UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

OR

For the transition period from _____________________ to _____________________

Commission file number 1-10258

Tredegar Corporation
(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (804) 330-1000

        Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|   No |   |

        Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X|   No |   |

        The number of shares of Common Stock, no par value, outstanding as of April 30, 2003: 38,227,575.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Tredegar Corporation
Consolidated Balance Sheets
(In Thousands)
(Unaudited)

See accompanying notes to financial statements.

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Tredegar Corporation
Consolidated Statements of Income
(In Thousands, except per share amounts)
(Unaudited)

See accompanying notes to financial statements.

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Tredegar Corporation
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

See accompanying notes to financial statements.

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TREDEGAR CORPORATION
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)

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    We account for the fair value of stock options granted to employees and directors in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized since the exercise price of the options was equal to the fair value of the underlying common stock on the date of grant. Had compensation cost for our stock-based compensation plans been determined based on the fair value of the options at the grant dates consistent with the method of accounting under Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” our income and diluted earnings per share from continuing operations would have been reduced to the pro forma amounts indicated below:

    For the purposes of the above presentation, the fair value of each option was estimated as of the grant date using the Black-Scholes option-pricing model. The weighted-average assumptions used in this model are provided below:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

        In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. We believe the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of our Annual Report on Form 10-K for the year ending December 31, 2002, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our accounting for impairment of long-lived assets and goodwill, investments, deferred tax assets and pension benefits. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition. There has been no significant change in these policies, or the estimates used in the application of these policies since our 2002 fiscal year-end.

Results of Operations

First Quarter 2003 Compared with First Quarter 2002

        The net loss for the first quarter of 2003 was $44.7 million ($1.16 per share) compared with net income of $583,000 (2 cents per share) in 2002. Net income from continuing operations was $4.9 million (12 cents per share) in 2003 compared with $10.1 million (26 cents per share) in 2002.

        On March 7, 2003, Tredegar Investments reached definitive agreements to sell substantially all of its venture capital investment portfolio. As of March 31, 2003, $21.5 million in net proceeds from the sales had been received. An additional $54.4 million of proceeds, in the form of income tax recoveries, are expected in mid-2004 from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments. The operating results from venture capital investment activities have been reported as discontinued operations and results for prior periods have been restated. Discontinued operations for the three months ended March 31, 2003, also include an after-tax charge of $49.2 million for the expected loss on the sale.

        Discontinued operations for 2002 also include an after-tax loss of $2.3 million related to Molecumetics. On July 2, 2002, the operations of Molecumetics ceased and its tangible assets were sold during the fourth quarter of 2002.

        During the first quarter, we suspended efforts to sell Therics pending a reassessment of strategic options. As a result, the long-lived assets of Therics are no longer classified as held for sale and an adjustment of $1.1 million to catch up depreciation was recorded during the first quarter of 2003 as an unusual item.

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        Overall, net sales in 2003 increased 2.4% compared with 2002. The increase is attributable to Film Products, where net sales rose 5%. In Aluminum Extrusions, net sales were flat. For more information on net sales, see the business segment review beginning on page 12.

        The gross profit margin decreased to 15.9% in 2003 from 20.9% in 2002. The lower gross profit margin was driven mainly by Aluminum Extrusions, where profits declined sharply. Industry conditions for Aluminum Extrusions have yet to show signs of recovery, making it increasingly difficult to operate efficiently at low volume levels. Also, significantly higher energy and insurance costs were major factors contributing to the decline in profit margin in Aluminum Extrusions.

        As a percentage of net sales, selling, general and administrative (“SG&A”) expenses increased to 7.2% compared with 6.8% in 2002, due primarily to higher expenses in Film Products in support of additional sales and marketing efforts and lower overall pension income.

        Research and development (“R&D”) expenses decreased slightly from $5.6 million to $5.3 million in 2003 due primarily to reduced spending at Therics (down approximately $300,000). R&D spending in Film Products was flat.

        Unusual charges in 2003 totaled $1.2 million ($748,000 after income taxes) and included:

        Unusual charges in 2002 totaled approximately $1 million ($637,000 after income taxes) and included:

        For more information on costs and expenses, see the business segment review beginning on page 12.

        Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $424,000 in 2003 and $554,000 in 2002. Despite a higher average cash and cash equivalents balance ($117 million in 2003 versus $99 million in 2002), interest income was down slightly due to lower average tax equivalent yield earned on cash equivalents (1.45% in 2003 and 2.2% in 2002). Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of our policy are safety of principal and liquidity.

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        Interest expense was $2.1 million in 2003 compared with $2.2 million in 2002. Average debt outstanding and interest rates were as follows:

        The effective tax rate from continuing operations was 35.8% in the first quarter of 2003 and 35.6% in 2002.

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Business Segment Review

        The following tables present Tredegar’s net sales and operating profit by segment for the first quarter ended March 31, 2003 and 2002:

Net Sales by Segment
(In Thousands)
(Unaudited)

Operating Profit by Segment
(In Thousands)
(Unaudited)

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        First-quarter sales in Film Products were $93.4 million, up 5% from $88.9 million in 2002. Operating profit for the quarter, excluding unusual items was $13.9 million compared with $18.1 million in the prior year. Volume for the quarter was 73 million pounds, down 5% from 77 million pounds in 2002. Operating profit and volume were down compared to last year due primarily to the loss of certain domestic backsheet products which, as expected, were no longer being sold at the end of the quarter. Additionally, compared with prior year, operating profits were negatively affected by increasing resin prices, particularly during the latter part of the quarter. Profits for the quarter exceeded our expectations due primarily to sales of apertured and elastic components. Our strategy is based on expanding sales of apertured, elastic, breathable and specialty products for global personal care, specialty and packaging markets. With the decline of our domestic backsheet business behind us, this growing portion of our business now comprises 83% of our Film Products revenues and margins are higher than those of domestic backsheet. We expect domestic backsheet revenues to level off around $40 million per year.

        On April 24, 2003, we announced that Film Products plans to build a new manufacturing facility in Guangzhou, China, to meet growing demand for our products throughout China and the rest of Asia. The new plant, which is expected to begin production by the end of 2004, will make components used primarily in personal care products such as sanitary napkins and diapers. Our current, smaller operations in Guangzhou will be relocated to the new facility.

        In Aluminum Extrusions, first-quarter sales were relatively flat at $84.5 million in 2003 versus $84.7 million in 2002. Operating profit, excluding unusual items, declined 78% to $1.2 million versus $5.4 million in 2002. Volume declined 4% to 54 million pounds from 56 million pounds in 2002. Industry conditions have yet to show signs of recovery, making it increasingly difficult to operate efficiently at low volume levels. Significantly higher energy and insurance costs were also major factors contributing to the decline in operating profit. We are aggressively exploring opportunities to make substantial reductions in our cost structure and improve near-term performance.

        For Therics, the operating loss, excluding unusual items, was $3.3 million in 2003 compared with $3.7 million in 2002. The lower losses are primarily attributable to decreased R&D spending (down $345,000).

Liquidity and Capital Resources

        Tredegar’s total assets decreased to $809.2 million at March 31, 2003, from $838 million at December 31, 2002, due primarily to the impact of the sale of substantially all of the venture capital investment portfolio. In addition to the sale of the venture capital investment portfolio, accounts receivable decreased $6.2 million.

        Cash provided by operating activities was $31.7 million in 2003 compared with $13.3 million in 2002. The increase is due primarily to a decrease in the level of working capital.

        Cash provided by investing activities was $6 million in 2003 compared with cash used in investing activities of $9.5 million in 2002. The change is primarily attributable to proceeds from the sale of venture capital investments, net of investments made, of $18.7 million in 2003 versus a net investment of $417,000 in 2002. This was offset somewhat by higher capital expenditures, an increase of $4.5 million.

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        Capital expenditures in the first quarter of 2003 reflect the normal replacement of machinery and equipment and:

        Cash used in financing activities was $16 million in 2003 versus $1.3 million in 2002. This change is attributable to repayments of debt in the total amount of $12.6 million in 2003. In addition, we repurchased 156,000 shares of our common stock for a total of $1.9 million in 2003.

        Debt outstanding of $246.6 million at March 31, 2003, consisted of a $237.5 million term loan, a note payable with a remaining balance of $5 million and other debt of $4.1 million. On April 16, 2003, we extended our $100 million 364-day credit facility for one year. This short-term facility is an interim step to longer-term financing that we hope to complete by September 30, 2003. There are no amounts currently borrowed under this facility.

Quantitative and Qualitative Disclosures About Market Risk

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

        Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products; however, those changes are generally followed by a corresponding change in selling prices. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices, but are also generally followed by a corresponding change in selling prices. Profit margins in our businesses are also affected by fluctuations in the energy markets. There is no assurance that higher raw material and energy costs can be passed along to customers.

        In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. To hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire aluminum, based on scheduled deliveries.

        We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of consolidated net sales from manufacturing operations related to foreign markets for the first quarter of 2003 and 2002 are presented below:

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We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from foreign operations in Europe primarily relates to the Euro. We believe that our exposure to the Canadian Dollar has been substantially neutralized by the U.S. Dollar-based spread (the difference between selling prices and aluminum costs) generated from Canadian casting operations and exports from Canada to the U.S.

Forward-Looking and Cautionary Statements

        From time to time, we may make statements that may constitute “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Factors that may cause such a difference include, but are not limited to the following:

General

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Film Products

Aluminum Extrusions

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Therics

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        See discussion under “Quantitative and Qualitative Disclosures About Market Risk” beginning on page 14.

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Item 4. Controls and Procedures.

        Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Tredegar required to be included in our periodic SEC filings.

        Subsequent to the date we carried out our evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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CEO CERTIFICATION

I, Norman A. Scher, certify that:

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PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, D. Andrew Edwards, certify that:

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