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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]TRANSACTION 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 INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1497771
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 Boulders Parkway, Richmond, Virginia 23225
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(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 whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 [X].
Aggregate market value of voting stock held by non-affiliates of the registrant
as of January 27, 1999: $668,845,570*
Number of shares of Common Stock outstanding as of January 27, 1999: 36,762,981
* In determining this figure, an aggregate of 11,875,704 shares of Common Stock
beneficially owned by Floyd D. Gottwald, Jr., Bruce C. Gottwald, 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 January 27, 1999, as reported by The Wall
Street Journal.
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Documents Incorporated By Reference
Portions of the "Tredegar Industries, Inc., ("Tredegar") Proxy Statement
for the 1999 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 around March 31.
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Index to Annual Report on Form 10-K
Year Ended December 31, 1998
Part I Page
Item 1. Business 1-5
Item 2. Properties 5-6
Item 3. Legal Proceedings None
Item 4. Submission of Matters to a Vote
of Security Holders None
Part II
Item 5. Market for Tredegar's Common Equity and Related 7-8
Stockholder Matters
Item 6. Selected Financial Data 8-17
Item 7. Management's Discussion and Analysis of Financial Condition 8-30
and Results of Operations
Item 8. Financial Statements and Supplementary Data 33-60
Item 9. Changes In and Disagreements With Accountants on Accounting None
and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of Tredegar * 31-32
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions None
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on 33
Form 8-K
* Items 11 and 12 and portions of Item 10 are incorporated by reference from the
Proxy Statement.
The Securities and Exchange Commission has not approved or disapproved of this
report or passed upon its accuracy or adequacy.
PART I
Item 1. BUSINESS
Description of Business
Tredegar is engaged directly or through subsidiaries in the
manufacture of plastic films, vinyl extrusions and aluminum extrusions. We also
have interests in a variety of technology-based businesses.
Film Products
Film Products manufactures plastic films for disposable personal
products (primarily feminine hygiene and diaper products) and packaging,
medical, industrial and agricultural products. These products are produced at
various locations throughout the United States and are sold both directly and
through distributors. Film Products also has plants in the Netherlands, Brazil
and Argentina, where it produces films for the European and Latin American
markets. During 1998, Film Products began operating a production facility near
Guangzhou, China. The China facility manufactures disposable films for hygiene
products marketed in the Far East. Film Products has begun construction of a new
production site near Budapest, Hungary, which should be operational in mid-1999.
The Hungary facility will produce disposable films for hygiene products marketed
in Eastern Europe. Film Products competes in all of its markets on the basis of
product quality, price and service.
Film Products produces films for two major market categories:
disposables and industrial.
Disposables. Film Products is one of the largest U.S. suppliers of permeable,
embossed and breathable films for disposable personal products. In each of the
last three years, this class of products accounted for more than 30% of
Tredegar's consolidated revenues.
Film Products supplies permeable films for use as liners in feminine
hygiene products and adult incontinent products. Film Products also supplies
embossed, breathable and elastomeric films and nonwoven film laminates for use
as backsheet and other components for hygienic products such as baby diapers,
adult incontinent products and feminine hygiene products. Film Products' primary
customer for permeable, embossed, breathable and elastomeric films and nonwoven
film laminates is The Procter & Gamble Company ("P&G"), the leading global
personal hygiene product manufacturer. Net sales by Tredegar's ongoing
operations to P&G totaled $233.5 million in 1998, $242.2 million in 1997 and
$206.9 million in 1996.
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 of sales associated with P&G would have a material
adverse effect on our business.
Industrial. Film Products produces coextruded and monolayer permeable films
under the VisPore(R) name. These films are used to regulate fluid and vapor
transmission in many industrial, medical, agricultural and packaging markets.
Specific examples include filter plies for surgical masks and other medical
applications, permeable ground cover, natural cheese mold release cloths and
rubber bale wrap.
Film Products also produces differentially embossed monolayer and
coextruded films. Some of these films are extruded in a Class 10,000 clean room
and act as a disposable, protective coversheet for photopolymers used in the
manufacture of circuit boards. Other films sold under the ULTRAMASK(R) name are
used as masking films to protect polycarbonate, acrylics and glass from damage
during fabrication, shipping and handling.
Film Products produces a line of oriented films for food packaging,
in-mold labels and other applications under the name Monax(R)Plus. These are
high-strength, high moisture barrier films that provide cost and source
reduction benefits over competing packaging materials.
Raw Materials. The primary raw materials used by Film Products are low-density
and linear low-density polyethylene resins, which are obtained from domestic and
foreign suppliers at competitive prices. We believe there will be an adequate
supply of polyethylene resins in the immediate future.
Research and Development. Film Products has a technical center in Terre Haute,
Indiana, and holds 42 U.S. patents and 14 U.S. trademarks. Expenditures for
research and development have averaged $5.4 million per year during the past
three years.
Fiberlux
Fiberlux is a leading U.S. producer of rigid vinyl extrusions for
windows and patio doors. Fiberlux products are sold to fabricators and directly
to end-users. The primary raw material, polyvinyl chloride resin, is purchased
in the open market and under contract. No critical shortages of polyvinyl
chloride resins are expected. Fiberlux competes in all of its markets on the
basis of product quality, price and service. Fiberlux holds one U.S. patent and
three U.S. trademarks.
Aluminum Extrusions
Aluminum Extrusions is composed of The William L. Bonnell Company,
Inc., Capitol Products Corporation, Bon L Campo Limited Partnership and Bon L
Canada Inc. (together, "Aluminum Extrusions"), which produce soft alloy aluminum
extrusions primarily for the building and construction, transportation, consumer
durables, electrical and distribution markets. The operations associated with
Bon L Campo Limited Partnership were acquired in 1997 and the operations
associated with Bon L Canada Inc. were acquired in 1998 (see Note 2 on page 43).
2
Aluminum Extrusions manufactures mill (unfinished), anodized and
painted aluminum extrusions for sale directly to fabricators and distributors
that use aluminum extrusions to produce curtain walls, architectural shapes, tub
and shower doors, window components, running boards, boat windshields, bus bars,
tractor-trailer shapes, snowmobiles and furniture, among other products. Sales
are made primarily in the United States and Canada, principally east of the
Rocky Mountains.
The percentage concentration of aluminum extrusions shipped to the
building and construction market has declined over the past several years due
primarily to acquisitions (51% in 1998 compared to 71% in 1995). A breakdown of
1998 aluminum extrusion sales volume by market segment is shown below:
-------------------------------------------
% of 1998 Aluminum
Extrusion Sales Volume
by Market Segment
-------------------------------------------
Building and construction 51
Transportation 15
Consumer durables 7
Electrical 7
Distribution 9
Other 11
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Total 100
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Raw materials for Aluminum Extrusions, consisting of aluminum ingot,
aluminum scrap and various alloys, are purchased from domestic and foreign
producers in open-market purchases and under short-term contracts. We do not
expect critical shortages of aluminum or other required raw materials and
supplies.
Aluminum Extrusions competes primarily on the basis of product
quality, price and service.
Aluminum Extrusions holds two U.S. patents and nine U.S. trademarks.
Technology
Our technology interests include Molecumetics, Ltd., and Tredegar
Investments, Inc. See Note 7 on page 46 for more information on Tredegar
Investments. Also, see Note 17 on page 58 regarding the sale of APPX Software,
Inc., in early 1998.
Our Molecumetics subsidiary operates its drug discovery research
laboratory in Bellevue, Washington, where it uses patented chemistry to develop
new drug candidates for licensing to pharmaceutical and biotech companies in
exchange for up-front fees, research and development support payments,
milestone-driven success payments and future royalties.
3
In 1998, Molecumetics entered into a research alliance with
Bristol-Myers Squibb Company aimed at developing new drugs for the treatment of
inflammatory and immunological diseases. The collaborative research is focused
on the identification of small-molecule transcription factor inhibitors that
interact with novel molecular targets identified by Molecumetics. Molecumetics
also will supply MolecuSet(R), a collection of 150,000 of its proprietary
compounds, to Bristol-Myers Squibb for broad-based screening against a wide
variety of disease targets. Under terms of the agreement, Bristol-Myers Squibb
provides Molecumetics with research funding, milestone payments and royalties on
any resulting marketed products.
In 1998, Molecumetics also announced the signing of a two-year
license and supply agreement with Choongwae Pharma Corporation, a Korean
pharmaceutical company. Under the terms of the agreement, Choongwae will
synthesize and deliver certain key chemical intermediates to Molecumetics. In
exchange for supplying these intermediates, Choongwae will receive licensing
rights to the jointly developed tryptase inhibitors in certain Asian countries.
Molecumetics will retain rights to these compounds in all other countries.
Tryptase inhibitors could be used to treat asthma, inflammatory bowel disease
and psoriasis.
In 1997, Molecumetics signed research and marketing partnerships with
two large Japanese pharmaceutical companies, Asahi Chemical Industry Co., Ltd.
("Asahi"), and Teijin Limited ("Teijin"). Both collaborations are aimed at
developing therapeutics for treatment of blood-clotting disorders. Molecumetics
is separately developing and optimizing drug lead compounds for each partner. In
turn, Asahi and Teijin are responsible for preclinical and clinical development
in Japan and other Asian countries. In each case, Molecumetics retains U.S. and
European rights to any compounds developed under the agreement. The terms of the
agreements provide Molecumetics with research funding, milestone payments and
royalties on any resulting marketed products.
Molecumetics holds 11 U.S. patents and three U.S. trademarks, and has
filed a number of other patent applications with respect to its technology.
Businesses included in the Technology segment (primarily Molecumetics) spent
$8.5 million in 1998, $7.2 million in 1997 and $6.8 million in 1996 for research
and development.
Miscellaneous
Patents, Licenses and Trademarks. Tredegar considers patents, licenses and
trademarks to be of significance for Film Products and Molecumetics. We
routinely apply for patents on significant developments with respect to all of
our businesses. Our patents have remaining terms ranging from 1 to 17 years. We
also have licenses under patents owned by third parties.
Research and Development. Tredegar spent approximately $14.5 million in 1998,
$13.2 million in 1997 and $11.1 million in 1996 on research and development
activities.
Backlog. Backlogs are not material to our operations.
4
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"), regulations promulgated under these acts, and any
other federal, state or local laws or regulations governing environmental
matters. 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.
From time to time the Environmental Protection Agency may identify us
as a potentially responsible party with respect to a Superfund site under
CERCLA. To date, we are indirectly potentially responsible with respect to three
Superfund sites. As a result, we may be required to expend amounts on remedial
investigations and actions at such Superfund sites. Responsible parties under
CERCLA may be jointly and severally liable for costs at a site, although
typically costs are allocated among the responsible parties.
In addition, we are indirectly potentially responsible for one New
Jersey Spill Site Act location. Another New Jersey site is being investigated
pursuant to the New Jersey Industrial Site Recovery Act.
Employees. Tredegar employed approximately 3,400 people at December 31, 1998.
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
condition of the plants, warehouses and other properties and assets owned or
leased by us to be generally good. We also consider the geographical
distribution of our plants to be well-suited to satisfying the needs of our
customers.
We believe that the capacity of our plants is adequate to meet our
immediate needs. Our plants generally have operated at 65-95 percent of
capacity. Our corporate headquarters offices are located at 1100 Boulders
Parkway, Richmond, Virginia 23225.
5
Our principal plants and facilities are listed below:
Film Products Principal Operations
Locations in the United States Locations in Foreign Countries
Carbondale, Pennsylvania Budapest, Hungary Production of plastic films
LaGrange, Georgia (operational in 1999)
Manchester, Iowa Guangzhou, China (leased)
New Bern, North Carolina Kerkrade, the Netherlands
Tacoma, Washington (leased) San Juan, Argentina
Terre Haute, Indiana (2) Sao Paulo, Brazil
(technical center and
production facility)
Fiberlux Locations Principal Operations
Pawling, New York Production of vinyl extrusions
Purchase, New York for windows and patio doors
(headquarters) (leased)
Aluminum Extrusions Principal Operations
Locations in the United States Locations in Canada
Carthage, Tennessee Aurora, Ontario Production of aluminum
El Campo, Texas Pickering, Ontario extrusions, fabrication and
Kentland, Indiana Richmond Hill, Ontario finishing
Newnan, Georgia Ste. Therese, Quebec
Technology
Molecumetics leases its laboratory space in Bellevue, Washington.
Tredegar Investments leases office space in Seattle, Washington.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
6
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Prices of Common Stock and Shareholder Data
Our common stock is traded on the New York Stock Exchange under the
ticker symbol TG. We have no preferred stock outstanding. There were 36,660,751
shares of common stock held by 6,246 shareholders of record on December 31,
1998.
The following table shows the reported high and low closing prices of
our common stock by quarter for the past two years.
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1998 1997
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High Low High Low
First quarter $24.70 $19.00 $14.17 $12.54
Second quarter 30.67 23.81 18.79 13.42
Third quarter 29.94 16.13 24.08 17.54
Fourth quarter 26.25 19.00 24.65 21.06
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Dividend Information
On May 20, 1998, we declared a three-for-one stock split payable on
July 1, 1998, to shareholders of record on June 15, 1998. Accordingly, all
historical references to per-share amounts, shares repurchased and the shares
used to compute earnings per share have been restated to reflect the split.
During 1996, we paid a quarterly dividend of 2 cents per share. The
quarterly dividend was increased to:
- - 2.67 cents per share effective January 1, 1997
- - 3 cents per share effective October 1, 1997
- - 4 cents per share effective July 1, 1998
All decisions with respect to payment of dividends will be made by
the Board of Directors based upon our earnings, financial condition, anticipated
cash needs and such other considerations as the Board deems relevant. See Note
10 on page 48 for restriction on minimum shareholders' equity required.
Annual Meeting
Our annual meeting of shareholders will be held on May 20, 1999,
beginning at 9:30 a.m. E.D.T. at The Jefferson Hotel in Richmond, Virginia.
Formal notices of the annual meeting, proxies and proxy statements will be
mailed to shareholders around March 31.
7
Inquiries
Inquiries concerning stock transfers, dividends, dividend
reinvestment, consolidating accounts, changes of address, or lost or stolen
stock certificates should be directed to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street - 46th Floor
New York, New York 10005
Phone: 800-937-5449
Web site: http://www.amstock.com
All other inquiries should be directed to:
Tredegar Industries, Inc.
Corporate Communications Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 804-330-1044
E-mail: invest@tredegar.com
Web site: http://www.tredegar.com
Quarterly Report Distribution
We do not distribute quarterly reports through brokerages or banks.
If your Tredegar shares are held through a third party, such as a bank or
brokerage, and you would like to receive quarterly reports, please write or call
Corporate Communications at the above address.
Counsel Independent Accountants
Hunton & Williams PricewaterhouseCoopers LLP
Richmond, Virginia Richmond, Virginia
Item 6. SELECTED FINANCIAL DATA
The tables that follow on pages 9-17 present certain selected
financial and segment information for the eight years ended December 31, 1998.
8
EIGHT-YEAR SUMMARY
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Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996 1995 1994 1993 1992 1991
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(In thousands, except per-share data)
Results of Operations (a)(b):
Net sales $699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229 $439,186
Other income (expense), net 4,015 17,015 4,248 (669) (296) (387) 226 745
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703,811 598,019 527,799 588,785 501,912 448,821 445,455 439,931
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Cost of goods sold 553,389 457,946 417,270 490,510 419,823 379,286 370,652 373,429
Selling, general & administrative expenses 39,493 37,035 39,719 48,229 47,978 47,973 48,130 49,764
Research and development expenses 14,502 13,170 11,066 8,763 8,275 9,141 5,026 4,541
Interest expense (c) 1,318 1,952 2,176 3,039 4,008 5,044 5,615 7,489
Unusual items (101)(d) (2,250)(e)(11,427)(f) (78)(g) 16,494(h) 452(i) 90(j) 721(k
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608,601 507,853 458,804 550,463 496,578 441,896 429,513 435,944
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Income from continuing operations
before income taxes 95,210 90,166 68,995 38,322 5,334 6,925 15,942 3,987
Income taxes 31,054(d) 31,720 23,960 14,269 3,917 3,202 6,425 1,468
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Income from continuing operations (a)(b) 64,156 58,446 45,035 24,053 1,417 3,723 9,517 2,519
Income from discontinued Energy
segment operations (b) 4,713 - - - 37,218 6,784 5,795 3,104
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Net income before extraordinary item
and cumulative effect of accounting changes 68,869 58,446 45,035 24,053 38,635 10,507 15,312 5,623
Extraordinary item - prepayment premium on
extinguishment of debt (net of tax) - - - - - (1,115) - -
Cumulative effect of accounting changes - - - - - 150 - -
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Net income $68,869 $58,446 $45,035 $24,053 $38,635 $ 9,542 $15,312 5,623
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Diluted earnings per share:
Continuing operations (a)(b) 1.66 1.48 1.15 .60 .03 .08 .19 .05
Discontinued Energy segment operations (b) .12 - - - .79 .14 .12 .06
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Before extraordinary item and cumulative
effect of accounting changes 1.78 1.48 1.15 .60 .82 .22 .31 .11
Net income 1.78 1.48 1.15 .60 .82 .19 .31 .11
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Refer to notes to financial tables on pages 16-17.
9
Share Data:
Equity per share $ 8.46 $ 7.34 $ 5.79 $ 4.67 $ 4.25 $ 3.45 $ 3.31 $ 3.06
Cash dividends declared per share .15 .11 .09 .06 .05 .05 .05 .05
Weighted average common shares outstanding
during the period 36,286 36,861 36,624 38,748 46,572 49,029 49,023 49,023
Shares used to compute diluted earnings
per share during the period 38,670 39,534 39,315 40,110 46,842 49,182 49,176 49,023
Shares outstanding at end of period 36,661 37,113 36,714 36,528 40,464 49,029 49,023 49,023
Closing market price per share:
High 30.67 24.65 15.13 7.72 4.14 4.00 4.14 2.39
Low 16.13 12.54 6.83 3.86 3.11 2.78 2.22 1.42
End of year 22.50 21.96 13.38 7.17 3.86 3.33 3.44 2.22
Total return to shareholders (l) 3.1% 65.0% 87.8% 87.2% 17.4% (1.7)% 57.4% 38.8%
Financial Position:
Total assets 457,178 410,937 341,077 314,052 318,345 353,383 354,910 335,415
Working capital excluding cash and
cash equivalents 52,050 30,279 31,860 54,504 53,087 62,064 56,365 60,341
Ending consolidated capital employed (m) 309,886 182,481 146,284 203,376 200,842 266,088 263,897 249,723
Current ratio 1.9:1 3.1:1 3.2:1 1.8:1 1.9:1 2.1:1 2.0:1 2.1:1
Cash and cash equivalents 25,409 120,065 101,261 2,145 9,036 - - 500
Technology investments:
Cost basis 60,617 25,826 6,048 3,410 2,200 800 200 -
Carrying value 60,024 33,513 6,048 3,410 2,200 800 200 -
Estimated fair value 70,841 40,757 15,000 5,700 2,300 800 200 -
Capital employed of divested and discontinued
operations (Molded Products, Brudi and
the Energy segment) (b)(m) - - - 60,144 59,267 98,903 96,830 92,365
Debt 25,000 30,000 35,000 35,000 38,000 97,000 101,500 100,000
Shareholders' equity (net book value) 310,295 272,546 212,545 170,521 171,878 169,088 162,397 150,223
Equity market capitalization (n) 824,873 814,940 491,050 261,784 156,236 163,430 168,857 108,940
Net debt (cash) (debt less cash and cash
equivalents) as a % of net capitalization (0.1)% (49.4)% (45.3)% 16.2% 14.4% 36.5% 38.5% 39.8%
Refer to notes to financial tables on pages 16-17.
10
Other financial data excluding unusual
items, technology-related investment
activities and divested and discontinued
operations (a)(b):
Net sales $699,796 $581,004 $489,040 $472,709 $396,738 $356,750 $344,296 $337,151
EBITDA (o) 115,977 89,443 71,914 56,283 45,684 31,734 36,334 36,203
Depreciation 22,239 18,364 18,451 17,553 17,089 17,550 16,373 16,566
Amortization of intangibles 205 50 56 26 463 1,712 3 3
Capital expenditures 34,016 22,655 22,698 17,778 11,985 12,729 17,431 18,072
Acquisitions 72,102 13,469 - 3,637 - - 13,884 -
Ending capital employed (m) 249,649 151,734 140,236 139,822 138,625 165,635 163,117 154,208
Average capital employed (m) 214,846 145,985 140,029 139,224 152,130 164,376 158,663 157,964
Unleveraged after-tax earnings (p) 60,624 45,105 33,913 24,498 17,603 7,544 12,558 12,397
Return on average capital employed (q) 28.2% 30.9% 24.2% 17.6% 11.6% 4.6% 7.9% 7.8%
EBITDA as % of net sales 16.6% 15.4% 14.7% 11.9% 11.5% 8.9% 10.6% 10.7%
Effective income tax rate
(excluding the effects of
tax-exempt interest income) 35.2% 36.4% 36.5% 36.6% 37.1% 39.5% 36.7% 36.3%
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Refer to notes to financial tables on pages 16-17.
11
SEGMENT TABLES
Tredegar Industries, Inc., and Subsidiaries
Net Sales
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Segment 1998 1997 1996 1995 1994 1993 1992 1991
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(In thousands)
Film Products $ 286,965 $298,862 $257,306 $237,770 $188,672 $177,052 $183,117 $184,448
Fiberlux 11,629 10,596 10,564 11,329 11,479 10,239 10,655 9,305
Aluminum Extrusions 395,455 266,585 219,044 221,657 193,870 166,465 150,524 143,398
Technology:
Molecumetics 5,718 2,583 36 - 200 - - -
Other 29 2,378 2,090 1,953 2,517 2,994 - -
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Total ongoing operations (r) 699,796 581,004 489,040 472,709 396,738 356,750 344,296 337,151
Divested operations (b):
Molded Products - - 21,131 84,911 76,579 68,233 80,834 87,860
Brudi - - 13,380 31,834 28,891 24,225 20,099 14,175
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Total $ 699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229 $439,186
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Refer to notes to financial tables on pages 16-17.
12
Operating Profit
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Segment 1998 1997 1996 1995 1994 1993 1992 1991
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(In thousands)
Film Products:
Ongoing operations $ 53,786 $ 50,463 $ 43,158 $ 36,019 $ 34,726 $ 22,320 $ 26,700 $ 32,189
Unusual items - - 680(f) 1,750(g) - (1,815) (i) - -
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53,786 50,463 43,838 37,769 34,726 20,505 26,700 32,189
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Fiberlux:
Ongoing operations 1,433 845 1,220 452 950 557 (127) 756
Unusual items - - - - - - - 2,797(k)
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1,433 845 1,220 452 950 557 (127) 3,553
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Aluminum Extrusions:
Ongoing operations 47,091 32,057 23,371 16,777 11,311 7,964 4,180 (4,247)
Unusual items (664)(d) - - - - - - -
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46,427 32,057 23,371 16,777 11,311 7,964 4,180 (4,247)
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Technology:
Molecumetics (3,504) (4,488) (6,564) (4,769) (3,534) (3,324) (1,031) -
Investments 615 13,880 2,139 (695) - - - -
Other (428) (267) (118) (566) (5,354) (6,380) (834) -
Unusual items 765(d) - - (1,672)(g) (9,521)(h) 2,263(i) (1,092)(j) -
- ------------------------------------------------------------------------------------------------------------------------------------
(2,552) 9,125 (4,543) (7,702) (18,409) (7,441) (773) -
- ------------------------------------------------------------------------------------------------------------------------------------
Divested operations (b):
Molded Products - - 1,011 2,718 (2,484) (228) 1,176 (9,307)
Brudi - - 231 222 (356) 177 513 1,870
Unusual items - 2,250(e) 10,747(f) - (6,973)(h) - (1,182)(j) (3,518)(k
- ------------------------------------------------------------------------------------------------------------------------------------
- 2,250 11,989 2,940 (9,813) (51) 507 (10,955)
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating profit 99,094 94,740 75,875 50,236 18,765 21,534 30,487 20,540
Interest income (t) 2,279 4,959 2,956 333 544 - - -
Interest expense (c) 1,318 1,952 2,176 3,039 4,008 5,044 5,615 7,489
Corporate expenses, net 4,845 7,581 7,660 9,208 9,967 9,565(i) 8,930 9,064
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 95,210 90,166 68,995 38,322 5,334 6,925 15,942 3,987
Income taxes 31,054(d) 31,720 23,960 14,269 3,917 3,202 6,425 1,468
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations (a) 64,156 58,446 45,035 24,053 1,417 3,723 9,517 2,519
Income from discontinued Energy
segment operations (b) 4,713 - - - 37,218 6,784 5,795 3,104
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary
item and cumulative effect of
accounting changes $ 68,869 $ 58,446 $ 45,035 $ 24,053 $ 38,635 $ 10,507 $ 15,312 $ 5,623
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17.
13
Identifiable Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 132,241 $123,613 $116,520 $118,096 $108,862 $109,916 $112,153 $102,453
Fiberlux 7,811 6,886 6,203 6,330 6,448 6,667 7,762 8,177
Aluminum Extrusions 201,518 101,855 83,814 80,955 89,406 89,498 93,365 95,000
Technology:
Molecumetics 5,196 2,550 2,911 2,018 1,536 1,926 1,415 -
Investments and other (s) 61,098 34,611 7,760 5,442 5,780 13,321 15,441 3,334
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets for
ongoing operations 407,864 269,515 217,208 212,841 212,032 221,328 230,136 208,964
Nonoperating assets held for sale - - - 6,057 5,018 3,605 4,330 13,600
General corporate 23,905 21,357 22,608 20,326 12,789 12,031 11,745 9,447
Cash and cash equivalents 25,409 120,065 101,261 2,145 9,036 - - 500
Divested operations (b):
Molded Products - - - 44,173 48,932 54,487 50,151 52,132
Brudi - - - 28,510 30,538 30,956 28,744 26,416
Net assets of discontinued Energy
segment operations (b) - - - - - 30,976 29,804 24,356
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 457,178 $410,937 $341,077 $314,052 $318,345 $353,383 $354,910 $335,415
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17.
14
Depreciation and Amortization
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 11,993 $ 10,947 $ 11,262 $ 9,766 $ 9,097 $ 9,200 $ 7,697 $ 6,837
Fiberlux 544 515 507 577 644 826 883 1,010
Aluminum Extrusions 8,393 5,508 5,407 5,966 5,948 6,240 7,093 8,033
Technology:
Molecumetics 1,260 996 780 592 573 443 - -
Investments and other 21 135 161 197 720 1,868 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 22,211 18,101 18,117 17,098 16,982 18,577 15,673 15,880
General corporate 254 313 390 481 570 685 703 689
- ------------------------------------------------------------------------------------------------------------------------------------
Total ongoing operations 22,465 18,414 18,507 17,579 17,552 19,262 16,376 16,569
Divested operations (b):
Molded Products - - 1,261 5,055 5,956 5,289 5,416 7,835
Brudi - - 550 1,201 1,337 1,272 1,085 798
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 22,465 $ 18,414 $ 20,318 $ 23,835 $ 24,845 $ 25,823 $ 22,877 $ 25,202
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures, Acquisitions and Investments
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 18,456 $ 15,354 $ 11,932 $ 10,734 $ 6,710 $ 6,561 $ 12,931 $ 9,996
Fiberlux 1,477 530 417 465 416 14 283 59
Aluminum Extrusions 10,407 6,372 8,598 5,454 4,391 1,870 2,487 7,594
Technology:
Molecumetics 3,561 366 1,594 894 178 939 1,414 -
Investments and other 54 5 14 - 99 905 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 33,955 22,627 22,555 17,547 11,794 10,289 17,115 17,649
General corporate 115 28 143 231 191 2,440 316 423
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures for ongoing
operations 34,070 22,655 22,698 17,778 11,985 12,729 17,431 18,072
Divested operations (b):
Molded Products - - 1,158 6,553 2,988 3,235 2,441 2,897
Brudi - - 104 807 606 516 833 391
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures 34,070 22,655 23,960 25,138 15,579 16,480 20,705 21,360
Acquisitions and other 72,102 13,469 - 3,637 - 5,099 17,422 25,654
Technology-related investments 35,399 20,801 3,138 1,904 1,400 600 200 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 141,571 $ 56,925 $ 27,098 $ 30,679 $ 16,979 $ 22,179 $ 38,327 $ 47,014
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17.
15
(a) Income and diluted earnings per share from continuing operations,
adjusted for unusual items and technology-related investment
gains/losses affecting the comparability of operating results between
years, are presented below:
1998 1997 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
as reported (b) $64,156 $58,446 $45,035 $24,053 $ 1,417 $ 3,723 $ 9,517 $ 2,519
After-tax effects of unusual items
related to continuing operations:
Unusual (income) charge, net (d-k) (2,341) (1,440) (8,479) 41 12,051 246 502 447
Impact on deferred taxes of 1%
increase in federal income tax rate - - - - - 348 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
as adjusted for unusual items 61,815 57,006 36,556 24,094 13,468 4,317 10,019 2,966
After-tax effect of technology-related
investment (gains) losses (394) (8,882) (1,369) 444 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations as
adjusted for unusual items and
technology-related investment
gains/losses (b) $61,421 $48,124 $35,187 $24,538 $13,468 $ 4,317 $10,019 $ 2,966
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share from
continuing operations (b):
As reported $ 1.66 $ 1.48 $ 1.15 $ .60 $ .03 $ .08 $ .19 $ .05
As adjusted for unusual items 1.60 1.44 .93 .60 .29 .09 .20 .06
As adjusted for unusual items and
technology-related investment
gains/losses 1.59 1.22 .90 .61 .29 .09 .20 .06
(b) On August 16, 1994, Tredegar completed the divestiture of its coal
subsidiary, The Elk Horn Coal Corporation. On February 4, 1994, we sold
our remaining oil and gas properties. As a result of these events, we
report the Energy segment as discontinued operations. In 1998,
discontinued operations includes gains for the reimbursement of payment
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 (see Note 19 on page
59). On March 29, 1996, we sold Molded Products. During the second
quarter of 1996, we completed the sale of Brudi. The operating results
for Molded Products were historically reported as part of the Plastics
segment on a combined basis with Film Products and Fiberlux. Likewise,
results for Brudi were combined with Aluminum Extrusions and reported
as part of the Metal Products segment. Accordingly, results for Molded
Products and Brudi have been included in continuing operations. We
began reporting Molded Products and Brudi separately in our segment
disclosures in 1995 after announcing our intent to divest these
businesses.
(c) Interest expense has been allocated between continuing and discontinued
operations based on relative capital employed (see (b)).
(d) Unusual items for 1998 include a charge related to the shutdown of the
powder-coat paint line in the production facility in Newnan, Georgia
($664) and a gain on the sale of APPX Software ($765). Income taxes
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.
(e) Unusual items for 1997 include a gain of $2,250 related to the
redemption of preferred stock received in connection with the 1996
divestiture of Molded Products (see Note 19 on page 59).
16
(f) Unusual items for 1996 include a gain on the sale of Molded Products
($19,893, see Note 19 on page 59), a gain on the sale of a former
plastic films manufacturing site in Fremont, California ($1,968), a
charge related to the loss on the divestiture of Brudi ($9,146, see
Note 19 on page 59) and a charge related to the write-off of
specialized machinery and equipment due to excess capacity in certain
industrial packaging films ($1,288).
(g) Unusual items in 1995 include a gain on the sale of Regal Cinema shares
($728), a charge related to the restructuring of APPX Software ($2,400)
and a recovery in connection with a Film Products product liability
lawsuit ($1,750).
(h) Unusual items in 1994 include the write-off of certain goodwill and
intangibles in APPX Software ($9,521), the write-off of certain
goodwill in Molded Products ($4,873) and the estimated costs related to
the closing of a Molded Products plant in Alsip, Illinois ($2,100).
(i) Unusual items in 1993 include estimated costs related to the sale of a
Film Products plant in Flemington, New Jersey ($1,815), and the
reorganization of corporate functions ($900), partially offset by the
gain on the sale of our remaining investment in Emisphere Technologies,
Inc. ($2,263).
(j) Unusual items in 1992 include the write-off of certain goodwill in
Molded Products ($1,182), partially offset by the gain on the sale of a
portion of an investment in Emisphere Technologies, Inc. ($1,092).
(k) Unusual items in 1991 include costs related to plant closings in Molded
Products ($4,412) offset by a credit ($2,797) related to our decision
to continue operating the vinyl extrusions business (Fiberlux), and the
gain on the sale of Molded Products' beverage closure business ($894).
(l) 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.
(m) Consolidated capital employed is debt plus shareholders' equity minus
cash and cash equivalents. Capital employed excluding
technology-related investments (see Note 7 on page 46) and divested and
discontinued operations (see (b)) is consolidated capital employed
minus the carrying value of technology-related investments (net of
related deferred income taxes) minus the capital employed of Molded
Products, Brudi and the Energy segment.
(n) Equity market capitalization is the closing market price per share for
the period times the shares outstanding at the end of the period.
(o) EBITDA excluding unusual items (see (d)-(k)), technology-related
gains/losses and divested and discontinued operations (see (b)) is
income before income taxes from operations plus depreciation and
amortization plus interest expense minus interest income minus/plus
unusual income/charges minus/plus technology-related investment
gains/losses minus the EBITDA (excluding unusual items) for Molded
Products and Brudi. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an
indicator of operating performance or to cash flow as a measure of
liquidity.
(p) Unleveraged after-tax earnings excluding unusual items (see (d)-(k)),
technology-related investment gains/losses and divested and
discontinued operations (see (b)) is net income (loss) from continuing
operations plus after-tax interest expense minus after-tax interest
income minus/plus after-tax unusual income/charges minus/plus after-tax
technology-related investment gains/losses minus the unleveraged
after-tax earnings (excluding unusual items) for Molded Products and
Brudi. Unleveraged after-tax earnings should not be considered as an
alternative to net income as defined by generally accepted accounting
principles.
(q) Return on average capital employed is unleveraged after-tax earnings
divided by average capital employed.
(r) Net sales for ongoing operations include sales to P&G totaling $233,493
in 1998, $242,229 in 1997 and $206,926 in 1996.
(s) Included in the investments and other category of the Technology
segment are APPX Software (sold in 1998 - see (d)) and
technology-related investments in which our ownership is less than 20%
(see Note 7 on page 46).
(t) Interest income was insignificant prior to 1994.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1998 Summary
Tredegar's net income, diluted earnings per share and EBITDA for 1998
and 1997 are summarized below:
- -----------------------------------------------------------------------------------
(In Millions, Except Per Share Data)
Percent
1998 1997 Change
- -----------------------------------------------------------------------------------
Net sales $ 699.8 $581.0 20
Net income:
Manufacturing and research operations $ 61.4 $ 48.1 28
Technology investments, net .4 8.9 (96)
Unusual items 2.4 1.4 71
Discontinued operations 4.7 - -
- -----------------------------------------------------------------------------------
Net income $ 68.9 $ 58.4 18
- -----------------------------------------------------------------------------------
Diluted earnings per share:
Manufacturing and research operations $ 1.59 $ 1.22 30
Technology investments, net .01 .22 (95)
Unusual items .06 .04 50
Discontinued operations .12 - -
- -----------------------------------------------------------------------------------
Net income $ 1.78 $ 1.48 20
- -----------------------------------------------------------------------------------
EBITDA (see Note (o) on page 17) $ 116.0 $ 89.4 30
As a % of net sales 16.6% 15.4%
Pro forma information (assumes acquisitions
occurred at the beginning of 1997 -
see Note 2 on page 43)
Net sales $ 745.6 $743.2 -
Manufacturing and research operations:
Net income 61.7 48.6 27
Diluted earnings per share 1.59 1.22 30
EBITDA 118.7 98.9 20
As a % of pro forma net sales 15.9% 13.3%
- -----------------------------------------------------------------------------------
Results for both years include technology-related investment
activities, unusual items and discontinued operations that affect comparability
between periods. Excluding the after-tax effects of these items, net income was
up 28% and pro forma EBITDA was up 20% in 1998. The improvement in operating
earnings and EBITDA was driven by:
- - Continued volume growth and acquisitions in Aluminum Extrusions
- - Higher profits in Film Products in most markets except Asia (profits in
Asia declined by $3 million)
18
- - Higher pension income and lower costs for certain other employee benefits
- - Higher contract research revenues resulting in lower losses at Molecumetics
Pro forma net sales were flat for the year as higher pro forma sales
in Aluminum Extrusions (up 3%), higher collaboration revenues at Molecumetics
and higher sales at Fiberlux were offset by lower sales in Film Products (down
4%). For more discussion, see the business segment review on pages 26-30.
Unusual Items. Unusual income (net) affecting operations in 1998 totaled
$101,000 ($2.4 million after income tax benefits) and included:
- - A fourth-quarter charge of $664,000 ($425,000 after taxes) related to the
shutdown of the powder-coat paint line at the aluminum extrusion facility
in Newnan, Georgia
- - A first-quarter gain of $765,000 ($2.8 million after tax benefits) on the
sale of APPX Software
Income taxes for continuing operations include a tax benefit of $2
million related to the sale of APPX Software, reflecting a tax benefit for the
excess of its income tax basis over its financial reporting basis.
Unusual income affecting operations in 1997 included a second-quarter
gain of $2.3 million ($1.4 million after income taxes) related to the redemption
of preferred stock received in connection with the 1996 divestiture of our
molded plastics subsidiary.
Technology-Related Investment Activities. Net gains realized from
technology-related investment activities totaled $615,000 ($394,000 after income
taxes) in 1998 and $13.9 million ($8.9 million after income taxes) in 1997.
These gains are included in "Other income (expense), net" in the consolidated
statements of income on page 35 and "Investments" in the operating profit table
on page 13.
Beginning April 1, 1998, we began classifying the stand-alone
operating expenses for our technology-related investment activities with gains
and losses in "Investments" in the operating profit table. Prior to that time
they were classified in the "Other" category of the technology segment. These
expenses, which continue to be reported in selling, general and administrative
expenses (SG&A) in the consolidated statements of income, totaled $2.1 million
for all of 1998, $1.7 million for the nine months ended December 31, 1998, and
$1 million in 1997. More information on our technology-related investments is
provided in Note 7 on page 46.
Discontinued Operations. Gains recognized in 1998 related to our discontinued
coal operations include:
- - A third-quarter after-tax gain of $3.4 million for the reversal of an
accrued liability established to cover future payments to the United Mine
Workers of America Combined Benefit Fund (the "UMWA Fund")
- - A fourth-quarter after-tax gain of $1.2 million for the reimbursement of
payments made by us to the UMWA Fund
We were relieved of any liability to the UMWA Fund as the result of a 1998
Supreme Court ruling.
19
1998 versus 1997
Revenues. Pro forma net sales were flat for the year as higher pro forma sales
in Aluminum Extrusions (up 3%), higher collaboration revenues at Molecumetics
and higher sales at Fiberlux were offset by lower sales in Film Products (down
4%). For more information, see the business segment review on pages 26-30.
Operating Costs and Expenses. The gross profit margin during 1998 decreased to
20.9% from 21.2% in 1997 due primarily to acquisitions in Aluminum Extrusions.
The acquired businesses generally have lower margins than those realized in Film
Products. Higher contract research revenues had a positive impact on margins.
SG&A expenses in 1998 were $39.5 million, up from $37 million in
1997. On a pro forma basis, including the impact of acquisitions, SG&A expenses
were down by $2 million or 5%, due primarily to lower charges for the savings
restoration plan and higher pension income. As a percentage of pro forma sales,
pro forma SG&A expenses declined to 5.5% in 1998 compared with 5.8% in 1997.
Research and development expenses increased to $14.5 million in 1998
from $13.2 million in 1997 due to higher spending at Molecumetics in support of
collaboration programs. Research and development spending at Film Products in
1998 was about the same as last year, with primary focus on breathable and
elastomeric film technologies, which were commercialized in 1998.
Unusual income of $101,000 in 1998 is explained on page 19 under
"Unusual Items".
Interest Income and Expense. Interest income, which is included in "Other income
(expense), net" in the consolidated statements of income, decreased to $2.3
million in 1998 from $5 million in 1997 due to a lower average cash equivalents
balance (see "Cash Flows" on page 23 for more information). The average
tax-equivalent yield earned on cash equivalents was approximately 5.6% in 1998
and 5.7% in 1997. Our policy permits investment of excess cash in marketable
securities that have the highest credit ratings and maturities of less than one
year. The primary objectives of our policy are safety of principal and
liquidity.
Interest expense decreased to $1.3 million in 1998 from $2 million in
1997 due to higher capitalized interest from higher capital expenditures, the
1997 write-off of deferred financing costs related to the refinancing of our
revolving credit facility, and lower average debt outstanding.
Income Taxes. The effective tax rate, excluding unusual items and
technology-related investment activities, was approximately 35% in 1998 and
1997, as the impact of a decline in average tax-exempt investments was offset by
a lower effective state income tax rate. See Note 16 on page 56 for additional
tax rate information.
20
1997 versus 1996
Revenues. Excluding the effects of the Molded Products and Brudi divestitures,
net sales increased 18.8% in 1997 due primarily to higher sales in Film Products
and Aluminum Extrusions. The increase in Film Products was driven by higher
volume of nonwoven film laminates, higher volume for foreign operations and
higher selling prices (reflecting higher average plastic resin costs). Higher
sales in Aluminum Extrusions reflected strength in residential and commercial
windows and curtain walls and higher volume to distributors, as well as the
acquisition of the aluminum extrusion and fabrication facility in El Campo,
Texas. Contract research revenues at Molecumetics also increased. For more
information, see the business segment review on pages 26-30.
Operating Costs and Expenses. The gross profit margin increased to 21.2% in 1997
from 20.3% in 1996 due primarily to higher volume and efficiencies in Film
Products (particularly nonwoven film laminates) and Aluminum Extrusions, and
contract research revenues supporting research and development projects at
Molecumetics.
SG&A expenses decreased by $2.7 million or 6.8% due primarily to the
Molded Products and Brudi divestitures and lower corporate overhead, partially
offset by higher SG&A expenses supporting higher sales at Film Products and
Aluminum Extrusions (including the acquisition of the El Campo facility). SG&A
expenses, as a percentage of sales, declined to 6.4% in 1997 compared with 7.6%
in 1996.
Research and development expenses increased by $2.1 million or 19%
due to higher product development spending at Film Products and higher spending
at Molecumetics.
Unusual income of $2.3 million in 1997 is explained on page 19 under
"Unusual Items".
Interest Income and Expense. Interest income increased to $5 million in 1997
from $3 million in 1996 due to the investment of divestiture proceeds for a full
year and cash generated from operations. The average tax-equivalent yield earned
on cash equivalents was 5.7% in 1997 and 5.5% in 1996.
Interest expense decreased slightly due to lower average debt
outstanding, partially offset by the second-quarter write-off of deferred
financing costs related to the refinancing of our revolving credit facility. The
average interest rate on debt was 7.2% in 1997 and 1996 (primarily fixed-rate
debt).
Income Taxes. The effective tax rate increased to 35.2% from 34.7% due primarily
to:
- - Slightly lower income on export sales in the tax-advantaged Foreign Sales
Corporation relative to significantly higher consolidated pre-tax income
- - A higher effective state income tax rate due to an increase in income in
states with higher tax rates
See Note 16 on page 56 for additional tax rate information.
21
Financial Condition
Assets
Total assets increased to $457.2 million at December 31, 1998, from
$410.9 million at December 31, 1997, due mainly to:
- - The aluminum extrusion acquisitions in Canada
- - New technology-related investments
- - Capital expenditures in excess of depreciation
The increase in assets related to these items was partially offset by a decrease
in cash and cash equivalents (see discussion below).
Liabilities and Available Credit
Total liabilities were $146.9 million at December 31, 1998, up from
$138.4 million at December 31, 1997, due primarily to acquisitions, partially
offset by lower debt outstanding and the reversal of an accrued liability
related to discontinued coal operations (see Note 19 on page 59).
Debt outstanding consisted of a note payable with a remaining balance
at December 31, 1998 of $25 million ($30 million at December 31, 1997). Interest
is payable on the note semi-annually at 7.2% per year. Annual principal payments
of $5 million are due each June through 2003 (the $5 million due in June 1999
has been classified as long-term in accordance with our ability to refinance
such obligation on a long-term basis). We also have a revolving credit facility
that permits borrowings of up to $275 million (no amounts borrowed at December
31, 1998 and 1997). The facility matures on July 9, 2002, with an annual
extension of one year permitted subject to the approval of participating banks.
See Note 10 on page 48 for more information on debt and credit agreements.
Shareholders' Equity
At December 31, 1998, Tredegar had 36,660,751 shares of common stock
outstanding and a total market capitalization of $824.9 million, compared with
37,113,735 shares outstanding and a total market capitalization of $814.9
million at December 31, 1997.
During 1998, we purchased 1,667,054 shares of our common stock for
$36.8 million ($22.06 per share). During 1997, we purchased 166,989 shares of
our common stock for $2.5 million ($15.15 per share). Since becoming an
independent company in 1989, we have purchased a total of 20.2 million shares,
or 36% of our issued and outstanding common stock, for $115.5 million ($5.70 per
share). Under a standing authorization from our board of directors, we may
purchase an additional four million shares in the open market or in privately
negotiated transactions at prices management deems appropriate.
22
Cash Flows
The reasons for the changes in cash and cash equivalents during 1998,
1997 and 1996, are summarized below:
- ---------------------------------------------------------------------------------------------
(In Millions)
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 120.1 $101.3 $ 2.1
- ---------------------------------------------------------------------------------------------
Cash provided by continuing operating activities
in excess of capital expenditures and dividends 33.2 39.5 18.1
Cash used by discontinued operations (1.9) - -
Proceeds from the exercise of stock options (including
related income tax benefits realized by Tredegar) 6.2 4.8 2.1
Acquisitions (all related to Aluminum Extrusions - see
Note 2 on page 43) (60.9) (13.5) -
Repurchases of Tredegar common stock (36.8) (2.5) (2.0)
New technology-related investments, net of proceeds
from disposals (see Note 7 on page 46) (29.9) (5.7) (.5)
Repayments of debt (5.0) (5.0) -
Proceeds from property disposals and divestitures .7 2.6 81.5
Other, net (.3) (1.4) -
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (94.7) 18.8 99.2
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 25.4 $120.1 $101.3
- ---------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends was $33.2 million in 1998, down from $39.5
million in 1997 due primarily to higher capital expenditures for manufacturing
and research operations and higher dividends, partially offset by improved
operating results. Cash used by discontinued operations of $1.9 million was due
to the recapture of tax deductions previously taken on the UMWA Fund liability,
partially offset by reimbursements received from the UMWA Fund.
Higher capital expenditures in 1998 are related to:
- - A new facility near Budapest, Hungary, which will produce disposable films
for hygiene products marketed in Eastern Europe (this facility should be
operational in mid-1999)
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films (these films are replacing conventional diaper backsheet
and other diaper components in order to improve comfort and fit)
- - Expansion of diaper backsheet film capacity in Brazil
- - The second phase of a modernization program at the aluminum extrusion plant
in Newnan, Georgia (the first phase was completed in 1996)
- - Expansion of Molecumetics' research lab in Bellevue, Washington.
23
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends was $39.5 million in 1997, up from $18.1
million in 1996 due primarily to:
- - Improved operating results
- - Lower capital expenditures in Aluminum Extrusions due to the completion
of the modernization project at the Newnan plant in late 1996
- - Lower capital expenditures due to the 1996 Molded Products and Brudi
divestitures (Molded Products and Brudi had combined capital expenditures
of $1.3 million in 1996)
These items were partially offset in 1997 by:
- - Income taxes paid on technology-related net investment gains
- - Higher capital expenditures in Film Products reflecting normal replace-
ment of machinery and equipment and permeable film additions, including
expansion into China and Eastern Europe.
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends was $18.1 million in 1996, down from $22.2
million in 1995 due primarily to:
- - Higher working capital for ongoing operations to support higher sales
volume
- - Income taxes paid on net gains realized from divestitures, property
disposals and the sale of a technology-related investment
Normal operating cash requirements over the next three to five years
are expected to be met from ongoing operations. Excess cash will be invested on
a short-term basis, with the primary objectives of safety of principal and
liquidity, until other opportunities are identified.
Quantitative and Qualitative Disclosures about Market Risk
Tredegar has exposure to the volatility of polyethylene resin prices,
aluminum ingot and scrap prices, foreign currencies, emerging markets and
technology stocks. At December 31, 1998, and during the last several years, we
have been in a net cash position (cash and cash equivalents in excess of debt),
and therefore our earnings have not been materially affected by interest rate
volatility. See Note 10 on page 48 for information on debt and credit
agreements.
Changes in resin prices, and the timing of those changes, could have
a significant impact on profit margins in Film Products; however, those changes
are generally followed by a corresponding change in selling prices. Profit
margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot
and scrap prices but are also generally followed by a corresponding change in
selling prices; however, there is no assurance that higher ingot costs can be
passed along to customers.
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 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 aluminum, based on
the scheduled deliveries. See Note 6 on page 45 for more information.
24
We sell to customers in foreign markets through our foreign
operations and through exports from U.S. plants. The percentage of sales, income
and total assets related to foreign markets for 1998 and 1997 are presented
below:
- -------------------------------------------------------------------------------------------------
Tredegar Industries, Inc.
Percentage of Net Sales, Pretax Income and Total Assets Related to Foreign Markets
- ----------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------
% of Total % of Total % Total % of Total % of Total % Total
Net Sales Pretax Income* Assets - Net Sales Pretax Income* Assets -
Exports Foreign Exports Foreign Foreign Exports Foreign Exports Foreign Foreign
From Oper- From Oper- Oper- From Oper- From Oper- Oper-
U.S. ations U.S. ations ations U.S. ations U.S. ations ations
Canada 3 15 6 7 20 4 - 7 - -
Europe 1 4 1 10 3 1 5 1 11 2
Latin America 3 4 4 5 4 3 4 5 6 4
Asia 4 - 6 (1) 1 7 - 11 (1) 1
- ----------------------------------------------------------------------------------------------------------
Total % exposure
to foreign
markets 11 23 17 21 28 15 9 24 16 7
- ----------------------------------------------------------------------------------------------------------
* The percentages of pretax income for foreign markets are relative to
Tredegar's total pretax income from manufacturing and research operations
(consolidated pretax income from continuing operations excluding
technology-related investment activities and unusual items).
We attempt to match the pricing and cost of our products in the same
currency and generally view the volatility of foreign currencies and emerging
markets, and the corresponding impact on earnings and cash flow, as part of the
overall risk of operating in a global environment. Exports from the U.S. are
denominated in U.S. dollars. Our foreign operations in emerging markets have
agreements with certain customers that index the pricing of our products to the
U.S. dollar or the German mark and the euro. Our foreign currency exposure on
income from foreign operations in Europe primarily relates to the German mark
and the euro. We believe that our exposure to the Canadian dollar has been
substantially neutralized by U.S. dollar-based spread (the difference between
selling prices and aluminum costs) generated from Canadian casting operations
and exports from Canada to the U.S.
We have investments in private venture capital fund limited
partnerships and early-stage technology companies, including the stock of
privately-held companies and the restricted and unrestricted stock of companies
that have recently registered shares in initial public offerings. Investments in
non-public companies are illiquid and the investments in public companies are
subject to the volatility of equity markets and technology stocks. See Note 7 on
page 46 for more information.
Year 2000 Information Technology Issues
The century date compliance problem, which is commonly referred to as
the "Year 2000" problem, will affect many computers and other electronic devices
that are not programmed to properly recognize dates starting with January 1,
2000. This could result in system failures or miscalculations. The potential
impact of such failures include, among others, an inability to secure raw
materials, manufacture products, ship products and be paid for products on a
timely basis.
Since 1996, we have been actively planning and responding to the Year
2000 problem. Year 2000 reviews have been and will continue to be made to our
Executive Committee and senior management. Periodic reviews with the Board of
Directors began in August 1998.
25
Our Year 2000 compliance efforts are focused on internal
computer-based information systems, external electronic interfaces and
communication equipment, shop floor machines and other manufacturing and
research process control devices. Remediation of systems requiring changes was
completed at the end of 1998, except for revisions to a small portion of certain
software programs and the replacement of certain software for the four aluminum
extrusion plants recently acquired in Canada (see Note 2 on page 43).
Remediation efforts for the exceptions will extend into 1999. Testing of systems
began in mid-1998 and will continue through 1999. We do not believe contingency
plans are necessary for internal systems at this time. We are also actively
evaluating the Year 2000 capabilities of parties with whom we have key business
relationships (suppliers, customers and banks, for example). Contingency plans
will be developed for these relationships as needed. Work to fix the Year 2000
problem is being performed largely by internal personnel and we do not track
those costs. The incremental costs associated with correcting the problem are
not expected to have a material adverse effect on our operating results,
financial condition or cash flows.
While we believe that we are taking the necessary steps to resolve
our Year 2000 issues in a timely manner, there can be no assurance that there
will be no Year 2000 problems. If any such problems occur, we will work to solve
them as quickly as possible. At present, we do not expect that any such problems
will have a material adverse effect on our businesses. The failure, however, of
a major customer or supplier to be Year 2000-compliant could have a material
adverse effect on our businesses.
New Accounting Standards
The Financial Accounting Standards Board has issued a new standard
affecting the accounting for derivative instruments and hedging activities. This
standard is not expected to significantly change our operating results,
financial condition or disclosures. The new standard will be adopted in the
first quarter of 2000.
Business Segment Review
Film Products
Sales. Film Products sales decreased by 4% to $287 million in 1998 due to lower
selling prices reflecting lower average plastic resin costs and lower volume of
plastic film in Asia (primarily supplied to P&G), partially offset by:
- - Sales of breathable backsheet and other new products to P&G
- - Higher volume of VisPore(R) film (primarily used for ground cover
applications)
- - Higher volume of permeable film supplied to P&G in Europe
- - Higher sales to new customers
26
Film Products sales were almost $300 million in 1997, up from $257
million in 1996 due to:
- - Higher volume of nonwoven film laminates supplied to P&G for diapers
- - Higher volume of permeable film supplied to P&G in Europe
- - Higher diaper backsheet and packaging film volume in South America
- - Higher selling prices, which reflected higher average plastic resin costs
Operating Profit. Film Products operating profit was $53.8 million in 1998, up
from $50.5 million in 1997 due to higher volume in the areas noted above and
material efficiencies in nonwoven film laminates, partially offset by:
- - Lower volume and operating profits relating to Asia (profits down $3 million)
- - Higher costs related to new product introductions
- - Start-up costs for the new permeable film production sites in China and
Hungary
Film Products operating profit was $50.5 million in 1997, up from
$43.2 million in 1996 due mainly to improved production efficiencies for
nonwoven film laminates and higher volume in the areas noted in the sales
discussion above. These positive factors were partially offset by higher new
product development expenses and start-up costs for the new permeable film
production site in China.
Identifiable Assets. Identifiable assets in Film Products were $132.2 million in
1998, up from $123.6 million in 1997 due primarily to capital expenditures in
excess of depreciation and amortization.
Identifiable assets in Film Products were $123.6 million in 1997, up
from $116.5 million in 1996 due mainly to higher accounts receivable supporting
higher sales, capital expenditures in excess of depreciation and an increase in
prepaid pension expense.
Depreciation, Amortization and Capital Expenditures. Depreciation and
amortization for Film Products was $12 million in 1998, up from $10.9 million in
1997 due to higher capital expenditures. Depreciation and amortization for Film
Products decreased slightly in 1997.
Capital expenditures in Film Products for 1998 reflect the normal
replacement of machinery and equipment and:
- - A new facility near Budapest, Hungary, which will produce disposable films
for hygiene products marketed in Eastern Europe (this facility should be
operational in mid-1999)
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films (these films are replacing conventional diaper backsheet
and other components in order to improve comfort and fit)
- - Expansion of diaper backsheet film capacity in Brazil
Capital expenditures in Film Products for 1997 reflect the normal
replacement of machinery and equipment and permeable film additions, including
the expansion into China and machinery and equipment purchased for the Hungary
facility.
27
Fiberlux
Fiberlux operating results improved during 1998, but are currently
not material to the consolidated results of operations.
Aluminum Extrusions
Acquisitions and Related Pro Forma Results. On June 11, 1998, Tredegar acquired
Canadian-based Exal Aluminum Inc. ("Exal"). Exal operates two aluminum extrusion
plants in Pickering, Ontario and Aurora, Ontario. Both facilities manufacture
extrusions for distribution, transportation, electrical, machinery and
equipment, and building and construction markets. The Pickering facility also
produces aluminum logs and billet for internal use and for sale to customers.
On February 6, 1998, we acquired two Canadian-based aluminum
extrusion and fabrication plants from Reynolds Metals Company ("Reynolds"). The
plants are located in Ste-Therese, Quebec, and Richmond Hill, Ontario. Both
facilities manufacture products used primarily in building and construction,
transportation, electrical, machinery and equipment, and consumer durables
markets.
On May 30, 1997, we acquired an aluminum extrusion and fabrication
plant in El Campo, Texas, from Reynolds. The El Campo facility extrudes and
fabricates products used primarily in transportation, electrical and consumer
durables markets.
The operating results for the five plants have been included in the
consolidated statements of income since the dates acquired. Pro forma financial
information with respect to these acquisitions for the first six months of 1998
and all of 1997 was filed on Form 8-K on August 19, 1998. The cost of these
acquisitions and selected pro forma and historical results on a consolidated
basis for Tredegar are provided in Note 2 on page 43. Selected historical and
pro forma results for Aluminum Extrusions for 1998 and 1997, which assume the
acquisitions occurred at the beginning of 1997, are summarized below:
- -----------------------------------------------------------------------------------
Aluminum Extrusions
Selected Historical and Pro Forma Financial Information
- -----------------------------------------------------------------------------------
(In Millions)
Historical Pro Forma
---------------------- ---------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------
Net sales $ 395.5 $ 266.6 $ 441.3 $ 428.8
Operating profit (excluding
unusual items) 47.1 32.1 48.6 36.9
Identifiable assets 201.5 101.9 201.5 198.9
Depreciation 8.2 5.5 9.3 9.8
Amortization of intangibles .2 - .3 .3
Capital expenditures 10.4 6.4 10.8 7.3
- -----------------------------------------------------------------------------------
Sales. Pro forma sales in Aluminum Extrusions increased by 3% in 1998 due to
strength in all building and construction markets and higher sales to
distributors.
28
Aluminum Extrusions sales in 1997 increased 21.7% due primarily to
higher volume, reflecting continued strength in residential and commercial
windows and curtain walls and higher volume to distributors. The acquisition of
the El Campo facility also had a positive impact on volume. Excluding the
acquisition, sales were up 10% and volume was up 12% for the year.
Operating Profit. Pro forma operating profit increased by 32% in 1998 due to
higher volume, related lower unit conversion costs and improved performance by
recently acquired operations. Conversion costs were also reduced by an insurance
recovery of $791,000 related to expenses incurred in 1997 for repairs to the
casting furnaces at the Newnan, Georgia, plant.
Aluminum Extrusions operating profit increased 37.2% in 1997 due to
higher volume, related lower unit conversion costs and the acquisition of the El
Campo facility, partially offset by expenses associated with repairs to the
casting furnaces at the Newnan plant. Conversion costs also improved due to a
modernization program completed late in 1996 at the Newnan facility. This
capital project cost $4.8 million, most of which was spent in 1996. Improvements
in productivity, scrap rates and sales returns are currently being realized as a
result of this project.
Identifiable Assets. Identifiable assets in Aluminum Extrusions were $201.5
million in 1998, up from pro forma assets of $198.9 million in 1997, due
primarily to capital expenditures in excess of depreciation and amortization.
Identifiable assets in Aluminum Extrusions were $101.9 million in
1997, up from $83.8 million in 1996 due primarily to the acquisition of the El
Campo facility, higher accounts receivable supporting higher sales and capital
expenditures in excess of depreciation.
Depreciation, Amortization and Capital Expenditures. Pro forma depreciation and
amortization for Aluminum Extrusions was $9.6 million in 1998, down from $10.1
million in 1997 due to the full depreciation of certain assets in 1997.
Depreciation and amortization for Aluminum Extrusions increased in
1997 due to the acquisition of the El Campo facility and the modernization
program completed in late 1996 at the Newnan plant, partially offset by the full
depreciation of certain assets in 1996.
Capital expenditures in 1998 reflect the normal replacement of
machinery and equipment, and expenditures for the second phase of a
modernization program at the aluminum extrusion plant in Newnan, Georgia (the
first phase was completed in 1996). Like the first phase, improvements in
productivity, scrap rates and sales returns are anticipated. Total capital
outlays for this project are expected to be $10 million, of which $1.3 million
was spent in 1998.
Capital expenditures in 1997 reflect the normal replacement of
machinery and equipment and costs capitalized for rebuilding the casting
furnaces at the Newnan plant.
29
Technology
Excluding net investment gains (see below), technology segment losses
decreased by $823,000 in 1998 and by $1.9 million in 1997 due to revenues
generated at Molecumetics from drug development partnerships, partially offset
by higher research and development spending.
Changes in Technology segment identifiable assets over the last three
years are summarized below:
- --------------------------------------------------------------------------------------
(In Millions)
1998 1997 1996
- --------------------------------------------------------------------------------------
Technology segment identifiable assets,
beginning of year $ 37.2 $ 10.7 $ 7.5
- --------------------------------------------------------------------------------------
Molecumetics:
Capital expenditures, primarily expansion of its
research lab in Bellevue, Washington 3.6 .4 1.6
Depreciation (1.3) (1.1) (.9)
Tredegar Investments (see Note 7 on page 46):
New investments 35.4 20.8 3.1
Proceeds from the sale of investments (5.5) (15.1) (2.6)
Realized gains 4.6 14.3 2.1
Realized losses, write-offs and write-downs (2.3) (.4) -
(Decrease) increase in unrealized gain on
available-for-sale securities (5.7) 7.8 -
Other .3 (.2) (.1)
- --------------------------------------------------------------------------------------
Net increase in Technology segment identifiable
assets 29.1 26.5 3.2
- --------------------------------------------------------------------------------------
Technology segment identifiable assets,
end of year $ 66.3 $ 37.2 $ 10.7
- --------------------------------------------------------------------------------------
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index on page 33 for references to the report of independent
accountants, management's report on the financial statements, the consolidated
financial statements and selected quarterly financial data.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
30
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF TREDEGAR
The information concerning directors and persons nominated to become
directors of Tredegar included in the Proxy Statement under the heading
"Election of Directors" is incorporated herein by reference.
The information included in the Proxy Statement under the heading
"Stock Ownership" is incorporated herein by reference.
Set forth below are the names, ages and titles of our executive
officers:
Name Age Title
John D. Gottwald 44 President and Chief Executive Officer
Douglas R. Monk 53 Executive Vice President and Chief Operating
Officer
Norman A. Scher 61 Executive Vice President and Chief Financial
Officer
Anthony J. Rinaldi 60 Senior Vice President and President, Film Products
D. Andrew Edwards 39 Vice President, Treasurer and Controller
Michael W. Giancaspro 43 Vice President, Corporate Development
Nancy M. Taylor 38 Vice President, General Counsel and Secretary
Frederick P. Woods 54 Vice President, Personnel
Except as described below, each of these officers has served in such
capacity since July 10, 1989. Each will hold office until his successor is
elected or until his earlier removal or resignation.
Douglas R. Monk. Mr. Monk was elected Executive Vice President and Chief
Operating Officer on November 18, 1998, and is responsible for our manufacturing
operations. Mr. Monk has served as a Vice President since August 29, 1994, and
served as President of The William L. Bonnell Company, Inc. and Capitol Products
Corporation since February 23, 1993. He also served as Director of Operations
for our Aluminum Division.
Anthony J. Rinaldi. Mr. Rinaldi was elected Senior Vice President on November
18, 1998. Mr. Rinaldi continues to serve as President of Film Products, a
position he has held since April 23, 1993. Mr. Rinaldi has served as a Vice
President since February 27, 1992. Mr. Rinaldi also served as General Manager of
Tredegar Film Products and as Managing Director of European operations. Mr.
Rinaldi served as Director of Sales and Marketing for Tredegar Film Products
from July 10, 1989 to June, 1991.
31
D. Andrew Edwards. Mr. Edwards was elected Vice President on November 18, 1998.
Mr. Edwards served as Controller from October 19, 1992, until May 22, 1997, when
he was elected Treasurer and Controller.
Nancy M. Taylor. Ms. Taylor was elected Vice President on November 18, 1998. Ms.
Taylor has served as General Counsel and Secretary since May 22, 1997. From
February 25, 1994 until May 22, 1997, Ms. Taylor served as Corporate Counsel and
Secretary. She served as Assistant General Counsel from September 1, 1991 until
February 25, 1994.
Michael W. Giancaspro. Mr. Giancaspro served as Director of Corporate Planning
from March 31, 1989, until February 27, 1992, when he was elected Vice
President, Corporate Planning. On January 1, 1998, his position was changed to
Vice President, Corporate Development.
Frederick P. Woods. Mr. Woods served as Vice President, Employee Relations from
July 10, 1989 until December, 1993, when his position was changed to Vice
President, Personnel.
Item 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement under the heading
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included in the Proxy Statement under the heading
"Stock Ownership" is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) List of documents filed as a part of the report:
(1) Financial statements:
Tredegar Industries, Inc.
Index to Financial Statements and Supplementary Data
Page
------------------------------------------------------------------- -----------
Report of Independent Accountants 34
------------------------------------------------------------------- -----------
Management's Report on the Financial Statements 34
------------------------------------------------------------------- -----------
Financial Statements (Audited):
- -------------------------------------------------------------------- -----------
Consolidated Statements of Income for the Years Ended 35
December 31, 1998, 1997 and 1996
------------------------------------------------------------------- -----------
Consolidated Balance Sheets as of December 31, 36
1998 and 1997
------------------------------------------------------------------- -----------
Consolidated Statements of Cash Flows for the Years Ended 37
December 31, 1998, 1997 and 1996
------------------------------------------------------------------- -----------
Consolidated Statement of Shareholder's Equity for the Years 38
Ended December 31, 1998, 1997 and 1996
------------------------------------------------------------------- -----------
Notes to Financial Statements 39-59
------------------------------------------------------------------- -----------
Selected Quarterly Financial Data (Unaudited) 60
------------------------------------------------------------------- -----------
(2) Financial statement schedules:
None
(3) Exhibits:
See Exhibit Index on page 63.
(b) Reports on Form 8-K
We did not file or amend any reports on Form 8-K during the
last quarter of the year ended December 31, 1998.
33
INDEPENDENT ACCOUNTANTS' AND MANAGEMENT'S REPORTS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders
of Tredegar Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Tredegar
Industries, Inc., and Subsidiaries ("Tredegar") at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Richmond, Virginia
January 12, 1999
MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Tredegar's management has prepared the financial statements and related
notes appearing on pages 35-59 in conformity with generally accepted accounting
principles. In so doing, management makes informed judgments and estimates of
the expected effects of events and transactions. Financial data appearing
elsewhere in this report are consistent with these financial statements.
Tredegar maintains a system of internal controls to provide reasonable,
but not absolute, assurance of the reliability of the financial records and the
protection of assets. The internal control system is supported by written
policies and procedures, careful selection and training of qualified personnel
and an extensive internal audit program.
These financial statements have been audited by PricewaterhouseCoopers
LLP, independent certified public accountants. Their audit was made in
accordance with generally accepted auditing standards and included a review of
Tredegar's internal accounting controls to the extent considered necessary to
determine audit procedures.
The Audit Committee of the Board of Directors, composed of outside
directors only, meets with management, internal auditors and the independent
accountants to review accounting, auditing and financial reporting matters. The
independent accountants are appointed by the Board on recommendation of the
Audit Committee, subject to shareholder approval.
34
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------
Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues:
Net sales $ 699,796 $ 581,004 $523,551
Other income (expense), net 4,015 17,015 4,248
- ---------------------------------------------------------------------------
Total 703,811 598,019 527,799
- ---------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 553,389 457,946 417,270
Selling, general and administrative 39,493 37,035 39,719
Research and development 14,502 13,170 11,066
Interest 1,318 1,952 2,176
Unusual items (101) (2,250) (11,427)
- ---------------------------------------------------------------------------
Total 608,601 507,853 458,804
- ---------------------------------------------------------------------------
Income from continuing operations
before income taxes 95,210 90,166 68,995
Income taxes 31,054 31,720 23,960
- ---------------------------------------------------------------------------
Income from continuing operations 64,156 58,446 45,035
Income from discontinued operations 4,713 0 0
- ---------------------------------------------------------------------------
Net income $ 68,869 $ 58,446 $ 45,035
- ---------------------------------------------------------------------------
Earnings per share:
Basic:
Continuing operations $ 1.77 $ 1.59 $ 1.23
Discontinued operations .13 - -
- ---------------------------------------------------------------------------
Net income $ 1.90 $ 1.59 $ 1.23
- ---------------------------------------------------------------------------
Diluted:
Continuing operations $ 1.66 $ 1.48 $ 1.15
Discontinued operations .12 - -
- ---------------------------------------------------------------------------
Net income $ 1.78 $ 1.48 $ 1.15
- ---------------------------------------------------------------------------
See accompanying notes to financial statements.
35
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
Tredegar Industries, Inc., and Subsidiaries
December 31 1998 1997
- -----------------------------------------------------------------------------
(In thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents $ 25,409 $ 120,065
Accounts and notes receivable 94,341 69,672
Inventories 34,276 20,008
Income taxes recoverable - 294
Deferred income taxes 8,762 8,722
Prepaid expenses and other