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Tredegar Reports Fourth-Quarter and Full Year 2016 Results
RICHMOND, Va., Feb 22, 2017 (BUSINESS WIRE) -- Copyright Business Wire 2017

Tredegar Corporation (NYSE:TG, also the "Company" or "Tredegar") today reported fourth-quarter and full year financial results for the period ended December 31, 2016.

Fourth quarter 2016 net income was $1.7 million ($0.05 per share) compared with net loss of $5.9 million ($0.18 per share) in the fourth quarter of 2015. Net income (loss) from ongoing operations, which excludes the special items shown in the table below, was $3.4 million ($0.10 per share) in the fourth quarter of 2016 and $11.0 million ($0.34 per share) in the fourth quarter of 2015. A reconciliation of net income (loss), a financial measure calculated in accordance with U.S. generally accepted accounting principles ("GAAP"), to net income (loss) from ongoing operations, a non-GAAP financial measure, for the three and twelve months ended December 31, 2016 and 2015, is shown below:

Highlights for the fourth quarter include:

-- Operating profit from ongoing operations for Bonnell Aluminum of $10.0 million was $0.4 million higher than the fourth quarter of 2015

-- Operating profit from ongoing operations for PE Films of $2.7 million was $9.7 million lower than the fourth quarter of 2015

-- Operating profit from ongoing operations for Flexible Packaging Films of $0.6 million was $3.1 million lower than the fourth quarter of 2015

John D. Gottwald, Tredegar's president and chief executive officer, said, "Tredegar's aluminum extrusions unit, Bonnell, turned in another excellent quarter, while PE Films' results were weak. Multiple transitions are taking place in our films business, which will continue for several more quarters. Terphane continues to face difficult market conditions due to large industry excess capacity."

Mr. Gottwald continued, "Earlier this month we announced Bonnell's acquisition of Futura Industries. I am optimistic that this acquisition will contribute meaningfully to Tredegar's growth and diversification."

OPERATIONS REVIEW

PE Films

PE Films is comprised of personal care materials, surface protection films, polyethylene overwrap films and films for other markets. A summary of fourth-quarter and full year operating results from ongoing operations for PE Films is provided below:

Fourth-Quarter Results vs. Prior Year Fourth Quarter Results

Net sales (sales less freight) in the fourth quarter of 2016 decreased by $13.6 million versus 2015 primarily due to:

-- The wind down of volume related to lost business in personal care materials with PE Films' largest customer ($4.2 million) and other personal care customers ($1.2 million) (see discussion below);

-- Lower volume in personal care materials primarily due to the timing of product transitions ($3.5 million);

-- Lower volume in surface protection films ($2.7 million) that reflects typical seasonality versus a strong performance in the fourth quarter of 2015; and

-- Lower volume of low margin overwrap films ($2.0 million).

As noted above, current year sales volume has declined in part due to the wind down of shipments for certain personal care materials related to previously announced known lost business, primarily with PE Films' largest customer. The restructuring project to consolidate domestic manufacturing facilities in PE Films, which commenced in the third quarter of 2015 ("North American facility consolidation"), is expected to be completed in the second half of 2017. Once complete, annual pre-tax cash cost savings are expected to be approximately $5-6 million on cash-related expenditures. Exit costs are expected to be approximately $17 million. The table below summarizes the pro forma operating profit from ongoing operations for the fourth quarters of 2016 and 2015, had the impact of the events noted above been fully realized:

Net sales associated with known lost business that have yet to be fully eliminated were approximately $1.1 million and $6.5 million in the fourth quarters of 2016 and 2015, respectively.

Net of the impact of known lost business, pro forma estimated operating profit from ongoing operations in the fourth quarter of 2016 decreased by $7.1 million versus the fourth quarter of 2015 primarily due to:

-- Lower contribution to profits from surface protection films ($2.1 million), primarily due to lower volume;

-- The unfavorable lag in the pass-through of average resin costs of $0.2 million in the fourth quarter of 2016 versus the favorable lag of $2.0 million in 2015;

-- A charge for inventories accounted for under the last-in last-out ("LIFO") method of $0.9 million in the fourth quarter of 2016 versus income of $0.4 million in 2015;

-- Lower productivity due to operational inefficiencies in personal care films of $2.0 million, due in part to elastics production for European customers sourced from the Lake Zurich, Illinois facility; and

-- Higher research and development ("R&D") expenses to support new product opportunities of $0.4 million offset by lower general, sales and administrative expenses of $0.6 million.

The surface protection operating segment of the PE Films reporting segment supports manufacturers of optical and other specialty substrates used in flat panel display products. These films are primarily used by customers to protect components of displays during the manufacturing and transportation process and then discarded. The top three surface protection customers account for a significant portion of surface protection sales.

As previously discussed, the Company believes that over the next few years, there is an increased risk that a portion of its film used in surface protection applications will be made obsolete by possible future customer product transitions to less costly alternative processes or materials. The Company estimates on a preliminary basis that the annual adverse impact on ongoing operating profit from customer shifts to alternative processes or materials in surface protection is in the range of up to $5 to $10 million. Given the technological and commercial complexity involved in bringing these alternative processes and materials to market, the Company is very uncertain as to the timing and ultimate amount of the possible transitions. In addition, the Company is experiencing increasing competitive pricing pressures in other surface protection applications. In response, the Company is aggressively pursuing new surface protection products, applications and customers.

The Company continues to anticipate a significant additional product transition in its personal care business after 2018 that has an estimated annual adverse impact on ongoing operating profit of $10 million. The competitive dynamics in the personal care business require continuous development of new materials for customers, which include the leading global and regional personal care producers. The product development process for personal care materials, which spans from idea inception to product commercialization, is typically 24 to 48 months.

Amounts estimated for the expected impact on future profits of lost business and product transitions are provided on a stand-alone basis and do not include any potential offsets such as sales growth, cost reductions or new product developments.

2016 vs. 2015

Net sales in 2016 decreased by $54.4 million versus 2015 primarily due to:

-- The loss of business with PE Films' largest customer related to various products in personal care materials ($22.0 million) and other personal care materials customers ($7.6 million);

-- Lower volume in personal care materials primarily due to the timing of product transitions and lower customer demand ($10.8 million);

-- A decline in volume in surface protection films ($6.2 million) that the Company believes is primarily the result of lower consumer demand for products with flat panel display screens; and

-- Lower volume of low margin overwrap films ($9.1 million) primarily due to the loss of business with a large customer, partially offset by sales growth for components used in LED lighting products ($1.3 million).

The table below summarizes the pro forma operating results for 2016 and 2015 had the impact of known lost business and efforts to consolidate domestic PE Films manufacturing facilities been fully realized:

Net sales associated with known lost business that have yet to be fully eliminated were $8.9 million and $38.5 million in 2016 and 2015, respectively.

Net of the impact of known lost business, pro forma estimated operating profit from ongoing operations in 2016 decreased by $11.6 million versus 2015 primarily due to:

-- Lower contribution to profits from surface protection films ($5.0 million) primarily due to lower volume and productivity issues;

-- Lower contribution to profits in personal care materials primarily due to volume declines resulting from the timing of product transitions and lower customer demand ($3.1 million) and lower productivity ($1.8 million) due in part to operational inefficiencies largely related to elastics production for European customers sourced from the Lake Zurich, Illinois facility;

-- The unfavorable lag in the pass-through of average resin costs of $0.2 million in 2016 versus the favorable lag of $1.3 million in 2015;

-- A charge for inventories accounted for under the LIFO method of $0.9 million in 2016 versus income of $0.4 million in 2015;

-- Higher contribution to profits from other products in PE Films ($0.7 million); and

-- Higher research and development expenses to support new product opportunities ($3.0 million), offset by lower general, sales and administrative expenses ($3.6 million).

Capital Expenditures and Depreciation & Amortization

Capital expenditures in PE Films were $25.8 million in 2016 compared to $21.2 million in 2015. Capital expenditures are projected to be $36 million in 2017, including capacity expansion for elastics and acquisition distribution layer materials, other growth and strategic projects and approximately $10 million for routine capital expenditures required to support operations. Depreciation expense was $13.5 million in 2016 and $15.4 million in 2015. Depreciation expense is projected to be $16 million in 2017. Amortization expense was $0.1 million in 2016 and $0.1 million in 2015, and is projected to be $0.1 million in 2017.

Flexible Packaging Films

Flexible Packaging Films, which is also referred to as Terphane, produces polyester-based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics. A summary of fourth-quarter and full year operating results from ongoing operations for Flexible Packaging Films, which excludes the 2015 goodwill impairment charge, is provided below:

Fourth-Quarter Results vs. Prior Year Fourth Quarter Results

Net sales in the fourth quarter of 2016 decreased 3.0% versus the fourth quarter of 2015 primarily due to competitive pricing pressures and the pass-through of lower raw material costs, partially offset by a 4.9% increase in sales volume. Sales volume improved from the fourth quarter of 2015 to the fourth quarter of 2016 partially due to the increase of end-use applications for flexible packaging films in the Latin American market.

Operating profit from ongoing operations decreased by $3.1 million in the fourth quarter of 2016 versus 2015 primarily due to:

-- Higher volume partially offset by lower margins from competitive pricing pressures that primarily related to ongoing excess global capacity in the industry, particularly in Latin America, and unfavorable economic conditions in Brazil (net favorable impact of $0.4 million);

-- The favorable settlement of certain loss contingencies of $0.6 million in the fourth quarter of 2015 (none in 2016);

-- The estimated lag in the pass through of lower raw material costs of $0.8 million in the fourth quarter of 2015 (none in 2016);

-- Higher costs and expenses of $1.7 million primarily related to the adverse impact of high inflation in Brazil and the appreciation of the Brazilian Real relative to the U.S. Dollar; and

-- Higher depreciation and amortization costs ($0.3 million).

The Company expects Terphane's future operating results to continue to be volatile until industry capacity utilization and the Brazilian business environment improve.

2016 vs. 2015

Net sales in 2016 increased 2.6% versus 2015 primarily due to a 8.9% increase in sales volume partially offset by competitive pricing pressures and the pass-through to customers of lower raw material costs. Sales volume improved from 2015 to 2016 partially due to the increase of end-use applications for flexible packaging films in the Latin American market.

Operating profit from ongoing operations decreased by $3.7 million in 2016 versus 2015 primarily due to:

-- Foreign currency transaction losses of $3.5 million in 2016 versus foreign currency transaction gains of $3.5 million in 2015, associated with U.S. dollar denominated export sales in Brazil;

-- Higher volume ($3.0 million) and operating efficiencies ($0.7 million);

-- Net refunds of $1.6 million in 2015 received as a result of the reinstatement by the U.S. of the Generalized System of Preferences (GSP) program for allowing duty-free shipments of Terphane products into the U.S. (none in 2016);

-- The favorable settlement of certain loss contingencies of $0.6 million in 2015 (none in 2016);

-- The estimated lag in the pass through of lower raw material costs of $1.2 million in 2016 versus $1.0 million in 2015; and

-- Lower depreciation and amortization costs ($0.2 million) and other costs and expenses ($1.4 million).

Capital Expenditures, Depreciation & Amortization and Goodwill Impairment Charge

Capital expenditures in Flexible Packaging were $3.4 million in 2016 compared to $3.5 million in 2015. Capital expenditures are projected to be $4 million in 2017, including approximately $3 million for routine items required to support operations. Depreciation expense was $6.7 million in 2016 and $6.8 million in 2015. Depreciation expense is projected to be $7 million in 2017. Amortization expense was $2.8 million in 2016 and $2.9 million in 2015, and is projected to be $3 million in 2017.

During the third quarter of 2015, the Company performed a goodwill impairment assessment related to Terphane. This review was undertaken as a result of the continued competitive pressures related to ongoing unfavorable economic conditions in Terphane's primary market of Brazil, and excess global industry capacity. The assessment resulted in a full write-off of the goodwill of $44.5 million associated with the acquisition of Terphane.

Aluminum Extrusions

Aluminum Extrusions, which is also referred to as Bonnell Aluminum, produces high-quality, soft-alloy and medium-strength aluminum extrusions primarily for building and construction, automotive, consumer durables, machinery and equipment, electrical and distribution markets. A summary of fourth-quarter and full year operating results from ongoing operations for Aluminum Extrusions is provided below:

Fourth-Quarter Results vs. Prior Year Fourth Quarter Results

Net sales in the fourth quarter of 2016 increased versus 2015 primarily due to higher sales volume and an increase in average selling prices. The higher sales volume had a net positive impact of $0.3 million on sales in 2016 versus 2015. Higher average net selling prices, primarily attributed to an increase in aluminum market prices, had a favorable impact on net sales of $0.6 million.

Operating profit from ongoing operations in the fourth quarter of 2016 increased in comparison to the fourth quarter of 2015 by $0.4 million, largely as a result of lower materials, supply and other net costs.

2016 vs. 2015

Net sales in 2016 decreased versus 2015 primarily due to a decrease in average selling prices, partially offset by higher sales volume. Higher sales volume, primarily in the automotive market, had a favorable impact of $4.7 million on sales in 2016 versus 2015. Lower average selling prices, which had an unfavorable impact on net sales of $20.8 million, can be primarily attributed to a decrease in average aluminum market prices.

Operating profit from ongoing operations in 2016 increased in comparison to 2015 by $7.4 million, as a result of:

-- Higher volume ($0.9 million) and lower materials, supply and other net costs ($2.6 million, including $0.7 million of construction-related costs incurred in 2015 for the anodizing upgrade project); and

-- Improved management of freight logistics and lower utility costs ($2.2 million) and other efficiencies ($1.8 million).

Cast House Explosion

As previously disclosed, on June 29, 2016, the Bonnell Aluminum plant in Newnan, Georgia suffered an explosion in the casting department, resulting in injuries to five employees, one seriously. The explosion caused significant damage to the cast house and related equipment. Production in the extrusion and finishing areas of the plant resumed on June 30, 2016. The Company is in the process of replacing the damaged casting equipment and expects the cast house to be back in production by the end of the second quarter of 2017. The Newnan plant is now sourcing raw materials for its extrusion process from other Bonnell plants and from third party vendors.

Bonnell Aluminum has various forms of insurance to cover losses in the event of such incidents. These policies cover damage to buildings and equipment, workers compensation claims, third party claims, business interruption losses and additional expenses incurred as a result of the explosion.

During 2016, Bonnell recognized a gain of $1.9 million for insurance recoveries to-date associated with assets destroyed or damaged (included in "Other income (expense), net" in the Condensed Consolidated Statements of Income - see Note (a) in the Notes to Financial Tables for additional details). The Company also incurred $5.0 million of additional expenses during 2016, $4.3 million of which have been fully offset by insurance recoveries. The remaining $0.7 million in 2016 of additional expenses for which recovery from insurance is not assured are included in "Plant shutdowns, asset impairments, restructurings and other" in the Net Sales and Operating Profit by Segment table. As the insurance recovery process progresses, additional insurance recoveries are expected.

Capital Expenditures and Depreciation & Amortization

Capital expenditures for Bonnell Aluminum were $15.9 million in 2016 compared to $8.1 million in 2015. Capital expenditures in 2016 included approximately $5 million for routine capital expenditures required to support operations and $9 million of a total $18 million expected to add extrusions capacity at the Niles, Michigan, manufacturing facility. Bonnell Aluminum's average extrusions capacity utilization at year end was in excess of 90%. Projections of capital expenditures for Bonnell Aluminum of $27 million in 2017 include approximately $9 million to complete the extrusions capacity project at Niles, expenditures to fix the damage caused by the cast house explosion net of related insurance recoveries (facility upgrades of approximately $2 million will not be covered by insurance reimbursements), $9 million for routine items required to support legacy operations, and $6 million to support operations for Futura Industries, which was acquired in February 2017. Depreciation expense was $8.1 million in 2016 compared to $8.7 million in 2015, and is projected to be $12 million in 2017. Amortization expense was $1.0 million in 2016 and $1.0 million in 2015, and is projected to be $4 million in 2017.

Futura Acquisition

On February 15, 2017, Bonnell Aluminum completed the previously announced acquisition of Futura Industries Corporation ("Futura") on a net debt-free basis for approximately $92 million. The acquisition, which was funded using Tredegar's existing revolving credit facility (which matures in March 2021) and will be treated as an asset purchase for U.S. federal income tax purposes, is expected to be immediately accretive to Tredegar's consolidated ongoing earnings.

Futura, headquartered in Clearfield, Utah, with a national sales presence and particular strength in the western U.S., designs and manufactures a wide range of extruded aluminum products for a number of industries and end markets, including branded flooring trims and TSLOTS(TM), as well as OEM (original equipment manufacturer) components for truck grills, solar panels, fitness equipment and other applications. Futura has approximately 350 employees and EBITDA (earnings before interest, taxes, depreciation and amortization) for 2016 of $13.6 million (unaudited). For additional information, please visit www.futuraind.com.

Corporate Expenses, Investments, Interest and Taxes

Pension expense was $10.9 million in 2016, a favorable change of $1.5 million from 2015. Most of the impact on earnings from lower pension expense is reflected in "Corporate expenses, net" in the Net Sales and Operating Profit by Segment table. Pension expense is projected to be $10.4 million in 2017. Corporate expenses, net decreased in 2016 versus 2015. In 2015, corporate expenses, net included non-operational costs of $4.9 million, which mainly consisted of employee-related charges of $3.9 million associated with the resignations of the Company's former chief executive and chief financial officers in the second quarter of 2015.

Interest expense was $3.8 million in 2016 in comparison to $3.5 million in 2015.

The effective tax rate from continuing operations was significantly impacted by the tax effects of the special items included in the introductory earnings reconciliation table on the first page. The comparable effective tax rate excluding the impact of these special items was 31.6% in 2016 and 36.2% in 2015. More information on the significant differences between the effective tax rate for income from continuing operations and the U.S. federal statutory rate for 2016 and 2015 will be provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

CAPITAL STRUCTURE

Total debt was $95.0 million at December 31, 2016, compared to $104.0 million at December 31, 2015. Net debt (debt in excess of cash and cash equivalents) was $65.5 million at December 31, 2016, compared with $59.8 million at December 31, 2015. Net debt is a financial measure that is not calculated or presented in accordance with GAAP. See the Notes to the Financial Tables for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Some of the information contained in this press release may constitute "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When we use the words "believe," "estimate," "anticipate," "expect," "project," "likely," "may" and similar expressions, we do so to identify forward-looking statements. 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. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ from expectations include, without limitation, the following: we have an underfunded defined benefit (pension) plan to which we will be required to make contributions; our performance is influenced by costs incurred by our operating companies, including, for example, the cost of raw materials and energy; our substantial international operations subject us to risks of doing business in countries outside the U.S., which could adversely affect our consolidated financial condition, results of operations and cash flows; we may not be able to successfully identify, complete or integrate strategic acquisitions; acquired businesses, including Futura Industries Corporation ("Futura"), may not achieve the levels of revenue, profit, productivity, or otherwise perform as we expect; acquisitions, including Futura, involve special risks, including without limitation, diversion of management's time and attention from our existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements; PE Films is highly dependent on sales associated with its top five customers, the largest of which is The Procter & Gamble Company, and the loss or significant reduction of sales associated with one or more of these customers could have a material adverse effect on our business; growth of PE Films depends on its ability to develop and deliver new products at competitive prices; the failure of PE Films' customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact its sales and operating margins; uncertain economic conditions in Brazil could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films; an impairment on our long-lived intangible assets, including goodwill, could have a material non-cash impact on our results of operations; and the other factors discussed in the reports Tredegar files with or furnishes to the Securities and Exchange Commission (the "SEC") from time to time, including the risks and important factors set forth in additional detail in "Risk Factors" Part II, Item 5 of Tredegar's Quarterly Report on Form 10-Q for the period ended September 30, 2016 and in Part I, Item 1A of Tredegar's 2015 Annual Report on Form 10-K/A filed with the SEC. Readers are urged to review and consider carefully the disclosures Tredegar makes in its filings with the SEC.

Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement made in this press release to reflect any change in management's expectations or any change in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law.

To the extent that this press release contains non-GAAP financial measures, it also presents both the most directly comparable financial measures calculated and presented in accordance with GAAP and a quantitative reconciliation of the difference between any such non-GAAP measures and such comparable GAAP financial measures. Accompanying the reconciliation is management's statement concerning the reasons why management believes that presentation of non-GAAP measures provides useful information to investors concerning Tredegar's financial condition and results of operations. Reconciliations of non-GAAP financial measures are provided in the Notes to the Financial Tables included with this press release and can also be found within "Presentations" in the "Investors" section of our website, www.tredegar.com. Tredegar uses its website as a channel of distribution of material company information. Financial information and other material information regarding Tredegar is posted on and assembled in the "Investors" section of our website.

Tredegar Corporation is a manufacturer of plastic films and aluminum extrusions. A global company headquartered in Richmond, Virginia, Tredegar had 2016 sales of $828 million. With approximately 3,200 employees, the company operates manufacturing facilities in North America, South America, Europe and Asia.

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SOURCE: Tredegar Corporation


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