NOTES TO FINANCIAL STATEMENTS
Tredegar Corporation and Subsidiaries
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Tredegar Corporation and subsidiaries (collectively “Tredegar,” “the Company,” “we,” “us” or “our”) is an industrial manufacturer with three primary businesses: custom aluminum extrusions for the North American building & construction, automotive and specialty end-use markets; surface protection films for high-technology applications in the global electronics industry and polyethylene overwrap films used in bathroom tissue and paper towels; and polyester-based films for use in packaging applications that have specialized properties primarily for the Latin American and the United States (“U.S.”) flexible packaging markets. The Company’s business segments are Aluminum Extrusions (also referred to as Bonnell Aluminum), PE Films, and Flexible Packaging Films (also referred to as Terphane). More information on the Company’s business segments is provided in Note 13.
On October 30, 2020, the Company completed the sale of its personal care films business (“Personal Care Films”), which was part of its PE Films segment. The transaction excluded the packaging film lines and related operations located at the Pottsville, Pennsylvania manufacturing site (“Pottsville Packaging”), which are now being reported with the Surface Protection component of PE Films. Commencing in the third quarter of 2020, all historical results for Personal Care Films have been presented as discontinued operations.
For more information on this transaction, see Note 15.
Basis of Presentation and Principles of Consolidation. The consolidated financial statements include the accounts and operations of the Company and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Intercompany balances and transactions have been eliminated in consolidation. Certain amounts for the prior years have been reclassified to conform to current year presentation.
Fiscal Year End. The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis. References to Aluminum Extrusions for 2022, 2021 and 2020 relate to the 52-week fiscal years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. The Company does not believe the impact of reporting the results of this segment in this manner 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 year end to the Company’s calendar year end. There was no intercompany funding with Aluminum Extrusions between December 25, 2022 and December 31, 2022 nor between December 27, 2021 and December 31, 2021.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities (if any). On an ongoing basis, the Company evaluates its estimates, including those related to provisions for transaction and credit losses, income taxes, pension, and the valuation of goodwill and intangible assets, among others. Tredegar bases its estimates on historical experience and various other assumptions which the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries located outside the U.S., where the local currency is the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders’ equity. There are no operating subsidiaries located outside the U.S. where the U.S. Dollar is the functional currency. Transaction and remeasurement gains or losses included in income were losses of $0.4 million, losses of $0.5 million and gains of $0.6 million in 2022, 2021 and 2020, respectively. These amounts do not include the effects between reporting periods that exchange rate changes have on income of the locations outside the U.S. that result from translation into U.S. Dollars.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with original maturities of three months or less. At December 31, 2022 and 2021, Tredegar had cash and cash equivalents of $19.2 million and $30.5 million, respectively, including funds held in locations outside the U.S. of $10.3 million and $16.4 million, respectively.
The Company’s policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.
Accounts and Other Receivables, net. Accounts receivable are stated at the amount invoiced to customers less allowances for doubtful accounts. Accounts receivable are non-interest bearing and arise from the sale of product to customers under typical industry trade terms. Notes receivable are immaterial. Past due amounts are determined based on established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on an assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current economic conditions. For
receivables that do not have a specific allowance, the loss rate is computed by segment to apply to the remaining receivables balance, using each segment’s historic loss rate. Other receivables include value-added taxes related to certain foreign subsidiaries and other miscellaneous receivables due within one year. For certain customers, the Company has arrangements in place with financial institutions whereby certain customer receivables are sold to the financial institution at a discount and without recourse. Upon sale, the associated receivable is unrecognized and the discount is recognized. For more information on accounts receivable and other receivables, net, see Note 2.
Inventories. Inventories are stated at the lower of cost or market, with cost determined using the last in, first out (“LIFO”) method, the weighted average cost or the first in, first out (“FIFO”) method. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead. Finished goods, work-in-process, raw materials and supplies, stores and other inventory are reviewed to determine if inventory quantities are in excess of forecasted usage or if they have become obsolete.
Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income. Capital expenditures for property, plant and equipment include capitalized interest. Capitalized interest included in capital expenditures for property, plant and equipment was immaterial. Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets that generally range from 5 to 40 years for buildings and land improvements and 2 to 20 years for machinery and equipment.
Goodwill and Identifiable Intangibles. The excess of the purchase price over the fair value of identifiable net assets of acquired companies is allocated to goodwill. The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). When assessing goodwill for impairment, accounting guidance allows the Company to first perform a qualitative assessment (“Step 0 analysis”), which evaluates certain qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit factors. If the Company's Step 0 analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would perform a quantitative impairment test (“Step 1 analysis”).
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 Step 1 analysis and long-lived impairment analysis for Surface Protection and determined that the fair value of Surface Protection exceeded its carrying value by 18.6%. Customer demand for electronics has continued to deteriorate since the third quarter of 2022, causing manufacturers in the supply chain to experience reduced capacity utilization and inventory corrections. In addition, these depressed market conditions, which are expected to continue through the first half of 2023, are adversely impacting mix through reduced sales to our highest value-added customers and products. 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 December 1, 2022, the Company’s reporting units with goodwill were Surface Protection in PE Films and Futura in Aluminum Extrusions. Both of these reporting units have separately identifiable operating net assets (operating assets including goodwill and identifiable intangible assets net of operating liabilities). The Company's Step 0 analyses as of December 1, 2022 of these reporting units concluded that it is not more likely than not that the fair values of each reporting unit was less than its carrying amount. Therefore, the Step 1 quantitative goodwill impairment tests for these reporting units were not necessary as of December 1, 2022.
As of December 31, 2022, Surface Protection had goodwill of $57.3 million and long-lived identifiable assets of $29.3 million.
During the first three months of 2020, the Company performed goodwill impairment tests and recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes), which represented the entire amount of goodwill associated with Aluminum Extrusions’ AACOA reporting unit. The operations of the AACOA reporting unit, which includes the Niles, Michigan and Elkhart, Indiana facilities, were expected to be severely impacted by COVID-19, with over 80% of the aluminum extrusions manufactured at these facilities sold to customers that make consumer durable products, such as recreational boating and power sports vehicles, and to customers serving the building and construction and automotive markets.
For more information on goodwill and identifiable intangibles, see Note 5.
Impairment of Long-Lived Assets. The Company reviews long-lived assets for possible impairment when events indicate that an impairment may exist. For assets that are held and used in operations, if events indicate that an asset may be impaired, the Company estimates the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows.
If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset group, an impairment loss is calculated. Measurement of the impairment loss is the amount by which the carrying amount exceeds the estimated fair value of the asset group. As of December 31, 2022 and 2021, no events were identified that indicated long-lived assets may be impaired.
Assets that are held for sale are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any write-down required.
Pension Costs and Postretirement Benefit Costs Other than Pensions. Pension costs and postretirement benefit costs other than pensions have been accrued over the period employees provided service to Tredegar. Liabilities and expenses for pension plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions relating to the employee workforce. The Company recognizes the funded status of its pension and other postretirement plans in the accompanying consolidated balance sheets. Tredegar’s policy is to fund its pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act (“ERISA”) of 1974 and to fund postretirement benefits other than pensions when claims are incurred.
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”). As a result, the Company expects there will be no required minimum contributions to the pension plan until final settlement. As the settlement process occurs, the Company expects to recognize a non-cash reclassification adjustment to net income or loss of other comprehensive net actuarial losses associated with the pension plan currently reflected directly in shareholders’ equity. Other comprehensive net actuarial losses associated with the pension plan were approximately $104 million on a pre-tax basis as of December 31, 2022.
Additional disclosure regarding Tredegar’s pension costs and postretirement benefit costs other than pensions is included in Note 8.
Revenue Recognition. The Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at the point in time when control of the product is transferred to customers, along with the title, risk of loss and rewards of ownership. Depending on the arrangement with the customer, these criteria are met either at the time the product is shipped or when the product is made available or delivered at the destination specified in the agreement with the customer.
Sales revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for that finished product. The Company offers various discounts, rebates and allowances to customers, (collectively, “allowances”), all of which are considered when determining the transaction price. Certain allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenues. Other allowances can vary depending on future outcomes such as sales returns and customer sales volume, thus represents variable consideration.
Amounts billed to customers related to freight are classified as sales revenue and the cost of freight is classified as a separate line in the accompanying consolidated statements of income. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction between Tredegar and its customers (such as value-added taxes) are accounted for on a net basis and therefore excluded from revenues. See Note 13 for disaggregation of revenue by segment and type. See Note 2 for a table showing accounts and other receivables, net of allowance for bad debts.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding i) revenue pertaining to contracts that have an original expected duration of one year or less, ii) contracts where revenue is recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to materially impact the Company’s financial results.
Research & Development (“R&D”) Costs. R&D costs are expensed as incurred and include primarily salaries, wages, employee benefits, equipment depreciation, facility costs and the cost of materials consumed relating to R&D efforts. R&D costs include a reasonable allocation of indirect costs.
Leases. At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company has elected to not record short-term leases with an original lease term of one year or less in the consolidated balance sheet. To the extent such leases contain renewal options that the Company intends to exercise, the related Right-of-Use (“ROU”) asset and lease liability are included in the consolidated balance sheet. Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance, labor charges, etc.). The Company generally accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating leases are included in “Right-of-use lease assets”, “Lease liabilities - short-term” and “Lease liabilities - long-term” on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates, adjusted for term and geographic location using country-based swap rates. As a result of the Company’s review of new and existing lease contracts, there were no instances where the Company could readily determine a rate implicit in the lease.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Depending upon the specific use of the ROU asset, lease expense is included in the “Cost of goods sold”, “Freight”, “Selling, general and administrative”, and “Research and development” line items on the consolidated statements of income. Lease income is not material to the results of operations for the years ended December 31, 2022 and 2021, respectively. Additional disclosure regarding Tredegar’s leases is included in Note 4.
Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 12). Tredegar’s policy is to accrue U.S. federal income taxes to the extent required under GAAP on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under the Tax Cuts and Jobs Act (the “TCJA”) enacted by the U.S. government in December 2017, Tredegar only records 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. Because of the accumulation of significant losses related to foreign currency translations at Terphane Limitada, there were no unrecorded deferred income tax liabilities associated with U.S. federal income taxes and foreign withholding taxes on Terphane Limitada’s undistributed earnings as of December 31, 2022 and December 31, 2021.
A valuation allowance is recorded in the period when the Company determines that it is more likely than not that all or a portion of deferred income tax assets may not be realized. The establishment and removal of a valuation allowance requires the Company to consider all positive and negative evidence and make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The benefit of an uncertain tax position is included in the accompanying financial statements when the Company determines that it is more likely than not that the position will be sustained, based on the technical merits of the position, if the taxing authority examines the position and the dispute is litigated. This determination is made on the basis of all the facts, circumstances and information available as of the reporting date.
Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Weighted average shares outstanding used to compute basic earnings per share | 33,805,530 | | | 33,562,684 | | | 33,402,147 | |
Incremental shares attributable to stock options and restricted stock | 20,900 | | | 107,566 | | | — | |
Shares used to compute diluted earnings per share | 33,826,430 | | | 33,670,250 | | | 33,402,147 | |
Incremental shares attributable to stock options and restricted stock are computed 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 2,760,983 and 1,582,222 for the year ended December 31, 2022 and 2021, respectively. The Company had a net loss from continuing operations for the year ended December 31, 2020, so there is no dilutive impact for such shares. If the Company had reported net income from continuing operations for the year ended December 31, 2020, 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 1,212,375.
Stock-Based Employee Compensation Plans. The cost of all share-based payments is recognized using the calculated fair value at the grant date, or the date of any later modification, over the requisite service period under the graded-vesting method. See Note 11 for additional information.
Financial Instruments. Tredegar uses derivative financial instruments for the purpose of hedging aluminum price volatility and currency exchange rate exposures that exist as part of transactions associated with ongoing business operations. The Company’s derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the accompanying balance sheet at fair value. A change in the fair value of the derivative that is highly effective and that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other
comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction. Such gains and losses are reported in the same line as the underlying hedged item, and the cash flows related to financial instruments are classified in the consolidated statements of cash flows in a manner consistent with those of the transactions being hedged.
The Company’s policy requires that it formally document all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also uses regression analysis, unless the hedge qualifies for other methods of assessing effectiveness, to formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively.
As a policy, Tredegar does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. Additional disclosure of the utilization of derivative hedging instruments is included in Note 10.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as net income or loss as adjusted by other comprehensive income or loss items. Other comprehensive income (loss) includes changes in foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments, prior service costs and net gains or losses from pension and other postretirement benefit plans arising during the period and amortization of these prior service costs and net gain or loss adjustments, all recorded net of deferred income taxes.
The changes in accumulated other comprehensive income (loss) by component are summarized as follows:
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| Foreign Currency Translation | | Gain (Loss) on Derivative Financial Instruments | | Pension & Other Postretirement Benefit Adjust | | Total Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2020 | $ | (100,663) | | | $ | (1,307) | | | $ | (95,681) | | | $ | (197,651) | |
Other comprehensive income (loss) | (9,678) | | | (4,362) | | | (16,425) | | | (30,465) | |
Income tax (expense) benefit | 897 | | | 1,077 | | | 4,228 | | | 6,202 | |
Other comprehensive income (loss), net of tax | (8,781) | | | (3,285) | | | (12,197) | | | (24,263) | |
Reclassification adjustment to net income (loss) | 25,295 | | | 8,724 | | | 15,296 | | | 49,315 | |
Income tax (expense) benefit | — | | | (1,868) | | | (3,937) | | | (5,805) | |
Reclassification adjustment to net income (loss), net of tax | 25,295 | | | 6,856 | | | 11,359 | | | 43,510 | |
Other comprehensive income (loss), net of tax | 16,514 | | | 3,571 | | | (838) | | | 19,247 | |
Balance at December 31, 2020 | (84,149) | | | 2,264 | | | (96,519) | | | (178,404) | |
Other comprehensive income (loss) | (2,008) | | | 3,800 | | | 23,932 | | | 25,724 | |
Income tax (expense) benefit | 365 | | | (842) | | | (5,212) | | | (5,689) | |
Other comprehensive income (loss), net of tax | (1,643) | | | 2,958 | | | 18,720 | | | 20,035 | |
Reclassification adjustment to net income (loss) | — | | | (5,513) | | | 16,862 | | | 11,349 | |
Income tax (expense) benefit | — | | | 1,192 | | | (3,676) | | | (2,484) | |
Reclassification adjustment to net income (loss), net of tax | — | | | (4,321) | | | 13,186 | | | 8,865 | |
Other comprehensive income (loss), net of tax | (1,643) | | | (1,363) | | | 31,906 | | | 28,900 | |
Balance at December 31, 2021 | (85,792) | | | 901 | | | (64,613) | | | (149,504) | |
Other comprehensive income (loss) | 3 | | | (1,256) | | | (6,464) | | | (7,717) | |
Income tax (expense) benefit | (290) | | | (374) | | | 1,400 | | | 736 | |
Other comprehensive income (loss), net of tax | (287) | | | (1,630) | | | (5,064) | | | (6,981) | |
Reclassification adjustment to net income (loss) | — | | | (2,461) | | | 13,606 | | | 11,145 | |
Income tax (expense) benefit | — | | | 710 | | | (2,965) | | | (2,255) | |
Reclassification adjustment to net income (loss), net of tax | — | | | (1,751) | | | 10,641 | | | 8,890 | |
Other comprehensive income (loss), net of tax | (287) | | | (3,381) | | | 5,577 | | | 1,909 | |
Balance at December 31, 2022 | $ | (86,079) | | | $ | (2,480) | | | $ | (59,036) | | | $ | (147,595) | |
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 8 for additional details.
Accounting Standards Adopted.
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04 “Reference Rate Reform (Topic 848)”, 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, 2024. 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.
In September 2022, the FASB issued ASU 2022-04 “Liabilities - Supplier Finance Programs (Subtopic 405-50)”, which requires that a buyer in a supplier finance program disclose sufficient information about the program to allow users of the 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 fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. In the fourth quarter of 2022, the Company adopted ASU 2022-04, which did not have a material impact on the Company’s consolidated financial statements. See Note 17 for more details.
2. ACCOUNTS AND OTHER RECEIVABLES
As of December 31, 2022 and 2021, accounts receivable and other receivables, net, include the following:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Customer receivables | $ | 83,667 | | | $ | 102,090 | |
Other accounts and notes receivable | 3,874 | | | 2,958 | |
Total accounts and other receivables | 87,541 | | | 105,048 | |
Less: Allowance for bad debts | (2,997) | | | (1,736) | |
Total accounts and other receivables, net | $ | 84,544 | | | $ | 103,312 | |
A reconciliation of the beginning and ending balances of the allowance for doubtful accounts for the three years ended December 31, 2022 is as follows:
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(In thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning of year | $ | 1,736 | | | $ | 2,797 | | | $ | 1,904 | |
Charges to expense | 1,926 | | | 1,440 | | | 1,901 | |
Recoveries | 2 | | | 35 | | | (90) | |
Write-offs and settlements | (639) | | | (1,246) | | | (709) | |
Foreign exchange and other | (28) | | | (1,290) | | | (209) | |
Balance, end of year | $ | 2,997 | | | $ | 1,736 | | | $ | 2,797 | |
3. INVENTORIES
Inventories consist of the following:
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(In thousands) | 2022 | | 2021 |
Finished goods | $ | 34,686 | | | $ | 25,199 | |
Work-in-process | 15,604 | | | 11,955 | |
Raw materials | 58,262 | | | 32,958 | |
Stores, supplies and other | 19,219 | | | 18,457 | |
Total | $ | 127,771 | | | $ | 88,569 | |
Inventories stated on the LIFO basis amounted to $25.3 million at December 31, 2022 and $18.8 million at December 31, 2021, which were below replacement costs by $15.6 million at December 31, 2022 and $27.5 million at December 31, 2021. Inventories stated on the weighted average cost basis were $62.9 million and $30.9 million at December 31, 2022 and 2021, respectively, while inventories stated on the FIFO method amounted to $39.5 million and $38.9 million at December 31, 2022 and 2021, respectively.
4. LEASES
Tredegar has various operating lease agreements with remaining terms up to 10 years, including leases of real estate, office equipment and vehicles. As of December 31, 2022 and 2021, the Company had no finance lease agreements. Some leases include options to purchase the leased asset, terminate the agreement or extend the term of the agreement for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
The following table presents a maturity analysis of the Company’s operating leases as of December 31, 2022:
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(In thousands) | | | |
| Future Lease Payments | |
2023 | | $ | 2,616 | | |
2024 | | 2,423 | | |
2025 | | 2,383 | | |
2026 | | 2,047 | | |
2027 | | 1,726 | | |
Thereafter | | 6,158 | | |
Total undiscounted operating lease payments | | 17,353 | | |
Less: Imputed interest | | 2,580 | | |
Present value of operating lease liabilities | | $ | 14,773 | | |
The following table summarizes lease costs, related cash flow and other information for the years ended December 31, 2022 and 2021. These costs are primarily related to long-term operating leases, but also include amounts for variable leases and short-term leases.
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(In thousands) | 2022 | | 2021 |
Operating lease expense | $ | 2,718 | | | $ | 2,752 | |
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Other Information: | | | |
Weighted-average remaining lease term for operating leases | 8 years | | 7 years |
Weighted-average discount rate for operating leases | 4.27 | % | | 4.22 | % |
5. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
A reconciliation of goodwill at December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Aluminum Extrusions(a) | | PE Films(a) | | Total |
Net carrying value of goodwill at December 31, 2020 | | $ | 10,370 | | | $ | 57,338 | | | $ | 67,708 | |
Out-of-period adjustment | | 2,900 | | | — | | | 2,900 | |
Net carrying value of goodwill at December 31, 2021 | | 13,270 | | | 57,338 | | | 70,608 | |
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Net carrying value of goodwill at December 31, 2022 | | $ | 13,270 | | | $ | 57,338 | | | $ | 70,608 | |
(a) The goodwill of Aluminum Extrusions and PE Films is carried by the Futura and Surface Protection reporting units, respectively. |
During the fourth quarter of 2021, the Company recorded an out-of-period adjustment in connection with the original valuation of intangible assets and goodwill related to the acquisition of Futura in February 2017. This adjustment resulted in a reclassification of $2.9 million from acquired customer relationship intangible assets to goodwill and a $0.9 million decrease to accumulated amortization and amortization expense as of and for the period ended December 31, 2021.
A reconciliation of identifiable intangibles at December 31, 2022 and 2021 is as follows:
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(In thousands) | Customer Relationships | | Proprietary Technology | | Trade Names | | Total | |
Gross carrying value at December 31, 2022 | $ | 26,549 | | | $ | 3,726 | | | $ | 13,394 | | | $ | 43,669 | | |
Accumulated amortization | (15,467) | | | (3,672) | | | (12,840) | | | (31,979) | | |
Net carrying value at December 31, 2022 | $ | 11,082 | | | $ | 54 | | | $ | 554 | | | $ | 11,690 | | |
| | | | | | | | |
Gross carrying value at December 31, 2021(a) | $ | 26,526 | | | $ | 3,721 | | | $ | 13,338 | | | $ | 43,585 | | |
Accumulated amortization | (13,267) | | | (3,603) | | | (12,563) | | | (29,433) | | |
Net carrying value at December 31, 2021 | $ | 13,259 | | | $ | 118 | | | $ | 775 | | | $ | 14,152 | | |
(a) Includes a $2.9 million gross reclassification from customer relationship intangible assets to goodwill offset by a $0.9 million decrease to accumulated amortization as a result of the out-of-period adjustment. | |
Amortization expense over the next five years is expected to be as follows:
| | | | | |
Year | Amount (In thousands) |
2023 | $ | 1,894 | |
2024 | 1,854 | |
2025 | 1,854 | |
2026 | 1,854 | |
2027 | 1,854 | |
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Incentive compensation | $ | 6,103 | | | $ | 7,016 | |
Payrolls, related taxes and medical and other benefits | 5,916 | | | 7,558 | |
Vacation | 3,502 | | | 3,452 | |
Derivative contract liability | 3,260 | | | 1,254 | |
Accrued freight | 2,298 | | | 2,337 | |
Accrued utilities | 2,099 | | | 1,938 | |
Workers’ compensation and disabilities | 2,051 | | | 2,422 | |
Environmental liabilities | 1,627 | | | 1,634 | |
Customer rebates | 1,154 | | | 1,857 | |
Other | 3,593 | | | 3,636 | |
Total | $ | 31,603 | | | $ | 33,104 | |
In the fourth quarter of 2021, the Company changed its vacation policy such that effective January 1, 2022 substantially all U.S. employees earn their vacation for the current year on a monthly basis throughout the year and forfeit any unused vacation at the end of the year, with the exception of a partial rollover allowance subject to a cap or where forfeiture is prohibited by applicable state or local law or a collective bargaining agreement. Under the previous policy, vacation was granted at the beginning of the year in advance of work being performed for the subsequent year. As a result of this policy change, the Company recorded in the fourth quarter of 2021 a reduction of $3.9 million to accrued expenses and a decrease to selling, general, and administrative expense ($1.3 million) and cost of goods sold ($2.6 million) within the consolidated statements of income.
7. DEBT AND CREDIT AGREEMENTS
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 December 31, 2022, $137.0 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 162.5 basis points. Prior to the Credit Agreement, the interest rate on borrowings 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 4.00x;
•Interest Coverage Ratio of 3.00x; 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 2.00x, 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 2.00x).
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 Credit EBITDA to interest expense.
The Credit Agreement is secured by substantially all assets of the Company and its domestic subsidiaries, including equity in certain material first-tier foreign subsidiaries. At December 31, 2022, based upon the most restrictive covenant within the Credit Agreement, available credit under the Credit Agreement was approximately $201 million. Tredegar was in compliance with all of its debt covenants as of December 31, 2022.
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees currently in effect is based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. 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.
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. The plan was designed to restore all or a part of the pension benefits that would have been payable to designated participants from the principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $1.7 million and $2.1 million at December 31, 2022 and December 31, 2021, respectively. Pension expense recognized for this plan was $0.1 million in 2022, 2021 and 2020. This information has been included in the pension benefit tables below.
In addition to providing pension benefits, the Company provides postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees hired on or before January 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. The Company eliminated prescription drug coverage for Medicare-eligible retirees as of January 1, 2006. Consequently, Tredegar is not eligible for any federal subsidies.
Pension and other postretirement benefit liabilities related to Personal Care Films have been retained by the Company. Pension expense recognized for participation by these former employees in the Company’s plans is not material for the years ended December 31, 2022, 2021, and 2020.
The following tables reconcile the changes in benefit obligations and plan assets in 2022 and 2021, and reconcile the funded status to prepaid or accrued cost at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | Other Post- Retirement Benefits |
(In thousands) | 2022 | | 2021 | | | 2022 | | 2021 |
Change in benefit obligation: | | | | | | | | |
Benefit obligation, beginning of year | $ | 316,169 | | | $ | 336,159 | | | | $ | 7,370 | | | $ | 8,164 | |
Service cost | — | | | — | | | | 18 | | | 21 | |
Interest cost | 8,945 | | | 8,398 | | | | 207 | | | 195 | |
Effect of actuarial (gains) losses related to the following: | | | | | | | | |
Discount rate change | (61,519) | | | (12,512) | | | | (1,483) | | | (272) | |
Retirement rate assumptions and mortality table adjustments | — | | | 1,028 | | | | — | | | (1) | |
Other | 1,513 | | | (101) | | | | 90 | | | (274) | |
Plan participant contributions | — | | | — | | | | 554 | | | 613 | |
Benefits paid | (16,994) | | | (16,803) | | | | (1,030) | | | (1,076) | |
Benefit obligation, end of year | $ | 248,114 | | | $ | 316,169 | | | | $ | 5,726 | | | $ | 7,370 | |
Change in plan assets: | | | | | | | | |
Plan assets at fair value, beginning of year | $ | 244,612 | | | $ | 233,075 | | | | $ | — | | | $ | — | |
Actual return on plan assets | (59,683) | | | 23,131 | | | | — | | | — | |
Employer contributions | 50,184 | | | 5,209 | | | | 476 | | | 463 | |
Plan participant contributions | — | | | — | | | | 554 | | | 613 | |
Benefits paid | (16,994) | | | (16,803) | | | | (1,030) | | | (1,076) | |
Plan assets at fair value, end of year | $ | 218,119 | | | $ | 244,612 | | | | $ | — | | | $ | — | |
Funded status of the plans | $ | (29,995) | | | $ | (71,557) | | | | $ | (5,726) | | | $ | (7,370) | |
Amounts recognized in the consolidated balance sheets: | | | | | | | | |
Accrued expenses (current) | $ | 180 | | | $ | 181 | | | | $ | 489 | | | $ | 478 | |
Pension and other postretirement benefit obligations, net | 29,815 | | | 71,376 | | | | 5,237 | | | 6,892 | |
Net amount recognized | $ | 29,995 | | | $ | 71,557 | | | | $ | 5,726 | | | $ | 7,370 | |
The following table sets forth the assumptions used in accounting for the pension and other post-retirement benefits, and the components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | Other Post- Retirement Benefits |
(In thousands, except percentages) | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2020 |
Weighted-average assumptions used to determine benefit obligations: | | | | | | | | | | | | |
Discount rate | 5.07 | % | | 2.90 | % | | 2.57 | % | | | 5.17 | % | | 2.86 | % | | 2.54 | % |
Expected long-term return on plan assets | 4.99 | % | | 3.05 | % | | 5.00 | % | | | n/a | | n/a | | n/a |
Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | |
Discount rate | 2.90 | % | | 2.57 | % | | 3.27 | % | | | 2.86 | % | | 2.54 | % | | 3.25 | % |
Expected long-term return on plan assets | 3.05 | % | | 5.00 | % | | 5.00 | % | | | n/a | | n/a | | n/a |
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost | $ | — | | | $ | — | | | $ | — | | | | $ | 18 | | | $ | 21 | | | $ | 29 | |
Interest cost | 8,945 | | | 8,398 | | | 10,156 | | | | 207 | | | 195 | | | 243 | |
Expected return on plan assets | (8,174) | | | (11,316) | | | (11,004) | | | | — | | | — | | | — | |
Amortization of prior service costs and gains or losses | 13,746 | | | 17,003 | | | 15,494 | | | | (140) | | | (141) | | | (198) | |
Net periodic benefit cost | $ | 14,517 | | | $ | 14,085 | | | $ | 14,646 | | | | $ | 85 | | | $ | 75 | | | $ | 74 | |
Net periodic benefit cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year. The amount of the accumulated benefit obligation is the same as the projected benefit obligation. At December 31, 2022, the effect of a 1% change in the health care cost trend rate assumptions would not impact the post-retirement obligation.
Expected benefit payments over the next five years and in the aggregate for 2028—2032 are as follows:
| | | | | | | | | | | |
(In thousands) | Pension Benefits | | Other Post- Retirement Benefits |
2023 | $ | 18,701 | | | $ | 489 | |
2024 | 18,971 | | | 480 | |
2025 | 19,047 | | | 469 | |
2026 | 18,666 | | | 458 | |
2027 | 18,600 | | | 446 | |
2028—2032 | 88,847 | | | 2,051 | |
The average remaining duration of benefit payments for the pension plan is about 9.6 years.
The pre-tax amounts recorded in 2022, 2021 and 2020 in accumulated other comprehensive income consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-Retirement Benefits |
(In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net actuarial (gain) loss | $ | 103,998 | | | $ | 109,893 | | | $ | 150,267 | | | $ | (1,574) | | | $ | (320) | | | $ | 86 | |
Pension expense is expected to be approximately $14 million in 2023. The amounts in accumulated other comprehensive income, before related deferred income taxes, that are expected to be recognized as components of net periodic cost during 2023 are approximately $12 million of cost for the pension plan and approximately $0.2 million of benefit for other post-retirement plans.
The percentage composition of assets held by pension plans at December 31, 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| % Composition of Plan Assets at December 31, |
| 2022 | | 2021 | | 2020 |
Pension plans: | | | | | |
Fixed income mutual fund | 13.9 | % | | — | | | — | |
Fixed income securities | — | | | 25.3 | % | | 7.7 | % |
Large/mid-capitalization equity securities | — | | | 28.1 | | | 27.1 | |
Small-capitalization equity securities | — | | | 6.8 | | | 8.6 | |
International and emerging market equity securities | — | | | 19.9 | | | 20.6 | |
Total equity securities | — | | | 54.8 | | | 56.3 | |
Private equity and hedge funds | 4.8 | | | 10.4 | | | 12.1 | |
Collective investment trust | 69.9 | | | — | | | — | |
Cash and cash equivalents | 11.4 | | | 2.8 | | | 17.5 | |
Other assets | — | | | 6.7 | | | 6.4 | |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Following the announcement to terminate and settle the pension plan, the Company contributed $50 million to the pension plan and implemented (through consultation with its investment advisors) a liability-matching bond portfolio investment strategy (including a derivative overlay) that hedged the estimated settlement funding gap, which was approximately $24 million (before plan administration costs) at that time. The overall objective of this hedging program is to minimize the volatility of the estimated settlement funding gap such that, as applicable interest rates move up or down causing a decrease or increase in the estimated value of the settlement liability, the value of the matching bond portfolio and derivative overlay decreases or increases by a similar amount.
A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. The total return on plan assets (net of fees and plan expenses), which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was approximately negative 15.1% in 2022, positive 10.4% in 2021 and positive 10.9% in 2020.
The expected long-term rate return of 5.00% used in both 2021 and 2020 were determined at the end of 2020 and 2019 and therefore did not contemplate the liability-driven investment strategy discussed above, however, the expected long-term rate return of 3.05% used in 2022 and 4.99% for 2023 does contemplate the liability-driven investment strategy discussed above.
Estimates of the fair value of assets held by the Company’s pension plan are provided by unaffiliated third parties. Investments in collective investment trusts, private equity, hedge funds and certain international equity securities are measured at net asset value, which is a practical expedient for measuring fair value. These assets are therefore excluded from the fair value hierarchy for each of the years presented. At December 31, 2022 and 2021, the pension plan assets are categorized by level within the fair value measurement hierarchy as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Balances at December 31, 2022 | | | | | | | |
Cash and cash equivalents(a) | $ | 24,796 | | | $ | 24,796 | | | $ | — | | | $ | — | |
Fixed income mutual fund | 30,284 | | | 30,284 | | | — | | | — | |
Private equity and hedge funds(b) | 10,250 | | | — | | | — | | | 10,250 | |
Total plan assets at fair value | $ | 65,330 | | | $ | 55,080 | | | $ | — | | | $ | 10,250 | |
Investments measured at net asset value: | | | | | | | |
Collective investment trust(c) | 152,389 | | | | | | | |
Private equity and hedge funds | 141 | | | | | | | |
Total investments measured at net asset value | $ | 152,530 | | | | | | | |
Securities sold and interest receivable | 259 | | | | | | | |
Total plan assets, December 31, 2022 | $ | 218,119 | | | | | | | |
Balances at December 31, 2021 | | | | | | | |
Cash and cash equivalents | $ | 6,943 | | | $ | 6,943 | | | $ | — | | | $ | — | |
Large/mid-capitalization equity securities | 68,739 | | | 68,739 | | | — | | | — | |
Small-capitalization equity securities | 16,588 | | | 16,588 | | | — | | | — | |
International and emerging market equity securities | 25,174 | | | 25,174 | | | — | | | — | |
Fixed income securities | 61,845 | | | 9,306 | | | 52,539 | | | — | |
Contracts with insurance companies | 9,438 | | | — | | | — | | | 9,438 | |
Other assets(d) | 6,868 | | | 6,868 | | | — | | | — | |
Total plan assets at fair value | $ | 195,595 | | | $ | 133,618 | | | $ | 52,539 | | | $ | 9,438 | |
Investments measured at net asset value | 49,017 | | | | | | | |
Total plan assets, December 31, 2021 | $ | 244,612 | | | | | | | |
(a) This category represents investments in cash and cash equivalents, which includes: 1.) cash held in the plan used for investments in U.S. Treasury futures which are entered into to minimize the volatility of the estimated settlement funding gap; and 2.) short term money market fund in which the amortized cost approximates fair value. These investments are highly liquid and therefore are classified as level 1 securities. (b) Represents the estimated fair market value of the Company’s ownership in private equity and hedge funds which are probable of being sold for an amount different from the net asset value per share in connection with the expected termination of the pension plan. (c) The collective investment trust contains liability hedging fixed income investments and are valued at the net asset value of the collective investment trust. The net asset value is used as a practical expedient to estimate fair value. The net asset value is based on the fair value of the underlying investments held by the fund less its liabilities. (d) Represents investments in certain commodity funds measured using quoted market prices. |
9. OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
Gain (loss) on investment in kaléo(a) | $ | 1,406 | | | $ | 12,780 | | | $ | (60,900) | |
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 | | | — | |
COVID-19-related expenses(b) | (350) | | | (624) | | | (2,231) | |
Loss on sale of Bright View Technologies | — | | | — | | | (2,299) | |
Other | (121) | | | (266) | | | (1,864) | |
Total | $ | 935 | | | $ | 20,376 | | | $ | (67,294) | |
(a) In May 2022, additional cash consideration of $1.4 million was received related to customary post-closing adjustments. The gain in 2021 includes a $0.3 million dividend received from kaléo in the first quarter of 2021. See Note 16 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. |
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, that included applicable interest, which the Company applied to required Brazilian federal tax payments during 2021. The pre-tax gain was recorded in “Other income (expense), net” in the consolidated statements of income.
In December 2020, the Company entered into a definitive agreement and completed the sale of Bright View Technologies, which resulted in the recognition of a pre-tax loss of $2.3 million ($1.8 million after-tax).
10. 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 exist as part of ongoing business operations (primarily in Flexible Packaging Films). These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $30.7 million (20.3 million pounds of aluminum) at December 31, 2022 and $22.1 million (14.9 million pounds of aluminum) at December 31, 2021.
The table below summarizes the location and gross amounts of aluminum derivative contract fair values (Level 2) in the consolidated balance sheets as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
(In thousands) | Balance Sheet Account | | Fair Value | | Balance Sheet Account | | Fair Value |
Derivatives Designated as Hedging Instruments | | | | | | | |
Asset derivatives: Aluminum futures contracts | Prepaid expenses & other | | $ | 48 | | | Prepaid expenses & other | | $ | 2,085 | |
Liability derivatives: Aluminum futures contracts | Accrued expenses | | (3,260) | | | Accrued expenses | | (119) | |
Aluminum futures contracts | Other non-current liabilities | | (369) | | | Other non-current liabilities | | — | |
Net asset (liability) | | | $ | (3,581) | | | | | $ | 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 is annual net costs of R$177 million Brazilian Real ("R$").
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 |
$1,728 | 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% |
$31,145 | 5.6880 | R$177,154 | | 48% |
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 consolidated statements of income.
The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the consolidated balance sheets as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
(In thousands) | Balance Sheet Account | | Fair Value | | Balance Sheet Account | | Fair Value |
Derivatives Designated as Hedging Instruments | | | | | | | |
Asset derivatives: Foreign currency forward contracts | Prepaid expenses and other | | $ | 781 | | | Prepaid expenses and other | | $ | — | |
Foreign currency forward contracts | Other non-current assets | | 33 | | | Other non-current assets | | — | |
Liability derivatives: Foreign currency forward contracts | Accrued expenses | | — | | | Accrued expenses | | (1,255) | |
Foreign currency forward contracts | Other non-current liabilities | | (3) | | | Other non-current liabilities | | — | |
Net asset (liability) | | | $ | 811 | | | | | $ | (1,255) | |
These derivative contracts involve elements of market risk that are not reflected on the 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) from continuing operations and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for years ended December 31, 2022, 2021, and 2020 is summarized in the tables below:
| | | | | | | | | | | | | | | | | |
(In thousands) | Cash Flow Derivative Hedges |
| Aluminum Futures Contracts |
Years Ended December 31, | 2022 | | 2021 | | 2020 |
Amount of pre-tax gain (loss) recognized in other comprehensive income | $ | (4,525) | | | $ | 6,215 | | | $ | 74 | |
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion) | Cost of goods sold | | Cost of goods sold | | Cost of goods sold |
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income to net income (effective portion) | $ | 1,022 | | | $ | 5,787 | | | $ | (2,717) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Cash Flow Derivative Hedges |
| Foreign Currency Forward Contracts |
Years Ended December 31, | 2022 | | 2021 | | 2020 |
Amount of pre-tax gain (loss) recognized in other comprehensive income | $ | — | | $ | 3,269 | | | $ | — | | $ | (2,415) | | | $ | — | | $ | (4,437) | |
Location of gain (loss) reclassified from accumulated other comprehensive income into net income (effective portion) | Cost of goods sold | Selling, general & admin | | 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 to net income (effective portion) | $ | 61 | | $ | 1,378 | | | $ | 63 | | $ | (337) | | | $ | 62 | | $ | (6,069) | |
As of December 31, 2022, the Company expects $2.0 million of unrealized after-tax net losses on aluminum and foreign currency derivative contracts reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the years ended December 31, 2022, 2021 and 2020, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
11. STOCK OPTION AND STOCK AWARD PLANS
As of December 31, 2022, the Company had one stock-based compensation plan that permits the grants of stock options, stock appreciation rights (“SARs”), stock, restricted stock, and stock unit awards. Awards available for grant totaled 681,479 shares at December 31, 2022. Stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. Stock options granted by
the Company in 2022, 2021 and 2020 vest after 2 years and have a 7-year life or vest after 3 years and have a 5-year life. Stock options exercisable totaled 2,719,919 and 1,762,190 shares at December 31, 2022 and 2021, respectively.
On December 1, 2020, Tredegar’s Board of Directors declared a special cash dividend of $200 million, or $5.97 per share, on the Company’s common stock (the “Special Dividend”). The Special Dividend was payable on December 18, 2020 and had an ex-dividend date of December 21, 2020. All stock option awards that were outstanding at the time of the Special Dividend were modified pursuant to the nondiscretionary anti-dilution provisions in the related stock-based compensation plan. SARs that were outstanding at the time of the Special Dividend were also modified pursuant to the nondiscretionary anti-dilution provisions in the related SARs grant agreements. The modifications included increasing the number of outstanding stock options and SARs as well as reducing the exercise prices of all outstanding stock options and SARS. The modification did not result in additional stock-based compensation expense. No other terms or conditions of outstanding awards were modified.
A summary of stock options outstanding at December 31, 2022, 2021 and 2020, and changes during those years, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Exercise Price/Share |
| Number of Options | | Range | | Weighted Average |
Outstanding at January 1, 2020 | 1,628,903 | | | $ | 15.65 | | | to | | $ | 24.84 | | | $ | 19.13 | |
Granted | 638,074 | | | 10.75 | | | to | | 14.62 | | | 11.90 | |
Modification for special cash dividend(a) | 701,535 | | | 10.75 | | | to | | 14.62 | | | 11.90 | |
Forfeited and expired(a) | (141,074) | | | 10.75 | | | to | | 24.84 | | | 11.87 | |
Outstanding at December 31, 2020(a) | 2,827,438 | | | 10.75 | | | to | | 22.49 | | | 13.55 | |
Granted | 388,822 | | | 16.37 | | | to | | 16.37 | | | 16.37 | |
Forfeited and expired | (22,611) | | | 14.47 | | | to | | 19.64 | | | 18.14 | |
Exercised | (67,705) | | | 10.75 | | | to | | 17.29 | | | 13.51 | |
Outstanding at December 31, 2021 | 3,125,944 | | | 10.75 | | | to | | 22.49 | | | 13.82 | |
| | | | | | | | | |
Forfeited and expired | (17,203) | | | 14.47 | | | to | | 19.64 | | | 15.33 | |
| | | | | | | | | |
Outstanding at December 31, 2022 | 3,108,741 | | | $ | 10.75 | | | to | | $ | 22.49 | | | $ | 13.81 | |
(a) The option exercise price per share reflects the reduction to the exercise prices of outstanding stock options impacted by the modification due to the anti-dilution provisions in the stock-based compensation plan. |
The assumptions used in the Black-Scholes options-pricing model for valuing Tredegar stock options originally granted in 2021 and 2020, and the related estimated fair values at the date of grant, were as follows, no options were granted in 2022:
| | | | | | | | | | | |
| 2021 | | 2020 |
Dividend yield | 2.6 | % | | 2.5 | % |
Weighted average volatility percentage | 48.3 | % | | 43.8 | % |
Weighted average risk-free interest rate | 0.9 | % | | 0.8 | % |
Holding period (years) | 5 | | 5 |
Weighted average exercise price at date of grant (also weighted average market price at date of grant)(a) | $ | 16.37 | | | $ | 14.41 | |
Estimated weighted average fair value of options per share at date of grant | $ | 5.57 | | | $ | 4.44 | |
Total estimated fair value of stock options granted (in thousands) | $ | 2,165 | | | $ | 2,833 | |
(a) In December 2020, the weighted average exercise price for outstanding stock option awards granted in 2020 were modified to $10.75. As the anti-dilution provisions in the stock-based compensation plan were structured to equitably adjust the award’s fair value before and after the modification, there is no resulting incremental fair value. |
The dividend yield is the actual dividend yield on Tredegar’s common stock at the date of grant, which the Company believes is a reasonable estimate of the expected yield during the holding period. The expected volatility is based on the historical volatility of Tredegar’s common stock using a sequential period of historical data equal to the expected holding period of the option. The Company has no reason to believe that future volatility for this period is likely to differ from the past. The assumed risk-free interest rate is based on observed interest rates for U.S. Treasury debt securities appropriate for the expected holding period.
The following table summarizes additional information about stock options outstanding and exercisable at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Options Outstanding at December 31, 2022 | | Options Exercisable at December 31, 2022 |
| | | | | | | | Weighted Average | | Aggregate Intrinsic Value | | | | | | Aggregate Intrinsic Value |
Range of Exercise Prices | | Shares | | Remaining Contractual Life | | Exercise Price | | | Shares | | Weighted Average Exercise Price | |
$ | 10.75 | | | to | | $ | 16.37 | | | 2,939,509 | | | 3.4 years | | $ | 13.47 | | | $ | — | | | 2,550,687 | | | $ | 13.03 | | | $ | — | |
17.29 | | | to | | 25.94 | | | 169,232 | | | 0.7 years | | 19.74 | | | — | | | 169,232 | | | 19.74 | | | — | |
Total | | 3,108,741 | | | 3.3 years | | $ | 13.82 | | | $ | — | | | 2,719,919 | | | $ | 13.45 | | | $ | — | |
The total intrinsic value of stock options exercised was $0.2 million in 2021. There were no stock options exercised in 2022 and 2020. The grant-date fair value of stock option-based awards vested in 2022, 2021, and 2020 was $5.4 million, $3.5 million, and $3.0 million, respectively. As of December 31, 2022, the unrecognized compensation cost for continuing operations related to stock option-based awards was $0.2 million. This cost is expected to be recognized over the remaining weighted average period of 0.2 years.
Restricted stock grants ordinarily vest three years from the date of grant based upon continued employment. The fair value of restricted stock awards is estimated as of the grant date using the closing stock price on that date. Stock unit awards vest upon the achievement of certain performance targets. The following table summarizes additional information about unvested restricted stock outstanding at December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unvested Restricted Stock | | Maximum Unvested Restricted Stock Units Issuable Upon Satisfaction of Certain Performance Criteria |
| Number of Shares | | Weighted Avg. Grant Date Fair Value/Share | | Grant Date Fair Value (In thousands) | | Number of Shares | | Weighted Avg. Grant Date Fair Value/Share | | Grant Date Fair Value (In thousands) |
Outstanding at January 1, 2020 | 285,935 | | | $ | 18.27 | | | $ | 5,224 | | | 147,663 | | | $ | 21.25 | | | $ | 3,138 | |
Granted | 155,138 | | | 14.55 | | | 2,257 | | | 34,275 | | | 15.25 | | | 523 | |
Vested | (148,709) | | | 17.39 | | | (2,586) | | | (37,370) | | | 17.38 | | | (649) | |
Forfeited | (57,385) | | | 17.00 | | | (976) | | | (32,066) | | | 17.36 | | | (557) | |
Outstanding at December 31, 2020 | 234,979 | | | 16.68 | | | 3,919 | | | 112,502 | | | 21.82 | | | 2,455 | |
Granted | 200,073 | | | 15.63 | | | 3,127 | | | 14,669 | | | 15.24 | | | 224 | |
Vested | (87,636) | | | 15.78 | | | (1,383) | | | (73,930) | | | 17.17 | | | (1,269) | |
Forfeited | (11,616) | | | 16.38 | | | (190) | | | (2,523) | | | 17.63 | | | (44) | |
Outstanding at December 31, 2021 | 335,800 | | | 16.30 | | | 5,473 | | | 50,718 | | | 17.63 | | | 1,366 | |
Granted | 301,969 | | | 11.88 | | | 3,587 | | | — | | | — | | | — | |
Vested | (144,317) | | | 15.10 | | | (2,179) | | | — | | | — | | | — | |
Forfeited | (18,474) | | | 14.94 | | | (276) | | | (50,718) | | | 17.63 | | | 1,366 | |
Outstanding at December 31, 2022 | 474,978 | | | $ | 13.82 | | | $ | 6,564 | | | — | | | $ | — | | | $ | — | |
As of December 31, 2022, the unrecognized compensation cost for continuing operations related to non-vested restricted stock awards was $3.2 million. This cost is expected to be recognized over the remaining weighted average period of 1.6 years.
SARs granted by the Company in 2021 and 2020 vest after 2 years and have a 7-year life. There were no SARs granted in 2022. SARs may be settled in cash upon exercise and therefore are classified as liabilities and included in accrued expenses in the consolidated balance sheet. The fair value of these liability awards is remeasured at each reporting period until the date of settlement. Increases and decreases in stock-based compensation expense is recognized over the vesting period, or immediately, for vested awards.
A summary of SARs outstanding at December 31, 2022, 2021 and 2020, and changes during those years, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Exercise Price/Share |
| Number of SARs | | Range | | Weighted Average |
Outstanding at January 1, 2020 | — | | | $ | — | | | to | | $ | — | | | $ | — | |
Granted(a) | 387,252 | | | 10.75 | | | to | | 19.64 | | | 11.60 | |
Modification for special cash dividend | 71,402 | | | 10.75 | | | to | | 19.64 | | | 11.60 | |
Forfeited and expired | (82,214) | | | 10.75 | | | to | | 19.64 | | | 11.39 | |
Outstanding at December 31, 2020 | 376,440 | | | 10.75 | | | to | | 19.64 | | | 11.64 | |
Granted | 164,464 | | | 16.37 | | | to | | 16.37 | | | 16.37 | |
Forfeited and expired | (10,043) | | | 10.75 | | | to | | 16.37 | | | 13.01 | |
Exercised | (9,260) | | | 10.75 | | | to | | 15.25 | | | 13.87 | |
Outstanding at December 31, 2021 | 521,601 | | | 10.75 | | | to | | 16.37 | | | 13.55 | |
| | | | | | | | | |
Forfeited and expired | (22,914) | | | 10.75 | | | to | | 16.37 | | | 14.83 | |
| | | | | | | | | |
Outstanding at December 31, 2022 | 498,687 | | | $ | 10.75 | | | to | | $ | 16.37 | | | $ | 13.49 | |
(a) The SARs exercise price per share reflects the reduction to the exercise prices of outstanding SARs as a results of the modification to the awards pursuant to the nondiscretionary anti-dilution provisions in the related SARs grant agreements. |
The grant-date fair value of SARs awards vested in 2022, 2021 and 2020 was $0.5 million, $0.1 million and $0.6 million, respectively. As of December 31, 2022, the unrecognized compensation cost for continuing operations was immaterial. This cost is expected to be recognized over the remaining weighted average period of 0.2 years.
12. INCOME TAXES
Income (loss) from continuing operations before income taxes and income tax expense (benefit) for continuing operations are as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
Income (loss) from continuing operations before income taxes: | | | | | |
Domestic | $ | 3,185 | | | $ | 22,885 | | | $ | (58,033) | |
Foreign | 29,585 | | | 44,336 | | | 32,987 | |
Total | $ | 32,770 | | | $ | 67,221 | | | $ | (25,046) | |
Current income tax expense (benefit): | | | | | |
Federal | $ | 2 | | | $ | 1,232 | | | $ | 4,777 | |
State | 772 | | | 764 | | | 136 | |
Foreign | 3,071 | | | 13,521 | | | 2,374 | |
Total | 3,845 | | | 15,517 | | | 7,287 | |
Deferred income tax expense (benefit): | | | | | |
Federal | 24 | | | (7,862) | | | (18,191) | |
State | (537) | | | 125 | | | (640) | |
Foreign | 1,057 | | | 1,504 | | | 3,331 | |
Total | 544 | | | (6,233) | | | (15,500) | |
Total income tax expense (benefit) | $ | 4,389 | | | $ | 9,284 | | | $ | (8,213) | |
The significant differences between the U.S. federal statutory rate and the effective income tax rate related to continuing operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
(In thousands, except percentages) | Amount | % | | Amount | % | | Amount | % |
Income tax expense (benefit) at federal statutory rate | $ | 6,882 | | 21.0 | | | $ | 14,116 | | 21.0 | | | $ | (5,260) | | 21.0 | |
Foreign rate differences | 2,924 | | 8.9 | | | 8,269 | | 12.3 | | | 4,554 | | (18.2) | |
U.S. tax on foreign branch income | 1,390 | | 4.1 | | | (5,667) | | (8.4) | | | 1,409 | | (5.6) | |
Non-deductible other | 381 | | 1.2 | | | 1,053 | | 1.6 | | | 208 | | (0.8) | |
Tax contingency accruals and tax settlements | 88 | | 0.3 | | | 202 | | 0.3 | | | (58) | | 0.2 | |
State taxes, net of federal income tax benefit | 48 | | 0.1 | | | 933 | | 1.4 | | | (373) | | 1.5 | |
Valuation allowance for capital loss carryforwards | — | | — | | | (5,415) | | (8.1) | | | 52 | | (0.2) | |
Foreign currency translation variation on intercompany loans | — | | — | | | 1,374 | | 2.0 | | | — | | — | |
Dividend received deduction net of foreign withholding tax | — | | — | | | (109) | | (0.2) | | | (52) | | 0.2 | |
Changes in estimates related to prior year tax provision | (175) | | (0.5) | | | (383) | | (0.6) | | | (2,472) | | 9.9 | |
Foreign derived intangible income deduction | (763) | | (2.3) | | | — | | — | | | — | | — | |
Tax on Prodepe tax incentive | (1,024) | | (3.1) | | | 2,858 | | 4.3 | | | (801) | | 3.2 | |
Research and development tax credit | (1,489) | | (4.5) | | | (928) | | (1.4) | | | (633) | | 2.5 | |
Brazilian tax incentive | (3,873) | | (11.8) | | | (7,019) | | (10.4) | | | (4,787) | | 19.1 | |
Income tax expense (benefit) at effective income tax rate | $ | 4,389 | | 13.4 | | | $ | 9,284 | | 13.8 | | | $ | (8,213) | | 32.8 | |
Provision for income taxes for the year ended December 31, 2022 was $4.4 million compared to $9.3 million for the year ended December 31, 2021. The effective tax rates for the years ended December 31, 2022 and 2021 were 13.4% and 13.8%, respectively. The change in effective tax rate is primarily attributed to a discrete tax 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 (“IRS”) 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. This discrete benefit was partially offset by an increase to the effective tax rate as the result of the Brazilian income tax no longer being creditable in the U.S. for the foreseeable future. Lastly, the effective tax rate changed due to foreign rate differences pertaining to the Company’s foreign operations and the benefit from tax incentives in Brazil.
Income taxes in 2021 are primarily due to the strong earnings of Terphane Ltda, which are included in Tredegar’s U.S. consolidated tax return and, the tax impact of the local statutory tax rates of Tredegar’s foreign subsidiaries being higher than the current U.S. tax rate of 21%, the benefit of tax incentives in Brazil and the release of the valuation allowance for capital loss carryforwards.
Income taxes in 2020 were primarily impacted by the tax impact of Terphane Ltda. being included in Tredegar’s U.S. consolidated tax return as a foreign branch, the tax impact of the local statutory tax rates of Tredegar’s foreign subsidiaries being higher than the current US tax rate of 21%, the benefit of tax incentives in Brazil, and by claims for prior years’ U.S. research and development tax credits.
Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under TCJA, 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. Because of the accumulation of significant losses related to foreign currency translations at Terphane Ltda., there were no deferred income tax liabilities associated with the U.S. federal income taxes and foreign withholding taxes on Terphane Ltda.’s undistributed earnings as of December 31, 2022 and 2021. Beginning January 1, 2022, the TCJA eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenses as a result of amendments to Internal Revenue Code (“IRC”) Section 174. As a result of this provision of the TCJA, deferred tax assets related to capitalized research expenses pursuant to the amended IRC Section 174 increased by a net $4.8 million.
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’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 levied on the operating profit of its products. These incentives produce a current tax rate of 15.25% for Terphane (6.25% of income tax and 9.0% social contribution on income). The incentives were originally granted for a 10-year period commencing January 1, 2015 and expiring at the end of 2024.
Terphane Brazil has been granted an additional three years of tax incentives through the end of 2027. The benefit from the tax incentives was $3.9 million, $7.0 million and $4.8 million in 2022, 2021 and 2020, respectively.
Deferred income tax liabilities and deferred income tax assets at December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Deferred income tax liabilities: | | | |
Amortization of goodwill and identifiable intangibles | $ | 10,533 | | | $ | 10,215 | |
Depreciation | 14,950 | | | 12,902 | |
Foregone tax credits on foreign branch income | 719 | | | 4,796 | |
| | | |
| | | |
Right-of-use leased assets | 3,147 | | | 2,767 | |
Other | 722 | | | 520 | |
Total deferred income tax liabilities | 30,071 | | | 31,200 | |
Deferred income tax assets: | | | |
Pensions | 7,535 | | | 5,632 | |
Employee benefits | 7,558 | | | 7,791 | |
Excess capital losses | 1,099 | | | 1,097 | |
Inventory | 3,952 | | | 3,775 | |
Asset write-offs, divestitures and environmental accruals | 1,075 | | | 1,173 | |
Tax benefit on U.S. federal, state and foreign NOL and credit carryforwards | 24,914 | | | 33,922 | |
Section 174 Capitalized R&D expenditures | 4,874 | | | — | |
Other | 1,220 | | | 146 | |
Lease liabilities | 3,328 | | | 2,977 | |
Tax basis remaining for installment sale - kaléo | 999 | | | 1,092 | |
Foreign currency translation gain adjustment | 1,224 | | | 1,970 | |
Deferred income tax assets before valuation allowance | 57,778 | | | 59,575 | |
Less: Valuation allowance | 13,807 | | | 12,652 | |
Total deferred income tax assets | 43,971 | | | 46,923 | |
Net deferred income tax (assets) liabilities | $ | (13,900) | | | $ | (15,723) | |
Amounts recognized in the consolidated balance sheets: | | | |
Deferred income tax assets (noncurrent) | $ | 13,900 | | | $ | 15,723 | |
Deferred income tax liabilities (noncurrent) | — | | | — | |
Net deferred income tax assets (liabilities) | $ | 13,900 | | | $ | 15,723 | |
Except as noted below, the Company believes that it is more likely than not that future taxable income will exceed future tax-deductible amounts thereby resulting in the realization of deferred income tax assets. The Company has estimated gross federal, state and foreign tax credits and net operating loss carryforwards of $24.9 million and $33.9 million at December 31, 2022 and 2021, respectively. The U.S. federal foreign tax credits will expire between 2027-2031 and the U.S. federal research and development tax credits will expire by 2043. The U.S. state carryforwards expire at different points over the next 20 years.
Valuation allowances of $10.3 million, $9.4 million and $5.5 million at December 31, 2022, 2021 and 2020, respectively, are recorded against the tax benefit on U.S. federal, state and foreign tax credits and net operating loss carryforwards generated by domestic subsidiaries that may not be recoverable in the carryforward period. The valuation allowance for excess capital losses from investments and other related items was $0.7 million, $0.7 million and $7.1 million at December 31, 2022, 2021 and 2020, respectively. The amount of the deferred income tax asset considered realizable, however, could be adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. As circumstances and events warrant, allowances will be reversed when it is more likely than not that future taxable income will exceed deductible amounts, thereby resulting in the realization of deferred income tax assets. Valuation allowances of $2.8 million, $2.5 million and $4.9 million at December 31, 2022, 2021 and 2020, respectively, were recorded against certain deferred state tax assets.
A reconciliation of the Company’s unrecognized uncertain tax positions since January 1, 2020, is shown below: | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance at beginning of period | $ | 648 | | | $ | 628 | | | $ | 881 | |
Increase (decrease) due to tax positions taken in: | | | | | |
Current period | 2 | | | — | | | 12 | |
Prior period | 44 | | | 40 | | | — | |
Reductions due to lapse of statute of limitations | (66) | | | (20) | | | (265) | |
Balance at end of period | $ | 628 | | | $ | 648 | | | $ | 628 | |
Additional information related to unrecognized uncertain tax positions since January 1, 2020 is summarized below:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Gross unrecognized tax benefits on uncertain tax positions (reflected in current income tax, other noncurrent liability accounts, or deferred tax assets in the balance sheet) | $ | 628 | | | $ | 648 | | | $ | 628 | |
Deferred income tax assets related to unrecognized tax benefits on uncertain tax positions (reflected in deferred income tax accounts in the balance sheet) | 143 | | | 48 | | | (110) | |
Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rate if recognized | 771 | | | 696 | | | 518 | |
Interest and penalties accrued on deductions taken relating to uncertain tax positions (approximately $16, $26 and $2 reflected in income tax expense in the income statement in 2022, 2021 and 2020, respectively, with the balance shown in current income tax and other noncurrent liability accounts in the balance sheet) | 149 | | | 133 | | | 102 | |
Related deferred income tax assets recognized on interest and penalties | (34) | | | (31) | | | (24) | |
Interest and penalties accrued on uncertain tax positions net of related deferred income tax benefits, which would impact the effective tax rate if recognized | 115 | | | 102 | | | 78 | |
Total net unrecognized tax benefits on uncertain tax positions reflected in the balance sheet, which would impact the effective tax rate if recognized | $ | 886 | | | $ | 798 | | | $ | 596 | |
Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2019. The Company anticipates that it is reasonably possible that Federal and state income tax audits or statutes may settle or close within the next 12 months and are not expected to result in a material changes in unrecognized tax positions, including any payments that may be made.
13. BUSINESS SEGMENTS
The Company's business segments are Aluminum Extrusions, PE Films and Flexible Packaging Films. Aluminum Extrusions, also referred to as Bonnell Aluminum, produces high-quality, soft and medium strength alloyed aluminum extrusions, custom fabricated and finished, for the building and construction, automotive and transportation, consumer durables goods, machinery and equipment, electrical and renewable energy, and distribution markets. PE Films produces surface protection films, polyethylene overwrap films and films for other markets. Flexible Packaging Films produces polyester based films for use in packaging applications that have specialized properties, such as heat resistance, strength, barrier protection and the ability to accept high-quality print graphics.
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. Earnings before interest and taxes ("EBIT") from ongoing operations is a non-GAAP financial measure included in the reconciliation of segment financial information to consolidated results for the Company below.
Information by business segment and geographic area for the last three years is provided in the segment tables below. There were no accounting transactions between segments and no allocations to segments.
| | | | | | | | | | | | | | | | | |
Net Sales |
(In thousands) | 2022 | | 2021 | | 2020 |
Aluminum Extrusions | $ | 637,872 | | | $ | 539,325 | | | $ | 455,711 | |
PE Films | 97,571 | | | 118,920 | | | 139,288 | |
Flexible Packaging Films | 168,139 | | | 139,978 | | | 134,605 | |
Total net sales | 903,582 | | | 798,223 | | | 729,604 | |
Add back freight | 34,982 | | | 28,232 | | | 25,686 | |
Sales as shown in consolidated statements of income | $ | 938,564 | | | $ | 826,455 | | | $ | 755,290 | |
Refer to Notes to Financial Tables that follow these tables.
| | | | | | | | | | | | | | | | | |
EBITDA from Ongoing Operations |
(In thousands) | 2022 | | 2021 | | 2020 |
Aluminum Extrusions: | | | | | |
Ongoing operations: | | | | | |
EBITDA | $ | 66,800 | | | $ | 55,948 | | | $ | 55,137 | |
Depreciation & amortization | (17,414) | | | (16,272) | | | (17,403) | |
EBIT | 49,386 | | | 39,676 | | | 37,734 | |
Plant shutdowns, asset impairments, restructurings and other (a) | (310) | | | 3,237 | | | (3,506) | |
Goodwill impairment charge | — | | | — | | | (13,696) | |
PE Films: | | | | | |
Ongoing operations: | | | | | |
EBITDA | 11,949 | | | 27,694 | | | 45,107 | |
Depreciation & amortization | (6,280) | | | (6,263) | | | (6,762) | |
EBIT | 5,669 | | | 21,431 | | | 38,345 | |
Plant shutdowns, asset impairments, restructurings and other (a) | (646) | | | (371) | | | (1,974) | |
Flexible Packaging Films: | | | | | |
Ongoing operations: | | | | | |
EBITDA | 27,452 | | | 31,684 | | | 30,645 | |
Depreciation & amortization | (2,444) | | | (1,988) | | | (1,761) | |
EBIT | 25,008 | | | 29,696 | | | 28,884 | |
Plant shutdowns, asset impairments, restructurings and other (a) | (91) | | | 8,439 | | | (18) | |
Total | 79,016 | | | 102,108 | | | 85,769 | |
Interest income | 57 | | | 73 | | | 44 | |
Interest expense | 4,990 | | | 3,386 | | | 2,587 | |
Gain (loss) on investment in kaléo (a) | 1,406 | | | 12,780 | | | (60,900) | |
Loss on sale of Bright View (a) | — | | | — | | | (2,299) | |
Stock option-based compensation expense | 1,424 | | | 2,495 | | | 2,161 | |
Corporate expenses, net (a) | 41,295 | | | 41,859 | | | 42,912 | |
Income (loss) from continuing operations before income taxes | 32,770 | | | 67,221 | | | (25,046) | |
Income tax expense (benefit) (a) | 4,389 | | | 9,284 | | | (8,213) | |
Income (loss) from continuing operations | 28,381 | | | 57,937 | | | (16,833) | |
Income (loss) from discontinued operations, net of tax (a) | 74 | | | (111) | | | (58,611) | |
Net income (loss) | $ | 28,455 | | | $ | 57,826 | | | $ | (75,444) | |
Refer to Notes to Financial Tables that follow these tables.
| | | | | | | | | | | |
Identifiable Assets |
(In thousands) | 2022 | | 2021 |
Aluminum Extrusions | $ | 293,308 | | | $ | 280,521 | |
PE Films | 102,431 | | | 113,613 | |
Flexible Packaging Films | 103,448 | | | 75,269 | |
Subtotal | 499,187 | | | 469,403 | |
General corporate | 23,674 | | | 23,482 | |
Cash and cash equivalents (b) | 19,232 | | | 30,521 | |
Discontinued operations | — | | | 178 | |
Total | $ | 542,093 | | | $ | 523,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and Amortization | | Capital Expenditures |
(In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Aluminum Extrusions | $ | 17,414 | | | $ | 15,326 | | | $ | 17,403 | | | $ | 23,664 | | | $ | 18,914 | | | $ | 10,260 | |
PE Films | 6,280 | | | 6,263 | | | 6,762 | | | 3,289 | | | 2,997 | | | 6,024 | |
Flexible Packaging Films | 2,444 | | | 1,988 | | | 1,761 | | | 8,151 | | | 5,603 | | | 4,959 | |
Subtotal | 26,138 | | | 23,577 | | | 25,926 | | | 35,104 | | | 27,514 | | | 21,243 | |
General corporate (d) | 264 | | | 207 | | | 520 | | | 1,771 | | | (153) | | | 200 | |
Discontinued operations | — | | | — | | | 5,511 | | | — | | | — | | | 1,912 | |
Total | $ | 26,402 | | | $ | 23,784 | | | $ | 31,957 | | | $ | 36,875 | | | $ | 27,361 | | | $ | 23,355 | |
| | | | | | | | | | | | | | | | | |
Net Sales by Geographic Area (c) |
(In thousands) | 2022 | | 2021 | | 2020 |
United States | $ | 717,049 | | | $ | 614,987 | | | $ | 530,243 | |
Exports from the United States to: | | | | | |
Asia | 41,995 | | | 59,242 | | | 80,217 | |
Canada | 15,264 | | | 17,776 | | | 18,024 | |
Europe | 3,885 | | | 4,489 | | | 5,440 | |
Latin America | 6,867 | | | 4,937 | | | 2,169 | |
Operations outside the United States: | | | | | |
Brazil | 117,896 | | | 96,792 | | | 93,511 | |
Asia | 626 | | | — | | | — | |
Total | $ | 903,582 | | | $ | 798,223 | | | $ | 729,604 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Identifiable Assets by Geographic Area (c) | | Property, Plant & Equipment, Net by Geographic Area (c) |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
United States | $ | 413,512 | | | $ | 398,749 | | | $ | 146,437 | | | $ | 135,310 | |
Operations outside the United States: | | | | | | | |
Brazil | 72,725 | | | 54,299 | | | 25,385 | | | 18,615 | |
China | 12,950 | | | 16,355 | | | 11,903 | | | 14,889 | |
General corporate | 23,674 | | | 23,482 | | | 2,686 | | | 1,567 | |
Cash and cash equivalents (b) | 19,232 | | | 30,521 | | | n/a | | n/a |
Discontinued operations | — | | | 178 | | | — | | | — | |
Total | $ | 542,093 | | | $ | 523,584 | | | $ | 186,411 | | | $ | 170,381 | |
Refer to Notes to Financial Tables that follow these tables.
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 $20.1 million in 2022, $32.7 million in 2021 and $35.1 million in 2020.
| | | | | | | | | | | | | | | | | |
Net Sales by Product Group |
(In thousands) | 2022 | | 2021 | | 2020 |
Aluminum Extrusions: | | | | | |
Nonresidential building & construction | $ | 338,981 | | | $ | 269,252 | | | $ | 253,126 | |
Consumer durables | 62,541 | | | 53,578 | | | 44,167 | |
Automotive | 51,286 | | | 43,256 | | | 35,895 | |
Machinery & equipment | 63,326 | | | 42,721 | | | 30,649 | |
Distribution | 29,732 | | | 45,639 | | | 28,339 | |
Residential building & construction | 64,268 | | | 52,236 | | | 40,049 | |
Electrical | 27,738 | | | 32,643 | | | 23,486 | |
Subtotal | 637,872 | | | 539,325 | | | 455,711 | |
PE Films: | | | | | |
Surface protection films | 68,140 | | | 88,436 | | | 109,097 | |
Packaging | 29,431 | | | 30,484 | | | 22,700 | |
LED-based products | — | | | — | | | 7,491 | |
Subtotal | 97,571 | | | 118,920 | | | 139,288 | |
Flexible Packaging Films | 168,139 | | | 139,978 | | | 134,605 | |
Total | $ | 903,582 | | | $ | 798,223 | | | $ | 729,604 | |
(a)See Notes 5, 9, 12 and 15 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, gains or losses from sale of assets, gains or losses on an investment accounted for under the fair value method and other items.
(b)Cash and cash equivalents includes funds held in locations outside the U.S. of $10.3 million and $16.4 million at December 31, 2022 and 2021, respectively.
(c)Export sales relate mostly to PE Films. Operations in Brazil relate to Flexible Packaging Films.
(d)Corporate depreciation and amortization are included in Corporate expenses, net, on the EBITDA from ongoing operations table above.
14. SAVINGS PLAN
Tredegar has a savings plan that allows eligible employees to voluntarily contribute a percentage of their compensation, up to IRS limitations. The provisions of the savings plan provided the following benefits for salaried and certain hourly employees:
•The Company makes matching contributions to the savings plan of $1 for every $1 an employee contributes per pay period up to a maximum of 5% of eligible compensation.
•The savings plan includes immediate vesting of matching contributions and automatic enrollment at 3% of eligible compensation unless the employee opts out or elects a different percentage.
The Company also has a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations (“restoration plan”). Charges recognized for these plans were $3.9 million in 2022, $3.3 million in 2021 and $4.0 million in 2020. The Company’s liability under the restoration plan was $0.7 million at December 31, 2022 (consisting of 70,266 phantom shares of common stock) and $0.7 million at December 31, 2021 (consisting of 56,570 phantom shares of common stock) and valued at the closing market price on those dates.
The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of the Company’s common stock in 1998 for $0.2 million and 46,671 shares of its common stock in 1997 for $1.0 million. There have been no shares purchased since 1998 except for re-invested dividends. The cost of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.
15. DIVESTITURES AND ASSETS HELD FOR SALE
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 Consolidated Statements of Income for the year ended December 31 2020. Net income (loss) from discontinued operations for the years ended December 31, 2022 and 2021 were immaterial.
| | | | | |
| Year Ended December 31, |
(In thousands) | 2020 |
Revenues and other items: | |
Sales | $ | 110,246 | |
Other income (expense), net | (333) | |
| 109,913 | |
Costs and expenses: | |
Cost of goods sold | 92,079 | |
Freight | 5,229 | |
Selling, general and administrative | 16,824 | |
Research and development | 8,863 | |
Asset impairments and costs associated with exit and disposal activities, net of adjustments | 1,529 | |
Loss on sale of business | 50,027 | |
Total | 174,551 | |
Income (loss) from discontinued operations before income taxes | (64,638) | |
Income tax expense (benefit) | (6,027) | |
Income (loss) from discontinued operations, net of tax | $ | (58,611) | |
The following table provides significant operating and investing cash flow information for discontinued operations for the year ended December 31, 2020. There was no significant operating and investing cash flow information for the years ended December 31, 2022 and 2021.
| | | | | |
| Year Ended December 31, |
(In thousands) | 2020 |
Operating activities: | |
Depreciation and amortization | $ | 5,511 | |
Loss on sale of Personal Care Films | 50,027 | |
Total | 55,538 | |
Investing activities: | |
Net proceeds on sale of Personal Care Films | $ | 55,115 | |
Capital expenditures | (1,912) | |
Total | $ | 53,203 | |
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 within the personal care component of its PE Films segment. As of December 31, 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.
16. INVESTMENTS
In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar historically accounted for its investment in kaléo under the fair value option. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. kaléo’s stock is not publicly traded.
On December 27, 2021, the Company completed the sale of its investment interests in kaléo (Series A-3 Preferred Stock, Series B Preferred Stock and common stock) that, taken together, represented on a fully-diluted basis an approximate 18% interest in kaléo. Tredegar received closing cash proceeds of $47.1 million. 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 consolidated statements of income.
17. SUPPLY CHAIN FINANCING
The Company has supply chain finance service agreements with third-party financial institutions to provide platforms that facilitate the ability of participating suppliers to finance payment obligations from the Company with the third-party financial institution. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers’ decisions to finance amounts under the supply chain finance agreements. As of December 31, 2022 and 2021, $25.9 million and $30.7 million, respectively, of the Company’s accounts payable were financed by participating suppliers through third-party financial institutions.
18. CONTINGENCIES
Tredegar is involved in various stages of investigation and remediation relating to environmental matters at certain current and former plant locations. Where the Company has determined the nature and scope of any required environmental remediation activity, estimates of cleanup costs have been obtained and accrued. As efforts to maintain compliance with applicable environmental laws and regulations, additional contingencies may be identified continue. If additional contingencies are identified in the future, the Company’s practice is to determine at that time the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. While the Company believes it is currently adequately accrued for known environmental issues, it is possible that unexpected future costs for known or unknown environmental issues could have a material adverse effect on its financial condition, results of operations and cash flows at that time.
The Company is involved in various other legal actions arising in the normal course of business. After taking into consideration the relevant information, the Company believes that it has sufficiently accrued for probable losses and that the actions will not have a material adverse effect on its financial position.
From time to time, the Company enters into transactions with third parties in connection with the sale of assets or businesses in which it agrees to indemnify the buyers or third parties involved in the transaction, or in which the sellers or third parties involved in the transaction agree to indemnify Tredegar, for certain liabilities or risks related to the assets or business. Also, in the ordinary course of its business, the Company may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. For these reasons, Tredegar is unable to estimate the maximum amount of the potential future liability under the indemnity provisions of these agreements. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount is reasonably estimable. The Company discloses contingent liabilities if the probability of loss is reasonably possible and considered to be material.
Item 16. FORM 10-K SUMMARY
Not Applicable.