TREDEGAR CORP (TG) FY 2022 MD&A

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, 2022, 2021 and 2020.

Business Overview

General

Tredegar Corporation is an industrial manufacturer with three primary businesses: custom aluminum extrusions for the North American building and construction ("B&C"), 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 2,300 employees, the Company operates manufacturing facilities in North America, South America, and Asia.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") from ongoing operations is the measure of segment profit and loss used by Tredegar’s chief operating decision maker ("CODM") for purposes of assessing financial performance. The Company uses sales less freight (“net sales”) from continuing operations as its measure of revenues from external customers at the segment level. 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 in Note 13 “Business Segments” to the Consolidated Financial Statements in Item 15. EBIT 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 (loss) as defined by GAAP. We believe that 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.

Sales were $938.6 million in 2022 compared to $826.5 million in 2021. Net income from continuing operations was $28.4 million ($0.84 per diluted share) in 2022, compared with net income from continuing operations of $57.9 million ($1.72 per diluted share) in 2021.

2022 Financial Results Highlights

•EBITDA from ongoing operations for Aluminum Extrusions of $66.8 million was $10.9 million higher than the year of 2021

•EBITDA from ongoing operations for PE Films of $11.9 million was $15.7 million lower than the year of 2021

•EBITDA from ongoing operations for Flexible Packaging Films of $27.5 million was $4.2 million lower than the year of 2021

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, 2022 and 2021, respectively. Gains and losses associated with plant shutdowns, asset impairments, restructurings and other items are described in Results of Operations below.

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Results of Operations

2022 versus 2021

The following table presents a bridge of consolidated net income (loss) from continuing operations from the year of 2021 to the year of 2022 with related management’s discussion and analysis below the table.

Sales in 2022 increased by 13.6% compared with 2021. Net sales increased 18.3% in Aluminum Extrusions primarily due to an increase in average selling prices to cover higher aluminum raw material costs and higher operating costs, partially offset by lower sales volume. Net sales decreased 18.0% in PE Films primarily due to lower volume, partially offset by higher pricing associated with the pass-through of increased resin costs. Net sales increased in Flexible Packaging Films by 20.1% primarily due to higher selling prices from the pass-through of higher resin costs, favorable product mix and higher sales volume. For more information on changes in net sales and volume, see the Segment Operations Review section below.

Other income (expense), net decreased $19.4 million compared to 2021, primarily due to 2021 gains of $12.8 million on the investment in kaléo and $8.5 million associated with a one-time tax credit in Brazil for unemployment/social security insurance non-income taxes resulting from a favorable decision by Brazil's Supreme Court regarding the calculation of such tax. See Note 9 “Other Income (Expense), net” to the Consolidated Financial Statements in Item 15 for additional information.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales (gross profit margin) was 14.9% in 2022 versus 18.0% in 2021. The gross profit margin in Aluminum Extrusions remained flat compared to 2021. The gross profit margin in PE Films decreased primarily due to Surface Protection lower sales for non-transitioning products associated with a market slowdown and customer inventory corrections and competitive pricing, and previously disclosed customer product transitions, partially offset by pass-through lag associated with resin pricing. The gross profit margin in Flexible Packaging Films decreased due to higher raw material costs and higher fixed costs, partially offset by favorable product mix, higher sales volume and higher selling prices from the pass-through of higher resin costs. For more information on changes in operating costs and expenses, see the Segment Operations Review section below.

As a percentage of sales, selling, general and administrative (“SG&A”) and R&D expenses were 9.1% in 2022 compared with 9.8% in 2021. SG&A expenses and sales increased year-over-year, while R&D expenses remained consistent with the prior year. Increased SG&A spending is primarily due to higher professional fees associated with the internal and external audits of the Company and higher employee-related compensation.

The effective tax rate used to compute income taxes for continuing operations for the year of 2022 was 13.4%, compared to 13.8% in 2021. The decrease in the effective tax rate for continuing operations is primarily due to a discrete tax benefit recorded in the first quarter of 2022 resulting from the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and Internal Revenue Service (“IRS”) on January 4, 2022. These regulations overhaul various components of the foreign tax credit regime including the determination of creditable foreign taxes and limit the amount of foreign taxes that are creditable against U.S. income taxes. This discrete benefit was partially offset by an increase to the effective tax rate as the result of the Brazilian income tax no longer being creditable in the U.S. for the foreseeable future. Lastly, the effective tax rate changed due to foreign rate differences pertaining to the Company’s foreign operations and the

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benefit from tax incentives in Brazil. See Note 12 “Income Taxes” to the Consolidated Financial Statements in Item 15 for additional information.

Pre-tax gains and losses associated with plant shutdowns, asset impairments, restructurings and other items for continuing operations in 2022 detailed below are shown in the statements of net sales and EBITDA from ongoing operations by segment table in Note 13 “Business Segments” 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.

Average debt outstanding and interest rates were as follows:

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2021 versus 2020

The following table presents a bridge of consolidated net income (loss) from continuing operations from the year of 2020 to the year of 2021 with related management’s discussion and analysis below the table.

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.

Other income (expense), net increased $87.7 million compared to 2020, primarily due to a 2021 gain of $8.5 million associated with a one-time tax credit in Brazil for unemployment/social security insurance non-income taxes resulting from a favorable decision by Brazil's Supreme Court regarding the calculation of such tax and a gain of $12.8 million on the Company’s investment in kaléo recognized in the full year ended December 31, 2021 compared to a loss of $60.9 million in the full year ended December 31, 2020.

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.

As a percentage of sales, SG&A and R&D expenses were 9.8% in 2021 compared with 12.3% in 2020. SG&A and R&D expenses were down year-over-year, while net sales increased. Decreased spending is primarily due to non-recurring corporate costs associated with the divested Personal Care Films business, lower R&D spending in PE Films, lower stock-based compensation, and nonrecurring SG&A expenses related to the Bright View Technologies divestiture at the end of 2020.

Amortization of intangible assets decreased $1.3 million compared to 2020 primarily due to an out-of-period adjustment of $0.9 million in connection with the original valuation of intangible assets and goodwill related to the acquisition of Futura in February 2017.

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During the first three months of 2020, the Company performed goodwill impairment tests and recognized a goodwill impairment charge of $13.7 million ($10.5 million after taxes), which represented the entire amount of goodwill associated with Aluminum Extrusions’ AACOA reporting unit. See Note 1 “Nature of Operations and Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Item 15 for additional details.

The effective tax rate used to compute income taxes for continuing operations for the year of 2021 was 13.8%, compared to 32.8% in 2020. The decrease in the effective tax rate for continuing operations is primarily due to the strong earnings of Terphane Ltda, which are included in Tredegar’s U.S. consolidated tax return and, the tax impact of the local statutory tax rates of Tredegar’s foreign subsidiaries being higher than the current U.S. tax rate of 21%, the benefit of tax incentives in Brazil and the release of the valuation allowance for capital loss carryforwards.

Pre-tax gains and 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 “Business Segments” 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.

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Average debt outstanding and interest rates were as follows:

Segment Operations Review

Aluminum Extrusions

A summary of results for Aluminum Extrusions is provided below:

Net sales in 2022 increased 18.3% versus 2021. The annual increase in net sales was primarily due to an increase in average selling prices to cover higher average aluminum raw material costs and higher operating costs, partially offset by lower sales volume. Sales volume in 2022 decreased 4.7% versus 2021, primarily due to lower shipments in the specialty and automotive segments which declined 14.3% and 4.2%, respectively. Shipments for non-residential B&C in 2022 increased by 1.6% versus 2021.

EBITDA from ongoing operations increased $10.9 million in 2022 versus 2021, primarily due to:

•Higher pricing ($69.6 million, net of the pass-through of aluminum raw materials costs), partially offset by: lower volume ($5.6 million); higher labor and employee-related costs ($7.2 million) and lower labor productivity ($5.6 million); higher supply expenses ($15.3 million), including significant price increases in paint, chemicals, packaging and other supplies; higher freight expenses ($6.3 million); higher utility rates ($3.1 million); higher maintenance expenses ($1.4 million); and higher SG&A ($3.0 million); and

•Inventories accounted for under the last in, first out (“LIFO”) method resulted in a charge of $2.9 million in 2022 versus a benefit of $0.6 million in 2021. In addition, inventories accounted for under the first in, first out (“FIFO”) method resulted in no charge or benefit in 2022 versus a benefit of $6.7 million in 2021, which related to the timing of the flow through of aluminum raw material costs passed through to customers previously acquired at higher prices in a quickly changing commodity pricing environment. Also, the Company recorded unfavorable net out-of-period adjustments totaling $0.6 million for charges related to inventory, accrued labor costs and accounts payable in 2022.

Aluminum Extrusions has secured supply sources to meet expected needs for aluminum raw materials in 2023. See discussion of quantitative and qualitative disclosures about market risk in Item 7a in this Form 10-K for additional information on aluminum price trends.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $26 million in 2023, include $11 million for a new ERP/MES, $6 million for infrastructure upgrades at the facilities located in Niles, Michigan, Carthage, Tennessee and Newnan, Georgia, and $2 million for other strategic projects. The ERP/MES project commenced in 2022 and is expected to cost a total of approximately $30 million over a two-year time span. In addition to strategic projects, approximately $7 million will be required to support continuity of current operations. Depreciation expense is projected to be $15 million in 2023. Amortization expense is projected to be $2 million in 2023.

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PE Films

A summary of results for PE Films is provided below:

Net sales in 2022 decreased 18% versus 2021, primarily due to lower volume in Surface Protection and overwrap films. Sales volume and net sales declined 15% and 23%, respectively, in Surface Protection. Sales volume and net sales declined 19% and 4%, respectively, in overwrap films, with volume declines partially offset by the pricing impact associated with the pass-through of resin costs.

EBITDA from ongoing operations in 2022 decreased $15.7 million versus 2021 primarily due to:

•A $14.6 million decrease from Surface Protection as a result of:

◦Lower contribution for: non-transitioning products associated with a market slowdown and customer inventory corrections ($7.3 million), competitive pricing ($5.5 million), lower productivity ($0.6 million) and previously disclosed customer product transitions ($6.6 million), partially offset by lower SG&A and research and development expenses ($1.4 million);

◦The pass-through lag associated with resin costs (a benefit of $0.5 million in 2022 versus a charge of $2.2 million in 2021);

◦A foreign currency transaction gain of $0.8 million in 2022 versus a loss of $0.2 million in 2021; and

◦Inventories accounted for under the LIFO method resulted in a charge of $0.1 million in 2022 versus a charge of $0.6 million in 2021.

•A $1.1 million decrease from overwrap films primarily due to lower volume ($1.9 million). The pass-through lag associated with resin costs resulted in a benefit of $0.4 million in 2022 versus a charge of $1.3 million in 2021. In addition, inventories accounted for under the LIFO method resulted in a charge of $0.4 million in 2022 versus a benefit of $0.5 million in 2021.

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, 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.

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Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $4 million in 2023, including: $2 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 2023. There is no amortization expense for PE Films.

Flexible Packaging Films

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

Net sales in 2022 increased 20.1% compared to 2021, primarily due to higher selling prices from the pass-through of higher resin costs, favorable product mix and higher sales volume.

EBITDA from ongoing operations in 2022 decreased by $4.2 million versus 2021, primarily due to:

•Higher raw material costs ($17.9 million), higher fixed costs ($1.5 million), and higher SG&A expenses ($1.4 million), offset by higher selling prices from the pass-through of higher resin costs ($18.3 million), higher sales volume ($1.1 million), favorable product mix ($1.6 million), and lower variable costs ($0.1 million);

•Net unfavorable foreign currency translation of Real-denominated operating costs ($3.7 million) in 2022 versus 2021; and

•Foreign currency transaction losses ($0.2 million) in 2022 compared to foreign currency transaction gains ($0.7 million) in 2021.

Projected Capital Expenditures and Depreciation & Amortization

Capital expenditures are projected to be $8 million in 2023, including $2 million for new capacity for value-added products and productivity projects and $6 million for capital expenditures required to support continuity of current operations. Depreciation expense is projected to be $3 million in 2023. Amortization expense is projected to be $0.1 million in 2023.

Corporate Expenses, Interest and Other

Corporate expenses, net in 2022 decreased by $0.6 million compared 2021, primarily due to lower professional fees associated with business development activities ($1.1 million), employee-related compensation ($0.9 million) and stock-based compensation ($0.6 million), partially offset by increased professional fees associated with the internal and external audits of the Company ($2.2 million).

Interest expense was $5.0 million in 2022 in comparison to $3.4 million in 2021, primarily due to higher interest rates.

Pension expense under GAAP was $14.4 million in 2022, an unfavorable change of $0.5 million from 2021. In February 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan. In connection therewith, the Company borrowed funds under its revolving credit agreement and made 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. The settlement process has been delayed because of longer-than-expected review times with the 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. The Company realized income tax benefits on the Special Contribution of $11 million in 2022. Administrative costs for the pension plan through the settlement process are estimated at $4 to $5 million.

Tredegar’s frozen defined benefit pension plan was underfunded on a GAAP basis (also estimated settlement basis) by $28 million at December 31, 2022, comprised of investments at fair value of $218 million and a PBO of $246 million. The ultimate underfunded amount at settlement may differ from amounts existing at the end of 2022, depending on changes in market factors, including for buyers of pension obligations at the time of settlement.

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Prior to the Special Contribution, GAAP pension expense was a reasonable proxy for the Company’s required minimum cash contribution to the pension plan. The Company expects there will be no required minimum cash contributions until final settlement. Pension expense under GAAP is projected to be approximately $14 million in 2023, which is mainly comprised of non-cash amortization of deferred net actuarial losses reflected in the Company’s shareholders’ equity as accumulated other comprehensive losses. Beginning in 2022, and consistent with no expected required minimum cash contributions, no pension expense is included in calculating earnings before interest, taxes, depreciation and amortization as defined in the Company’s revolving credit agreement (“Credit EBITDA”).

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

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, 2021 to December 31, 2022 are summarized below. Cash flows for discontinued operations have not been separately disclosed in the consolidated statements of cash flows.

•Accounts and other receivables decreased $18.8 million or 18.2%.

◦Accounts and other receivables in Aluminum Extrusions decreased by $10.4 million primarily due to lower sales volume and the pass-through of lower metal costs, partially offset by an increase in average selling prices to cover higher operating costs in the fourth quarter of 2022 versus 2021. DSO (computed using trailing 12 months net sales and a rolling 12-month average of accounts and other receivables balances) was approximately 48.7 days in 2022 and 47.6 days in 2021.

◦Accounts and other receivables in PE Films decreased by $6.5 million primarily due to lower sales volume in both Surface Protection and overwrap films, partially offset by increased overwrap films sales as a result of the pricing impact associated with the pass-through of higher resin costs. DSO was approximately 30.3 days in 2022 and 28.5 days in 2021.

◦Accounts and other receivables in Flexible Packaging Films decreased by $1.7 million primarily due to lower sales volume in the fourth quarter of 2022 versus 2021. DSO was approximately 41.1 days in 2022 and 40.0 days in 2021.

•Inventories increased $39.2 million or 44.3%.

◦Inventories in Aluminum Extrusions increased by $16.8 million primarily due to increased raw material levels due to lower than anticipated customer orders, order cancellations as customers report high inventory levels, and increased aluminum supplier costs. DIO (computed using trailing 12 months costs of goods sold calculated on a FIFO basis and a rolling 12-month average of inventory balances calculated on the FIFO basis) was approximately 53.6 days in 2022 and 41.4 days in 2021.

◦Inventories in PE Films has remained consistent with prior year. The DIO of approximately 62.8 days in 2021 increased to 66.8 days in 2022 primarily due to the weak market demand for Surface Protection’s products.

◦Inventories in Flexible Packaging Films increased by $22.5 million primarily due to the impact of higher average resin prices on raw materials, higher planned finished good levels and the impact from the change in the U.S. dollar value of currencies related to operations outside of the U.S. DIO was approximately 108.0 days in 2022 and 93.1 days in 2021.

•Net property, plant and equipment increased by $16.0 million or 9.4% primarily due to capital expenditures of $40.1 million, partially offset by depreciation expense of $23.9 million.

•Identifiable intangible assets, net decreased by $2.5 million or 17.7% primarily due to amortization expense.

•Deferred income tax assets decreased $1.8 million or 11.6% primarily due to changes in other comprehensive income and the projected utilization for foreign tax credits, partially offset by the change in deferred tax liability as a result of the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and IRS on January 4, 2022. See Note 12 “Income Taxes” to the Consolidated Financial Statements in Item 15 for additional information.

•Accounts payable decreased by $8.8 million or 7.1%.

◦Accounts payable in Aluminum Extrusions decreased by $11.3 million, primarily due to lower raw material purchases due to higher than anticipated on-hand inventory quantities, partially offset by favorable payment terms with certain vendors. DPO (computed using trailing 12 months costs of goods sold calculated on a FIFO basis and a rolling 12-month average of accounts payable balances) was approximately 64.2 days in 2022 and 60.1 days in 2021.

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◦Accounts payable in PE Films decreased by $3.7 million primarily due to lower raw material purchases. DPO was approximately 51.0 days in 2022 and 44.0 days in 2021.

◦Accounts payable in Flexible Packaging Films increased by $5.6 million, primarily due to higher resin costs related to raw material purchases in 2022 and favorable payment terms with certain vendors. DPO was approximately 72.4 days in 2022 and 68.2 days in 2021.

Net cash used in operating activities was $20.8 million in 2022 compared to net cash provided by operating activities of $70.6 million in 2021. The change in operating activities is primarily due to the Special Contribution ($50 million), higher income taxes paid during 2022 and higher working capital due to factors discussed earlier in this section relating to accounts and other receivables, inventories and accounts payable.

Net cash used in investing activities was $35.5 million in 2022 compared to net cash provided by investing activities of $24.5 million in 2021. The change in investing activities is primarily due to higher capital expenditure spending ($9.5 million), 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 in 2021 ($4.7 million).

Net cash provided by financing activities was $45.4 million in 2022 compared to net cash used in financing activities of $76.8 million in 2021. The change in financing activities is primarily due to higher net borrowings ($125.0 million) under the Credit Agreement (as defined below) to fund the $50 million Special Contribution to the pension plan and working capital, higher deferred financing costs ($1.2 million) associated with the refinancing of the Credit Agreement in June 2022, repurchases of employee common stock for tax withholdings of $0.4 million in 2022, and $0.9 million of proceeds from the exercise of stock options in the first nine months of 2021.

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, 2022, Tredegar had cash and cash equivalents of $19.2 million, including funds held in locations outside the U.S. of $10.3 million.

On June 29, 2022, Tredegar entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) that replaced its existing $375 million five-year, secured revolving credit facility that was due to expire on June 28, 2024. The Credit Agreement is a five-year, revolving, secured credit facility that permits aggregate borrowings of $375 million and matures on June 29, 2027.

Net capitalization and indebtedness as defined under the Credit Agreement as of December 31, 2022 were as follows:

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Borrowings under the Credit Agreement bear an interest rate equal to Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment of 10 basis points ("Adjusted Term SOFR Rate") and an amount depending on the type of borrowing and commitment fees charged on the unused amount under the Credit Agreement at various Total Net Leverage Ratio levels as follows:

At December 31, 2022, $137.0 million of the outstanding debt was principally priced at an interest rate equal to the Adjusted Term SOFR Rate plus the applicable credit spread of 162.5 basis points. Prior to the Credit Agreement, the interest rate on borrowings was based on LIBOR plus an applicable credit spread.

The primary restrictive covenants in the Credit Agreement include:

•Total Net Leverage Ratio of 4.00x;

•Interest Coverage Ratio of 3.00x; and

•Unlimited payments for dividends and stock repurchases during the term of the Credit Agreement so long as the Total Net Leverage Ratio is equal to or less than 2.00x, and otherwise restrictions on payments for dividends and stock repurchases for the term of the Credit Agreement at $75 million (provided that the $75 million basket will reset at the end of each fiscal quarter when the Total Net Leverage ratio is less than or equal to 2.00x).

Under the Credit Agreement:

•Total Net Leverage Ratio is defined as the ratio of (a)(i) total indebtedness minus (ii) liquidity (the lesser of $50,000,000 and the aggregate amount of cash and cash equivalents) to (b) Credit EBITDA; and

•Interest Coverage Ratio is defined as the ratio of Credit EBITDA to interest expense.

The Credit Agreement is secured by substantially all assets of the Company and its domestic subsidiaries, including equity in certain material first-tier foreign subsidiaries. At December 31, 2022, based upon the most restrictive covenant within the Credit Agreement, available credit under the Credit Agreement was approximately $201 million. Total debt outstanding was $137.0 million and $73.0 million as of December 31, 2022 and 2021, respectively.

Credit EBITDA is not intended to represent net income (loss) or cash flow from operations as defined by GAAP and should not be considered as an alternative to either net income (loss) or to cash flow. The computations of Credit EBITDA, the Total Net Leverage Ratio and Interest Coverage Ratio as defined in the Credit Agreement are presented below.

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Tredegar was in compliance with all of its debt covenants as of December 31, 2022. 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.

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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, 2022 were as follows:

Long-term debt and interest payments

As of December 31, 2022, the Company had outstanding debt of $137.0 million with contractual payments due in June 2027. Estimated future interest payments associated with outstanding debt total $37.7 million, with $8.4 million payable within the next 12 months.

Pension and other postretirement obligations

In February 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 expects that the final settlement funding will be approximately $28 million but may differ from this expectation based on changes in market factors, including from buyers of pension obligations at the time of settlement.

Tredegar also has a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. The plan was designed to restore all or a part of the pension benefits that would have been payable to designated participants from the principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $1.7 million, of which the Company expects to pay $0.2 million in the next 12 months.

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, 2022, the aggregate benefit obligation for the Company’s other post retirement plans was $5.7 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 “Segment Operations Overview” above in this Item 7 for discussion of the Company’s planned investment in capital expenditures in 2023, of which $13.3 million contractual commitments that existed as of December 31, 2022.

Operating Leases

The Company enters into various operating leases primarily for real estate, office equipment and vehicles. See Note 4 “Leases” to the Consolidated Financial Statements in Item 15 for additional information.

Uncertain Tax Positions

As of December 31, 2022, 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 “Income Taxes” 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,

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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.

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 “Nature of Operations and Summary of Significant Accounting Policies” 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 (“Step 0 analysis”), which evaluates certain qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit factors. If the Company's Step 0 analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would perform a quantitative impairment test (“Step 1 analysis”).

During the three months ended September 30, 2022, events and circumstances indicated that the Surface Protection reporting unit (“Surface Protection”), which is also the asset group, might be impaired. The Company performed a Step 1 analysis and long-lived impairment analysis for Surface Protection and determined that the fair value of Surface Protection exceeded its carrying value by 18.6%.

The Company estimated the fair value of Surface Protection at September 30, 2022 by: (i) computing a weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow (the “DCF Method”) and market multiple (the “Market Multiple Method”) methods, (ii) applying adjustments for any surplus or deficient working capital, (iii) adding cash and cash equivalents, and (iv) subtracting interest-bearing debt. The Company’s estimate of Surface Protection’s EV as of September 30, 2022 was determined by weighting the Market Multiple Method by 20% and the DCF Method by 80%. A heavier weighting towards the DCF Method was used since Surface Protection’s projections better reflect recovery from the weak market demand, competitive pricing and cash flows associated with new surface protection products, applications, customers, production efficiencies, and cost savings. Key financial assumptions utilized to determine the fair value of the reporting unit includes revenue growth projections and a weighted average cost of capital assumption. At September 30, 2022, the effect of a ten percent decrease in the revenue growth projections and a one percent increase to the weighted average cost of capital assumption would further decrease the fair value of the reporting unit’s fair value by approximately $5 million and $6 million, respectively.

Customer demand for electronics has continued to deteriorate since the third quarter of 2022, causing manufacturers in the supply chain to experience reduced capacity utilization and inventory corrections. In addition, these depressed market conditions, which are expected to continue through the first half of 2023, are adversely impacting mix through reduced sales to our highest value-added customers and products. Given the uncertain demand for Surface Protections products, it is reasonably possible that the cash flow estimates used in deriving such fair value measurements may change in the future.

As of December 1, 2022, the Company’s reporting units with goodwill were Surface Protection in PE Films and Futura in Aluminum Extrusions. Both of these reporting units have separately identifiable operating net assets (operating assets including goodwill and identifiable intangible assets net of operating liabilities). The Company's Step 0 analyses as of December 1, 2022 of these reporting units concluded that it is not more likely than not that the fair values of each reporting unit was less than its carrying amount. Therefore, the Step 1 quantitative goodwill impairment tests for these reporting units were not necessary as of December 1, 2022. The Surface Protection and Futura reporting units had goodwill in the amounts of $57.3 million and $13.3 million, respectively, at December 31, 2022. See Note 1 “Nature of Operations and Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Item 15 for additional information on the analysis of goodwill impairment.

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Pension Benefits

Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan is closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan. On February 10, 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan, which is expected to be completed by the end of 2023.

The Company’s pension plan has resulted in varying amounts of net pension income or expense, as developed from actuarial valuations and the application of GAAP. Inherent in the valuation are key assumptions including discount rates and the expected return on plan assets. Inherent in the application of GAAP includes the amortization of deferred non-cash actuarial gains or losses. Net periodic pension benefit cost under GAAP during 2022, 2021 and 2020 was $14.4 million, $14.0 million and $14.6 million, respectively, including non-cash amortization of net actuarial losses of $13.7 million, $17.0 million and $15.5 million, respectively.

The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining actuarial valuation assumptions. 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 are deferred in accumulated other comprehensive income or loss directly in shareholders’ equity and subsequently amortized in net periodic pension benefit cost. Other comprehensive net actuarial losses reflected directly in shareholders’ equity was $103.6 million, $109.2 million and $149.5 million on a pre-tax basis as of December 31, 2022, 2021 and 2020, respectively, which have resulted in the significant non-cash amortization costs as noted above.

Following the announcement to terminate and settle the pension plan, the Company contributed $50 million to the pension plan and implemented (through consultation with its investment advisors) a liability-matching bond portfolio investment strategy (including a derivative overlay) that hedged the estimated settlement funding gap, which was approximately $24 million (before plan administration costs) at that time. The overall objective of this hedging program is to minimize the volatility of the estimated settlement funding gap such that, as applicable interest rates move up or down causing a decrease or increase in the estimated value of the settlement liability, the value of the matching bond portfolio and derivative overlay decreases or increases by a similar amount.

The discount rate is used to determine the present value of future payments (i.e., the estimated settlement liability). In general, the estimated settlement liability increases as the discount rate decreases and vice versa. 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, which prior to the planned termination and settlement was determined by using the AA-rated bond yield curve. Given the anticipated termination and settlement of the pension plan, the Company determined an appropriate discount rate as of December 31, 2022, based on the weighted average of lump sum settlement interest rates and estimated annuity purchase settlement rates. The weighted average discount rate utilized was 5.07%, 2.90% and 2.57% at the end of 2022, 2021 and 2020, respectively, with changes between periods due to changes in market interest rates and in 2022 also the change to a settlement discount rate estimating methodology.

A 100 basis point increase in the discount rate assumption would have decreased the projected benefit obligation / estimated settlement liability and the net periodic pension cost for the pension plan by approximately $23 million and $2 million, respectively. A 100 basis point decrease in the discount rate assumption would have increased the projected benefit obligation / estimated settlement liability and the net periodic pension cost for the pension plan by approximately $24 million and $2 million, respectively. In both assumption situations, as a result of the hedging program, the Company would expect a similar overall change in the liability matching bond portfolio and derivative overlay.

A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. The total return on plan assets (net of fees and plan expenses), which is primarily affected by the change in fair value of plan assets, current year contributions and current year payments to participants, was approximately negative 15.1% in 2022, positive 10.4% in 2021 and positive 10.9% in 2020.

The expected long-term rate return of 5.00% used in both 2021 and 2020 were determined at the end of 2020 and 2019 and therefore did not contemplate the liability-driven investment strategy discussed above, however, the expected long-term rate return of 3.05% used in 2022 and 4.99% for 2023 does contemplate the liability-driven investment strategy discussed above. See Note 8 “Retirement Plans and Other Postretirement Benefits” to the Consolidated Financial Statements in Item 15 for more information on expected long-term return on plan assets and asset mix.

Net periodic benefit cost, which excludes the impact of the expected plan settlement, for 2023 under GAAP is expected to be approximately $14 million, including non-cash amortization of other comprehensive net actuarial losses of approximately $12 million.

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The Company has been monitoring the estimated settlement funding gap and the effectiveness of its liability-matching bond portfolio investment strategy through an online tool provided by its investment advisors, which increased to approximately $28 million at December 31, 2022 primarily due to administrative costs incurred by the plan.

As the settlement process occurs, the Company expects to recognize a non-cash reclassification adjustment to net income or loss of the entire remaining balance of other comprehensive net actuarial losses reflected directly in shareholders’ equity, which was approximately $104 million on a pre-tax basis at December 31, 2022.

See the Segment Operations Review 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 “Income Taxes” to the Consolidated Financial Statements in Item 15 for additional information on income taxes.