NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
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, 2019, the consolidated results of operations for the three and nine months ended September 30, 2019 and 2018, the consolidated cash flows for the nine months ended September 30, 2019 and 2018, and the consolidated changes in shareholders’ equity for the nine months ended September 30, 2019 and 2018, in accordance with U.S. generally accepted accounting principles (“GAAP”). 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 2019 and 2018 for this segment references 13-week periods ended September 29, 2019 and September 23, 2018, 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, 2018 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, 2018 (“2018 Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2018 Form 10-K. The results of operations for the three and nine months ended September 30, 2019, 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.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
36,886
|
|
|
$
|
34,397
|
|
Restricted cash
|
7,766
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
44,652
|
|
|
$
|
34,397
|
|
Restricted cash as of September 30, 2019 consists of funds received in the second and third quarters of 2019 for the sale of the PE Films idle manufacturing facility in Shanghai, China. The sale of the facility closed in the third quarter of 2019, and a pre-tax gain of $6.3 million was recognized. The Company is in the process of liquidating the legal entity that previously operated the Shanghai facility and received the funds from the sale. Chinese government regulations limit the use of these funds to the purposes of the liquidating entity until the completion of the liquidation process, which the Company expects to be concluded within the next six months.
Trade Name Accelerated Amortization
On October 30, 2019, Bonnell Aluminum announced a rebranding initiative. Bonnell and its subsidiaries, AACOA and Futura, will now all fall under the Bonnell Aluminum brand. The usage of the AACOA and Futura trade names will be discontinued at the end of 2019. In September 2019, management committed to implement the rebranding initiative. Prior to this commitment, the AACOA trade name had an indefinite useful life and a remaining net book value of $4.8 million, and the Futura trade name had an estimated remaining useful life of approximately 10.5 years and a remaining net book value of $5.4 million. As a result of the rebranding initiative, there was a change in estimate in the useful lives for both trade names to 4 months, the point at which the rebranding initiative is estimated to be substantially complete. The non-cash amounts amortized and to be amortized in the third and fourth quarters of 2019, respectively, related to these trade names are as follows:
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended
|
|
September 30, 2019
|
December 31, 2019
|
AACOA - accelerated
|
$
|
1.2
|
|
$
|
3.6
|
|
Futura - accelerated
|
1.3
|
|
3.9
|
|
Futura - ongoing1
|
0.1
|
|
0.1
|
|
Total amortization
|
$
|
2.6
|
|
$
|
7.6
|
|
1.
Amortization based on original useful life.
|
As of September 30, 2019 and December 31, 2018, accounts receivable and other receivables, net, were $115.7 million and $124.7 million, respectively, made up of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Customer receivables
|
$
|
114,112
|
|
|
$
|
122,182
|
|
Other accounts and notes receivable
|
4,689
|
|
|
5,482
|
|
Total accounts and other receivables
|
118,801
|
|
|
127,664
|
|
Less: Allowance for bad debts and sales returns
|
(3,140
|
)
|
|
(2,937
|
)
|
Total accounts and other receivables, net
|
$
|
115,661
|
|
|
$
|
124,727
|
|
For the three and nine months ended September 30, 2019, 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 sheets as of September 30, 2019. 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 and nine months ended September 30, 2019, 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 is recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to materially impact the Company’s financial results.
|
|
3
|
ASSET IMPAIRMENTS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES
|
The Company plans to close its PE Films manufacturing facility in Lake Zurich, Illinois, which produces elastic materials. Production at the Lake Zurich plant is expected to cease during the fourth quarter of 2019 with product transfers to the new elastic production line at Terre Haute, Indiana (“Lake Zurich plant shutdown”). As a result of the Lake Zurich plant shutdown, the Company expects to recognize pre-tax cash costs of $7.6 million comprised of (i) customer-related costs ($0.7 million), (ii) severance and other employee related costs ($1.8 million), and (iii) asset disposal and other cash costs ($5.1 million). In addition, the Company expects non-cash asset write-offs and accelerated depreciation of $1.6 million. Total expenses associated with the Lake Zurich plant shutdown are $1.9 million since
project inception. Cash expenditures were $0.2 million and $0.2 million in the three and nine months ended September 30, 2019, respectively. Proceeds from the expected sale of Lake Zurich’s real property are estimated at approximately $5 million. The Company anticipates that the Lake Zurich plant shutdown will be completed by the end of 2020.
The Company plans to consolidate the production of certain PE Films personal care products in Europe over the next twelve months (“PC Europe consolidation”). As a result of this consolidation, the Company expects to recognize pre-tax cash costs of $1.7 million, primarily for severance and customer-related costs. Total expenses associated with the PC Europe consolidation are $0.7 million since project inception. Cash expenditures were $0.1 million in the three and nine months ended September 30, 2019.
In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produced plastic films used as components for personal care products (“Shanghai plant shutdown”). Production ceased at this plant during the fourth quarter of 2018. Total expenses associated with the Shanghai transition are $4.0 million since project inception. Cash expenditures were $0.2 million and $0.7 million in the three and nine months ended September 30, 2019, respectively, and $3.2 million since project inception. The plant facilities were sold in the third quarter of 2019, resulting in a pre-tax gain of $6.3 million, reported in “Other income (expense), net” in the consolidated statements of income.
Other pre-tax charges include restructuring costs in PE Films for severance in the amounts of $0.1 million and $0.6 million, in the three and nine months ended September 30, 2019, respectively, the write-off of inventory at PE Films’ Personal Care facility in Restag, Hungary in the amount of $0.2 million in the three months ended September 30, 2019, and the write-off of a Personal Care production line at the Guangzhou, China facility in the amount of $0.4 million in the nine months ended September 30, 2019.
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, 2019 is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Asset Impairments
|
|
Other
|
|
Total
|
Balance at January 1, 2019
|
$
|
616
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
$
|
776
|
|
Changes in 2019:
|
|
|
|
|
|
|
Charges:
|
|
|
|
|
|
|
|
Shanghai plant shutdown
|
101
|
|
|
—
|
|
|
625
|
|
|
726
|
|
Lake Zurich plant shutdown
|
720
|
|
|
206
|
|
|
—
|
|
|
926
|
|
PC Europe consolidation
|
594
|
|
|
96
|
|
|
—
|
|
|
690
|
|
Other restructuring charges(a)
|
628
|
|
|
573
|
|
|
52
|
|
|
1,253
|
|
|
2,043
|
|
|
875
|
|
|
677
|
|
|
3,595
|
|
Cash payments
|
(1,212
|
)
|
|
—
|
|
|
(721
|
)
|
|
(1,933
|
)
|
Charges against assets
|
—
|
|
|
(875
|
)
|
|
—
|
|
|
(875
|
)
|
Balance at September 30, 2019
|
$
|
1,447
|
|
|
$
|
—
|
|
|
$
|
116
|
|
|
$
|
1,563
|
|
(a) Asset impairments not related to restructuring or exit and disposal activities are described in a paragraph above.
|
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Finished goods
|
$
|
22,638
|
|
|
$
|
24,938
|
|
Work-in-process
|
13,565
|
|
|
15,648
|
|
Raw materials
|
29,014
|
|
|
33,741
|
|
Stores, supplies and other
|
20,098
|
|
|
19,483
|
|
Total
|
$
|
85,315
|
|
|
$
|
93,810
|
|
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income 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)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average shares outstanding used to compute basic earnings per share
|
33,271
|
|
|
33,110
|
|
|
33,222
|
|
|
33,056
|
|
Incremental dilutive shares attributable to stock options and restricted stock
|
14
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Shares used to compute diluted earnings per share
|
33,285
|
|
|
33,110
|
|
|
33,230
|
|
|
33,056
|
|
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. For the three and nine months ended September 30, 2019, 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 1,222,000 and 1,224,222, respectively. 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.
|
|
6
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign
currency
translation
adjustment
|
|
Gain (loss) on
derivative
financial
instruments
|
|
Pension and
other
post-retirement
benefit
adjustments
|
|
Total
|
Beginning balance, January 1, 2019
|
$
|
(96,940
|
)
|
|
$
|
(1,601
|
)
|
|
$
|
(81,446
|
)
|
|
$
|
(179,987
|
)
|
Other comprehensive income (loss) before reclassifications
|
(6,291
|
)
|
|
(3,065
|
)
|
|
—
|
|
|
(9,356
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
2,209
|
|
|
6,236
|
|
|
8,445
|
|
Net other comprehensive income (loss) - current period
|
(6,291
|
)
|
|
(856
|
)
|
|
6,236
|
|
|
(911
|
)
|
Ending balance, September 30, 2019
|
$
|
(103,231
|
)
|
|
$
|
(2,457
|
)
|
|
$
|
(75,210
|
)
|
|
$
|
(180,898
|
)
|
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
|
)
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the three months ended September 30, 2019 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
|
$
|
(816
|
)
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(101
|
)
|
|
Selling, general & administrative
|
Foreign currency forward contracts, before taxes
|
15
|
|
|
Cost of sales
|
Total, before taxes
|
(902
|
)
|
|
|
Income tax expense (benefit)
|
(179
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(723
|
)
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(2,672
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(593
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(2,079
|
)
|
|
|
|
|
(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 (loss) for the nine months ended September 30, 2019 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
|
$
|
(2,039
|
)
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(661
|
)
|
|
Selling, general & administrative
|
Foreign currency forward contracts, before taxes
|
46
|
|
|
Cost of sales
|
Total, before taxes
|
(2,654
|
)
|
|
|
Income tax expense (benefit)
|
(445
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(2,209
|
)
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(8,014
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(1,778
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(6,236
|
)
|
|
|
|
|
(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 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 to net
income
|
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).
|
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 18.4% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value option. 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.
The estimated fair value of the Company’s investment was $95.5 million as of September 30, 2019 and $84.6 million as of December 31, 2018. The Company recognized net appreciation on its investment in kaléo of $4.3 million ($3.4 million after taxes) in the third quarter of 2019. The net appreciation on its investment of $28.5 million ($23.4 million after taxes) in the first nine months of 2019 included Tredegar’s $17.6 million share of a cash dividend declared by kaléo on March 29, 2019 and paid on April 30, 2019. Future dividends are subject to the discretion of kaléo’s board of directors. Amounts recognized associated with the Company’s investment in kaléo 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.
The Company estimated the fair value of its investment in kaléo at September 30, 2019 by: (i) computing the weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow method (the “DCF Method”) and the application of a market multiple to earnings before interest, taxes, depreciation and amortization (the “EBITDA Multiple Method”), (ii) applying adjustments for any surplus or deficient working capital and estimates of contingent liabilities, (iii) adding cash and cash equivalents, (iv) subtracting interest-bearing debt, (v) subtracting a private company liquidity discount estimated at 10% of the net result of (i) through (iv), and (vi) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (v).
The Company’s estimate of kaléo’s EV as of September 30, 2019 was determined by weighting the EBITDA Multiple Method by 80% and the DCF Method by 20%, which was consistent with the weighting applied at December 31, 2018. The heavier weighting towards the EBITDA Multiple Method was due to its heuristic nature versus the hypothetical nature of the projections used in the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns, wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses, income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition, 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 that require assessment in any valuation method applied.
The table below provides a sensitivity analysis of the estimated fair value at September 30, 2019, of the Company’s investment in kaléo for changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF Method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
EV-to-Adjusted EBITDA Multiple
|
|
|
7.0 x
|
|
8.0 x
|
|
9.0 x
|
|
10.0x
|
|
11.0x
|
|
Weighting to DCF Method
|
50
|
%
|
$
|
85.2
|
|
$
|
91.4
|
|
$
|
97.6
|
|
$
|
103.8
|
|
$
|
109.9
|
|
40
|
%
|
$
|
82.1
|
|
$
|
89.5
|
|
$
|
96.9
|
|
$
|
104.3
|
|
$
|
111.7
|
|
30
|
%
|
$
|
78.9
|
|
$
|
87.6
|
|
$
|
96.2
|
|
$
|
104.9
|
|
$
|
113.5
|
|
20
|
%
|
$
|
75.8
|
|
$
|
85.6
|
|
$
|
95.5
|
|
$
|
105.4
|
|
$
|
115.3
|
|
10
|
%
|
$
|
72.6
|
|
$
|
83.7
|
|
$
|
94.8
|
|
$
|
106.0
|
|
$
|
117.1
|
|
0
|
%
|
$
|
69.5
|
|
$
|
81.8
|
|
$
|
94.2
|
|
$
|
106.5
|
|
$
|
118.9
|
|
The estimated fair value increased from $91.2 million at the Company’s prior valuation date of June 30, 2019, to $95.5 million at the current valuation date of September 30, 2019. This increase of $4.3 million was mainly due to lower deficient working capital, a reduction in the liquidity discount from 15% to 10% and an increase in the EBITDA multiple supported by higher projected growth, partially offset by lower current EBITDA applied to the EBITDA multiple.
The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs, and the ultimate value could be materially different from the $95.5 million estimated fair value reflected in the Company’s financial statements at September 30, 2019.
|
|
8
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
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 contract obligations was $20.2 million (19.1 million pounds of aluminum) at September 30, 2019 and $25.4 million (22.5 million pounds of aluminum) at December 31, 2018.
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, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
(In thousands)
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Balance Sheet
Account
|
|
Fair
Value
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Asset derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
$
|
—
|
|
|
Accrued expenses
|
|
$
|
20
|
|
Liability derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
(1,478
|
)
|
|
Accrued expenses
|
|
(1,650
|
)
|
Net asset (liability)
|
|
|
$
|
(1,478
|
)
|
|
|
|
$
|
(1,630
|
)
|
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.
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, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
(In Thousands)
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Balance Sheet
Account
|
|
Fair
Value
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Asset derivatives:
Foreign currency forward contracts
|
Prepaid expenses and other
|
|
$
|
—
|
|
|
Prepaid expenses and other
|
|
$
|
37
|
|
Liability derivatives:
Foreign currency forward contracts
|
Accrued expenses
|
|
(1,857
|
)
|
|
Accrued expenses
|
|
(1,090
|
)
|
Net asset (liability)
|
|
|
$
|
(1,857
|
)
|
|
|
|
$
|
(1,053
|
)
|
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$130 million at September 30, 2019. Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
|
|
|
|
|
|
USD Notional Amount (000s)
|
Average Forward Rate Contracted on USD/BRL
|
R$ Equivalent Amount (000s)
|
Applicable Month
|
Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged
|
|
|
|
|
|
$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%
|
$1,400
|
3.7966
|
R$5,315
|
Jan-20
|
50%
|
$1,400
|
3.8041
|
R$5,326
|
Feb-20
|
51%
|
$1,400
|
3.8086
|
R$5,332
|
Mar-20
|
48%
|
$1,400
|
3.8163
|
R$5,343
|
Apr-20
|
49%
|
$1,400
|
3.8244
|
R$5,354
|
May-20
|
50%
|
$1,400
|
3.8323
|
R$5,365
|
Jun-20
|
49%
|
$1,400
|
3.8426
|
R$5,380
|
Jul-20
|
47%
|
$1,400
|
3.8545
|
R$5,396
|
Aug-20
|
49%
|
$1,400
|
3.8656
|
R$5,412
|
Sep-20
|
48%
|
$1,400
|
3.8769
|
R$5,428
|
Oct-20
|
49%
|
$1,400
|
3.8877
|
R$5,443
|
Nov-20
|
49%
|
$1,400
|
3.8997
|
R$5,460
|
Dec-20
|
53%
|
$22,200
|
3.8645
|
R$85,792
|
|
53%
|
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Ltda.’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 $1.9 million as of September 30, 2019.
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.
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, 2019 and 2018 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Cash Flow Derivative Hedges
|
|
Three Months Ended September 30,
|
|
Aluminum Futures Contracts
|
|
Foreign Currency Forwards
|
|
2019
|
|
2018
|
|
2019
|
2019
|
|
2018
|
|
2018
|
Amount of pretax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(449
|
)
|
|
$
|
(1,176
|
)
|
|
$
|
—
|
|
$
|
(1,501
|
)
|
|
$
|
—
|
|
|
(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
|
|
|
Selling, general & admin
|
Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income effective portion)
|
$
|
(816
|
)
|
|
$
|
300
|
|
|
$
|
15
|
|
$
|
(101
|
)
|
|
$
|
15
|
|
|
(807
|
)
|
|
Nine Months Ended September 30,
|
|
Aluminum Futures Contracts
|
|
Foreign Currency Forwards
|
|
2019
|
|
2018
|
|
2019
|
2019
|
|
2018
|
|
2018
|
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(1,887
|
)
|
|
$
|
(111
|
)
|
|
$
|
—
|
|
$
|
(1,598
|
)
|
|
$
|
—
|
|
|
(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
|
|
|
Selling, general & admin
|
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)
|
$
|
(2,039
|
)
|
|
$
|
1,244
|
|
|
$
|
46
|
|
$
|
(661
|
)
|
|
$
|
46
|
|
|
(1,226
|
)
|
As of September 30, 2019, the Company expects $1.0 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, 2019 and 2018, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
|
|
9
|
PENSION AND OTHER POSTRETIREMENT BENEFITS
|
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees currently in effect 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 is 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 postretirement 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)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
7
|
|
Interest cost
|
3,067
|
|
|
2,818
|
|
|
72
|
|
|
65
|
|
Expected return on plan assets
|
(3,404
|
)
|
|
(3,736
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
2,729
|
|
|
3,565
|
|
|
(58
|
)
|
|
(75
|
)
|
Net periodic benefit cost
|
$
|
2,392
|
|
|
$
|
2,654
|
|
|
$
|
23
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-Retirement Benefits
|
|
Nine Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
25
|
|
|
$
|
27
|
|
Interest cost
|
9,202
|
|
|
8,582
|
|
|
218
|
|
|
203
|
|
Expected return on plan assets
|
(10,212
|
)
|
|
(11,258
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
8,188
|
|
|
10,421
|
|
|
(173
|
)
|
|
(183
|
)
|
Net periodic benefit cost
|
$
|
7,178
|
|
|
$
|
7,762
|
|
|
$
|
70
|
|
|
$
|
47
|
|
Pension and other postretirement liabilities were $81.3 million and $88.8 million at September 30, 2019 and December 31, 2018, respectively ($0.6 million included in “Accrued expenses” at September 30, 2019 and December 31, 2018, 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 $8.1 million in 2019. Contributions to the pension plan during the first nine months of 2019 were $6.7 million. Tredegar funds its other postretirement benefits (life insurance and health benefits) on a claims-made basis; for 2019, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2018, or $0.3 million.
|
|
10
|
OTHER INCOME (EXPENSE), NET
|
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gain (loss) on investment in kaléo accounted for under fair value method
|
$
|
4,300
|
|
|
$
|
(2,100
|
)
|
|
$
|
28,482
|
|
|
$
|
11,900
|
|
Gain on sale of manufacturing plant in Shanghai, China
|
6,316
|
|
|
—
|
|
|
6,316
|
|
|
—
|
|
Other
|
18
|
|
|
(457
|
)
|
|
42
|
|
|
(368
|
)
|
Total
|
$
|
10,634
|
|
|
$
|
(2,557
|
)
|
|
$
|
34,840
|
|
|
$
|
11,532
|
|
The gain on investment in kaléo accounted for under fair value method shown above for the nine months ended September 30, 2019, includes a cash dividend of $17.6 million from kaléo. See Note 7 for more details on the investment in kaléo.
The Company’s business segments are Aluminum Extrusions, PE Films, and Flexible Packaging Films. 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.
The following table presents net sales and operating profit by segment for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Sales
|
|
|
|
|
|
|
|
Aluminum Extrusions
|
$
|
129,506
|
|
|
$
|
147,661
|
|
|
$
|
405,310
|
|
|
$
|
420,455
|
|
PE Films
|
69,837
|
|
|
76,470
|
|
|
205,778
|
|
|
252,177
|
|
Flexible Packaging Films
|
34,888
|
|
|
33,725
|
|
|
101,950
|
|
|
90,466
|
|
Total net sales
|
234,231
|
|
|
257,856
|
|
|
713,038
|
|
|
763,098
|
|
Add back freight
|
8,986
|
|
|
9,438
|
|
|
26,893
|
|
|
26,667
|
|
Sales as shown in the Consolidated Statements of Income
|
$
|
243,217
|
|
|
$
|
267,294
|
|
|
$
|
739,931
|
|
|
$
|
789,765
|
|
Operating Profit (Loss)
|
|
|
|
|
|
|
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
Ongoing operations
|
$
|
12,147
|
|
|
$
|
11,730
|
|
|
$
|
38,751
|
|
|
$
|
35,086
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(610
|
)
|
|
(297
|
)
|
|
(667
|
)
|
|
(396
|
)
|
Trade name accelerated amortization
|
(2,510
|
)
|
|
—
|
|
|
(2,510
|
)
|
|
—
|
|
PE Films:
|
|
|
|
|
|
|
|
Ongoing operations
|
6,889
|
|
|
4,145
|
|
|
17,606
|
|
|
26,857
|
|
Plant shutdowns, asset impairments, restructurings and other
|
3,834
|
|
|
(2,355
|
)
|
|
933
|
|
|
(4,542
|
)
|
Goodwill impairment charge
|
—
|
|
|
(46,792
|
)
|
|
—
|
|
|
(46,792
|
)
|
Flexible Packaging Films:
|
|
|
|
|
|
|
|
Ongoing operations
|
4,000
|
|
|
3,609
|
|
|
9,376
|
|
|
6,617
|
|
Plant shutdowns, asset impairments, restructurings and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
23,750
|
|
|
(29,960
|
)
|
|
63,489
|
|
|
16,830
|
|
Interest income
|
56
|
|
|
6
|
|
|
163
|
|
|
290
|
|
Interest expense
|
859
|
|
|
1,318
|
|
|
3,354
|
|
|
4,539
|
|
Gain (loss) on investment in kaléo accounted for under fair value method
|
4,300
|
|
|
(2,100
|
)
|
|
28,482
|
|
|
11,900
|
|
Unrealized loss on investment property
|
—
|
|
|
186
|
|
|
—
|
|
|
186
|
|
Stock option-based compensation costs
|
807
|
|
|
415
|
|
|
2,121
|
|
|
806
|
|
Corporate expenses, net
|
9,350
|
|
|
6,926
|
|
|
26,840
|
|
|
21,668
|
|
Income (loss) before income taxes
|
17,090
|
|
|
(40,899
|
)
|
|
59,819
|
|
|
1,821
|
|
Income tax expense (benefit)
|
(43
|
)
|
|
(6,699
|
)
|
|
8,424
|
|
|
3,135
|
|
Net income (loss)
|
$
|
17,133
|
|
|
$
|
(34,200
|
)
|
|
$
|
51,395
|
|
|
$
|
(1,314
|
)
|
The following table presents identifiable assets by segment at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2019
|
|
December 31, 2018
|
Aluminum Extrusions
|
$
|
282,932
|
|
|
$
|
281,372
|
|
PE Films
|
230,236
|
|
|
231,720
|
|
Flexible Packaging Films
|
58,965
|
|
|
58,964
|
|
Subtotal
|
572,133
|
|
|
572,056
|
|
General corporate
|
114,149
|
|
|
100,920
|
|
Cash, cash equivalents and restricted cash
|
44,652
|
|
|
34,397
|
|
Total
|
$
|
730,934
|
|
|
$
|
707,373
|
|
The following tables disaggregate the Company’s revenue by geographic area and product group for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Geographic Area (a)
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States
|
$
|
156,469
|
|
|
$
|
176,022
|
|
|
$
|
491,511
|
|
|
$
|
506,769
|
|
Exports from the United States to:
|
|
|
|
|
|
|
|
Asia
|
23,344
|
|
|
14,893
|
|
|
61,350
|
|
|
57,370
|
|
Latin America
|
3,332
|
|
|
3,104
|
|
|
8,869
|
|
|
9,810
|
|
Canada
|
2,429
|
|
|
13,451
|
|
|
11,906
|
|
|
40,988
|
|
Europe
|
1,616
|
|
|
1,608
|
|
|
4,493
|
|
|
5,127
|
|
Operations outside the United States:
|
|
|
|
|
|
|
|
Brazil
|
29,481
|
|
|
26,591
|
|
|
85,202
|
|
|
73,402
|
|
The Netherlands
|
9,471
|
|
|
11,428
|
|
|
27,508
|
|
|
34,750
|
|
Hungary
|
6,404
|
|
|
7,987
|
|
|
18,400
|
|
|
25,324
|
|
India
|
1,685
|
|
|
396
|
|
|
3,574
|
|
|
3,216
|
|
China
|
—
|
|
|
2,376
|
|
|
225
|
|
|
6,342
|
|
Total
|
$
|
234,231
|
|
|
$
|
257,856
|
|
|
$
|
713,038
|
|
|
$
|
763,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Product Group
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
Nonresidential building & construction
|
$
|
64,341
|
|
|
$
|
75,870
|
|
|
$
|
202,998
|
|
|
$
|
213,500
|
|
Consumer durables
|
12,939
|
|
|
14,991
|
|
|
44,865
|
|
|
47,300
|
|
Automotive
|
11,091
|
|
|
13,205
|
|
|
36,214
|
|
|
33,992
|
|
Residential building & construction
|
11,110
|
|
|
11,163
|
|
|
33,060
|
|
|
32,976
|
|
Electrical
|
10,468
|
|
|
12,093
|
|
|
31,910
|
|
|
30,243
|
|
Machinery & equipment
|
10,191
|
|
|
11,191
|
|
|
29,585
|
|
|
30,335
|
|
Distribution
|
9,366
|
|
|
9,148
|
|
|
26,678
|
|
|
32,109
|
|
Subtotal
|
129,506
|
|
|
147,661
|
|
|
405,310
|
|
|
420,455
|
|
PE Films:
|
|
|
|
|
|
|
|
Personal care materials
|
40,958
|
|
|
57,356
|
|
|
123,770
|
|
|
174,985
|
|
Surface protection films
|
27,052
|
|
|
17,193
|
|
|
76,194
|
|
|
71,926
|
|
LED lighting products & other films
|
1,827
|
|
|
1,921
|
|
|
5,814
|
|
|
5,266
|
|
Subtotal
|
69,837
|
|
|
76,470
|
|
|
205,778
|
|
|
252,177
|
|
Flexible Packaging Films
|
34,888
|
|
|
33,725
|
|
|
101,950
|
|
|
90,466
|
|
Total
|
$
|
234,231
|
|
|
$
|
257,856
|
|
|
$
|
713,038
|
|
|
$
|
763,098
|
|
See the previous page for a reconciliation of net sales to sales (as shown in the consolidated statements of income).
|
|
(a)
|
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.
|
Tredegar recorded tax expense of $8.4 million on pretax net income of $59.8 million in the first nine months of 2019. Therefore, the effective tax rate in the first nine months of 2019 was 14.1%, compared to 172.1% in the first nine months of 2018. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first nine months of the year. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
2019
|
|
2018
|
Nine Months Ended September 30,
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Income tax expense at federal statutory rate
|
$
|
12,562
|
|
|
21.0
|
|
|
$
|
383
|
|
|
21.0
|
|
U.S. Tax on Foreign Branch Income
|
2,541
|
|
|
4.2
|
|
|
953
|
|
|
52.3
|
|
Foreign rate differences
|
1,864
|
|
|
3.1
|
|
|
1,159
|
|
|
63.6
|
|
State taxes, net of federal income tax benefit
|
633
|
|
|
1.1
|
|
|
87
|
|
|
4.8
|
|
Non-deductible expenses
|
363
|
|
|
0.6
|
|
|
230
|
|
|
12.6
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
1,788
|
|
|
98.2
|
|
Valuation allowance for capital loss carry-forwards
|
—
|
|
|
—
|
|
|
245
|
|
|
13.4
|
|
Stock-based compensation
|
(148
|
)
|
|
(0.2
|
)
|
|
173
|
|
|
9.5
|
|
Changes in estimates related to prior year tax provision
|
(188
|
)
|
|
(0.3
|
)
|
|
(414
|
)
|
|
(22.7
|
)
|
Research and development tax credit
|
(475
|
)
|
|
(0.8
|
)
|
|
(318
|
)
|
|
(17.4
|
)
|
Foreign Derived Intangible Income (FDII)
|
(633
|
)
|
|
(1.1
|
)
|
|
(472
|
)
|
|
(25.9
|
)
|
Tax impact of dividend received
|
(1,016
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
Foreign tax incentives
|
(2,157
|
)
|
|
(3.6
|
)
|
|
(1,344
|
)
|
|
(73.8
|
)
|
Valuation allowance due to foreign losses and impairments
|
(2,395
|
)
|
|
(4.0
|
)
|
|
185
|
|
|
10.1
|
|
Tax contingency accruals and tax settlements
|
(2,527
|
)
|
|
(4.2
|
)
|
|
480
|
|
|
26.4
|
|
Effective income tax rate
|
$
|
8,424
|
|
|
14.1
|
|
|
$
|
3,135
|
|
|
172.1
|
|
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 the U.S. Tax Cuts and Jobs Act of 2017, 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, from the commencement date of January 1, 2015. The benefit from the tax incentives was $2.1 million and $1.3 million in the first nine months of 2019 and 2018, respectively.
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.
In the third quarter of 2019, the IRS concluded its examination of the years 2014, 2015, 2016, and 2017, requiring only minor adjustments for those years. With the audit concluding during the third quarter, the Company considers the years 2014-2017 to be effectively settled, allowing for the reversal of $2.4 million of the reserves previously established for uncertain tax positions.
The Company includes tax-related interest and penalties in income tax expense. As of September 30, 2019, $0.2 million of interest and penalties are accrued as a tax liability. During the nine months ended September 30, 2019, a minimal amount of net interest income was recorded.
|
|
13
|
NEW ACCOUNTING PRONOUNCEMENTS
|
New accounting pronouncements adopted in 2019:
ASU 2016-02, LEASES (TOPIC 842)
In February 2016, the Financial Accounting Standards Board (“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 elected to use certain transition practical expedients that 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 adopted the new guidance in the first quarter of 2019, electing the modified retrospective transition approach. The adoption did not have a material effect on the Company’s consolidated financial statements. The most significant impact of the new standard was the recognition of new ROU assets of $21 million and lease liabilities of $22 million for real estate, office equipment and vehicle operating leases.
ASU 2017-12, DERIVATIVES AND HEDGING (TOPIC 815)
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 Company adopted the amended guidance in the first quarter of 2019 and there was no impact from adoption on the Company’s consolidated financial statements.
ASU 2018-2, REPORTING COMPREHENSIVE INCOME (TOPIC 220)
In February 2018, the FASB issued ASU 2018-2 to provide entities an option to reclassify certain “stranded tax effects” resulting from the recent U.S. tax reform from accumulated other comprehensive income (AOCI) to retained earnings. This new standard takes effect for all entities in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted the standard and elected to not reclassify the income tax effects resulting from tax reform from AOCI to retained earnings.
Accounting Standards Not Yet Implemented:
ASU 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES (TOPIC 326)
In June 2016, the FASB issued ASU 2016-13 related to the measurement of credit losses on financial instruments. The pronouncement replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through net income. This standard is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for fiscal years, and interim periods therein, beginning after December 15, 2018. The Company is in the process of evaluating the guidance and expects to adopt ASU 2016-13 in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
ASU 2018-13, FAIR VALUE MEASUREMENT (TOPIC 820)
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all companies for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for all amendments. Further, a company may elect to early adopt the removal or modification of disclosures immediately and delay adoption of the new disclosure requirements until the
effective date. The Company plans to adopt all disclosure requirements in the first quarter of 2020 and expects no material impact on the Company’s consolidated financial statements.
Tredegar has various lease agreements with terms up to 12 years, including leases of real estate, office equipment and vehicles. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company has elected to not record short-term leases with an original lease term of one year or less in the consolidated balance sheet. To the extent such leases contain renewal options that the Company intends to exercise, the related ROU asset and lease liability are included in the consolidated balance sheet. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
Operating leases are included in “Right-of-use lease assets”, “Lease liabilities - short-term” and “Lease liabilities - long-term” on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates, adjusted for term and geographic location using country-based swap rates. From reviewing the lease contracts in the implementation effort upon adoption of ASC 2016-02, the Company found no instance where it could readily determine the rate implicit in the lease.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Depending upon the specific use of the ROU asset, lease expense is included in the “Cost of goods sold”, “Freight”, “Selling, general and administrative”, and “Research and development” line items on the consolidated statements of income. Lease income is not material to the results of operations for the three and nine months ended September 30, 2019.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of September 30, 2019.
|
|
|
|
|
|
(In thousands)
|
|
As of September 30, 2019
|
Maturity of Lease Liabilities
|
Future Lease Payments
|
2019 (remaining)
|
|
$
|
923
|
|
2020
|
|
3,686
|
|
2021
|
|
3,473
|
|
2022
|
|
2,547
|
|
2023
|
|
2,411
|
|
Thereafter
|
|
12,182
|
|
Total undiscounted operating lease payments
|
|
25,222
|
|
Less: Imputed interest
|
|
4,183
|
|
Present value of operating lease liabilities
|
|
$
|
21,039
|
|
|
|
|
Balance Sheet Classification
|
|
|
Lease liabilities, short-term
|
|
$
|
2,842
|
|
Lease liabilities, long-term
|
|
18,197
|
|
Total operating lease liabilities
|
|
$
|
21,039
|
|
|
|
|
Other Information:
|
|
|
Weighted-average remaining lease term for operating leases
|
|
9 Years
|
|
Weighted-average discount rate for operating leases
|
|
4.32
|
%
|
Rental expense was $5.2 million in 2018. Rental commitments under all noncancellable leases as of December 31, 2018, were as follows:
|
|
|
|
|
|
(In thousands)
|
|
2019
|
$
|
4,445
|
|
2020
|
4,007
|
|
2021
|
3,591
|
|
2022
|
2,391
|
|
2023
|
1,245
|
|
Remainder
|
2,630
|
|
Total minimum lease payments
|
$
|
18,309
|
|
Cash Flows
An initial right-of-use asset of $21 million was recognized as a non-cash asset addition and an initial lease liability of $22 million was recognized as a non-cash liability addition with the adoption of the new lease accounting standard.
Operating Lease Costs
Operating lease costs were $1.5 million and $4.4 million in the third quarter and first nine months of 2019, respectively. These costs are primarily related to long-term operating leases, but also include immaterial amounts for variable leases and short-term leases.
On June 28, 2019, Tredegar entered into a $500 million five-year, secured revolving credit agreement (“Credit Agreement”), with an option to increase that amount by $100 million. The Credit Agreement amends and restates the Company’s previous $400 million five-year, secured revolving credit agreement that was due to expire on March 1, 2021.
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:
|
|
|
|
|
|
|
|
Pricing Under Credit Revolving Agreement (Basis Points)
|
Indebtedness-to-Adjusted EBITDA Ratio
|
Credit Spread
Over LIBOR
|
|
Commitment
Fee
|
> 3.5x but <= 4.0x
|
200.0
|
|
|
40
|
|
> 3.0x but <= 3.5x
|
187.5
|
|
|
35
|
|
> 2.0x but <= 3.0x
|
175.0
|
|
|
30
|
|
> 1.0x but <= 2.0x
|
162.5
|
|
|
25
|
|
<= 1.0x
|
150.0
|
|
|
20
|
|
At September 30, 2019, 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:
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Maximum indebtedness-to-adjusted EBITDA (“Leverage Ratio”) of 4.00x;
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Minimum adjusted EBITDA-to-interest expense of 3.00x; and
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Maximum aggregate distributions to shareholders over the term of the Credit Agreement of $130 million plus, beginning with the fiscal quarter ended June 30, 2019, 50% of net income and, at a Leverage Ratio of equal to or greater than 3.00x, a limitation on such payments for the succeeding quarter at the greater of (i) $4.75 million and (ii) 50% of consolidated net income for the most recent fiscal quarter.
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The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries. As of September 30, 2019, Tredegar was in compliance with all financial covenants in the Credit Agreement.
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. In the third quarter of 2018, a goodwill impairment charge of $46.8 million ($38.2 million after taxes) was recognized in PE Films, which represented the entire amount of goodwill associated with the Personal Care component. The operations of PE Films have been adversely impacted by a significant customer product transition in the Personal Care component of 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 underlying working capital and long-lived net assets.