TREDEGAR CORP 10-Q

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 $ 25,648 $ 30,521 Accounts and other receivables, net 129,559 103,312 Income taxes recoverable 2,512 2,558 Inventories 104,560 88,569 Prepaid expenses and other 17,183 11,275 Current assets of discontinued operations 151 178 Total current assets 279,613 236,413 Property, plant and equipment, at cost 506,511 498,311 Less: accumulated depreciation ( 333,944 ) ( 327,930 ) Net property, plant and equipment 172,567 170,381 Right-of-use leased assets 13,385 13,847 Identifiable intangible assets, net 13,632 14,152 Goodwill 70,608 70,608 Deferred income taxes 11,409 15,723 Other assets 3,457 2,460 Total assets $ 564,671 $ 523,584 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 144,585 $ 123,760 Accrued expenses 27,012 33,104 Lease liability, short-term 2,119 2,158 Income taxes payable 643 9,333 Current liabilities of discontinued operations 178 193 Total current liabilities 174,537 168,548 Lease liability, long-term 12,361 12,831 Long-term debt 131,250 73,000 Pension and other postretirement benefit obligations, net 28,333 78,265 Other non-current liabilities 6,322 6,218 Total liabilities 352,803 338,862 Shareholders’ equity: Common stock, no par value (issued and outstanding 33,837,815 shares at March 31, 2022 and 33,736,629 shares at December 31, 2021) 55,953 55,174 Common stock held in trust for savings restoration plan ( 109,494 shares at March 31, 2022 and 108,433 shares at December 31, 2021) ( 2,148 ) ( 2,135 ) Accumulated other comprehensive income (loss): Foreign currency translation adjustment ( 80,256 ) ( 85,792 ) Gain (loss) on derivative financial instruments 6,831 901 Pension and other postretirement benefit adjustments ( 62,075 ) ( 64,613 ) Retained earnings 293,563 281,187 Total shareholders’ equity 211,868 184,722 Total liabilities and shareholders’ equity $ 564,671 $ 523,584 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 $ 236,566 $ 184,822 Other income (expense), net ( 267 ) 760 236,299 185,582 Costs and expenses: Cost of goods sold 183,260 141,285 Freight 8,081 6,223 Selling, general and administrative 21,282 18,384 Research and development 1,525 1,721 Amortization of identifiable intangibles 663 723 Pension and postretirement benefits 3,476 3,540 Interest expense 786 822 Asset impairments and costs associated with exit and disposal activities, net of adjustments ( 9 ) 169 Total 219,064 172,867 Income (loss) from continuing operations before income taxes 17,235 12,715 Income tax expense (benefit) 778 3,097 Net income (loss) from continuing operations 16,457 9,618 Income (loss) from discontinued operations, net of tax ( 35 ) ( 587 ) Net income (loss) $ 16,422 $ 9,031 Earnings (loss) per share: Basic: Continuing operations $ 0.49 $ 0.29 Discontinued operations — ( 0.02 ) Basic earnings (loss) per share $ 0.49 $ 0.27 Diluted: Continuing operations $ 0.49 $ 0.29 Discontinued operations — ( 0.02 ) Diluted earnings (loss) per share $ 0.49 $ 0.27 Shares used to compute earnings (loss) per share: Basic 33,654 33,406 Diluted 33,696 33,644 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) $ 16,422 $ 9,031 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax expense of $ 728 in 2022 and net of tax benefit of $ 272 in 2021) 5,536 ( 2,648 ) Derivative financial instruments adjustment (net of tax expense of $ 2,916 in 2022 and net of tax benefit of $ 188 in 2021) 5,930 ( 236 ) Amortization of prior service costs and net gains or losses (net of tax expense of $ 712 in 2022 and net of tax of $ 924 in 2021) 2,538 3,319 Other comprehensive income (loss) 14,004 435 Comprehensive income (loss) $ 30,426 $ 9,466 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) $ 16,422 $ 9,031 Adjustments for noncash items: Depreciation 5,829 5,463 Amortization of identifiable intangibles 663 723 Reduction of right-of-use lease asset 500 549 Deferred income taxes 552 1,017 Accrued pension and post-retirement benefits 3,506 3,540 Stock-based compensation expense 1,295 576 Gain on investment in kaléo — ( 400 ) Changes in assets and liabilities: Accounts and other receivables ( 24,351 ) ( 2,126 ) Inventories ( 12,622 ) ( 5,442 ) Income taxes recoverable/payable ( 8,791 ) 1,102 Prepaid expenses and other 3,323 2,798 Accounts payable and accrued expenses 10,384 ( 2,517 ) Lease liability ( 547 ) ( 535 ) Pension and postretirement benefit plan contributions ( 50,158 ) ( 3,886 ) Other, net ( 742 ) ( 23 ) Net cash (used in) provided by operating activities ( 54,737 ) 9,870 Cash flows from investing activities: Capital expenditures ( 5,086 ) ( 5,259 ) Net cash used in investing activities ( 5,086 ) ( 5,259 ) Cash flows from financing activities: Borrowings 109,500 32,000 Debt principal payments ( 51,250 ) ( 23,000 ) Dividends paid ( 4,059 ) ( 4,025 ) Other ( 396 ) 915 Net cash provided by financing activities 53,795 5,890 Effect of exchange rate changes on cash 1,155 ( 488 ) Increase (decrease) in cash & cash equivalents ( 4,873 ) 10,013 Cash and cash equivalents at beginning of period 30,521 11,846 Cash and cash equivalents at end of period $ 25,648 $ 21,859 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 $ 55,174 $ 281,187 $ ( 2,135 ) $ ( 149,504 ) $ 184,722 Net income (loss) — 16,422 — — 16,422 Foreign currency translation adjustment — — — 5,536 5,536 Derivative financial instruments adjustment — — — 5,930 5,930 Amortization of prior service costs and net gains or losses — — — 2,538 2,538 Cash dividends declared ($ 0.12 per share) — ( 4,059 ) — — ( 4,059 ) Stock-based compensation expense 1,175 — — — 1,175 Repurchase of employee common stock for tax withholdings ( 396 ) — — — ( 396 ) Tredegar common stock purchased by trust for savings restoration plan — 13 ( 13 ) — — Balance March 31, 2022 $ 55,953 $ 293,563 $ ( 2,148 ) $ ( 135,500 ) $ 211,868 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 $ 50,066 $ 239,480 $ ( 2,087 ) $ ( 178,404 ) $ 109,055 Net income (loss) — 9,031 — — 9,031 Foreign currency translation adjustment — — — ( 2,648 ) ( 2,648 ) Derivative financial instruments adjustment — — — ( 236 ) ( 236 ) Amortization of prior service costs and net gains or losses — — — 3,319 3,319 Cash dividends declared ($ 0.12 per share) — ( 4,025 ) — — ( 4,025 ) Stock-based compensation expense 576 — — — 576 Shares issued upon exercise of stock options 915 — — — 915 Tredegar common stock purchased by trust for savings restoration plan — 10 ( 10 ) — — Balance at March 31, 2021 $ 51,557 $ 244,496 $ ( 2,097 ) $ ( 177,969 ) $ 115,987 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 As of March 31, 2022 and December 31, 2021, accounts receivable and other receivables, net include the following: March 31, December 31, (In thousands) 2022 2021 Customer receivables $ 128,930 $ 102,090 Other receivables 2,517 2,958 Total accounts and other receivables 131,447 105,048 Less: Allowance for bad debts ( 1,888 ) ( 1,736 ) Total accounts and other receivables, net $ 129,559 $ 103,312 3. INVENTORIES The components of inventories are as follows: (In thousands) March 31, 2022 December 31, 2021 Finished goods $ 26,796 $ 25,199 Work-in-process 18,122 11,955 Raw materials 39,481 32,958 Stores, supplies and other 20,161 18,457 Total $ 104,560 $ 88,569 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. The components of net periodic benefit cost for the pension and other postretirement benefit programs reflected in the condensed consolidated statements of income for the three months ended March 31, 2022 and 2021, are shown 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 $ — $ — $ 5 $ 9 Interest cost 2,225 2,102 51 50 Expected return on plan assets ( 2,055 ) ( 2,862 ) — — Amortization of prior service costs, (gains) losses and net transition asset 3,284 4,265 ( 34 ) ( 24 ) Net periodic benefit cost $ 3,454 $ 3,505 $ 22 $ 35 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 Other income (expense), net consists of the following: Three Months Ended March 31, (In thousands) 2022 2021 Gain on investment in kaléo (a) $ — $ 718 Transition service fees, net of corporate costs associated with the divested Personal Care business ( 32 ) 304 COVID-19-related expenses, net of relief (b) ( 212 ) ( 19 ) Write-down of investment in Harbinger Capital Partners Special Situations Fund (c) ( 7 ) ( 148 ) Other ( 16 ) ( 95 ) Total $ ( 267 ) $ 760 (a) The gain in the first three months of 2021 includes a $ 0.3 million dividend received from kaléo in the first quarter of 2021. See Note 12. (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 $ 0.2 million as of March 31, 2022 and $ 0.2 million as of December 31, 2021 reported in "Other assets" in the condensed consolidated balance sheet. 8 6. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income (loss) from continuing and discontinued operations by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net 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) 2022 2021 Weighted average shares outstanding used to compute basic earnings per share 33,654 33,406 Incremental dilutive shares attributable to stock options and restricted stock 42 238 Shares used to compute diluted earnings per share 33,696 33,644 Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. The average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 2,477,708 and 411,516 for the three months ended March 31, 2022 and 2021, respectively. 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The changes in accumulated other comprehensive income (loss) by component are summarized as follows: 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 ( 85,792 ) 901 ( 64,613 ) ( 149,504 ) Other comprehensive income (loss) 6,264 10,003 — 16,267 Income tax (expense) benefit ( 728 ) ( 3,190 ) — ( 3,918 ) Other comprehensive income (loss), net of tax 5,536 6,813 — 12,349 Reclassification adjustment to net income (loss) — ( 1,157 ) 3,250 2,093 Income tax (expense) benefit — 274 ( 712 ) ( 438 ) Reclassification adjustment to net income (loss), net of tax — ( 883 ) 2,538 1,655 Other comprehensive income (loss), net of tax 5,536 5,930 2,538 14,004 Balance at March 31, 2022 $ ( 80,256 ) $ 6,831 $ ( 62,075 ) $ ( 135,500 ) 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 ( 84,149 ) 2,264 ( 96,519 ) ( 178,404 ) Other comprehensive income (loss) ( 2,920 ) 231 — ( 2,689 ) Income tax (expense) benefit 272 42 — 314 Other comprehensive income (loss), net of tax ( 2,648 ) 273 — ( 2,375 ) Reclassification adjustment to net income (loss) — ( 655 ) 4,243 3,588 Income tax (expense) benefit — 146 ( 924 ) ( 778 ) Reclassification adjustment to net income (loss), net of tax — ( 509 ) 3,319 2,810 Other comprehensive income (loss), net of tax ( 2,648 ) ( 236 ) 3,319 435 Balance at March 31, 2021 $ ( 86,797 ) $ 2,028 $ ( 93,200 ) $ ( 177,969 ) The amounts reclassified out of accumulated other comprehensive income (loss) related to pension and other postretirement benefits is included in the computation of net periodic pension costs, see Note 4 for additional details. 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. The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the condensed consolidated balance sheets as of March 31, 2022 and 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 $ 6,665 Prepaid expenses and other $ 2,085 Aluminum futures contracts Other assets 521 Other assets — Liability derivatives: Aluminum futures contracts Accrued expenses ( 43 ) Accrued expenses ( 119 ) Net asset $ 7,143 $ 1,966 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. 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 $ 1,615 5.4247 R$ 8,761 Apr-22 68 % $ 1,647 5.4545 R$ 8,984 May-22 70 % $ 1,596 5.4890 R$ 8,760 Jun-22 68 % $ 1,719 5.5200 R$ 9,489 Jul-22 74 % $ 1,708 5.5560 R$ 9,490 Aug-22 74 % $ 1,780 5.5915 R$ 9,953 Sep-22 77 % $ 1,793 5.6264 R$ 10,088 Oct-22 78 % $ 1,784 5.6597 R$ 10,097 Nov-22 78 % $ 1,659 5.6962 R$ 9,450 Dec-22 73 % $ 625 5.5145 R$ 3,447 Jan-23 24 % $ 625 5.5581 R$ 3,474 Feb-23 24 % $ 625 5.6014 R$ 3,501 Mar-23 24 % $ 625 5.6446 R$ 3,528 Apr-23 24 % $ 625 5.6866 R$ 3,554 May-23 24 % $ 625 5.7323 R$ 3,583 Jun-23 24 % $ 625 5.7756 R$ 3,610 Jul-23 25 % $ 625 5.8197 R$ 3,637 Aug-23 25 % $ 625 5.8627 R$ 3,664 Sep-23 25 % $ 625 5.9028 R$ 3,689 Oct-23 25 % $ 625 5.9414 R$ 3,713 Nov-23 25 % $ 625 5.9800 R$ 3,738 Dec-23 25 % $ 22,801 5.6230 R$ 128,210 39 % 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. The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the condensed consolidated balance sheets as of March 31, 2022 and 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: Foreign currency forward contracts Prepaid expenses and other $ 2,127 Prepaid expenses and other $ — Foreign currency forward contracts Other assets 481 Other assets — Liability derivatives: Foreign currency forward contracts Accrued expenses — Accrued expenses ( 1,255 ) Net asset (liability) $ 2,608 $ ( 1,255 ) 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. The pre-tax 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, 2022 and 2021 is summarized in the table below: 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) $ 6,182 $ 1,515 $ — $ 3,821 $ — $ ( 1,283 ) 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) $ ( 1,005 ) $ 640 $ ( 15 ) $ ( 137 ) $ 17 $ ( 2 ) 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. 12 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. 13 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 $ 158,110 $ 118,125 PE Films 31,131 27,953 Flexible Packaging Films 39,244 32,521 Total net sales 228,485 178,599 Add back freight 8,081 6,223 Sales as shown in the condensed consolidated statements of income $ 236,566 $ 184,822 EBITDA from Ongoing Operations Aluminum Extrusions: Ongoing operations: EBITDA $ 23,919 $ 13,302 Depreciation & amortization ( 4,261 ) ( 4,130 ) EBIT 19,658 9,172 Plant shutdowns, asset impairments, restructurings and other ( 105 ) 183 PE Films: Ongoing operations: EBITDA 7,047 7,213 Depreciation & amortization ( 1,595 ) ( 1,420 ) EBIT 5,452 5,793 Plant shutdowns, asset impairments, restructurings and other ( 102 ) ( 124 ) Flexible Packaging Films: Ongoing operations: EBITDA 5,035 9,623 Depreciation & amortization ( 550 ) ( 466 ) EBIT 4,485 9,157 Plant shutdowns, asset impairments, restructurings and other ( 43 ) ( 38 ) Total 29,345 24,143 Interest income 29 7 Interest expense 786 822 Gain on investment in kaléo — 718 Stock option-based compensation costs 631 468 Corporate expenses, net 10,722 10,863 Income (loss) from continuing operations before income taxes 17,235 12,715 Income tax expense (benefit) 778 3,097 Income (loss) from continuing operations 16,457 9,618 Income (loss) from discontinued operations, net of tax ( 35 ) ( 587 ) Net income (loss) $ 16,422 $ 9,031 14 The following table presents identifiable assets by segment at March 31, 2022 and December 31, 2021: (In thousands) March 31, 2022 December 31, 2021 Aluminum Extrusions $ 311,971 $ 280,521 PE Films 115,307 113,613 Flexible Packaging Films 92,852 75,269 Subtotal 520,130 469,403 General corporate 18,742 23,482 Cash and cash equivalents 25,648 30,521 Discontinued operations 151 178 Total $ 564,671 $ 523,584 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 $ 182,138 $ 132,897 Exports from the United States to: Asia 12,465 13,362 Latin America 1,441 1,102 Canada 4,193 5,434 Europe 1,363 955 Operations outside the United States: Brazil 26,885 24,849 Total $ 228,485 $ 178,599 (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. 15 Net Sales by Product Group Three Months Ended March 31, (In thousands) 2022 2021 Aluminum Extrusions: Nonresidential building & construction $ 80,921 $ 57,229 Consumer durables 16,891 13,152 Automotive 13,841 11,415 Residential building & construction 16,465 12,708 Electrical 7,287 7,180 Machinery & equipment 12,945 8,925 Distribution 9,760 7,516 Subtotal 158,110 118,125 PE Films: Surface protection films 22,148 20,601 Packaging 8,983 7,352 Subtotal 31,131 27,953 Flexible Packaging Films 39,244 32,521 Total $ 228,485 $ 178,599 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. The following table summarizes the financial results of discontinued operations reflected in the condensed consolidated statements of income for the three and three months ended March 31, 2022 and 2021: Three Months Ended March 31, (In thousands) 2022 2021 Costs and expenses: Selling, general and administrative 45 1,050 Adjustment to the fair value estimates used in the disposal of Personal Care Films (a) — ( 299 ) Total 45 751 Income (loss) from discontinued operations before income taxes ( 45 ) ( 751 ) Income tax expense (benefit) ( 10 ) ( 164 ) Income (loss) from discontinued operations, net of tax $ ( 35 ) $ ( 587 ) (a) Represents a net increase to the estimated fair value of Personal Care Films primarily due to lower costs associated with IT transition-related services to provide the seller developed assets, which did not exist at the time of the sale, to support the seller's IT infrastructure. 16 The assets and liabilities of the discontinued operations reflected in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively, were as follows: March 31, December 31, (In thousands) 2022 2021 Assets Prepaid expenses and other (a) $ 151 $ 178 Liabilities Accrued expenses (a) $ 178 $ 193 (a) The condensed consolidated balance sheet of discontinued operations as of March 31, 2022 includes $ 0.2 million of other receivables related to the settlement of customary post-closing adjustments and other miscellaneous accrued expenses of $ 0.2 million. The condensed consolidated balance sheet of discontinued operations as of December 31, 2021 includes $ 0.2 million of other receivables related to the settlement of customary post-closing adjustments and other miscellaneous accrued expenses of $ 0.2 million. The following table provides significant operating and investing cash flow information for discontinued operations: Three Months Ended March 31, (In thousands) 2022 2021 Operating activities Other — ( 299 ) 12. INVESTMENTS In August 2007 and December 2008, the Company made an aggregate investment of $ 7.5 million in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar historically accounted for its investment in kaléo under the fair value option. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. kaléo’s stock is not publicly traded. On December 27, 2021, the Company completed the sale of its investment interests in kaléo (Series A-3 Preferred Stock, Series B Preferred Stock and common stock) that, taken together, represented on a fully-diluted basis an approximate 18% interest in kaléo. Tredegar received closing cash proceeds of $ 47.1 million. A pre-tax gain of $ 0.7 million on the Company’s investment in kaléo was recognized in the first quarter ended March 31, 2021 which is reported in “Other income (expense), net” in the condensed consolidated statements of income. The gain in 2021 includes a $ 0.3 million dividend received from kaléo in the first quarter of 2021. 17