Company Quick10K Filing
Quick10K
Tredegar
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.64 33 $618
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-11-09 Earnings, Exhibits
8-K 2018-11-01 Other Events
8-K 2018-08-16 Officers, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-04 Exit Costs
8-K 2018-05-10 Officers
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-05-01 Accountant, Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2018-02-19 Officers
BHGE Baker Hughes A Ge
PH Parker Hannifin
AME Ametek
RS Reliance Steel & Aluminum
GNRC Generac Holdings
WTS Watts Water Technologies
DNOW NOW
CIR Circor
NNBR NN
AMSC American Superconductor
TG 2018-09-30
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 5. Risk Factors.
Item 6. Exhibits.
EX-31.1 tg-ex311_20180930x10q.htm
EX-31.2 tg-ex312_20180930x10q.htm
EX-32.1 tg-ex321_20180930x10q.htm
EX-32.2 tg-ex322_20180930x10q.htm

Tredegar Earnings 2018-09-30

TG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tg-20180930x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-10258 
 
Tredegar Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
 
Virginia
 
54-1497771
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
1100 Boulders Parkway
Richmond, Virginia
 
23225
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (804) 330-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
x
Smaller reporting company
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨ 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of Common Stock, no par value, outstanding as of October 25, 2018: 33,176,024




PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
Tredegar Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
 
September 30,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
36,776

 
$
36,491

Accounts and other receivables, net of allowance for doubtful accounts and sales returns of $5,764 in 2018 and $3,304 in 2017
125,368

 
120,135

Income taxes recoverable
5,886

 
32,080

Inventories
92,800

 
86,907

Prepaid expenses and other
7,754

 
8,224

Total current assets
268,584

 
283,837

Property, plant and equipment, at cost
777,834

 
770,892

Less accumulated depreciation
(559,551
)
 
(547,801
)
Net property, plant and equipment
218,283

 
223,091

Investment in kaléo (cost basis of $7,500)
65,900

 
54,000

Identifiable intangible assets, net
37,142

 
40,552

Goodwill
81,404

 
128,208

Deferred income taxes
11,357

 
16,636

Other assets
8,266

 
9,419

Total assets
$
690,936

 
$
755,743

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
128,034

 
$
108,391

Accrued expenses
45,138

 
42,433

Total current liabilities
173,172

 
150,824

Long-term debt
91,000

 
152,000

Pension and other postretirement benefit obligations, net
89,227

 
98,837

Deferred income taxes

 
2,123

Other noncurrent liabilities
8,766

 
8,179

Total liabilities
362,165

 
411,963

Commitments and contingencies (Notes 1 and 13)

 

Shareholders’ equity:
 
 
 
Common stock, no par value (issued and outstanding - 33,176,024 shares at September 30, 2018 and 33,017,422 shares at December 31, 2017)
38,531

 
34,747

Common stock held in trust for savings restoration plan (72,510 shares at September 30, 2018 and 71,309 shares at December 31, 2017)
(1,552
)
 
(1,528
)
Accumulated other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(97,749
)
 
(86,178
)
Gain (loss) on derivative financial instruments
(2,432
)
 
459

Pension and other post-retirement benefit adjustments
(83,024
)
 
(90,950
)
Retained earnings
474,997

 
487,230

Total shareholders’ equity
328,771

 
343,780

Total liabilities and shareholders’ equity
$
690,936

 
$
755,743

See accompanying notes to financial statements.

2



Tredegar Corporation
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues and other items:
 
 
 
 
 
 
 
Sales
$
267,294

 
$
247,121

 
$
789,765

 
$
715,494

Other income (expense), net
(2,557
)
 
34

 
11,532

 
38,055

 
264,737

 
247,155

 
801,297

 
753,549

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
217,378

 
194,508

 
631,235

 
569,555

Freight
9,438

 
8,621

 
26,667

 
24,840

Selling, general and administrative
20,676

 
20,718

 
63,452

 
61,852

Research and development
5,150

 
4,455

 
14,107

 
14,028

Amortization of identifiable intangibles
1,022

 
1,658

 
3,076

 
4,550

Pension and postretirement benefits
2,653

 
2,381

 
7,809

 
7,645

Interest expense
1,318

 
1,757

 
4,539

 
4,579

Asset impairments and costs associated with exit and disposal activities, net of adjustments
1,209

 
361

 
1,799

 
653

Goodwill impairment charge
46,792

 

 
46,792

 

Total
305,636

 
234,459

 
799,476

 
687,702

Income (loss) before income taxes
(40,899
)
 
12,696

 
1,821

 
65,847

Income taxes (benefit)
(6,699
)
 
4,422

 
3,135

 
9,667

Net income (loss)
$
(34,200
)
 
$
8,274

 
$
(1,314
)
 
$
56,180

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(1.03
)
 
$
0.25

 
$
(0.04
)
 
$
1.71

Diluted
$
(1.03
)
 
$
0.25

 
$
(0.04
)
 
$
1.70

Shares used to compute earnings per share:
 
 
 
 
 
 
 
Basic
33,110

 
32,954

 
33,056

 
32,945

Diluted
33,110

 
32,954

 
33,056

 
32,952

Dividends per share
$
0.11

 
$
0.11

 
$
0.33

 
$
0.33

See accompanying notes to financial statements.


3



Tredegar Corporation
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)

 
Three Months Ended September 30,
 
2018
 
2017
Net income (loss)
$
(34,200
)
 
$
8,274

  Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment (net of tax of $0 in 2018 and tax of $251 in 2017)
(2,666
)
 
7,143

Derivative financial instruments adjustment (net of tax benefit of $336 in 2018 and tax of $186 in 2017)
(1,701
)
 
326

Amortization of prior service costs and net gains or losses (net of tax of $789 in 2018 and tax of $1,057 in 2017)
2,703

 
1,854

Other comprehensive income (loss)
(1,664
)
 
9,323

Comprehensive income (loss)
$
(35,864
)
 
$
17,597

 
 
 
 
 
Nine Months Ended September 30,
 
2018
 
2017
Net income (loss)
$
(1,314
)
 
$
56,180

  Other comprehensive income (loss):
 
 
 
Unrealized foreign currency translation adjustment (net of tax of $0 in 2018 and tax of $481 in 2017)
(11,571
)
 
9,817

Derivative financial instruments adjustment (net of tax benefit of $316 in 2018 and tax of $162 in 2017)
(2,891
)
 
288

Amortization of prior service costs and net gains or losses (net of tax of $2,312 in 2018 and tax of $3,279 in 2017)
7,926

 
5,754

Other comprehensive income (loss)
(6,536
)
 
15,859

Comprehensive income (loss)
$
(7,850
)
 
$
72,039

See accompanying notes to financial statements.


4



Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,314
)
 
$
56,180

Adjustments for noncash items:
 
 
 
Depreciation
22,272

 
25,072

Amortization of identifiable intangibles
3,076

 
4,550

Goodwill impairment charge
46,792

 

Deferred income taxes
1,152

 
(104
)
Accrued pension and post-retirement benefits
7,809

 
7,645

(Gain)/loss on investment in kaléo accounted for under the fair value method
(11,900
)
 
(24,800
)
(Gain)/loss on asset impairments and divestitures
185

 
50

Net (gain)/loss on disposal of assets
(86
)
 
412

Changes in assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Accounts and other receivables
(13,020
)
 
(16,925
)
Inventories
(9,204
)
 
(4,220
)
Income taxes recoverable/payable
25,912

 
(603
)
Prepaid expenses and other
(1,655
)
 
129

Accounts payable and accrued expenses
29,452

 
8,674

Pension and postretirement benefit plan contributions
(7,182
)
 
(4,642
)
Other, net
705

 
2,093

Net cash provided by operating activities
92,994

 
53,511

Cash flows from investing activities:
 
 
 
Capital expenditures
(25,078
)
 
(37,245
)
Acquisition

 
(87,110
)
Return of escrowed funds relating to acquisition earn-out
4,250

 

Proceeds from the sale of assets and other
1,108

 
121

Net cash used in investing activities
(19,720
)
 
(124,234
)
Cash flows from financing activities:
 
 
 
Borrowings
34,750

 
173,250

Debt principal payments
(95,750
)
 
(91,250
)
Dividends paid
(10,943
)
 
(10,901
)
Proceeds from exercise of stock options and other
1,004

 
695

Net cash provided by (used in) financing activities
(70,939
)
 
71,794

Effect of exchange rate changes on cash
(2,050
)
 
1,268

Increase (decrease) in cash and cash equivalents
285

 
2,339

Cash and cash equivalents at beginning of period
36,491

 
29,511

Cash and cash equivalents at end of period
$
36,776

 
$
31,850

See accompanying notes to financial statements.


5



Tredegar Corporation
Consolidated Statement of Shareholders’ Equity
(In Thousands, Except Share and Per Share Data)
(Unaudited)

 
 
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
Common
Stock
 
Retained
Earnings
 
Trust for
Savings
Restoration
Plan
 
Foreign
Currency
Translation
 
Gain
(Loss) on
Derivative
Financial
Instruments
 
Pension &
Other
Post-retirement
Benefit
Adjustment
 
Total
Shareholders’
Equity
Balance at January 1, 2018
$
34,747

 
$
487,230

 
$
(1,528
)
 
$
(86,178
)
 
$
459

 
$
(90,950
)
 
$
343,780

Net income

 
(1,314
)
 

 

 

 

 
(1,314
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment (net of tax of $0)

 

 

 
(11,571
)
 

 

 
(11,571
)
Derivative financial instruments adjustment (net of tax benefit of $316)

 

 

 

 
(2,891
)
 

 
(2,891
)
Amortization of prior service costs and net gains or losses (net of tax of $2,312)

 

 

 

 

 
7,926

 
7,926

Cash dividends declared ($0.33 per share)

 
(10,943
)
 

 

 

 

 
(10,943
)
Stock-based compensation expense
2,780

 

 

 

 

 

 
2,780

Issued upon exercise of stock options & other
1,004

 

 

 

 

 

 
1,004

Tredegar common stock purchased by trust for savings restoration plan

 
24

 
(24
)
 

 

 

 

Balance at September 30, 2018
$
38,531

 
$
474,997

 
$
(1,552
)
 
$
(97,749
)
 
$
(2,432
)
 
$
(83,024
)
 
$
328,771

See accompanying notes to financial statements.


6



TREDEGAR CORPORATION
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
 
1.
In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of September 30, 2018, the consolidated results of operations for the three and nine months ended September 30, 2018 and 2017, the consolidated cash flows for the nine months ended September 30, 2018 and 2017, and the consolidated changes in shareholders’ equity for the nine months ended September 30, 2018. All such adjustments, unless otherwise detailed in the notes to the consolidated interim financial statements, are deemed to be of a normal, recurring nature.
The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis.  As such, the fiscal third quarter for 2018 and 2017 for this segment references 13-week periods ended September 23, 2018 and September 24, 2017, respectively.  The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated financial results.
The financial position data as of December 31, 2017 that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”) but does not include all disclosures required by United States generally accepted accounting principles (“GAAP”). These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2017 Form 10-K. The results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the results to be expected for the full year. Certain prior year balances have been reclassified to conform with current year presentation (see Note 14 for additional detail).
Revenue Recognition. Revenue from the sale of products, which is shown net of estimated sales returns and allowances, is recognized at a point in time when control has passed to the customer. Control passes to the customer generally when the customer takes physical possession or when title passes if defined separately in the sales agreement. Amounts billed to customers related to freight are classified as sales in the accompanying consolidated statements of income. The cost of freight is 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. See Note 11 for disaggregation of revenue by segment and type.
As of September 30, 2018 and December 31, 2017, accounts receivable and other receivables, net, were $125.4 million and $120.1 million, respectively, made up of the following:
 
 
September 30,
 
December 31,
(In thousands)
2018
 
2017
Customer receivables
$
125,985

 
$
113,556

Other accounts and notes receivable
5,147

 
9,883

      Total accounts and other receivables
131,132

 
123,439

Less: Allowance for bad debts and sales returns
(5,764
)
 
(3,304
)
Total accounts and other receivables, net
$
125,368

 
$
120,135


For the three and nine months ended September 30, 2018, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of September 30, 2018. Payment terms start from the date of satisfaction of the performance obligation and vary from COD (cash on delivery) to 120 days. The Company’s contracts generally include one performance obligation, which is satisfied at a point in time.
For the three months and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods (for example, changes in transaction price), was not material.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding i) revenue pertaining to contracts that have an original expected duration of one year or less, ii) contracts where revenue

7



is recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to materially impact the Company’s financial results. 
2.
On February 15, 2017, Bonnell Aluminum acquired 100% of the stock of Futura Industries Corporation (“Futura”) on a net debt-free basis for approximately $92 million. The amount actually funded in cash at the transaction date was approximately $87 million, which was net of preliminary closing adjustments for working capital and seller transaction-related obligations assumed and subsequently paid by Bonnell Aluminum. In addition, the Company was refunded $5 million in the first quarter of 2018 since Futura did not meet certain performance requirements for the 2017 fiscal year (“Earnout Provision”). The acquisition, which was funded using Tredegar’s existing revolving credit facility, was treated as an asset purchase for U.S. federal income tax purposes.

The net purchase price for financial reporting purposes was set at approximately $82.9 million, which includes adjustments for the fair value of the Earnout Provision of $4.3 million and the net settlement of certain post-closing adjustments of $0.1 million. Adjustments to the purchase price were made retrospectively as if the accounting had been completed on the acquisition date. Based upon management’s valuation of the fair value of tangible and intangible assets acquired (net of cash acquired) and liabilities assumed, the allocation of the purchase price was as follows:
(In Thousands)
 
Accounts receivable
$
6,680

Inventories
10,342

Prepaid expenses and other current assets
240

Property, plant & equipment
32,662

Identifiable intangible assets:
 
  Customer relationships
24,000

  Trade names
6,700

Trade payables & accrued expenses
(8,135
)
      Total identifiable net assets
72,489

      Adjusted Net Purchase Price
82,860

Goodwill
$
10,371


The goodwill and other intangible asset balances associated with this acquisition are deductible for U.S. federal income tax purposes on a straight-line basis over a period of approximately 15 years. For financial reporting purposes, customer relationships are being amortized over 12 years and trade names are being amortized over 13 years. Goodwill is not subject to amortization for financial reporting purposes.

3.
Plant shutdowns, asset impairments, restructurings and other items are shown in the net sales and operating profit by segment table in Note 11 and are also included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted below.

Plant shutdowns, asset impairments, restructurings and other items in the third quarter of 2018 include:
Pretax charges of $1.7 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related costs of $1.3 million ($0.2 million included in “Cost of goods sold” in the consolidated statements of income), and accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.4 million for professional fees associated with the Terphane Limitada worthless stock deduction and a market study for PE Films (included in “Selling, general and administrative expenses” in the consolidated statements of income);
Pretax charges of $0.2 million for severance and other employee-related costs associated with restructurings in PE Films;
Pretax charges of $0.2 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income);

8



Pretax charges of $0.2 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $0.1 million related to wind damage that occurred in the third quarter of 2018 at the aluminum extrusions manufacturing facility in Elkhart, Indiana (included in “Selling, general and administrative expenses” in the consolidated statements of income).
Plant shutdowns, asset impairments, restructurings and other items in the first nine months of 2018 include:
Pretax charges of $2.4 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related costs of $1.7 million, accelerated depreciation of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.2 million;
Pretax charges of $1.7 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.7 million for professional fees associated with the Terphane Limitada worthless stock deduction, the impairment of assets of Flexible Packaging Films, determining the effect of the new U.S. federal income tax law, and a market study for PE Films (included in “Selling, general and administrative expenses” in the consolidated statements of income);
Pretax charges of $0.3 million for severance and other employee-related costs associated with restructurings in PE Films;
Pretax charges of $0.2 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income); and
Pretax charges of $0.1 million related to wind damage that occurred in the third quarter of 2018 at the aluminum extrusions manufacturing facility in Elkhart, Indiana (included in “Selling, general and administrative expenses” in the consolidated statements of income).
Plant shutdowns, asset impairments, restructurings and other items in the third quarter of 2017 include:
Pretax charges of $0.7 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films of $0.6 million and by Bonnell of $0.1 million (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.2 million associated with a business development project (included in “Selling, general and administrative expense” in the consolidated statements of income);
Pretax charges of $0.2 million associated with the consolidation of domestic PE Films’ manufacturing facilities (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $0.2 million associated with the settlement of customer claims and other costs related to the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana; and
Pretax charges of $0.1 million for severance and other employee-related costs associated with restructurings in PE Films.
Plant shutdowns, asset impairments, restructurings and other items in the first nine months of 2017 include:
Pretax income of $11.9 million related to the settlement of an escrow arrangement established upon the acquisition of Terphane in 2011 (included in “Other income (expense), net” in the consolidated statements of income). In settling the escrow arrangement, the Company assumed the risk of the claims (and associated legal fees) against which the escrow previously secured the Company.  While the ultimate amount of such claims is unknown, the Company believes that it is reasonably possible that it could be liable for some portion of these claims, and currently estimates the amount of such future claims at approximately $1.0 million;
Pretax charges of $3.3 million related to the acquisition of Futura, i) associated with accounting adjustments of $1.7 million made to the value of inventory sold by Aluminum Extrusions after its acquisition of Futura (included in “Cost of goods sold” in the consolidated statements of income), ii) acquisition costs of $1.5 million and, iii) integration costs of $0.1 million (included in “Selling, general and administrative expenses”

9



in the consolidated statements of income), offset by pretax income of $0.7 million related to the fair valuation of an earnout provision (included in “Other income (expense), net” in the consolidated statements of income);
Pretax charges of $3.5 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films of $3.0 million and by Aluminum Extrusions of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income);
Pretax income of $0.5 million related to the explosion that occurred in the second quarter of 2016 at the aluminum extrusions manufacturing facility in Newnan, Georgia, which includes the expected recovery of excess production costs of $0.6 million incurred in 2016 for which recovery from insurance carriers was not previously considered to be reasonably assured (included in “Cost of goods sold” in the consolidated statements of income), partially offset by legal and consulting fees of $0.1 million (included in “Selling, general and administrative expenses” in the consolidated statements of income);
Pretax charges of $0.8 million associated with the consolidation of domestic PE Films’ manufacturing facilities, which consists of asset impairments of $0.1 million, accelerated depreciation of $0.2 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income), offset by pretax income of $0.1 million related to a reduction of severance and other employee-related accrued costs;
Pretax charges of $0.4 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income);
Pretax charges of $1.1 million associated with a business development project (included in “Selling, general and administrative expense” in the consolidated statements of income);
Pretax charges of $0.4 million for severance and other employee-related costs associated with restructurings in PE Films ($0.1 million) and Corporate ($0.3 million) (included in “Corporate expenses, net” in the net sales and operating profit by segment table); and
Pretax charges of $0.2 million associated with the settlement of customer claims and other costs related to the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana.
Results on the Company’s investment in kaleo, Inc. (“kaléo”), which is accounted for under the fair value method, in the third quarter of 2018 include an unrealized loss of $2.1 million ($1.6 million after taxes) and in the first nine months an unrealized gain of $11.9 million ($9.3 million after taxes), compared to an unrealized gain of $24.8 million ($18.2 million after taxes) in the first nine months of 2017 (included in “Other income (expense), net” in the consolidated statements of income). There was no change in the estimated fair value from June 30, 2017 to September 30, 2017, as appreciation in value from the discount rate for one quarter was offset by a change in the present value of projected cash flows versus prior projections. An unrealized loss on the Company’s investment in the Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”) of $0.2 million and $0.3 million was recognized in the third quarter and first nine months of 2018, respectively (included in “Other income (expense), net” in the consolidated statements of income) (none in 2017). See Note 7 for additional information on investments.
During the third quarter of 2018, the Company performed a goodwill impairment analysis related to the Personal Care component of PE Films. This review was undertaken as a result of the expected loss of business from a key customer and revised projections for PE Films. Based on an evaluation of projections under various business planning scenarios, the Company concluded that the value of the Personal Care component of PE Films was less than the carrying value of the underlying working capital and long-lived net assets. The assessment resulted in a full write-off of the goodwill of $46.8 million associated with the acquisition of certain components of PE Films. See Note 15 for additional details.
The Company recorded an unrealized loss on its investment property in Alleghany and Bath Counties, Virginia (included in “Other income (expense), net” in the consolidated statements of income) of $0.2 million in the third quarter of 2018.

10



In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produces plastic films used as components for personal care products (“Shanghai transition”).  Production is expected to cease at this plant during the fourth quarter of 2018.  The Company expects to recognize costs associated with exit and disposal activities of $7.1 million comprised of: (i) retention, severance and related costs ($3.6 million), (ii) customer-related costs ($1.1 million), and (iii) legal, asset disposal and other cash costs ($2.4 million).  In addition, the Company expects non-cash asset write-offs and accelerated depreciation of $0.9 million.  Net annual cash savings from consolidating operations of $1.7 million is expected.  Proceeds from expected property disposals are uncertain. The Company anticipates that these activities, including property disposals, will require 12-18 months to execute, and the costs are expected to be incurred during this period.
Total expenses associated with the Shanghai transition were $1.7 million and $2.4 million in the three months and nine months ended September 30, 2018, respectively, ($1.0 million and $1.5 million, respectively, included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” and $0.7 million and $0.9 million, respectively, included in “Cost of goods sold” in the consolidated statements of income). Cash expenditures were $0.1 million and $0.4 million in the three months and nine months ended September 30, 2018, respectively.
A reconciliation of the beginning and ending balances of accrued expenses associated with exit and disposal activities and charges associated with asset impairments and reported as “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income for the nine months ended September 30, 2018 is as follows:
(In thousands)
Severance (a)
 
Asset Impairments
 
Other (b)
 
Total
Balance at January 1, 2018
$
627

 
$

 
$
476

 
$
1,103

Changes in 2018:
 
 
 
 
 
 
 
Charges
1,871

 

 
20

 
1,891

Cash spent
(933
)
 

 
(310
)
 
(1,243
)
Charges against assets

 
92

 

 
92

Reversed to income
 
 
(92
)
 
 
 
(92
)
Balance at September 30, 2018
$
1,565

 
$

 
$
186

 
$
1,751

(a) Severance cash spent includes severance payments associated with the consolidation of North American PE Films manufacturing facilities.
(b) Other primarily includes other restructuring costs associated with Aluminum Extrusions.

4.
The components of inventories are as follows:
 
 
September 30,
 
December 31,
(In thousands)
2018
 
2017
Finished goods
$
24,632

 
$
20,281

Work-in-process
12,046

 
11,958

Raw materials
36,607

 
35,909

Stores, supplies and other
19,515

 
18,759

Total
$
92,800

 
$
86,907

 
5.
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Weighted average shares outstanding used to compute basic (loss) earnings per share
33,110

 
32,954

 
33,056

 
32,945

Incremental dilutive shares attributable to stock options and restricted stock

 

 

 
7

Shares used to compute diluted earnings (loss) per share
33,110

 
32,954

 
33,056

 
32,952


11



Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. The Company had a net loss for the three and nine months ended September 30, 2018, so there is no dilutive impact for such shares. If the Company had reported net income for the three and nine months ended September 30, 2018, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 178,676 and 236,138, respectively. For the three and nine months ended September 30, 2017, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 479,651 and 386,729, respectively.

6.
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2018:
(In thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2018
$
(86,178
)
 
$
459

 
$
(90,950
)
 
$
(176,669
)
Other comprehensive income (loss) before reclassifications
(11,571
)
 
(3,045
)
 

 
(14,616
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
154

 
7,926

 
8,080

Net other comprehensive income (loss) - current period
(11,571
)
 
(2,891
)
 
7,926

 
(6,536
)
Ending balance, September 30, 2018
$
(97,749
)
 
$
(2,432
)
 
$
(83,024
)
 
$
(183,205
)
    
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2017:
(In Thousands)
Foreign
currency
translation
adjustment
 
Gain (loss) on
derivative
financial
instruments
 
Pension and
other
post-retirement
benefit
adjustments
 
Total
Beginning balance, January 1, 2017
$
(93,970
)
 
$
863

 
$
(90,127
)
 
$
(183,234
)
Other comprehensive income (loss) before reclassifications
9,817

 
817

 

 
10,634

Amounts reclassified from accumulated other comprehensive income (loss)

 
(529
)
 
5,754

 
5,225

Net other comprehensive income (loss) - current period
9,817

 
288

 
5,754

 
15,859

Ending balance, September 30, 2017
$
(84,153
)
 
$
1,151

 
$
(84,373
)
 
$
(167,375
)

12



Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the three months ended September 30, 2018 are summarized as follows:
(In Thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
300

 
Cost of sales
Foreign currency forward contracts, before taxes
(807
)
 
Selling, general & administrative
Foreign currency forward contracts, before taxes
15

 
Cost of sales
Total, before taxes
(492
)
 
 
Income tax expense (benefit)
23

 
Income taxes
Total, net of tax
$
(515
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(3,492
)
 
(a)
Income tax expense (benefit)
(789
)
 
Income taxes
Total, net of tax
$
(2,703
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).

Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the nine months ended September 30, 2018 are summarized as follows:
(In thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
1,244

 
Cost of sales
Foreign currency forward contracts, before taxes
(1,226
)
 
Selling, general & administrative
Foreign currency forward contracts, before taxes
46

 
Cost of sales
Total, before taxes
64

 
 
Income tax expense (benefit)
218

 
Income taxes
Total, net of tax
$
(154
)
 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(10,238
)
 
(a)
Income tax expense (benefit)
(2,312
)
 
Income taxes
Total, net of tax
$
(7,926
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).


13



Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the three months ended September 30, 2017 are summarized as follows:
(In Thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
231

 
Cost of sales
Foreign currency forward contracts, before taxes
15

 
Cost of sales
Total, before taxes
246

 
 
Income tax expense (benefit)
90

 
Income taxes
Total, net of tax
$
156

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(2,911
)
 
(a)
Income tax expense (benefit)
(1,057
)
 
Income taxes
Total, net of tax
$
(1,854
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the nine months ended September 30, 2017 are summarized as follows:
(In thousands)
Amount
reclassified from
other
comprehensive
income (loss)
 
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
Gain (loss) on derivative financial instruments:
 
 
 
Aluminum future contracts, before taxes
$
785

 
Cost of sales
Foreign currency forward contracts, before taxes
46

 
Cost of sales
Total, before taxes
831

 
 
Income tax expense (benefit)
302

 
Income taxes
Total, net of tax
$
529

 
 
Amortization of pension and other post-retirement benefits:
 
 
 
Actuarial gain (loss) and prior service costs, before taxes
$
(9,033
)
 
(a)
Income tax expense (benefit)
(3,279
)
 
Income taxes
Total, net of tax
$
(5,754
)
 
 
(a)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).

7.
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate 20% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value method. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.
At September 30, 2018, the estimated fair value of the Company’s investment was $65.9 million, down from $68.0 million as of June 30, 2018 but up from $54.0 million as of December 31, 2017.
The change in the estimated fair value of the Company’s holding in kaléo since the end of 2017 primarily relates to the difference from discounting between the present value of projected cash flows at September 30, 2018

14



versus December 31, 2017 (i.e., the time value of money), changes in cash flow projections for various scenarios and the assessment of the risk-adjusted discount rate appropriate for the various scenarios. Kaléo’s stock is not publicly traded. The valuation estimate in this situation is based on projection assumptions or Level 3 inputs that have a wide range of possible outcomes.
There are numerous assumptions and Level 3 inputs that, if changed, impact the projection of kaléo’s future cash flows, and the probability of actually achieving those cash flows. For example, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business. Moreover, many of the assumptions and inputs are interrelated, including key assumptions for kaléo’s projected market share, pricing and net margins after chargebacks, discounts, rebates, copays and returns. Accordingly, determining the sensitivity of changes in estimated fair value to the change in one assumption is not practical.
Ultimately, the true value of the Company’s ownership interest in kaléo will be determined if and when a liquidity event occurs, and the ultimate value could be materially different from the $65.9 million estimated fair value reflected in the Company’s financial statements at September 30, 2018.
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 11. Subsequent to its most recent investment (December 15, 2008), and until the next round of financing, the Company believes fair value estimates are based upon Level 3 inputs since there is no secondary market for its ownership interest. Accordingly, until the next round of financing or any other significant financial transaction, value estimates will primarily be based on assumptions related to meeting cash flow projections and discounting of these factors for their high degree of risk. If kaléo does not meet its projected cash flows or related risks are unfavorable versus the most recent valuation, or a new round of financing or other significant financial transaction indicates a lower enterprise value, then the Company’s estimate of the fair value of its ownership interest in kaléo is likely to decline. Adjustments to the estimated fair value of this investment will be made in the period upon which such changes can be quantified.
The Company’s investment in the Harbinger Fund had a carrying value (included in “Other assets and deferred charges”) of $1.4 million and $1.7 million at September 30, 2018 and December 31, 2017, respectively. The carrying value at September 30, 2018 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received and unrealized losses. Based on an observable price change, the Company recorded an unrealized loss of $0.2 million and $0.3 million in the third quarter and first nine months of 2018, respectively (none in 2017). No withdrawal proceeds were received in the first nine months of 2017 or 2018. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of September 30, 2018.
The Company has determined that there is no readily determinable fair value for the Harbinger Fund and has elected to record its investment in the Harbinger Fund at cost, less impairment, adjusted for observable price changes. Gains on the Company’s investment in the Harbinger Fund will be recognized when there are positive observable price changes, including when the amounts expected to be collected from any withdrawal from the investment are known, which will likely be when cash in excess of the remaining carrying value is received. Losses will be recognized when management believes through observable methods that it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

8.
Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exist as part of ongoing business operations (primarily in Flexible Packaging Films). These 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, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales

15



contract obligations was $18.2 million (16.4 million pounds of aluminum) at September 30, 2018 and $8.2 million (8.0 million pounds of aluminum) at December 31, 2017.
The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(In thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
Asset derivatives:
Aluminum futures contracts
Accrued Expenses
 
$
201

 
Prepaid expenses and other
 
$
578

Liability derivatives:
Aluminum futures contracts
Accrued Expenses
 
(994
)
 
Prepaid expenses and other
 
$
(16
)
Net asset (liability)
 
 
$
(793
)
 
 
 
$
562

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 Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation.

16



The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the consolidated balance sheets as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(In Thousands)
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet
Account
 
Fair
Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
Asset derivatives:
Foreign currency forward contracts
Accrued Expenses
 
$

 
Accrued Expenses
 
$

Liability derivatives:
Foreign currency forward contracts
Accrued Expenses
 
(2,687
)
 
Accrued Expenses
 
(558
)
Net asset (liability)
 
 
$
(2,687
)
 
 
 
$
(558
)
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure between Flexible Packaging Films business unit in Brazil, Terphane Ltda.'s (“Terphane Ltda.”) U.S. Dollar quoted or priced sales and underlying Brazilian Real (“R$”) quoted or priced operating costs (excluding depreciation and amortization) is annual net costs of R$125 million. Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
USD Notional Amount (000s)
Average Forward Rate Contracted on USD/BRL
R$ Equivalent Amount (000s)
Applicable Month
Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged
$2,250
3.4801
R$7,830
Oct-18
78%
$2,250
3.4887
R$7,850
Nov-18
81%
$2,250
3.4969
R$7,868
Dec-18
83%
$2,025
3.6442
R$7,380
Jan-19
73%
$2,025
3.6527
R$7,397
Feb-19
75%
$2,025
3.6593
R$7,410
Mar-19
70%
$2,025
3.6690
R$7,430
Apr-19
72%
$2,025
3.6795
R$7,451
May-19
73%
$2,025
3.6904
R$7,473
Jun-19
72%
$1,800
3.8826
R$6,989
Jul-19
65%
$1,800
3.8950
R$7,011
Aug-19
68%
$1,800
3.9070
R$7,033
Sep-19
66%
$1,800
3.9203
R$7,056
Oct-19
67%
$1,800
3.9331
R$7,080
Nov-19
67%
$1,800
3.9455
R$7,102
Dec-19
73%
$29,700
3.7158
R$110,358
 
72%
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Limitada's forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and decreasing the net exposure to Brazilian Real in the consolidated statements of income. The net fair value of the open forward contracts was a negative $2.3 million as of September 30, 2018.
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial institutions.

17



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 the three and nine month periods ended September 30, 2018 and 2017 is summarized in the table below:
(In thousands)
Cash Flow Derivative Hedges
 
Three Months Ended September 30,
 
Aluminum Futures Contracts
 
Foreign Currency Forwards
 
2018
 
2017
 
2018
2018
 
2017
Amount of pretax gain (loss) recognized in other comprehensive income (loss)
$
(1,176
)
 
$
757

 
$

$
(1,353
)
 
$

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

 
Cost of
sales

 
Cost of
sales

Selling, general & admin

 
Cost of
sales

Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income effective portion)
$
300

 
$
231

 
$
15

$
(807
)
 
$
15

 
Nine Months Ended September 30,
 
Aluminum Futures Contracts
 
Foreign Currency Forwards
 
2018
 
2017
 
2018
2018
 
2017
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)
$
(111
)
 
$
1,281

 
$

$
(3,032
)
 
$

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

 
Cost of
sales

 
Cost of
sales

Selling, general & admin

 
Cost of
sales

Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)
$
1,244

 
$
785

 
$
46

$
(1,226
)
 
$
46

As of September 30, 2018, the Company expects $0.7 million of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three and nine month periods ended September 30, 2018 and 2017, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
 

18



9.
The Company sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees is 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 was closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.
The components of net periodic benefit cost for the pension and other post-retirement benefit programs reflected in the consolidated statements of income are shown below:
 
Pension Benefits
 
Other Post-Retirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Service cost
$
7

 
$
29

 
$
7

 
$
7

Interest cost
2,818

 
3,103

 
65

 
73

Expected return on plan assets
(3,736
)
 
(3,743
)
 

 

Amortization of prior service costs, (gains) losses and net transition asset
3,565

 
2,996

 
(75
)
 
(84
)
Net periodic benefit cost
$
2,654

 
$
2,385

 
$
(3
)
 
$
(4
)
 
Pension Benefits
 
Other Post-Retirement Benefits
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
17

 
$
145

 
$
27

 
$
25

Interest cost
8,582

 
9,431

 
203

 
226

Expected return on plan assets
(11,258
)
 
(11,216
)
 

 

Amortization of prior service costs, (gains) losses and net transition asset
10,421

 
9,241

 
(183
)
 
(207
)
Net periodic benefit cost
$
7,762

 
$
7,601

 
$
47

 
$
44

Pension and other post-retirement liabilities were $89.8 million and $99.5 million at September 30, 2018 and December 31, 2017, respectively ($0.6 million included in “Accrued expenses” at September 30, 2018 and December 31, 2017, with the remainder included in “Pension and other postretirement benefit obligations, net” in the consolidated balance sheets). The Company’s required contributions are expected to be $8.4 million in 2018. Contributions to the pension plan during the first nine months of 2018 were $7.0 million. Tredegar funds its other post-retirement benefits (life insurance and health benefits) on a claims-made basis; for 2018, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2017, or $0.3 million.
 
10.
Other income (expense), net consists of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Gain (loss) on investment in kaléo accounted for under fair value method
$
(2,100
)
 
$

 
$
11,900

 
$
24,800

Gain associated with the settlement of an escrow agreement

 

 

 
11,856

Other
(457
)
 
34

 
(368
)
 
1,399

Total
$
(2,557
)
 
$
34

 
$
11,532

 
$
38,055

See Note 7 for more details on the gain (loss) on the investment in kaléo.

11.
The Company’s business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.

19



The following table presents net sales and operating profit by segment for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Net Sales
 
 
 
 
 
 
 
PE Films
$
76,470

 
$
89,723

 
$
252,177

 
$
265,773

Flexible Packaging Films
33,725

 
26,628

 
90,466

 
79,925

Aluminum Extrusions
147,661

 
122,149

 
420,455

 
344,956

Total net sales
257,856

 
238,500

 
763,098

 
690,654

Add back freight
9,438

 
8,621

 
26,667

 
24,840

Sales as shown in the Consolidated Statements of Income
$
267,294

 
$
247,121

 
$
789,765

 
$
715,494

Operating Profit (Loss)
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
Ongoing operations
$
4,145

 
$
11,251

 
$
26,857

 
$
30,965

Plant shutdowns, asset impairments, restructurings and other
(2,355
)
 
(919
)
 
(4,542
)
 
(3,890
)
       Goodwill impairment charge
(46,792
)
 

 
(46,792
)
 

Flexible Packaging Films:
 
 
 
 
 
 
 
Ongoing operations
3,609

 
(1,074
)
 
6,617

 
(3,392
)
Plant shutdowns, asset impairments, restructurings and other

 

 

 
11,856

Aluminum Extrusions:
 
 
 
 
 
 
 
Ongoing operations
11,730

 
12,601

 
35,086

 
34,201

Plant shutdowns, asset impairments, restructurings and other
(297
)
 
(377
)
 
(396
)
 
(3,147
)
Total
(29,960
)
 
21,482

 
16,830

 
66,593

Interest income
6

 
42

 
290

 
171

Interest expense
1,318

 
1,757

 
4,539

 
4,579

Gain (loss) on investment in kaléo accounted for under fair value method
(2,100
)
 

 
11,900

 
24,800

Unrealized loss on investment property
(186
)
 

 
(186
)
 

Stock option-based compensation costs
415

 
111

 
806

 
153

Corporate expenses, net
6,926

 
6,960

 
21,668

 
20,985

Income (loss) before income taxes
(40,899
)
 
12,696

 
1,821

 
65,847

Income taxes (benefit)
(6,699
)
 
4,422

 
3,135

 
9,667

Net income (loss)
$
(34,200
)
 
$
8,274

 
$
(1,314
)
 
$
56,180

The following table presents identifiable assets by segment at September 30, 2018 and December 31, 2017:
(In thousands)
September 30, 2018
 
December 31, 2017
PE Films
$
231,106

 
$
289,514

Flexible Packaging Films
53,661

 
49,915

Aluminum Extrusions
277,810

 
268,127

Subtotal
562,577

 
607,556

General corporate
91,583

 
111,696

Cash and cash equivalents
36,776

 
36,491

Total
$
690,936

 
$
755,743



20



The following tables disaggregate the Company’s revenue by geographic area and product group for the three and nine months ended September 30, 2018 and 2017:
Net Sales by Geographic Area (b)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017(c)
United States
$
176,022

 
$
150,154

 
$
506,769

 
$
434,766

Exports from the United States to:
 
 
 
 
 
 
 
Asia
14,893

 
21,507

 
57,370

 
61,394

Canada
13,451

 
11,253

 
40,988

 
35,855

Europe
1,608

 
2,193

 
5,127

 
6,826

Latin America
3,104

 
3,841

 
9,810

 
11,562

Operations outside the United States:
 
 
 
 
 
 
 
Brazil
26,591

 
22,030

 
73,402

 
64,682

The Netherlands
11,428

 
15,691

 
34,750

 
41,378

Hungary
7,987

 
6,331

 
25,324

 
17,660

China
2,376

 
3,061

 
6,342

 
9,176

India
396

 
2,439

 
3,216

 
7,355

Total (a)
$
257,856

 
$
238,500

 
$
763,098

 
$
690,654

Net Sales by Product Group
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017(c)
PE Films:
 
 
 
 
 
 
 
Personal care materials
57,356

 
63,574

 
174,985

 
187,661

Surface protection films
17,193

 
24,368

 
71,926

 
72,805

LED lighting products & other films
1,921

 
1,781

 
5,266

 
5,307

Subtotal
76,470

 
89,723

 
252,177

 
265,773

Flexible Packaging Films
33,725

 
26,628

 
90,466

 
79,925

Aluminum Extrusions:
 
 
 
 
 
 
 
Nonresidential building & construction
75,870

 
63,187

 
213,500

 
177,534

Consumer durables
14,991

 
14,105

 
47,300

 
39,871

Distribution
9,148

 
7,182

 
32,109

 
23,024

Automotive
13,205

 
9,682

 
33,992

 
29,947

Residential building & construction
11,163

 
10,327

 
32,976

 
29,855

Machinery & equipment
11,191

 
8,430

 
30,335

 
23,975

Electrical
12,093

 
9,236

 
30,243

 
20,750

Subtotal
147,661

 
122,149

 
420,455

 
344,956

Total (a)
257,856

 
238,500

 
763,098

 
690,654

See a reconciliation of net sales to sales as shown in the Condensed Consolidated Statements of Income on the previous page.
(a)
The difference between total consolidated sales as reported in the consolidated statements of income and segment, geographic and product group net sales reported in this note is freight of $9.4 million and $26.7 million in the three months and nine months ended September 30, 2018 and $8.6 million and $24.8 million in the three months and nine months ended September 30, 2017, respectively.
(b)
Export sales relate primarily to PE Films. Operations outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia.
(c)
As disclosed in Note 1, prior period amounts have not been adjusted under the modified retrospective method.


21



12.
The Tax Cuts and Jobs Act (the “TCJA”) makes broad and complex changes to the U.S. tax code, including but not limited to: (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) creating new taxes on certain foreign earnings; (v) eliminating certain deductions; and (vi) providing the option to full expensing of qualified property.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under Accounting Standards Codification No. 740 (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of a company’s accounting for those tax effects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a reasonable estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of the TCJA.
The TCJA is complex and its impact may materially differ from the Company’s estimates due to, among other things, changes in the Company’s assumptions, implementation guidance that may be issued from the IRS and related interpretations and clarifications of the tax law relevant for the completion of the Company’s 2017 tax return filings. The Company expects to complete its assessment of these items during 2018, and any adjustments to the provisional amounts initially recorded will be included as an adjustment to income tax expense or benefit in the period the amounts are determined in accordance with SAB 118.
While item (ii) above has not been completed, the Company has not accrued any deemed repatriation taxes on unrepatriated earnings of its foreign subsidiaries, since its preliminary assessments indicates that such foreign subsidiaries have no net cumulative unremitted earnings due to historical repatriation. There has been no change to this estimate in the first nine months of 2018. The remaining TCJA summary items (i and iii through vi above) have been reflected in the Company’s 2018 effective tax rate based on the Company’s best estimates as indicated in the rate reconciliation table.
The application of the new Global Intangible Low Taxed Income (“GILTI”) tax rules to the Company, which is part of item (iv) above is not complete. The rules are complex, and under GAAP, the Company is allowed to make a policy choice of either (a) treating taxes due on future U.S. inclusions in taxable income related to GILTI as current period expense when incurred (the “period cost method”) or (b) factoring such amounts into a company’s measurement of its deferred income taxes (“deferred method”). The selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on the Company’s analysis of its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Accordingly, the Company has not made a policy decision regarding whether to record deferred income taxes on GILTI.

22



Tredegar recorded tax expense of $3.1 million on pretax net income of $1.8 million in the first nine months of 2018. Therefore, the effective tax rate in the first nine months of 2018 was 172.1%, compared to 14.7% in the first nine months of 2017. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the nine months ended September 30, 2018 and 2017 are as follows:
(In thousands, except percentages)
2018
 
2017
Nine Months Ended September 30,
Amount
 
%
 
Amount
 
%
Income tax expense at federal statutory rate
$
383

 
21.0

 
$
23,047

 
35.0

Goodwill impairment charge
1,788

 
98.2

 

 

Foreign rate differences
1,159

 
63.6

 
1,022

 
1.5

U.S. Tax on Foreign Branch Income
953

 
52.3

 

 

Tax contingency accruals and tax settlements
480

 
26.4

 
(284
)
 
(0.4
)
Valuation allowance for capital loss carry-forwards
245

 
13.4

 
(25
)
 

Non-deductible expenses
230

 
12.6

 
368

 
0.5

Valuation allowance due to foreign losses and impairments
185

 
10.1

 
272

 
0.4

Stock-based compensation
173

 
9.5

 
192

 
0.3

State taxes, net of federal income tax benefit
87

 
4.8

 
866

 
1.3

Unremitted earnings from foreign operations

 

 
117

 
0.2

Domestic production activities deduction

 

 
(610
)
 
(0.9
)
Remitted earnings from foreign operations

 

 
(413
)
 
(0.6
)
Increase in value of kaléo investment held abroad

 

 
(2,326
)
 
(3.5
)
Settlement of Terphane acquisition escrow

 

 
(4,200
)
 
(6.4
)
Worthless stock deduction

 

 
(8,057
)
 
(12.2
)
Research and development tax credit
(318
)
 
(17.4
)
 
(458
)
 
(0.7
)
Changes in estimates related to prior year tax provision
(414
)
 
(22.7
)
 
156

 
0.2

Foreign Derived Intangible Income (FDII)
(472
)
 
(25.9
)
 

 

Foreign tax incentives
(1,344
)
 
(73.8
)
 

 

Effective income tax rate
$
3,135

 
172.1

 
$
9,667

 
14.7

Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under TCJA, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.
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 Ltda.’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 to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, which has a commencement date of January 1, 2015. The benefit from the tax incentives was $1.3 million in the first nine months of 2018 (none in 2017).
Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.
The Company includes tax-related interest and penalties in income tax expense. During the first nine months of 2018, $0.1 million of interest and penalties were accrued. As of September 30, 2018, $0.2 million of interest and penalties are accrued as a tax liability.

23



13.
In 2011, Tredegar was notified by U.S. Customs and Border Protection (“U.S. Customs”) that certain film products exported by Terphane Ltda. to the U.S. since November 6, 2008 could be subject to duties associated with an anti-dumping duty order on imported PET films from Brazil.  The Company contested the applicability of these anti-dumping duties to the films exported by Terphane Ltda., and it filed a request with the U.S. Department of Commerce (“Commerce”) for clarification about whether the film products at issue are within the scope of the anti-dumping duty order.  In December 2014, the U.S. International Trade Commission separately voted to revoke the anti-dumping duty order on imported PET films from Brazil. On February 20, 2015, certain U.S. producers of PET films filed a summons with the U.S. Court of International Trade to appeal the determination by the U.S. International Trade Commission. After lengthy litigation, on June 19, 2018, the U.S. Court of International Trade ruled in favor of Terphane Ltda. by upholding the determination by Commerce that Terphane Ltda.’s films are outside the scope of the anti-dumping duty order.  The plaintiffs chose not to appeal the U.S. Court of International Trade’s opinion affirming Commerce’s scope ruling.  On September 4, 2018, the plaintiffs filed to dismiss their appeal of the December 2014 decision that revoked the anti-dumping duty order on PET films from Brazil.  The U.S. Court of International Trade issued an Order of Dismissal on September 5, 2018.  The litigation has now ended.
14.
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) issued their converged standard on revenue recognition. The revised revenue standard contains principles that an entity will apply to direct the measurement of revenue and timing of when it is recognized. The core principle of the guidance is that the recognition of revenue should depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity will utilize a principle-based five-step approach model. The converged standard also includes more robust disclosure requirements which will require entities to provide sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, amended guidance was issued regarding clarifying the implementation guidance on principal versus agent considerations and in April 2016, clarifying guidance was issued relating to identifying performance obligations and licensing implementation. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach applied to all contracts as of the date of adoption. Comparative periods have not been adjusted and continue to be reported under the accounting standards in effect for those periods. The adoption of ASU 2014-09, as amended, had no material impact on the Company’s consolidated financial position, results of operations, equity or cash flows upon adoption. The Company has included the disclosures required by ASU 2014-09.
In January 2016, the FASB issued amended guidance associated with accounting for equity investments measured at fair value. The amended guidance requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee or those without a readily determinable fair value). The amended guidance also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The Company adopted this amended guidance in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued a revised standard on lease accounting. Lessees will need to recognize virtually all of their leases with a term longer than 12 months on the balance sheet, by recording a right-of-use (“ROU”) asset and lease liability. The revised standard requires additional analysis of the components of a transaction to determine if a right-of-use asset is embedded in the transaction that needs to be treated as a lease. Substantial additional disclosures are also required by the revised standard. The revised standard is effective for the Company for fiscal years beginning after December 31, 2018, including the interim periods within those fiscal years. A modified retrospective transition approach which requires a cumulative-effect adjustment to the opening balance of retained earnings on the effective date is required for leases existing at, or entered into after, the effective date, with certain practical expedients available. The Company expects to use certain practical expedients that will allow it to elect to not reassess: i) whether expired or existing contracts contain leases under the new definition of a lease; ii) lease classification for expired or existing leases; and iii) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. The Company does not expect that this standard will have a material effect on its consolidated financial statements. The Company has a process in place to analyze the impact of the standard, and the related guidance issued, on all leases throughout the Company. This process includes reviewing all active leases with terms greater than 12 months, which

24



have been identified. The most significant impact of the new standard will be the recognition of new ROU assets and lease liabilities for real estate, office equipment and vehicle operating leases. Upon adoption, the Company will recognize operating lease liabilities with corresponding ROU assets calculated based on the present value of the remaining minimum rental payments for existing operating leases. The Company expects to complete its evaluations of the impacts of the accounting and disclosure requirements on its business processes, controls and systems by the end of 2018.
In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The Company adopted this guidance in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued amended guidance that eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new guidance, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company elected to early adopt for goodwill impairment testing starting in the third quarter of 2018.
In March 2017, the FASB issued final guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Previously, net benefit cost was reported as an employee cost within operating income. This new guidance requires the bifurcation of net periodic pension and postretirement benefit costs. Service cost will be part of operating income (and is the only piece eligible to be capitalized). All other components will be shown outside of operations. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and should be applied on a retrospective basis, except for the amendments related to capitalization of benefit cost, which should be applied on a prospective basis. The Company adopted this amended guidance in the first quarter of 2018 by separately presenting “Pension and postretirement benefits” expense in its consolidated statements of income.
In August 2017, the FASB issued amended guidance on the accounting for hedging activities. The amended guidance makes more hedging strategies qualify for hedge accounting. After initial qualification, the amended guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, if the company can reasonably support an expectation of effectiveness throughout the term of the hedge. The amended guidance is effective for annual and interim periods beginning after January 1, 2019, but may be adopted immediately. The adoption should be on a cumulative effect basis and applied prospectively. The Company is currently evaluating the amended guidance but does not expect there to be an impact of adopting this guidance on the Company’s consolidated financial statements.

15.
The Company assesses goodwill for impairment on an annual basis at a minimum (December 1st of each year) or when events or circumstances indicate that the carrying value may not be recoverable. Goodwill is assessed for impairment at the reporting unit level. Tredegar’s reporting units with goodwill are the Personal Care and Surface Protection operating divisions of PE Films and the AACOA and Futura operating divisions of Aluminum Extrusions. The Company estimates the fair value of its reporting units using discounted cash flow analysis and comparative enterprise value-to-EBITDA multiples.

The operations of PE Films have been adversely impacted by a customer transition to alternative suppliers and materials, resulting in the expected loss of business of approximately $70 million annually when the transitions are implemented, which may occur by the end of 2019. Based on an evaluation of projections under various business planning scenarios, the Company concluded that the value of the Personal Care component of PE Films was less than the carrying value of underlying working capital and long-lived net assets. Accordingly, a goodwill impairment charge of $46.8 million ($38.2 million after taxes) was recognized in PE Films in the third quarter of 2018. This impairment charge represents the entire amount of goodwill associated with the Personal Care component. The goodwill of Surface Protection, AACOA and Futura will be tested for impairment at the annual testing date unless there is an indicator of impairment identified at an earlier date.




25



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking and Cautionary Statements
Some of the information contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When using the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “plan,” “likely,” “may” and similar expressions, Tredegar does so to identify forward-looking statements. Such statements are based on then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is possible that actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ from expectations include, without limitation, the following:
loss or gain of sales to significant customers on which our business is highly dependent;
ability to achieve sales to new customers to replace lost business;
ability to develop, efficiently manufacture and deliver new products at competitive prices;
failure of our customers to achieve success or maintain market share;
failure to protect our intellectual property rights;
risks of doing business in countries outside the U.S. that affect our substantial international operations;
political, economic, and regulatory factors concerning our products;
uncertain economic conditions in countries in which we do business;
competition from other manufacturers, including manufacturers in lower-cost countries and manufacturers benefiting from government subsidies;
impact of fluctuations in foreign exchange rates;
a change in the amount of our underfunded defined benefit (pension) plan liability;
an increase in the operating costs incurred by our operating companies, including, for example, the cost of raw materials and energy;
inability to successfully identify, complete or integrate strategic acquisitions; failure to realize the expected benefits of such acquisitions; and assumption of unanticipated risks in such acquisitions;
disruption to our manufacturing facilities;
occurrence or threat of extraordinary events, including natural disasters and terrorist attacks;
an information technology system failure or breach;
volatility and uncertainty of the valuation of our cost-basis investment in kaléo;
the impact of the imposition of tariffs and sanctions on imported aluminum ingot used in our aluminum extrusions;
the impact of new tariffs or duties imposed as a result of rising trade tensions between the U.S. and other countries;
failure to establish and maintain effective internal control over financial reporting;
and the other factors discussed in the reports Tredegar files with or furnishes to the Securities and Exchange Commission (the “SEC”) from time to time, including the risks and important factors set forth in additional detail in Part I, Item 1A of Tredegar’s 2017 Annual Report on Form 10-K (the “2017 Form 10-K”) and Part II, Item 5 of this Form 10-Q. Readers are urged to review and consider carefully the disclosures Tredegar makes in its filings with the SEC, including the 2017 Form 10-K.
Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law.
References herein to “Tredegar,” “the Company,” “we,” “us” and “our” are to Tredegar Corporation and its subsidiaries, collectively, unless the context otherwise indicates or requires.

26



Executive Summary
Tredegar is a manufacturer of polyethylene plastic films through its PE Films segment, polyester films through its Flexible Packaging Films segment and aluminum extrusions through its Aluminum Extrusions segment. PE Films is composed of personal care materials, surface protection films, polyethylene overwrap films and films for other markets. Flexible Packaging Films produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. Aluminum Extrusions produces high-quality, soft-alloy and medium-strength aluminum extrusions primarily for building and construction, automotive, consumer durables, machinery and equipment, electrical and distribution markets.
Third-quarter 2018 net loss was $34.2 million ($1.03 per share) compared with net income of $8.3 million ($0.25 per share) in the third quarter of 2017. Net loss for the third quarter of 2018 included the following:
An impairment of the total goodwill balance of PE Films’ Personal Care division was recorded in the after-tax amount of $38.2 million ($1.15 per share after-tax). See the Customer Product Transitions in Personal Care and Surface Protection section below and Note 15 for more details; and
An unrealized after-tax loss on the Company’s investment in Kaleo, Inc. (“kaléo”) of $1.6 million ($0.05 per share), which is accounted for under the fair value method (see Note 7 for more details).
Other losses related to plant shutdowns, asset impairments, restructurings and other items are described in Note 3. 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 of each segment for purposes of assessing performance. See the table in Note 11 for a presentation of Tredegar’s net sales and operating profit by segment for the three and nine months ended September 30, 2018 and 2017.
PE Films
A summary of operating results from ongoing operations for PE Films, excluding the goodwill impairment discussed in the Customer Product Transitions in Personal Care and Surface Protection section below, is provided below:
 
Three Months Ended
 
Favorable/
(Unfavorable)
% Change
 
Nine Months Ended
 
Favorable/
(Unfavorable)
% Change
(In thousands, Except Percentages)
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
Sales volume (lbs)
29,597

 
34,701

 
(14.7
)%
 
94,519

 
103,923

 
(9.0
)%