TREDEGAR CORP - Annual Report: 2019 (Form 10-K)

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Item 1.	BUSINESS

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•	Apertured film and laminate materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinence products (including materials sold under the Sure&Soft™, Soft Quilt™, ComfortAire™, ComfortFeel™ and FreshFeel™ brand names);

•	Elastic films and fabrics for use as components for baby diapers, adult incontinence products and feminine hygiene products (including components sold under the ExtraFlex™ and FlexAire™ brand names);

•	Three-dimensional apertured film transfer layers for baby diapers and adult incontinence products sold under the AquiSoft™, AquiDry® and AquiDry Plus™ brand names;

•	Thin-gauge films that are readily printable and convertible on conventional processing equipment for overwrap for bathroom tissue and paper towels; and

•	Polypropylene films for various industrial applications, including tape and automotive protection.

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Item 1A.	RISK FACTORS

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Sales volume and profitability of Aluminum Extrusions is cyclical and seasonal and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector. Aluminum Extrusions’ end-use markets can be cyclical and subject to seasonal swings in volume. Because of the capital intensive nature and level of fixed costs inherent in the aluminum extrusions business, the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. In addition, during an economic slowdown, excess industry capacity often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts (including a greater chance of loss associated with customers defaulting on fixed-price forward sales contracts) that usually accompany a downturn. In addition, higher energy costs can further reduce profits unless offset by price increases or cost reductions and productivity improvements.

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Failure to prevent competitors from evading anti-dumping and countervailing duties, or a reduction in such duties, could adversely impact Aluminum Extrusions. Effective April 25, 2017, the anti-dumping duty and countervailing duty orders on aluminum extrusions were extended for a period of five years.  The orders will be reviewed again beginning in March 2022. Chinese and other overseas manufacturers continue to try to evade the anti-dumping and countervailing orders to avoid duties. A failure by, or the inability of, U.S. trade officials to curtail the evasion of these duties, or the potential reduction of applicable duties pursuant to annual administrative reviews of the orders by the Department of Commerce, could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.

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The duty-free importation of goods allowed under USMCA could result in lower demand for aluminum extrusions made in the U.S., which could materially and negatively affect Bonnell Aluminum’s business and results of operations. In March 2018, the U.S. imposed tariffs of 10% on aluminum ingot and semi-finished aluminum imported in the U.S. from certain countries, including countries from which Bonnell Aluminum has historically sourced aluminum products.  In September 2019, the United States, Canada and Mexico entered into the United States-Mexico-Canada Agreement (“USMCA”).  As a result of the 10% tariffs on aluminum ingot imported to the U.S. and the duty-free importation of goods allowed under USMCA, aluminum extrusions made in Canada and Mexico are free of the 10% tariff and can now be imported into and sold in the U.S. at very competitive prices.  This could result in lower demand for aluminum extrusions made in the U.S., which could materially and negatively affect Bonnell Aluminum’s business and results of operations.

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Competition from China could increase significantly if China is granted market economy status by the World Trade Organization. China launched a formal complaint at the World Trade Organization (“WTO”) challenging its non-market economy status, claiming that as of December 11, 2016, China’s transition period as a non-market economy under its Accession Protocol to the WTO ended. China believes with respect to all Chinese-made products that it should receive market economy status and the rights attendant to that status under WTO rules.  The U.S. and the European Union have each rejected that interpretation.  If China is granted market economy status by the WTO, the extent to which the U.S. anti-dumping laws will be able to limit unfair trade practices from China will likely be limited because the U.S. government will be forced to utilize Chinese prices and costs that do not reflect market principles in anti-dumping duty investigations involving China, which could ultimately limit the level of anti-dumping duties applied to unfairly traded Chinese imports. The volume of unfairly traded imports of Chinese aluminum extrusions could increase as a result and this, in turn, would likely create substantial pricing pressure on Aluminum Extrusions’ products and could have a material adverse effect on the financial condition, results of operations and cash flows of Aluminum Extrusions. In June 2019, at China’s request, after certain preliminary rulings in the case went against the Chinese position, the WTO indefinitely suspended the proceedings on the Chinese WTO complaint.

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The markets for Aluminum Extrusions’ products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors. Aluminum Extrusions has approximately 1,500 customers that are in a variety of end-use markets within the broad categories of building and construction, distribution, automotive and other transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 4% of Aluminum Extrusions’ net sales. Future success and prospects depend on Aluminum Extrusions’ ability to provide superior service, high quality products, timely delivery and competitive pricing to retain existing customers and participate in overall industry cross-cycle growth. Failure in any of these areas could lead to a loss of customers, which could have an adverse material effect on the financial condition, results of operations and cash flows of Aluminum Extrusions.

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PE Films is highly dependent on sales associated with its top five customers, the largest of which is P&G. PE Films’ top five customers comprised approximately 19%, 21% and 26% of Tredegar’s consolidated net sales in 2019, 2018 and 2017, respectively, with net sales to P&G alone comprising approximately 6%, 10% and 13% in 2019, 2018 and 2017, respectively. The loss or significant reduction of sales associated with one or more of these customers without replacement by new business could have a material adverse effect on the Company. Other factors that could adversely affect the business include, by way of example, (i) failure by a key customer to achieve success or maintain share in markets in which they sell products containing PE Films’ materials, including as a result of customer preferences for products other than plastics, (ii) key customers using products developed by others that replace PE Films’ business with such customer, (iii) delays in a key customer rolling out products utilizing new technologies developed by PE Films, (iv) operational decisions by a key customer that result in component substitution, inventory reductions and similar changes, and (v) the cyclicality of the electronic display markets. While PE Films is undertaking efforts to expand its customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with these large customers.

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PE Films and its customers operate in highly competitive markets. PE Films competes on product innovation, quality, price and service, and its businesses and their customers operate in highly competitive markets. Global market conditions continue to exacerbate the Company’s exposure to margin compression in its Personal Care business due to competitive forces, especially as certain personal care products move into the later stages of their product and intellectual protection life cycles. In addition, the changing dynamics of consumer products retailing, including the impact of on-line retailers such as Amazon, is creating price and margin pressure on the customers of PE Films’ Personal Care business. While PE Films continually works to identify new business opportunities with new and existing customers, primarily through the development of new products with improved performance and/or cost characteristics, there can be no assurance that such efforts will be successful or that they will offset business lost from competitive dynamics or customer product transitions.

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Cost saving initiatives may not achieve the results anticipated. PE Films has undertaken and will continue to undertake cost reduction initiatives to consolidate certain production, improve operating efficiencies and generate cost savings. PE Films cannot be certain that it will be able to complete these initiatives as planned or that the estimated operating efficiencies or cost savings from such activities will be fully realized or maintained over time. In addition, PE Films may not be successful in moving production to other facilities or timely qualifying new production equipment. Failure to complete these initiatives could adversely affect PE Films’ financial condition, results of operations and cash flows.

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Failure of PE Films’ customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact PE Films’ sales and operating margins. PE Films’ plastic films serve as components for, or are used in the production of, various consumer products sold worldwide. A customer’s ability to successfully develop, manufacture and market those products is integral to PE Films’ success. Also, consumers of premium products made with or using PE Films’ components may shift to less premium or less expensive products, reducing the demand for PE Films’ plastic films. Cyclical downturns and changing consumer preferences for plastic products generally may negatively affect businesses that use PE Films’ plastic film products, which could adversely affect sales and operating margins.

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The Company’s inability to protect its intellectual property rights or its infringement of the intellectual property rights of others could have a material adverse impact on PE Films. PE Films operates in an industry where its significant customers and competitors have substantial intellectual property portfolios. The continued success of PE Films’ business depends on its ability not only to protect its own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents or threaten existing customer relationships. Intellectual property litigation is very costly and could result in substantial expense and diversions of Company resources, both of which could adversely affect its consolidated financial condition, results of operations and cash flows. In addition, there may be no effective legal recourse against infringement of the Company’s intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.

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An unstable economic environment could have a disruptive impact on PE Films’ supply chain. Certain raw materials used in manufacturing PE Films’ products are sourced from single suppliers, and PE Films may not be able to quickly or inexpensively re-source from other suppliers.  The risk of damage or disruption to its supply chain may increase if and when different suppliers consolidate their product portfolios, experience financial distress or disruption of manufacturing operations (such as, for example, the impact of hurricanes on petrochemical production). Failure to take adequate steps to effectively manage such events, which are intensified when a product is procured from a single supplier or location, could adversely affect PE Films’ consolidated financial condition, results of operations and cash flows, as well as require additional resources to restore its supply chain.

•	Overcapacity in Latin American polyester film production and a history of uncertain economic conditions in Brazil could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films.

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Governmental failure to extend anti-dumping duties in Brazil on imported products or prevent competitors from circumventing such duties could adversely impact Flexible Packaging Films. In recent years, excess global capacity in the industry has led to increased competitive pressures from imports into Brazil.  The Company believes that these conditions have shifted the competitive environment from a regional to a global landscape and have driven price convergence and lower product margins for Flexible Packaging Films. Favorable anti-dumping rulings or countervailing duties are in effect for products imported from China, Egypt, India, Mexico, United Arab Emirates, Turkey, Peru and Bahrain. Competitors not currently subject to anti-dumping duties may choose to utilize their excess capacity by selling product in Brazil, which may result in pricing pressures that Flexible Packaging Films may not be able to offset with cost savings measures and/or manufacturing efficiency initiatives.  There can be no assurance that efforts to extend anti-dumping duties beyond 2020 on products imported from China, India, Egypt and other countries will be successful.

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The Company has identified material weaknesses in its internal control over financial reporting at December 31, 2017, 2018 and 2019. The Company’s failure to establish and maintain effective internal control over financial reporting and to maintain effective disclosure controls and procedures increases the risk of a material misstatement in its consolidated financial statements, and its failure to meet its reporting and financial obligations, which in turn could have a negative impact on its financial condition.

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Tredegar has an underfunded defined benefit (pension) plan. Tredegar sponsors a pension plan that covers certain hourly and salaried employees in the U.S. The plan was substantially frozen to new participants in 2007, and frozen to benefit accruals for active participants in 2014. As of December 31, 2019, the plan was underfunded under U.S. generally accepted accounting principles (“GAAP”) measures by $100.4 million. Tredegar expects that it will be required to make a cash contribution of approximately $12.3 million to its underfunded pension plan in 2020, and may be required to make higher cash contributions in future periods depending on the level of interest rates and investment returns on plan assets.

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Noncompliance with any of the covenants in the Company’s $500 million revolving credit facility, which matures in June of 2024, could result in all debt under the agreement outstanding at such time becoming due and limiting its borrowing capacity, which could have a material adverse effect on consolidated financial condition and liquidity. The credit agreement governing Tredegar’s revolving credit facility contains restrictions and financial covenants that, if violated, could restrict the Company’s operational and financial flexibility. Failure to comply with these covenants could result in an event of default, which if not cured or waived, would result in all outstanding debt under the credit facility at such time becoming due, which could have a material adverse effect on the Company’s consolidated financial condition and liquidity.

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Tredegar’s performance is influenced by costs incurred by its operating companies, including, for example, the cost of raw materials and energy. These costs include, without limitation, the cost of aluminum (the raw material on which Aluminum Extrusions primarily depends), resin (the raw material on which PE Films primarily depends), PTA and MEG (the raw materials on which Flexible Packaging Films primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Aluminum, resin and natural gas prices are volatile as shown in the charts in the Quantitative and Qualitative Disclosures in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurance that higher prices can effectively be passed through to customers or that Tredegar will be able to offset fully or on a timely basis the effects of higher raw material and energy costs through price increases or pass-through arrangements. Further, the Company’s cost control efforts may not be sufficient to offset any increases in raw material, energy or other costs.

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Tredegar may not be able to successfully integrate strategic acquisitions. Acquisitions involve special risks, including, without limitation, meeting revenue, margin, working capital and capital expenditure expectations that substantially drive valuation, diversion of management’s time and attention from existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements.  Acquired businesses may not achieve expected results.

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Tredegar is subject to current and future governmental regulation, including environmental laws and regulations, and could become exposed to material liabilities and costs associated with such regulation. The Company is subject to regulation by local, state, federal and foreign governmental authorities.  New laws and regulations, or changes to existing laws, including those relating to environmental matters (including global climate change and plastic products), and  privacy matters, could subject Tredegar to significant additional capital expenditures, operating expenses or other compliance costs. Moreover, future developments in federal, state, local and international laws and regulations, including environmental laws, are difficult to predict. Environmental laws and privacy restrictions have become and are expected to continue to become increasingly strict. As a result, Tredegar expects to be subject to new environmental and privacy laws and regulations. However, any such changes are uncertain and, therefore, it is not possible for the Company to predict with certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any such changes. See Environmental Regulation in Item 1. “Business” for a further discussion of this risk factor.

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Material disruptions at one of the Company’s major manufacturing facilities could negatively impact financial results. Tredegar believes its facilities are operated in compliance with applicable local laws and regulations and that the Company has implemented measures to minimize the risks of disruption at its facilities. Such a disruption could be a result of any number of events: an equipment failure with repairs requiring long lead times, labor stoppages or shortages, cybersecurity attacks, utility disruptions, constraints on the supply or delivery of critical raw materials, and severe weather conditions. A material disruption in one of the Company’s operating locations could negatively impact production and its consolidated financial condition, results of operations and cash flows.

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An inability to renegotiate the Company’s collective bargaining agreements could adversely impact its consolidated financial condition, results of operations and cash flows. Approximately 19% of the Company’s employees are represented by labor unions under various collective bargaining agreements with varying durations and expiration dates. Tredegar may not be able to satisfactorily renegotiate collective bargaining agreements when they expire, which could result in strikes or work stoppages or higher labor costs. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at the Company’s facilities in the future. Any such work stoppages (or potential work stoppages) could negatively impact Tredegar’s ability to manufacture its products and adversely affect its consolidated financial condition, results of operations and cash flows. None of Tredegar’s collective bargaining agreements expire before the fourth quarter of 2021.

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Our business and operations, and the operations of our suppliers, may be adversely affected by epidemics such as the recent coronavirus (or COVID-19) outbreak. We may face risks related to health epidemics or outbreaks of communicable diseases. The outbreak of such a communicable disease could result in a widespread health crisis that could adversely affect general commercial activity and the economies and financial markets of many countries. For example, the recent outbreak of the Coronavirus Disease 2019 (COVID-19), which began in China, has been declared by the World Health Organization to be a “pandemic,” has spread across the globe to many countries in which the Company does business and is impacting worldwide economic activity.

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Tredegar’s valuation of its $7.5 million cost-basis investment in kaléo is volatile and uncertain. Tredegar uses the fair value method to account for its fully-diluted ownership interest of approximately 18% in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company. There is no active secondary market for buying or selling stock in kaléo. The Company’s fair value estimates can fluctuate materially between reporting periods, primarily due to variances in kaléo’s performance versus expectations and changes in the valuation of guideline public companies as measured by their enterprise value-to-EBITDA multiples. Additionally, the estimated fair value of the Company’s investment in kaléo could decline. Public pressure to lower the price of pharmaceutical products and competitive pressures in the market could affect the price at which kaléo sells its products. The U.S. Department of Justice began an investigation of kaléo’s Evzio business in 2018, the impact of which on kaléo and on the value of the Company’s interest in kaléo cannot yet be estimated with any certainty. Kaléo initiated a plan in 2019 to reduce the cost structure of the Evzio product line and reallocate resources to its allergy and pediatric product lines, principally Auvi-Q. As a result, kaléo substantially reduced commercial activities associated with Evzio in 2019. See Note 4 to the Notes to Financial Statements (“Note 4”) for more information.

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Rising trade tensions could cause an increase in the cost of the Company’s products or otherwise negatively impact the Company. A significant portion of the Company’s business involves imports to and from the U.S. and other countries where the Company produces and sells its products. Trade tensions have been rising between the U.S. and other countries, particularly China. An increase in tariffs and other trade barriers between the U.S. and China, or between the U.S. and other countries, could cause an increase in the cost of the Company’s products or otherwise negatively impact the production and sale of the Company’s products in world markets.

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A failure in the Company’s information technology systems as a result of cybersecurity attacks or other causes could negatively affect Tredegar’s business. The Company depends on information technology (“IT”) to record and process customers’ orders, manufacture and ship products in a timely manner, secure its production processes and know-how, maintain the financial accuracy of its business records and maintain personally identified information of its employees. An IT system failure due to computer viruses, internal or external security breaches, cybersecurity attacks, or other malicious causes could disrupt our operations and prevent us from being able to process transactions with our customers, operate our manufacturing facilities and properly report transactions in a timely manner. Increased global IT security threats and cyber-crime pose a potential risk to the security and availability of the Company’s IT systems, networks, and services, including those that are managed, hosted, provided, or used by third parties, as well as to the confidentiality, availability, and integrity of the Company’s data. To date, interruptions of the Company’s IT systems have been infrequent and have not had a material impact on the Company’s operations. A significant protracted failure of or security breach of the IT systems, networks, or service providers the Company relies upon, or a loss or disclosure of business or other sensitive information, or personally identified information, as a result of a cybersecurity incident or other cause, could result in substantial costs to the Company, damage to the Company’s reputation, regulatory enforcement actions and lawsuits, and could adversely affect the Company’s results of operations, financial condition or cash flows.

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Item 1B.	UNRESOLVED STAFF COMMENTS

Item 2.	PROPERTIES

Item 3.	LEGAL PROCEEDINGS

Item 4.	MINE SAFETY DISCLOSURES

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Item 5.	MARKET FOR TREDEGAR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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Item 6.	SELECTED FINANCIAL DATA

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(a)	For a description of plant shutdowns, asset impairments, restructurings and other charges for 2019, 2018, and 2017, see the plant shutdowns, asset impairments, restructurings and other tables for 2019, 2018 and 2017 in Results of Continuing Operations “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.

(b)	For a description of plant shutdowns, asset impairments, restructurings and other charges for 2016 and 2015, see “Selected Financial Data” in Part II, Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K“), Part II, Item 6.

(c)

Results for 2018 included a goodwill impairment charge of $46.8 million ($38.2 million after taxes) recognized in PE Films in the third quarter of 2018 upon completion of an impairment analysis performed as of September 30, 2018. Results for 2015 included a goodwill impairment charge of $44.5 million ($44.5 million after taxes) recognized in Flexible Packaging Films in the third quarter of 2015 upon completion of an impairment analysis performed as of September 30, 2015.

(d)	Total return to shareholders is defined as the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.

(e)	Equity market capitalization is the closing market price per share for the period multiplied by the shares outstanding at the end of the period.

(f)	Net sales represents gross sales less freight. The Company uses net sales as its measure of revenues from external customers at the segment level.

(g)	The gains and losses on the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income. See Note 4 to the Notes to financial statements for more details for the years 2019, 2018 and 2017.

(h)	Equity per share is computed by dividing shareholders’ equity at year end by the shares outstanding at year end.

(i)	For the years ended December 31, 2015 to 2017, the pension and postretirement benefit expenses recorded in Cost of goods sold and Selling, general and administrative expenses were reclassified to a new line item, Pension and postretirement benefits, on the consolidated statements of income, due to the retrospective adoption of Accounting Standards Update (“ASU”) 2017-07.

(j)

Depreciation and amortization (“D&A”) in 2019 for Aluminum Extrusions excludes $10.0 million for accelerated amortization of trade names as a result of a rebranding initiative. D&A in 2019, 2018, 2017, 2016 and 2015 for PE Films excludes $1.2 million, $0.6 million, $0.3 million, $0.6 million and $0.4 million, respectively, for accelerated depreciation associated with restructurings and plant closures.

(k)	Corporate depreciation and amortization is included in Corporate expenses, net, on the EBITDA from ongoing operations table above.

(l)

In the fourth quarter of 2019, the Company changed its segment measure of profit and loss from operating profit from ongoing operations to EBITDA (earnings before interest, taxes, depreciation and amortization) from ongoing operations.  EBITDA from ongoing operations is the key profitability metric used by the Company’s chief operating decision maker to assess segment financial performance. See Note 5 to the Notes to Financial Statements in this 2019 Form 10-K for additional business segment information.

(m)

EBIT (earnings before interest and taxes) from ongoing operations is a non-GAAP financial measure included in the reconciliation of segment financial information to consolidated results for the Company.  It is not intended to represent the stand-alone results for Tredegar’s ongoing operations under GAAP and should not be considered as an alternative to net income as defined by GAAP.  EBIT is a widely understood and utilized metric that is meaningful to certain investors.  We believe that including this financial metric in the reconciliation of management’s performance metric, EBITDA from ongoing operations, provides useful information to those investors that primarily utilize EBIT to analyze the Company’s core operations.

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

•	An after-tax gain on the sale of the Company’s Shanghai manufacturing property of $5.9 million ($0.18 per share);

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

•	An unrealized after-tax gain on the Company’s investment in kaléo of $8.5 million ($0.26 per share), which is accounted for under the fair value method (see Note 4 for more details);

•	An after-tax impairment of the total goodwill balance of PE Films’ Personal Care division of $38.2 million ($1.15 per share after-tax). See the Customer Product Transitions in Personal Care and Surface Protection section below and Note 8 to the Notes to Financial Statements for more details; and

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

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

•	A $19.6 million decrease from Personal Care, primarily due to lower volume and unfavorable mix ($19.3 million), unfavorable pricing ($4.8 million), and production inefficiencies ($3.8 million), partially offset by the timing in the passthrough of changes in resin prices ($2.1 million), lower fixed manufacturing ($4.4 million) and selling, general and administrative costs ($1.8 million).

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

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

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

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•	Higher volume ($5.1 million) and favorable mix ($5.8 million), which were offset by higher employee-related costs ($5.2 million), higher supplies and maintenance ($2.3 million), higher freight ($1.7 million), and higher utilities, primarily in the first quarter of 2018 at the Newnan, Georgia facility ($0.9 million).

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The volume decline in Personal Care was primarily related to topsheet business lost from competitive pressures in North America, Europe and Asia, including at the Shanghai, China, facility that was shut down in the fourth quarter of 2018. A small portion of the volume decline was associated with the start of a customer product transition. Volume for elastics products in Personal Care increased year-over-year; and

•	Slightly lower sales in Surface Protection caused by lower volume and the adverse impact of quality claims, partially offset by higher volume-based selling prices.

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Lower contribution to profits from Personal Care, primarily due to lower volume and unfavorable product mix ($9.3 million), partially offset by volume-based higher selling pricing ($2.2 million), lower fixed and selling, general and administrative costs ($1.1 million), the timing of resin cost passthroughs ($0.7 million), productivity improvements ($0.3 million) and net favorable impact from the change in U.S. Dollar value of currencies for operations outside of the U.S. ($0.8 million);

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Lower contribution to profits from Surface Protection, primarily due to lower volumes and unfavorable product mix ($4.1 million), the adverse impact of quality claims ($1.3 million), higher fixed and other manufacturing costs ($1.6 million), higher research and development spending and selling, general and administrative costs ($0.4 million) and higher freight costs ($0.5 million), partially offset by volume-based higher selling prices ($4.4 million); and

•	Realized cost savings associated with the North American consolidation of our PE Films manufacturing facilities completed in 2017 ($2.4 million).

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•	A benefit from higher volume ($5.5 million) and favorable tax incentives ($1.3 million), partially offset by the unfavorable impact of mix and higher resin costs, net of higher selling prices ($2.2 million);

•	Higher fixed and other manufacturing costs and selling, general and administrative costs, primarily related to higher volume ($2.0 million);

•	Favorable foreign currency translation of Real-denominated operating costs ($3.2 million), which was offset by a $1.7 million loss on foreign currency forward contracts that partially hedged Real-denominated operating costs; and

•	Unfavorable net foreign currency transaction impact ($0.6 million) resulting from foreign currency transaction losses of $0.8 million in 2018 and losses of $0.2 million in 2017.

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•	Accounts and other receivables decreased $17.2 million (13.8%).

•	Accounts and other receivables in Aluminum Extrusions decreased by $11.6 million primarily due to lower sales. DSO (computed using trailing 12 months net sales and a rolling 12-month average of accounts and other receivables balances) was approximately 48.5 days in 2019 and 44.6 days in 2018.

•	Accounts and other receivables in PE Films decreased by $7.0 million due mainly to lower net sales for Personal Care products. DSO was approximately 44.0 days in 2019 and 43.2 days in 2018.

•	Accounts and other receivables in Flexible Packaging Films increased by $1.5 million primarily due to higher sales. DSO was approximately 37.7 days in 2019 and 43.7 days in 2018.

•	Inventories decreased $12.4 million (13.3%).

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Inventories in Aluminum Extrusions decreased by $5.4 million primarily due to a decrease in raw material prices and reduced purchases of inventory in light of lower sales. 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 38.6 days in 2019 and 33.5 days in 2018.

•	Inventories in PE Films decreased by $2.1 million primarily due to lower sales and the timing of raw material purchases. DIO was approximately 55.7 days in 2019 and 54.9 days in 2018.

•	Inventories in Flexible Packaging Films decreased by $5.0 million primarily due to a reduction of finished goods on hand and an overall reduction in raw material levels. DIO was approximately 94.3 days in 2019 and 77.9 days in 2018.

•	Net property, plant and equipment increased by $14.5 million (6.4%) primarily due to capital expenditures of $50.9 million, offset by depreciation of $30.7 million and the disposal of fixed assets ($2.1 million decrease).

•	Identifiable intangible assets decreased by $13.7 million (37.6%) primarily due to amortization expense of $13.6 million, including $10.0 million of accelerated amortization of trade names associated with the Bonnell Aluminum rebranding initiative. For information on the rebranding initiative, see Note 8.

•	Accounts payable decreased by $9.1 million (8.1%).

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Accounts payable in Aluminum Extrusions decreased by $6.5 million, primarily due to lower volume, a decrease in metal prices and the normal volatility associated with the timing of payments. 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 49.9 days in 2019 and 49.7 days in 2018.

•	Accounts payable in PE Films decreased by $0.9 million primarily due to the normal volatility associated with the timing of payments. DPO was approximately 44.9 days in 2019 and 43.7 days in 2018.

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•	Accounts payable in Flexible Packaging Films decreased by $1.3 million, primarily due to lower inventory levels and the normal volatility associated with the timing of payments. DPO was approximately 55.2 days in 2019 and 51.9 days in 2018.

•	Accrued expenses increased by $3.3 million (7.8%) from December 31, 2018 due to normal fluctuations in the accrual accounts.

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Net noncurrent deferred income tax assets in excess of noncurrent deferred income tax liabilities decreased by $1.3 million primarily due to numerous changes between years in the balance of the components shown in the December 31, 2019 and 2018 schedule of deferred income tax assets and liabilities provided in Note 16. The Company had a current income tax receivable of $4.1 million at December 31, 2019 compared to a current income tax receivable of $6.8 million at December 31, 2018. The change is primarily due to timing of tax payments and refunds from net operating losses and tax credits carried back to prior years.

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(1)

Estimated minimum required contributions for defined benefit plans and benefit payments for other postretirement plans are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases and health care cost trends. The expected defined benefit plan contribution estimates for 2020 through 2029 were determined under provisions of the Pension Protection Act of 2006 using the preliminary assumptions chosen by Tredegar for the 2020 plan year. Tredegar has determined that it is not practicable to present defined benefit contributions and other postretirement benefit payments beyond 2029.

(2)	Contractual lease payments for 2020 include $0.4 million of short term lease payments and $0.5 million of variable lease costs.

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

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

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Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 9A.	CONTROLS AND PROCEDURES

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•	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of its management and directors; and

•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

•	Control Environment: The Company did not have a sufficient number of trained resources with assigned responsibility and accountability for the design, operation and documentation of internal control over financial reporting in accordance with the 2013 COSO Framework.

•	Risk Assessment: The Company did not have an effective risk assessment process that defined clear financial reporting objectives and evaluated risks, including fraud risks, and risks resulting from changes in the external environment and business operations, at a sufficient level of detail to identify all relevant risks of material misstatement across the entity.

•	Information and Communication: The Company did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.

•	Monitoring Activities: The Company did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.

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•	Control Activities: As a consequence of the material weaknesses described above, internal control deficiencies related to the design and operation of process-level controls and general information technology controls were determined to be pervasive throughout the Company’s financial reporting processes.

a.	Identified material processes and significant locations for the purpose of identifying risks of material misstatement to the Company’s financial statements,

b.	Conducted interviews with relevant parties to ensure our understanding of the activities involved in the recording of transactions within material processes,

c.	Substantially completed a comprehensive review and update, as necessary, of the documentation of relevant processes with respect to the Company’s internal control over financial reporting, and

d.	Documented significant elements of a comprehensive risk assessment and internal control gap analysis and commenced the validation thereof with key stakeholders.

Item 9B.	OTHER INFORMATION

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Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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Item 11.	EXECUTIVE COMPENSATION

Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

*	Includes performance stock units that give the holder the right to receive shares of Tredegar common stock upon the satisfaction of certain performance criteria.

Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

•	Information on accounting fees and services to be included in the Proxy Statement under the heading “Audit and Non-Audit Fees;” and

•	Information on the Audit Committee’s procedures for pre-approving certain audit and non-audit services to be included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and Board Committees—Audit Committee Matters.”

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Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	List of documents filed as a part of the report:

(1)	Financial statements:

(2)	Financial statement schedules:

(3)	Exhibits:

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1	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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2	ACQUISITIONS

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3	OTHER INCOME (EXPENSE), NET

4	INVESTMENTS

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5	BUSINESS SEGMENTS

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(a)	See Notes 1, 3, 4 and 17 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, gains or losses from sale of assets, gains or losses on an investment accounted for under the fair value method and other items.

(b)

Information on exports and foreign operations are provided on the previous page. Cash and cash equivalents includes funds held in locations outside the U.S. of $23.0 million and $31.1 million at December 31, 2019 and 2018, respectively. Export sales relate almost entirely to PE Films. Operations outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia. The facility in Shanghai was shut down in the fourth quarter of 2018.

(c)	Depreciation and amortization for Aluminum Extrusions in 2019 excludes $10.0 million for accelerated amortization of trade names as a result of a rebranding initiative (see Note 8 for more information) and for PE Films in 2019, 2018 and 2017 excludes $1.2 million, $0.6 million and $0.3 million, respectively, for accelerated depreciation associated with restructurings and plant closures.

(d)	Corporate depreciation and amortization is included in Corporate expenses, net, on the EBITDA from ongoing operations table above.

6	ACCOUNTS AND OTHER RECEIVABLES

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7	INVENTORIES

8	GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

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9	FINANCIAL INSTRUMENTS

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10	ACCRUED EXPENSES

11	DEBT AND CREDIT AGREEMENTS

•	Maximum indebtedness-to-adjusted EBITDA (“Leverage Ratio:) of 4.00x;

•	Minimum adjusted EBITDA-to-interest expense of 3.00x; and

•

Maximum aggregate distributions to shareholders over the term of the Credit Agreement of $130 million plus, beginning with the fiscal quarter ended June 30, 2019, 50% of net income and, at a 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.

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12	STOCK OPTION AND STOCK AWARD PLANS

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13	RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

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14	SAVINGS PLAN

•	The Company makes matching contributions to the savings plan of $1 for every $1 an employee contributes per pay period up to a maximum of 5% of eligible compensation.

•	The savings plan includes immediate vesting of matching contributions and automatic enrollment at 3% of eligible compensation unless the employee opts out or elects a different percentage.

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15	LEASES

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16	INCOME TAXES

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17	ASSET IMPAIRMENTS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES

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18	CONTINGENCIES

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19	SELECTED QUARTERLY FINANCIAL DATA

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