10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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 at least the past 90 days.    Yes  x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨.
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. (Check one):
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 Act).    Yes  ¨    No  x
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter): $560,178,695*
Number of shares of Common Stock outstanding as of January 30, 2016: 32,682,162 (32,705,198 as of June 30, 2015)
*
In determining this figure, an aggregate of 7,369,210 shares of Common Stock beneficially owned by Floyd D. Gottwald, Jr., John D. Gottwald, William M. Gottwald and the members of their immediate families has been excluded because the shares are deemed to be held by affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange on June 30, 2015.





Documents Incorporated By Reference
Portions of the Tredegar Corporation Proxy Statement for the 2016 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
Index to Annual Report on Form 10-K
Year Ended December 31, 2015
 
 
 
Page
 
 
 
 
Part I
 
 
 
Item 1.
Business
 
1-4
Item 1A.
Risk Factors
 
5-9
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceedings
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Part II
 
 
 
Item 5.
Market for Tredegar’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
11-12
Item 6.
Selected Financial Data
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.
Financial Statements and Supplementary Data
 
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A.
Controls and Procedures
 

Item 9B.
Other Information
 
 
 
 
 
Part III
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance*
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 

Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
Principal Accounting Fees and Services
 
 
 
 
 
Part IV
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
*Items
11, 13 and 14 and portions of Items 10 and 12 are incorporated by reference from the Proxy Statement.





PART I
Item 1.
BUSINESS
Description of Business
Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in the manufacture of polyethylene (“PE”) plastic films, polyester (“PET”) films and aluminum extrusions. The financial information related to Tredegar’s PE films, PET films and aluminum extrusions segments and related geographical areas included in Note 5 of the Notes to Financial Statements is incorporated herein by reference. Unless the context requires otherwise, all references herein to “Tredegar,” “the Company,” “we,” “us” or “our” are to Tredegar Corporation and its consolidated subsidiaries.
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 reportable segments: PE Films and Flexible Packaging Films. As part of its transition to a new executive leadership team, the Company’s management decided to discontinue its efforts to integrate Terphane Holdings, LLC (“Terphane”) with its PE 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 reportable business segments are now PE Films, Flexible Packaging Films and Aluminum Extrusions.
PE Films
PE Films manufactures plastic films, elastics and laminate materials primarily utilized in personal care materials, surface protection films and specialty and optical lighting applications. These products are manufactured at facilities in the United States (“U.S.”), The Netherlands, Hungary, China, Brazil and India. PE Films competes in all of its markets on the basis of product innovation, quality, price and service.
Personal Care Materials. PE Films is one of the largest global suppliers of apertured, breathable, elastic and embossed films, laminate materials, and polyethylene and polypropylene overwrap films for personal care markets, including:
Apertured film and laminate materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinence products (including materials sold under the ComfortAire™, ComfortFeel™ and FreshFeel™ brand names);
Breathable, embossed and elastic materials for use as components for baby diapers, adult incontinence products and feminine hygiene products (including elastic components sold under the ExtraFlex™, FabriFlex™, FlexAire™ and FlexFeel™ brand names);
Absorbent transfer layers for baby diapers and adult incontinence products sold under the AquiDry® and AquiDry Plus™ brand names;
Thin-gauge films that are readily printable and convertible on conventional processing equipment for overwrap for bathroom tissue and paper towels; and
Polypropylene films for various industrial applications, including tape and automotive protection.
In 2015, 2014 and 2013, personal care materials accounted for approximately 33%, 40% and 43% of Tredegar’s consolidated net sales (sales less freight) from continuing operations, respectively.
Surface Protection Films. PE Films produces single- and multi-layer surface protection films sold under the UltraMask®, ForceField and ForceField PEARL brand names. These films are used in high-technology applications, most notably protecting high-value components of flat panel displays used in televisions, monitors, notebooks, smart phones, tablets, e-readers and digital signage, during the manufacturing and transportation process. In 2015, 2014 and 2013, surface protection films accounted for approximately 10% of Tredegar’s consolidated net sales (sales less freight) from continuing operations.
Engineered Polymer Solutions. PE Films also makes a variety of specialty films and film-based products that provide tailored functionality for the illumination market as well as various other markets. Bright View Technologies Corporation (“Bright View”), a wholly owned subsidiary of Tredegar, is a developer and producer of advanced optical management products for the LED (light-emitting diode) and fluorescent lighting markets. By leveraging multiple technology platforms, including film capabilities and its patented microstructure technology, Bright View offers engineered solutions for a wide range of applications.

1



PE Films’ net sales by market segment over the last three years is shown below:
% of PE Films Net Sales by Market Segment *
 
2015
 
2014
 
2013
Personal care materials
75
%
 
79
%
 
81
%
Surface protection films
23
%
 
19
%
 
18
%
Engineered polymer solutions
2
%
 
2
%
 
1
%
Total
100
%
 
100
%
 
100
%
 
 
 
 
 
 
* See previous discussion by market segment for comparison of net sales to the Company’s consolidated net sales (sales less freight) from continuing operations for significant market segments for each of the years presented.
Raw Materials. The primary raw materials used by PE Films in polyethylene and polypropylene films are low density, linear low density and high density polyethylene and polypropylene resins. All of these raw materials are obtained from domestic and foreign suppliers at competitive prices, and PE Films believes that there will be an adequate supply of polyethylene and polypropylene resins in the foreseeable future. PE Films also buys polypropylene-based nonwoven fabrics based on the resins previously noted and styrenic block copolymers, and it believes there will be an adequate supply of these raw materials in the foreseeable future.
Customers. PE Films sells to many branded product producers throughout the world, with the top five customers comprising 73%, 76% and 82% of its net sales in 2015, 2014 and 2013, respectively. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $164 million in 2015, $221 million in 2014 and $262 million in 2013 (these amounts include film sold to third parties that converted the film into materials used with products manufactured by P&G). P&G and Tredegar have a successful long-term relationship based on cooperation, product innovation and continuous process improvement. For additional information, see “Item 1A. Risk Factors” beginning on page 5.
Flexible Packaging Films
Flexible Packaging Films is comprised of Terphane, which was acquired in October 2011. Flexible Packaging Films produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. These differentiated, high-value films are primarily sold in Latin America and the U.S. under the Terphane® and Sealphane® brand names. Major end uses include food packaging and industrial applications. In 2015, 2014 and 2013, Flexible Packaging Films accounted for approximately 12%, 12% and 14%, respectively, of Tredegar’s consolidated net sales (sales less freight) from continuing operations. Flexible Packaging Films competes in all of its markets on the basis of product quality, price and service.
Raw Materials. The primary raw materials used by Flexible Packaging Films in polyester films are purified terephthalic acid (“PTA”) and monoethylene glycol (“MEG”) to produce the polyester resins. Flexible Packaging Films also purchases additional polyester resins directly from suppliers. All of these raw materials are obtained from domestic and foreign suppliers at competitive prices, and Flexible Packaging Films believes that there will be an adequate supply of polyester resins as well as PTA and MEG in the foreseeable future.
Aluminum Extrusions
The William L. Bonnell Company, Inc., known in the industry as Bonnell Aluminum, and AACOA, Inc., a division of Bonnell Aluminum (together, “Aluminum Extrusions”), produce high-quality, soft-alloy and medium-strength aluminum extrusions primarily for building and construction, automotive, consumer durables, machinery and equipment, electrical and distribution markets. Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted and fabricated aluminum extrusions for sale directly to fabricators and distributors, and it competes primarily on the basis of product quality, service and price. Sales are made predominantly in the U.S.

2



The end-uses in each of Aluminum Extrusions’ primary market segments include:
 
Major Markets
  
End-Uses
 
 
 
Building & construction -nonresidential
  
Commercial windows and doors, curtain walls, storefronts and entrances, walkway covers, ducts, louvers and vents, office wall panels, partitions and interior enclosures, acoustical walls and ceilings, point of purchase displays and pre-engineered structures
 
 
 
Building & construction -residential
 
Shower and tub enclosures, railing and support systems, venetian blinds, swimming pools and storm shutters
 
 
 
Consumer durables
  
Furniture, pleasure boats, refrigerators and freezers, appliances and sporting goods
 
 
 
Machinery & equipment
  
Material handling equipment, conveyors and conveying systems, industrial modular assemblies and medical equipment
 
 
 
Automotive
  
Automotive and light truck structural components, spare parts, after-market automotive accessories, travel trailers and recreation vehicles
 
 
 
Distribution (metal service centers specializing in stock and release programs and custom fabrications to small manufacturers)
  
Various custom profiles including storm shutters, pleasure boat accessories, theater set structures and various standard profiles (including rod, bar, tube and pipe)
 
 
 
Electrical
  
Lighting fixtures, solar panels, electronic apparatus and rigid and flexible conduits
Aluminum Extrusions’ sales volume from continuing operations by market segment over the last three years is shown below:
 
% of Aluminum Extrusions Sales Volume
by Market Segment (Continuing Operations)
 
2015
 
2014
 
2013
Building and construction:
 
 
 
 
 
Nonresidential
58
%
 
59
%
 
60
%
Residential
6
%
 
6
%
 
7
%
Specialty:
 
 
 
 
 
Consumer durables
10
%
 
12
%
 
12
%
Machinery & equipment
7
%
 
7
%
 
7
%
Distribution
5
%
 
5
%
 
4
%
Electrical
4
%
 
4
%
 
4
%
Automotive
10
%
 
7
%
 
6
%
Total
100
%
 
100
%
 
100
%
 
 
In 2015, 2014 and 2013, nonresidential building and construction accounted for approximately 26%, 22% and 19% of Tredegar’s consolidated net sales (sales less freight) from continuing operations, respectively.
Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term contracts. Aluminum Extrusions believes that it has adequate long-term supply agreements for aluminum and other required raw materials and supplies in the foreseeable future.
General
Intellectual Property. Tredegar considers patents, licenses and trademarks to be significant to PE Films. As of December 31, 2015, PE Films held 280 issued patents (81 of which are issued in the U.S.) and 107 trademarks (10 of which are issued in the

3



U.S.). Flexible Packaging Films held 1 patent, which is issued in the U.S. and 14 trademarks (2 of which are issued in the U.S.). Aluminum Extrusions held no U.S. patents and three U.S. trademark registrations. These patents have remaining terms ranging from 1 to 20 years. Tredegar also has licenses under patents owned by third parties.
Research and Development. Tredegar’s spending for research and development (“R&D”) activities in 2015, 2014 and 2013 was primarily related to PE Films. PE Films has technical centers in Durham, North Carolina; Richmond, Virginia; and Terre Haute, Indiana. Flexible Packaging has a technical center in Bloomfield, New York. R&D spending by the Company was approximately $16.2 million, $12.1 million and $12.7 million in 2015, 2014 and 2013, respectively.
Backlog. Backlogs are not material to the operations in PE Films or Flexible Packaging Films. Overall backlog for continuing operations in Aluminum Extrusions was approximately 11.8 million pounds at December 31, 2015 compared to approximately 17.0 million pounds at December 31, 2014, a decrease of 5.2 million pounds, or approximately 30%. Volume for Aluminum Extrusions, which it believes is cyclical in nature, was 170.0 million pounds in 2015, 153.8 million pounds in 2014 and 143.7 million pounds in 2013.
Government Regulation. U.S. laws concerning the environment to which the Company’s domestic operations are or may be subject include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), all as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. Compliance with these laws is an important consideration because Tredegar uses hazardous materials in some of its operations, is a generator of hazardous waste, and wastewater from the Company’s operations is discharged to various types of wastewater management systems. Under CERCLA and other laws, Tredegar may be subject to financial exposure for costs associated with waste management and disposal, even if the Company fully complies with applicable environmental laws.
The U.S. Environmental Protection Agency has adopted regulations under the Clean Air Act relating to emissions of carbon dioxide and other greenhouse gases (“GHG”), including mandatory reporting and permitting requirements. Additional regulations are anticipated. Several of the Company’s manufacturing operations result in emissions or GHG and are subject to the current GHG regulations. The Company’s compliance with these regulations has yet to require significant expenditures. The cost of compliance with any future GHG legislation or regulations is not presently determinable, but Tredegar does not anticipate compliance to have a material adverse effect on its consolidated financial condition, results of operations and cash flows based on information currently available.
Tredegar is also subject to the governmental regulations in the countries where it conducts business.
At December 31, 2015, the Company believes that it was in substantial compliance with all applicable environmental laws, regulations and permits in the U.S. and other countries where it conducts business. Environmental standards tend to become more stringent over time. In order to maintain substantial compliance with such standards, the Company may be required to incur additional expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities. Furthermore, failure to comply with current or future laws and regulations could subject Tredegar to substantial penalties, fines, costs and expenses.
Employees. Tredegar employed approximately 2,800 people at December 31, 2015.
Available Information and Corporate Governance Documents. Tredegar’s Internet address is www.tredegar.com. The Company makes available, free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information filed electronically with the SEC can be accessed on its website at www.sec.gov. In addition, the Company’s Corporate Governance Guidelines, Code of Conduct and the charters of the Audit, Executive Compensation, and Nominating and Governance Committees are available on Tredegar’s website and are available in print, without charge, to any shareholder upon request by contacting Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225. The information on or that can be accessed through the Company’s website is not, and shall not be deemed to be, a part of this report or incorporated into other filings it makes with the SEC.

4



Item 1A.
RISK FACTORS
There are a number of risks and uncertainties that could have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows. The following risk factors should be considered, in addition to the other information included in this Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”), when evaluating Tredegar and its businesses:
General
Tredegar has an underfunded defined benefit (pension) plan. Tredegar sponsors a pension plan that covers certain hourly and salaried employees in the U.S. The plan was substantially frozen to new participants in 2007, and frozen to benefit accruals for active participants in 2014. As of December 31, 2015, the plan was underfunded under U.S. GAAP measures by $93.2 million. Tredegar expects that it will be required to make a cash contribution of approximately $6.1 million to its underfunded pension plan in 2016, and may be required to make higher cash contributions in future periods depending on the level of interest rates and investment returns on plan assets.
U.S. and global economic conditions could have an adverse effect on the consolidated financial condition, results of operations and cash flows of some or all of Tredegar’s operations. As a global entity, the consolidated financial condition, results of operations and cash flows for Tredegar could become more sensitive to changes in macroeconomic conditions, including fluctuations in exchange rates. Sales associated with new products and regions tend to more closely follow the cycles within the economy. Cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from lower customer demand in an economic downturn. Therefore, as such product offerings become a greater part of the Company’s business, its consolidated financial condition, results of operations and cash flows may be adversely impacted by seasonal slowdowns, cyclical downturns in the economy or changes in foreign currency rates.
Noncompliance with any of the covenants in the Company’s $350 million credit facility could result in all debt under the agreement outstanding at such time becoming due and limiting its borrowing capacity, which could have a material adverse effect on consolidated financial condition and liquidity. The credit agreement governing Tredegar’s revolving credit facility contains restrictions and financial covenants that could restrict the Company’s operational and financial flexibility. Failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition and liquidity. Renegotiation of the covenant(s) through an amendment to the revolving credit facility may effectively cure the noncompliance, but may have a negative effect on the Company’s consolidated financial condition or liquidity depending upon how the amended covenant is renegotiated.
Tredegar’s performance is influenced by costs incurred by its operating companies, including, for example, the cost of raw materials and energy. These costs include, without limitation, the cost of resin (the raw material on which PE Films primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), aluminum (the raw material on which Aluminum Extrusions primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin, aluminum and natural gas prices are extremely volatile as shown in the charts in the Quantitative and Qualitative Disclosures section on pages 36-37. The Company attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that higher prices can effectively be passed through to customers or that Tredegar will be able to offset fully or on a timely basis the effects of higher raw material and energy costs through price increases or pass-through arrangements. Further, the Company’s cost control efforts may not be sufficient to offset any additional future declines in revenue or increases in raw material, energy or other costs.
Substantial international operations subject the Company to risks of doing business in countries outside the U.S., which could adversely affect its consolidated financial condition, results of operations and cash flows. Risks inherent in international operations include the following, by way of example: changes in general economic conditions or governmental policies, potential difficulty enforcing agreements and intellectual property rights, modifications in foreign tax laws and incentives, staffing and managing widespread operations and the challenges of complying with a wide variety of laws and regulations, restrictions on international trade or investment, restrictions on the repatriation of income, imposition of additional taxes on income generated outside the U.S., nationalization of private enterprises, unexpected adverse changes in international laws and regulatory requirements and fluctuations in exchange rates. In the countries where Tredegar conducts its operations, significant fluctuations in the foreign currencies relative to the U.S. dollar could have a material impact on its consolidated financial condition, results of operations and cash flows. In addition, while expanding operations into emerging markets provides greater opportunities for growth, there are certain operating risks, as previously noted.

5



Tredegar may not be able to successfully identify, complete or integrate strategic acquisitions. From time to time, the Company evaluates acquisition candidates that fit its business objectives. Acquisitions involve special risks, including, without limitation, meeting revenue, margin, working capital and capital expenditure expectations that substantially drive valuation, diversion of management’s time and attention from existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements.  Acquired businesses may not achieve expected results.
Failure to continue to attract, develop and retain certain senior executive officers, operating company management or other key employees could adversely affect Tredegar’s businesses. The Company depends on its senior executive officers, operating company management and other key personnel to run the businesses. The loss of key personnel could have a material adverse effect on operations. Competition for qualified employees among companies that rely heavily on engineering and technology expertise is intense, and the loss of qualified employees or an inability to attract, retain and motivate highly skilled employees required for the operation and expansion of Tredegar’s businesses could hinder its ability to improve manufacturing operations, conduct research activities successfully and develop marketable products.
Tredegar is subject to various environmental laws and regulations and could become exposed to material liabilities and costs associated with such laws. The Company is subject to various environmental obligations and could become subject to additional obligations in the future. In the case of known potential liabilities, it is management’s judgment that the resolution of ongoing and/or pending environmental remediation obligations is not expected to have a material adverse effect on the Company’s consolidated financial condition or liquidity. In any given period(s), however, it is possible such obligations or matters could have a material adverse effect on the results of operations. Changes in environmental laws and regulations, or their application, including, but not limited to, those relating to global climate change, could subject Tredegar to significant additional capital expenditures and operating expenses. Moreover, future developments in federal, state, local and international environmental laws and regulations are difficult to predict. Environmental laws have become and are expected to continue to become increasingly strict. As a result, Tredegar expects to be subject to new environmental laws and regulations. However, any such changes are uncertain and, therefore, it is not possible for the Company to predict with certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any such changes. See Government Regulation on page 4 for a further discussion of this risk factor.
Material disruptions at one of the Company’s major manufacturing facilities could negatively impact financial results. Tredegar believes its facilities are operated in compliance with applicable local laws and regulations and that the Company has implemented measures to minimize the risks of disruption at its facilities. Such a disruption could be a result of any number of events, including but not limited to: an equipment failure with repairs requiring long lead times, labor stoppages or shortages, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe weather conditions. A material disruption in one of the Company’s operating locations could negatively impact production and its consolidated financial condition, results of operations and cash flows.
An information technology system failure may adversely affect the business. Tredegar relies on information technology systems to help manage business processes, collect and interpret business data and communicate internally and externally with employees, investors, suppliers, customers and others. Some of these information systems are managed by third-party service providers. The Company has backup systems and business continuity plans in place, and takes care to protect its systems and data from unauthorized access. To date, interruptions of our information systems have been infrequent and have not had a material impact on our operations. Nevertheless, an information technology system failure due to computer viruses, internal or external security breaches, power interruptions, hardware failures, fire, natural disasters, human error, or other causes could disrupt operations and prevent the Company from being able to process transactions with its customers, operate its manufacturing facilities, and properly report those transactions in a timely manner. A significant, protracted information technology system failure or cyber attacks or security breaches by parties intent on extracting or corrupting information or otherwise disrupting business processes may result in the loss of revenue, assets or personal or other sensitive data, cause damage to the reputation of the Company and result in legal challenges and significant remediation and other costs to the Company.
Tredegar is subject to credit risk that is inherent with efforts to increase market share as the Company attempts to broaden its customer base. In the event of the deterioration of operating cash flows or diminished borrowing capacity of Tredegar’s customers, the collection of trade receivable balances may be delayed or deemed unlikely. The Company’s credit risk exposure could increase as business is expanded, including on export sales which have payment terms in excess of domestic sales. In addition, the operations of the customers for Aluminum Extrusions generally follow the cycles within the economy, resulting in greater credit risk from diminished operating cash flows and higher bankruptcy rates when the economy is deteriorating or in recession.

6



An inability to renegotiate the Company’s collective bargaining agreements could adversely impact its consolidated financial condition, results of operations and cash flows. Some of the Company’s employees are represented by labor unions under various collective bargaining agreements with varying durations and expiration dates. Tredegar may not be able to satisfactorily renegotiate collective bargaining agreements when they expire, which could result in strikes or work stoppages or higher labor costs. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at the Company’s facilities in the future. Any such work stoppages (or potential work stoppages) could negatively impact Tredegar’s ability to manufacture its products and adversely affect its consolidated financial condition, results of operations and cash flows.
Tredegar’s valuation of its $7.5 million cost-basis investment in kaléo is volatile and uncertain. Tredegar uses the fair value method to account for its 19% ownership interest and investment in kaleo, Inc. (“kaléo”), a private specialty pharmaceutical company. There is no active secondary market for buying or selling ownership interests in kaléo. The Company’s fair value estimates can fluctuate materially between reporting periods, primarily due to variances in performance versus expectations, and kaléo’s ability to meet developmental and commercialization milestones within an anticipated time frame. Commercial sales of kaléo’s first licensed product, an epinephrine auto-injector, commenced in the first quarter of 2013, and commercial sales of its second product, a naloxone auto-injector, commenced in the third quarter of 2014.
In 2009, kaléo licensed exclusive rights to sanofi-aventis U.S. LLC (“Sanofi”) to commercialize the 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 auto-injectors that were previously on the market.  As a result of this recall and its adverse impact on kaléo’s expected future prospects, the Company’s estimated fair value of its investment decreased $20.5 million, or 52%, in the fourth quarter of 2015.
Kaléo may need additional financing as it addresses this recall, attempts to correct the issues with its epinephrine auto-injector that resulted in the recall, and continues to invest in its product pipeline. Whether or not kaléo could be successful in raising additional funds is uncertain. Moreover, significant dilution could occur to existing investors in any new round of financing that does occur. Even with additional financing, kaléo may not be able to resolve the recall issue or bring new technology to market.
The estimated fair value of the Company’s investment in kaléo was $18.6 million at December 31, 2015 (included in “Other assets and deferred charges” in the consolidated balance sheets).
PE Films
PE Films is highly dependent on sales associated with its top five customers, the largest of which is P&G. PE Films’ top five customers comprised approximately 32%, 38% and 44% of Tredegar’s consolidated net sales (sales less freight) from continuing operations, in 2015, 2014 and 2013, respectively, with net sales to P&G alone comprising approximately 19%, 24% and 28% in 2015, 2014 and 2013, respectively. The loss or significant reduction of sales associated with one or more of these customers could have a material adverse effect on the Company’s business. Other factors that could adversely affect the business include, by way of example, (i) failure by a key customer to achieve success or maintain share in markets in which they sell products containing PE Films’ materials, (ii) key customers rolling out products utilizing technologies developed by others that replace PE Films’ business with such customer, (iii) delays in a key customer rolling out products utilizing new technologies developed by PE Films and (iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes. While PE Films has undertaken efforts to expand its customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with these large customers.
In recent years, PE Films lost substantial sales volume due to product transitions and suffered other losses associated with various customers (see further discussion in the Executive Summary, PE Films section on page 20).
PE Films anticipates further exposure to product transitions and lost business in certain personal care materials that could negatively affect future operating profit from ongoing operations by approximately $10 million annually, likely beginning after 2017. While it continues to identify new business opportunities with its existing customers, PE Films is also working to expand its customer base in order to create long-term growth and profitability by actively competing for new business with various customers across its full product portfolio and introducing new products and/or improvements to existing applications. There is no assurance that these efforts to expand the revenue base and mitigate this or any future loss of sales and profits from significant customers will be successful.

7



PE Films and its customers operate in highly competitive markets. PE Films competes on product innovation, quality, price and service, and its businesses and their customers operate in highly competitive markets. Global market conditions continue to exacerbate the Company’s exposure to margin compression due to competitive forces, especially as certain products move into the later stages of their product life cycles. While PE Films continually works to identify new business opportunities with existing and new customers, primarily through the development of new products with improved performance and/or cost characteristics, there can be no assurances that such efforts will be successful, or that they will offset business lost from competitive dynamics or customer product transitions.
Growth of PE Films depends on its ability to develop and deliver new products at competitive prices. Personal care materials, surface protection films and engineered polymer solutions applications are now being made with a variety of new innovative materials and the overall cycle for bringing new films products to market has accelerated. While PE Films has substantial technological resources, there can be no assurance that its new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from PE Films’ technologies, its inability to develop and deliver new profitable products, or delayed acceptance of its new products in domestic or foreign markets, could have a material adverse effect on its consolidated financial condition, results of operations and cash flows. In the long term, growth will depend on PE Films’ ability to provide innovative products at a price that meets the customers’ needs.
Failure of PE Films’ customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact its sales and operating margins. PE Films’ plastic films serve as components for various consumer products sold worldwide. A customer’s ability to successfully develop, manufacture and market their products is integral to PE Films’ success. In addition, many customers are in industries that are cyclical in nature and sensitive to changes in general economic conditions. During weak economic cycles, consumers of premium products made with or using PE Films’ components may shift to less premium, less expensive products, reducing the demand for PE Films’ plastic films. Cycle downturns may negatively affect businesses that use PE Films’ plastic film products, which could adversely affect sales and operating margins.
The Company’s inability to protect its intellectual property rights or its infringement of the intellectual property rights of others could have a material adverse impact on PE Films. PE Films operates in an industry where its significant customers and competitors have substantial intellectual property portfolios. The continued success of its business depends on its ability not only to protect its own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents or threaten existing customer relationships. Intellectual property litigation is very costly and could result in substantial expense and diversions of Company resources, both of which could adversely affect its consolidated financial condition, results of operations and cash flows. In addition, there may be no effective legal recourse against infringement of the Company’s intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors. An unfavorable outcome in any intellectual property litigation or similar proceeding could have a material adverse effect on the consolidated financial condition, results of operations and cash flows of PE Films.
An unstable economic environment could have a disruptive impact on PE Films’ supply chain. Certain raw materials used in manufacturing PE Films’ products are sourced from single suppliers, and PE Films may not be able to quickly or inexpensively re-source from other suppliers.  The risk of damage or disruption to its supply chain may increase if and when different suppliers consolidate their product portfolios or experience financial distress. Failure to take adequate steps to effectively manage such events, which are intensified when a product is procured from a single supplier or location, could adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, as well as require additional resources to restore its supply chain.
Flexible Packaging Films
Uncertain economic conditions in Brazil could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films. Flexible Packaging Films and its customers operate in a highly competitive global market for PET films. In addition, its operations have been adversely impacted by ongoing unfavorable economic conditions in Brazil, its primary market, which accounted for approximately 46% of its overall sales in 2015.  These combined factors have resulted in significant competitive pricing pressures and margin compression. Tredegar has attempted to mitigate these impacts through new product offerings, cost saving measures and manufacturing efficiency initiatives, but these efforts to-date have not been sufficient, resulting in a significant decline in the operating profit for Flexible Packaging Films since its acquisition in October 2011 and further efforts may not be successful, which could adversely impact Flexible Packaging Films’ financial condition, results of operations and cash flows.

8



Governmental failure to extend anti-dumping duties in Brazil on imported products or prevent competitors from circumventing such duties could adversely impact Flexible Packaging Films. In recent years, excess global capacity in the industry has led to increased competitive pressures from imports into Brazil, the Company’s primary market for flexible packaging films. 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 Flexible Packaging Films. In addition to previous actions taken against UAE, Mexico and Turkey, the Brazilian government recently extended anti-dumping duties on PET films imported from China, Egypt and India, and authorities have initiated new investigations of dumping against Peru and Bahrain. Competitors not currently subject to anti-dumping duties may choose to utilize their excess capacity by selling product in Brazil, which may result in pricing pressures thereby creating margin compression that Flexible Packaging Films may not be able to offset with cost savings measures and/or manufacturing efficiency initiatives.
Aluminum Extrusions
Sales volume and profitability of Aluminum Extrusions is seasonal and cyclical and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector. Aluminum Extrusions’ end-use markets can be subject to seasonality as well as large cyclical swings in volume. Because of capital intensive nature and level of fixed costs inherent in the aluminum extrusions business, the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts (including a greater chance of loss associated with customers defaulting on fixed-price forward sales contracts) that usually accompany a downturn. In addition, higher energy costs can further reduce profits unless offset by price increases or cost reductions and productivity improvements.
The markets for Aluminum Extrusions’ products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has approximately 1,500 customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, automotive and other transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 3% of Aluminum Extrusions’ net sales. Future success and prospects depend on its ability to provide superior service and high quality products to retain existing customers and participate in overall industry cross-cycle growth. In recent years, increased demand, primarily from the nonresidential building and construction sector, has pushed Aluminum Extrusions’ average capacity utilization in excess of 90%. Aluminum Extrusions’ ability to grow and service existing customers is closely tied to having sufficient capacity.
During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of its end-use markets. Conversely, during an economic slowdown, excess industry capacity often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers. Because the business is susceptible to these changing economic conditions, Aluminum Extrusions targets complex, customized, service-intensive business with more challenging requirements in order to differentiate itself from competitors that focus on higher volume, standard extrusion applications.
Aluminum Extrusions’ efforts to expand the Company’s presence in the automotive market may not be successful. Aluminum Extrusions has made significant capital investments in recent years to increase sales to automotive and light truck tier suppliers. Efforts to expand product offerings and broaden the customer base are tied to successfully substituting the Company’s aluminum extrusions for current market alternatives. New Corporate Average Fuel Economy (CAFE) standards requiring material improvements in the automotive and light truck MPG (miles per gallon) by 2025, are expected to increase demand for lighter materials used in the vehicle’s body, some of which can be supplied by Aluminum Extrusions. If the demand does not increase and/or the alternative products offered by Aluminum Extrusions are not accepted by its customers, Aluminum Extrusions may not generate expected returns on its capital investments, which could have a material adverse effect on its consolidated financial condition, results of operations and cash flows.
Failure to extend duties on imported products or prevent competitors from circumventing such duties could adversely impact Aluminum Extrusions. In previous years, imports into the U.S., primarily from China, represented an increasing portion of the U.S. aluminum extrusion market. However, due to an affirmative determination by the U.S. International Trade Commission in April 2011 that asserted that dumped and subsidized imports of aluminum extrusion from China unfairly and negatively impacted the domestic industry, the U.S. Department of Commerce has applied duties to these imported products. As a result, aluminum extrusion imports from China have decreased significantly. While the risk to the domestic industry has been abated for the time being, these protective duties are scheduled to expire in 2016. There are ongoing efforts within the U.S. aluminum extrusions industry to extend these protective duties. An unfavorable outcome could have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Aluminum Extrusions.

9



Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
General
Most of the improved real property and the other assets used in the Company’s operations are owned, and none of the owned property is subject to an encumbrance that is considered to be material to its consolidated operations. Tredegar considers the manufacturing facilities, warehouses and other properties and assets that it owns or leases to be in generally good condition. Capacity utilization at its various manufacturing facilities can vary with product mix and normal fluctuations in sales levels. The Company believes that its PE Films and Flexible Packaging Films manufacturing facilities have sufficient capacity to meet its current production requirements. Increased demand, primarily from the nonresidential building and construction sector, pushed Aluminum Extrusions’ average capacity utilization in excess of 90% in 2015. Tredegar’s corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.
The Company’s principal manufacturing plants and facilities are listed below:
PE Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
Lake Zurich, Illinois
Durham, North Carolina (technical center and production facility) (leased)
Pottsville, Pennsylvania
Richmond, Virginia (technical center) (leased)
Terre Haute, Indiana (technical center and production facility)
  
Guangzhou, China
Kerkrade, The Netherlands
Pune, India
Rétság, Hungary
São Paulo, Brazil
Shanghai, China
  
Production of plastic films and
laminate materials

Flexible Packaging Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
Bloomfield, New York (technical center and production facility)

  
Cabo de Santo Agostinho, Brazil
  
Production of polyester films
Aluminum Extrusions
Locations in the U.S.
  
 
  
Principal Operations
Carthage, Tennessee
Elkhart, Indiana
Newnan, Georgia
Niles, Michigan
  
 
  
Production of aluminum extrusions, fabrication and finishing
 
 
 
 
 
Item 3.
LEGAL PROCEEDINGS
None.
Item 4.
MINE SAFETY DISCLOSURES
None.

10




PART II
Item 5.
MARKET FOR TREDEGAR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices of Common Stock and Shareholder Data
Tredegar’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol TG. The Company has no preferred stock outstanding. There were 32,682,162 shares of common stock held by 2,188 shareholders of record on December 31, 2015.
The following table shows the reported high and low closing prices of Tredegar’s common stock by quarter for the past two years.
 
 
2015
 
2014
 
High
 
Low
 
High
 
Low
First quarter
$
23.07

 
$
18.87

 
$
28.45

 
$
22.48

Second quarter
23.16

 
19.75

 
25.08

 
19.65

Third quarter
23.76

 
12.63

 
24.07

 
18.41

Fourth quarter
16.17

 
13.09

 
22.49

 
16.76

The closing price of Tredegar’s common stock on February 20, 2016 was $12.19.
Dividend Information
Tredegar has paid a dividend every quarter since becoming a public company in July 1989. During the past three years, the Company paid quarterly dividends as follows:
11 cents per share in the last three quarters of 2015
9 cents per share in each of the final three quarters of 2014 and first quarter of 2015;
7 cents per share in the first quarter of 2014 and each of the quarters of 2013;
All decisions with respect to the declaration and payment of dividends will be made by the Board of Directors in its sole discretion based upon earnings, financial condition, anticipated cash needs, restrictions in the Company’s revolving credit agreement and other such considerations as the Board deems relevant. See Note 11 of the Notes to Financial Statements beginning on page 70 for the restrictions on the payment of dividends contained in the Company’s revolving credit agreement related to aggregate dividends permitted.
Issuer Purchases of Equity Securities
On January 7, 2008, Tredegar announced that its Board of Directors approved a share repurchase program whereby management is authorized at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of the Company’s outstanding common stock. The authorization has no time limit. Tredegar did not repurchase any shares in the open market or otherwise in 2015, 2014 and 2013 under this standing authorization. The maximum number of shares remaining under this standing authorization was 1,732,003 at December 31, 2015.

11



Comparative Tredegar Common Stock Performance
The following graph compares cumulative total shareholder returns for Tredegar, the S&P SmallCap 600 Stock Index (an index comprised of companies with market capitalizations similar to Tredegar) and the Russell 2000 Index for the five years ended December 31, 2015. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Tredegar Corporation, the S&P SmallCap 600 Index, and the Russell 2000 Index
*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright© 2016 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2016 Russell Investment Group. All rights reserved.

Inquiries
Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to Computershare Investor Services, the transfer agent and registrar for the Company’s common stock:
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
Phone: 800-622-6757
www.computershare.com/us/contact
All other inquiries should be directed to:
Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 800-411-7441
E-mail: invest@tredegar.com
Website: www.tredegar.com
Quarterly Information
Tredegar does not generate or distribute quarterly reports to its shareholders. Information on quarterly results can be obtained from the Company’s website. In addition, Tredegar files quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.gov.

12



Item 6.
SELECTED FINANCIAL DATA
The tables that follow on pages 13-18 present certain selected financial and segment information for the five years ended December 31, 2015.

FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2015
 
 
2014
 
 
2013
 
 
2012
 
 
2011
 
(In Thousands, Except Per-Share Data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Results of Operations (g):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
896,177

  
 
$
951,826

  
 
$
959,346

  
 
$
882,188

  
 
$
794,420

  
Other income (expense), net
(20,113
)
(b) 
 
(6,697
)
(c) 
 
1,776

(d) 
 
18,119

(e) 
 
3,213

(f) 
 
876,064

  
 
945,129

  
 
961,122

  
 
900,307

  
 
797,633

  
Cost of goods sold
725,459

(b) 
 
778,113

(c) 
 
784,675

(d) 
 
712,660

(e) 
 
654,087

(f) 
Freight
29,838

  
 
28,793

  
 
28,625

  
 
24,846

  
 
18,488

  
Selling, general & administrative expenses
71,911

(b)
 
69,526

(c) 
 
71,195

(d) 
 
73,717

(e) 
 
67,808

(f)
Research and development expenses
16,173

  
 
12,147

  
 
12,669

  
 
13,162

  
 
13,219

  
Amortization of intangibles
4,073

  
 
5,395

  
 
6,744

  
 
5,806

  
 
1,399

  
Interest expense
3,502

  
 
2,713

  
 
2,870

  
 
3,590

  
 
1,926

  
Asset impairments and costs associated with exit and disposal activities
3,850

(b) 
 
3,026

(c) 
 
1,412

(d) 
 
5,022

(e) 
 
1,917

(f) 
Goodwill impairment charge
44,465

(a) 
 

  
 

  
 

  
 

 
 
899,271

  
 
899,713

  
 
908,190

  
 
838,803

  
 
758,844

  
Income (loss) from continuing operations before income taxes
(23,207
)
  
 
45,416

  
 
52,932

  
 
61,504

  
 
38,789

  
Income taxes
8,928

(b) 
 
9,387

(c) 
 
16,995

(d) 
 
18,319

(e) 
 
10,244

(f) 
Income (loss) from continuing operations (g)
(32,135
)
  
 
36,029

  
 
35,937

  
 
43,185

 
 
28,545

  
Income (loss) from discontinued operations, net of tax (g)

 
 
850

(g) 
 
(13,990
)
(g) 
 
(14,934
)
(g) 
 
(3,690
)
(g)
Net income
$
(32,135
)
  
 
$
36,879

  
 
$
21,947

  
 
$
28,251

 
 
$
24,855

  
Diluted earnings (loss) per share (g):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.99
)
  
 
$
1.11

  
 
$
1.10

  
 
$
1.34

 
 
$
0.89

  
Discontinued operations

 
 
0.02

(g) 
 
(0.43
)
(g) 
 
(0.46
)
(g) 
 
(0.12
)
 
Net income
$
(0.99
)
  
 
$
1.13

  
 
$
0.67

  
 
$
0.88

 
 
$
0.77

  
Refer to Notes to Financial Tables on page 18.

13



FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2015
 
2014
 
2013
 
2012
 
 
2011
(In Thousands, Except Per-Share Data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share Data:
 
 
 
 
 
 
 
 
 
 
Equity per share (m)
$
8.35

 
$
11.47

 
$
12.46

 
$
11.61

 
 
$
12.38

Cash dividends declared per share
$
0.42

 
$
0.34

 
$
0.28

 
$
0.96

(k) 
 
$
0.18

Weighted average common shares outstanding during the period
32,578

 
32,302

 
32,172

 
32,032

 
 
31,932

Shares used to compute diluted earnings (loss) per share during the period
32,578

 
32,554

 
32,599

 
32,193

 
 
32,213

Shares outstanding at end of period
32,682

 
32,422

 
32,305

 
32,069

 
 
32,057

Closing market price per share:
 
 
 
 
 
 
 
 
 
 
High
$
23.76

 
$
28.45

 
$
30.73

 
$
26.29

 
 
$
23.00

Low
$
12.63

 
$
16.76

 
$
21.06

 
$
13.49

 
 
$
13.92

End of year
$
13.62

 
$
22.49

 
$
28.81

 
$
20.42

 
 
$
22.22

Total return to shareholders (h)
(37.6
)%
 
(20.8
)%
 
42.5
%
 
(3.8
)%
 
 
15.6
%
Financial Position:
 
 
 
 
 
 
 
 
 
 
Total assets (l)
$
623,260

 
$
788,626

 
$
793,008

 
$
783,165

 
 
$
780,610

Cash and cash equivalents
$
44,156

 
$
50,056

 
$
52,617

 
$
48,822

 
 
$
68,939

Debt
$
104,000

 
$
137,250

 
$
139,000

 
$
128,000

 
 
$
125,000

Shareholders’ equity (net book value)
$
272,748

 
$
372,029

 
$
402,664

 
$
372,252

 
 
$
396,907

Equity market capitalization (i)
$
445,131

 
$
729,173

 
$
930,711

 
$
654,857

 
 
$
712,307

Refer to Notes to Financial Tables on page 18.


14



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (j)
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
(In Thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
385,550

 
$
464,339

 
$
495,386

 
$
473,849

 
$
507,284

Flexible Packaging Films
105,332

 
114,348

 
125,853

 
138,028

 
28,256

Aluminum Extrusions
375,457

 
344,346

 
309,482

 
245,465

 
240,392

Total net sales
866,339

 
923,033

 
930,721

 
857,342

 
775,932

Add back freight
29,838

 
28,793

 
28,625

 
24,846

 
18,488

Sales as shown in Consolidated Statements of Income
$
896,177

 
$
951,826

 
$
959,346

 
$
882,188

 
$
794,420

 
 
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
(In Thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
270,236

 
$
283,606

 
$
291,377

 
$
301,175

 
$
329,961

Flexible Packaging Films
146,253

 
262,604

 
265,496

 
250,667

 
244,610

Aluminum Extrusions
136,935

 
143,328

 
134,928

 
129,279

 
78,661

Subtotal
553,424

 
689,538

 
691,801

 
681,121

 
653,232

General corporate
25,680

 
49,032

 
48,590

 
53,222

 
40,917

Cash and cash equivalents
44,156

 
50,056

 
52,617

 
48,822

 
68,939

Identifiable assets from continuing operations
623,260

 
788,626

 
793,008

 
783,165

 
763,088

Discontinued operations (g)

 

 

 

 
17,522

Total
$
623,260

 
$
788,626

 
$
793,008

 
$
783,165

 
$
780,610

Refer to Notes to Financial Tables on page 18.

15



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
2014
 
 
2013
 
 
2012
 
 
2011
 
(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
$
48,275

  
 
$
60,971

  
 
$
61,866

  
 
$
76,003

  
 
$
58,067

  
Plant shutdowns, asset impairments, restructurings and other
(4,180
)
(b) 
 
(12,236
)
(c) 
 
(671
)
(d) 
 
1,011

(e) 
 
(901
)
(f) 
Flexible Packaging Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
5,453

 
 
(2,917
)
 
 
9,100

 
 
(6,053
)
 
 
1,426

 
Plant shutdowns, asset impairments, restructurings and other
(185
)
 
 
(591
)
 
 

 
 
(1,120
)
 
 
(5,906
)
 
Goodwill impairment charge
(44,465
)
(a)
 

 
 

 
 

 
 

 
Aluminum Extrusions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
30,432

  
 
25,664

  
 
18,291

  
 
9,037

 
 
3,457

 
Plant shutdowns, asset impairments, restructurings and other
(708
)
(b) 
 
(976
)
(c) 
 
(2,748
)
(d) 
 
(5,427
)
(e) 
 
58

(f) 
Total
34,622

  
 
69,915

  
 
85,838

  
 
73,451

  
 
56,201

  
Interest income
294

  
 
588

  
 
594

  
 
418

  
 
1,023

  
Interest expense
3,502

  
 
2,713

  
 
2,870

  
 
3,590

  
 
1,926

  
Gain (loss) on investment accounted for under the fair value method
(20,500
)
 
 
2,000

(c) 
 
3,400

(d) 
 
16,100

(e) 
 
1,600

(f) 
Gain on sale of investment property

 
 
1,208

(c) 
 

 
 

 
 

 
Unrealized loss on investment property

 
 

 
 
1,018

(d) 
 

 
 

 
Stock option-based compensation expense
483

  
 
1,272

  
 
1,155

  
 
1,432

  
 
1,940

  
Corporate expenses, net
33,638

(b) 
 
24,310

(c) 
 
31,857

(d) 
 
23,443

(e) 
 
16,169

(f) 
Income (loss) from continuing operations before income taxes
(23,207
)
  
 
45,416

  
 
52,932

  
 
61,504

  
 
38,789

  
Income taxes
8,928

(b) 
 
9,387

(c) 
 
16,995

(d) 
 
18,319

(e) 
 
10,244

(f) 
Income (loss) from continuing operations
(32,135
)
  
 
36,029

  
 
35,937

  
 
43,185

 
 
28,545

  
Income (loss) from discontinued operations, net of tax (g)

 
 
850

(g) 
 
(13,990
)
(g) 
 
(14,934
)
(g)
 
(3,690
)
(g) 
Net income
$
(32,135
)
  
 
$
36,879

  
 
$
21,947

  
 
$
28,251

 
 
$
24,855

  
Refer to Notes to Financial Tables on page 18.

16



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

Depreciation and Amortization
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
(In Thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
15,480

 
$
21,399

 
$
25,656

 
$
28,962

 
$
34,201

Flexible Packaging Films
9,697

 
9,331

 
9,676

 
10,240

 
2,114

Aluminum Extrusions
9,698

 
9,974

 
9,202

 
9,984

 
8,333

Subtotal
34,875

 
40,704

 
44,534

 
49,186

 
44,648

General corporate
107

 
114

 
121

 
73

 
75

Total continuing operations
34,982

 
40,818

 
44,655

 
49,259

 
44,723

Discontinued operations (g)

 

 

 
10

 
12

Total depreciation and amortization expense
$
34,982

 
$
40,818

 
$
44,655

 
$
49,269

 
$
44,735

 
 
 
 
 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
(In Thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
21,218

 
$
17,000

 
$
15,615

 
$
5,965

 
$
10,783

Flexible Packaging Films
3,489

 
21,806

 
49,252

 
24,519

 
2,324

Aluminum Extrusions
8,124

 
6,092

 
14,742

 
2,332

 
2,697

Subtotal
32,831

 
44,898

 
79,609

 
32,816

 
15,804

General corporate

 

 
52

 
436

 
76

Capital expenditures for continuing operations
32,831

 
44,898

 
79,661

 
33,252

 
15,880

Discontinued operations

 

 

 

 

Total capital expenditures
$
32,831

 
$
44,898

 
$
79,661

 
33,252

 
15,880

Refer to Notes to Financial Tables on page 18.

17



NOTES TO FINANCIAL TABLES
(a)
Results for 2015 included a goodwill impairment charge of $44.5 million ($44.5 million after taxes) recognized in Flexible Packaging Films in the third quarter of 2015 upon completion of an impairment analysis performed as of September 30, 2015. See further discussion in Executive Summary beginning on page 19.
(b)
Plant shutdowns, asset impairments, restructurings and other charges for 2015 include charges of $3.9 million (included in “Selling, general and administrative” in the consolidated statements of income) for severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers; charges of $2.2 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes severance and other employee-related costs of $0.8 million, asset impairments of $0.4 million, accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.6 million ($0.1 million is included in “Cost of goods sold” in the consolidated statements of income); charge of $2.2 million for severance and other employee-related costs associated with restructurings in PE Films ($2.0 million) ($0.4 million included in “Selling, general and administrative expense” in the consolidated statement of income), Flexible Packaging Films ($0.2 million), Aluminum Extrusions ($35,000) and Corporate ($26,000); charges of $1.0 million associated with a non-recurring business development project (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.4 million associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana; and charges of $0.3 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). The unrealized loss on the Company’s investment in kaléo of $20.5 million is included in “Other income (expense), net” in the consolidated statements of income.
(c)
Plant shutdowns, asset impairments, restructurings and other for 2014 include a charge of $10.0 million (included in “Other income (expense), net” in the consolidated statements of income) associated with the one-time, lump sum license payment to 3M Company (“3M”) after the Company settled all litigation issues associated with a patent infringement complaint; charges of $2.3 million for severance and other employee-related costs in connection with restructurings in PE Films ($1.7 million), Flexible Packaging Films ($0.6 million) and Aluminum Extrusions ($31,000); charges of $0.9 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income); charges of $0.7 million associated with the shutdown of the film products manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.4 million and asset impairment and other shutdown-related charges of $0.3 million; gain of $0.1 million related to the sale of previously shutdown film products manufacturing facility in LaGrange, Georgia (included in “Other income (expense), net” in the consolidated statements of income); and charges of $54,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. The unrealized gain on the Company’s investment in kaléo of $2.0 million; the unrealized loss on the Company’s investment in Harbinger Capital Partners Special Situations Fund L.P. (“Harbinger”) of $0.8 million and the gain on sale on a portion the Company’s investment property in Alleghany and Bath County, Virginia was $1.2 million in 2014 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes from continuing operations in 2014 includes the recognition of a tax benefit for a portion of the Company’s capital loss carryforwards of $4.9 million. These capital loss carryforwards were previously offset by a valuation allowance associated with expected limitations on the utilization of these assumed capital losses. As a result of changes in the underlying basis of certain foreign subsidiaries, income taxes from continuing operations in 2014 also included an adjustment of $2.2 million to reverse previously accrued deferred tax liabilities arising from foreign currency translation adjustments.
(d)
Plant shutdowns, asset impairments, restructurings and other for 2013 include a charge of $1.7 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income); charges of $0.6 million associated with the shutdown of the Company’s aluminum extrusions manufacturing facility in Kentland, Indiana; charges of $0.5 million associated with the shutdown of the film products manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.3 million and asset impairment charges of $0.2 million; charges of $0.4 million for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions ($0.3 million) and PE Films ($0.1 million); charges of $0.2 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions; and a loss of $0.1 million related to the sale of previously impaired machinery and equipment at the Company’s film products manufacturing facility in Shanghai, China (included in “Other income (expense), net” in the consolidated statements of income). The unrealized gain on the Company’s investment in kaléo of $3.4 million, the unrealized loss on the Company’s investment in Harbinger of $0.4 million and the unrealized loss on the Company’s investment property in Alleghany and Bath County, Virginia of $1.0 million in 2013 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes for 2013 include the recognition of an additional valuation allowance of $0.4 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(e)
Plant shutdowns, asset impairments, restructurings and other for 2012 include a net charge of $3.6 million associated with the shutdown of the Company’s aluminum extrusions manufacturing facility in Kentland, Indiana, which included accelerated depreciation for property and equipment of $2.4 million (included in “Cost of goods sold” in the consolidated statement of income), severance and other employee-related costs of $1.2 million and other shutdown-related charges of $2.3 million, partially offset by adjustments to inventories accounted for under the last-in, first-out method of $1.5 million (included in “Cost of goods sold” in the consolidated statements of income) and gains of $0.8 million (included in “Other income (expense), net” in the consolidated statements of income); a gain of $1.3 million in PE Films (included in “Other income (expense), net” in the consolidated statements of income) associated with an insurance recovery on idle equipment that was destroyed in a fire at an outside warehouse; charges of $1.3 million for acquisition-related expenses (included in “Selling, general and administrative expenses in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions; charges of $1.1 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Tredegar; gain of $1.1 million (included in “Other income (expense), net” in the consolidated statements of income) on the sale of assets associated with a previously shutdown film products manufacturing facility in LaGrange, Georgia; losses of $0.8 million for asset impairments associated with a previously shutdown film products manufacturing facility in LaGrange, Georgia; charges of $0.5 million for severance and other employee-related costs in connection with restructurings in PE Films ($0.3 million) and Aluminum Extrusions ($0.2 million); charges of $0.2 million for asset impairments in PE Films; charges of $0.2 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions; charges of $0.1 million associated with purchase accounting adjustments made to the value of inventory sold by Aluminum Extrusions after its acquisition of AACOA; and a charge of $0.1 million (included in “Costs of goods sold” in the consolidated statements of income) related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income). The unrealized gain on the Company’s investment in kaléo of $16.1 million and the unrealized loss on the Company’s investment in Harbinger of $1.1 million in 2012 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes for 2012 include the recognition of an additional valuation allowance of $1.3 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(f)
Plant shutdowns, asset impairments, restructurings and other for 2011 include charges of $4.8 million for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Tredegar; charges of $1.4 million for asset impairments in PE Films; a gain of $1.0 million on the disposition of the film products business in Roccamontepiano, Italy (included in “Other income (expense), net” in the consolidated statements of income), which includes the recognition of previously unrecognized foreign currency translation gains of $4.3 million that were associated with the business; charges of $0.7 million associated with purchase accounting adjustments made to the value of inventory sold by Tredegar after its acquisition of Terphane (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.5 million for severance and other employee related costs in connection with restructurings in PE Films; charges of $0.4 million for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Tredegar; and gains of $0.1 million associated with Aluminum Extrusions 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). The unrealized gain on the Company’s investment in kaléo of $1.6 million and the unrealized loss on the Company’s investment in Harbinger of $0.6 million in 2011 are included in “Other income (expense), net” in the consolidated statements of income.
Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(g)
On November 20, 2012, Tredegar sold its membership interests in Falling Springs, LLC. All historical results for this business have been reflected in discontinued operations. In 2012, discontinued operations also includes an after-tax loss of $2.0 million from the sale of Falling Springs in addition to operating results through the closing date. In 2012 and 2011, net income of $0.5 million and $0.7 million, respectively, have been reclassified to discontinued operations. On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada. All historical results for this business have been reflected as discontinued operations. In 2014, accruals for indemnifications under the purchase agreement were adjusted, resulting in income from discontinued operations of $0.9 million. In 2013, 2012 and 2011, discontinued operations include after-tax charges of $14.0 million and $13.4 million and $4.4 million, respectively, to accrue for indemnifications under the purchase agreement related to environmental matters.
(h)
Total return to shareholders is defined as the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.
(i)
Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(j)
Net sales represent gross sales less freight. Net sales is the measure used by the chief operating decision maker of each segment for purposes of assessing performance.
(k)
In addition to quarterly dividends of 4 1/2 cents per share in the first and second quarters and 6 cents per share in the third and fourth quarters of 2012, there was a special one-time dividend of 75 cents per share in December 2012.
(l)
Total assets in 2015 are not comparable to prior years due to the adoption of new FASB guidance associated with the classification of deferred income tax assets and liabilities. See Note 17 to the Notes to the Financial Statements for additional details.
(m)
Equity per share is computed by dividing Shareholders’ equity at year end by the shares outstanding at end of period.

18



Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking and Cautionary Statements
Some of the information contained in this Form 10-K 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. For risks and important factors that could cause actual results to differ from expectations, refer to the reports that the Company files with or provides to the SEC from time-to-time, including the risks and important factors set forth in “Risk Factors” in Part I, Item 1A of this Form 10-K. Readers are urged to review and consider carefully the disclosures Tredegar makes in the reports Tredegar files with or furnishes to the SEC. 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.
Executive Summary
General
Tredegar is a manufacturer of polyethylene (“PE”) plastic films, polyester films, and aluminum extrusions. Descriptions of all of the Company’s businesses are provided in the Business section on pages 1-4.
Sales from continuing operations were $896.2 million in 2015 compared to $951.8 million in 2014. Net loss from continuing operations was $32.1 million ($0.99 per diluted share) in 2015, compared with net income from continuing operations of $36.0 million ($1.11 per diluted share) in 2014. The net loss from continuing operations in 2015 included the following:
The write-off of all goodwill associated with Flexible Packaging Films ($44.5 million); and
An unrealized loss on the Company’s investment in kaléo ($20.5 million), which is accounted for under the fair value method.
Other losses associated with plant shutdowns, asset impairments and restructurings and gains and losses on the sale of assets, gains or losses on investments accounted for under the fair value method and other items are described in Results of Continuing Operations beginning on page 26.
Tredegar has historically reported two business segments: Film Products and Aluminum Extrusions. In 2015, the Company divided Film Products into two separate reportable segments: PE Films and Flexible Packaging Films. PE Films is comprised of personal care materials, surface protection films and engineered polymer solutions, and Flexible Packaging Films is comprised of the Company’s polyester films business, Terphane, which was acquired by the Company in October 2011. As part of its transition to a new executive leadership team, the Company’s management decided to discontinue its efforts to integrate Terphane with its PE 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. See also the Business Segment Review beginning on page 39.

19



PE Films
A summary of operating results for PE Films is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2015
 
2014
 
% Change
Sales volume (pounds)
160,283

 
175,203

 
(8.5
)%
Net sales
$
385,550

 
$
464,339

 
(17.0
)%
Operating profit from ongoing operations
$
48,275

 
$
60,971

 
(20.8
)%
Net sales in 2015 decreased by $78.8 million versus 2014, primarily due to lower volume ($46.3 million), mainly from lost business and product transitions, and the unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. ($25.9 million).
Sales volume in 2015 declined as a result of the wind down of shipments for certain personal care materials due to various product transitions and lost business, 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 second half 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 2015 and 2014, had the impact of the events noted in the Restructuring section below been fully realized in each period:
 
Twelve Months Ended December 31,
(In Thousands)
  2015
  2014
Operating profit from ongoing operations, as reported
$48,275
$60,971
Contribution to operating profit from ongoing operations associated with lost business:
 
 
Certain babycare elastic films sold in North America

2,106

Product transitions & other lost business before restructurings & fixed costs reduction
13,349

22,686

Operating profit from ongoing operations net of the impact of business that will be fully eliminated in future periods
34,926

36,179

Estimated future benefit of North American facility consolidation
5,200

5,200

Pro forma estimated operating profit from ongoing operations
$40,126
$41,379
Net sales associated with lost business and product transitions that have yet to be fully eliminated were approximately $38.5 million and $84.5 million in 2015 and 2014, respectively.
Net of the impact of product transitions and lost business, pro forma estimated operating profit from ongoing operations in 2015 decreased by $1.3 million versus 2014 due to the following:
An increase in volume of over 6% and a favorable mix for surface protection films ($4.2 million);
A decrease in volume for polyethylene overwrap films and other personal care materials ($2.4 million);
The favorable lag in the pass-through of average resin costs of $1.3 million in 2015 versus a negative $0.1 million in 2014;
An increase in foreign currency translation and transaction losses ($3.7 million); and
Other factors including higher research and development costs partially offset by lower depreciation.
The competitive dynamics in PE Films require continuous development of new products to improve cost and performance for customers. PE Films anticipates additional exposure to product transitions and lost business in certain personal care materials. The estimated additional adverse impact to future operating profit from ongoing operations relating to such exposure is $10 million annually, which would not likely occur until after 2017.

20




Restructuring
PE Films believes that most of the growth in the demand for its products will come from markets outside of North America. In recent years, PE Films 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 be completed in the middle of 2017. Total pre-tax cash expenditures associated with restructuring the Lake Zurich manufacturing facility are expected to be approximately $15-16 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 the project 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 expenses associated with the North American facility consolidation project were $2.2 million in 2015 ($1.7 million included in “Asset impairments and costs associated with exit and disposal activities” and $0.5 million included in “Cost of goods sold” in the consolidated statement of income).
Total estimated cash expenditures of $15-16 million over the project 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 U.S. of approximately $10 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.
Cash expenditures for the North American facility consolidation project were $3.1 million in 2015, which includes $2.5 million for capital expenditures.
Capital Expenditures and Depreciation & Amortization
Capital expenditures in PE Films were $21.2 million in 2015 compared to $17.0 million in 2014. Capital expenditures are projected to be $30 million in 2016, including approximately $10 million for routine items required to support operations. Capital spending for strategic projects in 2016 includes expansion of elastics capacity in Europe, expansion of surface protection films capacity in China and the North American facility consolidation. Depreciation expense was $15.4 million in 2015 and $21.1 million in 2014. Depreciation expense is projected to be $15 million in 2016. Amortization expense was $0.1 million in 2015 and $0.3 million in 2014, and is projected to be $0.1 million in 2016.

21



Flexible Packaging Films
A summary of operating results for Flexible Packaging Films, which excludes the goodwill impairment charge discussed below, is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2015
 
2014
 
% Change
Sales volume (pounds)
82,347

 
72,064

 
14.3
 %
Net sales
$
105,332

 
$
114,348

 
(7.9
)%
Operating profit (loss) from ongoing operations
$
5,453

 
$
(2,917
)
 
-


Net sales in 2015 decreased 7.9% versus 2014 primarily due to competitive pricing pressures and the pass-through to customers of lower raw material costs, partially offset by a 14.3% increase in sales volume.

Operating profit (loss) from ongoing operations improved from a loss of $2.9 million in 2014 to income of $5.5 million in 2015 ($8.4 million improvement), primarily due to the following:
An improvement of $1.4 million in 2015 versus 2014 due to lower general, sales and administration costs of $1.2 million and operating efficiencies of $0.9 million, partially offset by lower margins of $0.7 million primarily from competitive pricing pressures;
Foreign currency transaction gains associated with U.S. dollar denominated export sales in Brazil of $3.5 million in 2015 versus $0.5 million in 2014;
The estimated lag in the pass through of lower raw material costs of $1.0 million in 2015 (none in 2014);
Net refunds of $1.6 million in 2015 as a result of the reinstatement by the U.S. in the third quarter of 2015 of the Generalized System of Preferences (GSP) program allowing for duty-free shipment of Terphane’s products to the U.S. versus duties paid of $1.1 million in 2014; and
The favorable settlement of certain loss contingencies of $0.6 million in 2015 versus $0.3 million in 2014.
Capital Expenditures, Depreciation & Amortization and Goodwill Impairment Charge
Capital expenditures were $3.5 million in 2015 compared to $21.8 million in 2014. Capital expenditures in 2014 included $17 million for the capacity expansion project at a manufacturing facility in Cabo de Santo Agostinho, Brazil. Capital expenditures are projected to be $5 million in 2016, including approximately $3 million for routine items required to support operations. Depreciation expense was $6.8 million in 2015 and $5.8 million in 2014. Depreciation expense is projected to be $6 million in 2016. Amortization expense was $2.9 million in 2015 and $3.5 million in 2014, and is projected to be $3 million in 2016.
During the third quarter of 2015, the Company performed a goodwill impairment assessment related to Flexible Packaging Films. This review was undertaken as a result of the continued competitive pressures related to ongoing unfavorable economic conditions in Flexible Packaging Films’ primary market of Brazil and excess global industry capacity. The assessment resulted in a full write-off of the goodwill of $44.5 million associated with the acquisition of Terphane. The Company believes that unfavorable business conditions in its markets have shifted the competitive environment from a regional to a global landscape and have driven price convergence and lower product margins. Authorities in Brazil have initiated new investigations of dumping against Peru and Bahrain. These new investigations follow recent favorable anti-dumping rulings issued by the Brazilian government against China, Egypt and India, which were in addition to previous actions taken against United Arab Emirates, Mexico, and Turkey.

22



Aluminum Extrusions
A summary of operating results for Aluminum Extrusions is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2015
 
2014
 
% Change
Sales volume (pounds)
170,045

 
153,843

 
10.5
%
Net sales
$
375,457

 
$
344,346

 
9.0
%
Operating profit from ongoing operations
$
30,432

 
$
25,664

 
18.6
%
Net sales in 2015 increased in comparison to 2014 primarily due to higher sales volume in all major markets, offset by a decrease in average selling prices. Higher sales volume had a favorable impact of $40.6 million in 2015 compared to 2014. The decrease in average selling prices, which reduced net sales by $9.5 million, were mainly due to lower aluminum costs and mix changes.
Operating profit from ongoing operations in 2015 increased $4.8 million primarily as a result of higher volume partially offset by new hire costs and other production inefficiencies that occurred in the first three quarters of 2015.
Capital Expenditures and Depreciation & Amortization
Capital expenditures for Aluminum Extrusions were $8.1 million in 2015 compared to $6.1 million in 2014. Capital expenditures are projected to be $24 million in 2016, which includes approximately $5 million for routine items required to support operations and approximately $14 million of a total $18 million expected to add extrusions capacity at the Niles facility. Depreciation expense was $8.7 million in 2015 compared to $8.3 million in 2014, and is projected to be $9 million in 2016. Amortization expense was $1.0 million in 2015 and $1.6 million in 2014, and is projected to be $1 million in 2016.
Corporate Expenses, Interest and Income Taxes
Pension expense was $12.3 million in 2015, an unfavorable change of $5.6 million from 2014 primarily due to a drop in the discount rate. Most of the impact on earnings from higher pension expense is reflected in “Corporate expenses, net” in the Net Sales and Operating Profit by Segment table. Pension expense is projected to be $11.3 million in 2016. Corporate expenses, net increased in 2015 versus 2014 primarily due to the increase in pension expense noted above, business development costs and corporate severance charges. In 2015, corporate expenses, net included non-recurring costs of $4.9 million, which consisted mainly of business development costs of $1.0 million and severance and other employee-related charges of $3.9 million associated with the resignations of the Company’s former chief executive and chief financial officers in the second quarter of 2015. In 2014, corporate expenses, net included non-recurring costs of $0.9 million.
Interest expense was $3.5 million in 2015 in comparison to $2.7 million in 2014.
The effective tax rate used to compute income taxes for income from continuing operations was a negative 38.5% in 2015 compared to a positive 20.7% in 2014. The effective tax rate for 2015 was significantly lowered by 68.1% due to the non-deductible goodwill impairment charge of $44.5 million associated with the acquisition of Terphane. The effective tax rate in 2014 was lowered by 14.3% due to the partial reversal of a valuation allowance, and the reversal of deferred tax liabilities recorded on unremitted earnings of foreign subsidiaries and other special items. More information on the significant differences between the effective tax rate for income from continuing operations and the U.S. federal statutory rate for 2015 and 2014 are further detailed in the effective income tax rate reconciliation provided in Note 17 of the Notes to Financial Statements beginning on Page 79.
Net debt (debt in excess of cash and cash equivalents) was $59.8 million at December 31, 2015, compared with $87.2 million at December 31, 2014. Net debt is calculated as follows:
(in millions)
 
December 31, 2015
 
December 31, 2014
Debt
 
$
104.0

 
$
137.3

Less: Cash and cash equivalents
 
44.2

 
50.1

Net debt
 
$
59.8

 
$
87.2


23



Net debt, a financial measure that is not calculated or presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), is not intended to represent debt as defined by U.S. GAAP, but is utilized by management in evaluating financial leverage and equity valuation. The Company believes that investors also may find net debt helpful for the same purposes. Consolidated net capitalization and other credit measures are provided in the Financial Condition section beginning on page 29.
Critical Accounting Policies
In the ordinary course of business, the Company makes 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 U.S. GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses its critical accounting policies. 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.
Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill
The Company assesses its long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when the Company does not believe the carrying value of the long-lived asset(s) will be recoverable. Tredegar also reassesses the useful lives of its long-lived assets based on changes in the business and technologies.
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). As of December 31, 2015, reporting units in PE Films and Aluminum Extrusions carried goodwill balances. All goodwill associated with Flexible Packaging Films was impaired in the third quarter of 2015. The remaining goodwill was tested for impairment at the annual testing date, with the estimated fair value of the tested units substantially exceeding the carrying value of the net assets.
In assessing the recoverability of goodwill and long-lived identifiable assets, the Company estimates fair value using discounted cash flow analysis and comparative enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. These calculations require management to make assumptions regarding estimated future cash flows, discount rates and other factors to determine if an impairment exists. If these estimates or their related assumptions change in the future, the Company may be required to record additional impairment charges.
Based upon assessments performed as to the recoverability of long-lived identifiable assets, the Company recorded asset impairment losses for continuing operations of $0.2 million in 2015 (none in 2014 and 2013).
Investment Accounted for Under the Fair Value Method
In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaléo (formerly Intelliject, Inc.), a privately held specialty pharmaceutical company. This 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 (venture capital funds generally use the fair value method to account for their investment portfolios). At December 31, 2015, Tredegar’s ownership interest was approximately 19% on a fully diluted basis.
The Company discloses the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). On the dates of its investments, Tredegar believes that the amount it paid for its ownership interest and liquidation preferences was based on Level 2 inputs, including investments by other investors. Subsequent to the last round of financing, and until the next round of financing, the Company believes fair value estimates are based upon Level 3 inputs since there is no secondary market for Tredegar’s ownership interest. Accordingly, after the latest financing and until the next round of financing or any other significant financial transaction, fair value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of development and commercialization milestone payments, 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 this investment will be made in the period upon which such changes can be quantified.

24



At December 31, 2015 and 2014, the fair value of the Company’s investment in kaléo (the carrying value included in “Other assets and deferred charges” in the consolidated balance sheet) was $18.6 million and $39.1 million, respectively. The weighted average cost of capital used in the fair market valuation of the Company’s interest in kaléo was 45% at both December 31, 2015 and 2014. The fair market valuation of Tredegar’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. At December 31, 2015, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of the Company’s interest in kaléo by approximately $4 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the Company’s interest by approximately $4 million. See Note 4 of the Notes to Financial Statements on page 61 for more information.
Pension Benefits
Tredegar sponsors noncontributory defined benefit (pension) plans in its continuing operations that have resulted in varying amounts of net pension income or expense, as developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income or expense recorded in future periods.
The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments determined by using the AA-rated bond yield curve. In general, the pension liability increases as the discount rate decreases and vice versa. The weighted average discount rate utilized was 4.55%, 4.17% and 4.99% at the end of 2015, 2014 and 2013, respectively, with changes between periods due to changes in market interest rates. Pay for active participants of the plan was frozen as of December 31, 2007. Beginning in the first quarter of 2014, with the exception of plan participants at two (one as of February 1, 2016) of the Company’s U.S. manufacturing facilities, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.
A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. The total return on plan assets, which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was approximately (1.8)%, 4.1% and 11.2% in 2015, 2014 and 2013, respectively. The expected long-term return on plan assets relating to continuing operations, which is estimated by asset class and generally based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums, was 7.5% in 2015, 7.75% in 2014 and 2013, 8.0% in 2012 and 8.25% from 2009 to 2011. The Company anticipates that its expected long-term return on plan assets will be 7.0% for 2016. See Note 14 of the Notes to Financial Statements on page 74 for more information on expected long-term return on plan assets and asset mix.
See the Executive Summary beginning on page 19 for further discussion regarding the financial impact of the Company’s pension plans.
Income Taxes
On a quarterly basis, Tredegar reviews its judgments regarding uncertain tax positions and the likelihood that the benefits of a deferred tax asset will be realized. As circumstances change, the Company reflects in earnings any adjustments to unrecognized benefits for uncertain tax positions and valuation allowances for deferred tax assets.
For financial reporting purposes, unrecognized tax benefits on uncertain tax positions were $4.0 million, $3.3 million and $2.2 million as of December 31, 2015, 2014 and 2013, respectively. Tax payments resulting from the successful challenge by the taxing authority on uncertain tax positions taken by Tredegar would possibly result in the payment of interest and penalties. Accordingly, the Company also accrues for possible interest and penalties on uncertain tax positions. The balance of accrued interest and penalties on deductions taken relating to uncertain tax positions was $0.4 million, $0.3 million and $0.2 million at December 31, 2015, 2014 and 2013, respectively ($0.2 million, $0.2 million and $0.1 million, respectively, net of corresponding federal and state income tax benefits). Accruals for possible interest and penalties on uncertain tax positions are reflected in income tax expense for financial reporting purposes.
Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2012.

25



As of December 31, 2015 and 2014, valuation allowances relating to deferred tax assets were $13.3 million and $14.6 million, respectively. For more information on deferred income tax assets and liabilities, see Note 17 of the Notes to Financial Statements beginning on Page 79.
Recently Issued Accounting Standards
Refer to the section Recently Issued Accounting Statements in Note 1 of the Notes to Financial Statements beginning on page 53 for information concerning the effect of recently issued accounting pronouncements.
Results of Continuing Operations
2015 versus 2014
Revenues. Sales in 2015 decreased by 5.8% compared with 2014 due to lower sales by PE Films and Flexible Packaging Films, partially offset by higher sales in Aluminum Extrusions. Net sales decreased 17.0% in PE Films primarily due to lower volume, a decrease in average selling prices due to competitive pricing pressures and lower input costs and the unfavorable impact of the change in the U.S. dollar value of currencies for operations outside the U.S. Net sales decreased 7.9% in Flexible Packaging Films primarily due to competitive pricing pressures and the pass-through to customers of lower raw material costs, partially offset by an increase in sales volume. Net sales increased 9.0% in Aluminum Extrusions primarily due to higher sales volume in all markets, offset by a decrease in average selling prices driven mainly by lower aluminum costs and mix changes. For more information on net sales and volume, see the Executive Summary beginning on page 19.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of sales) was 15.7% in 2015 and 15.2% in 2014. The gross profit margin in PE Films increased due to a favorable lag in the pass-through of average resin costs and higher productivity in surface protection films offset by lower volume, partially offset by competitive pricing pressures and the unfavorable impact of the change in the U.S. dollar value of currencies for operations outside the U.S. The gross profit margin in Flexible Packaging Films increased primarily as a result of higher sales volume, lower manufacturing costs, foreign currency transaction gains associated with U.S. dollar denominated export sales in Brazil, a favorable lag in the pass through of lower raw material costs and net refunds of export duties paid. The gross profit margin in Aluminum Extrusions increased primarily as a result of higher volume partially offset by new hire costs and other production inefficiencies that occurred in the first three quarters of 2015. Consolidated gross profit as a percentage of sales was negatively impacted by higher pension expenses in 2015 compared to 2014. Most of the impact of higher pension expense is not allocated to PE Films or Aluminum Extrusions. For more information on operating costs and expenses, see the Executive Summary beginning on page 19.
As a percentage of sales, selling, general and administrative and R&D expenses were 9.8% in 2015, which increased from 8.6% in 2014. The increase in selling, general and administrative and R&D expenses as a percentage of sales can be primarily attributed to the severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers and costs incurred on a non-recurring business development project.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations in 2015 totaled $10.1 million ($6.4 million after taxes) and unless otherwise noted below, are included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of income. Results in 2015 included:
A second quarter charge of $3.9 million ($2.5 million after taxes) for severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers (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);
A fourth quarter charge of $1.0 million ($0.6 million after taxes) and a third quarter charge of $1.2 million ($0.7 million) associated with the consolidation of domestic PE Films’ manufacturing facilities, which includes severance and other employee-related costs of $0.8 million, asset impairments of $0.4 million, accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.6 million ($0.1 million is included in “Cost of goods sold” in the consolidated statements of income);
A fourth quarter charge of $1.1 million ($0.7 million after taxes) in PE Films ($0.4 million included in “Selling, general and administrative expense” in the consolidated statement of income), a third quarter charge of $0.9 million ($0.6 million after taxes) 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) and a second quarter charge of $0.3 million ($0.2 million after taxes) in Flexible Packaging Films ($0.3 million) and PE Films ($7,000) for severance and other employee-related costs, and a first quarter reversal of previously accrued severance

26



and other employee related costs of $67,000 ($43,000 after taxes) in Flexible Packaging Films, all associated with restructurings;
A fourth quarter charge of $1.0 million ($0.6 million after taxes) associated with a business development project (included in “Selling, general and administrative expense” in the consolidated statement of income and “Corporate expenses, net” in the statement of net sales and operating profit by segment);
A fourth quarter charge of $31,000 ($19,000 after taxes), a third quarter charge of $0.3 million ($0.2 million after taxes), a second quarter charge of $18,000 ($11,000 after taxes) and a first quarter charge of $15,000 ($9,000 after taxes) associated with the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana; and
A fourth quarter charge of $0.3 million ($0.2 million after taxes) related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).
Results in 2015 included a goodwill impairment charge of $44.5 million ($44.5 million after taxes) recognized in Flexible Packaging Films in the third quarter of 2015 upon completion of an impairment analysis performed as of September 30, 2015. See further discussion in Executive Summary beginning on page 19. Results in 2015 also included an unrealized loss on the Company’s investment in kaléo (included in “Other income (expense), net” in the consolidated statements of income) of $20.5 million ($15.7 million after taxes; see further discussion in Investment Accounted for Under the Fair Value Method beginning on page 24).
For more information on costs and expenses, see the Executive Summary beginning on page 19.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.3 million in 2015, compared to $0.6 million in 2014.
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.4 million and $1.1 million capitalized in 2015 and 2014, respectively), was $3.5 million in 2015, compared to $2.7 million for 2014. Average debt outstanding and interest rates were as follows:
(In Millions)
2015
 
2014
Floating-rate debt with interest charged on a rollover
 
 
 
basis at one-month LIBOR plus a credit spread:
 
 
 
Average outstanding debt balance
$
135.1

 
$
136.5

Average interest rate
2.0
%
 
2.0
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
135.1

 
$
136.5

Average interest rate
2.0
%
 
2.0
%
Income Taxes. The effective income tax rate from continuing operations was (38.5)% in 2015 compared with 20.7% in 2014. The effective tax rate for 2015 was significantly lower due to the non-deductible goodwill impairment charge of $44.5 million associated with the acquisition of Terphane. Income taxes from continuing operations in 2014 included the recognition of a tax benefit for a portion of the Company’s capital loss carryforwards of $4.9 million. As a result of changes in the underlying basis of certain foreign subsidiaries, income taxes from continuing operations in 2014 also included an adjustment of $2.2 million to reverse previously accrued deferred tax liabilities arising from changes in tax basis due to foreign currency translation adjustments and unremitted earnings. Factors impacting the effective tax rate for 2015 and 2014 are further detailed in the effective income tax rate reconciliation provided in Note 17 of the Notes to Financial Statements beginning on Page 79.
2014 versus 2013
Revenues. Sales in 2014 decreased by 0.8% compared with 2013 due to lower sales in PE Films and Flexible Packaging Films, partially offset by higher sales in Aluminum Extrusions. Net sales decreased 6.3% in PE Films primarily due to lower volume and the unfavorable impact of the change in the U.S. dollar value of currencies for operations outside the U.S. Net sales decreased 9.1% in Flexible Packaging Films primarily due to lower volume and a decrease in average selling prices due to competitive pricing pressures and lower input costs. Net sales increased 11.3% in Aluminum Extrusions primarily due to

27



higher sales volume and an increase in average selling prices mainly driven by inflationary price increases, higher average aluminum costs and favorable changes in product mix due to a higher percentage of painted and anodized finished products and an increase in fabricated components. For more information on net sales and volume, see the Executive Summary beginning on page 19.
Operating Costs and Expenses. Consolidated gross profit margin was 15.2% in 2014 and 15.2% in 2013. Gross profit as a percentage of sales was favorably impacted by lower pension expenses in 2014 compared to 2013. Most of the impact of lower pension expense is not allocated to PE Films or Aluminum Extrusions. The gross profit margin in PE Films decreased due to lower volume, partially offset by the favorable impact of the change in the U.S. dollar value of currencies for operations outside the U.S. The gross profit margin in Flexible Packaging Films decreased due to lower volume, competitive pricing pressures and higher manufacturing costs, partially offset by foreign currency transaction gains associated with U.S. dollar denominated export sales in Brazil. The gross profit margin in Aluminum Extrusions increased primarily as a result of improved product mix, higher volume, additional manufacturing efficiencies and improved pricing on value-added services. For more information on operating costs and expenses, see the Executive Summary beginning on page 19.
As a percentage of sales, selling, general and administrative and R&D expenses were 8.6% in 2014, which decreased from 8.7% in 2013. The decrease in selling, general and administrative and R&D expenses as a percentage of sales can be primarily attributed to the reduction of selling, general and administrative costs in Aluminum Extrusions and lower performance-based incentive costs.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges in 2014 totaled $13.8 million ($9.3 million after taxes), and unless otherwise noted below, are included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of income. Results in 2014 included:
A second quarter charge of $10.0 million ($6.8 million after taxes) associated with a one-time, lump sum license payment to the 3M Company after the Company settled all litigation issues associated with a patent infringement complaint (included in “Other income (expense), net” in the consolidated statements of income);
A fourth quarter charge of $0.5 million ($0.3 million after taxes) in Flexible Packaging Films ($0.3 million) and PE Films ($0.2 million), a third quarter charge of $0.4 million ($0.2 million after taxes) in Flexible Packaging Films ($0.3 million), PE Films ($78,000) and Aluminum Extrusions ($31,000), a second quarter charge of $0.6 million ($0.4 million after taxes) in PE Films and a first quarter charge of $0.8 million ($0.5 million after taxes) in PE Films for severance and other employee-related costs associated with restructurings;
A fourth quarter charge of $0.7 million ($0.4 million after taxes), a third quarter charge of $75,000 ($46,000 after taxes) and a second quarter charge of $0.2 million ($0.1 million after taxes) related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income);
A fourth quarter adjustment of previously accrued severance and other employee-related costs of $0.1 million ($63,000 after taxes) and a third quarter charge of $37,000 ($23,000 after taxes), a second quarter charge of $0.3 million ($0.2 million after taxes) and a first quarter charge of $0.5 million ($0.3 million after taxes) associated with the shutdown of the PE Films’ manufacturing facility in Red Springs, North Carolina, which includes net severance and other employee-related costs of $0.4 million and asset impairment and other shutdown-related charges of $0.3 million;
A fourth quarter gain of $0.1 million ($73,000 after taxes) related to the sale of a previously shutdown PE Films’ manufacturing facility in LaGrange, Georgia (included in “Other income (expense), net” in the consolidated statements of income); and
A fourth quarter charge of $11,000 ($7,000 after taxes), a third quarter charge of $20,000 ($12,000 after taxes) and a second quarter charge of $24,000 ($15,000 after taxes) associated with the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana.
On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada for $25.0 million. All historical results for this business have been reflected as discontinued operations. Accruals for indemnifications under the purchase agreement related to environmental matters were adjusted in 2014, resulting in income from discontinued operations of $0.9 million ($0.9 million after taxes).
Results in 2014 include an unrealized gain on the Company’s investment in kaléo (included in “Other income (expense), net” in the consolidated statements of income) of $2.0 million ($1.0 million after taxes; see further discussion in Investment Accounted for Under the Fair Value Method beginning on page 24). An unrealized loss on the Company’s investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income and “Corporate expenses,

28



net” in the statement of net sales and operating profit by segment) of $0.8 million ($0.4 million after taxes) was recorded in 2014 as a result of a reduction in the fair value of the investment that is not expected to be temporary. The Company realized a gain on the sale of a portion of its investment property in Alleghany and Bath Counties, Virginia (included in “Other income (expense), net” in the consolidated statements of income) of $1.2 million ($0.8 million after taxes) in 2014. For more information on costs and expenses, see the Executive Summary beginning on page 19.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.6 million in 2014, compared to $0.6 million in 2013.
Interest expense, which includes the amortization of debt issue costs, was $2.7 million in 2014, compared to $2.9 million for 2013. Average debt outstanding and interest rates were as follows:
(In Millions)
2014
 
2013
Floating-rate debt with interest charged on a rollover
 
 
 
basis at one-month LIBOR plus a credit spread:
 
 
 
Average outstanding debt balance
$
136.5

 
$
133.5

Average interest rate
2.0
%
 
1.9
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
136.5

 
$
133.5

Average interest rate
2.0
%
 
1.9
%
Income Taxes. The effective income tax rate from continuing operations was 20.7% in 2014 compared with 32.1% in 2013. Income taxes from continuing operations in 2014 included the recognition of a tax benefit for a portion of the Company’s capital loss carryforwards of $4.9 million. These capital loss carryforwards were previously offset by a valuation allowance associated with expected limitations on the utilization of these assumed capital losses. As a result of changes in the underlying basis of certain foreign subsidiaries, income taxes from continuing operations in 2014 also included an adjustment of $2.2 million to reverse previously accrued deferred tax liabilities arising from changes in tax basis due to foreign currency translation adjustments and unremitted earnings. Income taxes from continuing operations in 2013 primarily reflect the benefit of foreign tax incentives, partially offset by the impact of adjustments for tax contingency matters. Factors impacting the effective tax rate for 2014 and 2013 are further detailed in the effective income tax rate reconciliation provided in Note 17 of the Notes to Financial Statements beginning on Page 79.
Financial Condition
Assets and Liabilities
Tredegar’s management continues to focus on improving working capital management, and measures such as days sales outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used by the Company to evaluate changes in working capital. Significant changes in assets and liabilities from continuing operations from December 31, 2014 to December 31, 2015 are summarized below:
Accounts and other receivables decreased $19.1 million (16.9%).
Accounts and other receivables in PE Films decreased by $9.3 million due mainly to the timing of cash receipts and lower sales volume. DSO (represents trailing 12 months net sales divided by a rolling 12-month average of accounts and other receivables balances) was approximately 42.7 days in 2015 and 42.9 days in 2014.
Accounts and other receivables in Flexible Packaging Films decreased by $6.2 million primarily due to the timing of cash receipts and lower net sales. DSO was approximately 68.9 days in 2015 and 59.5 days in 2014. The increase in DSO from 2014 to 2015 is primarily due to higher export sales, which have longer terms than domestic sales, and pricing pressures, which has led to extending payment terms to remain competitive.
Accounts and other receivables in Aluminum Extrusions decreased by $3.6 million primarily due to the timing of cash receipts. DSO was approximately 45.1 days in 2015 and 45.3 days in 2014.
Inventories decreased $9.0 million (12.1%).

29



Inventories in PE Films decreased by $3.8 million primarily due to the impact of the change in the U.S. dollar value of currencies for operations outside the U.S. and the timing of shipments at the end of the year. DIO (represents trailing 12 months costs of goods sold calculated on a first-in, first-out basis divided by a rolling 12-month average of inventory balances calculated on the first-in, first-out basis) was approximately 48.3 days in 2015 and 46.2 days in 2014.
Inventories in Flexible Packaging Films decreased by $6.7 million primarily due to the impact of the change in the U.S. dollar value of currencies for operations outside the U.S. DIO was approximately 81.6 days in 2015 and 71.8 days in 2014. The increase in DIO from 2014 to 2015 is primarily due to the impact of the change in the U.S. dollar value of currencies for operations outside the U.S.
Inventories in Aluminum Extrusions increased by $1.5 million primarily due to higher sales volume and the timing of shipments at the end of the year. DIO was approximately 29.8 days in 2015 and 24.1 days in 2014. The increase in DIO from 2014 to 2015 is primarily due to stockpiling of inventory for expected future demand.
Net property, plant and equipment decreased $38.6 million (14.3%) due primarily to depreciation of $30.9 million and a change in the value of the U.S. dollar relative to foreign currencies (a decrease of approximately $40.3 million), partially offset by capital expenditures of $32.8 million.
Goodwill and other intangibles decreased by $62.1 million (28.8%) primarily due to the write-off of $44.5 million of goodwill associated with Flexible Packaging Films (see Note 8 of the Notes to Financial Statements beginning on page 67), amortization expense of $4.1 million and changes in the value of the U.S. dollar relative to the Brazilian Real.
Accounts payable decreased by $10.0 million (10.6%).
Accounts payable in PE Films decreased by $3.6 million primarily due to lower inventory balances and the timing of payments at the end of the year. DPO (represents trailing 12 months costs of goods sold calculated on a first-in, first-out basis divided by a rolling 12-month average of accounts payable balances) was approximately 39.0 days in 2015 and 36.2 days in 2014.
Accounts payable in Flexible Packaging Films decreased by $4.6 million, primarily due to lower inventory balances, the timing of payments and the impact of the change in the U.S. dollar value of currencies for operations outside the U.S. DPO was approximately 34.2 days in 2015 and 35.5 days in 2014.
Accounts payable in Aluminum Extrusions decreased by $2.4 million, primarily due to the timing of payments. DPO was approximately 48.0 days in 2015 and 48.0 days in 2014.
Accrued expenses increased by $1.6 million (5.0%) from December 31, 2014.
Other noncurrent liabilities decreased by $3.9 million (3.4%) from December 31, 2014. 
Net deferred income tax liabilities in excess of assets decreased by $11.7 million primarily due to numerous changes between years in the balance of the components shown in the December 31, 2015 and 2014 schedule of deferred income tax assets and liabilities provided in Note 17 of the Notes to Financial Statements beginning on Page 79. The Company had a current income tax receivable of $0.4 million at December 31, 2015 compared to a current receivable of $0.9 million at December 31, 2014. The change is primarily due to the timing of tax payments.

30



Net capitalization and indebtedness as defined under the Company’s revolving credit agreement as of December 31, 2015 were as follows:
Net Capitalization and Indebtedness as of December 31, 2015
(In Thousands)
 
Net capitalization:
 
Cash and cash equivalents
$
44,156

Debt:
 
$350 million revolving credit agreement maturing April 23, 2017
104,000

Other debt

Total debt
104,000

Debt net of cash and cash equivalents
59,844

Shareholders’ equity
272,748

Net capitalization
$
332,592

Indebtedness as defined in revolving credit agreement:
 
Total debt
$
104,000

Face value of letters of credit
2,684

Other
250

Indebtedness
$
106,934

Under the revolving credit agreement, borrowings are permitted up to $350 million, and approximately $164 million was available to borrow at December 31, 2015 based on the most restrictive covenants. The credit spread and commitment fees charged on the unused amount under the revolving credit agreement at various indebtedness-to-adjusted EBITDA levels are as follows:
Pricing Under Revolving Credit Agreement (Basis Points)
Indebtedness-to-Adjusted EBITDA Ratio
Credit Spread
Over LIBOR
 
Commitment
Fee
> 2.0x but <= 3.0x
200
 
35
> 1.0x but <=2.0x
175
 
30
<= 1.0x
150
 
25
At December 31, 2015, the interest rate on debt borrowed under the revolving credit agreement was priced at one-month LIBOR plus the applicable credit spread of 175 basis points. Market exposure related to changes in one-month LIBOR (assuming that the applicable credit spread remains at 175 basis points) would not be material to the consolidated financial results. The Company has historically had indebtedness-to-adjusted EBITDA ratios of less than 2.0x.
As of December 31, 2015, Tredegar is in compliance with all financial covenants outlined in its revolving credit agreement. Noncompliance with any of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the covenant(s) through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the amended covenant is renegotiated.
The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the credit agreement are not intended to represent net income or cash flow from operations as defined by U.S. GAAP and should not be considered as either an alternative to net income or to cash flow.

31




Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and Interest Coverage Ratio as Defined in the Credit Agreement Along with Related Most Restrictive Covenants

As of and for the Twelve Months Ended December 31, 2015 (In Thousands)
Computations of adjusted EBITDA and adjusted EBIT as defined in revolving credit agreement for the twelve months ended December 31, 2015:
Net income (loss)
$
(32,135
)
Plus:
 
After-tax losses related to discontinued operations

Total income tax expense for continuing operations
8,928

Interest expense
3,502

Depreciation and amortization expense for continuing operations
34,982

All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $8,331)
54,561

Charges related to stock option grants and awards accounted for under the fair value-based method
483

Losses related to the application of the equity method of accounting

Losses related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting
20,500

Minus:
 
After-tax income related to discontinued operations

Total income tax benefits for continuing operations

Interest income
(294
)
All non-cash gains and income, plus cash gains and income in excess of $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings

Income related to changes in estimates for stock option grants and awards accounted for under the fair value-based method

Income related to the application of the equity method of accounting

Income related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting

Plus cash dividends declared on investments accounted for under the equity method of accounting

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

Adjusted EBITDA as defined in revolving credit agreement
90,527

Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions and asset dispositions)
(34,982
)
Adjusted EBIT as defined in revolving credit agreement
$
55,545

Computations of leverage and interest coverage ratios as defined in revolving credit agreement at December 31, 2015:
Leverage ratio (indebtedness-to-adjusted EBITDA)
1.18x

Interest coverage ratio (adjusted EBIT-to-interest expense)
15.86x

Most restrictive covenants as defined in revolving credit agreement:
 
Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the revolving credit agreement ($100,000 plus 50% of net income generated beginning January 1, 2012)
$
148,771

Maximum leverage ratio permitted:
3.00x

Minimum interest coverage ratio permitted
2.50x


32



Tredegar is obligated to make future payments under various contracts as set forth below:
 
Payments Due by Period
(In Millions)
2016
 
2017
 
2018
 
2019
 
2020
 
Remainder
 
Total
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal payments
$

 
$
104.0

 
$

 
$

 
$

 
$

 
$
104.0

Estimated interest expense
2.3

 
0.7

 

 

 

 

 
3.0

Estimated contributions required (1) :
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
6.1

 
8.0

 
13.8

 
13.0

 
12.8

 
52.2

 
105.9

Other postretirement benefits
0.5

 
0.5

 
0.5

 
0.5

 
0.5

 
5.2

 
7.7

Capital expenditure commitments
7.3

 

 

 

 

 


 
7.3

Operating leases
2.3

 
2.0

 
1.9

 
1.8

 
1.8

 
2.3

 
12.1

Estimated obligations relating to uncertain tax positions (2)