x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Large accelerated filer | ¨ | Accelerated filer | x | Smaller reporting company | ¨ | ||
Non-accelerated filer | ¨ | Emerging growth company | ¨ |
Item 1. | Financial Statements. |
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 36,776 | $ | 36,491 | |||
Accounts and other receivables, net of allowance for doubtful accounts and sales returns of $5,764 in 2018 and $3,304 in 2017 | 125,368 | 120,135 | |||||
Income taxes recoverable | 5,886 | 32,080 | |||||
Inventories | 92,800 | 86,907 | |||||
Prepaid expenses and other | 7,754 | 8,224 | |||||
Total current assets | 268,584 | 283,837 | |||||
Property, plant and equipment, at cost | 777,834 | 770,892 | |||||
Less accumulated depreciation | (559,551 | ) | (547,801 | ) | |||
Net property, plant and equipment | 218,283 | 223,091 | |||||
Investment in kaléo (cost basis of $7,500) | 65,900 | 54,000 | |||||
Identifiable intangible assets, net | 37,142 | 40,552 | |||||
Goodwill | 81,404 | 128,208 | |||||
Deferred income taxes | 11,357 | 16,636 | |||||
Other assets | 8,266 | 9,419 | |||||
Total assets | $ | 690,936 | $ | 755,743 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 128,034 | $ | 108,391 | |||
Accrued expenses | 45,138 | 42,433 | |||||
Total current liabilities | 173,172 | 150,824 | |||||
Long-term debt | 91,000 | 152,000 | |||||
Pension and other postretirement benefit obligations, net | 89,227 | 98,837 | |||||
Deferred income taxes | — | 2,123 | |||||
Other noncurrent liabilities | 8,766 | 8,179 | |||||
Total liabilities | 362,165 | 411,963 | |||||
Commitments and contingencies (Notes 1 and 13) | |||||||
Shareholders’ equity: | |||||||
Common stock, no par value (issued and outstanding - 33,176,024 shares at September 30, 2018 and 33,017,422 shares at December 31, 2017) | 38,531 | 34,747 | |||||
Common stock held in trust for savings restoration plan (72,510 shares at September 30, 2018 and 71,309 shares at December 31, 2017) | (1,552 | ) | (1,528 | ) | |||
Accumulated other comprehensive income (loss): | |||||||
Foreign currency translation adjustment | (97,749 | ) | (86,178 | ) | |||
Gain (loss) on derivative financial instruments | (2,432 | ) | 459 | ||||
Pension and other post-retirement benefit adjustments | (83,024 | ) | (90,950 | ) | |||
Retained earnings | 474,997 | 487,230 | |||||
Total shareholders’ equity | 328,771 | 343,780 | |||||
Total liabilities and shareholders’ equity | $ | 690,936 | $ | 755,743 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues and other items: | |||||||||||||||
Sales | $ | 267,294 | $ | 247,121 | $ | 789,765 | $ | 715,494 | |||||||
Other income (expense), net | (2,557 | ) | 34 | 11,532 | 38,055 | ||||||||||
264,737 | 247,155 | 801,297 | 753,549 | ||||||||||||
Costs and expenses: | |||||||||||||||
Cost of goods sold | 217,378 | 194,508 | 631,235 | 569,555 | |||||||||||
Freight | 9,438 | 8,621 | 26,667 | 24,840 | |||||||||||
Selling, general and administrative | 20,676 | 20,718 | 63,452 | 61,852 | |||||||||||
Research and development | 5,150 | 4,455 | 14,107 | 14,028 | |||||||||||
Amortization of identifiable intangibles | 1,022 | 1,658 | 3,076 | 4,550 | |||||||||||
Pension and postretirement benefits | 2,653 | 2,381 | 7,809 | 7,645 | |||||||||||
Interest expense | 1,318 | 1,757 | 4,539 | 4,579 | |||||||||||
Asset impairments and costs associated with exit and disposal activities, net of adjustments | 1,209 | 361 | 1,799 | 653 | |||||||||||
Goodwill impairment charge | 46,792 | — | 46,792 | — | |||||||||||
Total | 305,636 | 234,459 | 799,476 | 687,702 | |||||||||||
Income (loss) before income taxes | (40,899 | ) | 12,696 | 1,821 | 65,847 | ||||||||||
Income taxes (benefit) | (6,699 | ) | 4,422 | 3,135 | 9,667 | ||||||||||
Net income (loss) | $ | (34,200 | ) | $ | 8,274 | $ | (1,314 | ) | $ | 56,180 | |||||
Earnings (loss) per share: | |||||||||||||||
Basic | $ | (1.03 | ) | $ | 0.25 | $ | (0.04 | ) | $ | 1.71 | |||||
Diluted | $ | (1.03 | ) | $ | 0.25 | $ | (0.04 | ) | $ | 1.70 | |||||
Shares used to compute earnings per share: | |||||||||||||||
Basic | 33,110 | 32,954 | 33,056 | 32,945 | |||||||||||
Diluted | 33,110 | 32,954 | 33,056 | 32,952 | |||||||||||
Dividends per share | $ | 0.11 | $ | 0.11 | $ | 0.33 | $ | 0.33 |
Three Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Net income (loss) | $ | (34,200 | ) | $ | 8,274 | ||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustment (net of tax of $0 in 2018 and tax of $251 in 2017) | (2,666 | ) | 7,143 | ||||
Derivative financial instruments adjustment (net of tax benefit of $336 in 2018 and tax of $186 in 2017) | (1,701 | ) | 326 | ||||
Amortization of prior service costs and net gains or losses (net of tax of $789 in 2018 and tax of $1,057 in 2017) | 2,703 | 1,854 | |||||
Other comprehensive income (loss) | (1,664 | ) | 9,323 | ||||
Comprehensive income (loss) | $ | (35,864 | ) | $ | 17,597 | ||
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Net income (loss) | $ | (1,314 | ) | $ | 56,180 | ||
Other comprehensive income (loss): | |||||||
Unrealized foreign currency translation adjustment (net of tax of $0 in 2018 and tax of $481 in 2017) | (11,571 | ) | 9,817 | ||||
Derivative financial instruments adjustment (net of tax benefit of $316 in 2018 and tax of $162 in 2017) | (2,891 | ) | 288 | ||||
Amortization of prior service costs and net gains or losses (net of tax of $2,312 in 2018 and tax of $3,279 in 2017) | 7,926 | 5,754 | |||||
Other comprehensive income (loss) | (6,536 | ) | 15,859 | ||||
Comprehensive income (loss) | $ | (7,850 | ) | $ | 72,039 |
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (1,314 | ) | $ | 56,180 | ||
Adjustments for noncash items: | |||||||
Depreciation | 22,272 | 25,072 | |||||
Amortization of identifiable intangibles | 3,076 | 4,550 | |||||
Goodwill impairment charge | 46,792 | — | |||||
Deferred income taxes | 1,152 | (104 | ) | ||||
Accrued pension and post-retirement benefits | 7,809 | 7,645 | |||||
(Gain)/loss on investment in kaléo accounted for under the fair value method | (11,900 | ) | (24,800 | ) | |||
(Gain)/loss on asset impairments and divestitures | 185 | 50 | |||||
Net (gain)/loss on disposal of assets | (86 | ) | 412 | ||||
Changes in assets and liabilities, net of effects of acquisitions and divestitures: | |||||||
Accounts and other receivables | (13,020 | ) | (16,925 | ) | |||
Inventories | (9,204 | ) | (4,220 | ) | |||
Income taxes recoverable/payable | 25,912 | (603 | ) | ||||
Prepaid expenses and other | (1,655 | ) | 129 | ||||
Accounts payable and accrued expenses | 29,452 | 8,674 | |||||
Pension and postretirement benefit plan contributions | (7,182 | ) | (4,642 | ) | |||
Other, net | 705 | 2,093 | |||||
Net cash provided by operating activities | 92,994 | 53,511 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (25,078 | ) | (37,245 | ) | |||
Acquisition | — | (87,110 | ) | ||||
Return of escrowed funds relating to acquisition earn-out | 4,250 | — | |||||
Proceeds from the sale of assets and other | 1,108 | 121 | |||||
Net cash used in investing activities | (19,720 | ) | (124,234 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings | 34,750 | 173,250 | |||||
Debt principal payments | (95,750 | ) | (91,250 | ) | |||
Dividends paid | (10,943 | ) | (10,901 | ) | |||
Proceeds from exercise of stock options and other | 1,004 | 695 | |||||
Net cash provided by (used in) financing activities | (70,939 | ) | 71,794 | ||||
Effect of exchange rate changes on cash | (2,050 | ) | 1,268 | ||||
Increase (decrease) in cash and cash equivalents | 285 | 2,339 | |||||
Cash and cash equivalents at beginning of period | 36,491 | 29,511 | |||||
Cash and cash equivalents at end of period | $ | 36,776 | $ | 31,850 |
Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||
Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Post-retirement Benefit Adjustment | Total Shareholders’ Equity | |||||||||||||||||||||
Balance at January 1, 2018 | $ | 34,747 | $ | 487,230 | $ | (1,528 | ) | $ | (86,178 | ) | $ | 459 | $ | (90,950 | ) | $ | 343,780 | ||||||||||
Net income | — | (1,314 | ) | — | — | — | — | (1,314 | ) | ||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||
Foreign currency translation adjustment (net of tax of $0) | — | — | — | (11,571 | ) | — | — | (11,571 | ) | ||||||||||||||||||
Derivative financial instruments adjustment (net of tax benefit of $316) | — | — | — | — | (2,891 | ) | — | (2,891 | ) | ||||||||||||||||||
Amortization of prior service costs and net gains or losses (net of tax of $2,312) | — | — | — | — | — | 7,926 | 7,926 | ||||||||||||||||||||
Cash dividends declared ($0.33 per share) | — | (10,943 | ) | — | — | — | — | (10,943 | ) | ||||||||||||||||||
Stock-based compensation expense | 2,780 | — | — | — | — | — | 2,780 | ||||||||||||||||||||
Issued upon exercise of stock options & other | 1,004 | — | — | — | — | — | 1,004 | ||||||||||||||||||||
Tredegar common stock purchased by trust for savings restoration plan | — | 24 | (24 | ) | — | — | — | — | |||||||||||||||||||
Balance at September 30, 2018 | $ | 38,531 | $ | 474,997 | $ | (1,552 | ) | $ | (97,749 | ) | $ | (2,432 | ) | $ | (83,024 | ) | $ | 328,771 |
1. | In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of September 30, 2018, the consolidated results of operations for the three and nine months ended September 30, 2018 and 2017, the consolidated cash flows for the nine months ended September 30, 2018 and 2017, and the consolidated changes in shareholders’ equity for the nine months ended September 30, 2018. All such adjustments, unless otherwise detailed in the notes to the consolidated interim financial statements, are deemed to be of a normal, recurring nature. |
September 30, | December 31, | |||||||
(In thousands) | 2018 | 2017 | ||||||
Customer receivables | $ | 125,985 | $ | 113,556 | ||||
Other accounts and notes receivable | 5,147 | 9,883 | ||||||
Total accounts and other receivables | 131,132 | 123,439 | ||||||
Less: Allowance for bad debts and sales returns | (5,764 | ) | (3,304 | ) | ||||
Total accounts and other receivables, net | $ | 125,368 | $ | 120,135 |
2. | On February 15, 2017, Bonnell Aluminum acquired 100% of the stock of Futura Industries Corporation (“Futura”) on a net debt-free basis for approximately $92 million. The amount actually funded in cash at the transaction date was approximately $87 million, which was net of preliminary closing adjustments for working capital and seller transaction-related obligations assumed and subsequently paid by Bonnell Aluminum. In addition, the Company was refunded $5 million in the first quarter of 2018 since Futura did not meet certain performance requirements for the 2017 fiscal year (“Earnout Provision”). The acquisition, which was funded using Tredegar’s existing revolving credit facility, was treated as an asset purchase for U.S. federal income tax purposes. |
(In Thousands) | |||
Accounts receivable | $ | 6,680 | |
Inventories | 10,342 | ||
Prepaid expenses and other current assets | 240 | ||
Property, plant & equipment | 32,662 | ||
Identifiable intangible assets: | |||
Customer relationships | 24,000 | ||
Trade names | 6,700 | ||
Trade payables & accrued expenses | (8,135 | ) | |
Total identifiable net assets | 72,489 | ||
Adjusted Net Purchase Price | 82,860 | ||
Goodwill | $ | 10,371 |
3. | Plant shutdowns, asset impairments, restructurings and other items are shown in the net sales and operating profit by segment table in Note 11 and are also included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted below. |
• | Pretax charges of $1.7 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related costs of $1.3 million ($0.2 million included in “Cost of goods sold” in the consolidated statements of income), and accelerated depreciation of $0.4 million (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $0.4 million for professional fees associated with the Terphane Limitada worthless stock deduction and a market study for PE Films (included in “Selling, general and administrative expenses” in the consolidated statements of income); |
• | Pretax charges of $0.2 million for severance and other employee-related costs associated with restructurings in PE Films; |
• | Pretax charges of $0.2 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $0.2 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income); and |
• | Pretax charges of $0.1 million related to wind damage that occurred in the third quarter of 2018 at the aluminum extrusions manufacturing facility in Elkhart, Indiana (included in “Selling, general and administrative expenses” in the consolidated statements of income). |
• | Pretax charges of $2.4 million associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related costs of $1.7 million, accelerated depreciation of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.2 million; |
• | Pretax charges of $1.7 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $0.7 million for professional fees associated with the Terphane Limitada worthless stock deduction, the impairment of assets of Flexible Packaging Films, determining the effect of the new U.S. federal income tax law, and a market study for PE Films (included in “Selling, general and administrative expenses” in the consolidated statements of income); |
• | Pretax charges of $0.3 million for severance and other employee-related costs associated with restructurings in PE Films; |
• | Pretax charges of $0.2 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income); and |
• | Pretax charges of $0.1 million related to wind damage that occurred in the third quarter of 2018 at the aluminum extrusions manufacturing facility in Elkhart, Indiana (included in “Selling, general and administrative expenses” in the consolidated statements of income). |
• | Pretax charges of $0.7 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films of $0.6 million and by Bonnell of $0.1 million (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $0.2 million associated with a business development project (included in “Selling, general and administrative expense” in the consolidated statements of income); |
• | Pretax charges of $0.2 million associated with the consolidation of domestic PE Films’ manufacturing facilities (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $0.2 million associated with the settlement of customer claims and other costs related to the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana; and |
• | Pretax charges of $0.1 million for severance and other employee-related costs associated with restructurings in PE Films. |
• | Pretax income of $11.9 million related to the settlement of an escrow arrangement established upon the acquisition of Terphane in 2011 (included in “Other income (expense), net” in the consolidated statements of income). In settling the escrow arrangement, the Company assumed the risk of the claims (and associated legal fees) against which the escrow previously secured the Company. While the ultimate amount of such claims is unknown, the Company believes that it is reasonably possible that it could be liable for some portion of these claims, and currently estimates the amount of such future claims at approximately $1.0 million; |
• | Pretax charges of $3.3 million related to the acquisition of Futura, i) associated with accounting adjustments of $1.7 million made to the value of inventory sold by Aluminum Extrusions after its acquisition of Futura (included in “Cost of goods sold” in the consolidated statements of income), ii) acquisition costs of $1.5 million and, iii) integration costs of $0.1 million (included in “Selling, general and administrative expenses” |
• | Pretax charges of $3.5 million related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films of $3.0 million and by Aluminum Extrusions of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax income of $0.5 million related to the explosion that occurred in the second quarter of 2016 at the aluminum extrusions manufacturing facility in Newnan, Georgia, which includes the expected recovery of excess production costs of $0.6 million incurred in 2016 for which recovery from insurance carriers was not previously considered to be reasonably assured (included in “Cost of goods sold” in the consolidated statements of income), partially offset by legal and consulting fees of $0.1 million (included in “Selling, general and administrative expenses” in the consolidated statements of income); |
• | Pretax charges of $0.8 million associated with the consolidation of domestic PE Films’ manufacturing facilities, which consists of asset impairments of $0.1 million, accelerated depreciation of $0.2 million (included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of $0.5 million (included in “Cost of goods sold” in the consolidated statements of income), offset by pretax income of $0.1 million related to a reduction of severance and other employee-related accrued costs; |
• | Pretax charges of $0.4 million related to expected future environmental costs at the aluminum extrusions manufacturing facility in Carthage, Tennessee (included in “Cost of goods sold” in the consolidated statements of income); |
• | Pretax charges of $1.1 million associated with a business development project (included in “Selling, general and administrative expense” in the consolidated statements of income); |
• | Pretax charges of $0.4 million for severance and other employee-related costs associated with restructurings in PE Films ($0.1 million) and Corporate ($0.3 million) (included in “Corporate expenses, net” in the net sales and operating profit by segment table); and |
• | Pretax charges of $0.2 million associated with the settlement of customer claims and other costs related to the previously shutdown aluminum extrusions manufacturing facility in Kentland, Indiana. |
(In thousands) | Severance (a) | Asset Impairments | Other (b) | Total | |||||||||||
Balance at January 1, 2018 | $ | 627 | $ | — | $ | 476 | $ | 1,103 | |||||||
Changes in 2018: | |||||||||||||||
Charges | 1,871 | — | 20 | 1,891 | |||||||||||
Cash spent | (933 | ) | — | (310 | ) | (1,243 | ) | ||||||||
Charges against assets | — | 92 | — | 92 | |||||||||||
Reversed to income | (92 | ) | (92 | ) | |||||||||||
Balance at September 30, 2018 | $ | 1,565 | $ | — | $ | 186 | $ | 1,751 | |||||||
(a) Severance cash spent includes severance payments associated with the consolidation of North American PE Films manufacturing facilities. (b) Other primarily includes other restructuring costs associated with Aluminum Extrusions. |
4. | The components of inventories are as follows: |
September 30, | December 31, | |||||||
(In thousands) | 2018 | 2017 | ||||||
Finished goods | $ | 24,632 | $ | 20,281 | ||||
Work-in-process | 12,046 | 11,958 | ||||||
Raw materials | 36,607 | 35,909 | ||||||
Stores, supplies and other | 19,515 | 18,759 | ||||||
Total | $ | 92,800 | $ | 86,907 |
5. | Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows: |
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||
Weighted average shares outstanding used to compute basic (loss) earnings per share | 33,110 | 32,954 | 33,056 | 32,945 | |||||||
Incremental dilutive shares attributable to stock options and restricted stock | — | — | — | 7 | |||||||
Shares used to compute diluted earnings (loss) per share | 33,110 | 32,954 | 33,056 | 32,952 |
6. | The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2018: |
(In thousands) | Foreign currency translation adjustment | Gain (loss) on derivative financial instruments | Pension and other post-retirement benefit adjustments | Total | |||||||||||
Beginning balance, January 1, 2018 | $ | (86,178 | ) | $ | 459 | $ | (90,950 | ) | $ | (176,669 | ) | ||||
Other comprehensive income (loss) before reclassifications | (11,571 | ) | (3,045 | ) | — | (14,616 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | 154 | 7,926 | 8,080 | |||||||||||
Net other comprehensive income (loss) - current period | (11,571 | ) | (2,891 | ) | 7,926 | (6,536 | ) | ||||||||
Ending balance, September 30, 2018 | $ | (97,749 | ) | $ | (2,432 | ) | $ | (83,024 | ) | $ | (183,205 | ) |
(In Thousands) | Foreign currency translation adjustment | Gain (loss) on derivative financial instruments | Pension and other post-retirement benefit adjustments | Total | |||||||||||
Beginning balance, January 1, 2017 | $ | (93,970 | ) | $ | 863 | $ | (90,127 | ) | $ | (183,234 | ) | ||||
Other comprehensive income (loss) before reclassifications | 9,817 | 817 | — | 10,634 | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | (529 | ) | 5,754 | 5,225 | ||||||||||
Net other comprehensive income (loss) - current period | 9,817 | 288 | 5,754 | 15,859 | |||||||||||
Ending balance, September 30, 2017 | $ | (84,153 | ) | $ | 1,151 | $ | (84,373 | ) | $ | (167,375 | ) |
(In Thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||
Gain (loss) on derivative financial instruments: | |||||
Aluminum future contracts, before taxes | $ | 300 | Cost of sales | ||
Foreign currency forward contracts, before taxes | (807 | ) | Selling, general & administrative | ||
Foreign currency forward contracts, before taxes | 15 | Cost of sales | |||
Total, before taxes | (492 | ) | |||
Income tax expense (benefit) | 23 | Income taxes | |||
Total, net of tax | $ | (515 | ) | ||
Amortization of pension and other post-retirement benefits: | |||||
Actuarial gain (loss) and prior service costs, before taxes | $ | (3,492 | ) | (a) | |
Income tax expense (benefit) | (789 | ) | Income taxes | ||
Total, net of tax | $ | (2,703 | ) |
(a) | This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail). |
(In thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||
Gain (loss) on derivative financial instruments: | |||||
Aluminum future contracts, before taxes | $ | 1,244 | Cost of sales | ||
Foreign currency forward contracts, before taxes | (1,226 | ) | Selling, general & administrative | ||
Foreign currency forward contracts, before taxes | 46 | Cost of sales | |||
Total, before taxes | 64 | ||||
Income tax expense (benefit) | 218 | Income taxes | |||
Total, net of tax | $ | (154 | ) | ||
Amortization of pension and other post-retirement benefits: | |||||
Actuarial gain (loss) and prior service costs, before taxes | $ | (10,238 | ) | (a) | |
Income tax expense (benefit) | (2,312 | ) | Income taxes | ||
Total, net of tax | $ | (7,926 | ) |
(a) | This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail). |
(In Thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||
Gain (loss) on derivative financial instruments: | |||||
Aluminum future contracts, before taxes | $ | 231 | Cost of sales | ||
Foreign currency forward contracts, before taxes | 15 | Cost of sales | |||
Total, before taxes | 246 | ||||
Income tax expense (benefit) | 90 | Income taxes | |||
Total, net of tax | $ | 156 | |||
Amortization of pension and other post-retirement benefits: | |||||
Actuarial gain (loss) and prior service costs, before taxes | $ | (2,911 | ) | (a) | |
Income tax expense (benefit) | (1,057 | ) | Income taxes | ||
Total, net of tax | $ | (1,854 | ) |
(a) | This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail). |
(In thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||
Gain (loss) on derivative financial instruments: | |||||
Aluminum future contracts, before taxes | $ | 785 | Cost of sales | ||
Foreign currency forward contracts, before taxes | 46 | Cost of sales | |||
Total, before taxes | 831 | ||||
Income tax expense (benefit) | 302 | Income taxes | |||
Total, net of tax | $ | 529 | |||
Amortization of pension and other post-retirement benefits: | |||||
Actuarial gain (loss) and prior service costs, before taxes | $ | (9,033 | ) | (a) | |
Income tax expense (benefit) | (3,279 | ) | Income taxes | ||
Total, net of tax | $ | (5,754 | ) |
(a) | This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail). |
7. | In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate 20% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value method. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. |
8. | Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exist as part of ongoing business operations (primarily in Flexible Packaging Films). These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability. |
September 30, 2018 | December 31, 2017 | ||||||||||
(In thousands) | Balance Sheet Account | Fair Value | Balance Sheet Account | Fair Value | |||||||
Derivatives Designated as Hedging Instruments | |||||||||||
Asset derivatives: Aluminum futures contracts | Accrued Expenses | $ | 201 | Prepaid expenses and other | $ | 578 | |||||
Liability derivatives: Aluminum futures contracts | Accrued Expenses | (994 | ) | Prepaid expenses and other | $ | (16 | ) | ||||
Net asset (liability) | $ | (793 | ) | $ | 562 |
September 30, 2018 | December 31, 2017 | ||||||||||
(In Thousands) | Balance Sheet Account | Fair Value | Balance Sheet Account | Fair Value | |||||||
Derivatives Designated as Hedging Instruments | |||||||||||
Asset derivatives: Foreign currency forward contracts | Accrued Expenses | $ | — | Accrued Expenses | $ | — | |||||
Liability derivatives: Foreign currency forward contracts | Accrued Expenses | (2,687 | ) | Accrued Expenses | (558 | ) | |||||
Net asset (liability) | $ | (2,687 | ) | $ | (558 | ) |
USD Notional Amount (000s) | Average Forward Rate Contracted on USD/BRL | R$ Equivalent Amount (000s) | Applicable Month | Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged |
$2,250 | 3.4801 | R$7,830 | Oct-18 | 78% |
$2,250 | 3.4887 | R$7,850 | Nov-18 | 81% |
$2,250 | 3.4969 | R$7,868 | Dec-18 | 83% |
$2,025 | 3.6442 | R$7,380 | Jan-19 | 73% |
$2,025 | 3.6527 | R$7,397 | Feb-19 | 75% |
$2,025 | 3.6593 | R$7,410 | Mar-19 | 70% |
$2,025 | 3.6690 | R$7,430 | Apr-19 | 72% |
$2,025 | 3.6795 | R$7,451 | May-19 | 73% |
$2,025 | 3.6904 | R$7,473 | Jun-19 | 72% |
$1,800 | 3.8826 | R$6,989 | Jul-19 | 65% |
$1,800 | 3.8950 | R$7,011 | Aug-19 | 68% |
$1,800 | 3.9070 | R$7,033 | Sep-19 | 66% |
$1,800 | 3.9203 | R$7,056 | Oct-19 | 67% |
$1,800 | 3.9331 | R$7,080 | Nov-19 | 67% |
$1,800 | 3.9455 | R$7,102 | Dec-19 | 73% |
$29,700 | 3.7158 | R$110,358 | 72% |
(In thousands) | Cash Flow Derivative Hedges | |||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||
Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||
2018 | 2017 | 2018 | 2018 | 2017 | ||||||||||||||
Amount of pretax gain (loss) recognized in other comprehensive income (loss) | $ | (1,176 | ) | $ | 757 | $ | — | $ | (1,353 | ) | $ | — | ||||||
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion) | Cost of sales | Cost of sales | Cost of sales | Selling, general & admin | Cost of sales | |||||||||||||
Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income effective portion) | $ | 300 | $ | 231 | $ | 15 | $ | (807 | ) | $ | 15 | |||||||
Nine Months Ended September 30, | ||||||||||||||||||
Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||
2018 | 2017 | 2018 | 2018 | 2017 | ||||||||||||||
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) | $ | (111 | ) | $ | 1,281 | $ | — | $ | (3,032 | ) | $ | — | ||||||
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion) | Cost of sales | Cost of sales | Cost of sales | Selling, general & admin | Cost of sales | |||||||||||||
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion) | $ | 1,244 | $ | 785 | $ | 46 | $ | (1,226 | ) | $ | 46 |
9. | The Company sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees is based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan was closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan. |
Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Service cost | $ | 7 | $ | 29 | $ | 7 | $ | 7 | |||||||
Interest cost | 2,818 | 3,103 | 65 | 73 | |||||||||||
Expected return on plan assets | (3,736 | ) | (3,743 | ) | — | — | |||||||||
Amortization of prior service costs, (gains) losses and net transition asset | 3,565 | 2,996 | (75 | ) | (84 | ) | |||||||||
Net periodic benefit cost | $ | 2,654 | $ | 2,385 | $ | (3 | ) | $ | (4 | ) | |||||
Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | 17 | $ | 145 | $ | 27 | $ | 25 | |||||||
Interest cost | 8,582 | 9,431 | 203 | 226 | |||||||||||
Expected return on plan assets | (11,258 | ) | (11,216 | ) | — | — | |||||||||
Amortization of prior service costs, (gains) losses and net transition asset | 10,421 | 9,241 | (183 | ) | (207 | ) | |||||||||
Net periodic benefit cost | $ | 7,762 | $ | 7,601 | $ | 47 | $ | 44 |
10. | Other income (expense), net consists of the following: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Gain (loss) on investment in kaléo accounted for under fair value method | $ | (2,100 | ) | $ | — | $ | 11,900 | $ | 24,800 | ||||||
Gain associated with the settlement of an escrow agreement | — | — | — | 11,856 | |||||||||||
Other | (457 | ) | 34 | (368 | ) | 1,399 | |||||||||
Total | $ | (2,557 | ) | $ | 34 | $ | 11,532 | $ | 38,055 |
11. | The Company’s business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance. |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net Sales | |||||||||||||||
PE Films | $ | 76,470 | $ | 89,723 | $ | 252,177 | $ | 265,773 | |||||||
Flexible Packaging Films | 33,725 | 26,628 | 90,466 | 79,925 | |||||||||||
Aluminum Extrusions | 147,661 | 122,149 | 420,455 | 344,956 | |||||||||||
Total net sales | 257,856 | 238,500 | 763,098 | 690,654 | |||||||||||
Add back freight | 9,438 | 8,621 | 26,667 | 24,840 | |||||||||||
Sales as shown in the Consolidated Statements of Income | $ | 267,294 | $ | 247,121 | $ | 789,765 | $ | 715,494 | |||||||
Operating Profit (Loss) | |||||||||||||||
PE Films: | |||||||||||||||
Ongoing operations | $ | 4,145 | $ | 11,251 | $ | 26,857 | $ | 30,965 | |||||||
Plant shutdowns, asset impairments, restructurings and other | (2,355 | ) | (919 | ) | (4,542 | ) | (3,890 | ) | |||||||
Goodwill impairment charge | (46,792 | ) | — | (46,792 | ) | — | |||||||||
Flexible Packaging Films: | |||||||||||||||
Ongoing operations | 3,609 | (1,074 | ) | 6,617 | (3,392 | ) | |||||||||
Plant shutdowns, asset impairments, restructurings and other | — | — | — | 11,856 | |||||||||||
Aluminum Extrusions: | |||||||||||||||
Ongoing operations | 11,730 | 12,601 | 35,086 | 34,201 | |||||||||||
Plant shutdowns, asset impairments, restructurings and other | (297 | ) | (377 | ) | (396 | ) | (3,147 | ) | |||||||
Total | (29,960 | ) | 21,482 | 16,830 | 66,593 | ||||||||||
Interest income | 6 | 42 | 290 | 171 | |||||||||||
Interest expense | 1,318 | 1,757 | 4,539 | 4,579 | |||||||||||
Gain (loss) on investment in kaléo accounted for under fair value method | (2,100 | ) | — | 11,900 | 24,800 | ||||||||||
Unrealized loss on investment property | (186 | ) | — | (186 | ) | — | |||||||||
Stock option-based compensation costs | 415 | 111 | 806 | 153 | |||||||||||
Corporate expenses, net | 6,926 | 6,960 | 21,668 | 20,985 | |||||||||||
Income (loss) before income taxes | (40,899 | ) | 12,696 | 1,821 | 65,847 | ||||||||||
Income taxes (benefit) | (6,699 | ) | 4,422 | 3,135 | 9,667 | ||||||||||
Net income (loss) | $ | (34,200 | ) | $ | 8,274 | $ | (1,314 | ) | $ | 56,180 |
(In thousands) | September 30, 2018 | December 31, 2017 | |||||
PE Films | $ | 231,106 | $ | 289,514 | |||
Flexible Packaging Films | 53,661 | 49,915 | |||||
Aluminum Extrusions | 277,810 | 268,127 | |||||
Subtotal | 562,577 | 607,556 | |||||
General corporate | 91,583 | 111,696 | |||||
Cash and cash equivalents | 36,776 | 36,491 | |||||
Total | $ | 690,936 | $ | 755,743 |
Net Sales by Geographic Area (b) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017(c) | ||||||||||||
United States | $ | 176,022 | $ | 150,154 | $ | 506,769 | $ | 434,766 | ||||||||
Exports from the United States to: | ||||||||||||||||
Asia | 14,893 | 21,507 | 57,370 | 61,394 | ||||||||||||
Canada | 13,451 | 11,253 | 40,988 | 35,855 | ||||||||||||
Europe | 1,608 | 2,193 | 5,127 | 6,826 | ||||||||||||
Latin America | 3,104 | 3,841 | 9,810 | 11,562 | ||||||||||||
Operations outside the United States: | ||||||||||||||||
Brazil | 26,591 | 22,030 | 73,402 | 64,682 | ||||||||||||
The Netherlands | 11,428 | 15,691 | 34,750 | 41,378 | ||||||||||||
Hungary | 7,987 | 6,331 | 25,324 | 17,660 | ||||||||||||
China | 2,376 | 3,061 | 6,342 | 9,176 | ||||||||||||
India | 396 | 2,439 | 3,216 | 7,355 | ||||||||||||
Total (a) | $ | 257,856 | $ | 238,500 | $ | 763,098 | $ | 690,654 |
Net Sales by Product Group | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017(c) | ||||||||
PE Films: | ||||||||||||
Personal care materials | 57,356 | 63,574 | 174,985 | 187,661 | ||||||||
Surface protection films | 17,193 | 24,368 | 71,926 | 72,805 | ||||||||
LED lighting products & other films | 1,921 | 1,781 | 5,266 | 5,307 | ||||||||
Subtotal | 76,470 | 89,723 | 252,177 | 265,773 | ||||||||
Flexible Packaging Films | 33,725 | 26,628 | 90,466 | 79,925 | ||||||||
Aluminum Extrusions: | ||||||||||||
Nonresidential building & construction | 75,870 | 63,187 | 213,500 | 177,534 | ||||||||
Consumer durables | 14,991 | 14,105 | 47,300 | 39,871 | ||||||||
Distribution | 9,148 | 7,182 | 32,109 | 23,024 | ||||||||
Automotive | 13,205 | 9,682 | 33,992 | 29,947 | ||||||||
Residential building & construction | 11,163 | 10,327 | 32,976 | 29,855 | ||||||||
Machinery & equipment | 11,191 | 8,430 | 30,335 | 23,975 | ||||||||
Electrical | 12,093 | 9,236 | 30,243 | 20,750 | ||||||||
Subtotal | 147,661 | 122,149 | 420,455 | 344,956 | ||||||||
Total (a) | 257,856 | 238,500 | 763,098 | 690,654 |
(a) | The difference between total consolidated sales as reported in the consolidated statements of income and segment, geographic and product group net sales reported in this note is freight of $9.4 million and $26.7 million in the three months and nine months ended September 30, 2018 and $8.6 million and $24.8 million in the three months and nine months ended September 30, 2017, respectively. |
(b) | Export sales relate primarily to PE Films. Operations outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia. |
(c) | As disclosed in Note 1, prior period amounts have not been adjusted under the modified retrospective method. |
12. | The Tax Cuts and Jobs Act (the “TCJA”) makes broad and complex changes to the U.S. tax code, including but not limited to: (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) creating new taxes on certain foreign earnings; (v) eliminating certain deductions; and (vi) providing the option to full expensing of qualified property. |
(In thousands, except percentages) | 2018 | 2017 | |||||||||||
Nine Months Ended September 30, | Amount | % | Amount | % | |||||||||
Income tax expense at federal statutory rate | $ | 383 | 21.0 | $ | 23,047 | 35.0 | |||||||
Goodwill impairment charge | 1,788 | 98.2 | — | — | |||||||||
Foreign rate differences | 1,159 | 63.6 | 1,022 | 1.5 | |||||||||
U.S. Tax on Foreign Branch Income | 953 | 52.3 | — | — | |||||||||
Tax contingency accruals and tax settlements | 480 | 26.4 | (284 | ) | (0.4 | ) | |||||||
Valuation allowance for capital loss carry-forwards | 245 | 13.4 | (25 | ) | — | ||||||||
Non-deductible expenses | 230 | 12.6 | 368 | 0.5 | |||||||||
Valuation allowance due to foreign losses and impairments | 185 | 10.1 | 272 | 0.4 | |||||||||
Stock-based compensation | 173 | 9.5 | 192 | 0.3 | |||||||||
State taxes, net of federal income tax benefit | 87 | 4.8 | 866 | 1.3 | |||||||||
Unremitted earnings from foreign operations | — | — | 117 | 0.2 | |||||||||
Domestic production activities deduction | — | — | (610 | ) | (0.9 | ) | |||||||
Remitted earnings from foreign operations | — | — | (413 | ) | (0.6 | ) | |||||||
Increase in value of kaléo investment held abroad | — | — | (2,326 | ) | (3.5 | ) | |||||||
Settlement of Terphane acquisition escrow | — | — | (4,200 | ) | (6.4 | ) | |||||||
Worthless stock deduction | — | — | (8,057 | ) | (12.2 | ) | |||||||
Research and development tax credit | (318 | ) | (17.4 | ) | (458 | ) | (0.7 | ) | |||||
Changes in estimates related to prior year tax provision | (414 | ) | (22.7 | ) | 156 | 0.2 | |||||||
Foreign Derived Intangible Income (FDII) | (472 | ) | (25.9 | ) | — | — | |||||||
Foreign tax incentives | (1,344 | ) | (73.8 | ) | — | — | |||||||
Effective income tax rate | $ | 3,135 | 172.1 | $ | 9,667 | 14.7 |
13. | In 2011, Tredegar was notified by U.S. Customs and Border Protection (“U.S. Customs”) that certain film products exported by Terphane Ltda. to the U.S. since November 6, 2008 could be subject to duties associated with an anti-dumping duty order on imported PET films from Brazil. The Company contested the applicability of these anti-dumping duties to the films exported by Terphane Ltda., and it filed a request with the U.S. Department of Commerce (“Commerce”) for clarification about whether the film products at issue are within the scope of the anti-dumping duty order. In December 2014, the U.S. International Trade Commission separately voted to revoke the anti-dumping duty order on imported PET films from Brazil. On February 20, 2015, certain U.S. producers of PET films filed a summons with the U.S. Court of International Trade to appeal the determination by the U.S. International Trade Commission. After lengthy litigation, on June 19, 2018, the U.S. Court of International Trade ruled in favor of Terphane Ltda. by upholding the determination by Commerce that Terphane Ltda.’s films are outside the scope of the anti-dumping duty order. The plaintiffs chose not to appeal the U.S. Court of International Trade’s opinion affirming Commerce’s scope ruling. On September 4, 2018, the plaintiffs filed to dismiss their appeal of the December 2014 decision that revoked the anti-dumping duty order on PET films from Brazil. The U.S. Court of International Trade issued an Order of Dismissal on September 5, 2018. The litigation has now ended. |
14. | In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) issued their converged standard on revenue recognition. The revised revenue standard contains principles that an entity will apply to direct the measurement of revenue and timing of when it is recognized. The core principle of the guidance is that the recognition of revenue should depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity will utilize a principle-based five-step approach model. The converged standard also includes more robust disclosure requirements which will require entities to provide sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, amended guidance was issued regarding clarifying the implementation guidance on principal versus agent considerations and in April 2016, clarifying guidance was issued relating to identifying performance obligations and licensing implementation. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach applied to all contracts as of the date of adoption. Comparative periods have not been adjusted and continue to be reported under the accounting standards in effect for those periods. The adoption of ASU 2014-09, as amended, had no material impact on the Company’s consolidated financial position, results of operations, equity or cash flows upon adoption. The Company has included the disclosures required by ASU 2014-09. |
15. | The Company assesses goodwill for impairment on an annual basis at a minimum (December 1st of each year) or when events or circumstances indicate that the carrying value may not be recoverable. Goodwill is assessed for impairment at the reporting unit level. Tredegar’s reporting units with goodwill are the Personal Care and Surface Protection operating divisions of PE Films and the AACOA and Futura operating divisions of Aluminum Extrusions. The Company estimates the fair value of its reporting units using discounted cash flow analysis and comparative enterprise value-to-EBITDA multiples. |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
• | loss or gain of sales to significant customers on which our business is highly dependent; |
• | ability to achieve sales to new customers to replace lost business; |
• | ability to develop, efficiently manufacture and deliver new products at competitive prices; |
• | failure of our customers to achieve success or maintain market share; |
• | failure to protect our intellectual property rights; |
• | risks of doing business in countries outside the U.S. that affect our substantial international operations; |
• | political, economic, and regulatory factors concerning our products; |
• | uncertain economic conditions in countries in which we do business; |
• | competition from other manufacturers, including manufacturers in lower-cost countries and manufacturers benefiting from government subsidies; |
• | impact of fluctuations in foreign exchange rates; |
• | a change in the amount of our underfunded defined benefit (pension) plan liability; |
• | an increase in the operating costs incurred by our operating companies, including, for example, the cost of raw materials and energy; |
• | inability to successfully identify, complete or integrate strategic acquisitions; failure to realize the expected benefits of such acquisitions; and assumption of unanticipated risks in such acquisitions; |
• | disruption to our manufacturing facilities; |
• | occurrence or threat of extraordinary events, including natural disasters and terrorist attacks; |
• | an information technology system failure or breach; |
• | volatility and uncertainty of the valuation of our cost-basis investment in kaléo; |
• | the impact of the imposition of tariffs and sanctions on imported aluminum ingot used in our aluminum extrusions; |
• | the impact of new tariffs or duties imposed as a result of rising trade tensions between the U.S. and other countries; |
• | failure to establish and maintain effective internal control over financial reporting; |
• | An impairment of the total goodwill balance of PE Films’ Personal Care division was recorded in the after-tax amount of $38.2 million ($1.15 per share after-tax). See the Customer Product Transitions in Personal Care and Surface Protection section below and Note 15 for more details; and |
• | An unrealized after-tax loss on the Company’s investment in Kaleo, Inc. (“kaléo”) of $1.6 million ($0.05 per share), which is accounted for under the fair value method (see Note 7 for more details). |
Three Months Ended | Favorable/ (Unfavorable) % Change | Nine Months Ended | Favorable/ (Unfavorable) % Change | ||||||||||||||||||
(In thousands, Except Percentages) | September 30, | September 30, | |||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Sales volume (lbs) | 29,597 | 34,701 | (14.7 | )% | 94,519 | 103,923 | (9.0 | )% | |||||||||||||
Net sales | $ | 76,470 | $ | 89,723 | (14.8 | )% | $ | 252,177 | $ | 265,773 | (5.1 | )% | |||||||||
Operating profit from ongoing operations | $ | 4,145 | $ | 11,251 | (63.2 | )% | $ | 26,857 | $ | 30,965 | (13.3 | )% |
• | Lower contribution to profits from surface protection films, primarily due to lower net sales as noted above ($1.9 million, of which $0.3 million, the Company estimates, is related to customer product transitions), a sales return reserve for a quality claim ($2.4 million) and related higher production costs ($0.9 million), higher freight costs ($0.5 million) and higher research and development spending ($0.6 million); |
• | Lower contribution to profits from personal care films, primarily due to lower volume as noted above, net of a favorable product mix ($2.2 million), partially offset by improved pricing on certain products ($0.7 million), and net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($0.1 million); and |
• | Realized cost savings associated with the North American consolidation of our PE Films manufacturing facilities completed in 2017 ($0.5 million). |
• | Lower contribution to profits from surface protection films, primarily due to reserves for sales returns for quality claims ($3.6 million) and related higher production costs ($0.8 million), an inventory write-down and higher fixed |
• | Lower contribution to profits from personal care films, primarily due to lower volume in topsheet and other products ($5.6 million), partially offset by improved pricing on certain products ($2.0 million), net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($1.0 million) and lower fixed and sales, general and administrative costs ($0.3 million); and |
• | Realized cost savings associated with the previously announced project to consolidate domestic manufacturing facilities in PE Films ($2.3 million). |