)
Plant shutdowns, asset impairments, restructurings and other

 
(297
)
 
(185
)
 
(297
)
Goodwill impairment charge
(44,465
)
 

 
(44,465
)
 

Aluminum Extrusions:
 
 
 
 
 
 
 
Ongoing operations
7,272

 
5,752

 
20,863

 
18,563

Plant shutdowns, asset impairments, restructurings and other
(331
)
 
(126
)
 
(364
)
 
(300
)
Total
(25,721
)
 
18,422

 
11,440

 
50,576

Interest income
76

 
117

 
247

 
419

Interest expense
901

 
590

 
2,679

 
1,751

Gain (loss) on investment accounted for under fair value method

 
4,000

 

 
2,900

Gain on sale of investment property

 

 

 
1,208

Stock option-based compensation costs
73

 
358

 
571

 
944

Corporate expenses, net
6,722

 
5,477

 
25,632

 
17,291

Income (loss) from continuing operations before income taxes
(33,341
)
 
16,114

 
(17,195
)
 
35,117

Income taxes from continuing operations
3,382

 
5,369

 
9,064

 
12,141

Income (loss) from continuing operations
(36,723
)
 
10,745

 
(26,259
)
 
22,976

Income (loss) from discontinued operations, net of tax

 
850

 

 
850

Net income (loss)
$
(36,723
)
 
$
11,595

 
$
(26,259
)
 
$
23,826


24



PE Films
A summary of operating results from ongoing operations for PE Films is provided below:
 
Three Months Ended
 
Favorable/
(Unfavorable)
% Change
 
Nine Months Ended
 
Favorable/
(Unfavorable)
% Change
(In Thousands, Except Percentages)
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
Sales volume (lbs)
40,023

 
44,283

 
(9.6
)%
 
121,866

 
133,871

 
(9.0
)%
Net sales
$
93,943

 
$
115,155

 
(18.4
)%
 
$
292,259

 
$
354,892

 
(17.6
)%
Operating profit from ongoing operations
$
9,745

 
$
14,471

 
(32.7
)%
 
$
35,849

 
$
47,174

 
(24.0
)%
Third-Quarter Results vs. Prior Year Third Quarter
Net sales (sales less freight) in the third quarter of 2015 decreased by $21.2 million versus 2014 primarily due to:
The loss of business with PE Films’ largest customer related to various product transitions in personal care materials (approximately $6.1 million);
A decline in volumes for the remaining portion of personal care materials and within polyethylene overwrap films (approximately $6.9 million);
A decline in volumes in surface protection films that is believed to be associated with customer inventory corrections (approximately $0.9 million); and
The unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. (approximately $7.2 million).
As noted above, current year sales volumes have declined as a result of the wind down of shipments for certain personal care materials due to various product transitions and business lost, primarily with PE Films’ largest customer. In addition, efforts to consolidate domestic manufacturing facilities in PE Films commenced in the third quarter of 2015. This restructuring project is not expected to be completed until the middle of 2017, and once complete, annual pre-tax cash cost savings are expected to be approximately $5-6 million. The table below summarizes the pro forma operating profit from ongoing operations for the third quarters of 2015 and 2014, had the impact of the events noted above been fully realized:
 
Operating Profit from
Ongoing Operations
 
Three Months Ended September 30,
(In Thousands)
2015
2014
Operating profit from ongoing operations, as reported
$
9,745

$
14,471

Contribution to operating profit from ongoing operations associated with business lost:
 
 
Certain babycare elastic films sold in North America

248

Product transitions & other losses before restructurings & fixed costs reduction
3,023

5,182

Operating profit from ongoing operations net of the impact of business that will be fully eliminated in future periods
6,722

9,041

Estimated future benefit of North American facility consolidation
1,300

1,300

Pro forma estimated operating profit from ongoing operations
$
8,022

$
10,341

Net sales associated with lost business and product transitions that have yet to be fully eliminated were approximately $8.4 million and $16.1 million in the third quarters of 2015 and 2014, respectively. The competitive dynamics in PE Films require continuous development of new materials to improve cost and performance for customers. PE Films anticipates additional exposure to product transitions and lost business in certain personal care materials, and the estimated additional exposure to future operating profit from ongoing operations relating to such is approximately $10 million annually, which would not likely occur until after 2017.
    Net of the impact of product transitions and business lost, pro forma estimated operating profit from ongoing operations in the third quarter of 2015 decreased by $2.3 million versus the third quarter of 2014. The decrease can be primarily attributed to lower volumes and customer pricing pressures in polyethylene overwrap films (approximately $1.0

25



million), the unfavorable impact from the change in the U.S. dollar value of currencies for operations outside the U.S. (approximately $0.8 million) and higher selling, research and development (“R&D”) and general expenses (approximately $0.4 million).
Year-To-Date Results vs. Prior Year-To-Date
Net sales in the first nine months of 2015 decreased by $62.6 million versus 2014 primarily due to:
The loss of business to PE Films’ largest customer related to certain babycare elastic laminate films sold in North America (approximately $17.1 million) and to the unfavorable impact of various product transitions in personal care materials (approximately $13.1 million);
Volume declines for the remaining portion of personal care materials and within polyethylene overwrap films, partially offset by higher volumes in surface protection films (approximately $7.0 million);
The unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. (approximately $20.2 million); and
Estimated reductions in average selling prices attributable to the unfavorable impact of competitive pricing pressures and the contractual pass-through of lower average resin prices (approximately $5.2 million).
Consistent with the pro forma information provided for quarter-to-date operating results, the table below summarizes the pro forma operating results for the first nine months of 2015 and 2014 had the impact of various product transitions and lost business and efforts to consolidate domestic PE Films manufacturing facilities been fully realized:
 
Operating Profit from
Ongoing Operations
 
Nine Months Ended September 30,
(In Thousands)
2015
2014
Operating profit from ongoing operations, as reported
$
35,849

$
47,174

Contribution to operating profit from ongoing operations associated with business lost:
 
 
Certain babycare elastic films sold in North America

2,106

Product transitions & other losses before restructurings & fixed costs reduction
10,638

17,746

Operating profit from ongoing operations net of the impact of business that will be fully eliminated in future periods
25,211

27,322

Estimated future benefit of North American facility consolidation
3,900

3,900

Pro forma estimated operating profit from ongoing operations
$
29,111

$
31,222

Net sales associated with lost business and product transitions that have yet to be fully eliminated were approximately $32.1 million and $52.0 million in the first nine months of 2015 and 2014, respectively.
Net of the impact of product transitions and business lost, pro forma estimated operating profit from ongoing operations in the first nine months of 2015 decreased by $2.1 million versus the first nine months of 2014, primarily due to:
Lower volumes in polyethylene overwrap films and other personal care materials, partially offset by higher volumes in surface protection films, of approximately $2.8 million;
The unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. of approximately $3.2 million;
The estimated favorable impact from the quarterly lag in the pass-through of average resin costs of approximately $0.7 million; and
Other factors with a favorable impact of approximately $3.2 million, primarily lower depreciation expense and other cost savings, partially offset by lower margins from competitive pricing pressures.

26



Capital Expenditures, Depreciation & Amortization
Capital expenditures in PE Films were $13.8 million in the first nine months of 2015 compared to $10.8 million in the first nine months of 2014. Current year capital expenditures include a project to expand surface protection films capacity in China, and the Company previously announced a project to invest $10 million in new assets in Europe to provide elastic film capabilities to customers in Europe, the Middle East and Africa. PE Films currently estimates that capital expenditures in 2015 will total approximately $21 million, including approximately $10 million for routine capital expenditures required to support operations. Depreciation expense was $12.1 million in the first nine months of 2015 and $16.4 million in the first nine months of 2014. Depreciation expense is projected to be approximately $16 million in 2015. Amortization expense was $0.1 million in the first nine months of 2015 and $0.2 million in the first nine months of 2014, and is projected to be approximately $0.1 million in 2015.
Restructuring
PE Films believes that most of its growth in the demand for its products will come from markets outside of North America. In recent years, PE Films has made significant capacity investments in foreign markets to better meet its customers’ desire for local supply. With increasing levels of production shifting to the PE Films manufacturing facilities located outside of North America, PE Films believes that consolidating its domestic PE Films manufacturing facilities provides an opportunity to reduce fixed manufacturing costs.
On July 7, 2015, the Company announced its intention to consolidate its domestic production for PE Films by restructuring its manufacturing facility in Lake Zurich, Illinois. Efforts to transition domestic production from the Lake Zurich manufacturing facility will require various machinery upgrades and equipment transfers to its other manufacturing facilities. Given PE Films’ focus on maintaining product quality and customer satisfaction, the Company anticipates that these activities will require 21-24 months to execute. Total pre-tax cash expenditures associated with restructuring the Lake Zurich manufacturing facility are expected to be approximately $13-14 million over this period, and once complete, annual pre-tax cash cost savings are expected to be approximately $5-6 million.
The Company expects to recognize costs associated with the exit and disposal activities of approximately $4-5 million over a 21-24 month period. Exit and disposal costs include severance charges and other employee-related expenses arising from the termination of employees of approximately $2-3 million and equipment transfers and other facility consolidation-related costs of approximately $2 million. During the same period of time, operating expenses will include the acceleration of approximately $3 million of non-cash depreciation expense for certain machinery and equipment at the Lake Zurich manufacturing facility.
Total estimated cash expenditures of $13-14 million over a 21-24 month period include the following:
Cash outlays associated with previously discussed exit and disposal expenses of approximately $4 million;
Capital expenditures associated with equipment upgrades at other PE Films manufacturing facilities in the United States of approximately $8 million;
Cash incentives of approximately $1 million in connection with meeting safety and quality standards while production ramps down at the Lake Zurich manufacturing facility; and
Additional operating expenses of approximately $1 million associated with customer product qualifications on upgraded and transferred production lines.

Flexible Packaging Films
The operations of Flexible Packaging Films, which is also referred to as Terphane, continue to be adversely impacted by competitive pressures that are primarily related to ongoing unfavorable economic conditions in its primary market of Brazil and excess global capacity in the industry. The Company believes that these conditions have shifted the competitive environment from a regional to a global landscape and have driven price convergence and lower product margins for Terphane in Brazil. While recent favorable anti-dumping rulings have been issued against China, Egypt and India, authorities in Brazil have initiated new investigations of dumping against Peru and Bahrain. In light of market trends, increased economic uncertainty and continued dumping activity in Brazil, the Company reassessed its projections for the timing and extent of a market recovery for Terphane in the third quarter of 2015.

27



    The Company’s assessment of Terphane’s future prospects and timing of a recovery under these conditions indicate that its current enterprise value is less than approximately $120 million (Terphane’s net assets excluding goodwill and tradenames), the minimum value needed to have avoided a full write-off of its goodwill. Accordingly, an impairment charge of $44.5 million was recognized in the third quarter of 2015 to write-off the Terphane goodwill.
Flexible Packaging Films had net sales and adjusted EBITDA for the twelve months ended September 30, 2015 of $108 million (sales of $114 million less freight expense of $6 million) and $11.4 million (operating profit from ongoing operations of $1.1 million plus depreciation and amortization expense of $10.3 million), respectively. The adjusted EBITDA benefited from non-operational items related to refunds of previously paid duties applied to films imported into the U.S. ($1.2 million) and foreign currency transaction gains associated with U.S. dollar denominated export sales in Brazil ($4.3 million). While the Company uses adjusted EBITDA as a primary valuation metric, it is a non-GAAP financial measure that is not intended to represent net income (loss) or cash flows from operations as defined under U.S. GAAP and should not be considered as either an alternative to net income (loss) (as an indicator of operating performance) or to cash flow (as a measure of liquidity).
A summary of operating results from ongoing operations for Flexible Packaging Films, which excluded the previously noted goodwill impairment charge, is provided below:
 
Three Months Ended
 
Favorable/
(Unfavorable)
% Change