Annual Reports

  • 10-K (Feb 28, 2014)
  • 10-K (Mar 1, 2013)
  • 10-K (Mar 2, 2012)
  • 10-K (Mar 4, 2011)
  • 10-K (Mar 4, 2010)
  • 10-K (Mar 6, 2009)

 
Quarterly Reports

 
8-K

 
Other

Tredegar 10-K 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 


FORM 10-K

FOR ANNUAL AND TRANSACTION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 

x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005
OR

 

 

o     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 o  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 o  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 o

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 o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large accelerated filer  o

Accelerated filer   x

Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o  No x

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005: $479,481,397*

Number of shares of Common Stock outstanding as of January 31, 2006: 38,738,514 (38,627,094 as of June 30, 2005)

 

 

*

In determining this figure, an aggregate of 7,891,107 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 held by




affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange Composite Transactions on June 30, 2005, as reported by The Wall Street Journal.

 


Documents Incorporated By Reference

 

 

          Portions of the Tredegar Corporation (“Tredegar”) Proxy Statement for the 2006 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. We expect to file our Proxy Statement with the Securities and Exchange Commission and mail it to shareholders on or about March 23, 2006.


Index to Annual Report on Form 10-K
Year Ended December 31, 2005

 

 

 

 

 

Page




Part I

 

 




Item 1.

Business

1-3




Item 1A.

Risk Factors

3-5




Item 1B.

Unresolved Staff Comments

None




Item 2.

Properties

5-6




Item 3.

Legal Proceedings

6




Item 4.

Submission of Matters to a Vote of Security Holders

None




Part II

 

 




Item 5.

Market for Tredegar’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities

7-8




Item 6.

Selected Financial Data

8-15




Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16-35




Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35




Item 8.

Financial Statements and Supplementary Data

39-71




Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None




Item 9A.

Controls and Procedures

36




Item 9B.

Other Information

None




Part III

 

 




Item 10.

Directors and Executive Officers of Tredegar*

37-38




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

38




Item 14.

Principal Accounting Fees and Services

*




Part IV

 

 




Item 15.

Exhibits and Financial Statement Schedules

39





 

 

*

Items 11, 12 and 14 and portions of Item 10 are incorporated by reference from the Proxy Statement.

The Securities and Exchange Commission (the “SEC”) has not approved or disapproved of this report or passed upon its accuracy or adequacy.



PART I

 

 

Item 1.

BUSINESS

Description of Business

          Tredegar Corporation (“Tredegar”) is engaged, through its subsidiaries, in the manufacture of plastic films and aluminum extrusions.

          On June 30, 2005, substantially all of the assets of AFBS, Inc. (formerly known as Therics, 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. AFBS received a 17.5% equity interest in Therics, LLC, valued at $170,000 and a 3.5% interest in Theken Spine, LLC, valued at $800,000, along with potential future payments based on the sale of certain products by Therics, LLC. AFBS had operating losses of $3.5 million during the first six months of 2005 and $9.8 million in 2004.

Film Products

          Tredegar Film Products Corporation and its subsidiaries (together, “Film Products”) manufacture plastic films, elastics, nonwovens and laminate materials primarily for personal and household care products and packaging and surface protection applications. These products are produced at locations in the United States and at plants in The Netherlands, Hungary, Italy, China and Brazil. Film Products competes in all of its markets on the basis of product innovation, quality, price and service.

Personal and Household Care Films. Film Products is one of the largest global suppliers of apertured, breathable, elastic and embossed films, and nonwovens and laminate materials for personal care markets, including:

 

 

Apertured film and nonwoven materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinent products (including materials sold under the ComfortQuilt® and ComfortAireTM brand names);

 

 

Breathable, embossed and elastic materials for use as components for baby diapers, adult incontinent products and feminine hygiene products (including elastic components sold under the FabriflexTM, StretchTabTM and FlexAireTM brand names); and

 

 

Absorbent transfer layers for baby diapers and adult incontinent products sold under the AquiDryTM and AquiSoftTM brand names.

          In each of the last three years, personal care products accounted for more than 30% of Tredegar’s consolidated net sales.

          Film Products also makes apertured films, breathable barrier films and laminates that regulate vapor or fluid transmission. These products are typically used in industrial, medical, agricultural and household markets, including disposable mops, facial wipes, filter layers for personal protective suits, facial masks and landscaping fabric. Film Products supplies a family of laminates for use in protective apparel under the GuardDog LaminatesTM brand name.

Packaging and Protective Films. Film Products produces a broad line of packaging films with an emphasis on paper, as well as laminating films for food packaging applications. These products give our customers a competitive advantage by providing cost savings with thin-gauge films that are readily printable and convertible on conventional processing equipment. Major end uses include overwrap for bathroom tissue and paper towels, and retort pouches.

          Film Products also produces films that are disposable, protective coversheets for photopolymers used in the manufacture of circuit boards. Other films sold under the UltraMask® and ForceFieldTM brand names are used as protective films to protect flat panel display components during fabrication, shipping and handling.

Raw Materials. The primary raw materials used by Film Products are low density, linear low density and high



density polyethylene and polypropylene resins, which are obtained from domestic and foreign suppliers at competitive prices. We believe there will be an adequate supply of polyethylene and polypropylene resins in the immediate future. Film Products also buys nonwoven fabrics based on these same resins, and we believe there will be an adequate supply of these materials in the immediate future.

Customers. Film Products sells to many branded product producers throughout the world. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $237 million in 2005, $226 million in 2004 and $207 million in 2003 (these amounts include film sold to third parties that converted the film into materials used in products manufactured by P&G).

          P&G and Tredegar have had a successful long-term relationship based on cooperation, product innovation and continuous process improvement. The loss or significant reduction in sales associated with P&G would have a material adverse effect on our business.

Research and Development and Intellectual Property. Film Products has technical centers in Richmond, Virginia; Terre Haute, Indiana; Chieti, Italy; and Shanghai, China; and holds 170 issued patents (73 of which are issued in the U.S.) and 90 trademarks (4 of which are issued in the U.S.). Expenditures for research and development (“R&D”) have averaged $7.2 million per year over the past three years.

          In September 2004, we announced that our technical centers in Terre Haute, Indiana and Lake Zurich, Illinois would be moved to Richmond, Virginia, where many of Film Products’ marketing, sales and senior management are located. The move is substantially complete.

Aluminum Extrusions

          The William L. Bonnell Company, Inc. and its subsidiaries (together, “Aluminum Extrusions”) produce soft-alloy aluminum extrusions primarily for building and construction, distribution, transportation, machinery and equipment, electrical and consumer durables markets.

          Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted aluminum extrusions for sale directly to fabricators and distributors that use our extrusions to produce window components, curtain walls and storefronts, tub and shower doors, industrial and agricultural machinery and equipment, ladders, bus bars, automotive parts, snowmobiles and tractor-trailer shapes, among other products. Sales are made primarily in the United States and Canada, principally east of the Rocky Mountains. Aluminum Extrusions competes primarily on the basis of product quality, service and price.

          Aluminum Extrusions sales volume by market segment over the last three years is shown below:

 

 

 

 

 

 

 

 

 

 

 


 

% of Aluminum Extrusions Sales Volume
by Market Segment

 


 

 

 

2005

 

2004

 

2003

 

 

 


 


 


 

Building and construction:

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

44

 

 

41

 

 

39

 

Residential

 

 

18

 

 

21

 

 

23

 

Distribution

 

 

16

 

 

13

 

 

14

 

Transportation

 

 

9

 

 

10

 

 

10

 

Machinery and equipment

 

 

6

 

 

7

 

 

6

 

Electrical

 

 

4

 

 

5

 

 

5

 

Consumer durables

 

 

3

 

 

3

 

 

3

 











 

Total

 

 

100

 

 

100

 

 

100

 











 

2



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. We believe there will be an adequate supply of aluminum and other required raw materials and supplies in the immediate future.

Intellectual Property. Aluminum Extrusions holds one U.S. patent and two U.S. trademarks.

General

Patents, Licenses and Trademarks. Tredegar considers patents, licenses and trademarks to be of significance for Film Products. We routinely apply for patents on significant developments in this business. Our patents have remaining terms ranging from 1 to 19 years. We also have licenses under patents owned by third parties.

Research and Development. Tredegar’s spending for R&D activities in 2005, 2004 and 2003 was related to Film Products and AFBS. R&D spending at Film Products was approximately $6.6 million in 2005, $7.5 million in 2004 and $7.6 million in 2003. R&D spending at AFBS was approximately $2.4 million in 2005, $7.8 million in 2004 and $11.2 million in 2003.

Backlog. Backlogs are not material to our operations.

Government Regulation. Laws concerning the environment that affect or could affect our domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation 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”), as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. We believe that we are in substantial compliance with all applicable laws, regulations and permits. In order to maintain substantial compliance with such standards, we may be required to incur 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.

Employees. Tredegar employed approximately 3,000 people at December 31, 2005.

Available Information and Corporate Governance Documents. Our Internet address is www.tredegar.com. We make available, free of charge through our website, our 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, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. Information filed electronically with the SEC can be accessed on its website at www.sec.gov. In addition, our Corporate Governance Guidelines, Code of Conduct and the charters of our Audit, Executive Compensation and Nominating and Governance Committees are available on our 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 our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.

 

 

Item 1A.

RISK FACTORS

          There are a number of risks and uncertainties that can have a material effect on the operating results of our businesses and our financial condition. These risk factors include, but are not limited to, the following:

General

 

 

Our future performance is influenced by costs incurred by our operating companies including, for example, the cost of energy and raw materials. These costs include, without limitation, the cost of resin (the raw material on which Film Products primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin and natural gas prices have risen significantly,

3



 

 

 

and may continue to do so in the future. Tredegar 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 our customers or that we will be able to offset fully or on a timely basis the effects of higher raw material costs through price increases or pass-through arrangements. Further, there is no assurance that cost control efforts will be sufficient to offset any additional future declines in revenue or increases in energy, raw material or other costs.

 

 

Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations. Risks inherent in international operations include the following, by way of example: changes in general economic conditions, potential difficulty enforcing agreements and intellectual property rights, restrictions on foreign trade or investment, fluctuations in exchange rates, imposition of additional taxes on our foreign income, nationalization of private enterprises and unexpected adverse changes in foreign laws and regulatory requirements.

 

 

Film Products

 

Film Products is highly dependent on sales associated with one customer, P&G. P&G comprised approximately 25% of Tredegar’s net sales in 2005, 27% in 2004 and 29% in 2003. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business, as would delays in P&G rolling out products utilizing new technologies developed by Tredegar. While we have undertaken efforts to expand our 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 P&G.

 

 

Growth of Film Products depends on our ability to develop and deliver new products at competitive prices, especially in the personal care market. Personal care products are now being made with a variety of new materials, replacing traditional backsheet and other components. While we have substantial technical resources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from our technologies, our inability to develop and deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business. In the long term, growth will depend on our ability to provide innovative materials at or below existing material costs, including lowering equipment and other capital costs.

 

 

Film Products operates in a field where our significant customers and competitors have substantial intellectual property portfolios. The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents. Although we are not currently involved in any patent litigation, an unfavorable outcome of any such action could have a significant adverse impact on Film Products.

 

 

As Film Products expands its personal care business, we have greater credit risk that is inherent in broadening our customer base.

 

 

Aluminum Extrusions

 

Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economic conditions of end-use markets in the United States and Canada, particularly in the construction, distribution and transportation industries. Our market segments are also subject to seasonal slowdowns during the winter months. Because of the high degree of operating leverage inherent in our operations (generally constant fixed costs until full capacity utilization is achieved), the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. 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 that usually accompany a downturn. In addition, higher energy costs and the appreciation of the U.S. Dollar equivalent value of the Canadian Dollar can further reduce profits unless

4



 

 

 

offset by price increases or cost reductions and productivity improvements.

 

 

 

In 2004, operating profit from ongoing operations in Aluminum Extrusions increased to $22.6 million from $15.1 million in 2003. The $7.5 million or 50% increase in operating profit on 6.7% volume growth during this period was primarily due to operating leverage and pricing improvements. In 2005, operating profit from ongoing operations in Aluminum Extrusions decreased to $19.3 million (down $3.3 million from 2004 or 14.7%) despite higher selling prices and 1.2% volume growth due to higher energy costs (adverse impact estimated of approximately $7 million) and appreciation of the Canadian Dollar (adverse impact estimated of about $3.5 million).

 

 

The markets for our products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has around 1,800 customers in a variety of end-use markets within the broad categories of building and construction, distribution, transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 4% of Aluminum Extrusion’s net sales. Due to the diverse customer mix across many end-use markets, we believe the industry generally tracks the real growth of the overall economy (historical cross-cycle volume growth has been in the 3% range).

 

 

 

During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of our end-use markets. Conversely, 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. Because the business is susceptible to these changing economic conditions, Aluminum Extrusions targets complex, customized, service-intensive business with more challenging requirements which is competitively more defensible compared to higher volume, standard extrusion applications.

 

 

 

Foreign imports, primarily from China, represent a growing portion of the North American aluminum extrusion market. Foreign competition to date has been primarily large volume, standard extrusion profiles that impact some of our less strategic end-use markets. Market share erosion in other end-use markets remains possible.

 

 

 

There can be no assurance that we will be able to maintain current margins and profitability. Our continued success and prospects depend on our ability to retain existing customers and participate in overall industry cross-cycle growth.


 

 

Item 1B.

UNRESOLVED STAFF COMMENTS

          None.

 

 

Item 2.

PROPERTIES

General

          Most of the improved real property and the other assets used in our operations are owned, and none of the owned property is subject to an encumbrance that is material to our consolidated operations. We consider the plants, warehouses and other properties and assets owned or leased by us to be in generally good condition.

          We believe that the capacity of our plants is adequate to meet our immediate needs. Our plants generally have operated at 50-95% of capacity. Our corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.

5



          Our principal plants and facilities are listed below:

Film Products

 

 

 

 

Locations in the United States

 

Locations in Foreign Countries

 

Principal Operations


 


 


LaGrange, Georgia*
Lake Zurich, Illinois
Pottsville, Pennsylvania
Red Springs, North Carolina (leased)
Richmond, Virginia
   (technical center) (leased)
Terre Haute, Indiana (technical
  center and production facility)

 

Chieti, Italy (technical center)
Guangzhou, China
Kerkrade, The Netherlands
Rétság, Hungary
Roccamontepiano, Italy
São Paulo, Brazil
Shanghai, China

 

Production of plastic films and laminate materials

 

 

 

 

 

Aluminum Extrusions

 

 

 

 

Locations in the United States

 

Locations in Canada

 

Principal Operations


 


 


Carthage, Tennessee
Kentland, Indiana
Newnan, Georgia

 

Pickering, Ontario
Richmond Hill, Ontario
Ste Thérèse, Québec
Woodbridge, Ontario (leased)

 

Production of aluminum extrusions, fabrication and finishing


 

 

*

On February 2, 2006, we announced the expected shut down of the Film Products’ plant in LaGrange, Georgia. The facility, which is operating at about the break-even level, is expected to close by May 1, 2006. The plant had sales of commodity blown films of approximately $20 million in 2005.


 

 

Item 3.

LEGAL PROCEEDINGS

          On June 23, 2005, the United States Environmental Protection Agency, Region 4 (“EPA”), issued an Administrative Order (Docket No. CAA-04-2005-1838, the “Order”) under the Clean Air Act (as amended from time to time, the “Act”) alleging certain violations by Aluminum Extrusions’ Carthage, Tennessee facility of the refrigerant management regulations promulgated pursuant to the Act. The Order alleged that the violations occurred primarily in 2002 and 2003.

          The Order required Aluminum Extrusions to either replace the cooling system at issue or retrofit it with an EPA approved non-ozone depleting substance. The Order further required Aluminum Extrusions to comply with certain applicable provisions of the Act and to provide certified documentation verifying compliance with the Order. Aluminum Extrusions was required to comply with all terms of the Order within 180 days from issuance.

          Aluminum Extrusions fulfilled all obligations imposed by the Order during 2005, and reported that fact in a letter to EPA dated October 25, 2005. Although Aluminum Extrusions has not admitted any violations to the EPA pursuant to the Order, Aluminum Extrusions elected to replace the affected cooling system and incurred related replacement costs of approximately $110,000.

          While the Order does not impose penalties or fines, EPA has reserved the right to do so in the future. To reduce any such claim for penalties or fines, Aluminum Extrusions may undertake a supplemental environmental project at a cost of up to $282,000. Management believes that future penalties or fines assessed by EPA relating to this matter, if any, should not exceed $40,000 (which has been reflected in the financial statements). Tredegar does not expect that the Order or any future fines or penalties assessed by EPA with respect to this matter will have a material adverse effect on Tredegar.

6



 

 

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.

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

          Our common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol TG. We have no preferred stock outstanding. There were 38,737,016 shares of common stock held by 3,570 shareholders of record on December 31, 2005.

          The following table shows the reported high and low closing prices of our common stock by quarter for the past two years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 

 

 

2005

 

2004

 

 

 


 


 

 

 

High

 

Low

 

High

 

Low

 

 

 


 


 


 


 

First quarter

 

$

20.19

 

$

16.08

 

$

17.80

 

$

13.20

 

Second quarter

 

 

17.56

 

 

14.52

 

 

16.13

 

 

13.00

 

Third quarter

 

 

16.67

 

 

12.09

 

 

18.38

 

 

14.75

 

Fourth quarter

 

 

13.16

 

 

11.76

 

 

20.25

 

 

16.68

 














 

Dividend Information

          We have paid a dividend every quarter since becoming a public company in July 1989. During 2005, 2004 and 2003, our quarterly dividend was 4 cents per share.

          All decisions with respect to payment of dividends will be made by the Board of Directors based upon earnings, financial condition, anticipated cash needs and such other considerations as the Board deems relevant. See Note 8 beginning on page 57 for minimum shareholders’ equity required and aggregate dividends permitted.

Issuer Purchases of Equity Securities

          During 2005 and 2004, we did not purchase any shares of our common stock in the open market. During 2003, we purchased 406,400 shares of our common stock in the open market for $5.2 million (an average price of $12.72 per share). Under a standing authorization from our board of directors, we may purchase an additional 3.4 million shares in the open market or in privately negotiated transactions at prices management deems appropriate.

Annual Meeting

          Our annual meeting of shareholders will be held on May 18, 2006, beginning at 8:30 a.m. EDT at a location that will be disclosed in the Proxy Statement. We expect to mail formal notice of the annual meeting, proxies and proxy statements to shareholders on or about March 23, 2006.

7



Inquiries

          Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to:

National City Bank
Dept. 5352
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44193-0900
Phone: 800-622-6757
E-mail: shareholder.inquiries@nationalcity.com

          All other inquiries should be directed to:

Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 800-411-7441
E-mail: invest@tredegar.com
Web site: www.tredegar.com

Quarterly Information

          We do not generate or distribute quarterly reports to shareholders. Information on quarterly results can be obtained from our website. In addition, we file quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.gov.

Legal Counsel

 

Independent Registered Public Accounting Firm


 


Hunton & Williams LLP

 

PricewaterhouseCoopers LLP

Richmond, Virginia

 

Richmond, Virginia


 

 

Item 6.

SELECTED FINANCIAL DATA

          The tables that follow on pages 9-15 present certain selected financial and segment information for the eight years ended December 31, 2005.

8



 

 

 

 

 

 

 

 

 

 

 

 

 

 

EIGHT-YEAR SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 















Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31

 

2005

 

2004

 

2003

 

2002

 











(In Thousands, Except Per-Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

956,969

 

$

861,165

 

$

738,651

 

$

753,724

 

Other income (expense), net

 

 

(544

) (b)

 

15,604

  (c)

 

7,853

 

 

546

 















 

 

 

956,425

 

 

876,769

 

 

746,504

 

 

754,270

 















Cost of goods sold

 

 

810,621

  (b)

 

717,120

  (c)

 

606,242

 

 

582,658

 

Freight

 

 

24,691

 

 

22,398

 

 

18,557

 

 

16,319

 

Selling, general & administrative expenses

 

 

64,723

  (b)

 

60,030

  (c)

 

53,341

 

 

52,252

 

Research and development expenses

 

 

8,982

 

 

15,265

 

 

18,774

 

 

20,346

 

Amortization of intangibles

 

 

299

 

 

330

 

 

268

 

 

100

 

Interest expense

 

 

4,573

 

 

3,171

 

 

6,785

 

 

9,352

 

Asset impairments and costs associated with exit and disposal activities

 

 

16,334

  (b)

 

22,973

  (c)

 

11,426

  (d)

 

3,884

  (e)

Unusual items

 

 

 

 

 

 

1,067

  (d)

 

(6,147

  (e)















 

 

 

930,223

 

 

841,287

 

 

716,460

 

 

678,764

 















Income from continuing operations before income taxes

 

 

26,202

 

 

35,482

 

 

30,044

 

 

75,506

 

Income taxes

 

 

9,973

 

 

9,222

  (c)

 

10,717

 

 

26,881

 











Income from continuing operations (a)

 

 

16,229

 

 

26,260

 

 

19,327

 

 

48,625

 











Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from venture capital investment activities

 

 

 

 

2,921

 

 

(46,569

)

 

(42,428

)

Income (loss) from operations of Molecumetics

 

 

 

 

 

 

891

 

 

(8,728

)

Income from discontinued energy segment

 

 

 

 

 

 

 

 

 











Income (loss) from discontinued operations (a)

 

 

 

 

2,921

 

 

(45,678

)

 

(51,156

)















Net income (loss)

 

$

16,229

 

$

29,181

 

$

(26,351

)

$

(2,531

)















 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations (a)

 

$

.42

 

$

.68

 

$

.50

 

$

1.25

 

Discontinued operations (a)

 

 

 

 

.08

 

 

(1.19

)

 

(1.32

)















Net income (loss)

 

$

.42

 

$

.76

 

$

(.69

)

$

(.07

)
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31

 

2001

 

2000

 

1999

 

1998

 











(In Thousands, Except Per-Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

779,157

 

$

879,475

 

$

828,015

 

$

705,024

 

Other income (expense), net

 

 

1,255

 

 

1,914

 

 

972

 

 

1,749

 















 

 

 

780,412

 

 

881,389

 

 

828,987

 

 

706,773

 















Cost of goods sold

 

 

618,323

 

 

706,817

 

 

648,254

 

 

553,184

 

Freight

 

 

15,580

 

 

17,125

 

 

15,221

 

 

10,946

 

Selling, general & administrative expenses

 

 

47,954

 

 

47,321

 

 

44,675

 

 

37,127

 

Research and development expenses

 

 

20,305

 

 

15,305

 

 

11,500

 

 

5,995

 

Amortization of intangibles

 

 

4,914

 

 

5,025

 

 

3,430

 

 

205

 

Interest expense

 

 

12,671

 

 

17,319

 

 

9,088

 

 

1,318

 

Asset impairments and costs associated with exit and disposal activities

 

 

16,935

  (f)

 

23,791

  (g)

 

4,628

  (h)

 

664

  (i)

Unusual items

 

 

(971

) (f)

 

(762

) (g)

 

 

 

(765

) (i)















 

 

 

735,711

 

 

831,941

 

 

736,796

 

 

608,674

 















Income from continuing operations before income taxes

 

 

44,701

 

 

49,448

 

 

92,191

 

 

98,099

 

Income taxes

 

 

13,950

 (f)

 

18,135

 

 

32,728

 

 

32,094

  (i)















Income from continuing operations (a)

 

 

30,751

 

 

31,313

 

 

59,463

 

 

66,005

 















Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from venture capital investment activities

 

 

(16,627

)

 

83,640

 

 

(4,626

)

 

394

 

Income (loss) from operations of Molecumetics

 

 

(5,768

)

 

(3,577

)

 

(2,189

)

 

(2,243

)

Income from discontinued energy segment

 

 

1,396

 

 

 

 

 

 

4,713

 















Income (loss) from discontinued operations (a)

 

 

(20,999

)

 

80,063

 

 

(6,815

)

 

2,864

 















Net income (loss)

 

$

9,752

 

$

111,376

 

$

52,648

 

$

68,869

 















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations (a)

 

$

.79

 

$

.80

 

$

1.54

 

$

1.71

 

Discontinued operations (a)

 

 

(.54

)

 

2.06

 

 

(.18

)

 

.07

 















Net income (loss)

 

$

.25

 

$

2.86

 

$

1.36

 

$

1.78

 















Refer to notes to financial tables on page 15.

9



 

 

 

 

 

 

 

 

 

 

 

 

 

 

EIGHT-YEAR SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 















Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31

 

2005

 

2004

 

2003

 

2002

 











(In Thousands, Except Per-Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity per share

 

$

12.53

 

$

12.45

 

$

11.72

 

$

12.08

 

Cash dividends declared per share

 

 

.16

 

 

.16

 

 

.16

 

 

.16

 

Weighted average common shares outstanding during the period

 

 

38,471

 

 

38,295

 

 

38,096

 

 

38,268

 

Shares used to compute diluted earnings per share during the period

 

 

38,597

 

 

38,507

 

 

38,441

 

 

38,869

 

Shares outstanding at end of period

 

 

38,737

 

 

38,598

 

 

38,177

 

 

38,323

 

Closing market price per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

20.19

 

 

20.25

 

 

16.76

 

 

24.72

 

Low

 

 

11.76

 

 

13.00

 

 

10.60

 

 

12.25

 

End of year

 

 

12.89

 

 

20.21

 

 

15.53

 

 

15.00

 

Total return to shareholders (j)

 

 

(35.4

)%

 

31.2

%

 

4.6

%

 

(20.2

)%

 

Financial Position:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

781,758

 

 

769,474

 

 

753,025

 

 

837,962

 

Cash and cash equivalents

 

 

23,434

 

 

22,994

 

 

19,943

 

 

109,928

 

Income taxes recoverable from sale of venture capital portfolio

 

 

 

 

 

 

55,000

 

 

 

Debt

 

 

113,050

 

 

103,452

 

 

139,629

 

 

259,280

 

Shareholders’ equity (net book value)

 

 

485,362

 

 

480,442

 

 

447,399

 

 

462,932

 

Equity market capitalization (k)

 

 

499,320

 

 

780,066

 

 

592,889

 

 

574,845

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31

 

2001

 

2000

 

1999

 

1998

 











(In Thousands, Except Per-Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity per share

 

$

12.53

 

$

13.07

 

$

9.88

 

$

8.46

 

Cash dividends declared per share

 

 

.16

 

 

.16

 

 

.16

 

 

.15

 

Weighted average common shares outstanding during the period

 

 

38,061

 

 

37,885

 

 

36,992

 

 

36,286

 

Shares used to compute diluted earnings per share during the period

 

 

38,824

 

 

38,908

 

 

38,739

 

 

38,670

 

Shares outstanding at end of period

 

 

38,142

 

 

38,084

 

 

37,661

 

 

36,661

 

Closing market price per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

21.70

 

 

32.00

 

 

32.94

 

 

30.67

 

Low

 

 

15.30

 

 

15.00

 

 

16.06

 

 

16.13

 

End of year

 

 

19.00

 

 

17.44

 

 

20.69

 

 

22.50

 

Total return to shareholders (j)

 

 

9.9

%

 

(14.9

)%

 

(7.3

)%

 

3.1

%

 

Financial Position:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

865,031

 

 

903,768

 

 

792,487

 

 

457,178

 

Cash and cash equivalents

 

 

96,810

 

 

44,530

 

 

25,752

 

 

25,409

 

Income taxes recoverable from sale of venture capital portfolio

 

 

 

 

 

 

 

 

 

Debt

 

 

264,498

 

 

268,102

 

 

270,000

 

 

25,000

 

Shareholders’ equity (net book value)

 

 

477,899

 

 

497,728

 

 

372,228

 

 

310,295

 

Equity market capitalization (k)

 

 

724,706

 

 

664,090

 

 

779,112

 

 

824,873

 















Refer to notes to financial tables on page 15.

10



 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEGMENT TABLES

 

 

 

 

 

 

 

 

 

 

 

 

 

Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales (l)

 

 

 

 

 

 

 

 

 

 

 

 

 















Segment

 

2005

 

2004

 

2003

 

2002

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

460,277

 

$

413,257

 

$

365,501

 

$

376,904

 

Aluminum Extrusions

 

 

471,749

 

 

425,130

 

 

354,593

 

 

360,293

 

AFBS (formerly Therics)

 

 

252

 

 

380

 

 

 

 

208

 















Total ongoing operations (n)

 

 

932,278

 

 

838,767

 

 

720,094

 

 

737,405

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

 

 

 

Other (m)

 

 

 

 

 

 

 

 

 















Total net sales

 

 

932,278

 

 

838,767

 

 

720,094

 

 

737,405

 

Add back freight

 

 

24,691

 

 

22,398

 

 

18,557

 

 

16,319

 















Sales as shown in Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Income

 

$

956,969

 

$

861,165

 

$

738,651

 

$

753,724

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

2001

 

2000

 

1999

 

1998

 


(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

382,740

 

$

380,202

 

$

342,300

 

$

286,965

 

Aluminum Extrusions

 

 

380,387

 

 

479,889

 

 

461,241

 

 

395,455

 

AFBS (formerly Therics)

 

 

450

 

 

403

 

 

161

 

 

 















Total ongoing operations (n)

 

 

763,577

 

 

860,494

 

 

803,702

 

 

682,420

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

1,856

 

 

9,092

 

 

11,629

 

Other (m)

 

 

 

 

 

 

 

 

29

 















Total net sales

 

 

763,577

 

 

862,350

 

 

812,794

 

 

694,078

 

Add back freight

 

 

15,580

 

 

17,125

 

 

15,221

 

 

10,946

 















Sales as shown in Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Income

 

$

779,157

 

$

879,475

 

$

828,015

 

$

705,024

 















Refer to notes to financial tables on page 15.

11



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 















Segment

 

2005

 

2004

 

2003

 

2002

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

44,946

 

$

43,259

 

$

45,676

 

$

72,307

 

Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets

 

 

(3,955

(b)

 

(10,438

) (c)

 

(5,746

) (d)

 

(3,397

) (e)

Unusual items

 

 

 

 

 

 

 

 

6,147

  (e)















Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

19,302

 

 

22,637

 

 

15,117

 

 

27,304

 

Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets

 

 

122

  (b)

 

(10,553

) (c)

 

(644)

  (d)

 

(487

) (e)

Gain on sale of land

 

 

 

 

 

 

1,385

 

 

 

Other

 

 

 

 

7,316

) (c)

 

 

 

 















AFBS (formerly Therics):

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

(3,467

)

 

(9,763

)

 

(11,651

)

 

(13,116

)

Loss on investment in Therics, LLC

 

 

(145

)

 

 

 

 

 

 

Plant shutdowns, asset impairments and restructurings

 

 

(10,318

(b)

 

(2,041

) (c)

 

(3,855)

  (d)

 

 

Unusual items

 

 

 

 

 

 

(1,067)

  (d)

 

 















Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

 

 

 

Other (m)

 

 

 

 

 

 

 

 

 

Unusual items

 

 

 

 

 

 

 

 

 















Total

 

 

46,485

 

 

40,417

 

 

39,215

 

 

88,758

 

Interest income

 

 

586

 

 

350

 

 

1,183

 

 

1,934

 

Interest expense

 

 

4,573

 

 

3,171

 

 

6,785

 

 

9,352

 

Gain on sale of corporate assets

 

 

61

 

 

7,560

 

 

5,155

 

 

 

Loss from write-down of investment in Novalux

 

 

5,000

  (b)

 

 

 

 

 

 

Corporate expenses, net

 

 

11,357

 

 

9,674

 

 

8,724

  (d)

 

5,834

 















Income from continuing operations before income taxes

 

 

26,202

 

 

35,482

 

 

30,044

 

 

75,506

 

Income taxes

 

 

9,973

 

 

9,222

 

 

10,717

 

 

26,881

 















Income from continuing operations

 

 

16,229

 

 

26,260

 

 

19,327

 

 

48,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations (a)

 

 

 

 

2,921

 

 

(45,678

)

 

(51,156

)















Net income (loss)

 

$

16,229

 

$

29,181

 

$

(26,351

)

$

(2,531

)
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

2001

 

2000

 

1999

 

1998

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

$

61,787

 

$

47,112

 

$

59,554

 

$

53,786

 

Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets

 

 

(9,136

) (f)

 

(22,163

) (g)

 

(1,170

) (h)

 

 

Unusual items

 

 

 

 

 

 

 

 

 















Aluminum Extrusions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

25,407

 

 

52,953

 

 

56,501

 

 

47,091

 

Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets

 

 

(7,799

) (f)

 

(1,628

) (g)

 

 

 

(664

) (i)

Gain on sale of land

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 















AFBS (formerly Therics):

 

 

 

 

 

 

 

 

 

 

 

 

 

Ongoing operations

 

 

(12,861

)

 

(8,024

)

 

(5,235

)

 

 

Loss on investment in Therics, LLC

 

 

 

 

 

 

 

 

 

Plant shutdowns, asset impairments and restructurings

 

 

 

 

 

 

(3,458

)  (h)

 

 

Unusual items

 

 

 

 

 

 

 

 

 















Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

(264

)

 

57

 

 

1,433

 

Other (m)

 

 

 

 

 

 

 

 

(428

)

Unusual items

 

 

 

 

762

  (g)

 

 

 

765

  (i)















Total

 

 

57,398

 

 

68,748

 

 

106,249

 

 

101,983

 

Interest income

 

 

2,720

 

 

2,578

 

 

1,419

 

 

2,279

 

Interest expense

 

 

12,671

 

 

17,319

 

 

9,088

 

 

1,318

 

Gain on sale of corporate assets

 

 

 

 

 

 

712

 

 

 

Loss from write-down of investment in Novalux

 

 

 

 

 

 

 

 

 

Corporate expenses, net

 

 

2,746

  (f)

 

4,559

 

 

7,101

 

 

4,845

 















Income from continuing operations before income taxes

 

 

44,701

 

 

49,448

 

 

92,191

 

 

98,099

 

Income taxes

 

 

13,950

  (f)

 

18,135

 

 

32,728

 

 

32,094

  (i)















Income from continuing operations

 

 

30,751

 

 

31,313

 

 

59,463

 

 

66,005

 

Income (loss) from discontinued operations (a)

 

 

(20,999

)

 

80,063

 

 

(6,815

)

 

2,864

 















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,752

 

$

111,376

 

$

52,648

 

$

68,869

 















Refer to notes to financial tables on page 15.

12



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

 

 

 

 

 

 

 

 











Segment

 

2005

 

2004

 

2003

 

2002

 











(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

479,286

 

$

472,810

 

$

422,321

 

$

379,635

 

Aluminum Extrusions

 

 

214,374

 

 

210,894

 

 

185,336

 

 

176,631

 

AFBS (formerly Therics)

 

 

2,759

 

 

8,613

 

 

8,917

 

 

10,643

 















Subtotal

 

 

696,419

 

 

692,317

 

 

616,574

 

 

566,909

 

General corporate

 

 

61,905

 

 

54,163

 

 

61,508

 

 

52,412

 

Income taxes recoverable from sale of venture capital investment portfolio

 

 

 

 

 

 

55,000

 

 

 

Cash and cash equivalents

 

 

23,434

 

 

22,994

 

 

19,943

 

 

109,928

 















Identifiable assets from ongoing operations

 

 

781,758

 

 

769,474

 

 

753,025

 

 

729,249

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

 

 

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

 

 

 

 

 

 

108,713

 

Molecumetics

 

 

 

 

 

 

 

 

 















Total

 

$

781,758

 

$

769,474

 

$

753,025

 

$

837,962

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

2001

 

2000

 

1999

 

1998

 











(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$

367,291

 

$

367,526

 

$

360,517

 

$

132,241

 

Aluminum Extrusions

 

 

185,927

 

 

210,434

 

 

216,258

 

 

201,518

 

AFBS (formerly Therics)

 

 

9,931

 

 

9,609

 

 

9,905

 

 

 















Subtotal

 

 

563,149

 

 

587,569

 

 

586,680

 

 

333,759

 

General corporate

 

 

40,577

 

 

30,214

 

 

22,419

 

 

23,905

 

Income taxes recoverable from sale of venture capital investment portfolio

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

96,810

 

 

44,530

 

 

25,752

 

 

25,409

 















Identifiable assets from ongoing operations

 

 

700,536

 

 

662,313

 

 

634,851

 

 

383,073

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

7,859

 

 

7,811

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

158,887

 

 

236,698

 

 

145,028

 

 

61,098

 

Molecumetics

 

 

5,608

 

 

4,757

 

 

4,749

 

 

5,196

 















Total

 

$

865,031

 

$

903,768

 

$

792,487

 

$

457,178

 















Refer to notes to financial tables on page 15.

13



SEGMENT TABLES
Tredegar Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 















Segment

 

2005

 

2004

 

2003

 

2002

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$  

26,673

 

$

21,967

 

$

19,828

 

$

20,085

 

Aluminum Extrusions

 

 

11,484

 

 

10,914

 

 

10,883

 

 

10,506

 

AFBS (formerly Therics)

 

 

437

 

 

1,300

 

 

1,641

 

 

463

 















Subtotal

 

 

38,594

 

 

34,181

 

 

32,352

 

 

31,054

 

General corporate

 

 

195

 

 

241

 

 

270

 

 

353

 















Total ongoing operations

 

 

38,789

 

 

34,422

 

 

32,622

 

 

31,407

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

 

 

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

 

 

 

 

 

 

 

Molecumetics

 

 

 

 

 

 

 

 

527

 















Total

 

$

38,789

 

$

34,422

 

$

32,622

 

$

31,934

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

2001

 

2000

 

1999

 

1998

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$  

22,047

 

$

23,122

 

$

18,751

 

$

11,993

 

Aluminum Extrusions

 

 

11,216

 

 

9,862

 

 

9,484

 

 

8,393

 

AFBS (formerly Therics)

 

 

2,262

 

 

1,782

 

 

1,195

 

 

 















Subtotal

 

 

35,525

 

 

34,766

 

 

29,430

 

 

20,386

 

General corporate

 

 

329

 

 

315

 

 

253

 

 

254

 















Total ongoing operations

 

 

35,854

 

 

35,081

 

 

29,683

 

 

20,640

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

151

 

 

498

 

 

544

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

 

 

18

 

 

22

 

 

21

 

Molecumetics

 

 

2,055

 

 

1,734

 

 

1,490

 

 

1,260

 















Total

 

$

37,909

 

$

36,984

 

$

31,693

 

$

22,465

 















Capital Expenditures, Acquisitions and Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 















Segment

 

 

2005

 

 

2004

 

 

2003

 

 

2002

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$  

50,466

 

$

44,797

 

$

57,203

 

$

24,063

 

Aluminum Extrusions

 

 

11,968

 

 

10,007

 

 

8,293

 

 

4,799

 

AFBS (formerly Therics)

 

 

36

 

 

275

 

 

219

 

 

1,621

 















Subtotal

 

 

62,470

 

 

55,079

 

 

65,715

 

 

30,483

 

General corporate

 

 

73

 

 

572

 

 

93

 

 

60

 















Capital expenditures for ongoing operations

 

 

62,543

 

 

55,651

 

 

65,808

 

 

30,543

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

 

 

 

 

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

 

 

 

 

 

 

 

Molecumetics

 

 

 

 

 

 

 

 

793

 















Total capital expenditures

 

 

62,543

 

 

55,651

 

 

65,808

 

 

31,336

 

Acquisitions and other

 

 

 

 

1,420

 

 

1,579

 

 

 

Novalux investment

 

 

1,095

 

 

5,000

 

 

 

 

 

Venture capital investments

 

 

 

 

 

 

2,807

 

 

20,373

 















Total

 

$

63,638

 

$

62,071

 

$

70,194

 

$

51,709

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

 

2001

 

 

2000

 

 

1999

 

 

1998

 















(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Film Products

 

$  

24,775

 

$

53,161

 

$

25,296

 

$

18,456

 

Aluminum Extrusions

 

 

8,506

 

 

21,911

 

 

16,388

 

 

10,407

 

AFBS (formerly Therics)

 

 

2,340

 

 

1,730

 

 

757

 

 

 















Subtotal

 

 

35,621

 

 

76,802

 

 

42,441

 

 

28,863

 

General corporate

 

 

519

 

 

384

 

 

606

 

 

115

 















Capital expenditures for ongoing operations

 

 

36,140

 

 

77,186

 

 

43,047

 

 

28,978

 

Divested operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberlux

 

 

 

 

425

 

 

812

 

 

1,477

 

Discontinued operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

 

 

 

 

86

 

 

 

 

54

 

Molecumetics

 

 

2,850

 

 

2,133

 

 

1,362

 

 

3,561

 















Total capital expenditures

 

 

38,990

 

 

79,830

 

 

45,221

 

 

34,070

 

Acquisitions and other

 

 

1,918

 

 

6,316

 

 

215,227

 

 

72,102

 

Novalux investment

 

 

 

 

 

 

 

 

 

Venture capital investments

 

 

24,504

 

 

93,058

 

 

81,747

 

 

35,399

 















Total

 

$

65,412

 

$

179,204

 

$

342,195

 

$

141,571

 















Refer to notes to financial tables on page 15.

14



 

NOTES TO FINANCIAL TABLES


(In Thousands, Except Per-Share Data)


 

 

(a)

In 2004, discontinued operations include a gain of $2,921 after-taxes primarily related to the reversal of a business and occupancy tax contingency accrual upon favorable resolution. The accrual was originally recorded in connection with our venture capital investment operation. In 2003, we sold substantially all of our venture capital investment portfolio. In 2002, we ceased operations at Molecumetics, one of our biotechnology units, and sold its tangible assets. The operating results associated with the venture capital investment portfolio and Molecumetics have been reported as discontinued operations. In 2003, discontinued operations also include a gain of $891 after-taxes on the sale of intellectual property of Molecumetics and a loss on the divestiture of the venture capital investment portfolio of $46,269 after-taxes. Discontinued operations in 2002 also include a loss on the disposal of Molecumetics of $4,875 after-taxes. In 2001, discontinued operations include a gain of $1,396 for the reversal of an income tax contingency accrual upon favorable conclusion of IRS examinations through 1997. The accrual was originally recorded in conjunction with the sale of The Elk Horn Coal Corporation. We divested our coal subsidiary, The Elk Horn Coal Corporation, and our remaining oil and gas properties in 1994. As a result of these events, we report the Energy segment as discontinued operations. In 1998, discontinued operations include gains for the reimbursement of payments made by us to the United Mine Workers of America Combined Benefit Fund (the “Fund”) and the reversal of a related accrued liability established to cover future payments to the Fund. On April 10, 2000, we sold Fiberlux. The operating results of Fiberlux were historically reported as part of the Plastics segment on a combined basis with Film Products.

 

 

(b)

Plant shutdowns, asset impairments and restructurings for 2005 include charges of $10,318 related to the sale or assignment of substantially all of AFBS’ assets, charges of $2,221 related to severance and other employee-related costs in connection with restructurings in Film Products ($1,118), Aluminum Extrusions ($648) and corporate headquarters ($455, included in “Corporate expenses, net” in the operating profit by segment table), a charge of $2,101 related to the planned shutdown of the films manufacturing facility in LaGrange, Georgia, a net gain of $1,667 related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a gain on the sale of the facility ($1,816, included in “Other income (expense), net” in the consolidated statements of income), partially offset by shutdown-related expenses ($225), a net gain of $1,265 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including a gain on the sale of the facility ($1,667, included in “Other income (expense), net” in the consolidated statements of income), shutdown-related costs ($1,111), partially offset by the reversal to income of certain accruals associated with severance and other costs ($709), a charge of $1,019 for process reengineering costs associated with the implementation of a global information system in Film Products (included in “Costs of goods sold” in the consolidated statements of income), a net charge of $843 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $1,363 in charges for employee relocation and recruitment is included in “Selling, general & administrative expenses” in the consolidated statements of income); a gain of $653 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a gain on the sale of the facility ($630, included in “Other income (expense), net” in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals ($23), charges of $583 for asset impairments in Film Products, a gain of $508 for interest receivable on tax refund claims (included in “Corporate expenses, net” in the operating profit by segment table and “Other income (expense), net” in the consolidated statements of income), a charge of $495 in Aluminum Extrusions, including an asset impairment ($597), partially offset by the reversal to income of certain shutdown-related accruals ($102), charges of $353 for accelerated depreciation related to restructurings in Film Products, and a charge of $182 in Film Products related to the write-off of an investment. As of December 31, 2005, the investment in Novalux, Inc. of $6,095 was written down to estimated fair value of $1,095. The loss from the write-down, $5,000, is included in “Other income (expense), net” in the consolidated statements of income.

 

 

(c)

Plant shutdowns, asset impairments and restructurings for 2004 include a charge of $10,127 related to the planned shutdown of the aluminum extrusions plant in Aurora, Ontario, a charge of $3,022 related to the sale of the films business in Argentina, charges of $2,572 related to accelerated depreciation from plant shutdowns and restructurings in Film Products, charges of $2,459 related to severance and other costs associated with plant shutdowns in Film Products, charges of $1,547 for severance and other employee-related costs associated with restructurings in AFBS ($735), Film Products ($532) and Aluminum Extrusions ($280), a charge of $1,306 related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey, a charge of $1,278 (of this amount, $59 for employee relocation is included in “Selling, general & administrative expenses” in the consolidated statements of income) related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products and charges of $575 in Film Products and $146 in Aluminum Extrusions related to asset impairments. Income taxes in 2004 include a tax benefit of $4,000 related to the reversal of income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000. The other pretax gain of $7,316 included in the Aluminum Extrusions section of the operating profit by segment table is comprised of the present value of an insurance settlement of $8,357 (future value of $8,455) associated with environmental costs related to prior years, partially offset by accruals for expected future environmental costs of $1,041. The company received $5,143 of the $8,455 insurance settlement in 2004 and recognized receivables at present value for future amounts due ($1,497 received in February of 2005 and $1,717 received in February 2006). The gain from the insurance settlement is included in “Other income (expense), net” in the consolidated statements of income, while the accruals for expected future environmental costs are included in “Cost of goods sold.”

 

 

(d)

Plant shutdowns, asset impairments and restructurings for 2003 include charges of $4,514 for severance costs in connection with restructurings in Film Products ($1,922), Aluminum Extrusions ($256), AFBS ($1,155) and corporate headquarters ($1,181, included in “Corporate expenses, net” in the operating profit by segment table), charges of $2,776 for asset impairments in the films business, charges of $2,700 related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey, a charge of $611 primarily related to severance costs associated with the shutdown of the films plant in New Bern, North Carolina, a charge of $388 related to an early retirement program in our aluminum business and charges of $437 for additional costs incurred related to plant shutdowns in our films business. Unusual items for 2003 include a charge of $1,067 related to an adjustment for depreciation and amortization at AFBS based on our decision to suspend divestiture efforts.

 

 

(e)

Plant shutdowns, asset impairments and restructurings for 2002 include a charge of $1,457 for asset impairments in the films business, a charge of $1,007 for additional costs related to the shutdown of the films plant in Carbondale, Pennsylvania, a charge of $541 for additional costs related to the shutdown of the films plant in Tacoma, Washington, a charge of $487 for additional costs related to the shutdown of the aluminum extrusions plant in El Campo, Texas, and a charge of $392 for additional costs related to the 2000 shutdown of the films plant in Manchester, Iowa. Unusual items for 2002 include a net gain of $5,618 for payments received from P&G related to terminations and revisions to contracts and related asset writedowns, and a gain of $529 related to the sale of assets.

 

 

(f)

Plant shutdowns, asset impairments and restructurings for 2001 include a charge of $7,799 for the shutdown of the aluminum extrusions plant in El Campo, Texas, a charge of $3,386 for the shutdown of the films plant in Tacoma, Washington, a charge of $2,877 for the shutdown of the films plant in Carbondale, Pennsylvania, a charge of $1,505 for severance costs related to further rationalization in the films business, and a charge of $1,368 for impairment of our films business in Argentina. Unusual items in 2001 include a gain of $971 (included in “Corporate expenses, net” in the operating profit by segment table) for interest received on tax overpayments. Income taxes in 2001 include a benefit of $1,904 for the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations through 1997.

 

 

(g)

Plant shutdowns, asset impairments and restructurings for 2000 include a charge of $17,870 related to excess capacity in the films business, a charge of $1,628 related to restructuring at our aluminum extrusions plant in El Campo, Texas, and a charge of $4,293 for the shutdown of the films plant in Manchester, Iowa. Unusual items in 2000 include a gain of $762 for the sale of Fiberlux.

 

 

(h)

Plant shutdowns, asset impairments and restructurings for 1999 include a charge of $3,458 related to a write-off of in-process research and development expenses associated with the AFBS acquisition and a charge of $1,170 for the write-off of excess packaging film capacity.

 

 

(i)

Plant shutdowns, asset impairments and restructurings for 1998 include a charge of $664 related to the shutdown of the powder-coat paint line in our aluminum extrusions plant in Newnan, Georgia. Unusual items for 1998 include a gain of $765 on the sale of APPX Software. Income taxes in 1998 include a tax benefit of $2,001 related to the sale, including a tax benefit for the excess of APPX Software’s income tax basis over its financial reporting basis.

 

 

(j)

Total return to shareholders is computed as the sum of the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.

 

 

(k)

Equity market capitalization is the closing market price per share for the period times the shares outstanding at the end of the period.

 

 

(l)

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.

 

 

(m)

Other includes primarily APPX Software (sold in 1998 - see (i)).

 

 

(n)

Net sales include sales to P&G totaling $236,554 in 2005, $226,122 in 2004, and $207,049 in 2003. These amounts include plastic film sold to others who converted the film into materials used in products manufactured by P&G.

15



 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking and Cautionary Statements

          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. Such statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Risk factors that may cause such a difference are summarized on pages 3-5 and are incorporated herein.

Executive Summary

          Tredegar is a manufacturer of plastic films and aluminum extrusions. Descriptions of our businesses are provided on pages 1-5.

          Income from continuing operations was $16.2 million (42 cents per diluted share) in 2005 compared with $26.3 million (68 cents per diluted share) in 2004. Gains on the sale of assets, investment write-downs and other items and losses related to plant shutdowns, assets impairments and restructurings are described in results of operations beginning on page 19. The business segment review begins on page 31.

          In Film Products, operating profit from ongoing operations was $44.9 million in 2005 compared with $43.3 million in 2004. The improvement over last year was due primarily to growth in higher value-added products including apertured, elastic and surface protection materials, partially offset by higher resin costs. We estimate that the adverse impact on operating profit of the lag in passing through higher resin costs (net of the favorable effect of a decline in inventories accounted for under the last-in first-out method) in the fourth quarter of 2005 compared with the third quarter of 2005 was approximately $5.5 million. Fourth quarter 2004 operating profit was also adversely affected by the lag of passing through higher resin prices of around $2 million compared with the third quarter of 2004.

          Resin prices continued to escalate to record high levels in the fourth quarter of 2005 due to supply shortages related to the gulf coast hurricanes. Average quarterly prices of low-density polyethylene resin in the U.S. increased 21 cents per pound or 32% in the quarter (see the chart on page 28). Resin prices in Europe and South America exhibited similar trends. To reduce the impact of resin price fluctuations, we have index-based pass-through agreements for the majority of our business. However, under certain agreements, changes in resin costs are not passed through for an average period of 90 days. For non-indexed customers, we have implemented price increases to reduce the negative impact of higher resin costs.

          Capital expenditures in 2005 in Film Products were $50 million and primarily supported capacity expansions for higher value-added materials and a new global information system. Aggregate capital spending for years 2003-2005 totaled approximately $150 million. About one-third of this capital spending relates to customer-specific opportunities that are covered by capital indemnification, contractual volume commitments or similar arrangements. Capital expenditures are expected to be about $50 million in 2006, about half of which is for additional capacity to meet growing demand for surface protection films. These films are primarily used to protect flat panel display components during fabrication, shipping and handling. Sales of surface protection films totaled approximately $30 million in 2005, up from $16 million in 2004, and are expected to grow further. Planned capital expenditures also include expansion of capacity to support elastic material growth opportunities. Sales of elastic materials are expected to continue growing as manufacturers of diapers and adult incontinence products add more stretch to their products to improve comfort and fit.

          In Aluminum Extrusions, operating profit from ongoing operations declined 15% to $19.3 million in 2005 from $22.6 million in 2004 due mainly to higher energy costs (approximately $7 million) and strength of the Canadian Dollar (about $3.5 million), partially offset by price increases, higher volume and an energy surcharge. Annual volume increased to 246.4 million pounds in 2005 from 243.4 million pounds in 2004.

16



          The average costs for natural gas, electricity and diesel fuel were significantly higher in 2005 compared with 2004 (see the natural gas price chart on page 29). For every $1 per mmBtu change in the price of natural gas, the company expects a corresponding operating profit impact in Aluminum Extrusions of approximately $150,000 per month.

          During 2005, we announced price increases in Aluminum Extrusions in April and September. In September 2005, we also announced an energy surcharge in the U.S. to be applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu.

          Capital expenditures in Aluminum Extrusions were $12 million in 2005 and are expected to be approximately $10 million in 2006. Profit growth in 2006 is expected to be driven by focusing on improving volume for operations in Canada, higher volume anticipated from hurricane-related rebuilding, price increases, the energy surcharge and cost reductions from productivity enhancements.

          On June 30, 2005, substantially all of the assets of AFBS, Inc. (formerly known as Therics, 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. For more information, see the business segment review beginning on page 31.

          We refinanced our debt in December 2005 with a $300 million five-year unsecured revolving credit facility. Net capitalization and other credit measures are provided in the liabilities, credit and long-term obligations section beginning on page 24.

Critical Accounting Policies

          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 most 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 1 of each year). We have made determinations as to what our reporting units are and what amounts of goodwill and intangible assets should be allocated to those reporting units.

          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 2005, $14.1 million in 2004 and $2.8 million in 2003.

Pension Benefits

          We have noncontributory and contributory defined benefit (pension) plans that have significant net pension income developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates,

17



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. We reduced our weighted average discount rate in each of the last three years (the rate was 5.70% at the end of 2005, 6.00% at the end of 2004 and 6.25% at the end of 2003) due to the decline in market interest rates. The compensation increase assumption affects the estimate of future payments, and was 4% at the end of 2005, 2004 and 2003. 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. During 2005, 2004 and 2003, the value of our plan assets increased due to improved general market conditions after declining in 2002, 2001 and 2000. Our expected long-term return on plan assets has been 8.4% since 2004 based on market and economic conditions and asset mix (our expected return was 8.6% in 2003 and 9% in 2002 and prior years). See page 62 for more information on expected long-term return on plan assets and asset mix.

          We currently expect net pension income to decline in 2006 by approximately $5 million compared with 2005 after declining by approximately $2 million in 2005 compared with 2004 and $800,000 in 2004 compared with 2003. We expect our minimum cash-funding requirement to be about $800,000 in 2006.

Income Taxes

          Many deductions for tax return purposes cannot be taken until the expenses are actually paid, rather than when the expenses are recorded for book purposes. In these circumstances, we accrue for the tax benefit expected to be received in future years if, in our judgment, it is more likely than not that we will receive such benefits. In addition, the amount and timing of certain current deductions (which reduce taxes currently payable or generate income tax refunds) require interpretation of tax laws. In these circumstances, we estimate and accrue income tax contingencies for differences in interpretation that may exist with tax authorities. On a quarterly basis, we review our judgments regarding income tax contingency accruals and the likelihood the benefits of a deferred tax asset will be realized. During the periodic reviews, we must consider a variety of factors, including the nature and amount of the tax income and expense items, the current tax statutes, the current status of audits performed by tax authorities and the projected future earnings. We believe the realization of our net deferred tax assets is reasonably assured and that our income tax contingency accruals are adequate. If circumstances change, our valuation allowances for deferred tax assets, income tax contingency accruals and net earnings are adjusted accordingly in that period.

Recently Issued Accounting Standards

          In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. It requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow, and we do not expect it to have an impact on amounts reported in the consolidated statement of income and balance sheet.

          In December 2004, the FASB revised SFAS No. 123, Share-Based Payment. This statement requires that the cost of employee services received in exchange for equity instruments be measured based on the fair value of the award on the grant date. The statement also requires that the cost be recognized over the employee service period required to receive the award. The statement applies to awards granted after the effective date and to awards modified, repurchased or cancelled after that date. The statement is effective beginning the first fiscal year that begins after June

18



15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow. The primary impact of adoption on Tredegar will be the recognition of compensation expense for stock options granted. Currently, we disclose the pro forma effects of treating stock option grants as compensation expense under the fair value-based method (see pages 47-49). We will transition to the new standard during the first quarter of 2006 using the modified prospective method and continue to use the Black-Scholes options-pricing model to determine the estimated fair value of option grants. We believe that the pro forma effects that have been disclosed are not materially different from compensation expense that would have been recognized if this standard had been previously adopted.

          In November 2004, the FASB issued SFAS No. 151, Inventory Costs – An Amendment of ARB No. 43, Chapter 4. This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be expensed as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow, and we do not expect it to have a significant impact on amounts reported in the consolidated statement of income and balance sheet.

          In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004and Staff Position No. 109-2 (“FSP 109-2”), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. We do not expect that the tax benefits resulting from the AJCA will have a material impact on our financial statements.

Results of Operations

2005 versus 2004

Revenues. Overall, sales for 2005 increased 11.1% compared with 2004. Net sales (sales less freight) for Film Products increased 11.4% primarily due to sales of higher value-added products (mainly apertured, elastic and surface protection materials) and higher selling prices driven by higher raw material costs. Net sales for Aluminum Extrusions increased 11% primarily due to higher selling prices driven by higher raw material and energy costs and higher sales volume (volume was up 1.2%). For more information on net sales, see the business segment review beginning on page 31.

Operating Costs and Expenses. Gross profit (sales less cost of goods sold and freight) as a percentage of sales decreased to 12.7% from 14.1% in 2004. At Film Products, the lower gross profit margin was driven primarily by higher resin costs, partially offset by higher overall gross profit from sales of higher value-added products. For more information on resin costs, see the executive summary beginning on page 16. At Aluminum Extrusions, the gross profit margin decreased primarily due to higher energy costs and strength of the Canadian Dollar, partially offset by price increases, higher volume and an energy surcharge.

          As a percentage of sales, selling, general and administrative (“SG&A”) expenses decreased to 6.8% in 2005 compared with 7.0% in 2004 due to higher sales and the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005, partially offset by the classification of certain costs at AFBS as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year.

          R&D expenses declined to $9.0 million in 2005 from $15.3 million in 2004. R&D spending at AFBS declined to $2.4 million in 2005 from $7.8 million in 2004 due to the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005. Further contributing to lower R&D expenses at AFBS were cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year. R&D spending at Film Products dropped to $6.6 million in 2005 compared with $7.5 million in 2004 due to restructuring.

19



          Losses associated with plant shutdowns, asset impairments and restructurings, net of gains on sale of related assets, in 2005 totaled $14.6 million ($9.4 million after taxes) and included:

 

 

A fourth-quarter charge of $269,000 ($174,000 after taxes) and a second-quarter charge of $10 million ($6.5 million after taxes) related to the sale or assignment of substantially all of AFBS’ (formerly Therics) assets, including asset impairment charges of $5.6 million, lease-related losses of $3.3 million and severance (31 people) and other transaction-related costs of $1.4 million (see page 34 for additional information on the transaction);

 

 

Fourth-quarter charges of $397,000 ($256,000 after taxes), third-quarter charges of $906,000 ($570,000 after taxes), second-quarter charges of $500,000 ($317,000 after taxes) and first-quarter charges of $418,000 ($266,000 after taxes) related to severance and other employee-related costs associated with restructurings in Film Products ($1.1 million before taxes) and Aluminum Extrusions ($648,000 before taxes) and at corporate headquarters ($455,000 before taxes; included in “Corporate expenses, net” in the operating profit by segment table on page 12) (an aggregate of 21 people were affected by these restructurings);

 

 

A fourth-quarter charge of $2.1 million ($1.3 million after taxes) related to the planned shutdown of the films manufacturing facility in LaGrange, Georgia, including asset impairment charges of $1.6 million and severance (15 people) and other costs of $486,000 (we anticipate recognizing additional shutdown-related costs of about $1.7 million in the first half of 2006);

 

 

A fourth-quarter gain of $1.9 million ($1.2 million after taxes), a third-quarter charge of $198,000 ($127,000 after taxes), a second-quarter net gain of $71,000 ($46,000 after taxes) and a first-quarter charge of $470,000 ($301,000 after taxes) related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including a $1.7 million gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income) and $1.1 million of shutdown-related costs partially offset by the reversal to income of certain accruals associated with severance and other costs of $709,000;

 

 

A second-quarter charge of $27,000 ($16,000 after taxes) and a first-quarter gain of $1.6 million ($973,000 after taxes) related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a $1.8 million gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), partially offset by shutdown-related expenses of $225,000;

 

 

A first-quarter charge of $1 million ($653,000 after taxes) for process reengineering costs associated with the implementation of a global information system in Film Products (included in “Costs of goods sold” in the consolidated statements of income);

 

 

Fourth-quarter charges of $118,000 ($72,000 after taxes), third-quarter charges of $595,000 ($359,000 after taxes), second-quarter charges of $250,000 ($150,000 after taxes) partially offset by a net first-quarter gain of $120,000 ($72,000 after taxes) related to severance and other employee-related accruals associated with the restructuring of the research and development operations in Film Products (of this amount, $1.4 million in pretax charges for employee relocation and recruitment is included in SG&A expenses in the consolidated statements of income);

 

 

A second-quarter gain of $653,000 ($392,000 after taxes) related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements on income), and the reversal to income of certain

 

 

 

shutdown-related accruals of $23,000;

 

 

Fourth-quarter charges of $583,000 ($351,000 after taxes) for asset impairments in Film Products;

 

 

A net fourth-quarter charge of $495,000 ($310,000 after taxes) in Aluminum Extrusions, including an asset impairment of $597,000, partially offset by the reversal to income of certain shutdown-related accruals of $102,000;

 

 

Fourth-quarter charges of $31,000 ($19,000 after taxes), third-quarter charges of $117,000 ($70,000 after taxes), second-quarter charges of $105,000 ($63,000 after taxes) and first-quarter charges of $100,000 ($60,000 after taxes) for accelerated depreciation related to restructurings in Film Products; and

 

 

A fourth-quarter charge of $182,000 ($119,000 after taxes) in Film Products related to the write-off of an investment.

          Gain on sale of corporate assets in 2005 includes a pretax gain of $61,000 related to the sale of corporate real estate. This gain is included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table on page 12.

20



          During the first quarter of 2005, we recognized a pretax gain for interest receivable on tax refund claims of $508,000 ($327,000 after taxes) (included in “Other income (expense), net” in the consolidated statements of income and “Corporate expenses, net” in the operating profit by segment table on page 12).

          During the fourth quarter of 2005, we recognized a pretax loss of $5 million ($3.8 million after taxes) from the write-down of our investment in Novalux, Inc. to estimated fair value of $1.1 million. Novalux is a developer of laser technology for potential use in a variety of applications. The reduction in estimated fair value was due to longer than anticipated delays both in bringing the company’s technology to market and in obtaining key development partnerships as well as liquidity issues. The loss from the write-down is included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table on page 12.

          On June 30, 2005, substantially all of the assets of AFBS, Inc. (formerly known as Therics, 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. For more information, see the business segment review beginning on page 31.

          For more information on costs and expenses, see the business segment review beginning on page 31.

Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $586,000 in 2005 and $350,000 in 2004. Interest income was up primarily due to a higher average yield earned on cash equivalents. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.

          Interest expense increased to $4.6 million in 2005 compared with $3.2 million in 2004. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 







(In Millions)

 

2005

 

2004

 







Floating-rate debt with interest charged on a rollover
basis at one-month LIBOR plus a credit spread:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

110.0

 

$

105.2

 

Average interest rate

 

 

4.5

%

 

2.7

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

5.9

 

$

5.6

 

Average interest rate

 

 

5.5

%

 

6.0

%









Total debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

115.9

 

$

110.8

 

Average interest rate

 

 

4.6

%

 

2.8

%









Income Taxes. The effective tax rate from continuing operations was 38.1% in 2005, up from 26.0% in 2004. The lower rate in 2004 reflects a tax benefit of $4 million related to the reversal of income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000.

2004 versus 2003

Revenues. Overall, sales for 2004 increased 17% compared with 2003. Net sales (sales less freight) for Film Products and Aluminum Extrusions increased primarily due to higher sales volume and mix, including sales of new value-added products in Film Products, and higher selling prices driven by higher raw material costs. For more information on net sales, see the business segment review beginning on page 31.

Operating Costs and Expenses. Gross profit (sales less cost of goods sold and freight) as a percentage of sales decreased to 14.1% from 15.4% in 2003. At Film Products, the lower gross profit margin was driven primarily by higher resin costs and the loss of certain domestic backsheet business at the end of the first quarter of 2003, partially offset by higher overall gross profit. At Aluminum Extrusions, the gross profit margin increased primarily due to

21



higher volume, operating leverage (generally constant fixed costs until full capacity utilization is achieved) and selling price increases above raw material cost increases, partially offset by appreciation of the Canadian Dollar.

          As a percentage of sales, SG&A expenses decreased to 7.0% in 2004 compared with 7.2% in 2003 primarily due to higher sales. Overall SG&A expenses were up by $6.7 million partially due to the classification of certain costs at AFBS as operating versus R&D consistent with the commercialization of the company’s initial line of bone graft substitutes. SG&A expenses also increased in equivalent U.S. Dollars as a result of the appreciation of the Euro, Hungarian Forint and Canadian Dollar.

          R&D expenses declined to $15.3 million in 2004 from $18.8 million in 2003. R&D spending at AFBS declined to $7.8 million in 2004 from $11.2 million in 2003 due to cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s initial line of bone graft substitutes. R&D spending at Film Products was $7.5 million in 2004 compared with $7.6 million in 2003.

          Losses associated with plant shutdowns, asset impairments and restructurings in 2004 totaled $23 million ($15.2 million after taxes) and included:

 

 

A fourth-quarter charge of $84,000 ($56,000 after taxes), a third-quarter charge of $828,000 ($537,000 after taxes), a second-quarter charge of $994,000 ($647,000 after taxes) and a first-quarter charge of $666,000 ($432,000 after taxes) related to accelerated depreciation from plant shutdowns and restructurings in Film Products;

 

 

A fourth-quarter charge of $569,000 (of this amount, $59,000 for employee relocation is included in SG&A expenses in the consolidated statements of income) ($369,000 after taxes) and a third-quarter charge of $709,000 ($461,000 after taxes) related to severance for 30 people and other employee-related costs associated with the restructuring of the R&D operations in Film Products;

 

 

A fourth-quarter charge of $639,000 ($415,000 after taxes), a third-quarter charge of $617,000 ($401,000 after taxes), a second-quarter charge of $300,000 ($195,000 after taxes) and a first-quarter charge of $537,000 ($349,000 after taxes) primarily related to severance (63 people) and other employee-related costs associated with the shutdown of the films manufacturing facility in New Bern, North Carolina;

 

 

A third-quarter charge of $357,000 ($329,000 after taxes) and a second-quarter charge of $2.7 million ($1.9 million after taxes) for the loss on the sale of the films business in Argentina (proceeds net of transaction costs were $803,000 ($401,000 net of cash included in business sold));

 

 

A fourth-quarter charge of $352,000 ($228,000 after taxes), a third-quarter charge of $195,000 ($127,000 after taxes) and a first-quarter charge of $9.6 million ($6.2 million after taxes) related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including asset impairment charges of $7.1 million and severance and other employee-related costs of $2.5 million (these costs were contractually-related for about 100 people and were immediately accrued);

 

 

A third-quarter charge of $170,000 ($111,000 after taxes) for additional costs incurred related to a plant shutdown in Film Products;

 

 

A second-quarter charge of $300,000 ($195,000 after taxes), partially offset by a fourth-quarter gain of $104,000 ($68,000 after taxes), related to the loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa;

 

 

A fourth-quarter charge of $427,000 ($277,000 after taxes) and a second-quarter charge of $879,000 ($571,000 after taxes) related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey;

 

 

Second-quarter charges of $575,000 ($374,000 after taxes) in Film Products and $146,000 ($95,000 after taxes) in Aluminum Extrusions related to asset impairments; and

 

 

Fourth-quarter charges of $1.4 million ($912,000 after taxes) related to severance and other employee-related costs associated with restructurings in AFBS ($590,000 before taxes), Film Products ($532,000 before taxes) and Aluminum Extrusions ($280,000 before taxes) and a second-quarter charge of $145,000 ($94,000 after taxes) related to severance at AFBS (an aggregate of 24 people were affected by these restructurings).

          Gain on sale of corporate assets in 2004 includes a fourth-quarter gain on the sale of land of $1 million ($649,000 after taxes and proceeds of $1.3 million), a second-quarter gain on the sale of land of $413,000 ($268,000 after taxes and proceeds of $647,000) and a first-quarter gain on the sale of public equity securities of $6.1 million ($4

22



million after taxes and proceeds of $7.2 million). These gains are included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table on page 12.

          Income taxes in 2004 include a third-quarter tax benefit of $4 million related to the reversal of income tax contingency accruals upon the favorable conclusion of IRS and state examinations through 2000.

          The other gain of $7.3 million ($4.8 million after taxes) included in the Aluminum Extrusions section of the operating profit by segment table on page 12 is comprised of the present value of an insurance settlement of $8.4 million (future value of $8.5 million) associated with environmental matters related to prior years, partially offset by accruals for expected future environmental costs of $1 million. The company received $5.2 million of the $8.5 million insurance settlement in September of 2004 and recognized receivables at present value for future amounts due ($1.5 million received in February 2005 and $1.8 million received in February 2006). The gain from the insurance settlement is included in “Other income (expense), net” in the consolidated statements of income, while the accruals for expected future environmental costs are included in “Cost of goods sold.”

          For more information on costs and expenses, see the business segment review beginning on page 31.

Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $350,000 in 2004 and $1.2 million in 2003. Interest income was down primarily due to lower average cash and cash equivalents balances (excess cash was used to repay debt in conjunction with our debt refinancing in October 2003).

          Interest expense declined to $3.2 million in 2004 compared with $6.8 million in 2003. Average debt outstanding and interest rates were as follows:

 

 

 

 

 

 

 

 









(In Millions)

 

2004

 

2003

 







Floating-rate debt with interest charged on a rollover
basis at one-month LIBOR plus a credit spread:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

105.2

 

$

180.8

 

Average interest rate

 

 

2.7

%

 

2.0

%

Floating-rate debt fixed via interest rate swaps in the second quarter of 2001 and maturing in the second quarter of 2003:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

 

$

28.9

 

Average interest rate

 

 

 

 

5.4

%

Fixed-rate and other debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

5.6

 

$

7.2

 

Average interest rate

 

 

6.0

%

 

6.4

%









Total debt:

 

 

 

 

 

 

 

Average outstanding debt balance

 

$

110.8

 

$

216.9

 

Average interest rate

 

 

2.8

%

 

2.6

%









Income Taxes. The effective tax rate from continuing operations was 26.0% in 2004, down from 35.7% in 2003. The decrease is primarily due to a tax benefit of $4 million in 2004 related to the reversal of income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000, partially offset by tax benefits of about $600,000 not recognized on 2004 operating losses of certain foreign subsidiaries that may not be recoverable in the carryforward period.

Discontinued Operations. On March 7, 2003, Tredegar Investments, Inc. reached definitive agreements to sell substantially all of its venture capital investment portfolio. For more information on the sale (including a summary of venture capital investment activities through disposal in 2003), see the business segment review beginning on page 31. The results for venture capital investment activities have been reported as discontinued operations and include an after-tax gain of $2.9 million in 2004 primarily related to the reversal of business and occupancy tax contingency accruals upon favorable resolution.

23



Financial Condition

Assets

          Tredegar’s total assets increased to $781.8 million at December 31, 2005, from $769.5 million at December 31, 2004. Significant changes in balance sheet items since December 31, 2004, are summarized below:

 

 

 

Accounts receivable increased by $2.0 million (1.7%).

 

 

 

 

Days sales outstanding in Film Products was 45 days, about 5 days below the average for the last several quarters.

 

 

 

 

Days sales outstanding in Aluminum Extrusions was 46 days consistent with last year.

 

 

 

Current income taxes recoverable increased by $7.2 million, primarily reflecting amounts recoverable at Film Products’ subsidiary in The Netherlands.

 

 

 

Inventories decreased by $2.9 million (4.5%).

 

 

 

 

Inventory days were 48 days in Film Products and 32 days in Aluminum Extrusions consistent with last year.

 

 

 

Net property, plant and equipment (“PP&E”) was up $6.2 million (2.0%) due primarily to capital expenditures of $62.5 million in excess of depreciation of $38.5 million (a $24.0 million net addition to PP&E), partially offset by the effects of foreign exchange rate changes of $7.5 million and asset impairments and disposals during the year totaling $4.3 million in Film Products, $3.1 million in Aluminum Extrusions and $2.1 million in AFBS.

 

 

 

Other assets increased by $7.3 million (8.1%) due to higher prepaid pension assets (up $2.0 million), higher noncurrent income taxes recoverable (up $5.8 million), the carrying value of investments in Therics, LLC and Theken Spine, LLC ($825,000), higher interest on tax overpayments (up $598,000), higher deferred financing costs (up $481,000) and lower deferred revenue relating to a customer contract (down $1.5 million; recognized as a credit in other assets), partially offset by lower carrying value for our investment in Novalux, Inc. (down $3.9 million).

Liabilities, Credit and Long-Term Obligations

          Total liabilities were $296.4 million at December 31, 2005, up from $289.0 million at December 31, 2004, primarily due to higher debt (up $9.6 million), partially offset by lower accounts payable and accrued expenses (down $4.2 million) due to the timing of accruals and payments.

          Debt outstanding at December 31, 2005 of $113.1 million consisted of $107 million borrowed under our new (originated December 2005) $300 million five-year unsecured revolving credit facility and other debt of $6.1 million. At December 31, 2005, available credit under the revolving credit facility was $154.3 million.

          The credit spread over LIBOR and commitment fees charged on the unused amount under the credit agreement at various indebtedness-to-adjusted EBITDA levels is as follows:

 

 

 

 

 

 

 

 


Pricing Under Credit Agreement (Basis Points)


 

 

 

Credit Spread
Over LIBOR

 

 

 

 

 

 


 

 

 

Indebtedness-to-
Adjusted EBITDA
Ratio

 

 

($107 Million
Outstanding
at 12/31/05)

 

Commitment
Fee







> 2.50x but <= 3x

 

 

125

 

 

25

 

> 1.75x but <= 2.50x

 

 

100

 

 

20

 

> 1x but <= 1.75x

 

 

87.5

 

 

17.5

 

<= 1x

 

 

75

 

 

15

 









          At December 31, 2005, we had no interest rate swaps outstanding and the interest cost on debt was priced at one-month LIBOR plus the applicable credit spread of 87.5 basis points.

24



          The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the credit agreement are not intended to represent cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.

 

 

 

 

 






Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and
Interest Coverage Ratio as Defined in Credit Agreement Along with Related Most
Restrictive Covenants
For the Year Ended December 31, 2005 (In Thousands)






Computations of adjusted EBITDA and adjusted EBIT as defined in
Credit Agreement:

 

 

 

 

Net income

 

$

16,229

 

Plus:

 

 

 

 

After-tax losses related to discontinued operations

 

 

 

Total income tax expense for continuing operations

 

 

9,973

 

Interest expense

 

 

4,573

 

Losses related to the application of the equity method of accounting

 

 

145

 

Depreciation and amortization expense for continuing operations

 

 

38,789

 

All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $8,834)

 

 

23,719

 

Minus:

 

 

 

 

After-tax income related to discontinued operations

 

 

 

Total income tax benefits for continuing operations

 

 

 

Interest income

 

 

(586

)

All non-cash gains and income, plus cash gains and income not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (all cash-related)

 

 

(4,682

)

Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions

 

 

3,030

 

 

 



 

Adjusted EBITDA as defined in Credit Agreement

 

 

91,190

 

Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions and asset dispositions)

 

 

(38,352

)

 

 



 

Adjusted EBIT as defined in Credit Agreement

 

$

52,838

 

 

 



 

Indebtedness:

 

 

 

 

Total debt

 

$

113,050

 

Face value of letters of credit

 

 

6,259

 

 

 



 

Indebtedness

 

$

119,309

 

 

 



 

Shareholders’ equity at December 31, 2005

 

$

485,362

 

Computations of leverage and interest coverage ratios as defined in Credit Agreement:

 

 

 

 

Leverage ratio (indebtedness-to-adjusted EBITDA)

 

 

1.31

x

Interest coverage ratio (adjusted EBIT-to-interest expense)

 

 

11.55

x

Most restrictive covenants as defined in Credit Agreement:

 

 

 

 

Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the Credit Agreement ($100,000 plus 50% of net income generated after October 1, 2005)

 

$

100,445

 

Minimum adjusted shareholders’ equity permitted ($351,918 plus 50% of net income generated after October 1, 2005)

 

$

352,363

 

Maximum leverage ratio permitted:

 

 

 

 

Ongoing

 

 

3.00

x

Pro forma for acquisitions

 

 

2.50

x

 

 

 

 

 

Minimum interest coverage ratio permitted

 

 

2.50

x






25



          Noncompliance with any one or more of the debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant(s) through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.

          We are obligated to make future payments under various contracts as set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

























 

 

Payments Due by Period

 





(In Millions)

 

2006

 

2007

 

2008

 

2009

 

2010

 

Remainder

 

Total

 

















Debt

 

$

 

$

4.7

 

$

.4

 

$

.4

 

107.2

 

$

.3

 

 

113.0

 

Operating leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFBS (formerly Therics)

 

 

1.5

 

 

1.6

 

 

1.6

 

 

1.6

 

 

1.6

 

 

0.4

 

 

 

8.3

 

Other

 

 

2.1

 

 

1.9

 

 

1.5

 

 

.4

 

 

.5

 

 

1.5

 

 

 

7.9

 

Capital expenditure commitments *

 

 

14.6

 

 

 

 

 

 

 

 

 

 

 

 

 

14.6

 

























Total

 

$

18.2

 

$

8.2

 

$

3.5

 

$

2.4

 

$

109.3

 

$

2.2

 

 

$

143.8

 


























 

 

*

Represents contractual obligations for plant construction and purchases of real property and equipment. See Note 13 on page 63.

          We believe that existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.

          From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.

Shareholders’ Equity

          At December 31, 2005, we had 38,737,016 shares of common stock outstanding and a total market capitalization of $499.3 million, compared with 38,597,522 shares of common stock outstanding and a total market capitalization of $780.1 million at December 31, 2004.

          During 2005 and 2004, we did not purchase any shares of our common stock in the open market. During 2003, we purchased 406,400 shares of our common stock in the open market for $5.2 million (an average price of $12.72 per share). Since becoming an independent company in 1989, we have purchased a total of 20.8 million shares for $122.8 million (an average price of $5.90 per share). Under a standing authorization from our board of directors, we may purchase an additional 3.4 million shares in the open market or in privately negotiated transactions at prices management deems appropriate.

Cash Flows

          The discussion below supplements the information presented in the consolidated statements of cash flows on page 43.

          Cash provided by operating activities was $53.7 million in 2005 compared with $93.8 million in 2004. The decrease is due primarily to the income tax refund received in 2004 related to the sale in 2003 of our venture capital portfolio, partially offset by lower working capital investment in 2005 compared with 2004 (see assets section on page 24 for discussion of working capital trends).

26



          Cash used in investing activities was $55.0 million in 2005 compared with $52.2 million in 2004. The change is primarily attributable to higher capital expenditures (up $6.9 million) and lower proceeds from the sale of assets and property disposals (down $2.2 million), partially offset by a small acquisition in Film Products in 2004 ($1.4 million) and higher investment in Novalux, Inc. in 2004 ($5.0 million invested in 2004 compared with $1.1 million invested in 2005).

          Capital expenditures in 2005 included the normal replacement of machinery and equipment and primarily:

 

 

Continued expansion of capacity for apertured and elastic materials and surface protection films and a new global information system in Film Products; and

 

 

Moving and upgrading the largest aluminum extrusions press at the facility shut down in Aurora, Ontario to the plant in Pickering, Ontario, and enlargement of the Pickering facility.

          See the executive summary beginning on page 16 and the business segment review beginning on page 31 for more information on capital expenditures.

          Net cash provided by financing activities was $3.6 million in 2005 and included the refinancing of our debt in December 2005 (see the section on liabilities, credit and long-term obligations beginning on page 24 for more information).

          In 2004, cash provided by operating activities was $93.8 million compared with $76.4 million in 2003. The increase is due primarily to the income tax refund related to the sale of the venture capital portfolio (see the business segment review beginning on page 31) partially offset by higher primary working capital (accounts receivable, inventories and accounts payable) needed to support higher sales.

           Cash used in investing activities was $52.2 million in 2004 compared with $38.5 million in 2003. The change is primarily attributable to proceeds from the sale of venture capital investments, net of investments made, of $18.7 million in 2003, and the $5 million investment in Novalux, Inc. made in the third quarter of 2004, partially offset by lower capital expenditures of $10.2 million. See the business segment review beginning on page 31 regarding capital expenditures in 2004 and 2003.

          Net cash used in financing activities was $40.5 million in 2004 compared with $129.9 million in 2003. In 2004, we used $50 million from tax refunds related to the sale of the venture capital portfolio to pay down debt. Additional net borrowings of $13.8 million related primarily to capital expenditures and higher primary working capital needed to support higher sales. Net cash used in financing activities in 2003 was driven by scheduled debt payments and debt payments made in conjunction with our refinancing in 2003.

          In 2003, net cash provided by operating activities was $76.4 million compared with $65.3 million in 2002. The increase is due to a decrease in the level of primary working capital partially offset by lower income from ongoing operations. Accounts receivable declined mainly from volume shortfall payments and contract terminations and revisions in Film Products accrued at the end of 2002 and received in 2003 (about $15 million in accounts receivable at the end of 2002 versus none at the end of 2003). Accounts payable increased due to the timing of payments. Inventories increased primarily due to the appreciation of the Euro and the Canadian Dollar.

          Net cash used in investing activities was $38.5 million in 2003 compared with $46.0 million in 2002. This decrease was due to positive cash flow from venture capital activities in 2003 versus negative cash flow in 2002 and higher proceeds from the sale of corporate assets and property disposals (see Note 15 on page 66 for more information), partially offset by higher capital expenditures and acquisitions (up $36.1 million).

27



          Net cash used in financing activities was $129.9 million in 2003 compared with $10.1 million in 2002. This increase was driven by scheduled debt payments and debt payments made in conjunction with our refinancing in 2003.

Quantitative and Qualitative Disclosures about Market Risk

          Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the section on liabilities, credit and long-term obligations beginning on page 24 regarding credit agreements and interest rate exposures.

          Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate our casting furnaces). There is no assurance of our ability to pass through higher raw material and energy costs to our customers.

          We estimate that resin price increases in the fourth quarter of 2005 and 2004 resulted in a negative operating profit impact of about $5.5 million and $2 million, respectively, compared with the related third quarters of those years. The significant increases in the U.S. since 2002 in average quarterly prices of low density polyethylene resin (a primary raw material for Film Products) are shown in the chart below.

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using monthly data provided by Chemical Data Inc. ("CDI"). In January 2005, CDI reflected a 4 cents per pound non-market adjustment based on their estimate of the growth of discounts over the 2000 to 2003 period. The 4th quarter 2004 average rate of 67 cents per pound is shown on a pro forma basis as if the non-market adjustment was made in October 2004.

          Resin prices in Europe, Asia and South America have exhibited similar trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, we have pass-through or cost-sharing agreements covering about 65% of our sales, but many have a 90-day lag. We have implemented price increases for customers that are currently not subject to pass-through arrangements. Most new customer contracts contain resin pass-through arrangements.

28



          In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. See Note 6 on page 55 for more information.

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

          In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $150,000 impact on the monthly operating profit in Aluminum Extrusions. Substantially higher energy costs (primarily natural gas) in 2005 resulted in a reduction in operating profit in Aluminum Extrusions of approximately $7 million in 2005 compared with 2004. In September 2005, we announced an energy surcharge for our aluminum extrusions business in the U.S. to be applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu.

(LINE GRAPH)

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

29



          We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for manufacturing operations related to foreign markets for 2005 and 2004 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Tredegar Corporation - Manufacturing Operations
Percentage of Net Sales and Total Assets Related to Foreign Markets

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

% of Total
Net Sales *

 

% Total
Assets -
Foreign
Operations *

 

% of Total
Net Sales *

 

% Total
Assets -
Foreign
Operations *

 

 

 


 

 


 

 

 

 

Exports
From
U.S.

 

Foreign
Operations

 

 

Exports
From
U.S.

 

Foreign
Operations

 

 

 

 


 


 


 


 

Canada

 

5

 

 

16

 

 

12

 

 

3

 

 

18

 

 

13

 

 

Europe

 

1

 

 

14

 

 

14

 

 

2

 

 

14

 

 

17

 

 

Latin America

 

1

 

 

2

 

 

2

 

 

2

 

 

2

 

 

1

 

 

Asia

 

4

 

 

4

 

 

5

 

 

4

 

 

3

 

 

5

 

 





















Total % exposure to foreign markets

 

11

 

 

36