TREDEGAR CORP 10-Q

Item 1. Financial Statements. Tredegar Corporation Condensed Consolidated Balance Sheets (In Thousands, Except Share Data) (Unaudited) June 30, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 27,462 $ 30,521 Accounts and other receivables, net 127,995 103,312 Income taxes recoverable 641 2,558 Inventories 121,369 88,569 Prepaid expenses and other 8,180 11,275 Current assets of discontinued operations 151 178 Total current assets 285,798 236,413 Property, plant and equipment, at cost 510,596 498,311 Less: accumulated depreciation ( 336,821 ) ( 327,930 ) Net property, plant and equipment 173,775 170,381 Right-of-use leased assets 13,111 13,847 Identifiable intangible assets, net 12,879 14,152 Goodwill 70,608 70,608 Deferred income taxes 12,220 15,723 Other assets 3,423 2,460 Total assets $ 571,814 $ 523,584 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 174,646 $ 123,760 Accrued expenses 32,680 33,104 Lease liability, short-term 2,205 2,158 Income taxes payable 1,362 9,333 Current liabilities of discontinued operations 71 193 Total current liabilities 210,964 168,548 Lease liability, long-term 11,954 12,831 Long-term debt 101,500 73,000 Pension and other postretirement benefit obligations, net 28,415 78,265 Other non-current liabilities 7,196 6,218 Total liabilities 360,029 338,862 Shareholders’ equity: Common stock, no par value (issued and outstanding 33,965,478 shares at June 30, 2022 and 33,736,629 shares at December 31, 2021) 56,911 55,174 Common stock held in trust for savings restoration plan ( 110,564 shares at June 30, 2022 and 108,433 shares at December 31, 2021) ( 2,161 ) ( 2,135 ) Accumulated other comprehensive income (loss): Foreign currency translation adjustment ( 85,486 ) ( 85,792 ) Gain (loss) on derivative financial instruments ( 2,330 ) 901 Pension and other postretirement benefit adjustments ( 59,519 ) ( 64,613 ) Retained earnings 304,370 281,187 Total shareholders’ equity 211,785 184,722 Total liabilities and shareholders’ equity $ 571,814 $ 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues and other items: Sales $ 274,363 $ 211,129 $ 510,929 $ 395,951 Other income (expense), net 1,261 8,122 994 8,882 275,624 219,251 511,923 404,833 Costs and expenses: Cost of goods sold 218,088 158,692 401,348 299,977 Freight 11,036 7,044 19,118 13,267 Selling, general and administrative 18,862 20,275 40,143 38,659 Research and development 1,754 1,436 3,278 3,157 Amortization of identifiable intangibles 666 723 1,329 1,446 Pension and postretirement benefits 3,506 3,540 6,982 7,080 Interest expense 1,234 891 2,020 1,713 Asset impairments and costs associated with exit and disposal activities, net of adjustments 134 199 126 368 Total 255,280 192,800 474,344 365,667 Income (loss) from continuing operations before income taxes 20,344 26,451 37,579 39,166 Income tax expense (benefit) 5,556 5,723 6,334 8,820 Net income (loss) from continuing operations 14,788 20,728 31,245 30,346 Income (loss) from discontinued operations, net of tax 81 508 47 ( 79 ) Net income (loss) $ 14,869 $ 21,236 $ 31,292 $ 30,267 Earnings (loss) per share: Basic: Continuing operations $ 0.44 $ 0.62 $ 0.93 $ 0.91 Discontinued operations — 0.02 — — Basic earnings (loss) per share $ 0.44 $ 0.64 $ 0.93 $ 0.91 Diluted: Continuing operations $ 0.44 $ 0.61 $ 0.93 $ 0.90 Discontinued operations — 0.02 — — Diluted earnings (loss) per share $ 0.44 $ 0.63 $ 0.93 $ 0.90 Shares used to compute earnings (loss) per share: Basic 33,814 33,594 33,734 33,500 Diluted 33,854 33,740 33,776 33,692 See accompanying notes to financial statements. 3 Tredegar Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (In Thousands) (Unaudited) Three Months Ended June 30, 2022 2021 Net income (loss) $ 14,869 $ 21,236 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax benefit of $ 482 in 2022 and net of tax expense of $ 463 in 2021) ( 5,230 ) 3,993 Derivative financial instruments adjustment (net of tax benefit of $ 3,359 in 2022 and net of tax expense of $ 547 in 2021) ( 9,161 ) 1,468 Amortization of prior service costs and net gains or losses (net of tax expense of $ 712 in 2022 and net of tax expense of $ 922 in 2021) 2,556 3,318 Other comprehensive income (loss) ( 11,835 ) 8,779 Comprehensive income (loss) $ 3,034 $ 30,015 Six Months Ended June 30, 2022 2021 Net income (loss) $ 31,292 $ 30,267 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax expense of $ 246 in 2022 and net of tax expense of $ 191 in 2021) 306 1,345 Derivative financial instruments adjustment (net of tax benefit of $ 443 in 2022 and net of tax expense of $ 359 in 2021) ( 3,231 ) 1,232 Amortization of prior service costs and net gains or losses (net of tax expense of $ 1,424 in 2022 and net of tax expense of $ 1,846 in 2021) 5,094 6,637 Other comprehensive income (loss) 2,169 9,214 Comprehensive income (loss) $ 33,461 $ 39,481 See accompanying notes to financial statements. 4 Tredegar Corporation Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ 31,292 $ 30,267 Adjustments for noncash items: Depreciation 11,536 10,875 Amortization of identifiable intangibles 1,329 1,446 Reduction of right-of-use lease asset 1,072 1,066 Deferred income taxes 2,516 2,477 Accrued pension and post-retirement benefits 7,013 7,080 Stock-based compensation expense 1,842 2,444 Gain on investment in kaléo ( 1,406 ) ( 600 ) Changes in assets and liabilities: Accounts and other receivables ( 24,172 ) ( 12,840 ) Inventories ( 31,495 ) ( 14,020 ) Income taxes recoverable/payable ( 6,129 ) 2,680 Prepaid expenses and other ( 516 ) 7,267 Accounts payable and accrued expenses 47,388 8,040 Lease liability ( 1,166 ) ( 1,051 ) Pension and postretirement benefit plan contributions ( 50,314 ) ( 4,020 ) Other, net 1,781 396 Net cash (used in) provided by operating activities ( 9,429 ) 41,507 Cash flows from investing activities: Capital expenditures ( 13,514 ) ( 11,324 ) Proceeds from the sale of kaléo 1,406 — Net cash used in investing activities ( 12,108 ) ( 11,324 ) Cash flows from financing activities: Borrowings 221,250 34,000 Debt principal payments ( 192,750 ) ( 51,000 ) Dividends paid ( 8,135 ) ( 8,070 ) Debt financing costs ( 1,245 ) — Other ( 396 ) 915 Net cash provided by (used in) financing activities 18,724 ( 24,155 ) Effect of exchange rate changes on cash ( 246 ) 424 Increase (decrease) in cash & cash equivalents ( 3,059 ) 6,452 Cash and cash equivalents at beginning of period 30,521 11,846 Cash and cash equivalents at end of period $ 27,462 $ 18,298 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 June 30, 2022: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance April 1, 2022 $ 55,953 $ 293,563 $ ( 2,148 ) $ ( 135,500 ) $ 211,868 Net income (loss) — 14,869 — — 14,869 Foreign currency translation adjustment — — — ( 5,230 ) ( 5,230 ) Derivative financial instruments adjustment — — — ( 9,161 ) ( 9,161 ) Amortization of prior service costs and net gains or losses — — — 2,556 2,556 Cash dividends declared ($ 0.12 per share) — ( 4,075 ) — — ( 4,075 ) Stock-based compensation expense 958 — — — 958 Tredegar common stock purchased by trust for savings restoration plan — 13 ( 13 ) — — Balance June 30, 2022 $ 56,911 $ 304,370 $ ( 2,161 ) $ ( 147,335 ) $ 211,785 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 January 1, 2022 $ 55,174 $ 281,187 $ ( 2,135 ) $ ( 149,504 ) $ 184,722 Net income (loss) — 31,292 — — 31,292 Foreign currency translation adjustment — — — 306 306 Derivative financial instruments adjustment — — — ( 3,231 ) ( 3,231 ) Amortization of prior service costs and net gains or losses — — — 5,094 5,094 Cash dividends declared ($ 0.24 per share) — ( 8,135 ) — — ( 8,135 ) Stock-based compensation expense 2,133 — — — 2,133 Repurchase of employee common stock for tax withholdings ( 396 ) — — — ( 396 ) Tredegar common stock purchased by trust for savings restoration plan — 26 ( 26 ) — — Balance June 30, 2022 $ 56,911 $ 304,370 $ ( 2,161 ) $ ( 147,335 ) $ 211,785 6 The following summarizes the changes in shareholders’ equity for the three month period ended June 30, 2021: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance at April 1, 2021 $ 51,557 $ 244,496 $ ( 2,097 ) $ ( 177,969 ) $ 115,987 Net income (loss) — 21,236 — — 21,236 Foreign currency translation adjustment — — — 3,993 3,993 Derivative financial instruments adjustment — — — 1,468 1,468 Amortization of prior service costs and net gains or losses — — — 3,318 3,318 Cash dividends declared ($ 0.12 per share) — ( 4,045 ) — — ( 4,045 ) Stock-based compensation expense 1,383 — — — 1,383 Tredegar common stock purchased by trust for savings restoration plan — 12 ( 12 ) — — Balance at June 30, 2021 $ 52,940 $ 261,699 $ ( 2,109 ) $ ( 169,190 ) $ 143,340 The following summarizes the changes in shareholders’ equity for the six month period ended June 30, 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) — 30,267 — — 30,267 Foreign currency translation adjustment — — — 1,345 1,345 Derivative financial instruments adjustment — — — 1,232 1,232 Amortization of prior service costs and net gains or losses — — — 6,637 6,637 Cash dividends declared ($ 0.24 per share) — ( 8,070 ) — — ( 8,070 ) Stock-based compensation expense 1,959 — — — 1,959 Shares issued upon exercise of stock options 915 — — — 915 Tredegar common stock purchased by trust for savings restoration plan — 22 ( 22 ) — — Balance at June 30, 2021 $ 52,940 $ 261,699 $ ( 2,109 ) $ ( 169,190 ) $ 143,340 See accompanying notes to financial statements. 7 TREDEGAR CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying condensed consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s condensed consolidated financial position as of June 30, 2022, the condensed consolidated results of operations for the three and six months ended June 30, 2022 and 2021, the condensed consolidated cash flows for the six months ended June 30, 2022 and 2021, and the condensed consolidated changes in shareholders’ equity for the six months ended June 30, 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 second quarter for 2022 and 2021 for this segment references 13-week periods ended June 26, 2022 and June 27, 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 June 26, 2022 and June 30, 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 and six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full year. Accounting Standards 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. In the second quarter of 2022, the Company adopted ASU 2020-04, which did not have a material impact on the Company’s consolidated financial statements. 2. ACCOUNTS AND OTHER RECEIVABLES As of June 30, 2022 and December 31, 2021, accounts receivable and other receivables, net include the following: June 30, December 31, (In thousands) 2022 2021 Customer receivables $ 126,441 $ 102,090 Other receivables 3,583 2,958 Total accounts and other receivables 130,024 105,048 Less: Allowance for bad debts ( 2,029 ) ( 1,736 ) Total accounts and other receivables, net $ 127,995 $ 103,312 8 3. INVENTORIES The components of inventories are as follows: (In thousands) June 30, 2022 December 31, 2021 Finished goods $ 30,486 $ 25,199 Work-in-process 16,284 11,955 Raw materials 54,294 32,958 Stores, supplies and other 20,305 18,457 Total $ 121,369 $ 88,569 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 second 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 and six months ended June 30, 2022 and 2021, are shown below: Pension Benefits Other Post-Retirement Benefits Three Months Ended June 30, Three Months Ended June 30, (In thousands) 2022 2021 2022 2021 Service cost $ — $ — $ 5 $ 8 Interest cost 2,225 2,102 51 51 Expected return on plan assets ( 2,043 ) ( 2,863 ) — — Amortization of prior service costs, (gains) losses and net transition asset 3,302 4,266 ( 34 ) ( 24 ) Net periodic benefit cost $ 3,484 $ 3,505 $ 22 $ 35 Pension Benefits Other Post-Retirement Benefits Six Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Service cost $ — $ — $ 10 $ 17 Interest cost 4,450 4,204 102 101 Expected return on plan assets ( 4,098 ) ( 5,725 ) — — Amortization of prior service costs, (gains) losses and net transition asset 6,586 8,531 ( 68 ) ( 48 ) Net periodic benefit cost $ 6,938 $ 7,010 $ 44 $ 70 Pension and other postretirement liabilities were $ 29.1 million and $ 78.9 million at June 30, 2022 and December 31, 2021, respectively ($ 0.7 million included in “Accrued expenses” at June 30, 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. 9 5. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of the following: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Gain on investment in kaléo (a) $ 1,406 $ 200 $ 1,406 $ 918 One-time tax credit in Brazil for unemployment/social security insurance non-income taxes resulting from a favorable decision by Brazil's Supreme Court regarding the calculation of such tax — 8,486 — 8,486 Transition service fees, net of corporate costs associated with the divested Personal Care business ( 16 ) 267 ( 48 ) 571 COVID-19-related expenses, net of relief (b) ( 96 ) ( 415 ) ( 308 ) ( 435 ) Write-down of investment in Harbinger Capital Partners Special Situations Fund (c) — ( 363 ) ( 7 ) ( 511 ) Other ( 33 ) ( 53 ) ( 49 ) ( 147 ) Total $ 1,261 $ 8,122 $ 994 $ 8,882 (a) In May 2022, additional cash consideration of $ 1.4 million was received related to customary post-closing adjustments. See Note 12 for additional information. (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 June 30, 2022 and $ 0.2 million as of December 31, 2021 reported in "Other assets" in the condensed consolidated balance sheet. In May 2021, the Brazil Supreme Court ruled in a leading case related to the amount of Brazilian value-added tax to exclude from the calculation of unemployment/social security insurance non-income taxes ("PIS/COFINS"). As a result, in the second quarter of 2021, the Company recorded a pre-tax gain of $ 8.5 million for certain excess PIS/COFINS paid from 2003 to 2021, plus applicable interest, which the Company applied to required Brazilian federal tax payments during 2021. 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 Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Weighted average shares outstanding used to compute basic earnings per share 33,814 33,594 33,734 33,500 Incremental dilutive shares attributable to stock options and restricted stock 40 146 42 192 Shares used to compute diluted earnings per share 33,854 33,740 33,776 33,692 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 2,525,104 and 2,501,406 for the three and six months ended June 30, 2022, respectively, and 996,400 and 703,958 for the three and six months ended June 30, 2021, respectively. 10 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 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 $ ( 80,256 ) $ 6,831 $ ( 62,075 ) $ ( 135,500 ) Other comprehensive income (loss) ( 5,712 ) ( 11,681 ) — ( 17,393 ) Income tax (expense) benefit 482 3,110 — 3,592 Other comprehensive income (loss), net of tax ( 5,230 ) ( 8,571 ) — ( 13,801 ) Reclassification adjustment to net income (loss) — ( 840 ) 3,268 2,428 Income tax (expense) benefit — 250 ( 712 ) ( 462 ) Reclassification adjustment to net income (loss), net of tax — ( 590 ) 2,556 1,966 Other comprehensive income (loss), net of tax ( 5,230 ) ( 9,161 ) 2,556 ( 11,835 ) Balance at June 30, 2022 $ ( 85,486 ) $ ( 2,330 ) $ ( 59,519 ) $ ( 147,335 ) 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 $ ( 85,792 ) $ 901 $ ( 64,613 ) $ ( 149,504 ) Other comprehensive income (loss) 552 ( 1,678 ) — ( 1,126 ) Income tax (expense) benefit ( 246 ) ( 80 ) — ( 326 ) Other comprehensive income (loss), net of tax 306 ( 1,758 ) — ( 1,452 ) Reclassification adjustment to net income (loss) — ( 1,997 ) 6,518 4,521 Income tax (expense) benefit — 524 ( 1,424 ) ( 900 ) Reclassification adjustment to net income (loss), net of tax — ( 1,473 ) 5,094 3,621 Other comprehensive income (loss), net of tax 306 ( 3,231 ) 5,094 2,169 Balance at June 30, 2022 $ ( 85,486 ) $ ( 2,330 ) $ ( 59,519 ) $ ( 147,335 ) 11 The changes in accumulated other comprehensive income (loss) by component for the three months ended June 30, 2021. (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, 2021 $ ( 86,797 ) $ 2,028 $ ( 93,200 ) $ ( 177,969 ) Other comprehensive income (loss) 4,456 3,257 — 7,713 Income tax (expense) benefit ( 463 ) ( 808 ) — ( 1,271 ) Other comprehensive income (loss), net of tax 3,993 2,449 — 6,442 Reclassification adjustment to net income (loss) — ( 1,241 ) 4,240 2,999 Income tax (expense) benefit — 260 ( 922 ) ( 662 ) Reclassification adjustment to net income (loss), net of tax — ( 981 ) 3,318 2,337 Other comprehensive income (loss), net of tax 3,993 1,468 3,318 8,779 Balance at June 30, 2021 $ ( 82,804 ) $ 3,496 $ ( 89,882 ) $ ( 169,190 ) The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2021. (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, 2021 $ ( 84,149 ) $ 2,264 $ ( 96,519 ) $ ( 178,404 ) Other comprehensive income (loss) 1,536 3,488 — 5,024 Income tax (expense) benefit ( 191 ) ( 766 ) — ( 957 ) Other comprehensive income (loss), net of tax 1,345 2,722 — 4,067 Reclassification adjustment to net income (loss) — ( 1,896 ) 8,483 6,587 Income tax (expense) benefit — 406 ( 1,846 ) ( 1,440 ) Reclassification adjustment to net income (loss), net of tax — ( 1,490 ) 6,637 5,147 Other comprehensive income (loss), net of tax 1,345 1,232 6,637 9,214 Balance at June 30, 2021 $ ( 82,804 ) $ 3,496 $ ( 89,882 ) $ ( 169,190 ) 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 have durations generally no longer than 24 months. The notional amount of aluminum futures contracts that hedged future 12 purchases of aluminum to meet fixed-price forward sales contract obligations was $ 32.7 million ( 19.1 million pounds of aluminum) at June 30, 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 June 30, 2022 and December 31, 2021: June 30, 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 $ 153 Prepaid expenses and other $ 2,085 Liability derivatives: Aluminum futures contracts Accrued expenses ( 1,893 ) Accrued expenses ( 119 ) Aluminum futures contracts Other non-current liabilities ( 1,332 ) Other non-current liabilities — Net asset (liability) $ ( 3,072 ) $ 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 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 $ 1,719 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 % $ 1,728 5.4310 R$ 9,385 Jan-23 64 % $ 1,822 5.4657 R$ 9,959 Feb-23 68 % $ 1,921 5.4995 R$ 10,565 Mar-23 72 % $ 1,903 5.5379 R$ 10,539 Apr-23 72 % $ 1,873 5.5753 R$ 10,443 May-23 71 % $ 1,928 5.6118 R$ 10,820 Jun-23 74 % $ 2,154 5.6378 R$ 12,144 Jul-23 83 % $ 2,020 5.6831 R$ 11,480 Aug-23 78 % $ 2,071 5.7174 R$ 11,841 Sep-23 80 % $ 2,013 5.7556 R$ 11,586 Oct-23 79 % $ 2,018 5.7836 R$ 11,671 Nov-23 79 % $ 1,786 5.8312 R$ 10,414 Dec-23 71 % $ 33,680 5.6239 R$ 189,414 74 % 13 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 June 30, 2022 and December 31, 2021: June 30, 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 $ 628 Prepaid expenses and other $ — Foreign currency forward contracts Other assets 41 Other assets — Liability derivatives: Foreign currency forward contracts Accrued expenses ( 132 ) Accrued expenses ( 1,255 ) Foreign currency forward contracts Other non-current liabilities ( 234 ) Other non-current liabilities — Net asset (liability) $ 303 $ ( 1,255 ) 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. 14 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 and six month periods ended June 30, 2022 and 2021 is summarized in the table below: Cash Flow Derivative Hedges Three Months Ended June 30, Aluminum Futures Contracts Foreign Currency Forwards (In thousands) 2022 2021 2022 2021 Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) $ ( 9,923 ) $ 2,195 $ — $ ( 1,758 ) $ — $ 1,061 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) $ 293 $ 1,372 $ 15 $ 532 $ 16 $ ( 147 ) Six Months Ended June 30, Aluminum Futures Contracts Foreign Currency Forwards 2022 2021 2022 2021 Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) $ ( 3,741 ) $ 3,710 $ — $ 2,063 $ — $ ( 222 ) 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) $ 1,298 $ 2,012 $ 30 $ 669 $ 33 $ ( 149 ) As of June 30, 2022, the Company expects $ 1.0 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, 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 $ 6.3 million on pre-tax income from continuing operations of $ 37.6 million in the first six months of 2022. Therefore, the effective tax rate in the first six months of 2022 was 16.9 %, compared to 22.5 % in the first six 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 second 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 15 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 $ 2.6 million in the first six months of 2022 and $ 5.9 million in 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 as of June 30, 2022 are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2018 . 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. 16 The following table presents net sales and EBITDA from ongoing operations by segment for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Net Sales Aluminum Extrusions $ 190,308 $ 139,281 $ 348,417 $ 257,405 PE Films 31,424 31,430 62,555 59,384 Flexible Packaging Films 41,595 33,374 80,839 65,895 Total net sales 263,327 204,085 491,811 382,684 Add back freight 11,036 7,044 19,118 13,267 Sales as shown in the condensed consolidated statements of income $ 274,363 $ 211,129 $ 510,929 $ 395,951 EBITDA from Ongoing Operations Aluminum Extrusions: Ongoing operations: EBITDA $ 21,895 $ 19,723 $ 45,814 $ 33,024 Depreciation & amortization ( 4,169 ) ( 4,032 ) ( 8,430 ) ( 8,162 ) EBIT 17,726 15,691 37,384 24,862 Plant shutdowns, asset impairments, restructurings and other 16 ( 246 ) ( 89 ) ( 63 ) PE Films: Ongoing operations: EBITDA 7,065 9,001 14,112 16,213 Depreciation & amortization ( 1,559 ) ( 1,671 ) ( 3,154 ) ( 3,090 ) EBIT 5,506 7,330 10,958 13,123 Plant shutdowns, asset impairments, restructurings and other ( 50 ) ( 151 ) ( 153 ) ( 275 ) Flexible Packaging Films: Ongoing operations: EBITDA 7,631 8,277 12,665 17,901 Depreciation & amortization ( 583 ) ( 506 ) ( 1,132 ) ( 972 ) EBIT 7,048 7,771 11,533 16,929 Plant shutdowns, asset impairments, restructurings and other ( 37 ) 8,452 ( 80 ) 8,414 Total 30,209 38,847 59,553 62,990 Interest income 3 25 32 32 Interest expense 1,234 891 2,020 1,713 Gain on investment in kaléo 1,406 200 1,406 918 Stock option-based compensation costs 251 675 882 1,144 Corporate expenses, net 9,789 11,055 20,510 21,917 Income (loss) from continuing operations before income taxes 20,344 26,451 37,579 39,166 Income tax expense (benefit) 5,556 5,723 6,334 8,820 Income (loss) from continuing operations 14,788 20,728 31,245 30,346 Income (loss) from discontinued operations, net of tax 81 508 47 ( 79 ) Net income (loss) $ 14,869 $ 21,236 $ 31,292 $ 30,267 17 The following table presents identifiable assets by segment at June 30, 2022 and December 31, 2021: (In thousands) June 30, 2022 December 31, 2021 Aluminum Extrusions $ 318,534 $ 280,521 PE Films 115,797 113,613 Flexible Packaging Films 92,060 75,269 Subtotal 526,391 469,403 General corporate 17,810 23,482 Cash and cash equivalents 27,462 30,521 Discontinued operations 151 178 Total $ 571,814 $ 523,584 The following tables disaggregate the Company’s revenue by geographic area and product group for the three and six months ended June 30, 2022 and 2021: Net Sales by Geographic Area (a) Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 United States $ 213,955 $ 156,719 $ 396,092 $ 289,616 Exports from the United States to: Asia 14,680 17,158 27,145 30,520 Latin America 1,245 1,358 2,686 2,460 Canada 4,173 4,604 8,366 10,038 Europe 1,085 1,025 2,448 1,980 Operations outside the United States: Brazil 28,189 23,221 55,074 48,070 Total $ 263,327 $ 204,085 $ 491,811 $ 382,684 (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 $ 5.3 million and $ 10.8 million in the second quarters of 2022 and 2021, respectively, and $ 11.7 million and $ 17.7 million in the first six months of 2022 and 2021, respectively. 18 Net Sales by Product Group Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Aluminum Extrusions: Nonresidential building & construction $ 99,302 $ 70,122 $ 180,223 $ 127,350 Consumer durables 18,805 13,586 35,695 26,738 Automotive 14,473 11,185 28,314 22,600 Residential building & construction 20,948 13,893 37,413 26,601 Electrical 9,687 9,572 16,974 16,752 Machinery & equipment 15,929 10,654 28,874 19,579 Distribution 11,164 10,269 20,924 17,785 Subtotal 190,308 139,281 348,417 257,405 PE Films: Surface protection films 23,674 24,490 45,822 45,091 Packaging 7,750 6,940 16,733 14,293 Subtotal 31,424 31,430 62,555 59,384 Flexible Packaging Films 41,595 33,374 80,839 65,895 Total $ 263,327 $ 204,085 $ 491,811 $ 382,684 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 six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Costs and expenses: Selling, general and administrative ( 81 ) 169 ( 37 ) 1,219 Adjustment to the fair value estimates used in the disposal of Personal Care Films (a) — ( 819 ) — ( 1,118 ) Total ( 81 ) ( 650 ) ( 37 ) 101 Income (loss) from discontinued operations before income taxes 81 650 37 ( 101 ) Income tax expense (benefit) — 142 ( 10 ) ( 22 ) Income (loss) from discontinued operations, net of tax $ 81 $ 508 $ 47 $ ( 79 ) (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. 19 The assets and liabilities of the discontinued operations reflected in the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively, were as follows: June 30, December 31, (In thousands) 2022 2021 Assets Prepaid expenses and other (a) $ 151 $ 178 Liabilities Accrued expenses (a) $ 71 $ 193 (a) The condensed consolidated balance sheet of discontinued operations as of June 30, 2022 includes $ 0.2 million of other receivables related to the settlement of customary post-closing adjustments and other miscellaneous accrued expenses of $ 0.1 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: Six Months Ended June 30, (In thousands) 2022 2021 Operating activities Other — ( 1,118 ) 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. In the first six months ended June 30, 2021, a pre-tax gain of $ 0.9 million was recognized on the Company’s investment in kaléo, which included a $ 0.3 million dividend received from kaléo. 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) and received closing cash proceeds of $ 47.1 million. Subsequently, in May 2022, additional cash consideration of $ 1.4 million was received related to customary post-closing adjustments, which is reported in “Other income (expense), net” in the condensed consolidated statements of income. 20 13. DEBT On June 29, 2022, Tredegar entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) that replaced its existing $ 375 million five-year, secured revolving credit facility that was due to expire on June 28, 2024. The Credit Agreement is a five-year, revolving, secured credit facility that permits aggregate borrowings of $ 375 million and matures on June 29, 2027. Borrowings under the Credit Agreement bear an interest rate equal to Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment of 10 basis points ("Adjusted Term SOFR Rate") and an amount depending on the type of borrowing and commitment fees charged on the unused amount under the Credit Agreement at various Total Net Leverage Ratio levels as follows: Pricing Under the Credit Agreement (Basis Points) Total Net Leverage Ratio Term Benchmark Spread Commitment Fee <= 1.0x 150.0 20 >1.0x but <=2.0x 162.5 25 >2.0x but <=3.0x 175.0 30 >3.0x but <=3.5x 187.5 35 >3.5x 200.0 40 At June 30, 2022, $ 101.5 million of the outstanding debt was principally priced at an interest rate equal to the Adjusted Term SOFR Rate plus the applicable credit spread of 150.0 basis points. Prior to the Credit Agreement, the interest rate was based on London Inter-Bank Offered Rate plus an applicable credit spread. The primary restrictive covenants in the Credit Agreement include: • Total Net Leverage Ratio of 4.00 x; • Interest Coverage Ratio of 3.00 x; and • Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00 x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $ 75 million (provided that the $ 75 million basket will reset at the end of each fiscal quarter when the Total Net Leverage ratio is less than or equal to 2.00 x). Under the Credit Agreement: • Total Net Leverage Ratio is defined as the ratio of (a)(i) total indebtedness minus (ii) liquidity (the lesser of $ 50,000,000 and the aggregate amount of cash and cash equivalents) to (b) EBITDA (as defined in Credit Agreement "Credit EBITDA"); and • Interest Coverage Ratio is defined as the ratio of (a) Credit EBITDA to (b) interest expense. The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries. Tredegar was in compliance with all of its debt covenants as of June 30, 2022. Noncompliance with any of the debt covenants may have a material adverse effect on its financial condition or liquidity, in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated. 21