FINANCIAL CONTENTS
FIVE-YEAR SUMMARY 14
SEGMENT TABLES 15
SHAREHOLDER VALUE 17
RESULTS OF OPERATIONS 18
FINANCIAL CONDITION 21
BUSINESS SEGMENT REVIEW 24
SELECTED QUARTERLY FINANCIAL DATA 27
NOTES TO FINANCIAL TABLES 28
REPORT OF INDEPENDENT ACCOUNTANTS 29
MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS 29
CONSOLIDATED STATEMENTS OF INCOME 30
CONSOLIDATED BALANCE SHEETS 31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY 32
CONSOLIDATED STATEMENTS OF CASH FLOWS 33
NOTES TO FINANCIAL STATEMENTS 34
SHAREHOLDER INFORMATION 47
FINANCIAL REVIEW
TREDEGAR INDUSTRIES, INC., AND SUBSIDIARIES
FIVE-YEAR SUMMARY
Years Ended December 31 1994 1993 1992 1991 1990
(In thousands, except per-share data)
RESULTS OF OPERATIONS (a):
Net sales $502,208 $449,208 $445,229 $439,186 $505,884
Other (expense) income, net (296) (387) 226 745 861
501,912 448,821 445,455 439,931 506.745
Cost of goods sold 419,823 379,286 370,652 373,429 450,843
Selling, general & administrative expenses 47,978 47,973 48,130 49,764 54,457
Research and development expenses 8,275 9,141 5,026 4,541 4,850
Interest expense (b) 4,008 5,044 5,615 7,489 7,101
Unusual items 16,494(c) 452(d) 90(e) 721(f) 32,915(g)
496,578 441,896 429,513 435,944 550,166
Income (loss) from continuing operations
before income taxes 5,334 6,925 15,942 3,987 (43,421)
Income taxes 3,917 3,202 6,425 1,468 (14,734)
Income (loss) from continuing
operations (a) 1,417 3,723 9,517 2,519 (28,687)
Income from discontinued operations (h) 37,218 6,784 5,795 3,104 4,001
Net income (loss) before extraordinary
item and cumulative effect of accounting
changes 38,635 10,507 15,312 5,623 (24,686)
Extraordinary item - prepayment premium on
extinguishment of debt (net of tax) - (1,115) - - -
Cumulative effect of accounting changes - 150 - - -
Net income (loss) $ 38,635 $ 9,542 $ 15,312 $ 5,623 ($24,686)
SHARE DATA:
Earnings (loss) per share:
Continuing operations (a) $ .13 $ .34 $ .88 $ .24 ($2.54)
Discontinued operations (h) 3.60 .63 .53 .28 .35
Before extraordinary item and cumulative
effect of accounting changes 3.73 .97 1.41 .52 (2.19)
Net income (loss) 3.73 .88 1.41 .52 (2.19)
Equity per share 19.11 15.52 14.91 13.79 13.52
Cash dividends declared per share .24 .24 .24 .24 .24
Weighted average shares outstanding 10,349 10,895 10,894 10,894 11,296
Shares outstanding at end of period 8,992 10,895 10,894 10,894 10,894
Closing market price per share:
High 18.63 18.00 18.63 10.75 15.75
Low 14.00 12.50 10.00 6.38 7.00
End of year 7.38 15.00 15.50 10.00 7.38
Total return to shareholders (i) 17.4% (1.7)% 57.4% 38.8% (52.0)%
FINANCIAL POSITION AND OTHER DATA:
Total assets $318,345 $353,383 $354,910 $335,415 $339,114
Working capital excluding cash and cash
equivalents 53,087 62,064 56,365 60,341 70,890
Current ratio 1.9:1 2.1:1 2.0:1 2.1:1 2.2:1
Cash and cash equivalents 9,036 - - 500 2,290
Net assets of discontinued operations - 30,976 29,804 24,356 22,846
Debt 38,000 97,000 101,500 100,000 100,000
Shareholders' equity 171,878 169,088 162,397 150,223 147,261
Ending capital employed for continuing
operations (j) 200,842 235,112 234,093 225,367 222,125
Average capital employed for
continuing operations (j) 217,977 234,603 229,730 223,746 230,136
Unleveraged after-tax earnings from
continuing operations (excluding special
items) (a) (k) 15,565 7,394 13,500 7,609 139
Return on average capital employed for
continuing operations (excluding special
items) (a) (l) 7.1% 3.2% 5.9% 3.4% .1%
Net debt (debt less cash and cash
equivalents) as a % of net capitalization 14.4% 36.5% 38.5% 39.8% 39.9%
Depreciation (continuing operations) 23,491 23,117 21,963 24,089 23,641
Amortization of intangibles (continuing
operations) 1,354 2,706 914 1,113 764
Capital expenditures (continuing operations) 15,579 16,480 20,705 21,360 34,799
Acquisitions and other investments 1,400 5,699 17,622 25,654 -
Gross margin as % of net sales
(continuing operations) 16.4% 15.6% 16.8% 15.0% 10.9%
Effective income tax rate (continuing
operations, excluding special items) (a) 38.3% 41.5% 37.5% 37.0% 21.1%
Refer to Notes to Financial Tables on page 28.
SEGMENT TABLES
Tredegar Industries, Inc., and Subsidiaries
NET SALES
Segment 1994 1993 1992 1991 1990
(In thousands)
Plastics:
Ongoing operations (m) $276,730 $255,524 $274,606 $281,613 $ 273,983
Plants closed and businesses sold - - - - 10,717(n)
276,730 255,524 274,606 281,613 284,700
Metal Products:
Ongoing operations 222,761 190,690 170,623 157,573 193,347
Plants closed and businesses sold - - - - 27,837(n)
222,761 190,690 170,623 157,573 221,184
Technology (o) 2,717 2,994 - - -
Total (p) $502,208 $449,208 $445,229 $439,186 $ 505,884
OPERATING PROFIT
Segment 1994 1993 1992 1991 1990
(In thousands)
Plastics:
Ongoing operations $33,192 $22,649 $ 27,749 $ 23,638 $13,202
Plants closed and businesses sold - - - - (1,799)(n)
Unusual items (6,973)(c) (1,815)(d) (1,182)(e) (721)(f) (2,831)(g)
26,219 20,834 26,567 22,917 8,572
Metal Products:
Ongoing operations 10,955 8,141 4,693 (2,377) (1,713)
Plants closed and businesses sold - - - - (3,304)(n)
Unusual items - - - - (30,084)(g)
10,955 8,141 4,693 (2,377) (35,101)
Technology (o):
Ongoing operations (8,888) (9,704) (1,865) - -
Unusual items (9,521)(c) 2,263 (d) 1,092 (e) - -
(18,409) (7,441) (773) - -
Operating profit (loss) 18,765 21,534 30,487 20,540 (26,529)
Interest expense (b) 4,008 5,044 5,615 7,489 7,101
Corporate expenses, net 9,423 9,565(d) 8,930 9,064 9,791
Income (loss) from continuing operations before
income taxes 5,334 6,925 15,942 3,987 (43,421)
Income taxes 3,917 3,202 6,425 1,468 (14,734)
Income (loss) from continuing operations (a) 1,417 3,723 9,517 2,519 (28,687)
Income from discontinued operations (h) 37,218 6,784 5,795 3,104 4,001
Net income (loss) before extraordinary item and
cumulative effect of accounting changes $38,635 $ 10,507 $ 15,312 $ 5,623 ($24,686)
Refer to Notes to Financial Tables on page 28.
IDENTIFIABLE ASSETS
Segment 1994 1993 1992 1991 1990
(In thousands)
Plastics $164,242 $171,070 $170,066 $162,762 $176,282
Metal Products 119,944 120,454 122,109 121,416 116,391
Technology (o) 7,316 15,247 16,856 3,334 750
Identifiable assets 291,502 306,771 309,031 287,512 293,423
Net assets held for sale (q) 5,018 3,605 4,330 13,600 13,908
General corporate 21,825 12,031 11,745 9,947 8,937
Net assets of discontinued
operations (h) - 30,976 29,804 24,356 22,846
Total $318,345 $353,383 $354,910 $335,415 $339,114
DEPRECIATION AND AMORTIZATION
Segment 1994 1993 1992 1991 1990
(In thousands)
Plastics $15,697 $15,315 $13,996 $15,682 $13,602
Metal Products 7,285 7,512 8,178 8,831 10,236
Technology (o) 1,293 2,311 - - -
Subtotal 24,275 25,138 22,174 24,513 23,838
General corporate 570 685 703 689 567
Total $24,845 $25,823 $22,877 $25,202 $24,405
CAPITAL EXPENDITURES
Segment 1994 1993 1992 1991 1990
(In thousands)
Plastics $10,114 $ 9,810 $15,655 $12,952 $24,145
Metal Products 4,997 2,386 3,320 7,985 9,509
Technology (o) 277 1,844 1,414 - -
Subtotal 15,388 14,040 20,389 20,937 33,654
General corporate 191 2,440 316 423 1,145
Total capital expenditures 15,579 16,480 20,705 21,360 34,799
Acquisitions and other
investments 1,400 5,699 17,622 25,654 -
Total capital expenditures,
acquisitions and investments $16,979 $22,179 $38,327 $47,014 $34,799
Refer to Notes to Financial Tables on page 28.
SHAREHOLDER VALUE
Tredegar's primary objective is to enhance shareholder value. The ultimate
measure of value creation is total return on common stock. During 1994, the
total return on Tredegar's common stock was 17.4%. This compares favorably to
the negative total return for the S&P SmallCap 600(R) Index in which Tredegar is
included.
Key operational value drivers affecting total return include sales growth
rate, operating profit margin, income tax rate and fixed and working capital
investment. Tredegar attributes its favorable total return in 1994 primarily to
an increase in profits and cash flow in Film Products and Aluminum Extrusions,
and the positive reaction of its stock price to the "Dutch auction" tender offer
and subsequent share repurchases (see Shareholders' Equity on page 22). The
strong performance of our core businesses was partially offset by operating
losses in the Technology segment and disappointing performance in Molded
Products.
Tredegar's value creation efforts also link pay to performance, primarily
through the issuance of bonuses and stock options. The charts on this page
depict the relationship between CEO pay, incentives and selected performance
measures. Additional information on compensation paid to Mr. Gottwald is
included in Tredegar's 1995 proxy statement.
In addition to cash compensation, Mr. Gottwald was granted the following
stock options:
Per Share
Year Number of Options Exercise Price
1989 31,900 $16.7045
1992 30,000 $12.1250
1994 22,500 $15.1250
15,000 $24.0000
The per-share exercise price of the stock options was at least equal to the
market price of Tredegar common stock on the date of grant.
RESULTS OF OPERATIONS
1994 SUMMARY
Tredegar's 1994 earnings increased significantly over 1993 due to
divestiture-related gains and strong results in the company's core plastics and
aluminum businesses. Net income was $38.6 million or $3.73 per share versus
$9.5 million or 88 cents per share in 1993.
In the third quarter,Tredegar divested its Elk Horn Coal subsidiary for $71
million, realizing an after-tax gain of $25.7 million. Earlier in the
year, Tredegar sold its remaining oil and gas properties for $8 million,
realizing an after-tax gain of $3.9 million. Tredegar used the proceeds from
these transactions to repay debt and purchase shares of its common stock. The
Elk Horn divestiture completed Tredegar's exit from its energy businesses. The
Energy segment is being reported as discontinued operations. Details regarding
these divestitures, including combined financial statements for discontinued
operations, are presented in Note 2 on page 36.
The following analysis refers to Tredegar's continuing operations.
Net income from continuing operations in 1994 was $1.4 million or 13 cents
per share, compared with $3.7 million or 34 cents per share in 1993. Results for
1994 and 1993 include several special items that affect comparability between
periods.
Excluding special items, net income from continuing operations was $13.5
million or $1.30 per share, up significantly from $4.3 million or 39 cents per
share in 1993. The increase was due primarily to higher volumes in Film
Products and Aluminum Extrusions.
SPECIAL ITEMS
Special charges affecting continuing operations in 1994 totaled $16.5
million ($12.1 million after income taxes) and included:
(bullet) a third-quarter charge of $4.9 million ($3.1 million after taxes) for
the write-off of certain Molded Products goodwill
(bullet) a third-quarter charge of $2.1 million ($1.3 million after taxes) for
the planned shutdown of a Molded Products plant in Alsip, Illinois
(bullet) a first-quarter charge of $9.5 million ($7.6 million after taxes) for
the write-off of goodwill and other intangibles in APPX Software
The goodwill write-off in Molded Products resulted from continued
disappointing results in certain lines of business. The plant closing relates
to a planned transfer of business to a new Molded Products facility in Graham,
North Carolina, as well as other Molded Products facilities, in an effort to
reduce costs while improving service to customers in the Eastern United States.
The write-off in APPX Software is the result of management's determination
that income generated by the acquired products will not be sufficient to recover
the unamortized costs associated with the intangible software assets purchased
by Tredegar in December 1992. In addition, on January 31, 1995, APPX Software
announced a restructuring aimed at eliminating its operating losses, which were
$4.7 million ($3.1 million after income tax benefits or 30 cents per share) in
1994. While new product development activities will be curtailed, APPX Software
intends to continue to sell, maintain and support existing products. In
connection with the restructuring,Tredegar expects to recognize a charge ranging
from $2.1 million to $2.8 million ($1.4 million to $1.8 million after income tax
benefits) in the first quarter of 1995. Further details regarding the
restructuring are presented in Note 19 on page 46.
The goodwill and other intangibles written off in Molded Products and APPX
Software were being amortized over a remaining period of 5 to 8 years at an
annual rate of approximately $1.9 million after income taxes.
Special items affecting continuing operations in 1993 resulted in a net
charge of $452,000 ($594,000 after income taxes) and included:
(bullet) fourth-quarter charges of $1.8 million ($1.1 million after taxes) for
the sale of a Film Products plant in Flemington, New Jersey, and
$900,000 ($549,000 after taxes) for the reorganization of corporate
functions
(bullet) a third-quarter charge of $348,000 related to the adjustment of
deferred income tax balances for the one percent increase in the
federal income tax rate
(bullet) gains in the first and second quarters totaling $2.3 million ($1.4
million after taxes) on the sale of Emisphere Technologies, Inc.
("Emisphere") common stock
The sale of the Flemington facility in 1994 completed Film Products' exit
from the non-strategic, conventional films business (single layer, blown
polyethylene film used primarily for general purpose industrial packaging). In
July 1993, Film Products announced the planned closing of its Fremont,
California, plant and the consolidation of capacity at its facility in Tacoma,
Washington. The Fremont plant was expected to close by May 1994, but an
increase in sales and production volume and corresponding need for capacity
resulted in its continued operation in 1994. The plant ceased production in
December 1994. No provision for the Fremont shutdown was recorded in 1993 or
1994 since the estimated net realizable value of the facility exceeds the total
of its carrying value and expected shutdown and disposal costs.
1994 VERSUS 1993
REVENUES
Net sales from continuing operations increased 11.8% in 1994 due primarily
to higher sales in Aluminum Extrusions and Film Products, and the inclusion of
Polestar's full-year results. Polestar, acquired in July 1993, is an injection
molder of medical and electronic components. Sales for Brudi and Fiberlux also
increased. For further discussion, see segment information on pages 24-26.
OPERATING COSTS AND EXPENSES
The gross profit margin in 1994 was 16.4%, up from 15.6% in 1993. Higher
volume and improved capacity utilization in Aluminum Extrusions and Film
Products, and the inclusion of Polestar's full-year results, were the primary
drivers of this improvement.
Selling, general and administrative expenses were virtually unchanged due
to ongoing cost reduction efforts, despite normal inflation of 3% - 4%.
Research and development expenses decreased 9.5% due to lower spending in
Film Products, partially offset by higher spending in Molecumetics.
Unusual charges totaling $16.5 million in 1994 represent the pretax effect
of special items described on page 18.
INTEREST EXPENSE
Interest expense has been allocated between continuing operations and
discontinued operations based on relative capital employed (see Note 2 on page
36). Interest expense for continuing operations decreased 20.6% due to lower
debt levels, partially offset by higher interest rates. The weighted average
interest rate on consolidated debt outstanding during 1994 was 6.2% compared
with 5.6% in 1993. Average consolidated debt outstanding during the year
declined 35.7% to $61.6 million, down from $95.8 million. Divestiture proceeds
and cash generated by operating activities were used to achieve this
significant debt reduction. Interest expense of $337,000 and $653,000 was
allocated to discontinued operations in 1994 and 1993, respectively.
INCOME TAXES
The effective tax rate for continuing operations (excluding special items)
decreased to 38.3% in 1994 from 41.5% in 1993. The higher rate in 1993 was due
primarily to the combined effects of non-deductible goodwill amortization and
relatively low income. See Note 16 on page 44 for additional tax rate
information.
1993 VERSUS 1992
REVENUES
Net sales from continuing operations increased 1% in 1993 due to
significantly higher volume in Aluminum Extrusions. Plastics revenues
declined, particularly in Molded Products. For further discussion, see segment
information on pages 24-26.
OPERATING COSTS AND EXPENSES
Tredegar's gross profit margin decreased to 15.6% in 1993 from 16.8% in
1992. Profit margins were hurt by lower volume and higher costs related to
unused capacity in Film Products and Molded Products, and the inclusion of APPX
Software's operating losses in 1993 results. The unfavorable effect of these
items on gross margin was partially offset by higher volumes and improved
manufacturing efficiencies, including lower scrap rates and customer returns, in
Aluminum Extrusions.
Selling, general and administrative expenses for continuing operations
decreased slightly in 1993 due to cost reduction efforts, partially offset by
the inclusion in 1993 of APPX Software.
Research and development expenses increased to $9.1 million in 1993 from
$5 million in 1992 due to higher spending at Molecumetics, software development
costs at APPX Software and product development efforts in Film Products.
Unusual charges of $452,000 in 1993 represent the pretax effect of special
items described on page 18.
INTEREST EXPENSE
Interest expense allocated to continuing operations declined 10% in 1993
due to lower interest rates and lower outstanding debt. The weighted average
interest rate on consolidated debt outstanding was 5.6% for the year, compared
with 6.1% in 1992. Average consolidated debt outstanding during these periods
totaled $95.8 million and $101.3 million, respectively. Interest expense of
$653,000 and $661,000 was allocated to discontinued operations in 1993 and
1992, respectively.
INCOME TAXES
The effective tax rate for continuing operations (excluding special items)
increased to 41.5% in 1993 from 37.5% in 1992 due to a higher state income tax
rate, an increase in non-deductible goodwill amortization and relatively lower
income, partially offset by the research and development tax credit. See Note
16 on page 44 for additional effective tax rate information.
EXTRAORDINARY ITEM
On June 16, 1993,Tredegar paid a prepayment penalty to an institutional
lender in the amount of $1.8 million ($1.1 million after income tax benefits) to
refinance its $35 million, 8.6% fixed-rate debt that was due in September 1994.
The new note carries a fixed rate of 7.2% and matures in June 2003. Annual
principal payments of $5 million will begin in 1997.
ACCOUNTING CHANGES
Tredegar provides 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 retiring after July 1, 1993,
receiving a fixed subsidy from Tredegar to cover a portion of their health care
premiums. Effective January 1, 1993, Tredegar adopted Statement of Financial
Accounting Standards ("SFAS") No. 106,"Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 requires recognition of the cost of
postretirement benefits during the employees' service periods. Previously, such
expenses were accounted for on a cash basis. Tredegar elected to immediately
recognize the liability for prior years' service as the cumulative effect of a
change in accounting principle. Accordingly, in the first quarter of 1993,
Tredegar recorded an unfunded, accumulated postretirement benefit obligation of
$6.7 million and a noncurrent, deferred income tax benefit of $2.5 million,
resulting in an after-tax charge of $4.2 million.
Effective January 1, 1993, Tredegar adopted SFAS No. 109,"Accounting for
Income Taxes." SFAS No. 109 requires the asset and liability method of
accounting for deferred income taxes, whereby enacted statutory tax rates are
applied to the differences between the financial reporting and tax bases of
assets and liabilities. The cumulative effect of this change in accounting
principle was a reduction in deferred income taxes and a corresponding increase
in net income of $4.3 million in the first quarter of 1993.
FINANCIAL CONDITION
ASSETS
Total assets at December 31, 1994, were $318.4 million, a decrease of $35
million from December 31, 1993. The decrease is primarily attributable to the
write-offs of goodwill and other intangibles in APPX Software and Molded
Products, and the use of divestiture proceeds to repay debt and purchase
Tredegar common stock. In addition, depreciation related to continuing
operations exceeded capital expenditures by approximately $7.9 million. Accounts
receivable and inventories increased primarily as a result of higher sales. The
ratio of current assets to current liabilities was 1.9 to 1 at December 31,
1994, compared with 2.1 to 1 at December 31, 1993.
LIABILITIES
Total liabilities decreased to $146.5 million at December 31, 1994, from
$184.3 million at December 31, 1993, due primarily to the repayment of debt ($59
million) with divestiture proceeds and cash generated from operating activities.
Higher accounts payable reflects higher raw material costs not fully reflected
in inventories as a result of the LIFO pricing method. Other noncurrent
liabilities increased as a result of a $6.2 million charge ($4 million after
income tax benefits) recognized for the present value of the unfunded obligation
under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act") assumed
by Tredegar in the divestiture of Elk Horn. This charge was reflected as a
reduction to the gain on the disposal. The noncurrent deferred income tax
liability declined primarily as a result of higher depreciation for financial
reporting purposes than tax purposes, and the reversal of deferred tax
liabilities associated with the write-off of intangibles.
On August 19, 1994, Tredegar used a portion of the proceeds from the Elk
Horn divestiture to prepay its $35 million variable-rate term loan due June 7,
1997. On August 18 and 19, 1994,Tredegar established two new revolving credit
facilities that permit it to borrow up to $235 million (no amounts borrowed at
December 31, 1994) with $200 million maturing on August 18, 1998, and $35
million maturing on August 19, 1999. In connection with these new
agreements, Tredegar terminated its $180 million facility that was due June 16,
1996. Tredegar's total borrowing capacity is limited by loan covenants,
including a covenant that limits the maximum debt-to-total capitalization ratio
to 60%. Under this restriction, Tredegar had credit available of $219.8 million
at December 31, 1994. See Note 10 on page 39 for additional information
concerning Tredegar's credit agreements.
Net debt (debt less cash and cash equivalents) as a percentage of net
capitalization was 14.4% and 36.5% at December 31, 1994 and 1993,
respectively. The average interest rate on debt outstanding at December 31,
1994, was 7.1% compared with 5.3% at the end of 1993. The higher rate reflects
proportionally higher fixed-rate debt. The average yield on cash and cash
equivalents at December 31, 1994 was 6.2%. There were no balances of cash and
cash equivalents at December 31, 1993.
SHAREHOLDERS' EQUITY
On August 29, 1994, Tredegar's Board of Directors authorized a "Dutch
auction" tender offer for up to one million shares of Tredegar's common stock at
prices ranging from $17 to $19 per share. The offer expired on October 6, 1994.
Because more than one million shares were tendered, Tredegar purchased 1,211,857
shares, the maximum permitted without requiring an extension of the offer. The
purchase price was $18.25 per share. The total cost to purchase the tendered
shares was $22.5 million. In addition, during 1994 Tredegar purchased 698,382
shares of its common stock in the open market and in privately negotiated
transactions for $11.6 million. In aggregate, Tredegar purchased 1,910,239
shares or 18% of its common stock in 1994 for $34.1 million, or $17.85 per
share.
At December 31, 1994, Tredegar had 8,992,258 shares of common stock
outstanding with a total market capitalization of $156.2 million compared to
10,894,904 shares outstanding at December 31, 1993, and a total market
capitalization of $163.4 million. Under a standing authorization from its Board
of Directors, Tredegar may purchase an additional 1.4 million shares in the open
market or in privately negotiated transactions at prices management deems
appropriate. See Note 12 on page 41 for information regarding stock options.
CASH FLOWS
Overall cash and cash equivalents increased $9 million in 1994. The major
sources of cash during 1994 were the divestiture of Elk Horn ($67.5 million
after minority interests and transaction costs), cash from continuing operating
activities in excess of capital expenditures and dividends ($21 million), cash
from discontinued operating activities in excess of capital expenditures ($3.5
million, including $8 million from the liquidation of coal trading working
capital and income taxes paid on divestiture gains), proceeds from the sale of
Tredegar's remaining oil and gas properties ($8 million), and proceeds from
other property disposals ($3.5 million) related primarily to facilities
previously shut down. Cash was used primarily to repay debt ($59 million), to
purchase 1,910,239 shares of Tredegar common stock ($34.1 million) and for
technology-related investments in which Tredegar's ownership is equal to or less
than 5% ($1.4 million).
Net cash provided by continuing operations increased to $39.1 million in
1994, compared with $17.6 million in 1993. The increase was due primarily to
improved operating results and better working capital management. Net cash
provided by discontinued operations decreased to $3.4 million in 1994 from $4.3
million in 1993 due to lower operating profits resulting from divestitures and
income taxes paid on divestiture-related gains, partially offset by the
liquidation of working capital from Tredegar's coal trading business.
Net cash used in investing activities of continuing operations decreased to
$13.3 million in 1994 from $14.2 million in 1993 due primarily to lower capital
expenditures. Capital expenditures for continuing operations of $15.6 million
and $16.5 million in 1994 and 1993, respectively, represent primarily the
ongoing fixed capital required to support Tredegar's business units at their
current operating levels. Net cash provided by investing activities of
discontinued operations in 1994 increased significantly over 1993 as Tredegar
completed the disposal of its energy businesses and received proceeds of
approximately $75.4 million.
In 1993, overall net cash provided by consolidated operating activities
exceeded net cash used in consolidated investing activities by $7.9 million.
The excess cash was sufficient to pay dividends of $3.3 million and to repay
$4.5 million of debt.
Net cash from continuing operations decreased to $17.6 million in 1993 from
$30.9 million in 1992 due to lower operating results and additional working
capital investment to support higher sales at the end of the year. Net cash
used in 1993 for the prepayment penalty on extinguishment of debt was $1.1
million. Net cash provided by discontinued operating activities increased to
$4.3 million in 1993 from $536,000 in 1992 due to lower incremental working
capital investment in the coal trading business.
Net cash used in investing activities of continuing operations declined to
$14.2 million in 1993 from $29.8 million in 1992 as a result of lower capital
expenditures and lower spending for acquisitions. Proceeds from asset disposals
totaled $8.6 million in 1993 and $9.2 million in 1992. The decrease in capital
expenditures in 1993 for continuing operations was primarily due to unfavorable
market conditions in Film Products and Molded Products, resulting in unused
capacity. During the 1990-1992 period, Tredegar expanded capacity in Film
Products. Net cash was provided by investing activities of discontinued
operations in 1993 due to the sale for $1.7 million of certain oil and gas
properties, partially offset by capital expenditures.
In 1992, overall net cash provided by consolidated operating activities
exceeded capital expenditures and dividends by $7.8 million. This excess cash
flow, combined with proceeds from asset disposals, net borrowings and cash
available from 1991, funded acquisitions and other investments of $17.6
million.
Normal operating cash requirements over the next 3 to 5 years are expected
to be met from continuing operations. The amount and timing of any additions to
capital will depend on Tredegar's specific cash requirements and the cost of
such capital.
BUSINESS SEGMENT REVIEW
PLASTICS SEGMENT
The Plastics segment is composed of the Film Products division, Tredegar
Molded Products Company and Fiberlux, Inc. Film Products and Molded Products
manufacture a wide range of products including specialty films, injection-molded
products and custom injection molds. Broad application for these products is
found in films for packaging, medical, industrial, agricultural and disposable
personal products, including diapers, and in molded products for industrial,
household, personal care, medical and electronic products. Fiberlux produces
vinyl extrusions, windows and patio doors. Products are produced at various
locations throughout the United States and are sold both directly and through
distributors. Tredegar also has films plants located in the Netherlands and
Brazil, where it produces films primarily for the European and Latin American
markets.
Film Products is the largest U.S. supplier of embossed and permeable films
for disposable personal products. In each of the last three years, this class
of products accounted for more than 20% of the consolidated revenues of
Tredegar.
Film Products supplies embossed films for use as backsheet in such
disposable products as baby diapers and adult incontinent products, feminine
hygiene products and hospital underpads. Film Products' primary customer for
embossed films for backsheet is the Procter & Gamble Company ("P&G"), the
leading disposable diaper manufacturer.
Film Products also supplies permeable films to P&G for use as liners in
adult incontinent products, feminine hygiene products and hospital underpads.
In addition, P&G purchases molded plastic products from Molded Products. 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 of business associated with P&G would have a material
adverse effect on Tredegar's business.
SALES
Tredegar Film Products' sales improved in 1994 due to higher domestic back-
sheet and permeable film volume, partially offset by the exit in early 1994 from
the conventional films business. Higher volumes in industrial films and in
foreign operations also contributed to the improvement in sales. While selling
prices began increasing at year-end due to higher raw material costs, average
prices for 1994 were relatively flat. Film Products' 1993 sales were down due
primarily to lower volume in industrial films, domestic permeable films,
domestic backsheet film for private label manufacturers and the discontinuance
of certain unprofitable agricultural product lines. The volume decrease in 1993
was partially offset by higher sales volume from foreign operations and
domestic backsheet film supplied to P&G.
Tredegar Molded Products' sales increased in 1994 due to the inclusion of
Polestar for 12 months in 1994 versus 5 months in 1993. Packaging, industrial
and tooling sales were virtually unchanged from 1993 levels. Molded Products'
1993 sales declined due to significantly lower technical services revenues and
lower volume in tooling, packaging and industrial products, partially offset by
the inclusion of the Polestar business since its acquisition date of July 31,
1993.
Fiberlux's sales increased in both 1994 and 1993 due to improved building
and construction markets and new product introductions.
OPERATING PROFIT
Excluding unusual or special items (see page 18), Plastics segment
operating profit increased 46.5% over 1993 due primarily to higher diaper
backsheet and permeable films volume, resulting in greater capacity utilization
and higher margins. Industrial films, Polestar and Fiberlux also contributed to
the improvement in operating results. Ongoing cost reduction programs were
another important performance driver.
Plastics segment operating profit (excluding unusual or special items) in
1993 declined $5.1 million, or 18.4%, from 1992 due to lower profits in both
Film Products and Molded Products. A major cause of the decline in Film
Products was disappointing demand for industrial films, permeable films for
domestic markets, and backsheet film for private-label diaper manufacturers.
In recent years, Film Products has invested in new capacity and printing
capabilities aimed at meeting anticipated customer needs. These expected sales
did not materialize in 1993 and the costs associated with these investments
reduced profitability.
Molded Products' operating profit in 1993 declined due to lower volume,
especially lower tooling and technical sales, and higher conversion costs.
The decline was partially off-set by the inclusion of Polestar results since
July 31, 1993, the effective date of acquisition.
IDENTIFIABLE ASSETS
Plastics segment assets decreased $6.8 million in 1994 due primarily to
depreciation in excess of capital expenditures, the third-quarter write-off of
certain Molded Products goodwill, and the writedown of the Molded Products plant
in Alsip to estimated net realizable value, partially offset by higher
accounts receivable and inventories supporting higher sales. The 1993 increase
in Plastics segment identifiable assets was primarily due to the acquisition of
Polestar.
DEPRECIATION, AMORTIZATION AND CAPITAL EXPENDITURES
Depreciation increased 2.5% in 1994 as higher depreciation at the films
plant in Tacoma and the additional depreciation at Polestar were partially
offset by the effects of plant closings. Plastics segment capital spending
increased 3.1% in 1994 due to the upgrade of two extrusion lines in Tacoma,
capacity expansions at Polestar, and machine upgrading and replacement at other
Molded Products facilities. No significant capital spending has yet occurred at
the new Molded Products facility in Graham, North Carolina.
Depreciation increased in 1993 due to the start-up of the Tacoma plant.
Plastics capital expenditures decreased in 1993 due to unused capacity in Film
Products and Molded Products as a result of unfavorable market conditions and
higher spending for capacity expansions in Film Products from 1990 through 1992.
METAL PRODUCTS SEGMENT
The Metal Products segment is comprised of the Aluminum Extrusions business
and Brudi, Inc. Aluminum Extrusions produces soft alloy aluminum extrusions for
sale directly to fabricators and distributors that serve primarily the building
and construction industry, as well as transportation and consumer durables
markets. Brudi, acquired by Tredegar in April 1991, produces steel attachments
and uprights for sale primarily to dealers and original equipment manufacturers
of forklift trucks.
SALES
Metal Products sales increased 16.8% over 1993 due to higher volume and
higher sales prices in Aluminum Extrusions. Improved economic conditions in
construction and automotive markets enabled Tredegar's extrusions plants to
operate at near-capacity levels. Selling prices and raw material costs increased
significantly during 1994. Increased levels of secondary operations (cutting,
drilling, etc.) also contributed to the sales improvement. Brudi's sales also
increased over 1993, reflecting an increase in overall forklift truck sales.
Metal Products sales increased 11.8% in 1993 due primarily to higher volume
in Aluminum Extrusions. Improved economic conditions and efforts to increase
volume with new and existing customers contributed to the improvement.
OPERATING PROFIT
Driven by an 8.8% increase in Aluminum Extrusions volume, Metal Products
operating profit increased 34.6% in 1994. Brudi's operating profit declined due
to lower margins and an increase in its provision for doubtful accounts,
partially offset by lower selling, general and administrative expenses relative
to sales.
Metal Products operating profit increased significantly in 1993, driven by
an 11% increase in volume in Aluminum Extrusions. Operating profits were also
up due to improved manufacturing efficiency, reduced scrap rates and customer
returns. Selling, general and administrative costs in Aluminum Extrusions also
declined.
IDENTIFIABLE ASSETS
Metal Products identifiable assets decreased in 1994 and in 1993 due to
depreciation in excess of capital spending and better management of inventories,
partially offset by higher receivables to support higher sales levels.
DEPRECIATION, AMORTIZATION AND CAPITAL EXPENDITURES
Capital expenditures increased to $5 million in 1994 from $2.4 million in
1993, and consisted of ongoing fixed capital programs that are necessary to
support current operating levels. Capital spending in Metal Products declined
in 1993 as a result of higher capital spending in prior years.
Although consistently higher than capital spending, depreciation has
decreased in each of the last five years as capital spending reached a peak in
1990.
TECHNOLOGY SEGMENT
The Technology segment is comprised primarily of APPX Software, a supplier
of flexible software development environments and business applications
software, Molecumetics, which conducts rational drug design research using
synthetic chemistry techniques, and certain technology-related investments in
which Tredegar's ownership is equal to or less than 5% (see Note 7 on page 38
for additional information). See discussion regarding the restructuring of APPX
Software on page 18.
The Technology segment had sales of $2.7 million in 1994, down slightly
from 1993. Technology segment sales consist primarily of revenues from APPX
Software.
Excluding unusual or special items (see page 18), the Technology segment
generated operating losses of $8.9 million in 1994 compared to operating
losses of $9.7 million in 1993.
Technology segment identifiable assets and depreciation and amortization
decreased due primarily to the first-quarter write-off of goodwill and other
intangibles in APPX Software. Technology segment identifiable assets in 1994
also reflect technology-related investments of $1.4 million. The 1993
depreciation and amortization primarily relates to the amortization of APPX
Software intangibles acquired in December 1992.
SELECTED QUARTERLY FINANCIAL DATA
Tredegar Industries, Inc., and Subsidiaries
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per-share amounts)
(Unaudited)
1994
Net sales (continuing operations) $120,994 $122,913 $132,191 $126,110
Gross profit (continuing operations) 18,744 20,229 21,728 21,684
Operating profit (loss) (continuing operations) (1,239) 8,466 2,918 8,620
Income (loss) from continuing operations (r) (5,093) 3,074 (278) 3,714
Income from discontinued operations (h) 8,693 1,772 26,753 -
Net income 3,600 4,846 26,475 3,714
Earnings (loss) per share:
Continuing operations (r) (.47) .29 (.02) .40
Discontinued operations (h) .80 .16 2.52 -
Net income .33 .45 2.50 .40
Shares used to compute earnings per share 10,896 10,722 10,590 9,205
1993
Net sales (continuing operations) $111,198 $108,042 $113,922 $116,046
Gross profit (continuing operations) 17,184 16,574 18,095 18,069
Operating profit (continuing operations) 6,226 4,802 5,821 4,685
Income from continuing operations (r) 1,710 674 1,145 194
Income from discontinued operations (h) 1,841 2,154 1,162 1,627
Net income before extraordinary item and cumulative
effect of changes in accounting principles 3,551 2,828 2,307 1,821
Net income 3,701 1,713 2,307 1,821
Earnings per share:
Continuing operations (r) .16 .06 .10 .02
Discontinued operations (h) .17 .20 .11 .15
Before extraordinary item and cumulative
effect of changes in accounting principles .33 .26 .21 .17
Net income .34 .16 .21 .17
Shares used to compute earnings per share 10,895 10,895 10,895 10,895
Refer to Notes to Financial Tables on page 28.
NOTES TO FINANCIAL TABLES
(In thousands, except per-share amounts)
(a) Income (loss) and earnings (loss) per share from continuing operations,
adjusted for special items affecting the comparability of operating
results between years, are presented below:
1994 1993 1992 1991 1990
Income (loss) from continuing operations
as reported $ 1,417 $3,723 $ 9,517 $2,519 ($28,687)
After-tax effects of special items related to
continuing operations:
Unusual charges, net (c-g) 12,051 246 502 447 24,424
Impact on deferred taxes of 1% increase
in federal income tax rate - 348 - - -
Income from continuing operations
as adjusted for special items $13,468 $4,317 $10,019 $2,966 ($4,263)
Earnings (loss) per share from continuing operations:
As reported $ .13 $ .34 $ .88 $ .24 ($2.54)
As adjusted for special items $ 1.30 $ .39 $ .93 $ .27 ($.38)
Included in the above amounts are net losses (excluding special items) of
the Technology segment of $5,791 ($.56 per share), $6,568 ($.60 per share)
and $1,349 ($.12 per share) in 1994, 1993 and 1992, respectively. See page
18 and Note 19 on page 46 regarding the restructuring of APPX Software.
(b) Interest expense has been allocated between continuing and discontinued
operations based on relative capital employed. See Note 2 on page 36.
(c) Unusual items in 1994 include the write-off of certain goodwill and
intangibles in APPX Software ($9,521), the write-off of certain goodwill in
Molded Products ($4,873) and the estimated costs related to the closing of a
Molded Products plant in Alsip, Illinois ($2,100).
(d) Unusual items in 1993 include estimated costs related to the sale of a Film
Products plant in Flemington, New Jersey ($1,815), and the reorganization of
corporate functions ($900), partially offset by the gain on the sale of
Tredegar's remaining investment in Emisphere ($2,263).
(e) Unusual items in 1992 include the write-off of certain goodwill in Molded
Products ($1,182), partially offset by the gain on the sale of a portion of
an investment in Emisphere ($1,092).
(f) Unusual items in 1991 include costs related to plant closings in Molded
Products ($4,412) offset by a credit ($2,797) related to management's
decision to continue operating the vinyl extrusions business, and the gain
on the sale of Molded Products' beverage closure business ($894).
(g) Unusual items in 1990 include costs related to divestitures and
reorganization, including results of operations from August 1. The Metal
Products segment also includes provisions for environmental review and
cleanup, and costs related to certain legal proceedings for ongoing
operations.
(h) On August 16, 1994, Tredegar completed the divestiture of its coal
subsidiary, The Elk Horn Coal Corporation. On February 4, 1994, Tredegar
sold its remaining oil and gas properties. As a result of these events,
Tredegar is reporting its Energy segment as discontinued operations. See
Note 2 on page 36.
(i) Total return to shareholders is computed as the sum of the change in stock
price during the year plus dividends per share, divided by the stock price
at the beginning of the year.
(j) Capital employed for continuing operations is debt plus shareholders' equity
minus net assets of discontinued operations minus cash and cash equivalents.
(k) Unleveraged after-tax earnings from continuing operations (excluding special
items) is net income (loss) from continuing operations plus after-tax
interest expense minus after-tax interest income plus after-tax special
items.
(l) Return on average capital employed for continuing operations (excluding
special items) is unleveraged after-tax earnings from continuing operations
(excluding special items) divided by average capital employed for continuing
operations.
(m) Net sales include sales to P&G totaling $163,120, $145,631 and $145,560 in
1994, 1993 and 1992, respectively.
(n) Includes results to August 1.
(o) In 1993, Tredegar began reporting its business development activities,
primarily investments in high-technology businesses (APPX Software,
Molecumetics, Emisphere and technology-related investments in which
Tredegar's ownership is equal to or less than 5%), as a separate segment.
See page 18 and Note 19 on page 46 regarding the restructuring of APPX
Software.
(p) Export sales totaled $63,345, $52,642 and $48,566 in 1994, 1993 and 1992,
respectively. The majority of these export sales were made by the Plastics
segment.
(q) Net assets held for sale include $1,721 in current assets in 1992 and
$5,018, $3,605 and $2,609 in non-current assets in 1994, 1993 and 1992,
respectively.
(r) Quarterly income and earnings per share from continuing operations, adjusted
for special items affecting the comparability of operating results between
quarters, are presented below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1994
Income $2,549 $3,074 $ 4,131 $ 3,714
Earnings per share .23 .29 .39 .40
1993
Income $ 760 $ 214 $ 1,493 $ 1,850
Earnings per share .07 .02 .13 .17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Tredegar Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Tredegar
Industries, Inc., and Subsidiaries ("Tredegar") as of December 31, 1994 and
1993, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of Tredegar's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statments. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tedegar as of
December 31, 1994 and 1993, and the consolidated results of their operations and
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 14 and 16 to the consolidated financial statments,
effective as of the beginning of 1993, Tredegar changed its method of accounting
for postretirement benefits other than pensions to conform with Statement of
Financial Accounting Standards No. 106 and its method of accounting for income
taxes to conform with Statement of Financial Accounting Standards No. 109.
(signature of Coopers & Lybrand L.L.P.)
Richmond, Virginia
January 16, 1995, except for the information presented in Note 19, for which the
date is January 31, 1995.
MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS
Tredegar's management has prepared the financial statements and related
notes appearing on pages 30 through 46 in conformity with generally accepted
principles. In so doing, management makes informed judgments and estimates of
the expected effects of events and transactions. Financial data appearing
elsewhere in this annual report are consistent with these financial statements.
Tredegar maintains a system of internal controls to provide reasonable, but
not absolute assurance of the reliability of the financial records and the
protection of assets. The internal control system is supported by written
policies and procedures, careful selection and training of qualified personnel
and an extensive internal audit program.
These financial statements have been audited by Coopers & Lybrand L.L.P.,
independent certified public accountants. Their audit was made in accordance
with generally accepted auditing standards and included a review of Tredegar's
internal accounting controls to the extent considered necessary to determine
audit procedures.
The Audit Committee of the Board of Directors, composed of outside
directors only, meets with management, internal auditors and the independent
accountants to review accounting, auditing and financial reporting matters. The
independent accountants are appointed by the Board on recommendation of the
Audit Committee, subject to shareholder approval.
CONSOLIDATED STATEMENTS OF INCOME
Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1994 1993 1992
(In thousands, except per-share amounts)
REVENUES:
Net sales $502,208 $449,208 $445,229
Other (expense) income, net (296) (387) 226
Total 501,912 448,821 445,455
COSTS AND EXPENSES:
Cost of goods sold 419,823 379,286 370,652
Selling, general and administrative 47,978 47,973 48,130
Research and development 8,275 9,141 5,026
Interest 4,008 5,044 5,615
Unusual items 16,494 452 90
Total 496,578 441,896 429,513
Income from continuing operations
before income taxes 5,334 6,925 15,942
Income taxes 3,917 3,202 6,425
Income from continuing operations 1,417 3,723 9,517
Discontinued operations:
Income from energy segment operations 4,220 6,784 5,795
Gain on disposition of interest in The Elk Horn
Coal Corporation (net of income tax of $16,224) 25,740 - -
Gain on sale of remaining oil & gas properties
(net of income tax of $2,121) 3,938 - -
Deferred tax benefit on the difference between
financial reporting and income tax basis of
The Elk Horn Coal Corporation 3,320 - -
Net income before extraordinary item and
cumulative effect of accounting changes 38,635 10,507 15,312
Extraordinary item-prepayment premium on
extinguishment of debt (net of income
tax benefit of $685) - (1,115) -
Cumulative effect of accounting changes:
Postretirement benefits other than pensions
(net of income tax benefit of $2,545) - (4,150) -
Income taxes - 4,300 -
NET INCOME $ 38,635 $ 9,542 $ 15,312
EARNINGS PER SHARE:
Continuing operations $ .13 $ .34 $ .88
Discontinued operations 3.60 .63 .53
Before extraordinary item and cumulative effect
of accounting changes 3.73 .97 1.41
Extraordinary item - (.10) -
Cumulative effect of accounting changes - .01 -
Net income $ 3.73 $ .88 $ 1.41
See accompanying notes to financial statements.
CONSOLIDATED BALANCE SHEETS
Tredegar Industries, Inc., and Subsidiaries
December 31 1994 1993
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 9,036 $ -
Accounts and notes receivable 73,248 70,173
Inventories 35,369 34,211
Income taxes recoverable 2,534 -
Deferred income taxes 14,014 11,555
Prepaid expenses and other 696 881
Total current assets 134,897 116,820
Property, plant and equipment, at cost:
Land and land improvements 6,789 7,194
Buildings 50,181 46,608
Machinery and equipment 261,154 270,131
Total property, plant and equipment 318,124 323,933
Less accumulated depreciation and amortization 194,505 188,531
Net property, plant and equipment 123,619 135,402
Other assets and deferred charges 29,073 24,456
Goodwill and other intangibles 30,756 45,729
Net assets of discontinued operations - 30,976
Total assets $318,345 $ 353,383
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,486 $ 19,376
Accrued expenses 41,288 35,380
Total current liabilities 72,774 54,756
Long-term debt 38,000 97,000
Deferred income taxes 20,336 23,108
Other noncurrent liabilities 15,357 9,431
Total liabilities 146,467 184,295
Commitments and contingencies
Shareholders' equity:
Common stock (no par value):
Authorized 50,000,000 shares;
Issued and outstanding - 8,992,258 shares
in 1994 and 10,894,904 shares in 1993 136,150 170,140
Foreign currency translation adjustment 327 (283)
Retained earnings (deficit) 35,401 (769)
Total shareholders' equity 171,878 169,088
Total liabilities and shareholders' equity $318,345 $ 353,383
See accompanying notes to financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Tredegar Industries, Inc., and Subsidiaries
Retained Foreign Total
Common Stock Earnings Currency Shareholders'
Years Ended December 31, 1994, 1993 and 1992 Shares Amount (Deficit) Translation Equity
(In thousands, except share and per-share data)
Balance December 31, 1991 10,894,357 $170,131 ($20,391) $ 483 $150,223
Net income - - 15,312 - 15,312
Cash dividends declared ($.24 per share) - - (2,616) - (2,616)
Issued upon exercise of SARs 44 - - - -
Foreign currency translation adjustment - - - (522) (522)
Balance December 31, 1992 10,894,401 170,131 (7,695) (39) 162,397
Net income - - 9,542 - 9,542
Cash dividends declared ($.24 per share) - - (2,616) - (2,616)
Issued upon exercise of SARs 503 9 - - 9
Foreign currency translation adjustment - - - (244) (244)
Balance December 31, 1993 10,894,904 170,140 (769) (283) 169,088
Net income - - 38,635 - 38,635
Cash dividends declared ($.24 per share) - - (2,465) - (2,465)
Repurchases of Tredegar common stock (1,910,239) (34,105) - - (34,105)
Issued upon exercise of stock options 6,000 87 - - 87
Issued upon exercise of SARs 1,593 28 - - 28
Foreign currency translation adjustment - - - 610 610
Balance December 31, 1994 8,992,258 $136,150 $ 35,401 $ 327 $171,878
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1994 1993 1992
(In thousands)
Cash flows from operating activities:
Continuing operations:
Income from continuing operations $ 1,417 $ 3,723 $9,517
Adjustments for noncash items:
Depreciation 23,491 23,117 21,963
Amortization of intangibles 1,354 2,706 914
Write-off of intangibles 14,394 - 1,576
Deferred income taxes (6,907) (1,418) (98)
Accrued pension income and
postretirement benefits (623) (621) (1,086)
Loss on divestitures 2,100 1,815 -
Gain on sale of investments - (2,263) (1,092)
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts and notes receivable (3,075) (7,194) 723
Inventories (1,158) (2,480) 113
Income taxes recoverable and other
prepaid expenses (2,349) 3,347 (1,609)
Accounts payable and accrued expenses 12,311 (1,701) 1,602
Other, net (1,873) (1,435) (1,595)
Net cash provided by continuing operating
activities 39,082 17,596 30,928
Net cash used for extraordinary item - (1,115) -
Net cash provided by discontinued operating
activities 3,435 4,318 536
Net cash provided by operating activities 42,517 20,799 31,464
Cash flows from investing activities:
Continuing operations:
Capital expenditures (15,579) (16,480) (20,705)
Acquisitions (net of $398 and $294 cash
acquired in 1993 and 1992, respectively) - (5,099) (15,922)
Investments (1,400) (600) (1,700)
Proceeds from sales of investments - 5,263 1,992
Property disposals 3,519 3,373 4,025
Proceeds from sales of businesses - - 3,167
Other, net 186 (613) (661)
Net cash used in investing activities
of continuing operations (13,274) (14,156) (29,804)
Discontinued operations:
Capital expenditures (16) (417) (341)
Property disposals 7,924 1,711 152
Proceeds from sale of business 67,485 - -
Net cash provided by (used in) investing
activities of discontinued operations 75,393 1,294 (189)
Net cash provided by (used in)
investing activities 62,119 (12,862) (29,993)
Cash flows from financing activities:
Dividends paid (2,465) (3,270) (2,616)
Net (decrease) increase in borrowings (59,000) (4,500) 1,500
Repurchases of Tredegar common stock (34,105) - -
Other, net (30) (167) (855)
Net cash used in financing activities (95,600) (7,937) (1,971)
Increase (decrease) in cash and cash equivalents 9,036 - (500)
Cash and cash equivalents at beginning of year - - 500
Cash and cash equivalents at end of year $ 9,036 $ - $ -
Supplemental cash flow information:
Interest payments (net of amount capitalized) $ 4,412 $ 8,332 $ 6,331
Income tax payments, net $ 26,388 $ 6,673 $ 8,051
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
Tredegar Industries, Inc., and Subsidiaries
(In thousands, except share and per-share amounts)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Tredegar Industries, Inc., and subsidiaries ("Tredegar") is a diversified
manufacturer of plastics and metal products. Tredegar also has interests in
various technologies, including computer software and rational drug design
research. In August 1994, Tredegar completed the divestiture of its energy
businesses (see Note 2 on page 36).
During 1993, Tredegar acquired the assets of Polestar Plastics, Inc., a
custom molder of precision plastic parts for the medical and electronics
markets. During 1992, Tredegar acquired APPX Software, Inc., and the assets of
Folium Plasticos Especiais (plastic film) and Fielden Engineers, Ltd. (materials
handling). These acquisitions were accounted for using the purchase method;
accordingly, the assets and liabilities of the acquired entities have been
recorded at their estimated fair value at the date of acquisition. The excess
of the purchase price over the estimated fair value of the identifiable net
assets acquired had an original straight-line amortization period of 7 to 15
years. The operating results of entities acquired have been included in the
Consolidated Statements of Income since the date of acquisition.
CONSOLIDATION
The consolidated financial statements include the accounts and operations
of Tredegar and all of its subsidiaries. Intercompany accounts and transactions
within Tredegar have been eliminated. Certain previously reported amounts have
been reclassified to conform to the 1994 presentation.
REVENUE RECOGNITION
Revenue from the sale of products is recognized when title and risk of loss
have transferred to the buyer, which is generally when product is shipped.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand in excess of daily
operating requirements and highly liquid investments with maturities of three
months or less when purchased. At December 31, 1994, Tredegar had approximately
$9,000 invested primarily in securities with maturities of one month or less.
There were no funds invested at December 31, 1993.
Tredegar's 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 Tredegar's policy are safety of principal and liquidity.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost principally
determined on the last-in, first-out ("LIFO") basis. Other inventories are
stated on either 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.
Property, plant and equipment includes capitalized interest of $206, $320 and
$607 in 1994, 1993 and 1992, respectively. Maintenance and repairs of property,
plant and equipment were $19,400, $17,300 and $17,900 in 1994, 1993 and 1992,
respectively.
Depreciation is computed primarily by the straight-line method based on the
estimated useful lives of the assets.
GOODWILL AND OTHER INTANGIBLES
Goodwill acquired prior to November 1, 1970 ($19,629), is not being
amortized and relates primarily to Tredegar's Aluminum Extrusions business.
Goodwill acquired subsequently ($9,752, $19,764 and $19,946 at December 31,
1994, 1993 and 1992, respectively, net of accumulated amortization) that was
not written off in 1994 (see Note 8 on page 39) is being amortized on a
straight-line basis over approximately 40 years and relates primarily to
Tredegar's acquisition of Brudi, Inc. in 1991. Other intangibles ($1,375,
$6,086 and $4,752 at December 31, 1994, 1993 and 1992, respectively, net of
accumulated amortization) consist primarily of software technology acquired in
1992 and written off in 1994 (see Note 8 on page 39), and the cost of certain
non-competition agreements that are being amortized on a straight-line basis
over 5 years.
PENSION PLANS
Annual costs of pension plans are determined actuarially in compliance with
Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers
Accounting for Pensions." Tredegar's policy is to fund its pension plans at
amounts not less than the minimum requirements of the Employee Retirement Income
Security Act of 1974.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, Tredegar adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires recognition of the cost of postretirement benefits during the
employees' service periods. Previously, such expenses were accounted for on a
cash basis. Tredegar elected to immediately recognize the liability for prior
years' service as the cumulative effect of a change in accounting principle.
Accordingly, in the first quarter of 1993 Tredegar recorded an unfunded,
accumulated postretirement benefit obligation of $6,695 and a noncurrent,
deferred income tax benefit of $2,545, resulting in an after-tax charge of
$4,150. Tredegar's current policy is to fund related benefits when claims are
incurred.
POSTEMPLOYMENT BENEFITS
Tredegar periodically provides certain postemployment benefits purely on a
discretionary basis. Accordingly, under SFAS No. 112, "Employers Accounting for
Postemployment Benefits," related costs for these programs are accrued when it
is probable that such benefits will be paid. All other postemployment benefits
are either accrued under current benefit plans or are not material to Tredegar's
financial position or results of operations.
INCOME TAXES
Effective January 1, 1993, Tredegar adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires the asset and liability method of
accounting for deferred income taxes, whereby enacted statutory tax rates are
applied to the differences between the financial reporting and tax bases of
assets and liabilities. The cumulative effect of this change in accounting
principle was a reduction in deferred income taxes and a corresponding increase
in net income of $4,300 in the first quarter of 1993. Deferred income taxes were
determined under Accounting Principles Board Opinion ("APB") No. 11 prior to
1993.
Deferred income taxes arise from temporary differences between financial
and income tax reporting of various items, principally depreciation and accruals
for employee benefits, divestitures, plant shutdowns and environmental
remediation.
SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." This statement requires that all costs incurred to
establish the technological feasibility of a computer software product to be
sold, leased or otherwise marketed be considered research and development
costs. Such costs are expensed as incurred. Once technological feasibility is
established, all software development and production costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable value.
Capitalization is discontinued once software is available for sale or lease.
Capitalized costs are amortized based on current and anticipated future revenues
for each product over periods not exceeding 5 years, with an annual minimum
equal to the straight-line amortization over the estimated remaining life of the
product.
Capitalized software costs are included in "Other assets and deferred
charges" and totaled $260 and $433 at December 31, 1994 and 1993, respectively.
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock outstanding for each period presented. For the periods
presented, stock options have an immaterial dilutive effect. The number of
shares used in computing earnings per share were 10,349,420, 10,894,802 and
10,894,370 in 1994, 1993 and 1992, respectively.
2 DISCONTINUED OPERATIONS
On August 16, 1994, The Elk Horn Coal Corporation ("Elk Horn"), Tredegar's
97% owned coal subsidiary, was acquired by Pen Holdings, Inc., for an aggregate
consideration of approximately $71,000 ($67,485 after minority interests and
transaction costs). Tredegar realized an after-tax gain on the transaction of
$25,740. In the first quarter of 1994, Tredegar recognized an income tax
benefit of $3,320 on the difference between the financial reporting and income
tax basis of Elk Horn. On February 4, 1994, Tredegar sold its remaining oil and
gas properties for approximately $8,000 and recognized an after-tax gain of
$3,938. The divestiture of Elk Horn completed Tredegar's exit from its energy
businesses. Accordingly, information about results of operations, financial
condition, cash flows and segments have been restated where appropriate.
In accordance with applicable accounting pronouncements, a $6,194 charge
($3,964 after income tax benefits) was recognized as a reduction to the gain on
the disposal of Elk Horn for the estimated present value of the portion of the
unfunded obligation under the Coal Industry Retiree Health Benefit Act of 1992
(the "Act") assumed by Tredegar in the divestiture transaction. Under the Act,
assigned operators (former employers) are responsible for a portion of the
funding of medical and death benefits of certain retired miners and dependents
of the United Mine Workers of America. The obligation under the Act is reflected
in Tredegar's consolidated balance sheet in "Other noncurrent liabilities."
The net periodic cost (interest and the amortization of gains or losses) of the
obligation since the Elk Horn divestiture is reflected in Tredegar's
consolidated statements of income in "Other (expense) income, net."
At December 31, 1994, the accrued cost for Tredegar's obligation under the
Act was $6,102, including an unfunded obligation of $5,720 and an unrecognized
gain of $382. The discount rate used in determining the unfunded obligation was
8.25% at December 31, 1994 and 7% at August 16, 1994. The medical premium trend
rate was assumed to be 13% at December 31, 1994 and 14% at August 16, 1994, with
a gradual decrease to 6.75% in year 2003 and 5.5% in year 2005, respectively,
and remaining at that level thereafter. The accrued cost was determined using
assumptions at the end of each period, and the net periodic cost was determined
using assumptions as of the beginning of each period. If the medical premium
trend rate were increased by 1%, the obligation at December 31, 1994 would
increase by approximately $500. The effect of this increase on the annual
interest cost component of the net periodic cost would be $42.
The combined statements of income and net assets of the discontinued Energy
segment are presented below through August 16, 1994, the date Elk Horn was
acquired by Pen Holdings, Inc.:
COMBINED STATEMENTS OF INCOME
DISCONTINUED ENERGY SEGMENT
(UNAUDITED)
JANUARY 1, 1994 TO
AUGUST 16, 1994 1993 1992
Net sales $19,868 $33,431 $32,859
Costs and expenses:
Operating costs and expenses 13,229 23,818 22,610
Interest allocated 337 653 661
Unusual items - (1,424) -
Total 13,566 23,047 23,271
Income from Energy segment operations
before income taxes 6,302 10,384 9,588
Income taxes 2,082 3,600 3,793
Income from Energy segment operations $ 4,220 $ 6,784 $ 5,795
COMBINED STATEMENT OF NET ASSETS
DISCONTINUED ENERGY SEGMENT
(UNAUDITED)
AUGUST 16, 1994 December 31, 1993
Current assets:
Accounts and notes receivable $ 1,831 $ 6,173
Inventories - 6,695
Deferred income taxes 3,320 -
Total current assets 5,151 12,868
Net property, plant and equipment 26,980 29,204
Other assets and deferred charges 137 184
Total assets 32,268 42,256
Total current liabilities 2,876 4,961
Deferred income taxes 7,511 5,434
Other noncurrent liabilities 934 885
Total liabilities 11,321 11,280
Net assets of discontinued operations $20,947 $30,976
Unusual items totaling $1,424 in 1993 include gains on the sale of certain
oil and gas properties.
Transactions between Tredegar and the Energy segment are reflected as
though they are settled immediately and there are no amounts due to or from
Tredegar at the end of any period. All of the Energy segment's full-time
employees participated in Tredegar's noncontributory defined benefit plan for
salaried employees. These employees also participated in Tredegar's welfare
(medical, life and disability) and savings plans. Accordingly, related costs
have been allocated to discontinued operations. Interest expense was allocated
to discontinued operations based upon the ratio of the Energy segment's capital
employed (net assets) to Tredegar's consolidated capital employed.
For federal income tax purposes, results of the Energy segment's operations
through the date of disposal have been included in Tredegar's consolidated tax
return. The Energy segment's provision for income taxes represents its
allocated share of Tredegar's income tax expense. The allocated share
approximates income tax expense that would have been incurred had the Energy
segment (i) filed a separate consolidated tax return, and (ii) separately
computed income taxes in accordance with SFAS No. 109 in 1994 and 1993 and APB
No. 11 prior to 1993.
3 BUSINESS SEGMENTS
See pages 15 to 16 and 24 to 26 for net sales, operating profit,
identifiable assets and related information about Tredegar's segments that are
presented for the years 1990-1994. The discussion of segment information is
unaudited.
4 ACCOUNTS AND NOTES RECEIVABLE
December 31 1994 1993
Trade, less allowance for doubtful accounts
and sales returns of $5,211 and $3,216
in 1994 and 1993 $71,470 $69,051
Other 1,778 1,122
Total $73,248 $70,173
5 INVENTORIES
Inventories consist of the following:
December 31 1994 1993
Finished goods $ 4,970 $ 5,735
Work-in-process 5,243 5,298
Raw materials 18,004 15,497
Stores, supplies and other 7,152 7,681
Total $35,369 $34,211
Inventories stated on the LIFO basis amounted to $15,736 and $15,044 at
December 31, 1994 and 1993, respectively, which are below replacement costs by
approximately $18,100 and $10,590, respectively.
6 NET ASSETS HELD FOR SALE
Included in "Other assets and deferred charges" are net assets held for
sale, primarily land and buildings related to closed facilities, totaling
$5,018 and $3,605 as of December 31, 1994 and 1993, respectively. Such assets
are stated at estimated net realizable value and are expected to be sold over
the next 1 to 2 years.
7 INVESTMENTS
As of December 31, 1994, Tredegar,through a subsidiary,owned 5% of a
venture capital limited partnership. Tredegar's total capital commitment is
$2,000, with $1,200 and $800 invested at December 31, 1994 and 1993,
respectively. Additional contributions of $800 are expected to be made over the
next year. In addition, during 1994 Tredegar invested an aggregate of $1,000 in
the restricted convertible preferred stock of two separate medical technology
companies. Tredegar's ownership in each of these companies on a fully diluted
basis is less than 5%. Tredegar's investments are carried at the lower of cost
or estimated fair value and are included in "Other assets and deferred charges."
During 1991 and 1992, Tredegar acquired 541,071 shares of Emisphere
Technologies, Inc. ("Emisphere") common stock for $3,900. In December 1992,
Tredegar sold 112,500 shares for $1,992 and recognized a pretax gain of $1,092
($680 after income taxes). In 1993, Tredegar sold its remaining 428,571 shares
for $5,263 and recognized a pretax gain of $2,263 ($1,410 after income taxes).
In total, Tredegar received $7,255 for its $3,900 investment in Emisphere common
stock, resulting in a pretax gain of $3,355 ($2,090 after income taxes).
8 GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles,and the related accumulated amortization,
are as follows:
December 31 1994 1993
Goodwill and other intangibles $ 64,043 $ 60,185
Additions and reclassifications 775 3,858
Write-offs (14,394) -
Subtotal 50,424 64,043
Accumulated amortization (19,668) (18,314)
Net $ 30,756 $ 45,729
Write-offs in 1994 relate to certain goodwill written off in Molded
Products and goodwill and other intangibles written off in APPX Software. The
goodwill write-off in Molded Products resulted from continued disappointing
results in certain lines of its business. The write-off in APPX Software is the
result of management's determination that income generated by the acquired
products will not be sufficient to recover the unamortized costs associated
with the intangible software assets purchased by Tredegar in December 1992. See
Note 19 on page 46 regarding the restructuring of APPX Software.
9 ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31 1994 1993
Payrolls, related taxes and medical and
other benefits $ 7,378 $ 6,036
Workmen's compensation and disabilities 6,116 6,094
Vacation 5,478 5,298
Environmental 4,153 4,293
Divestitures 3,284 2,709
Other 14,879 10,950
Total $41,288 $35,380
10 DEBT AND CREDIT AGREEMENTS
Long-term debt consists of:
December 31 1994 1993
Borrowings under short-term variable-rate
credit arrangements $ 2,500 $ 6,000
Variable-rate revolving loans - 20,000
Variable-rate term loan due in 1997 - 35,000
7.2% note to institutional lender due in 2003 35,000 35,000
Other 500 1,000
Total $38,000 $97,000
On August 19, 1994, Tredegar used a portion of the proceeds received from
the divestiture of Elk Horn (see Note 2 on page 36) to prepay its $35,000
variable-rate term loan due June 7, 1997. On August 18 and 19, 1994, Tredegar
established two new revolving credit facilities that permit it to borrow up to
$235,000 (no amounts borrowed at December 31, 1994) with $200,000 maturing on
August 18, 1998 and $35,000 maturing on August 19, 1999. In connection with
these new agreements, Tredegar terminated its $180,000 facility that was due
June 16, 1996. The new agreements provide for interest to be charged at a base
rate (generally the London Interbank Offered Rate) plus a spread that is
dependent on Tredegar's quarterly debt-to-total capitalization ratio. Facility
fees are also charged on the $235,000 commitment amount. The weighted average
spreads and facility fees charged under the new agreements at various
debt-to-total capitalization levels are as follows:
Debt-to-Total (Basis Points)
Capitalization Ratio Spread Facility Fee
Less than or equal to 35% 31.1 19.7
Greater than 35% and less than or equal to 50% 39.6 23.6
Greater than 50% 49.3 26.5
On June 16, 1993, Tredegar paid a $1,800 ($1,115 after income tax benefits)
prepayment premium to an institutional lender to refinance its $35,000, 8.6%
fixed-rate debt that was due in September 1994. The new note carries a fixed
rate of 7.2% and matures in June 2003. Annual principal payments of $5,000 will
begin in 1997. Tredegar estimates that an equivalent rate for similar debt
would be 9.2% at December 31, 1994. On this basis, the estimated fair value of
Tredegar's fixed-rate note would be $31,900.
At December 31, 1994 and 1993, $2,500 and $6,000, respectively, were
borrowed under short-term credit arrangements at an average interest rate of 5%
and 3.8%, respectively. The balances outstanding were classified as long-term
debt in accordance with Tredegar's ability to refinance such obligations on a
long-term basis.
The weighted average interest rate on all variable-rate loans outstanding
during 1994 was 4.9%, compared with 4.2% in 1993.
Tredegar's loan agreements contain restrictions, among others, on the
payment of cash dividends and the maximum debt-to-total capitalization ratio
permitted (60%). At December 31, 1994, $61,266 was available for cash dividend
payments, and $219,817 was available to borrow under the 60% debt-to-total
capitalization ratio restriction.
11 SHAREHOLDER RIGHTS AGREEMENT
Pursuant to a Rights Agreement dated as of June 15, 1989 (as amended),
between Tredegar and American Stock Transfer and Trust Company as Rights Agent
(the "Rights Agreement"), one Right is attendant to each share of Tredegar
common stock. 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 $50 (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
Tredegar common stock or announces a tender offer, the consummation of which
would result in ownership by a person or group of 10% or more of Tredegar common
stock. Any action by a person who, together with his associates and affiliates,
owned 10% or more of the outstanding shares of Tredegar common stock on July 10,
1989, cannot 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 will expire on June 30, 1999.
12 STOCK OPTION PLANS
Tredegar has two stock option plans whereby stock options may be granted to
purchase a specified number of shares of Tredegar common stock at a price not
less than the fair market value on the date of grant and for a term not to
exceed 10 years. In addition to the stock options, recipients may also be
granted stock appreciation rights ("SARs") and restricted stock.
Activity for 1992 - 1994 is shown below:
Number of Shares Option Price
Option SAR Per Share Aggregate
Outstanding at 12/31/91 303,500 303,500 $16.7045 $ 5,070
Granted in 1992 210,000 192,000 $12.125 to $17.00 2,627
Lapsed in 1992 (25,400) (25,400) $16.7045 (424)
SARs exercised in 1992 (1,500) (1,500) $16.7045 (25)
Outstanding at 12/31/92 486,600 468,600 $12.125 to $17.00 7,248
Granted in 1993 20,000 - $12.875 258
Lapsed in 1993 (11,000) (11,000) $16.7045 (184)
SARs exercised in 1993 (6,000) (6,000) $12.125 to $16.7045 (89)
Outstanding at 12/31/93 489,600 451,600 $12.125 to $17.00 7,233
Granted in 1994 386,000 - $15.125 to $24.00 6,609
Lapsed in 1994 (37,500) (11,000) $12.875 to $17.00 (568)
Options exercised in 1994 (6,000) (6,000) $12.125 to $16.7045 (87)
SARs exercised in 1994 (27,000) (27,000) $12.125 to $16.7045 (413)
Outstanding at 12/31/94 805,100 407,600 $12.125 to $24.00 $12,774
At December 31, 1994 and 1993, options to purchase 431,130 and 452,352
shares, respectively, were exercisable and 404,400 and 752,900 shares,
respectively, were available for grant.
13 RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS
Rental expense was $3,337, $2,936 and $2,026 for 1994, 1993 and 1992,
respectively. Rental commitments under all noncancelable operating leases as of
December 31, 1994, are as follows:
1995 $ 2,960
1996 2,191
1997 1,356
1998 1,224
1999 1,023
Remainder 3,259
Total $12,013
Contractual obligations for plant construction and purchases of real
property and equipment amounted to approximately $4,493 and $2,029 at December
31, 1994 and 1993, respectively.
14 RETIREMENT PLANS & OTHER POSTRETIREMENT BENEFITS
Tredegar has noncontributory defined benefit 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. Plan assets consist
principally of common stock and government and corporate obligations.
The components of net pension income for Tredegar's plans for 1994, 1993
and 1992 are as follows:
1994 1993 1992
Return on plan assets:
Actual return ($572) $18,557 $ 7,509
Expected return greater (lower) than actual 11,494 (8,097) 2,327
Expected return 10,922 10,460 9,836
Amortization of transition asset 1,231 1,231 1,231
Service cost (benefits earned during the year) (3,016) (3,072) (3,139)
Interest cost on projected benefit obligation (6,885) (6,515) (6,104)
Amortization of prior service costs and
gains or losses (942) (805) (738)
Net pension income $ 1,310 $ 1,299 $ 1,086
The following table presents a reconciliation of the funded status of
Tredegar's pension plans at December 31, 1994, 1993 and 1992, to prepaid pension
expense:
1994 1993 1992
Plan assets at fair value $125,390 $ 130,603 $116,587
Actuarial present value of benefit obligations:
Accumulated benefit obligation (including vested
benefits of $77,858, $85,828 and $65,400,
respectively) (80,422) (89,221) (68,469)
Projected compensation increase (9,296) (11,225) (15,209)
Projected benefit obligation (89,718) (100,446) (83,678)
Plan assets in excess of projected benefit obligation 35,672 30,157 32,909
Unrecognized net gain being amortized (16,862) (11,736) (14,475)
Unrecognized transition asset being amortized (5,456) (6,687) (7,918)
Unrecognized prior service costs being amortized 5,354 5,464 5,631
Prepaid pension expense $ 18,708 $ 17,198 $ 16,147
Prepaid pension expense of $18,708 and $17,198 is included in "Other assets
and deferred charges" in the consolidated balance sheets at December 31, 1994
and 1993, respectively.
Net pension income and plan obligations are calculated using assumptions of
discount rates on projected benefit obligations, estimated rates of projected
increases in compensation, and expected rates of return on plan assets. The
discount rate on projected benefit obligations was assumed to be 8.25% at
December 31, 1994, 7% at December 31, 1993 and 8% at December 31, 1992. The
rate of projected compensation increase was assumed to be 5% at December 31,
1994, 5% at December 31, 1993 and 5.5% at December 31, 1992. The expected
long-term rate of return on plan assets was assumed to be 9% each year. Net
pension income is determined using assumptions as of the beginning of each year.
Funded status is determined using assumptions as of the end of each year.
In December 1993, Tredegar established a non-qualified supplemental pension
plan covering certain employees. The plan is designed to restore all or a part
of the pension benefits that would have been payable to designated participants
from Tredegar's principal pension plans if it were not for limitations imposed
by income tax regulations. The projected benefit obligation relating to this
unfunded plan ($613 and $612 at December 31, 1994 and 1993, respectively) is
being amortized over the average remaining working life of participants in the
plan (approximately $100 annually), and is included in the above pension
information.
In addition to providing pension benefits, Tredegar provides 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 retiring after July 1, 1993, receiving a fixed subsidy from
Tredegar to cover a portion of their health care premiums. Effective January 1,
1993, Tredegar adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (see Note 1 on page 34). In accordance with the
new standard, prior years' financial statements have not been restated.
Previously, such expenses were accounted for on a cash basis.
The components of net periodic postretirement benefit cost are as follows:
1994 1993
Service cost (benefits earned
during the year) ($177) ($186)
Interest cost on accumulated
postretirement benefit obligation (492) (492)
Recognition of gains (losses) (18) -
Net postretirement benefit cost ($687) ($678)
The following table presents a reconciliation of the funded status of
Tredegar's postretirement life insurance and health care benefit plans at
December 31, 1994 and 1993, and January 1, 1993, to accrued postretirement
benefit cost:
DECEMBER 31, December 31, January 1,
1994 1993 1993
Plan assets at fair value $ - $ - $ -
Accumulated postretirement
benefit obligation (APBO):
Retirees (3,085) (3,001) (3,411)
Other fully eligible participants (1,593) (2,408) (1,749)
Other active participants (1,852) (1,755) (1,535)
Total APBO (6,530) (7,164) (6,695)
APBO in excess of plan assets (6,530) (7,164) (6,695)
Unrecognized gain (1,124) (52) -
Accrued postretirement benefit cost ($7,654) ($7,216) ($6,695)
Accrued postretirement benefit cost of $7,654 and $7,216 is included in
"Other noncurrent liabilities" in the consolidated balance sheets of December
31, 1994 and 1993, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.25% at December 31, 1994, 7% at December 31, 1993 and
8% at January 1, 1993. The rate of annual pay increase for life insurance
benefits was assumed to be 5% at December 31, 1994, 5% at December 31, 1993 and
5.5% at January 1, 1993. The rate of increase in the per-capita cost of covered
health care benefits for the indemnity plan was assumed to be 13% at December
31, 1994, 14% at December 31, 1993 and 15% at January 1, 1993. The rate of
increase in the per-capita cost of covered health care benefits for the managed
care plans was assumed to be 10.4% at December 31, 1994, 11.2% at December 31,
1993 and 12% at January 1, 1993. The rates for the per-capita cost of covered
health care benefits were assumed to decrease gradually for the indemnity and
managed care plans to 6% and 5%, respectively, in year 2002 and remain at that
level thereafter. Net postretirement benefit cost is determined using
assumptions as of the beginning of each year. Funded status is determined using
assumptions as of the end of each year.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 1994, would
increase by approximately $30. The effect of this increase on the sum of the
service cost and interest cost components of net periodic postretirement benefit
cost for 1994 would be $6.
15 SAVINGS PLAN
Tredegar has a savings plan that allows eligible employees to voluntarily
contribute a percentage of their compensation. Under the provisions of the plan,
Tredegar matches a portion of the employee's contribution to the plan with
shares of Tredegar common stock. Contributions by Tredegar in 1994, 1993 and
1992 amounted to $2,059, $2,146 and $1,818, respectively.
Tredegar also has a non-qualified plan that restores matching benefits for
employees suspended from the savings plan due to certain limitations imposed by
income tax regulations. Tredegar's liability under this plan was $327 and $189
at December 31, 1994 and 1993, respectively.
16 INCOME TAXES
Effective January 1, 1993, Tredegar adopted SFAS No. 109, "Accounting for
Income Taxes," which requires use of the asset and liability method of
accounting for deferred income taxes (see Note 1 on page 34). As permitted
under the new standard, prior years' financial statements have not been
restated. Deferred income taxes were determined under APB No. 11 for years
prior to 1993.
Income from continuing operations before income taxes and income taxes are
as follows:
1994 1993 1992
Income from continuing operations
before income taxes:
Domestic $ 2,346 $ 4,460 $13,307
Foreign 2,988 2,465 2,635
Total $ 5,334 $ 6,925 $15,942
Current income taxes:
Federal $ 8,375 $ 2,190 $ 5,423
State 1,622 759 919
Foreign 827 1,671 181
Total 10,824 4,620 6,523
Deferred income taxes:
Federal (6,741) (848) (378)
State (424) (197) (222)
Foreign 258 (721) 502
Adjustment for 1% increase
in federal statutory rate - 348 -
Total (6,907) (1,418) (98)
Total income taxes $ 3,917 $ 3,202 $ 6,425
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 From Continuing
Operations Before Income Taxes
1994 1993 1992
Income tax expense at federal statutory rate 35.0 35.0 34.0
Write-off of certain goodwill 31.1 - 2.5
State taxes, net of federal income tax benefit 14.6 5.3 2.9
Research and development tax credit (7.5) (5.8) -
Foreign Sales Corporation (6.6) (3.1) (3.6)
Adjustment of deferred income taxes for 1%
increase in federal statutory rate - 5.0 -
Goodwill amortization 3.0 5.1 1.0
Other items, net 3.8 4.7 3.5
Effective income tax rate 73.4 46.2 40.3
Deferred income taxes result from temporary differences between financial
and income tax reporting of various items. The source of these differences and
the tax effects for continuing operations were as follows:
1994 1993 1992
Write-offs of certain goodwill
and other intangibles ($3,643) $ - $ -
Depreciation (3,472) (2,002) 1,176
Divestitures, plant shutdowns
and environmental accruals 778 1,229 (846)
Employee benefits 169 309 (132)
Other items, net (739) (954) (296)
Total ($6,907) ($1,418) ($98)
Deferred tax liabilities and deferred tax assets as of December 31, 1994
and 1993, are as follows:
1994 1993
Deferred tax liabilities:
Depreciation $13,510 $16,982
Pensions 7,214 6,642
Other 1,348 2,442
Total deferred tax liabilities 22,072 26,066
Deferred tax assets:
Employee benefits 8,302 7,899
Allowance for doubtful accounts and sales returns 1,957 1,169
Inventory 1,651 1,441
Environmental accruals 1,525 1,697
Divestitures 673 1,279
Alternative minimum tax credit carryforward - 524
Other 1,642 504
Total deferred tax assets 15,750 14,513
Net deferred tax liability $ 6,322 $11,553
Included in the balance sheet:
Noncurrent deferred tax liabilities in excess of
assets $20,336 $23,108
Current deferred tax assets in excess of liabilities 14,014 11,555
Net deferred tax liability $ 6,322 $11,553
17 UNUSUAL ITEMS
In 1994, unusual items totaling $16,494 include the write-off of certain
Molded Products goodwill ($4,873) (see Note 8 on page 39), costs related to the
closing of a Molded Products plant in Alsip, Illinois ($2,100), and the
write-off of goodwill and other intangibles in APPX Software ($9,521) (see Note
8 on page 39).
In 1993, unusual items totaling $452 include estimated costs related to the
planned disposal of a Films Products plant in Flemington, New Jersey ($1,815),
and the reorganization of corporate functions ($900), offset by a gain on the
sale of a portion of Tredegar's investment in Emisphere ($2,263) (see Note 7
on page 38).
In 1992, unusual items totaling $90 include the write-off of certain
goodwill associated with the restructuring of Molded Products ($1,182), offset
by the gain on the sale of a portion of Tredegar's investment in Emisphere
($1,092) (see Note 7 on page 38).
18 CONTINGENCIES
Tredegar is involved in various stages of investigation and cleanup
relating to environmental matters at certain of its plant locations. Where
management has determined the nature and scope of any required environmental
cleanup activity, estimates of cleanup costs have been obtained and accrued. As
management continues its efforts to assure compliance with environmental laws
and regulations, additional contingencies may be identified. If additional
contingencies are identified, it is management's practice to determine the
nature and scope of such contingencies, obtain and accrue estimates of the cost
of remediation, and begin remediation. While it is not possible to predict the
course of ongoing environmental compliance activities, management does not
currently believe that additional costs that could arise from such activities
will have a material adverse effect on its financial position; however, such
costs could have a material adverse effect on quarterly or annual operating
results when resolved in a future period.
Tredegar is involved in various other legal actions arising in the normal
course of business. After taking into consideration legal counsels' evaluation
of such actions, management believes that Tredegar has sufficiently accrued for
possible losses and that these actions will not have a material adverse effect
on Tredegar's financial position; however, the resolution of such actions in a
future period could have a material adverse effect on quarterly or annual
operating results at that time.
19 SUBSEQUENT EVENT
On January 31, 1995, APPX Software announced a restructuring aimed at
eliminating its operating losses. While new product development activities will
be curtailed, APPX Software intends to continue to sell, maintain and support
existing products.
Tredegar expects to recognize a charge in the first quarter of 1995 ranging
from $2,100 to $2,800 ($1,350 to $1,800 after income tax benefits) in connection
with the restructuring. The restructuring charge includes estimated losses on
the disposal of assets, severance costs and costs for the termination of
leases and certain contracts.
APPX Software incurred operating losses in 1994 of $4,712 ($3,127 after
income tax benefits or $.30 per share) on revenues of $2,517. In addition,
during the first quarter of 1994, Tredegar recognized a pretax charge of $9,521
in connection with the write-off of goodwill and other intangibles associated
with APPX Software (see Note 8 on page 39).