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 June 30, 2023
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 August 4, 2023: 34,384,677
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)
| June 30, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts and other receivables, net | |||||||||||
| Income taxes recoverable | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other | |||||||||||
| 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 | |||||||||||
| 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 (authorized shares | |||||||||||
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 the condensed consolidated financial statements.
2
Tredegar Corporation
Condensed Consolidated Statements of Income (Loss)
(In Thousands, Except Per Share Data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| 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) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Shares used to compute earnings (loss) per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
Tredegar Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
| Three Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 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) | $ | ( | $ | ||||||||
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 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 the condensed consolidated financial statements.
4
Tredegar Corporation
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 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 | |||||||||||
| 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 provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from the sale of kaléo | |||||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings | |||||||||||
| Debt principal payments | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Debt financing costs | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash provided by (used in) 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 the condensed consolidated 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 June 30, 2023:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
Balance April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| 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 | — | — | — | ||||||||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | — | ( | — | — | |||||||||||||||||||||||||
Balance June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
The following summarizes the changes in shareholders’ equity for the six month period ended June 30, 2023:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
Balance January 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| 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 June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
6
The following summarizes the changes in shareholders’ equity for the three month period ended June 30, 2022:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance at April 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 | — | — | — | ||||||||||||||||||||||||||
| Tredegar common stock purchased by trust for savings restoration plan | — | ( | — | — | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
The following summarizes the changes in shareholders’ equity for the six month period ended June 30, 2022:
| Common Stock | Retained Earnings | Trust for Savings Restoration Plan | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance at 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 at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
See accompanying notes to the condensed consolidated 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 condensed consolidated financial position as of June 30, 2023, the condensed consolidated results of operations for the three and six months ended June 30, 2023 and 2022, the condensed consolidated cash flows for the six months ended June 30, 2023 and 2022, and the condensed consolidated changes in shareholders’ equity for the six months ended June 30, 2023 and 2022, 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 second quarter for 2023 and 2022 for this segment references 13-week periods ended June 25, 2023 and June 26, 2022, 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 June 25, 2023 and June 30, 2023.
The condensed consolidated financial statements as of December 31, 2022 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, 2022 (“2022 Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the 2022 Form 10-K.
The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of the results to be expected for the full year.
Impairment of Goodwill
The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). As of June 30, 2023, the Company’s reporting units with goodwill were Surface Protection in PE Films ("Surface Protection") and Futura in Aluminum Extrusions (“Futura”). No events or circumstances were identified during the second quarter of 2023 that indicate that Futura’s fair value is more likely than not less than its carrying amount.
However, manufacturers in the supply chain for consumer electronics continue to experience reduced capacity utilization and inventory corrections. In light of the continued uncertainty about the timing of a recovery for this market and the expected adverse future impact to the Surface Protection business, the Company performed a Step 1 goodwill impairment analysis of the Surface Protection component of PE Films using projections that contemplate the expected market recovery and business conditions, as these events indicated Surface Protection’s fair value is more likely than not less than its carrying amount.
The Company estimated the fair value of Surface Protection at June 30, 2023 by: (i) computing an estimated enterprise value (“EV”) utilizing the discounted cash flow method (the “DCF Method”), (ii) applying adjustments for any surplus or deficient working capital, (iii) adding cash and cash equivalents, and (iv) subtracting interest-bearing debt. The DCF Method was used since Surface Protection’s projections reflect the expected recovery from the weak market demand, competitive pricing and cash flows associated with new surface protection products, applications, customers, production efficiencies, and cost savings.
The analysis concluded that the fair value of Surface Protection was less than its carrying value, thus a non-cash partial goodwill impairment of $15.4 million ($11.9 million after deferred income tax benefits) was recognized during the second quarter of 2023.
Given the uncertain demand for Surface Protections products, it is reasonably possible that the cash flow estimates used in deriving such fair value measurements may change in the future. The Surface Protection reporting unit had goodwill of $41.9 million and $57.3 million as of June 30, 2023 and December 31, 2022, respectively.
8
Accounting Standards Adopted
No Accounting Standard Updates issued by the Financial Accounting Standards Board were adopted during the second quarter of 2023.
2. ACCOUNTS AND OTHER RECEIVABLES
| (In thousands) | June 30, 2023 | December 31, 2022 | |||||||||
| Customer receivables | $ | $ | |||||||||
| Other receivables | |||||||||||
| Total accounts and other receivables | |||||||||||
| Less: Allowance for bad debts | ( | ( | |||||||||
| Total accounts and other receivables, net | $ | $ | |||||||||
3. INVENTORIES
| (In thousands) | June 30, 2023 | December 31, 2022 | |||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Stores, supplies and other | |||||||||||
| Total | $ | $ | |||||||||
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. 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 three and six months ended June 30, 2023 and 2022. This information has been included in the pension benefit table below.
9
| Pension Benefits | Other Post-Retirement Benefits | ||||||||||||||||||||||
| Three Months Ended June 30, | Three Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 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 Benefits | Other Post-Retirement Benefits | ||||||||||||||||||||||
| Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 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 $36.4 million and $35.7 million at June 30, 2023 and December 31, 2022, respectively ($0.7 million included in “Accrued expenses” at June 30, 2023 and December 31, 2022, 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 2023, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2022, or approximately $0.5 million.
5. OTHER INCOME (EXPENSE), NET
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Gain on investment in kaléo(a) | $ | — | $ | $ | $ | ||||||||||||||||||
COVID-19-related expenses, net of relief (b) | — | ( | ( | ||||||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ||||||||||||||||||
(a) In January 2023, additional cash consideration of $ (b) Costs associated with operating under COVID-19 conditions include employee overtime expenses associated with absenteeism, personal protective equipment supplies and facility maintenance. | |||||||||||||||||||||||
10
6. EARNINGS PER SHARE
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 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)
The changes in accumulated other comprehensive income (loss) by component for the three months ended June 30, 2023.
| (In thousands) | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Postretirement Benefit Adjust | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
| Balance at April 1, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| 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 June 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
11
The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2023.
| (In thousands) | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Postretirement Benefit Adjust | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
| Balance at January 1, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| 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 June 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The changes in accumulated other comprehensive income (loss) by component for the three months ended June 30, 2022.
| (In thousands) | Foreign Currency Translation | Gain (Loss) on Derivative Financial Instruments | Pension & Other Postretirement Benefit Adjust | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
| Balance at April 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 June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
12
The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2022.
| (In thousands) | 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 June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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 have durations generally no longer 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 $17.0 million (11.1 million pounds of aluminum) at June 30, 2023 and $30.7 million (20.3 million pounds of aluminum) at December 31, 2022.
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (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 | ( | |||||||||||||||||||
| Aluminum futures contracts | Other non-current liabilities | ( | Other non-current liabilities | ( | |||||||||||||||||||
| Net asset (liability) | $ | ( | $ | ( | |||||||||||||||||||
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.
13
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$") will result in an annual net cost of R$177 million for the full year of 2023.
| USD Notional Amount (000s) | Average Forward Rate Contracted on USD/BRL | R$ Equivalent Amount (000s) | Applicable Month | Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged | ||||||||||
| $ | R$ | Jul-23 | ||||||||||||
| $ | R$ | Aug-23 | ||||||||||||
| $ | R$ | Sep-23 | ||||||||||||
| $ | R$ | Oct-23 | ||||||||||||
| $ | R$ | Nov-23 | ||||||||||||
| $ | R$ | Dec-23 | ||||||||||||
| $ | R$ | Jan-24 | ||||||||||||
| $ | R$ | Feb-24 | ||||||||||||
| $ | R$ | Mar-24 | ||||||||||||
| $ | R$ | Apr-24 | ||||||||||||
| $ | R$ | May-24 | ||||||||||||
| $ | R$ | Jun-24 | ||||||||||||
| $ | R$ | Jul-24 | ||||||||||||
| $ | R$ | Aug-24 | ||||||||||||
| $ | R$ | Sep-24 | ||||||||||||
| $ | R$ | Oct-24 | ||||||||||||
| $ | R$ | Nov-24 | ||||||||||||
| $ | R$ | Dec-24 | ||||||||||||
| $ | 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.
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (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 | Other non-current liabilities | ( | ||||||||||||||||||||
| Net asset (liability) | $ | $ | |||||||||||||||||||||
14
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 June 30, | ||||||||||||||||||||||||||||||||
| Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||||||||||||||
| Aluminum Futures Contracts | Foreign Currency Forwards | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| 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 June 30, 2023, the Company expects $1.8 million of unrealized after-tax losses 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 and six month periods ended June 30, 2023 and 2022, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
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9. INCOME TAXES
Tredegar recorded tax benefit of $3.0 million on pre-tax loss of $22.9 million in the first six months of 2023. Therefore, the effective tax rate in the first six months of 2023 was 13.1 %, compared to 16.9 % in the first six months of 2022. The change in the effective tax rate is primarily due to a pre-tax loss in first six months of 2023 versus pre-tax income in first six months of 2022, lower Brazil tax incentives, a discrete charge in the second quarter of 2023 for a Brazil tax law change and a large 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 overhauled 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 under Brazil tax law in place at that time would have been 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. In the second quarter of 2023, Brazil enacted new tax legislation which will likely cause the Brazil income tax to once again be creditable after 2023. This law change caused a partial reversal of the discrete tax benefit recognized in the first quarter of 2022 described above, which increased the deferred tax liability related to anticipated future income from Brazil. Total deferred tax assets increased during the second quarter of 2023 compared to December 31, 2022 primarily due to changes in other comprehensive income, increase in net operational loss and decrease in deferred tax liability related to the goodwill impairment that took place in second quarter of 2023.
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 10-year period, from the commencement date of January 1, 2015 and expiring at the end of 2024. The benefit from the tax incentives was $0.4 million and $2.6 million in the first six months of 2023 and 2022, respectively.
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”) 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 and six months ended June 30, 2023 and 2022:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 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 (loss) | $ | $ | $ | $ | |||||||||||||||||||
| 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 | ( | ( | |||||||||||||||||||||
| Goodwill impairment | ( | ( | |||||||||||||||||||||
| 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) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
17
| (In thousands) | June 30, 2023 | December 31, 2022 | |||||||||
| Aluminum Extrusions | $ | $ | |||||||||
| PE Films | |||||||||||
| Flexible Packaging Films | |||||||||||
| Subtotal | |||||||||||
| General corporate | |||||||||||
| Cash and cash equivalents | |||||||||||
| Total | $ | $ | |||||||||
The following tables disaggregate the Company’s revenue by geographic area and product group for the three and six months ended June 30, 2023 and 2022:
| Net Sales by Geographic Area (a) | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Exports from the United States to: | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Operations outside the United States: | |||||||||||||||||||||||
| Brazil | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(a) Export sales relate mostly to PE Films. Operations in Brazil relate 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 $3.4 million and $5.3 million in the second quarter of 2023 and 2022, respectively, and $6.8 million and $11.7 million in the first six months of 2023 and 2022, respectively.
18
| Net Sales by Product Group | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Aluminum Extrusions: | |||||||||||||||||||||||
| Nonresidential building & construction | $ | $ | $ | $ | |||||||||||||||||||
| Consumer durables | |||||||||||||||||||||||
| Automotive | |||||||||||||||||||||||
| Residential building & construction | |||||||||||||||||||||||