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EX-32.2 - EXHIBIT 32.2 - TREDEGAR CORPtg-ex322_20171231x10k.htm
EX-32.1 - EXHIBIT 32.1 - TREDEGAR CORPtg-ex321_20171231x10k.htm
EX-31.2 - EXHIBIT 31.2 - TREDEGAR CORPtg-ex312_20171231x10k.htm
EX-31.1 - EXHIBIT 31.1 - TREDEGAR CORPtg-ex311_20171231x10k.htm
EX-23.1 - EXHIBIT 23.1 - TREDEGAR CORPtg-ex231_20171231x10k.htm
EX-21 - EXHIBIT 21 - TREDEGAR CORPtg-ex21_20171231x10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number 1-10258
 
TREDEGAR CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
54-1497771
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1100 Boulders Parkway,
Richmond, Virginia
 
23225
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 804-330-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.    Yes  x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
Accelerated filer
x
Smaller reporting company
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter): $391,348,943*
Number of shares of Common Stock outstanding as of January 31, 2018: 33,014,831 (33,030,190 as of June 30, 2017)
*
In determining this figure, an aggregate of 7,283,549 shares of Common Stock beneficially owned by Floyd D. Gottwald, Jr., John D. Gottwald, William M. Gottwald and the members of their immediate families has been excluded because the shares are deemed to be held by affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange on June 30, 2017.
Documents Incorporated By Reference
Portions of the Tredegar Corporation Proxy Statement for the 2018 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.





Index to Annual Report on Form 10-K
Year Ended December 31, 2017
 
 
 
Page
 
 
 
 
Part I
 
 
 
Item 1.
Business
 
1-4
Item 1A.
Risk Factors
 
5-9
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceedings
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Part II
 
 
 
Item 5.
Market for Tredegar’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
11-13
Item 6.
Selected Financial Data
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.
Financial Statements and Supplementary Data
 
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A.
Controls and Procedures
 
Item 9B.
Other Information
 
 
 
 
 
Part III
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance*
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 

Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
Principal Accounting Fees and Services
 
 
 
 
 
Part IV
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
Item 16.
Form 10-K Summary
 
*Items
11, 13 and 14 and portions of Items 10 and 12 are incorporated by reference from the Proxy Statement.





PART I
Item 1.
BUSINESS
Description of Business
Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in the manufacture of polyethylene (“PE”) plastic films, polyester (“PET”) films and aluminum extrusions. The financial information related to Tredegar’s polyethylene plastic films, polyester films and aluminum extrusions segments and related geographical areas included in Note 5 of the Notes to Financial Statements is incorporated herein by reference. Unless the context requires otherwise, all references herein to “Tredegar,” “the Company,” “we,” “us” or “our” are to Tredegar Corporation and its consolidated subsidiaries.
The Company's reportable business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions.
PE Films
PE Films manufactures plastic films, elastics and laminate materials primarily utilized in personal care materials, surface protection films, and specialty and optical lighting applications. These products are manufactured at facilities in the United States (“U.S.”), The Netherlands, Hungary, China, Brazil and India. PE Films competes in all of its markets on the basis of product innovation, quality, service and price.

Personal Care. Tredegar’s Personal Care unit is a global supplier of apertured, elastic and embossed films, laminate materials, and polyethylene and polypropylene overwrap films for personal care markets, including:
Apertured film and laminate materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinence products (including materials sold under the ComfortAire, ComfortFeel and FreshFeel brand names);
Elastic materials for use as components for baby diapers, adult incontinence products and feminine hygiene products (including components sold under the ExtraFlex and FlexAire brand names);
Three-dimensional apertured film transfer layers for baby diapers and adult incontinence products sold under the AquiDry® and AquiDry Plus brand names;
Thin-gauge films that are readily printable and convertible on conventional processing equipment for overwrap for bathroom tissue and paper towels; and
Polypropylene films for various industrial applications, including tape and automotive protection.
In 2017, 2016 and 2015, personal care materials accounted for approximately 27%, 30% and 33% of Tredegar’s consolidated net sales (sales less freight) from continuing operations, respectively.
Surface Protection. Tredegar’s Surface Protection unit produces single- and multi-layer surface protection films sold under the UltraMask®, ForceField and ForceField PEARL brand names. These films are used in high-technology applications, most notably protecting high-value components of flat panel displays used in televisions, monitors, notebooks, smart phones, tablets, e-readers and digital signage, during the manufacturing and transportation process. In 2017, 2016 and 2015, surface protection films accounted for approximately 11%, 11% and 10%, respectively, of Tredegar’s consolidated net sales from continuing operations.
Bright View Technologies. Tredegar’s Bright View unit designs and manufactures a range of specialty film-based components that provide tailored functionality for the global engineered optics market.  By leveraging multiple technology platforms, including film capabilities and its patented microstructure technology, Bright View offers high performance optical management solutions for a wide range of applications including LED illumination. 

  

1



PE Films’ net sales by market segment over the last three years is shown below:
% of PE Films Net Sales by Market Segment *
 
2017
 
2016
 
2015
Personal Care
70%
 
72%
 
75%
Surface Protection
28%
 
25%
 
23%
Bright View
2%
 
3%
 
2%
Total
100%
 
100%
 
100%
 
 
 
 
 
 
* See previous discussion by market segment for comparison of net sales to the Company’s consolidated net sales for significant market segments for each of the years presented.
Raw Materials. The primary raw materials used by PE Films in polyethylene and polypropylene films are low density, linear low density and high density polyethylene and polypropylene resins. These raw materials are obtained from domestic and foreign suppliers at competitive prices. PE Films believes that there will be an adequate supply of polyethylene and polypropylene resins in the foreseeable future. PE Films also buys polypropylene-based nonwoven fabrics based on the resins previously noted and styrenic block copolymers, and it believes there will be an adequate supply of these raw materials in the foreseeable future.
Customers. PE Films sells to many branded product producers throughout the world, with the top five customers, collectively, comprising 68%, 69% and 73% of its net sales in 2017, 2016 and 2015, respectively. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $122 million in 2017, $129 million in 2016 and $164 million in 2015 (these amounts include film sold to third parties that converted the film into materials used with products manufactured by P&G). For additional information, see “Item 1A. Risk Factors”.
Flexible Packaging Films
Flexible Packaging Films is comprised of Terphane Holdings LLC (“Terphane”). Flexible Packaging Films produces PET-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. These differentiated, high-value films are primarily manufactured in Brazil and sold in Latin America and the U.S. under the Terphane® and Sealphane® brand names. Major end uses include food packaging and industrial applications. In 2017, 2016 and 2015, Flexible Packaging Films accounted for approximately 12%, 14% and 12%, respectively, of Tredegar’s consolidated net sales from continuing operations. Flexible Packaging Films competes in all of its markets on the basis of product quality, service and price.
Raw Materials. The primary raw materials used by Flexible Packaging Films to produce polyester resins are purified terephthalic acid (“PTA”) and monoethylene glycol (“MEG”). Flexible Packaging Films also purchases additional polyester resins directly from suppliers. All of these raw materials are obtained from domestic Brazilian suppliers and foreign suppliers at competitive prices, and Flexible Packaging Films believes that there will be an adequate supply of polyester resins as well as PTA and MEG in the foreseeable future.
Aluminum Extrusions
The William L. Bonnell Company, Inc., known in the industry as Bonnell Aluminum, and its operating divisions, AACOA, Inc. and Futura Industries Corporation (“Futura”) (together, “Aluminum Extrusions”), produce high-quality, soft-alloy and medium-strength aluminum extrusions primarily for building and construction, automotive, consumer durables, machinery and equipment, electrical and distribution markets. Aluminum Extrusions manufactures mill (unfinished), anodized and painted (coated) and fabricated aluminum extrusions for sale directly to fabricators and distributors, and it competes primarily on the basis of product quality, service and price. Futura designs and manufactures a wide range of extruded aluminum products for a number of industries and end markets, including branded flooring trims and aluminum framing systems (TSLOTSTM), as well as OEM (original equipment manufacturer) components for electronics, store fixture, transportation, medical, marine, retail, solar and other applications. Sales are made predominantly in the U.S.
On February 15, 2017, Bonnell Aluminum acquired Futura on a net debt-free basis for approximately $92 million ($87 million net of a $5 million refund expected in 2018 from an earnout price adjustment mechanism). The acquisition was funded using Tredegar’s revolving credit agreement and treated as an asset purchase for U.S. federal income tax purposes. Futura, located in Clearfield, Utah, has a national sales presence and particular strength in the western U.S.

2



The end-uses in each of Aluminum Extrusions’ primary market segments include:
 
Major Markets
  
End-Uses
 
 
 
Building & construction - nonresidential
  
Commercial windows and doors, curtain walls, storefronts and entrances, walkway covers, ducts, louvers and vents, office wall panels, partitions and interior enclosures, acoustical walls and ceilings, point of purchase displays, pre-engineered structures, and flooring trims
 
 
 
Building & construction - residential
 
Shower and tub enclosures, railing and support systems, venetian blinds, swimming pools and storm shutters
 
 
 
Automotive
  
Automotive and light truck structural components, spare parts, after-market automotive accessories, grills for heavy trucks, travel trailers and recreation vehicles
 
 
 
Consumer durables
  
Furniture, pleasure boats, refrigerators and freezers, appliances and sporting goods
 
 
 
Machinery & equipment
  
Material handling equipment, conveyors and conveying systems, medical equipment, and aluminum framing systems (TSLOTSTM)
 
 
 
Distribution (metal service centers specializing in stock and release programs and custom fabrications to small manufacturers)
  
Various custom profiles including storm shutters, pleasure boat accessories, theater set structures and various standard profiles (including rod, bar, tube and pipe)
 
 
 
Electrical
  
Lighting fixtures, solar panels, electronic apparatus and rigid and flexible conduits
Aluminum Extrusions’ net sales by market segment over the last three years is shown below:
 
% of Aluminum Extrusions Net Sales by Market Segment*
 
2017
 
2016
 
2015
Building and construction:
 
 
 
 
 
Nonresidential
51%
 
59%
 
59%
Residential
9%
 
6%
 
6%
Automotive
8%
 
9%
 
8%
Specialty:
 
 
 
 
 
Consumer durables
12%
 
11%
 
11%
Machinery & equipment
7%
 
6%
 
5%
Electrical
7%
 
3%
 
6%
Distribution
6%
 
6%
 
5%
 
 
 
 
 
 
Total
100%
 
100%
 
100%
*Includes Futura as of its acquisition date of February 15, 2017.
In 2017, 2016 and 2015, nonresidential building and construction accounted for approximately 26%, 27% and 26% of Tredegar’s consolidated net sales from continuing operations, respectively.
Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term contracts. Aluminum Extrusions believes that it has adequate long-term supply agreements for aluminum and other required raw materials and supplies in the foreseeable future.

3



General
Intellectual Property. Tredegar considers patents, licenses and trademarks to be significant to PE Films. As of December 31, 2017, PE Films held 266 issued patents (63 of which are issued in the U.S.) and 108 registered trademarks (9 of which are issued in the U.S.). Flexible Packaging Films held 1 patent, which was issued in the U.S. and 13 registered trademarks (2 of which are registered in the U.S.). Aluminum Extrusions held no U.S. patents and 3 registered trademarks (all of which are registered in the U.S.). These patents have remaining terms ranging from 1 to 20 years. Tredegar also has licenses under patents owned by third parties.
Research and Development. Tredegar’s spending for research and development (“R&D”) activities in 2017, 2016 and 2015 was primarily related to PE Films. PE Films has technical centers in Durham, North Carolina; Richmond, Virginia; and Terre Haute, Indiana. Flexible Packaging has a technical center in Bloomfield, New York. R&D spending by the Company was approximately $18.3 million, $19.1 million and $16.2 million in 2017, 2016 and 2015, respectively.
Backlog. Backlogs are not material to the operations in PE Films or Flexible Packaging Films. Overall backlog for continuing operations in Aluminum Extrusions was approximately $46.2 million at December 31, 2017 compared to approximately $27.1 million at December 31, 2016, an increase of $19.1 million, or approximately 70%. Backlog at December 31, 2017 included $5.7 million for Futura. Net sales for Aluminum Extrusions, which the Company believes is cyclical in nature, was $466.8 million in 2017, $360.1 million in 2016 and $375.5 million in 2015. Net sales for Futura since it was acquired on February 15, 2017 were $71.0 million.
Government Regulation. U.S. laws concerning the environment to which the Company’s domestic operations are or may be subject include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), regulations promulgated under these acts, and other federal, state or local laws or regulations governing environmental matters. Compliance with these laws is an important consideration because Tredegar uses hazardous materials in some of its operations, is a generator of hazardous waste, and wastewater from the Company’s operations is discharged to various types of wastewater management systems. Under CERCLA and other laws, Tredegar may be subject to financial exposure for costs associated with waste management and disposal, even if the Company fully complies with applicable environmental laws.
The U.S. Environmental Protection Agency has adopted regulations under the Clean Air Act relating to emissions of carbon dioxide and other greenhouse gases (“GHG”), including mandatory reporting and permitting requirements. Several of the Company’s manufacturing operations result in emissions of carbon dioxide or GHG and are subject to the current GHG regulations. The Company’s compliance with these regulations has yet to require significant expenditures. The cost of compliance with any future GHG legislation or regulations is not presently determinable, but Tredegar does not anticipate compliance to have a material adverse effect on its consolidated financial condition, results of operations and cash flows based on information currently available.
Tredegar is also subject to the governmental regulations in the countries where it conducts business.
At December 31, 2017, the Company believes that it was in substantial compliance with all applicable environmental laws, regulations and permits in the U.S. and other countries where it conducts business. Environmental standards tend to become more stringent over time. In order to maintain substantial compliance with such standards, the Company may be required to incur additional expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities. Furthermore, failure to comply with current or future laws and regulations could subject Tredegar to substantial penalties, fines, costs and expenses.
Employees. Tredegar employed approximately 3,200 people at December 31, 2017.
Available Information and Corporate Governance Documents. Tredegar’s Internet address is www.tredegar.com. The Company makes available, free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information filed electronically with the SEC can be accessed on its website at www.sec.gov. In addition, the Company’s Corporate Governance Guidelines, Code of Conduct and the charters of the Audit, Executive Compensation, and Nominating and Governance Committees are available on Tredegar’s website and are available in print, without charge, to any shareholder upon request by contacting Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225. The information on or that can be accessed through the Company’s website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”) or incorporated into other filings it makes with the SEC.

4



Item 1A.
RISK FACTORS
There are a number of risks and uncertainties that could have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows. The following risk factors should be considered, in addition to the other information included in this Form 10-K, when evaluating Tredegar and its businesses.
PE Films
PE Films is highly dependent on sales associated with its top five customers, the largest of which is P&G. PE Films’ top five customers comprised approximately 26%, 29% and 32% of Tredegar’s consolidated net sales, in 2017, 2016 and 2015, respectively, with net sales to P&G alone comprising approximately 13%, 16% and 19% in 2017, 2016 and 2015, respectively. The loss or significant reduction of sales associated with one or more of these customers without replacement by new business could have a material adverse effect on the Company. Other factors that could adversely affect the business include, by way of example, (i) failure by a key customer to achieve success or maintain share in markets in which they sell products containing PE Films’ materials, (ii) key customers using products developed by others that replace PE Films’ business with such customer, (iii) delays in a key customer rolling out products utilizing new technologies developed by PE Films and (iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes. While PE Films is undertaking efforts to expand its customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with these large customers.
In recent years, PE Films lost substantial sales volume due to product transitions and incurred other sales losses associated with various customers. PE Films anticipates a significant product transition after 2018 in the personal care operating segment of the PE Films reporting segment. PE Films currently estimates that this will adversely impact the annual sales of the business unit by $70 million sometime between 2019 and 2021. PE Films has been increasing its R&D spending (an increase of $6 million in 2017 versus 2014), expects to invest capital, and is accelerating sales and marketing efforts to capture growth and diversify its customer base and product offerings in personal care products, but there can be no assurance that such efforts will be successful or that they will offset any loss of business due to product transitions. The overall timing and net change in personal care’s revenues and profits and capital expenditures needed to support growth during this transition period are uncertain at this time.
PE Films also anticipates that, over the next few years, there is an increased risk that a portion of its film used in surface protection applications will be made obsolete by possible customer product transitions to less costly alternative processes or materials. PE Films estimates on a preliminary basis that the annual adverse impact on ongoing operating profit from customer shifts to alternative processes or materials in surface protection is in the range of $5 to $10 million. Given the technological and commercial complexity involved in bringing these alternative processes or materials to market, PE Films is very uncertain as to the timing and ultimate amount of the possible transitions. In response, the Company is aggressively pursuing new surface protection products, applications and customers, but there can be no assurance that such efforts will be successful or that they will offset any loss of business due to product transitions.
PE Films and its customers operate in highly competitive markets. PE Films competes on product innovation, quality, price and service, and its businesses and their customers operate in highly competitive markets. Global market conditions continue to exacerbate the Company’s exposure to margin compression due to competitive forces, especially as certain products move into the later stages of their product life cycles. In addition, the changing dynamics of consumer products retailing, including the impact of on-line retailers such as Amazon, is creating price and margin pressure on the customers of PE Films’ personal care business. While PE Films continually works to identify new business opportunities with new and existing customers, primarily through the development of new products with improved performance and/or cost characteristics, there can be no assurances that such efforts will be successful or that they will offset business lost from competitive dynamics or customer product transitions.
Failure of PE Films’ customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact PE Films’ sales and operating margins. PE Films’ plastic films serve as components for, or are used in the production of, various consumer products sold worldwide. A customer’s ability to successfully develop, manufacture and market those products is integral to PE Films’ success. Also, consumers of premium products made with or using PE Films’ components may shift to less premium or less expensive products, reducing the demand for PE Films’ plastic films. Cyclical downturns may negatively affect businesses that use PE Films’ plastic film products, which could adversely affect sales and operating margins.
The Company’s inability to protect its intellectual property rights or its infringement of the intellectual property rights of others could have a material adverse impact on PE Films. PE Films operates in an industry where its significant customers and competitors have substantial intellectual property portfolios. The continued success of PE Films’ business depends on its ability not only to protect its own technologies and trade secrets, but also to develop and sell new products

5



that do not infringe upon existing patents or threaten existing customer relationships. Intellectual property litigation is very costly and could result in substantial expense and diversions of Company resources, both of which could adversely affect its consolidated financial condition, results of operations and cash flows. In addition, there may be no effective legal recourse against infringement of the Company’s intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.
An unstable economic environment could have a disruptive impact on PE Films’ supply chain. Certain raw materials used in manufacturing PE Films’ products are sourced from single suppliers, and PE Films may not be able to quickly or inexpensively re-source from other suppliers.  The risk of damage or disruption to its supply chain may increase if and when different suppliers consolidate their product portfolios, experience financial distress or disruption of manufacturing operations. Failure to take adequate steps to effectively manage such events, which are intensified when a product is procured from a single supplier or location, could adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, as well as require additional resources to restore its supply chain.
Our cost saving initiatives may not achieve the results we anticipate. PE Films has undertaken and will continue to undertake cost reduction initiatives to consolidate certain production, improve operating efficiencies and generate cost savings. PE Films cannot be certain that it will be able to complete these initiatives as planned or that the estimated operating efficiencies or cost savings from such activities will be fully realized or maintained over time. In addition, PE Films may not be successful in moving production to other facilities or timely qualifying new production equipment. Failure to complete these initiatives could adversely affect PE Films’ financial condition, results of operations and cash flows.
Flexible Packaging Films
Overcapacity in Latin American polyester film production and a history of uncertain economic conditions in Brazil could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films. Competition in Brazil, Terphane’s primary market, has been exacerbated by global overcapacity in the polyester industry generally, and by particularly acute overcapacity in Latin America. Additional PET capacity from a competitor in Latin America came on line in September 2017.  These factors, plus a recent period of unfavorable economic and political conditions in Brazil, have resulted in significant competitive pricing pressures and U.S. Dollar equivalent margin compression.
For flexible packaging films produced in Brazil, variable conversion, fixed conversion and sales, general and administrative costs for operations in Brazil have been adversely impacted by inflation in Brazil that is higher than in the U.S.  Flexible Packaging Films is exposed to additional foreign exchange translation risk because almost 90% of Flexible Packaging Films’ Brazilian sales are quoted or priced in U.S. Dollars while a large part of its Brazilian costs are quoted or priced in Brazilian Real.  This mismatch, together with a variety of economic variables impacting currency exchange rates, causes volatility that could negatively or positively impact operating profit for Flexible Packaging Films.
Tredegar has attempted to mitigate these impacts through new product offerings, cost saving measures, a currency hedge entered into in 2017, and manufacturing efficiency initiatives, but these efforts to-date have not been sufficient to prevent a significant decline in the operating profit for Flexible Packaging Films since the acquisition of Terphane in October 2011 and continuing efforts may not be successful, which could further adversely impact Flexible Packaging Films’ financial condition, results of operations and cash flows.
Governmental failure to extend anti-dumping duties in Brazil on imported products or prevent competitors from circumventing such duties could adversely impact Flexible Packaging Films. In recent years, excess global capacity in the industry has led to increased competitive pressures from imports into Brazil.  The Company believes that these conditions have shifted the competitive environment from a regional to a global landscape and have driven price convergence and lower product margins for Flexible Packaging Films. Favorable anti-dumping rulings are in effect for products imported from China, Egypt, India, Mexico, UAE and Turkey.  In January 2018, the Brazilian government opened new anti-dumping investigations for products imported from Peru and Bahrain. Competitors not currently subject to anti-dumping duties may choose to utilize their excess capacity by selling product in Brazil, which may result in pricing pressures that Flexible Packaging Films may not be able to offset with cost savings measures and/or manufacturing efficiency initiatives.  There can be no assurance that efforts to impose anti-dumping constraints on products imported to Brazil from Peru and Bahrain, or to extend duties beyond 2018 on products imported from certain other countries, will be successful.

6



Aluminum Extrusions
Sales volume and profitability of Aluminum Extrusions is cyclical and seasonal and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector. Aluminum Extrusions’ end-use markets can be cyclical and subject to seasonal swings in volume. Because of the capital intensive nature and level of fixed costs inherent in the aluminum extrusions business, the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. In addition, during an economic slowdown, excess industry capacity often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts (including a greater chance of loss associated with customers defaulting on fixed-price forward sales contracts) that usually accompany a downturn. In addition, higher energy costs can further reduce profits unless offset by price increases or cost reductions and productivity improvements.
Failure to prevent competitors from circumventing anti-dumping and countervailing duties, or a reduction in such duties, could adversely impact Aluminum Extrusions. As of April 2017, the antidumping duty and countervailing duty orders on aluminum extrusions from China will remain in place until the next five-year review of the orders. Chinese and other overseas manufacturers continue to try to circumvent the antidumping and countervailing orders to avoid duties. A failure by, or the inability of, U.S. trade officials to curtail efforts to circumvent these duties, or the potential reduction of applicable duties pursuant to annual reviews of the orders, could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.
The imposition of tariffs or duties on imported aluminum products could significantly increase the price of Aluminum Extrusions’ main raw material, which could adversely impact demand for its products. On April 27, 2017, President Trump directed the U.S. Department of Commerce (“DOC”) to begin an investigation under Section 232 of the Trade Expansion Act regarding the effects on U.S. economic and national security of aluminum imports into the U.S. On January 19, 2018, the DOC formally submitted to President Trump the results of its investigation, which included recommendations from the DOC that the President impose tariffs or quotas, or both, on imports into the U.S. of primary aluminum and semi-fabricated aluminum products. The President has 90 days to decide on any potential action based on the findings of the investigation. It is unknown at this time if the President will take any action as a result of the Section 232 investigation, and, if action is taken, what the impact of that action would be on Bonnell Aluminum. However, the President could impose tariffs or quotas on aluminum imports to the U.S. Bonnell Aluminum and other major U.S. aluminum extruders are net importers of aluminum raw materials. If high tariffs are imposed on imported aluminum ingots purchased by Bonnell, then the aggregate cost of aluminum extrusions produced by Bonnell could rise significantly. Bonnell would expect to be able to pass through the higher aluminum costs to its customers. However, a higher cost for aluminum extrusions could result in product substitutions in place of aluminum extrusions, which could materially and negatively affect Bonnell and other U.S. aluminum extrusion businesses and their results of operations. If tariffs were imposed on all primary aluminum imports into the U.S., then aluminum extruders located outside the U.S. who were not subject to similar tariffs in the country where they produced extrusions, could have a price advantage relative to U.S.-based aluminum extruders.
Competition from China could increase significantly if China is granted market economy status by the World Trade Organization. China has launched a formal complaint at the World Trade Organization challenging its non-market economy status, claiming that as of December 11, 2016, China’s transition period as a non-market economy under its Accession Protocol to the World Trade Organization ended. China believes with respect to all Chinese-made products that it should receive market economy status and the rights attendant to that status under World Trade Organization rules.  The U.S. and the European Union have each rejected that interpretation.  If China is granted market economy status, the extent to which the U.S. antidumping laws will be able to limit unfair trade practices from China will likely be limited because the U.S. government will be forced to utilize Chinese prices and costs that do not reflect market principles in antidumping duty investigations involving China, which would ultimately limit the level of antidumping duties applied to unfairly traded Chinese imports. The volume of unfairly traded imports of Chinese aluminum extrusions would likely increase as a result and this, in turn, would likely create substantial pricing pressure on Aluminum Extrusions’ products and could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.

7



The markets for Aluminum Extrusions’ products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has approximately 1,700 customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, automotive and other transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 4% of Aluminum Extrusions’ net sales. Future success and prospects depend on Aluminum Extrusions’ ability to provide superior service, high quality products, timely delivery and competitive pricing to retain existing customers and participate in overall industry cross-cycle growth. Failure in any of these areas could lead to a loss of customers, which could have an adverse material effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.
Aluminum Extrusions may not have sufficient capacity to meet its growth targets and service all of its customers. Aluminum Extrusions’ ability to grow and service existing customers is closely tied to having sufficient capacity. In recent years, increased demand, primarily from the nonresidential building and construction sector, has substantially increased Aluminum Extrusions’ average capacity utilization.
General
Tredegar has an underfunded defined benefit (pension) plan. Tredegar sponsors a pension plan that covers certain hourly and salaried employees in the U.S. The plan was substantially frozen to new participants in 2007, and frozen to benefit accruals for active participants in 2014. As of December 31, 2017, the plan was underfunded under U.S. generally accepted accounting principles (“GAAP”) measures by $91.8 million. Tredegar expects that it will be required to make a cash contribution of approximately $5.3 million to its underfunded pension plan in 2018, and may be required to make higher cash contributions in future periods depending on the level of interest rates and investment returns on plan assets.
An impairment of our identifiable intangible assets could have a material non-cash adverse impact on our results of operations. As of December 31, 2017, reporting units in PE Films and Aluminum Extrusions carried goodwill balances of $104 million and $24 million, respectively. PE Films’ goodwill balance was carried by its operating units, Personal Care Films and Surface Protection Films, at $47 million and $57 million, respectively. The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis. The valuation of goodwill depends on a variety of factors, including the success in achieving the Company’s business goals, global market and economic conditions, earnings growth and expected cash flows, and goodwill impairment valuations can be sensitive to assumptions associated with such factors. Failure to successfully achieve projections could result in future impairments. Impairments to goodwill and identifiable intangible assets may also be caused by factors outside the Company’s control, such as increasing competitive pricing pressures, changes in foreign exchange rates, lower than expected sales and profit growth rates, and various other factors. Significant and unanticipated changes could require a non-cash charge for impairment in a future period, which may significantly affect the Company’s results of operations in the period of such charge.
Noncompliance with any of the covenants in the Company’s $400 million revolving credit facility, which matures in March of 2021, could result in all debt under the agreement outstanding at such time becoming due and limiting its borrowing capacity, which could have a material adverse effect on consolidated financial condition and liquidity. The credit agreement governing Tredegar’s revolving credit facility contains restrictions and financial covenants that, if violated, could restrict the Company’s operational and financial flexibility. Failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition and liquidity.
Tredegar’s performance is influenced by costs incurred by its operating companies, including, for example, the cost of raw materials and energy. These costs include, without limitation, the cost of resin (the raw material on which PE Films primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), aluminum (the raw material on which Aluminum Extrusions primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin, aluminum and natural gas prices are extremely volatile as shown in the charts in the Quantitative and Qualitative Disclosures section. The Company attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that higher prices can effectively be passed through to customers or that Tredegar will be able to offset fully or on a timely basis the effects of higher raw material and energy costs through price increases or pass-through arrangements. Further, the Company’s cost control efforts may not be sufficient to offset any increases in raw material, energy or other costs.

8



Tredegar may not be able to successfully integrate strategic acquisitions. Acquisitions, including our recent acquisition of Futura, involve special risks, including, without limitation, meeting revenue, margin, working capital and capital expenditure expectations that substantially drive valuation, diversion of management’s time and attention from existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements.  Acquired businesses may not achieve expected results.
Tredegar is subject to various environmental laws and regulations and could become exposed to material liabilities and costs associated with such laws. The Company is subject to various environmental obligations and could become subject to additional obligations in the future. Changes in environmental laws and regulations, or their application, including, but not limited to, those relating to global climate change, could subject Tredegar to significant additional capital expenditures and operating expenses. Moreover, future developments in federal, state, local and international environmental laws and regulations are difficult to predict. Environmental laws have become and are expected to continue to become increasingly strict. As a result, Tredegar expects to be subject to new environmental laws and regulations. However, any such changes are uncertain and, therefore, it is not possible for the Company to predict with certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any such changes. See Government Regulation in “Item 1. Business” for a further discussion of this risk factor.
Material disruptions at one of the Company’s major manufacturing facilities could negatively impact financial results. Tredegar believes its facilities are operated in compliance with applicable local laws and regulations and that the Company has implemented measures to minimize the risks of disruption at its facilities. Such a disruption could be a result of any number of events, including but not limited to: an equipment failure with repairs requiring long lead times, labor stoppages or shortages, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe weather conditions. A material disruption in one of the Company’s operating locations could negatively impact production and its consolidated financial condition, results of operations and cash flows.
An information technology system failure may adversely affect the business. Tredegar relies on information technology systems to transact its business. An information technology system failure due to computer viruses, internal or external security breaches, cybersecurity attacks, power interruptions, hardware failures, fire, natural disasters, human error, or other causes could disrupt its operation and prevent it from being able to process transactions with its customers, operate its manufacturing facilities, and properly report transactions in a timely manner. A significant, protracted information technology system failure may adversely affect Tredegar’s results of operations, financial condition, or cash flows.
An inability to renegotiate the Company’s collective bargaining agreements could adversely impact its consolidated financial condition, results of operations and cash flows. Some of the Company’s employees are represented by labor unions under various collective bargaining agreements with varying durations and expiration dates. Tredegar may not be able to satisfactorily renegotiate collective bargaining agreements when they expire, which could result in strikes or work stoppages or higher labor costs. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at the Company’s facilities in the future. Any such work stoppages (or potential work stoppages) could negatively impact Tredegar’s ability to manufacture its products and adversely affect its consolidated financial condition, results of operations and cash flows.
Tredegar’s valuation of its $7.5 million cost-basis investment in kaléo is volatile and uncertain. Tredegar uses the fair value method to account for its fully-diluted ownership interest of approximately 20% in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company. There is no active secondary market for buying or selling stock in kaléo. The Company’s fair value estimates can fluctuate materially between reporting periods, primarily due to variances in its performance versus expectations. Additionally, the estimated fair value of the Company’s investment in kaléo could decline. Kaléo’s first product, an epinephrine auto-injector, was licensed to sanofi-aventis U.S. LLC (“Sanofi”) in 2009. Sanofi commenced commercial sales in the first quarter of 2013. Kaléo subsequently developed and commenced commercial sales of its second product, a naloxone auto-injector, in the third quarter of 2014. In the fourth quarter of 2015, Sanofi announced a voluntary recall of the product and subsequently returned the rights to kaléo in 2016. Kaléo relaunched the epinephrine auto-injector in the U.S. in the first quarter of 2017. See Note 4 to the Notes to Financial Statements for more information.


9



Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
General
Most of the improved real property and the other assets used in the Company’s operations are owned. Certain of the owned property is subject to an encumbrance under the Company’s revolving credit facility (see Note 11 in the Notes to Financial Statements for more information). Tredegar considers the manufacturing facilities, warehouses and other properties and assets that it owns or leases to be in generally good condition. Capacity utilization at its various manufacturing facilities can vary with product mix and normal fluctuations in sales levels. The Company believes that its PE Films manufacturing facilities have sufficient capacity to meet its current production requirements. Flexible Packaging Films is operating at capacity but has an idled line that it expects will be restarted in 2018. Bonnell Aluminum is operating at nearly full capacity utilization in its building and construction sector. Tredegar’s corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.
The Company’s principal manufacturing plants and facilities as of December 31, 2017 are listed below:
PE Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
Lake Zurich, Illinois
Durham, North Carolina (technical center and production facility) (leased)
Pottsville, Pennsylvania
Richmond, Virginia (technical center) (leased)
Terre Haute, Indiana (technical center and production facility)
  
Guangzhou, China
Kerkrade, The Netherlands
Pune, India
Rétság, Hungary
São Paulo, Brazil
Shanghai, China
  
Production of plastic films and
laminate materials
Flexible Packaging Films
Locations in the U.S.
  
Locations Outside the U.S.
  
Principal Operations
Bloomfield, New York (technical center and production facility)

  
Cabo de Santo Agostinho, Brazil
  
Production of polyester films
Aluminum Extrusions
Locations in the U.S.
  
 
  
Principal Operations
Carthage, Tennessee
Elkhart, Indiana
Newnan, Georgia
Niles, Michigan
Clearfield, Utah
  
 
  
Production of aluminum extrusions, fabrication and finishing
Item 3.
LEGAL PROCEEDINGS
None.
Item 4.
MINE SAFETY DISCLOSURES
None.

10




PART II
Item 5.
MARKET FOR TREDEGAR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices of Common Stock and Shareholder Data
Tredegar’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “TG”. There were 33,017,422 shares of common stock held by 1,951 shareholders of record on December 31, 2017.
The following table shows the reported high and low closing prices of Tredegar’s common stock by quarter for the past two years.
 
 
2017
 
2016
 
High
 
Low
 
High
 
Low
First quarter
$
25.00

 
$
16.50

 
$
16.01

 
$
11.68

Second quarter
17.65

 
14.90

 
17.37

 
14.80

Third quarter
18.35

 
14.85

 
19.39

 
16.30

Fourth quarter
20.20

 
18.20

 
25.55

 
17.30

The closing price of Tredegar’s common stock on February 16, 2018 was $16.80.
Dividend Information
Tredegar has paid a dividend every quarter since becoming a public company in July 1989. During the past three years, the Company paid quarterly dividends as follows:
11 cents per share in the last three quarters of 2015 and each of the quarters of 2016 and 2017;
9 cents per share in the first quarter of 2015.
All decisions with respect to the declaration and payment of dividends will be made by the Board of Directors in its sole discretion based upon earnings, financial condition, anticipated cash needs, restrictions in the Company’s revolving credit facility and other such considerations as the Board deems relevant. See Note 11 of the Notes to Financial Statements for the restrictions on the payment of dividends contained in the Company’s revolving credit agreement related to aggregate dividends permitted.
Issuer Purchases of Equity Securities
On January 7, 2008, Tredegar announced that its Board of Directors approved a share repurchase program whereby management is authorized at its discretion to purchase, in the open market or in privately negotiated transactions, up to 5 million shares of the Company’s outstanding common stock. The authorization has no time limit. Tredegar did not repurchase any shares in the open market or otherwise in 2017, 2016 and 2015 under this standing authorization. The maximum number of shares remaining under this standing authorization was 1,732,003 at December 31, 2017.

11



Comparative Tredegar Common Stock Performance
The following graph compares cumulative total shareholder returns for Tredegar, the S&P SmallCap 600 Stock Index (an index comprised of companies with market capitalizations similar to Tredegar) and the Russell 2000 Index for the five years ended December 31, 2017. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Tredegar Corporation, the S&P SmallCap 600 Index, and the Russell 2000 Index


chart-dfa54858494b5d8f996.jpg
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2018 Russell Investment Group. All rights reserved.




Inquiries
Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to Computershare Investor Services, the transfer agent and registrar for the Company’s common stock:
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
Phone: 800-622-6757
www.computershare.com/us/contact
All other inquiries should be directed to:
Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 855-330-1001
E-mail: invest@tredegar.com
Website: www.tredegar.com

12



Quarterly Information
Tredegar does not generate or distribute quarterly reports to its shareholders. Information on quarterly results can be obtained from the Company’s website. In addition, Tredegar files quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.gov.

13



Item 6.
SELECTED FINANCIAL DATA
The tables that follow present certain selected financial and segment information for the five years ended December 31, 2017.

FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2017
 
 
2016
 
 
2015
 
 
2014
 
 
2013
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Results of Operations (g):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
961,330

  
 
$
828,341

  
 
$
896,177

  
 
$
951,826

  
 
$
959,346

  
Other income (expense), net
51,713

(a) 
 
2,381

(b) 
 
(20,113
)
(d) 
 
(6,697
)
(e) 
 
1,776

(f) 
 
1,013,043

  
 
830,722

  
 
876,064

  
 
945,129

  
 
961,122

  
Cost of goods sold
775,628

(a) 
 
668,626

(b) 
 
725,459

(d) 
 
778,113

(e) 
 
784,675

(f) 
Freight
33,683

  
 
29,069

  
 
29,838

  
 
28,793

  
 
28,625

  
Selling, general & administrative expenses
85,501

(a) 
 
75,754

(b) 
 
71,911

(d) 
 
69,526

(e) 
 
71,195

(f)
Research and development expenses
18,287

  
 
19,122

  
 
16,173

  
 
12,147

  
 
12,669

  
Amortization of identifiable intangibles
6,198

  
 
3,978

  
 
4,073

  
 
5,395

  
 
6,744

  
Interest expense
6,170

  
 
3,806

  
 
3,502

  
 
2,713

  
 
2,870

  
Asset impairments and costs associated with exit and disposal activities
102,488

(a) 
 
2,684

(b) 
 
3,850

(d) 
 
3,026

(e) 
 
1,412

(f) 
Goodwill impairment charge

 
 

 
 
44,465

(c)
 

  
 

 
 
1,027,955

  
 
803,039

  
 
899,271

  
 
899,713

  
 
908,190

  
Income (loss) from continuing operations before income taxes
(14,912
)
  
 
27,683

  
 
(23,207
)
  
 
45,416

  
 
52,932

  
Income tax expense (benefit)
(53,163
)
(a) 
 
3,217

(b) 
 
8,928

(d) 
 
9,387

(e) 
 
16,995

(f) 
Income (loss) from continuing operations (g)
38,251

  
 
24,466

  
 
(32,135
)
  
 
36,029

 
 
35,937

  
Income (loss) from discontinued operations, net of tax (g)

 
 

 
 

 
 
850

(g) 
 
(13,990
)
(g)
Net income (loss)
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
  
 
$
36,879

 
 
$
21,947

  
Diluted earnings (loss) per share (g):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.16

  
 
$
0.75

  
 
$
(0.99
)
  
 
$
1.11

 
 
$
1.10

  
Discontinued operations

 
 

 
 

 
 
0.02

(g) 
 
(0.43
)
(g) 
Net income (loss)
$
1.16

  
 
$
0.75

  
 
$
(0.99
)
  
 
$
1.13

 
 
$
0.67

  
Refer to Notes to Financial Tables that follow these tables.

14



FIVE-YEAR SUMMARY
Tredegar Corporation and Subsidiaries
 
Years Ended December 31
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per-share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share Data:
 
 
 
 
 
 
 
 
 
 
Equity per share (l)
$
10.41

 
$
9.44

 
$
8.35

 
$
11.47

 
$
12.46

 
Cash dividends declared per share
$
0.44

 
$
0.44

 
$
0.42

 
$
0.34

 
$
0.28

 
Weighted average common shares outstanding during the period
32,946

 
32,762

 
32,578

 
32,302

 
32,172

 
Shares used to compute diluted earnings (loss) per share during the period
32,951

 
32,775

 
32,578

 
32,554

 
32,599

 
Shares outstanding at end of period
33,017

 
32,934

 
32,682

 
32,422

 
32,305

 
Closing market price per share:
 
 
 
 
 
 
 
 
 
 
High
$
25.00

 
$
25.55

 
$
23.76

 
$
28.45

 
$
30.73

 
Low
$
14.85

 
$
11.68

 
$
12.63

 
$
16.76

 
$
21.06

 
End of year
$
19.20

 
$
24.00

 
$
13.62

 
$
22.49

 
$
28.81

 
Total return to shareholders (h)
(18.2
)%
 
79.4
%
 
(37.6
)%
 
(20.8
)%
 
42.5
%
 
Financial Position:
 
 
 
 
 
 
 
 
 
 
Total assets (k)
$
755,743

 
$
651,162

 
$
623,260

 
$
788,626

 
$
793,008

 
Cash and cash equivalents
$
36,491

 
$
29,511

 
$
44,156

 
$
50,056

 
$
52,617

 
Debt
$
152,000

 
$
95,000

 
$
104,000

 
$
137,250

 
$
139,000

 
Shareholders’ equity (net book value)
$
343,780

 
$
310,783

 
$
272,748

 
$
372,029

 
$
402,664

 
Equity market capitalization (i)
$
633,935

 
$
790,411

 
$
445,131

 
$
729,173

 
$
930,711

 
Refer to Notes to Financial Tables that follow these tables.


15



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (j)
 
 
 
 
 
 
 
 
 
Years Ended December 31
2017
 
2016
 
2015
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
352,459

 
$
331,146

 
$
385,550

 
$
464,339

 
$
495,386

Flexible Packaging Films
108,355

 
108,028

 
105,332

 
114,348

 
125,853

Aluminum Extrusions
466,833

 
360,098

 
375,457

 
344,346

 
309,482

Total net sales
927,647

 
799,272

 
866,339

 
923,033

 
930,721

Add back freight
33,683

 
29,069

 
29,838

 
28,793

 
28,625

Sales as shown in Consolidated Statements of Income
$
961,330

 
$
828,341

 
$
896,177

 
$
951,826

 
$
959,346

 
 
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
 
 
 
As of December 31
2017
 
2016
 
2015
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
289,514

 
$
278,558

 
$
270,236

 
$
283,606

 
$
291,377

Flexible Packaging Films
49,915

 
156,836

 
146,253

 
262,604

 
265,496

Aluminum Extrusions
268,127

 
147,639

 
136,935

 
143,328

 
134,928

Subtotal
607,556

 
583,033

 
553,424

 
689,538

 
691,801

General corporate
111,696

 
38,618

 
25,680

 
49,032

 
48,590

Cash and cash equivalents
36,491

 
29,511

 
44,156

 
50,056

 
52,617

Total
$
755,743

 
$
651,162

 
$
623,260

 
$
788,626

 
$
793,008

Refer to Notes to Financial Tables that follow these tables.

16



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31
2017
 
 
2016
 
 
2015
 
 
2014
 
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PE Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
$
41,546

  
 
$
26,312

  
 
$
48,275

  
 
$
60,971

  
 
$
61,866

  
Plant shutdowns, asset impairments, restructurings and other
(4,905
)
(a)
 
(4,602
)
(b) 
 
(4,180
)
(d) 
 
(12,236
)
(e) 
 
(671
)
(f) 
Flexible Packaging Films:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
(2,626
)
 
 
1,774

 
 
5,453

 
 
(2,917
)
 
 
9,100

 
Plant shutdowns, asset impairments, restructurings and other
(89,398
)
(a)
 
(214
)
(b)
 
(185
)
(d) 
 
(591
)
(e) 
 

 
Goodwill impairment charge

 
 

 
 
(44,465
)
(c)
 

 
 

 
Aluminum Extrusions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ongoing operations
43,454

  
 
37,794

  
 
30,432

  
 
25,664

 
 
18,291

 
Plant shutdowns, asset impairments, restructurings and other
321

(a)
 
(741
)
(b) 
 
(708
)
(d) 
 
(976
)
(e) 
 
(2,748
)
(f) 
Total
(11,608
)
  
 
60,323

  
 
34,622

  
 
69,915

  
 
85,838

  
Interest income
209

  
 
261

  
 
294

  
 
588

  
 
594

  
Interest expense
6,170

  
 
3,806

  
 
3,502

  
 
2,713

  
 
2,870

  
Gain (loss) on investment accounted for under the fair value method
33,800

(a)
 
1,600

(b) 
 
(20,500
)
(d) 
 
2,000

(e) 
 
3,400

(f) 
Gain on sale of investment property

 
 

 
 

 
 
1,208

(e) 
 

 
Unrealized loss on investment property

 
 
1,032

(b) 
 

 
 

 
 
1,018

(e) 
Stock option-based compensation expense
264

  
 
56

  
 
483

  
 
1,272

  
 
1,155

  
Corporate expenses, net
30,879

(a)
 
29,607

(b) 
 
33,638

(d) 
 
24,310

(e) 
 
31,857

(f) 
Income (loss) from continuing operations before income taxes
(14,912
)
  
 
27,683

  
 
(23,207
)
  
 
45,416

  
 
52,932

  
Income tax expense (benefit)
(53,163
)
(a)
 
3,217

(b) 
 
8,928

(d) 
 
9,387

(e) 
 
16,995

(f) 
Income (loss) from continuing operations
38,251

  
 
24,466

  
 
(32,135
)
  
 
36,029

 
 
35,937

  
Income (loss) from discontinued operations, net of tax (g)

 
 

 
 

 
 
850

(g)
 
(13,990
)
(g) 
Net income (loss)
$
38,251

  
 
$
24,466

  
 
$
(32,135
)
  
 
$
36,879

 
 
$
21,947

  
Refer to Notes to Financial Tables that follow these tables.

17



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

Depreciation and Amortization
 
 
 
 
 
 
 
 
 
Years Ended December 31
2017
 
2016
 
2015
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
14,609

 
$
13,653

 
$
15,480

 
$
21,399

 
$
25,656

Flexible Packaging Films
10,443

 
9,505

 
9,697

 
9,331

 
9,676

Aluminum Extrusions
15,070

 
9,173

 
9,698

 
9,974

 
9,202

Subtotal
40,122

 
32,331

 
34,875

 
40,704

 
44,534

General corporate
155

 
141

 
107

 
114

 
121

Total depreciation and amortization expense
$
40,277

 
$
32,472

 
$
34,982

 
$
40,818

 
$
44,655

 
 
 
 
 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
 
 
 
 
Years Ended December 31
2017
 
2016
 
2015
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
 
PE Films
$
15,029

 
$
25,759

 
$
21,218

 
$
17,000

 
$
15,615

Flexible Packaging Films
3,619

 
3,391

 
3,489

 
21,806

 
49,252

Aluminum Extrusions
25,653

 
15,918

 
8,124

 
6,092

 
14,742

Subtotal
44,301

 
45,068

 
32,831

 
44,898

 
79,609

General corporate
61

 
389

 

 

 
52

Total capital expenditures
$
44,362

 
$
45,457

 
$
32,831

 
44,898

 
79,661

Refer to Notes to Financial Tables that follow these tables.

18



NOTES TO FINANCIAL TABLES
(a)
Plant shutdowns, asset impairments, restructurings and other charges for 2017 include: income of $11.9 million related to the settlement of an escrow arrangement (included in “Other income (expense), net” in the consolidated statements of income); charges related to the impairment of assets of Flexible Packaging in the amount of $101 million; income of $5.6 million related to the explosion that occurred in the second quarter of 2016 at Bonnell’s aluminum extrusions manufacturing facility in Newnan, Georgia, which includes the recognition of a gain of $5.3 million for a portion of the insurance recoveries received from the insurer for the replacement of capital equipment, plus the recovery of excess production costs incurred in 2016 for which recovery from insurance carriers was not previously considered to be reasonably assured, net of other nonrecoverable costs, of $0.3 million ($0.4 million benefit included in “Cost of goods sold” in the consolidated statements of income and $0.1 million charge included in “Selling, general and administrative expenses” in the consolidated statements of income); charges of $4.1 million for estimated excess costs associated with the ramp-up of new product offerings (included in “Cost of goods sold” in the consolidated statements of income); charges of $1.9 million related to expected environmental costs at certain Aluminum Extrusions manufacturing facilities (included in “Cost of goods sold” in the consolidated statements of income); charges of $3.3 million related to the acquisition of Futura Industries Corporation ($1.7 million included in “Cost of goods sold” and $1.6 million included in “Selling, general and administrative expense” in the consolidated statements of income), offset by pretax income of $0.7 million related to the fair valuation of an earnout provision (included in “Other income (expense), net” in the condensed consolidated statements of income); charges of $0.8 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes asset impairments of $0.1 million, accelerated depreciation of $0.3 million and other facility consolidation-related expenses of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income) offset by income of $0.1 million related to a reduction of severance and other employee-related accrued costs; charges of $2.4 million associated with a business development project included in “Selling, general and administrative” in the consolidated statements of income); charge of $0.7 million for severance and other employee-related costs associated with restructurings in PE Films ($0.2 million), Aluminum Extrusions ($0.1 million) and Corporate ($0.4 million); charges of $0.3 million associated with asset impairments in PE Films; charge of $0.2 million associated with the settlement of customer claims and the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. The unrealized gain of $33.8 million on the Company’s investment in kaléo is included in “Other income (expense), net” in the consolidated statements of income.
(b)
Plant shutdowns, asset impairments, restructurings and other charges for 2016 include income of $0.4 million related to the explosion that occurred in the second quarter of 2016 at Bonnell’s aluminum extrusions manufacturing facility in Newnan, Georgia, which includes the recognition of a gain of $1.9 million for a portion of the insurance recoveries approved by the insurer to begin the replacement of capital equipment, offset by the impairment of equipment damaged by the explosion of $0.3 million (net amount included in “Other income (expense), net” in the consolidated statements of income) and other costs related to the explosion that are not recoverable from insurance of $0.6 million (included in “Selling, general and administrative”) and excess production costs for which recovery from insurance is not assured of $0.6 million (included in “Cost of goods sold” in the consolidated statements of income); charges of $4.3 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes severance and other employee-related costs of $1.2 million, asset impairments of $0.4 million, accelerated depreciation of $0.6 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $2.0 million ($1.6 million is included in “Cost of goods sold” in the consolidated statements of income); charges of $0.4 million associated with a business development project included in “Selling, general and administrative” in the consolidated statements of income); charge of $0.3 million for severance and other employee-related costs associated with restructurings in PE Films ($0.1 million) and Corporate ($0.2 million); charges of $0.6 million associated with the acquisition of Futura Industries Corporation (included in “Selling, general and administrative” in the consolidated statements of income); charges of $0.5 million related to expected future environmental costs at the Company’s aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.3 million related to the settlement of a tax dispute in the Flexible Packaging Films segment (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.2 million associated with asset impairments in PE Films; gain of $0.1 million from the settlement of a Terphane pre-acquisition contingency (included in “Other income (expense), net” in the consolidated statements of income); charge of $0.1 million from the sale of the aluminum extrusions manufacturing facility in Kentland, Indiana at a pretax gain of $0.2 million, offset by pretax charges of $0.3 million associated with the shutdown of this facility. The unrealized gain of $1.6 million on the Company’s investment in kaléo is included in “Other income (expense), net” in the consolidated statements of income.
(c)
Results for 2015 included a goodwill impairment charge of $44.5 million ($44.5 million after taxes) recognized in Flexible Packaging Films in the third quarter of 2015 upon completion of an impairment analysis performed as of September 30, 2015.
(d)
Plant shutdowns, asset impairments, restructurings and other charges for 2015 include charges of $3.9 million (included in “Selling, general and administrative” in the consolidated statements of income) for severance and other employee-related costs associated with the resignation of the Company’s former chief executive and chief financial officers; charges of $2.2 million associated with the consolidation of domestic PE Films manufacturing facilities, which includes severance and other employee-related costs of $0.8 million, asset impairments of $0.4 million, accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.6 million ($0.1 million is included in “Cost of goods sold” in the consolidated statements of income); charge of $2.2 million for severance and other employee-related costs associated with restructurings in PE Films ($2.0 million) ($0.4 million included in “Selling, general and administrative expense” in the consolidated statement of income), Flexible Packaging Films ($0.2 million), Aluminum Extrusions ($35,000) and Corporate ($26,000); charges of $1.0 million associated with a non-recurring business development project (included in “Cost of goods sold” in the consolidated statements of income); charges of $0.4 million associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana; and charges of $0.3 million related to expected future environmental costs at the Company’s aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statements of income). The unrealized loss of $20.5 million on the Company’s investment in kaléo is included in “Other income (expense), net” in the consolidated statements of income.
(e)
Plant shutdowns, asset impairments, restructurings and other for 2014 include a charge of $10.0 million (included in “Other income (expense), net” in the consolidated statements of income) associated with the one-time, lump sum license payment to 3M Company (“3M”) after the Company settled all litigation issues associated with a patent infringement complaint; charges of $2.3 million for severance and other employee-related costs in connection with restructurings in PE Films ($1.7 million), Flexible Packaging Films ($0.6 million) and Aluminum Extrusions ($31,000); charges of $0.9 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income); charges of $0.7 million associated with the shutdown of the film products manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.4 million and asset impairment and other shutdown-related charges of $0.3 million; gain of $0.1 million related to the sale of previously shutdown film products manufacturing facility in LaGrange, Georgia (included in “Other income (expense), net” in the consolidated statements of income); and charges of $54,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. The unrealized gain of $2.0 million on the Company’s investment in kaléo; the unrealized loss of $0.8 million on the Company’s investment in Harbinger Capital Partners Special Situations Fund L.P. (“Harbinger”) and the gain of $1.2 million on sale on a portion the Company’s investment property in Alleghany and Bath County, Virginia in 2014 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes from continuing operations in 2014 includes the recognition of a tax benefit for a portion of the Company’s capital loss carryforwards of $4.9 million. These capital loss carryforwards were previously offset by a valuation allowance associated with expected limitations on the utilization of these assumed capital losses. As a result of changes in the underlying basis of certain foreign subsidiaries, income taxes from continuing operations in 2014 also included an adjustment of $2.2 million to reverse previously accrued deferred income tax liabilities arising from foreign currency translation adjustments.
(f)
Plant shutdowns, asset impairments, restructurings and other for 2013 include a charge of $1.7 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Newnan, Georgia (included in “Cost of goods sold” in the consolidated statement of income); charges of $0.6 million associated with the shutdown of the Company’s aluminum extrusions manufacturing facility in Kentland, Indiana; charges of $0.5 million associated with the shutdown of the film products manufacturing facility in Red Springs, North Carolina, which includes severance and other employee-related costs of $0.3 million and asset impairment charges of $0.2 million; charges of $0.4 million for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions ($0.3 million) and PE Films ($0.1 million); charges of $0.2 million for integration-related expenses and other nonrecurring transactions (included in “Selling, general and administrative expenses” in the consolidated statements of income) associated with the acquisition of AACOA, Inc. (“AACOA”) by Aluminum Extrusions; and a loss of $0.1 million related to the sale of previously impaired machinery and equipment at the Company’s film products manufacturing facility in Shanghai, China (included in “Other income (expense), net” in the consolidated statements of income). The unrealized gain of $3.4 million on the Company’s investment in kaléo, the unrealized loss of $0.4 million on the Company’s investment in Harbinger and the unrealized loss of $1.0 million on the Company’s investment property in Alleghany and Bath County, Virginia in 2013 are included in “Other income (expense), net” in the consolidated statements of income. Income taxes for 2013 include the recognition of an additional valuation allowance of $0.4 million related to the expected limitations on the utilization of assumed capital losses on certain investments.
(g)
On November 20, 2012, Tredegar sold its membership interests in Falling Springs, LLC. All historical results for this business have been reflected in discontinued operations. On February 12, 2008, Tredegar sold its aluminum extrusions business in Canada. All historical results for this business have been reflected as discontinued operations. In 2014, accruals for indemnifications under the purchase agreement were adjusted, resulting in income from discontinued operations of $0.9 million. In 2013, discontinued operations include after-tax charges of $14.0 million, to accrue for indemnifications under the purchase agreement related to environmental matters.
(h)
Total return to shareholders is defined as the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.
(i)
Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.
(j)
Net sales represent gross sales less freight. Net sales is the measure used by the chief operating decision maker of each segment for purposes of assessing performance.
(k)
Total assets in 2015, 2016 and 2017 are not comparable to prior years due to the adoption of new FASB guidance associated with the classification of deferred income tax assets and liabilities. See Note 16 to the Notes to the Financial Statements for additional details.
(l)
Equity per share is computed by dividing shareholders’ equity at year end by the shares outstanding at end of period.

19



Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking and Cautionary Statements
Some of the information contained in this Form 10-K may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When using the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, Tredegar does so to identify forward-looking statements. Such statements are based on then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is possible that actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. For risks and important factors that could cause actual results to differ from expectations, refer to the reports that Tredegar files with or furnishes the SEC from time-to-time, including the risks and important factors set forth in “Risk Factors” in Part I, Item 1A of this Form 10-K. Readers are urged to review and consider carefully the disclosures Tredegar makes in the reports Tredegar files with or furnishes to the SEC. Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law.
Executive Summary
General
Tredegar is a manufacturer of polyethylene (“PE”) plastic films, polyester films, and aluminum extrusions. Descriptions of all the Company’s businesses are provided in the Business section.
Sales were $961.3 million in 2017 compared to $828.3 million in 2016. Net income was $38.3 million ($1.16 per diluted share) in 2017, compared with $24.5 million ($0.75 per diluted share) in 2016. In addition to the results of ongoing operations, the 2017 results include:
An unrealized after-tax gain on the Company’s investment in kaléo of $24.0 million ($0.73 per share), which is accounted for under the fair value method (see Note 4 of the Notes to Financial Statements for more details);
An after-tax gain of $11.9 million ($0.36 per share) from the settlement of an escrow agreement related to the Terphane acquisition in 2011 (see Note 17 of the Notes to Financial Statements for more details);
An income tax benefit of $61.4 million ($1.86 per share) associated with the write-off of the stock basis of Terphane Limitada, Terphane’s Brazilian subsidiary, and Terphane’s U.S. subsidiary, Terphane Inc., computed at the 35% U.S. corporate federal income tax rate in effect in 2017 ($56.6 million ($1.72 per share) when reduced for the deductions applicable to the 21% U.S. corporate federal income tax rate effective in 2018 under the Tax Cuts and Jobs Act (the “TCJA”)) (see Note 17 of the Notes to Financial Statements for more details);
An income tax benefit from the adjustment of deferred income tax liabilities as a result of the reduction of U.S. federal corporate income tax rates effective in 2018 and other law changes of $4.4 million ($0.13 per share) (see Note 16 of the Notes to Financial Statements for more details); and
An after-tax write-down of the assets of Flexible Packaging Films of $87.2 million ($2.65 per share) (see Note 17 of the Notes to Financial Statements for more details).
Other losses associated with plant shutdowns, asset impairments and restructurings and gains and losses on the sale of assets, and other items are described in Note 17 of the Notes to Financial Statements. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance. See the table in Note 5 of the Notes to Financial Statements for a presentation of Tredegar’s net sales and operating profit by segment for the years ended December 31, 2017 and 2016.



20



PE Films
A summary of operating results for PE Films is provided below: 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)
138,999

 
139,020

 
 %
Net sales
$
352,459

 
$
331,146

 
6.4
 %
Operating profit from ongoing operations
$
41,546

 
$
26,312

 
57.9
 %
Net sales in 2017 increased by $21.3 million versus 2016 primarily due to:
Higher sales from surface protection films ($15.1 million), primarily due to higher volume and a favorable sales mix; and
Higher volume for acquisition distribution layer materials and overwrap products, and a favorable sales mix in personal care materials ($12.0 million), partially offset by volume reductions from the winding down of known lost business in personal care that was substantially completed by the end of 2016 ($6.2 million).
Operating profit from ongoing operations in 2017 increased by $15.2 million versus 2016 primarily due to:
Higher contribution to profits from surface protection films ($12.3 million), primarily due to higher volume, a favorable sales mix, and production efficiencies;
Higher contribution to profits from personal care materials, primarily due to improved volume, production efficiencies and favorable pricing ($7.3 million), partially offset by known lost business ($2.1 million);
A benefit for inventories accounted for under the LIFO method of $1.1 million in 2017 versus a charge of $0.9 million in 2016; and
Higher net general, selling and plant expenses ($7.3 million), primarily associated with strategic hires and an increase in employee incentive costs, partially offset by realized cost savings of $3.1 million associated with the North American facility consolidation.
The North American facility consolidation was completed in the third quarter of 2017, with expected annualized savings, excluding depreciation expense, of approximately $6 million. Total pretax cash expenditures for this multi-year project were $16.0 million, which included $11.2 million of capital expenditures.
The surface protection operating segment 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.
As previously discussed, the Company believes that over the next few years, there is an increased risk 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 on a preliminary basis that the annual adverse impact on ongoing operating profit from customer shifts to alternative processes or materials in surface protection is in the range of up to $5 to $10 million. Given the technological and commercial complexity involved in bringing these alternative processes or materials to market, the Company is very uncertain as to the timing and ultimate amount of the possible transitions. In response, the Company is aggressively pursuing new surface protection products, applications and customers.
The Company continues to anticipate a significant product transition after 2018 in the personal care operating segment of PE Films. The Company currently estimates that this will adversely impact the annual sales of the business unit by $70 million sometime between 2019 and 2021. The Company has been increasing its research and development spending (an increase of approximately $6 million in 2017 versus 2014), expects to invest 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 the capital expenditures needed to support growth during this transition period are uncertain at this time. The loss of this business without replacement with new business could trigger impairment of personal care’s long-lived assets and goodwill; see Impairment and Useful Lives of Long-lived Assets and Goodwill in the Critical Accounting Policies section for more information.

21



Restructuring
In July 2015, the Company began a consolidation of its domestic production for PE Films by restructuring the operations in its manufacturing facility in Lake Zurich, Illinois. This restructuring was completed in the third quarter of 2017, with expected annualized savings excluding depreciation expenses of $6.0 million. Total expenses associated with the restructuring were $0.8 million in 2017 (included in “Cost of goods sold” in the consolidated statements of income) and the total expenses for the project since inception were $7.3 million. Cash expenditures for the North American facility consolidation project were $1.9 million in 2017, which includes capital expenditures of $0.1 million. Total cash expenditures for the project since inception were $16.0 million, which includes $11.2 million for capital expenditures. Additional cash payments for remaining accrued costs of approximately $0.5 million are expected to be paid within the next 12 months.
Capital Expenditures and Depreciation
Capital expenditures in PE Films were $15.0 million in 2017 compared to $25.8 million in 2016. Capital expenditures are projected to be $53 million in 2018, including: North American capacity expansion for elastics products in personal care ($25 million); new capacity and upgrades for next generation products in surface protection ($9 million); other growth and strategic projects ($9 million); and approximately $10 million for routine capital expenditures required to support operations. Depreciation expense was $14.5 million in 2017 and $13.5 million in 2016. Depreciation expense is projected to be $16 million in 2018.
Flexible Packaging Films
A summary of operating results for Flexible Packaging Films is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)
89,325

 
89,706

 
(0.4
)%
Net sales
$
108,355

 
$
108,028

 
0.3
 %
Operating profit (loss) from ongoing operations
$
(2,626
)
 
$
1,774

 
n/a


Net sales and sales volume in 2017 were relatively flat compared to 2016, and adversely impacted by production issues due to intermittent power outages at Terphane’s Cabo de Santo Agostinho, Brazil plant during the third quarter.
Terphane had an operating loss from ongoing operations in 2017 of $2.6 million versus an operating profit from ongoing operations in 2016 of $1.8 million. The resulting unfavorable change of $4.4 million for the period was primarily due to:
Lower production, primarily due to numerous intermittent power outages during the third quarter ($0.5 million), and lower average sales price ($1.6 million), partially offset by a favorable sales mix ($1.5 million);
Higher raw material costs of $1.8 million in 2017 that could not be passed through to customers due to competitive pressures versus a benefit from lower raw material costs of $1.2 million in 2016;
Foreign currency transaction losses primarily associated with U.S. Dollar denominated export sales in Brazil of $0.2 million in 2017 versus foreign currency transaction losses of $3.5 million in 2016;
Higher costs and expenses of $3.2 million primarily related to the adverse impact of high inflation in Brazil and the appreciation by approximately 9% of the average exchange rate for the Brazilian Real relative to the U.S. Dollar; and
Higher depreciation and amortization costs ($0.9 million).
Terphane Asset Impairment Loss and Worthless Stock Deduction
The Company acquired Terphane in October 2011, and since that time Terphane’s selling prices, margins and overall performance have been adversely impacted by excess industry capacity, particularly in Latin America, and by a period of poor economic conditions in Brazil. Moreover, significant additional capacity came on-line late in the third quarter of 2017 from a competitor in Latin America. As a result, Terphane has struggled with profitability and incurred operating losses from ongoing operations in two of the last five years, including an operating loss of $2.6 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. Furthermore, while industry economics are suffering with excess

22



capacity, Terphane is currently operating at full capacity utilization and needs to spend approximately $1.8 million (including capital expenditures of $1 million and project expenses of $0.8 million) in 2018 to re-start an idled production line to participate in expected market growth and defend its market share.
During the fourth quarter of 2017, in conjunction with annual business planning as well as valuation activities and other efforts, the Company determined that the carrying value of Terphane’s remaining long-lived assets were impaired (Terphane’s goodwill was written off in 2015).  Accordingly, the Company wrote down these assets based on an enterprise valuation for all of Terphane of approximately $30 million. This write-down resulted in a non-cash asset impairment loss recognized during the fourth quarter of 2017 of $101 million ($87 million after non-cash tax benefits).
Also during the fourth quarter of 2017, as a result of the valuation activities referred to above, the Company claimed an ordinary loss for U.S. federal and state income tax purposes of $153 million for the write-off of the stock basis of Terphane Limitada (Terphane’s Brazilian subsidiary). The Terphane Limitada worthless stock deduction resulted in an overall reduction of Tredegar’s U.S. income tax liability of approximately $49 million. Approximately $36 million of the benefit is expected to be realized in cash in 2018 with the balance of $13 million expected to be realized in cash mostly in 2019. The full net tax benefit expected from the Terphane Limitada worthless stock deduction of $49 million was accrued during the fourth quarter of 2017 and reflected as a reduction to Tredegar’s consolidated income tax expense. During the second quarter of 2017, the Company recognized a worthless stock deduction for Terphane, Inc. (Terphane’s U.S. subsidiary), which resulted in an income tax benefit recognized of $8.1 million.
Capital Expenditures, Depreciation & Amortization
Capital expenditures in Flexible Packaging were $3.6 million in 2017 compared to $3.4 million in 2016. Capital expenditures are projected to be $5 million in 2018, including approximately $1 million to re-start the idled production line referred to above and $4 million for routine items required to support operations. Depreciation expense was $7.5 million in 2017 and $6.7 million in 2016. Depreciation expense is projected to be $1 million in 2018. Amortization expense was $3.0 million in 2017 and $2.8 million in 2016, and is projected to be $0.5 million in 2018. Depreciation and amortization expense projections for 2018 are significantly lower than 2017 actual amounts due to the write-down of Terphane’s long-lived assets during the fourth quarter of 2017.
Aluminum Extrusions
A summary of operating results for Aluminum Extrusions, including the results of Futura Industries Corporation (“Futura”) (except sales volume) since its date of acquisition, is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2017
 
2016
 
% Change
Sales volume (lbs)*
176,269

 
172,986

 
1.9
%
Net sales
$
466,833

 
$
360,098

 
29.6
%
Operating profit from ongoing operations
$
43,454

 
$
37,794

 
15.0
%
*Excludes sales volume for Futura, which was acquired on February 15, 2017.
Net sales in 2017 increased versus 2016 primarily due to the addition of Futura. Futura contributed net sales of $71.0 million in 2017. Excluding the impact of Futura, net sales improved due to higher sales volume, improved product mix, 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 2017 increased by 1.9% versus 2016. Higher volume in specialty and automotive & light truck markets were the primary drivers.
Operating profit in 2017 increased by $5.7 million versus 2016. Excluding the favorable profit impact of Futura ($8.2 million), operating profit decreased $2.5 million, primarily due to:
Higher volume and inflation-related sales prices ($7.3 million benefit);
Increased operating costs, including utilities and employee-related expenses and higher depreciation ($3.9 million);
Higher costs associated with the startup of the new press at the Niles, Michigan plant, resulting from disruptions to normal plant production ($4.3 million); and

23



A charge for inventories accounted for under the LIFO method of $1.3 million in 2017 versus a benefit of $0.5 million in 2016.
Cast House Explosion
On June 29, 2016, the Bonnell Aluminum plant in Newnan, Georgia suffered an explosion in the casting department, causing significant damage to the cast house and related equipment. The Company completed the process of replacing the damaged casting equipment, and the cast house resumed production in the third quarter of 2017. Bonnell Aluminum has various forms of insurance to cover losses associated with this type of event.
During 2017, Bonnell incurred $5.6 million of additional operational expenses as a result of the explosion; $5.5 million of this amount has been fully offset by insurance recoveries. Also, $0.6 million of additional operational expenses incurred in 2016 that were previously considered not reasonably assured of being covered by insurance recoveries were recovered. Each of these amounts is recorded in “Plant shutdowns, asset impairments, restructurings and other” in the Operating Profit table in Note 5 of the Notes to Financial Statements and in “Cost of goods sold” in the Consolidated Statements of Income. In the fourth quarter of 2017, all remaining insurance claims associated with this matter were settled, and a gain on involuntary conversion of the old cast house of $5.3 million was recorded in “Other income (expense), net” in the Consolidated Statements of Income and in “Plant shutdowns, asset impairments, restructurings and other” in the Operating Profit table in Note 5 of the Notes to Financial Statements.
Capital Expenditures and Depreciation & Amortization
Capital expenditures for Aluminum Extrusions were $25.7 million in 2017 compared to $15.9 million in 2016. Capital expenditures in 2017 included: $8 million to complete the extrusions capacity expansion project at the Niles, Michigan, manufacturing facility; expenditures to repair the damage caused by the cast house explosion net of related insurance recoveries (facility upgrades of $2 million); $5 million for routine capital expenditures required to support legacy operations; and $2 million to support the operations of Futura. Projections of capital expenditures for Bonnell Aluminum of $15 million in 2018 include approximately $7 million for infrastructure upgrades and to expand fabrication and machining capabilities, and approximately $8 million for routine items required to support operations. Depreciation expense was $11.9 million in 2017, which included $2.9 million from the addition of Futura, compared to $8.1 million in 2016, and is projected to be $13 million in 2018. Amortization expense was $3.1 million in 2017, which included $2.1 million from the addition of Futura, and $1.0 million in 2016, and is projected to be $3 million in 2018.
Futura Acquisition
On February 15, 2017, Bonnell Aluminum acquired Futura on a net debt-free basis for approximately $92 million. The amount actually funded in cash at the transaction date was approximately $87 million, which was net of preliminary closing adjustments for working capital and seller transaction-related obligations assumed and subsequently paid by Bonnell Aluminum. In addition, the Company will be refunded $5 million in the first half of 2018 since Futura did not meet certain performance requirements for the 2017 fiscal year. The acquisition, which was funded using Tredegar’s revolving credit facility, is being treated as an asset purchase for U.S. federal income tax purposes. For more information, see “Aluminum Extrusions” in the Business section.
Corporate Expenses, Interest and Income Taxes
Pension expense was $10.1 million in 2017, a favorable change of $0.8 million from 2016. Most of the impact on earnings from lower pension expense is reflected in “Corporate expenses, net” in the Operating Profit table in Note 5 of the Notes to Financial Statements. Pension expense is projected to be $10.2 million in 2018. Corporate expenses, net, for ongoing operations increased in 2017 versus 2016 primarily due to higher stock-based employee benefit costs and incentive accruals, partially offset by lower pension expense. In addition, corporate expenses included aggregate charges for business development, environmental, severance, and other special items of $3.9 million in 2017 and $1.6 million in 2016.
Interest expense increased to $6.2 million in 2017 from $3.8 million in 2016, primarily due to higher average debt levels from the acquisition of Futura. Interest expense in 2016 included the write off of $0.2 million in unamortized loan fees from the Company’s revolving credit agreement that was refinanced in the first quarter of 2016.
During 2017, the Company recognized a consolidated income tax benefit of $53.2 million based on a pretax loss of $14.9 million. During 2016, the Company recognized a consolidated income tax expense of $3.2 million based on pretax income of $27.7 million. Information on the significant differences between the effective tax rate for income and the U.S. federal statutory rate for 2017 and 2016 are further detailed in the effective income tax rate reconciliation provided in Note 16 of the Notes to Financial Statements.

24



The U.S. government enacted the TCJA in December 2017, which, among other impacts, reduces the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018. In the fourth quarter of 2017, the Company recognized a non-cash deferred income tax benefit of $4.4 million for the decrease of its net deferred income tax liabilities, resulting from the 14% tax rate reduction and other applicable tax law changes. No deemed repatriation tax was recorded on unrepatriated earnings of the Company’s foreign subsidiaries as the Company’s foreign subsidiaries have no net cumulative unremitted earnings due to historical repatriation. The Company expects that its effective tax rate for ongoing operations in 2018 will drop to 22% as a result of the TCJA, but how the TCJA will impact the overall competitive dynamics for the Company’s businesses and markets is uncertain.
Total debt was $152.0 million at December 31, 2017, compared to $95.0 million at December 31, 2016. Net debt (debt in excess of cash and cash equivalents) was $115.5 million at December 31, 2017, compared to $65.5 million at December 31, 2016. The increase in net debt during 2017 includes the acquisition of Futura on February 15, 2017. Net debt is calculated as follows:
(In millions)
 
December 31, 2017
 
December 31, 2016
Debt
 
$
152.0

 
$
95.0

Less: Cash and cash equivalents
 
36.5

 
29.5

Net debt
 
$
115.5

 
$
65.5

Net debt, a financial measure that is not calculated or presented in accordance with GAAP, is not intended to represent debt as defined by GAAP, but is utilized by management in evaluating financial leverage and equity valuation. The Company believes that investors also may find net debt helpful for the same purposes. Consolidated net capitalization and other credit measures are provided in the Financial Condition section.
Critical Accounting Policies
In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses its critical accounting policies. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.
Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill
The Company assesses its long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when the Company does not believe the carrying value of the long-lived asset(s) will be recoverable. Tredegar also reassesses the useful lives of its long-lived assets based on changes in the business and technologies.
The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). As of December 31, 2017, reporting units in PE Films and Aluminum Extrusions carried goodwill balances. Goodwill of the PE Films operating units, Personal Care and Surface Protection, in the amounts of $46.8 million and $57.3 million, respectively, was tested for impairment at the annual testing date, with the estimated fair value of these reporting units exceeding the carrying value of their net assets by approximately 15% and +100%, respectively, at December 1, 2017.
All goodwill associated with Flexible Packaging Films was impaired in the third quarter of 2015. In 2017, Flexible Packaging Films’ recorded a charge for the impairment of assets in the amount of $101 million. As part of this write-down, trade names, customer relationships and proprietary technology were impaired by $4.0 million, $9.4 million and $4.1 million, respectively, reducing their values to $2.4 million, $0.8 million and $0.4 million, respectively. The remaining part of the write-down was related to property, plant and equipment. See Terphane Asset Impairment Loss and Worthless Stock Deduction in Flexible Packaging Films in the Executive Summary section for more details.
Goodwill of the Aluminum Extrusions operating units are associated with the October 2012 acquisition of AACOA and the February 2017 acquisition of Futura. The estimated fair value of AACOA and Futura exceeded the carrying value of their net assets by approximately 61% and 42%, respectively, at December 1, 2017. Goodwill for AACOA and Futura totaled $13.7 million and $10.4 million, respectively, at December 31, 2017.

25



In assessing the recoverability of goodwill and long-lived identifiable assets, the Company primarily estimates fair value using discounted cash flow analysis and comparative enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. These calculations require management to make assumptions regarding estimated future cash flows, discount rates and other factors to determine if an impairment exists. If these estimates or their related assumptions change in the future, the Company may be required to record additional impairment charges.
In addition to the impairment of Terphane’s assets, based upon assessments performed as to the recoverability of other long-lived identifiable assets, the Company recorded an asset impairment loss for continuing operations of $1.2 million, $0.6 million and $0.2 million in 2017, 2016 and 2015, respectively.
Investment Accounted for Under the Fair Value Method
In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaléo (formerly Intelliject, Inc.), a privately held specialty pharmaceutical company. This investment is accounted for under the fair value method. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests (venture capital funds generally use the fair value method to account for their investment portfolios). At December 31, 2017, Tredegar’s ownership interest was approximately 20% on a fully diluted basis.
The Company discloses the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). On the dates of its investments, Tredegar believes that the amount it paid for its ownership interest and liquidation preferences was based on Level 2 inputs, including investments by other investors. Subsequent to the last round of financing, and until the next round of financing, the Company believes fair value estimates are based upon Level 3 inputs since there is no secondary market for Tredegar’s ownership interest. Accordingly, after the latest financing and until the next round of financing or any other significant financial transaction, fair value estimates will primarily be based on assumptions relating to meeting cash flow projections and discounting of these factors for the high degree of risk. Adjustments to the estimated fair value of this investment will be made in the period upon which such changes can be quantified.
At December 31, 2017 and 2016, the fair value of the Company’s investment in kaléo (also the carrying value, which is separately stated in the consolidated balance sheets) was estimated at $54.0 million and $20.2 million, respectively. The weighted average cost of capital used in the fair market valuation of the Company’s interest in kaléo was 45% at both December 31, 2017 and 2016. Ultimately, the true value of the Company’s ownership interest in kaléo will be determined if and when a liquidity event occurs, and the ultimate value could be materially different from the $54.0 million estimated fair value at December 31, 2017. The fair market valuation of Tredegar’s interest in kaléo is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk and wide range of possible outcomes. At December 31, 2017, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of the Company’s interest in kaléo by approximately $11 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the Company’s interest by approximately $10 million. See Note 4 of the Notes to Financial Statements for more information.
Pension Benefits
Tredegar sponsors noncontributory defined benefit (pension) plans in its continuing operations that have resulted in varying amounts of net pension income or expense, as developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income or expense recorded in future periods.
The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments determined by using the AA-rated bond yield curve. In general, the pension liability increases as the discount rate decreases and vice versa. The weighted average discount rate utilized was 3.72%, 4.29% and 4.55% at the end of 2017, 2016 and 2015, respectively, with changes between periods due to changes in market interest rates. Pay for active participants of the plan 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.

26



A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. The total return on plan assets, which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was approximately 11.6%, 7.9% and (1.8)% in 2017, 2016 and 2015, respectively. The expected long-term return on plan assets relating to continuing operations, which is estimated by asset class and generally based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums, was 6.50%, 7.00% and 7.50% in 2017, 2016 and 2015, respectively. The Company anticipates that its expected long-term return on plan assets will be 6.50% for 2018. See Note 13 of the Notes to Financial Statements for more information on expected long-term return on plan assets and asset mix.
See the Executive Summary for further discussion regarding the financial impact of the Company’s pension plans.
Income Taxes
On a quarterly basis, Tredegar reviews its judgments regarding uncertain tax positions and the likelihood that the benefits of a deferred income tax asset will be realized. As circumstances change, the Company reflects in earnings any adjustments to unrecognized benefits for uncertain tax positions and valuation allowances for deferred income tax assets.
For financial reporting purposes, unrecognized tax benefits on uncertain tax positions were $2.0 million, $3.3 million and $4.0 million as of December 31, 2017, 2016 and 2015, respectively. Tax payments resulting from the successful challenge by the taxing authority on uncertain tax positions taken by Tredegar would possibly result in the payment of interest and penalties. Accordingly, the Company also accrues for possible interest and penalties on uncertain tax positions. The balance of accrued interest and penalties on deductions taken relating to uncertain tax positions was $0.1 million, $0.1 million and $0.4 million at December 31, 2017, 2016 and 2015, respectively ($0.1 million, $0.1 million and $0.2 million, respectively, net of corresponding U.S. federal and state income tax benefits). Accruals for possible interest and penalties on uncertain tax positions are reflected in income tax expense for financial reporting purposes.
Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.
As of December 31, 2017 and 2016, valuation allowances relating to deferred income tax assets were $28.5 million and $12.7 million, respectively. For more information on deferred income tax assets and liabilities, see Note 16 of the Notes to Financial Statements.
Recently Issued Accounting Standards
Refer to the section Recently Issued Accounting Statements in Note 1 of the Notes to Financial Statements for information concerning the effect of recently issued accounting pronouncements.
Results of Continuing Operations
2017 versus 2016
Revenues. Sales in 2017 increased by 16.1% compared with 2016 due to higher sales in all segments and, in particular, from the acquisition of Futura by Aluminum Extrusions in February 2017. Net sales increased 6.4% in PE Films primarily due to increased volume and favorable sales mix for surface protection films, acquisition distribution layer materials and overwrap products. Net sales were relatively flat in Flexible Packaging Films (0.3% increase). Net sales increased 29.6% in Aluminum Extrusions primarily due to the acquisition of Futura, higher sales volume, improved product mix, and an increase in average selling prices primarily due to the pass-through to customers of higher market-driven raw material costs. For more information on changes in net sales and volume, see the Executive Summary.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of sales) was 15.8% in 2017 and 15.8% in 2016. The gross profit margin in PE Films increased due to higher revenue, as discussed above, the realized cost savings of a restructuring completed in 2017, productivity efficiencies in surface protection films and personal care, and a favorable LIFO inventory adjustment. The gross profit margin in Flexible Packaging Films decreased primarily as a result of lower production primarily due to numerous intermittent power outages at Terphane’s Cabo, Brazil plant, during the third quarter, higher raw material and other costs related to adverse impact of high inflation in Brazil, partially offset by lower foreign currency transaction losses in 2017 versus 2016. The gross profit margin in Aluminum Extrusions increased slightly due to higher sales volume and improved product mix noted above, partially offset by increased operating costs, disruptions to normal plant production associated with the startup of a new press at the Niles, Michigan plant and an unfavorable LIFO adjustment. Consolidated gross profit as a percentage of sales was positively impacted by lower

27



pension expense in 2017 compared to 2016. Most of the impact related to pension expense is not allocated to the Company’s business segments.
For more information on changes in operating costs and expenses, see the Executive Summary.
Selling, General and Administrative. As a percentage of sales, selling, general and administrative and R&D expenses were 10.8% in 2017, which decreased from 11.5% in 2016. The decrease in selling, general and administrative and R&D expenses as a percentage of sales can be primarily attributed to higher sales as a result of the acquisition of Futura.
Plant shutdowns, asset impairments, restructurings and other. Plant shutdowns, asset impairments, restructurings and other items in 2017 are shown in the segment operating profit table in Note 5 and are described in detail in Note 17 of the Notes to Financial Statements. A discussion of unrealized gains and losses on investments can also be found in Note 4 of the Notes to Financial Statements.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.2 million in 2017 and $0.3 million in 2016.
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.4 million and $0.3 million capitalized in 2017 and 2016, respectively), was $6.2 million in 2017, compared to $3.8 million for 2016. In February 2017, the Company borrowed $87 million under its revolving credit agreement to fund the acquisition of Futura. Interest expense in 2016 included the write-off of $0.2 million in unamortized loan fees from Tredegar’s revolving credit facility that was refinanced in the first quarter of 2016. Average debt outstanding and interest rates were as follows:
(In millions, except percentages)
2017
 
2016
Floating-rate debt with interest charged on a rollover
 
 
 
basis at one-month LIBOR plus a credit spread:
 
 
 
Average outstanding debt balance
$
175.0

 
$
103.5

Average interest rate
3.0
%
 
2.3
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
175.0

 
$
103.5

Average interest rate
3.0
%
 
2.3
%
Identifiable Assets. A summary of identifiable assets for the year ended December 31, 2017 versus 2016 is provided below: 
(In thousands)
Year Ended
December 31
 
 
 
2017
 
2016
 
Variance
PE Films
$
289,514

 
$
278,558

 
$
10,956

Flexible Packaging Films
49,915

 
156,836

 
(106,921
)
Aluminum Extrusions
268,127

 
147,639

 
120,488

      Subtotal
607,556

 
583,033

 
24,523

General corporate
111,696

 
38,618

 
73,078

Cash and cash equivalents
36,491

 
29,511

 
6,980

      Total
$
755,743

 
$
651,162

 
$
104,581

Identifiable assets in PE Films increased at December 31, 2017 from December 31, 2016 primarily due to higher property, plant and equipment balances as a result of higher current year capital expenditures. Identifiable assets in Flexible Packaging Films decreased at December 31, 2017 from December 31, 2016 due to the impairment of assets recognized during the fourth quarter of 2017. For more information on the impairment, see the Flexible Packaging Films section of the Executive Summary. Identifiable assets in Aluminum Extrusions increased at December 31, 2017 from December 31, 2016 primarily due to the acquisition of Futura and higher property, plant and equipment balances as a result of current year capital expenditures, higher accounts receivable balances due to the timing of collections and higher inventory balances. Identifiable assets in

28



General corporate increased at December 31, 2017 from December 31, 2016 due to an increase in income taxes recoverable and an increase in the value of the Company’s investment in kaléo.
2016 versus 2015
Revenues. Sales in 2016 decreased by 7.6% compared with 2015 due to lower sales by PE Films and Aluminum Extrusions, partially offset by higher sales by Flexible Packaging Films. Net sales decreased 14.1% in PE Films primarily due to lower volume from lost sales, product transitions and adverse market demand for certain products. Net sales increased 2.6% in Flexible Packaging Films from higher volume partially due to the increase of end-use applications for flexible packaging films in the Latin American market, partially offset by competitive pricing pressures and the pass-through to customers of lower raw material costs. Net sales decreased 4.1% in Aluminum Extrusions primarily due to a decrease in average selling prices driven mainly by lower aluminum costs, partially offset by higher sales volume in the automotive market.
Operating Costs and Expenses. Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of sales) was 15.8% in 2016 and 15.7% in 2015. The gross profit margin in PE Films decreased due to lower revenue, as discussed above, an unfavorable lag in the pass-through of average resin costs, productivity inefficiencies in surface protection films and an unfavorable LIFO inventory adjustment. The gross profit margin in Flexible Packaging Films increased primarily as a result of higher sales volume, as discussed above, operating efficiencies and lower other costs and expenses, partially offset by net refunds in 2015 of export duties paid. The gross profit margin in Aluminum Extrusions increased primarily as a result of higher volume, production efficiencies, improved management of freight logistics and lower utility costs. Consolidated gross profit as a percentage of sales was positively impacted by lower pension expenses in 2016 compared to 2015. Most of the impact related to pension expense is not allocated to the Company’s business segments.
Selling, General and Administrative. As a percentage of sales, selling, general and administrative and R&D expenses were 11.5% in 2016, which increased from 9.8% in 2015. The increase in selling, general and administrative and R&D expenses as a percentage of sales can be primarily attributed to the higher R&D expenses.
Plant shutdowns, asset impairments, restructurings and other. Plant shutdowns, asset impairments, restructurings and other items in 2016 are shown in the segment operating profit table in Note 5 and are described in detail in Note 17 of the Notes to Financial Statements. A discussion of unrealized gains and losses on investments can also be found in Note 4 of the Notes to Financial Statements.
Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $0.3 million in both 2016 and 2015.
Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.3 million and $0.4 million capitalized in 2016 and 2015, respectively), was $3.8 million in 2016, compared to $3.5 million for 2015. Interest expense in 2016 included the write-off of $0.2 million in unamortized loan fees from Tredegar’s revolving credit facility that was refinanced, in the first quarter of 2016. Average debt outstanding and interest rates were as follows:
(In millions, except percentages)
2016
 
2015
Floating-rate debt with interest charged on a rollover
 
 
 
basis at one-month LIBOR plus a credit spread:
 
 
 
Average outstanding debt balance
$
103.5

 
$
135.1

Average interest rate
2.3
%
 
2.0
%
Fixed-rate and other debt:
 
 
 
Average outstanding debt balance
$

 
$

Average interest rate
n/a

 
n/a

Total debt:
 
 
 
Average outstanding debt balance
$
103.5

 
$
135.1

Average interest rate
2.3
%
 
2.0
%
Identifiable Assets. A summary of identifiable assets for the year ended December 31, 2016 versus 2015 is provided below: 

29



(In thousands)
Year Ended
December 31
 
 
 
2016
 
2015
 
Variance
PE Films
$
278,558

 
$
270,236

 
$
8,322

Flexible Packaging Films
156,836

 
146,253

 
10,583

Aluminum Extrusions
147,639

 
136,935

 
10,704

      Subtotal
583,033

 
553,424

 
29,609

General corporate
38,618

 
25,680

 
12,938

Cash and cash equivalents
29,511

 
44,156

 
(14,645
)
      Total
$
651,162

 
$
623,260

 
$
27,902

Identifiable assets in PE Films increased at December 31, 2016 from December 31, 2015 primarily due to higher property, plant and equipment balances as a result of higher current year capital expenditures. Identifiable assets in Flexible Packaging Films increased at December 31, 2016 from December 31, 2015 primarily due to higher property, plant and equipment balances as a result of changes in the value of the U.S. Dollar relative to foreign currencies, partially offset by depreciation and amortization. Identifiable assets in Aluminum Extrusions increased at December 31, 2016 from December 31, 2015 primarily due to higher property, plant and equipment balances as a result of current year capital expenditures, higher accounts receivable balances due to the timing of collections and higher inventory balances. Identifiable assets in General Corporate increased at December 31, 2016 from December 31, 2015 due to an increase in income taxes recoverable, deferred financing fees from the refinancing of the revolving credit facility, and an increase in the value of the Company’s investment in kaléo.
Segment Analysis. A summary of operating results for 2016 versus 2015 for each of the Company’s reporting segments is shown below.
PE Films
A summary of operating results for PE Films is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2016
 
2015
 
% Change
Sales volume (pounds)
139,020

 
160,283

 
(13.3
)%
Net sales
$
331,146

 
$
385,550

 
(14.1
)%
Operating profit from ongoing operations
$
26,312

 
$
48,275

 
(45.5
)%

30



Net sales in 2016 decreased by $54.4 million versus 2015 primarily due to:
The loss of business with PE Films’ largest customer related to various products in personal care materials ($22.0 million) and other personal care materials customers ($7.6 million);
Lower volume in personal care materials primarily due to the timing of product transitions and lower customer demand ($10.8 million);
A decline in volume in surface protection films ($6.2 million) that the Company believes is primarily the result of lower consumer demand for products with flat panel display screens; and
Lower volume of low margin overwrap films ($9.1 million) primarily due to the loss of business with a large customer, partially offset by sales growth for components used in LED lighting products ($1.3 million).
Sales volume in 2016 declined in part due to the wind down of shipments for certain personal care materials related to previously announced known lost business, primarily with PE Films’ largest customer. The table below summarizes the pro forma operating profit from ongoing operations for 2016 and 2015, had the impact of the lost business been fully realized:
 
Year Ended December 31,
(In thousands)
2016
2015
Operating profit from ongoing operations, as reported
$26,312
$48,275
Contribution to operating profit from ongoing operations associated with known lost business before restructurings & fixed costs reduction
2,995

13,349

Operating profit from ongoing operations net of the impact of known business that will be fully eliminated in future periods
23,317

34,926

Estimated future benefit of North American facility consolidation
5,200

5,200

Pro forma estimated operating profit from ongoing operations
$28,517
$40,126
Net sales associated with known lost business that had not been fully eliminated were $8.9 million and $38.5 million in 2016 and 2015, respectively.
Net of the impact of known lost business, pro forma estimated operating profit from ongoing operations in 2016 decreased by $11.6 million versus 2015 primarily due to:
Lower contribution to profits from surface protection films ($5.0 million) primarily due to lower volume and productivity issues;
Lower contribution to profits in personal care materials primarily due to volume declines resulting from the timing of product transitions and lower customer demand ($3.1 million) and lower productivity ($1.8 million) due in part to operational inefficiencies largely related to elastics production for European customers sourced from the Lake Zurich, Illinois facility;
The unfavorable lag in the pass-through of average resin costs of $0.2 million in 2016 versus the favorable lag of $1.3 million in 2015;
A charge for inventories accounted for under the LIFO method of $0.9 million in 2016 versus income of $0.4 million in 2015;
Higher contribution to profits from other products in PE Films ($0.7 million); and
Higher research and development expenses to support new product opportunities ($3.0 million), offset by lower general, sales and administrative expenses ($3.6 million).
Capital Expenditures and Depreciation & Amortization
Capital expenditures in PE Films were $25.8 million in 2016 compared to $21.2 million in 2015. Depreciation expense was $13.5 million in 2016 and $15.4 million in 2015. Amortization expense was $0.1 million in 2016 and $0.1 million in 2015.

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Flexible Packaging Films
A summary of operating results for Flexible Packaging Films, which excludes the 2015 goodwill impairment charge, is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2016
 
2015
 
% Change
Sales volume (pounds)
89,706

 
82,347

 
8.9
 %
Net sales
$
108,028

 
$
105,332

 
2.6
 %
Operating profit from ongoing operations
$
1,774

 
$
5,453

 
(67.5
)%

Net sales in 2016 increased 2.6% versus 2015 primarily due to a 8.9% increase in sales volume partially offset by competitive pricing pressures and the pass-through to customers of lower raw material costs. Sales volume improved from 2015 to 2016 partially due to the increase of end-use applications for flexible packaging films in the Latin American market.
Operating profit from ongoing operations decreased by $3.7 million in 2016 versus 2015 primarily due to:
Foreign currency transaction losses of $3.5 million in 2016 versus foreign currency transaction gains of $3.5 million in 2015, associated with U.S. Dollar denominated export sales in Brazil;
Higher volume ($3.0 million) and operating efficiencies ($0.7 million);
Net refunds of $1.6 million in 2015 received as a result of the reinstatement by the U.S. of the Generalized System of Preferences (GSP) program for allowing duty-free shipments of Terphane products into the U.S. (none in 2016);
The favorable settlement of certain loss contingencies of $0.6 million in 2015 (none in 2016);
The estimated lag in the pass through of lower raw material costs of $1.2 million in 2016 versus $1.0 million in 2015; and
Lower depreciation and amortization costs ($0.2 million) and other costs and expenses ($1.4 million).
Capital Expenditures, Depreciation & Amortization and Goodwill Impairment Charge
Capital expenditures were $3.4 million in 2016 compared to $3.5 million in 2015. Depreciation expense was $6.7 million in 2016 and $6.8 million in 2015. Amortization expense was $2.8 million in 2016 and $2.9 million in 2015.
During the third quarter of 2015, the Company performed a goodwill impairment assessment related to Terphane. This review was undertaken as a result of the continued competitive pressures related to ongoing unfavorable economic conditions in Terphane’s primary market of Brazil, and excess global industry capacity. The assessment resulted in a full write-off of the goodwill of $44.5 million associated with the acquisition of Terphane.
Aluminum Extrusions
A summary of operating results for Aluminum Extrusions is provided below:
 
(In thousands, except percentages)
Year Ended
December 31
 
Favorable/
(Unfavorable)
2016
 
2015
 
% Change
Sales volume (pounds)
172,986

 
170,045

 
1.7
 %
Net sales
$
360,098

 
$
375,457

 
(4.1
)%
Operating profit from ongoing operations
$
37,794

 
$
30,432

 
24.2
 %
Net sales in 2016 decreased versus 2015 primarily due to a decrease in average selling prices, partially offset by higher sales volume. Higher sales volume, primarily in the automotive market, had a favorable impact of $4.7 million on sales in 2016 versus 2015. Lower average selling prices, which had an unfavorable impact on net sales of $20.8 million, can be primarily attributed to a decrease in average aluminum market prices.
Operating profit from ongoing operations in 2016 increased in comparison to 2015 by $7.4 million, as a result of:

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Higher volume ($0.9 million) and lower materials, supply and other net costs ($2.6 million, including $0.7 million of construction-related costs incurred in 2015 for the anodizing upgrade project); and
Improved management of freight logistics and lower utility costs ($2.2 million) and other efficiencies ($1.8 million).
Cast House Explosion
During 2016, Bonnell Aluminum recognized a gain of $1.9 million for insurance recoveries to-date associated with assets destroyed or damaged in the cast house explosion (included in “Other income (expense), net” in the Consolidated Statements of Income - see Note 17 of the Notes to Financial Statements for additional details). The Company also incurred $5.0 million of additional expenses during 2016, $4.3 million of which had been fully offset by insurance recoveries (netted in “Cost of goods sold” in the Consolidated Statements of Income and in “Plant shutdowns, asset impairments, restructurings and other” in the Operating Profit table in Note 5 of the Notes to Financial Statements). The remaining $0.7 million in 2016 of additional expenses for which recovery from insurance was not assured was included in “Cost of goods sold” in the Consolidated Statements of Income.
Capital Expenditures and Depreciation & Amortization
Capital expenditures for Aluminum Extrusions were $15.9 million in 2016 compared to $8.1 million in 2015. Capital expenditures in 2016 included approximately $5 million for routine capital expenditures required to support operations and $9 million of a total of $18 million to add extrusions capacity at the Niles, Michigan, manufacturing facility.  Depreciation expense was $8.1 million in 2016 compared to $8.7 million in 2015. Amortization expense was $1.0 million in 2016 and $1.0 million in 2015.
Financial Condition
Assets and Liabilities
Tredegar’s management continues to focus on improving working capital management. Measures such as days sales outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used by the Company to evaluate changes in working capital. Significant changes in assets and liabilities from December 31, 2016 to December 31, 2017 are summarized below:
Accounts and other receivables increased $22.7 million (23.4%).
Accounts and other receivables in PE Films increased by $2.1 million due mainly to the timing of cash receipts and collections. DSO (computed using trailing 12 months net sales and a rolling 12-month average of accounts and other receivables balances) was approximately 48.4 days in 2017 and 45.7 days in 2016.
Accounts and other receivables in Flexible Packaging Films increased by $0.3 million primarily due to the impact of the change in the value of the U.S. Dollar relative to the Brazilian real. DSO was approximately 53.2 days in 2017 and 51.8 days in 2016.
Accounts and other receivables in Aluminum Extrusions increased by $20.6 million primarily due to the acquisition of Futura in February 2017, which added $10.0 million, higher sales and the timing of cash receipts. DSO was approximately 43.3 days in 2017 and 43.3 days in 2016.
Inventories increased $20.8 million (31.5%).
Inventories in PE Films increased by $3.9 million primarily due to increased production to accommodate higher demand and the timing of raw material purchases. DIO (computed using trailing 12 months costs of goods sold calculated on a first-in, first-out basis and a rolling 12-month average of inventory balances calculated on the first-in, first-out basis) was approximately 55.0 days in 2017 and 52.2 days in 2016.
Inventories in Flexible Packaging Films increased by $1.3 million primarily due to the impact of the change in the value of the U.S. Dollar relative to the Brazilian real. DIO was approximately 70.1 days in 2017 and 77.0 days in 2016.
Inventories in Aluminum Extrusions increased by $15.6 million primarily due to the addition of balances from the acquisition of Futura, which added $9.7 million, the restart of the Newnan, Georgia cast house and the timing of purchases. DIO was approximately 32.6 days in 2017 and 26.5 days in 2016.
Net property, plant and equipment decreased $37.6 million (14.4%) due primarily to the property and equipment added from the acquisition of Futura of $32.7 million and capital expenditures of $44.4 million, more than offset by the impairment of assets at Terphane ($83.1 million) and depreciation of $34.1 million.

33



Identifiable intangible assets increased by $7.0 million (20.7%) primarily due to balances added from the acquisition of Futura of $30.7 million, partially offset by the write-down of identifiable intangibles at Terphane in the amount of $17.5 million and amortization expense of $6.2 million.
Goodwill increased by $10.4 million (8.8%) due to balances added from the acquisition of Futura.
Accounts payable increased by $27.0 million (33.3%).
Accounts payable in PE Films increased by $6.1 million primarily due to the normal volatility associated with the timing of payments at the end of the year. DPO (computed using trailing 12 months costs of goods sold calculated on a first-in, first-out basis and a rolling 12-month average of accounts payable balances) was approximately 40.6 days in 2017 and 38.5 days in 2016.
Accounts payable in Flexible Packaging Films increased by $2.5 million, due to the timing of payments and the impact of the change in the U.S. Dollar value of currencies for operations outside the U.S. DPO was approximately 42.8 days in 2017 and 39.5 days in 2016.
Accounts payable in Aluminum Extrusions increased by $18.3 million, primarily due to the addition of balances from the acquisition of Futura, which added $4.3 million, negotiation of favorable payment terms and the normal volatility associated with the timing of payments. DPO was approximately 48.0 days in 2017 and 45.4 days in 2016.
Accrued expenses increased by $3.8 million (9.8%) from December 31, 2016 due to the addition of balances from the acquisition of Futura, which added $2.1 million, higher employee benefit accruals, and higher stock-based compensation obligations.
Net noncurrent deferred income tax assets in excess of noncurrent deferred income tax liabilities increased by $35.0 million primarily due to numerous changes between years in the balance of the components shown in the December 31, 2017 and 2016 schedule of deferred income tax assets and liabilities provided in Note 16 of the Notes to Financial Statements. The Company had a current income tax receivable of $32.1 million at December 31, 2017 compared to $7.5 million at December 31, 2016. The change is primarily due to timing of tax payments and anticipated refunds of net operating losses and tax credits available for carryback to prior years.
On March 1, 2016, the Company entered into a new five-year, $400 million secured revolving credit agreement that expires on March 1, 2021 (“revolving credit agreement”). Net capitalization and indebtedness as defined under the revolving credit agreement as of December 31, 2017 were as follows: