# TREDEGAR CORP (TG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TREDEGAR CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/850429/000085042922000007/tg-20211231.htm
Accession: 0000850429-22-000007
Filing date: 2022-03-11
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TG/
All MD&A years: /company/TG/mda/
Next year: /company/TG/mda/fy2022/ (FY 2022)

Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

General

Tredegar Corporation is an industrial manufacturer with three primary businesses: custom aluminum extrusions for the North American building & construction, automotive and specialty end-use markets through its Aluminum Extrusions segment; surface protection films for high-technology applications in the global electronics industry through its PE Films segment; and specialized polyester films primarily for the Latin American flexible packaging market through its Flexible Packaging Films segment. 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 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. For more information on these transactions, see Note 17 to the Consolidated Financial Statements in Item 15.

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

•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).

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. 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.

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. 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.

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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. 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 shortage 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, transportation 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

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%). 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.

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OPERATIONS REVIEW

Segment Analysis. A summary of results for 2021 versus 2020 for each of the Company’s reporting segments is shown below.

Aluminum Extrusions

A summary of results for Aluminum Extrusions is provided below: 

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[[/GREPCENT_TABLE]]

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 $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. Amortization expense is projected to be $3 million in 2022.

PE Films

A summary of results for PE Films is provided below: 

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[[/GREPCENT_TABLE]]

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.

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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; and

•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 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.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $5 million in 2022, including: $3 million for productivity projects and $2 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $7 million in 2022. There is no amortization expense for PE Films.

Flexible Packaging Films

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

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[[/GREPCENT_TABLE]]

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:

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•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; and

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

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $8 million in 2022, including $4 million for new capacity for value-added products and productivity projects and $4 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $2 million in 2022. Amortization expense is projected to be $0.4 million in 2022.

Corporate Expenses, Interest and Income Taxes

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 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.

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 the COVID-19 pandemic. As a consequence, the Company's results could differ significantly from its projections, depending on, among other

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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. 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.

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. 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 1st of each year). When assessing goodwill for impairment, accounting guidance allows the Company to first perform a qualitative assessment about the likelihood of the carrying value of a reporting unit exceeding its fair value, referred to as the Step 0 assessment. The Step 0 assessment requires the evaluation of certain qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit factors. If the Company's Step 0 analysis indicates that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company would perform a quantitative impairment test.

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 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. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income or expense recorded in future periods.

The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments determined by using the AA-rated bond yield curve. In general, the pension liability increases as the discount rate decreases and vice versa. The weighted average discount rate utilized was 2.90%, 2.57% and 3.27% at the end of 2021, 2020 and 2019, respectively, with changes between periods due to changes in market interest rates. Pay for active participants of the plan was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan. 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.

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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 10.4% in 2021, 10.9% in 2020 and 11.8% in 2019. 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. See Note 8 to the Consolidated Financial Statements in Item 15 for more information on expected long-term return on plan assets and asset mix.

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

Income Taxes

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

Revenues. 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 (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 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

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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. Pre-tax losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in 2021 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 13 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 16 to the 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.

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[[GREPCENT_TABLE]]
[["($ in millions)","Q1","Q2","Q3","Q4","2021"],["Aluminum Extrusions:"],["(Gains) losses from sale of assets, investment writedowns and other items:"],["Consulting expenses for ERP feasibility study1","$","\u2014","","$","\u2014","","$","\u2014","","$","0.3","","$","0.3"],["Futura intangible amortization out-of-period adjustment6","\u2014","","\u2014","","\u2014","","(0.9)","","(0.9)"],["Vacation accrual policy change5","\u2014","","\u2014","","\u2014","","(2.9)","","(2.9)"],["Environmental charges at Newnan, Georgia plant3","\u2014","","\u2014","","0.1","","0.1","","0.2"],["COVID-19-related expenses, net of relief 2","(0.2)","","0.3","","0.1","","(0.1)","","0.1"],["Total for Aluminum Extrusions","$","(0.2)","","$","0.3","","$","0.2","","$","(3.5)","","$","(3.2)"],["PE Films:"],["(Gains) losses associated with plant shutdowns, asset impairments and restructurings:"],["Other restructuring costs - severance","$","\u2014","","$","\u2014","","$","0.1","","$","0.3","","$","0.4"],["(Gains) losses from sale of assets, investment writedowns and other items:"],["Vacation accrual policy change5","\u2014","","\u2014","","\u2014","","(0.5)","","(0.5)"],["COVID-19-related expenses2","0.2","","0.1","","0.1","","0.1","","0.5"],["Total for PE Films","$","0.2","","$","0.1","","$","0.2","","$","(0.1)","","$","0.4"],["Flexible Packaging Films:"],["(Gains) losses from sale of assets, investment writedowns and other items:"],["One-time tax credit in Brazil for unemployment/social security insurance non-income taxes resulting from a favorable decision by Brazil\u2019s Supreme Court regarding the calculation of such taxes 2,4","$","\u2014","","$","(8.5)","","$","\u2014","","$","\u2014","","$","(8.5)"],["COVID-19-related expenses2","\u2014","","\u2014","","\u2014","","0.1","","0.1"],["Total for Flexible Packaging Films","$","\u2014","","$","(8.5)","","$","\u2014","","$","0.1","","$","(8.4)"],["Corporate:"],["(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)","","$","0.1"],["Other restructuring costs - severance","\u2014","","\u2014","","\u2014","","0.2","","0.2"],["(Gains) losses from sale of assets, investment writedowns and other items:"],["Professional fees associated with business development activities and other2","0.8","","0.8","","0.7","","1.6","","3.9"],["Professional fees associated with internal control over financial reporting2","0.2","0.9","0.8","1.2","3.1"],["Write-down of investment in Harbinger Capital Partners Special Situations Fund2","0.1","","0.4","","\u2014","","\u2014","","0.5"],["Stock compensation expense associated with the fair value remeasurement of awards granted at the time of the 2020 Special Dividend1","0.4","","0.1","","(0.1)","","\u2014","","0.4"],["Transition service fees, net of corporate costs associated with the divested Personal Care Films business2","(0.3)","","(0.3)","","0.1","","0.2","","(0.3)"],["Vacation accrual policy change5","\u2014","","\u2014","","\u2014","","(0.4)","","(0.4)"],["Total for Corporate","$","1.4","","$","2.1","","$","1.3","","$","2.7","","$","7.5"],["1.Included in \u201cSelling, general and administrative expenses\u201d in the consolidated statements of income.2. Included in \u201cOther income (expense), net\u201d in the consolidated statements of income.3. Included in \"Costs of goods sold\" in the consolidated statements of income.4. For more information, see Note 9 to the consolidated financial statements in Item 15.5. For more information, see Note 6 to the consolidated financial statements in Item 15.6. Included in \u201cAmortization of identifiable intangibles\u201d in the consolidated statements of income."]]
[[/GREPCENT_TABLE]]

Interest Expense. Interest expense, which is net of amounts capitalized and included in property, plant and equipment ($0.1 million and $0.1 million capitalized in 2021 and 2020, respectively), was $3.4 million in 2021, compared to $2.6 million for 2020. Average debt outstanding and interest rates were as follows:

21

[[GREPCENT_TABLE]]
[["(In millions, except percentages)","2021","","2020"],["Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:"],["Average outstanding debt balance","$","128.8","","","$","33.5"],["Average interest rate","1.8","%","","2.3","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

The Company continuously focuses on working capital management. Measures such as days sales outstanding (“DSO”), days inventory outstanding (“DIO”) and days payables outstanding (“DPO”) are used to evaluate changes in working capital. Changes in operating assets and liabilities from continuing operations from December 31, 2020 to December 31, 2021 are summarized below. Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.

•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 $0.6 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 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 $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 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 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 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 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 $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.

22

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

[[GREPCENT_TABLE]]
[["Net Capitalization and Indebtedness as of December 31, 2021"],["(In thousands)"],["Net capitalization:"],["Cash and cash equivalents","$","30,521"],["Debt:"],["Credit Agreement","73,000"],["Debt, net of cash and cash equivalents","42,479"],["Shareholders\u2019 equity","184,722"],["Net capitalization","$","227,201"],["Indebtedness as defined in Credit Agreement:"],["Total debt","$","73,000"],["Indebtedness","$","73,000"]]
[[/GREPCENT_TABLE]]

The credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-Credit EBITDA levels are as follows:

[[GREPCENT_TABLE]]
[["Pricing Under Credit Agreement (Basis Points)"],["Indebtedness-to-Credit EBITDA Ratio","Credit Spread Over LIBOR","","Commitment Fee"],[" 3.5x but = 4.0x","200.0","","","40"],[" 3.0x but = 3.5x","187.5","","","35"],[" 2.0x but = 3.0x","175.0","","","30"],[" 1.0x but = 2.0x","162.5","","","25"],["= 1.0x","150.0","","","20"]]
[[/GREPCENT_TABLE]]

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.

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; and

23

•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. Credit EBITDA as defined in the Credit Agreement is not intended to represent net income or cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.

24

[[GREPCENT_TABLE]]
[["Computations of Credit EBITDA, Leverage Ratio and Interest Coverage Ratio as Defined in the Credit Agreement Along with Related Most Restrictive Covenants"],["As of and for the Twelve Months Ended December 31, 2021 (In thousands)"],["Computations of Credit EBITDA as defined in Credit Agreement for the twelve months ended December 31, 2021"],["Net income (loss)","$","57,826"],["Plus:"],["After-tax losses related to discontinued operations","111"],["Total income tax expense for continuing operations","9,284"],["Interest expense","3,386"],["Depreciation and amortization expense for continuing operations","23,784"],["All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $8,999)","9,553"],["Charges related to stock option grants and awards accounted for under the fair value-based method","2,495"],["Losses related to the application of the equity method of accounting","\u2014"],["Losses related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting","\u2014"],["Minus:"],["After-tax income related to discontinued operations","\u2014"],["Total income tax benefits for continuing operations","\u2014"],["Interest income","(73)"],["All non-cash gains and income, plus cash gains and income in excess of $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings","(3,859)"],["Income related to changes in estimates for stock option grants and awards accounted for under the fair value-based method","\u2014"],["Income related to the application of the equity method of accounting","\u2014"],["Income related to adjustments in the estimated fair value of assets accounted for under the fair value method of accounting","(12,780)"],["Plus cash dividends declared on investments in an amount not to exceed $10,000 for such period","318"],["Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions","\u2014"],["Plus or minus, as applicable, pro forma EBITDA adjustments to pension expense associated with the early payment of pension obligations","\u2014"],["Credit EBITDA as defined in Credit Agreement","$","90,045"],["Computations of leverage and interest coverage ratios as defined in Credit Agreement at December 31, 2021:"],["Leverage ratio (indebtedness-to-Credit EBITDA)","0.81x"],["Interest coverage ratio (Credit EBITDA-to-interest expense)","26.59x"],["Most restrictive covenants as defined in Credit Agreement:"],["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 $20,187 of dividends paid after December 1, 2020)","$","54,813"],["Maximum leverage ratio permitted","4.00x"],["Minimum interest coverage ratio permitted","3.00x"]]
[[/GREPCENT_TABLE]]

Tredegar was in compliance with all of its debt covenants as of December 31, 2021. Noncompliance with any of the debt covenants may have a material adverse effect on its financial condition or liquidity, in the event such noncompliance cannot be cured or should the Company be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on its financial condition or liquidity depending upon how the covenant is renegotiated.

25

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

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. Also, in the ordinary course of business, the Company may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, the Company is unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. Tredegar does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount is reasonably estimable. The Company discloses contingent liabilities if the probability of loss is reasonably possible and material.

26