UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 1-10258
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| (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 | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | x | Smaller reporting company | ¨ | |||||||||||||||||||
| Non-accelerated filer | ¨ | Emerging growth company | ¨ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of Common Stock, no par value, outstanding as of April 30, 2021: 33,677,433
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Corporation
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
| March 31, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts and other receivables, net of allowance for doubtful accounts and sales returns of $ | |||||||||||
| Income taxes recoverable | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other | |||||||||||
| Current assets of discontinued operations | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, at cost | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Net property, plant and equipment | |||||||||||
| Right-of-use leased assets | |||||||||||
Investment in kaléo (cost basis of $7,500) | |||||||||||
| Identifiable intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Non-current assets of discontinued operations | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Lease liability, short-term | |||||||||||
| Income taxes payable | |||||||||||
| Current liabilities of discontinued operations | |||||||||||
| Total current liabilities | |||||||||||
| Lease liability, long-term | |||||||||||
| Long-term debt | |||||||||||
| Pension and other postretirement benefit obligations, net | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock, no par value (issued and outstanding - | |||||||||||
Common stock held in trust for savings restoration plan ( | ( | ( | |||||||||
| Accumulated other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||
| Gain (loss) on derivative financial instruments | |||||||||||
| Pension and other postretirement benefit adjustments | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to financial statements.
2
Tredegar Corporation
Condensed Consolidated Statements of Income (Loss)
(In Thousands, Except Per Share Data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues and other items: | |||||||||||
| Sales | $ | $ | |||||||||
| Other income (expense), net | ( | ||||||||||
| Costs and expenses: | |||||||||||
| Cost of goods sold | |||||||||||
| Freight | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Amortization of identifiable intangibles | |||||||||||
| Pension and postretirement benefits | |||||||||||
| Interest expense | |||||||||||
| Asset impairments and costs associated with exit and disposal activities, net of adjustments | |||||||||||
Goodwill impairment | |||||||||||
| Total | |||||||||||
| Income (loss) from continuing operations before income taxes | ( | ||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Net income (loss) from continuing operations | ( | ||||||||||
| Income (loss) from discontinued operations, net of tax | ( | ( | |||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Earnings (loss) per share: | |||||||||||
| Basic: | |||||||||||
| Continuing operations | $ | $ | ( | ||||||||
| Discontinued operations | ( | ( | |||||||||
| Basic earnings (loss) per share | $ | $ | ( | ||||||||
| Diluted: | |||||||||||
| Continuing operations | $ | $ | ( | ||||||||
| Discontinued operations | ( | ( | |||||||||
| Diluted earnings (loss) per share | $ | $ | ( | ||||||||
| Shares used to compute earnings (loss) per share: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes to financial statements.
3
Tredegar Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Other comprehensive income (loss): | |||||||||||
Unrealized foreign currency translation adjustment (net of tax benefit of $ | ( | ( | |||||||||
Derivative financial instruments adjustment (net of tax benefit of $ | ( | ( | |||||||||
Amortization of prior service costs and net gains or losses (net of tax of $ | |||||||||||
| Other comprehensive income (loss) | ( | ||||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||
See accompanying notes to financial statements.
4
Tredegar Corporation
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments for noncash items: | |||||||||||
| Depreciation | |||||||||||
| Amortization of identifiable intangibles | |||||||||||
| Reduction of right-of-use lease asset | |||||||||||
| Goodwill impairment | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Accrued pension and post-retirement benefits | |||||||||||
| (Gain) loss on investment in kaléo accounted for under the fair value method | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts and other receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Income taxes recoverable/payable | |||||||||||
| Prepaid expenses and other | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Lease liability | ( | ( | |||||||||
| Pension and postretirement benefit plan contributions | ( | ( | |||||||||
| Other, net | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings | |||||||||||
| Debt principal payments | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Other | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Increase in cash & cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to financial statements.
5
Tredegar Corporation
Condensed Consolidated Statements of Shareholders’ Equity
(In Thousands, Except Share and Per Share Data)
(Unaudited)
The following summarizes the changes in shareholders’ equity for the three month period ended March 31, 2021:
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Post-retirement Benefit Adjustment | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Balance January 1, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment (net of tax benefit of $ | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Derivative financial instruments adjustment (net of tax benefit of $ | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
Amortization of prior service costs and net gains or losses (net of tax of $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issued upon exercise of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
6
The following summarizes the changes in shareholders’ equity for the three month period ended March 31, 2020:
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Post-retirement Benefit Adjustment | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net income (loss) | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment (net of tax benefit of $ | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Derivative financial instruments adjustment (net of tax benefit of $ | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
Amortization of prior service costs and net gains or losses (net of tax of $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Repurchase of employee common stock for tax withholdings | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
See accompanying notes to financial statements.
7
TREDEGAR CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of March 31, 2021 , the consolidated results of operations for the three months ended March 31, 2021 and 2020, the consolidated cash flows for the three months ended March 31, 2021 and 2020, and the consolidated changes in shareholders’ equity for the three months ended March 31, 2021 and 2020, in accordance with U.S. generally accepted accounting principles (“GAAP”). All such adjustments, unless otherwise detailed in the notes to the condensed consolidated financial statements, are deemed to be of a normal, recurring nature.
The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis. As such, the fiscal first quarter for 2021 and 2020 for this segment references 13-week periods ended March 28, 2021 and March 29, 2020, respectively. The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated financial results. The Company may fund or receive cash from the Aluminum Extrusions segment based on Aluminum Extrusion’s cash flows from operations during the intervening period from Aluminum Extrusion’s fiscal quarter end and the Company’s fiscal quarter end. There was no intercompany funding with Aluminum Extrusions between March 28, 2021 and March 31, 2021. As of December 31, 2020, the Company’s cash and cash equivalents declined by $3.8 million since the Company made payments to the Aluminum Extrusions segment to fund its working capital during the intervening period.
The financial position data as of December 31, 2020 that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2020 Form 10-K.
On October 30, 2020, the Company completed the sale of its personal care films business (“Personal Care Films”), which was part of its PE Films segment. The transaction excluded the packaging film lines and related operations located at the Pottsville, Pennsylvania manufacturing site (“Pottsville Packaging”), which are now being reported within the Surface Protection component of PE Films. All historical results for Personal Care Films have been presented as discontinued operations.
On December 31, 2020, the Company completed the sale of Bright View Technologies, which was part of its PE Films segment. The sale did not represent a strategic shift nor did it have a major effect on the Company's historical and ongoing operations, thus all financial information for Bright View Technologies has been presented in continuing operations.
The results of operations for the three months ended March 31, 2021 , are not necessarily indicative of the results to be expected for the full year.
Accounting Standards Adopted:
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2019-12, which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. In the first quarter of 2021, the Company adopted ASU 2019-12 which did not have a material impact on the Company's consolidated financial statements.
2 DIVESTITURES AND ASSETS HELD FOR SALE
Divestitures
Personal Care Films
In 2020, the Company completed the sale of Personal Care Films for an aggregate purchase price of approximately $60.5
8
The following table summarizes the financial results of discontinued operations reflected in the consolidated statements of income for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues and other items: | |||||||||||
| Sales | $ | $ | |||||||||
| Other income (expense), net | ( | ||||||||||
| Costs and expenses: | |||||||||||
| Cost of goods sold | |||||||||||
| Freight | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Asset impairments and costs associated with exit and disposal activities, net of adjustments | |||||||||||
Adjustment to the fair value estimates used in the disposal of Personal Care Films(a) | ( | ||||||||||
| Total | |||||||||||
| Income (loss) from discontinued operations before income taxes | ( | ( | |||||||||
| Income tax expense (benefit) | ( | ( | |||||||||
| Income (loss) from discontinued operations, net of tax | $ | ( | $ | ( | |||||||
(a) Represents a net increase to the estimated fair value of Personal Care Films primarily due to lower costs associated with transition-related services. | |||||||||||
The assets and liabilities of the discontinued operations reflected in the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively were as follows:
| March 31, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
Prepaid expenses and other (b) | $ | $ | |||||||||
| Other non-current assets | |||||||||||
| Total assets of discontinued operations | $ | $ | |||||||||
Liabilities (a) | |||||||||||
Accrued expenses (b) | $ | $ | |||||||||
(a) Pension and other postretirement benefit liabilities related to Personal Care Films have been retained by the Company. (b) The consolidated balance sheet of discontinued operations as of March 31, 2021 includes $ | |||||||||||
9
The following table provides significant operating and investing cash flow information for discontinued operations:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Operating activities | |||||||||||
| Depreciation and amortization | $ | $ | |||||||||
| Asset impairment | |||||||||||
| Other | ( | ||||||||||
| Total | ( | ||||||||||
| Investing activities | |||||||||||
| Capital expenditures | $ | $ | ( | ||||||||
Assets Held For Sale
In July 2019, the Company committed to a plan to close its manufacturing facility in Lake Zurich, Illinois, which historically was reported by the Company within the Personal Care Films component of its PE Films segment. In 2020, the held for sale criteria was met since the Company expects the sale of the facility to be completed within one year. The disposal group carrying value of $4.6 million consists of land, building, and building improvements and is reported in "Prepaid expenses and other" in the consolidated balance sheet. These assets were not included as part of the sale of Personal Care Films.
3 LONG-LIVED ASSETS & GOODWILL IMPAIRMENT
The Company assesses its long-lived assets for impairment when events and circumstances indicate that the carrying amount of the assets may not be recoverable. Long-lived assets consist primarily of buildings, machinery and equipment. During the three months ended March 31, 2021 , the Company did not identify any indicators of impairment for long-lived assets.
The Company annually assesses goodwill for impairment on December 1st of each year or more frequently when events or circumstances indicate that the carrying amount of a reporting unit that includes goodwill exceeds its fair value. The Company evaluated whether triggering events occurred during the three months ended March 31, 2021 and 2020 for all reporting units that include goodwill and determined that triggering events did occur during the first three months of 2020 for the Aluminum Extrusions’ reporting units created as a result of acquisitions in 2012 (“AACOA”) and in 2017 (“Futura”). As a result of the impairment testing performed, the Company recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes), which represented the entire amount of goodwill associated with the AACOA reporting unit. No impairment was identified for Futura.
The Company continues to monitor developments related to the COVID-19 pandemic and may perform updated analyses during 2021 as necessary.
4 INVENTORIES
The components of inventories are as follows:
| (In thousands) | December 31, 2020 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Stores, supplies and other | |||||||||||
| Total | $ | $ | |||||||||
5 EARNINGS PER SHARE
10
income (loss) from continuing and discontinued operations by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Weighted average shares outstanding used to compute basic earnings per share | |||||||||||
| Incremental dilutive shares attributable to stock options and restricted stock | |||||||||||
| Shares used to compute diluted earnings per share | |||||||||||
6 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 :
| (In thousands) | Foreign currency translation adjustment | Gain (loss) on derivative financial instruments | Pension and other post-retirement benefit adjustments | Total | |||||||||||||||||||
| Beginning balance, January 1, 2021 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Net other comprehensive income (loss) - current period | ( | ( | |||||||||||||||||||||
| Ending balance, | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020:
| (In thousands) | Foreign currency translation adjustment | Gain (loss) on derivative financial instruments | Pension and other post-retirement benefit adjustments | Total | |||||||||||||||||||
| Beginning balance, January 1, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Net other comprehensive income (loss) - current period | ( | ( | ( | ||||||||||||||||||||
| Ending balance, March 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
11
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the three months ended March 31, 2021 are summarized as follows:
| (In thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||||||||
| Gain (loss) on derivative financial instruments: | |||||||||||
| Aluminum future contracts, before taxes | $ | Cost of sales | |||||||||
| Foreign currency forward contracts, before taxes | ( | Selling, general & administrative | |||||||||
| Foreign currency forward contracts, before taxes | Cost of sales | ||||||||||
| Total, before taxes | |||||||||||
| Income tax expense (benefit) | Income tax expense (benefit) | ||||||||||
| Total, net of tax | $ | ||||||||||
| Amortization of pension and other post-retirement benefits: | |||||||||||
| Actuarial gain (loss) and prior service costs, before taxes | $ | ( | (a) | ||||||||
| Income tax expense (benefit) | ( | Income tax expense (benefit) | |||||||||
| Total, net of tax | $ | ( | |||||||||
(a) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the three months ended March 31, 2020 are summarized as follows:
| (In thousands) | Amount reclassified from other comprehensive income (loss) | Location of gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (loss) | |||||||||
| Gain (loss) on derivative financial instruments: | |||||||||||
| Aluminum future contracts, before taxes | $ | ( | Cost of sales | ||||||||
| Foreign currency forward contracts, before taxes | ( | Selling, general & administrative | |||||||||
| Foreign currency forward contracts, before taxes | Cost of sales | ||||||||||
| Total, before taxes | ( | ||||||||||
| Income tax expense (benefit) | ( | Income tax expense (benefit) | |||||||||
| Total, net of tax | $ | ( | |||||||||
| Amortization of pension and other post-retirement benefits: | |||||||||||
| Actuarial gain (loss) and prior service costs, before taxes | $ | ( | (a) | ||||||||
| Income tax expense (benefit) | ( | Income tax expense (benefit) | |||||||||
| Total, net of tax | $ | ( | |||||||||
(a) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
7 INVESTMENTS
The Company's aggregate investment of $7.5 million, for an approximate 19 % ownership interest, in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions, is accounted for under the fair value method in the consolidated financial statements.
12
The Company estimated the fair value of its investment in kaléo at March 31, 2021 by: (i) computing the weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow method (the “DCF Method”) and the application of a market multiple to EBITDA (the “EBITDA Multiple Method”), (ii) applying adjustments for any surplus or deficient working capital and estimates of contingent liabilities, (iii) adding cash and cash equivalents, (iv) subtracting interest-bearing debt, (v) subtracting a private company liquidity discount estimated at approximately 20 % at March 31, 2021 (versus 20 % at both December 31, 2020 and March 31, 2020) of the net result of (i) through (iv), and (vi) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (v).
The Company’s estimate of kaléo’s EV as of March 31, 2021 and December 31, 2020 was determined by weighting the EBITDA Multiple Method by 20 % and the DCF Method by 80 %. A heavier weighting towards the DCF Method was used since kaléo’s projections better reflect ongoing pricing pressures and expected changes in market access. The DCF Method projections rely on numerous assumptions and Level 3 inputs. In addition, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s discontinued Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation method applied.
8 FINANCIAL INSTRUMENTS
Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exists as part of ongoing business operations in Flexible Packaging Films. These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months. The notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $10.4 million (10.5 million pounds of aluminum) at March 31, 2021 and $12.1 million (13.0 million pounds of aluminum) at December 31, 2020.
The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of March 31, 2021 and December 31, 2020:
| December 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Balance Sheet Account | Fair Value | Balance Sheet Account | Fair Value | |||||||||||||||||||
| Derivatives Designated as Hedging Instruments | |||||||||||||||||||||||
Asset derivatives: Aluminum futures contracts | Prepaid expenses and other | $ | Prepaid expenses and other | $ | |||||||||||||||||||
Liability derivatives: Aluminum futures contracts | Accrued expenses | Accrued expenses | ( | ||||||||||||||||||||
| Net asset | $ | $ | |||||||||||||||||||||
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation.
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure for the Flexible Packaging Film's business unit in Brazil (“Terphane Ltda.”) of its sales and raw materials quoted or priced in U.S. Dollars and its variable conversion, fixed conversion and sales, general and administrative costs (before depreciation and amortization) quoted or priced in Brazilian Real ("R$") is annual net costs of R$119 million.
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Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
| USD Notional Amount (000s) | Average Forward Rate Contracted on USD/BRL | R$ Equivalent Amount (000s) | Applicable Month | Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged | ||||||||||
| $ | R$ | Apr-21 | ||||||||||||
| $ | R$ | May-21 | ||||||||||||
| $ | R$ | Jun-21 | ||||||||||||
| $ | R$ | Jul-21 | ||||||||||||
| $ | R$ | Aug-21 | ||||||||||||
| $ | R$ | Sep-21 | ||||||||||||
| $ | R$ | Oct-21 | ||||||||||||
| $ | R$ | Nov-21 | ||||||||||||
| $ | R$ | Dec-21 | ||||||||||||
| $ | R$ | |||||||||||||
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Ltda.’s forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and decreasing the net exposure to Brazilian Real in the consolidated statements of income. Pre-tax accumulated losses of $0.4 million related to the net fair value of the open forward contracts is reported in accumulated other comprehensive income (loss) as of March 31, 2021 .
The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the consolidated balance sheets as of March 31, 2021 and December 31, 2020:
| December 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Balance Sheet Account | Fair Value | Balance Sheet Account | Fair Value | |||||||||||||||||||
| Derivatives Designated as Hedging Instruments | |||||||||||||||||||||||
Asset derivatives: Foreign currency forward contracts | Prepaid expenses and other | $ | Prepaid expenses and other | $ | |||||||||||||||||||
Liability derivatives: Foreign currency forward contracts | Accrued expenses | ( | Accrued expenses | ( | |||||||||||||||||||
| Net asset (liability) | $ | ( | $ | ||||||||||||||||||||
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial institutions.
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The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three month periods ended March 31, 2021 and 2020 is summarized in the table below:
| Cash Flow Derivative Hedges | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
| Amount of pretax gain (loss) recognized in other comprehensive income (loss) | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion) | Cost of sales | Cost of sales | Cost of sales | Selling, general & admin | Cost of sales | Selling, general & admin | ||||||||||||||||||||||||||
| Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion) | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
As of March 31, 2021 , the Company expects $1.8 million of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three month periods ended March 31, 2021 and 2020, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
9 PENSION AND OTHER POSTRETIREMENT BENEFITS
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan. The components of net periodic benefit cost for the pension and other postretirement benefit programs reflected in the consolidated statements of income for the three months ended March 31, 2021 and 2020, are shown below:
| Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||||||||||
| Three Months Ended March 31, | Three Months Ended March 31, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Amortization of prior service costs, (gains) losses and net transition asset | ( | ( | |||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
Pension and other postretirement liabilities were $106.7 million and $111.3 million at March 31, 2021 and December 31, 2020, respectively ($0.7 million included in “Accrued expenses” at March 31, 2021 and December 31, 2020, with the remainder included in “Pension and other postretirement benefit obligations, net” in the consolidated balance sheets). As of December 31, 2020, the required minimum pension contributions were $11.7 million for 2021. The United States government enacted the American Rescue Plan Act of 2021 in March 2021, which, among other impacts, has reduced the Company's 2021 required minimum pension contributions to zero as a result of the Company's election of the interest rate relief used in the present value of the pension obligation and extension of the shortfall amortization period that is used to determine the minimum pension funding requirements.
Tredegar funds its other postretirement benefits on a claims-made basis; for 2021, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2020, or approximately $0.5 million.
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10 OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
Gain (loss) on investment in kaléo accounted for under fair value method(b) | $ | $ | ( | ||||||||
| Transition service fees, net of corporate costs associated with the divested Personal Care business | |||||||||||
COVID-19-related expenses, net of relief (a) | ( | ||||||||||
| Other | ( | ( | |||||||||
| Total | $ | $ | ( | ||||||||
(a) Costs associated with operating under COVID-19 conditions include employee overtime expenses associated with absenteeism, personal protective equipment supplies and facility maintenance. (b) The gain in the first quarter of 2021 includes a $ | |||||||||||
11 BUSINESS SEGMENTS
The Company’s business segments are Aluminum Extrusions, PE Films, and Flexible Packaging Films. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. All historical results for Personal Care Films have been presented as discontinued operations. The Surface Protection component of the PE Films segment now includes Pottsville Packaging.
The Company’s reportable segments are based on its method of internal reporting, which is generally segregated by differences in products. Accounting standards for presentation of segments require an approach based on the way the Company organizes the segments for making operating decisions and how the chief operating decision maker (“CODM”) assesses performance. EBITDA from ongoing operations is the key profitability measure used by the CODM (Tredegar’s President and Chief Executive Officer) for purposes of assessing financial performance. The Company uses sales less freight (“net sales”) from continuing operations as its measure of revenues from external customers at the segment level. This measure is separately included in the financial information regularly provided to the CODM.
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The following table presents net sales and EBITDA from ongoing operations by segment for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Net Sales | |||||||||||
| Aluminum Extrusions | $ | $ | |||||||||
| PE Films | |||||||||||
| Flexible Packaging Films | |||||||||||
| Total net sales | |||||||||||
| Add back freight | |||||||||||
| Sales as shown in the consolidated statements of income | $ | $ | |||||||||
| EBITDA from Ongoing Operations | |||||||||||
| Aluminum Extrusions: | |||||||||||
| Ongoing operations: | |||||||||||
| EBITDA | $ | $ | |||||||||
| Depreciation & amortization | ( | ( | |||||||||
| EBIT | |||||||||||
| Plant shutdowns, asset impairments, restructurings and other | ( | ||||||||||
| Goodwill impairment | ( | ||||||||||
| PE Films: | |||||||||||
| Ongoing operations: | |||||||||||
| EBITDA | |||||||||||
| Depreciation & amortization | ( | ( | |||||||||
| EBIT | |||||||||||
| Plant shutdowns, asset impairments, restructurings and other | ( | ( | |||||||||
| Flexible Packaging Films: | |||||||||||
| Ongoing operations: | |||||||||||
| EBITDA | |||||||||||
| Depreciation & amortization | ( | ( | |||||||||
| EBIT | |||||||||||
| Plant shutdowns, asset impairments, restructurings and other | ( | ||||||||||
| Total | |||||||||||
| Interest income | |||||||||||
| Interest expense | |||||||||||
| Gain (loss) on investment in kaléo accounted for under fair value method | ( | ||||||||||
| Stock option-based compensation costs | |||||||||||
| Corporate expenses, net | |||||||||||
| Income (loss) from continuing operations before income taxes | ( | ||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Income (loss) from continuing operations | ( | ||||||||||
| Income (loss) from discontinued operations, net of tax | ( | ( | |||||||||
| Net income (loss) | $ | $ | ( | ||||||||
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The following table presents identifiable assets by segment at March 31, 2021 and December 31, 2020:
| (In thousands) | December 31, 2020 | ||||||||||
| Aluminum Extrusions | $ | $ | |||||||||
| PE Films | |||||||||||
| Flexible Packaging Films | |||||||||||
| Subtotal | |||||||||||
| General corporate | |||||||||||
| Cash and cash equivalents | |||||||||||
| Discontinued operations | |||||||||||
| Total | $ | $ | |||||||||
The following tables disaggregate the Company’s revenue by geographic area and product group for the three months ended March 31, 2021 and 2020:
| Net Sales by Geographic Area (a) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| United States | $ | $ | |||||||||
| Exports from the United States to: | |||||||||||
| Asia | |||||||||||
| Latin America | |||||||||||
| Canada | |||||||||||
| Europe | |||||||||||
| Operations outside the United States: | |||||||||||
| Brazil | |||||||||||
| Total | $ | $ | |||||||||
(a) Export sales relate entirely to PE Films. Operations in Brazil are related to Flexible Packaging Films. | |||||||||||
The Company’s facilities in Pottsville, PA (“PV”) and Guangzhou, China (“GZ”) have a tolling arrangement whereby certain surface protection films are manufactured in GZ for a fee with raw materials supplied from PV that are then shipped by GZ directly to customers principally in the Asian market, but paid by customers directly to PV. Amounts associated with this intercompany tolling arrangement are reported in the table above as export sales from the U.S. to Asia, and include net sales of $6.9 million and $9.3 million in the first quarters of 2021 and 2020, respectively.
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| Net Sales by Product Group | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Aluminum Extrusions: | |||||||||||
| Nonresidential building & construction | |||||||||||