Market Overview

Tredegar Reports Second-Quarter 2018 Results

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Tredegar Corporation (NYSE:TG, also the "Company" or "Tredegar")) today
reported second-quarter financial results for the period ended June 30,
2018.

Second quarter 2018 net income was $14.7 million ($0.44 per share)
compared with net income of $44.2 million ($1.34 per share) in the
second quarter of 2017. Net income from ongoing operations, which
excludes special items, was $11.5 million ($0.35 per share) in the
second quarter of 2018 compared with $8.3 million ($0.25 per share) in
the second quarter of 2017. A reconciliation of net income, a financial
measure calculated in accordance with U.S. generally accepted accounting
principles ("GAAP"), to net income from ongoing operations, a non-GAAP
financial measure, for the three and six months ended June 30, 2018 and
2017, is provided in Note (a) of the Notes to the Financial Tables in
this press release.

Highlights for ongoing operations for the second quarter of 2018 include:

  • Operating profit from ongoing operations for PE Films of $8.7 million
    was $2.0 million lower than the second quarter of 2017
  • Operating profit from ongoing operations for Flexible Packaging Films
    was $1.3 million, which was favorable by $1.6 million versus the
    operating loss in the second quarter of 2017
  • Operating profit from ongoing operations for Bonnell Aluminum of $13.2
    million was $1.4 million higher than the second quarter of 2017

John Gottwald, Tredegar's president and chief executive officer, said,
"Our PE Films segment had a solid first six months, but recent
discussions with customers firmed up the timing of previously disclosed
product transitions away from certain products in personal care and
surface protection films. Our future earnings will be adversely impacted
in a meaningful way by these transitions."

Mr. Gottwald continued, "Terphane's profit improvement was mainly due to
lower depreciation and amortization expenses as a consequence of the
impairment charge taken in the fourth quarter of last year. Bonnell
Aluminum showed good profit improvement despite continued inefficiencies
at our facility in Niles, Michigan."

Mr. Gottwald further stated, "I'm especially pleased to see our debt,
net of cash, at $60.7 million, which reflects a decline of approximately
$55 million this year."

OPERATIONS REVIEW

PE Films

PE Films is composed of personal care materials, surface protection
films, polyethylene overwrap films and films for other markets. A
summary of second-quarter and year-to-date operating results from
ongoing operations for PE Films is provided below:

                 
  Three Months Ended   Favorable/
(Unfavorable)
% Change
  Six Months Ended   Favorable/
(Unfavorable)
% Change
(In Thousands, Except Percentages) June 30, June 30,
  2018   2017   2018   2017  
Sales volume (lbs) 30,099   34,166 (11.9 )%   64,922   69,222 (6.2 )%
Net sales $ 82,457 $ 89,639 (8.0 )% $ 175,707 $ 176,050 (0.2 )%
Operating profit from ongoing operations   $ 8,678     $ 10,682     (18.8 )%   $ 22,712     $ 19,713     15.2

%

 

Second-Quarter 2018 Results vs. Second-Quarter
2017 Results

Net sales (sales less freight) in the second quarter of 2018 decreased
by $7.2 million versus 2017 primarily due to lower volume in Personal
Care. The sales decline in Personal Care was primarily related to lower
demand for topsheet from its largest customer and, due to timing, lower
sales of elastic materials in the second quarter of 2018 versus 2017.
The Company believes it is making inroads with customers for new elastic
products in Europe. In addition, the company is spending $25 million at
its plant in Terre Haute, Indiana to expand elastics capacity to serve
customers in North America, which is expected to begin production in the
middle of 2019.

Sales volume in the second quarter of 2018 in Surface Protection was
comparable to the prior year with strong demand for components of flat
panel displays continuing through the first half of 2018. Looking
forward, there are indications that sales volume in Surface Protection
during the third quarter of 2018 may decline sequentially and when
compared to last year due to a combination of factors. These factors
include a possible inventory build-up by customers during the first half
of 2018 and partial customer product transitions, which have already
begun, to alternative processes or materials as further discussed in the
last two paragraphs of this section.

Operating profit from ongoing operations in the second quarter of 2018
decreased by $2.0 million versus the second quarter of 2017 primarily
due to:

  • Lower contribution to profits from personal care films, primarily due
    to lower volume as noted above ($2.0 million) and higher variable
    costs due to timing of resin pass-through ($0.3 million), partially
    offset by improved pricing on certain products ($0.6 million), net
    favorable impact from the change in U.S. Dollar value of currencies
    for operations outside of the U.S. ($0.6 million) and lower sales,
    general and administrative costs ($0.5 million);
  • Lower contribution to profits from surface protection films, primarily
    due to a sales return reserve for a quality claim ($1.5 million),
    manufacturing inefficiencies ($0.8 million) and inventory adjustments
    ($0.3 million), partially offset by improved mix ($0.9 million);
  • Additional costs of $0.5 million associated with business development
    activities related to optical films; and
  • Realized cost savings associated with the previously announced project
    to consolidate domestic manufacturing facilities in PE Films ($0.8
    million).

In June 2018, the Company announced plans to close its facility in
Shanghai, China, which primarily produces topsheet films used as
components for personal care products. Production is expected to cease
at this plant by the end of 2018. The Company expects to recognize costs
associated with exit and disposal activities of $7.1 million comprised
of: (i) retention, severance and related costs ($3.6 million), (ii)
customer-related costs ($1.1 million), and (iii) legal, asset disposal
and other cash costs ($2.4 million). In addition, the Company expects
non-cash asset write-offs and accelerated depreciation of $0.9 million.
Net annual cash savings from consolidating operations of $1.7 million is
expected. Proceeds from expected property disposals are uncertain. The
Company anticipates that these activities, including property disposals,
will require 12-18 months to execute, and the costs are expected to be
incurred during this period. See additional information on current
year-to-date costs in Note (b) in the Notes to Financial Statements.

The Company continues to anticipate a significant customer product
transition in the Personal Care component of PE Films. The Company now
expects that customer product transition to begin in the fourth quarter
of 2018. The Company currently estimates that, when fully implemented,
this will adversely impact the annual sales of the business unit by $70
million and will materially impact earnings. Ongoing discussions with
this customer will determine the full implementation schedule. The loss
of this business without replacement with new business could trigger an
impairment of Personal Care's long-lived assets and goodwill. As of June
30, 2018, the goodwill balance carried by Personal Care was $47 million.
Personal Care has been increasing its R&D spending (an increase of $5
million in 2017 versus 2014), is investing capital, and is accelerating
sales and marketing efforts to capture growth and diversify its customer
base and product offerings in personal care products. The overall timing
and net change in Personal Care's revenues and profits and capital
expenditures needed to support these efforts during this transition
period are uncertain at this time.

The Surface Protection component of PE Films supports manufacturers of
optical and other specialty substrates used in flat panel display
products. These films are primarily used by customers to protect
components of displays in the manufacturing and transportation process
and then discarded.

The Company previously reported the risk over the next few years that a
portion of its film used in surface protection applications will be made
obsolete by possible future customer product transitions to less costly
alternative processes or materials. The Company estimates that the
customer product transitions will be fully implemented by the fourth
quarter of 2019. When fully implemented, the Company estimates that the
annualized adverse impact on future ongoing operating profit from this
customer shift will be approximately $10 million. The Company is
aggressively pursuing new surface protection products, applications and
customers.

Year-To-Date 2018 Results vs. Year-To-Date 2017
Results

Net sales (sales less freight) in the first six months of 2018 decreased
by $0.3 million versus 2017 primarily due to lower topsheet and elastics
volume in Personal Care, partially offset by an increase in Surface
Protection volume. The factors impacting sales for PE Films during the
first half of 2018 versus last year are similar to the factors described
above in the quarterly comparison.

Operating profit from ongoing operations in the first six months of 2018
increased by $3.0 million versus the first six months of 2017 primarily
due to:

  • Higher contribution to profits from surface protection films,
    primarily due to higher volume and improved mix ($3.8 million),
    partially offset by a sales return reserve for a quality claim ($1.5
    million);
  • Lower contribution to profits from personal care films, primarily due
    to lower volume in topsheet, elastics and other products ($3.4
    million), partially offset by improved pricing on certain products
    ($1.3 million), net favorable impact from the change in U.S. Dollar
    value of currencies for operations outside of the U.S. ($0.9 million)
    and lower sales, general and administrative costs ($0.5 million);
  • Additional costs of $0.5 million associated with business development
    activities related to optical films; and
  • Realized cost savings associated with the previously announced project
    to consolidate domestic manufacturing facilities in PE Films ($1.8
    million).

Capital Expenditures, Depreciation &
Amortization

Capital expenditures in PE Films were $7.4 million in the first six
months of 2018 compared to $7.8 million in the first six months of 2017.
Capital expenditures are projected to be $32 million in 2018, including:
$15 million of a total $25 million expected for North American capacity
expansion for elastics products in Personal Care; new capacity for next
generation products in Surface Protection ($6 million); and
approximately $10 million for routine capital expenditures required to
support operations. Depreciation expense was $7.6 million in the first
six months of 2018 and $6.9 million in the first six months of 2017.
Depreciation expense is projected to be $16 million in 2018.

Flexible Packaging Films

Flexible Packaging Films, which is also referred to as Terphane,
produces polyester-based films for use in packaging applications that
have specialized properties, such as heat resistance, strength, barrier
protection and the ability to accept high-quality print graphics. A
summary of second quarter operating results from ongoing operations for
Flexible Packaging Films is provided below:

                     
  Three Months Ended  

Favorable/
(Unfavorable)
% Change

  Six Months Ended  

Favorable/
(Unfavorable)
% Change

(In Thousands, Except Percentages) June 30, June 30,
  2018   2017   2018   2017
Sales volume (lbs) 23,701   21,966

7.9

%

  47,018   44,028

6.8

%

Net sales $ 28,304 $ 26,588

6.5

%

$ 56,741 $ 53,297

6.5

%

Operating profit (loss) from ongoing operations   $ 1,294     $ (319 )  

NA

    $ 3,008     $ (2,317 )  

NA

 
 

Second-Quarter 2018 Results vs. Second-Quarter
2017 Results

Net sales and volume increased in the second quarter of 2018 compared
with the second quarter of 2017 due to higher demand. Terphane was
operating at full capacity utilization during the second quarter. To
increase capacity, Terphane is spending approximately $1.8 million
(including capital expenditures of $1 million and project expenses of
$0.8 million) on a previously idled production line which was restarted
in mid-June. Also during the second quarter, a nationwide trucking
strike caused a disruption of shipments, lowering sales volume by
approximately 0.9 million pounds.

Terphane's operating results from ongoing operations in the second
quarter of 2018 increased by $1.6 million versus the second quarter of
2017 primarily due to:

  • Significantly lower depreciation and amortization of $2.2 million
    resulting from the $101 million non-cash asset impairment loss
    recognized in the fourth quarter of 2017;
  • A benefit of $0.6 million primarily from higher volume and favorable
    foreign currency translation of Real-denominated operating costs,
    partially offset by a $0.4 million loss on foreign currency forward
    contracts that partially hedged Real-denominated operating costs;
  • One-time costs of $0.4 million related to the restarting of the idled
    production line referenced above; and
  • Net foreign currency transaction losses of $0.5 million (losses of
    $0.3 million in 2018 versus gains of $0.2 million in 2017).

Terphane's quarterly financial results have been volatile, and the
Company expects continued uncertainty and volatility until industry
capacity utilization and the competitive dynamics in Latin America
improve.

Year-To-Date 2018 Results vs. Year-To-Date 2017
Results

Net sales and volume increased in the first six months of 2018 compared
with the first six months of 2017 due to higher demand.

Terphane's operating results from ongoing operations in the first six
months of 2018 increased by $5.3 million versus the first six months of
2017 primarily due to:

  • Significantly lower depreciation and amortization of $4.5 million
    resulting from the $101 million non-cash asset impairment loss
    recognized in the fourth quarter of 2017;
  • A benefit of $1.9 million primarily from higher volume and favorable
    foreign currency translation of Real-denominated operating costs,
    partially offset by a $0.4 million loss on foreign currency forward
    contracts that partially hedged Real-denominated operating costs;
  • One-time costs of $0.5 million related to the restarting of the idled
    production line referenced above; and
  • Net foreign currency transaction losses of $0.3 million (losses of
    $0.4 million in 2018 versus $0.1 million in 2017).

Capital Expenditures, Depreciation &
Amortization

Capital expenditures in Terphane were $1.4 million in the first six
months of 2018 compared to $1.2 million in the first six months of 2017.
Terphane currently estimates that total capital expenditures in 2018
will be $5 million, including approximately $1 million to re-start the
idled production line referenced above and $4 million for routine
capital expenditures required to support operations. Depreciation
expense was $0.4 million in the first six months of 2018 and $3.7
million in the first six months of 2017. Depreciation expense is
projected to be $1.0 million in 2018. Amortization expense was $0.2
million in the first six months of 2018 and $1.5 million in the first
six months of 2017, and is projected to be $0.5 million in 2018.
Aggregate depreciation and amortization expense is projected at $1.5
million in 2018, down significantly from $10.5 million in 2017 due to
the write-down of Terphane's long-lived assets during the fourth quarter
of 2017.

Aluminum Extrusions

Aluminum Extrusions, which includes Bonnell Aluminum and its operating
divisions, AACOA and Futura, produces high-quality, soft-alloy and
medium-strength aluminum extrusions primarily for the following markets:
building and construction, automotive, and specialty, which consists of
consumer durables, machinery and equipment, electrical and distribution
end-use products.

A summary of second-quarter results from ongoing operations for Aluminum
Extrusions is provided below:

                 
  Three Months Ended   Favorable/
(Unfavorable)
% Change
  Six Months Ended   Favorable/
(Unfavorable)
% Change
(In Thousands, Except Percentages) June 30, June 30,
  2018   2017   2018   2017  
Sales volume (lbs) * 55,057   51,976 5.9 %   91,174   87,357 4.4 %
Net sales $ 144,558 $ 123,208 17.3 % $ 272,793 $ 222,807 22.4 %
Operating profit from ongoing operations   $ 13,156     $ 11,772     11.8 %   $ 23,355     $ 21,601     8.1 %

*

 

Sales volume for the six months ended June 30, 2018 and 2017
excludes sales volume associated with Futura Industries
Corporation ("Futura"), acquired on February 15, 2017.

Second-Quarter 2018 Results vs. Second-Quarter
2017 Results

Net sales in the second quarter of 2018 increased versus 2017 primarily
due to higher sales volume and an increase in average selling prices
primarily due to the pass-through to customers of higher market-driven
raw material costs.

Sales volume in the second quarter of 2018 increased by 5.9% versus 2017
due to higher volume in the nonresidential building and construction and
specialty markets. Higher average net selling prices, primarily
attributed to an increase in aluminum market prices, had a favorable
impact on net sales of $14.4 million, and higher volume improved net
sales by $6.9 million. Bookings and backlog remain strong.

Operating profit from ongoing operations in the second quarter of 2018
increased by $1.4 million in comparison to the second quarter of 2017,
primarily due to higher volume and inflation-related sales prices ($2.4
million), partially offset by increased operating costs, including
employee-related expenses and higher depreciation ($1.0 million).
Bonnell Aluminum's Niles, Michigan facility continued to experience
inefficiencies. Without these inefficiencies, the Company estimates that
operating profit from ongoing operations in the second quarter of 2018
would have been higher by $1 million.

On March 8, 2018, the U.S. imposed tariffs of 10% on aluminum ingot and
semi-finished aluminum imported into the U.S. from certain countries,
including countries from which Bonnell Aluminum has historically sourced
aluminum supplies. On April 6, 2018, the U.S. announced sanctions on
certain Russian individuals and on companies controlled by those
individuals, including United Company RUSAL Plc, Russia's largest
aluminum producer and a substantial supplier of primary aluminum to the
U.S. market. Collectively, these events have resulted in a significant
increase in the cost of aluminum ingot used by Bonnell Aluminum to make
its products. The average U.S. Midwest Transaction price, the benchmark
price for P1020 high-grade aluminum ingot delivered, averaged $1.24 per
pound in the second quarter of 2018, up $0.28 from $0.96 per pound in
the first quarter of 2017. This price has exceeded $1.35 per pound on
certain days in the second quarter of 2018. In 2017, aluminum raw
materials comprised 43% of Bonnell Aluminum's average selling price when
the U.S. Midwest Transaction price averaged $0.98 per pound. For the
vast majority of its business, Bonnell Aluminum expects to be able to
pass through higher aluminum costs to customers. However, sustained
higher costs for aluminum extrusions could result in reduced demand and
product substitutions in place of aluminum extrusions, which could
materially and negatively affect Bonnell Aluminum's business and results
of operations. In addition, continued sanctions on RUSAL Plc could
result in aluminum billet supply shortages in the U.S. aluminum
extrusion market, although Bonnell does not currently anticipate any
impact of such potential shortages on its access to aluminum.

Year-To-Date 2018 Results vs. Year-To-Date 2017
Results

Net sales in the first six months of 2018 increased versus 2017
primarily due to the addition of Futura and higher volume. Futura
contributed $47.3 million of net sales in the first six months of 2018
versus $29.4 million for the 131 days owned during the first six months
of 2017 (acquired on February 15, 2017). Excluding the impact of Futura,
net sales improved due to higher sales volume and an increase in average
selling prices primarily due to the pass-through to customers of higher
market-driven raw material costs.

Volume on an organic basis (which excludes the impact of the Futura
acquisition) in the second quarter of 2018 increased by 4.4% versus 2017
due to higher volume in the nonresidential building and construction and
specialty markets. Higher average net selling prices, primarily
attributed to an increase in aluminum market prices, had a favorable
impact on net sales of $24.7 million, and higher volume improved net
sales by $6.9 million.

Operating profit from ongoing operations in the first six months of 2018
increased by $1.8 million in comparison to the first six months of 2017.
Excluding the favorable profit impact of Futura ($1.4 million),
operating profit from ongoing operations increased $0.4 million,
primarily due to:

  • Higher volume, improved mix and inflation-related sales prices ($5.1
    million), partially offset by increased operating costs, including
    employee-related expenses and higher depreciation ($3.2 million); and
  • Continued inefficiencies associated with the new extrusion line at the
    Niles, Michigan plant ($1.5 million).

Capital Expenditures, Depreciation &
Amortization

Capital expenditures in Bonnell Aluminum were $5.6 million in the first
six months of 2018 (including $1.1 million associated with Futura),
compared to $17.7 million in the first six months of 2017. Capital
expenditures in 2017 included the extrusions capacity expansion project
at the facility in Niles, Michigan. Capital expenditures are projected
to be $14 million in 2018, including approximately $7 million for
infrastructure upgrades and expanded fabrication and machining
capabilities, and approximately $7 million for routine items required to
support operations. Depreciation expense was $6.6 million in the first
six months of 2018 compared to $5.3 million in the first six months of
2017, and is projected to be $13 million in 2018. Amortization expense
was $1.8 million in the first six months of 2018 and $1.4 million in the
first six months of 2017, and is projected to be $4 million in 2018.

Corporate Expenses, Interest, Taxes & Other

Pension expense was $5.1 million in the first six months of 2018, versus
$5.2 million in the first six months of 2017. The impact on earnings
from pension expense is reflected in "Corporate expenses, net" in the
Net Sales and Operating Profit by Segment table. Pension expense is
projected to be $10.2 million in 2018. Corporate expenses, net,
increased in the first six months of 2018 versus 2017 primarily due to
higher stock-based employee benefit costs and professional fees for
services rendered early in the first quarter of 2018 associated with the
Terphane non-cash asset impairment loss that was recognized in the
fourth quarter of 2017.

Interest expense was $3.2 million in the first six months of 2018 in
comparison to $2.8 million in the first six months of 2017, primarily
due to higher interest rates.

The effective tax rate used to compute income tax expense from
continuing operations was 23.0% in the first six months of 2018,
compared to 9.9% in the first six months of 2017. The effective tax rate
from ongoing operations comparable to the earnings reconciliation table
provided in Note (a) of the Notes to Financial Tables in this press
release was 22.2% for the first six months of 2018 versus 39.1% in 2017
(see also Note (e) of the Notes to Financial Tables). The effective tax
rates benefited from the U.S. Tax Cuts and Jobs Act enacted in December
2017, which, among other impacts, reduced the U.S. federal corporate
income tax rate from 35% to 21% beginning in 2018. An explanation of
additional significant differences between the effective tax rate for
income from continuing operations and the U.S. federal statutory rate
for 2018 and 2017 will be provided in the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2018 ("Form 10-Q").

Tredegar's approximately 20% ownership in kaleo, Inc. ("kaléo"), which
is accounted for under the fair value method, was estimated at a value
of $68 million at June 30, 2018, versus $54 million at December 31, 2017
and $62 million at March 31, 2018. The changes in the estimated fair
value of the Company's investment in kaléo, which are included in net
income under GAAP, have consistently been excluded from net income from
ongoing operations as shown in the reconciliation table in Note (a) of
the Notes to the Financial Tables in this press release. Kaléo's stock
is not publicly traded. The Company's valuation estimate is based on
projection assumptions that have a wide range of possible outcomes.
Ultimately, the true value of Tredegar's ownership interest in kaléo
will be determined if and when a liquidity event occurs.

CAPITAL STRUCTURE

Total debt was $123.0 million at June 30, 2018, compared to $152.0
million at December 31, 2017. Net debt (debt in excess of cash and cash
equivalents) was $60.7 million at June 30, 2018, compared to $104.9
million at March 31, 2018 and $115.5 million at December 31, 2017. The
decline in net debt of $44.2 million from March 31 to June 30, 2018
included the impact of a U.S. federal income tax refund received in June
of approximately $19 million. Net debt is a financial measure that is
not calculated or presented in accordance with GAAP. See Note (d) of the
Notes to the Financial Tables in this press release for a reconciliation
of this non-GAAP financial measure to the most directly comparable GAAP
financial measure.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Some of the information contained in this press release may constitute
"forward-looking statements" within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. When
we use the words "believe," "estimate," "anticipate," "expect,"
"project," "plan," "likely," "may" and similar expressions, we do so to
identify forward-looking statements. Such statements are based on our
then current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from
those addressed in the forward-looking statements. It is possible that
our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Accordingly, you should not place undue reliance on these
forward-looking statements. Factors that could cause actual results to
differ from expectations include, without limitation, the following:

  • loss or gain of sales to significant customers on which our business
    is highly dependent;
  • inability to achieve sales to new customers to replace lost business;
  • ability to develop, efficiently manufacture and deliver new products
    at competitive prices;
  • failure of our customers to achieve success or maintain market share;
  • failure to protect our intellectual property rights;
  • risks of doing business in countries outside the U.S. that affect our
    substantial international operations;
  • political, economic, and regulatory factors concerning our products;
  • uncertain economic conditions in countries in which we do business;
  • competition from other manufacturers, including manufacturers in
    lower-cost countries and manufacturers benefiting from government
    subsidies;
  • impact of fluctuations in foreign exchange rates;
  • a change in the amount of our underfunded defined benefit (pension)
    plan liability;
  • an increase in the operating costs incurred by our operating
    companies, including, for example, the cost of raw materials and
    energy;
  • inability to successfully identify, complete or integrate strategic
    acquisitions; failure to realize the expected benefits of such
    acquisitions and assumption of unanticipated risks in such
    acquisitions;
  • disruption to our manufacturing facilities;
  • occurrence or threat of extraordinary events, including natural
    disasters and terrorist attacks;
  • an information technology system failure or breach;
  • volatility and uncertainty of the valuation of our cost-basis
    investment in kaléo;
  • the impact of the imposition of tariffs and sanctions on imported
    aluminum ingot used in our aluminum extrusions;

and the other factors discussed in the reports Tredegar files with or
furnishes to the Securities and Exchange Commission (the "SEC") from
time to time, including the risks and important factors set forth in
additional detail in Part I, Item 1A of Tredegar's Annual Report on Form
10-K for the year ended December 31, 2017. Readers are urged to review
and consider carefully the disclosures Tredegar makes in its filings
with the SEC.

Tredegar does not undertake, and expressly disclaims any duty, to update
any forward-looking statement made in this press release to reflect any
change in management's expectations or any change in conditions,
assumptions or circumstances on which such statements are based, except
as required by applicable law.

To the extent that the financial information portion of this press
release contains non-GAAP financial measures, it also presents both the
most directly comparable financial measures calculated and presented in
accordance with GAAP and a quantitative reconciliation of the difference
between any such non-GAAP measures and such comparable GAAP financial
measures. Reconciliations of non-GAAP financial measures are provided in
the Notes to the Financial Tables included with this press release and
can also be found within "Presentations" in the "Investors" section of
our website, www.tredegar.com.

Tredegar uses its website as a channel of distribution of material
company information. Financial information and other material
information regarding Tredegar is posted on and assembled in the
"Investors" section of its website.

Tredegar Corporation is a manufacturer of plastic films and aluminum
extrusions. A global company headquartered in Richmond, Virginia,
Tredegar had 2017 sales of $961 million. With approximately 3,200
employees, the company operates manufacturing facilities in North
America, South America, Europe, and Asia.

 
Tredegar Corporation
Condensed Consolidated Statements of Income
(In Thousands, Except Per-Share Data)
(Unaudited)
         
  Three Months Ended   Six Months Ended
June 30, June 30,
    2018   2017   2018   2017
Sales $ 263,759   $ 247,347 $ 522,470   $ 468,372
Other income (expense), net (b)(c)   5,857     34,735     14,089     38,022
269,616 282,082 536,559 506,394
 
Cost of goods sold (b) 210,667 195,286 413,856 375,047
Freight 8,440 7,912 17,229 16,218
Selling, R&D and general expenses (b) 25,592 26,198 51,732 50,705
Amortization of intangibles 1,025 1,652 2,054 2,893
Pension and postretirement benefits 2,578 2,632 5,156 5,264
Interest expense 1,577 1,642 3,221 2,822
Asset impairments and costs associated with exit and disposal
activities, net of adjustments (b)
  468     (271 )   590     293
    250,347     235,051     493,838     453,242
Income before income taxes 19,269 47,031 42,721 53,152
Income taxes   4,547     2,827     9,834     5,246
Net income   $ 14,722     $ 44,204     $ 32,887     $ 47,906
 
Earnings per share:
Basic $ 0.45 $ 1.34 $ 1.00 $ 1.45
Diluted   $ 0.44     $ 1.34     $ 1.00     $ 1.45
 
Shares used to compute earnings per share:
Basic 33,074 32,961 33,028 32,941
Diluted   33,108     33,051     33,048     32,999
 
Tredegar Corporation
Net Sales and Operating Profit by Segment
(In Thousands)
(Unaudited)
         
  Three Months Ended   Six Months Ended
June 30, June 30,
    2018   2017   2018   2017
Net Sales    
PE Films $ 82,457 $ 89,639 $ 175,707 $ 176,050
Flexible Packaging Films 28,304 26,588 56,741 53,297
Aluminum Extrusions   144,558     123,208     272,793     222,807  
Total net sales 255,319 239,435 505,241 452,154
Add back freight   8,440     7,912     17,229     16,218  
Sales as shown in the Condensed Consolidated Statements of Income   $ 263,759     $ 247,347     $ 522,470     $ 468,372  
 
Operating Profit (Loss)
PE Films:
Ongoing operations $ 8,678 $ 10,682 $ 22,712 $ 19,713
Plant shutdowns, asset impairments, restructurings and other (b) (1,135 ) (904 ) (2,187 ) (2,972 )
Flexible Packaging Films:
Ongoing operations 1,294 (319 ) 3,008 (2,317 )
Plant shutdowns, asset impairments, restructurings and other (b) 11,856 11,856
Aluminum Extrusions:
Ongoing operations 13,156 11,772 23,355 21,601
Plant shutdowns, asset impairments, restructurings and other (b)   (46 )   1,571     (99 )   (2,769 )
Total 21,947 34,658 46,789 45,112
Interest income 228 55 284 129
Interest expense 1,577 1,642 3,221 2,822
Gain (loss) on investment in kaleo accounted for under fair value
method (c)
5,800 21,500 14,000 24,800
Stock option-based compensation costs 305 38 391 41
Corporate expenses, net (b)   6,824     7,502     14,740     14,026  
Income before income taxes 19,269 47,031 42,721 53,152
Income taxes   4,547     2,827     9,834     5,246  
Net income   $ 14,722     $ 44,204     $ 32,887     $ 47,906  
 
Tredegar Corporation
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
         
    June 30, 2018   December 31, 2017
Assets    
Cash & cash equivalents $ 62,321 $ 36,491
Accounts & other receivables, net 128,301 120,135
Income taxes recoverable 5,572 32,080
Inventories 84,890 86,907
Prepaid expenses & other   8,776     8,224
Total current assets 289,860 283,837
Property, plant & equipment, net 217,296 223,091
Investment in kaléo (cost basis of $7,500) 68,000 54,000
Identifiable intangible assets, net 38,225 40,552
Goodwill 128,205 128,208
Deferred income taxes 3,946 16,636
Other assets   8,957     9,419
Total assets   $ 754,489     $ 755,743
Liabilities and Shareholders' Equity
Accounts payable $ 121,266 $ 108,391
Accrued expenses   40,192     42,433
Total current liabilities 161,458 150,824
Long-term debt 123,000 152,000
Pension and other postretirement benefit obligations, net 94,335 98,837
Deferred income taxes 2,123
Other noncurrent liabilities 8,287 8,179
Shareholders' equity   367,409     343,780
Total liabilities and shareholders' equity   $ 754,489     $ 755,743
 
Tredegar Corporation
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
     
  Six Months Ended
June 30,
    2018   2017
Cash flows from operating activities:  
Net income $ 32,887 $ 47,906
Adjustments for noncash items:
Depreciation 14,688 15,993
Amortization of intangibles 2,054 2,893
Deferred income taxes 8,996 2,000
Accrued pension income and post-retirement benefits 5,156 5,264
(Gain)/loss on investment accounted for under the fair value method (14,000 ) (24,800 )
(Gain)/loss on asset impairments and divestitures 50
Net (gain)/loss on sale of assets (109 ) 307
Changes in assets and liabilities, net of effects of acquisitions
and divestitures:
Accounts and other receivables (15,205 ) (20,197 )
Inventories (810 ) (7,261 )
Income taxes recoverable/payable 26,277 (6,120 )
Prepaid expenses and other (2,057 ) 735
Accounts payable and accrued expenses 13,879 6,178
Pension and postretirement benefit plan contributions (2,912 ) (2,106 )
Other, net   2,926     1,126  
Net cash provided by operating activities 71,770 21,968
Cash flows from investing activities:
Capital expenditures (14,528 ) (26,692 )
Acquisition (87,110 )
Return of escrowed funds relating to acquisition earn-out 4,250
Proceeds from the sale of assets and other   1,095     95  
Net cash used in investing activities (9,183 ) (113,707 )
Cash flows from financing activities:
Borrowings 28,000 148,750
Debt principal payments (57,000 ) (56,500 )
Dividends paid (7,293 ) (7,268 )
Proceeds from exercise of stock options and other   926     695  
Net cash provided by (used in) financing activities (35,367 ) 85,677
Effect of exchange rate changes on cash   (1,390 )   577  
Increase (decrease) in cash and cash equivalents 25,830 (5,485 )
Cash and cash equivalents at beginning of period   36,491     29,511  
Cash and cash equivalents at end of period   $ 62,321     $ 24,026  

Notes to the Financial Tables

(Unaudited)

 
(a) Tredegar's presentation of net income and earnings per share from
ongoing operations are non-GAAP financial measures that exclude the
effects of gains or losses associated with plant shutdowns, asset
impairments and restructurings, gains or losses from the sale of
assets, goodwill impairment charges and other items (which includes
unrealized gains and losses for an investment accounted for under
the fair value method), which have been presented separately and
removed from net income and diluted earnings per share as reported
under GAAP. Net income and earnings per share from ongoing
operations are key financial and analytical measures used by
management to gauge the operating performance of Tredegar's ongoing
operations. They are not intended to represent the stand-alone
results for Tredegar's ongoing operations under GAAP and should not
be considered as an alternative to net income or earnings per share
from continuing operations as defined by GAAP. They exclude items
that management believes do not relate to Tredegar's ongoing
operations. A reconciliation to net income from ongoing operations
for the three and six months ended June 30, 2018 and 2017 is shown
below:
         
(in millions, except per share data)  

Three Months Ended
June 30,

 

Six Months Ended
June 30,

    2018   2017   2018   2017
Net income as reported under GAAP $ 14.7   $ 44.2 $ 32.9   $ 47.9
After-tax effects of:
Losses associated with plant shutdowns, asset impairments and
restructurings
0.6 0.7 0.6
(Gains) losses from sale of assets and other:
Unrealized (gain) loss associated with the investment in kaléo (4.5 ) (15.7 ) (10.9 ) (18.2 )
Gain associated with the settlement of an escrow agreement (11.9 ) (11.9 )
Income tax benefit associated with the write-off of the stock basis
of a certain U.S. subsidiary
(8.1 ) (8.1 )
Other   0.7     (0.2 ) 1.8     4.0  
Net income from ongoing operations   $ 11.5     $ 8.3     $ 24.5     $ 14.3  
 
Earnings per share as reported under GAAP (diluted) $ 0.44 $ 1.34 $ 1.00 $ 1.45
After-tax effects per diluted share of:
Losses associated with plant shutdowns, asset impairments and
restructurings
0.02 0.02 0.02
(Gains) losses from sale of assets and other:
Unrealized (gain) loss associated with the investment in kaléo (0.14 ) (0.47 ) (0.33 ) (0.55 )
Gain associated with the settlement of an escrow agreement (0.36 ) (0.36 )
Income tax benefit associated with the write-off of the stock basis
of a certain U.S. subsidiary
(0.25 ) (0.25 )
Other   0.03     (0.01 ) 0.05     0.12  
Earnings per share from ongoing operations (diluted)   $ 0.35     $ 0.25     $ 0.74     $ 0.43  

Reconciliations of the pre-tax and post-tax balances attributed to net
income are shown in Note (e).

(b)   Losses associated with plant shutdowns, asset impairments,
restructurings and other items for continuing operations in the
first six months of 2018 and 2017 detailed below are shown in the
statements of net sales and operating profit by segment and are
included in "Asset impairments and costs associated with exit and
disposal activities, net of adjustments" in the condensed
consolidated statements of income, unless otherwise noted.

Plant shutdowns, asset impairments, restructurings and other items in
the second quarter of 2018 include:

  • Pretax charges of $0.6 million related to estimated excess costs
    associated with the ramp-up of new product offerings and additional
    expenses related to strategic capacity expansion projects by PE Films
    (included in "Cost of goods sold" in the condensed consolidated
    statements of income); and
  • Pretax charges of $0.7 million associated with the shutdown of PE
    Films' manufacturing facility in Shanghai, China, which consists of
    severance and other employee-related accrued costs of $0.4 million,
    accelerated depreciation of $0.1 million (included in "Cost of goods
    sold" in the condensed consolidated statements of income) and other
    facility consolidation-related expenses of $0.2 million.

Plant shutdowns, asset impairments, restructurings and other items in
the first six months of 2018 include:

  • Pretax charges of $1.5 million related to estimated excess costs
    associated with the ramp-up of new product offerings and additional
    expenses related to strategic capacity expansion projects by PE Films
    (included in "Cost of goods sold" in the condensed consolidated
    statements of income);
  • Pretax charges of $0.3 million for professional fees associated with
    the Terphane Limitada worthless stock deduction, the impairment of
    assets of Flexible Packaging Films and determining the effect of the
    new U.S. federal income tax law (included in "Selling, R&D and general
    expenses" in the statements of net sales and operating profit by
    segment and "Corporate expenses, net" in the statements of net sales
    and operating profit by segment); and
  • Pretax charges of $0.7 million associated with the shutdown of PE
    Films' manufacturing facility in Shanghai, China, which consists of
    severance and other employee-related accrued costs of $0.4 million,
    accelerated depreciation of $0.1 million (included in "Cost of goods
    sold" in the condensed consolidated statements of income) and other
    facility consolidation-related expenses of $0.2 million.

Plant shutdowns, asset impairments, restructurings and other items in
the second quarter of 2017 include:

  • Pretax income of $11.9 million related to the settlement of an escrow
    arrangement established upon the acquisition of Terphane in 2011
    (included in "Other income (expense), net" in the condensed
    consolidated statements of income). In settling the escrow
    arrangement, the Company assumed the risk of the claims (and
    associated legal fees) against which the escrow previously secured the
    Company. While the ultimate amount of such claims is unknown, the
    Company believes that it is reasonably possible that it could be
    liable for some portion of these claims, and currently estimates the
    amount of such future claims at approximately $3.5 million;
  • Pretax charges of $1.0 million related to estimated excess costs
    associated with the ramp-up of new product offerings and additional
    expenses related to strategic capacity expansion projects by PE Films
    of $0.9 million and by Bonnell of $0.1 million (included in "Cost of
    goods sold" in the condensed consolidated statements of income);
  • Pretax income of $0.9 million related to the explosion that occurred
    in the second quarter of 2016 at the aluminum extrusions manufacturing
    facility in Newnan, Georgia, for the expected recovery of excess
    production costs of $0.6 million incurred in 2016 and $0.3 million
    incurred in the first quarter of 2017 for which recovery from
    insurance carriers was not previously considered to be reasonably
    assured (included in "Cost of goods sold" in the condensed
    consolidated statements of income);
  • Pretax income of $0.7 million related to the fair valuation of an
    earnout provision from the acquisition of Futura (included in "Other
    income (expense), net" in the condensed consolidated statements of
    income);
  • Pretax charges of $0.6 million associated with a business development
    project (included in "Selling, R&D and general expenses" in the
    condensed consolidated statements of income and "Corporate expenses,
    net" in the statements of net sales and operating profit by segment);
    and
  • Pretax charges of $0.3 million associated with the consolidation of
    domestic PE Films' manufacturing facilities, which consists of
    facility consolidation-related expenses of $0.2 million and
    accelerated depreciation of $0.1 million (included in "Cost of goods
    sold" in the condensed consolidated statements of income), offset by
    pretax income of $0.3 million related to a reduction of severance and
    other employee-related accrued costs.

Plant shutdowns, asset impairments, restructurings and other items in
the first six months of 2017 include:

  • Pretax income of $11.9 million related to the settlement of an escrow
    arrangement established upon the acquisition of Terphane in 2011
    (included in "Other income (expense), net" in the condensed
    consolidated statements of income). In settling the escrow
    arrangement, the Company assumed the risk of the claims (and
    associated legal fees) against which the escrow previously secured the
    Company. While the ultimate amount of such claims is unknown, the
    Company believes that it is reasonably possible that it could be
    liable for some portion of these claims, and currently estimates the
    amount of such future claims at approximately $3.5 million;
  • Pretax charges of $3.3 million related to the acquisition of Futura,
    i) associated with accounting adjustments of $1.7 million made to the
    value of inventory sold by Aluminum Extrusions after its acquisition
    of Futura (included in "Cost of goods sold" in the condensed
    consolidated statements of income), ii) acquisition costs of $1.5
    million and iii) integration costs of $0.1 million (both ii and iii
    included in "Selling, R&D and general expenses" in the condensed
    consolidated statements of income), offset by pretax income of $0.7
    million related to the fair valuation of an earnout provision
    (included in "Other income (expense), net" in the condensed
    consolidated statements of income);
  • Pretax charges of $2.8 million related to estimated excess costs
    associated with the ramp-up of new product offerings and additional
    expenses related to strategic capacity expansion projects by PE Films
    of $2.4 million and by Aluminum Extrusions of $0.4 million (included
    in "Cost of goods sold" in the condensed consolidated statements of
    income);
  • Pretax income of $0.5 million related to the explosion that occurred
    in the second quarter of 2016 at the aluminum extrusions manufacturing
    facility in Newnan, Georgia, which includes the expected recovery of
    excess production costs of $0.6 million incurred in 2016 for which
    recovery from insurance carriers was not previously considered to be
    reasonably assured (included in "Cost of goods sold" in the condensed
    consolidated statements of income), partially offset by legal and
    consulting fees of $0.1 million (included in "Selling, R&D and general
    expenses" in the condensed consolidated statements of income);
  • Pretax charges of $0.7 million associated with the consolidation of
    domestic PE Films' manufacturing facilities, which consists of asset
    impairments of $0.1 million, accelerated depreciation of $0.2 million
    (included in "Cost of goods sold" in the condensed consolidated
    statements of income) and other facility consolidation-related
    expenses of $0.4 million ($0.3 million is included in "Cost of goods
    sold" in the condensed consolidated statements of income), offset by
    pretax income of $0.1 million related to a reduction of severance and
    other employee-related accrued costs;
  • Pretax charges of $0.3 million related to expected future
    environmental costs at the aluminum extrusions manufacturing facility
    in Carthage, Tennessee (included in "Cost of goods sold" in the
    condensed consolidated statements of income);
  • Pretax charges of $0.9 million associated with a business development
    project (included in "Selling, R&D and general expenses" in the
    condensed consolidated statements of income and "Corporate expenses,
    net" in the statements of net sales and operating profit by segment);
    and
  • Pretax charges of $0.3 million for severance and other
    employee-related costs associated with restructurings in Corporate
    (included in "Corporate expenses, net" in the statements of net sales
    and operating profit by segment).
(c)   Unrealized gains on the Company's investment in kaléo of $5.8
million and $14.0 million were recognized in the second quarter and
first six months of 2018, respectively (included in "Other income
(expense), net" in the condensed consolidated statements of income),
compared to unrealized gains of $21.5 million and $24.8 million in
the second quarter and first six months of 2017. An unrealized loss
on the Company's investment in the Harbinger Capital Partners
Special Situations Fund, L.P. of $0.1 million was recognized in the
second quarter and first six months of 2018 (included in "Other
income (expense), net" in the condensed consolidated statements of
income) (none in 2017).
 
(d) Net debt is calculated as follows:
                                 
(in millions)   June 30,   December 31,
    2018   2017
Debt $ 123.0 $ 152.0
Less: Cash and cash equivalents   62.3     36.5
Net debt   $ 60.7     $ 115.5
 

Net debt is not intended to represent total debt as defined by
GAAP. Net debt is utilized by management in evaluating the
Company's financial leverage and equity valuation, and management
believes that investors also may find net debt to be helpful for
the same purposes.

 
(e) Tredegar's presentation of net income and earnings per share from
ongoing operations are non-GAAP financial measures that exclude the
effects of gains or losses associated with plant shutdowns, asset
impairments and restructurings, gains or losses from the sale of
assets, goodwill impairment charges and other items (which includes
unrealized gains and losses for an investment accounted for under
the fair value method), which have been presented separately and
removed from net income and diluted earnings per share as reported
under GAAP. Net income and earnings per share from ongoing
operations are key financial and analytical measures used by
management to gauge the operating performance of Tredegar's ongoing
operations. They are not intended to represent the stand-alone
results for Tredegar's ongoing operations under GAAP and should not
be considered as an alternative to net income or earnings per share
as defined by GAAP. They exclude items that we believe do not relate
to Tredegar's ongoing operations. A reconciliation of the pre-tax
and post-tax balances attributed to net income from ongoing
operations for the three and six months ended June 30, 2018 and 2017
are shown below in order to show the impact on the effective tax
rate:
                   
(In Millions)   Pre-tax  

Taxes Expense
(Benefit)

  After-Tax  

Effective
Tax Rate

Three Months Ended June 30, 2018   (a)   (b)     (b)/(a)
Net income reported under GAAP   $ 19.3     $ 4.5       $ 14.7   23.6 %
Losses associated with plant shutdowns, asset impairments and
restructurings
0.6 0.6
(Gains) losses from sale of assets and other   (5.0 )   (1.2 )     (3.8 )  
Net income from ongoing operations   $ 14.8     $ 3.3       $ 11.5     22.4 %
Three Months Ended June 30, 2017                
Net income reported under GAAP   $ 47.0     $ 2.8       $ 44.2   6.0 %
Losses associated with plant shutdowns, asset impairments and
restructurings
(Gains) losses from sale of assets and other   (33.4 )   2.5       (35.9 )  
Net income from ongoing operations   $ 13.6     $ 5.3       $ 8.3     38.9 %
Six Months Ended June 30, 2018                  
Net income reported under GAAP   $ 42.7     $ 9.8       $ 32.9   23.0 %
Losses associated with plant shutdowns, asset impairments and
restructurings
0.7 0.7
(Gains) losses from sale of assets and other (12.0 ) (2.9 ) (9.1 )
Goodwill impairment charge                
Net income from ongoing operations   $ 31.4     $ 6.9       $ 24.5    

22.2

%
Six Months Ended June 30, 2017                
Net income reported under GAAP   $ 53.2     $ 5.3       $ 47.9   9.9 %
Losses associated with plant shutdowns, asset impairments and
restructurings
0.9 0.3 0.6
(Gains) losses from sale of assets and other (30.6 ) 3.6 (34.2 )
Goodwill impairment charge                
Net income from ongoing operations   $ 23.5     $ 9.2       $ 14.3     39.1 %

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