TREDEGAR CORP 10-Q

Item 1. Financial Statements. Tredegar Corporation Condensed Consolidated Balance Sheets (In Thousands, Except Share Data) (Unaudited) September 30, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 19,250 $ 30,521 Accounts and other receivables, net 110,077 103,312 Income taxes recoverable 1,834 2,558 Inventories 114,103 88,569 Prepaid expenses and other 9,601 11,275 Current assets of discontinued operations 151 178 Total current assets 255,016 236,413 Property, plant and equipment, at cost 520,371 498,311 Less: accumulated depreciation ( 340,868 ) ( 327,930 ) Net property, plant and equipment 179,503 170,381 Right-of-use leased assets 14,356 13,847 Identifiable intangible assets, net 12,200 14,152 Goodwill 70,608 70,608 Deferred income taxes 11,820 15,723 Other assets 3,155 2,460 Total assets $ 546,658 $ 523,584 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 126,848 $ 123,760 Accrued expenses 36,894 33,104 Lease liability, short-term 2,003 2,158 Income taxes payable 1,391 9,333 Current liabilities of discontinued operations 71 193 Total current liabilities 167,207 168,548 Lease liability, long-term 13,160 12,831 Long-term debt 124,000 73,000 Pension and other postretirement benefit obligations, net 28,464 78,265 Other non-current liabilities 6,769 6,218 Total liabilities 339,600 338,862 Shareholders’ equity: Common stock, no par value (issued and outstanding 33,982,479 shares at September 30, 2022 and 33,736,629 shares at December 31, 2021) 57,902 55,174 Common stock held in trust for savings restoration plan ( 111,861 shares at September 30, 2022 and 108,433 shares at December 31, 2021) ( 2,174 ) ( 2,135 ) Accumulated other comprehensive income (loss): Foreign currency translation adjustment ( 87,826 ) ( 85,792 ) Gain (loss) on derivative financial instruments ( 4,877 ) 901 Pension and other postretirement benefit adjustments ( 56,963 ) ( 64,613 ) Retained earnings 300,996 281,187 Total shareholders’ equity 207,058 184,722 Total liabilities and shareholders’ equity $ 546,658 $ 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues and other items: Sales $ 238,486 $ 209,517 $ 749,415 $ 605,468 Other income (expense), net 119 391 1,113 9,272 238,605 209,908 750,528 614,740 Costs and expenses: Cost of goods sold 200,582 170,756 601,930 470,733 Freight 9,500 7,264 28,619 20,531 Selling, general and administrative 19,018 16,767 59,160 55,422 Research and development 1,576 1,613 4,855 4,770 Amortization of identifiable intangibles 653 724 1,982 2,170 Pension and postretirement benefits 3,506 3,540 10,489 10,622 Interest expense 1,138 842 3,158 2,555 Asset impairments and costs associated with exit and disposal activities, net of adjustments 495 265 621 633 Total 236,468 201,771 710,814 567,436 Income (loss) from continuing operations before income taxes 2,137 8,137 39,714 47,304 Income tax expense (benefit) 1,125 1,908 7,460 10,728 Net income (loss) from continuing operations 1,012 6,229 32,254 36,576 Income (loss) from discontinued operations, net of tax 21 ( 26 ) 68 ( 104 ) Net income (loss) $ 1,033 $ 6,203 $ 32,322 $ 36,472 Earnings (loss) per share: Basic: Continuing operations $ 0.03 $ 0.19 $ 0.96 $ 1.09 Discontinued operations — — — — Basic earnings (loss) per share $ 0.03 $ 0.19 $ 0.96 $ 1.09 Diluted: Continuing operations $ 0.03 $ 0.19 $ 0.96 $ 1.09 Discontinued operations — — — — Diluted earnings (loss) per share $ 0.03 $ 0.19 $ 0.96 $ 1.09 Shares used to compute earnings (loss) per share: Basic 33,870 33,620 33,780 33,541 Diluted 33,871 33,649 33,808 33,678 See accompanying notes to financial statements. 3 Tredegar Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (In Thousands) (Unaudited) Three Months Ended September 30, 2022 2021 Net income (loss) $ 1,033 $ 6,203 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax benefit of $ 148 in 2022 and net of tax benefit of $ 294 in 2021) ( 2,340 ) ( 2,788 ) Derivative financial instruments adjustment (net of tax benefit of $ 818 in 2022 and net of tax benefit of $ 174 in 2021) ( 2,547 ) ( 717 ) Amortization of prior service costs and net gains or losses (net of tax expense of $ 712 in 2022 and net of tax expense of $ 927 in 2021) 2,556 3,317 Other comprehensive income (loss) ( 2,331 ) ( 188 ) Comprehensive income (loss) $ ( 1,298 ) $ 6,015 Nine Months Ended September 30, 2022 2021 Net income (loss) $ 32,322 $ 36,472 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax expense of $ 98 in 2022 and net of tax benefit of $ 103 in 2021) ( 2,034 ) ( 1,443 ) Derivative financial instruments adjustment (net of tax benefit of $ 1,261 in 2022 and net of tax expense of $ 185 in 2021) ( 5,778 ) 515 Amortization of prior service costs and net gains or losses (net of tax expense of $ 2,136 in 2022 and net of tax expense of $2,773 in 2021) 7,650 9,954 Other comprehensive income (loss) ( 162 ) 9,026 Comprehensive income (loss) $ 32,160 $ 45,498 See accompanying notes to financial statements. 4 Tredegar Corporation Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ 32,322 $ 36,472 Adjustments for noncash items: Depreciation 17,538 16,169 Amortization of identifiable intangibles 1,982 2,170 Reduction of right-of-use lease asset 1,590 1,582 Deferred income taxes 3,078 4,120 Accrued pension and post-retirement benefits 10,519 10,622 Stock-based compensation expense 2,575 3,227 Gain on investment in kaléo ( 1,406 ) ( 879 ) Changes in assets and liabilities: Accounts and other receivables ( 7,222 ) ( 11,379 ) Inventories ( 24,855 ) ( 19,902 ) Income taxes recoverable/payable ( 7,227 ) 111 Prepaid expenses and other ( 5,365 ) 3,422 Accounts payable and accrued expenses 3,624 12,078 Lease liability ( 1,737 ) ( 1,566 ) Pension and postretirement benefit plan contributions ( 50,503 ) ( 5,510 ) Other, net 1,935 750 Net cash (used in) provided by operating activities ( 23,152 ) 51,487 Cash flows from investing activities: Capital expenditures ( 25,527 ) ( 19,576 ) Proceeds from the sale of kaléo 1,406 — Proceeds from the sale of assets — 4,749 Net cash used in investing activities ( 24,121 ) ( 14,827 ) Cash flows from financing activities: Borrowings 279,250 69,250 Debt principal payments ( 228,250 ) ( 76,250 ) Dividends paid ( 12,552 ) ( 12,114 ) Debt financing costs ( 1,245 ) — Other ( 396 ) 915 Net cash provided by (used in) financing activities 36,807 ( 18,199 ) Effect of exchange rate changes on cash ( 805 ) ( 54 ) Increase (decrease) in cash & cash equivalents ( 11,271 ) 18,407 Cash and cash equivalents at beginning of period 30,521 11,846 Cash and cash equivalents at end of period $ 19,250 $ 30,253 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 September 30, 2022: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance July 1, 2022 $ 56,911 $ 304,370 $ ( 2,161 ) $ ( 147,335 ) $ 211,785 Net income (loss) — 1,033 — — 1,033 Foreign currency translation adjustment — — — ( 2,340 ) ( 2,340 ) Derivative financial instruments adjustment — — — ( 2,547 ) ( 2,547 ) Amortization of prior service costs and net gains or losses — — — 2,556 2,556 Cash dividends declared ($ 0.13 per share) — ( 4,420 ) — — ( 4,420 ) Stock-based compensation expense 991 — — — 991 Tredegar common stock purchased by trust for savings restoration plan — 13 ( 13 ) — — Balance September 30, 2022 $ 57,902 $ 300,996 $ ( 2,174 ) $ ( 149,666 ) $ 207,058 The following summarizes the changes in shareholders’ equity for the nine month period ended September 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) — 32,322 — — 32,322 Foreign currency translation adjustment — — — ( 2,034 ) ( 2,034 ) Derivative financial instruments adjustment — — — ( 5,778 ) ( 5,778 ) Amortization of prior service costs and net gains or losses — — — 7,650 7,650 Cash dividends declared ($ 0.37 per share) — ( 12,552 ) — — ( 12,552 ) Stock-based compensation expense 3,124 — — — 3,124 Repurchase of employee common stock for tax withholdings ( 396 ) — — — ( 396 ) Tredegar common stock purchased by trust for savings restoration plan — 39 ( 39 ) — — Balance September 30, 2022 $ 57,902 $ 300,996 $ ( 2,174 ) $ ( 149,666 ) $ 207,058 6 The following summarizes the changes in shareholders’ equity for the three month period ended September 30, 2021: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance at July 1, 2021 $ 52,940 $ 261,699 $ ( 2,109 ) $ ( 169,190 ) $ 143,340 Net income (loss) — 6,203 — — 6,203 Foreign currency translation adjustment — — — ( 2,788 ) ( 2,788 ) Derivative financial instruments adjustment — — — ( 717 ) ( 717 ) Amortization of prior service costs and net gains or losses — — — 3,317 3,317 Cash dividends declared ($ 0.12 per share) — ( 4,042 ) — — ( 4,042 ) Stock-based compensation expense 966 — — — 966 Tredegar common stock purchased by trust for savings restoration plan — 13 ( 13 ) — — Balance at September 30, 2021 $ 53,906 $ 263,873 $ ( 2,122 ) $ ( 169,378 ) $ 146,279 The following summarizes the changes in shareholders’ equity for the nine month period ended September 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) — 36,472 — — 36,472 Foreign currency translation adjustment — — — ( 1,443 ) ( 1,443 ) Derivative financial instruments adjustment — — — 515 515 Amortization of prior service costs and net gains or losses — — — 9,954 9,954 Cash dividends declared ($ 0.36 per share) — ( 12,114 ) — — ( 12,114 ) Stock-based compensation expense 2,925 — — — 2,925 Shares issued upon exercise of stock options 915 — — — 915 Tredegar common stock purchased by trust for savings restoration plan — 35 ( 35 ) — — Balance at September 30, 2021 $ 53,906 $ 263,873 $ ( 2,122 ) $ ( 169,378 ) $ 146,279 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 September 30, 2022, the condensed consolidated results of operations for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021, and the condensed consolidated changes in shareholders’ equity for the nine months ended September 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 third quarter for 2022 and 2021 for this segment references 13-week periods ended September 25, 2022 and September 26, 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 September 25, 2022 and September 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 nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year. Risks and Uncertainties During the three months ended September 30, 2022, events and circumstances indicated that the Surface Protection reporting unit ("Surface Protection"), which is also the asset group, might be impaired. The Company performed a goodwill and long-lived impairment analysis for Surface Protection and determined that the fair value of Surface Protection exceeded its carrying value. 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. As of September 30, 2022, the Surface Protection reporting unit had goodwill of $ 57.3 million and long-lived identifiable assets of $ 29.5 million. Accounting Standards Adopted In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Accounting Standards Not Yet Adopted In September 2022, the FASB issued ASU 2022-04, which requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The guidance is effective for annual periods beginning after December 15, 2022, with early adoption permitted. 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. 8 2. ACCOUNTS AND OTHER RECEIVABLES As of September 30, 2022 and December 31, 2021, accounts receivable and other receivables, net include the following: September 30, December 31, (In thousands) 2022 2021 Customer receivables $ 108,438 $ 102,090 Other receivables 3,959 2,958 Total accounts and other receivables 112,397 105,048 Less: Allowance for bad debts ( 2,320 ) ( 1,736 ) Total accounts and other receivables, net $ 110,077 $ 103,312 3. INVENTORIES The components of inventories are as follows: (In thousands) September 30, 2022 December 31, 2021 Finished goods $ 30,025 $ 25,199 Work-in-process 17,201 11,955 Raw materials 49,212 32,958 Stores, supplies and other 17,665 18,457 Total $ 114,103 $ 88,569 9 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 third 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 nine months ended September 30, 2022 and 2021, are shown below: Pension Benefits Other Post-Retirement Benefits Three Months Ended September 30, Three Months Ended September 30, (In thousands) 2022 2021 2022 2021 Service cost $ — $ — $ 5 $ 9 Interest cost 2,226 2,101 51 50 Expected return on plan assets ( 2,044 ) ( 2,862 ) — — Amortization of prior service costs, (gains) losses and net transition asset 3,301 4,268 ( 33 ) ( 24 ) Net periodic benefit cost $ 3,483 $ 3,507 $ 23 $ 35 Pension Benefits Other Post-Retirement Benefits Nine Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Service cost $ — $ — $ 15 $ 26 Interest cost 6,676 6,305 153 151 Expected return on plan assets ( 6,141 ) ( 8,587 ) — — Amortization of prior service costs, (gains) losses and net transition asset 9,887 12,799 ( 101 ) ( 72 ) Net periodic benefit cost $ 10,422 $ 10,517 $ 67 $ 105 Pension and other postretirement liabilities were $ 29.1 million and $ 78.9 million at September 30, 2022 and December 31, 2021, respectively ($ 0.7 million included in “Accrued expenses” at September 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. 10 5. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of the following: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Gain on investment in kaléo (a) $ — $ 279 $ 1,406 $ 1,197 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 Other 119 112 ( 293 ) ( 411 ) Total $ 119 $ 391 $ 1,113 $ 9,272 (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 on the sale of the investment in kaléo. 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 Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Weighted average shares outstanding used to compute basic earnings per share 33,870 33,620 33,780 33,541 Incremental dilutive shares attributable to stock options and restricted stock 1 29 28 137 Shares used to compute diluted earnings per share 33,871 33,649 33,808 33,678 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 2,932,378 and 2,645,063 for the three and nine months ended September 30, 2022, respectively, and 2,433,213 and 1,280,376 for the three and nine months ended September 30, 2021, respectively. 11 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The changes in accumulated other comprehensive income (loss) by component for the three months ended September 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 July 1, 2022 $ ( 85,486 ) $ ( 2,330 ) $ ( 59,519 ) $ ( 147,335 ) Other comprehensive income (loss) ( 2,488 ) ( 2,205 ) — ( 4,693 ) Income tax (expense) benefit 148 522 — 670 Other comprehensive income (loss), net of tax ( 2,340 ) ( 1,683 ) — ( 4,023 ) Reclassification adjustment to net income (loss) — ( 1,159 ) 3,268 2,109 Income tax (expense) benefit — 295 ( 712 ) ( 417 ) Reclassification adjustment to net income (loss), net of tax — ( 864 ) 2,556 1,692 Other comprehensive income (loss), net of tax ( 2,340 ) ( 2,547 ) 2,556 ( 2,331 ) Balance at September 30, 2022 $ ( 87,826 ) $ ( 4,877 ) $ ( 56,963 ) $ ( 149,666 ) The changes in accumulated other comprehensive income (loss) by component for the nine months ended September 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) ( 1,936 ) ( 3,883 ) — ( 5,819 ) Income tax (expense) benefit ( 98 ) 442 — 344 Other comprehensive income (loss), net of tax ( 2,034 ) ( 3,441 ) — ( 5,475 ) Reclassification adjustment to net income (loss) — ( 3,156 ) 9,786 6,630 Income tax (expense) benefit — 819 ( 2,136 ) ( 1,317 ) Reclassification adjustment to net income (loss), net of tax — ( 2,337 ) 7,650 5,313 Other comprehensive income (loss), net of tax ( 2,034 ) ( 5,778 ) 7,650 ( 162 ) Balance at September 30, 2022 $ ( 87,826 ) $ ( 4,877 ) $ ( 56,963 ) $ ( 149,666 ) 12 The changes in accumulated other comprehensive income (loss) by component for the three months ended September 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 July 1, 2021 $ ( 82,804 ) $ 3,496 $ ( 89,882 ) $ ( 169,190 ) Other comprehensive income (loss) ( 3,082 ) 1,245 — ( 1,837 ) Income tax (expense) benefit 294 ( 297 ) — ( 3 ) Other comprehensive income (loss), net of tax ( 2,788 ) 948 — ( 1,840 ) Reclassification adjustment to net income (loss) — ( 2,141 ) 4,244 2,103 Income tax (expense) benefit — 476 ( 927 ) ( 451 ) Reclassification adjustment to net income (loss), net of tax — ( 1,665 ) 3,317 1,652 Other comprehensive income (loss), net of tax ( 2,788 ) ( 717 ) 3,317 ( 188 ) Balance at September 30, 2021 $ ( 85,592 ) $ 2,779 $ ( 86,565 ) $ ( 169,378 ) The changes in accumulated other comprehensive income (loss) by component for the nine months ended September 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) ( 1,546 ) 4,736 — 3,190 Income tax (expense) benefit 103 ( 1,064 ) — ( 961 ) Other comprehensive income (loss), net of tax ( 1,443 ) 3,672 — 2,229 Reclassification adjustment to net income (loss) — ( 4,037 ) 12,727 8,690 Income tax (expense) benefit — 880 ( 2,773 ) ( 1,893 ) Reclassification adjustment to net income (loss), net of tax — ( 3,157 ) 9,954 6,797 Other comprehensive income (loss), net of tax ( 1,443 ) 515 9,954 9,026 Balance at September 30, 2021 $ ( 85,592 ) $ 2,779 $ ( 86,565 ) $ ( 169,378 ) 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 13 have durations generally no longer than 24 months. The notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $ 33.7 million ( 18.4 million pounds of aluminum) at September 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 September 30, 2022 and December 31, 2021: September 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 $ 8 Prepaid expenses and other $ 2,085 Liability derivatives: Aluminum futures contracts Accrued expenses ( 5,016 ) Accrued expenses ( 119 ) Aluminum futures contracts Other non-current liabilities ( 1,222 ) Other non-current liabilities — Net asset (liability) $ ( 6,230 ) $ 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. 14 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 $ 1,793 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 % $ 659 5.7360 R$ 3,780 Jan-24 23 % $ 659 5.7562 R$ 3,793 Feb-24 23 % $ 659 5.7774 R$ 3,807 Mar-24 23 % $ 659 5.8000 R$ 3,822 Apr-24 23 % $ 659 5.8207 R$ 3,836 May-24 24 % $ 659 5.8419 R$ 3,850 Jun-24 24 % $ 659 5.8636 R$ 3,864 Jul-24 24 % $ 659 5.8872 R$ 3,880 Aug-24 24 % $ 659 5.9118 R$ 3,896 Sep-24 24 % $ 659 5.9350 R$ 3,911 Oct-24 24 % $ 659 5.9581 R$ 3,926 Nov-24 24 % $ 659 5.9813 R$ 3,942 Dec-24 24 % $ 36,381 5.6840 R$ 206,789 50 % 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. 15 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 September 30, 2022 and December 31, 2021: September 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 $ 397 Prepaid expenses and other $ — Foreign currency forward contracts Other assets 59 Other assets — Liability derivatives: Foreign currency forward contracts Accrued expenses ( 363 ) Accrued expenses ( 1,255 ) Net asset (liability) $ 93 $ ( 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. 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 nine month periods ended September 30, 2022 and 2021 is summarized in the table below: Cash Flow Derivative Hedges Three Months Ended September 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) $ ( 2,320 ) $ 2,919 $ — $ 115 $ — $ ( 1,670 ) 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) $ 837 $ 2,160 $ 16 $ 306 $ 15 $ ( 34 ) Nine Months Ended September 30, Aluminum Futures Contracts Foreign Currency Forwards 2022 2021 2022 2021 Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) $ ( 6,060 ) $ 6,629 $ — $ 2,177 $ — $ ( 1,892 ) 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) $ 2,135 $ 4,172 $ 46 $ 975 $ 48 $ ( 183 ) As of September 30, 2022, the Company expects $ 3.7 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 nine month periods ended September 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. 16 9. INCOME TAXES Tredegar recorded tax expense of $ 7.5 million on pre-tax income from continuing operations of $ 39.7 million in the first nine months of 2022. Therefore, the effective tax rate in the first nine months of 2022 was 18.8 %, compared to 22.7 % in the first nine 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 third 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 $ 2.6 million in the first nine months of 2022 and $ 8.8 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 September 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. 17 The following table presents net sales and EBITDA from ongoing operations by segment for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Net Sales Aluminum Extrusions $ 161,649 $ 137,086 $ 510,066 $ 394,492 PE Films 20,059 28,501 82,613 87,885 Flexible Packaging Films 47,278 36,666 128,117 102,560 Total net sales 228,986 202,253 720,796 584,937 Add back freight 9,500 7,264 28,619 20,531 Sales as shown in the condensed consolidated statements of income $ 238,486 $ 209,517 $ 749,415 $ 605,468 EBITDA from Ongoing Operations Aluminum Extrusions: Ongoing operations: EBITDA $ 12,071 $ 12,038 $ 57,885 $ 45,062 Depreciation & amortization ( 4,416 ) ( 3,900 ) ( 12,846 ) ( 12,062 ) EBIT 7,655 8,138 45,039 33,000 Plant shutdowns, asset impairments, restructurings and other ( 32 ) ( 160 ) ( 120 ) ( 223 ) PE Films: Ongoing operations: EBITDA 431 4,821 14,543 21,035 Depreciation & amortization ( 1,579 ) ( 1,591 ) ( 4,733 ) ( 4,681 ) EBIT ( 1,148 ) 3,230 9,810 16,354 Plant shutdowns, asset impairments, restructurings and other ( 498 ) ( 182 ) ( 650 ) ( 457 ) Flexible Packaging Films: Ongoing operations: EBITDA 7,830 7,396 20,495 25,296 Depreciation & amortization ( 590 ) ( 493 ) ( 1,723 ) ( 1,466 ) EBIT 7,240 6,903 18,772 23,830 Plant shutdowns, asset impairments, restructurings and other ( 6 ) ( 7 ) ( 86 ) 8,407 Total 13,211 17,922 72,765 80,911 Interest income 9 8 41 40 Interest expense 1,138 842 3,158 2,555 Gain on investment in kaléo — 279 1,406 1,197 Stock option-based compensation costs 271 675 1,153 1,819 Corporate expenses, net 9,674 8,555 30,187 30,470 Income (loss) from continuing operations before income taxes 2,137 8,137 39,714 47,304 Income tax expense (benefit) 1,125 1,908 7,460 10,728 Income (loss) from continuing operations 1,012 6,229 32,254 36,576 Income (loss) from discontinued operations, net of tax 21 ( 26 ) 68 ( 104 ) Net income (loss) $ 1,033 $ 6,203 $ 32,322 $ 36,472 18 The following table presents identifiable assets by segment at September 30, 2022 and December 31, 2021: (In thousands) September 30, 2022 December 31, 2021 Aluminum Extrusions $ 302,392 $ 280,521 PE Films 105,434 113,613 Flexible Packaging Films 96,676 75,269 Subtotal 504,502 469,403 General corporate 22,755 23,482 Cash and cash equivalents 19,250 30,521 Discontinued operations 151 178 Total $ 546,658 $ 523,584 The following tables disaggregate the Company’s revenue by geographic area and product group for the three and nine months ended September 30, 2022 and 2021: Net Sales by Geographic Area (a) Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 United States $ 181,405 $ 157,969 $ 577,496 $ 447,585 Exports from the United States to: Asia 7,437 12,609 34,582 43,129 Latin America 2,138 1,170 4,824 3,630 Canada 4,065 4,107 12,431 14,145 Europe 1,016 1,343 3,464 3,323 Operations outside the United States: Brazil 32,925 25,055 87,999 73,125 Total $ 228,986 $ 202,253 $ 720,796 $ 584,937 (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 $ 4.4 million and $ 7.4 million in the third quarters of 2022 and 2021, respectively, and $ 16.1 million and $ 25.0 million in the first nine months of 2022 and 2021, respectively. 19 Net Sales by Product Group Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Aluminum Extrusions: Nonresidential building & construction $ 86,659 $ 68,590 $ 266,882 $ 195,941 Consumer durables 16,714 12,873 52,409 39,611 Automotive 11,543 10,150 39,857 32,750 Residential building & construction 15,136 13,154 52,549 39,755 Electrical 4,730 8,015 21,704 24,767 Machinery & equipment 20,028 11,611 48,902 31,190 Distribution 6,839 12,693 27,763 30,478 Subtotal 161,649 137,086 510,066 394,492 PE Films: Surface protection films 13,018 20,905 58,839 65,997 Overwrap packaging 7,041 7,596 23,774 21,888 Subtotal 20,059 28,501 82,613 87,885 Flexible Packaging Films 47,278 36,666 128,117 102,560 Total $ 228,986 $ 202,253 $ 720,796 $ 584,937 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 nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Costs and expenses: Selling, general and administrative ( 49 ) 33 ( 86 ) 1,251 Adjustment to the fair value estimates used in the disposal of Personal Care Films (a) — — — ( 1,118 ) Total ( 49 ) 33 ( 86 ) 133 Income (loss) from discontinued operations before income taxes 49 ( 33 ) 86 ( 133 ) Income tax expense (benefit) 28 ( 7 ) 18 ( 29 ) Income (loss) from discontinued operations, net of tax $ 21 $ ( 26 ) $ 68 $ ( 104 ) (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. 20 The assets and liabilities of the discontinued operations reflected in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively, were as follows: September 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 September 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: Nine Months Ended September 30, (In thousands) 2022 2021 Operating activities Other — ( 1,118 ) Assets Held For Sale In July 2019, the Company committed to a plan to close its manufacturing facility in Lake Zurich, Illinois, which historically was reported by the Company within the Personal Care Films component of its PE Films segment. During the third quarter of 2020, the disposal group carrying value of $4.6 million was reported in "Prepaid expenses and other" in the consolidated balance sheet as the held for sale criteria was met. During the third quarter of 2021, the Company completed the sale of the remaining assets in Lake Zurich, Illinois resulting in total cash proceeds of $4.7 million. 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 nine months ended September 30, 2021, a pre-tax gain of $ 1.2 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. 21 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 September 30, 2022, $ 124.0 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 September 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. 22