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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-16 · 231 added, 377 removed, 291 unchanged (68% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking and Cautionary Statements

Some of the information contained in this Form 10-K may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

When using the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “plan,” “likely,” “may” and similar expressions, Tredegar does so to identify forward-looking statements.

Such statements are based on Tredegar’s then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.

It is possible that Tredegar’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements.

In addition, the Company's current projections for its businesses could be materially affected by the highly uncertain impact of COVID-19.

As a consequence, the Company's results could differ significantly from its projections, depending on, among other things, the duration of "shelter in place" orders and the ultimate impact of the pandemic on employees, supply chains, customers and the U.S.

and world economies.

Accordingly, you should not place undue reliance on these forward-looking statements.

For risks and important factors that could cause actual results to differ from expectations, refer to the reports that Tredegar files with or furnishes the SEC from time-to-time, including the risks and important factors set forth in Item 1A.

Readers are urged to review and consider carefully the disclosures Tredegar makes in the reports Tredegar files with or furnishes to the SEC.

Tredegar does not undertake, and expressly disclaims any duty, to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based, except as required by applicable law.

The following discussion and analysis of our financial condition and results of operations focuses on and is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included in this Form 10-K.

This discussion should be read in conjunction with, and is qualified by reference to, the other related information including, but not limited to, the audited consolidated financial statements (including the notes thereto) and the description of our business, all as set forth in this Form 10-K, as well as the risk factors discussed above in Item 1A.

This section provides discussion and a year-to-year comparison for the years ended December 31, 2021 and 2020.

Discussion regarding our results of operations for the year ended December 31, 2019 and a year-to-year comparison between the years ended December 31, 2020 and 2019 can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Executive Summary

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With approximately 2,400 employees, the Company operates manufacturing facilities in North America, South America, and Asia.

On October 30, 2020, the Company completed the sale of its personal care films business (“Personal Care Films”).

The transaction excluded the packaging film lines and related operations located at the Pottsville, Pennsylvania manufacturing site (“Pottsville Packaging”), which are now being reported within the Surface Protection component of PE Films.

On October 30, 2020, the Company completed the sale of Personal Care Films.

The transaction excluded the packaging film lines and related operations located at Pottsville Packaging, which are now being reported within 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.

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Sales were $826.5 million in 2021 compared to $755.3 million in 2020.

Net loss from continuing operations was $16.8 million ($0.51 per diluted share) in 2020, compared with net income from continuing operations of $58.5 million ($1.76 per diluted share) in 2019.

The 2020 results include:

• An after-tax loss on the Company’s investment in kaléo of $47.6 million ($1.42 per diluted share), which is accounted for under the fair value method (see Note 4 to the Consolidated Financial Statements in Item 15 for more details);

• An impairment of the total goodwill balance of Aluminum Extrusions' reporting unit acquired in the AACOA acquisition in 2012 was recorded in the after-tax amount of $10.5 million ($0.32 per diluted share).

Net income from continuing operations was $57.9 million ($1.72 per diluted share) in 2021, compared with net loss from continuing operations of $16.8 million ($0.51 per diluted share) in 2020.

The 2021 results include:

• An after-tax dividend received from kaléo of $14.8 million ($0.45 per diluted share);

• An unrealized after-tax gain on the Company’s investment in kaléo of $8.5 million ($0.26 per diluted share).

• An after-tax gain of $10.0 million ($0.30 per diluted share) on the sale of the Company’s investment in kaléo on December 27, 2021 resulting in total cash proceeds of $47.1 million (see Note 9 to the Consolidated Financial Statements in Item 15 for more details).

The 2020 results include:

• An unrealized after-tax gain on the Company’s investment in kaléo of $23.9 million ($0.72 per diluted share).

• An after-tax loss on the Company’s investment in kaléo of $47.6 million ($1.42 per diluted share), which was accounted for under the fair value method (see Note 9 to the Consolidated Financial Statements in Item 15 for more details);

Other losses related to asset impairments and costs associated with exit and disposal activities for continuing operations were not material for the years ended December 31, 2021 and 2020, respectively.

Losses associated with plant shutdowns, asset impairments, restructurings and other items are described in Results of Operations.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations is the measure of profit and loss used by Tredegar’s chief operating decision maker (“CODM”) 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.

EBITDA from ongoing operations is the measure of profit and loss used by Tredegar’s chief operating decision maker (“CODM”) for purposes of assessing financial performance.

The Company uses 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.

EBIT (earnings before interest and taxes) from ongoing operations is a non-GAAP financial measure included in the reconciliation of segment financial information to consolidated results for the Company.

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.

It is not intended to represent the stand-alone results for Tredegar’s ongoing operations under GAAP and should not be considered as an alternative to net income as defined by GAAP.

EBIT is a widely understood and utilized metric that is meaningful to certain investors.

We believe that including this financial metric in the reconciliation of management’s performance metric, EBITDA from ongoing operations, provides useful information to those investors that primarily utilize EBIT to analyze the Company’s core operations.

THE IMPACT OF COVID-19

We believe EBIT is a widely understood and utilized metric that is meaningful to certain investors and that including this financial metric in the reconciliation of management’s performance metric, EBITDA from ongoing operations, provides useful information to those investors that primarily utilize EBIT to analyze the Company’s core operations.

See the table in Note 13 to the Consolidated Financial Statements in Item 15 for a reconciliation of this non-GAAP measure to GAAP.

THE IMPACT OF COVID-19 AND RELATED FINANCIAL CONSIDERATIONS

Essential Business and Employee Considerations

The Company’s priorities during the COVID-19 pandemic continue to be to protect the health and safety of employees while keeping its manufacturing sites open due to the essential nature of many of its products.

Within the limitations imposed by the health and safety procedures described below, the Company has continued to manufacture the full range of products at its facilities.

The Company’s protocols to protect the health and well-being of its employees from COVID-19 continue to develop as COVID-19 informed work practices evolve and the Company responds to recommended and mandated actions of government and health authorities.

In addition, to facilitate a return to fully functional operations, the Company has undertaken an education campaign to provide employees with the most accurate and up-to-date information available, particularly from the Centers for Disease Control (“CDC”), the Office of the Surgeon General and state and local health departments.

The Company believes that these efforts will encourage employees to receive a vaccine when they are eligible.

The Company has educated employees about COVID-19, including how the virus is spread, COVID-19 symptoms and mitigation efforts to keep employees safe.

Even in those facilities not bound by the Families First Coronavirus Response Act, the Company has adopted COVID-19 related pay and sick leave policies and remote work policies that require employees to stay home if they feel ill or have been exposed to others with the illness, until they are cleared to return to work by our Human Resources team, who applies CDC and other state health department guidance to each case.

The Company’s policies include:

mandating employees self-monitor for symptoms;

taking an employee’s temperature before entering production facilities;

answering self-screening questions related to potential exposure and COVID-19 symptoms;

mandating frequent handwashing;

requiring social distancing;

requiring face coverings on production floors at all times and in common areas and office settings where social distancing is difficult;

streamlining onsite personnel to only those required for production and distribution;

strongly encouraging and, where mandated, requiring remote work for all those who can work from home;

limiting travel to essential business purposes;

and regularly cleaning and disinfecting facilities.

In the U.S., the Company has educated employees on COVID-19-related government benefits and has provided such benefits even in those facilities where the government benefits are not mandated.

Bonnell Aluminum is experiencing higher than normal absenteeism and hiring difficulties, which it attributes to COVID-19-related factors.

Bonnell Aluminum attempts to match its direct labor with demand and is facing difficulty maintaining sufficient labor to meet desired shipment levels.

The Company has continued to manufacture the full range of products at its facilities.

The Company’s protocols to protect the health and well-being of its employees from COVID-19 continue to evolve as the Centers for Disease Control, the Office of the Surgeon General and other state and local health departments learn more about the virus and its variants.

Consistent with recommendations and mandates from government agencies and health authorities, the Company has implemented multiple layers of COVID-19 protections and interventions.

The Company has engaged in an education campaign that provides employees with the most accurate and up-to-date information related to COVID-19 vaccines and has offered different monetary and/or time-away-from-work incentives to encourage employees to get vaccinated with the primary dose(s) and to get a booster shot once eligible.

The Company will continue to monitor available information to assess safeguards that may be taken to try to prevent a COVID-19 outbreak in the workplace.

Aluminum Extrusions, also known as Bonnell Aluminum, continues to experience higher than normal absenteeism and hiring difficulties, which it attributes to COVID-19-related factors, including high COVID-19 transmission rates in the geographic areas where its plants are located.

While the average number of direct labor employees at Bonnell Aluminum facilities increased approximately 9% in the fourth quarter of 2021, compared with the abnormally low levels related to the pandemic in the second and third quarters of 2020, there continues to be a shorta ge of labor to meet existing demand and desired shipment levels.

Moreover, onboarding new employees has resulted in higher hiring and training costs and labor inefficiencies in 2021 versus last year.

All three of the Company's business segments are managing through supply chain disruptions and escalating costs, including raw material cost increases, shortages, tra nsportation cost increases and delays.

To offset growing cost pressures, Bonnell Aluminum implemented a selling price increase effective January 3, 2022, which followed two price increases in 2021.

In response to unprecedented cost increases and supply issues for polyethylene and polypropylene resin, PE Films implemented a quarterly resin cost pass-through mechanism, effective July 1, 2021, for all products and customers not previously covered by such arrangements.

Flexible Packaging Films, which is also known as Terphane, which is headquartered in Brazil, continues to monitor cost escalations to adjust selling prices as market dynamics permit.

Financial Considerations

The 2020 annual plan for Bonnell Aluminum (pre-COVID-19) included sales volume of 201 million pounds and EBITDA from ongoing operations of $65 million, versus 2019 sales volume of 208 million pounds and EBITDA from ongoing operations of $65.7 million.

Actual 2020 sales volume was 186 million pounds and EBITDA from ongoing operations was $55.1 million.

Approximately 58% of Bonnell Aluminum’s sales volume in 2021 was related to building and construction (“B&C”) markets (non-residential B&C of 51% and residential B&C of 7%).

Much of the 2020 sales volume associated with the B&C market was related to contracts that existed at the start of the COVID-19 pandemic.

With the completion of many of these contracts, Bonnell began experiencing weakness in the B&C market during the fourth quarter of 2020.

Overall, the Company believes that volume results for Bonnell Aluminum in 2020 have outperformed the industry, and performance to date during the COVID-19 environment has exceeded the Company's expectations, with current bookings and backlog at high levels.

No significant issues have arisen to date on the collection of accounts receivable at Bonnell Aluminum.

Demand has remained strong under COVID-19 conditions for the Company’s flexible food packaging films produced by Terphane.

The Surface Protection component of PE Films had record performance for EBITDA from ongoing operations in the second quarter and first half of 2020, but it experienced a slowdown in the third quarter, with a portion of the decline in volume related to a previously disclosed customer product transition and customer inventory corrections.

The Company believes that while Surface Protection’s customer inventory corrections were largely resolved during the third quarter of 2020, it will experience a significant decline in volume and profitability in the first quarter of 2021 as a result of the customer product

See the PE Films section below for further discussion.

No significant issues have arisen to date on the collection of accounts receivable at Terphane or Surface Protection.

Tredegar owns approximately 20% of kaleo, Inc.

(“kaléo”), which makes and sells an epinephrine delivery device under the name AUVI-Q ® .

The Company accounts for its investment in kaléo on a fair value basis.

The Company’s estimate of the fair value of its interest in kaléo at December 31, 2020 was $34.6 million ($29.7 million after taxes), which represents an increase of $0.1 million ($0.1 million after taxes) and a decrease of $60.9 million ($47.6 million after taxes) since September 30, 2020 and December 31, 2019, respectively.

The decline in estimated fair value in 2020 was primarily due to:

(i) current projections that assume ongoing pricing pressures, (ii) expected changes in market access as well as continued lower market demand for epinephrine delivery devices resulting from COVID-19-driven delays in in-person back-to-school schedules and social distancing guidelines, and (iii) a higher private company liquidity discount.

kaléo’s stock is not publicly traded.

The ultimate value of Tredegar’s ownership interest in kaléo could be materially different from the $34.6 million estimated fair value reflected in the Company’s financial statements at December 31, 2020.

Total debt was $134 million at December 31, 2020, compared to $42 million at December 31, 2019.

Net debt (debt in excess of cash and cash equivalents), a non-GAAP financial measure, was $122.2 million at December 31, 2020, compared to $10.6 million at December 31, 2019.

In December 2020, the Company paid a special dividend of $5.97 per share or $200 million, as a result of strong cash generation and overall net cash proceeds of approximately $46 million relating to the sale of Personal Care Films.

The overall net cash proceeds resulted from net proceeds of $53 million received in the fourth quarter of 2020 less $7 million of expected expenditures during 2021, primarily related to information technology transition services and severance.

The Company’s revolving credit agreement allows borrowings of up to $375 million and matures in June 2024.

The Company believes that its most restrictive covenant (computed quarterly) is the leverage ratio, which permits maximum borrowings of up to 4x EBITDA, as defined under the revolving credit agreement for the trailing four quarters (“Credit EBITDA”).

The Company had Credit EBITDA and a leverage ratio (calculated in the “ Liquidity and Capital Resources ” below) of $93.4 million and 1.43x, respectively, at December 31, 2020.

The Company’s current stress testing under a COVID-19-driven recession indicates a low probability that a future leverage ratio will exceed 4.0x.

See the “ Liquidity and Capital Resources ” below for a reconciliation of net debt, a non-GAAP financial measure, to the most directly comparable GAAP financial measure.

Non-residential B&C volume started to decline in the fourth quarter of 2020 after the fulfillment of contracts that existed at the start of the COVID-19 pandemic.

Market demand in this sector has recently been strong but not fully realized in Bonnell Aluminum's fourth quarter and full year 2021 results due to pandemic-related labor shortages and resulting production inefficiencies.

Non-residential B&C volume declined 4% versus the fourth quarter of 2020 and 11% versus full year 2020.

However, current bookings and backlog remain at record high levels which the Company believes will bode well for future results when production constraints are alleviated.

The Surface Protection component of PE Films had record EBITDA from ongoing operations in 2020 but experienced a decline in volume in 2021, primarily related to a previously disclosed customer product transition unrelated to the pandemic.

In addition, the lag in the pass-through of significant pandemic-related increases in resin costs, and some of such cost increases incurred prior to mid-year that will not be recovered even on a lagging basis, have adversely impacted PE Films’ profitability in 2021.

At Terphane, the Company believes that the pandemic-related surge in demand for flexible packaging films that began in early 2020 returned to lower pre-pandemic levels during the second quarter of 2021.

OPERATIONS REVIEW

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Capital expenditures $ 18,914 $ 10,260

* Excludes pre-tax accelerated amortization of trade names of $10.0 million in the year ended December 31, 2019.

** See the table in Item 6.

“Selected Financial Data” of this Form 10-K (“Item 6”) for a reconciliation of this non-GAAP measure to GAAP.

Net sales in 2020 decreased by 14.0% versus 2019 primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.

Sales volume in 2020 decreased by 10.5% versus 2019 with declines in all key markets, which the Company believes was mainly a result of COVID-19-related lower demand.

EBITDA from ongoing operations in 2020 decreased by $10.5 million in comparison to 2019 due to lower volume ($16.1 million) and higher labor and employee-related costs ( $4.3 million), partially offset by higher pricing ($8.1 million), lower freight ($0.8 million) and lower travel and entertainment expenses as a result of COVID-19 ($0.9 million).

Net sales in 2021 increased by 18.3% versus 2020.

The annual increase in net sales was primarily due to an increase in average selling prices to cover significantly higher aluminum raw material costs and higher operating costs, partially offset by lower sales volume.

Sales volume in 2021 decreased by 1.6% versus 2020.

Increased shipments in the specialty sector were offset by declines in B&C and automotive markets.

All end markets served within the specialty sector experienced growth.

The Company believes that declines in the non-residential B&C market resulted mainly from COVID-19-related labor shortages, with a portion of the decline in automotive sales volume associated with supply chain issues in the automotive industry.

EBITDA from ongoing operations in 2021 increased by $0.8 million versus 2020 due to higher pricing ($13.6 million net of the pass-through of aluminum raw materials costs), partially offset by higher labor and employee-related costs ($7.2 million) and other inflationary operating costs such as higher supply expenses ($6.4 million), lower labor productivity ($1.6 million), higher freight expenses ($3.2 million) and higher selling, general and administrative costs ($3.2 million).

In addition, the timing of the flow through under the first-in first-out method of aluminum raw material costs passed through to customers, previously acquired at lower prices in a quickly rising commodity pricing environment, resulted in a benefit of $6.9 million in 2021 versus a charge of $1.3 million in 2020.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $21 million in 2021, including $3 million for infrastructure upgrades at the Carthage, Tennessee and Newnan, Georgia facilities , $3 million for a roof replacement at the Elkhart, Indiana site and $4 million for strategic projects.

In addition, approximately $11 million will be required to support continuity of current operations.

Capital expenditures are projected to be $30 million in 2022, including $15 million for new ERP/MES, $6 million for infrastructure upgrades at the facilities located in Niles, Michigan, Carthage, Tennessee and Newnan, Georgia, and $3 million for other strategic projects.

The ERP/MES project is expected to cost $28 million over a two-year time span.

In addition to strategic projects, approximately $6 million will be required to support continuity of current operations.

Depreciation expense is projected to be $14 million in 2022.

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Capital expenditures $ 2,997 $ 6,024

* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP.

Net sales increased by 4.1% in 2020 versus 2019 primarily due to higher sales of products in Surface Protection unrelated to customer product transitions ($12.0 million), partially offset by lower sales associated with the customer product transitions this year ($6.8 million).

EBITDA from ongoing operations in 2020 increased by $4.0 million versus 2019 primarily due to:

• A $3.2 million increase from Surface Protection, primarily due to sales of products unrelated to the customer product transitions ($8.3 million), partially offset by lower sales associated with the customer product transitions ($4.5 million);

• A $0.8 million increase from Pottsville Packaging primarily related to higher sales volume and favorable raw materials pricing.

Customer Product Transitions in Surface Protection

Net sales in 2021 decreased by $20.4 million versus 2020, primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection, partially offset by higher pricing associated with the pass-through of increased resin costs.

EBITDA from ongoing operations in 2021 decreased by $17.4 million versus 2020 primarily due to:

• A $19.4 million decrease from Surface Protection primarily related to lower sales and unfavorable mix associated with the customer product transitions ($14.8 million), lower sales and unfavorable mix for products unrelated to customer product transitions ($3.4 million), margin erosion associated with higher resin costs that occurred before the resin index pricing plan was fully implemented ($1.4 million), the pass-through lag associated with higher resin costs ($1.4 million), and higher freight expense ($1.0 million), partially offset by production efficiencies and cost savings ($1.9 million) and lower research and development spend ($0.4 million);

• A $0.1 million increase from Pottsville Packaging;

• A $2.7 million favorable variance associated with the divestiture of Bright View Technologies at the end of 2020.

Customer Product Transitions and Other Factors in Surface Protection

The Surface Protection component of PE Films supports manufacturers of optical and other specialty substrates used in flat panel display products.

These films are primarily used by customers to protect components of displays in the manufacturing and transportation processes and then discarded.

The Company previously reported the risk that a portion of its film products used in surface protection applications will be made obsolete by possible future customer product transitions to less costly alternative processes or materials.

These transitions principally relate to one customer.

The Company believes that previously reported delays in this customer's transitions were recently resolved by the customer and much of the remaining transitions could occur by the end of 2021.

Under this scenario, the Company estimates that the contribution to EBITDA from ongoing operations for PE Films could decline due to the remaining customer product transitions by $18 million in 2021 versus 2020 and $4 million in 2022 versus 2021.

To offset the expected adverse impact, the Company is aggressively pursuing and making progress in generating contribution from sales from new surface protection products, applications and customers and implementing cost savings measures.

Annual contribution to EBITDA from ongoing operations for PE Films on surface protection products unrelated to the customer product transitions has increased since 2018 by approximately $12 million.

The Company previously reported the risk that a portion of its film products used in surface protection applications would be made obsolete by customer product transitions to less costly alternative processes or materials.

The Company estimates that these transitions, which principally relate to one customer, adversely impacted EBITDA from ongoing operations for PE Films by $14.8 million during 2021 versus 2020.

A further decline of $7 million in EBITDA from ongoing operations due to the transitions is expected in 2022 versus 2021, at which time the transitions are expected to be complete.

The Surface Protection business is also experiencing competitive pricing pressures, unrelated to the customer product transitions, that are expected to adversely impact EBITDA from ongoing operations by approximately $6 million i n 2022 versus 2021.

To offset the expected adverse impact of the customer transitions and pricing pressures, the Company is aggressively pursuing and making progress in generating contribution from sales of new surface protection products, applications and customers and driving production efficiencies and cost savings.

Annual contribution to EBITDA from ongoing operations for PE Films from sales of products unrelated to previously disclosed customer product transitions increased $7 million for the two-year period ended December 31, 2021, which excludes the impact of resin pass-through lag but includes the adverse impact of customer inventory corrections, customer production slowdowns associated with COVID-19-related factors, and a slowdown in the television market in the fourth quarter of 2021.

Projected Capital Expenditures and Depreciation & Amortization

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Capital expenditures $ 5,603 $ 4,959

* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP.

Net sales in 2020 increased 0.5% versus 2019 while volume increased 7.4% versus 2019 primarily due to lower selling prices from lower raw material costs and changes in product mix.

Terphane’s EBITDA from ongoing operations in 2020 increased by $15.9 million versus 2019 due to:

• Lower raw material costs, net of lower selling prices ($8.9 million), higher sales volume ($3.3 million), favorable product mix ($2.2 million) and lower fixed costs ($1.0 million), partially offset by higher variable costs ($1.1 million) and higher selling and general administration expenses ($0.4 million);

• Net favorable foreign currency translation of Real-denominated costs ($1.5 million);

• Foreign currency transaction losses of $0.5 million in 2020 versus gains of $0.2 million in 2019;

• A benefit of $1.2 million in 2020 resulting from the favorable settlement of a dispute related to value-added taxes.

Sales volume declined by 7.6% in 2021 versus 2020, primarily due to lower demand, resin supply issues, and an equipment failure impacting production.

Net sales in 2021 increased 4.0% compared to 2020, primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume.

EBITDA from ongoing operations in 2021 increased by $1.0 million versus 2020 primarily due to:

• Higher selling prices from the pass-through of higher resin costs ($11.2 million), favorable product mix ($2.0 million) and lower selling, general, and administration expenses ($0.7 million), partially offset by higher raw material costs ($12.8 million), lower sales volume ($4.9 million) and higher variable costs ($1.7 million);

• Net favorable currency translation of Real-denominated operating costs ($5.9 million);

• Higher foreign currency transaction gains ($1.2 million) in 2021 versus 2020;

• Lower value-added tax credits received in 2021 ($0.5 million) versus 2020.

Projected Capital Expenditures and Depreciation & Amortization

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Corporate Expenses, Interest and Income Taxes

Pension expense was $14.6 million in 2020, an unfavorable change of $5.1 million from 2019.

The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the net sales and operating profit by segment table in Note 5 to the Consolidated Financial Statements in Item 15.

Pension expense is projected to be $14.0 million in 2021, which is determined at the beginning of the year based on the funded status of the Company’s defined benefit pension plan and actuarial assumptions at that time.

In addition to the higher pension expense in 2020 compared to 2019, corporate expenses, net, increased primarily due to higher professional fees ($3.4 million) related to business development activities and higher stock compensation expense ($1.0 million), partially offset by lower environmental expenses ($0.6 million) and lower other employee-related compensation ($1.3 million).

Interest expense decreased to $2.6 million in 2020 from $4.1 million in 2019, primarily due to lower average debt levels.

Corporate expenses, net, decreased $1.1 million in 2021 versus 2020, primarily due to higher transition service fees, net of corporate costs associated with the 2020 divestiture of the Personal Care Films business ($1.1 million).

Interest expense increased to $3.4 million in 2021 from $2.6 million in 2020, primarily due to higher average debt levels.

The effective tax rate used to compute income taxes for continuing operations in 2021 was 13.8% compared to 32.8% in 2020.

The differences between the U.S.

federal statutory rate and the effective tax rate for 2020 and 2019 are shown in Note 16 in the Notes to the Financial Statements.

federal statutory rate and the effective tax rate for 2021 and 2020 are shown in Note 12 to the Consolidated Financial Statements in Item 15.

Pension expense was $14.1 million in 2021, a favorable change of $0.5 million from 2020.

The impact on earnings from pension expense is reflected in “Corporate expenses, net” in the net sales and operating profit by segment statements in Note 13 to the Consolidated Financial Statements in Item 15.

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, the Company borrowed funds under its revolving credit agreement and made a $50 million Special Contribution to reduce its underfunding and as part of a program within the pension plan to hedge or fix the expected future contributions that will be needed by the Company through the settlement process.

The Company expects to realize income tax benefits on the Special Contribution of approximately $11 million.

Administrative costs for the pension plan through the settlement process are estimated at $4 to $5 million.

As of December 31, 2021 (and before the Special Contribution), the estimated pension plan underfunding under GAAP was $69 million, comprised of investments at fair value of $245 million and a projected benefit obligation (“PBO”) of $314 million.

The ultimate settlement benefit obligation may differ from the PBO, depending on market factors for buyers of pension obligations at the time of settlement.

Pension expense is projected to be approximately $14 million under GAAP in 2022 and zero for calculating earnings before interest, taxes, depreciation and amortization as defined in the Company’s revolving credit agreement (“Credit EBITDA”), which is used to compute certain borrowing ratios.

The Company estimates that, with the Special Contribution, there will be no required minimum contributions to the pension plan until final settlement.

Total debt was $73.0 million at December 31, 2021, compared to $134.0 million at December 31, 2020.

Net debt (debt in excess of cash and cash equivalents), a non-GAAP financial measure, was $42.5 million at December 31, 2021, compared to $122.2 million at December 31, 2020.

The year-over-year decline in net debt of $79.7 million includes proceeds of $47.1 million from the sale of the Company’s investment in kaleo, Inc (“kaléo”).

on December 27, 2021.

The Company’s revolving credit agreement allows borrowings of up to $375 million and matures in June 2024.

The Company believes that its most restrictive covenant (computed quarterly) is the leverage ratio, which permits maximum borrowings of up to 4x Credit EBITDA.

The Company had Credit EBITDA and a leverage ratio (calculated in the “ Liquidity and Capital Resources ” below) of $90.0 million and 0.81x, respectively, at December 31, 2021.

Net capitalization and other credit measures are provided in Liquidity and Capital Resources , below.

Critical Accounting Policies

In the ordinary course of business, the Company makes a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with GAAP.

Forward-looking and Cautionary Statements

In addition, the Company's current projections for its businesses could be materially affected by the highly uncertain impact of the COVID-19 pandemic.

As a consequence, the Company's results could differ significantly from its projections, depending on, among other

things, the ultimate impact of the pandemic on employees, supply chains, customers and the U.S.

and world economies.

Accordingly, you should not place undue reliance on these forward-looking statements.

Readers are urged to review and consider carefully the disclosures Tredegar makes in the reports Tredegar files with or furnishes to the SEC.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Certain accounting policies, as described below, are considered "critical accounting policies" because they are particularly dependent on estimates made by management about matters that are inherently uncertain and could have a material impact on the Company’s consolidated financial statements.

Estimates and judgments are based on historical experience, forecasted events and various other assumptions that management believes are reasonable under the circumstances.

Actual results could differ significantly from those estimates under different assumptions and conditions.

The Company believes the following discussion addresses its critical accounting policies.

These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.

Impairment of Long-lived Identifiable Assets and Goodwill

The Company assesses its long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.

Any necessary impairment charges are recorded when the Company does not believe the carrying value of the long-lived asset(s) will be recoverable.

Tredegar also reassesses the useful lives of its long-lived assets based on changes in the business and technologies.

A summary of all of our significant accounting policies is included in Note 1 to the Consolidated Financial Statements in Item 15.

Impairment of 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 1 st of each year).

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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 the carrying amount, then the Company would perform a quantitative impairment test.

As of December 1, 2020, the Company applied the Step 0 assessment to its PE Films’ Surface Protection reporting unit and its Aluminum Extrusions’ Futura reporting unit, which was created as a result of an acquisition in 2017.

Each reporting unit had a fair value significantly in excess of its carrying amount when last tested using the quantitative impairment test.

The Company's Step 0 analysis in 2020 of these reporting units concluded that it is not more likely than not that the fair value of each reporting unit was less than its carrying amount.

Goodwill for Surface Protection and Futura totaled $57.3 million and $10.4 million, respectively, at December 31, 2020.

In assessing the recoverability of goodwill and long-lived identifiable assets, the Company primarily estimates fair value using discounted cash flow analyses and comparative enterprise value-to-EBITDA multiples.

These calculations require management to make assumptions regarding estimated future cash flows, discount rates and other factors to determine if an impairment exists.

If these estimates or their related assumptions change in the future, the Company may be required to record additional impairment charges.

During the first three months of 2020, the Company performed goodwill impairment tests for the Aluminum Extrusions’ AACOA reporting unit, which was created as a result of an acquisition in 2011, and the Futura reporting unit using a combination of income and market approaches and determined that the fair value of the Futura reporting unit exceeded its carrying value.

However, the fair value of the AAOCA reporting unit did not exceed its carrying value.

As a result, the Company recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes), which represented the entire amount of goodwill associated with the AACOA reporting unit.

The operations of the AACOA reporting unit, which includes the Niles, Michigan and Elkhart, Indiana facilities, was expected to be severely impacted by COVID-19 at that time, 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.

Investment Accounted for Under the Fair Value Method

In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaléo (formerly Intelliject, Inc.), a privately held specialty pharmaceutical company.

This investment is accounted for under the fair value method.

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 (venture capital funds generally use the fair value option to account for their investment portfolios).

At December 31, 2020, Tredegar’s ownership interest was approximately 20% on a fully diluted basis.

The Company considers its investment in kaléo to be a Level 3 investment under the fair value hierarchy described in GAAP.

The Company discloses the level of its investments within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3).

The Company believes that its fair value estimates will continue to be based upon Level 3 inputs since there is no secondary market for Tredegar’s ownership.

See Note 4 to the Consolidated Financial Statements in Item 15 for more information on valuation methods used.

Adjustments to the estimated fair value of this investment will be made in the period in which such changes can be quantified.

At December 31, 2020 and 2019, the fair value of the Company’s investment in kaléo (also the carrying value, which is separately stated in the consolidated balance sheets) was estimated at $34.6 million and $95.5 million, respectively.

The weighted average cost of capital used in the fair market valuation of the Company’s interest in kaléo was 35% and 29% as of December 31, 2020 and 2019.

The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs, and the ultimate value could be materially different from the $34.6 million estimated fair value reflected in the Company’s financial statements at December 31, 2020.

The fair market valuation of Tredegar’s interest in kaléo is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk and wide range of possible outcomes.

At December 31, 2020, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of the Company’s interest in kaléo by approximately $5 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the Company’s interest by approximately $6 million.

As of December 1, 2021, 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).

In addition, 2021 the Company applied the Step 0 goodwill assessment to Surface Protection and Futura;

both had fair values significantly in excess of their carrying amounts when last tested using the quantitative impairment test.

The Company's Step 0 analyses in 2021 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 quantitative goodwill impairment tests for these reporting units were not necessary in 2021.

The Surface Protection and Futura reporting units had goodwill in the amounts of $57.3 million and $13.3 million, respectively, at December 31, 2021.

Pension Benefits

Tredegar sponsors noncontributory defined benefit (pension) plans that have resulted in varying amounts of net pension income or expense, as developed from actuarial valuations.

Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases.

Inherent in these valuations are key assumptions including discount rates and the expected return on plan assets.

The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions.

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As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.

On February 10, 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan, which could take up to 24 months to complete.

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 $109 million on a pretax basis as of December 31, 2021.

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 10.9% in 2020, 11.8% in 2019 and negative 5.4% in 2018.

The expected long-term return on plan assets, which is estimated by asset class and generally based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums, was 5.00%, 6.00% and 6.50% in 2020, 2019 and 2018, respectively.

The expected long-term rate return of 3.05%, 5.00% and 6.00% in 2021, 2020 and 2019 was developed through consultation with the Company’s investment advisors.

Several factors were considered, including prevailing and planned strategic asset allocations, current and expected future market conditions, inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums.

The Company anticipates that its expected long-term return on plan assets will be 3.05% for 2022.

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See the Executive Summary section above for further discussion regarding the financial impact of the Company’s pension plans.

On a quarterly basis, Tredegar reviews its judgments regarding uncertain tax positions and the likelihood that the benefits of a deferred income tax asset will be realized.

As circumstances change, the Company reflects in earnings any adjustments to unrecognized benefits for uncertain tax positions and valuation allowances for deferred income tax assets.

For financial reporting purposes, unrecognized tax benefits on uncertain tax positions were $0.6 million and $0.9 million as of December 31, 2020 and 2019, respectively.

Tax payments resulting from the successful challenge by the taxing authority on uncertain tax positions taken by Tredegar would possibly result in the payment of interest and penalties.

Accordingly, the Company also accrues for possible interest and penalties on uncertain tax positions.

The balance of accrued interest and penalties on deductions taken relating to uncertain tax positions was $0.1 million, $0.1 million and $0.2 million at December 31, 2020, 2019 and 2018, respectively ($0.1 million, $0.1 million and $0.2 million, respectively, net of corresponding U.S.

federal and state income tax benefits).

Accruals for possible interest and penalties on uncertain tax positions are reflected in income tax expense for financial reporting purposes.

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 2017.

As of December 31, 2020 and 2019, valuation allowances relating to deferred income tax assets were $17.5 million and $3.8 million, respectively.

For more information on deferred income tax assets and liabilities, see Note 16 to the Consolidated Financial Statements in Item 15.

Current tax liabilities and assets are recognized for the estimated taxes payable or refundable, respectively, on the tax returns for the current year.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Accordingly, accounting for income taxes represents the Company’s best estimate of various events and transactions.

Tax laws are often complex and may be subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities.

In establishing a provision for income tax expense, Tredegar must make judgments and interpretations about the application of tax laws.

The Company must also make estimates about when in the future certain items will affect taxable income in the various taxing jurisdictions.

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.

Tredegar may be required to change its provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change, or when new information indicates the need for adjustment in valuation allowances.

Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate.

Any such changes could significantly affect the amounts reported in the financial statements in the year these changes occur.

See Note 12 to the Consolidated Financial Statements in Item 15 for additional information on income taxes.

Results of Operations

2021 versus 2020

Sales in 2020 decreased by 8.6% compared with 2019 primarily due to lower sales in Aluminum Extrusions partially offset by higher sales in PE Films.

Net sales decreased 14.0% in Aluminum Extrusions primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.

Net sales increased 4.1% in PE Films primarily due to higher sales of products in Surface Protection unrelated to customer product transitions, partially offset by lower sales associated with the customer product transitions.

Net sales increased in Flexible Packaging Films by 0.5% primarily due to increased volume and changes in product mix.

Sales in 2021 increased by 9.4% compared with 2020.

Net sales increased 18.3% in Aluminum Extrusions primarily due to an increase in average selling prices to cover significantly higher aluminum raw material costs and higher operating costs, partially offset by lower sales volume.

Net sales decreased 14.6% in PE Films primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection, partially offset by higher pricing associated with the pass-through of increased resin costs.

Net sales increased in Flexible Packaging Films by 4.0% primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume.

For more information on changes in net sales and volume, see the Executive Summary section above.

Operating Costs and Expenses.

Consolidated gross profit margin (sales minus cost of goods sold and freight as a percentage of sales) was 22.6% in 2020 versus 18.9% in 2019.

The gross profit margin in Flexible Packaging Films increased due to higher sales volume, lower raw material costs and favorable product mix.

The gross profit margin in PE Films and Aluminum Extrusions was flat compared to 2019.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 18.0% in 2021 versus 22.6% in 2020.

The gross profit margin in Aluminum Extrusions decreased primarily due to higher labor and employee-related costs and other inflationary operating costs such as higher supply expenses, partially offset by higher pricing.

The gross profit margin in PE Films decreased primarily due to Surface Protection lower sales and unfavorable mix associated with the customer product transitions, lower sales and unfavorable mix for products unrelated to customer product transitions, and margin erosion associated with higher resin costs that occurred before the resin index pricing plan was fully implemented.

The gross profit margin in Flexible Packaging Films decreased due to lower sales volume and higher raw material costs, partially offset by favorable product mix and higher selling prices from the pass-through of higher resin costs.

For more information on changes in operating costs and expenses, see the Executive Summary section above.

Selling, General and Administrative.

As a percentage of sales, selling, general and administrative (“SG&A”) and R&D expenses were 12.3% in 2020, which increased from 10.2% in 2019.

SG&A and R&D expenses were up year-over-year, while net sales decreased.

Increased SG&A expense was primarily due to higher professional fees related to business development activities, higher stock-based compensation expense, and corporate costs incurred during 2020 associated with the sale of Personal Care Films.

As a percentage of sales, selling, general and administrative (“SG&A”) and R&D expenses were 9.8% in 2021 compared with 12.3% in 2020.

SG&A and R&D expenses were down year-over-year, while net sales increased.

Decreased spending is primarily due to non-recurring corporate costs associated with the divested Personal

Care Films business, lower R&D spending in PE Films, lower stock-based compensation, and nonrecurring SG&A expenses related to the Bright View Technologies divestiture at the end of 2020.

Plant shutdowns, asset impairments, restructurings and other.

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Aluminum Extrusions:

Losses from sale of assets, investment writedowns and other items:

(Gains) losses from sale of assets, investment writedowns and other items:

Consulting expenses for ERP feasibility study 1

$ — $ — $ — $ 0.3 $ 0.3

Futura intangible amortization out-of-period adjustment 6

— — — (0.9) (0.9)

Vacation accrual policy change 5

— — — (2.9) (2.9)

Environmental charges at Newnan, Georgia plant 3

— — 0.1 0.1 0.2

COVID-19-related expenses 2

COVID-19-related expenses, net of relief 2

(0.2) 0.3 0.1 (0.1) 0.1

Total for Aluminum Extrusions $ (0.2) $ 0.3 $ 0.2 $ (3.5) $ (3.2)

Losses associated with plant shutdowns, asset impairments and restructurings:

Surface Protection restructuring costs - severance $ — $ — $ — $ 1.6 $ 1.6

(Gains) losses associated with plant shutdowns, asset impairments and restructurings:

Other restructuring costs - severance $ — $ — $ 0.1 $ 0.3 $ 0.4

(Gains) losses from sale of assets, investment writedowns and other items:

Vacation accrual policy change 5

— — — (0.5) (0.5)

COVID-19-related expenses 2

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Total for PE Films $ 0.2 $ 0.1 $ 0.2 $ (0.1) $ 0.4

Professional fees associated with:

internal control over financial reporting;

business development activities;

and implementation of new accounting guidance 2

$ 1.8 $ 1.8 $ 0.6 $ 1.3 $ 5.5

Accelerated recognition of stock option-based compensation 2

— 0.1 — — 0.1

Corporate costs associated with the divestiture of Personal Care Films 2

— — 1.1 (0.3) 0.8

Loss on sale of Bright View 3

— — — 2.3 2.3

Write-down of investment in Harbinger Capital Partners Special Situations Fund 3

0.2 — 0.1 0.1 0.4

Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the Special Dividend 2

— — — 0.4 0.4

Total for Corporate $ 2.0 $ 1.9 $ 1.8 $ 3.8 $ 9.5

Included in “Cost of goods sold” in the consolidated statements of income.

Included in “Selling, general and administrative” in the consolidated statements of income.

Included in “Other income (expense), net” in the consolidated statements of income.

Interest Expense.

Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.1 million and $0.3 million capitalized in 2020 and 2019, respectively), was $2.6 million in 2020, compared to $4.1 million for 2019.

Average debt outstanding and interest rates were as follows:

(In millions, except percentages) 2020 2019

Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:

Average outstanding debt balance $ 33.5 $ 85.0

Average interest rate 2.3 % 4.0 %

2019 versus 2018

Sales in 2019 decreased by 3.0% compared with 2018 due to lower sales in Aluminum Extrusions partially offset by higher sales in PE Films and Flexible Packaging Films.

Net sales decreased 7.6% in Aluminum Extrusions primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.

Net sales increased 4.8% in PE Films primarily due to higher sales volume and increased selling prices.

Net sales increased in Flexible Packaging Films by 8.2% primarily due to higher sales volume and increased selling prices.

For more information on changes in net sales and volume, see the Segment Analysis below.

Operating Costs and Expenses.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 18.9% in 2019 versus 17.0% in 2018.

The gross profit margin in Aluminum Extrusions increased primarily as a result of higher selling prices.

The gross profit margin in PE Films increased primarily due to higher profits in Surface Protection as a result of higher sales volume and increased selling prices.

The gross profit margin in Flexible Packaging Films was essentially unchanged from 2018 to 2019.

For more information on changes in operating costs and expenses, see the Segment Analysis below.

Selling, General and Administrative.

As a percentage of sales, SG&A and R&D expenses were 10.2% in 2019, which increased from 8.8% in 2018.

The increase in SG&A and R&D expenses as a percentage of sales can be primarily attributed to lower sales for Aluminum Extrusions.

Increased spending was due to higher stock-based compensation and consulting fees for remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting, business development activities and implementation of new accounting guidance.

Plant shutdowns, asset impairments, restructurings and other.

Pre-tax losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in 2019 and 2018 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 5 to the Consolidated Financial Statements in Item 15 and are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted.

A discussion of unrealized gains and losses on investments can also be found in Note 4 to the Consolidated Financial Statements in Item 15 and additional information on restructuring costs can be found in Note 17 to the Consolidated Financial Statements in Item 15.

($ in millions) Q1 Q2 Q3 Q4 2019

Aluminum Extrusions:

Flexible Packaging Films:

(Gains) losses from sale of assets, investment writedowns and other items:

Wind damage to roof of Elkhart, Indiana plant 2

$ — $ — $ 0.3 $ (0.4) $ (0.1)

Environmental charges at Carthage Tennessee plant 1

— — 0.4 0.2 0.6

Total for Aluminum Extrusions $ — $ — $ 0.7 $ (0.2) $ 0.5

Losses associated with plant shutdowns, asset impairments and restructurings:

Write-off of films production line - Guangzhou, China facility $ 0.4 $ — $ — $ — $ 0.4

Surface Protection restructuring costs - severance — — 0.1 0.2 0.3

Total for PE Films $ 0.4 $ — $ 0.1 $ 0.2 $ 0.7

Professional fees associated with:

internal control over financial reporting;

business development activities;

and implementation of new accounting guidance 2

$ 0.9 $ 0.9 $ 1.5 $ 0.2 $ 3.5

Accelerated recognition of stock option-based compensation 2

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 taxes 2,4

$ — $ (8.5) $ — $ — $ (8.5)

Environmental costs not associated with a business unit 2

COVID-19-related expenses 2

— — — 0.1 0.1

Total for Corporate $ 0.9 $ 0.9 $ 1.5 $ 2.1 $ 5.4

Included in “Cost of goods sold” in the consolidated statements of income.

Included in “Selling, general and administrative” in the consolidated statements of income.

($ in millions) Q1 Q2 Q3 Q4 2018

Aluminum Extrusions:

Losses associated with plant shutdowns, asset impairments and restructurings:

Total for Flexible Packaging Films $ — $ (8.5) $ — $ 0.1 $ (8.4)

(Gains) losses associated with plant shutdowns, asset impairments and restructurings:

Costs, net of gain associated with the sale of the Lake Zurich manufacturing facility assets $ 0.2 $ 0.2 $ (0.2) $ (0.1) $ 0.1

Other restructuring costs - severance — — — 0.2 0.2

(Gains) losses from sale of assets, investment writedowns and other items:

Wind damage to roof of Elkhart, Indiana plant 2

— — 0.1 — 0.1

Environmental charges at Carthage Tennessee plant 1

Professional fees associated with business development activities and other 2

0.8 0.8 0.7 1.6 3.9

Total for Aluminum Extrusions $ 0.1 $ — $ 0.3 $ 0.1 $ 0.5

Losses associated with plant shutdowns, asset impairments and restructurings:

Surface Protection restructuring costs - severance $ — $ — $ — $ 0.2 $ 0.2

(Gains) losses from sale of assets, investment writedowns and other items:

Costs to prepare a market study 2

Professional fees associated with internal control over financial reporting 2

0.2 0.9 0.8 1.2 3.1

Gain on reversal of contingent liability 3

Write-down of investment in Harbinger Capital Partners Special Situations Fund 2

0.1 0.4 — — 0.5

Total for PE Films $ — $ — $ 0.2 $ (0.1) $ 0.1

Professional fees associated with:

internal control over financial reporting;

and implementation of new accounting guidance 2

Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 Special Dividend 1

0.4 0.1 (0.1) — 0.4

Write-down of investment in Harbinger Capital Partners Special Situations Fund 3

Transition service fees, net of corporate costs associated with the divested Personal Care Films business 2

(0.3) (0.3) 0.1 0.2 (0.3)

Business development projects 2

Vacation accrual policy change 5

— — — (0.4) (0.4)

Total for Corporate $ 1.4 $ 2.1 $ 1.3 $ 2.7 $ 7.5

Included in “Cost of goods sold” in the consolidated statements of income.

Included in “Selling, general and administrative” in the consolidated statements of income.

Included in “Selling, general and administrative expenses” in the consolidated statements of income.

Included in “Other income (expense), net” in the consolidated statements of income.

Included in "Costs of goods sold" in the consolidated statements of income.

For more information, see Note 9 to the consolidated financial statements in Item 15.

For more information, see Note 6 to the consolidated financial statements in Item 15.

Included in “Amortization of identifiable intangibles” in the consolidated statements of income.

Interest Expense.

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Average interest rate 1.8 % 2.3 %

Segment Analysis.

A summary of operating results for 2019 versus 2018 for each of the Company’s reporting segments is shown below.

Aluminum Extrusions

A summary of results for Aluminum Extrusions is provided below:

Year Ended Favorable/

(In thousands, except percentages) December 31, (Unfavorable)

2019 2018 % Change

Sales volume (lbs) 208,249 223,866 (7.0) %

Net sales $ 529,602 $ 573,126 (7.6) %

Ongoing operations:

EBITDA $ 65,683 $ 65,479 0.3 %

Depreciation & amortization* (16,719) (16,866) 0.9 %

EBIT** $ 48,964 $ 48,613 0.7 %

Capital expenditures $ 17,855 $ 12,966

* Excludes pre-tax accelerated amortization of trade names of $10.0 million in the year ended December 31, 2019.

** See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP.

Net sales in 2019 decreased versus 2018 primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs.

EBITDA from ongoing operations in 2019 increased slightly in comparison to 2018.

Excluding the adverse impact of the accounting for inventories under the last in, first out method in the fourth quarter of 2019 versus 2018 ($1.5 million), EBITDA from ongoing operations increased $1.7 million despite a 7% decline in sales volume.

The increase was primarily due to higher pricing ($22.8 million) and fabrication profits ($1.0 million), partially offset by lower sales volume ($8.7 million), increased labor and employee-related expenses ($7.4 million), higher supplies, maintenance, utilities and other operating costs ($2.0 million), increased freight costs ($2.0 million) and increased general and administrative expenses ($1.9 million).

A summary of results for PE Films is provided below:

Year Ended Favorable/

(In thousands, except percentages) December 31, (Unfavorable)

2019 2018 % Change

Sales volume (lbs) 43,983 40,173 9.5 %

Net sales $ 133,807 $ 127,708 4.8 %

Ongoing operations:

EBITDA $ 41,133 $ 32,404 26.9 %

Depreciation & amortization (5,860) (6,201) 5.5 %

EBIT* $ 35,273 $ 26,203 34.6 %

Capital expenditures $ 8,567 $ 2,523

* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP.

Net sales in 2019 increased by $6.1 million versus 2018 primarily due to higher sales in Surface Protection.

Surface Protection’s sales increased $5.8 million due to higher sales volume and increased selling prices, partially offset by unfavorable product mix.

EBITDA from ongoing operations in 2019 increased by $8.7 million versus 2018 primarily due to:

• A $6.8 million increase from Surface Protection, primarily due to higher selling prices ($6.0 million), quality claims in 2018 that did not recur in 2019 ($1.2 million), production efficiencies ($1.4 million) and favorable raw material costs ($1.9 million), partially offset by unfavorable mix (net impact of $2.0 million) and higher fixed manufacturing and general and administrative costs ($1.5 million);

• A $1.6 million increase from Pottsville Packaging primarily related to higher sales volume ($1.5 million), increased productivity ($0.5 million) and increased selling prices ($0.2 million), partially offset by unfavorable product mix ($1.0 million).

Flexible Packaging Films

A summary of results for Flexible Packaging Films is provided below:

Year Ended Favorable/

(Unfavorable)

(In thousands, except percentages) December 31,

Sales volume (lbs) 105,276 98,994 6.3 %

Net sales $ 133,935 $ 123,830 8.2 %

Ongoing operations:

EBITDA $ 14,737 $ 11,154 32.1 %

Depreciation & amortization (1,517) (1,262) (20.2) %

EBIT* $ 13,220 $ 9,892 33.6 %

Capital expenditures $ 8,866 $ 5,423

* See the table in Item 6 for a reconciliation of this non-GAAP measure to GAAP.

Net sales in 2019 increased versus 2018 primarily due to higher sales volume and increased selling prices.

Terphane’s EBITDA from ongoing operations in 2019 increased by $3.6 million versus 2018 due to:

• Higher volume ($2.6 million) and higher selling prices ($1.6 million), partially offset by higher fixed and variable costs, including costs related to a restarted line ($2.0 million);

• Net favorable foreign currency translation of Real-denominated operating costs of $0.4 million;

• Foreign currency transaction gains of $1.0 million in 2019 versus losses of $0.8 million in 2018.

Liquidity and Capital Resources

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Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.

• Accounts and other receivables decreased $2.8 million (3.1%).

◦ Accounts and other receivables in Aluminum Extrusions decreased by $3.3 million primarily due to lower sales volume and lower sales prices from the pass-through of lower metal costs, partially offset by an increase in average selling prices.

• Accounts and other receivables increased $17.0 million or 19.7%.

◦ Accounts and other receivables in Aluminum Extrusions increased by $17.1 million primarily due to an increase in average selling prices to cover significantly higher aluminum raw material costs and higher operating costs, partially offset by lower sales volume and improved collection efforts in 2021.

DSO (computed using trailing 12 months net sales and a rolling 12-month average of accounts and other receivables balances) was approximately 47.6 days in 2021 and 47.5 days in 2020.

◦ Accounts and other receivables in PE Films decreased by $0.3 million as the removal of assets related to Bright View was partially offset by increased accounts receivables in Surface Protection due to higher sales.

◦ Accounts and other receivables in PE Films decreased by $0.6 million primarily due to lower volume and unfavorable mix associated with the previously disclosed customer product transitions in Surface Protection, partially offset by higher pricing associated with the pass-through of increased resin costs.

DSO was approximately 28.5 days in 2021 and 30.2 days in 2020.

◦ Accounts and other receivables in Flexible Packaging Films remained consistent compared to the prior year.

◦ Accounts and other receivables in Flexible Packaging Films increased by $1.3 million primarily due to higher selling prices from the pass-through of higher resin costs and favorable product mix, partially offset by lower sales volume.

DSO was approximately 40.0 days in 2021 and 41.0 days in 2020.

• Inventories increased $2.2 million (3.5%).

• Inventories increased $22.1 million or 33.3%.

◦ Inventories in Aluminum Extrusions increased by $17.4 million primarily due to higher average aluminum prices and COVID-19-related operational and production inefficiencies.

DIO (computed using trailing 12 months costs of goods sold calculated on a first in, first out basis and a rolling 12-month average of inventory balances calculated on the first-in, first-out basis) was approximately 41.4 days in 2021 and 39.3 days in 2020.

◦ Inventories in PE Films increased by $0.7 million primarily due to higher raw material levels in Surface Protection partially offset by the removal of assets related to Bright View.

◦ Inventories in PE Films decreased by $2.1 million primarily due to lower planned raw material levels as a result of lower sales volume in 2021 compared to 2020.

DIO was approximately 62.8 days in 2021 and 59.2 days in 2020.

◦ Inventories in Flexible Packaging Films decreased by $1.6 million primarily due to increased sales volume and lower resin costs partially offset by higher raw material levels.

◦ Inventories in Flexible Packaging Films increased by $6.8 million primarily related to higher average resin prices, higher finished good levels due to lower than anticipated sales demand and higher planned raw material levels due to resin supply issues.

DIO was approximately 93.1 days in 2021 and 89.4 days in 2020.

• Net property, plant and equipment decreased by $7.0 million (4.0%) primarily due to depreciation expenses of $23.4 million, a reduction from the effect of changes in foreign exchange rates of $3.3 million and the removal of assets related to Bright View of $2.3 million, partially offset by capital expenditures of $21.4 million.

• Identifiable intangible assets, net decreased by $3.8 million (16.9%) primarily due to amortization expense of $3.0 million and the removal of assets related to Bright View of $0.6 million.

• Accounts payable increased by $2.4 million (2.8%).

◦ Accounts payable in Aluminum Extrusions increased by $3.3 million, primarily due to increased inventory levels as a result of COVID-19-related lower demand.

• Net property, plant and equipment increased by $3.8 million (2.3%) primarily due to capital expenditures of $27.8 million, partially offset by depreciation expense of $22.1 million and a reduction from the effect of changes in foreign exchange rates of $0.8 million.

• Goodwill and identifiable intangible assets, net decreased by $1.8 million (2.0%) primarily due to amortization expense.

• Accounts payable increased by $34.1 million or 38.0%.

◦ Accounts payable in Aluminum Extrusions increased by $23.7 million, primarily due to higher average aluminum prices and favorable payment terms with certain vendors.

DPO (computed using trailing 12 months costs of goods sold calculated on a first in, first out basis and a rolling 12-month average of accounts payable balances) was approximately 60.1 days in 2021 and 53.1 days in 2020.

◦ Accounts payable in PE Films decreased by $3.2 million primarily due to effective working capital management and the normal volatility associated with the timing of payments.

◦ Accounts payable in PE Films increased by $4.4 million primarily due to higher resin costs related to raw material purchases in 2021.

DPO was approximately 44.0 days in 2021 and 36.8 days in 2020.

◦ Accounts payable in Flexible Packaging Films increased by $0.5 million, primarily due the negotiation of longer payment terms partially offset by reduced resin costs.

◦ Accounts payable in Flexible Packaging Films increased by $6.7 million, primarily due to higher resin costs related to raw material purchases in 2021 and favorable payment terms with certain vendors.

DPO was approximately 68.2 days in 2021 and 61.7 days in 2020.

Net cash provided by operating activities was $70.6 million in 2021 compared to $74.4 million in 2020.

The decrease is primarily due to significant net working capital efficiencies in 2019 versus 2020 ($28.5 million), a dividend received from kaléo in 2019 ($17.6 million), and higher pension and postretirement benefit plan contributions ($4.1 million), partially offset by higher EBITDA from ongoing operations for business segments of $9.3 million in 2020 versus the prior period.

Cash provided by investing activities was $32.9 million in 2020 compared to cash used in investing activities of $39.9 million in 2019.

Cash provided by investing activities in 2020 includes the net cash proceeds received for the sale of Personal Care Films ($55.1 million) and Bright View ($1.1 million), partially offset by capital expenditures of $23.4 million.

Cash used in investing activities in 2019 includes capital expenditures of $50.9 million, which was partially offset by $10.9 million of cash proceeds received for the sale of the PE Films’ Shanghai manufacturing facility.

Net cash used in financing activities of $125.6 million in 2020 compared to $77.3 million in 2019.

The increase is primarily due to higher net borrowings of $151.5 million under the Credit Agreement (as defined below) and higher dividend payments to shareholders of $200.7 million primarily due to the $200 million Special Dividend (partially funded from borrowings under the Credit Agreement, as defined below), partially offset by lower debt financing costs of $1.1 million.

On December 1, 2020, Tredegar entered into an amendment (“Amendment No.

1”) to its five-year secured revolving credit agreement (the “Credit Agreement”), which matures in June 2024.

The material changes from Amendment No.

1 are as follows:

• Aggregate borrowings available under the facility were reduced from $500 million to $375 million.

• The definition of Credit EBITDA was amended to permit certain adjustments for prepayment of pension obligations on a pro forma basis.

• Amendments were made to certain of the negative covenants, including, among other amendments, the following:

(i) the restricted payments covenant was amended to permit a one-time special dividend payment of up to $200 million and allow for an aggregate amount of dividend payments up to $75 million subsequent to Amendment No.

1 through the maturity date of the Credit Agreement;

(ii) the asset disposition covenant was amended to reduce the general basket to 20% of consolidated total assets over the life of the facility and was reset as of December 1, 2020;

and (iii) the indebtedness covenant was amended to reduce several baskets to $25 million each.

The decrease was primarily due to higher net working capital ($13.8 million), partially offset by lower pension and postretirement benefit plan contributions ($7.0 million) and lower operating lease payments ($1.1 million) in 2021 compared to 2020.

Net cash provided by investing activities was $24.5 million in 2021 compared to $32.9 million in 2020.

The decrease was primarily due to higher capital expenditure spending of $4.0 million in 2021 and cash proceeds from the sale of Personal Care Films ($55.1 million) and Bright View Technologies ($1.1 million) in 2020, partially offset by cash proceeds received in 2021 in connection with the sale of the Company’s investment in kaléo ($47.1 million) and the sale of the Lake Zurich manufacturing facility assets ($4.7 million).

Net cash used in financing activities was $76.8 million in 2021 compared to $125.6 million in 2020.

The decrease was primarily due to a special dividend of $200 million paid to shareholders in 2020, partially offset by higher net borrowings ($153.0 million) in 2020 under the Credit Agreement (as defined below).

The Company believes that existing borrowing availability, current cash balances and cash flow from operations will be sufficient to satisfy short term material cash requirements related to working capital, capital expenditure, debt repayments and dividend requirements for at least the next twelve months.

In the longer term, liquidity will depend on many factors, including results of operations, the timing and extent of capital expenditures, changes in operating plans, or other events that would cause the Company to seek additional financing in future periods.

At December 31, 2021, Tredegar had cash and cash equivalents of $30.5 million, including funds held in locations outside the U.S.

of $16.4 million.

Tredegar has a five-year secured revolving credit agreement (the “Credit Agreement”) providing for aggregate borrowings in an amount of $375 million, which matures in June 2024.

Net capitalization and indebtedness as defined under the Credit Agreement as of December 31, 2021 were as follows:

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At December 31, 2021, the interest rate on debt under the Credit Agreement existing at that date was priced at one-month LIBOR plus the applicable credit spread of 150.0 basis points.

Under the Credit Agreement, borrowings are permitted up to $375 million, and approximately $241 million was available to borrow at December 31, 2020, based upon the most restrictive covenant within the Credit Agreement.

The most restrictive covenants in the Credit Agreement include:

• Maximum indebtedness-to-Credit EBITDA (“Leverage Ratio”) of 4.00x;

• Minimum Credit EBITDA-to-interest expense of 3.00x;

• Maximum aggregate distributions to shareholders over the remaining term of the Credit Agreement of $75 million;

provided, that if the Leverage Ratio of equal to or greater than 3.00x, a limitation on such payments for the succeeding quarter at the greater of (i) $4.75 million and (ii) 50% of consolidated net income for the most recent fiscal quarter.

The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries.

At December 31, 2021, based upon the most restrictive covenant within the Credit Agreement, available credit under the Credit Agreement was approximately $287 million.

Total debt outstanding was $73 million and $134 million as of December 31, 2021 and 2020, respectively.

The computations of Credit EBITDA, the leverage ratio and interest coverage ratio as defined in the Credit Agreement are presented below along with the related most restrictive covenants.

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Most restrictive covenants as defined in Credit Agreement:

Maximum permitted aggregate amount of dividends that can be paid by Tredegar subsequent to Amendment No.

1 of the Credit Agreement ($75,000) 75,000

Available balance of maximum permitted aggregate amount of dividends that can be paid by Tredegar during the remaining term of the Credit Agreement ($75,000 minus $20,187 of dividends paid after December 1, 2020)

Maximum leverage ratio permitted 4.00x

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Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated.

The Company believes that existing borrowing availability, current cash balances and cash flow from operations will be sufficient to satisfy working capital, capital expenditure and dividend requirements for at least the next twelve months.

At December 31, 2020, Tredegar had cash and cash equivalents of $11.8 million, including funds held in locations outside the U.S.

of $9.4 million.

Contractual Obligations, Contingent Liabilities and Commitments

Following is a table which summarizes the continuing operations contractual obligations of Tredegar as of December 31, 2020:

Payments Due by Period

(In millions) 2021 2022 2023 2024 2025 Remainder Total

Principal payments $ — $ — $ — $ 134.0 $ — $ — $ 134.0

Estimated interest expense 2.3 2.3 2.3 1.1 — — 8.0

Estimated contributions required:

Defined benefit plans 11.7 12.0 11.9 11.3 9.7 9.5 66.1

Other postretirement benefits 0.5 0.5 0.5 0.5 0.5 2.1 4.6

Material Cash Requirements for Known Contractual and Other Obligations

The Company’s material cash requirements from known contractual and other obligations as of December 31, 2021 were as follows:

Long-term debt and interest payments

As of December 31, 2021, the Company had outstanding debt of $73.0 million with contractual payments due in June 2024.

Estimated future interest payments associated with outstanding debt total $3.2 million, with $1.3 million payable within the next 12 months.

Pension and other postretirement obligations

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 borrowed funds under its revolving credit agreement and contributed a $50 million Special Contribution to the pension plan to reduce its underfunding and as part of a program within the pension plan to hedge or fix the expected future contributions that will be needed by the Company through the settlement process.

The Company estimates that, with the Special Contribution, there will be no required minimum contributions to the pension plan until final settlement.

Tredegar has determined that it is not practicable to estimate additional cash requirements beyond 2022 as the ultimate settlement of the benefit obligation may differ from the projected benefit obligation of $314 million as of December 31, 2021.

In addition to providing pension benefits, the Company provides postretirement life insurance and health care benefits for certain groups of employees.

As of December 31, 2021, the aggregate benefit obligation for the Company’s other post retirement plans was $7.4 million, of which the Company expects to pay $0.5 million in the next 12 months.

Capital expenditure commitments

3.2 2.9 2.6 2.5 2.4 7.4 21.0

Estimated obligations relating to uncertain tax positions (3)

0.1 — — — — 0.6 0.7

4.2 0.6 — — — — 4.8

Total $ 23.3 $ 21.4 $ 17.3 $ 149.4 $ 12.6 $ 19.6 $ 243.6

(1) Estimated minimum required contributions for defined benefit plans and benefit payments for other postretirement plans are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases and health care cost trends.

The expected defined benefit plan contribution estimates for 2021 through 2030 were determined under provisions of the Pension Protection Act of 2006 using the preliminary assumptions chosen by Tredegar for the 2021 plan year.

Tredegar has determined that it is not practicable to present defined benefit contributions and other postretirement benefit payments beyond 2030.

(2) Contractual lease payments for 2021 include $0.5 million of short term lease payments and $0.3 million of variable lease costs.

(3) Amounts for which reasonable estimates about the timing of payments cannot be made are included in the remainder column.

(4) Includes contractual severance and other miscellaneous contractual arrangements.

See “ Projected Capital Expenditures and Depreciation & Amortization ” within “ Operations Overview ” above in this Item 7 for discussion of the Company’s planned investment in capital expenditures in 2022, a portion of which represents contractual commitments that existed as of December 31, 2021.

Operating Leases

The Company enters into various operating leases primarily for real estate, office equipment and vehicles.

See Note 4 to the consolidated financial statements for additional information.

Uncertain Tax Positions

As of December 31, 2021, unrecognized tax benefits on uncertain tax positions were $0.6 million.

Tax payments resulting from the successful challenge by the taxing authority on uncertain tax positions taken by Tredegar would possibly result in the payment of estimated interest and penalties of $0.1 million if tax payments were made as a result of a successful challenge by the taxing authority on uncertain tax positions.

Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain.

Therefore, the Company is unable to make a reasonably reliable estimate of the timing of payments beyond 12 months.

See Note 12 to the Consolidated Financial Statements in Item 15 for additional information.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 the sellers or third parties involved in the transaction agree to indemnify Tredegar, for certain liabilities or risks related to the assets or business.

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Quantitative and Qualitative Disclosures about Market Risk

Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, Terephthalic Acid (“PTA”) and Monoethylene Glycol (“MEG”) prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets.

Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, PTA and MEG prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets.

See Liquidity and Capital Resources regarding interest rate exposures related to borrowings under the Credit Agreement.

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However, under certain agreements, changes in resin prices are not passed through for a period of 90 days or more.

In response to unprecedented cost increases and supply issues for polyethylene and polypropylene resin, Tredegar Surface Protection implemented a quarterly resin cost pass-through mechanism, effective July 1, 2021, for all products and customers not previously covered by such arrangements.

Pricing on the remainder of the business is based upon raw material costs and supply/demand dynamics within the markets that the Company competes.

Polyester resins, MEG and PTA used in flexible packaging films produced in Brazil are primarily purchased domestically, with other sources available mostly from Asia and the U.S.

Given the nature of these products as commodities, pricing is derived from Asian pricing indexes.

Given the nature of these products as commodities, pricing is

derived from Asian pricing indexes.

The volatility of the average quarterly prices for polyester fibers in Asia, which is representative of polyester resin (a primary raw material for Flexible Packaging Films) pricing trends, is shown in the chart below:

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Operating Costs”) are quoted or priced in Brazilian Real.

This mismatch, together

with a variety of economic variables impacting currency exchange rates, causes volatility that could negatively or positively impact EBITDA from ongoing operations for Flexible Packaging Films.

This mismatch, together with a variety of economic variables impacting currency exchange rates, causes volatility that could negatively or positively impact EBITDA from ongoing operations for Flexible Packaging Films.

The Company estimates annual net costs of R$150 million for the net mismatch translation exposure between Terphane Ltda.’s U.S.

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Tredegar estimates that the change in the value of foreign currencies relative to the U.S.

Dollar on PE Films had an unfavorable impact on EBITDA from ongoing operations in PE Films of $0.7 million in 2020 compared to 2019 and an unfavorable impact on EBITDA from ongoing operations of $0.5 million in 2019 compared with 2018.

Dollar on PE Films had a favorable impact on EBITDA from ongoing operations in PE Films of $0.3 million in 2021 compared to 2020 and an unfavorable impact on EBITDA from ongoing operations of $0.7 million in 2020 compared with 2019.

Trends for the Brazilian Real and Chinese Yuan are shown in the chart below:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis