Derivative Financial Instruments

9 Months Ended

Sep. 30, 2021

Summary of Derivative Instruments [Abstract]

DERIVATIVES

Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exists as part of ongoing business operations in Flexible Packaging Films. These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments is recorded on the consolidated balance sheets. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.

In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin

exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months. The notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $18.7 million (13.9 million pounds of aluminum) at September 30, 2021 and $12.1 million (13.0 million pounds of aluminum) at December 31, 2020.

The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of September 30, 2021 and December 31, 2020:


	September 30, 2021			December 31, 2020
(In thousands)	Balance Sheet Account	Fair Value		Balance Sheet Account	Fair Value
Derivatives Designated as Hedging Instruments
Asset derivatives: Aluminum futures contracts	Prepaid expenses and other	$	3,996	Prepaid expenses and other	$	1,560
Liability derivatives: Aluminum futures contracts	Accrued expenses	(1)		Accrued expenses	(22)
Net asset		$	3,995		$	1,538

In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation.

The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure for the Flexible Packaging Film's business unit in Brazil (“Terphane Ltda.”) of its sales and raw materials quoted or priced in U.S. Dollars and its variable conversion, fixed conversion and sales, general and administrative costs (before depreciation and amortization) quoted or priced in Brazilian Real ("R$") is annual net costs of R$150 million.

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
$1,400	5.5100	R$7,714	Oct-21	78%
$1,495	5.5224	R$8,256	Nov-21	83%
$1,170	5.5060	R$6,442	Dec-21	65%
$1,677	5.3360	R$8,948	Jan-22	72%
$1,751	5.3631	R$9,391	Feb-22	75%
$1,662	5.3905	R$8,959	Mar-22	72%
$1,615	5.4247	R$8,761	Apr-22	70%
$1,647	5.4545	R$8,984	May-22	72%
$1,596	5.4890	R$8,760	Jun-22	70%
$1,719	5.5200	R$9,489	Jul-22	76%
$1,708	5.5560	R$9,489	Aug-22	76%
$1,780	5.5915	R$9,953	Sep-22	80%
$1,793	5.6264	R$10,088	Oct-22	81%
$1,784	5.6597	R$10,097	Nov-22	81%
$1,659	5.6962	R$9,450	Dec-22	76%
$24,456	5.5112	R$134,781		75%

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. Pre-tax accumulated gains of $0.9 million related to the net fair value of the open forward contracts is reported in accumulated other comprehensive income (loss) as of September 30, 2021.

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 September 30, 2021 and December 31, 2020:


	September 30, 2021			December 31, 2020
(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	$	99	Prepaid expenses and other	$	853
Liability derivatives: Foreign currency forward contracts	Accrued expenses	(891)		Accrued expenses	(466)
Net asset (liability)		$	(792)		$	387

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 pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three and nine month periods ended September 30, 2021 and 2020 is summarized in the table below:


	Cash Flow Derivative Hedges
	Three Months Ended September 30,
	Aluminum Futures Contracts				Foreign Currency Forwards
(In thousands)	2021		2020		2021				2020
Amount of pretax gain (loss) recognized in other comprehensive income (loss)	$	2,919	$	1,158	$	—	$	(1,670)	$	—	$	(655)
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)	Cost of goods sold		Cost of goods sold		Cost of goods sold		Selling, general & admin		Cost of goods sold		Selling, general & admin
Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)	$	2,160	$	(575)	$	15	$	(34)	$	15	$	(1,767)
	Nine Months Ended September 30,
	Aluminum Futures Contracts				Foreign Currency Forwards
	2021		2020		2021				2020
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)	$	6,629	$	(1,637)	$	—	$	(1,892)	$	—	$	(6,015)
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)	Cost of goods sold		Cost of goods sold		Cost of goods sold		Selling, general & admin		Cost of goods sold		Selling, general & admin
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)	$	4,172	$	(2,766)	$	48	$	(183)	$	46	$	(4,359)

As of September 30, 2021, the Company expects $2.9 million of unrealized after-tax gains on Aluminum Extrusions derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three and nine month periods ended September 30, 2021 and 2020, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.