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, 2022
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 29, 2022: 33,853,082
Tredegar Corporation
Table of Contents
| Page | |||||||||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tredegar Corporation
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited)
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts and other receivables, net | |||||||||||
| 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 | |||||||||||
| Identifiable intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| 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 | ( | ||||||||||
| 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income (loss) | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
Unrealized foreign currency translation adjustment (net of tax expense of $ | ( | ||||||||||
Derivative financial instruments adjustment (net of tax expense of $ | ( | ||||||||||
Amortization of prior service costs and net gains or losses (net of tax expense 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | |||||||||
| Adjustments for noncash items: | |||||||||||
| Depreciation | |||||||||||
| Amortization of identifiable intangibles | |||||||||||
| Reduction of right-of-use lease asset | |||||||||||
| Deferred income taxes | |||||||||||
| Accrued pension and post-retirement benefits | |||||||||||
| Stock-based compensation expense | |||||||||||
| Gain on investment in kaléo | ( | ||||||||||
| 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 (used in) 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 financing activities | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Increase (decrease) 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, 2022:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
Balance January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income (loss) | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ||||||||||||||||||||||||||
| Derivative financial instruments adjustment | — | — | — | ||||||||||||||||||||||||||
| Amortization of prior service costs and net gains or losses | — | — | — | ||||||||||||||||||||||||||
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 March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
The following summarizes the changes in shareholders’ equity for the three month period ended March 31, 2021:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income (loss) | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Derivative financial instruments adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Amortization of prior service costs and net gains or losses | — | — | — | ||||||||||||||||||||||||||
Cash dividends declared ($ | — | ( | — | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Shares issued upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | — | ( | — | — | |||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
See accompanying notes to financial statements.
6
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 condensed consolidated financial position as of March 31, 2022, the condensed consolidated results of operations for the three months ended March 31, 2022 and 2021, the condensed consolidated cash flows for the three months ended March 31, 2022 and 2021, and the condensed consolidated changes in shareholders’ equity for the three months ended March 31, 2022 and 2021, 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 2022 and 2021 for this segment references 13-week periods ended March 27, 2022 and March 28, 2021. 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 27, 2022 and March 31, 2022.
The financial position data as of December 31, 2021 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, 2021 (“2021 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 2021 Form 10-K.
The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year.
Accounting Standards Not Yet Adopted.
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate or by another reference rate expected to be discontinued because of reference rate reform. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, which clarified the scope and application of the original guidance. The Company is currently evaluating the potential impact of adopting this guidance, but does not expect it to have a material impact on the consolidated financial statements.
2. ACCOUNTS AND OTHER RECEIVABLES
| March 31, | December 31, | ||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Customer receivables | $ | $ | |||||||||
| Other receivables | |||||||||||
| Total accounts and other receivables | |||||||||||
| Less: Allowance for bad debts | ( | ( | |||||||||
| Total accounts and other receivables, net | $ | $ | |||||||||
3. INVENTORIES
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Stores, supplies and other | |||||||||||
| Total | $ | $ | |||||||||
7
4. 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. On February 10, 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan, which could take up to 24 months to complete. In connection therewith, on February 9, 2022, the Company contributed $50 million to the pension plan (the “Special Contribution”). The Company estimates that, with the Special Contribution, there will be no required minimum contributions to the pension plan until final settlement.
Tredegar also has a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. Pension expense recognized for this plan was immaterial in the first quarter of 2022 and 2021, respectively. This information has been included in the pension benefit table below.
| Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||||||||||
| Three Months Ended March 31, | Three Months Ended March 31, | ||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| 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 $29.0 million and $78.9 million at March 31, 2022 and December 31, 2021, respectively ($0.7 million included in “Accrued expenses” at March 31, 2022 and December 31, 2021, respectively, with the remainder included in “Pension and other postretirement benefit obligations, net” in the condensed consolidated balance sheets).
Tredegar funds its other postretirement benefits on a claims-made basis; for 2022, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2021, or approximately $0.5 million.
5. OTHER INCOME (EXPENSE), NET
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
Gain on investment in kaléo(a) | $ | $ | |||||||||
| Transition service fees, net of corporate costs associated with the divested Personal Care business | ( | ||||||||||
COVID-19-related expenses, net of relief (b) | ( | ( | |||||||||
Write-down of investment in Harbinger Capital Partners Special Situations Fund(c) | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Total | $ | ( | $ | ||||||||
(a) The gain in the first three months of 2021 includes a $ (b) Costs associated with operating under COVID-19 conditions include employee overtime expenses associated with absenteeism, personal protective equipment supplies and facility maintenance. (c) Represents the unrealized loss on the Company’s investment in Harbinger Capital Partners Special Situations Fund L.P. that had a fair value of $ | |||||||||||
8
6. EARNINGS PER SHARE
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| 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 | |||||||||||
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Postretirement Benefit Adjust | Total Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance at January 1, 2022 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Reclassification adjustment to net income (loss) | ( | ||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||||||||
| Reclassification adjustment to net income (loss), net of tax | ( | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
9
| Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Postretirement Benefit Adjust | Total Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance at January 1, 2021 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Income tax (expense) benefit | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Reclassification adjustment to net income (loss) | ( | ||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||||||||
| Reclassification adjustment to net income (loss), net of tax | ( | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Balance at March 31, 2021 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
8. DERIVATIVES
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 condensed consolidated balance sheet at fair value. 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 $24.2 million (14.3 million pounds of aluminum) at March 31, 2022 and $22.1 million (14.9 million pounds of aluminum) at December 31, 2021.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (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 | $ | |||||||||||||||||||
| Aluminum futures contracts | Other assets | Other assets | |||||||||||||||||||||
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
10
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$150 million for the full year of 2022.
| USD Notional Amount (000s) | Average Forward Rate Contracted on USD/BRL | R$ Equivalent Amount (000s) | Applicable Month | Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged | ||||||||||
| $ | R$ | Apr-22 | ||||||||||||
| $ | R$ | May-22 | ||||||||||||
| $ | R$ | Jun-22 | ||||||||||||
| $ | R$ | Jul-22 | ||||||||||||
| $ | R$ | Aug-22 | ||||||||||||
| $ | R$ | Sep-22 | ||||||||||||
| $ | R$ | Oct-22 | ||||||||||||
| $ | R$ | Nov-22 | ||||||||||||
| $ | R$ | Dec-22 | ||||||||||||
| $ | R$ | Jan-23 | ||||||||||||
| $ | R$ | Feb-23 | ||||||||||||
| $ | R$ | Mar-23 | ||||||||||||
| $ | R$ | Apr-23 | ||||||||||||
| $ | R$ | May-23 | ||||||||||||
| $ | R$ | Jun-23 | ||||||||||||
| $ | R$ | Jul-23 | ||||||||||||
| $ | R$ | Aug-23 | ||||||||||||
| $ | R$ | Sep-23 | ||||||||||||
| $ | R$ | Oct-23 | ||||||||||||
| $ | R$ | Nov-23 | ||||||||||||
| $ | R$ | Dec-23 | ||||||||||||
| $ | 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 condensed consolidated statements of income.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (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 | $ | |||||||||||||||||||
| Foreign currency forward contracts | Other assets | Other assets | |||||||||||||||||||||
Liability derivatives: Foreign currency forward contracts | Accrued expenses | Accrued expenses | ( | ||||||||||||||||||||
| Net asset (liability) | $ | $ | ( | ||||||||||||||||||||
11
These derivative contracts involve elements of market risk that are not reflected on the condensed 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.
| Cash Flow Derivative Hedges | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Amount of pre-tax 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 goods sold | Cost of goods sold | Cost of goods sold | Selling, general & admin | Cost of goods sold | Selling, general & admin | ||||||||||||||||||||||||||
| Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion) | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
As of March 31, 2022, the Company expects $3.5 million of unrealized after-tax gains on aluminum and foreign currency 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, 2022 and 2021, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
9. INCOME TAXES
Tredegar recorded tax expense of $0.8 million on pre-tax income from continuing operations of $17.2 million in the first three months of 2022. Therefore, the effective tax rate in the first three months of 2022 was 4.5 %, compared to 24.4 % in the first three months of 2021. The decrease in the effective tax rate for continuing operations is primarily due to a discrete benefit recorded in the first quarter of 2022 resulting from the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These regulations overhaul various components of the foreign tax credit regime including the determination of creditable foreign taxes and limit the amount of foreign taxes that are creditable against U.S. income taxes. As the result of these regulations, future Brazilian income tax will be deductible, but not creditable, in the U.S. The accounting rules require a reduction of the U.S. deferred tax liability previously established related to anticipated future income from Brazil. The tax effect of the reduction of the U.S. deferred tax liability resulted in the discrete tax benefit described above. This one-time discrete benefit is expected to reduce the effective tax rate for the remainder of 2022, which will be offset by an expected increase to the effective tax rate as the result of Brazilian income tax no longer being creditable in the U.S. for the foreseeable future. Total deferred tax assets declined during the first quarter of 2022 compared to December 31, 2021 primarily due to changes in other comprehensive income and the projected utilization of foreign tax credits partially offset by the change in the deferred tax liability discussed above.
Tredegar accrues U.S. federal income taxes on unremitted earnings of foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.
The Brazilian federal statutory income tax rate is a composite of 34.0 % (25.0 % of income tax and 9.0 % of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25 % levied on the operating profit on certain of its products. The incentives have been granted for a 13-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $1.5 million in the first three months of 2022 and 2021.
Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2018.
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10. 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.
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, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Net Sales | |||||||||||
| Aluminum Extrusions | $ | $ | |||||||||
| PE Films | |||||||||||
| Flexible Packaging Films | |||||||||||
| Total net sales | |||||||||||
| Add back freight | |||||||||||
| Sales as shown in the condensed consolidated statements of income | $ | $ | |||||||||
| EBITDA from Ongoing Operations | |||||||||||
| Aluminum Extrusions: | |||||||||||
| Ongoing operations: | |||||||||||
| EBITDA | $ | $ | |||||||||
| Depreciation & amortization | ( | ( | |||||||||
| EBIT | |||||||||||
| Plant shutdowns, asset impairments, restructurings and other | ( | ||||||||||
| 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 on investment in kaléo | |||||||||||
| 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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| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| 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, 2022 and 2021:
| Net Sales by Geographic Area (a) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| 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 relate entirely 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 $6.5 million and $6.9 million in the first three months of 2022 and 2021, respectively.
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| Net Sales by Product Group | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Aluminum Extrusions: | |||||||||||
| Nonresidential building & construction | $ | $ | |||||||||
| Consumer durables | |||||||||||
| Automotive | |||||||||||
| Residential building & construction | |||||||||||
| Electrical | |||||||||||
| Machinery & equipment | |||||||||||
| Distribution | |||||||||||
| Subtotal | |||||||||||
| PE Films: | |||||||||||
| Surface protection films | |||||||||||
| Packaging | |||||||||||
| Subtotal | |||||||||||
| Flexible Packaging Films | |||||||||||
| Total | $ | $ | |||||||||
11. DIVESTITURES
Personal Care Films
In 2020, the Company completed the sale of Personal Care Films for an aggregate purchase price of $60.5 million, subject to customary adjustments. The Company agreed to provide certain transition services related to finance, human resources and information technology ("IT") that ended during the second quarter of 2021, resulting in final cash proceeds of $64.1 million. Personal Care Films was previously reported in the PE Films segment.
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Costs and expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
Adjustment to the fair value estimates used in the disposal of Personal Care Films(a) | |||||||||||