Item 1. BUSINESS
Description of Business
Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in the manufacture of plastic films and aluminum extrusions. The financial information related to Tredegar’s film products and aluminum extrusions segments and related geographical areas included in Note 5 to the Notes to Financial Statements is incorporated herein by reference. Unless the context requires otherwise, all references herein to “Tredegar,” “we,” “us” or “our” are to Tredegar Corporation and its consolidated subsidiaries.
Film Products
Tredegar Film Products Corporation and its subsidiaries (together, “Film Products”) manufacture plastic films, elastics and laminate materials primarily for personal care products and surface protection and packaging applications. These products are manufactured at facilities in the United States (“U.S.”) and The Netherlands, Hungary, China, Brazil and India. In October 2011, Film Products acquired Terphane Holdings LLC (“Terphane”), further expanding our films business in Latin America and the U.S. Film Products competes in all of its markets on the basis of product innovation, quality, price and service.
Personal Care Materials. Film Products is one of the largest global suppliers of apertured, breathable, elastic and embossed films, and laminate materials for personal care markets, including:
•
Apertured film and laminate materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinence products (including materials sold under the SoftQuiltTM, ComfortQuiltTM, ComfortAireTM, ComfortFeelTM, SoftAireTM and FreshFeelTM brand names);
•
Breathable, embossed and elastic materials for use as components for baby diapers, adult incontinence products and feminine hygiene products (including elastic components sold under the ExtraFlexTM, FabriFlexTM, StretchTabTM, FlexAireTM and FlexFeelTM brand names); and
•
Absorbent transfer layers for baby diapers and adult incontinence products sold under the AquiDry®, AquiDry PlusTM and AquiSoftTM brand names.
In 2012, 2011 and 2010, personal care products accounted for approximately 38%, 45% and 50% of Tredegar’s consolidated net sales from continuing operations, respectively.
Flexible Packaging Films. Film Products produces specialized polyester (“PET”) films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. These differentiated, high-value films are primarily sold in Latin America and the U.S. under the Terphane® and Sealphane® brand names. Major end uses include food packaging and industrial applications. In 2012, flexible packaging films accounted for approximately 16% of Tredegar’s consolidated net sales from continuing operations. Tredegar did not offer these films until the fourth quarter of 2011, so flexible packaging films only accounted for approximately 4% of consolidated net sales from continuing operations in 2011.
Surface Protection Films. Film Products produces single and multi-layer surface protection films sold under the UltraMask® and ForceFieldTM brand names. These films are used in high technology applications, most notably protecting high-value components of flat panel displays used in monitors, notebooks, smart phones, tablets, e-readers and digital signage, during the manufacturing and transportation process. In 2012, 2011 and 2010, surface protection films accounted for approximately 8%, 9% and 12% of Tredegar’s consolidated net sales from continuing operations, respectively.
Polyethylene Overwrap & Polypropylene Films. Film Products produces various types of polyethylene and polypropylene overwrap films. Applications for polyethylene films include an emphasis on packaging for paper products. These products provide our customers with thin-gauge films that are readily printable and convertible on conventional processing equipment. Film Products also manufactures polypropylene films for packaging applications. Major end uses for polyethylene and polypropylene films include overwrap for bathroom tissue and paper towels as well as retort pouches.
Films for Other Markets. Film Products also makes a variety of specialty films and film-based products that provide tailored functionality for the illumination market as well as various other markets. By leveraging the combination of film capabilities and our patented microstructure technology, we are able to offer optical management products for a wide range of applications, including lighting, signage and durable goods.
The operations of Bright View Technologies Corporation (“Bright View”) were incorporated into Film Products effective January 1, 2012 to better leverage efforts to produce films for new market segments. Bright View is a developer and producer of high-value microstructure-based optical films for the LED (light-emitting diode) and fluorescent lighting markets.
Raw Materials. The primary raw materials used by Film Products are low density, linear low density and high density polyethylene and polypropylene resins, Purified Terephthalic Acid (“PTA”) and Mono-ethylene Glycol (“MEG”), which are obtained from domestic and foreign suppliers at competitive prices. We believe there will be an adequate supply of these raw materials in the foreseeable future. Film Products also buys polypropylene-based nonwoven fabrics based on the resins previously noted and styrenic block copolymers, and we believe there will be an adequate supply in the foreseeable future.
Customers. Film Products sells to many branded product producers throughout the world. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $264 million in 2012, $280 million in 2011 and $273 million in 2010 (these amounts include film sold to third parties that converted the film into materials used with products manufactured by P&G).
P&G and Tredegar have had a successful long-term relationship based on cooperation, product innovation and continuous process improvement. The loss or significant reduction in sales associated with P&G would have a material adverse effect on our business.
Aluminum Extrusions
The William L. Bonnell Company, Inc. and its subsidiaries (together, “Aluminum Extrusions”) produce high-quality, soft-alloy aluminum extrusions primarily for building and construction, distribution, transportation, electrical, consumer durables and machinery and equipment markets. Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted and fabricated aluminum extrusions for sale directly to fabricators and distributors, and it competes primarily on the basis of product quality, service and price. Sales are made primarily in the U.S., principally east of the Rocky Mountains.
On October 1, 2012, Aluminum Extrusions acquired AACOA, Inc. (“AACOA”). AACOA produces aluminum extrusions and provides anodizing services to customers in the consumer durables, machinery and equipment and transportation markets. Our acquisition of AACOA allows us to add fabrication capabilities to Aluminum Extrusions’ current array of products and services while providing AACOA with large press capabilities and enhanced geographic sales coverage in a variety of end-use markets.
The primary end-uses in each of Aluminum Extrusions’ primary market segments include:
Major Markets
End-Uses
Residential & nonresidential construction
Windows and doors, pre-engineered structures, wall panels, partitions and interior enclosures, ducts, louvers and vents, curtain walls, storefronts and entrances, walkway covers, bus shelters, point of purchase displays, shower and tub enclosures, railings and support systems, venetian blinds, acoustical ceilings and walls, swimming pools and storm shutters
Transportation
Automotive and light truck products, spare parts, after-market automotive accessories, travel trailers and recreation vehicles
Distribution (metal service centers specializing in stock and release programs and custom fabrications to small manufacturers)
Standard profiles (rod, bar, tube and pipe), hurricane shutters, pleasure boat accessories, theatre set structures and other applications
Consumer durables
Refrigerators and freezers, office and institutional furniture, serving carts and pleasure boats
Electrical
Lighting fixtures (LED housings and heat sinks), solar panels, electronic apparatus and rigid and flexible conduits
Machinery & equipment
Material handling equipment, conveyors and conveying systems, hospital patient lifts, office machines and industrial erector sets
Aluminum Extrusions’ sales volume from continuing operations by market segment over the last three years is shown below:
% of Aluminum Extrusions Sales Volume
by Market Segment (Continuing Operations) *
* Includes sales volumes for AACOA for the fourth quarter of 2012 (subsequent to accquisition).
Aluminum Extrusions closed its manufacturing facility in Kentland, Indiana in the third quarter of 2012. The plant, whose core market was residential construction, previously employed 146 people.
Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term contracts. We believe there will be an adequate supply of aluminum and other required raw materials and supplies in the foreseeable future.
Other
In February 2010, we added a new segment, Other, comprised of the start-up operations of Bright View and Falling Springs, LLC (“Falling Springs”). As previously noted, the operations of Bright View were incorporated into Film Products effective January 1, 2012 to better leverage efforts to produce films for new market segments. Prior year balances for Bright View have been reclassified to Film Products to conform with the current year presentation.
Falling Springs develops, owns and operates multiple mitigation banks. Through the establishment of perpetual easements to restore, enhance and preserve wetlands, streams or other protected environmental resources, these mitigation banks create saleable credits that are used by the purchaser of credits to offset the negative environmental impacts from private and public development projects. On November 20, 2012, we sold our membership interests in Falling Springs to Arc Ventures, LC, a Virginia limited liability company affiliated with John D. Gottwald, a member of Tredegar’s Board of Directors, for cash and stock proceeds of $16.6 million. The corresponding loss on sale of $3.1 million and the results of operations related to Falling Springs have been classified as discontinued operations for all periods presented. With the sale of Falling Springs, there is no longer an Other segment to report.
General
Intellectual Property. We consider patents, licenses and trademarks to be of significance for Film Products. We routinely apply for patents on significant developments in these businesses. As of December 31, 2012, Film Products held 342 issued patents (108 of which are issued in the U.S.) and 117 trademarks (19 of which are issued in the U.S.). Aluminum Extrusions held three U.S. trademark registrations. Our patents have remaining terms ranging from 1 to 20 years. We also have licenses under patents owned by third parties.
Research and Development. Tredegar’s spending for research and development (“R&D”) activities in 2012, 2011 and 2010 was primarily related to Film Products. As of December 31, 2012, Film Products has technical centers in Bloomfield, New York; Cabo de Santo Agostinho, Brazil; Richmond, Virginia; Morrisville, North Carolina; and Terre Haute, Indiana. R&D spending was approximately $13.2 million in 2012, $13.2 million in 2011 and $13.6 million in 2010.
Backlog. Backlogs are not material to our operations in Film Products. Overall backlog for continuing operations in Aluminum Extrusions at December 31, 2012 increased by approximately 77% compared with December 31, 2011, with approximately half of this increase being attributed to the addition of AACOA. Demand for extruded aluminum shapes continued to improve in 2012. Volume for Aluminum Extrusions, which we believe is cyclical in nature, was 114.8 million pounds in 2012, 108.0 million pounds in 2011 and 94.9 million pounds in 2010.
Government Regulation. U.S. laws concerning the environment to which our domestic operations are or may be subject include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), all as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. Compliance with these laws is an important consideration for us because we use hazardous materials in some of our operations, we are a generator of hazardous waste, and wastewater from our operations is discharged to various types of wastewater management systems. Under CERCLA and other laws, we may be subject to financial exposure for costs associated with waste management and disposal, even if we fully comply with applicable environmental laws.
The U.S. Environmental Protection Agency has adopted regulations under the Clean Air Act relating to emissions of carbon dioxide and other greenhouse gases (“GHG”), including mandatory reporting and permitting requirements. Additional regulations are anticipated. Several of our manufacturing operations result in emissions or GHG and are subject to the current GHG regulations. Compliance with these regulations has yet to require significant expenditures. The cost of compliance with any future GHG legislation or regulations is not presently determinable, but it is not anticipated to have a material adverse effect on our financial condition or results of operations based on information currently available.
Tredegar is also subject to the governmental regulations in the countries where we conduct business.
At December 31, 2012, we believe that we were in substantial compliance with all applicable environmental laws, regulations and permits in the U.S. and other countries where we conduct business. Environmental standards tend to become more stringent over time. In order to maintain substantial compliance with such standards, we may be required to incur additional expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities. Furthermore, our failure to comply with current or future laws and regulations could subject us to substantial penalties, fines, costs and expenses.
Employees. Tredegar employed approximately 2,700 people at December 31, 2012.
Available Information and Corporate Governance Documents. Our Internet address is www.tredegar.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information filed electronically with the SEC can be accessed on its website at www.sec.gov. In addition, our Corporate Governance Guidelines, Code of Conduct and the charters of our Audit, Executive Compensation and Nominating and Governance Committees are available on our website and are available in print, without charge, to any shareholder upon request by contacting Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225. The information on or that can be accessed through our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.
Item 1A.
Item 1A. RISK FACTORS
There are a number of risks and uncertainties that could have a material adverse effect on the operating results of our businesses and our consolidated financial condition and liquidity. The following risk factors should be considered, in addition to the other information included in this Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”), when evaluating Tredegar and our businesses:
General
•
Our performance is influenced by costs incurred by our operating companies, including, for example, the cost of raw materials and energy. These costs include, without limitation, the cost of resin, PTA and MEG (the raw materials on which Film Products primarily depends), aluminum (the raw material on which Aluminum Extrusions primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin, aluminum and natural gas prices are extremely volatile as shown in the charts on pages 35-36. We attempt to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to offset fully or on a timely basis the effects of higher raw material and energy costs through price increases or pass-through arrangements. Further, our cost control efforts may not be sufficient to offset any additional future declines in revenue or increases in raw material, energy or other costs.
•
Tredegar and its customers operate in highly competitive markets. Tredegar and its businesses compete on product innovation, quality, price and service, and our businesses and their customers operate in highly competitive markets. Global market conditions continue to exacerbate our exposure to margin compression due to competitive forces, especially as certain products move into the later stages of their product life cycles. We attempt to mitigate the effects of this trend through cost saving measures and manufacturing efficiency initiatives, but these efforts may not be sufficient to offset the impact of margin compression as a result of competitive pressure.
•
Tredegar may not be able to successfully execute its acquisition strategy. New acquisitions, such as our October 2011 acquisition of Terphane and our October 2012 acquisition of AACOA, can provide meaningful opportunities to grow our business and improve profitability. Acquired businesses may not achieve expected levels of revenue, profit or productivity, or otherwise perform as we expect. Acquisitions involve special risks,
including, without limitation, diversion of management’s time and attention from our existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements. While our strategy is to acquire businesses that will improve our competitiveness and profitability, acquisitions may not be successful or accretive to earnings.
•
Noncompliance with any of the covenants in our $350 million credit facility could result in all debt under the agreement outstanding at such time becoming due and limiting our borrowing capacity, which could have a material adverse effect on our financial condition and liquidity. The credit agreement governing our revolving credit facility contains restrictions and financial covenants that could restrict our operational and financial flexibility. Our failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at such time becoming due, which could have a material adverse effect on our financial condition and liquidity. Renegotiation of the covenant(s) through an amendment to our revolving credit facility may effectively cure the noncompliance, but may have a negative effect on our consolidated financial condition or liquidity depending upon how the amended covenant is renegotiated.
•
Loss of certain key officers or employees could adversely affect our businesses. We depend on our senior executive officers and other key personnel to run our businesses. The loss of any of these officers or other key personnel could have a material adverse effect on our operations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate highly skilled employees required for the operation and expansion of our businesses could hinder our ability to improve manufacturing operations, conduct research activities successfully and develop marketable products.
•
Tredegar is subject to increased credit risk that is inherent with economic uncertainty and efforts to increase market share as we attempt to broaden our customer base. In the event of the deterioration of operating cash flows or diminished borrowing capacity of our customers, the collection of trade receivable balances may be delayed or deemed unlikely. The operations of our customers for Aluminum Extrusions generally follow the cycles within the economy, resulting in greater credit risk from diminished operating cash flows and higher bankruptcy rates when the economy is deteriorating or in recession. In addition, Film Products’ credit risk exposure could increase as efforts to expand its business may lead to a broader, more diverse customer base.
•
Tredegar is subject to various environmental laws and regulations and could become exposed to material liabilities and costs associated with such laws. We are subject to various environmental obligations and could become subject to additional obligations in the future. In the case of known potential liabilities, it is management’s judgment that the resolution of ongoing and/or pending environmental remediation obligations is not expected to have a material adverse effect on our consolidated financial condition or liquidity. In any given period or periods, however, it is possible such obligations or matters could have a material adverse effect on the results of operations. Changes in environmental laws and regulations, or their application, including, but not limited to, those relating to global climate change, could subject us to significant additional capital expenditures and operating expenses. Moreover, future developments in federal, state, local and international environmental laws and regulations are difficult to predict. Environmental laws have become and are expected to continue to become increasingly strict. As a result, we will be subject to new environmental laws and regulations. However, any such changes are uncertain and, therefore, it is not possible for us to predict with certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any such changes.
•
Tredegar could be required to make additional cash contributions to its defined benefit (pension) plan. We sponsor a pension plan that covers certain hourly and salaried employees in the U.S. Recent economic trends have resulted in a significant reduction in interest rates and plan asset investment returns. Cash contribution requirements for the pension plan are sensitive to changes in these market factors. We expect that we will be required to make a cash contribution of approximately $0.2 million to our underfunded pension plan in 2013, and we may be required to make additional cash contributions in future periods if current trends in interest rates continue, volatility in investment returns on plan assets persist or if our plan asset investment returns lag market performance.
•
An information technology system failure may adversely affect our business. We rely on information technology systems to transact our businesses. An information technology system failure due to computer viruses, internal or external security breaches, power interruptions, hardware failures, fire, natural disasters, human error, or other causes could disrupt our operations and prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report those transactions in a timely manner. A significant, protracted information technology system failure may result in a material adverse effect on our financial condition, results of operations, or cash flows.
•
Material disruptions at one of our major manufacturing facilities could negatively impact our financial results. We believe our facilities are operated in compliance with applicable local laws and regulations and that we have implemented measures to minimize the risks of disruption at our facilities. A material disruption in one of our operating locations could negatively impact production and our financial results. Such a disruption could be a result of any number of events, including but not limited to: an equipment failure with repairs requiring long lead times, labor stoppages or shortages, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe weather conditions.
•
An inability to renegotiate one of our collective bargaining agreements could adversely affect our financial results. Some of our employees are represented by labor unions under various collective bargaining agreements with varying durations and expiration dates. Tredegar may not be able to satisfactorily renegotiate collective bargaining agreements when they expire, which could result in strikes or work stoppages or higher labor costs. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future. Any such work stoppages (or potential work stoppages) could negatively impact our ability to manufacture our products and adversely affect results of operations.
•
Our investments (primarily $7.5 million of investments in Intelliject and a $3.6 million net investment in Harbinger) have high risk. The value of our investment in a specialty pharmaceutical company, Intelliject, Inc. (“Intelliject”), can fluctuate, primarily as a result of its ability to meet its developmental and commercialization milestones within an anticipated time frame. Intelliject received approval from the U.S. Food and Drug Administration for its first product in 2012, with market launch of the product in the first quarter of 2013. As Intelliject continues to invest in its product pipeline, it may require additional rounds of financing to have the opportunity to complete product pipeline development and bring its technology to market, which may never occur. The estimated fair value of our investment was $33.7 million at December 31, 2012.
Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”) is a private investment fund, and an investment in the fund involves risk and is subject to limitations on withdrawal. The amount of future installments of withdrawal proceeds is uncertain, and the timing of such payments is not known.
There is no secondary market for selling our interests in either investment. As a result, we may be required to bear the risk of our investment in Intelliject and Harbinger for an indefinite period of time.
Film Products
•
Film Products is highly dependent on sales associated with one customer, P&G. P&G comprised approximately 31% of Tredegar’s consolidated net sales from continuing operations in 2012, 36% in 2011 and 38% in 2010. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business. Other P&G-related factors that could adversely affect our business include, by way of example, (i) failure by P&G to achieve success or maintain share in markets in which P&G sells products containing our materials, (ii) operational decisions by P&G that result in component substitution, inventory reductions and similar changes, (iii) delays in P&G rolling out products utilizing new technologies developed by us and (iv) P&G rolling out products utilizing technologies developed by others that replace our business with P&G. While we have undertaken efforts to expand our customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with P&G.
•
Growth of Film Products depends on our ability to develop and deliver new products at competitive prices. Personal care materials, surface protection films and polyethylene overwrap and polypropylene films are now being made with a variety of new materials and the overall cycle for changing materials has accelerated. While we have substantial technological resources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from our technologies, our inability to develop and deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business, results of operations and cash flows. In the long term, growth will depend on our ability to provide innovative materials at a price that meets our customers’ needs.
•
Failure of our customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact sales and operating margins. Our products serve as components for various consumer products sold worldwide. Our customers’ ability to successfully develop, manufacture and market their products is integral to our success. In addition, many of our customers are in industries that are cyclical in nature and sensitive to changes in general economic conditions. Downturns in the businesses that use our products can adversely affect our sales and operating margins.
•
Continued growth in Film Products’ sale of protective film products is not assured. A shift in our customers’ preference to new or different products or new technology that displaces the need for protective films that currently utilize our surface protection applications could have a material adverse effect on our sales of protective films. Surface protection films accounted for approximately 8%, 9% and 12% of Tredegar’s consolidated net sales from continuing operations in 2012, 2011 and 2010, respectively. Unanticipated changes in the demand for our customers’ products, a decline in the rate of growth for flat panel displays or improvements in the durability of flat panel displays could have a material adverse effect on protective film sales.
•
Our substantial international operations subject us to risks of doing business in countries outside the U.S., which could adversely affect our business, financial condition and results of operations. Risks inherent in international operations include the following, by way of example: changes in general economic conditions or governmental policies, potential difficulty enforcing agreements and intellectual property rights, modifications in foreign tax laws and incentives, staffing and managing widespread operations and the challenges of complying with a wide variety of laws and regulations, restrictions on international trade or investment, restrictions on the repatriation of income, fluctuations in exchange rates, imposition of additional taxes on our income generated outside the U.S., nationalization of private enterprises and unexpected adverse changes in international laws and regulatory requirements. In addition, while expanding operations into emerging foreign markets provides greater opportunities for growth, there are certain operating risks, as previously noted.
•
Our inability to protect our intellectual property rights or our infringement of the intellectual property rights of others could have a material adverse impact on Film Products. Film Products operates in an industry where our significant customers and competitors have substantial intellectual property portfolios. The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents or threaten existing customer relationships. An unfavorable outcome in any intellectual property litigation or similar proceeding could have a materially adverse effect on the financial condition and results of operations in Film Products.
•
U.S. and global economic conditions could have an adverse effect on the operating results of some or all of our operations. As Films Products expands its business into new products and geographic regions, operating results and our financial condition could become more sensitive to changes in macroeconomic conditions, including fluctuations in exchange rates. Sales associated with new products and regions tend to more closely follow the cycles within the economy. Cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from lower customer demand in an economic downturn. Therefore, as such product offerings become a greater part of the film products business, our operating results and financial condition may be adversely impacted by seasonal slowdowns, cyclical downturns in the economy or changes in foreign currency rates.
•
An unstable economic environment could have a disruptive impact on our supply chain. Certain raw materials used in manufacturing our products are available from a single supplier, and we may not be able to quickly or inexpensively re-source to another supplier. The risk of damage or disruption to our supply chain has been exacerbated as different suppliers have consolidated their product portfolios or experienced financial distress. Failure to take adequate steps to effectively manage such events, which are intensified when a product is sourced from a single supplier or location, could adversely affect our business and results of operations, as well as require additional resources to restore our supply chain.
Aluminum Extrusions
•
Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector. Our end-use markets can be subject to seasonal slowdowns. Because of the high degree of operating leverage inherent in our operations (generally constant fixed costs until full capacity utilization is achieved), the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts (including a greater chance of loss associated with defaults on fixed-price forward sales contracts with our customers) that usually accompany a downturn. In addition, higher energy costs can further reduce profits unless offset by price increases or cost reductions and productivity improvements.
Although our sales volumes have improved in recent years, there is uncertainty surrounding the extent and timing of a full recovery in the building and construction sector. Therefore, the extent and timing of the recovery of sales volumes and profits for Aluminum Extrusions is uncertain, especially since there can be a lag in the recovery of its end-use markets in comparison to the overall economic recovery.
•
The markets for our products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has approximately 1,200 customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 5% of Aluminum Extrusions’ net sales. Due to the diverse customer mix across many end-use markets, we believe the industry generally tracks the real growth of the overall economy. Future success and prospects depend on our ability to retain existing customers and participate in overall industry cross-cycle growth.
During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of our end-use markets. Conversely, during an economic slowdown, excess industry capacity often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers. Because the business is susceptible to these changing economic conditions, Aluminum Extrusions targets complex, customized, service-intensive business with more challenging requirements in order to differentiate itself from competitors that focus on higher volume, standard extrusion applications.
In the past, imports into the U.S., primarily from China, represented an increasing portion of the U.S. aluminum extrusion market. However, following an affirmative determination by the U.S. International Trade Commission in April 2011 that dumped and subsidized imports of aluminum extrusion from China are a cause of material injury to the domestic industry, the U.S. Department of Commerce has applied duties to these imported products. As a result, aluminum extrusion imports from China have decreased significantly. While the risk to the domestic industry has been abated for the time being, efforts continue to address the challenges and circumvention issues that remain.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
General
Most of the improved real property and the other assets used in our operations are owned, and none of the owned property is subject to an encumbrance that is material to our consolidated operations. We consider the plants, warehouses and other properties and assets owned or leased by us to be in generally good condition.
We believe that the capacity of our plants is adequate to meet our immediate needs. Our plants generally have operated at approximately 40-95% of capacity during 2012. Our corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.
Our principal plants and facilities are listed below:
Film Products
Locations in the U.S.
Locations Outside the U.S.
Principal Operations
Bloomfield, New York
Cabo de Santo Agostinho, Brazil
Production of plastic films and
laminate materials
(technical center and
production facility)
(technical center and
production facility)
Lake Zurich, Illinois
Morrisville, North Carolina
Guangzhou, China
Kerkrade, The Netherlands
(technical center and production
facility) ( leased)
Pune, India
Rétság, Hungary
Pottsville, Pennsylvania
Red Springs, North Carolina (leased)
Richmond, Virginia (technical center) (leased)
Terre Haute, Indiana
(technical center and
production facility)
São Paulo, Brazil
Shanghai, China
Aluminum Extrusions
Locations in the U.S.
Principal Operations
Carthage, Tennessee
Elkhart, Indiana
Newnan, Georgia
Niles, Michigan
Production of aluminum extrusions, fabrication and finishing
Item 3.
Item 3. LEGAL PROCEEDINGS
None.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
None.
PART II
Item 5.
Item 5. MARKET FOR TREDEGAR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices of Common Stock and Shareholder Data
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol TG. We have no preferred stock outstanding. There were 32,069,370 shares of common stock held by 2,513 shareholders of record on December 31, 2012.
The following table shows the reported high and low closing prices of our common stock by quarter for the past two years.
The closing price of our common stock on February 22, 2013 was $25.65.
Dividend Information
We have paid a dividend every quarter since becoming a public company in July 1989. We paid quarterly dividends of 4 1/2 cents per share in the first two quarters of 2012 and 6 cents per share in the final two quarters of 2012. We also paid a one-time dividend of 75 cents per share to all shareholders in December 2012. We paid a quarterly dividend of 4 1/2 cents per share in 2011, and 4 cents per share in 2010.
All decisions with respect to the declaration and payment of dividends will be made by the Board of Directors in its sole discretion based upon earnings, financial condition, anticipated cash needs, restrictions in our revolving credit agreement and other such considerations as the Board deems relevant. See Note 11 beginning on page 68 for the restrictions contained in our revolving credit agreement related to minimum shareholders’ equity required and aggregate dividends permitted.
Issuer Purchases of Equity Securities
On January 7, 2008, we announced that our Board of Directors approved a share repurchase program whereby management is authorized at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of Tredegar’s outstanding common stock. The authorization has no time limit. We did not repurchase any shares in the open market or otherwise in 2012 or 2011 under this standing authorization. We repurchased approximately 2.1 million shares in 2010 of our common stock in the open market at an average price of $16.54 per share.
We received 209,576 shares in 2012 at a price of $17.70 per share as consideration from Arc Ventures, LC in connection with our divestiture of Falling Springs. Shares received from the sale of Falling Springs do not represent shares repurchased under the current approved program.
Comparative Tredegar Common Stock Performance
The following graph compares cumulative total shareholder returns for Tredegar, the S&P SmallCap 600 Stock Index (an index comprised of companies with market capitalizations similar to Tredegar) and the Russell 2000 Index for the five years ended December 31, 2012. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.
Inquiries
Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to Computershare Investor Services, the transfer agent and registrar for our common stock:
Computershare Investor Services
250 Royall Street
Canton, MA 02021
Phone: 800-622-6757
E-mail: web.queries@computershare.com
All other inquiries should be directed to:
Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 800-411-7441
E-mail: invest@tredegar.com
Website: www.tredegar.com
Quarterly Information
We do not generate or distribute quarterly reports to shareholders. Information on quarterly results can be obtained from our website. In addition, we file quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.gov.
Legal Counsel
Independent Registered Public Accounting Firm
Hunton & Williams LLP
PricewaterhouseCoopers LLP
Richmond, Virginia
Richmond, Virginia
Item 6.
Item 6. SELECTED FINANCIAL DATA
The tables that follow on pages 14-19 present certain selected financial and segment information for the five years ended December 31, 2012.
FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
Refer to notes to financial tables on page 19.
FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (j)
Refer to notes to financial tables on page 19.
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
Refer to notes to financial tables on page 19.
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Depreciation and Amortization
Refer to notes to financial tables on page 19.
NOTES TO FINANCIAL TABLES
(a) On November 20, 2012, we sold our membership interests in Falling Springs. All historical results for this business have been reflected in discontinued operations. In 2012, discontinued operations also includes an after-tax loss of $2.0 million from the sale of Falling Springs in addition to operating results through the closing date. On February 12, 2008, we sold our aluminum extrusions business in Canada. All historical results for this business have been reflected as discontinued operations. In 2012 and 2011, discontinuned operations include after-tax charges of $13.4 million and $4.4 million, respectively, to accrue for indemnifications under the purchase agreement related to environmental matters. In 2008, discontinued operations include an after-tax loss of $0.4 million on the sale in addition to operating results through the closing date.
(b) A goodwill impairment charge of $30.6 million ($30.6 million after taxes) was recognized in Aluminum Extrusions upon completion of an impairment analysis performed as of March 31, 2009. The non-cash charge resulted from the estimated adverse impact on the business unit’s fair value of possible future losses and the uncertainty of the amount and timing of an economic recovery.
(c) Plant shutdowns, asset impairments, restructurings and other for 2012 include a net charge of $3.6 million associated with the shutdown of our aluminum extrusions manufacturing facility in Kentland, Indiana, which included accelerated depreciation for property and equipment of $2.4 million (included in “Cost of goods sold” in the consolidated statement of income), severance and other employee-related costs of $1.2 million and other shutdown-related charges of $2.3 million, partially offset by adjustments to inventories accounted for under the last-in, first-out method of $1.5 million (included in “Cost of goods sold” in the consolidated statement of income) and gains of $0.8 million (included in “Other income (expense), net” in the consolidated statements of income); a gain of $1.3 million in Film Products (included in “Other income (expense), net” in the consolidated statements of income) associated with an insurance recovery on idle equipment that was destroyed in a fire at an outside warehouse; charges of $1.3 million for acquisition-related expenses (included in “Selling, general and administrative expenses in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions; charges of $1.1 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Film Products; gain of $1.1 million (included in “Other income (expense), net” in the consolidated statements of income) on the sale of a previously shutdown film products manufacturing facility in LaGrange, Georgia; losses of $0.8 million for asset impairments associated with a previously shutdown film products manufacturing facility in LaGrange, Georgia; charges of $0.5 million for severance and other employee-related costs in connection with restructurings in Film Products ($0.3 million) and Aluminum Extrusions ($0.2 million); charges of $0.2 million for asset impairments in Film Products; charges of $0.2 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions; charges of $0.1 million associated with purchase accounting adjustments made to the value of inventory sold by Aluminum Extrusions after its acquisition of AACOA; and a charge of $0.1 million (included in “Costs of goods sold” in the consolidated statement of income) related to adjustments of future environmental costs expected to be incurred by Aluminum Extrusions. The gain from the write-up of an investment accounted for under the fair value method of $16.1 million and the unrealized loss on our investment in Harbinger of $1.1 million in 2012 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes for 2012 include the recognition of an additional valuation allowance of $1.3 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(d) Plant shutdowns, asset impairments, restructurings and other for 2011 include charges of $4.8 million for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Film Products; charges of $1.4 million for asset impairments in Films Products; a gain of $1.0 million on the disposition of our film products business in Roccamontepiano, Italy (included in “Other income (expense), net” in the consolidated statements of income), which includes the recognition of previously unrecognized foreign currency translation gains of $4.3 million that were associated with the business; charges of $0.7 million associated with purchase accounting adjustments made to the value of inventory sold by Films Products after its purchase of Terphane (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.5 million for severance and other employee related costs in connection with restructurings in Film Products; charges of $0.4 million for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of Terphane by Film Products; and gains of $0.1 million associated with Aluminum Extrusions for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income). The gain from the write-up of an investment accounted for under the fair value method of $1.6 million and the unrealized loss on our investment in Harbinger of $0.6 million in 2011 are included in “Other income (expense), net” in the consolidated statements of income.
(e) Plant shutdowns, asset impairments, restructurings and other for 2010 include gains of $0.9 million associated with Aluminum Extrusions for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income); asset impairment charges of $0.6 million related to Films Products; a charge of $0.4 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.2 million for severance and other employee-related costs in connection with restructurings in Film Products; a gain of $0.1 million on the sale of previously impaired equipment (included in “Other income (loss), net” in the consolidated statements of income) at the film products manufacturing facility in Pottsville, Pennsylvania; and losses of $0.1 million on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia. The loss from the write-down of an investment accounted for under the fair value method of $2.2 million in 2010 is included in “Other income (expense), net” in the consolidated statement of income. Income taxes in 2010 include the recognition of an additional valuation allowance of $0.2 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(f) Plant shutdowns, asset impairments, restructurings and other for 2009 include a charge of $2.1 million for severance and other employee related costs in connection with restructurings for Film Products ($1.3 million), Aluminum Extrusions ($0.4 million) and corporate headquarters ($0.4 million, included in “Corporate expenses, net” in the operating profit by segment table); an asset impairment charge of $1.0 million in Films Products; losses of $1.0 million associated with Aluminum Extrusions for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income); a gain of $0.6 million related to the sale of land at our aluminum extrusions facility in Newnan, Georgia (included in “Other income (expense), net” in the consolidated statements of income); a gain of $0.3 million on the sale of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown film products manufacturing facility in LaGrange, Georgia; a gain of $0.2 million on the sale of a previously shutdown aluminum extrusions manufacturing facility in El Campo, Texas (included in “Other income (expense), net” in the consolidated statements of income); a gain of $0.1 million related to the reversal to income of certain inventory impairment accruals in Film Products; and a net charge of $0.1 million (included in “Costs of goods sold” in the consolidated statement of income) related to adjustments of future environmental costs expected to be incurred by Aluminum Extrusions. The gain from the write-up of an investment accounted for under the fair value method of $5.1 million in 2009 is included in “Other income (expense), net” in the consolidated statement of income. The gain on sale of investments in Theken Spine and Therics, LLC, which is also included in “Other income (expense), net” in the consolidated statement of income, includes the receipt of a contractual earn-out payment of $1.8 million and a post-closing contractual adjustment of $0.2 million. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar. Income taxes in 2009 include the recognition of an additional valuation allowance of $2.1 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(g) Plant shutdowns, asset impairments, restructurings and other for 2008 include an asset impairment charge of $9.7 million for Film Products; a charge of $2.7 million for severance and other employee related costs in connection with restructurings for Film Products ($2.2 million) and Aluminum Extrusions ($0.5 million); a gain of $0.6 million from the sale of land rights and related improvements at the film products facility in Shanghai, China (included in “Other income (expense), net” in the consolidated statement of income); and a $0.2 million charge related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income). The gain of $1.5 million from the sale of our investments in Theken Spine and Therics, LLC is included in “Other income (expense), net” in the consolidated statements of income. The gain from the write-up of an investment accounted for under the fair value method of $5.6 million in 2008 is included in “Other income (expense), net” in the consolidated statements of income. Income taxes in 2008 includes the reversal of a valuation allowance recognized in the third quarter of 2007 of $1.1 million that originally related to expected limitations on the utilization of assumed capital losses on certain investments.
(h) Total return to shareholders is defined as the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.
(i) Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(j) Net sales represent gross sales less freight. Net sales is the measure used by the chief operating decision maker of each segment for purposes of assessing performance.
(k) In addition to quarterly dividends of 4 1/2 cents per share in the the first and second quarters and 6 cents per share in the third and fourth quarters of 2012, there was a special one-time dividend of 75 cents per share paid to shareholders in December 2012.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking and Cautionary Statements
Some of the information contained in this Form 10-K may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When we use the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, we do so to identify forward-looking statements. Such statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For risks and important factors that could cause actual results to differ from expectations refer to the reports that we file with or provide to the SEC from time-to-time, including the risks and important factors set forth in “Risk Factors” in Part I, Item 1A of this Form 10-K. Readers are urged to review and consider carefully the disclosures Tredegar makes in the reports Tredegar files with or furnishes to the SEC. Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based.
Executive Summary
General
Tredegar is primarily a manufacturer of plastic films and aluminum extrusions. Descriptions of all of our businesses are provided on pages 1-9.
Sales from continuing operations were $882.2 million in 2012 compared to $794.4 million in 2011. Income from continuing operations was $43.2 million ($1.34 per diluted share) in 2012, compared with $28.5 million (89 cents per diluted share) in 2011. Losses associated with plant shutdowns, assets impairments and restructurings and gains and losses on the sale of assets, gains or losses on investments accounted for under the fair value method and other items are described in results of continuing operations beginning on page 25. The business segment review begins on page 38.
Film Products
A summary of operating results for Film Products is provided below:
The improvement in operating results for Film Products in 2012 was primarily driven by higher volumes in flexible packaging films as a result of our acquisition of Terphane on October 24, 2011. Net sales (sales less freight) for Terphane were $138.0 million in 2012 compared to $28.3 million in 2011. The impact on operating profit from ongoing operations directly attributable to the acquisition of Terphane was $19.1 million in 2012, which includes amortization expense of $5.1 million. In 2011, operating profit from ongoing operations attributed to the addition of Terphane was approximately $3.0 million, which included $0.9 million in one-time reimbursements for custom duties and $0.9 million of amortization expense.
As noted above, net sales for 2012 increased in comparison to 2011 primarily due to the acquisition of Terphane. Higher net sales from the addition of Terphane were primarily offset by lower volumes in the other product lines of approximately $18.7 million, the unfavorable change in the U.S. dollar value of currencies for operations outside the U.S. of approximately $10.1 million and a decrease in average selling prices of approximately $4.6 million. Lower net sales volumes are primarily related to lower volumes for personal care materials and polyethylene overwrap films, partially offset by improved performance in surface protection films in the fourth quarter of 2012. The decrease in the average selling prices in 2012 compared to 2011 can be primarily attributed to pricing pressures.
The increase in operating profit from ongoing operations in 2012 compared to 2011 is primarily due to the acquisition of Terphane, partially offset by lower volumes and compressed margins for personal care materials and the unfavorable impact of the change in the U.S. dollar value of currencies outside the U.S. Excluding the impact of the acquisition of Terphane, lower volumes in Film Products had an unfavorable impact of approximately $4.8 million in 2012 compared to 2011. Lower volumes in personal care materials were partially mitigated by higher sales volumes for surface protection films. The change in the U.S. dollar value of currencies for operations outside the U.S. had an unfavorable impact of approximately $1.4 million in 2012 compared to 2011. The estimated impact on operating profit from ongoing operations of the quarterly lag in the pass-through of average resin costs was approximately a negative $0.5 million in 2012 compared to a negative $0.8 million in 2011.
Effective January 1, 2012, the operations of Bright View were incorporated into Film Products to leverage research and development efforts and accelerate new product development. Prior year balances for Bright View have been reclassified to Film Products to conform with the current year presentation. Operating losses for Bright View in 2012 were consistent with 2011 at $3.8 million.
Capital expenditures in Film Products were $30.5 million in 2012 compared to $13.1 million in 2011, which included approximately $19.6 million in capital expenditures for a project that will expand our capacity at the manufacturing facility in Cabo de Santo Agostinho, Brazil. Film Products currently estimates that capital expenditures will be approximately $80 million in 2013, which includes approximately $49 million for the capacity expansion project in Brazil. This multi-year project will significantly increase capacity in Brazil and primarily serve flexible packaging films customers in Latin America. Depreciation expense was $33.9 million in 2012 and $34.9 million in 2011, and is projected to be approximately $32 million in 2013.
Aluminum Extrusions
On October 1, 2012, The William L. Bonnell Company acquired 100% ownership of AACOA. The purchase price, net of cash acquired, of $54.6 million was primarily funded using financing secured from our existing $350 million revolving credit facility. AACOA operates production facilities in Elkhart, Indiana and Niles, Michigan, and its primary markets include consumer durables, machinery and equipment and transportation. The acquisition will add fabrication capabilities to Aluminum Extrusions’ current array of products and services while providing AACOA with large press capabilities and enhanced geographic sales coverage in a variety of end-use markets.
A summary of operating results for Aluminum Extrusions is provided below:
Net sales in 2012 increased versus 2011 primarily due to the acquisition of AACOA, partially offset by a decrease in average selling prices driven by lower aluminum prices and lower volume resulting from the shutdown of the Kentland facility. AACOA, which was acquired on October 1, 2012, had net sales of $19.5 million in the fourth quarter of 2012. Excluding the impact of the acquisition of AACOA and the Kentland plant shutdown, sales volume in 2012 increased 0.6% in comparison to 2011.
Operating profit from ongoing operations increased in 2012 versus 2011 due to improved profitability from the shutdown of our Kentland manufacturing facility, better pricing, lower energy costs and the acquisition of AACOA. AACOA had operating profit from ongoing operations of approximately $0.8 million for the fourth quarter of 2012, which included amortization expense of $0.5 million.
Aluminum Extrusions closed its manufacturing facility in Kentland, Indiana in August 2012. The plant, whose core market was residential construction, previously employed 146 people. Charges associated with the Kentland shutdown were $3.6 million in 2012, and included accelerated depreciation on property, plant and equipment of approximately $2.4 million, severance and other employee-related costs of approximately $1.2 million and other shutdown-related charges of $2.3 million, partially offset by an adjustment for inventories accounted for under the last-in, first-out (“LIFO”) method of $1.5 million and gains on the sale of equipment of $0.8 million. Other shutdown-related costs are primarily comprised of equipment transfers, environmental assessments, estimated remediation costs, and other miscellaneous plant shutdown charges. Estimated cash expenditures for shutdown-related activities that are expected to be recognized in 2013 are approximately $1 million. The shutdown of our Kentland manufacturing facility had a favorable impact on operating profit from ongoing operations of approximately $2.5 million in 2012 compared to 2011. Starting in 2013, we estimate that on an annual basis the closure of Kentland will have a positive impact of approximately $4-5 million on segment operating profit from ongoing operations in future periods.
Capital expenditures for Bonnell Aluminum were $2.3 million in 2012 compared with $2.7 million in 2011. Capital expenditures are projected to be approximately $19 million in 2013, which includes approximately $15 million for an 18-month project that will expand our capacity at the manufacturing facility in Newnan, Georgia. This additional capacity will primarily serve the automotive industry. Depreciation expense was $9.5 million in 2012 compared with $8.3 million in 2011, and is projected to be approximately $7 million in 2013. Higher depreciation expense in 2012 is primarily related to approximately $2.4 million in accelerated depreciation on property, plant and equipment at the Kentland manufacturing facility.
Other
The Other segment was previously comprised of Bright View and Falling Springs, LLC (“Falling Springs”). Falling Springs develops, owns and operates multiple mitigation banks. As previously noted, the operations of Bright View were incorporated into Film Products in 2012, and all prior year balances for Bright View have been reclassified to Film Products to conform with the current year presentation
On November 20, 2012, Tredegar Real Estate Holdings, Inc., a wholly owned subsidiary of Tredegar, sold its membership interests in Falling Springs to Arc Ventures, LC for cash and stock proceeds totaling $16.6 million. Arc Ventures, LC is a Virginia limited liability company affiliated with John D. Gottwald, a member of our Board of Directors. The purchase price paid to Tredegar was comprised of cash of $12.8 million and 209,576 shares of common stock of Tredegar owned by Arc Ventures, LC. The corresponding loss on sale of $3.1 million, which includes transaction-related expenses of $0.5 million, and the results of operations related to Falling Springs have been classified as discontinued operations for all periods presented.
Corporate Expenses, Interest and Income Taxes
Pension expense was $8.1 million in 2012, an unfavorable change of $5.8 million from pension expense recognized in 2011. Most of the change is reflected in “Corporate expenses, net” in the segment operating profit table presented on page 17. We contributed approximately $2.3 million to our pension plans in 2012. Minimum required contributions to our pension plans in 2013 are expected to be $0.2 million as interest rates and expected long-term plan asset investment returns declined in recent years. Pension expense in 2013 is estimated at $13.3 million. Corporate expenses, net increased in 2012 in comparison to 2011 primarily due to the higher pension expenses noted above, an unrealized loss on our investment in Harbinger of $1.1 million, certain acquisition-related expenses of $0.8 million and higher performance-based incentive compensation of $0.6 million.
Interest expense, which includes the amortization of debt issue costs, was $3.6 million in 2012 in comparison to $1.9 million in 2011 as a result of an increase in the average borrowings under our revolving credit facility. Additional borrowings under our revolving credit facility were used to finance a portion of the purchase prices for the acquisition of Terphane in the fourth quarter of 2011 and the acquisition of AACOA in the fourth quarter of 2012.
The effective tax rate used to compute income taxes from continuing operations was 29.8% in 2012 compared with 26.4% in 2011. Income taxes from continuing operations in 2012 primarily reflect the benefit of current year foreign tax incentives, and income taxes for continuing operations in 2011 primarily reflect the recognition of estimated tax benefits from the divestiture of the film products business in Italy, partially offset by the
nondeductible acquisition-related expenses associated with the acquisition of Terphane by Film Products. Significant differences between the effective tax rate for continuing operations and the U.S. federal statutory rate for 2012 and 2011 are further detailed in the effective income tax rate reconciliation provided in Note 17 beginning on page 76.
Our net debt balance (total debt of $128.0 million in excess of cash and cash equivalents of $48.8 million) at December 31, 2012 was $79.2 million, compared to a net debt balance (total debt of $125.0 million in excess of cash and cash equivalents of $68.9 million) at December 31, 2011 of $56.1 million. Net debt, a financial measure that is not calculated or presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), is not intended to represent debt as defined by U.S. GAAP, but is utilized by management in evaluating financial leverage and equity valuation. We believe that investors also may find net debt helpful for the same purposes. Consolidated net capitalization and other credit measures are provided in the financial condition section beginning on page 29.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with U.S. GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our critical accounting policies. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.
Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill
We assess our long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when we do not believe the carrying value of the long-lived asset will be recoverable. We also reassess the useful lives of our long-lived assets based on changes in our business and technologies.
We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). Our reporting units in Film Products include, but are not limited to, Polyethylene and Polypropylene Films and PET Films. As of December 31, 2012, each of the previously identified reporting units in Film Products was carrying a goodwill balance. We have two reporting units in Aluminum Extrusions, AACOA and Bonnell. All goodwill in Aluminum Extrusions is associated with the AACOA reporting unit.
In assessing the recoverability of goodwill and long-lived identifiable assets, we estimate fair value using discounted cash flow analysis and comparative enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. These calculations require us to make assumptions regarding estimated future cash flows, discount rates and other factors to determine if an impairment exists. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges.
Based upon assessments performed as to the recoverability of long-lived identifiable assets, we recorded asset impairment losses for continuing operations of $1.0 million in 2012, $1.4 million in 2011 and $0.6 million in 2010.
Investment Accounted for Under the Fair Value Method
In August 2007 and December 2008, we made an aggregate investment of $7.5 million in Intelliject, a privately held specialty pharmaceutical company. This investment is accounted for under the fair value method. At the time of our initial investment, we elected the fair value option over the equity method of accounting since our investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests (venture capital funds generally use the fair value method to account for their investment portfolios). At December 31, 2012, our ownership interest was approximately 20% on a fully diluted basis.
We disclose the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). On the dates of our investments, we believe that the amount we paid for our ownership interest and liquidation preferences was based on Level
2 inputs, including investments by other investors. Subsequent to the last round of financing, and until the next round of financing, we believe fair value estimates are based upon Level 3 inputs since there is no secondary market for our ownership interest. In addition, Intelliject had no product sales as of December 31, 2012. Their first product launched in the first quarter of 2013. Accordingly, after the latest financing and until the next round of financing or any other significant financial transaction, fair value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of development and commercialization milestone payments, sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk.
At December 31, 2012 and 2011, the fair value of our investment (the carrying value included in “Other assets and deferred charges” in our consolidated balance sheet) was $33.7 million and $17.6 million, respectively. The fair market valuation of our interest in Intelliject is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk associated with meeting development and commercialization milestones as anticipated. At December 31, 2012, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of our interest in Intelliject by approximately $6 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of our interest by approximately $5 million. Any future changes in the estimated fair value of our ownership interest will likely be attributed to a new round of financing, a merger or initial public offering or adjustments to the timing or magnitude of cash flows associated with development and commercialization milestones. Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.
Pension Benefits
We sponsor noncontributory defined benefit (pension) plans in our continuing operations that have resulted in varying amounts of net pension income or expense, as developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. We are required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income or expense recorded in future periods.
The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments determined by using the AA-rated bond yield curve. In general, our liability increases as the discount rate decreases and vice versa. The weighted average discount rate utilized was 4.21% at the end of 2012, 4.95% at the end of 2011 and 5.45% at the end of 2010, with changes between periods due to changes in market interest rates. Based on plan changes announced in 2006, pay for active participants of the plan was frozen as of December 31, 2007. A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. The total return on our plan assets, which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was 8.9% in 2012, a negative 5.1% in 2011, and 11.4% in 2010. Our expected long-term return on plan assets relating to continuing operations, which is estimated by asset class and generally based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums, were 8.0% in 2012, 8.25% in 2009 to 2011 and 8.5% from 2004 to 2008. We anticipate that our expected long-term return on plan assets will be 7.75% for 2013. See page 73 for more information on expected long-term return on plan assets and asset mix.
See the executive summary beginning on page 20 for further discussion regarding the financial impact of our pension plans.
Income Taxes
On a quarterly basis, we review our judgments regarding uncertain tax positions and the likelihood that the benefits of a deferred tax asset will be realized. As circumstances change, we reflect in earnings any adjustments to unrecognized benefits for uncertain tax positions and valuation allowances for deferred tax assets.
For financial reporting purposes, we had unrecognized tax benefits on uncertain tax positions of $0.9 million, $1.0 million and $1.1 million as of December 31, 2012, 2011 and 2010, respectively. Tax payments resulting from the successful challenge by the taxing authority on uncertain tax positions taken by us would possibly result in the payment of interest and penalties. Accordingly, we also accrue for possible interest and penalties on uncertain tax positions. The balance of accrued interest and penalties on deductions taken relating to uncertain tax positions was approximately $0.1 million, $0.4 million and $0.1 million at December 31, 2012, 2011 and 2010, respectively ($37,000, $0.2 million and $0.1 million, respectively, net of corresponding federal and state income tax benefits). Accruals for possible interest and penalties on uncertain tax positions are reflected in income tax expense for financial reporting purposes.
Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. Except for refund claims and amended returns, the Internal Revenue Service (“IRS”) has provided written confirmation that they do not plan to make any additional changes to our U.S. consolidated tax returns for the years prior to 2010, although the federal statute of limitations was extended through December 31, 2013 for the tax years 2006-2009. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2009.
As of December 31, 2012 and 2011, we had valuation allowances relating to deferred tax assets of $18.6 million and $12.4 million, respectively. For more information on deferred income tax assets and liabilities, see Note 17 of the notes to financial statements beginning on page 76.
Recently Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board (“FASB”) issued updated guidance for testing indefinite-lived intangible assets for impairment. The revised standard provides entities with an option to perform a “qualitative” assessment to determine whether further testing is necessary when performing an annual impairment assessment for indefinite-lived intangible assets other than goodwill. This new standard is comparable to the guidance finalized last year for goodwill impairment testing. An entity can still choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect that this FASB accounting standard will have a material impact on our financial statements and disclosures.
Results of Continuing Operations
2012 versus 2011
Revenues. Sales in 2012 increased by 11.0% compared with 2011 due to higher sales in both Film Products and Aluminum Extrusions. Net sales increased 14.3% in Film Products primarily due to the acquisition of Terphane, partially offset by lower volumes in the remaining product lines, the unfavorable change in the U.S. dollar value of currencies for operations outside the U.S. and a decrease in average selling prices. Net sales increased 2.1% in Aluminum Extrusions primarily due to the acquisition of AACOA, partially offset by a decrease in average selling prices driven by lower aluminum prices and lower volumes resulting from the shutdown of the Kentland facility. For more information on net sales and volume, see the executive summary beginning on page 20.
Operating Costs and Expenses. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales were 16.4% in 2012 and 15.3% in 2011. The gross profit margin in Film Products was relatively flat primarily due to the favorable impact of the acquisition of Terphane and the lag in the pass-through of higher resin costs, offset by lower volumes and margin compression, primarily in personal care materials. Gross profit margin in Aluminum Extrusions increased primarily as a result of improved profitability from the shutdown of our Kentland manufacturing facility, better pricing and lower energy costs. For more information on operating costs and expenses, see the executive summary beginning on page 20.
As a percentage of sales, selling, general and administrative and R&D expenses were 9.8% in 2012, which decreased from 10.2% in 2011. The decrease in selling, general and administrative and R&D expenses as a percentage of sales can be attributed to higher sales and lower acquisition-related expenditures in 2012. Acquisition-related expenses were $2.0 million in 2012 compared to $4.8 million in 2011.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges in 2012 totaled $5.5 million ($3.6 million loss after taxes) and included:
•
A fourth quarter charge of $0.9 million ($0.5 million after taxes), a third quarter charge of $0.8 million ($0.5 million after taxes), a second quarter charge of $1.0 million ($0.7 million after taxes) and a first quarter charge of $0.9 million ($0.5 million after taxes) associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana, which includes accelerated depreciation for property, plant and equipment of $2.4 million (included in “Cost of goods sold” in the consolidated statements of income), severance and other employee-related expenses of $1.2 million and other shutdown-related charges of $2.3 million, partially offset by adjustments to inventories accounted for under the LIFO method of $1.5 million (included in “Cost of goods sold” in the consolidated statements of income) and gains on the sale of equipment of $0.8 million (included in “Other income (expense), net” in the consolidated statements of income);
•
A fourth quarter gain of $1.3 million ($0.7 million after taxes) in Film Products (included in “Other income (expense), net” in the consolidated statements of income) associated with an insurance recovery on idle equipment that was destroyed in a fire at an outside warehouse;
•
A fourth quarter charge of $0.9 million ($0.6 million after taxes) and a third quarter charge of $0.3 million ($0.2 million after taxes) for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions;
•
A fourth quarter charge of $0.1 million ($0.1 million after taxes), a third quarter charge of $0.1 million ($0.1 million after taxes), a second quarter charge of $0.6 million ($0.4 million after taxes) and a first quarter charge of $0.3 million ($0.2 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane;
•
A fourth quarter gain of $1.1 million ($0.6 million after taxes) related to the sale of a previously shutdown film products manufacturing facility in LaGrange, Georgia;
•
A second quarter charge of $0.8 million ($0.5 million after taxes) for asset impairments associated with a previously shutdown film products manufacturing facility in LaGrange, Georgia;
•
A fourth quarter charge of $0.2 million ($0.1 million after taxes) and a second quarter charge of $0.1 million ($46,000 after taxes) in Film Products and a first quarter charge of $0.2 million ($0.1 million after taxes) in Aluminum Extrusions for severance and other employee-related costs in connection with restructurings;
•
A fourth quarter charge of $0.2 million ($0.2 million after taxes) for asset impairments in Film Products;
•
A fourth quarter charge of $0.2 million ($0.1 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Aluminum Extrusions’ acquisition of AACOA;
•
A fourth quarter charge of $0.1 million ($0.1 million after taxes) associated with purchase accounting adjustments made to the value of inventory sold by Aluminum Extrusions after its acquisition of AACOA (included in “Cost of goods sold” in the consolidated statements of income; see discussion that follows for additional detail); and
•
A fourth quarter charge of $0.1 million ($49,000 after taxes) related to expected future environmental costs at our aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).
Business combination accounting principles under U.S. GAAP require that we adjust the inventory acquired in the acquisition of AACOA to fair value at the date of acquisition. In particular, finished goods inventory acquired was adjusted to reflect the cost of manufacturing plus a portion of the expected profit margin. The acquired inventory was sold in the fourth quarter of 2012. We believe that the adjustment included in “Cost of goods sold” in the fourth quarter of 2012 should be removed by investors as a means to determine profit and margins from ongoing operations, which reflect the operating trends of the acquired business.
As previously noted, on November 20, 2012, we sold Falling Springs to Arc Ventures, LC. The corresponding loss on sale of $3.1 million ($2.0 million after taxes), which includes transaction-related expenses of $0.5 million, and the results of operations related to Falling Springs (net income of $0.5 million in 2012) have been classified as discontinued operations.
On February 12, 2008, we sold our aluminum extrusions business in Canada for approximately $25.0 million to an affiliate of H.I.G. Capital. All historical results for this business have been reflected as discontinued operations. In 2012, an accrual of $13.4 million ($13.4 million after taxes) was made for indemnifications under the purchase agreement related to environmental matters.
Results in 2012 include an unrealized gain from the write-up of our investment in Intelliject of $16.1 million ($10.2 million after taxes; see further discussion beginning on page 23). An unrealized loss on our investment in Harbinger of $1.1 million ($0.7 million after taxes) was recorded in 2012 as a result of a reduction in the fair value of our investment that is not expected to be temporary. For more information on costs and expenses, see the executive summary beginning on page 20.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.4 million in 2012, compared to $1.0 million in 2011. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.
Interest expense, which includes the amortization of debt issue costs, was $3.6 million in 2012, compared to $1.9 million for 2011. In October 2011, we borrowed $125 million under our revolving credit agreement to help fund the acquisition of Terphane. In October 2012, we borrowed an additional $51 million under our revolving credit facility to fund the acquisition of AACOA.
Average debt outstanding and interest rates were as follows:
Income Taxes. The effective tax rate used to compute income taxes from continuing operations was 29.8% in 2012 compared with 26.4% in 2011. Income taxes from continuing operations in 2012 primarily reflect the benefit of current year foreign tax incentives. Income taxes for continuing operations in 2011 reflect the recognition of estimated tax benefits from the divestiture of the film products business in Italy, partially offset by nondeductible acquisition-related expenses associated with the acquisition of Terphane by Film Products. Factors impacting our effective tax rate for 2012 and 2011 are further detailed in the effective income tax rate reconciliation provided in Note 17 beginning on page 76.
2011 versus 2010
Revenues. Sales in 2011 increased by 7.6% compared with 2010 due to higher sales in both Film Products and Aluminum Extrusions. Net sales increased 2.8% in Film Products primarily due to the acquisition of Terphane and an increase in average selling prices from the pass-through of higher average resin prices, partially offset by lower volume in surface protection films and personal care materials. Net sales increased 20.4% in Aluminum Extrusions due to higher sales volume in most markets and an increase in average selling prices driven by higher aluminum prices.
Operating Costs and Expenses. Consolidated gross profit as a percentage of sales was 15.3% in 2011 and 17.0% in 2010. The gross profit margin in Film Products decreased primarily due to lower volumes in personal care materials and surface protection films, partially offset by the estimated favorable impact of the quarterly lag in the pass-through of changes in average resin costs, additional operating profits generated from the acquisition of Terphane, improved manufacturing efficiencies in 2011 and the change in the U.S. dollar value of currencies for operations outside the U.S. Gross profit margin in Aluminum Extrusions increased as a result of the higher sales volumes noted above.
As a percentage of sales, selling, general and administrative and R&D expenses were 10.2% in 2011, which decreased from 11.0% in 2010. The decrease in selling, general and administrative and R&D expenses as a percentage of sales can be attributed to the cost reduction efforts in 2011 and lower performance-based incentive accruals, partially offset by higher acquisition-related expenditures in 2011.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges in 2011 totaled $6.8 million ($0.3 million gain after taxes) and included:
•
A fourth quarter charge of $2.5 million ($2.2 million after taxes) and a third quarter charge of $2.3 million ($2.2 million after taxes) for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane;
•
A fourth quarter charge of $0.6 million ($0.4 million after taxes) and a second quarter charge of $0.8 million ($0.5 million after taxes) for asset impairments in Film Products;
•
A third quarter gain of $1.0 million ($6.6 million after taxes) on the divestiture of our film products subsidiary in Roccamontepiano, Italy (included in “Other income (expense), net” in the consolidated statements of income), which includes the recognition of previously unrealized foreign currency translation gains of $4.3 million that were associated with the business;
•
A fourth quarter charge of $0.7 million ($0.5 million after taxes) associated with purchase accounting adjustments made to the value of inventory sold by Film Products after its acquisition of Terphane (included in “Cost of goods sold” in the consolidated statements of income; see discussion that follows for additional detail);
•
A fourth quarter charge of $0.1 million ($39,000 after taxes), a third quarter charge of $0.2 million ($0.1 million after taxes) and a second quarter charge of $0.3 million ($0.2 million after taxes) for severance and other employee-related costs in connection with restructurings in Film Products;
•
A fourth quarter charge of $0.4 million ($0.3 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane; and
•
A fourth quarter benefit of $39,000 ($24,000 after taxes), a third quarter charge of $43,000 ($27,000 after taxes), a second quarter benefit of $0.1 million ($0.1 million after taxes), and a first quarter charge of $32,000 ($20,000 after taxes) for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income).
Business combination accounting principles under U.S. GAAP require that we adjust the inventory acquired in the acquisition of Terphane to fair value at the date of acquisition. In particular, finished goods inventory acquired was adjusted to reflect the cost of manufacturing plus a portion of the expected profit margin. The acquired inventory was sold in the fourth quarter of 2011. We believe that the adjustment included in “Cost of goods sold” in the fourth quarter of 2011 should be removed by investors as a means to determine profit and margins from ongoing operations, which reflect the operating trends of the acquired business.
The results of operations related to Falling Springs (net income of $0.7 million in 2011 and $0.2 million in 2010) have been classified as discontinued operations as a result of our divestiture of Fallings Springs in November 2012. In 2011, an accrual of $4.4 million ($4.4 million after taxes) was made for indemnifications under the purchase agreement associated with the 2008 sale of our aluminum extrusions business in Canada. These contractual indemnifications were related to environmental matters associated with our former aluminum extrusions operations in Canada.
Results in 2011 include an unrealized gain from the write-up of our investment in Intelliject of $1.6 million ($1.0 million after taxes; see further discussion beginning on page 23). An unrealized loss on our investment in Harbinger of $0.6 million ($0.4 million after taxes) was recorded in 2011 as a result of a reduction in the fair value of our investment that is not expected to be temporary. For more information on costs and expenses, see the executive summary beginning on page 20.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $1.0 million in 2011, compared to $0.7 million in 2010. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.
Interest expense, which includes the amortization of debt issue costs, was $1.9 million in 2011, compared to $1.1 million for 2010. In October 2011, we borrowed $125 million under our revolving credit agreement to help fund the acquisition of Terphane. Average debt outstanding and interest rates were as follows:
Income Taxes. The effective tax rate used to compute income taxes from continuing operations was 26.4% in 2011 compared with 33.7% in 2010 primarily as a result of the recognition of estimated tax benefits related to the 2011 divestiture of our film products subsidiary in Italy, partially offset by the effect on income taxes from the reduction in 2010 of the estimated value of a dividend received from a foreign subsidiary and the impact of non-deductible acquisition-related expenses in 2011 associated with the acquisition of Terphane by Film Products. Factors impacting our effective tax rate for 2011 and 2010 are further detailed in the effective income tax rate reconciliation provided in Note 17 beginning on page 76. The impact of the change in the estimated value of a dividend received from a foreign subsidiary is reflected in “Changes in estimates related to prior year tax provision” in the effective income tax rate reconciliation.
Financial Condition
Assets and Liabilities
Significant changes in assets and liabilities from continuing operations from December 31, 2011 to December 31, 2012 are summarized below:
•
Accounts and other receivables increased $2.5 million (2.5%).
•
Accounts and other receivables in Film Products decreased by $6.8 million due mainly to the timing of cash receipts.
•
Accounts and other receivables in Aluminum Extrusions increased by $9.0 million primarily due to the addition of balances from the acquisition of AACOA and the timing of cash receipts.
•
Other receivables increased in corporate by approximately $0.3 million due to contractual amounts due from Arc Ventures, LC from the sale of Falling Springs.
•
Inventories increased $13.4 million (21.8%).
•
Inventories in Film Products increased by approximately $7.9 million primarily due to the timing of shipments.
•
Inventories in Aluminum Extrusions increased by approximately $5.5 million primarily due to the addition of balances from the acquisition of AACOA.
•
Net property, plant and equipment decreased $3.8 million (1.5%) due primarily to depreciation of $43.5 million, a change in the value of the U.S. dollar relative to foreign currencies (a decrease of approximately $6.0 million) and asset impairments and property disposals of approximately $2.7 million, partially offset by capital expenditures of $33.3 million and property and equipment added from the acquisition of AACOA of $15.1 million.
•
Goodwill and other intangibles increased by $17.7 million (7.9%) primarily due to balances added from the acquisition of AACOA, partially offset by amortization expense of $5.8 million and changes in the value of the U.S. dollar relative to foreign currencies (decrease of approximately $5.4 million). Identifiable intangible assets and goodwill associated with the acquisition were $14.6 million and $14.3 million, respectively.
•
Accounts payable increased by $9.2 million (12.6%).
•
Accounts payable in Film Products increased by $2.2 million primarily due to the timing of payments.
•
Accounts payable in Aluminum Extrusions increased by $7.3 million, primarily due to the addition of balances from the acquisition of AACOA and the timing of payments.
•
Accounts payable decreased in corporate by $0.3 million due to the normal volatility associated with the timing of payments.
•
Accrued expenses increased by $1.6 million (4.0%) from December 31, 2011 primarily due to the addition of balances from the acquisition of AACOA.
•
Other noncurrent liabilities increased by $25.7 million (35.8%) due primarily to the change in the funded status of our defined benefit plans. As of December 31, 2012, the funded status of our defined benefit pension plan was a net liability of $83.3 million compared with $57.8 million as of December 31, 2011, and the liability associated with our other post-employment benefits plan was $8.9 million as of December 31, 2012 compared to $8.4 million as of December 31, 2011.
•
Net deferred income tax liabilities in excess of assets increased by $8.5 million primarily due to numerous changes between years in the balance of the components shown in the December 31, 2012 and 2011 schedule of deferred income tax assets and liabilities provided in Note 17 beginning on page 76. Income taxes recoverable increased by $0.3 million primarily due to the timing of tax payments.
Net capitalization and indebtedness as defined under our revolving credit agreement as of December 31, 2012 were as follows:
Under the revolving credit agreement, borrowings are permitted up to $350 million, and approximately $199 million was available to borrow at December 31, 2012 based on the most restrictive covenants. The credit spread and commitment fees charged on the unused amount under the revolving credit agreement at various indebtedness-to-adjusted EBITDA levels are as follows:
At December 31, 2012, the interest rate on debt borrowed under the revolving credit agreement was priced at one-month LIBOR plus the applicable credit spread of 150 basis points. Market exposure related to changes in one-month LIBOR (assuming that the applicable credit spread remains at 150 basis points) would not be material to our consolidated financial results.
Noncompliance with any of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant(s) through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the amended covenant is renegotiated.
The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the credit agreement are not intended to represent net income or cash flow from operations as defined by U.S. GAAP and should not be considered as either an alternative to net income or to cash flow.
Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and
Interest Coverage Ratio as Defined in the Credit Agreement Along with Related Most
Restrictive Covenants
As of and for the Twelve Months Ended December 31, 2012 (In Thousands)
We are obligated to make future payments under various contracts as set forth below:
(1) Estimated minimum required contributions for defined benefit plans and benefit payments for other postretirement plans are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases and health care cost trends. The expected defined benefit plan contribution estimates for 2013 through 2022 were determined under provisions of the Pension Protection Act of 2006 using the preliminary assumptions chosen by Tredegar for the 2013 plan year. Tredegar has determined that it is not practicable to present defined benefit contributions and other postretirement benefit payments beyond 2022.
(2) Represents contractual obligations for plant construction and purchases of real property and equipment. In February 2012, Film Products signed contracts associated with our multi-year capacity expansion project in Brazil that resulted in future contractual commitments of approximately $14 million in 2013.
(3) Amounts for which reasonable estimates about the timing of payments cannot be made are included in the remainder column.
(4) Includes contractual severance, the expected contingent earnout from our purchase of the assets of Bright View, and other miscellaneous contractual arrangements.
We believe that existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future. At December 31, 2012, we had cash and cash equivalents of $48.8 million, including funds held in locations outside the U.S. of $28.6 million. We accrue U.S. federal income taxes on unremitted earnings of all foreign subsidiaries except Terphane Ltda. (a subsidiary of Film Products). Deferred U.S. federal income taxes have not been provided on the undistributed earnings for Terphane Ltda. because of our intent to permanently reinvest these earnings. The cumulative amount of untaxed earnings was $23.0 million at December 31, 2012.
From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the transaction, or the sellers or third parties involved in the transaction agree to indemnify us, for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount is reasonably estimable. We disclose contingent liabilities if the probability of loss is reasonably possible and material.
Shareholders’ Equity
At December 31, 2012, we had 32,069,370 shares of common stock outstanding and a total market capitalization of $654.9 million, compared with 32,057,281 shares of common stock outstanding and a total market capitalization of $712.3 million at December 31, 2011.
We received 209,576 shares in 2012 at a price of $17.70 per share as consideration from Arc Ventures, LC in connection with our divestiture of Falling Springs.
We did not repurchase any shares on the open market in 2012 or 2011 under our approved share repurchase program.
Cash Flows
The discussion in this section supplements the information presented in the consolidated statements of cash flows on page 49. Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.
Cash provided by operating activities was $82.6 million in 2012 compared with $71.8 million in 2011. The increase is due primarily to normal volatility of working capital components (see the assets and liabilities section beginning on page 29 for discussion of changes in working capital).
Cash used in investing activities was $75.6 million in 2012 compared with $195.2 million in 2011. Cash used in investing activities in 2012 primarily includes the acquisition of AACOA ($54.6 million) and capital expenditures ($33.3 million), partially offset by net cash proceeds received from the sale of Falling Springs ($12.1 million).
Net cash flow provided in financing activities was $26.7 million in 2012, which is primarily due to the one-time dividend of $24.0 million in December 2012 and the payment of regular quarterly dividends of $6.8 million (4 1/2 cents per share per quarter in the first and second quarters and 6 cents per share in the third and fourth quarters). Net borrowings against our revolving credit facility were $3.0 million in 2012.
Cash provided by operating activities was $71.8 million in 2011 compared with $46.4 million in 2010. The increase is due primarily to normal volatility of working capital components.
Cash used in investing activities was $195.2 million in 2011 compared with $22.2 million in 2010. Cash used in investing activities in 2011 primarily includes the purchase of Terphane ($181.0 million) and capital expenditures ($15.9 million).
Net cash flow provided in financing activities was $120.4 million in 2011, which is primarily due to borrowings of $125 million to fund the purchase of Terphane, partially offset by the payment of regular quarterly dividends of $5.8 million (4 1/2 cents per share per quarter).
Quantitative and Qualitative Disclosures about Market Risk
Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, Terephtalic Acid (“PTA”) and Monoethylene Glycol (“MEG”) prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the assets and liabilities section beginning on page 29 regarding interest rate exposures related to borrowings under the revolving credit agreement.
Changes in resin, PTA and MEG prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate our casting furnaces). There is no assurance of our ability to pass through higher raw material and energy costs to our customers.
See the executive summary beginning on page 20 and the business segment review beginning on page 38 for discussion regarding the impact of the lag in the pass-through of resin price changes. The volatility of average quarterly prices of low density polyethylene resin in the U.S. (a primary raw material for Film Products) is shown in the chart below.
Resin prices in Europe, Asia and South America have exhibited similar long-term trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days (see the executive summary on page 20 and the business segment review on page 38 for more information). Pricing on the remainder of our business is based upon raw material costs and supply/demand dynamics within the markets that we compete.
The volatility of average quarterly prices of PTA and MEG (raw materials for Film Products) is shown in the chart below:
In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. See Note 9 beginning on page 65 for more information. The volatility of quarterly average aluminum prices is shown in the chart below.
In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $75,000 impact on the continuing monthly operating profit for our U.S. operations in Aluminum Extrusions. We have an energy surcharge for our aluminum extrusions business in the U.S. that is applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu. The volatility of quarterly average natural gas prices is shown in the chart below.
We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for ongoing operations related to foreign markets for 2012, 2011 and 2010 are as follows:
Tredegar Corporation-Continuing Ongoing Operations
Percentage of Net Sales and Total Assets Related to Foreign Markets
* The percentages for foreign markets are relative to Tredegar’s total net sales and total assets from ongoing operations
(consolidated net sales and total assets from continuing operations excluding cash and cash equivalents).
We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies (see trends for the Euro, Brazilian Real and Chinese Yuan in the chart below) and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from continuing foreign operations relates to the Euro, the Chinese Yuan, the Hungarian Forint, the Brazilian Real and the Indian Rupee.
In Film Products, where we are primarily able to match the currency of our sales and costs, we estimate that the change in value of foreign currencies relative to the U.S. Dollar had a negative impact on operating profit from ongoing operations of approximately $1.4 million in 2012 compared to 2011, a positive impact on operating profit from ongoing operations of approximately $1.8 million in 2011 compared with 2010, a negative impact of approximately $1.3 million in 2010 compared with 2009.
For flexible packaging films produced in Brazil, we price our products in U.S. Dollars, and key raw materials are also priced in U.S. Dollars. However, certain production costs, such as conversion costs and other fixed costs, are priced in Brazilian Real, which exposes our operating margins to some currency exposure. In general, when the U.S. Dollar is strengthening versus the Brazilian Real, operating results will benefit from relatively lower costs, and when the U.S. Dollar is weakening versus the Brazilian Real, operating results will be negatively impacted from relatively higher costs.
Trends for the Euro are shown in the chart below:
Trends for the Brazilian Real and Chinese Yuan are shown in the chart below:
Business Segment Review
Net sales and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.
Film Products
Net Sales. See the executive summary beginning on page 20 for the discussion of net sales (sales less freight) in Film Products in 2012 compared with 2011.
In Film Products, net sales were $535.5 million in 2011, an increase of 2.8% from $520.7 million in 2010. Volume decreased to 218.7 million pounds in 2011 from 221.2 million pounds in 2010. Net sales in 2011 increased compared to 2010 due to the acquisition of Terphane and an increase in average selling prices from the pass-through of higher average resin prices, partially offset by lower volume in surface protection films and personal care materials.
The slowdown in end-user demand for large-sized LCD panels, particularly in the high-end segment, negatively impacted the volumes of our surface protection films. In addition, reduced consumer demand for applications that utilize our premium personal care films also contributed to the reduction in sales volume. Terphane generated net sales of $28.3 million subsequent to its acquisition in October 2011.
Operating Profit. See the executive summary beginning on page 20 for the discussion of operating profit in Film Products in 2012 compared with 2011.
Operating profit from ongoing operations was $59.5 million in 2011, a decrease of 10.8% compared with $66.7 million in 2010. Operating profit from ongoing operations decreased in 2011 compared to 2010 due to the lower sales volumes in surface protection materials and personal care films. The impact of lower volumes was partially offset by a reduction in the unfavorable impact of the lag in the pass-through of higher resin costs, additional operating profits generated by the acquisition of Terphane, cost reduction efforts and improved manufacturing efficiencies in 2011, and favorable changes in the U.S. dollar value of currencies for operations outside the U.S. The estimated impact of the lag in the pass-through of changes in average resin costs was a negative $0.8 million in 2011 and a negative $6.4 million in 2010. The estimated favorable impact from U.S. dollar value currencies for operations outside the U.S. was $1.8 million in 2011 compared with 2010. Terphane had operating profit of $3.0 million from the acquisition date through December 31, 2011, which included $0.9 million of amortization expense and $0.9 million of one-time reimbursements for customs duties.
Identifiable Assets. Identifiable assets in Film Products decreased to $551.8 million at December 31, 2012, from $574.6 million at December 31, 2011, due primarily to the depreciation of property, plant and equipment and amortization of identifiable intangible assets, partially offset by current year capital expenditures. See the assets and liabilities section beginning on page 29 for further discussion on changes in assets and liabilities.
Identifiable assets in Film Products increased to $574.6 million at December 31, 2011, from $368.9 million at December 31, 2010, due primarily to the acquisition of Terphane.
Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Film Products was $39.2 million in 2012, $36.3 million in 2011 and $34.4 million in 2010. The increase in depreciation and amortization in 2012 compared with 2011 is primarily related to the acquisition of Terphane ($10.2 million in 2012 compared to $2.1 million in 2011), partially offset by lower depreciation expense as certain assets becoming fully depreciated. The increase in depreciation and amortization in 2011 compared to 2010 is related to the acquisition of Terphane. We estimate depreciation and amortization expense for Film Products will be approximately $37 million in 2013.
Capital expenditures totaled $30.5 million in 2012, $13.1 million in 2011 and $15.8 million in 2010. Capital expenditures in 2012 include approximately $19.6 million for the project to expand capacity at our manufacturing facility in Cabo de Santo Agosthino, Brazil. Capital expenditures in 2011 primarily included the normal replacement of machinery and equipment. Capital expenditures in 2010 included the construction of our new manufacturing facility in India as well as capital spending to support growth initiatives. Capital expenditures in 2013 are estimated to be approximately $80 million, which includes approximately $49 million in capital expenditures for a project that will expand capacity at our manufacturing facility in Cabo de Santo Agosthino, Brazil.
Aluminum Extrusions (Continuing Operations)
Net Sales and Operating Profit. See the executive summary beginning on page 20 for the discussion of net sales (sales less freight) and operating profit from ongoing operations of Aluminum Extrusions in 2012 compared with 2011.
Net sales in Aluminum Extrusions were $240.4 million in 2011, an increase of 20.4% from $199.6 million in 2010. Operating profit from ongoing operations was $3.5 million, a positive change of $7.7 million from operating losses from ongoing operations of $4.2 million in 2010. Volume was 108.0 million pounds in 2011 compared to 94.9 million pounds in 2010.
The increase in net sales was due to higher volumes and an increase in average selling prices driven by higher average aluminum costs. Sales volume increased 13.8% in 2011 compared to 2010 as we developed new customer opportunities and were able to support key customers who continue to demonstrate strength in a difficult business environment. The improvement in results from ongoing operations in 2011 reflects higher volumes.
Identifiable Assets. Identifiable assets in Aluminum Extrusions were $129.3 million at December 31, 2012, $78.7 million at December 31, 2011 and $81.7 million at December 31, 2010. The increase in identifiable assets between December 31, 2011 and December 31, 2012 can be primarily attributed to the acquisition of AACOA. The decrease of $3.0 million at the end of 2011 compared to 2010 is mainly due to depreciation of property, plant and equipment and lower capital expenditures in 2011.
Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Aluminum Extrusions was $10.0 million in 2012, $8.3 million in 2011 and $9.1 million in 2010. The increase in 2012 compared to 2011 is primarily attributed to approximately $2.4 million in accelerated depreciation on property, plant and equipment associated with shutdown of the Kentland manufacturing facility and impact of the acquisition of AACOA ($1.0 million in additional depreciation and amortization expense in the fourth quarter of 2012), partially offset by certain assets becoming fully depreciated and lower than normal capital expenditures in 2012, 2011 and the second half of 2010. The decrease between 2011 compared to 2010 is primarily attributed to certain assets becoming fully depreciated and lower than normal capital expenditures in 2011 and the second half of 2010. We estimate depreciation and amortization expense for Aluminum Extrusions to be approximately $8.5 million in 2013.
Capital expenditures totaled $2.3 million in 2012, $2.7 million in 2011 and $4.3 million in 2010. Capital expenditures are estimated to be approximately $19 million in 2013, which includes approximately $15 million for an 18-month project that will expand our capacity at the manufacturing facility in Newnan, Georgia. This additional capacity will primarily serve the automotive industry.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion of “Quantitative and Qualitative Disclosures about Market Risk” beginning on page 34 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index on page 44 for references to the report of the independent registered public accounting firm, the consolidated financial statements and selected quarterly financial data.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Tredegar’s internal control over financial reporting is designed to provide reasonable assurance to Tredegar’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles and includes policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices) and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In conducting its assessment of the effectiveness of our internal controls over financial reporting, management excluded its acquisition of AACOA, Inc., which was acquired by Tredegar on October 1, 2012 and is included in Tredegar’s 2012 consolidated financial statements and constituted less than 8% of consolidated total assets and less than 3% of consolidated total sales for the year then ended. Based on their evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included on page 45.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors and persons nominated to become directors of Tredegar to be included in our Proxy Statement under the headings “Election of Directors” and “Tredegar’s Board of Directors” is incorporated herein by reference.
The information concerning corporate governance to be included in the Proxy Statement under the headings “Board Meetings, Meetings of Non-Management Directors and the Board Committees” and “Corporate Governance” is incorporated herein by reference.
The information to be included in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
Set forth below are the names, ages and titles of our executive officers:
Name
Age
Title
Nancy M. Taylor
President and Chief Executive Officer
Duncan A. Crowdis
President, The William L. Bonnell Company, Inc. and Corporate Vice President
Mary Jane Hellyar
President, Tredegar Film Products Corporation and Corporate Vice President
A. Brent King
Vice President, General Counsel and Corporate Secretary
Kevin A. O’Leary
Vice President, Chief Financial Officer and Treasurer
Larry J. Scott
Vice President, Audit
Nancy M. Taylor. Ms. Taylor was elected President and Chief Executive Officer effective February 1, 2010. Prior to February 1, 2010, Ms. Taylor was President of Tredegar Films Products Corporation and Executive Vice President. She was elected Executive Vice President effective January 1, 2009. She was elected President of Tredegar Film Products Corporation effective April 5, 2005. She was elected Senior Vice President effective November 1, 2004. Ms. Taylor served as Senior Vice President, Strategy and Special Projects from November 1, 2004 until April 5, 2005.
Duncan A. Crowdis. As the Company has previously announced, Mr. Crowdis intends to retire effective June 1, 2013. Mr. Crowdis was elected Vice President of the Company effective January 1, 2009. Mr. Crowdis was elected President of The William L. Bonnell Company, Inc. on June 13, 2005, and continues to serve in such capacity. Mr. Crowdis served as Plant Manager of The William L. Bonnell Company, Inc. from March 2005 until June 2005. He previously served as Chief Process Officer of The William L. Bonnell Company, Inc. from December 2002 until March 2005.
Mary Jane Hellyar. Ms. Hellyar was elected Vice President of the Company and President of Tredegar Film Products Corporation on September 24, 2012. Ms. Hellyar served as Chief Executive Officer of TechnoCorp Energy OLED from September 2009 until returning to retirement in September 2010. She served as President of Eastman Kodak Company’s Film Photofinishing and Entertainment Group from September 2005 until retiring from Kodak in June 2009.
A. Brent King. Mr. King was elected Vice President, General Counsel and Corporate Secretary on October 20, 2008, the date that he joined Tredegar. From October 2005 until October 2008, he served as General Counsel at Hilb Rogal & Hobbs Company. Mr. King was Vice President and Assistant Secretary for Hilb Rogal & Hobbs Company from October 2001 to October 2008. He served as Associate General Counsel for Hilb Rogal & Hobbs Company from October 2001 to October 2005.
Kevin A. O’Leary. Mr. O’Leary was elected Vice President, Chief Financial Officer and Treasurer effective December 11, 2009. He was appointed Vice President, Finance, of Tredegar Film Products Corporation, effective January 1, 2009 until December 11, 2009 and served as Director, Finance, of Tredegar Film Products Corporation from October 2008 until January 2009. Mr. O’Leary previously served as Vice President, Finance-Mergers and Acquisitions of the Avery Dennison Retail Information Services Group (“Avery Dennison RIS”), a division of Avery Dennison Corporation from March 2007 through August 2008. He served as General Manager of the Printer Systems division of Avery Dennison RIS from February 2006 through February 2007 and as Director, Finance, of Avery Dennison RIS from August 2004 through January 2006.
Larry J. Scott. Mr. Scott was elected Vice President, Audit, on May 24, 2000.
We have adopted a Code of Conduct that applies to all of our directors, officers and employees (including our chief executive officer, chief financial officer and principal accounting officer) and have posted the Code of Conduct on our website. All amendments to or waivers from any provision of our Code of Conduct applicable to the chief executive officer, chief financial officer and principal accounting officer will be disclosed on our website. Our Internet address is www.tredegar.com. The information on or that can be accessed through our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information to be included in the Proxy Statement under the headings “Compensation of Directors,” “Board Meetings, Meetings of Non-Management Directors and Board Committees-Executive Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Executive Compensation Committee Report” and “Compensation of Executive Officers” is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information to be included in the Proxy Statement under the heading “Stock Ownership” is incorporated herein by reference. The following table summarizes information with respect to equity compensation plans under which securities are authorized for issuance as of December 31, 2012.
* Includes performance stock units that give the holder the right to receive shares of Tredegar common stock upon the satisfaction of certain performance criteria.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information to be included in the Proxy Statement under the headings “Certain Relationships and Related Transactions”, “Tredegar’s Board of Directors” and “Board Meetings, Meetings of Non-Management Directors and Board Committees” is incorporated herein by reference.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is incorporated herein by reference:
•
Information on accounting fees and services to be included in the Proxy Statement under the heading “Audit Fees;” and
•
Information on the Audit Committee’s procedures for pre-approving certain audit and non-audit services to be included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and Board Committees-Audit Committee Matters.”
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as a part of the report:
(1) Financial statements:
Tredegar Corporation
Index to Financial Statements and Supplementary Data
(2) Financial statement schedules:
None.
(3) Exhibits:
See Exhibit Index on pages 91-93.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tredegar Corporation:
In our opinion, the accompanying balance sheets and related statements of income, comprehensive income, cash flows and shareholders’ equity, present fairly, in all material respects, the financial position of Tredegar Corporation and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control Over Financial Reporting” appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in “Management’s Report on Internal Control Over Financial Reporting”, management has excluded AACOA, Inc. (“AACOA”) from its assessment of internal control over financial reporting as of December 31, 2012 because they were acquired by the Company in a business combination during 2012. We have also excluded AACOA from our audit of internal controls over financial reporting. AACOA is a wholly-owned business whose total assets and revenues represent approximately 8% and 2%, respectively of the related consolidated financial statement amounts as of and for the year ended December 31, 2012.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
March 1, 2013
CONSOLIDATED BALANCE SHEETS
Tredegar Corporation and Subsidiaries
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Tredegar Corporation and Subsidiaries
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Tredegar Corporation and Subsidiaries
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Tredegar Corporation and Subsidiaries
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Tredegar Corporation and Subsidiaries
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
Tredegar Corporation and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations. Tredegar Corporation and subsidiaries (collectively “Tredegar,” “we,” “us” or “our”) are primarily engaged in the manufacture of plastic films and aluminum extrusions. See Notes 10 and 18 regarding restructurings and Note 3 regarding discontinued operations.
Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. On February 12, 2008, we sold our aluminum extrusions business in Canada, and on November 20, 2012, we sold our mitigation banking business, Falling Springs, LLC (“Falling Springs”). All historical results for these businesses have been reflected as discontinued operations in these financial statements; however, cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows. See Note 3 regarding discontinued operations.
The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries located outside the U.S., where the local currency is the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders’ equity. We have no subsidiaries located outside the U.S. where the U.S. Dollar is the functional currency.
Transaction and remeasurement gains or losses included in income were not material in 2012, 2011 and 2010. These amounts do not include the effects between reporting periods that exchange rate changes have on income of our locations outside the U.S. that result from translation into U.S. Dollars.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with original maturities of three months or less. At December 31, 2012 and 2011, Tredegar had cash and cash equivalents of $48.8 million and $68.9 million, respectively, including funds held in locations outside the U.S. of $28.6 million and $42.3 million, respectively.
Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.
Accounts and Other Receivables. Accounts receivable are stated at the amount invoiced to customers less allowances for doubtful accounts and sales returns. Accounts receivable are non-interest bearing and arise from the sale of product to customers under typical industry trade terms. Notes receivable are not significant. Past due amounts are determined based on established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on our assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current economic conditions. Other receivables include value-added taxes related to certain foreign subsidiaries and other miscellaneous receivables due within one year.
Inventories. Inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out (“LIFO”) basis, the weighted average cost or the first-in, first-out basis. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead.
Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income.
Capital expenditures for property, plant and equipment include capitalized interest. Capitalized interest included in capital expenditures for property, plant and equipment were not material in 2012, 2011 and 2010.
Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets, which except for certain isolated exceptions, range from 10 to 25 years for buildings and land improvements and 2 to 15 years for machinery and equipment. The average depreciation period for machinery and equipment is approximately 10 years in Film Products and for the continuing operations of Aluminum Extrusions.
Investments in Private Entities with Less Than or Equal to 50% Voting Ownership Interest. We account for our investments in private entities where our voting ownership is less than or equal to 50% based on the facts and circumstances surrounding the investment. We are required to account for investments under the consolidation method in situations where we are the primary beneficiary of a variable interest entity. The primary beneficiary is the party that has a controlling financial interest in a variable interest entity. We are deemed to have a controlling financial interest if we have (i) the power to direct activities of the variable interest entity that most significantly impact its economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the variable interest entity that could potentially be significant to its operations.
If we are not deemed to be the primary beneficiary in an investment in a variable interest entity then we select either: (i) the fair value method or (ii) either (a) the cost method if we do not have significant influence over operating and financial policies of the investee or (b) the equity method if we do have significant influence.
U.S. GAAP requires disclosure of the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3).
Goodwill and Other Intangibles. The excess of the purchase price over the fair value of identifiable net assets of acquired companies is allocated to goodwill. We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). Our significant reporting units in Film Products include Polyethylene and Polypropylene Films and PET Films. We have two reporting units in Aluminum Extrusions, Bonnell and AACOA. All goodwill in Aluminum Extrusions is associated with the AACOA reporting unit. Each of our reporting units has separately identifiable operating net assets (operating assets including goodwill and intangible assets net of operating liabilities).
We estimate the fair value of our reporting units using discounted cash flow analysis and comparative enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. The goodwill of Polyethylene and Polypropylene Films was tested for impairment at the annual testing date, with the estimated fair value of this reporting unit substantially exceeding the carrying value of its net assets. The goodwill of PET Films was also tested for impairment at December 1, 2012, with the estimated fair value of this reporting unit exceeding the carrying value of its net assets by approximately 23%. The goodwill of AAOCA is associated with the October 2012 acquisition of AACOA, Inc. (“AACOA”), and carrying value of its net assets approximate the estimated fair value of this reporting unit at December 1, 2012.
Impairment of Long-Lived Assets. We review long-lived assets for possible impairment when events indicate that an impairment may exist. For assets to be held and used in operations, if events indicate that an asset may be impaired, we estimate the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows. If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset, an impairment loss is calculated. Measurement of the impairment loss is the amount by which the carrying amount exceeds the estimated fair value of the asset group.
Assets that are held for sale are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any write-down required.
Pension Costs and Postretirement Benefit Costs Other than Pensions. Pension costs and postretirement benefit costs other than pensions are accrued over the period employees provide service to Tredegar. Liabilities and expenses for pension plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions relating to the employee workforce. We recognize the funded status of our pension and other postretirement plans in the accompanying consolidated balance sheets. Our policy is to fund our pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act (“ERISA”) of 1974 and to fund postretirement benefits other than pensions when claims are incurred.
Revenue Recognition. Revenue from the sale of products, which is shown net of estimated sales returns and allowances, is recognized when title has passed to the customer, the price of the product is fixed and determinable, and collectability is reasonably assured. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The cost of freight has been classified as a separate line in the accompanying consolidated statements of income. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction between Tredegar and its customers (such as value-added taxes) are accounted for on a net basis and therefore excluded from revenues.
Research & Development (“R&D”) Costs. R&D costs are expensed as incurred and include primarily salaries, wages, employee benefits, equipment depreciation, facility costs and the cost of materials consumed relating to R&D efforts. R&D costs include a reasonable allocation of indirect costs.
Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 17). Deferred U.S. federal income taxes have not been provided on the undistributed earnings for Terphane Ltda. (a subsidiary of Film Products) because of our intent to permanently reinvest these earnings. The cumulative amount of untaxed earnings was $23.0 million at December 31, 2012. We accrue U.S. federal income taxes on unremitted earnings of all other foreign subsidiaries. The benefit of an uncertain tax position is included in the accompanying financial statements when we determine that it is more likely than not that the position will be sustained, based on the technical merits of the position, if the taxing authority examines the position and the dispute is litigated. This determination is made on the basis of all the facts, circumstances and information available as of the reporting date.
Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During 2012, 2011 and 2010, the average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock was 632,050, 293,704 and 324,558, respectively.
Stock-Based Employee Compensation Plans. Compensation expense is recorded on all share-based awards based upon its calculated fair value over the requisite service period using the graded-vesting method. The fair value of stock option awards was estimated as of the grant date using the Black-Scholes options-pricing model. The fair value of restricted stock awards was estimated as of the grant date using our closing stock price on that date.
The assumptions used in this model for valuing Tredegar stock options granted in 2012, 2011 and 2010 are as follows:
The dividend yield is the dividend yield on our common stock at the date of grant, which we believe is a reasonable estimate of the expected yield during the holding period. We calculate expected volatility based on the historical volatility of our common stock using a sequential period of historical data equal to the expected holding period of the option. We have no reason to believe that future volatility for this period is likely to differ from the past. The assumed risk-free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period. The expected holding period and forfeiture assumptions are based on historical experience. Estimated forfeiture assumptions are reviewed through the vesting period. Adjustments are made if actual forfeitures differ from previous estimates. The cumulative effect of a change in estimated forfeitures is recognized in the period of the change.
Tredegar stock options granted during 2012, 2011 and 2010, and related estimated fair value at the date of grant, are as follows:
Additional disclosure of Tredegar stock options is included in Note 13.
Financial Instruments. We use derivative financial instruments for the purpose of hedging aluminum price volatility and currency exchange rate exposures that exist as part of transactions associated with our ongoing business operations. Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the accompanying balance sheet at fair value. A change in the fair value of the derivative that is highly effective as and that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction. Such gains and losses are reported on the same line as the underlying hedged item, and the cash flows related to financial instruments are classified in the consolidated statements of cash flows in a manner consistent with those of the transactions being hedged. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. The amount of gains and losses recognized for hedge ineffectiveness were not material in 2012, 2011 and 2010.
Our policy requires that we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. We also formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively.
As a policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes. Additional disclosure of our utilization of derivative hedging instruments is included in Note 9.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as net income or loss and other comprehensive income or loss. Other comprehensive income (loss) includes changes in foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments, prior service costs and net gains or losses from pension and other postretirement benefit plans arising during the period and amortization of these prior service costs and net gains or losses adjustments, all recorded net of deferred income taxes.
Recently Issued Accounting Standards. In July 2012, the Financial Accounting Standards Board (“FASB”) issued updated guidance for testing indefinite-lived intangible assets for impairment. The revised standard provides entities with an option to perform a “qualitative” assessment to determine whether further testing is necessary when performing an annual impairment assessment for indefinite-lived intangible assets other than goodwill. This new standard is comparable to the guidance finalized last year for goodwill impairment testing. An entity can still choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect that this FASB accounting standard will have a material impact on our financial statements and disclosures.
ACQUISITIONS
On October 1, 2012, The William L. Bonnell Company, Inc. acquired 100% ownership of AACOA. AACOA operates production facilities in Elkhart, Indiana and Niles, Michigan. Its primary markets include consumer durables, machinery and equipment and transportation. The acquisition will add fabrication capabilities to Aluminum Extrusions’ current array of products and services while providing AACOA with large press capabilities and enhanced geographic sales coverage in a variety of end-use markets.
After certain post-closing adjustments (primarily related to working capital transferred), the purchase price, net of cash acquired, was $54.6 million. The purchase price was funded using financing secured from our existing $350 million revolving credit facility.
Based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired (net of cash acquired) and liabilities assumed, the preliminary estimated purchase price allocation is as follows:
The goodwill and other intangible asset balances associated with this acquisition will be deductible for tax purposes. Intangible assets acquired in the purchase of AACOA are being amortized over the following periods:
Identifiable Intangible Asset
Useful Life (Yrs)
Customer relationships
Proprietary technology
6-10
Trade names
Indefinite
Noncompete agreements
The final purchase price continues to be subject to certain post-closing contractual adjustments. If information becomes available that would indicate adjustments are required to the purchase price or the purchase price allocation prior to the end of the measurement period for finalizing the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.
On October 14, 2011, TAC Holdings, LLC (the “Buyer”) and Tredegar Film Products Corporation, which are indirect and direct, respectively, wholly-owned subsidiaries of Tredegar, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Gaucho Holdings, B.V. (the “Seller”) an indirect, wholly-owned subsidiary of Vision Capital Partners VII LP (“Vision Capital”). On October 24, under the terms of the Purchase Agreement, the Buyer acquired from the Seller 100% of the outstanding equity interests of Terphane Holdings, LLC (“Terphane”).
Terphane operates manufacturing facilities in Cabo de Santo Agostinho, Brazil and Bloomfield, New York. It is a producer of thin polyester films in Latin America with a growing presence in strategic niches in the U.S. Polyester films have specialized properties, such as heat resistance and barrier protection, that make them uniquely suited for the fast-growing flexible packaging market. We expect that the acquisition of Terphane will allow us to extend our product offerings into adjacent specialty films markets and to expand in Latin America.
All post-closing adjustments related to the purchase price for Terphane have been resolved in 2012. Adjustments to the purchase price were made retrospectively as if the accounting had been completed on the acquisition date. Upon completing these post-closing adjustments, which were primarily related to working capital transferred, the total purchase price (net of cash acquired) was $182.7 million. The purchase price was funded using available cash (net of cash received) of approximately $57.7 million and financing of $125 million secured from Tredegar’s former revolving credit facility.
Based upon management’s valuation of the fair value of tangible and intangible assets acquired (net of cash acquired) and liabilities assumed, the final estimated purchase price allocation is as follows:
None of the goodwill or other intangible assets will be deductible for tax purposes. Intangible assets acquired in the purchase of Terphane are being amortized over the following periods:
Identifiable Intangible Asset
Useful Life (Yrs)
Customer relationships
Proprietary technology
Trade names
Indefinite
Noncompete agreements
The financial position and results of operations for AACOA have been consolidated with Tredegar subsequent to October 1, 2012. For the year ended December 31, 2012, the consolidated results of operations included sales of $19.9 million and net income from continuing operations of $1.0 million related to AACOA. The financial position and results of operations for Terphane have been consolidated with Tredegar subsequent to October 24, 2011. For the year ended December 31, 2012 and 2011, the consolidated results of operations included sales of $143.3 million and $29.2 million, respectively, and net income from continuing operations of $17.4 million and $2.0 million, respectively, related to Terphane.
The following unaudited supplemental pro forma data presents our consolidated revenues and earnings as if the acquisitions of Terphane and AACOA had been consummated on January 1, 2011. The pro forma results are not necessarily indicative of our consolidated revenues and earnings if the acquisition and related borrowing had been consummated on January 1, 2011. Supplemental unaudited pro forma results for the years ended December 31, 2012 and 2011 are as follows:
The above supplemental unaudited pro forma amounts reflect the application of the following adjustments in order to present the consolidated results as if the acquisitions and related borrowings had occurred on January 1, 2011:
•
Adjustment for additional depreciation and amortization expense associated with the adjustments to property, plant and equipment, and intangible assets associated with purchase accounting;
•
Additional interest expense and financing fees associated with borrowing arrangements used to fund the acquisitions of Terphane and AACOA and the elimination of historical interest expense associated with historical borrowings of Terphane and AACOA that were not assumed by Tredegar;
•
Adjustments to eliminate transactions-related expenses associated with the October 2011 acquisition of Terphane and the October 2012 acquisition of AACOA;
•
Adjustments related to the elimination of foreign currency remeasurement gains associated with long-term borrowings of Terphane that were not assumed by Tredegar;
•
Adjustments for the estimated net income tax benefit associated with the previously described adjustments; and
•
Adjustments to income tax expense for AACOA as it had previously elected to be treated as an S-Corp for federal income tax purposes.
On February 3, 2010, we purchased the assets of Bright View Technologies Corporation (“Bright View”) for $5.5 million. Bright View is a developer and producer of high-value microstructure-based optical films for the LED (light emitting diode) and fluorescent lighting markets. The primary identifiable intangible assets purchased in the transaction were patented and unpatented technology, which are being amortized over a weighted average period of 12 years.
DISCONTINUED OPERATIONS
On November 20, 2012, Tredegar Real Estate Holdings, Inc., a wholly-owned subsidiary, sold its membership interests in Falling Springs to Arc Ventures, LC for $16.6 million. Arc Ventures, LC is a Virginia limited liability company affiliated with John D. Gottwald, a member of our Board of Directors. The purchase price was comprised of $12.8 million of cash and 209,576 shares of common stock of Tredegar owned by Arc Ventures, LC. The corresponding loss on sale of $3.1 million, which includes transaction-related expenses of $0.5 million, and the results of operations related to Falling Springs have been classified as discontinued operations for all periods presented. For the years ended December 31, 2012, 2011 and 2010, sales of $3.2 million, $3.2 million and $2.3 million, respectively, have been reclassified to discontinued operations, and net income of $0.5 million, $0.7 million and $0.2 million have been reclassified to discontinued operations in 2012, 2011 and 2010, respectively. Falling Springs was formerly a component of the Other segment.
On February 12, 2008, we sold our aluminum extrusions business in Canada for approximately $25.0 million to an affiliate of H.I.G. Capital. In 2012 and 2011, accruals of $13.4 million ($13.4 million net of tax) and $4.4 million ($4.4 million net of tax) were made for indemnifications under the purchase agreement related to environmental matters.
All historical results for these businesses as well as the assets and liabilities included in the historical statements of positions have been reflected as discontinued operations; however, cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.
INVESTMENTS
In August 2007 and December 2008, we made an aggregate investment of $7.5 million in Intelliject, Inc. (“Intelliject”), a privately held specialty pharmaceutical company. Intelliject seeks to set a new standard in drug/device combination pharmaceuticals designed to enable superior treatment outcomes, improved cost effectiveness and intuitive patient administration. Our ownership interest on a fully diluted basis is approximately 20%, and the investment is accounted for under the fair value method. At the time of our initial investment, we elected the fair value option over the equity method of accounting since our investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. We recognized an unrealized gain of $16.1 million ($10.2 million after taxes) in 2012 attributed to various factors, most notably:
•
a favorable adjustment to the timing and amount of anticipated cash flows derived from updated marketing research;
•
the passage of time as anticipated cash flows associated with achieving product development commercialization milestones are discounted at 55% for their high degree of risk; and
•
a reduction in the weighted average cost of capital used to discount cash flows in our valuation in the first quarter to reflect the completion of certain process testing and a reassessment of the risk associated with the timing for obtaining final marketing approval from the U.S. Food and Drug Administration (“FDA”) for the company’s first product.
We recognized an unrealized gain of $1.6 million ($1.0 million after taxes) in 2011 attributed to the appreciation of our interest upon changes in the market dynamics and pricing associated with an upcoming product introduction and the addition of projects to the product pipeline. In 2010, we recognized an unrealized loss of $2.2 million ($1.4 million after taxes) for the estimated changes in the fair value of our investment after Intelliject, which had its new drug application to the FDA accepted for review during the fourth quarter, reassessed its projected timeframe for obtaining final marketing approval from the FDA. Unrealized gains (losses) associated with this investment are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 5.
At December 31, 2012 and 2011, the estimated fair value of our investment (included in “Other assets and deferred charges” in the consolidated balance sheets) was $33.7 million and $17.6 million, respectively. Subsequent to our most recent investment (December 15, 2008), and until the next round of financing, we believe fair value estimates are based upon Level 3 inputs since there is no secondary market for our ownership interest. In addition, Intelliject did not have any product sales as of December 31, 2012. Their first product launched in the first quarter of 2013. Accordingly, until the next round of financing or any other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of development and commercialization milestone payments, sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. As a result, any future changes in the estimated fair value of our ownership interest will likely be attributed to a new round of financing, a merger or initial public offering or adjustments to the timing or magnitude of cash flows associated with development and commercialization milestones. If Intelliject does not meet its development and commercialization milestones and there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus our most recent valuation, or a new round of financing or other significant financial transaction indicates a lower enterprise value, then our estimate of the fair value of our ownership interest in the company is likely to decline. Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.
The fair market valuation of our interest in Intelliject is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk associated with meeting development and commercialization milestones as anticipated. The weighted average cost of capital used in the fair market valuation of our interest in Intelliject was 55% at December 31, 2012 and 60% at December 31, 2011. At December 31, 2012, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of our interest in Intelliject by approximately $6 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of our interest by approximately $5 million.
Had we not elected to account for our investment under the fair value method, we would have been required to use the equity method of accounting. The condensed balance sheets for Intelliject at December 31, 2012 and 2011 and related condensed statements of operations for the last three years ended December 31, 2012, that were reported to us by Intelliject, are provided below:
The audited financial statements and accompanying footnotes of Intelliject as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 have been included as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.
On April 2, 2007, we invested $10.0 million in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger”), a private investment fund that is subject to limitations on withdrawal. There is no secondary market for interests in the fund. Our investment in Harbinger, which represents less than 2% of its total partnership capital, is accounted for under the cost method. We recorded unrealized losses of $1.1 million ($0.7 million after taxes) and $0.6 million ($0.4 million after taxes) on our investment in Harbinger in 2012 and 2011, respectively, as a result of a reduction in the estimated fair value of our investment that is not expected to be temporary. The December 31, 2012 and 2011 carrying value in the consolidated balance sheets (included in “Other assets and deferred charges”) was $3.6 million and $5.2 million, respectively. The carrying value at December 31, 2012 reflected Tredegar’s cost basis in its investment in Harbinger, net of total withdrawal proceeds received and unrealized losses. Withdrawal proceeds were $0.5 million in 2012 and $0.6 million in 2011. The timing and amount of future installments of withdrawal proceeds was not known as of December 31, 2012. There were no realized gains or losses associated with our investment in Harbinger in 2012, 2011 and 2010. Gains on our investment in Harbinger, if any, will be recognized when the amounts expected to be collected from our withdrawal from the investment are known, which will likely be when cash in excess of our remaining carrying value is received. Losses will be recognized if management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.
BUSINESS SEGMENTS
Our primary business segments are Film Products and Aluminum Extrusions. In February 2010, we started reporting an additional segment, Other, comprised of the start-up operations of Bright View and Falling Springs. Effective January 1, 2012, the operations and results of Bright View were incorporated into Film Products to leverage research and development efforts and accelerate new product development. Prior year balances for Bright View have been reclassified to Film Products to conform with the current year presentation. As discussed in Note 3, Falling Springs was divested in the fourth quarter of 2012. All historical results for this business have been reflected as discontinued operations. With the sale of Falling Springs, there is no longer an Other segment to report.
Information by business segment and geographic area for the last three years is provided below. There were no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance. Film Products’ net sales to The Procter & Gamble Company (“P&G”) totaled $264.0 million in 2012, $280.3 million in 2011 and $273.1 million in 2010. These amounts include plastic film sold to others that convert the film into materials used with products manufactured by P&G.
(a) See Notes 1, 3, 4 and 18 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, gains or losses from sale of assets, gains or losses on an investment accounted for under the fair value method and other items.
(b) We recognize in the balance sheets the funded status of each of our defined benefit pension and other postretirement plans. The funded status of our defined benefit pension plan was a net liability of $83.3 million, $57.8 million and $8.3 million in “Other noncurrent liabilities” as of December 31, 2012, 2011 and 2010. See Note 14 for more information on our pension and other postretirement plans.
(c) The difference between total consolidated sales as reported in the consolidated statements of income and segment and geographic net sales reported in this note is freight of $24.8 million in 2012, $18.5 million in 2011 and $17.8 million in 2010.
(d) Information on exports and foreign operations are provided on the next page. Cash and cash equivalents includes funds held in locations outside the U.S. of $28.6 million, $42.3 million and $35.7 million at December 31, 2012, 2011 and 2010, respectively. Export sales relate almost entirely to Film Products. Operations outside the U.S. in The Netherlands, Hungary, China, Italy (sold in 2011), Brazil and India also relate to Film Products. Sales from our locations in The Netherlands, Hungary and Italy are primarily to customers located in Europe. Sales from our locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia. Sales activity at the new film products manufacturing facility in India were not significant in 2011.
See footnotes on prior page and a reconciliation of net sales to sales as shown in the consolidated statements of income.
See footnotes on prior pages and a reconciliation of net sales to sales as shown in the consolidated statements of income.
ACCOUNTS AND OTHER RECEIVABLES
Accounts and other receivable consist of the following:
A reconciliation of the beginning and ending balances of the allowance for doubtful accounts and sales returns for the three years ended December 31, 2012 is as follows:
INVENTORIES
Inventories consist of the following:
Inventories stated on the LIFO basis amounted to $10.9 million at December 31, 2012 and $12.1 million at December 31, 2011, which are below replacement costs by approximately $20.5 million at December 31, 2012 and $20.2 million at December 31, 2011. During 2012, 2011 and 2010, certain inventories accounted for on a LIFO basis declined, which resulted in cost of goods sold being stated at below current replacement costs, by approximately $2.7 million in 2012 ($1.1 million in Film Products and $1.6 million in Aluminum Extrusions), $1.1 million in Film Products in 2011 and $2.6 million in 2010 ($0.9 million in Film Products and $1.7 million in Aluminum Extrusions).
GOODWILL AND OTHER INTANGIBLE ASSETS
The components of goodwill and other intangibles at December 31, 2012 and 2011, and related amortization periods for continuing operations are as follows:
A reconciliation of the beginning and ending balance of goodwill for each of the three years in the period ended December 31, 2012 is as follows:
Based on the severity of the economic downturn and its impact on the sales volumes of our aluminum extrusions business, the resulting operating loss in the first quarter of 2009, possible future losses and the uncertainty in the amount and timing of an economic recovery, a goodwill impairment charge of $30.6 million ($30.6 million after taxes) was recognized in Aluminum Extrusions in 2009. At December 31, 2012, the goodwill balance was $162.9 million for Film Products and $14.3 million for Aluminum Extrusions.
Amortization expense for continuing operations over the next five years is expected to be as follows:
FINANCIAL INSTRUMENTS
We use derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and currency exchange rate exposures that exist as part of ongoing business operations (primarily in Film Products). Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, we record the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $6.2 million (6.7 million pounds of aluminum) at December 31, 2012 and $10.8 million (11.0 million pounds of aluminum) at December 31, 2011.
The table below summarizes the location and gross amounts of aluminum derivative contract fair values in the consolidated balance sheets as of December 31, 2012 and 2011:
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate us for any losses on the related aluminum futures and/or forward purchase contracts through the date of cancellation. The offsetting asset and liability positions for derivatives not designated as hedging instruments included in the table above are associated with the unwinding of aluminum futures contracts that relate to such cancellations.
We have future fixed Euro-denominated contractual payments for equipment being purchased as part of our multi-year capacity expansion project at our film products manufacturing facility in Cabo de Santo Agostinho, Brazil. We are using fixed rate Euro forward contracts with various settlement dates through November 2013 to hedge exchange rate exposure on these obligations. We had fixed rate forward contracts with outstanding notional amounts of 9.9 million as of December 31, 2012 (none at December 31, 2011).
The table below summarizes the location and gross amounts of foreign currency forward contract fair values in the consolidated balance sheets as of December 31, 2012 (none at December 31, 2011):
We receive Euro-based royalty payments relating to our operations in Europe. From time to time we use zero-cost collar currency options to hedge a portion of our exposure to changes in cash flows due to variability in U.S. Dollar and Euro exchange rates. There were no outstanding notional amounts on these collars at December 31, 2012 and 2011 as there were no derivatives outstanding related to the hedging of royalty payments with currency options.
The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers. The counterparties to our foreign currency futures and zero-cost collar contracts are major financial institutions.
The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for years ended December 31, 2012, 2011, and 2010 is summarized in the tables below:
Gains and losses on the ineffective portion of derivative instruments or derivative instruments that were not designated as hedging instruments were not significant in 2012, 2011 and 2010. For the years ended December 31, 2012, 2011 and 2010, unrealized net losses from hedges that were discontinued were not significant. As of December 31, 2012, we expect $0.1 million of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income to be reclassified to earnings within the next 12 months.
ACCRUED EXPENSES
Accrued expenses consist of the following:
A reconciliation of the beginning and ending balances of accrued expenses associated with asset impairments and costs associated with exit and disposal activities for each of the three years in the period ended December 31, 2012 is as follows:
(a) Other includes primarily accrued losses on a sub-lease at a facility in Princeton, New Jersey and other shutdown-related costs associated with the shutdown of our aluminum extrusions manaufacturing facility in Kentland, Indiana.
See Note 18 for more information on plant shutdowns, asset impairments and restructurings of continuing operations.
DEBT AND CREDIT AGREEMENTS
On April 23, 2012, we entered into a $350 million five-year, unsecured revolving credit facility (the “Credit Agreement”), with an option to increase that amount by an additional $75 million. The Credit Agreement replaced our previous $300 million four-year, unsecured revolving credit facility that was due to expire on June 21, 2014. In connection with the refinancing, we borrowed $102 million under the Credit Agreement, which was used, together with available cash on hand, to repay all indebtedness under our previous revolving credit facility.
Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted-EBITDA levels as follows:
At December 31, 2012, the interest cost on debt borrowed under the Credit Agreement was priced at one-month LIBOR plus the applicable credit spread of 150 basis points.
The most restrictive covenants in the Credit Agreement include:
•
Maximum indebtedness-to-adjusted EBITDA of 3.0x;
•
Minimum adjusted EBIT-to-interest expense of 2.5x;
•
Maximum aggregate distributions to shareholders over the term of the Credit Agreement of $100 million plus, beginning with the fiscal quarter ended March 31, 2012, 50% of net income; and
•
Minimum shareholders’ equity at any point during the term of the Credit Agreement of at least $320 million increased on a cumulative basis at the end of each fiscal quarter, beginning with the fiscal quarter ended March 31, 2012, by an amount equal to 50% of net income (to the extent positive).
At December 31, 2012, based upon the most restrictive covenants within the Credit Agreement, available credit under the Credit Agreement was approximately $199 million. Total debt due and outstanding at December 31, 2012 is summarized below:
We believe we were in compliance with all of our debt covenants as of December 31, 2012. Noncompliance with any of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.
SHAREHOLDER RIGHTS AGREEMENT
Pursuant to an Amended and Restated Rights Agreement, dated as of June 30, 2009, with Computershare Investor Services, as Rights Agent (essentially renewing and extending our Rights Agreement, dated as of June 30, 1999), as amended, one right is attendant to each share of our common stock (“Right”). All Rights outstanding under the previous Rights Plan remain outstanding under the Amended and Restated Rights Agreement.
Each Right entitles the registered holder to purchase from Tredegar one one-hundredth of a share of Participating Cumulative Preferred Stock, Series A (the “Preferred Stock”), at an exercise price of $150 (the “Purchase Price”). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 15% or more of the outstanding shares of our common stock (thereby becoming an “Acquiring Person”) or announces a tender offer that would result in ownership by a person or group of 15% or more of our common stock. Any action by a person or group whose beneficial ownership was reported on Amendment No. 4 to the Schedule 13D filed with respect to Tredegar on March 20, 1997, cannot cause such person or group to become an Acquiring Person and thereby cause the Rights to become exercisable.
Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Preferred Stock (or in certain circumstances, cash, property or other securities of Tredegar or a potential acquirer) having a value equal to twice the amount of the Purchase Price.
The Rights are scheduled to expire on June 30, 2019.
STOCK OPTION AND STOCK AWARD PLANS
We have one equity incentive plan under which stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. In addition, we have one other equity incentive plan under which there are options that remain outstanding, but no future grants can be made. Prior to 2012, employee options ordinarily vest two years from the date of grant. Employee options granted in 2012 and thereafter ordinarily vest over a four year period, with a quarter of the options granted vesting on each year on the grant date anniversary. The option plans also permit the grant of stock appreciation rights (“SARs”), stock, restricted stock, stock unit awards and incentive awards. Restricted stock grants ordinarily vest three years from the date of grant based upon continued employment and/or the achievement of certain performance targets. No SARs have been granted since 1992 and none are currently outstanding.
A summary of our stock options outstanding at December 31, 2012, 2011 and 2010, and changes during those years, is presented below:
The following table summarizes additional information about stock options outstanding and exercisable at December 31, 2012:
The following table summarizes additional information about non-vested restricted stock outstanding at December 31, 2012:
The total intrinsic value of stock options exercised was $0.5 million in 2012, $0.4 million in 2011 and $0.2 million in 2010. The grant-date fair value of stock option-based awards vested was $2.1 million in 2012, $1.9 million in 2011 and $1.9 million in 2010. As of December 31, 2012, there was unrecognized compensation cost of $0.8 million related to stock option-based awards and $1.3 million related to non-vested restricted stock and other stock-based awards. This cost is expected to be recognized over the remaining weighted average period of 0.9 years for stock option-based awards and 1.6 years for non-vested restricted stock and other stock-based awards.
Stock options exercisable totaled 714,800 at December 31, 2012 and 600,400 shares at December 31, 2011. Stock options available for grant totaled 2,607,001 shares at December 31, 2012.
RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
We sponsor noncontributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants, and based on plan changes announced in 2006, pay for active participants of the plan was frozen as of December 31, 2007.
In addition to providing pension benefits, we provide postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees hired on or before January 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. We eliminated prescription drug coverage for Medicare-eligible retirees as of January 1, 2006. Consequently, we are not eligible for any federal subsidies.
The following tables reconcile the changes in benefit obligations and plan assets in 2012 and 2011, and reconcile the funded status to prepaid or accrued cost at December 31, 2012 and 2011:
Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations for continuing operations, and the components of net periodic benefit income or cost for continuing operations, are as follows:
Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year. Pension and other postretirement liabilities for continuing operations of $92.1 million and $66.2 million are included in “Other noncurrent liabilities” in the consolidated balance sheets at December 31, 2012 and 2011, respectively. The amount of our accumulated benefit obligation is the same as our projected benefit obligation.
At December 31, 2012, the effect of a 1% change in the health care cost trend rate assumptions would be immaterial.
Expected benefit payments for continuing operations over the next five years and in the aggregate for 2018-2022 are as follows:
Amounts recognized in 2012, 2011 and 2010 before related deferred income taxes in accumulated other comprehensive income consist of:
The amounts before related deferred income taxes in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit or cost during 2013 are as follows:
The percentage composition of assets held by pension plans for continuing operations at December 31, 2012, 2011 and 2010 are as follows:
Our targeted allocation percentage for pension plan assets and the expected long-term rate of return on assets is as follows:
* Target percentages for the composition of plan assets represents a neutral position within the approved range of allocations for such assets.
Expected long-term returns are estimated by asset class and generally are based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums. The portfolio of fixed income securities is structured with maturities that generally match estimated benefit payments over the next 1-2 years. Other assets are primarily comprised of cash and contracts with insurance companies. Our primary investment objective is to maximize total return with a strong emphasis on the preservation of capital. We believe that over the long term a diversified portfolio of fixed income securities, equity securities, hedge funds and private equity funds has a better risk-return profile than fixed income securities alone. The average remaining duration of benefit payments for our pension plans is about 13 years. We expect our required contributions to be approximately $0.2 million in 2013.
Estimates of the fair value of assets held by our pension plans are provided by third parties not affiliated with Tredegar. At December 31, 2012, the pension plan assets are categorized by level within the fair value measurement hierarchy as follows:
For fair value measurements of plan assets using significant unobservable inputs (Level 3), a reconciliation of the balances from January 1, 2011 to December 31, 2012 are as follows:
We also have a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. The plan was designed to restore all or a part of the pension benefits that would have been payable to designated participants from our principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $2.8 million at December 31, 2012 and $2.6 million at December 31, 2011. Pension expense recognized for this plan was $0.1 million in 2012, $0.1 million in 2011 and $0.2 million in 2010. This information has been included in the preceding pension benefit tables.
Approximately 101 employees at our films manufacturing facility in Kerkrade, The Netherlands are covered by a collective bargaining agreement that includes participation in a multi-employer pension plan. Pension expense recognized for participation in this plan, which is equal to required contributions, was $0.5 million in 2012, $0.6 million in 2011 and $0.6 million in 2010. This information has been excluded from the preceding pension benefit tables.
SAVINGS PLAN
We have a savings plan that allows eligible employees to voluntarily contribute a percentage of their compensation up to Internal Revenue Service (“IRS”) limitations. Effective January 1, 2007, the provisions of the savings plan provided the following benefits for salaried and certain hourly employees:
•
The company makes matching contributions to the savings plan of $1 for every $1 of employee contribution. The maximum matching contribution is 6% of base pay for 2007-2009 and 5% of base pay thereafter.
•
The savings plan includes immediate vesting for active employees of past matching contributions as well as future matching contributions when made (compared with the previous 5-year graded vesting) and automatic enrollment at 3% of base pay unless the employee opts out or elects a different percentage.
We also have a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations. Charges recognized for these plans were $2.5 million in 2012, $2.5 million in 2011 and $2.6 million in 2010. Our liability under the restoration plan was $1.6 million at December 31, 2012 (consisting of 78,615 phantom shares of common stock) and $1.6 million at December 31, 2011 (consisting of 70,588 phantom shares of common stock) and valued at the closing market price on those dates.
The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of our common stock in 1998 for $0.2 million and 46,671 shares of our common stock in 1997 for $1.0 million, as a partial hedge against the phantom shares held in the restoration plan. There have been no shares purchased since 1997 except for re-invested dividends. The cost of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.
RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS
Rental expense for continuing operations was $3.6 million in 2012, $3.2 million in 2011 and $2.9 million in 2010. Rental commitments under all non-cancelable operating leases for continuing operations as of December 31, 2012, are as follows:
Contractual obligations for plant construction and purchases of real property and equipment amounted to $16.4 million at December 31, 2012. Film Products has various contractual commitments of approximately $14 million in 2013 associated with our multi-year capacity expansion project in Cabo de Santo Agostinho.
INCOME TAXES
Income from continuing operations before income taxes and income taxes are as follows:
The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows:
The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These incentives produce a current tax rate of 15.25% for Terphane Ltda. (6.25% of income tax and 9.0% social contribution on income). The current incentives will expire at the end of 2014, but we anticipate that we will qualify for additional incentives that will extend beyond 2014. The benefit from the tax incentives was $4.3 million (13 cents per share) and $0.7 million (2 cents per share) in 2012 and 2011, respectively.
Deferred tax liabilities and deferred tax assets at December 31, 2012 and 2011, are as follows:
Except as noted below, we believe that it is more likely than not that future taxable income will exceed future tax deductible amounts thereby resulting in the realization of deferred tax assets. A valuation allowance of $1.3 million at December 31, 2012 and 2011, respectively, is provided against the tax benefit on state and foreign net operating loss carryforwards for possible future tax benefits on domestic state and foreign operating losses generated by certain foreign and domestic subsidiaries that may not be recoverable in the carry-forward period. In addition, the valuation allowance for excess capital losses from investments and other related items was increased from $9.3 million at December 31, 2011 to $15.5 million at December 31, 2012 due to changes in the relative amounts of capital gains and losses generated during the year. The amount of the deferred tax asset considered realizable, however, could be adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. The valuation allowance for asset impairments in foreign jurisdictions where we believe it is more likely than not that the deferred tax asset will not be realized increased from $1.8 million in 2011 to $1.9 million in 2012.
A reconciliation of our unrecognized uncertain tax positions since January 1, 2010, is shown below:
Additional information related to our unrecognized uncertain tax positions since January 1, 2010 is summarized below:
We claimed an ordinary loss on the write-off of our investment in our aluminum extrusions operations in Canada (sold in February 2008) on our 2008 consolidated tax return (included in discontinued operations in the consolidated statement of income in 2007). During an audit, the IRS challenged the ordinary nature of the loss, asserting that the loss should be re-characterized as capital in nature. Had the IRS prevailed in final, non-appealable determinations, it is possible that the matter would have resulted in additional tax payments of up to $12 million, plus any interest and penalties. Prior to issuing a Notice of Deficiency, however, the IRS revised their audit report to allow the ordinary loss treatment to stand. The audit findings have been confirmed by the IRS Joint Committee review, and we expect no further challenge on this issue.
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Except for refund claims and amended returns, the IRS has provided written confirmation that they do not plan to make any additional changes to our U.S. consolidated tax returns for the years prior to 2010, although the federal statute of limitations was extended for the tax years 2006-2009 through December 31, 2013. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2009. We believe that it is reasonably possible that approximately $0.1 million of the balance of unrecognized state tax positions may be recognized within the next twelve months as a result of a lapse of the statute of limitations.
LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS, UNUSUAL ITEMS, GAINS FROM SALE OF ASSETS AND OTHER ITEMS
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations in 2012 (as shown in the segment operating profit table in Note 5) totaled $5.5 million ($3.6 million after taxes), and unless otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of income. Results in 2012 included:
•
A fourth quarter charge of $0.9 million ($0.5 million after taxes), a third quarter charge of $0.8 million ($0.5 million after taxes), a second quarter charge of $1.0 million ($0.7 million after taxes) and a first quarter charge of $0.9 million ($0.5 million after taxes) associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana, which includes accelerated depreciation for property, plant and equipment of $2.4 million (included in “Cost of goods sold” in the consolidated statements of income), severance and other employee related expenses of $1.2 million and other shutdown-related charges of $2.3 million, partially offset by adjustments to inventories accounted for under the LIFO method of $1.5 million (included in “Cost of goods sold” in the consolidated statements of income) and gains on the sale of equipment of $0.8 million (included in “Other income (expense), net” in the consolidated statements of income);
•
A fourth quarter gain of $1.3 million ($0.7 million after taxes) in Film Products (included in “Other income (expense), net” in the consolidated statements of income) associated with an insurance recovery on idle equipment that was destroyed in a fire at an outside warehouse;
•
A fourth quarter charge of $0.9 million ($0.6 million after taxes) and a third quarter charge of $0.3 million ($0.2 million after taxes) for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions (see discussion below for further detail);
•
A fourth quarter charge of $0.1 million ($0.1 million after taxes), a third quarter charge of $0.1 million ($0.1 million after taxes), a second quarter charge of $0.6 million ($0.4 million after taxes) and a first quarter charge of $0.3 million ($0.2 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane;
•
A fourth quarter gain of $1.1 million ($0.6 million after taxes) related to the sale of a previously shutdown film products manufacturing facility in LaGrange, Georgia;
•
A second quarter charge of $0.8 million ($0.5 million after taxes) for asset impairments associated with a previously shutdown film products manufacturing facility in LaGrange, Georgia;
•
A fourth quarter charge of $0.2 million ($0.1 million after taxes) and a second quarter charge of $0.1 million ($46,000 after taxes) in Film Products and a first quarter charge of $0.2 million ($0.1 million after taxes) in Aluminum Extrusions for severance and other employee-related costs in connection with restructurings;
•
A fourth quarter charge of $0.2 million ($0.2 million after taxes) for asset impairments in Film Products;
•
A fourth quarter charge of $0.2 million ($0.1 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Aluminum Extrusions’ acquisition of AACOA;
•
A fourth quarter charge of $0.1 million ($0.1 million after taxes) associated with purchase accounting adjustments made to the value of inventory sold by Aluminum Extrusions after its acquisition of AACOA (included in “Cost of goods sold” in the consolidated statements of income); and
•
A fourth quarter charge of $0.1 million ($49,000 after taxes) related to expected future environmental costs at our aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income).
Total acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA by Aluminum Extrusions were $2.0 million in 2012. Acquisitions-related expenses of $0.8 million were recorded to “Corporate expenses, net” in the segment operating profit table in Note 5 during the first and second quarters of 2012, and as noted above, acquisitions-related expenses of $1.2 million were recorded to “Losses associated with plant shutdowns, asset impairments, restructurings and other charges” for Aluminum Extrusions in the segment operating profit table in Note 5 during the third and fourth quarters of 2012.
Results in 2012 include an unrealized gain from our investment in Intelliject of $16.1 million ($10.2 million after taxes), which is accounted for under the fair value method. An unrealized loss on our investment in Harbinger of $1.1 million ($0.7 million after taxes) was recorded in 2012 as a result of a reduction in the fair value of our investment that is not expected to be temporary. See Note 4 for additional information on investments.
The estimated fair value of machinery and equipment that was evaluated for impairment was primarily based on our estimates of the proceeds that we would receive if and/or when assets are sold. Our estimates of the remaining fair value for the related machinery and equipment were based on both Level 2 and 3 inputs as defined under U.S. GAAP.
Aluminum Extrusions closed its manufacturing facility in Kentland, Indiana in August 2012. The plant, whose core market was residential construction, previously employed 146 people. We estimate that charges incurred related to the shutdown will be approximately $4.5 million, and include accelerated depreciation on property, plant and equipment of approximately $2.4 million, severance and other employee-related charges of approximately $1.2 million and other shutdown-related costs of approximately $1 million. Other shutdown-related costs are primarily comprised of equipment transfers and plant shutdown charges, partially offset by adjustment for inventories accounted for under the LIFO method. Most of these shutdown charges, which include cash expenditures of approximately $3.5 million, are expected to be recognized over an 18 month period.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations in 2011 (as shown in the segment operating profit table in Note 5) totaled $6.8 million ($0.3 million gain after taxes), and unless otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of income. Results in 2011 included:
•
A fourth quarter charge of $2.5 million ($2.2 million after taxes) and a third quarter charge of $2.3 million ($2.2 million after taxes) for acquisition-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane;
•
A fourth quarter charge of $0.6 million ($0.4 million after taxes) and a second quarter charge of $0.8 million ($0.5 million after taxes) for asset impairments in Film Products;
•
A third quarter gain of $1.0 million ($6.6 million after taxes) on the divestiture of our film products business in Roccamontepiano, Italy (included in “Other income (expense), net” in the consolidated statements of income), which includes the recognition of previously unrealized foreign currency translation gains of $4.3 million that were associated with the business;
•
A fourth quarter charge of $0.7 million ($0.5 million after taxes) associated with purchase accounting adjustments made to the value of inventory sold by Film Products after its purchase of Terphane (included in “Cost of goods sold” in the consolidated statements of income);
•
A fourth quarter charge of $0.1 million ($39,000 after taxes), a third quarter charge of $0.2 million ($0.1 million after taxes) and a second quarter charge of $0.3 million ($0.2 million after taxes) for severance and other employee-related costs in connection with restructurings in Film Products;
•
A fourth quarter charge of $0.4 million ($0.3 million after taxes) for integration-related expenses (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the Film Products acquisition of Terphane; and
•
A fourth quarter benefit of $39,000 ($24,000 after taxes), a third quarter charge of $43,000 ($27,000 after taxes), a second quarter benefit of $0.1 million ($0.1 million after taxes), and a first quarter charge of $32,000 ($20,000 after taxes) for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income).
Results in 2011 include an unrealized gain from the write-up of our investment in Intelliject of $1.6 million ($1.0 million after taxes), which is accounted for under the fair value method. An unrealized loss on our investment in Harbinger of $0.6 million ($0.4 million after taxes) was recorded in 2011 as a result of a reduction in the fair value of our investment that is not expected to be temporary. See Note 4 for additional information on investments.
The estimated fair value of machinery and equipment that was evaluated for impairment was primarily based on our estimates of the proceeds that we would receive if and/or when assets are sold. Our estimates of the remaining fair value for the related machinery and equipment were based on both Level 2 and 3 inputs as defined under U.S. GAAP.
Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations in 2010 (as shown in the segment operating profit table in Note 5) totaled $0.3 million ($0.3 million after taxes), and unless otherwise noted below, are also included in “Asset impairments and costs associated with exit and disposal activities” in the consolidated statements of income. Results in 2010 included:
•
A fourth quarter benefit of $0.4 million ($0.3 million after taxes), a third quarter benefit of $14,000 ($9,000 after taxes), a second quarter benefit of $23,000 ($14,000 after taxes), and a first quarter benefit of $0.4 million ($0.3 million after taxes) for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from the delayed fulfillment by customers of fixed-price forward purchase commitments (included in “Cost of goods sold” in the consolidated statements of income);
•
Fourth quarter charges of $0.3 million ($0.2 million after taxes) and a second quarter charge of $0.3 million ($0.3 million after taxes) for an asset impairment in Film Products;
•
A fourth quarter charge of $0.4 million ($0.2 million after taxes) related to expected future environmental costs at our aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income);
•
A third quarter charge of $0.1 million ($0.1 million after taxes) and a first quarter charge of $0.1 million ($35,000 after taxes) for severance and other employee-related costs in connection with restructurings in Film Products;
•
A second quarter gain of $0.1 million ($0.1 million after taxes) related to the sale of previously impaired equipment (included in “Other income (expense), net” in the consolidated statements of income) at our film products manufacturing facility in Pottsville, Pennsylvania; and
•
A second quarter loss of $44,000 ($26,000 after taxes) and a first quarter loss of $0.1 million ($36,000 after taxes) on the disposal of equipment (included in “Other income (expense), net” in the consolidated statements of income) from a previously shutdown films manufacturing facility in LaGrange, Georgia.
Results in 2010 include an unrealized loss from the write-down of our investment in Intellject of $2.2 million ($1.4 million after taxes), which is accounted for under the fair value method. See Note 4 for additional information on investments.
The impairment charges in Film Products were recognized to write down the machinery and equipment to the lower of their carrying value or estimated fair value. The estimated fair value of machinery and equipment that was evaluated for impairment was primarily based on our estimates of the proceeds that we would receive if and/or when assets are sold. Our estimates of the remaining fair value for the related machinery and equipment were based on both Level 2 and 3 inputs as defined under U.S generally accepted accounting principles.
CONTINGENCIES
We are involved in various stages of investigation and remediation relating to environmental matters at certain current and former plant locations. Where we have determined the nature and scope of any required environmental remediation activity, estimates of cleanup costs have been obtained and accrued. As we continue efforts to maintain compliance with applicable environmental laws and regulations, additional contingencies may be identified. If additional contingencies are identified, our practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. We do not believe that additional costs that could arise from those activities will have a material adverse effect on our financial position. However, those costs could have a material adverse effect on quarterly or annual operating results at that time.
We are involved in various other legal actions arising in the normal course of business. After taking into consideration information we deemed relevant, we believe that we have sufficiently accrued for probable losses and that the actions will not have a material adverse effect on our financial position. However, the resolution of the actions in a future period could have a material adverse effect on quarterly or annual operating results at that time.
From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the transaction, or in which the sellers or third parties involved in the transaction agree to indemnify us, for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount is reasonably estimable. We disclose contingent liabilities if the probability of loss is reasonably possible and material.
In 2011, we were notified by U.S. Customs and Border Protection (“U.S. Customs”) that certain film products exported by Terphane to the U.S. since November 6, 2008 could be subject to duties associated with an antidumping duty order on imported PET films from Brazil. We contested the applicability of these antidumping duties to the films exported by Terphane, and we filed a request with the U.S. Department of Commerce (“Commerce”) for clarification about whether the film products at issue are within the scope of the antidumping duty order. On January 8, 2013, Commerce issued a scope ruling confirming that the films are not subject to the order, provided that Terphane can establish to the satisfaction of U.S. Customs that the performance enhancing layer on those films is greater than 0.00001 inches thick. The films at issue are manufactured to specifications that exceed that threshold. On February 6, 2013, certain U.S. producers of PET film filed a summons with the U.S. Court of International Trade to appeal the scope ruling from Commerce. If U.S. Customs ultimately were to require the collection of antidumping duties because Commerce’s scope ruling was overturned on appeal, or otherwise, indemnifications for related liabilities are specifically provided for under the Purchase Agreement.
SELECTED QUARTERLY FINANCIAL DATA
Tredegar Corporation and Subsidiaries
(In Thousands, Except Per-Share Amounts)
(Unaudited)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 1, 2013.
Signature
Title
/s/ Nancy M. Taylor
(Nancy M. Taylor)
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Kevin A. O’Leary
(Kevin A. O’Leary)
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Frasier W. Brickhouse, II
(Frasier W. Brickhouse, II)
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)
/s/ R. Gregory Williams
(R. Gregory Williams)
Chairman of the Board of Directors
/s/ William M. Gottwald
(William M. Gottwald)
Vice Chairman of the Board of Directors
/s/ Austin Brockenbrough, III
(Austin Brockenbrough, III)
Director
/s/ Donald T. Cowles
(Donald T. Cowles)
Director
EXHIBIT INDEX
* Denotes compensatory plans or arrangements or management contracts.
+ Filed herewith