PART I
Description of Business
Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in the manufacture of plastic films and aluminum extrusions. FinancialThe financial information related to Tredegar’s films and continuing aluminum segments and related to geographical areas included in Note 3 to the notes to financial statements is incorporated herein by reference. Unless the context requires otherwise, all references herein to “Tredegar,” “we,” “us” or “our” are to Tredegar Corporation and its consolidated subsidiaries.
Film Products
Tredegar Film Products Corporation and its subsidiaries (together, “Film Products”) manufacture plastic films, elastics and laminate materials primarily for personal and household care products and packagingsurface protection and surface protectionpackaging applications. These products are produced at locations in the United States (“U.S.”) and at plants in The Netherlands, Hungary, Italy, China and Brazil. Film Products competes in all of its markets on the basis of product innovation, quality, price and service.
Personal and Household Care Materials. Film Products is one of the largest global suppliers of apertured, breathable, elastic and embossed films, and laminate materials for personal care markets, including:
Apertured film and nonwoven materials for use as topsheet in feminine hygiene products, baby diapers and adult |
Breathable, embossed and elastic materials for use as components for baby diapers, adult |
Absorbent transfer layers for baby diapers and adult |
In each of the last three years,2009, personal care products accounted for more than 30%approximately 52% of Tredegar’s consolidated net sales.sales from continuing operations compared to approximately 40% of consolidated net sales from continuing operations in the preceding two years.
Protective Films. Film Products also makes aperturedproduces single and multi-layer surface protection films breathable barriersold under the UltraMaskTM and ForceFieldTM brand names. These films and laminates that regulate vapor or fluid transmission. These products are typically used in industrial, medical, agriculturalhigh technology applications, most notably protecting components of flat panel displays, which include liquid crystal display (“LCD”) televisions, monitors and household markets, including disposable mops, facial wipes, filter layers for personal protective suits, facial masks and landscaping fabric. Film Products supplies a family of laminates for use in protective apparel undernotebooks, during the GuardDog LaminatesTM brand name.manufacturing process.
Packaging Films and Protective Films. Films for Other Markets. Film Products produces a broad line of packaging films with an emphasis on paper products, as well as laminating films for food packaging applications. TheseWe believe these products give our customers a competitive advantage by providing cost savings with thin-gauge films that are readily printable and convertible on conventional processing equipment. Major end uses include overwrap for bathroom tissue and paper towels andas well as retort pouches.
Film Products also producesmakes apertured films, breathable barrier films and laminates that regulate fluid or vapor transmission. These products are disposable, protective coversheets for photopolymerstypically used in the manufacture of circuit boards. Other films sold under the UltraMask®industrial, medical, agricultural and ForceFieldTM brand names are used ashousehold markets, including filter layers for personal protective films to protect flat panel display components during fabrication, shippingsuits, facial masks, landscaping fabric and handling.construction applications.
Raw Materials. The primary raw materials used by Film Products are low density, linear low density and high density polyethylene and polypropylene resins, which are obtained from domestic and foreign suppliers at competitive prices. We believe there will be an adequate supply of polyethylene and polypropylene resins in the immediate
foreseeable future. Film Products also buys polypropylene-based nonwoven fabrics based on these same resins, and we believe there will be an adequate supply of these materials in the immediateforeseeable future.
P&G and Tredegar have had a successful long-term relationship based on cooperation, product innovation and continuous process improvement. The loss or significant reduction in sales associated with P&G would have a material adverse effect on our business.
Aluminum Extrusions
The William L. Bonnell Company, Inc. and its subsidiaries (together, "Aluminum Extrusions") produce soft-alloy aluminum extrusions primarily for building and construction, distribution, transportation, machinery and equipment, electrical, and consumer durables markets. On February 12, 2008, we sold our aluminum extrusions business in Canada. All historical results for the Canadian business have been reflected as discontinued operations (see Note 17 to the notes to financial statements for more information).
Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted aluminum extrusions for sale directly to fabricators and distributors that use our extrusions to produce window components, curtain walls and storefronts, tub and shower doors,enclosures, industrial and agricultural machinery and equipment ladders, bus bars,and automotive parts, snowmobiles and tractor-trailer shapes, among other products. Sales are made primarily in the United States, and Canada, principally east of the Rocky Mountains. Aluminum Extrusions competes primarily on the basis of product quality, service and price.
Aluminum ExtrusionsExtrusions’ 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) | |||||||
| 2009 | 2008 | 2007 | |||||
| Building and construction: | |||||||
| Nonresidential | 71 | 72 | 65 | ||||
| Residential | 14 | 13 | 17 | ||||
| Transportation | 6 | 4 | 4 | ||||
| Distribution | 4 | 5 | 9 | ||||
| Electrical | 2 | 2 | 2 | ||||
| Consumer durables | 2 | 2 | 1 | ||||
| Machinery and equipment | 1 | 2 | 2 | ||||
| Total | 100 | 100 | 100 | ||||
| by Market Segment | ||||||||||
2006 | 2005 | 2004 | ||||||||
| Building and construction: | ||||||||||
| Commercial | 48 | 44 | 41 | |||||||
| Residential | 14 | 18 | 21 | |||||||
| Distribution | 19 | 16 | 13 | |||||||
| Transportation | 9 | 9 | 10 | |||||||
| Machinery and equipment | 5 | 6 | 7 | |||||||
| Electrical | 3 | 4 | 5 | |||||||
| Consumer durables | 2 | 3 | 3 | |||||||
| Total | 100 | 100 | 100 | |||||||
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. We believe there will be an adequate supply of aluminum and other required raw materials and supplies in the immediateforeseeable future.
Intellectual Property. Aluminum Extrusions holds two U.S. patents and two U.S.registered trademarks.
General
Research and Development. Tredegar’s spending for research and development (“R&D&D”) activities in 2006, 20052009, 2008 and 20042007 was related to Film Products. Film Products has technical centers in Richmond, Virginia; Terre Haute, Indiana; and AFBS, Inc. (formerly known as Therics, Inc.).Chieti, Italy. R&D spending at Film Products was approximately $8.1$11.9 million in 2006, $6.62009, $11.0 million in 20052008 and $7.5$8.4 million in 2004.2007.
Government Regulation. Laws concerning the environment that affect or could affect our domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation 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"), as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. WeAt December 31, 2009, we believe that we arewere in substantial compliance with all applicable environmental laws, regulations and permits. In orderord er to maintain substantial compliance with such standards, we may be required to incur 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.
Employees. Tredegar employed approximately 3,0002,000 people at December 31, 2006.2009.
Available Information and Corporate Governance Documents. Our Internet address is www.tredegar.comwww.tredegar.com. We make available, free of charge through our website, our 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 SEC. Information filed electronically with the SEC can be accessed on its website at www.sec.govwww.sec.gov. In addition,additio n, our Corporate Governance Guidelines, Code of Conduct and the charters of our Audit, Executive Compensation and Nominating and Governance Committees are available on our 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 our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.
Item 1A. RISK FACTORS |
There are a number of risks and uncertainties that can have a material effect on the operating results of our businesses and our financial condition. TheseThe following risk factors include, but are not limitedshould be considered, in addition to the following:
| ● | Our future performance is influenced by costs incurred by our operating companies including, for example, the cost of |
If we are unable to obtain capital at a reasonable cost, we may not be able to expand our operations and implement our growth strategies. Our |
Non-compliance with any of the covenants in our $300 million credit facility could result in all outstanding debt under the agreement becoming due, which could have an adverse effect on our financial condition |
| ● | Our investments (primarily $10 million investment in Harbinger and $7.5 million investment in a drug delivery company) have high risk. Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”) is a fund that seeks to achieve superior absolute returns by participating primarily in medium to long-term investments involving distressed/high yield debt securities, special situation equities and private loans and notes. The fund is a highly speculative investment and subject to limitations on withdrawal. The drug delivery company may need several more rounds of financing to have the opportunity to complete product development and bring its technology to market, which may never occur. There is no secondary market for selling o ur interests in Harbinger or the drug delivery company. As a result, we may be required to bear the risk of our investments in Harbinger and the drug delivery company for an indefinite period of time. |
| ● | Loss of certain key officers or employees could adversely affect our business. We depend on our senior executive officers and other key personnel to run our business. The loss of any of these officers or other key personnel could materially adversely affect our operations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and |
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| expansion of our business could hinder our ability to improve manufacturing operations, conduct research activities successfully and develop marketable products. |
| ● | Tredegar is subject to increased credit risk that is inherent with an economic downturn and efforts to increase market share as we attempt to broaden our customer base. In the event of the deterioration of operating cash flows or diminished borrowing capacity of our customers, the collection of trade receivable balances may be delayed or deemed unlikely. The operations of our 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 in recession. In addition, Films Products’ credit risk exposure could increase as efforts to expand its business may lead to a broader, more diverse customer base. |
| ● | Tredegar is subject to various environmental laws and regulations and could become exposed to substantial liabilities and costs associated with such laws. We are subject to various environmental proceedings and could become subject to additional proceedings 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 our consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations. Changes in environmental laws and regulations, or their appl ication, including, but not limited to, those relating to global climate change, could subject us to significant additional capital expenditures and operating expenses. Moreover, future developments in federal, state, local and international environmental laws and regulations are currently especially difficult to predict. Environmental laws have become and are expected to continue to become increasingly strict. As a result, we will be subject to new environmental laws and regulations. However, any such changes are uncertain and, therefore, it is not possible for us 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. |
| ● | An inability to renegotiate one of our collective bargaining agreements could adversely affect our financial results. Some of our 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. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future. Any such work stoppages (or potential work stoppages) could negatively impact our ability to manufacture our products and adversely affect results of operations. |
| ● | Film Products is highly dependent on sales associated with one customer, P |
Growth of Film Products depends on our ability to develop and deliver new products at competitive |
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| business. In the long term, growth will depend on our ability to provide innovative materials at a cost that meets our customers’ needs. |
Continued growth in Film Products' sale of high value protective film products is not assured.A shift in our customers' preference to new or different products or new technology that displaces flat panel displays that currently utilize our protective films could have a material adverse effect on our |
| ● | Our substantial international operations subject us to risks of doing business in countries outside the United States, which could adversely affect our business, financial condition and results of operations. Risks inherent in international operations include the following, by way of example: changes in general economic conditions, potential difficulty enforcing agreements and intellectual property rights, 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, fluctuations in exchange rates, imposition of additional taxes on our income generated outside the U.S., nationalization of private enterprises and un expected adverse changes in international laws and regulatory requirements. |
Our inability to protect our intellectual property rights or our infringement of the intellectual property rights of others could have a significant adverse impact on Film Products.Film Products operates in a field where our significant customers and competitors have substantial intellectual property portfolios. The continued success of this business depends on our ability not only to protect our 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. An unfavorable outcome in any intellectual property litigation or similar proceeding could have a |
| ● | Failure of our customers to achieve success or maintain market share could adversely impact sales and operating margins. Our products serve as components for various consumer products sold worldwide. Our customers’ ability to successfully develop, manufacture and market its products is integral to our success. |
| ● | Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economic conditions of end-use markets in the United States, Currently, there is uncertainty surrounding the extent and timing of recovery from the current economic recession. There can be no assurance as to the extent and timing of the recovery of sales volumes and profits for |
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| Aluminum Extrusions, especially since there can be a lag in the recovery of its end-use markets in comparison to the overall economic recovery. |
| ● | The markets for our products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has |
| During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of our 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 which is competitively more defensible compared to higher volume, standard extrusion applications. |
None.
General
Most of the improved real property and the other assets used in our operations are owned, and none of the owned property is subject to an encumbrance that is material to our consolidated operations. We consider the plants, warehouses and other properties and assets owned or leased by us to be in generally good condition.
We believe that the capacity of our plants is adequate to meet our immediate needs. Our plants generally have operated at 50-95%50-90% of capacity. Our corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.
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Our principal plants and facilities are listed below:
Film Products | ||||
Locations in the Lake Zurich, Illinois Pottsville, Pennsylvania Red Springs, North Carolina (leased) Richmond, Virginia (technical center) (leased) Terre Haute, Indiana (technical center and production facility) | Locations Chieti, Italy (technical center) (leased) Guangzhou, China Kerkrade, The Netherlands Pune, India (under construction) Rétság, Hungary Roccamontepiano, Italy São Paulo, Brazil Shanghai, China | Principal Operations Production of plastic films and laminate materials |
Aluminum Extrusions | ||||
Locations in the Carthage, Tennessee Kentland, Indiana Newnan, Georgia | Locations in Canada | Principal Operations Production of aluminum extrusions, fabrication and finishing |
None.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
PART II
Market Prices of Common Stock and Shareholder Data
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol TG. We have no preferred stock outstanding. There were 39,286,07933,887,550 shares of common stock held by 3,4823,620 shareholders of record on December 31, 2006.2009.
The following table shows the reported high and low closing prices of our common stock by quarter for the past two years.
2006 | 2005 | ||||||||||||
High | Low | High | Low | ||||||||||
| First quarter | $ | 16.65 | $ | 13.06 | $ | 20.19 | $ | 16.08 | |||||
| Second quarter | 16.89 | 13.84 | 17.56 | 14.52 | |||||||||
| Third quarter | 16.94 | 14.39 | 16.67 | 12.09 | |||||||||
| Fourth quarter | 23.32 | 16.31 | 13.16 | 11.76 | |||||||||
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First quarter | $ | 18.68 | $ | 14.43 | $ | 18.56 | $ | 13.13 | ||||||||
| Second quarter | 17.99 | 12.79 | 19.49 | 14.19 | ||||||||||||
| Third quarter | 15.82 | 13.07 | 20.59 | 13.38 | ||||||||||||
| Fourth quarter | 15.93 | 13.40 | 18.68 | 11.41 | ||||||||||||
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The closing price of our common stock on February 20, 200726, 2010 was $23.86.$16.75.
Dividend Information
We have paid a dividend every quarter since becoming a public company in July 1989. During 2006, 20052009, 2008 and 2004,2007, our quarterly dividend was 4 cents per share.
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 our credit agreement and other such other considerations as the Board deems relevant. See Note 8 beginning on page 5961 for the restrictions contained in our credit agreement related to minimum shareholders’ equity required and aggregate dividends permitted.
Issuer Purchases of Equity Securities
Under these standing authorizations, we purchased 105,497 shares in 2009 and approximately 1.1 million shares in 2008 of our stock in the open market at an average price of $14.44 and $14.88 per share, respectively.
The table below summarizes share repurchase activity under the current program by month during 2009 and 2008:
| Period | Total Number ofPurchased | Average Price PaidCommissions | Total CumulativePurchased: | Maximum Number ofPurchased: | ||||||
| January 2008 | - | $ | - | - | 5,000,000 | |||||
| February 2008 | 16,300 | 15.38 | 16,300 | 4,983,700 | ||||||
| March 2008 | 386,500 | 15.44 | 402,800 | 4,597,200 | ||||||
| April 2008 | - | - | 402,800 | 4,597,200 | ||||||
| May 2008 | 311,800 | 14.84 | 714,600 | 4,285,400 | ||||||
| June 2008 | 69,400 | 14.23 | 784,000 | 4,216,000 | ||||||
| July 2008 | 253,600 | 13.87 | 1,037,600 | 3,962,400 | ||||||
| August 2008 - July 2009 | - | - | 1,037,600 | 3,962,400 | ||||||
| August 2009 | 66,737 | 14.59 | 1,104,337 | 3,895,663 | ||||||
| September 2009 | 38,760 | 14.13 | 1,143,097 | 3,856,903 | ||||||
| October 2009 - December 2009 | - | - | 1,143,097 | 3,856,903 | ||||||
See page 31 of the Financial Condition section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional share repurchases from January 1, 2010 through February 26, 2010. | ||||||||||
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Annual Meeting
Our annual meeting of shareholders will be held on May 17, 2007,18, 2010, beginning at 9:00 a.m. EDT at Lewis Ginter Botanical Garden, 1800 Lakeside Avenue,the Jepson Alumni Center of the University of Richmond, Virginia, 23229.49 Crenshaw Way, Richmond, Virginia. We expect to mail formal notice of the annual meeting, proxies and proxy statements to shareholders on or about March 28, 2007.April 6, 2010.
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, 2006.2009. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.
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Inquiries
Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to:
Phone: 800-622-6757
E-mail: shareholder.inquiries@nationalcity.comweb.queries@computershare.com
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
Web site: www.tredegar.com
Quarterly Information
We do not generate or distribute quarterly reports to shareholders. Information on quarterly results can be obtained from our website. In addition, we file quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.govwww.sec.gov.
Legal Counsel | Independent Registered Public Accounting Firm |
Hunton & Williams LLP Richmond, Virginia | PricewaterhouseCoopers LLP Richmond, Virginia |
The tables that follow on pages 10-1612-17 present certain selected financial and segment information for the eightfive years ended December 31, 2006.2009.
EIGHT-YEAR SUMMARY | |||||||||||||||||||||||||
| Tredegar Corporation and Subsidiaries | |||||||||||||||||||||||||
| Years Ended December 31 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands, Except Per-Share Data) | |||||||||||||||||||||||||
Results of Operations (a): | |||||||||||||||||||||||||
| Sales | $ | 1,116,525 | $ | 956,969 | $ | 861,165 | $ | 738,651 | $ | 753,724 | $ | 779,157 | $ | 879,475 | $ | 828,015 | |||||||||
| Other income (expense), net | 1,444 | (b) | (544 | ) (c) | 15,604 | (d) | 7,853 | 546 | 1,255 | 1,914 | 972 | ||||||||||||||
1,117,969 | 956,425 | 876,769 | 746,504 | 754,270 | 780,412 | 881,389 | 828,987 | ||||||||||||||||||
| Cost of goods sold | 944,839 | (b) | 810,621 | (c) | 717,120 | (d) | 606,242 | 582,658 | 618,323 | 706,817 | 648,254 | ||||||||||||||
| Freight | 28,096 | 24,691 | 22,398 | 18,557 | 16,319 | 15,580 | 17,125 | 15,221 | |||||||||||||||||
| Selling, general & administrative expenses | 68,360 | (b) | 64,723 | (c) | 60,030 | (d) | 53,341 | 52,252 | 47,954 | 47,321 | 44,675 | ||||||||||||||
| Research and development expenses | 8,088 | 8,982 | 15,265 | 18,774 | 20,346 | 20,305 | 15,305 | 11,500 | |||||||||||||||||
| Amortization of intangibles | 149 | 299 | 330 | 268 | 100 | 4,914 | 5,025 | 3,430 | |||||||||||||||||
| Interest expense | 5,520 | 4,573 | 3,171 | 6,785 | 9,352 | 12,671 | 17,319 | 9,088 | |||||||||||||||||
| Asset impairments and costs associated with exit and disposal activities | 4,080 | (b) | 16,334 | (c) | 22,973 | (d) | 11,426 | (e) | 3,884 | (f) | 16,935 | (g) | 23,791 | (h) | 4,628 | (i) | |||||||||
| Unusual items | - | - | - | 1,067 | (e) | (6,147 | ) (f) | (971 | ) (g) | (762 | ) (h) | - | |||||||||||||
1,059,132 | 930,223 | 841,287 | 716,460 | 678,764 | 735,711 | 831,941 | 736,796 | ||||||||||||||||||
| Income from continuing operations before income taxes | 58,837 | 26,202 | 35,482 | 30,044 | 75,506 | 44,701 | 49,448 | 92,191 | |||||||||||||||||
| Income taxes | 20,636 | (b) | 9,973 | 9,222 | (d) | 10,717 | 26,881 | 13,950 | (g) | 18,135 | 32,728 | ||||||||||||||
| Income from continuing operations (a) | 38,201 | 16,229 | 26,260 | 19,327 | 48,625 | 30,751 | 31,313 | 59,463 | |||||||||||||||||
| Discontinued operations (a): | |||||||||||||||||||||||||
| Income (loss) from venture capital investment activities | - | - | 2,921 | (46,569 | ) | (42,428 | ) | (16,627 | ) | 83,640 | (4,626 | ) | |||||||||||||
| Income (loss) from operations of Molecumetics | - | - | - | 891 | (8,728 | ) | (5,768 | ) | (3,577 | ) | (2,189 | ) | |||||||||||||
| Income from discontinued energy segment | - | - | - | - | - | 1,396 | - | - | |||||||||||||||||
| Income (loss) from discontinued operations (a) | - | - | 2,921 | (45,678 | ) | (51,156 | ) | (20,999 | ) | 80,063 | (6,815 | ) | |||||||||||||
| Net income (loss) | $ | 38,201 | $ | 16,229 | $ | 29,181 | $ | (26,351 | ) | $ | (2,531 | ) | $ | 9,752 | $ | 111,376 | $ | 52,648 | |||||||
| Diluted earnings (loss) per share: | |||||||||||||||||||||||||
| Continuing operations (a) | $ | .98 | $ | .42 | $ | .68 | $ | .50 | $ | 1.25 | $ | .79 | $ | .80 | $ | 1.54 | |||||||||
| Discontinued operations (a) | - | - | .08 | (1.19 | ) | (1.32 | ) | (.54 | ) | 2.06 | (.18 | ) | |||||||||||||
| Net income (loss) | $ | .98 | $ | .42 | $ | .76 | $ | (.69 | ) | $ | (.07 | ) | $ | .25 | $ | 2.86 | $ | 1.36 | |||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
EIGHT-YEAR SUMMARY | |||||||||||||||||||||||||
| Tredegar Corporation and Subsidiaries | |||||||||||||||||||||||||
| Years Ended December 31 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands, Except Per-Share Data) | |||||||||||||||||||||||||
Share Data: | |||||||||||||||||||||||||
| Equity per share | $ | 13.15 | $ | 12.53 | $ | 12.45 | $ | 11.72 | $ | 12.08 | $ | 12.53 | $ | 13.07 | $ | 9.88 | |||||||||
| Cash dividends declared per share | .16 | .16 | .16 | .16 | .16 | .16 | .16 | .16 | |||||||||||||||||
| Weighted average common shares outstanding during the period | 38,671 | 38,471 | 38,295 | 38,096 | 38,268 | 38,061 | 37,885 | 36,992 | |||||||||||||||||
| Shares used to compute diluted earnings per share during the period | 38,931 | 38,597 | 38,507 | 38,441 | 38,869 | 38,824 | 38,908 | 38,739 | |||||||||||||||||
| Shares outstanding at end of period | 39,286 | 38,737 | 38,598 | 38,177 | 38,323 | 38,142 | 38,084 | 37,661 | |||||||||||||||||
| Closing market price per share: | |||||||||||||||||||||||||
| High | 23.32 | 20.19 | 20.25 | 16.76 | 24.72 | 21.70 | 32.00 | 32.94 | |||||||||||||||||
| Low | 13.06 | 11.76 | 13.00 | 10.60 | 12.25 | 15.30 | 15.00 | 16.06 | |||||||||||||||||
| End of year | 22.61 | 12.89 | 20.21 | 15.53 | 15.00 | 19.00 | 17.44 | 20.69 | |||||||||||||||||
| Total return to shareholders (j) | 76.6 | % | (35.4 | )% | 31.2 | % | 4.6 | % | (20.2 | )% | 9.9 | % | (14.9 | )% | (7.3 | )% | |||||||||
Financial Position: | |||||||||||||||||||||||||
| Total assets | 781,787 | 781,758 | 769,474 | 753,025 | 837,962 | 865,031 | 903,768 | 792,487 | |||||||||||||||||
| Cash and cash equivalents | 40,898 | 23,434 | 22,994 | 19,943 | 109,928 | 96,810 | 44,530 | 25,752 | |||||||||||||||||
| Income taxes recoverable from sale of venture capital portfolio | - | - | - | 55,000 | - | - | - | - | |||||||||||||||||
| Debt | 62,520 | 113,050 | 103,452 | 139,629 | 259,280 | 264,498 | 268,102 | 270,000 | |||||||||||||||||
| Shareholders' equity (net book value) | 516,595 | 485,362 | 480,442 | 447,399 | 462,932 | 477,899 | 497,728 | 372,228 | |||||||||||||||||
| Equity market capitalization (k) | 888,256 | 499,320 | 780,066 | 592,889 | 574,845 | 724,706 | 664,090 | 779,112 | |||||||||||||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
| Net Sales (1) | |||||||||||||||||||||||||
| Segment | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products | $ | 511,169 | $ | 460,277 | $ | 413,257 | $ | 365,501 | $ | 376,904 | $ | 382,740 | $ | 380,202 | $ | 342,300 | |||||||||
| Aluminum Extrusions | 577,260 | 471,749 | 425,130 | 354,593 | 360,293 | 380,387 | 479,889 | 461,241 | |||||||||||||||||
| AFBS (formerly Therics) | - | 252 | 380 | - | 208 | 450 | 403 | 161 | |||||||||||||||||
| Total ongoing operations (m) | 1,088,429 | 932,278 | 838,767 | 720,094 | 737,405 | 763,577 | 860,494 | 803,702 | |||||||||||||||||
| Divested operations (a): | |||||||||||||||||||||||||
| Fiberlux | - | - | - | - | - | - | 1,856 | 9,092 | |||||||||||||||||
| Total net sales | 1,088,429 | 932,278 | 838,767 | 720,094 | 737,405 | 763,577 | 862,350 | 812,794 | |||||||||||||||||
| Add back freight | 28,096 | 24,691 | 22,398 | 18,557 | 16,319 | 15,580 | 17,125 | 15,221 | |||||||||||||||||
| Sales as shown in Consolidated Statements of Income | $ | 1,116,525 | $ | 956,969 | $ | 861,165 | $ | 738,651 | $ | 753,724 | $ | 779,157 | $ | 879,475 | $ | 828,015 | |||||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
| FIVE-YEAR SUMMARY | |||||||||||||||||||||||||
| Tredegar Corporation and Subsidiaries | |||||||||||||||||||||||||
| Years Ended December 31 | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||
| (In Thousands, Except Per-Share Data) | |||||||||||||||||||||||||
| Results of Operations (a): | |||||||||||||||||||||||||
| Sales | $ | 648,613 | $ | 883,899 | $ | 922,583 | $ | 937,561 | $ | 808,464 | |||||||||||||||
| Other income (expense), net | 8,464 | (c) | 10,341 | (d) | 1,782 | (e) | 1,444 | (f) | (2,211 | ) | (g) | ||||||||||||||
| 657,077 | 894,240 | 924,365 | 939,005 | 806,253 | |||||||||||||||||||||
| Cost of goods sold | 516,933 | (c) | 739,721 | (d) | 761,509 | (e) | 779,376 | (f) | 672,465 | (g) | |||||||||||||||
| Freight | 16,085 | 20,782 | 19,808 | 22,602 | 20,276 | ||||||||||||||||||||
| Selling, general & administrative expenses | 60,481 | 58,699 | 68,501 | 64,082 | 61,007 | (g) | |||||||||||||||||||
| Research and development expenses | 11,856 | 11,005 | 8,354 | 8,088 | 8,982 | ||||||||||||||||||||
| Amortization of intangibles | 120 | 123 | 149 | 149 | 299 | ||||||||||||||||||||
| Interest expense | 783 | 2,393 | 2,721 | 5,520 | 4,573 | ||||||||||||||||||||
| Asset impairments and costs associated | |||||||||||||||||||||||||
| with exit and disposal activities | 2,950 | (c) | 12,390 | (d) | 4,027 | (e) | 4,080 | (f) | 15,782 | (g) | |||||||||||||||
| Goodwill impairment charge | 30,559 | (b) | - | - | - | - | |||||||||||||||||||
| 639,767 | 845,113 | 865,069 | 883,897 | 783,384 | |||||||||||||||||||||
| Income from continuing operations | |||||||||||||||||||||||||
| before income taxes | 17,310 | 49,127 | 59,296 | 55,108 | 22,869 | ||||||||||||||||||||
| Income taxes | 18,663 | (c) | 19,486 | (d) | 24,366 | 19,791 | (f) | 9,497 | |||||||||||||||||
| Income (loss) from continuing operations (a) | (1,353 | ) | 29,641 | 34,930 | 35,317 | 13,372 | |||||||||||||||||||
| Discontinued operations (a): | |||||||||||||||||||||||||
| Income (loss) from aluminum extrusions | |||||||||||||||||||||||||
| business in Canada | - | (705 | ) | (19,681 | ) | 2,884 | 2,857 | ||||||||||||||||||
| Net income (loss) | $ | (1,353 | ) | $ | 28,936 | $ | 15,249 | $ | 38,201 | $ | 16,229 | ||||||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||||||||||
| Continuing operations (a) | $ | (.04 | ) | $ | .87 | $ | .90 | $ | .91 | $ | .35 | ||||||||||||||
| Discontinued operations (a) | - | (.02 | ) | (.51 | ) | .07 | .07 | ||||||||||||||||||
| Net income (loss) | $ | (.04 | ) | $ | .85 | $ | .39 | $ | .98 | $ | .42 | ||||||||||||||
| Refer to notes to financial tables on page 17. | |||||||||||||||||||||||||
| FIVE-YEAR SUMMARY | ||||||||||||||||||||
| Tredegar Corporation and Subsidiaries | ||||||||||||||||||||
| Years Ended December 31 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| (In Thousands, Except Per-Share Data) | ||||||||||||||||||||
| Share Data: | ||||||||||||||||||||
| Equity per share | $ | 12.66 | $ | 12.40 | $ | 14.13 | $ | 13.15 | $ | 12.53 | ||||||||||
| Cash dividends declared per share | .16 | .16 | .16 | .16 | .16 | |||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||
| during the period | 33,861 | 33,977 | 38,532 | 38,671 | 38,471 | |||||||||||||||
| Shares used to compute diluted earnings (loss) | ||||||||||||||||||||
| per share during the period | 33,861 | 34,194 | 38,688 | 38,931 | 38,597 | |||||||||||||||
| Shares outstanding at end of period | 33,888 | 33,910 | 34,765 | 39,286 | 38,737 | |||||||||||||||
| Closing market price per share: | ||||||||||||||||||||
| High | $ | 18.68 | $ | 20.59 | $ | 24.45 | $ | 23.32 | $ | 20.19 | ||||||||||
| Low | 12.79 | 11.41 | 13.33 | 13.06 | 11.76 | |||||||||||||||
| End of year | 15.82 | 18.18 | 16.08 | 22.61 | 12.89 | |||||||||||||||
| Total return to shareholders (h) | (12.1 | ) % | 14.1 | % | (28.2 | ) % | 76.6 | % | (35.4 | ) % | ||||||||||
| Financial Position: | ||||||||||||||||||||
| Total assets | $ | 596,279 | $ | 610,632 | $ | 784,478 | $ | 781,787 | $ | 781,758 | ||||||||||
| Cash and cash equivalents | 90,663 | 45,975 | 48,217 | 40,898 | 23,434 | |||||||||||||||
| Debt | 1,163 | 22,702 | 82,056 | 62,520 | 113,050 | |||||||||||||||
| Shareholders' equity (net book value) | 429,072 | 420,416 | 491,328 | 516,595 | 485,362 | |||||||||||||||
| Equity market capitalization (i) | 536,108 | 616,484 | 559,021 | 888,256 | 499,320 | |||||||||||||||
| Refer to notes to financial tables on page 17. | ||||||||||||||||||||
Operating Profit | |||||||||||||||||||||||||
| Segment | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products: | |||||||||||||||||||||||||
| Ongoing operations | $ | 57,645 | $ | 44,946 | $ | 43,259 | $ | 45,676 | $ | 72,307 | $ | 61,787 | $ | 47,112 | $ | 59,554 | |||||||||
| Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets and related income from LIFO inventory liquidations | 221 | (b) | (3,955 | ) (c) | (10,438 | ) (d) | (5,746 | ) (e) | (3,397 | ) (f) | (9,136 | ) (g) | (22,163 | ) (h) | (1,170 | ) (i) | |||||||||
| Unusual items | - | - | - | - | 6,147 | (f) | - | - | - | ||||||||||||||||
| Aluminum Extrusions: | |||||||||||||||||||||||||
| Ongoing operations | 22,031 | 19,302 | 22,637 | 15,117 | 27,304 | 25,407 | 52,953 | 56,501 | |||||||||||||||||
| Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets | (1,434 | ) (b) | 122 | (c) | (10,553 | ) (d) | (644 | ) (e) | (487 | ) (f) | (7,799 | ) (g) | (1,628 | ) (h) | - | ||||||||||
| Gain on sale of land | - | 1,385 | - | - | - | - | |||||||||||||||||||
| Other | - | - | 7,316 | (d) | - | - | - | - | - | ||||||||||||||||
| AFBS (formerly Therics): | |||||||||||||||||||||||||
| Ongoing operations | - | (3,467 | ) | (9,763 | ) | (11,651 | ) | (13,116 | ) | (12,861 | ) | (8,024 | ) | (5,235 | ) | ||||||||||
| Loss on investment in Therics, LLC | (25 | ) | (145 | ) | - | - | - | - | - | - | |||||||||||||||
| Plant shutdowns, asset impairments and restructurings | (637 | ) (b) | (10,318 | ) (c) | (2,041 | ) (d) | (3,855 | ) (e) | - | - | - | (3,458 | ) (i) | ||||||||||||
| Unusual items | - | - | - | (1,067 | ) (e) | - | - | - | - | ||||||||||||||||
| Divested operations (a): | |||||||||||||||||||||||||
| Fiberlux | - | - | - | - | - | - | (264 | ) | 57 | ||||||||||||||||
| Unusual items | - | - | - | - | - | - | 762 | (h) | - | ||||||||||||||||
| Total | 77,801 | 46,485 | 40,417 | 39,215 | 88,758 | 57,398 | 68,748 | 106,249 | |||||||||||||||||
| Interest income | 1,240 | 586 | 350 | 1,183 | 1,934 | 2,720 | 2,578 | 1,419 | |||||||||||||||||
| Interest expense | 5,520 | 4,573 | 3,171 | 6,785 | 9,352 | 12,671 | 17,319 | 9,088 | |||||||||||||||||
| Gain on sale of corporate assets | 56 | 61 | 7,560 | 5,155 | - | - | - | 712 | |||||||||||||||||
| Loss from write-down of investment in Novalux | - | (b) | 5,000 | (c) | - | - | - | - | - | - | |||||||||||||||
| Stock option-based compensation costs | 970 | - | - | - | - | - | - | - | |||||||||||||||||
| Corporate expenses, net | 13,770 | 11,357 | 9,674 | 8,724 | (e) | 5,834 | 2,746 | (g) | 4,559 | 7,101 | |||||||||||||||
| Income from continuing operations before income taxes | 58,837 | 26,202 | 35,482 | 30,044 | 75,506 | 44,701 | 49,448 | 92,191 | |||||||||||||||||
| Income taxes | 20,636 | (b) | 9,973 | 9,222 | 10,717 | 26,881 | 13,950 | (g) | 18,135 | 32,728 | |||||||||||||||
| Income from continuing operations | 38,201 | 16,229 | 26,260 | 19,327 | 48,625 | 30,751 | 31,313 | 59,463 | |||||||||||||||||
| Income (loss) from discontinued operations (a) | - | - | 2,921 | (45,678 | ) | (51,156 | ) | (20,999 | ) | 80,063 | (6,815 | ) | |||||||||||||
| Net income (loss) | $ | 38,201 | $ | 16,229 | $ | 29,181 | $ | (26,351 | ) | $ | (2,531 | ) | $ | 9,752 | $ | 111,376 | $ | 52,648 | |||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
| SEGMENT TABLES | ||||||||||||||||
| Tredegar Corporation and Subsidiaries | ||||||||||||||||
| Net Sales (j) | ||||||||||||||||
| Segment | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (In Thousands) | ||||||||||||||||
| Film Products | $ | 455,007 | $ | 522,839 | $ | 530,972 | $ | 511,169 | $ | 460,277 | ||||||
| Aluminum Extrusions | 177,521 | 340,278 | 371,803 | 403,790 | 327,659 | |||||||||||
| AFBS (formerly Therics) | - | - | - | - | 252 | |||||||||||
| Total net sales | 632,528 | 863,117 | 902,775 | 914,959 | 788,188 | |||||||||||
| Add back freight | 16,085 | 20,782 | 19,808 | 22,602 | 20,276 | |||||||||||
| Sales as shown in Consolidated | ||||||||||||||||
| Statements of Income | $ | 648,613 | $ | 883,899 | $ | 922,583 | $ | 937,561 | $ | 808,464 | ||||||
| Identifiable Assets | ||||||||||||||||
| Segment | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (In Thousands) | ||||||||||||||||
| Film Products | $ | 371,639 | $ | 399,895 | $ | 488,035 | $ | 498,961 | $ | 479,286 | ||||||
| Aluminum Extrusions | 82,429 | 112,259 | 115,223 | 128,967 | 130,448 | |||||||||||
| AFBS (formerly Therics) | 1,147 | 1,629 | 2,866 | 2,420 | 2,759 | |||||||||||
| Subtotal | 455,215 | 513,783 | 606,124 | 630,348 | 612,493 | |||||||||||
| General corporate | 50,401 | 50,874 | 74,927 | 30,113 | 61,905 | |||||||||||
| Cash and cash equivalents | 90,663 | 45,975 | 48,217 | 40,898 | 23,434 | |||||||||||
| Identifiable assets from continuing operations | 596,279 | 610,632 | 729,268 | 701,359 | 697,832 | |||||||||||
| Discontinued operations (a): | ||||||||||||||||
| Aluminum extrusions business in Canada | - | - | 55,210 | 80,428 | 83,926 | |||||||||||
| Total | $ | 596,279 | $ | 610,632 | $ | 784,478 | $ | 781,787 | $ | 781,758 | ||||||
| Refer to notes to financial tables on page 17. | ||||||||||||||||
| Identifiable Assets | |||||||||||||||||||||||||
| Segment | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products | $ | 498,961 | $ | 479,286 | $ | 472,810 | $ | 422,321 | $ | 379,635 | $ | 367,291 | $ | 367,526 | $ | 360,517 | |||||||||
| Aluminum Extrusions | 209,395 | 214,374 | 210,894 | 185,336 | 176,631 | 185,927 | 210,434 | 216,258 | |||||||||||||||||
| AFBS (formerly Therics) | 2,420 | 2,759 | 8,613 | 8,917 | 10,643 | 9,931 | 9,609 | 9,905 | |||||||||||||||||
| Subtotal | 710,776 | 696,419 | 692,317 | 616,574 | 566,909 | 563,149 | 587,569 | 586,680 | |||||||||||||||||
| General corporate | 30,113 | 61,905 | 54,163 | 61,508 | 52,412 | 40,577 | 30,214 | 22,419 | |||||||||||||||||
| Income taxes recoverable from sale of venture capital investment portfolio | - | - | - | 55,000 | - | - | - | - | |||||||||||||||||
| Cash and cash equivalents | 40,898 | 23,434 | 22,994 | 19,943 | 109,928 | 96,810 | 44,530 | 25,752 | |||||||||||||||||
| Identifiable assets from ongoing operations | 781,787 | 781,758 | 769,474 | 753,025 | 729,249 | 700,536 | 662,313 | 634,851 | |||||||||||||||||
| Divested operations (a): | |||||||||||||||||||||||||
| Fiberlux | - | - | - | - | - | - | - | 7,859 | |||||||||||||||||
| Discontinued operations (a): | |||||||||||||||||||||||||
| Venture capital | - | - | - | - | 108,713 | 158,887 | 236,698 | 145,028 | |||||||||||||||||
| Molecumetics | - | - | - | - | - | 5,608 | 4,757 | 4,749 | |||||||||||||||||
| Total | $ | 781,787 | $ | 781,758 | $ | 769,474 | $ | 753,025 | $ | 837,962 | $ | 865,031 | $ | 903,768 | $ | 792,487 | |||||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||||
| Segment | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products | $ | 31,847 | $ | 26,673 | $ | 21,967 | $ | 19,828 | $ | 20,085 | $ | 22,047 | $ | 23,122 | $ | 18,751 | |||||||||
| Aluminum Extrusions | 12,323 | 11,484 | 10,914 | 10,883 | 10,506 | 11,216 | 9,862 | 9,484 | |||||||||||||||||
| AFBS (formerly Therics) | - | 437 | 1,300 | 1,641 | 463 | 2,262 | 1,782 | 1,195 | |||||||||||||||||
| Subtotal | 44,170 | 38,594 | 34,181 | 32,352 | 31,054 | 35,525 | 34,766 | 29,430 | |||||||||||||||||
| General corporate | 111 | 195 | 241 | 270 | 353 | 329 | 315 | 253 | |||||||||||||||||
| Total ongoing operations | 44,281 | 38,789 | 34,422 | 32,622 | 31,407 | 35,854 | 35,081 | 29,683 | |||||||||||||||||
| Divested operations (a): | |||||||||||||||||||||||||
| Fiberlux | - | - | - | - | - | - | 151 | 498 | |||||||||||||||||
| Discontinued operations (a): | |||||||||||||||||||||||||
| Venture capital | - | - | - | - | - | - | 18 | 22 | |||||||||||||||||
| Molecumetics | - | - | - | - | 527 | 2,055 | 1,734 | 1,490 | |||||||||||||||||
| Total | $ | 44,281 | $ | 38,789 | $ | 34,422 | $ | 32,622 | $ | 31,934 | $ | 37,909 | $ | 36,984 | $ | 31,693 | |||||||||
Capital Expenditures, Acquisitions and Investments | |||||||||||||||||||||||||
| Segment | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products | $ | 33,168 | $ | 50,466 | $ | 44,797 | $ | 57,203 | $ | 24,063 | $ | 24,775 | $ | 53,161 | $ | 25,296 | |||||||||
| Aluminum Extrusions | 7,381 | 11,968 | 10,007 | 8,293 | 4,799 | 8,506 | 21,911 | 16,388 | |||||||||||||||||
| AFBS (formerly Therics) | - | 36 | 275 | 219 | 1,621 | 2,340 | 1,730 | 757 | |||||||||||||||||
| Subtotal | 40,549 | 62,470 | 55,079 | 65,715 | 30,483 | 35,621 | 76,802 | 42,441 | |||||||||||||||||
| General corporate | 24 | 73 | 572 | 93 | 60 | 519 | 384 | 606 | |||||||||||||||||
| Capital expenditures for ongoing operations | 40,573 | 62,543 | 55,651 | 65,808 | 30,543 | 36,140 | 77,186 | 43,047 | |||||||||||||||||
| Divested operations (a): | |||||||||||||||||||||||||
| Fiberlux | - | - | - | - | - | - | 425 | 812 | |||||||||||||||||
| Discontinued operations (a): | |||||||||||||||||||||||||
| Venture capital | - | - | - | - | - | - | 86 | - | |||||||||||||||||
| Molecumetics | - | - | - | - | 793 | 2,850 | 2,133 | 1,362 | |||||||||||||||||
| Total capital expenditures | 40,573 | 62,543 | 55,651 | 65,808 | 31,336 | 38,990 | 79,830 | 45,221 | |||||||||||||||||
| Acquisitions and other | - | - | 1,420 | 1,579 | - | 1,918 | 6,316 | 215,227 | |||||||||||||||||
| Novalux investment | 542 | 1,095 | 5,000 | - | - | - | - | - | |||||||||||||||||
| Venture capital investments | - | - | - | 2,807 | 20,373 | 24,504 | 93,058 | 81,747 | |||||||||||||||||
| Total | $ | 41,115 | $ | 63,638 | $ | 62,071 | $ | 70,194 | $ | 51,709 | $ | 65,412 | $ | 179,204 | $ | 342,195 | |||||||||
Refer to notes to financial tables on page 16. | |||||||||||||||||||||||||
| SEGMENT TABLES | |||||||||||||||||||||||||
| Tredegar Corporation and Subsidiaries | |||||||||||||||||||||||||
| Operating Profit | |||||||||||||||||||||||||
| Segment | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Film Products: | |||||||||||||||||||||||||
| Ongoing operations | $ | 64,379 | $ | 53,914 | $ | 59,423 | $ | 57,645 | $ | 44,946 | |||||||||||||||
| Plant shutdowns, asset impairments | |||||||||||||||||||||||||
| and restructurings, net of gains on | |||||||||||||||||||||||||
| sale of assets and related income from | |||||||||||||||||||||||||
| LIFO inventory liquidations | (1,846 | ) | (c) | (11,297 | ) | (d) | (649 | ) | (e) | 221 | (f) | (3,955 | ) | (g) | |||||||||||
| Aluminum Extrusions: | |||||||||||||||||||||||||
| Ongoing operations | (6,494 | ) | 10,132 | 16,516 | 18,302 | 17,084 | |||||||||||||||||||
| Plant shutdowns, asset impairments, | |||||||||||||||||||||||||
| restructurings and other | (639 | ) | (c) | (687 | ) | (d) | (634 | ) | (e) | (1,434 | ) | (f) | (993 | ) | (g) | ||||||||||
| Goodwill impairment charge | (30,559 | ) | (b) | - | - | - | - | ||||||||||||||||||
| AFBS (formerly Therics): | |||||||||||||||||||||||||
| Ongoing operations | - | - | - | - | (3,467 | ) | |||||||||||||||||||
| Loss on investment in Therics, LLC | - | - | - | (25 | ) | (145 | ) | ||||||||||||||||||
| Gain on sale of investments in Theken | |||||||||||||||||||||||||
| Spine and Therics, LLC | 1,968 | (c) | 1,499 | (d) | - | - | - | ||||||||||||||||||
| Plant shutdowns, asset impairments, | |||||||||||||||||||||||||
| restructurings and other | - | - | (2,786 | ) | (e) | (637 | ) | (f) | (10,318 | ) | (g) | ||||||||||||||
| Total | 26,809 | 53,561 | 71,870 | 74,072 | 43,152 | ||||||||||||||||||||
| Interest income | 806 | 1,006 | 1,212 | 1,240 | 586 | ||||||||||||||||||||
| Interest expense | 783 | 2,393 | 2,721 | 5,520 | 4,573 | ||||||||||||||||||||
| Gain on sale of corporate assets | 404 | 1,001 | 2,699 | 56 | 61 | ||||||||||||||||||||
| Gain from write-up of an investment | |||||||||||||||||||||||||
| accounted for under the fair value method | 5,100 | (c) | 5,600 | (d) | - | - | - | ||||||||||||||||||
| Loss from write-down of an investment | - | - | 2,095 | (e) | - | 5,000 | (g) | ||||||||||||||||||
| Stock option-based compensation costs | 1,692 | 782 | 978 | 970 | - | ||||||||||||||||||||
| Corporate expenses, net | 13,334 | 8,866 | 10,691 | 13,770 | 11,357 | (g) | |||||||||||||||||||
| Income from continuing operations | |||||||||||||||||||||||||
| before income taxes | 17,310 | 49,127 | 59,296 | 55,108 | 22,869 | ||||||||||||||||||||
| Income taxes | 18,663 | (c) | 19,486 | (d) | 24,366 | 19,791 | (f) | 9,497 | |||||||||||||||||
| Income (loss) from continuing operations | (1,353 | ) | 29,641 | 34,930 | 35,317 | 13,372 | |||||||||||||||||||
| Income (loss) from discontinued operations (a) | - | (705 | ) | (19,681 | ) | 2,884 | 2,857 | ||||||||||||||||||
| Net income (loss) | $ | (1,353 | ) | $ | 28,936 | $ | 15,249 | $ | 38,201 | $ | 16,229 | ||||||||||||||
| Refer to notes to financial tables on page 17. | |||||||||||||||||||||||||
| SEGMENT TABLES | ||||||||||||||||
| Tredegar Corporation and Subsidiaries | ||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||
| Segment | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (In Thousands) | ||||||||||||||||
| Film Products | $ | 32,360 | $ | 34,588 | $ | 34,092 | $ | 31,847 | $ | 26,673 | ||||||
| Aluminum Extrusions | 7,566 | 8,018 | 8,472 | 8,378 | 7,996 | |||||||||||
| AFBS (formerly Therics) | - | - | - | - | 437 | |||||||||||
| Subtotal | 39,926 | 42,606 | 42,564 | 40,225 | 35,106 | |||||||||||
| General corporate | 71 | 70 | 91 | 111 | 195 | |||||||||||
| Total continuing operations | 39,997 | 42,676 | 42,655 | 40,336 | 35,301 | |||||||||||
| Discontinued operations (a): | ||||||||||||||||
| Aluminum extrusions business in Canada | - | 515 | 3,386 | 3,945 | 3,488 | |||||||||||
| Total | $ | 39,997 | $ | 43,191 | $ | 46,041 | $ | 44,281 | $ | 38,789 | ||||||
| Capital Expenditures and Investments | ||||||||||||||||
| Segment | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (In Thousands) | ||||||||||||||||
| Film Products | $ | 11,487 | $ | 11,135 | $ | 15,304 | $ | 33,168 | $ | 50,466 | ||||||
| Aluminum Extrusions | 22,530 | 9,692 | 4,391 | 6,609 | 5,750 | |||||||||||
| AFBS (formerly Therics) | - | - | - | - | 36 | |||||||||||
| Subtotal | 34,017 | 20,827 | 19,695 | 39,777 | 56,252 | |||||||||||
| General corporate | 125 | 78 | 6 | 24 | 73 | |||||||||||
| Capital expenditures for continuing | ||||||||||||||||
| operations | 34,142 | 20,905 | 19,701 | 39,801 | 56,325 | |||||||||||
| Discontinued operations (a): | ||||||||||||||||
| Aluminum extrusions business in Canada | - | 39 | 942 | 772 | 6,218 | |||||||||||
| Total capital expenditures | 34,142 | 20,944 | 20,643 | 40,573 | 62,543 | |||||||||||
| Investments | - | 5,391 | 23,513 | 542 | 1,095 | |||||||||||
| Total | $ | 34,142 | $ | 26,335 | $ | 44,156 | $ | 41,115 | $ | 63,638 | ||||||
| Refer to notes to financial tables on page 17. | ||||||||||||||||
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| NOTES TO FINANCIAL TABLES | ||||||||||||||||||
| (a) | ||||||||||||||||||
| (b) | A goodwill impairment charge of | |||||||||||||||||
| (c) | Plant shutdowns, asset impairments, restructurings and other for 2009 include a charge of $2.1 million for severance and other employee related costs in connection with restructurings for Film Products ($1.3 million), Aluminum Extrusions ($433,000) and corporate headquarters ($396,000, included in "Corporate expenses, net" in the operating profit by segment table), an asset impairment charge of $1.0 million in Films Products, pretax losses of $952,000 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), a gain of $640,000 related to the sale of land at our aluminum extrusions faci lity in Newnan, Georgia (included in "Other income (expense), net" in the consolidated statements of income), a gain of $275,000 on the sale of equipment (included in "Other income (expense), net" in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia, a gain of $175,000 on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in "Other income (expense), net" in the consolidated statements of income), a gain of $149,000 related to the reversal to income of certain inventory impairment accruals in Film Products, and a net charge of $69,000 (included in "Costs of goods sold" in the consolidated statement of income) related to adjustments of future environmental costs expected to be incurred by Aluminum Extrusions. The gain from the write-up of an investment accounted for under the fair value method of $5.1 million in 2009 is included in "Other income (expense), net" in the cons olidated statement of income. The gain on sale of investments in Theken Spine and Therics, LLC, which is also included in "Other income (expense), net" in the consolidated statement of income, includes the receipt of a contractual earn-out payment of $1.8 million and a post-closing contractual adjustment of $150,000. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar. Income taxes in 2009 include the recognition of a valuation allowance of $2.1 million related to the expected limitations on the utilization of assumed capital losses on certain investments. | |||||||||||||||||
| (d) | Plant shutdowns, asset impairments, restructurings and other for 2008 include an asset impairment charge of $9.7 million for Film Products, a charge of $2.7 million for severance and other employee related costs in connection with restructurings for Film Products ($2.2 million) and Aluminum Extrusions ($510,000), a pretax gain of $583,000 from the sale of land rights and related improvements at the Film Products facility in Shanghai, China (included in "Other income (expense), net" in the consolidated statement of income), and a $177,000 pretax charge related to expected future environmental costs at the Aluminum Extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income). The gain of $1.5 million from the sale of our investments in Theken Spine and Therics, LLC. is included in "Other income (expense), net" in the consolidated statements of income. The gain from the write-up of an investment accounted for under the fair value method of $5.6 million in 2008 is included in "Other income (expense), net" in the consolidated statements of income. Income taxes in 2008 includes the reversal of a valuation allowance recognized in the third quarter of 2007 of $1.1 million that originally related to expected limitations on the utilization of assumed capital losses on certain investments. | |||||||||||||||||
| (e) | Plant shutdowns, asset impairments, restructurings and other for 2007 include a charge of $2.8 million related to the estimated loss on the sub-lease of a portion of the AFBS (formerly Therics) facility in Princeton, New Jersey, charges of $594,000 for asset impairments in Film Products, a charge of $592,000 for severance and other employee-related costs in Aluminum Extrusions, a charge of $55,000 related to the shutdown of the films manufacturing facility in LaGrange, Georgia, and a charge of $42,000 associated with the expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income). The loss from the write-down of an investment in 2007 of $2.1 million is included in "Other income (expense), net" in the consolidated statements of income . | |||||||||||||||||
| (f) | Plant shutdowns, asset impairments, restructurings and other for 2006 include a net gain of | |||||||||||||||||
| (g) | Plant shutdowns, asset impairments, restructurings and | |||||||||||||||||
| (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. | |||||||||||||||||
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking and Cautionary Statements
Executive Summary
General
Tredegar is a manufacturer of plastic films and aluminum extrusions. Descriptions of our businesses are provided on pages 1-5.1-7.
Film Products
In Film Products, net sales were $511.2$455.0 million in 2006, up 11.1%2009, down 13.0% versus $460.3$522.8 million in 2005.2008. Operating profit from ongoing operations was $57.6$64.4 million in 2006, up 28.3%2009, an increase of 19.4% compared with $53.9 million in 2008. Volume decreased to 206.7 million pounds in 2009 from 221.2 million pounds in 2008. Net sales declined compared to $44.9 millionlast year due to the impact on selling prices from the pass-through of lower resin costs, volume declines in 2005. personal care materials and packaging films and the unfavorable effect of changes in the U.S. dollar value of currencies for operations outside the U.S.
Operating profit from ongoing operations excludingincreased in 2009 compared to 2008 as cost reduction efforts, productivity gains, the estimated effects of resin pass-through lag and year-end LIFO adjustments was $53.1 million in 2006, up 8.6% versus $48.9 million in 2005. Volume decreased to 253.5 million pounds in 2006 from 261.1 million pounds in 2005. We estimate that the growth in net sales excluding the effectspositive impact of the pass-through of resin price changes and foreign exchange rate changes was approximately 6%change in 2006. Sales and operating profit growthproduct mix driven mostly by an increase in 2006 were driven primarily by increased sales of high-value surface protection films, elastic materials and new apertured topsheets,the lag in the pass-through of reduced resin costs were partially offset by lower overall sales volumes and the unfavorable effects of certain commodity barrier films that were dropped in conjunction with the shutdown of the plant in LaGrange, Georgia. The plant was shut down in the first half of 2006 and had sales of commodity barrier films of approximately $20 million in 2005.
foreign currency rates. Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days. Average quarterly pricesThe estimated impact of low-density polyethylene resin (“LDPE”)the lag in the pass-through of changes in average resin costs and year-end adjustments for inventories accounted for under the last-in first-out method (“LIFO”) was a positive $1.7 million in 200 9 and a negative $600,000 in 2008. The estimated unfavorable impact from U.S. have been volatile overdollar value currencies for operations outside the last several years (seeU.S. was $1.9 million in 2009 compared with 2008.
Future operating profit levels within Film Products will depend upon our ability to deliver product innovations and cost reductions, to support growth in the chart on page 29). Resin prices in Europe, Asiasales of higher value surface protection materials and South America have exhibited similar trends.to address competitive pressures facing our personal care and packaging materials businesses.
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Capital expenditures in 2007Film Products were $11.5 million in 2009, up from $11.1 million in 2008, and are expectedprojected to be approximately $35 million. Approximately half of the capital expenditures in 2006 related to expanding the production capacity for surface protection films. These films are primarily used to protect flat panel display components during fabrication, shipping and handling. Sales of surface protection films used primarily in this application totaled approximately $56$24 million in 2006, $30 million in 2005 and $16 million in 2004. Other capital expenditures in 2006 included capacity additions for elastic materials and a new information system, which was rolled out in U.S. locations.2010 as spending returns to more normalized levels. Depreciation expense was $31.7$32.2 million in 2006 compared with $26.52009, down from $34.5 million 2005,in 2008, and is projected to be $34approximately $36 million in 2007.2010.
Aluminum Extrusions
Net sales from continuing operations in Aluminum Extrusions were $177.5 million in 2009, down 47.8% from $340.3 million in 2008. Operating losses from ongoing U.S. operations were $6.5 million, a negative change of $16.6 million from operating profits of $10.1 million in 2008. Volume from continuing operations was 91.5 million pounds in 2009, down 32.8% from 136.2 million pounds in 2008.
Upon completing a goodwill impairment analysis as of March 31, 2009, a goodwill impairment charge of $30.6 million ($30.6 million after tax) was recognized in Aluminum Extrusions. This impairment charge represents the entire amount of goodwill associated with the Aluminum Extrusions reporting unit. For additional detail on this goodwill impairment charge, see Note 1 of the notes to the financial statements beginning on page 47.
Capital expenditures for continuing operations in Aluminum Extrusions were $577.3$22.5 million in 2006, up 22.4% versus $471.72009, a $12.8 million increase from $9.7 million in 2005. Operating profit from ongoing operations was $22.0 million in 2006, up 14.0% compared to $19.3 million in 2005. Volume increased to 259.9 million pounds in 2006, up 5.5% compared to 246.4 million pounds in 2005. Growth in shipments in 2006 was driven by demand for extrusions used in commercial construction and hurricane protection products, partially offset by a decline in extrusions used in residential construction. The increase in operating profit during 2006 was primarily due to higher volume and selling prices and lower energy costs (energy costs were down $1.1 million), partially offset by appreciation of the Canadian Dollar ($2.8 million) and higher charges for possible uncollectible accounts ($1.4 million).
Other Developments
Net pension expenseincome from continuing operations was $2.6$3.1 million in 2006,2009, an increaseunfavorable change of $5.3$1.8 million (9 cents per share after taxes) from the net pension income of $2.7 millionamounts recognized in 2005 (see Note 11 beginning on page 61 for more information).2008. Most of this unfavorablethe change relates to a pension plan that is reflected in “Corporate expenses, net” in the segment operating profit by segment table presented on page 13.15. We contributed $1.1 millionapproximately $129,000 to our pension plans for continuing operations in 2009, and minimum required contributions to our pension plans in 20062010 are expected to be comparable. The projected benefit obligation of our pension plans at December 31, 2009 is approximately $235.0 million at a weighted average discount rate of 5.7%, and expect required contributions of $1.1 millionnet pension expense in 2007.2010 is estimated at $1.4 million. Corporate expenses, net in 2009 increased in comparison to 2008 prima rily due to adjustments made to accruals for certain performance-based compensation programs and the unfavorable change in pension income noted above.
19
On April 2, 2007, we invested $10 million in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”), a fund that seeks to achieve superior absolute returns by participating primarily in medium to long-term investments involving distressed/high yield debt securities, special situation equities and private loans and notes. The fund is a highly speculative investment and subject to limitations on withdrawal. There is no secondary market for interests in the fund. Our investment in Harbinger, which represents less than 2% of Harbinger’s total partnership capital, is accounted for under the cost method. At December 31, 2006, we adopted Statement2009, Harbinger reported our capital account value at $14.5 million versus the carrying value of Financial Accounting Standards (“SFAS”) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106 and 132(R). In accordance with this new standard we recognized the funded status of our pension and other postretirement plans in our balance sheet as of December 31, 2006, which included plan assets at fair value in excess of benefit obligations of $41.0 million. The adjustments in our balance sheet of our pension and other postretirement plans to recognize their funded status resulted in a decrease in prepaid pension cost of $27.7$10 million an increase in related liabilities of $3.3 million, a decrease in non-current deferred income tax liabilities of $11.4 million and a decrease in shareholders’ equity of $19.6 million. Prepaid pension cost and related liabilities are included(included in “Other assets and deferred charges” and “Other noncurrent liabilities” in theour consolidated balance sheets.sheet).
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our 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
We regularly assess our 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 we do not believe the carrying value of the long-lived asset will be recoverable. We also reassess the useful lives of our long-lived assets based on changes in our business and technologies.
We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). We have made determinations as to what ourOur reporting units areinclude Film Products and what amountsAluminum Extrusions, each of which may have separately identifiable operating net assets (operating assets including goodwill and intangible assets should be allocated to those reporting units.net of operating liabilities).
In assessing the recoverability of long-lived identifiable assets and goodwill, we mustestimate fair value using discounted cash flow analysis and comparative enterprise value-to-EBITDA multiples. These calculations require us to make assumptions regarding estimated future cash flows, discount rates and other factors to determine if impairment tests are met or the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges.
Based on the severity of the economic downturn and its impact on sales volumes of our aluminum extrusions business (a 36.8% decline in sales volume in the first quarter of 2009 compared with the first quarter of 2008), the resulting first quarter loss, possible future losses and the uncertainty in the amount and timing of an economic recovery, we determined that impairment indicators existed. Upon completing the impairment analysis as of March 31, 2009, a goodwill impairment charge of $30.6 million, which represents the entire amount of goodwill associated with Aluminum Extrusions, was recorded.
20
Based upon assessments performed as to the recoverability of long-lived identifiable assets, we have recorded asset impairment losses for continuing operations related to long-lived identifiable assets of $1.2$1.0 million in 2006,2009, $8.6 million in 20052008 and $14.1$594,000 in 2007. For asset impairments relating to discontinued operations, see Note 17 to the notes to financial statements.
Investment Accounted for Under the Fair Value Method
On August 31, 2007, we invested $6.5 million in 2004.a privately held drug delivery company that is developing and commercializing state of the art drug delivery systems designed to improve patient compliance and outcomes. On December 15, 2008, we invested an additional $1.0 million as part of a new round of equity financing completed by the investee. This investment is accounted for under the fair value method. We elected the fair value option over the equity method of accounting since our investment objectives are similar to those of venture capitalists, which typically do not have controlling financial interests (venture capital funds use the fair value method to account for their investment portfolios). At December 31, 2009, our ownership interest was approximately 21% on a fully diluted basis.
In connection with the new round of equity financing in the fourth quarter of 2008, we recognized an unrealized gain of $5.6 million for the write-up of this investment based upon the implied valuation of our ownership interest. In the fourth quarter of 2009, we recognized an additional unrealized gain of $5.1 million for the appreciation of our ownership interest upon the investee entering into an exclusive licensing agreement that included an upfront payment, additional potential milestone payments and tiered royalties on sales of any products commercialized under the license. At December 31, 2009 and 2008, the fair value of our investment (the carrying value included in “Other assets and deferred charges” in our consolidated balance sheet) was $18.2 million and $13 .1 million, respectively. The fair market valuation of our interest in the drug delivery company 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, 2009, the effect of a 500 basis point change in the weighted average cost of capital assumption would have increased or decreased the fair value of our interest in the drug delivery company by approximately $2-3 million. Any future changes in the estimated fair value of our ownership interest will likely be attributed to a new round of financing, a merger or initial public offering or adjustments to the timing or magnitude of cash flows associated with development and commercialization milestones. Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.
| Pension Benefits |
We have noncontributory and contributory defined benefit (pension) plans in our continuing operations that have significant net pension income 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. We are 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, our liability increases as the discount
21
rate decreases and vice versa. Our weighted average discount rate for continuing operations was 5.70% at the end of 2006, 5.70%2009, 6.5% at the end of 20052008 and 6.00%6.25% at the end of 2004,2007, with changes between periods due to changes in market interest rates. The compensation increase assumption affects the estimate of future payments, and was 4% at the end of 2007 (not applicable in 2009 and 2008). Based on plan changes announced in 2006, 2005 and 2004.pay for active participants of the plan was frozen as of December 31, 2007. 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. During 2006, 2005, 2004The value of our plan assets relating to continuing operations increased $34.4 million, or 17.7%, in 2009, partially recovering from an $89.6 million decline in 2008. The 31.5% asset value decline in 2008 was primarily due to the drop in global stock prices. Between 2003 and 2003,2007, the value of our plan assets relating to continuing operations increased due to improved general market conditions after declining in 2002, 2001 and 2000.from 2000 to 2002. Our expected long-term return on plan assets has been 8.4% since 2004relating to continuing operations, which is primarily based on estimated market and economic conditions andas well as asset mix, (our expected return was 8.6%8.25% in 2009, 8.5% from 2004 to 2008, 8.75% in 2003 and 9% in 2002 and prior years).years. We anticipate that our expected long-term return on plan assets will be 8.25% for fiscal year 2010. See page 6566 for more information on expected long-term return on plan assets and asset mix.
See the executive summary beginning on page 1718 for further discussion regarding the financial impact of our pension plans.
Income Taxes
For financial reporting purposes, we had unrecognized tax benefits on uncertain tax positions of $1.0 million, $2.6 million and $3.3 million as of December 31, 2009, 2008 and 2007, respectively. Included in the 2009, 2008 and 2007 amounts were $348,000, $1.8 million and $2.3 million, respectively, for tax positions for which ultimate deductibility is highly certain but for which the timing of deductibility is uncertain. Because of the impact of deferred income tax accounting, other than interest, penalties and deductions not related to timing, a longer deductibility period would not affect the total income tax expense or the annual effective tax rate shown for financial reporting purposes, but would accelerate payments to the taxing authority. Tax payments r esulting from the successful challenge by the taxing authority for accelerated deductions taken by us would possibly result in the payment of interest and penalties. Accordingly, we also accrue 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 approximately $537,000, $1.3 million and $1.2 million at December 31, 2009, 2008 and 2007, respectively ($342,000, $827,000 and $759,000, 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.
In 2009, we settled several disputed issues raised by the Internal Revenue Service (the “IRS”) during its examination of our U.S. income tax returns for 2001-2003, the most significant of which regards the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes. The settlement with the IRS for the disputed issues cost us approximately $1.0 million, which is lower than the previous estimate of $1.3 million and was applied against the balance of unrecognized tax benefits.
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Generally, except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2006. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2006.
As of December 31, 2009 and 2008, we had valuation allowances relating to deferred tax assets of $11.7 million and $9.8 million, respectively. For more information on deferred income tax assets and liabilities, see Note 14 of the notes to financial statements.
Recently Issued Accounting Standards
In September 2006,June 2009, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued guidance that clarifies the information that an entity must provide in its financial statements surrounding a transfer of financial assets and the effect of the transfer on its financial position, financial performance, and cash flows. These new accounting rules are effective as of the beginning of the annual period beginning after November 15, 2009. We do not expect these FASB Staff Position ("FSP") No. AUG AIR-1, rules to have a material impact on our financial statements and disclosures.
In October 2009, the firstFASB Emerging Issues Task Force issued a consensus updating accounting standards for revenue recognition for multiple-deliverable arrangements. The stated objective of the accounting standards update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The revision of current FASB guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements. The accounting standards update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal yearyears beginning on or after June 15, 2010, with early adopti on permitted. We do not expect these FASB rules to have a material impact on our financial statements and disclosures.
The FASB issued guidance in January 2010 that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update also clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2006. The FSP eliminates2009, except for disclosures about the accrual methodpurchase, sale, issuance and settlement activity of accounting for major maintenance activities, but continues to permit the use of the direct expensing, built-in overhaul and deferral methods. The FSP also continues to require accruals or deferrals for interim periods of annual costs that clearly benefit two or more interim periods. WeLevel 3 fair value measurements. Those disclosures are evaluating the FSP and have not determined whether or not it will have a material effect on our financial position or results of operations.
23
Results of operations.Continuing Operations
2009 versus 2008
Revenues. Sales in 2006 increased2009 decreased by 16.7%26.6% compared with 2005.2008 due to sales declines in both Film Products and Aluminum Extrusions. Net sales (sales less freight) increased 11.1%decreased 13.0% in Film Products primarily due to growththe impact of lower selling prices from the pass-through of reduced resin prices, volume declines in higher value-added products, including surface protection, elastic and aperturedpersonal care materials and higher selling prices, which were driven by higher raw material costs.packaging films and the unfavorable effect of foreign currency rates. Net sales increased 22.4%decreased 47.8% in Aluminum Extrusions due to higher volume (up 5.5%)lower sales volumes and a decrease in average selling prices driven by lower aluminum prices. Volumes in Aluminum Extrusions were 91.5 million pounds in 2009, down 32.8% from 136.2 million pounds in 2008. 0;For more information on net sales and volume, see the executive summary beginning on page 17.18.
Operating Costs and Expenses. GrossConsolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales increased to 12.9%was 17.8% in 2006 from 12.7%2009 and 14.0% in 2005. At Film Products, a higher2008. The gross profit margin was driven primarily by growth in higher value-added products, including surface protection, elastic and apertured materials, partially offset by the effects of higher average selling prices to cover higher average resin costs. Marginsincreased in Film Products also improvedprimarily due to cost reduction efforts, productivity gains, a change in 2006 versus 2005 from a favorableproduct mix mostly driven by sales of high value surface protection materials and the lag in the pass-through to customers of changes insubstantially higher average resin costs and income from LIFO inventory liquidations of approximately $7.4 million in 2006 (including $2.9 million of income shown2008. Gross profit margins in “Cost of goods sold” in the consolidated statements of income from LIFO liquidations related to the shutdown of the facility in LaGrange, Georgia) compared with an unfavorable net lag and LIFO adjustment in 2005 of approximately $4.0 million. At Aluminum Extrusions decreased as a lower gross profit margin was primarily due to the effectsresult of higher selling prices to cover higher aluminum costs and appreciation of the Canadian Dollar, partially offset by higher volume and selling prices and lower energy costs. declines noted above.
As a percentage of sales, selling, general and administrative (“SG&A”) expenses decreased to 6.1% in 2006 compared with 6.8% in 2005 due primarily to higher sales and the divestiture of substantially all of our interest in AFBS, Inc. (formerly known as Therics, Inc.) at the end of the second quarter of 2005. For more information on this divestiture, see the business segment review beginning on page 33.
R&D expenses declined to $8.1 millionwere 11.2% in 20062009, an increase from $9.0 million7.9% in 20052008. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to the divestiture of substantially all of our interestdecline in AFBS.sales noted above and adjustments made to accruals for certain performance-based compensation programs.
Losses associated with plant shutdowns, asset impairments, restructurings and restructurings, net of gains on sale of related assets and related income from LIFO inventory liquidations,other charges in 20062009 totaled $1.9$2.9 million ($1.42.3 million after taxes) and included:
| A fourth quarter |
| ● | A fourth quarter charge of $1.0 million ($1.0 million after taxes) for asset impairments in Film Products; |
| ● | A fourth quarter benefit of $547,000 ($340,000 after taxes), a |
| ● | A fourth quarter gain of |
| A fourth quarter charge of |
| ● | A fourth quarter charge of $218,000 ($ |
| ● | A first quarter gain of $275,000 ($162,000 after taxes) on the sale of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown films manufacturing facility in LaGrange, Georgia; |
| ● | A second quarter gain of $175,000 ($110,000 after taxes) on the sale of previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); |
| ● | A second quarter gain of $149,000 ($91,000 after taxes) related to the reversal to income of certain inventory impairment accruals in Film |
24
The severance in Film Products includes reduction in workforce in 2009 (approximately 50 employees) that is expected to save approximately $2.0 million on an annualized basis.
We recognized gains of $1.8 million ($1.2 million after taxes) from the receipt of a pretax gain oncontractual earn-out payment and $150,000 ($96,000 after taxes) from a post-closing contractual adjustment from the sale in 2008 of public equity securities of $56,000 (proceeds also of $56,000) isour investments in Theken Spine and Therics, LLC. These gains are included in “Other income (expense), net” in the consolidated statements of incomeincome. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and “Gainmanaged by an individual not affiliated with Tredegar.
Results in 2009 include unrealized gains from the write-up of an investment accounted for under the fair value method of $5.1 million ($3.2 million after taxes; see further discussion on page 21). Gains on the sale of corporate assets”assets in 2009 include realized gains of $404,000 ($257,000 after taxes) from the sale of corporate real estate. The pretax amounts for each of these items are included in "Other income (expense), net" in the consolidated statements of income and separately shown in the segment operating profit table on page 13. Income taxes in 2006 include a reversal of a valuation allowance of $577,000 for deferred tax assets associated with capital loss carry-forwards recorded with the write-down of the investment in Novalux. Outside appraisal of the value of corporate assets, primarily real estate, performed in December 2006, indicates that realization of related deferred tax assets is more likely than not.15.
For more information on costs and expenses, see the executive summary beginning on page 17.18.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $1.2$806,000 in 2009, compared to $1.0 million in 2006 and $586,000 in 2005. Interest income was up primarily due to a higher average yield earned on cash equivalents.2008. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.
Interest expense, increasedwhich includes the amortization of debt issue costs, was $783,000 in 2009, a 67.3% decrease in comparison to $5.5$2.4 million in 2006 compared with $4.6 million in 2005.for 2008 due to lower average debt levels and lower average interest rates during 2009. Average debt outstanding and interest rates were as follows:
| (In Millions) | 2006 | 2005 | 2009 | 2008 | |||||||||||
| Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread: | |||||||||||||||
| Floating-rate debt with interest charged on a rollover | |||||||||||||||
| basis at one-month LIBOR plus a credit spread: | |||||||||||||||
| Average outstanding debt balance | $ | 91.0 | $ | 110.0 | $ | 5.0 | $ | 47.7 | |||||||
| Average interest rate | 5.9 | % | 4.5 | % | 1.2 | % | 3.8 | % | |||||||
| Fixed-rate and other debt: | |||||||||||||||
| Average outstanding debt balance | $ | 4.4 | $ | 5.9 | $ | 1.5 | $ | 1.8 | |||||||
| Average interest rate | 6.5 | % | 5.5 | % | 3.5 | % | 4.1 | % | |||||||
| Total debt: | |||||||||||||||
| Average outstanding debt balance | $ | 95.4 | $ | 115.9 | $ | 6.5 | $ | 49.5 | |||||||
| Average interest rate | 5.9 | % | 4.6 | % | 1.8 | % | 3.8 | % | |||||||
Income Taxes. The effective tax rate declinedused to 35.1%compute income taxes from continuing operations was 107.8% in 20062009 compared with 38.1%39.7% in 2005 due to2008. The differences between the numerous variances between years thatU.S. federal statutory rate and the effective tax rate for continuing operations are shown in the effective income tax rate reconciliation provided in Note 14 of the notes to financial statements.on page 69.
2008 versus 2007
Revenues. Overall, sales for 2005 increased 11.1%Sales in 2008 decreased by 4.2% compared with 2004.2007 due to sales declines in both Film Products and Aluminum Extrusions. Net sales (sales less freight) fordecreased 1.5% in Film Products increased 11.4% primarily dueas competitive pressures led to sales of higher value-added products (mainly apertured, elastic and surface protection materials) andlower volume, which was partially offset by higher selling prices driven by higher raw materialfrom the pass-through of increased resin costs. Net sales fordecreased 8.5% in Aluminum Extrusions increased 11% primarily due to higher selling prices driven by higher raw material and energy costs and higher saleslower volume (volume was up 1.2%).as shipments declined in most markets. For more information on net sales and volume, see the business segment reviewexecutive summary beginning on page 33.18.
25
Operating Costs and Expenses. GrossConsolidated gross profit (sales lessminus cost of goods sold and freight) as a percentage of sales decreased to 12.7%was 14.0% in 2005 from 14.1%2008 and 15.3% in 2004. At Film Products, the lower gross profit margin was driven primarily by higher resin costs, partially offset by higher overall gross profit from sales of higher value-added products. For more information on resin costs, see the executive summary beginning on page 17. At Aluminum Extrusions, the2007. The gross profit margin decreased in 2005 compared with 2004Film Products and Aluminum Extrusions primarily due to higher energy costs and strength of the Canadian Dollar,lower sales volumes, partially offset by price increases, higher volumecost reduction efforts and an energy surcharge.the favorable impact of changes in the U.S. dollar value of currencies for operations outside the U.S. The benefit from currency rate changes was approximately $3.6 million.
As a percentage of sales, SG&A expenses decreased to 6.8% in 2005 compared with 7.0% in 2004 due to higher salesselling, general and the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005, partially offset by the classification of certain costs at AFBS as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year.
administrative and R&D expenses declined to $9.0 millionwere 7.9% in 20052008, down from $15.3 million8.3% in 2004. R&D spending at AFBS declined to $2.4 million in 2005 from $7.8 million in 20042007. The decrease is primarily due to the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005. Further contributing to lower R&Dselling, general and administrative expenses at AFBS werein Film Products from cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year. R&D spending at Film Products dropped to $6.6 million in 2005 compared with $7.5 million in 2004 due to restructuring..
Losses associated with plant shutdowns, asset impairments and restructurings net of gains on sale of related assets, in 20052008 totaled $14.6$12.0 million ($9.48.4 million after taxes) and included:
| A |
| A |
| ● | A fourth quarter gain of $583,000 ($437,000 after taxes) related to |
| A |
We recognized a gain of $61,000 related to$1.5 million ($965,000 after taxes) from the sale of corporate real estate. Thisour investments in Theken Spine and Therics, LLC. The gain is included in “Other income (expense), net” in the consolidated statements of income. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar.
Results in 2008 include unrealized gains from the write-up of an investment accounted for under the fair value method of $5.6 million ($3.6 million after taxes; see further discussion on page 21). Gains on the sale of corporate assets in 2008 include realized gains of $509,000 ($310,000 after taxes) from the sale of equity securities and $492,000 ($316,000 after taxes) from the sale of corporate real estate. The pretax amounts for each of these items is included in "Other income (expense), net" in the consolidated statements of income and separately shown in the segment operating profit table on page 13.
For more information on costs and expenses, see the business segment reviewexecutive summary beginning on page 33.18.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $586,000$1.0 million in 2005 and $350,0002008, down from $1.2 million in 2004. Interest income was up primarily2007 due to a higherlower average yield earned on cash equivalents. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.
Interest expense increased to $4.6was $2.4 million in 2005 compared with $3.22008, a 12.0% decrease in comparison to $2.7 million in 2004.for 2007, as higher average debt levels during the year were offset by lower average interest rates. Average debt outstanding and interest rates were as follows:
| (In Millions) | 2005 | 2004 | 2008 | 2007 | |||||||||||
| Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread: | |||||||||||||||
| Floating-rate debt with interest charged on a rollover | |||||||||||||||
| basis at one-month LIBOR plus a credit spread: | |||||||||||||||
| Average outstanding debt balance | $ | 110.0 | $ | 105.2 | $ | 47.7 | $ | 41.5 | |||||||
| Average interest rate | 4.5 | % | 2.7 | % | 3.8 | % | 6.0 | % | |||||||
| Fixed-rate and other debt: | |||||||||||||||
| Average outstanding debt balance | $ | 5.9 | $ | 5.6 | $ | 1.8 | $ | 2.2 | |||||||
| Average interest rate | 5.5 | % | 6.0 | % | 4.1 | % | 3.8 | % | |||||||
| Total debt: | |||||||||||||||
| Average outstanding debt balance | $ | 115.9 | $ | 110.8 | $ | 49.5 | $ | 43.7 | |||||||
| Average interest rate | 4.6 | % | 2.8 | % | 3.8 | % | 5.9 | % | |||||||
Income Taxes. The effective tax rate used to compute income taxes from continuing operations decreased to 39.7% in 2008 compared with 41.1% in 2007. The decrease in the effective tax rate for continuing operations was 38.1%due to numerous factors as shown in 2005, up from 26.0% in 2004. The lower rate in 2004 reflects a tax benefit of $4 million related to the reversal ofeffective income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000.rate reconciliation provided in Note 14 on page 69.
Financial Condition
Assets and Liabilities
Changes in operating assets and liabilities from continuing operations from December 31, 20052008 to December 31, 20062009 are summarized below:
| Accounts receivable |
| - | Accounts receivable in Film Products |
| - | Accounts receivable in Aluminum Extrusions decreased by |
| Inventories |
| - | Inventories in Film Products increased by |
| - | Inventories in Aluminum Extrusions |
| Net property, plant and equipment |
| Goodwill and other intangibles decreased by $30.5 million (22.6%) primarily due to the goodwill impairment charge of $30.6 million related to our aluminum extrusions business (see Note 1 beginning on page 47). |
| ● | Other assets increased by $6.6 million (17.0%) primarily due to the $5.1 million write-up of an investment accounted for under the fair value method. |
● | Accounts payable |
| - | Accounts payable |
27
| Accounts payable in Aluminum Extrusions decreased by $2.3 million, or 8.5%, primarily due to lower sales volumes. |
| - | Accounts payable increased at corporate by $128,000. |
| ● | Accrued expenses decreased by $3.4 million (8.9%) due primarily due to the decrease in unrealized losses on future contracts that are used to hedge fixed-priced forward sales contracts with certain customer in Aluminum Extrusions, partially offset by higher accruals for certain performance-based incentive programs. |
| ● | Other noncurrent |
| Net deferred income tax liabilities in excess of assets increased by |
Net capitalization and indebtedness as defined under our revolving credit agreement as of December 31, 2006 are2009 were as follows:
| Net Capitalization and Indebtedness as of Dec. 31, 2006 | ||||||||
| Net Capitalization and Indebtedness as of Dec. 31, 2009 | Net Capitalization and Indebtedness as of Dec. 31, 2009 | |||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||
| Net capitalization: | ||||||||
| Cash and cash equivalents | $ | 40,898 | $ | 90,663 | ||||
| Debt: | ||||||||
$300 million revolving credit agreement maturing December 15, 2010 | 60,000 | |||||||
| $300 million revolving credit agreement maturing | ||||||||
| December 15, 2010 | - | |||||||
| Other debt | 2,520 | 1,163 | ||||||
| Total debt | 62,520 | 1,163 | ||||||
| Debt net of cash and cash equivalents | 21,622 | |||||||
| Cash and cash equivalents net of debt | (89,500 | ) | ||||||
| Shareholders' equity | 516,595 | 429,072 | ||||||
| Net capitalization | $ | 538,217 | $ | 339,572 | ||||
| Indebtedness as defined in revolving credit agreement: | Indebtedness as defined in revolving credit agreement: | |||||||
| Total debt | $ | 62,520 | $ | 1,163 | ||||
| Face value of letters of credit | 5,907 | 7,030 | ||||||
| Liabilities relating to derivative financial instruments | 116 | |||||||
| Liabilities relating to derivative financial | ||||||||
| instruments, net of cash deposits | 255 | |||||||
| Indebtedness | $ | 68,543 | $ | 8,448 | ||||
Under the revolving credit agreement, borrowings are permitted up to $300 million, and $239$222 million was available to borrow at December 31, 2006.2009 based on the most restrictive covenants (no amounts borrowed at December 31, 2009). 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) | Pricing Under Revolving Credit Agreement (Basis Points) | Pricing Under Revolving Credit Agreement (Basis Points) | |||||||||
Indebtedness-to-Adjusted EBITDA Ratio | Credit Spread Over LIBOR | Commitment Fee | |||||||||
| Indebtedness-to-Adjusted | Indebtedness-to-Adjusted | Credit Spread | Commitment | ||||||||
| EBITDA Ratio | EBITDA Ratio | Over LIBOR | Fee | ||||||||
| > 2.50x but <= 3x | 125 | 25 | > 2.50x but <= 3x | 125 | 25 | ||||||
| > 1.75x but <= 2.50x | 100 | 20 | > 1.75x but <= 2.50x | 100 | 20 | ||||||
| > 1x but <=1.75x | 87.5 | 17.5 | > 1x but <=1.75x | 87.5 | 17.5 | ||||||
| <= 1x | 75 | 15 | 75 | 15 | |||||||
28
At December 31, 2006,2009, the interest rate on debt borrowed under the revolving credit agreement waswould have been priced at one-month LIBOR plus the applicable credit spread of 75 basis points.
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 cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.
| Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and | ||||
| Interest Coverage Ratio as Defined in Revolving Credit Agreement Along with Related Most | ||||
| Restrictive Covenants | ||||
| As of and for the Twelve Months Ended December 31, 2009 (In Thousands) | ||||
| Computations of adjusted EBITDA and adjusted EBIT as defined in | ||||
| revolving credit agreement for the twelve months ended December 31, 2009: | ||||
| Net loss | $ | (1,353 | ) | |
| Plus: | ||||
| After-tax losses related to discontinued operations | - | |||
| Total income tax expense for continuing operations | 18,663 | |||
| Interest expense | 783 | |||
| Charges related to stock option grants and awards accounted for | ||||
| under the fair value-based method | 1,692 | |||
| Losses related to the application of the equity method of accounting | - | |||
| Depreciation and amortization expense for continuing operations | 39,997 | |||
| 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 $2,439) | 34,003 | |||
| Minus: | ||||
| After-tax income related to discontinued operations | - | |||
| Total income tax benefits for continuing operations | - | |||
| Interest income | (806 | ) | ||
| All non-cash gains and income, plus cash gains and income not to | ||||
| exceed $10,000, for continuing operations that are classified as | ||||
| unusual, extraordinary or which are related to plant shutdowns, | ||||
| asset impairments and/or restructurings (cash-related of $3,738) | (8,987 | ) | ||
| Plus or minus, as applicable, pro forma EBITDA adjustments associated | ||||
| with acquisitions and asset dispositions | - | |||
| Adjusted EBITDA as defined in revolving credit agreement | 83,992 | |||
| Less: Depreciation and amortization expense for continuing operations | ||||
| (including pro forma for acquisitions and asset dispositions) | (39,997 | ) | ||
| Adjusted EBIT as defined in revolving credit agreement | $ | 43,995 | ||
| Shareholders' equity at December 31, 2009 as defined in revolving credit agreement | $ | 429,072 | ||
| Computations of leverage and interest coverage ratios as defined in | ||||
| revolving credit agreement: | ||||
| Leverage ratio (indebtedness-to-adjusted EBITDA) | .10 | x | ||
| Interest coverage ratio (adjusted EBIT-to-interest expense) | 56.19 | x | ||
| Most restrictive covenants as defined in revolving credit agreement: | ||||
| Maximum permitted aggregate amount of dividends that can be paid | ||||
| by Tredegar during the term of the revolving credit agreement | ||||
| ($100,000 plus 50% of net income generated after October 1, 2005) | $ | 141,638 | ||
| Minimum adjusted shareholders' equity permitted ($315,000 plus 50% of | ||||
| net income generated, to the extent positive, after July 1, 2007) | $ | 349,879 | ||
| Maximum leverage ratio permitted: | ||||
| Ongoing | 2.75 | x | ||
| Pro forma for acquisitions | 2.50 | x | ||
| Minimum interest coverage ratio permitted | 2.50 | x | ||
| Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and | ||||
| Interest Coverage Ratio as Defined in Credit Agreement Along with Related Most | ||||
| Restrictive Covenants | ||||
| For the Year Ended December 31, 2006 (In Thousands) | ||||
| Computations of adjusted EBITDA and adjusted EBIT as defined in | ||||
| Credit Agreement: | ||||
| Net income | $ | 38,201 | ||
| Plus: | ||||
| After-tax losses related to discontinued operations | - | |||
| Total income tax expense for continuing operations | 20,636 | |||
| Interest expense | 5,520 | |||
| Charges related to stock option grants and awards accounted for under the fair value-based method | 970 | |||
| Losses related to the application of the equity method of accounting | 25 | |||
| Depreciation and amortization expense for continuing operations | 44,281 | |||
| All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $3,850) | 5,000 | |||
| Minus: | ||||
| After-tax income related to discontinued operations | - | |||
| Total income tax benefits for continuing operations | - | |||
| Interest income | (1,240 | ) | ||
| All non-cash gains and income, plus cash gains and income not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $317) | (3,206 | ) | ||
| Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions | - | |||
| Adjusted EBITDA as defined in Credit Agreement | 110,187 | |||
| Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions and asset dispositions) | (44,281 | ) | ||
| Adjusted EBIT as defined in Credit Agreement | $ | 65,906 | ||
| Indebtedness: | ||||
| Total debt | $ | 62,520 | ||
| Face value of letters of credit | 5,907 | |||
| Indebtedness | $ | 68,427 | ||
| Shareholders' equity at December 31, 2006 | $ | 516,595 | ||
| Computations of leverage and interest coverage ratios as defined in | ||||
| Credit Agreement: | ||||
| Leverage ratio (indebtedness-to-adjusted EBITDA) | .62x | |||
| Interest coverage ratio (adjusted EBIT-to-interest expense) | 11.94x | |||
| Most restrictive covenants as defined in Credit Agreement: | ||||
| Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the Credit Agreement ($100,000 plus 50% of net income generated after October 1, 2005) | $ | 119,546 | ||
| Minimum adjusted shareholders' equity permitted ($351,918 plus 50% of net income generated after October 1, 2005) | $ | 371,464 | ||
| Maximum leverage ratio permitted: | ||||
| Ongoing | 3.00x | |||
| Pro forma for acquisitions | 2.50x | |||
| Minimum interest coverage ratio permitted | 2.50x | |||
We are obligated to make future payments under various contracts as set forth below:
| Payments Due by Period | ||||||||||||||||||||||||||||
| (In Millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Remainder | Total | |||||||||||||||||||||
| Debt | $ | .5 | $ | .3 | $ | .1 | $ | .3 | $ | - | $ | - | $ | 1.2 | ||||||||||||||
| Operating leases: | ||||||||||||||||||||||||||||
| AFBS (formerly Therics) | 1.7 | .4 | - | - | - | - | 2.1 | |||||||||||||||||||||
| Other | 1.3 | 1.4 | 1.3 | .2 | .2 | - | 4.4 | |||||||||||||||||||||
Estimated contributions required (1) : | ||||||||||||||||||||||||||||
| Defined benefit plans | .2 | .2 | 8.3 | 1.8 | .2 | 1.9 | 12.6 | |||||||||||||||||||||
| Other postretirement benefits | .5 | .5 | .5 | .6 | .6 | 3.2 | 5.9 | |||||||||||||||||||||
Capital expenditure commitments (2) | 1.5 | - | - | - | - | - | 1.5 | |||||||||||||||||||||
| Estimated obligations relating to | ||||||||||||||||||||||||||||
uncertain tax positions (3) | - | - | - | - | - | 1.5 | 1.5 | |||||||||||||||||||||
| Total | $ | 5.7 | $ | 2.8 | $ | 10.2 | $ | 2.9 | $ | 1.0 | $ | 6.6 | $ | 29.2 | ||||||||||||||
| Payments Due by Period | ||||||||||||||||||||||
| (In Millions) | 2007 | 2008 | 2009 | 2010 | 2011 | Remainder | Total | |||||||||||||||
| Debt | $ | .7 | $ | .5 | $ | .5 | $ | 60.4 | $ | .2 | $ | .2 | $ | 62.5 | ||||||||
| Operating leases: | ||||||||||||||||||||||
| AFBS (formerly Therics) | 1.6 | 1.6 | 1.6 | 1.6 | .4 | - | 6.8 | |||||||||||||||
| Other | 2.1 | 1.6 | .5 | .5 | .3 | .8 | 5.8 | |||||||||||||||
| Capital expenditure commitments * | 6.0 | - | - | - | - | - | 6.0 | |||||||||||||||
| Total | $ | 10.4 | $ | 3.7 | $ | 2.6 | $ | 62.5 | $ | .9 | $ | 1.0 | $ | 81.1 | ||||||||
| *Represents contractual obligations for plant construction and purchases of real property and equipment. See Note 13 on page 66. | ||||||||||||||||||||||
| (1) | Estimated minimum required contributions for defined benefit plans and benefit payments for other postretirement plans are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases and health care cost trends. The expected defined benefit plan contribution estimates for 2010 through 2019 were determined under provisions of the Pension Protection Act of 2006 using the preliminary assumptions chosen by Tredegar for the 2009 plan year. Trede gar has determined that it is not practicable to present defined benefit contributions and other postretirement benefit payments beyond 2019. See Note 11 on page 63. | ||||||||||||||||
| (2) | Represents contractual obligations for plant construction and purchases of real property and equipment. See Note 13 on page 68. | ||||||||||||||||
| (3) | Amounts for which reasonable estimates about the timing of payments cannot be made are included in the remainder column. | ||||||||||||||||
We believe that existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.
From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or bas ket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.
Shareholders’ Equity
At December 31, 2009, we had 33,887,550 shares of common stock outstanding and a total market capitalization of $536.1 million, compared with 33,909,932 shares of common stock outstanding and a total market capitalization of $616.5 million at December 31, 2008.
30
We purchased 105,497 shares in 2009 and 1.1 million shares in 2008 on the open market at an average price of $14.44 and $14.88 per share, respectively. See the issuer purchases of equity securities section of Item 5 on page 9 regarding purchases of our common stock and our standing authorization permitting additional purchases as of December 31, 2009. From January 1, 2010 through February 26, 2010, we have repurchased an additional 750,500 shares of Tredegar common stock for $12.2 million.
Cash Flows
The discussion in this section supplements the information presented in the consolidated statements of cash flows on page 45. Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.
Cash provided by operating activities was $103.2 million in 2009 compared with $75.4 million in 2008. The increase is due primarily to normal volatility of working capital components (see assets and liabilities section on page 27 for discussion of changes in working capital).
Cash used in investing activities was $31.7 million in 2009 compared with cash provided by investing activities of $3.5 million in 2008. The change between periods was primarily due to proceeds received in 2008 from the sale of our aluminum extrusions business in Canada of $23.4 million and a $16.6 million increase in capital expenditures. Capital expenditures in 2009 primarily included the expansion of capacity at our aluminum extrusion facility Carthage, Tennessee as well as the normal replacement of machinery and equipment. See the executive summary beginning on page 18 and the business segment review beginning on page 34 for more information on capital expenditures.
Net cash flow used in financing activities was $28.2 million in 2009 and related to net repayments on our revolving credit facility with excess cash flow of $21.5 million, the payment of regular quarterly dividends of $5.4 million (4 cents per share per quarter) and repurchase of 105,497 shares of Tredegar common stock for $1.5 million.
Cash provided by operating activities was $75.4 million in 2008 compared with $95.6 million in 2007. The decrease is due primarily to normal volatility of working capital components (see assets and liabilities section on page 25 for discussion of working capital trends) and lower income from continuing operations, partially offset by lower income tax payments (income tax payments were approximately $8.8 million in 2008 compared with $17 million in 2007).
Cash provided by investing activities was $3.5 million in 2008 compared with cash used in investing activities of $36.3 million in 2007. The improvement was primarily due to proceeds received in 2008 from the sale of our aluminum extrusions business in Canada of $23.4 million and lower investments in 2008 compared with 2007. Capital expenditures in 2008 primarily included the normal replacement of machinery and equipment and the expansion of capacity at our aluminum extrusion facility Carthage, Tennessee.
Net cash flow used in financing activities was $80.7 million in 2008 and related to net repayments on our revolving credit facility with excess cash flow of $59.5 million, the payment of regular quarterly dividends of $5.4 million (4 cents per share per quarter) and repurchases of Tredegar common stock ($19.8 million including settlement of $3.4 million), partially offset by proceeds from the exercise of stock options of $4.1 million.
Quantitative and Qualitative Disclosures about Market Risk
Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the assets and liabilities section beginning on page 27 regarding credit agreement and interest rate exposures.
Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate our casting furnaces). There is no assurance of our ability to pass through higher raw material and energy costs to our customers.
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See the executive summary beginning on page 18 and the business segment review beginning on page 34 for discussion regarding the impact of the lag in the pass-through of resin price changes. The volatility of average quarterly prices of low density polyethylene resin in the U.S. (a primary raw material for Film Products) is shown in the chart below.
| Source: Quarterly averages computed by Tredegar using monthly data provided by Chemical Data Inc. ("CDI"). In January 2005, CDI reflected a 4 cents | |||||||||||
| per pound non-market adjustment based on their estimate of the growth of discounts over the 2000 to 2003 period. The 4th quarter 2004 average rate | |||||||||||
| of 67 cents per pound is shown on a pro forma basis as if the non-market adjustment was made in October 2004. | |||||||||||
Resin prices in Europe, Asia and South America have exhibited similar trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days (see the executive summary on page 18 and the business segment review on page 34 for more information).
In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. See Note 6 on page 57 for more information.
Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg. |
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In Aluminum Extrusions, we hedge from time to time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $70,000 impact on the continuing monthly operating profit for our U.S. operations in Aluminum Extrusions. In September 2005, we announced an energy surcharge for our aluminum extrusions business in the U.S. to be applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu.
| Source: Quarterly averages computed by Tredegar using monthly NYMEX settlement prices. |
We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for continuing manufacturing operations related to foreign markets for 2009 and 2008 are as follows:
| Tredegar Corporation - Continuing Manufacturing Operations | |||||||||||||
| Percentage of Net Sales and Total Assets Related to Foreign Markets | |||||||||||||
| 2009 | 2008 | ||||||||||||
% of Total Net Sales * | % Total Assets - | % of Total Net Sales * | % Total Assets - | ||||||||||
Exports From U.S. | Foreign Oper- ations | Foreign Oper- ations * | Exports From U.S. | Foreign Oper- ations | Foreign Oper- ations * | ||||||||
| Canada | 6 | - | - | 5 | - | - | |||||||
| Europe | 1 | 19 | 14 | 1 | 18 | 15 | |||||||
| Latin America | - | 3 | 2 | - | 3 | 2 | |||||||
| Asia | 7 | 6 | 6 | 3 | 7 | 7 | |||||||
| Total % exposure | |||||||||||||
| to foreign | |||||||||||||
| markets | 14 | 28 | 22 | 9 | 28 | 24 | |||||||
| * | The percentages for foreign markets are relative to Tredegar's total net sales and total assets from manufacturing operations (consolidated net sales and total assets from continuing operations excluding cash and cash equivalents and AFBS (formerly Therics)). | |||||||||||||
We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies (see trends for the Euro and Chinese Yuan in the chart below) and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from continuing foreign operations relates to the Euro, the Chinese Yuan, the Hungarian Forint and the Brazilian Real.
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In Film Products, where we are typically able to match the currency of our sales and costs, we estimate that the change in value of foreign currencies relative to the U.S. Dollar had a negative impact on operating profit of approximately $1.9 million in 2009 compared with 2008, a positive impact of $3.6 million in 2008 compared with 2007 and a positive impact of $3.0 million in 2007 compared with 2006.
Trends for the Euro and Chinese Yuan are shown in the chart below:
| Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg. |
Business Segment Review
Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.
Film Products
Net Sales. See the executive summary beginning on page 18 for the discussion of net sales (sales less freight) in Film Products in 2009 compared with 2008.
In Film Products, net sales were $522.8 million in 2008, down 1.5% versus $531.0 million in 2007. Operating profit from ongoing operations was $53.9 million in 2008, down 9.3% compared with $59.4 million in 2007. Volume decreased to 221.2 million pounds in 2008 from 244.3 million pounds in 2007. The volume decline was primarily due to competitive pressures in most product segments, most notably the personal care and surface protection markets. Net sales declined compared to 2007 due to lower volume, partially offset by higher selling prices from the pass-through of increased resin costs. A significant portion of the substantially lower resin costs realized in the fourth quarter of 2008 were not passed through t o customers via lower selling prices until the first quarter of 2009. |
Operating Profit. See the executive summary beginning on page 18 for the discussion of operating profit in Film Products in 2009 compared with 2008.
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| Operating profit from ongoing operations in Film Products decreased in 2008 versus 2007 due primarily to lower volume, partially offset by cost reduction efforts and the benefit from appreciation of the U.S. dollar value of currencies for operations outside of the U.S. (benefit from currency rate changes was approximately $3.6 million). Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days. The estimated unfavorable impact of the lag in the pass-through of changes in average resin costs and year-end adjustments for inventories accounted for under LIFO was $600,000 and $2.5 million for 2008 and 2007, r espectively. |
Identifiable Assets. Identifiable assets in Film Products decreased to $371.6 million at December 31, 2009, from $399.9 million at December 31, 2008, due primarily to the depreciation of $32.2 million, partially offset by capital expenditures of $11.5 million, a lower accounts receivable balance ($4.2 million) and higher accruals for performance-based incentive plans. See page 27 for further discussion on changes in assets and liabilities.
Identifiable assets in Film Products decreased to $399.9 million at December 31, 2008, from $488.0 million at December 31, 2007, due primarily to the decline in prepaid pension assets of $42.9 million as the funded status of our pension plans shifted from a net asset to a net liability, depreciation of $34.5 million and machinery and equipment asset impairments of $8.6 million, partially offset by capital expenditures of $11.1 million and efforts to lower inventory levels (total inventory balances decreased $9.9 million). See page 25 for further discussion on changes in assets and liabilities.
Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Film Products was $32.4 million in 2009, $34.6 million in 2008 and $34.1 million in 2007. The decrease in 2009 compared with 2008 is primarily due to the write-down of certain assets in prior years and lower than normal capital expenditures in recent years. The increase in 2008 compared with 2007 is primarily due to capital expenditures in 2007 and 2008 and appreciation of the U.S. Dollar value of currencies for operations outside of the U.S. We expect depreciation and amortization expense for Film Products will be approximately $36 million in 2010.
Capital expenditures increased to $11.5 million in 2009 compared with $11.1 million in 2008 and $15.3 million in 2007. Capital expenditures in 2009 and 2008 primarily included the normal replacement of machinery and equipment. Capital expenditures in 2010 are expected to increase to approximately $24 million as spending returns to more normalized levels.
Aluminum Extrusions (Continuing Operations)
Net Sales and Operating Profit. See the executive summary beginning on page 18 for the discussion of net sales (sales less freight) and operating profit for the continuing operations of Aluminum Extrusions in 2009 compared with 2008.
Net sales from continuing operations in Aluminum Extrusions were $340.3 million in 2008, down 8.5% from $371.8 million in 2007. Operating profit from ongoing U.S. operations decreased to $10.1 million in 2008, down 38.7% from $16.5 million in 2007. Volume from continuing operations was 136.2 million pounds in 2008, down 12.6% from 155.8 million pounds in 2007. The decrease in net sales was mainly due to lower volume. Shipments declined in most markets. Shipments in non-residential construction, which comprised 72% of total volume in 2008, declined by approximately 2.7% in 2008 compared with 2007. Operating profit from ongoing U.S. operations declined in 2008 compared with 2007 mainly due to lower volume.
Identifiable Assets. Identifiable assets in Aluminum Extrusions were $82.4 million at December 31, 2009, $112.3 million at December 31, 2008 and $115.2 million at December 31, 2007. The decline of $29.9 million at the end of 2009 compared with 2008 is mainly due to the goodwill impairment charge of $30.6 million in 2009 and lower accounts receivable balances of $13.2 million, partially offset by higher property, plant and equipment balances from capital expenditures of $22.5 million, net of depreciation expense of $7.6 million.
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Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Aluminum Extrusions was $7.6 million in 2009, $8.0 million in 2008 and $8.5 million in 2007. We expect depreciation and amortization expense for Aluminum Extrusions to be approximately $9.5 million in 2010.
Capital expenditures totaled $22.5 million in 2009, $9.7 million in 2008 and $4.4 million in 2007. Capital expenditures of $19.0 million in 2009 and $5.7 million in 2008 reflect spending on the 18-month project to expand the capacity of our Carthage, Tennessee manufacturing facility. The new capacity will be dedicated to serving customers in the nonresidential construction sector. Capital expenditures are expected to be approximately $6.4 million in 2010.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion of quantitative and qualitative disclosures about market risk beginning on page 31 in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index on page 41 for references to the report of the independent registered public accounting firm, the consolidated financial statements and selected quarterly financial data.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports t hat we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles and includes policies and procedures that:
| · | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. |
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices) and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on their evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included on pages 41-42.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors and persons nominated to become directors of Tredegar to be included in our Proxy Statement under the headings "Election of Directors" and “Tredegar’s Board of Directors” is incorporated herein by reference.
The information concerning corporate governance to be included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and the Board Committees” and “Corporate Governance” is incorporated herein by reference.
The information to be included in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Requirements” is incorporated herein by reference.
Set forth below are the names, ages and titles of our executive officers:
| Name | Age | Title |
| Nancy M. Taylor | 50 | President and Chief Executive Officer |
| Duncan A. Crowdis | 57 | President, Aluminum Extrusions and Corporate Vice President |
| A. Brent King | 41 | Vice President, General Counsel and Corporate Secretary |
| Monica Moretti | 40 | President, Tredegar Film Products |
| Kevin A. O’Leary | 51 | Vice President, Chief Financial Officer and Treasurer |
| Larry J. Scott | 59 | Vice President, Audit |
Nancy M. Taylor. Ms. Taylor was elected President and Chief Executive Officer effective February 1, 2010. Prior to February 1, 2010, Ms. Taylor was President of Tredegar Films Products and Executive Vice President. She was elected Executive Vice President effective January 1, 2009. She was elected President of Tredegar Film Products effective April 5, 2005. She was elected Senior Vice President effective November 1, 2004. Ms. Taylor served as Senior Vice President, Strategy and Special Projects from November 1, 2004 until April 5, 2005. Ms. Taylor served as Managing Director, European Operations, of Tredegar Film Products from January 1, 2003 until November 1, 2004. Ms. Taylor served as Vice Presi dent, Administration and Corporate Development from September 10, 2001 until February 12, 2003. Ms. Taylor served as Secretary from February 24, 1994 until February 12, 2003. She served as Vice President, Law, from November 18, 1998 until September 10, 2001, and served as General Counsel from May 22, 1997 until July 25, 2000.
Duncan A. Crowdis. On January 6, 2009, Mr. Crowdis was appointed Vice President effective January 1, 2009. Mr. Crowdis was elected President of Tredegar's Aluminum Extrusions subsidiaries on June 13, 2005, and continues to serve in such capacity. Mr. Crowdis served as Plant Manager of Aluminum Extrusions from March, 2005 until June, 2005. He previously served as Chief Process Officer of Aluminum Extrusions from December, 2002 until March, 2005.
A. Brent King. Mr. King was elected Vice President, General Counsel and Corporate Secretary on October 20, 2008, the date that he joined Tredegar. From October, 2005 until October, 2008, he served as General Counsel at Hilb Rogal & Hobbs. Mr. King was Vice President and Assistant Secretary for Hilb Rogal & Hobbs from October, 2001 to October, 2008. He served as Associate General Counsel for Hilb Rogal & Hobbs from October, 2001 to October, 2005.
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Kevin A. O’Leary. Mr. O’Leary was appointed Vice President, Chief Financial Officer and Treasurer effective December 11, 2009. He was appointed Vice President, Finance, of Tredegar Film Products Corporation, effective January 1, 2009 until December 11, 2009 and served as Director, Finance, of Tredegar Film Products Corporation from October, 2008 until January, 2009. Mr. O’Leary previously served as Vice President, Finance – Mergers and Acquisitions of the Avery Dennison Retail Information Services Group (“Avery Dennison RIS”), a division of Avery Dennison Corporation from March, 2007 through August, 2008. He served as General Manager of the Printer Systems division of Avery Dennison RIS from February, 200 6 through February, 2007 and as Director, Finance, of Avery Dennison RIS from August, 2004 through January, 2006.
Monica Moretti. Ms. Moretti was elected President of Tredegar Film Products Corporation and its subsidiaries effective February 1, 2010. She served as Vice President and General Manager, Consumer Care, of Tredegar Film Products Corporation from May, 2008 until January 31, 2010 and as General Manager, Hygienics, of Tredegar Film Products Corporation from March, 2008 until May, 2008. Ms. Moretti served as Chief Marketing Officer and Vice President, Marketing and Technology, of H.B. Fuller Company from February, 2007 until March, 2008. She served as Group Vice President, Marketing and Technology, of H.B. Fuller Company from December, 2005 until February, 2007 and as Global Business Unit Manager, Assembly, of H.B. Fuller Company from December, 2004 until December, 2005.
Larry J. Scott. Mr. Scott was elected Vice President, Audit, on May 24, 2000. Mr. Scott served as Director of Internal Audit from February 24, 1994 until May 24, 2000.
We have adopted a Code of Conduct that applies to all of our directors, officers and employees (including our chief executive officer, chief financial officer and principal accounting officer) and have posted the Code of Conduct on our web site. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers from any provision of our Code of Conduct applicable to the chief executive officer, chief financial officer and principal accounting officer by posting this information on our web site. Our Internet address is www.tredegar.com. The information on or that can be accessed through our web site is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.
Item 11. EXECUTIVE COMPENSATION
The information to be included in the Proxy Statement under the headings “Compensation of Directors”, “Board Meetings of Non-Management Directors and Board Committees - Executive Compensation Committee Interlocks and Insider Participation”, “Compensation Discussion and Analysis”, “Executive Compensation Committee Report” and “Compensation of Executive Officers” is incorporated herein by reference.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information to be included in the Proxy Statement under the heading "Stock Ownership" is incorporated herein by reference. The following table summarizes information with respect to equity compensation plans under which securities are authorized for issuance as of December 31, 2009.
| Column (a) | Column (b) | Column (c) | Column (d) | ||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column | ||||||||||
| Equity compensation plans approved by security holders | *914,100 | $ | 16.29 | 3,591,585 | |||||||||
| Equity compensation plans not approved by security holders | - | - | - | ||||||||||
| Total | 914,100 | $ | 16.29 | 3,591,585 | |||||||||
* Includes performance stock units that give the holder the right to receive shares of Tredegar common stock upon the satisfaction of certain performance criteria.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information to be included in the Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Tredegar’s Board of Directors” is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is incorporated herein by reference:
| · | Information on accounting fees and services to be included in the Proxy Statement under the heading "Audit Fees;" and |
| · | Information on the Audit Committee’s procedures for pre-approving certain audit and non-audit services to be included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and Board Committees - Audit Committee Matters”. |
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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | List of documents filed as a part of the report: |
| (1) | Financial statements: |
| Tredegar Corporation | |
| Index to Financial Statements and Supplementary Data | Page |
| Report of Independent Registered Public Accounting Firm | 41-42 |
| Financial Statements: | |
Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007 | 43 |
| Consolidated Balance Sheets as of December 31, 2009 and 2008 | 44 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 | 45 |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007 | 46 |
| Notes to Financial Statements | 47-76 |
| Selected Quarterly Financial Data (Unaudited) | 77 |
(2) | Financial statement schedules: |
None.
| (3) | Exhibits: |
| See Exhibit Index on pages 84-85. |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
To the Board of Directors and Shareholders of
Tredegar Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Tredegar Corporation and its subsidiaries (the “Company”) at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
41
assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance wi th authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Richmond, Virginia
March 3, 2010
42
| CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||
| Tredegar Corporation and Subsidiaries | ||||||||||||
| Years Ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In Thousands, Except Per-Share Data) | ||||||||||||
| Revenues and other: | ||||||||||||
| Sales | $ | 648,613 | $ | 883,899 | $ | 922,583 | ||||||
| Other income (expense), net | 8,464 | 10,341 | 1,782 | |||||||||
| 657,077 | 894,240 | 924,365 | ||||||||||
| Costs and expenses: | ||||||||||||
| Cost of goods sold | 516,933 | 739,721 | 761,509 | |||||||||
| Freight | 16,085 | 20,782 | 19,808 | |||||||||
| Selling, general and administrative | 60,481 | 58,699 | 68,501 | |||||||||
| Research and development | 11,856 | 11,005 | 8,354 | |||||||||
| Amortization of intangibles | 120 | 123 | 149 | |||||||||
| Interest expense | 783 | 2,393 | 2,721 | |||||||||
| Asset impairments and costs associated | ||||||||||||
| with exit and disposal activities | 2,950 | 12,390 | 4,027 | |||||||||
| Goodwill impairment charge | 30,559 | - | - | |||||||||
| Total | 639,767 | 845,113 | 865,069 | |||||||||
| Income from continuing operations | ||||||||||||
| before income taxes | 17,310 | 49,127 | 59,296 | |||||||||
| Income taxes | 18,663 | 19,486 | 24,366 | |||||||||
| Income (loss) from continuing operations | (1,353 | ) | 29,641 | 34,930 | ||||||||
| Income (loss) from discontinued operations | - | (705 | ) | (19,681 | ) | |||||||
| Net income (loss) | $ | (1,353 | ) | $ | 28,936 | $ | 15,249 | |||||
| Earnings (loss) per share: | ||||||||||||
| Basic: | ||||||||||||
| Continuing operations | $ | (.04 | ) | $ | .87 | $ | .91 | |||||
| Discontinued operations | - | (.02 | ) | (.51 | ) | |||||||
| Net income (loss) | $ | (.04 | ) | $ | .85 | $ | .40 | |||||
| Diluted: | ||||||||||||
| Continuing operations | $ | (.04 | ) | $ | .87 | $ | .90 | |||||
| Discontinued operations | - | (.02 | ) | (.51 | ) | |||||||
| Net income (loss) | $ | (.04 | ) | $ | .85 | $ | .39 | |||||
| See accompanying notes to financial statements. | ||||||||||||
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| CONSOLIDATED BALANCE SHEETS | ||||
| Tredegar Corporation and Subsidiaries | ||||
| December 31 | 2009 | 2008 | ||
| (In Thousands, Except Share Data) | ||||
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 90,663 | $ 45,975 | |
| Accounts and notes receivable, net of allowance for doubtful | ||||
| accounts and sales returns of $5,299 in 2009 and $3,949 in 2008 | 74,014 | 91,400 | ||
| Income taxes recoverable | 4,016 | 12,549 | ||
| Inventories | 35,522 | 36,809 | ||
| Deferred income taxes | 5,750 | 7,654 | ||
| Prepaid expenses and other | 5,335 | 5,374 | ||
| Total current assets | 215,300 | 199,761 | ||
| Property, plant and equipment, at cost: | ||||
| Land and land improvements | 6,496 | 7,068 | ||
| Buildings | 87,297 | 80,867 | ||
| Machinery and equipment | 580,493 | 552,557 | ||
| Total property, plant and equipment | 674,286 | 640,492 | ||
| Less accumulated depreciation | 443,410 | 403,622 | ||
| Net property, plant and equipment | 230,876 | 236,870 | ||
| Other assets and deferred charges | 45,561 | 38,926 | ||
| Goodwill and other intangibles (other intangibles | ||||
| of $252 in 2009 and $372 in 2008) | 104,542 | 135,075 | ||
| Total assets | $ | 596,279 | $ 610,632 | |
| Liabilities and Shareholders' Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 53,770 | $ 54,990 | |
| Accrued expenses | 34,930 | 38,349 | ||
| Current portion of long-term debt | 451 | 529 | ||
| Total current liabilities | 89,151 | 93,868 | ||
| Long-term debt | 712 | 22,173 | ||
| Deferred income taxes | 59,052 | 45,152 | ||
| Other noncurrent liabilities | 18,292 | 29,023 | ||
| Total liabilities | 167,207 | 190,216 | ||
| Commitments and contingencies (Notes 13 and 16) | ||||
| Shareholders' equity: | ||||
| Common stock (no par value): | ||||
| Authorized 150,000,000 shares; | ||||
| Issued and outstanding - 33,887,550 shares | ||||
| in 2009 and 33,909,932 in 2008 (including restricted stock) | 41,137 | 40,719 | ||
| Common stock held in trust for savings restoration | ||||
| plan (60,424 shares in 2009 and 59,798 in 2008) | (1,322) | (1,313) | ||
| Accumulated other comprehensive income (loss): | ||||
| Foreign currency translation adjustment | 26,250 | 23,443 | ||
| Gain (loss) on derivative financial instruments | 758 | (6,692) | ||
| Pension and other postretirement benefit adjustments | (60,028) | (64,788) | ||
| Retained earnings | 422,277 | 429,047 | ||
| Total shareholders' equity | 429,072 | 420,416 | ||
| Total liabilities and shareholders' equity | $ | 596,279 | $ 610,632 | |
| See accompanying notes to financial statements. | ||||
44
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
| Tredegar Corporation and Subsidiaries | ||||||||||||
| Years Ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In Thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | (1,353 | ) | $ | 28,936 | $ | 15,249 | |||||
| Adjustments for noncash items: | ||||||||||||
| Depreciation | 39,877 | 43,068 | 45,892 | |||||||||
| Amortization of intangibles | 120 | 123 | 149 | |||||||||
| Goodwill impairment charge | 30,559 | - | - | |||||||||
| Deferred income taxes | 6,771 | 22,183 | (24,241 | ) | ||||||||
| Accrued pension and postretirement benefits | (2,654 | ) | (4,426 | ) | (1,735 | ) | ||||||
| Gain on the write-up of an investment accounted for under | ||||||||||||
| the fair value mehtod | (5,100 | ) | (5,600 | ) | - | |||||||
| Loss from write-down of investment | - | - | 2,095 | |||||||||
| Gain on sale of assets | (3,462 | ) | (3,083 | ) | (2,699 | ) | ||||||
| Loss on asset impairments and divestitures | 1,005 | 10,136 | 32,287 | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions | ||||||||||||
| and divestitures: | ||||||||||||
| Accounts and notes receivable | 18,449 | (678 | ) | 15,786 | ||||||||
| Inventories | 2,200 | 13,374 | 4,099 | |||||||||
| Income taxes recoverable | 8,533 | (12,092 | ) | 10,478 | ||||||||
| Prepaid expenses and other | 1,209 | (1,873 | ) | 764 | ||||||||
| Accounts payable and accrued expenses | 7,023 | (18,900 | ) | (2,932 | ) | |||||||
| Other, net | 38 | 4,238 | 362 | |||||||||
| Net cash provided by operating activities | 103,215 | 75,406 | 95,554 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures (including settlement of related accounts payable | ||||||||||||
| of $1,709 in 2009 and net of accounts payable of $1,709 in 2008) | (35,851 | ) | (19,235 | ) | (20,643 | ) | ||||||
| Investment in a drug delivery company ($1,000 in 2008 and $6,500 in | ||||||||||||
| 2007), real estate in 2008 and 2007 and Harbinger ($10,000 in 2007) | - | (5,391 | ) | (23,513 | ) | |||||||
| Proceeds from the sale of the aluminum extrusions business in Canada | ||||||||||||
| (net of cash included in sale and transaction costs) | - | 23,407 | - | |||||||||
| Proceeds from the sale of assets and property disposals & | ||||||||||||
| reimbursements from customers for purchases of equipment in 2007 | 4,146 | 4,691 | 7,871 | |||||||||
| Net cash provided by (used in) investing activities | (31,705 | ) | 3,472 | (36,285 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Dividends paid | (5,426 | ) | (5,447 | ) | (6,126 | ) | ||||||
| Debt principal payments | (21,539 | ) | (84,489 | ) | (39,964 | ) | ||||||
| Borrowings | - | 25,000 | 59,500 | |||||||||
| Repurchases of Tredegar common stock (including settlement of $3,368 | ||||||||||||
| in 2008 and net of settlement payable of $3,368 in 2007) | (1,523 | ) | (19,792 | ) | (73,959 | ) | ||||||
| Proceeds from exercise of stock options | 244 | 4,069 | 6,471 | |||||||||
| Net cash used in financing activities | (28,244 | ) | (80,659 | ) | (54,078 | ) | ||||||
| Effect of exchange rate changes on cash | 1,422 | (461 | ) | 2,128 | ||||||||
| Increase (decrease) in cash and cash equivalents | 44,688 | (2,242 | ) | 7,319 | ||||||||
| Cash and cash equivalents at beginning of period | 45,975 | 48,217 | 40,898 | |||||||||
| Cash and cash equivalents at end of period | $ | 90,663 | $ | 45,975 | $ | 48,217 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest payments (net of amount capitalized) | $ | 786 | $ | 2,465 | $ | 2,712 | ||||||
| Income tax payments (refunds), net | 3,019 | 8,794 | 16,989 | |||||||||
| See accompanying notes to financial statements. | ||||||||||||
45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Tredegar Corporation and Subsidiaries
| Accumulation Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
| Common Stock | Retained Earnings | Trust for Savings Restora- tion Plan | Foreign Currency Trans- lation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Post- retirement Benefit Adjust. | Total Share- holders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| (In Thousands, Except Share and Per-Share Data) | ||||||||||||||||||||||||||||||||
| Balance December 31, 2006 | 39,286,079 | $ | 120,508 | $ | 396,413 | $ | (1,291 | ) | $ | 21,522 | $ | 654 | $ | (21,211 | ) | $ | 516,595 | |||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Net income | - | - | 15,249 | - | - | - | - | 15,249 | ||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
| (net of tax of $10,428) | - | - | - | - | 19,088 | - | - | 19,088 | ||||||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||||||||||||||
| adjustment (net of tax of $1,166) | - | - | - | - | - | (1,858 | ) | - | (1,858 | ) | ||||||||||||||||||||||
| Net gains or losses and prior service | ||||||||||||||||||||||||||||||||
| costs (net of tax of $10,209) | - | - | - | - | - | - | 16,218 | 16,218 | ||||||||||||||||||||||||
| Amortization of prior service costs and | ||||||||||||||||||||||||||||||||
| net gains or losses (net of tax of $702) | - | - | - | - | - | - | 1,226 | 1,226 | ||||||||||||||||||||||||
| Comprehensive income | 49,923 | |||||||||||||||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (6,126 | ) | - | - | - | - | (6,126 | ) | ||||||||||||||||||||||
| Stock-based compensation expense | (10,000 | ) | 1,654 | - | - | - | - | - | 1,654 | |||||||||||||||||||||||
| Issued upon exercise of stock options (including | ||||||||||||||||||||||||||||||||
| related income tax benefits of $491) & other | 322,871 | 6,609 | - | - | - | - | - | 6,609 | ||||||||||||||||||||||||
| Repurchases of Tredegar common stock | (4,833,500 | ) | (77,327 | ) | - | - | - | - | - | (77,327 | ) | |||||||||||||||||||||
| Tredegar common stock purchased by trust | ||||||||||||||||||||||||||||||||
| for savings restoration plan | - | - | 12 | (12 | ) | - | - | - | - | |||||||||||||||||||||||
| Balance December 31, 2007 | 34,765,450 | 51,444 | 405,548 | (1,303 | ) | 40,610 | (1,204 | ) | (3,767 | ) | 491,328 | |||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Net income | - | - | 28,936 | - | - | - | - | 28,936 | ||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
| (net of tax of $1,607) | - | - | - | - | (2,875 | ) | - | - | (2,875 | ) | ||||||||||||||||||||||
| Reclassification of foreign currency translation | ||||||||||||||||||||||||||||||||
| gain realized on the sale of the aluminum | ||||||||||||||||||||||||||||||||
| extrusions business in Canada (net of tax | ||||||||||||||||||||||||||||||||
| of $7,696) | - | - | - | - | (14,292 | ) | - | - | (14,292 | ) | ||||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||||||||||||||
| adjustment (net of tax of $3,325) | - | - | - | - | - | (5,488 | ) | - | (5,488 | ) | ||||||||||||||||||||||
| Net gains or losses and prior service | ||||||||||||||||||||||||||||||||
| costs (net of tax of $39,678) | - | - | - | - | - | - | (66,292 | ) | (66,292 | ) | ||||||||||||||||||||||
| Amortization of prior service costs and | ||||||||||||||||||||||||||||||||
| net gains or losses (net of tax of $228) | - | - | - | - | - | - | 400 | 400 | ||||||||||||||||||||||||
| Reclassification of net actuarial losses | ||||||||||||||||||||||||||||||||
| and prior service costs realized on | ||||||||||||||||||||||||||||||||
| the sale of the aluminum extrusions | ||||||||||||||||||||||||||||||||
| business in Canada (net of tax of $1,799) | - | - | - | - | - | - | 4,871 | 4,871 | ||||||||||||||||||||||||
| Comprehensive loss | (54,740 | ) | ||||||||||||||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (5,447 | ) | - | - | - | - | (5,447 | ) | ||||||||||||||||||||||
| Stock-based compensation expense | (6,000 | ) | 1,379 | - | - | - | - | - | 1,379 | |||||||||||||||||||||||
| Issued upon exercise of stock options (including | ||||||||||||||||||||||||||||||||
| related income tax benefits of $76) & other | 254,582 | 4,320 | - | - | - | - | - | 4,320 | ||||||||||||||||||||||||
| Repurchases of Tredegar common stock | (1,104,100 | ) | (16,424 | ) | - | - | - | - | - | (16,424 | ) | |||||||||||||||||||||
| Tredegar common stock purchased by trust | ||||||||||||||||||||||||||||||||
| for savings restoration plan | - | - | 10 | (10 | ) | - | - | - | - | |||||||||||||||||||||||
| Balance December 31, 2008 | 33,909,932 | 40,719 | 429,047 | (1,313 | ) | 23,443 | (6,692 | ) | (64,788 | ) | 420,416 | |||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Net loss | - | - | (1,353 | ) | - | - | - | - | (1,353 | ) | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
| (net of tax of $1,563) | - | - | - | - | 2,807 | - | - | 2,807 | ||||||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||||||||||||||
| adjustment (net of tax of $4,538) | - | - | - | - | - | 7,450 | - | 7,450 | ||||||||||||||||||||||||
| Net gains or losses and prior service | ||||||||||||||||||||||||||||||||
| costs (net of tax of $2,310) | - | - | - | - | - | - | 4,061 | 4,061 | ||||||||||||||||||||||||
| Amortization of prior service costs and | ||||||||||||||||||||||||||||||||
| net gains or losses (net of tax of $398) | - | - | - | - | - | - | 699 | 699 | ||||||||||||||||||||||||
| Comprehensive income | 13,664 | |||||||||||||||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (5,426 | ) | - | - | - | - | (5,426 | ) | ||||||||||||||||||||||
| Stock-based compensation expense | 9,387 | 2,538 | - | - | - | - | - | 2,538 | ||||||||||||||||||||||||
| Issued upon exercise of stock options (including | ||||||||||||||||||||||||||||||||
| related income tax benefits of $64) & other | 73,728 | (597 | ) | - | - | - | - | - | (597 | ) | ||||||||||||||||||||||
| Repurchases of Tredegar common stock | (105,497 | ) | (1,523 | ) | - | - | - | - | - | (1,523 | ) | |||||||||||||||||||||
| Tredegar common stock purchased by trust | ||||||||||||||||||||||||||||||||
| for savings restoration plan | - | - | 9 | (9 | ) | - | - | - | - | |||||||||||||||||||||||
| Balance December 31, 2009 | 33,887,550 | $ | 41,137 | $ | 422,277 | $ | (1,322 | ) | $ | 26,250 | $ | 758 | $ | (60,028 | ) | $ | 429,072 | |||||||||||||||
See accompanying notes to financial statements.
46
NOTES TO FINANCIAL STATEMENTS
Tredegar Corporation and Subsidiaries
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations. Tredegar Corporation and subsidiaries (collectively “Tredegar,” “we,” “us” or “our”) are engaged in the manufacture of plastic films and aluminum extrusions. See Note 15 regarding restructurings and Note 17 regarding discontinued operations.
Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. On February 12, 2008, we sold our aluminum extrusions business in Canada. All historical results for this business have been reflected as discontinued operations in these financial statements.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries located outside the U.S., where the local currency is the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders’ equity. We have no subsidiaries located outside the U.S. where the U.S. Dollar is the functional currency.
Transaction and remeasurement gains or losses included in income were not material in 2009, 2008 and 2007. These amounts do not include the effects between reporting periods that exchange rate changes have on income of our locations outside the U.S, that result from translation into U.S. Dollars.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with original maturities of three months or less. At December 31, 2009 and 2008, Tredegar had cash and cash equivalents of $90.7 million and $46.0 million, respectively, including funds held in locations outside the U.S. of $34.2 million and $37.3 million, respectively.
Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.
Accounts and Notes Receivable. Accounts receivable are stated at the amount invoiced to customers less allowances for doubtful accounts and sales returns. Accounts receivable are non-interest bearing and arise from the sale of product to customers under typical industry trade terms. Notes receivable are not significant. Past due amounts are determined based on established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on our assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current economic conditions. Other receivables include value-added taxes related to certain foreign su bsidiaries and other miscellaneous operating receivables due within one year.
Inventories. Inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out (“LIFO”) basis, the weighted average cost or the first-in, first-out basis. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead.
Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income.
47
Capital expenditures for property, plant and equipment include capitalized interest of $116,000 in 2009, $228,000 in 2008 and $577,000 in 2007.
Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets, which range from 15 to 25 years for buildings and land improvements and 2 to 15 years for machinery and equipment. The average depreciation period for machinery and equipment is approximately 10 years in Film Products and for the continuing operations of Aluminum Extrusions.
Investments in Private Entities with Less Than or Equal to 50% Voting Ownership Interest. We account for our investments in private entities where our voting ownership is less than or equal to 50% based on the facts and circumstances surrounding the investment. We are required to account for investments under the consolidation method in situations where we are the primary beneficiary of a variable interest entity. The primary beneficiary is the party in a variable interest entity that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. If we are not deemed the primary beneficiary in an investment in a private entity then we select eith er: (i) the fair value method or (ii) either the (a) the cost method if we do not have significant influence over operating and financial policies of the company or (b) the equity method if we do have significant influence.
U.S. generally accepted accounting principles requires disclosure of 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).
Goodwill and Other Intangibles. The excess of the purchase price over the fair value of identifiable net assets of acquired companies is allocated to goodwill. We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). Our reporting units include Film Products and Aluminum Extrusions, each of which may have separately identifiable operating net assets (operating assets including goodwill and intangible assets net of operating liabilities). We estimate the fair value of our reporting units using discounted cash flow ana lysis and comparative enterprise value-to-EBITDA multiples. Based on the severity of the economic downturn and its impact on the sales volumes of our aluminum extrusions business (a 36.8% decline in sales volume in the first quarter of 2009 compared with the first quarter of 2008), the resulting first quarter operating loss, possible future losses and the uncertainty in the amount and timing of an economic recovery, we determined that impairment indicators existed in the first quarter of 2009. Upon completing the impairment analysis as of March 31, 2009, a goodwill impairment charge of $30.6 million ($30.6 million after tax) was recognized in Aluminum Extrusions. This was the entire amount of goodwill associated with the Aluminum Extrusions reporting unit and an anomalous write-off under U.S. generally accepted accounting principles since the decline in the estimated fair value below the carrying value of the operating net assets of Aluminum Extrusions was far less than $30.6 million. The goodwill of Film Products was tested for impairment at the annual testing date, with the estimated fair value of Film Products exceeding the carrying value of its net assets by a wide margin.
The components of goodwill and other intangibles at December 31, 2009 and 2008, and related amortization periods for continuing operations are as follows:
| (In Thousands) | 2009 | 2008 | Amortization Periods | ||
| Carrying value of goodwill: | |||||
| Film Products | $ | 104,290 | $ 104,144 | Not amortized | |
| Aluminum Extrusions | - | 30,559 | Not amortized | ||
| Total carrying value of goodwill | 104,290 | 134,703 | |||
| Carrying value of other intangibles: | |||||
| Film Products (cost basis of $1,172 in 2009 and 2008) | 252 | 372 | Not more than 17 yrs. | ||
| Total carrying value of goodwill and other intangibles | $ | 104,542 | $ 135,075 | ||
48
A reconciliation of the beginning and ending balances of goodwill and other intangibles for each of the three years in the period ended December 31, 2009 is as follows:
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Goodwill and other intangibles: | ||||||||||||
| Net carrying value, beginning of year | $ | 135,075 | $ | 135,907 | $ | 132,237 | ||||||
| Amortization | (120 | ) | (123 | ) | (149 | ) | ||||||
| Goodwill impairment charge | (30,559 | ) | - | - | ||||||||
| Increase (decrease) due to foreign currency translation | ||||||||||||
| and other | 146 | (709 | ) | 3,819 | ||||||||
| Total carrying value of goodwill and other intangibles | $ | 104,542 | $ | 135,075 | $ | 135,907 | ||||||
Excluded from the table above is goodwill for the Aluminum Extrusions reporting unit of $6.5 million which was allocated to discontinued aluminum extrusions operations in Canada. This goodwill was allocated using the estimated fair value of the aluminum extrusions business in Canada (the after-tax cash flow expected from disposal of approximately $30.0 million when it was classified as held for sale at the end of December 2007), and the estimated fair value of the aluminum extrusions business in the U.S. retained. The fair value of the aluminum extrusions business in the U.S. was estimated at approximately $145.0 million using comparable enterprise value-to-EBITDA multiples as of December 31, 2007. See Note 17 for more information on discontinued operations.
Impairment of Long-Lived Assets. We review long-lived assets for possible impairment when events indicate that an impairment may exist. For assets to be held and used in operations, if events indicate that an asset may be impaired, we estimate the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows. If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of the impairment loss is based on the estimated fair value of the asset, generally determined on a discounted after-tax cash flow basis.
Assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any write-down required.
Pension Costs and Postretirement Benefit Costs Other than Pensions. Pension costs and postretirement benefit costs other than pensions are accrued over the period employees provide service to Tredegar. Liabilities and expenses for pension plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions relating to the employee workforce, and we recognize the funded status of our pension and other postretirement plans in the accompanying consolidated balance sheets. Our policy is to fund our pension plans at amounts not less than the mini mum requirements of the Employee Retirement Income Security Act of 1974 and to fund postretirement benefits other than pensions when claims are incurred.
Postemployment Benefits. We periodically provide certain postemployment benefits purely on a discretionary basis. Related costs for these programs are accrued when it is probable that benefits will be paid and amounts can be reasonably estimated. All other postemployment benefits are either accrued under current benefit plans or are not material to our financial position or results of operations.
Revenue Recognition. Revenue from the sale of products, which is shown net of estimated sales returns and allowances, is recognized when title has passed to the customer, the price of the product is fixed and determinable, and collectibility is reasonably assured. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The cost of freight has been classified as a separate line in the accompanying consolidated statements of income. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction between Tredegar and its customers (such as value-added taxes) are accounted for on a net basis and therefore excluded from revenues.
49
Research & Development (“R&D”) Costs. R&D costs are expensed as incurred and include primarily salaries, wages, employee benefits, equipment depreciation, facility costs and the cost of materials consumed relating to R&D efforts. R&D costs include a reasonable allocation of indirect costs.
Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 14). We accrue U.S. federal income taxes on unremitted earnings of our foreign subsidiaries. The benefit of uncertain tax position is included in the accompanying financial statements when we determine that it is more likely than not that the position will be sustained, based on the technical merits of the position, if the taxing authority examines the position and the dispute is litigated. This de termination is made on the basis of all the facts, circumstances and information available as of the reporting date.
Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Weighted average shares outstanding used | ||||||||||||
| to compute basic earnings per share | 33,861,171 | 33,976,833 | 38,532,036 | |||||||||
| Incremental shares attributable to stock | ||||||||||||
| options and restricted stock | - | 216,887 | 156,467 | |||||||||
| Shares used to compute diluted | ||||||||||||
| earnings per share | 33,861,171 | 34,193,720 | 38,688,503 | |||||||||
Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During 2009, 2008 and 2007, the average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock was 545,450, 507,982 and 184,960, respectively.
Stock-Based Employee Compensation Plans. Compensation expense is recorded on all share-based awards based upon its calculated fair value. The fair value of stock option awards was estimated as of the grant date using the Black-Scholes options-pricing model. The assumptions used in this model for valuing Tredegar stock options granted in 2009, 2008 and 2007 are as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Dividend yield | 0.9 | % | 1.0 | % | 1.1 | % | ||||||
| Weighted average volatility percentage | 39.9 | % | 39.0 | % | 33.1 | % | ||||||
| Weighted average risk-free interest rate | 2.1 | % | 3.0 | % | 3.3 | % | ||||||
| Holding period (years): | ||||||||||||
| Officers | 6.0 | 6.0 | n/a | |||||||||
| Management | 5.0 | 5.0 | 5.0 | |||||||||
| Weighted average excercise price at date | ||||||||||||
| of grant (also weighted average market | ||||||||||||
| price at date of grant): | ||||||||||||
| Officers | $ | 18.12 | $ | 15.64 | n/a | |||||||
| Management | 17.81 | 15.81 | $ | 14.40 | ||||||||
The dividend yield is the dividend yield on our common stock at the date of grant, which we believe is a reasonable estimate of the expected yield during the holding period. We calculate expected volatility based on the historical volatility of our common stock using a sequential period of historical data equal to the expected holding period of the option. We have no reason to believe that future volatility for this period is likely to differ from the past.
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The assumed risk-free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period. The expected holding period and forfeiture assumptions are based on historical experience. Estimated forfeiture assumptions are reviewed through the vesting period. Adjustments are made if actual forfeitures differ from previous estimates. The cumulative effect of a change in estimated forfeitures is recognized in the period of the change.
Tredegar stock options granted during 2009, 2008 and 2007, and related estimated fair value at the date of grant, are as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Stock options granted (number of shares): | ||||||||||||
| Officers | 99,600 | 220,000 | n/a | |||||||||
| Management | 183,800 | 181,000 | 4,000 | |||||||||
| Total | 283,400 | 401,000 | 4,000 | |||||||||
| Estimated weighted average fair value of | ||||||||||||
| options per share at date of grant: | ||||||||||||
| Officers | $ | 7.53 | $ | 6.01 | n/a | |||||||
| Management | 6.93 | 5.48 | $ | 4.91 | ||||||||
Total estimated fair value of stock options granted (in thousands) | $ | 2,023 | $ | 2,314 | $ | 20 | ||||||
Additional disclosure of Tredegar stock options is included in Note 10.
Financial Instruments. We use derivative financial instruments for the purpose of hedging aluminum price volatility and currency exchange rate exposures that exist as part of ongoing business operations. Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the accompanying balance sheet at fair value. A change in the fair value of the derivative that is highly effective as and that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other comprehensive income are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction. & #160;Such gains and losses are reported on the same line as the underlying hedged item, and the cash flows related to financial instruments are classified in the consolidated statements of cash flows in a manner consistent with those of the transactions being hedged. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. The amount of gains and losses recognized for hedge ineffectiveness was immaterial in 2009, 2008 and 2007.
Our policy requires that we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. We also formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively.
As a policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes. Additional disclosure of our utilization of derivative hedging instruments is included in Note 6.
Comprehensive Income or Loss. Comprehensive income or loss, which is included in the consolidated statement of shareholders’ equity, is defined as net income or loss and other comprehensive income or loss. Other comprehensive income or loss includes changes in foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments, prior service cost and net gains or losses from pension and other postretirement benefit plans arising during the period and amortization of these prior service cost and net gains or losses and minimum pension liability adjustments, all recorded net of deferred income taxes directly in shareholders’ equity.
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Recently Issued Accounting Standards. The Financial Accounting Standards Board (FASB) issued guidance in June 2009 that clarifies the information that an entity must provide in its financial statements surrounding a transfer of financial assets and the effect of the transfer on its financial position, financial performance, and cash flows. These new accounting rules are effective as of the beginning of the annual period beginning after November 15, 2009. We do not expect these FASB rules to have a material impact on our financial statements and disclosures.
The FASB also provided guidance in June 2009 that clarifies and improves financial reporting by entities involved with variable interest entities. The revised statement amends previous guidance to require an enterprise to perform a qualitative analysis to determine whether it has a controlling financial interest in a variable interest entity, to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This new accounting standard is effective for annual periods beginning after November 15, 2009. We do not expect this updated standard to impact our financial statements and disclosures.
In October 2009, the FASB Emerging Issues Task Force issued a consensus updating accounting standards for revenue recognition for multiple-deliverable arrangements. The stated objective of the accounting standards update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The revision of current FASB guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements. The accounting standards update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect these FASB rules to have a material impact on our financial statements and disclosures.
The FASB issued guidance in January 2010 that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update also clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for the interim periods in that year. We do not anticipate that the adoption of this statement will materially expand our consolidated financial statement footnote disclosures.
2 INVESTMENTS
During the third quarter of 2007, we invested $6.5 million in a privately held drug delivery company. In the fourth quarter of 2008, we invested an additional $1.0 million as part of a new round of equity financing completed by the investee. The company is developing and commercializing state of the art drug delivery systems designed to improve patient compliance and outcomes, and our ownership interest on a fully diluted basis is approximately 21%. The investment is accounted for under the fair value method. We elected the fair value option over the equity method of accounting since our investment objectives are similar to those of venture capitalists, which typically do not have controlling financial interests. In 2008, there was a wr ite-up of $5.6 million ($3.6 million after taxes) based on the valuation of our ownership interest implied from a new round of equity financing completed for the investee in the fourth quarter of 2008. We recognized an additional unrealized gain of $5.1 million ($3.2 million after taxes) in the fourth quarter of 2009 for the estimated appreciation of our ownership interest upon the investee entering into an exclusive licensing agreement that included an upfront payment, additional potential milestone payments and tiered royalties on sales of any products commercialized under the license. Both of these unrealized gains are included in “Other income
52
(expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 3.
At December 31, 2009 and 2008, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) was $18.2 million and $13.1 million, respectively. On the date of our most recent investment (December 15, 2008), we believe that the amount we would be paid for our ownership interest and liquidation preferences was based on Level 2 inputs, including investments by other investors. Subsequent to December 15, 2008, and until the next round of financing, we believe fair value estimates drop to Level 3 inputs since there is no secondary market for our ownership interest. In addition, the drug delivery company currently has no product sales. Accordingly, after the latest f inancing and until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. As a result, any future changes in the estimated fair value of our ownership interest will likely be attributed to a new round of financing, a merger or initial public offering or adjustments to the timing or magnitude of cash flows associated with development and commercialization milestones. If the company does not meet its development and commercialization milestones and there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus our most recent valuation, or a new round of financing or other significant financial transaction indicates a l ower value, then our estimate of the fair value of our ownership interest in the company is likely to decline. Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.
Had we not elected to account for our investment under the fair value method, we would have been required to use the equity method of accounting. On December 31, 2008, the privately held drug delivery company was converted from a limited liability company taxed as a pass-through entity (partnership) to a corporation. Substantially all shareholder rights from the limited liability company carried over in the conversion. Our allocation of losses for tax purposes as a pass-through entity in 2008 was approximately $4.8 million (there was no allocation of income or loss to us in 2007).
The condensed balance sheets for the drug delivery company at December 31, 2009 and 2008 and related condensed statements of income for the years ended December 31, 2009 and 2008 and four months ended December 31, 2007, that were reported to us by the investee, are provided below:
| (In Thousands) | 12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 | |||||||||||||||||
| Assets | Liabilities & Equity | ||||||||||||||||||||
| Convertible promissory notes - current | $ | - | $ | 5,000 | |||||||||||||||||
| Current portion of deferred revenues | 18,360 | - | |||||||||||||||||||
| Other current liabilities | 1,029 | 1,956 | |||||||||||||||||||
| Cash & cash equivalents | $ | 22,835 | $ | 5,493 | Non-current liabilities | 5,440 | 825 | ||||||||||||||
| Other current assets | 2,526 | 177 | Equity: | ||||||||||||||||||
| Other tangible assets | 1,046 | 1,163 | Redeemable preferred stock | 18,044 | 12,068 | ||||||||||||||||
| Identifiable intangibles assets | 1,743 | 1,602 | Other | (14,723 | ) | (11,414 | ) | ||||||||||||||
| Total assets | $ | 28,150 | $ | 8,435 | Total liabilities & equity | $ | 28,150 | $ | 8,435 | ||||||||||||
| 2009 | 2008 | 2007 | |||||||||||||||||||
| Revenues & Expenses | |||||||||||||||||||||
| Revenues | $ | 2,062 | $ | - | $ | - | |||||||||||||||
| Costs & expenses | 6,732 | 7,321 | 2,379 | ||||||||||||||||||
| Income tax benefit | 2,309 | - | - | ||||||||||||||||||
| Net loss | $ | (2,361 | ) | $ | (7,321 | ) | $ | (2,379 | ) | ||||||||||||
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On April 2, 2007, we invested $10.0 million in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”), a fund that seeks to achieve superior absolute returns by participating primarily in medium to long-term investments involving distressed/high yield debt securities, special situation equities and private loans and notes. The fund is a highly speculative investment subject to limitations on withdrawal. There is no secondary market for interests in the fund. Our investment in Harbinger, which represents less than 2% of Harbinger’s total partnership capital, is accounted for under the cost method. At December 31, 2009 and 2008, Harbinger reported our capital account value at $14.5 million and $10.1 million, respectively. ; The December 31, 2009 and 2008 carrying value in our balance sheet was equal to our cost basis of $10.0 million (included in “Other assets and deferred charges”).
During 2008 and 2007, we invested approximately $4.3 million and $6.2 million, respectively, in real estate. At December 31, 2009 and 2008, the carrying value in our balance sheet of investments in this real estate (included in “Other assets and deferred charges”) equaled the amount invested.
In August of 2004, we invested $5.0 million in Novalux, Inc., a developer of laser technology for potential use in a variety of applications. We made additional investments in Novalux based on its prospects at the time of $1.1 million in October 2005, $400,000 in May 2006, $142,000 in September 2006, $458,000 in July 2007 and $404,000 in November 2007. We wrote down our investment in Novalux and recognized losses of $2.1 million in September 2007 based on anticipated delays in bringing the company’s technology to market and liquidity issues. Novalux assets were sold in January 2008 in exchange for certain unrestricted and restricted common shares of a public company in Australia. We do not expect to receive any significant value from our rem aining interest in the Australian company, and no carrying value remains in our balance sheet for this investment.
3 BUSINESS SEGMENTS
Information by business segment and geographic area for the last three years is provided below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance. Film Products’ net sales to The Procter & Gamble Company (“P&G”) totaled $253.5 million in 2009, $282.7 million in 2008 and $258.6 million in 2007. These amounts include plastic film sold to others that convert the film into materials used with products manufactured by P&G.
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| Net Sales | ||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Film Products | $ | 455,007 | $ | 522,839 | $ | 530,972 | ||||||
| Aluminum Extrusions | 177,521 | 340,278 | 371,803 | |||||||||
| Total net sales | 632,528 | 863,117 | 902,775 | |||||||||
| Add back freight | 16,085 | 20,782 | 19,808 | |||||||||
| Sales as shown in consolidated | ||||||||||||
| statements of income | $ | 648,613 | $ | 883,899 | $ | 922,583 | ||||||
| Operating Profit | ||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Film Products: | ||||||||||||
Ongoing operations | $ | 64,379 | $ | 53,914 | $ | 59,423 | ||||||
| Plant shutdowns, asset impairments, | ||||||||||||
| restructurings and other (a) | (1,846 | ) | (11,297 | ) | (649 | ) | ||||||
| Aluminum Extrusions: | ||||||||||||
| Ongoing operations | (6,494 | ) | 10,132 | 16,516 | ||||||||
| Plant shutdowns, asset impairments, | ||||||||||||
| restructurings and other (a) | (639 | ) | (687 | ) | (634 | ) | ||||||
| Goodwill impairment charge (a) | (30,559 | ) | - | - | ||||||||
| AFBS (formerly Therics): | ||||||||||||
| Gain on sale of investments in Theken | ||||||||||||
| Spine and Therics, LLC | 1,968 | 1,499 | - | |||||||||
| Restructurings (a) | - | - | (2,786 | ) | ||||||||
| Total | 26,809 | 53,561 | 71,870 | |||||||||
| Interest income | 806 | 1,006 | 1,212 | |||||||||
| Interest expense | 783 | 2,393 | 2,721 | |||||||||
| Gain on sale of corporate assets (a) | 404 | 1,001 | 2,699 | |||||||||
| Gain from write-up of an investment | ||||||||||||
| accounted for under the fair value method (a) | 5,100 | 5,600 | - | |||||||||
| Loss from write-down of an investment (a) | - | - | 2,095 | |||||||||
| Stock option-based compensation expense | 1,692 | 782 | 978 | |||||||||
| Corporate expenses, net (a) | 13,334 | 8,866 | 10,691 | |||||||||
| Income from continuing operations | ||||||||||||
| before income taxes | 17,310 | 49,127 | 59,296 | |||||||||
| Income taxes (a) | 18,663 | 19,486 | 24,366 | |||||||||
| Income (loss) from continuing operations | (1,353 | ) | 29,641 | 34,930 | ||||||||
| Income (loss) from discontinued operations (a) | - | (705 | ) | (19,681 | ) | |||||||
| Net income (loss) | $ | (1,353 | ) | $ | 28,936 | $ | 15,249 | |||||
| (a) | See Notes 2 and 15 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, gains from sale of assets, investment write-downs or write-ups and other items, and Note 17 for more information on discontinued operations. | |||||||||||
| (b) | We recognize in the balance sheets the funded status of each of our defined benefit pension and other postretirement plans. The funded status of our defined benefit pension plan was a net liability of $6.0 million and $17.1 million in "Other noncurrent liabilities" as of December 31, 2009 and 2008 compared with an asset of $86.3 million in "Other assets and deferred charges" (of which $42.9 million was reported in Film Products) and a liability of $2.3 million in "Other noncurrent liabilities" as December 31, 2007. See Note 11 for more information on our pension and other postretirement plans. | |||||||||||
| (c) | The difference between total consolidated sales as reported in the consolidated statements of income and segment and geographic net sales reported in this note is freight of $16.1 million in 2009, $20.8 million in 2008 and $19.8 million in 2007. | |||||||||||
| (d) | Information on exports and foreign operations are provided on the next page. Cash and cash equivalents includes funds held in locations outside the U.S. of $34.2 million, $37.3 million and $24.6 million at December 31, 2009, 2008, and 2007, respectively. Export sales relate almost entirely to Film Products. Operations outside the U.S. in The Netherlands, Hungary, China, Italy and Brazil also relate to Film Products. Sales from our locations in The Netherlands, Hungary and Italy are primarily to customers located in Europe. Sales from our locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia. | |||||||||||
55
| Identifiable Assets | ||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Film Products (b) | $ | 371,639 | $ | 399,895 | $ | 488,035 | ||||||
| Aluminum Extrusions | 82,429 | 112,259 | 115,223 | |||||||||
| AFBS (formerly Therics) | 1,147 | 1,629 | 2,866 | |||||||||
| Subtotal | 455,215 | 513,783 | 606,124 | |||||||||
| General corporate (b) | 50,401 | 50,874 | 74,927 | |||||||||
| Cash and cash equivalents (d) | 90,663 | 45,975 | 48,217 | |||||||||
| Continuing operations | 596,279 | 610,632 | 729,268 | |||||||||
| Discontinued aluminum extrusions | ||||||||||||
| business in Canada (a) | - | - | 55,210 | |||||||||
| Total | $ | 596,279 | $ | 610,632 | $ | 784,478 | ||||||
| Depreciation and Amortization | Capital Expenditures | |||||||||||||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| Film Products | $ | 32,360 | $ | 34,588 | $ | 34,092 | $ | 11,487 | $ | 11,135 | $ | 15,304 | ||||||||||||
| Aluminum Extrusions | 7,566 | 8,018 | 8,472 | 22,530 | 9,692 | 4,391 | ||||||||||||||||||
| AFBS (formerly Therics) | - | - | - | - | - | - | ||||||||||||||||||
| Subtotal | 39,926 | 42,606 | 42,564 | 34,017 | 20,827 | 19,695 | ||||||||||||||||||
| General corporate | 71 | 70 | 91 | 125 | 78 | 6 | ||||||||||||||||||
| Continuing operations | 39,997 | 42,676 | 42,655 | 34,142 | 20,905 | 19,701 | ||||||||||||||||||
| Discontinued aluminum extrusions | ||||||||||||||||||||||||
| business in Canada (a) | - | 515 | 3,386 | - | 39 | 942 | ||||||||||||||||||
| Total | $ | 39,997 | $ | 43,191 | $ | 46,041 | $ | 34,142 | $ | 20,944 | $ | 20,643 | ||||||||||||
| Net Sales by Geographic Area (d) | ||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| United States | $ | 363,570 | $ | 531,235 | $ | 577,824 | ||||||
| Exports from the United States to: | ||||||||||||
| Canada | 39,300 | 46,790 | 46,243 | |||||||||
| Latin America | 2,238 | 1,614 | 1,188 | |||||||||
| Europe | 7,261 | 12,532 | 9,856 | |||||||||
| Asia | 43,948 | 26,156 | 31,432 | |||||||||
| Operations outside the United States: | ||||||||||||
| The Netherlands | 88,563 | 109,392 | 104,379 | |||||||||
| Hungary | 20,300 | 34,889 | 35,286 | |||||||||
| China | 36,438 | 62,957 | 57,252 | |||||||||
| Italy | 10,497 | 11,057 | 13,359 | |||||||||
| Brazil | 20,413 | 26,495 | 25,956 | |||||||||
| Total (c) | $ | 632,528 | $ | 863,117 | �� | $ | 902,775 | |||||
| Identifiable Assets | Property, Plant & Equipment, Net by Geographic Area (d) | |||||||||||||||||||||||
| by Geographic Area (d) | ||||||||||||||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| United States (b) | $ | 326,120 | $ | 373,073 | $ | 429,376 | $ | 152,189 | $ | 150,354 | $ | 163,130 | ||||||||||||
| Operations outside the United States: | ||||||||||||||||||||||||
| The Netherlands | 56,761 | 61,204 | 73,658 | 40,832 | 44,559 | 52,383 | ||||||||||||||||||
| Hungary | 12,265 | 15,195 | 20,178 | 7,978 | 7,731 | 10,952 | ||||||||||||||||||
| China | 34,176 | 40,092 | 49,696 | 23,605 | 27,809 | 33,192 | ||||||||||||||||||
| Italy | 15,492 | 15,187 | 17,378 | 2,546 | 2,792 | 3,580 | ||||||||||||||||||
| Brazil | 10,401 | 9,032 | 15,838 | 3,212 | 3,088 | 5,055 | ||||||||||||||||||
| General corporate (b) | 50,401 | 50,874 | 74,927 | 514 | 537 | 791 | ||||||||||||||||||
| Cash and cash equivalents (d) | 90,663 | 45,975 | 48,217 | n/a | n/a | n/a | ||||||||||||||||||
| Continuing operations | 596,279 | 610,632 | 729,268 | 230,876 | 236,870 | 269,083 | ||||||||||||||||||
| Discontinued aluminum extrusions | ||||||||||||||||||||||||
| business in Canada (a) | - | - | 55,210 | - | - | 11,001 | ||||||||||||||||||
| Total | $ | 596,279 | $ | 610,632 | $ | 784,478 | $ | 230,876 | $ | 236,870 | $ | 280,084 | ||||||||||||
| See footnotes on prior page and a reconciliation of net sales to sales as shown in the consolidated statements of income. | ||||||||||||
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4 ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
| (In Thousands) | 2009 | 2008 | ||
| Trade, less allowance for doubtful | ||||
| accounts and sales returns of $5,299 | ||||
| in 2009 and $3,949 in 2008 | $ | 69,789 | $ 87,551 | |
| Other | 4,225 | 3,849 | ||
| Total | $ | 74,014 | $ 91,400 | |
A reconciliation of the beginning and ending balances of the allowance for doubtful accounts and sales returns for the last three years in the period ended December 31, 2009 is as follows:
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Balance, beginning of year | $ | 3,949 | $ | 5,198 | $ | 7,388 | ||||||
| Charges to expense | 4,034 | 2,527 | 3,001 | |||||||||
| Recoveries | (1,522 | ) | (1,494 | ) | (1,442 | ) | ||||||
| Write-offs | (1,411 | ) | (2,171 | ) | (3,780 | ) | ||||||
| Foreign exchange and other | 249 | (111 | ) | 31 | ||||||||
| Balance, end of year | $ | 5,299 | $ | 3,949 | $ | 5,198 | ||||||
5 INVENTORIES
Inventories consist of the following:
| (In Thousands) | 2009 | 2008 | ||||||
| Finished goods | $ | 6,080 | $ | 7,470 | ||||
| Work-in-process | 2,740 | 2,210 | ||||||
| Raw materials | 12,249 | 14,264 | ||||||
| Stores, supplies and other | 14,453 | 12,865 | ||||||
| Total | $ | 35,522 | $ | 36,809 | ||||
Inventories stated on the LIFO basis amounted to $13.4 million at December 31, 2009 and $15.4 million at December 31, 2008, which are below replacement costs by approximately $21.5 million at December 31, 2009 and $17.2 million at December 31, 2008. During 2009 and 2008, inventories accounted for on a LIFO basis declined, which resulted in cost of goods sold being stated at below current replacement costs, by approximately $1.1 million in 2009 in Film Products and $3.6 million in 2008 ($2.0 million in Film Products and $1.6 million in Aluminum Extrusions).
6 FINANCIAL INSTRUMENTS
We use derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and currency exchange rate exposures that exist as part of ongoing business operations primarily in Film Products. Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, we record the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our margin
57
exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $6.9 million (7.8 million pounds of aluminum) at December 31, 2009 and $28.1 million (23.8 million pounds of aluminum) at December 31, 2008.
The table below summarizes the location and gross amounts of aluminum futures contract fair values in the consolidated balance sheets as of December 31, 2009 and 2008:
| December 31, 2009 | December 31, 2008 | |||||||||
| Balance Sheet | Fair | Balance Sheet | Fair | |||||||
| (In Thousands) | Account | Value | Account | Value | ||||||
Derivatives Designated as Hedging Instruments | ||||||||||
| Asset derivatives: | ||||||||||
| Aluminum futures contracts (before | Prepaid expenses | |||||||||
| margin deposits) | and other | $ | 1,184 | Accrued expenses | $ | - | ||||
| Liability derivatives: | ||||||||||
| Aluminum futures contracts (before | Prepaid expenses | |||||||||
| margin deposits) | and other | $ | - | Accrued expenses | $ | 11,042 | ||||
Derivatives Not Designated as Hedging Instruments | ||||||||||
| Asset derivatives: | ||||||||||
| Aluminum futures contracts (before | Prepaid expenses | |||||||||
| margin deposits) | and other | $ | 614 | Accrued expenses | $ | 973 | ||||
| Liability derivatives: | ||||||||||
| Aluminum futures contracts (before | Prepaid expenses | |||||||||
| margin deposits) | and other | $ | 614 | Accrued expenses | $ | 973 | ||||
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate us for any losses on the related aluminum futures and/or forward purchase contracts through the date of cancellation. The offsetting asset and liability positions included in the table above are associated with the unwinding of aluminum futures contracts that relate to such cancellations.
Our aluminum futures brokers contractually require assets to be posted as collateral for unrealized losses in excess of a contractually defined credit limit. Due to significant reductions in aluminum prices on the London Metal Exchange (“LME”) in the second half of 2008 (see chart on page 32), we were required to post margin deposits of $4.0 million at December 31, 2008 on LME futures losses (no deposits required at December 31, 2009). These amounts are recorded as an offset to the fair value of unrealized aluminum futures contract losses included in “Accrued expenses” in the consolidated balance sheets.
Losses associated with the aluminum extrusions business of $952,000 ($592,000 after tax) were recognized in 2009 for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from delayed fulfillment by customers of fixed-price forward purchase commitments. Such timing differences are included in “Plant shutdowns, assets impairments, restructurings and other” in the net sales and operating profit by segment table in Note 3. Timing differences prior to 2009 were not significant.
We have future fixed Euro-denominated contractual payments for equipment being purchased as part of our expansion of the Carthage, Tennessee aluminum extrusion manufacturing facility. We have used a fixed rate Euro forward contract with various settlement dates to hedge exchange rate exposure on these obligations. The notional
58
amount of this foreign currency forward was $1.6 million and $4.2 million at December 31, 2009 and 2008, respectively.
The table below summarizes the location and gross amounts of foreign currency forward contract fair values in the consolidated balance sheets as of December 31, 2009 and 2008:
| December 31, 2009 | December 31, 2008 | ||||||||||
| Balance Sheet | Fair | Balance Sheet | Fair | ||||||||
| (In Thousands) | Account | Value | Account | Value | |||||||
Derivatives Designated as Hedging Instruments | |||||||||||
| Asset derivatives: | |||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | $ | 35 | Prepaid expenses and other | $ | 56 | |||||
Derivatives Not Designated as Hedging Instruments | |||||||||||
| Liability derivatives: | |||||||||||
| Foreign currency forward contracts | Accrued expenses | $ | 41 | Accrued expenses | $ | - | |||||
We receive Euro-based royalty payments relating to our operations in Europe. From time to time we use zero-cost collar currency options to hedge a portion of our exposure to changes in cash flows due to variability in U.S. Dollar and Euro exchange rates. There were no outstanding notional amounts on these collars at December 31, 2009 and 2008 as there were no derivatives outstanding at December 31, 2009 and 2008 related to the hedging of royalty payments with currency options.
Our derivative contracts involve elements of credit and market risk, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers. The counterparties to our foreign currency futures and zero-cost collar contracts are major financial institutions.
The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for years ended December 31, 2009 and 2008 is summarized in the tables below:
| (In Thousands) | Cash Flow Derivative Hedges | |||||||||||||||
| Aluminum Futures Contracts | Foreign Currency Forwards and Options | |||||||||||||||
| Year Ended December 31, | 2009 | 2008 | 2009 | 2008 | ||||||||||||
| Amount of pre-tax gain (loss) recognized in | ||||||||||||||||
| other comprehensive income | $ | 1,762 | $ | (9,771 | ) | $ | (336 | ) | $ | 56 | ||||||
| Location of gain (loss) reclassified from | Selling, | |||||||||||||||
| accumulated other comprehensive income | Cost of | Cost of | general and | Not | ||||||||||||
| into net income (effective portion) | sales | sales | admin. exp. | Applicable | ||||||||||||
| Amount of pre-tax gain (loss) reclassified | ||||||||||||||||
| from accumulated other comprehensive | ||||||||||||||||
| income to net income (effective portion) | $ | (10,248 | ) | $ | (760 | ) | $ | (315 | ) | $ | - | |||||
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Gains and losses on the ineffective portion of derivative instruments or derivative instruments that were not designated as hedging instruments were not significant in 2009 and 2008. For the year ended December 31, 2009, we realized $41,000 in unrealized net losses (none in 2008) from hedges that had been discontinued. As of December 31, 2009, we expect $736,000 of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income to be reclassified to earnings within the next twelve months.
7 ACCRUED EXPENSES
Accrued expenses consist of the following:
| (In Thousands) | 2009 | 2008 | ||||||
| Incentive compensation | $ | 6,528 | $ | 1,849 | ||||
| Vacation | 5,665 | 5,922 | ||||||
| Payrolls, related taxes and medical and | ||||||||
| other benefits | 5,332 | 4,476 | ||||||
| Plant shutdowns and divestitures | 3,981 | 4,922 | ||||||
| Workers' compensation and disabilities | 2,360 | 2,986 | ||||||
| Futures contracts, net of cash deposits | 255 | 7,085 | ||||||
| Other | 10,809 | 11,109 | ||||||
| Total | $ | 34,930 | $ | 38,349 | ||||
A reconciliation of the beginning and ending balances of accrued expenses associated with asset impairments and costs associated with exit and disposal activities for each of the three years in the period ended December 31, 2009 is as follows:
| (In Thousands) | Severance | Long-Lived AssetImpairments | Accelerated Depreciation (a) | Other (b) | Total | |||||||||||||||
| Balance at December 31, 2006 | $ | 436 | $ | - | $ | - | $ | 4,622 | $ | 5,058 | ||||||||||
| 2007: | ||||||||||||||||||||
| Charges | 592 | 594 | - | 2,841 | 4,027 | |||||||||||||||
| Cash spent | (665 | ) | - | - | (1,625 | ) | (2,290 | ) | ||||||||||||
| Charged against assets | - | (594 | ) | - | - | (594 | ) | |||||||||||||
| Balance at December 31, 2007 | 363 | - | - | 5,838 | 6,201 | |||||||||||||||
| 2008: | ||||||||||||||||||||
| Charges | 2,662 | 6,994 | 1,649 | - | 11,305 | |||||||||||||||
| Cash spent | (2,594 | ) | - | - | (1,347 | ) | (3,941 | ) | ||||||||||||
| Charged against assets | - | (6,994 | ) | (1,649 | ) | - | (8,643 | ) | ||||||||||||
| Balance at December 31, 2008 | 431 | - | - | 4,491 | 4,922 | |||||||||||||||
| 2009: | ||||||||||||||||||||
| Charges | 2,094 | 1,005 | - | - | 3,099 | |||||||||||||||
| Cash spent | (1,702 | ) | - | - | (1,333 | ) | (3,035 | ) | ||||||||||||
| Charged against assets | - | (1,005 | ) | - | - | (1,005 | ) | |||||||||||||
| Balance at December 31, 2009 | $ | 823 | $ | - | $ | - | $ | 3,158 | $ | 3,981 | ||||||||||
| (a) Represents depreciation accelerated due to plant shutdowns based on a remaining useful life of less than one year. | ||||||||||||||||||||
| (b) Other includes primarily accrued losses on a sub-lease at a facility in Princeton, New Jersey. | ||||||||||||||||||||
See Note 15 for more information on plant shutdowns, asset impairments and restructurings of continuing operations.
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8 DEBT AND CREDIT AGREEMENTS
On December 15, 2005, we refinanced our debt with a new $300 million, five-year unsecured revolving credit agreement (the “Credit Agreement”). At January 1, 2009, the date our maximum leverage covenant dropped from 3.0x adjusted EBITDA to 2.75x adjusted EBITDA, available credit under the Credit Agreement was approximately $222 million.
Total debt due and outstanding at December 31, 2009 is summarized below:
| Debt Due and Outstanding at December 31, 2009 | ||||||||||||
| (In Thousands) | ||||||||||||
| Year | Credit | Total Debt | ||||||||||
| Due | Agreement | Other | Due | |||||||||
| 2010 | $ | - | $ | 476 | $ | 476 | ||||||
| 2011 | - | 265 | 265 | |||||||||
| 2012 | - | 148 | 148 | |||||||||
| 2013 | - | 274 | 274 | |||||||||
| 2014 | - | - | - | |||||||||
| Total | $ | - | $ | 1,163 | $ | 1,163 | ||||||
The credit spread over LIBOR and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted EBITDA levels are as follows:
| Pricing Under Credit Agreement (Basis Points) | ||||||||
| Credit Spread | ||||||||
| Over LIBOR | ||||||||
| Indebtedness-to- | (No amounts | |||||||
| Adjusted EBITDA | Outstanding | Commitment | ||||||
| Ratio | at 12/31/09) | Fee | ||||||
| > 2.50x but <= 3x | 125 | 25 | ||||||
| > 1.75x but <= 2.50x | 100 | 20 | ||||||
| > 1x but <= 1.75x | 87.5 | 17.5 | ||||||
| <= 1x | 75 | 15 | ||||||
At December 31, 2009, the interest cost on debt was priced at one-month LIBOR plus the applicable credit spread of 75 basis points.
The most restrictive covenants in the Credit Agreement include:
| · | Maximum aggregate dividends over the term of the Credit Agreement of $100,000 plus, beginning October 1, 2005, 50% of net income ($141.6 million as of December 31, 2009); |
| · | Minimum shareholders’ equity (minimum of $349.9 million compared with $490.1 million of shareholders’ equity as defined in the Credit Agreement as of December 31, 2009); |
| · | Maximum indebtedness-to-adjusted EBITDA through December 31, 2009 of 2.75x (2.5x on a pro forma basis for acquisitions); and |
| · | Minimum adjusted EBIT-to-interest expense of 2.5x. |
We believe we were in compliance with all of our debt covenants as of December 31, 2009. Noncompliance with any one or more of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.
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In the past we have used interest rate swaps with large major financial institutions to manage interest rate exposure, but there have been no interest rate swaps outstanding since 2003.
9 SHAREHOLDER RIGHTS AGREEMENT
Pursuant to an Amended and Restated Rights Agreement, dated as of June 30, 2009, between Tredegar and National City Bank, N.A., as Rights Agent (essentially renewing and extending our Rights Agreement, dated as of June 30, 1999), one right is attendant to each share of our common stock (“Right”). All Rights outstanding under the previous Rights Plan remain outstanding under the Amended and Restated Rights Agreement.
Each Right entitles the registered holder to purchase from Tredegar one one-hundredth of a share of Participating Cumulative Preferred Stock, Series A (the “Preferred Stock”), at an exercise price of $150 (the “Purchase Price”). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 10% or more of the outstanding shares of our common stock (thereby becoming an “Acquiring Person”) or announces a tender offer that would result in ownership by a person or group of 10% or more of our common stock. Any action by a person or group whose beneficial ownership was reported on Amendment No. 4 to the Schedule 13D filed with respect to Tredegar on March 20, 1997, cannot cause such person or group to become an Ac quiring Person and thereby cause the Rights to become exercisable.
Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Preferred Stock (or in certain circumstances, cash, property or other securities of Tredegar or a potential acquirer) having a value equal to twice the amount of the Purchase Price.
The Rights are now scheduled to expire on June 30, 2019.
10 STOCK OPTION AND STOCK AWARD PLANS
We have one stock option plan under which stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. In addition, we have one other stock option plan under which there are options that remain outstanding, but no future grants can be made. Employee options ordinarily vest two years from the date of grant. The option plans also permit the grant of stock appreciation rights (“SARs”), stock, restricted stock, stock unit awards and incentive awards. No SARs have been granted since 1992 and none are currently outstanding.
A summary of our stock options outstanding at December 31, 2009, 2008 and 2007, and changes during those years, is presented below:
| Option Exercise Price/Share | |||||||||||||||||
Number of Options | Range | Wgted. Ave. | |||||||||||||||
| Outstanding at 12/31/06 | 1,247,173 | $ | 13.95 | to | $ | 29.94 | $ | 18.16 | |||||||||
| Granted | 4,000 | 14.40 | to | 14.40 | 14.40 | ||||||||||||
| Forfeited and Expired | (184,065 | ) | 13.95 | to | 29.94 | 20.68 | |||||||||||
| Exercised | (364,125 | ) | 13.95 | to | 22.72 | 18.58 | |||||||||||
| Outstanding at 12/31/07 | 702,983 | 13.95 | to | 29.94 | 17.25 | ||||||||||||
| Granted | 401,000 | 14.06 | to | 19.25 | 15.72 | ||||||||||||
| Forfeited and Expired | (161,515 | ) | 13.95 | to | 29.94 | 20.07 | |||||||||||
| Exercised | (248,118 | ) | 13.95 | to | 18.90 | 16.66 | |||||||||||
| Outstanding at 12/31/08 | 694,350 | 13.95 | to | 19.52 | 15.92 | ||||||||||||
| Granted | 283,400 | 14.72 | to | 18.12 | 17.92 | ||||||||||||
| Forfeited and Expired | (171,875 | ) | 13.95 | to | 19.52 | 17.59 | |||||||||||
| Exercised | (9,700 | ) | 13.95 | to | 15.11 | 14.37 | |||||||||||
| Outstanding at 12/31/09 | 796,175 | $ | 13.95 | to | $ | 19.52 | $ | 16.29 | |||||||||
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The following table summarizes additional information about stock options outstanding and exercisable and non-vested restricted stock outstanding at December 31, 2009:
| Options Outstanding at December 31, 2009 | Options Exercisable at December 31, 2009 | ||||||||||||||||||||||||||||||||||
| Weighted Average | |||||||||||||||||||||||||||||||||||
Range of Exercise Prices | Shares | Remaining Contract- | Exercise Price | Aggregate Intrinsic | Shares | Weighted Average | Aggregate Intrinsic | ||||||||||||||||||||||||||||
| $ | 13.95 | to | $ | 17.88 | 535,275 | 4.9 | $ | 15.39 | $ | 247 | 195,775 | $ | 14.97 | $ | 173 | ||||||||||||||||||||
| 17.89 | to | 19.52 | 260,900 | 6.1 | 18.14 | - | 4,000 | 19.52 | - | ||||||||||||||||||||||||||
| Total | 796,175 | 5.3 | $ | 16.29 | $ | 247 | 199,775 | $ | 15.06 | $ | 173 | ||||||||||||||||||||||||
| Non-vested Restricted Stock | Maximum Non-vested Restricted Stock Units Issuable Upon Satis- | |||||||||||||||||||||||
Number of Shares | Wgtd. Ave. Grant Date | Grant Date Fair Value (In | Number of Shares | Wgtd. Ave. Grant Date | Grant Date Fair Value (In | |||||||||||||||||||
| Outstanding at 12/31/06 | 69,500 | $ | 13.97 | $ | 971 | - | $ | - | $ | - | ||||||||||||||
| Granted | - | - | - | 233,375 | 20.80 | 4,854 | ||||||||||||||||||
| Vested | (6,000 | ) | 13.95 | (84 | ) | - | - | - | ||||||||||||||||
| Forfeited | (4,000 | ) | 13.95 | (56 | ) | (56,500 | ) | 23.00 | (1,300 | ) | ||||||||||||||
| Outstanding at 12/31/07 | 59,500 | 13.97 | 831 | 176,875 | 20.09 | 3,554 | ||||||||||||||||||
| Granted | 12,690 | 16.01 | 203 | 146,600 | 15.80 | 2,316 | ||||||||||||||||||
| Vested | (8,190 | ) | 17.08 | (140 | ) | - | - | - | ||||||||||||||||
| Forfeited | (10,500 | ) | 14.06 | (148 | ) | (115,694 | ) | 20.40 | (2,360 | ) | ||||||||||||||
| Outstanding at 12/31/08 | 53,500 | 13.94 | 746 | 207,781 | 16.89 | 3,510 | ||||||||||||||||||
| Granted | 50,637 | 17.52 | 887 | 76,175 | 17.93 | 1,366 | ||||||||||||||||||
| Vested | (58,387 | ) | 14.10 | (823 | ) | (66,731 | ) | 20.02 | (1,336 | ) | ||||||||||||||
| Forfeited | - | - | - | (145,050 | ) | 15.63 | (2,267 | ) | ||||||||||||||||
| Outstanding at 12/31/09 | 45,750 | $ | 17.70 | $ | 810 | 72,175 | $ | 17.64 | $ | 1,273 | ||||||||||||||
The total intrinsic value of stock options exercised was $14,000 in 2009, $653,000 in 2008 and $1.5 million in 2007. The grant-date fair value of stock option-based awards vested was $1.8 million in 2008 (none in 2009 and 2007). As of December 31, 2009, there was unrecognized compensation cost of $1.3 million related to stock option-based awards and $460,000 related to non-vested restricted stock and other stock-based awards. This cost is expected to be recognized over the remaining weighted average period of 0.7 years for stock option-based awards and 1.2 years for non-vested restricted stock and other stock-based awards. Compensation costs for non-vested restricted stock is subject to accelerated vesting based on meeting certain financial targets.
Stock options exercisable totaled 199,775 shares at December 31, 2009 and 321,350 shares at December 31, 2008. Stock options available for grant totaled 3,591,585 shares at December 31, 2009, 1,009,210 shares at December 31, 2008 and 1,412,232 shares at December 31, 2007.
11 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
We have noncontributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount.
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On October 26, 2006, we announced changes to our U.S. defined benefit (pension) and savings plans covering salaried and certain other employees. In 2007, the changes to the pension plan reduced our service cost, interest cost and amortization of prior service cost components of pension expense by approximately $600,000, $600,000 and $1.5 million, respectively, and the savings plan changes (see Note 12) increased charges for company matching contributions by approximately $700,000.
In addition to providing pension benefits, we provide postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees hired on or before January 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. We eliminated prescription drug coverage for Medicare-eligible retirees as of January 1, 2006. Consequently, we are not eligible for any federal subsidies.
Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations for continuing operations, and the components of net periodic benefit income or cost for continuing operations, are as follows:
| Pension Benefits | Other Post- Retirement Benefits | |||||||||||||||||||||||
| (In Thousands, Except Percentages) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| Weighted-average assumptions used | ||||||||||||||||||||||||
| to determine benefit obligations: | ||||||||||||||||||||||||
| Discount rate | 5.70 | % | 6.50 | % | 6.25 | % | 5.75 | % | 6.50 | % | 6.25 | % | ||||||||||||
| Rate of compensation increases | n/a | n/a | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||
| Weighted-average assumptions used | ||||||||||||||||||||||||
| to determine net periodic benefit | ||||||||||||||||||||||||
| cost: | ||||||||||||||||||||||||
| Discount rate | 6.50 | % | 6.25 | % | 5.75 | % | 6.50 | % | 6.25 | % | 5.75 | % | ||||||||||||
| Rate of compensation increases | n/a | n/a | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||
| Expected long-term return on | ||||||||||||||||||||||||
| plan assets, during the year | 8.25 | % | 8.50 | % | 8.50 | % | n/a | n/a | n/a | |||||||||||||||
| Rate of increase in per-capita cost | ||||||||||||||||||||||||
| of covered health care benefits: | ||||||||||||||||||||||||
| Indemnity plans, end of year | n/a | n/a | n/a | 6.00 | % | 6.00 | % | 6.00 | % | |||||||||||||||
| Managed care plans, end of year | n/a | n/a | n/a | 6.00 | % | 6.00 | % | 6.00 | % | |||||||||||||||
| Components of net periodic benefit | ||||||||||||||||||||||||
| income (cost): | ||||||||||||||||||||||||
| Service cost | $ | (3,077 | ) | $ | (3,447 | ) | $ | (4,232 | ) | $ | (70 | ) | $ | (71 | ) | $ | (106 | ) | ||||||
| Interest cost | (13,287 | ) | (12,909 | ) | (11,447 | ) | (495 | ) | (484 | ) | (503 | ) | ||||||||||||
| Expected return on plan assets | 20,680 | 21,965 | 20,372 | - | - | - | ||||||||||||||||||
| Amortization of prior service | ||||||||||||||||||||||||
| costs and gains or losses | (1,224 | ) | (675 | ) | (1,819 | ) | 127 | 47 | - | |||||||||||||||
| Net periodic benefit income (cost) | $ | 3,092 | $ | 4,934 | $ | 2,874 | $ | (438 | ) | $ | (508 | ) | $ | (609 | ) | |||||||||
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The following tables reconcile the changes in benefit obligations and plan assets in 2009 and 2008, and reconcile the funded status to prepaid or accrued cost at December 31, 2009 and 2008:
| Pension Benefits | Other Post- Retirement Benefits | |||||||||||||||
| (In Thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation, beginning of year | $ | 211,685 | $ | 200,129 | $ | 8,124 | $ | 8,690 | ||||||||
| Service cost | 3,076 | 3,447 | 70 | 71 | ||||||||||||
| Interest cost | 13,287 | 12,909 | 495 | 484 | ||||||||||||
| Effect of actuarial (gains) losses related | ||||||||||||||||
| to the following: | ||||||||||||||||
| Discount rate change | 18,758 | (5,951 | ) | 656 | (219 | ) | ||||||||||
| Retirement rate assumptions and | ||||||||||||||||
| mortality table adjustments | 462 | 8,899 | (3 | ) | - | |||||||||||
| Other | (1,435 | ) | 2,485 | (373 | ) | (659 | ) | |||||||||
| Benefits paid | (10,818 | ) | (10,233 | ) | (282 | ) | (243 | ) | ||||||||
| Benefit obligation, end of year | $ | 235,015 | $ | 211,685 | $ | 8,687 | $ | 8,124 | ||||||||
| Change in plan assets: | ||||||||||||||||
| Plan assets at fair value, | ||||||||||||||||
| beginning of year | $ | 194,538 | $ | 284,100 | $ | - | $ | - | ||||||||
| Actual return on plan assets | 45,135 | (79,451 | ) | - | - | |||||||||||
| Employer contributions | 129 | 122 | 282 | 243 | ||||||||||||
| Benefits paid | (10,818 | ) | (10,233 | ) | (282 | ) | (243 | ) | ||||||||
| Plan assets at fair value, end of year | $ | 228,984 | $ | 194,538 | $ | - | $ | - | ||||||||
| Funded status of the plans | $ | (6,031 | ) | $ | (17,147 | ) | $ | (8,687 | ) | $ | (8,124 | ) | ||||
| Amounts recognized in the consolidated | ||||||||||||||||
| balance sheets: | ||||||||||||||||
| Prepaid benefit cost | $ | - | $ | - | $ | - | $ | - | ||||||||
| Accrued benefit liability | (6,031 | ) | (17,147 | ) | (8,687 | ) | (8,124 | ) | ||||||||
| Net amount recognized | $ | (6,031 | ) | $ | (17,147 | ) | $ | (8,687 | ) | $ | (8,124 | ) | ||||
Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year. Pension and other postretirement liabilities for continuing operations of $14.7 million and $25.3 million are included in “Other noncurrent liabilities” in the consolidated balance sheets at December 31, 2009 and 2008, respectively. The amount of our accumulated benefit obligation is the same as our projected benefit obligation.
At December 31, 2009, the effect of a 1% change in the health care cost trend rate assumptions would be immaterial.
Expected benefit payments for continuing operations over the next five years and in the aggregate for 2015-2019 are as follows:
| (In Thousands) | Pension Benefits | Other Post- | ||||||
| 2010 | $ | 12,422 | $ | 481 | ||||
| 2011 | 12,928 | 517 | ||||||
| 2012 | 13,527 | 547 | ||||||
| 2013 | 14,069 | 581 | ||||||
| 2014 | 14,626 | 600 | ||||||
| 2015 - 2019 | 81,662 | 3,168 | ||||||
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Amounts recognized in 2009, 2008 and 2007 before related deferred income taxes in accumulated other comprehensive income consist of:
| Pension | Other Post- Retirement | |||||||||||||||||||||||
| (In Thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||
| Prior service cost (benefit) | $ | (4,035 | ) | $ | (5,092 | ) | $ | (6,140 | ) | $ | - | $ | - | $ | - | |||||||||
| Net actuarial (gain) loss | 101,368 | 110,319 | 5,194 | (1,107 | ) | (1,514 | ) | (682 | ) | |||||||||||||||
| Discontinued operations: | ||||||||||||||||||||||||
| Prior service cost (benefit) | - | - | 1,108 | - | - | - | ||||||||||||||||||
| Net actuarial (gain) loss | - | - | 6,008 | - | - | (445 | ) | |||||||||||||||||
| Total: | ||||||||||||||||||||||||
| Prior service cost (benefit) | (4,035 | ) | (5,092 | ) | (5,032 | ) | - | - | - | |||||||||||||||
| Net actuarial (gain) loss | 101,368 | 110,319 | 11,202 | (1,107 | ) | (1,514 | ) | (1,127 | ) | |||||||||||||||
The amounts before related deferred income taxes in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit or cost during 2010 are as follows:
| (In Thousands) | Pension | Other Post- Retirement | |||||||
| Continuing operations: | |||||||||
| Prior service cost (benefit) | $ | (1,069 | ) | $ | - | ||||
| Net actuarial (gain) loss | 5,433 | (37 | ) | ||||||
The percentage composition of assets held by pension plans for continuing operations at December 31, 2009, 2008 and 2007, and the current expected long-term return on assets are as follows:
% Composition of Plan Assets at December 31, | Expected Long-term Return % | |||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
| Pension plans related to continuing operations: | ||||||||||||||||
| Low-risk fixed income securities | 3.5 | % | 10.3 | % | 8.5 | % | 4.0 | % | ||||||||
| Large capitalization equity securities | 21.7 | 19.9 | 20.7 | 8.8 | ||||||||||||
| Mid-capitalization equity securities | 0.0 | 0.0 | 7.4 | 10.3 | ||||||||||||
| Small-capitalization equity securities | 5.8 | 4.1 | 4.7 | 10.7 | ||||||||||||
| International equity securities | 21.4 | 18.6 | 22.6 | 9.5 | ||||||||||||
| Total equity securities | 48.9 | 42.6 | 55.4 | 9.3 | ||||||||||||
| Hedge and private equity funds | 42.9 | 43.8 | 33.9 | 8.0 | ||||||||||||
| Other assets | 4.7 | 3.3 | 2.2 | 4.0 | ||||||||||||
| Total for continuing operations | 100.0 | % | 100.0 | % | 100.0 | % | 8.3 | % | ||||||||
Our targeted allocation percentage for pension plan assets is in the range of the percentage composition that existed at December 31, 2009. Expected long-term returns are estimated by asset class and generally are based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums. The portfolio of fixed income securities is structured with maturities that generally match estimated benefit payments over the next 1-2 years. Other assets are primarily comprised of cash and contracts with insurance companies. Our primary investment objective is to maximize total return with a strong emphasis on the preservation of capital. We believe that over the long term a diversified portfolio of equity securities, hedge funds a nd private equity funds has a better risk-return profile than fixed income securities. The average remaining duration of benefit payments for our pension plans is about 12 years. We expect our required contributions to approximate $200,000 in 2010.
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Estimates of the fair value of assets held by our pension plans are provided by third parties not affiliated with Tredegar. At December 31, 2009 and 2008, the pension plan assets are categorized by level within the fair value measurement hierarchy as follows:
| Fair Value Measurements at December 31, 2009 | ||||||||||||||||
| (In Thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Signficant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Large capitalization equity securities | $ | 49,655 | $ | 35,545 | $ | 14,110 | $ | - | ||||||||
| Small-capitalization equity securities | 13,272 | 13,272 | - | - | ||||||||||||
| International equity securities | 49,078 | 49,078 | - | - | ||||||||||||
| Hedge and private equity funds | 98,204 | - | 86,567 | 11,637 | ||||||||||||
| Low-risk fixed income securities | 8,069 | 4,047 | 4,022 | - | ||||||||||||
| Other assets | 451 | �� | 451 | - | - | |||||||||||
| Total plan assets at fair value | $ | 218,729 | $ | 102,393 | $ | 104,699 | $ | 11,637 | ||||||||
| Contracts with insurance companies | 10,255 | |||||||||||||||
| Total plan assets | $ | 228,984 | ||||||||||||||
For fair value measurements of plan assets using significant unobservable inputs (Level 3), a reconciliation of the balances from January 1, 2009 to December 31, 2009 are as follows:
| (In Thousands) | Hedge and private equity funds | |||
| Balance at December 31, 2008 | $ | 6,064 | ||
| Purchases, sales, and settlements | (447 | ) | ||
| Actual return on plan assets: | ||||
| Related to assets still held at year end | 855 | |||
| Related to assets sold during the year | - | |||
| Transfers in and/or out of Level 3 | 5,165 | |||
| Balance at December 31, 2009 | $ | 11,637 | ||
We also have a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. The plan was designed to restore all or a part of the pension benefits that would have been payable to designated participants from our principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $2.9 million at December 31, 2009 and $2.8 million at December 31, 2008. Pension expense recognized was $202,000 in 2009, $185,000 in 2008 and $161,000 in 2007. This information has been included in the preceding pension benefit t ables.
Approximately 126 employees at our films manufacturing facility in Kerkrade, The Netherlands are covered by a collective bargaining agreement that includes participation in a multi-employer pension plan. Pension expense recognized for participation in this plan, which is equal to required contributions, was $807,000 in 2009, $1.0 million in 2008 and $868,000 in 2007. This information has been excluded from the preceding pension benefit tables.
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12 SAVINGS PLAN
We have a savings plan that allows eligible employees to voluntarily contribute a percentage of their compensation up to Internal Revenue Service (“IRS”) limitations. Under the provisions of the plan on or before December 31, 2006, we matched a portion (generally 50 cents for every $1 of employee contribution, up to a maximum of 10% of base pay) of the employee’s contribution to the plan with shares of our common stock. Effective January 1, 2007, and in conjunction with certain pension plan changes (see Note 11), the following changes were made to the savings plan for salaried and certain hourly employees:
| ● | The company makes matching contributions to the savings plan of $1 for every $1 of employee contribution. The maximum matching contribution is 6% of base pay for 2007-2009 and 5% of base pay thereafter. |
| ● | The savings plan includes immediate vesting for active employees of past matching contributions as well as future matching contributions when made (compared with the previous 5-year graded vesting) and automatic enrollment at 3% of base pay unless the employee opts out or elects a different percentage. |
We also have a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations. Charges recognized for these plans were $2.5 million in 2009, $3.1 million in 2008 and $2.8 million in 2007. The savings plan changes effective January 1, 2007 increased charges for company matching contributions in 2007 by approximately $700,000. Our liability under the restoration plan was $1.3 million at December 31, 2009 (consisting of 79,088 phantom shares of common stock) and $1.3 million at December 31, 2008 (consisting of 69,957 phantom shares of common stock) valued at the closing market price on those dates.
The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of our common stock in 1998 for $192,000 and 46,671 shares of our common stock in 1997 for $1.0 million, as a partial hedge against the phantom shares held in the restoration plan. There have been no shares purchased since 1997 except for re-invested dividends. The cost of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.
13 RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS
Rental expense for continuing operations was $2.9 million in 2009, $3.5 million in 2008 and $3.9 million in 2007. Rental commitments under all non-cancelable operating leases for continuing operations as of December 31, 2009, are as follows:
| Year | Amount (In Thousands) | |||
| 2010 | $ | 3,072 | ||
| 2011 | 1,792 | |||
| 2012 | 1,331 | |||
| 2013 | 238 | |||
| 2014 | 238 | |||
| Remainder | - | |||
| Total | $ | 6,671 | ||
AFBS, Inc. (formerly known as Therics, Inc. - see Note 15 for additional information regarding its restructuring in 2005), a wholly-owned subsidiary of Tredegar, has future rental commitments under noncancelable operating leases through 2011 (most of which contain sublease options) totaling approximately $2.1 million. These future rental commitments are included in the above table. Sublease rental commitments relating to excess space at AFBS total $168,000 (excluded from the above table).
Contractual obligations for plant construction and purchases of real property and equipment amounted to $1.5 million at December 31, 2009 and $17.5 million at December 31, 2008. Contractual commitments at December 31,
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2009 and 2008 are primarily related to the capacity expansion at our aluminum extrusions facility in Carthage, Tennessee.
14 INCOME TAXES
Income from continuing operations before income taxes and income taxes are as follows:
| (In Thousands) | 2009 | 2008 | 2007 | |||||||||
| Income from continuing operations | ||||||||||||
| before income taxes: | ||||||||||||
| Domestic | $ | 2,098 | $ | 31,838 | $ | 50,942 | ||||||
| Foreign | 15,212 | 17,289 | 8,354 | |||||||||
| Total | $ | 17,310 | $ | 49,127 | $ | 59,296 | ||||||
| Current income taxes: | ||||||||||||
| Federal | $ | 7,624 | $ | 1,494 | $ | 24,698 | ||||||
| State | (335 | ) | 1,126 | 856 | ||||||||
| Foreign | 4,399 | 6,038 | 4,351 | |||||||||
| Total | 11,688 | 8,658 | 29,905 | |||||||||
| Deferred income taxes: | ||||||||||||
| Federal | 6,088 | 9,672 | (4,009 | ) | ||||||||
| State | 831 | 114 | 316 | |||||||||
| Foreign | 56 | 1,042 | (1,846 | ) | ||||||||
| Total | 6,975 | 10,828 | (5,539 | ) | ||||||||
| Total income taxes | $ | 18,663 | $ | 19,486 | $ | 24,366 | ||||||
The decrease in 2009 compared with 2008 in income from continuing operations before income taxes for domestic operations is primarily due to the 2009 goodwill impairment charge of $30.6 million in Aluminum Extrusions.
The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows:
Percent of Income Before Income Taxes for Continuing Operations | |||||||
| 2009 | 2008 | 2007 | |||||
| Income tax expense at federal statutory rate | 35.0 | 35.0 | 35.0 | ||||
| Goodwill impairment charge | 61.8 | - | - | ||||
| Valuation allowance for capital loss | |||||||
| carry-forwards | 12.2 | (2.2) | 1.8 | ||||
| Unremitted earnings from foreign operations | 8.1 | 6.7 | 2.2 | ||||
| Remitted earnings from foreign operations | 3.0 | - | - | ||||
| State taxes, net of federal income tax benefit | 2.2 | 1.6 | 1.3 | ||||
| Non-deductible expenses | - | .2 | .2 | ||||
| Extraterritorial Income Exclusion and | |||||||
| Domestic Production Activities Deduction | - | - | (.5) | ||||
| Reversal of income tax contingency accruals | |||||||
| and tax settlements | (.9) | (.3) | .9 | ||||
| Valuation allowance for foreign operating | |||||||
| loss carry-forwards | (1.0) | 3.2 | 1.4 | ||||
| Research and development tax credit | (2.1) | (.4) | (.1) | ||||
| Foreign rate differences | (6.5) | (4.2) | (1.1) | ||||
| Other | (4.0) | .1 | - | ||||
| Effective income tax rate | 107.8 | 39.7 | 41.1 | ||||
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Deferred tax liabilities and deferred tax assets at December 31, 2009 and 2008, are as follows:
| (In Thousands) | 2009 | 2008 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | 30,308 | $ | 27,139 | ||||
| Amortization of goodwill | 23,637 | 20,648 | ||||||
| Foreign currency translation gain adjustment | 14,211 | 12,648 | ||||||
| Book basis in excess of tax for investments (net of | ||||||||
| valuation allowance of $6,655 in 2009 and $4,537 in 2008) | 3,425 | - | ||||||
| Derivative financial instruments | 461 | - | ||||||
| Other | 640 | 1,975 | ||||||
| Total deferred tax liabilities | 72,682 | 62,410 | ||||||
| Deferred tax assets: | ||||||||
| Employee benefits | 9,222 | 6,195 | ||||||
| Asset write-offs, divestitures and environmental | ||||||||
| accruals (net of valuation allowance of $1,426 in 2009) | 2,672 | 3,609 | ||||||
| Pensions | 2,182 | 6,218 | ||||||
| Allowance for doubtful accounts and sales returns | 1,343 | 966 | ||||||
| Inventory | 1,279 | 166 | ||||||
| Tax benefit on state and foreign NOL carryforwards (net of | ||||||||
| valuation allowance of $3,599 in 2009 and $5,228 in 2008) | 1,121 | 883 | ||||||
| Timing adjustment for unrecognized tax benefits on | ||||||||
| uncertain tax positions, including portion relating to | ||||||||
| interest and penalties | 543 | 2,304 | ||||||
| Derivative financial instruments | - | 4,077 | ||||||
| Other | 1,018 | 494 | ||||||
| Total deferred tax assets | 19,380 | 24,912 | ||||||
| Net deferred tax liability | $ | 53,302 | $ | 37,498 | ||||
| Included in the balance sheet: | ||||||||
| Noncurrent deferred tax liabilities in excess of assets | $ | 59,052 | $ | 45,152 | ||||
| Current deferred tax assets in excess of liabilities | 5,750 | 7,654 | ||||||
| Net deferred tax liability | $ | 53,302 | $ | 37,498 | ||||
Except as noted below, we believe that it is more likely than not that future taxable income will exceed future tax deductible amounts thereby resulting in the realization of deferred tax assets. A valuation allowance of $3.6 million and $5.2 million at December 31, 2009 and 2008, respectively, is included in tax benefit on state and foreign net operating loss carryforwards that offsets an amount included in that line item relating to possible future tax benefits on domestic state and foreign operating losses generated by certain foreign and domestic subsidiaries that may not be recoverable in the carry-forward period. In addition, the valuation allowance for excess capital losses from investments and other related items was increased from $4.5 million at December 31, 2008 to $6.7 million at December 31, 2009 due to changes in the relative amounts of capital gains and losses generated during the year. The amount of the deferred tax asset considered realizable, however, could be adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. A valuation allowance of $1.4 million at December 31, 2009 was established for asset impairments in foreign jurisdictions where we believe it is more likely than not that the deferred tax asset will not be realized.
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A reconciliation of our unrecognized uncertain tax positions since January 1, 2008, is shown below:
| Increase (Decrease) Due to Settlements with Taxing Authorities | ||||||||||||||||||||||||
| Increase (Decrease) Due to Tax Positions Taken in | Reductions Due to Lapse of Statute of Limitations | |||||||||||||||||||||||
| Balance at Jan. 1, 2008 | Balance at Dec. 31, 2008 | |||||||||||||||||||||||
| Current | Prior | |||||||||||||||||||||||
| (In Thousands) | Period | Period | ||||||||||||||||||||||
Gross unrecognized tax benefits on uncertain tax noncurrent liability accounts in the balance sheet)positions (reflected in current income tax and other | $ | 3,268 | $ | 105 | $ | (392 | ) | $ | (31 | ) | $ | (397 | ) | $ | 2,553 | |||||||||
Deferred income tax assets related to unrecognized tax benefits on uncertain tax positions for whichultimate deductibility is highly certain but for which the timing of the deduction is uncertain (reflected in deferred income tax accounts in the balance sheet) | (2,325 | ) | (1,828 | ) | ||||||||||||||||||||
Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rateif recognized | 943 | 725 | ||||||||||||||||||||||
Interest and penalties accrued on deductions taken relating to uncertain tax positions (approximately $100,income statement in 2008, 2007 and 2006, respectively, with the balance shown in current income tax and other noncurrent liability accounts in the balance sheet) | 1,195 | 1,303 | ||||||||||||||||||||||
| Related deferred income tax assets recognized on interest and penalties | (436 | ) | (476 | ) | ||||||||||||||||||||
Interest and penalties accrued on uncertain tax which would impact the effective tax rate if recognizedpositions net of related deferred income tax benefits, | 759 | 827 | ||||||||||||||||||||||
Total net unrecognized tax benefits on uncertain tax impact the effective tax rate if recognizedpositions reflected in the balance sheet, which would | $ | 1,702 | $ | 1,552 | ||||||||||||||||||||
Increase (Decrease) Due to Settlements with Taxing Authorities | ||||||||||||||||||||||||
| Increase (Decrease) Due to Tax Positions Taken in | Reductions Due to Lapse of Statute of Limitations | |||||||||||||||||||||||
| Balance at Jan. 1, 2009 | Balance at Dec. 31, 2009 | |||||||||||||||||||||||
| Current Period | Prior Period | |||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Gross unrecognized tax benefits on uncertain tax positions (reflected in current income tax and other noncurrent liability accounts in the balance sheet) | $ | 2,553 | $ | 68 | $ | 208 | $ | (1,543 | ) | $ | (290 | ) | $ | 996 | ||||||||||
Deferred income tax assets related to unrecognized ultimate deductibility is highly certain but for whichtax benefits on uncertain tax positions for which the timing of the deduction is uncertain (reflected in deferred income tax accounts in the balance sheet) | (1,828 | ) | (348 | ) | ||||||||||||||||||||
| Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rate if recognized | 725 | 648 | ||||||||||||||||||||||
| Interest and penalties accrued on deductions taken relating to uncertain tax positions (approximately $(800), $100 and $300 reflected in income tax expense in the income statement in 2009, 2008 and 2007, respectively, with the balance shown in current income tax and other noncurrent liability accounts in the balance sheet) | 1,303 | 537 | ||||||||||||||||||||||
| Related deferred income tax assets recognized on interest and penalties | (476 | ) | (195 | ) | ||||||||||||||||||||
| Interest and penalties accrued on uncertain tax positions net of related deferred income tax benefits, which would impact the effective tax rate if recognized | 827 | 342 | ||||||||||||||||||||||
| Total net unrecognized tax benefits on uncertain tax positions reflected in the balance sheet, which would impact the effective tax rate if recognized | $ | 1,552 | $ | 990 | ||||||||||||||||||||
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In the second quarter of 2009, we settled several disputed issues raised by the IRS during its examination of our U.S. income tax returns for 2001-2003, the most significant of which regards the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes. The settlement with the IRS for the disputed issues cost us approximately $1.0 million, which is lower than the previous estimate of $1.3 million and was applied against the balance of unrecognized tax benefits.
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Generally, except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2006. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2006. We believe that it is reasonably possible that approximately $230,000 of the balance of unrecognized state tax positions may be recognized within the next twelve months as a result of a lapse of the statute of limitations.
15 LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS, UNUSUAL ITEMS, GAINS FROM SALE OF ASSETS
AND OTHER ITEMS
AND OTHER ITEMS
Losses associated with plant shutdowns, asset impairments, restructurings and other charges in 2009 totaled $2.9 million ($2.3 million after taxes) and included:
| ● | A fourth quarter charge of $181,000 ($121,000 after taxes) and a first quarter charge of $1.1 million ($806,000 after taxes) for severance and other employee-related costs in connection with restructurings in Film Products; |
| ● | A fourth quarter charge of $1.0 million ($1.0 million after taxes) for asset impairments in Film Products; |
| ● | A fourth quarter benefit of $547,000 ($340,000 after taxes), a third quarter charge of $111,000 ($69,000 after taxes), a second quarter charge of $779,000 ($484,000 after taxes), and a first quarter charge of $609,000 ($378,000 after taxes) for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income, see Note 6 for additional detail); |
| ● | A fourth quarter gain of $640,000 ($398,000 after taxes) related to the sale of land at our aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Other income (expense), net” in the consolidated statements of income); |
| ● | A fourth quarter charge of $64,000 ($40,000 after taxes) and a first quarter charge of $369,000 ($232,000 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; |
| ● | A fourth quarter charge of $218,000 ($139,000 after taxes) and a first quarter charge of $178,000 ($113,000 after taxes) for severance and other employee-related costs in connection with restructurings at corporate headquarters (included in “Corporate expenses, net” in the segment operating profit table in Note 3); |
| ● | A first quarter gain of $275,000 ($162,000 after taxes) on the sale of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown films manufacturing facility in LaGrange, Georgia; |
| ● | A second quarter gain of $175,000 ($110,000 after taxes) on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); |
| ● | A second quarter gain of $149,000 ($91,000 after taxes) related to the reversal to income of certain inventory impairment accruals in Film Products; and |
| ● | A fourth quarter charge of $345,000 ($214,000 after taxes) and a second quarter benefit of $276,000 ($172,000 after taxes) related to adjustments of future environmental costs expected to be incurred by Aluminum Extrusions (included in “Cost of goods sold” in the consolidated statements of income). |
We recognized a gain of $1.8 million ($1.2 million after taxes) from the receipt of a contractual earn-out payment and a gain of $150,000 ($96,000 after taxes) from a post-closing contractual adjustment from the sale of our investments in Theken Spine and Therics, LLC. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with
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Tredegar. Results in 2009 also include unrealized gains from the write-up of an investment accounted for under the fair value method of $5.1 million ($3.2 million after taxes). See Note 2 for additional information on this investment, which is accounted for under the fair value method. Gains on the sale of corporate assets in 2009 include realized gains of $404,000 ($257,000 after taxes) from the sale of corporate real estate. The pretax amount for each of these items is included in "Other income (expense), net" in the consolidated statements of income. Income taxes for 2009 include the recognition of a valuation allowance of $2.1 million related to expected limitations on the utilization of assumed capital losses on certain investments.
The severance in Film Products includes a reduction in workforce in the first and fourth quarters of 2009 (approximately 50 employees) that is expected to save approximately $2.0 million on an annualized basis. The impairment charge in Film Products was recognized to write down the machinery and equipment to the lower of their carrying value or estimated fair value. The estimated fair value of machinery and equipment that was evaluated for impairment was primarily based on our estimates of the proceeds that we would receive if and/or when assets are sold. Our estimates of the remaining fair value for the related machinery and equipment were based on both Level 2 and 3 inputs as defined under U.S generally accepted accounting principles.
Losses associated with plant shutdowns, asset impairments and restructurings for continuing operations in 2008 totaled $12.0 million ($8.4 million after taxes) and included:
| ● | A fourth quarter charge of $7.2 million ($5.0 million after taxes), a second quarter charge of $854,000 ($717,000 after taxes) and a first quarter charge of $1.7 million ($1.2 million after taxes) for asset impairments in Film Products; |
● | A second quarter charge of $90,000 ($83,000 after taxes) and a first quarter charge of $2.1 million ($1.4 million after taxes) for severance and other employee-related costs in connection with restructurings in Film Products; |
| ● | A second quarter charge of $275,000 ($169,000 after taxes) and a first quarter charge of $235,000 ($145,000 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions; |
| ● | A fourth quarter gain of $583,000 ($437,000 after taxes) related to the sale of land rights and related improvements at the Film Products facility in Shanghai, China (included in “Other income (expense), net” in the consolidated statements of income); and |
| ● | A fourth quarter charge of $72,000 ($44,000 after taxes) and a second quarter charge of $105,000 ($65,000 after taxes) related to expected future environmental costs at the Aluminum Extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income). |
A gain of $1.5 million ($965,000 after taxes) from the sale of our investments in Theken Spine and Therics, LLC is included in “Other income (expense), net” in the consolidated statements of income. Results in 2008 also include unrealized gains from the write-up of an investment in a privately held drug company of $5.6 million ($3.6 million after taxes). See Note 2 for additional information on this investment, which is accounted for under the fair value method. Gains on the sale of corporate assets in 2008 include realized gains of $509,000 ($310,000 after taxes) from the sale of equity securities and $492,000 ($316,000 after taxes) from the sale of corporate real estate. The pretax amounts for each of these items are included in "Other income (expense), net" in the consolidated st atements of income. Income taxes for 2008 include the reversal of a valuation allowance recognized in the third quarter of 2007 of $1.1 million that originally related to expected limitations on the utilization of assumed capital losses on certain investments.
The severance in Film Products includes a reduction in workforce in the first quarter of 2008 (approximately 90 or 6% of Film Products’ total employees) that is expected to save approximately $4.2 million on an annualized basis. The impairment charges in Film Products were recognized to write down the machinery and equipment for certain product groups to the lower of their carrying value or estimated fair value. The estimated fair value of machinery and equipment that was evaluated for impairment was primarily based on our estimates of the proceeds that we would receive if and/or when assets are sold. Our estimates of the remaining fair value for the related machinery and equipment were based on both Level 2 and 3 inputs as defined under U.S generally accepted accounting principles.
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Losses associated with plant shutdowns, asset impairments and restructurings for continuing operations in 2007 totaled $4.1 million ($2.8 million after taxes) and included:
| ● | A fourth quarter charge of $1.2 million ($780,000 after taxes), a third quarter charge of $1.2 million ($793,000 after taxes) and a first quarter charge of $366,000 ($238,000 after taxes) related to the estimated loss on the sub-lease of a portion of the AFBS (formerly Therics) facility in Princeton, New Jersey; |
| ● | A fourth quarter charge of $256,000 ($256,000 after taxes) and a first quarter charge of $338,000 ($284,000 after taxes) for asset impairments in Film Products; |
| ● | A third quarter charge of $493,000 ($309,000 after taxes) and a second quarter charge of $99,000 ($62,000 after taxes) for severance and other employee-related costs in Aluminum Extrusions; |
| ● | A second quarter charge of $26,000 ($16,000 after taxes) and a first quarter charge of $29,000 ($17,000 after taxes) for costs related to the shutdown of the films manufacturing facility in LaGrange, Georgia; and |
| ● | A third quarter charge of $42,000 ($26,000 after taxes) related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income). |
Results in 2007 also include a fourth-quarter gain of $2.7 million ($1.7 million after taxes) on the sale of corporate real estate (proceeds of approximately $3.8 million) and a third-quarter loss from the write-down of Novalux of $2.1 million ($1.3 million after taxes). See Note 2 for more information on Novalux. The pretax amounts for both of these items are included in "Other income (expense), net" in the consolidated statements of income and separately shown in the segment operating profit table in Note 3. Income taxes in 2007 include the recognition of a valuation allowance against deferred tax assets of $1.1 million in the third quarter for expected limitations on the utilization of assumed capital losses (see Note 14).
16 CONTINGENCIES
We are involved in various stages of investigation and remediation relating to environmental matters at certain current and former plant locations. Where we have determined the nature and scope of any required environmental remediation activity, estimates of cleanup costs have been obtained and accrued. As we continue efforts to maintain compliance with applicable environmental laws and regulations, additional contingencies may be identified. If additional contingencies are identified, our practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. We do not believe that additional costs that could arise from those activities will have a material adverse eff ect on our financial position. However, those costs could have a material adverse effect on quarterly or annual operating results at that time.
We are involved in various other legal actions arising in the normal course of business. After taking into consideration information we deemed relevant, we believe that we have sufficiently accrued for probable losses and that the actions will not have a material adverse effect on our financial position. However, the resolution of the actions in a future period could have a material adverse effect on quarterly or annual operating results at that time.
From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.
Tredegar Corporation - Manufacturing Operations | |||||||||||||||||||
Percentage of Net Sales and Total Assets Related to Foreign Markets | |||||||||||||||||||
| 2006 | 2005 | ||||||||||||||||||
| % of Total | % Total | % of Total | % Total | ||||||||||||||||
| Net Sales * | Assets - | Net Sales * | Assets - | ||||||||||||||||
| Exports | Foreign | Foreign | Exports | Foreign | Foreign | ||||||||||||||
| From | Oper- | Oper- | From | Oper- | Oper- | ||||||||||||||
| U.S. | ations | ations * | U.S. | ations | ations * | ||||||||||||||
| Canada | 4 | 16 | 11 | 5 | 16 | 12 | |||||||||||||
| Europe | 1 | 12 | 14 | 1 | 14 | 14 | |||||||||||||
| Latin America | - | 2 | 2 | 1 | 2 | 2 | |||||||||||||
| Asia | 5 | 4 | 7 | 4 | 4 | 5 | |||||||||||||
| Total % exposure to foreign markets | 10 | 34 | 34 | 11 | 36 | 33 | |||||||||||||
| *The percentages for foreign markets are relative to Tredegar's total net sales and total assets from manufacturing operations (consolidated net sales and total assets from continuing operations excluding cash and cash equivalents and AFBS (formerly Therics)). | |||||||||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||||||||||||||
Notional Amount as a % of Forecasted USD-Equiv. | USD-Equivalent Strike Prices of Options Bought & | Pretax Unrealized Gain (Loss) on Options at | USD- Equiv. Average | Cash (Paid to) Received from | Gain (Loss) on Options Recognized in Income for Period | ||||||||||||||||||||||||||
| Notional | CAD- | Net Option | Sold on CAD/USD | 12/31/06 | Reference | Counter- | Portion | Portion | |||||||||||||||||||||||
| Description of Currency | Amount | Related | Premium | Call | Put | Included in | Price of | party at | Deemed | Deemed | |||||||||||||||||||||
| Exposure, Options Hedging Strategy | of Option | Costs for | (Paid) | Options | Options | Shareholders' | CAD for | Expiration | Effective | Ineffective | |||||||||||||||||||||
| Used & Periods Covered | Contracts | Period | Received | Bought | Sold | Equity | Period | of Options | as Hedge | as Hedge | |||||||||||||||||||||
Exposure: About 80% of sales of extrusions manufactured in facilities in Canada are denominated or economically priced in U.S. Dollars ("USD") while conversion costs are denominated or economically priced in Canadian Dollars ("CAD"). | |||||||||||||||||||||||||||||||
Hedge Strategy: Bought average rate call options & sold average rate put options on CAD/USD. | |||||||||||||||||||||||||||||||
Periods Covered by Option Contracts: | |||||||||||||||||||||||||||||||
| 5/11/06 to end of second quarter 2006 | $ | 2,500 | 38 | % | $ | - | $ | 0.9500 | $ | 0.8850 | n/a | $ | 0.8995 | $ | - | $ | - | $ | - | ||||||||||||
| Third quarter 2006 | 5,000 | 40 | % | - | 0.9500 | 0.8749 | n/a | 0.8919 | - | - | - | ||||||||||||||||||||
| Fourth quarter 2006 | 6,500 | 53 | % | - | 0.9324 | 0.8650 | n/a | 0.8793 | - | - | - | ||||||||||||||||||||
| First quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8380 | $ | (3 | ) | n/a | n/a | n/a | - | ||||||||||||||||||
| First quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8345 | (2 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Second quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8430 | (18 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Second quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8364 | (8 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Third quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8473 | (27 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Third quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8403 | (11 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Fourth quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8516 | (33 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Fourth quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8446 | (14 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| $ | (116 | ) | |||||||||||||||||||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Sensitivity Analysis of Amount Tredegar (Pays to) Receives | |||||||||||||||||||
| Average | Average | from Counterparty in 2007 for Settlement of CAD/USD Options | |||||||||||||||||
| CAD Per | USD Equiv. | First | Second | Third | Fourth | ||||||||||||||
| USD | of CAD | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||
| 1.21951 | $ | 0.8200 | $ | (136 | ) | $ | (164 | ) | $ | (197 | ) | $ | (232 | ) | $ | (729 | ) | ||
| 1.20482 | 0.8300 | (52 | ) | (81 | ) | (115 | ) | (149 | ) | (397 | ) | ||||||||
| 1.19048 | 0.8400 | - | (12 | ) | (32 | ) | (67 | ) | (111 | ) | |||||||||
| 1.17647 | 0.8500 | - | - | - | (7 | ) | (7 | ) | |||||||||||
| 1.16279 | 0.8600 | - | - | - | - | - | |||||||||||||
| 1.14943 | 0.8700 | - | - | - | - | - | |||||||||||||
| 1.13636 | 0.8800 | - | - | - | - | - | |||||||||||||
| 1.12360 | 0.8900 | - | - | - | - | - | |||||||||||||
| 1.11111 | 0.9000 | - | - | - | - | - | |||||||||||||
| 1.09890 | 0.9100 | 39 | 39 | 39 | 39 | 155 | |||||||||||||
| 1.08696 | 0.9200 | 116 | 116 | 116 | 116 | 465 | |||||||||||||
| 1.07527 | 0.9300 | 194 | 194 | 194 | 194 | 774 | |||||||||||||
| 1.06383 | 0.9400 | 271 | 271 | 271 | 271 | 1,084 | |||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Notional | |||||||||||||||||||
| Amount as | Pretax | ||||||||||||||||||
| a % of | USD-Equivalent | Unrealized | |||||||||||||||||
| Forecasted | Strike Prices of | Gain (Loss) | |||||||||||||||||
| USD-Equiv. | Options Bought & | on Options at | |||||||||||||||||
| Notional | Royalty | Net Option | Sold on EUR/USD | 12/31/06 | |||||||||||||||
| Description of Currency | Amount | from | Premium | Call | Put | Included in | |||||||||||||
| Exposure, Options Hedging Strategy | of Option | Nether- | (Paid) | Options | Options | Shareholders' | |||||||||||||
| Used & Periods Covered | Contracts | lands Sub | Received | Sold | Bought | Equity* | |||||||||||||
Exposure: Significant royalty on sales from film technology licensed to subsidiary in the Netherlands is earned in Euros ("EUR"). | |||||||||||||||||||
Hedge Strategy: Sold average rate call options & bought average rate put options on EUR/USD. | |||||||||||||||||||
Periods Covered by Option Contracts: | |||||||||||||||||||
| First quarter 2007 | $ | 3,200 | 74 | % | $ | - | $ | 1.3350 | $ | 1.2800 | n/a | ||||||||
| Second quarter 2007 | 3,200 | 82 | % | - | 1.3480 | 1.2800 | n/a | ||||||||||||
| Third quarter 2007 | 3,200 | 75 | % | - | 1.3575 | 1.2800 | n/a | ||||||||||||
| Fourth quarter 2007 | 3,200 | 76 | % | - | 1.3640 | 1.2800 | n/a | ||||||||||||
| * Hedge transactions occurred on 1/4/07 and therefore there was no unrealized gain or loss at 12/31/06. | |||||||||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Sensitivity Analysis of Amount Tredegar (Pays to) Receives | |||||||||||||||||||
| Average | Average | from Counterparty in 2007 for Settlement of EUR/USD Options | |||||||||||||||||
| EUR Per | USD Equiv. | First | Second | Third | Fourth | ||||||||||||||
| USD | of EUR | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||
| 0.84034 | $ | 1.1900 | $ | 225 | $ | 225 | $ | 225 | $ | 225 | $ | 900 | |||||||
| 0.82645 | 1.2100 | 175 | 175 | 175 | 175 | 700 | |||||||||||||
| 0.81301 | 1.2300 | 125 | 125 | 125 | 125 | 500 | |||||||||||||
| 0.80000 | 1.2500 | 75 | 75 | 75 | 75 | 300 | |||||||||||||
| 0.78740 | 1.2700 | 25 | 25 | 25 | 25 | 100 | |||||||||||||
| 0.77519 | 1.2900 | - | - | - | - | - | |||||||||||||
| 0.76336 | 1.3100 | - | - | - | - | - | |||||||||||||
| 0.75188 | 1.3300 | - | - | - | - | - | |||||||||||||
| 0.74074 | 1.3500 | (36 | ) | (5 | ) | - | - | (41 | ) | ||||||||||
| 0.72993 | 1.3700 | (84 | ) | (52 | ) | (29 | ) | (14 | ) | (180 | ) | ||||||||
| 0.71942 | 1.3900 | (132 | ) | (100 | ) | (77 | ) | (61 | ) | (369 | ) | ||||||||
| 0.70922 | 1.4100 | (180 | ) | (147 | ) | (124 | ) | (108 | ) | (559 | ) | ||||||||
| 0.69930 | 1.4300 | (228 | ) | (195 | ) | (171 | ) | (155 | ) | (748 | ) | ||||||||
The sale to W Capital Partnersof our aluminum extrusions business in Canada, which was suffering from operating losses driven by lower volume and higher conversion costs from appreciation of the subsidiary fundsCanadian dollar, allows us to focus on our U.S. aluminum extrusions operations where we have more control over costs and profitability. The business was classified as held for sale at the end of December 2007 when it became probable that hold the direct investments occurred on March 7, 2003. The sale of the private equity fund interests occurred in a series of closings.
We recognized losses of $1.1 million ($430,000 after taxes) in the first quarter of 2008 and $207,000 ($207,000 after taxes) in the second quarter of 2008, which were in addition to the asset impairment charges recognized in 2007, to adjust primarily for differences in the carrying value of assets and liabilities and related tax benefits associated with the business sold since December 31, 2007. We also recognized $225,000 in the fourth quarter of 2008 for additional income tax benefits relating to the worthless stock deduction for the business. The remaining after-tax loss for discontinued operations in 2004 include an after-tax gain associated with venture capital investment activities2008 of $2.9$293,000 relates to the loss recognized in the first quarter from operations up through the date of sale.
During September 2007, we recognized a charge of $27.6 million primarily($22.7 million after taxes) for impairment of property, plant and equipment (“PP&E”) related to the reversalaluminum extrusions operations in Canada. The impairment of PP&E was due to deteriorating business conditions and occupancyfinancial results. The combination of lower volume and appreciation of the Canadian dollar, which impacted our costs, caused a shift from overall profitability in 2006 to losses in 2007. In addition, our projections of the future unlevered pretax cash flows for this business indicated that the carrying value of its net assets at September 30, 2007 of approximately $71.7 million (tangible assets in excess of liabilities excluding deferred income taxes) before the impairment would not be recovered. As a r esult, we recognized the impairment charge to write down the individual components of long-lived assets (PP&E) to the lower of their carrying value or estimated fair value. Our estimates of real property values were based on a commonly used valuation methodology in real estate whereby projected net operating income for the property (projected EBITDA that could be earned from rent) is divided by a related risk-adjusted expected rate of return (referred to as the capitalization rate). The estimated fair value of machinery and equipment was based on our estimates of the proceeds that we would receive if they were sold. Our estimates of the value of real estate and machinery and equipment were based on Level 2 inputs.
During December 2007, we recognized an additional impairment charge of $4.1 million ($4.1 million after taxes) to write down the remaining carrying value of the aluminum extrusions operations in Canada to estimated fair value less cost to sell. In addition, in December 2007 we recognized income tax contingency accruals upon favorable resolution.benefits of $11.4 million relating to a worthless stock deduction for the business that will be recognized in Tredegar’s 2008 consolidated income tax return (included in discontinued operations in the consolidated statement of income in 2007 but reflected as a deferred income tax asset for continuing operations in our consolidated balance sheet at December 31, 2007). This tax benefit was realized by a reduction of Tredegar’s quarterly estimated income tax payment s by the third quarter of 2008.
Goodwill for the Aluminum Extrusions reporting unit of $6.5 million has been allocated to the discontinued aluminum extrusions operations in Canada using the estimated fair value of the business sold (the after-tax cash flow expected from disposal of approximately $30.0 million when it was classified as held for sale at the end of December 2007), and the estimated fair value of the aluminum extrusions business in the U.S. retained. The fair value of the aluminum extrusions business in the U.S. was estimated at approximately $145.0 million using comparable enterprise value-to-EBITDA multiples as of December 31, 2007.
75
The statements of income for 2008 and 2007 for the aluminum extrusions business in Canada are shown below:
| Aluminum Extrusions Business in Canada | ||||||||
| Statements of Income | ||||||||
| (In Thousands) | Jan. 1, 2008 to Feb. 12, 2008 | 2007 | ||||||
| Revenues | $ | 18,756 | $ | 157,691 | ||||
| Costs and expenses: | ||||||||
| Cost of goods sold | 17,913 | 156,700 | ||||||
| Freight | 744 | 4,969 | ||||||
| Selling, general and administrative | 490 | 2,389 | ||||||
| Asset impairments and costs associated | ||||||||
| with exit and disposal activities | 1,337 | 31,754 | ||||||
| Total | 20,484 | 195,812 | ||||||
| Income (loss) before income taxes | (1,728 | ) | (38,121 | ) | ||||
| Income taxes | (1,023 | ) | (18,440 | ) | ||||
| Net income (loss) | $ | (705 | ) | $ | (19,681 | ) | ||
| Column (a) | Column (b) | Column (c) | Column (d) | |||
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (b) | |||
| Equity compensation plans approved by security holders* | 1,247,173 | $18.16 | 1,601,700 | |||
| Equity compensation plans not approved by security holders | - | - | - | |||
| Total | 1,247,173 | $18.16 | 1,601,700 |
| Years Ended December 31 | 2006 | 2005 | 2004 | |||||||
| (In Thousands, Except Per-Share Data) | ||||||||||
Revenues and other: | ||||||||||
| Sales | $ | 1,116,525 | $ | 956,969 | $ | 861,165 | ||||
| Other income (expense), net | 1,444 | (544 | ) | 15,604 | ||||||
1,117,969 | 956,425 | 876,769 | ||||||||
Costs and expenses: | ||||||||||
| Cost of goods sold | 944,839 | 810,621 | 717,120 | |||||||
| Freight | 28,096 | 24,691 | 22,398 | |||||||
| Selling, general and administrative | 68,360 | 64,723 | 60,030 | |||||||
| Research and development | 8,088 | 8,982 | 15,265 | |||||||
| Amortization of intangibles | 149 | 299 | 330 | |||||||
| Interest | 5,520 | 4,573 | 3,171 | |||||||
Asset impairments and costs associated with exit and disposal activities | 4,080 | 16,334 | 22,973 | |||||||
| Total | 1,059,132 | 930,223 | 841,287 | |||||||
| Income from continuing operations | ||||||||||
| before income taxes | 58,837 | 26,202 | 35,482 | |||||||
| Income taxes | 20,636 | 9,973 | 9,222 | |||||||
| Income from continuing operations | 38,201 | 16,229 | 26,260 | |||||||
| Discontinued operations: | ||||||||||
| Gain from venture capital investment activities (including an after-tax gain on a tax-related item of $2,275 in 2004) | - | - | 2,921 | |||||||
| Income from discontinued operations | - | - | 2,921 | |||||||
Net income | $ | 38,201 | $ | 16,229 | $ | 29,181 | ||||
Earnings per share: | ||||||||||
| Basic: | ||||||||||
| Continuing operations | $ | .99 | $ | .42 | $ | .69 | ||||
| Discontinued operations | - | - | .08 | |||||||
| Net income | $ | .99 | $ | .42 | $ | .77 | ||||
| Diluted: | ||||||||||
| Continuing operations | $ | .98 | $ | .42 | $ | .68 | ||||
| Discontinued operations | - | - | .08 | |||||||
| Net income | $ | .98 | $ | .42 | $ | .76 | ||||
See accompanying notes to financial statements. | ||||||||||
| December 31 | 2006 | 2005 | |||||
| (In Thousands, Except Share Data) | |||||||
Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 40,898 | $ | 23,434 | |||
| Accounts and notes receivable, net of allowance for doubtful accounts and sales returns of $8,559 in 2006 and $5,423 in 2005 | 121,834 | 119,330 | |||||
| Income taxes recoverable | 10,975 | 7,163 | |||||
| Inventories | 68,930 | 62,438 | |||||
| Deferred income taxes | 6,055 | 7,778 | |||||
| Prepaid expenses and other | 4,558 | 4,224 | |||||
| Total current assets | 253,250 | 224,367 | |||||
| Property, plant and equipment, at cost: | |||||||
| Land and land improvements | 12,540 | 12,496 | |||||
| Buildings | 95,877 | 91,400 | |||||
| Machinery and equipment | 567,989 | 528,821 | |||||
| Total property, plant and equipment | 676,406 | 632,717 | |||||
| Less accumulated depreciation | 350,643 | 309,841 | |||||
| Net property, plant and equipment | 325,763 | 322,876 | |||||
| Other assets and deferred charges | 64,078 | 96,527 | |||||
| Goodwill and other intangibles (other intangibles of $581 in 2006 and $712 in 2005) | 138,696 | 137,988 | |||||
| Total assets | $ | 781,787 | $ | 781,758 | |||
Liabilities and Shareholders' Equity | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 69,426 | $ | 61,731 | |||
| Accrued expenses | 41,906 | 36,031 | |||||
| Current portion of long-term debt | 678 | - | |||||
| Total current liabilities | 112,010 | 97,762 | |||||
| Long-term debt | 61,842 | 113,050 | |||||
| Deferred income taxes | 75,772 | 74,287 | |||||
| Other noncurrent liabilities | 15,568 | 11,297 | |||||
| Total liabilities | 265,192 | 296,396 | |||||
| Commitments and contingencies (Notes 13 and 16) | |||||||
| Shareholders' equity: | |||||||
| Common stock (no par value): | |||||||
| Authorized 150,000,000 shares; | |||||||
| Issued and outstanding - 39,286,079 shares in 2006 and 38,737,016 in 2005 (including restricted stock) | 120,508 | 110,706 | |||||
| Common stock held in trust for savings restoration plan (58,632 shares in 2006 and 58,156 in 2005) | (1,291 | ) | (1,284 | ) | |||
| Unearned compensation on restricted stock (109,000 shares in 2005) | - | (966 | ) | ||||
| Accumulated other comprehensive income (loss): | |||||||
| Unrealized gain on available-for-sale securities | - | 23 | |||||
| Foreign currency translation adjustment | 21,522 | 14,114 | |||||
| Gain on derivative financial instruments | 654 | 776 | |||||
| Pension and other postretirement benefit adjustments | (21,211 | ) | (2,434 | ) | |||
| Retained earnings | 396,413 | 364,427 | |||||
| Total shareholders' equity | 516,595 | 485,362 | |||||
| Total liabilities and shareholders' equity | $ | 781,787 | $ | 781,758 | |||
| Years Ended December 31 | 2006 | 2005 | 2004 | |||||||
| (In Thousands) | ||||||||||
Cash flows from operating activities: | ||||||||||
| Net income | $ | 38,201 | $ | 16,229 | $ | 29,181 | ||||
| Adjustments for noncash items: | ||||||||||
| Depreciation | 44,132 | 38,490 | 34,092 | |||||||
| Amortization of intangibles | 149 | 299 | 330 | |||||||
| Deferred income taxes | 10,155 | 9,217 | 1,947 | |||||||
| Accrued pension income and postretirement benefits | 3,178 | (1,979 | ) | (3,999 | ) | |||||
| Stock option-based compensation expense | 970 | - | - | |||||||
| Loss from write-down of investment in Novalux | - | 5,000 | - | |||||||
| Gain on sale of assets | (317 | ) | (4,174 | ) | (7,560 | ) | ||||
| Loss on asset impairments and divestitures | 1,150 | 9,378 | 13,811 | |||||||
| Changes in assets and liabilities, net of effects from acquisitions and divestitures: | ||||||||||
| Accounts and notes receivable | 151 | (3,361 | ) | (31,711 | ) | |||||
| Inventories | (5,080 | ) | 2,803 | (13,962 | ) | |||||
| Income taxes recoverable | 1,991 | (12,966 | ) | 61,538 | ||||||
| Prepaid expenses and other | (275 | ) | 530 | (258 | ) | |||||
| Accounts payable and accrued expenses | 11,592 | (3,590 | ) | 12,269 | ||||||
| Other, net | (1,392 | ) | (2,173 | ) | (1,858 | ) | ||||
| Net cash provided by operating activities | 104,605 | 53,703 | 93,820 | |||||||
Cash flows from investing activities: | ||||||||||
| Capital expenditures | (40,573 | ) | (62,543 | ) | (55,651 | ) | ||||
| Acquisitions | - | - | (1,420 | ) | ||||||
| Novalux investment | (542 | ) | (1,095 | ) | (5,000 | ) | ||||
| Proceeds from the sale of assets and property disposals | 475 | 8,018 | 10,209 | |||||||
| Other, net | - | 636 | (310 | ) | ||||||
| Net cash used in investing activities | (40,640 | ) | (54,984 | ) | (52,172 | ) | ||||
Cash flows from financing activities: | ||||||||||
| Dividends paid | (6,221 | ) | (6,190 | ) | (6,154 | ) | ||||
| Debt principal payments and financing costs | (54,530 | ) | (147,846 | ) | (72,750 | ) | ||||
| Borrowings | 4,000 | 156,500 | 36,573 | |||||||
| Proceeds from exercise of stock options | 9,702 | 1,130 | 1,871 | |||||||
| Net cash (used in) provided by financing activities | (47,049 | ) | 3,594 | (40,460 | ) | |||||
Effect of exchange rate changes on cash | 548 | (1,873 | ) | 1,863 | ||||||
Increase in cash and cash equivalents | 17,464 | 440 | 3,051 | |||||||
Cash and cash equivalents at beginning of period | 23,434 | 22,994 | 19,943 | |||||||
Cash and cash equivalents at end of period | $ | 40,898 | $ | 23,434 | $ | 22,994 | ||||
| Supplemental cash flow information: | ||||||||||
| Interest payments (net of amount capitalized) | $ | 5,734 | $ | 4,388 | $ | 3,264 | ||||
| Income tax payments (refunds), net | $ | 7,828 | $ | 14,915 | $ | (50,006 | ) | |||
See accompanying notes to financial statements. | ||||||||||
| Accumulated Other | |||||||||||||||||||||||||||||||
| Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||
| Unrealized | Gain | Pension & | |||||||||||||||||||||||||||||
| Trust for | Unearned | Gain on | Foreign | (Loss) on | Other Post- | Total | |||||||||||||||||||||||||
| Savings | Restricted | Available- | Currency | Derivative | retirement | Share- | |||||||||||||||||||||||||
| Common Stock | Retained | Restora- | Stock | for-Sale | Trans- | Financial | Benefit | holders' | |||||||||||||||||||||||
| Shares | Amount | Earnings | tion Plan | Compensation | Securities | lation | Instruments | Adjust. | Equity | ||||||||||||||||||||||
| (In Thousands, Except Share and Per-Share Data) | |||||||||||||||||||||||||||||||
| Balance December 31, 2003 | 38,176,821 | $ | 104,991 | $ | 331,289 | $ | (1,212 | ) | $ | - | $ | 2,770 | $ | 9,997 | $ | 444 | $ | (880 | ) | $ | 447,399 | ||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Net income | - | - | 29,181 | - | - | - | - | - | - | 29,181 | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Available-for-sale securities adjustment, net of reclassification adjustment (net of tax of $1,556) | - | - | - | - | - | (2,770 | ) | - | - | - | (2,770 | ) | |||||||||||||||||||
Foreign currency translation adjustment (net of tax of $4,500) | - | - | - | - | - | - | 8,404 | - | - | 8,404 | |||||||||||||||||||||
| Reclassification of foreign currency translation loss realized on the sale of the films business in Argentina (net of tax of $625) | - | - | - | - | - | - | 1,161 | - | - | 1,161 | |||||||||||||||||||||
Derivative financial instruments adjustment (net of tax of $247) | - | - | - | - | - | - | - | 440 | - | 440 | |||||||||||||||||||||
| Minimum pension liability adjustment (net of tax of $149) | - | - | - | - | - | - | - | - | (276 | ) | (276 | ) | |||||||||||||||||||
| Comprehensive income | 36,140 | ||||||||||||||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (6,154 | ) | - | - | - | - | - | - | (6,154 | ) | |||||||||||||||||||
| Restricted stock grant, net of forfeitures | 120,000 | 1,674 | - | - | (1,674 | ) | - | - | - | - | - | ||||||||||||||||||||
| Restricted stock amortization | - | - | - | - | 272 | - | - | - | - | 272 | |||||||||||||||||||||
Issued upon exercise of stock options (including related income tax benefits of $868) & other | 300,701 | 2,785 | - | - | - | - | - | - | - | 2,785 | |||||||||||||||||||||
Tredegar common stock purchased by trust for savings restoration plan | - | - | 62 | (62 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Balance December 31, 2004 | 38,597,522 | 109,450 | 354,378 | (1,274 | ) | (1,402 | ) | - | 19,562 | 884 | (1,156 | ) | 480,442 | ||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Net income | - | - | 16,229 | - | - | - | - | - | - | 16,229 | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Available-for-sale securities adjustment, net of reclassification adjustment (net of tax of $13) | - | - | - | - | - | 23 | - | - | - | 23 | |||||||||||||||||||||
| Foreign currency translation adjustment (net of tax of $2,933) | - | - | - | - | - | - | (5,448 | ) | - | - | (5,448 | ) | |||||||||||||||||||
| Derivative financial instruments adjustment (net of tax of $60) | - | - | - | - | - | - | - | (108 | ) | - | (108 | ) | |||||||||||||||||||
Minimum pension liability adjustment (net of tax of $630) | - | - | - | - | - | - | - | - | (1,278 | ) | (1,278 | ) | |||||||||||||||||||
| Comprehensive income | 9,418 | ||||||||||||||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (6,190 | ) | - | - | - | - | - | - | (6,190 | ) | |||||||||||||||||||
| Restricted stock grant, net of forfeitures and vested shares | (11,000 | ) | (49 | ) | - | - | 49 | - | - | - | - | - | |||||||||||||||||||
| Restricted stock amortization | - | - | - | - | 387 | - | - | - | - | 387 | |||||||||||||||||||||
Issued upon exercise of stock options (including related income tax benefits of $175) & other | 150,494 | 1,305 | - | - | - | - | - | - | - | 1,305 | |||||||||||||||||||||
Tredegar common stock purchased by trust for savings restoration plan | - | - | 10 | (10 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Balance December 31, 2005 | 38,737,016 | 110,706 | 364,427 | (1,284 | ) | (966 | ) | 23 | 14,114 | 776 | (2,434 | ) | 485,362 | ||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Net income | - | - | 38,201 | - | - | - | - | - | - | 38,201 | |||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Available-for-sale securities adjustment, net of reclassification adjustment (net of tax of $13) | - | - | - | - | - | (23 | ) | - | - | - | (23 | ) | |||||||||||||||||||
Foreign currency translation adjustment (net of tax of $3,921) | - | - | - | - | - | - | 7,408 | - | - | 7,408 | |||||||||||||||||||||
| Derivative financial instruments adjustment (net of tax of $60) | - | - | - | - | - | - | - | (122 | ) | - | (122 | ) | |||||||||||||||||||
Minimum pension liability adjustment (net of tax of $422) | - | - | - | - | - | - | - | - | 821 | 821 | |||||||||||||||||||||
| Comprehensive income | 46,285 | ||||||||||||||||||||||||||||||
| Cumulative adjustment for the adoption of SFAS No. 158 relating to pension and other postretirement benefits (net of tax of $11,354) | - | - | - | - | - | - | - | - | (19,598 | ) | (19,598 | ) | |||||||||||||||||||
| Cash dividends declared ($.16 per share) | - | - | (6,221 | ) | - | - | - | - | - | - | (6,221 | ) | |||||||||||||||||||
| Stock-based Compensation expense | (25,500 | ) | 1,066 | - | - | - | - | - | - | - | 1,066 | ||||||||||||||||||||
| Restricted stock amortization | - | (966 | ) | - | - | 966 | - | - | - | - | - | ||||||||||||||||||||
| Issued upon exercise of stock options (including related income tax benefits of $678) & other | 574,563 | 9,702 | - | - | - | - | - | - | - | 9,702 | |||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | - | - | 6 | (7 | ) | - | - | - | - | - | (1 | ) | |||||||||||||||||||
| Balance December 31, 2006 | 39,286,079 | $ | 120,508 | $ | 396,413 | $ | (1,291 | ) | $ | - | $ | - | $ | 21,522 | $ | 654 | $ | (21,211 | ) | $ | 516,595 | ||||||||||
See accompanying notes to financial statements. | |||||||||||||||||||||||||||||||
Tredegar Corporation and Subsidiaries
(In thousands, except Tredegar share and per-share amounts and unless otherwise stated)Thousands, Except Per-Share Amounts)
(Unaudited)
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||||||
| 2009 | ||||||||||||||||||||
| Sales | $ | 153,066 | $ | 158,115 | $ | 175,662 | $ | 161,770 | $ | 648,613 | ||||||||||
| Gross profit | 24,579 | 28,630 | 35,191 | 27,195 | 115,595 | |||||||||||||||
| Income (lloss) from continuing operations | (28,817 | ) | 6,487 | 10,996 | 9,981 | (1,353 | ) | |||||||||||||
| Income (loss) from discontinued operations | - | - | - | - | - | |||||||||||||||
| Net income (loss) | $ | (28,817 | ) | $ | 6,487 | $ | 10,996 | $ | 9,981 | $ | (1,353 | ) | ||||||||
| Earnings (loss) per share: | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Continuing operations | $ | (.85 | ) | $ | .19 | $ | .32 | $ | .30 | $ | (.04 | ) | ||||||||
| Discontinued operations | - | - | - | - | - | |||||||||||||||
| Net income (loss) | $ | (.85 | ) | $ | .19 | $ | .32 | $ | .30 | $ | (.04 | ) | ||||||||
| Diluted | ||||||||||||||||||||
| Continuing operations | $ | (.85 | ) | $ | .19 | $ | .32 | $ | .29 | $ | (.04 | ) | ||||||||
| Discontinued operations | - | - | - | - | - | |||||||||||||||
| Net income (loss) | $ | (.85 | ) | $ | .19 | $ | .32 | $ | .29 | $ | (.04 | ) | ||||||||
| Shares used to compute earnings per share: | ||||||||||||||||||||
| Basic | 33,866 | 33,876 | 33,878 | 33,825 | 33,861 | |||||||||||||||
| Diluted | 33,866 | 33,971 | 33,922 | 33,871 | 33,861 | |||||||||||||||
| 2008 | ||||||||||||||||||||
| Sales | $ | 228,480 | $ | 234,008 | $ | 228,709 | $ | 192,702 | $ | 883,899 | ||||||||||
| Gross profit | 29,140 | 31,962 | 27,821 | 34,473 | 123,396 | |||||||||||||||
| Income from continuing operations | 3,785 | 8,865 | 11,078 | 5,913 | 29,641 | |||||||||||||||
| Income (loss) from discontinued operations | (723 | ) | (207 | ) | - | 225 | (705 | ) | ||||||||||||
| Net income | $ | 3,062 | $ | 8,658 | $ | 11,078 | $ | 6,138 | $ | 28,936 | ||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Continuing operations | $ | .11 | $ | .26 | $ | .33 | $ | .17 | $ | .87 | ||||||||||
| Discontinued operations | (.02 | ) | (.01 | ) | - | .01 | (.02 | ) | ||||||||||||
| Net income | $ | .09 | $ | .25 | $ | .33 | $ | .18 | $ | .85 | ||||||||||
| Diluted | ||||||||||||||||||||
| Continuing operations | $ | .11 | $ | .26 | $ | .33 | $ | .17 | $ | .87 | ||||||||||
| Discontinued operations | (.02 | ) | (.01 | ) | - | .01 | (.02 | ) | ||||||||||||
| Net income | $ | .09 | $ | .25 | $ | .33 | $ | .18 | $ | .85 | ||||||||||
| Shares used to compute earnings per share: | ||||||||||||||||||||
| Basic | 34,467 | 33,997 | 33,672 | 33,782 | 33,977 | |||||||||||||||
| Diluted | 34,682 | 34,211 | 33,903 | 33,990 | 34,194 | |||||||||||||||
| December 31 | 2006 | 2005 | Amortization Periods | |||||||
| Carrying value of goodwill: | ||||||||||
| Film Products | $ | 103,562 | $ | 102,732 | Not amortized | |||||
| Aluminum Extrusions | 34,553 | 34,544 | Not amortized | |||||||
| Total carrying value of goodwill | 138,115 | 137,276 | ||||||||
| Carrying value of other intangibles: | ||||||||||
| Film Products (cost basis of $1,172 in 2006 and 2005) | 581 | 712 | Not more than 17 yrs. | |||||||
| Total carrying value of other intangibles | 581 | 712 | ||||||||
| Total carrying value of goodwill and other intangibles | $ | 138,696 | $ | 137,988 | ||||||
2006 | 2005 | 2004 | ||||||||
| Goodwill and other intangibles: | ||||||||||
| Net carrying value, beginning of year | $ | 137,988 | $ | 142,983 | $ | 140,548 | ||||
| Amortization | (149 | ) | (299 | ) | (330 | ) | ||||
| Decrease due to sale of AFBS (formerly Therics) assets | - | (4,329 | ) | - | ||||||
| Increase (decrease) due to foreign currency translation and other | 857 | (367 | ) | 2,765 | ||||||
| Total carrying value of goodwill and other intangibles | $ | 138,696 | $ | 137,988 | $ | 142,983 | ||||
2006 | 2005 | 2004 | ||||||||
| Weighted average shares outstanding used to compute basic earnings per share | 38,670,757 | 38,471,348 | 38,294,996 | |||||||
| Incremental shares attributable to stock options and restricted stock | 260,305 | 125,356 | 211,688 | |||||||
| Shares used to compute diluted earnings per share | 38,931,062 | 38,596,704 | 38,506,684 | |||||||
| 2005 | 2004 | ||||||
| Income from continuing operations: | |||||||
| As reported | $ | 16,229 | $ | 26,260 | |||
| Pro forma for stock option-based employee compensation cost, net of tax, based on the fair value method | (1,073 | ) | (2,133 | ) | |||
| Pro forma income from continuing operations | $ | 15,156 | $ | 24,127 | |||
| Basic earnings per share from continuing operations: | |||||||
| As reported | $ | .42 | $ | .69 | |||
| Pro forma | .39 | .63 | |||||
| Diluted earnings per share from continuing operations: | |||||||
| As reported | $ | .42 | $ | .68 | |||
| Pro forma | .39 | .63 | |||||
2006 | 2004 | ||||||
| Dividend yield | 1.1 | % | 1.2 | % | |||
| Weighted average volatility percentage | 38.3 | % | 45.0 | % | |||
| Weighted average risk-free interest rate | 4.7 | % | 3.1 | % | |||
| Holding period (years): | |||||||
| Officers | 6.0 | n/a | |||||
| Management | 5.0 | 5.0 | |||||
| Other employees | n/a | 3.0 | |||||
| Weighted average excercise price at date of grant (also weighted average market price at date of grant): | |||||||
| Officers | $ | 15.22 | n/a | ||||
| Management | 15.32 | $ | 13.97 | ||||
| Other employees | n/a | 13.95 | |||||
2006 | 2004 | ||||||
| Stock options granted (number of shares): | |||||||
| Officers | 107,500 | n/a | |||||
| Management | 342,300 | 176,950 | |||||
| Other employees | n/a | 161,675 | |||||
| Total | 449,800 | 338,625 | |||||
| Estimated weighted average fair value of options per share at date of grant: | |||||||
| Officers | $ | 6.26 | n/a | ||||
| Management | 5.69 | $ | 5.54 | ||||
| Other employees | n/a | 4.32 | |||||
Total estimated fair value of stock options granted (in thousands) | $ | 2,620 | $ | 1,679 | |||
| Assumptions Used in Determining Pro Forma Comp. Expense for AFBS Stock Options Granted in 2004 & Other Data | ||||
| Assumptions used in Black-Scholes | Other assumptions and items: | |||
| options-pricing model: | Vesting period (years) | 0.4 - 4 | ||
| Dividend yield | 0.0% | AFBS stock options granted: | ||
| Volatility percentage (a) | 95% | 3rd quarter 2004 | 7,906,149 | |
| Weighted average risk-free interest rate | 4.1% | 1st quarter 2004 | 30,809,000 | |
| Holding period (years) | 7.0 | Aggregate estimated fair value of options | ||
| Weighted average estimated fair value per share | at date of grant: | |||
| of underlying stock at date of grant (b) | $ .090 | 3rd quarter 2004 | $ 584 | |
| Weighted average estimated fair value of | 1st quarter 2004 | $ 2,271 | ||
| options per share at date of grant | $ .074 | |||
| (a) Volatility estimated for AFBS based on Orthovita, Inc. (NASDAQ: VITA), a comparable company. | ||||
| (b) Estimated fair value of underlying stock equaled the stock option exercise price at date of grant. | ||||
2006 | 2005 | 2004 | ||||||||
| Available-for-sale securities adjustment: | ||||||||||
| Unrealized net holding gains (losses) arising during the period | $ | 20 | $ | 36 | $ | 1,872 | ||||
| Income taxes | (7 | ) | (13 | ) | (655 | ) | ||||
| Reclassification adjustment for net losses (gains) realized in income | (56 | ) | - | (6,134 | ) | |||||
| Income taxes | 20 | - | 2,147 | |||||||
| Available-for-sale securities adjustment | $ | (23 | ) | $ | 23 | $ | (2,770 | ) | ||
Net Sales | ||||||||||
2006 | 2005 | 2004 | ||||||||
| Film Products | $ | 511,169 | $ | 460,277 | $ | 413,257 | ||||
| Aluminum Extrusions | 577,260 | 471,749 | 425,130 | |||||||
| AFBS (formerly Therics) | - | 252 | 380 | |||||||
| Total net sales | 1,088,429 | 932,278 | 838,767 | |||||||
| Add back freight | 28,096 | 24,691 | 22,398 | |||||||
| Sales as shown in consolidated statements of income | $ | 1,116,525 | $ | 956,969 | $ | 861,165 | ||||
Operating Profit | ||||||||||
2006 | 2005 | 2004 | ||||||||
| Film Products: | ||||||||||
| Ongoing operations | $ | 57,645 | $ | 44,946 | $ | 43,259 | ||||
| Plant shutdowns, asset impairments and restructurings, net of gains on the sale of assets (a) | 221 | (3,955 | ) | (10,438 | ) | |||||
| Aluminum Extrusions: | ||||||||||
| Ongoing operations | 22,031 | 19,302 | 22,637 | |||||||
| Plant shutdowns, asset impairments and restructurings, net of gains on the sale of assets (a) | (1,434 | ) | 122 | (10,553 | ) | |||||
| Other (a) | - | - | 7,316 | |||||||
| AFBS (formerly Therics): | ||||||||||
| Ongoing operations | - | (3,467 | ) | (9,763 | ) | |||||
| Loss on investment in Therics, LLC | (25 | ) | (145 | ) | - | |||||
| Restructurings (a) | (637 | ) | (10,318 | ) | (2,041 | ) | ||||
| Total | 77,801 | 46,485 | 40,417 | |||||||
| Interest income | 1,240 | 586 | 350 | |||||||
| Interest expense | 5,520 | 4,573 | 3,171 | |||||||
| Gain on sale of corporate assets (a) | 56 | 61 | 7,560 | |||||||
| Loss from write-down of investment in Novalux (a) | - | 5,000 | - | |||||||
| Stock option-based compensation expense | 970 | - | - | |||||||
| Corporate expenses, net (a) | 13,770 | 11,357 | 9,674 | |||||||
| Income from continuing operations before income taxes | 58,837 | 26,202 | 35,482 | |||||||
| Income taxes (a) | 20,636 | 9,973 | 9,222 | |||||||
| Income from continuing operations | 38,201 | 16,229 | 26,260 | |||||||
| Income from discontinued operations (a) | - | - | 2,921 | |||||||
| Net income | $ | 38,201 | $ | 16,229 | $ | 29,181 | ||||
Identifiable Assets | ||||||||||
| December 31 | 2006 | 2005 | 2004 | |||||||
| Film Products | $ | 498,961 | $ | 479,286 | $ | 472,810 | ||||
| Aluminum Extrusions | 209,395 | 214,374 | 210,894 | |||||||
| AFBS (formerly Therics) | 2,420 | 2,759 | 8,613 | |||||||
| Subtotal | 710,776 | 696,419 | 692,317 | |||||||
| General corporate | 30,113 | 61,905 | 54,163 | |||||||
| Cash and cash equivalents (c) | 40,898 | 23,434 | 22,994 | |||||||
| Total | $ | 781,787 | $ | 781,758 | $ | 769,474 | ||||
Depreciation and Amortization | Capital Expenditures | ||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||
| Film Products | $ | 31,847 | $ | 26,673 | $ | 21,967 | $ | 33,168 | $ | 50,466 | $ | 44,797 | |||||||
| Aluminum Extrusions | 12,323 | 11,484 | 10,914 | 7,381 | 11,968 | 10,007 | |||||||||||||
| AFBS (formerly Therics) | - | 437 | 1,300 | - | 36 | 275 | |||||||||||||
| Subtotal | 44,170 | 38,594 | 34,181 | 40,549 | 62,470 | 55,079 | |||||||||||||
| General corporate | 111 | 195 | 241 | 24 | 73 | 572 | |||||||||||||
| Total | $ | 44,281 | $ | 38,789 | $ | 34,422 | $ | 40,573 | $ | 62,543 | $ | 55,651 | |||||||
Net Sales by Geographic Area (c) | ||||||||||
2006 | 2005 | 2004 | ||||||||
| United States | $ | 606,410 | $ | 495,900 | $ | 441,891 | ||||
| Exports from the United States to: | ||||||||||
| Canada | 42,669 | 44,870 | 27,663 | |||||||
| Latin America | 4,364 | 9,428 | 16,668 | |||||||
| Europe | 8,944 | 8,311 | 15,768 | |||||||
| Asia | 50,096 | 40,476 | 31,617 | |||||||
| Foreign operations: | ||||||||||
| Canada | 173,471 | 144,090 | 147,145 | |||||||
| The Netherlands | 91,476 | 83,649 | 66,856 | |||||||
| Hungary | 29,152 | 33,573 | 34,721 | |||||||
| China | 42,460 | 36,823 | 25,291 | |||||||
| Italy | 14,323 | 15,866 | 12,423 | |||||||
| Brazil and Argentina (2004) | 25,064 | 19,292 | 18,724 | |||||||
| Total (b) | $ | 1,088,429 | $ | 932,278 | $ | 838,767 | ||||
Identifiable Assetsby Geographic Area (c) | Property, Plant & Equipment,Net by Geographic Area (c) | ||||||||||||||||||
| December 31 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||
| United States | $ | 446,005 | $ | 444,144 | $ | 427,240 | $ | 176,160 | $ | 178,154 | $ | 163,383 | |||||||
| Foreign operations: | |||||||||||||||||||
| Canada | 89,354 | 92,328 | 92,290 | 38,151 | 41,208 | 38,610 | |||||||||||||
| The Netherlands | 70,609 | 67,683 | 75,449 | 53,905 | 54,331 | 58,370 | |||||||||||||
| Hungary | 20,039 | 18,505 | 27,308 | 12,475 | 12,787 | 19,371 | |||||||||||||
| China | 53,633 | 40,599 | 38,713 | 34,671 | 26,104 | 25,684 | |||||||||||||
| Italy | 16,734 | 17,997 | 20,785 | 3,565 | 3,093 | 3,991 | |||||||||||||
| Brazil | 14,402 | 15,163 | 10,532 | 4,892 | 5,205 | 5,037 | |||||||||||||
| General corporate | 30,113 | 61,905 | 54,163 | 1,944 | 1,994 | 2,246 | |||||||||||||
| Cash and cash equivalents (c) | 40,898 | 23,434 | 22,994 | n/a | n/a | n/a | |||||||||||||
| Total | $ | 781,787 | $ | 781,758 | $ | 769,474 | $ | 325,763 | $ | 322,876 | $ | 316,692 | |||||||
| See footnotes on prior page and a reconciliation of net sales to sales as shown in the consolidated statements of income. | |||||||||||||||||||
2006 | 2005 | ||||||
| Trade, less allowance for doubtful accounts and sales returns of $8,559 in 2006 and $5,423 in 2005 | $ | 116,943 | $ | 112,968 | |||
| Other | 4,891 | 6,362 | |||||
| Total | $ | 121,834 | $ | 119,330 | |||
2006 | 2005 | ||||||
| Finished goods | $ | 15,412 | $ | 12,838 | |||
| Work-in-process | 4,540 | 3,685 | |||||
| Raw materials | 34,185 | 33,043 | |||||
| Stores, supplies and other | 14,793 | 12,872 | |||||
| Total | $ | 68,930 | $ | 62,438 | |||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||||||||||||||
| Notional Amount as a % of Forecasted USD-Equiv. | Net | USD-Equivalent Strike Prices of Options Bought & | Pretax Unrealized Gain (Loss) on Options at | USD-Equiv. Average | Cash (Paid to) Recieved from | Gain (Loss) on Options Recognized in Income for Period | |||||||||||||||||||||||||
| Notional | CAD- | Option | Sold on CAD/USD | 12/31/06 | Reference | Counter- | Portion | Portion | |||||||||||||||||||||||
| Description of Currency | Amount | Related | Premium | Call | Put | Included in | Price of | party at | Deemed | Deemed | |||||||||||||||||||||
| Exposure, Options Hedging Strategy | of Option | Costs for | (Paid) | Options | Options | Shareholders' | CAD for | Expiration | Effective | Ineffective | |||||||||||||||||||||
| Used & Periods Covered | Contracts | Period | Received | Bought | Sold | Equity | Period | of Options | as Hedge | as Hedge | |||||||||||||||||||||
Exposure: About 80% of sales of extrusions manufactured in facilities in Canada are denominated or economically priced in U.S. Dollars ("USD") while conversion costs are denominated or economically priced in Canadian Dollars ("CAD"). | |||||||||||||||||||||||||||||||
Hedge Strategy: Bought average rate call options & sold average rate put options on CAD/USD. | |||||||||||||||||||||||||||||||
Periods Covered by Option Contracts: | |||||||||||||||||||||||||||||||
| 5/11/06 to end of second quarter 2006 | $ | 2,500 | 38 | % | $ | - | $ | 0.9500 | $ | 0.8850 | n/a | $ | 0.8995 | $ | - | $ | - | $ | - | ||||||||||||
| Third quarter 2006 | 5,000 | 40 | % | - | 0.9500 | 0.8749 | n/a | 0.8919 | - | - | - | ||||||||||||||||||||
| Fourth quarter 2006 | 6,500 | 53 | % | - | 0.9324 | 0.8650 | n/a | 0.8793 | - | - | - | ||||||||||||||||||||
| First quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8380 | $ | (3 | ) | n/a | n/a | n/a | - | ||||||||||||||||||
| First quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8345 | (2 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Second quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8430 | (18 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Second quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8364 | (8 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Third quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8473 | (27 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Third quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8403 | (11 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Fourth quarter 2007 | 3,500 | 28 | % | - | 0.9100 | 0.8516 | (33 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| Fourth quarter 2007 | 3,500 | 28 | % | - | 0.9000 | 0.8446 | (14 | ) | n/a | n/a | n/a | - | |||||||||||||||||||
| $ | (116 | ) | |||||||||||||||||||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Sensitivity Analysis of Amount Tredegar (Pays to) Receives | |||||||||||||||||||
| Average | Average | from Counterparty in 2007 for Settlement of CAD/USD Options | |||||||||||||||||
| CAD Per | USD Equiv. | First | Second | Third | Fourth | ||||||||||||||
| USD | of CAD | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||
| 1.21951 | $ | 0.8200 | $ | (136 | ) | $ | (164 | ) | $ | (197 | ) | $ | (232 | ) | $ | (729 | ) | ||
| 1.20482 | 0.8300 | (52 | ) | (81 | ) | (115 | ) | (149 | ) | (397 | ) | ||||||||
| 1.19048 | 0.8400 | - | (12 | ) | (32 | ) | (67 | ) | (111 | ) | |||||||||
| 1.17647 | 0.8500 | - | - | - | (7 | ) | (7 | ) | |||||||||||
| 1.16279 | 0.8600 | - | - | - | - | - | |||||||||||||
| 1.14943 | 0.8700 | - | - | - | - | - | |||||||||||||
| 1.13636 | 0.8800 | - | - | - | - | - | |||||||||||||
| 1.12360 | 0.8900 | - | - | - | - | - | |||||||||||||
| 1.11111 | 0.9000 | - | - | - | - | - | |||||||||||||
| 1.09890 | 0.9100 | 39 | 39 | 39 | 39 | 155 | |||||||||||||
| 1.08696 | 0.9200 | 116 | 116 | 116 | 116 | 465 | |||||||||||||
| 1.07527 | 0.9300 | 194 | 194 | 194 | 194 | 774 | |||||||||||||
| 1.06383 | 0.9400 | 271 | 271 | 271 | 271 | 1,084 | |||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Notional | |||||||||||||||||||
| Amount as | Pretax | ||||||||||||||||||
| a % of | USD-Equivalent | Unrealized | |||||||||||||||||
| Forecasted | Strike Prices of | Gain (Loss) | |||||||||||||||||
| USD-Equiv. | Options Bought & | on Options at | |||||||||||||||||
| Notional | Royalty | Net Option | Sold on EUR/USD | 12/31/06 | |||||||||||||||
| Description of Currency | Amount | from | Premium | Call | Put | Included in | |||||||||||||
| Exposure, Options Hedging Strategy | of Option | Nether- | (Paid) | Options | Options | Shareholders' | |||||||||||||
| Used & Periods Covered | Contracts | lands Sub | Received | Sold | Bought | Equity* | |||||||||||||
Exposure: Significant royalty on sales from film technology licensed to subsidiary in the Netherlands is earned in Euros ("EUR"). | |||||||||||||||||||
Hedge Strategy: Sold average rate call options & bought average rate put options on EUR/USD. | |||||||||||||||||||
Periods Covered by Option Contracts: | |||||||||||||||||||
| First quarter 2007 | $ | 3,200 | 74 | % | $ | - | $ | 1.3350 | $ | 1.2800 | n/a | ||||||||
| Second quarter 2007 | 3,200 | 82 | % | - | 1.3480 | 1.2800 | n/a | ||||||||||||
| Third quarter 2007 | 3,200 | 75 | % | - | 1.3575 | 1.2800 | n/a | ||||||||||||
| Fourth quarter 2007 | 3,200 | 76 | % | - | 1.3640 | 1.2800 | n/a | ||||||||||||
| * Hedge transactions occurred on 1/4/07 and therefore there was no unrealized gain or loss at 12/31/06. | |||||||||||||||||||
| (In Thousands Except Exchange Rates) | |||||||||||||||||||
| Sensitivity Analysis of Amount Tredegar (Pays to) Receives | |||||||||||||||||||
| Average | Average | from Counterparty in 2007 for Settlement of EUR/USD Options | |||||||||||||||||
| EUR Per | USD Equiv. | First | Second | Third | Fourth | ||||||||||||||
| USD | of EUR | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||
| 0.84034 | $ | 1.1900 | $ | 225 | $ | 225 | $ | 225 | $ | 225 | $ | 900 | |||||||
| 0.82645 | 1.2100 | 175 | 175 | 175 | 175 | 700 | |||||||||||||
| 0.81301 | 1.2300 | 125 | 125 | 125 | 125 | 500 | |||||||||||||
| 0.80000 | 1.2500 | 75 | 75 | 75 | 75 | 300 | |||||||||||||
| 0.78740 | 1.2700 | 25 | 25 | 25 | 25 | 100 | |||||||||||||
| 0.77519 | 1.2900 | - | - | - | - | - | |||||||||||||
| 0.76336 | 1.3100 | - | - | - | - | - | |||||||||||||
| 0.75188 | 1.3300 | - | - | - | - | - | |||||||||||||
| 0.74074 | 1.3500 | (36 | ) | (5 | ) | - | - | (41 | ) | ||||||||||
| 0.72993 | 1.3700 | (84 | ) | (52 | ) | (29 | ) | (14 | ) | (180 | ) | ||||||||
| 0.71942 | 1.3900 | (132 | ) | (100 | ) | (77 | ) | (61 | ) | (369 | ) | ||||||||
| 0.70922 | 1.4100 | (180 | ) | (147 | ) | (124 | ) | (108 | ) | (559 | ) | ||||||||
| 0.69930 | 1.4300 | (228 | ) | (195 | ) | (171 | ) | (155 | ) | (748 | ) | ||||||||
2006 | 2005 | ||||||
| Payrolls, related taxes and medical and other benefits | $ | 8,620 | $ | 6,687 | |||
| Workmen's compensation and disabilities | 4,335 | 4,226 | |||||
| Vacation | 4,875 | 4,488 | |||||
| Plant shutdowns and divestitures | 5,058 | 6,972 | |||||
| Incentive compensation | 4,075 | 383 | |||||
| Other | 14,943 | 13,275 | |||||
| Total | $ | 41,906 | $ | 36,031 | |||
| Severance | Asset Impairments | Accelerated Depreciation (a) | Other (b) | Total | ||||||||||||
| Balance at December 31, 2003 | $ | 2,106 | $ | - | $ | - | $ | 3,086 | $ | 5,192 | ||||||
| 2004: | ||||||||||||||||
| Charges | 6,456 | 11,554 | 2,572 | 2,450 | 23,032 | |||||||||||
| Cash spent | (3,732 | ) | - | - | (2,112 | ) | (5,844 | ) | ||||||||
| Charged against assets | - | (11,554 | ) | (2,572 | ) | - | (14,126 | ) | ||||||||
| Foreign currency translation | 261 | - | - | - | 261 | |||||||||||
| Reversed to income | - | - | - | (30 | ) | (30 | ) | |||||||||
| Balance at December 31, 2004 | 5,091 | - | - | 3,394 | 8,485 | |||||||||||
| 2005: | ||||||||||||||||
| Charges | 3,620 | 8,198 | 353 | 6,553 | 18,724 | |||||||||||
| Cash spent | (6,182 | ) | - | - | (4,290 | ) | (10,472 | ) | ||||||||
| Charged against assets | - | (8,198 | ) | (353 | ) | - | (8,551 | ) | ||||||||
| Foreign currency translation | (8 | ) | - | - | - | (8 | ) | |||||||||
| Reversed to income | (1,036 | ) | - | - | (170 | ) | (1,206 | ) | ||||||||
| Balance at December 31, 2005 | 1,485 | - | - | 5,487 | 6,972 | |||||||||||
| 2006: | ||||||||||||||||
| Charges | 1,371 | 1,150 | - | 1,607 | 4,128 | |||||||||||
| Cash spent | (2,420 | ) | - | - | (2,472 | ) | (4,892 | ) | ||||||||
| Charged against assets | - | (1,150 | ) | - | - | (1,150 | ) | |||||||||
| Foreign currency translation | - | - | - | - | - | |||||||||||
| Reversed to income | - | - | - | - | - | |||||||||||
| Balance at December 31, 2006 | $ | 436 | $ | - | $ | - | $ | 4,622 | $ | 5,058 | ||||||
| (a) Represents depreciation accelerated due to plant shutdowns based on a remaining useful life of less than one year. | ||||||||||||||||
| (b) Other includes primarily accrued losses on a sub-lease at a facility in Princeton New, Jersey. | ||||||||||||||||
| Debt Due and Outstanding at December 31, 2006 | ||||||||||
Year Due | Credit Agreement | Other | Total Debt Due | |||||||
| 2007 | $ | - | $ | 678 | $ | 678 | ||||
| 2008 | - | 484 | 484 | |||||||
| 2009 | - | 495 | 495 | |||||||
| 2010 | 60,000 | 415 | 60,415 | |||||||
| 2011 | - | 221 | 221 | |||||||
| Remainder | - | 227 | 227 | |||||||
| Total | $ | 60,000 | $ | 2,520 | $ | 62,520 | ||||
| Pricing Under Credit Agreement (Basis Points) | |||||||
Credit Spread Over LIBOR | |||||||
Indebtedness-to- Adjusted EBITDA Ratio | ($60 Million Outstanding at 12/31/06) | Commitment Fee | |||||
| > 2.50x but <= 3x | 125 | 25 | |||||
| > 1.75x but <= 2.50x | 100 | 20 | |||||
| > 1x but <= 1.75x | 87.5 | 17.5 | |||||
| <= 1x | 75 | 15 | |||||
| Option Exercise Price/Share | ||||||||||||||||
Number of Options | Range | Wgted. Ave. | ||||||||||||||
| Outstanding at 12/31/03 | 2,722,610 | $ | 3.37 | to | 46.63 | $ | 21.39 | |||||||||
| Granted | 348,425 | 13.95 | to | 14.50 | 13.97 | |||||||||||
| Forfeited and Expired | (102,175 | ) | 7.38 | to | 46.63 | 23.28 | ||||||||||
| Exercised | (306,870 | ) | 3.37 | to | 19.75 | 6.99 | ||||||||||
| Outstanding at 12/31/04 | 2,661,990 | 4.17 | to | 46.63 | 22.01 | |||||||||||
| Granted | - | n/a | to | n/a | n/a | |||||||||||
| Forfeited and Expired | (274,575 | ) | 13.95 | to | 46.63 | 21.90 | ||||||||||
| Exercised | (137,075 | ) | 4.17 | to | 16.55 | 7.51 | ||||||||||
| Outstanding at 12/31/05 | 2,250,340 | 7.38 | to | 46.63 | 22.90 | |||||||||||
| Granted | 449,800 | 15.11 | to | 19.52 | 15.30 | |||||||||||
| Forfeited and Expired | (874,525 | ) | 7.38 | to | 46.63 | 29.73 | ||||||||||
| Exercised | (578,442 | ) | 7.38 | to | 19.75 | 16.47 | ||||||||||
| Outstanding at 12/31/06 | 1,247,173 | $ | 13.95 | to | $ | 29.94 | $ | 18.16 | ||||||||
| Options Outstanding at | Options Exercisable at | |||||||||||||||||||||||||||
| December 31, 2006 | December 31, 2006 | |||||||||||||||||||||||||||
| Weighted Average | Aggregate | Aggregate | ||||||||||||||||||||||||||
| Remaining | Intrinsic | Weighted | Intrinsic | |||||||||||||||||||||||||
| Contract- | Value | Average | Value | |||||||||||||||||||||||||
| Range of | ual Life | Exercise | (In | Exercise | (In | |||||||||||||||||||||||
| Exercise Prices | Shares | (Years) | Price | Thousands) | Shares | Price | Thousands) | |||||||||||||||||||||
| $ | 13.95 | to | $ | 17.88 | 627,068 | 4.6 | $ | 15.18 | $ | 4,660 | 243,268 | $ | 15.14 | $ | 1,816 | |||||||||||||
| 17.89 | to | 19.75 | 361,650 | 1.7 | 19.06 | 1,282 | 350,150 | 19.05 | 1,247 | |||||||||||||||||||
| 19.76 | to | 25.65 | 188,300 | .2 | 21.98 | 131 | 188,300 | 21.98 | 131 | |||||||||||||||||||
| 25.66 | to | 29.94 | 70,155 | 1.4 | 29.84 | - | 70,155 | 29.84 | - | |||||||||||||||||||
| $ | 13.95 | to | $ | 29.94 | 1,247,173 | 2.9 | $ | 18.16 | $ | 6,073 | 851,873 | $ | 19.47 | $ | 3,194 | |||||||||||||
| Non-vested Restricted Stock | Number of Shares | Wgtd. Ave. Grant Date Fair Value/Sh. | Grant Date Fair Value (In Thousands) | |||||||
| Outstanding at 12/31/03 | - | $ | - | $ | - | |||||
| Granted | 125,000 | 13.95 | 1,744 | |||||||
| Vested | - | - | - | |||||||
| Forfeited | (5,000 | ) | 13.95 | (70 | ) | |||||
| Outstanding at 12/30/04 | 120,000 | 13.95 | 1,674 | |||||||
| Granted | 7,000 | 12.92 | 90 | |||||||
| Vested | (8,000 | ) | 13.95 | (111 | ) | |||||
| Forfeited | (10,000 | ) | 13.95 | (140 | ) | |||||
| Outstanding at 12/31/05 | 109,000 | 13.88 | 1,513 | |||||||
| Granted | 2,000 | 16.31 | 33 | |||||||
| Vested | (17,333 | ) | 13.95 | (242 | ) | |||||
| Forfeited | (24,167 | ) | 13.80 | (333 | ) | |||||
| Outstanding at 12/31/06 | 69,500 | $ | 13.97 | $ | 971 | |||||
| Pension Benefits | Other Post- Retirement Benefits | ||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||
| Weighted-average assumptions used to determine benefit obligations: | |||||||||||||||||||
| Discount rate | 5.70 | % | 5.70 | % | 6.00 | % | 5.70 | % | 5.70 | % | 6.00 | % | |||||||
| Rate of compensation increases | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | |||||||
| Weighted-average assumptions used to determine net periodic benefit cost: | |||||||||||||||||||
| Discount rate | 5.70 | % | 6.00 | % | 6.25 | % | 5.70 | % | 6.00 | % | 6.25 | % | |||||||
| Rate of compensation increases | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | |||||||
| Expected long-term return on plan assets, during the year | 8.40 | % | 8.40 | % | 8.40 | % | n/a | n/a | n/a | ||||||||||
| Rate of increase in per-capita cost of covered health care benefits: | |||||||||||||||||||
| Indemnity plans, end of year | n/a | n/a | n/a | 6.00 | % | 6.00 | % | 6.00 | % | ||||||||||
| Managed care plans, end of year | n/a | n/a | n/a | 6.00 | % | 6.00 | % | 6.00 | % | ||||||||||
| Components of net periodic benefit income (cost): | |||||||||||||||||||
| Service cost | $ | (6,327 | ) | $ | (6,469 | ) | $ | (5,519 | ) | $ | (70 | ) | $ | (109 | ) | $ | (115 | ) | |
| Interest cost | (13,497 | ) | (12,661 | ) | (12,283 | ) | (535 | ) | (576 | ) | (562 | ) | |||||||
| Employee contributions | 517 | 468 | 443 | - | - | - | |||||||||||||
| Other | (127 | ) | 12 | (212 | ) | - | - | - | |||||||||||
| Expected return on plan assets | 21,583 | 22,050 | 22,678 | - | - | - | |||||||||||||
| Amortization of: | |||||||||||||||||||
| Net transition asset | - | - | 7 | - | - | - | |||||||||||||
| Prior service costs and gains or losses | (4,746 | ) | (738 | ) | (491 | ) | 24 | 2 | 53 | ||||||||||
| Net periodic benefit income (cost) | $ | (2,597 | ) | $ | 2,662 | $ | 4,623 | $ | (581 | ) | $ | (683 | ) | $ | (624 | ) | |||
| Pension Benefits | Other Post- Retirement Benefits | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
| Change in benefit obligation: | |||||||||||||
| Benefit obligation, beginning of year | $ | 238,533 | $ | 214,037 | $ | 10,070 | $ | 9,994 | |||||
| Service cost | 6,327 | 6,469 | 70 | 109 | |||||||||
| Interest cost | 13,497 | 12,661 | 535 | 576 | |||||||||
| Plan amendments | (10,039 | ) | 1,372 | - | - | ||||||||
| Effect of discount rate change | (985 | ) | 10,424 | (4 | ) | 326 | |||||||
| Employee contributions | 517 | 468 | - | - | |||||||||
| Other | (3,615 | ) | 3,500 | (329 | ) | (290 | ) | ||||||
| Benefits paid | (10,841 | ) | (10,398 | ) | (920 | ) | (645 | ) | |||||
| Benefit obligation, end of year | $ | 233,394 | $ | 238,533 | $ | 9,422 | $ | 10,070 | |||||
| Change in plan assets: | |||||||||||||
| Plan assets at fair value, beginning of year | $ | 257,101 | $ | 247,505 | $ | - | $ | - | |||||
| Actual return on plan assets | 36,086 | 18,487 | - | - | |||||||||
| Employee contributions | 517 | 468 | - | - | |||||||||
| Employer contributions | 1,074 | 1,158 | 920 | 645 | |||||||||
| Other | (128 | ) | (119 | ) | - | - | |||||||
| Benefits paid | (10,841 | ) | (10,398 | ) | (920 | ) | (645 | ) | |||||
| Plan assets at fair value, end of year | $ | 283,809 | $ | 257,101 | $ | - | $ | - | |||||
| Reconciliation of prepaid (accrued) cost: | |||||||||||||
| Funded status of the plans | $ | 50,415 | $ | 18,568 | $ | (9,422 | ) | $ | (10,070 | ) | |||
| Unrecognized prior service cost | - | 4,303 | - | - | |||||||||
| Unrecognized net (gain) loss | - | 62,776 | - | (8 | ) | ||||||||
| Prepaid (accrued) cost, end of year | $ | 50,415 | $ | 85,647 | $ | (9,422 | ) | $ | (10,078 | ) | |||
| Amounts recognized in the consolidated balance sheets: | |||||||||||||
| Prepaid benefit cost | $ | 54,034 | $ | 85,647 | $ | - | $ | - | |||||
| Accrued benefit liability | (3,619 | ) | (4,832 | ) | (9,422 | ) | (10,078 | ) | |||||
| Intangible asset | - | 1,145 | - | - | |||||||||
| Decrease in deferred income tax liabilities relating to accumulated other comprehensive loss | - | 1,253 | - | - | |||||||||
| Accumulated other comprehensive loss | - | 2,434 | - | - | |||||||||
| Net amount recognized | $ | 50,415 | $ | 85,647 | $ | (9,422 | ) | $ | (10,078 | ) | |||
| Years | Pension Benefits | Other Post- Retirement Benefits | |||||
| 2007 | 11,027 | 496 | |||||
| 2008 | 11,885 | 534 | |||||
| 2009 | 12,418 | 572 | |||||
| 2010 | 12,781 | 615 | |||||
| 2011 | 13,363 | 642 | |||||
| 2012 - 2016 | 76,660 | 3,546 | |||||
| As of December 31, 2006 | Prior to AML & SFAS No. 158 Adjustments | AML Adjustment | SFAS No. 158 Adjustment | Post AML & SFAS No. 158 Adjustments | |||||||||
| Prepaid pension costs | $ | 80,442 | $ | 1,243 | $ | (27,651 | ) | $ | 54,034 | ||||
| Pension liabilities | - | - | 3,619 | 3,619 | |||||||||
| Postretirement liabilities | 9,740 | - | (318 | ) | 9,422 | ||||||||
| Decrease (increase) in deferred income tax liabilities relating to accumulated other comprehensive loss | 1,252 | (422 | ) | 11,354 | 12,184 | ||||||||
| Accumulated other comprehensive loss | 2,434 | (821 | ) | 19,598 | 21,211 | ||||||||
| Pension | Other Post- Retirement | Total | ||||||||
| Prior service cost | $ | (967 | ) | $ | - | $ | (967 | ) | ||
| Net (gain) loss | 2,855 | (47 | ) | 2,808 | ||||||
| Pension | Other Post- Retirement | ||||||
| Prior service cost | $ | (6,198 | ) | $ | - | ||
| Net (gain) loss | 39,910 | (317 | ) | ||||
% Composition of Plan Assets | Expected Long-term | |||||||||
| December 31 | 2006 | 2005 | Return % | |||||||
| Pension plans related to operations in the U.S.: | ||||||||||
| Low-risk fixed income securities | 10.3 | % | 14.1 | % | 5.0 | % | ||||
| Large capitalization equity securities | 20.2 | 19.1 | 9.2 | |||||||
| Mid-capitalization equity securities | 8.0 | 7.3 | 9.8 | |||||||
| Small-capitalization equity securities | 4.6 | 4.3 | 10.4 | |||||||
| International equity securities | 24.8 | 22.4 | 10.4 | |||||||
| Total equity securities | 57.6 | 53.1 | 9.9 | |||||||
| Hedge and private equity funds | 20.3 | 21.0 | 7.0 | |||||||
| Other assets | 2.2 | 2.3 | 3.0 | |||||||
| Total for pension plans related to operations in the U.S. | 90.4 | 90.5 | 8.5 | |||||||
| Pension plans related to operations in Canada | 9.6 | 9.5 | 7.0 | |||||||
| Total | 100.0 | % | 100.0 | % | 8.4 | % | ||||
| Amount | ||||
| 2007 | $ | 3,652 | ||
| 2008 | 3,165 | |||
| 2009 | 2,123 | |||
| 2010 | 2,120 | |||
| 2011 | 701 | |||
| Remainder | 818 | |||
| Total | $ | 12,579 | ||
2006 | 2005 | 2004 | ||||||||
| Income from continuing operations before income taxes: | ||||||||||
| Domestic | $ | 52,408 | $ | 19,709 | $ | 27,875 | ||||
| Foreign | 6,429 | 6,493 | 7,607 | |||||||
| Total | $ | 58,837 | $ | 26,202 | $ | 35,482 | ||||
| Current income taxes: | ||||||||||
| Federal | $ | 5,584 | $ | 1,853 | $ | (2 | ) | |||
| State | 840 | 811 | 1,105 | |||||||
| Foreign | 4,057 | (1,908 | ) | 6,996 | ||||||
| Total | 10,481 | 756 | 8,099 | |||||||
| Deferred income taxes: | ||||||||||
| Federal | 9,807 | 7,900 | 3,385 | |||||||
| State | 687 | 600 | 1,198 | |||||||
| Foreign | (339 | ) | 717 | (3,460 | ) | |||||
| Total | 10,155 | 9,217 | 1,123 | |||||||
| Total income taxes | $ | 20,636 | $ | 9,973 | $ | 9,222 | ||||
Percent of Income Before Income Taxes for Continuing Operations | ||||||||||
2006 | 2005 | 2004 | ||||||||
| Income tax expense at federal statutory rate | 35.0 | 35.0 | 35.0 | |||||||
| State taxes, net of federal income tax benefit | 1.7 | 3.5 | 4.2 | |||||||
| Valuation allowance for foreign operating loss carry-forwards | 1.3 | 1.6 | 1.7 | |||||||
| Unremitted earnings from foreign operations | 1.2 | 2.3 | (.1 | ) | ||||||
| Non-deductible expenses | .7 | .6 | .8 | |||||||
| Foreign rate differences | - | - | 1.0 | |||||||
| Tax-exempt income | - | (1.6 | ) | - | ||||||
| Reversal of income tax contingency accruals | - | - | (11.3 | ) | ||||||
| Research and development tax credit | (.9 | ) | (1.6 | ) | (1.9 | ) | ||||
Valuation allowance for capital loss carry-forwards | (1.0 | ) | 2.2 | - | ||||||
| Extraterritorial Income Exclusion and | ||||||||||
| Domestic Production Activities Deduction | (1.7 | ) | (2.4 | ) | (2.3 | ) | ||||
| Other | (1.2 | ) | (1.5 | ) | (1.1 | ) | ||||
| Effective income tax rate | 35.1 | 38.1 | 26.0 | |||||||
2006 | 2005 | ||||||
| Deferred tax liabilities: | |||||||
| Depreciation | $ | 37,188 | $ | 37,438 | |||
| Pensions | 19,384 | 30,595 | |||||
| Amortization of goodwill | 14,314 | 11,627 | |||||
| Foreign currency translation gain adjustment | 11,607 | 7,686 | |||||
| Unrealized gain on available-for-sale securities | - | 12 | |||||
| Derivative financial instruments | 497 | 437 | |||||
| Other | 1,315 | 351 | |||||
| Total deferred tax liabilities | 84,305 | 88,146 | |||||
| Deferred tax assets: | |||||||
| Employee benefits | 5,987 | 5,244 | |||||
Tax in excess of book basis for venture capital and other investments (net of valuation allowance of $577 in 2005) | 2,372 | 1,863 | |||||
Asset write-offs, divestitures and environmental accruals | 1,251 | 2,602 | |||||
| Allowance for doubtful accounts and sales returns | 1,209 | 1,086 | |||||
| Tax benefit on U.S. foreign and R&D tax credits and | |||||||
| NOL carryforwards | 731 | 7,895 | |||||
| Inventory | 640 | 329 | |||||
Other (net of valuation allowance of $2,120 in 2006 and $1,020 in 2005) | 2,398 | 2,618 | |||||
| Total deferred tax assets | 14,588 | 21,637 | |||||
| Net deferred tax liability | $ | 69,717 | $ | 66,509 | |||
| Included in the balance sheet: | |||||||
| Noncurrent deferred tax liabilities in excess of assets | $ | 75,772 | $ | 74,287 | |||
| Current deferred tax assets in excess of liabilities | 6,055 | 7,778 | |||||
| Net deferred tax liability | $ | 69,717 | $ | 66,509 | |||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||
| 2006 | ||||||||||||||||
| Sales | $ | 267,964 | $ | 282,491 | $ | 296,256 | $ | 269,814 | $ | 1,116,525 | ||||||
| Gross profit | 34,852 | 35,550 | 36,143 | 37,045 | 143,590 | |||||||||||
| Net income | 8,215 | 9,250 | 9,690 | 11,046 | 38,201 | |||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | .21 | .24 | .25 | .28 | .99 | |||||||||||
| Diluted | .21 | .24 | .25 | .28 | .98 | |||||||||||
| Shares used to compute earnings per share: | ||||||||||||||||
| Basic | 38,602 | 38,632 | 38,654 | 38,793 | 38,671 | |||||||||||
| Diluted | 38,664 | 38,837 | 39,123 | 39,092 | 38,931 | |||||||||||
| 2005 | ||||||||||||||||
| Sales | $ | 232,757 | $ | 243,724 | $ | 240,716 | $ | 239,772 | $ | 956,969 | ||||||
| Gross profit | 28,462 | 33,245 | 32,518 | 27,432 | 121,657 | |||||||||||
| Net income | 5,550 | 2,132 | 7,657 | 890 | 16,229 | |||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | .14 | .05 | .20 | .02 | .42 | |||||||||||
| Diluted | .14 | .05 | .20 | .02 | .42 | |||||||||||
| Shares used to compute earnings per share: | ||||||||||||||||
| Basic | 38,440 | 38,453 | 38,465 | 38,527 | 38,471 | |||||||||||
| Diluted | 38,636 | 38,592 | 38,565 | 38,594 | 38,597 | |||||||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TREDEGAR CORPORATION (Registrant) | ||
Dated: March 3, 2010 | By | /s/ |
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 2, 2007.3, 2010.
Signature | Title | |
| /s/ | President, Chief Executive Officer and Director | |
| (Principal Executive Officer) | ||
| /s/ | Vice President, Chief Financial Officer and Treasurer | |
| (Principal Financial | ||
| /s/ Frasier W. Brickhouse, II | Controller | |
| (Frasier W. Brickhouse, II) | (Principal Accounting Officer) | |
| /s/ Richard L. Morrill | Chairman of the Board of Directors | |
| /s/ William M. Gottwald | Vice Chairman of the Board of Directors | |
| /s/ N. A. Scher | Vice Chairman of the Board of Directors | |
| /s/ Austin Brockenbrough, III | Director | |
| /s/ Donald T. Cowles | Director | |