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| TG > SEC Filings for TG > Form 10-K on 6-Mar-2009 | All Recent SEC Filings |
6-Mar-2009
Annual Report
From time to time, we may make statements that may constitute "forward-looking statements" within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Some of the risk factors that may cause such a difference are summarized on pages 4-6 and are incorporated herein.
General
Tredegar is a manufacturer of plastic films and aluminum extrusions. Descriptions of our businesses are provided on pages 1-6.
Income from continuing operations was $29.6 million (87 cents per diluted share) in 2008 compared with $34.9 million (90 cents per diluted share) in 2007. Gains on the sale of assets, investment write-downs or write-ups and other items and losses related to plant shutdowns, assets impairments and restructurings are described in results of operations beginning on page 22. The business segment review begins on page 33.
Film Products
In Film Products, net sales were $522.8 million in 2008, down 1.5% versus $531.0 million in 2007. Operating profit from ongoing operations was $53.9 million in 2008, down 9.3% compared with $59.4 million in 2007. Volume decreased to 221.2 million pounds in 2008 from 244.3 million pounds in 2007. The volume decline was primarily due to competitive pressures in most product segments, most notably the personal care and surface protection markets. Net sales declined compared to last year due to lower volume, partially offset by higher selling prices from the pass-through of increased resin costs. A significant portion of the substantially lower resin costs realized in the fourth quarter of 2008 will not be passed through to customers via lower selling prices until the first quarter of 2009.
Operating profit from ongoing operations in Film Products decreased in 2008 versus 2007 due primarily to lower volume, partially offset by cost reduction efforts and the benefit from appreciation of the U.S. dollar value of currencies for operations outside of the U.S. (benefit from currency rate changes was approximately $3.6 million). Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days. The estimated unfavorable impact of the lag in the pass-through of changes in average resin costs and year-end adjustments for inventories accounted for under the last-in first-out method ("LIFO") was $600,000 and $2.5 million for 2008 and 2007, respectively.
Volume and operating profits in films are expected to continue to be adversely impacted by competitive pressures and the global economic downturn. More than ever, we are focused on reducing costs and managing the business under significantly greater economic uncertainty.
Capital expenditures in Film Products were $11.1 million in 2008, down from $15.3 million in 2007, and are projected to be approximately $22 million in 2009. Depreciation expense was $34.5 million in 2008, up from $33.9 million in 2007, and is projected to be approximately $32 million in 2009.
Aluminum Extrusions
Net sales from continuing operations in Aluminum Extrusions were $340.3 million in 2008, down 8.5% from $371.8 million in 2007. Operating profit from ongoing U.S. operations decreased to $10.1 million in 2008, down 38.7% from $16.5 million in 2007. Volume from continuing operations was 136.2 million pounds in 2008, down 12.6% from 155.8 million pounds in 2007.
The decrease in net sales was mainly due to lower volume. Shipments declined in most markets. Shipments in non-residential construction, which comprised 72% of total volume in 2008, declined by approximately 2.7% in 2008 compared with 2007. Operating profit from ongoing U.S. operations declined in 2008 compared with last year mainly due to lower volume. Overall backlog for continuing operations in Aluminum Extrusions at December 31, 2008 was down by approximately 47% compared with December 31, 2007. We continue to be very focused on reducing costs in light of anticipated further declines in volume based on current market conditions.
Capital expenditures for continuing operations in Aluminum Extrusions were $9.7 million in 2008, a $5.3 million increase from $4.4 million in 2007, and are projected to be approximately $24 million in 2009. In January 2008, we announced plans to spend approximately $24 million over the following 18 months to expand the capacity at our plant in Carthage, Tennessee. This project, which accounted for $5.7 million of capital expenditures in 2008, will increase our capabilities in the non-residential construction sector. Depreciation expense for continuing operations was $8.0 million in 2008, a decrease of 5.4% from $8.5 million in 2007, and is projected to be $8.6 million in 2009.
On February 12, 2008, we sold our aluminum extrusions business in Canada for approximately $25 million to an affiliate of H.I.G. Capital. We realized cash income tax benefits in 2008 from the sale of approximately $12 million. All historical results for this business have been reflected as discontinued operations.
Other Developments
Net pension income from continuing operations was $4.9 million in 2008, a favorable change of $2.1 million (4 cents per share after taxes) from amounts recognized in 2007. Most of the favorable changes relate to a pension plan that is reflected in "Corporate expenses, net" in the operating profit by segment table presented on page 14. We contributed approximately $122,000 to our pension plans for continuing operations in 2008.
At December 31, 2008, the fair value of the assets of our pension plans was estimated at $194.5 million, down from $284.1 million at December 31, 2007. The significant decline was mainly due to the drop in global stock prices and benefit payments to retirees of approximately $10.2 million in 2008. The projected benefit obligation at December 31, 2008 is approximately $211.7 million at a discount rate of 6.5%. The minimum required contribution to our pension plans in 2009 is estimated at $4.4 million, and net pension income in 2009 is estimated at $3.2 million.
Interest expense was $2.4 million in 2008, a $328,000 decline versus 2007 as higher average debt levels during the year were offset by lower average interest.
The effective tax rate used to compute income taxes from continuing operations was 39.7 % in 2008 compared with 41.1% in 2007. The decrease in the effective tax rate for continuing operations for 2008 versus 2007, which had a favorable impact of 2 cents per share, was due to numerous factors as shown in the effective income tax rate reconciliation provided in Note 14 on page 66.
On April 2, 2007, we invested $10 million in Harbinger Capital Partners Special Situations Fund, L.P. ("Harbinger"), a fund that seeks to achieve superior absolute returns by participating primarily in medium to long-term investments involving distressed/high yield debt securities, special situation equities and private loans and notes. The fund is a highly speculative investment and subject to limitations on withdrawal. There is no secondary market for interests in the fund. Our investment in Harbinger, which represents less than 2% of Harbinger's total partnership capital, is accounted for under the cost method. At December 31, 2008, Harbinger reported our capital account value at $10.1 million versus the carrying value of $10 million (included in "Other assets and deferred charges" in our consolidated balance sheet).
See discussion of investment accounted for under the fair value method on page 20.
During 2008 and 2007, we invested $4.3 million and $6.2 million, respectively, in real estate. At December 31, 2008 and 2007, the carrying value of investments in this real estate equaled the amounts invested (included in "Other assets and deferred charges" in our consolidated balance sheet).
In 2008 we repurchased 1.1 million shares of our stock under a standing authorization from our board of directors at an average price of $14.88 per share. Due to strong cash flows from operations and proceeds received from the sales of the aluminum extrusions business in Canada, our net debt (total debt of $82.0 million less cash and cash equivalents of $48.2 million) of $33.8 million at December 31, 2007 improved to net cash (cash and cash equivalents of $46.0 million in excess of total debt of $22.7 million) of $23.3 million at December 31, 2008 (net debt or cash is not intended to represent debt or cash as defined by generally accepted accounting principles, but is utilized by management in evaluating financial leverage and equity valuation and we believe that investors also may find net debt or cash helpful for the same purposes). Consolidated net capitalization and other credit measures are provided in the financial condition section beginning on page 25.
In the ordinary course of business, we make 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 generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our 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
We regularly assess our 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 we do not believe the carrying value of the long-lived asset will be recoverable. We also reassess the useful lives of our long-lived assets based on changes in our business and technologies.
We assess 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). Our reporting units include Film Products and Aluminum Extrusions, each of which may have separately identifiable operating net assets (operating assets including goodwill and intangible assets net of operating liabilities). As of December 1 and December 31, 2008, the estimated fair value of our reporting units exceeded the carrying value of their respective net assets. We estimate the fair value using discounted cash flow analysis and comparative enterprise value-to-EBITDA multiples. The estimated fair value of Film Products exceeded the carrying value of its net assets by a wide margin. In Aluminum Extrusions, the excess of its fair value over carrying value of related net assets was approximately 12% at December 31, 2008. Estimated fair values and carrying values change as business conditions change, and the relatively low margin by which the estimated fair value of Aluminum Extrusions exceeded its carrying value results in a reasonably possible chance that a goodwill impairment under U.S. generally accepted accounting principles will be triggered in the future. As of December 31, 2008, we estimate that if the estimated fair value of Aluminum Extrusions were only $1 below the carrying value of its net assets, that the amount of the goodwill impairment under U.S. generally accepted accounting principles would have been an anomalous write-off of the entire amount of $30.6 million (also $30.6 million after taxes since there would be no income tax benefits related to the write-off).
In assessing the recoverability of long-lived identifiable assets and goodwill, we must make assumptions regarding estimated future cash flows, discount rates and other factors to determine if impairment tests are met or the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges. Based upon assessments performed, we recorded asset impairment losses for continuing operations related to long-lived identifiable assets of $8.6 million in 2008, $594,000 in 2007 and $1.2 million in 2006. For asset impairments relating to discontinued operations, see Note 17 to the notes to financial statements.
Investment Accounted for Under the Fair Value Method
On August 31, 2007, we invested $6.5 million in a privately held drug delivery that is developing and commercializing state of the art drug delivery systems designed to improve patient compliance and outcomes. On December 15, 2008, we invested an additional $1.0 million as part of a new round of equity financing completed by the investee. This investment is accounted for under the fair value method. We elected the fair value option over the equity method of accounting since our investment objectives are similar to those of venture capitalists, which typically do not have controlling financial interests (venture capital funds use the fair value method to account for their investment portfolios). At December 31, 2008, our ownership interest was approximately 21% on a fully diluted basis. In connection with the new round of equity financing in the fourth quarter of 2008, we recognized an unrealized gain of $5.6 million for the write-up of this investment based upon the implied valuation of our ownership interest. At December 31, 2008 and 2007, the fair value of our investment (the carrying value included in "Other assets and deferred charges" in our consolidated balance sheet) was $13.1 million and $6.5 million, respectively.
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, requires disclosure of 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 our investments (August 31, 2007 and December 15, 2008), we believe that the amount we paid for our 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, we believe fair value estimates drop to Level 3 inputs since there is no secondary market for our ownership interest. In addition, the company currently has no product sales. Accordingly, after the latest financing and until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. As a result, an increase in our estimate of the fair value of our ownership interest is unlikely unless a significant new round of financing, merger or initial public offering indicates a higher value. However, if the company does not meet its development and commercialization milestones and there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus plans as of December 15, 2008, or another new round of financing or other significant financial transaction indicates a lower value, then our estimate of the fair value of our ownership interest in the company is likely to decline.
Pension Benefits
We have noncontributory defined benefit (pension) plans in our continuing operations that have significant net pension income 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. We are 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 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, our liability increases as the discount rate decreases and vice versa. Our weighted average discount rate for continuing operations was 6.5% at the end of 2008, 6.25% at the end of 2007 and 5.75% at the end of 2006, with changes between periods due to changes in market interest rates. The compensation increase assumption affects the estimate of future payments, and was 4% at the end of 2007 and 2006 (not applicable in 2008). Based on plan changes announced in 2006, pay for active participants of the plan was frozen as of December 31, 2007. 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 value of our plan assets relating to continuing operations decreased $89.6 million, or 31.5%, in 2008 primarily due to the drop in global stock prices. Between 2003 and 2007, the value of our plan assets relating to continuing operations increased due to improved general market conditions after declining from 2000 to 2002. Our expected long-term return on plan assets relating to continuing operations, which is primarily based on estimated market and economic
conditions as well as asset mix, was 8.5% from 2004 to 2007, 8.75% in 2003 and 9% in 2002 and prior years. Our expected long-term return on plan assets was lowered to 8.25% for fiscal year 2009. See page 64 for more information on expected long-term return on plan assets and asset mix.
See the executive summary beginning on page 17 for further discussion regarding the financial impact of our pension plans.
Income Taxes
On a quarterly basis, we review our judgments regarding uncertain tax positions and the likelihood that the benefits of a deferred tax asset will be realized. As circumstances change, we reflect in earnings any adjustments to unrecognized benefits for uncertain tax positions and valuation allowances for deferred tax assets.
For financial reporting purposes, we had unrecognized tax benefits on uncertain tax positions of $2.6 million and $3.3 million as of December 31, 2008 and 2007, respectively. Included in the 2008 and 2007 amounts were $1.8 million and $2.3 million, respectively, for tax positions for which ultimate deductibility is highly certain but for which the timing of deductibility is uncertain. Because of the impact of deferred income tax accounting, other than interest, penalties and deductions not related to timing, a longer deductibility period would not affect the total income tax expense or the annual effective tax rate shown for financial reporting purposes, but would accelerate payments to the taxing authority. Tax payments resulting from the successful challenge by the taxing authority for accelerated deductions taken by us would possibly result in the payment of interest and penalties. Accordingly, we also accrue 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 approximately $1.3 million and $1.2 million at December 31, 2008 and 2007, respectively ($827,000 and $759,000, respectively, net of corresponding 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.
We anticipate that by December 31, 2009, we will settle several disputed issues raised by the Internal Revenue Service (the "IRS") during its examination of our U.S. income tax returns for 2001-2003, the most significant of which regards the recognition of our captive insurance subsidiary as an insurance company for U.S. income tax purposes. It is reasonably possible that a settlement with the IRS for the disputed issues would cost us $1.3 million, which would be applied against the balance of unrecognized tax benefits and accrued interest and penalties.
Tredegar and its subsidiaries file income tax returns in U.S., state and foreign jurisdictions. Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2001. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2005.
As of December 31, 2008 and 2007, we had valuation allowances relating to deferred tax assets of $9.8 million and $9.4 million, respectively. For more information on deferred income tax assets and liabilities, see Note 14 of the notes to financial statements.
The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161), to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 161 addresses concerns that the disclosures required by SFAS No. 133 do not provide adequate information about the impact derivative instruments can have on an entity's financial position, results of operations and cash flows. SFAS No. 161 amends and expands the disclosures required by SFAS No. 133 so that they provide an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments affect an entity's financial position, financial performance, and cash flows. The new disclosure guidance will apply to all interim and annual reporting periods for which a balance sheet and income statement are presented. SFAS No. 161 is effective for both interim and annual reporting periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not believe that the adoption of SFAS No. 161 will have a material impact on our financial statements and related disclosures.
2008 versus 2007
Revenues. Sales in 2008 decreased by 4.2% compared with 2007 due to sales declines in both Film Products and Aluminum Extrusions. Net sales (sales less freight) decreased 1.5% in Film Products as competitive pressures led to lower volume, which was partially offset by higher selling prices from the pass-through of increased resin costs. Net sales decreased 8.5% in Aluminum Extrusions due to lower volume as shipments declined in most markets. For more information on net sales and volume, see the executive summary beginning on page 17.
Operating Costs and Expenses. Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales was 14.0% in 2008 and 15.3% in 2007. The gross profit margin decreased in Film Products and Aluminum Extrusions primarily due to lower sales volumes, partially offset by cost reduction efforts and the favorable impact of changes in the U.S. dollar value of currencies for operations outside the U.S. The benefit from currency rate changes was approximately $3.6 million.
As a percentage of sales, selling, general and administrative and R&D expenses were 7.9% in 2008, down from 8.3% in 2007. The decrease is primarily due to lower selling, general and administrative expenses in Film Products from cost reduction efforts.
Losses associated with plant shutdowns, asset impairments and restructurings in 2008 totaled $12.0 million ($8.4 million after taxes) and included:
• A fourth quarter charge of $7.2 million ($5.0 million after taxes), a second quarter charge of $854,000 ($717,000 after taxes), and a first quarter charge of $1.6 million ($1.2 million after taxes) for asset impairments in Film Products;
• A second quarter charge of $90,000 ($83,000 after taxes) and a first quarter charge of $2.1 million ($1.4 million after taxes) for severance and other employee-related costs in connection with restructurings in Film Products;
• A second quarter charge of $275,000 ($169,000 after taxes) and a first quarter charge of $235,000 ($145,000 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions;
• A fourth quarter pretax gain of $583,000 ($437,000 after taxes) related to the sale of land rights and related improvements at the Film Products facility in Shanghai, China (included in "Other income (expense), net" in the consolidated statements of income); and
• A fourth quarter charge of $72,000 ($44,000 after taxes) and a second quarter charge of $105,000 ($65,000 after taxes) related to expected future environmental costs at the Aluminum Extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income).
The severance in Film Products includes a reduction in workforce in the first quarter of 2008 (approximately 6% or 90 of Film Products' total employees) that is expected to save approximately $4.2 million on an annualized basis.
We recognized a gain of $1.5 million ($965,000 after taxes) from the sale of our investments in Theken Spine and Therics, LLC. The gain is included in "Other income (expense), net" in the consolidated statements of income. AFBS Inc. (formerly Therics, Inc.) received these investments in 2005, when substantially all of the assets of AFBS, Inc., a wholly owned subsidiary of Tredegar, were sold or assigned to a newly created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar.
Results in 2008 include unrealized gains from the write-up of an investment accounted for under the fair value method of $5.6 million ($3.6 million after taxes; see further discussion on page 20). Gains on the sale of corporate assets in 2008 include realized gains of $509,000 ($310,000 after taxes) from the sale of equity securities and $492,000 ($316,000 after taxes) from the sale of corporate real estate. The pretax amounts for each of these items is included in "Other income (expense), net" in the consolidated statements of income and separately shown in the segment operating profit table on page 14.
For more information on costs and expenses, see the executive summary beginning on page 17.
Interest Income and Expense. Interest income, which is included in "Other income (expense), net" in the consolidated statements of income, was $1.0 million in . . .
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