NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
1 BASIS OF PRESENTATION
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 June 30, 2020, the consolidated results of operations for the three and six months ended June 30, 2020 and 2019, the consolidated cash flows for the six months ended June 30, 2020 and 2019, and the consolidated changes in shareholders’ equity for the three and six months ended June 30, 2020 and 2019, 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 second quarter for 2020 and 2019 for this segment references 13-week periods ended June 28, 2020 and June 30, 2019, 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, 2019 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, 2019 (“2019 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 2019 Form 10-K. The results of operations for the three and six months ended June 30, 2020, 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.
Adoption of ASU 2016-13, Financial Instruments - Credit Losses
In the first quarter of 2020, the Company adopted 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. The adoption of the updated guidance in the first quarter of 2020 resulted in an adjustment of less than $0.2 million and, therefore, did not have a material impact on the Company’s consolidated financial statements. The Company's policy on Accounts and Other Receivables as described in the 2019 Form 10-K was revised to read as follows:
Accounts and Other Receivables. Accounts receivable are stated at the amount invoiced to customers less allowances for doubtful accounts and sales returns. Accounts receivable are non-interest bearing and arise from the sale of product to customers under typical industry trade terms. Notes receivable are not significant. Past due amounts are determined based on established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on an assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current economic conditions. For receivables that do not have a specific allowance, the loss rate is computed by segment to apply to the remaining receivables balance, using each segment’s historic loss rate. Other receivables include value-added taxes related to certain foreign subsidiaries and other miscellaneous receivables due within one year. For certain customers, the Company has arrangements in place with financial institutions whereby certain customer receivables are sold to the financial institution at a discount and without recourse. Upon sale, the associated receivable is unrecognized and the discount is recognized as a reduction of sales.
As of June 30, 2020 and December 31, 2019, accounts receivable and other receivables, net, were $100.5 million and $107.6 million, respectively, made up of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Customer receivables
|
|
$
|
99,520
|
|
|
$
|
106,153
|
|
|
Other receivables
|
|
4,323
|
|
|
4,441
|
|
|
Total accounts and other receivables
|
|
103,843
|
|
|
110,594
|
|
|
Less: Allowance for bad debts and sales returns
|
|
(3,383)
|
|
|
(3,036)
|
|
|
Total accounts and other receivables, net
|
|
$
|
100,460
|
|
|
$
|
107,558
|
|
2 LONG-LIVED ASSETS & GOODWILL IMPAIRMENT
The Company assesses its long-lived assets for impairment when events and circumstances indicate that the carrying amount of the assets may not be recoverable. Long-lived assets consist primarily of buildings, machinery and equipment. During the three months ended June 30, 2020, the Company did not identify any indicators of impairment in light of the economic impacts from coronavirus pandemic ("COVID-19") for its asset groups.
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 amount of a reporting unit that includes goodwill exceeds its fair value. The Company evaluated whether triggering events occurred for all reporting units that include goodwill and determined that triggering events did occur during the first three months of 2020 for the Aluminum Extrusions’ reporting units created as a result of acquisitions in 2012 (“AACOA”) and in 2017 (“Futura”).
The Company performed goodwill impairment tests for the AACOA and Futura reporting units using a combination of income and market approaches and determined that the fair value of the Futura reporting unit exceeded its carrying value. During the first three months of 2020, the Company recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes), which represented the entire amount of goodwill associated with the AACOA reporting unit. The operations of the AACOA reporting unit, which includes the Niles, Michigan and Elkhart, Indiana facilities, have been severely impacted by COVID-19, with over 80% of the aluminum extrusions manufactured at these facilities sold to customers that make consumer durable products, such as recreational boating and power sports vehicles, as well as to customers serving building and construction and automotive markets.
The Company evaluated whether triggering events occurred during the three months ended June 30, 2020 for all reporting units that include goodwill and determined no events or circumstances existed that indicated the fair value of the reporting units are below their carrying amounts.
Recent disruptions to the global economy from COVID-19 make it reasonably possible that future interim tests for long-lived assets and goodwill may be required during 2020. The Company continues to monitor developments and perform updated analyses as necessary.
3 ASSET IMPAIRMENTS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES
Since July 2019, the Company planned to close its PE Films manufacturing facility in Lake Zurich, Illinois (“Lake Zurich plant shutdown”). In March 2020, this facility was shut down and the production of elastic materials it previously produced was transferred to the new elastic production line at Terre Haute, Indiana. As a result of the Lake Zurich plant shutdown, the Company expects to recognize overall pre-tax cash costs of $6.9 million comprised of (i) customer-related costs ($0.7 million), (ii) severance and other employee related costs ($1.1 million), and (iii) asset disposal and other cash costs ($5.1 million). In addition, the Company expects overall non-cash asset write-offs and accelerated depreciation of $1.3 million. Total expenses associated with the Lake Zurich plant shutdown are $2.9 million since project inception. Cash expenditures were $0.7 million in the six months ended June 30, 2020. The Company anticipates that the Lake Zurich plant shutdown will be completed by the end of 2020 and that the sale of real property will occur sometime thereafter.
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 six months ended June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Asset Impairments
|
|
|
|
Other
|
|
Total
|
|
Balance at January 1, 2020
|
$
|
1,294
|
|
|
$
|
—
|
|
|
|
|
$
|
86
|
|
|
$
|
1,380
|
|
|
Changes in 2020:
|
|
|
|
|
|
|
|
|
|
|
Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lake Zurich plant shutdown
|
168
|
|
|
11
|
|
|
|
|
325
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring charges
|
77
|
|
|
—
|
|
|
|
|
16
|
|
|
93
|
|
|
|
245
|
|
|
11
|
|
|
|
|
341
|
|
|
597
|
|
|
Cash payments
|
(1,148)
|
|
|
—
|
|
|
|
|
(386)
|
|
|
(1,534)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges against assets
|
—
|
|
|
(11)
|
|
|
|
|
—
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020
|
$
|
391
|
|
|
$
|
—
|
|
|
|
|
$
|
41
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
4 INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Finished goods
|
|
$
|
19,565
|
|
|
$
|
24,504
|
|
|
Work-in-process
|
|
13,123
|
|
|
12,328
|
|
|
Raw materials
|
|
30,482
|
|
|
24,735
|
|
|
Stores, supplies and other
|
|
22,048
|
|
|
19,813
|
|
|
Total
|
|
$
|
85,218
|
|
|
$
|
81,380
|
|
5 EARNINGS PER SHARE
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
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Weighted average shares outstanding used to compute basic earnings per share
|
33,435
|
|
|
33,270
|
|
|
33,374
|
|
|
33,197
|
|
|
Incremental dilutive shares attributable to stock options and restricted stock
|
1
|
|
|
8
|
|
|
—
|
|
|
6
|
|
|
Shares used to compute diluted earnings per share
|
33,436
|
|
|
33,278
|
|
|
33,374
|
|
|
33,203
|
|
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 six months ended June 30, 2020, so there is no dilutive impact for such shares. For the three months ended June 30, 2020, 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 1,567,709. If the Company had reported net income for the six months ended June 30, 2020, 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 1,125,203.
For the three and six months ended June 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 1,474,762 and 1,225,333, respectively.
6 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign
currency
translation
adjustment
|
|
Gain (loss) on
derivative
financial
instruments
|
|
Pension and
other
post-retirement
benefit
adjustments
|
|
Total
|
|
Beginning balance, January 1, 2020
|
$
|
(100,663)
|
|
|
$
|
(1,307)
|
|
|
$
|
(95,681)
|
|
|
$
|
(197,651)
|
|
|
Other comprehensive income (loss) before reclassifications
|
(12,003)
|
|
|
(6,242)
|
|
|
—
|
|
|
(18,245)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
3,725
|
|
|
5,862
|
|
|
9,587
|
|
|
Net other comprehensive income (loss) - current period
|
(12,003)
|
|
|
(2,517)
|
|
|
5,862
|
|
|
(8,658)
|
|
|
Ending balance, June 30, 2020
|
$
|
(112,666)
|
|
|
$
|
(3,824)
|
|
|
$
|
(89,819)
|
|
|
$
|
(206,309)
|
|
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the six months ended June 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
|
(283)
|
|
|
(1,218)
|
|
|
—
|
|
|
(1,501)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
1,486
|
|
|
4,158
|
|
|
5,644
|
|
|
Net other comprehensive income (loss) - current period
|
(283)
|
|
|
268
|
|
|
4,158
|
|
|
4,143
|
|
|
Ending balance, June 30, 2019
|
$
|
(97,223)
|
|
|
$
|
(1,333)
|
|
|
$
|
(77,288)
|
|
|
$
|
(175,844)
|
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the three months ended June 30, 2020 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
|
$
|
(1,551)
|
|
|
Cost of sales
|
|
Foreign currency forward contracts, before taxes
|
(1,798)
|
|
|
Selling, general & administrative
|
|
Foreign currency forward contracts, before taxes
|
16
|
|
|
Cost of sales
|
|
Total, before taxes
|
(3,333)
|
|
|
|
|
Income tax expense (benefit)
|
(721)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(2,612)
|
|
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(3,766)
|
|
|
(a)
|
|
Income tax expense (benefit)
|
(835)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(2,931)
|
|
|
|
(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 six months ended June 30, 2020 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
|
$
|
(2,191)
|
|
|
Cost of sales
|
|
Foreign currency forward contracts, before taxes
|
(2,592)
|
|
|
Selling, general & administrative
|
|
Foreign currency forward contracts, before taxes
|
31
|
|
|
Cost of sales
|
|
Total, before taxes
|
(4,752)
|
|
|
|
|
Income tax expense (benefit)
|
(1,027)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(3,725)
|
|
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(7,533)
|
|
|
(a)
|
|
Income tax expense (benefit)
|
(1,671)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(5,862)
|
|
|
|
(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 June 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
|
$
|
(606)
|
|
|
Cost of sales
|
|
Foreign currency forward contracts, before taxes
|
(369)
|
|
|
Selling, general & administrative
|
|
Foreign currency forward contracts, before taxes
|
16
|
|
|
Cost of sales
|
|
Total, before taxes
|
(959)
|
|
|
|
|
Income tax expense (benefit)
|
(131)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(828)
|
|
|
|
|
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 tax expense (benefit)
|
|
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 for the six months ended June 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
|
$
|
(1,223)
|
|
|
Cost of sales
|
|
Foreign currency forward contracts, before taxes
|
(560)
|
|
|
Selling, general & administrative
|
|
Foreign currency forward contracts, before taxes
|
31
|
|
|
Cost of sales
|
|
Total, before taxes
|
(1,752)
|
|
|
|
|
Income tax expense (benefit)
|
(266)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(1,486)
|
|
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(5,343)
|
|
|
(a)
|
|
Income tax expense (benefit)
|
(1,185)
|
|
|
Income tax expense (benefit)
|
|
Total, net of tax
|
$
|
(4,158)
|
|
|
|
(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 INVESTMENTS
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, Inc. (“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% 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 $70.7 million as of June 30, 2020 and $95.5 million as of December 31, 2019. The Company recognized an increase in value on its investment in kaléo of $1.3 million ($0.9 million after deferred income taxes) in the second quarter of 2020, but a decline of $24.8 million ($19.5 million after deferred income taxes) since the December 31, 2019 valuation. The decline in estimated fair value during the first six months of 2020 was primarily due to: (i) lower expectations for 2020 EBITDA and net cash flow associated with lower market demand for epinephrine delivery devices resulting from COVID-19-related social distancing guidelines, especially if such guidelines or restrictions impact the peak back-to-school season and (ii) a higher private company liquidity discount. The net appreciation on its investment of $24.2 million($19.9 million after deferred income taxes) in the first six months of 2019, included a pre-tax cash dividend of $17.6 million 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 net sales and EBITDA from ongoing operations by segment table in Note 11.
The Company estimated the fair value of its investment in kaléo at June 30, 2020 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 20% at June 30, 2020 (versus 10% at December 31, 2019 and 15% at June 30, 2019) 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 June 30, 2020 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, 2019
and March 31, 2020. 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 discontinued 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 June 30, 2020, 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
|
|
|
|
|
|
|
|
5.0 x
|
6.0 x
|
7.0 x
|
8.0x
|
9.0x
|
|
Weighting to DCF Method
|
50
|
%
|
$
|
60.9
|
|
$
|
66.3
|
|
$
|
71.7
|
|
$
|
77.1
|
|
$
|
82.4
|
|
|
|
40
|
%
|
$
|
58.4
|
|
$
|
64.9
|
|
$
|
71.4
|
|
$
|
77.8
|
|
$
|
84.3
|
|
|
|
30
|
%
|
$
|
56.0
|
|
$
|
63.5
|
|
$
|
71.0
|
|
$
|
78.6
|
|
$
|
86.1
|
|
|
|
20
|
%
|
$
|
53.5
|
|
$
|
62.1
|
|
$
|
70.7
|
|
$
|
79.3
|
|
$
|
87.9
|
|
|
|
10
|
%
|
$
|
51.0
|
|
$
|
60.7
|
|
$
|
70.4
|
|
$
|
80.0
|
|
$
|
89.7
|
|
|
|
0
|
%
|
$
|
48.5
|
|
$
|
59.3
|
|
$
|
70.0
|
|
$
|
80.8
|
|
$
|
91.5
|
|
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 $70.7 million estimated fair value reflected in the Company’s financial statements at June 30, 2020.
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. The notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $20.1 million (21.7 million pounds of aluminum) at June 30, 2020 and $20.2 million (19.6 million pounds of aluminum) at December 31, 2019.
The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
(In thousands)
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Asset derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
$
|
172
|
|
|
Accrued expenses
|
|
$
|
6
|
|
|
Liability derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
(2,029)
|
|
|
Accrued expenses
|
|
(1,259)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
$
|
(1,857)
|
|
|
|
|
$
|
(1,253)
|
|
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 June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
(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
|
|
|
$
|
83
|
|
|
Liability derivatives:
Foreign currency forward contracts
|
Accrued expenses
|
|
(4,058)
|
|
|
Accrued expenses
|
|
|
(935)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
$
|
(4,058)
|
|
|
|
|
|
$
|
(852)
|
|
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 for the Flexible Packaging Film's business unit in Brazil (“Terphane Ltda.”) of its sales and raw materials quoted or priced in U.S. Dollars and its variable conversion, fixed conversion and sales, general and administrative costs (before depreciation and amortization) quoted or priced in Brazilian Real is annual net costs of 136 million Brazilian Real ("R$").
Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD Notional Amount (000s)
|
Average Forward Rate Contracted on USD/BRL
|
R$ Equivalent Amount (000s)
|
Applicable Month
|
Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged
|
|
$2,200
|
3.9326
|
R$8,652
|
Jul-20
|
76%
|
|
$2,200
|
3.9413
|
R$8,671
|
Aug-20
|
77%
|
|
$2,200
|
3.9495
|
R$8,689
|
Sep-20
|
77%
|
|
$2,200
|
3.9579
|
R$8,707
|
Oct-20
|
77%
|
|
$2,200
|
3.9660
|
R$8,725
|
Nov-20
|
77%
|
|
$2,050
|
3.9653
|
R$8,129
|
Dec-20
|
72%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13,050
|
3.9520
|
R$51,573
|
|
76%
|
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 pre-tax net fair value of the open forward contracts was a negative $3.5 million as of June 30, 2020.
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 six month periods ended June 30, 2020 and 2019 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Cash Flow Derivative Hedges
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum Futures Contracts
|
|
|
|
Foreign Currency Forwards
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
2020
|
|
2019
|
|
2019
|
|
Amount of pretax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(1,201)
|
|
|
$
|
(1,192)
|
|
|
$
|
—
|
|
$
|
(535)
|
|
|
$
|
—
|
|
|
$
|
719
|
|
|
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)
|
$
|
(1,551)
|
|
|
$
|
(606)
|
|
|
$
|
16
|
|
$
|
(1,798)
|
|
|
$
|
16
|
|
|
$
|
(369)
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum Futures Contracts
|
|
|
|
Foreign Currency Forwards
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
2020
|
|
2019
|
|
2019
|
|
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(2,795)
|
|
|
$
|
(1,438)
|
|
|
$
|
—
|
|
$
|
(5,360)
|
|
|
$
|
—
|
|
|
$
|
(97)
|
|
|
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)
|
$
|
(2,191)
|
|
|
$
|
(1,223)
|
|
|
$
|
31
|
|
$
|
(2,592)
|
|
|
$
|
31
|
|
|
$
|
(560)
|
|
As of June 30, 2020, the Company expects $1.4 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 six month periods ended June 30, 2020 and 2019, 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 for the three and six month periods ended June 30, 2020 and 2019, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Three Months Ended June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
Interest cost
|
2,535
|
|
|
3,068
|
|
|
60
|
|
|
73
|
|
|
Expected return on plan assets
|
(2,804)
|
|
|
(3,404)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
3,814
|
|
|
2,730
|
|
|
(47)
|
|
|
(57)
|
|
|
Net periodic benefit cost
|
$
|
3,545
|
|
|
$
|
2,394
|
|
|
$
|
22
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
16
|
|
|
Interest cost
|
5,070
|
|
|
6,135
|
|
|
120
|
|
|
146
|
|
|
Expected return on plan assets
|
(5,608)
|
|
|
(6,808)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
7,628
|
|
|
5,459
|
|
|
(94)
|
|
|
(115)
|
|
|
Net periodic benefit cost
|
$
|
7,090
|
|
|
$
|
4,786
|
|
|
$
|
44
|
|
|
$
|
47
|
|
Pension and other postretirement liabilities were $105.6 million and $108.1 million at June 30, 2020 and December 31, 2019, respectively ($0.7 million included in “Accrued expenses” at June 30, 2020 and December 31, 2019, with the remainder included in “Pension and other postretirement benefit obligations, net” in the consolidated balance sheets). The Company’s total required pension contributions for 2020 are expected to be $12.3 million; however, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Company has elected to defer payment of $2.4 millionof total contributions until January 1, 2021. A $1.8 million pension plan contribution was made in January 2020 prior to the enactment of the CARES Act.
Tredegar funds its other postretirement benefits on a claims-made basis; for 2020, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2019, or approximately $0.3 million.
10 OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gain (loss) on investment in kaléo accounted for under fair value method
|
$
|
1,300
|
|
|
$
|
7,100
|
|
|
$
|
(24,800)
|
|
|
$
|
24,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COVID-19-related expenses1
|
(1,294)
|
|
|
—
|
|
|
(1,294)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
(19)
|
|
|
(4)
|
|
|
(131)
|
|
|
24
|
|
|
Total
|
$
|
(13)
|
|
|
$
|
7,096
|
|
|
$
|
(26,225)
|
|
|
$
|
24,206
|
|
|
1.Costs associated with operating under COVID-19 conditions, include employee overtime expenses associated with absenteeism, personal protective equipment supplies and facility maintenance.
|
|
|
|
|
|
|
|
The gain on investment in kaléo accounted for under fair value method shown above for the six months ended June 30, 2019, includes a cash dividend of $17.6 million from kaléo. See Note 7 for more details on the investment in kaléo.
11 BUSINESS SEGMENTS
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.
The Company’s reportable segments are based on its method of internal reporting, which is generally segregated by differences in products. Accounting standards for presentation of segments require an approach based on the way the Company organizes the segments for making operating decisions and how the chief operating decision maker (“CODM”) assesses performance. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations is the key profitability measure used by the CODM (Tredegar’s President and Chief Executive Officer) for purposes of assessing financial performance. The Company uses sales less freight (“net sales”) as its measure of revenues from external customers at the segment level. This measure is separately included in the financial information regularly provided to the CODM.
The following table presents net sales and EBITDA from ongoing operations by segment for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net Sales
|
|
|
|
|
|
|
|
|
Aluminum Extrusions
|
$
|
106,058
|
|
|
$
|
136,757
|
|
|
$
|
223,945
|
|
|
$
|
275,804
|
|
|
PE Films
|
71,012
|
|
|
69,161
|
|
|
142,273
|
|
|
135,941
|
|
|
Flexible Packaging Films
|
34,104
|
|
|
33,443
|
|
|
64,678
|
|
|
67,062
|
|
|
Total net sales
|
211,174
|
|
|
239,361
|
|
|
430,896
|
|
|
478,807
|
|
|
Add back freight
|
7,464
|
|
|
8,887
|
|
|
16,044
|
|
|
17,907
|
|
|
Sales as shown in the Consolidated Statements of Income
|
$
|
218,638
|
|
|
$
|
248,248
|
|
|
$
|
446,940
|
|
|
$
|
496,714
|
|
|
EBITDA from Ongoing Operations
|
|
|
|
|
|
|
|
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
|
Ongoing operations:
|
|
|
|
|
|
|
|
|
EBITDA
|
$
|
13,279
|
|
|
$
|
18,600
|
|
|
$
|
24,956
|
|
|
$
|
34,767
|
|
|
Depreciation & amortization
|
(4,267)
|
|
|
(4,082)
|
|
|
(8,380)
|
|
|
(8,164)
|
|
|
EBIT
|
9,012
|
|
|
14,518
|
|
|
16,576
|
|
|
26,603
|
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(1,230)
|
|
|
(17)
|
|
|
(1,918)
|
|
|
(57)
|
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
(13,696)
|
|
|
—
|
|
|
PE Films:
|
|
|
|
|
|
|
|
|
Ongoing operations:
|
|
|
|
|
|
|
|
|
EBITDA
|
15,319
|
|
|
11,160
|
|
|
29,507
|
|
|
17,703
|
|
|
Depreciation & amortization
|
(3,753)
|
|
|
(3,394)
|
|
|
(7,477)
|
|
|
(6,986)
|
|
|
EBIT
|
11,566
|
|
|
7,766
|
|
|
22,030
|
|
|
10,717
|
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(646)
|
|
|
(1,523)
|
|
|
(1,552)
|
|
|
(2,901)
|
|
|
|
|
|
|
|
|
|
|
|
Flexible Packaging Films:
|
|
|
|
|
|
|
|
|
Ongoing operations:
|
|
|
|
|
|
|
|
|
EBITDA
|
6,495
|
|
|
2,880
|
|
|
13,048
|
|
|
6,084
|
|
|
Depreciation & amortization
|
(436)
|
|
|
(363)
|
|
|
(864)
|
|
|
(707)
|
|
|
EBIT
|
6,059
|
|
|
2,517
|
|
|
12,184
|
|
|
5,377
|
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(10)
|
|
|
—
|
|
|
(10)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
24,751
|
|
|
23,261
|
|
|
33,614
|
|
|
39,739
|
|
|
Interest income
|
24
|
|
|
48
|
|
|
76
|
|
|
107
|
|
|
Interest expense
|
548
|
|
|
1,263
|
|
|
1,104
|
|
|
2,495
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investment in kaléo accounted for under fair value method
|
1,300
|
|
|
7,100
|
|
|
(24,800)
|
|
|
24,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option-based compensation costs
|
725
|
|
|
898
|
|
|
1,309
|
|
|
1,313
|
|
|
Corporate expenses, net
|
10,542
|
|
|
9,331
|
|
|
21,080
|
|
|
17,492
|
|
|
Income (loss) before income taxes
|
14,260
|
|
|
18,917
|
|
|
(14,603)
|
|
|
42,728
|
|
|
Income tax expense (benefit)
|
3,064
|
|
|
4,440
|
|
|
(3,477)
|
|
|
8,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
11,196
|
|
|
$
|
14,477
|
|
|
$
|
(11,126)
|
|
|
$
|
34,261
|
|
The following table presents identifiable assets by segment at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2020
|
|
December 31, 2019
|
|
Aluminum Extrusions
|
$
|
240,905
|
|
|
$
|
265,027
|
|
|
PE Films
|
226,027
|
|
|
230,415
|
|
|
Flexible Packaging Films
|
66,011
|
|
|
74,016
|
|
|
Subtotal
|
532,943
|
|
|
569,458
|
|
|
General corporate
|
85,934
|
|
|
111,788
|
|
|
Cash and cash equivalents
|
39,930
|
|
|
31,422
|
|
|
Total
|
$
|
658,807
|
|
|
$
|
712,668
|
|
The following tables disaggregate the Company’s revenue by geographic area and product group for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Geographic Area (a)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
United States
|
|
$
|
141,559
|
|
|
$
|
162,788
|
|
|
$
|
287,742
|
|
|
$
|
335,042
|
|
|
Exports from the United States to:
|
|
|
|
|
|
|
|
|
|
Asia
|
|
23,643
|
|
|
24,513
|
|
|
45,807
|
|
|
38,006
|
|
|
Latin America
|
|
2,078
|
|
|
2,670
|
|
|
5,212
|
|
|
5,537
|
|
|
Canada
|
|
1,854
|
|
|
5,872
|
|
|
6,752
|
|
|
9,477
|
|
|
Europe
|
|
1,562
|
|
|
1,517
|
|
|
3,063
|
|
|
2,877
|
|
|
Operations outside the United States:
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
25,739
|
|
|
27,582
|
|
|
51,687
|
|
|
55,721
|
|
|
The Netherlands
|
|
7,132
|
|
|
8,450
|
|
|
15,017
|
|
|
18,037
|
|
|
Hungary
|
|
5,751
|
|
|
5,162
|
|
|
12,355
|
|
|
11,996
|
|
|
India
|
|
1,856
|
|
|
807
|
|
|
3,261
|
|
|
1,884
|
|
|
China
|
|
—
|
|
|
—
|
|
|
—
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
211,174
|
|
|
$
|
239,361
|
|
|
$
|
430,896
|
|
|
$
|
478,807
|
|
(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.
The Company’s facilities in Pottsville, PA (“PV”) and Guangzhou, China (“GZ”) have a tolling arrangement whereby certain surface protection films are manufactured in GZ for a fee with raw materials supplied from PV that are then sold by GZ directly to customers principally in the Asian market, but paid by customers directly to PV. Amounts associated with this intercompany tolling arrangement are reported in the table above as export sales from the U.S. to Asia, and include net sales of $32.1 million in 2019, $10.0 million and $7.5 million in the second quarters of 2020 and 2019, respectively, and $19.3 millionand $12.7 million in the first six months of 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Product Group
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
|
|
Nonresidential building & construction
|
|
$
|
64,726
|
|
|
$
|
69,019
|
|
|
$
|
127,865
|
|
|
$
|
138,657
|
|
|
Consumer durables
|
|
7,782
|
|
|
16,381
|
|
|
20,331
|
|
|
31,926
|
|
|
Automotive
|
|
5,572
|
|
|
12,496
|
|
|
15,043
|
|
|
25,123
|
|
|
Residential building & construction
|
|
9,052
|
|
|
10,278
|
|
|
18,867
|
|
|
21,950
|
|
|
Electrical
|
|
4,775
|
|
|
10,373
|
|
|
12,014
|
|
|
21,442
|
|
|
Machinery & equipment
|
|
7,630
|
|
|
9,471
|
|
|
15,566
|
|
|
19,394
|
|
|
Distribution
|
|
6,521
|
|
|
8,739
|
|
|
14,259
|
|
|
17,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
106,058
|
|
|
136,757
|
|
|
223,945
|
|
|
275,804
|
|
|
PE Films:
|
|
|
|
|
|
|
|
|
|
Personal care materials
|
|
36,258
|
|
|
37,956
|
|
|
77,488
|
|
|
82,812
|
|
|
Surface protection films
|
|
31,699
|
|
|
29,253
|
|
|
60,052
|
|
|
49,142
|
|
|
LED lighting products & other films
|
|
3,055
|
|
|
1,952
|
|
|
4,733
|
|
|
3,987
|
|
|
Subtotal
|
|
71,012
|
|
|
69,161
|
|
|
142,273
|
|
|
135,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flexible Packaging Films
|
|
34,104
|
|
|
33,443
|
|
|
64,678
|
|
|
67,062
|
|
|
|
|
$
|
211,174
|
|
|
$
|
239,361
|
|
|
$
|
430,896
|
|
|
$
|
478,807
|
|
12 INCOME TAXES
Tredegar recorded a tax benefit of $3.5 million on a pretax loss of $14.6 million in the first six months of 2020. Therefore, the effective tax rate in the first six months of 2020 was 23.8%, compared to 19.8% in the first six months of 2019. 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 six months of the year.
The significant differences between the U.S. federal statutory rate and the effective income tax rate for the six months ended June 30, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
2020
|
|
|
|
2019
|
|
|
|
Six Months Ended June 30,
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Income tax (benefit) expense at federal statutory rate
|
$
|
(3,066)
|
|
|
21.0
|
|
|
$
|
8,972
|
|
|
21.0
|
|
|
Foreign tax incentives
|
(2,630)
|
|
|
18.0
|
|
|
(1,074)
|
|
|
(3.0)
|
|
|
Changes in estimates related to prior year tax provision
|
(592)
|
|
|
4.1
|
|
|
152
|
|
|
0.4
|
|
|
Research and development tax credit
|
(487)
|
|
|
3.3
|
|
|
(255)
|
|
|
(0.7)
|
|
|
State taxes, net of federal income tax benefit
|
(179)
|
|
|
1.2
|
|
|
468
|
|
|
1.1
|
|
|
Valuation allowance due to foreign losses and impairments
|
(209)
|
|
|
1.4
|
|
|
(1,353)
|
|
|
(3.7)
|
|
|
Tax impact of dividend received
|
—
|
|
|
—
|
|
|
(919)
|
|
|
(2.2)
|
|
|
Tax contingency accruals and tax settlements
|
(148)
|
|
|
1.0
|
|
|
(154)
|
|
|
(0.4)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Derived Intangible Income (FDII)
|
—
|
|
|
—
|
|
|
(445)
|
|
|
(1.2)
|
|
|
Valuation allowance for capital loss carry-forwards
|
40
|
|
|
(0.3)
|
|
|
—
|
|
|
—
|
|
|
Non-deductible expenses
|
375
|
|
|
(2.6)
|
|
|
217
|
|
|
0.6
|
|
|
Stock-based compensation
|
247
|
|
|
(1.7)
|
|
|
(141)
|
|
|
(0.4)
|
|
|
U.S. Tax on Foreign Branch Income
|
534
|
|
|
(3.7)
|
|
|
1,808
|
|
|
5.0
|
|
|
Foreign rate differences
|
2,510
|
|
|
(17.0)
|
|
|
1,191
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unremitted earnings from foreign operations
|
128
|
|
|
(0.9)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) at effective income tax rate
|
$
|
(3,477)
|
|
|
23.8
|
|
|
$
|
8,467
|
|
|
19.8
|
|
Tredegar accrues U.S. federal income taxes on unremitted earnings of 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 13-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $2.6 million and $1.1 million in the first six months of 2020 and 2019, 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 2016.
During the six months ended June 30, 2020, new legislation was enacted and new IRS guidance was issued to provide relief to businesses in response to COVID-19. We have evaluated the tax provisions included in legislation such as the Coronavirus Aid, Relief, and Economic Security Act, as well as recent IRS guidance and we do not expect it to have a significant impact on our financial position, results of operations or cash flows.
13 NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements adopted in 2020:
ASU 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES (TOPIC 326)
See Note 1 for details on the adoption of ASU 2016-13.
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. The Company adopted all disclosure requirements in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Implemented:
ASU 2019-12, INCOME TAXES (TOPIC 740)
In December 2019, the FASB issued ASU 2019-12, which simplifies the accounting for income taxes. The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The amendments are effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.