What changed in this filing

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Item 1A. Risk Factors

2023-03-16 compared with 2022-03-11 · 85 added, 76 removed, 104 unchanged (61% of the section changed)

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Risks Related to all Tredegar Businesses

• Our results of operations, financial condition and cash flows could be adversely affected by pandemics, epidemics or other public health emergencies, such as coronavirus (“ COVID-19”) and emerging variants.

Our business, results of operations, financial condition, and cash flows have been, and may continue to be, adversely affected by pandemics, epidemics or other public health emergencies, such as the global outbreak of COVID-19 and emerging variants.

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.

The outbreak resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

However, there have been increases in COVID-19 cases in many areas caused by a combination of the potentially more contagious variants of the virus, as well as vaccine hesitancy and low vaccination rates in many areas of the U.S.

The extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time, including:

• the duration, spread and intensity of the pandemic;

• the availability, usage and effectiveness of vaccines, low vaccination rates in many areas of the U.S., and employee hesitancy to get vaccinated;

• increasing costs of labor, raw materials, and global transportation and logistics resources;

• a sustained labor shortage due to excessive absenteeism as a result of COVID-19 cases and/or exposures and increased turnover rates within our employee base impacting our ability to meet desired shipping levels;

• the ability of our suppliers, contractors and third-party logistics providers to meet their obligations to us (including supplying us with essential raw materials or shipping finished goods to our customers) on a timely basis and at previously anticipated costs without significant disruption, and our ability to identify alternative sources of materials and services, if necessary;

• our ability to continue to meet our customers’ needs in the event of the suspension or interruption of essential elements of our manufacturing and supply arrangements and activities such as, the continued availability of raw materials, transportation, labor and production capacity at previously anticipated costs;

• the effect of the COVID-19 pandemic on our customers, including their ability to remain in operation and pay for the products purchased from us on a timely basis;

• the impact of the COVID-19 pandemic on the financial and credit markets and economic activity generally, including our ability to maintain compliance with financial covenants, access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all.

While it is not possible at this time to estimate the impact that any particular epidemic, including COVID-19, could have on the Company’s business, the extent of that impact would likely be affected by factors outside of our control such as the severity, duration and spread of such an epidemic, the measures taken by the governments of countries affected and the ability of our customers and consumers to access government programs providing liquidity and support during the crisis.

The impact of an epidemic on our employees, our customers, our supply chains, demand for our products, our ability to supply customers, our operating costs and our other business activities, could adversely affect our financial condition, results of operations and cash flows.

For more information on the effect of COVID-19 on our business and financial condition, refer to “ The Impact of COVID-19 ” in Item 7.

• Tredegar’s performance is influenced by costs incurred by its operating companies, including, for example, the cost of raw materials and energy.

These costs include the cost of aluminum (the raw material on which Aluminum Extrusions primarily depends), resin (the raw material on which PE Films primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity, diesel fuel and paint.

Aluminum, resin and natural gas prices are volatile as shown in the charts in Quantitative and Qualitative Disclosures in Item 7.

The Company continues to face inflationary pressures stemming from the COVID-19 operating environment, including notable increases in costs for raw materials, labor and freight.

Additionally, geopolitical tensions, including deteriorating relations between the United States and Russia

resulting from the current situation involving Russia and Ukraine, could result in economic sanctions, tariffs, import-export restrictions and retaliatory actions that all have the potential to adversely impact the cost of raw materials and energy.

Aluminum, resin and natural gas prices are volatile as shown in the charts in Item 7a.

The Company continues to face inflationary pressures, including notable increases in costs for raw materials, labor and freight.

Additionally, geopolitical tensions, including deteriorating relations between the United States and Russia resulting from the invasion of Russia into Ukraine, could result in the implementation of additional economic sanctions, tariffs, import-export restrictions and retaliatory actions that all have the potential to adversely impact the cost of raw materials and energy.

The Company attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that higher prices can effectively be passed through to customers or that Tredegar will be able to offset fully or on a timely basis the effects of higher raw material and energy costs through price increases or pass-through arrangements.

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However, a disruption could occur as a result of any number of events:

an equipment failure with repairs requiring long lead times, labor stoppages or shortages, cybersecurity attacks, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe weather conditions, including potential flooding at the Aluminum Extrusions facility located in Carthage, TN.

A material disruption in one of the Company’s operating locations could negatively impact production and the Company’s consolidated financial condition, results of operations and cash flows.

• Tredegar has an underfunded defined benefit (pension) plan.

Tredegar sponsors a pension plan that covers certain hourly and salaried employees in the U.S.

The plan was closed to new participants in 2007, and substantially frozen to benefit accruals for active participants in 2014.

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

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

In connection therewith, on February 9, 2022, the Company borrowed funds under its revolving credit agreement to contribute $50 million to the pension plan (the “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.

As of December 31, 2021 (and before the Special Contribution), the plan was underfunded under U.S.

generally accepted accounting principles (“GAAP”) measures by $69.5 million.

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

The ultimate settlement benefit obligation may differ from the projected benefit obligation (“PBO”) of $314 million as of December 31, 2021, depending on market factors for buyers of pension obligations at the time of settlement.

Additionally, factors that could cause actual future contributions by the Company to settle the pension plan to differ from expectations include, without limitation, the change in the values of pension plan assets and liabilities up through initiating hedging activities to fix underfunding amounts and assumptions thereafter relating to differences between the ultimate settlement benefit obligation and the PBO, census data, administrative costs, the effectiveness of hedging activities and discounts required to liquidate non-public securities held by the plan.

• Noncompliance with any of the covenants in the Company’s $375 million revolving credit facility, as amended on December 1, 2020, which matures in June 2024, could result in all debt under the agreement outstanding at such time becoming due and limiting the Company’s borrowing capacity, which could have a material adverse effect on its consolidated financial condition and liquidity.

The credit agreement governing Tredegar’s revolving credit facility contains restrictions and financial covenants that, if violated, could restrict the Company’s operational and financial flexibility.

Failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition and liquidity.

• A failure in the Company’s information technology systems as a result of cybersecurity attacks or other causes could negatively affect Tredegar’s business.

The Company depends on information technology (“IT”) to record and process customers’ orders, manufacture and ship products in a timely manner, secure its production processes and know-how, maintain the financial accuracy of its business records and maintain personally identified information of its employees.

An IT system failure due to computer viruses, internal or external security breaches, cybersecurity attacks or other malicious causes could disrupt our operations and prevent us from being able to process transactions with our customers, operate our manufacturing facilities and properly report transactions in a timely manner.

The Company depends on information technology (“IT”) to record and process customer orders, manufacture and ship products in a timely manner, secure its production processes and know-how, maintain the financial accuracy of its business records and maintain personally identifiable information of its employees.

operate our manufacturing facilities and properly report transactions in a timely manner.

Increased global IT security threats and cyber-crime pose a potential risk to the security and availability of the Company’s IT systems, networks and services, including those that are managed, hosted, provided or used by third parties, as well as to the confidentiality, availability and integrity of the Company’s data.

Additionally, increased cybersecurity risk arises due to certain employees working remotely during the COVID-19 pandemic.

Additionally, increased cybersecurity risk arises due to certain employees working remotely.

To date, interruptions of the Company’s IT systems have been infrequent and have not had a material impact on the Company’s operations.

A significant protracted failure of or security breach of the IT systems, networks or service providers the Company relies upon, or a loss or disclosure of business or other sensitive information, or personally identified information, as a result of a cybersecurity incident or other cause, could result in substantial costs to the Company, damage to the Company’s reputation, regulatory enforcement actions and lawsuits and could adversely affect the Company’s results of operations, financial condition or cash flows.

A significant prolonged failure of or security breach of the IT systems, networks or service providers the Company relies upon, or a loss or disclosure of business or other sensitive information, or personally identifiable information, as a result of a cybersecurity incident or other cause, could result in substantial costs to the Company, damage to the Company’s reputation, regulatory enforcement actions and lawsuits and could adversely affect the Company’s results of operations, financial condition or cash flows.

• Our failure to continue to attract, develop and retain certain key officers or employees could adversely affect our businesses.

Our success depends upon the efforts and abilities of key personnel, many of whom are longstanding employees.

The loss of any of these key personnel could deplete our institutional knowledge base and negatively affect our ability to efficiently operate our businesses.

Certain roles have experienced high turnover in recent years, and we are experiencing an increasingly competitive labor market.

Job market dynamics have been impacted by macroeconomic conditions, the effects of the COVID-19 pandemic and the “great resignation.” Increased employee turnover could hinder our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and cash flows.

• The Company has identified material weaknesses in its internal control over financial reporting.

The Company’s failure to establish and maintain effective internal control over financial reporting and to maintain effective disclosure controls and procedures increases the risk of a material misstatement in its consolidated financial statements, and its failure to meet its reporting and financial obligations, could, in turn, have a negative impact on its financial condition.

Since 2019, a total of $7.6 million has been incrementally spent on remediation efforts for management’s outside consultant and design, hiring (including hiring replacements due to high turnover) and training activities.

Maintaining effective internal control over financial reporting is an integral part of producing reliable financial statements.

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“Controls and Procedures” of this Form 10-K (“Item 9A”), the Company’s management concluded that the Company’s internal control over financial reporting was not effective for the periods referred to therein as a result of certain deficiencies that were determined to constitute material weaknesses in the Company’s internal control over financial reporting.

Specifically, the Company did not sufficiently attract, develop, and retain competent resources to fulfill internal control responsibilities and did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting.

As a consequence of these material weaknesses, the Company did not effectively design, implement and operate process-level controls across its financial reporting processes.

Under standards established by the Public Company Accounting Oversight Board, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Under the criteria set forth in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission, a material weakness in the design of monitoring controls indicates that the Company has not sufficiently developed and/or documented internal controls by which management can review and oversee the Company’s financial information to detect and correct material errors or that the personnel responsible for performing the review did not have the sufficient skill set or knowledge of the subject matter to perform a proper assessment.

The Company is in the process of making certain changes in its internal control over financial reporting to remediate the material weaknesses as described in Item 9A.

The implementation of the material aspects of this plan began in the second quarter of 2019 with the continuous significant assistance and support of a well-known outside consultant, and, while meaningful progress has been made, completion has been delayed by the COVID-19 pandemic, turnover in positions relevant to internal controls and the need for additional training.

As of December 31, 2022, the Company continues to revise and execute management’s remediation plan, including the implementation of the new and revised internal controls over financial reporting.

The results of management’s testing of the design, implementation and operating effectiveness of controls identified that the Company continued to have material weaknesses in its internal control over financial reporting as of December 31, 2022;

however, the material weaknesses existing as of December 31, 2022 were limited to certain discrete items within the previously identified material weaknesses as described further in Item 9A.

While progress has been made since 2019, including the remediation of a significant number of process-level control deficiencies throughout our financial reporting processes, the Company experienced significant turnover in positions relevant to its internal control over financial reporting during 2021 and 2022 that impacted the effectiveness of prior training programs and management’s ability to implement control activities that operated for a sufficient period of time to allow management, through testing, to conclude that the control activities were operating effectively during 2022.

To remediate the material weaknesses described in Item 9A, the Company, with the oversight of the Audit Committee and the assistance of management’s outside consultant, has continued to revise its remediation strategy.

The Company is in the process of implementing certain changes in its internal controls to remediate the material weaknesses described above.

As the Company continues to evaluate and work to improve its internal control over financial reporting and disclosure controls and procedures, management may determine to take additional measures to address control deficiencies or modify the remediation plan.

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Moreover, the Company cannot provide assurance that additional material weaknesses will not arise in the future.

See Item 9A for details regarding the numerous activities in the remediation plan that were completed through the fourth quarter of 2021 and the remaining activities that are scheduled for completion in the first half of 2022, in anticipation of conducting management’s testing beginning in the first half of 2022.

The material weaknesses cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

weaknesses cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

The material weaknesses discussed in Item 9A did not result in material misstatements of the Company’s financial statements as of and for the years ended December 31, 2022, 2021 and 2020 or in the intervening interim periods during those respective years.

Any failure to remediate the material weaknesses, or the development of new material weaknesses in its internal control over financial reporting, could result in material misstatements in the Company’s consolidated financial statements and cause it to fail to meet its reporting and financial obligations, which in turn could have a negative impact on its financial condition.

• Tredegar has an underfunded defined benefit (pension) plan.

Tredegar sponsors a pension plan that covers certain hourly and salaried employees in the U.S.

The plan was closed to new participants in 2007, and substantially frozen to benefit accruals for active participants in 2014.

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.

The settlement process has been delayed because of longer-than-expected review times with the Internal Revenue Service (“IRS”).

The Company does not expect issues with receiving approval from the IRS and is hopeful that the entire process will be completed by the end of 2023.

As of December 31, 2022, the plan was underfunded under U.S.

generally accepted accounting principles (“GAAP”) measures by $28 million.

The Company expects there will be no required minimum contributions to the pension plan until final settlement.

The ultimate settlement benefit obligation may differ from the projected benefit obligation (“PBO”) of $246 million as of December 31, 2022, depending on market factors for buyers of pension obligations at the time of settlement.

Additionally, factors that could cause actual future contributions by the Company to settle the pension plan to differ from expectations include, without limitation, differences between the ultimate settlement benefit obligation and the PBO, census data, administrative costs, the effectiveness of hedging activities and discounts required to liquidate non-public securities held by the plan.

• Tredegar is subject to current and future governmental regulation, including environmental laws and regulations, and could become exposed to material liabilities and costs associated with such regulation.

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“Business” of this Form 10-K for a further discussion of this risk factor.

• The transition away from the use of the London interbank offered rate ("LIBOR") settings as an interest rate benchmark may negatively impact our debt agreements and financial position, results of operations and liquidity.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority published the dates that the use of LIBOR as an index for commercial loans will be phased out.

Foreign currency indices, including the British pound, the Euro, and Swiss franc, along with the U.S.

dollar 1-week and 2-month settings ceased after December 31, 2021.

Also, after June 30, 2023, the remaining U.S.

dollar settings will cease.

Our most significant exposure to LIBOR relates to our revolving domestically held credit facility, which may be negatively impacted by renegotiated terms and costs of indebtedness associated with the latter of these transition dates.

In addition, the overall financial markets may be disrupted as a result of the replacement of LIBOR, which could have an adverse effect on our cost of capital and our financial position.

We continue to monitor the LIBOR transition and will work to minimize any impact.

• Noncompliance with any of the covenants in the Company’s $375 million revolving credit facility, as amended and restated on June 29, 2022, which matures in June 2027, could result in all debt under the agreement outstanding at such time becoming due and limiting the Company’s borrowing capacity, which could have a material adverse effect on its consolidated financial condition and liquidity.

Failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the revolving credit facility at such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition and liquidity.

• Our results of operations, financial condition and cash flows have been, and may continue to be, impacted by the Coronavirus (“ COVID-19”).

The COVID-19 pandemic has adversely affected the economy of the United States and other countries around the world, including affecting labor supply and causing supply chain disruptions.

While some of the economic impacts resulting from COVID-19 have eased and many COVID-19 related restrictions have been lifted or relaxed due to advancements in COVID-19 vaccination, testing, and treatment, a rise in infection rates, the emergence of new COVID-19 variants, or any future pandemic could result in, among other things, a reduction in orders placed by our customers who could be closing or curtailing their own operations.

We may also experience labor shortages and supply chain disruptions, including product and raw material shortages, delays, and price increases as a result of the COVID-19 pandemic or any future pandemic.

Our suppliers, contractors, and third-party logistic providers may continue to experience disruptions and delays stemming from labor and supply challenges, and significant disruptions in transport and logistics services due to facility closures, labor constraints, and other challenges.

These challenges may impact our ability to maintain sufficient inventory and to accurately predict demand or lead times, which may inhibit our ability to service customer demand.

Additionally, addressing shortages from our current suppliers may require the Company to procure products from new suppliers or through brokers with whom we have a limited or no prior relationship.

Providing an estimate for the ongoing impact of COVID-19 pandemic on the Company’s business is difficult given the evolving nature of COVID-19 and the likelihood that any impact would be affected by factors outside of our control.

Such factors may include the severity, duration and spread of COVID-19 and emerging variants, the actions that have been or may be taken by the governments of countries affected, and the ability of our customers and consumers to remain in operation and pay for the products purchased on a timely basis.

Additionally, to the extent the COVID-19 pandemic or any future pandemic adversely affects our business, financial condition, or results of operations, it may heighten other risks described in this section.

Risks Related to Aluminum Extrusions

• Sales volume and profitability of Aluminum Extrusions is cyclical and seasonal and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector.

Aluminum Extrusions’ end-use markets can be cyclical and subject to seasonal swings in volume and have been adversely impacted during the COVID-19 pandemic.

Aluminum Extrusions’ end-use markets can be cyclical and subject to seasonal swings in volume.

Because of the capital-intensive nature and level of fixed costs inherent in the aluminum extrusions business, the percentage drop in earnings before interest, taxes, depreciation and amortization (“EBITDA”) from ongoing operations in a cyclical downturn will likely exceed the percentage drop in volume.

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In addition, higher energy costs can reduce profits unless offset by price increases or cost reductions and productivity improvements.

Starting in third quarter of 2022, the Company observed slowing order input and order cancellations as customers reported high inventory levels.

There can be no assurance as to the extent and timing of the recovery of sales volumes and profits for Aluminum Extrusions, especially since there can be a lag in the recovery of its end-use markets in comparison to the overall economic recovery.

• The failure to successfully implement the new enterprise resource planning and manufacturing execution systems could adversely impact the Aluminum Extrusions business and results of operations.

On January 28, 2022, Aluminum Extrusions obtained approval from the Board to engage in the implementation project of a new enterprise resource planning and manufacturing execution systems (“ERP/MES”) across all locations of the Aluminum Extrusions business.

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

In January 2022, Aluminum Extrusions obtained approval from the Board to engage in the implementation project of a new enterprise resource planning and manufacturing execution systems (“ERP/MES”) across all locations of the Aluminum Extrusions business.

The ERP/MES project commenced in 2022 and is expected to cost a total of approximately $30 million over a two-year time span.

The implementation of these systems is a major undertaking from a financial, management, and personnel perspective.

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additionally, any disruptions, delays or deficiencies could adversely affect our remediation efforts with respect to the effectiveness of our internal controls over financial reporting.

• Failure to prevent competitors from evading anti-dumping and countervailing duties, or a reduction in such duties, could adversely impact Aluminum Extrusions.

• Failure to prevent foreign competitors from evading anti-dumping and countervailing duties, or failure to reinstate the Aluminum Tariff on aluminum extrusions, could adversely impact Aluminum Extrusions.

Chinese and other overseas manufacturers continue to try to evade the anti-dumping and countervailing orders to avoid duties.

Effective April 25, 2017, the anti-dumping duty and countervailing duty orders on aluminum extrusions were extended for a period of five years.

The orders will be reviewed again beginning in March 2022.

A failure by, or the inability of, U.S.

trade officials to curtail the evasion of these duties, or the potential reduction of applicable duties pursuant to annual administrative reviews of the orders by the Department of Commerce, could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.

On October 3, 2022, the U.S.

International Trade Commission (“ITC”) extended the anti-dumping (“AD”) and countervailing duty (“CVD”) orders against aluminum extrusions from China, for a period of five years.

In 2018, the U.S.

imposed tariffs of 10% on aluminum ingot and semi-finished aluminum imported into the U.S.

from certain countries.

However, in December 2020, the Department of Commerce (“DOC”) introduced a tariff exclusion process, granting applicants with tariff exclusions.

failure by, or the inability of, U.S.

trade officials to restore the import tariff in its full format, could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.

• The duty-free importation of goods allowed under the United States-Mexico-Canada Agreement (“USMCA”), or other free trade agreements or duty-preference regimes, could result in lower demand for aluminum extrusions made in the U.S., which could materially and negatively affect Aluminum Extrusions’ business and results of operations.

In March 2018, the U.S.

As noted above, in March 2018, the U.S.

imposed tariffs of 10% on aluminum ingot and semi-finished aluminum imported into the U.S.

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• The markets for Aluminum Extrusions’ products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors.

Aluminum Extrusions has approximately 1,370

customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, automotive and other transportation, machinery and equipment, electrical and consumer durables.

Aluminum Extrusions has approximately 1,200 customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, automotive and other transportation, machinery and equipment, electrical and consumer durables.

No single Aluminum Extrusions’ customer exceeds 4% of consolidated net sales.

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The loss or significant reduction of sales associated with one or more of these customers without replacement by new business could have a material adverse effect on the Company.

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 in 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.

Surface Protection sales have been adversely impacted by weak market demand and competitive pricing.

Customer demand for electronics has continued to deteriorate since the third quarter of 2022, causing manufacturers in the supply chain to experience reduced capacity utilization and inventory corrections.

In addition, these depressed market conditions, which are expected to continue for most of the first half of 2023, are adversely impacting mix through reduced sales to our highest value-added customers and products.

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, which principally relate to one customer, to less costly alternative processes or materials.

The Company estimates that these transitions, which were complete as of the second quarter of 2022, resulted in a total decline of $7 million in pre-tax income from continuing operations as reported under GAAP and EBITDA from ongoing operations during 2022 versus 2021.

The Surface Protection business is continuing to experience competitive pricing pressures, unrelated to the customer product transitions, that adversely impacted pre-tax income from continuing operations as reported under GAAP and EBITDA from ongoing operations by approximately $5.5 million in 2022 versus 2021.

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

While PE Films is undertaking efforts to expand its customer base, there can be no assurance that such efforts will be successful, or that they will offset any loss of sales and profits associated with customer transitions and other large customer declines.

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Cyclical downturns and changing consumer preferences may negatively affect businesses that use PE Films’ plastic film products, which could adversely affect sales and operating margins.

Other factors that could adversely affect the business include (i) failure by a key customer to achieve success or maintain share in markets in which they sell products containing PE Films’ materials, including as a result of customer preferences for products other than plastics, (ii) key customers using products developed by others that replace PE Films’ business with such customers, (iii) delays in a key customer rolling out products utilizing new technologies developed by PE Films, and (iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes.

(iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes.

• The Company’s inability to protect its intellectual property rights or its infringement of the intellectual property rights of others could have a material adverse impact on PE Films.

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The risk of damage or disruption to its supply chain may increase if and when different suppliers consolidate their product portfolios, experience financial distress or disruption of manufacturing operations (such as, for example, the impact of hurricanes on petrochemical production).

Failure to take adequate steps to effectively manage such events, which are intensified when a product is procured from a single supplier or location, could

adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, and also require additional resources to restore its supply chain.

Failure to take adequate steps to effectively manage such events, which are intensified when a product is procured from a single supplier or location, could adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, and also require additional resources to restore its supply chain.

• Rising trade tensions could cause an increase in the cost of PE Films’ products or otherwise negatively impact the Company.

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and other countries, could cause an increase in the cost of PE Films’ products or otherwise negatively impact the production and sale of the Company’s products in world markets.

• An impairment of the Surface Protection reporting unit’s goodwill could have a material non-cash adverse impact on our results of operations.

The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year).

The valuation of goodwill depends on a variety of factors, including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit factors, and goodwill impairment valuations can be sensitive to assumptions associated with such factors.

Failure to successfully achieve projections could result in future impairments.

Impairment to the Surface Protection reporting unit’s goodwill may also be caused by factors outside the Company’s control, such as increasing competitive pricing pressures, weak consumer electronic market demand, lower than expected sales and profit growth rates, and various other factors.

Significant and unanticipated changes could require a non-cash charge for impairment in a future period, which may significantly affect the Company’s results of operations in the period of such charge.

Risks Related to Flexible Packaging Films

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Favorable anti-dumping rulings or countervailing duties are in effect for products imported from China, Egypt, India, Mexico, United Arab Emirates, Turkey, Peru and Bahrain.

Competitors not currently subject to anti-dumping duties may choose to utilize their excess capacity by selling product in Brazil, which may result in pricing pressures that Flexible Packaging Films may not be able to offset with cost savings measures and/or manufacturing efficiency initiatives.

Competitors not currently subject to anti-dumping duties may

choose to utilize their excess capacity by selling product in Brazil, which may result in pricing pressures that Flexible Packaging Films may not be able to offset with cost savings measures and/or manufacturing efficiency initiatives.

In May 2021, the Brazilian authorities concluded the sunset review relating to the anti-dumping process for polyester film imported from China, India and Egypt, and decided to extend duties for another five years.

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For India, the Brazilian authorities also reviewed measures against countervailing duties and extended those for five years as well.

Considering the expiration date for anti-dumping rulings against Mexico, United Arab Emirates and Turkey in first quarter 2023, Terphane may request a sunset review in the fourth quarter of 2022, if there are indications of continuous dumping practices from those sources into the Brazilian market.

Considering the expiration date for anti-dumping rulings against Mexico, United Arab Emirates and Turkey in first quarter 2023, Terphane timely petitioned for a sunset review in the fourth quarter of 2022, and the Brazilian authority is in the process of reviewing the petition and data provided in order to initiate the sunset review investigation, which was formalized in February 2023.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors