TREDEGAR CORP - Quarter Report: 2011 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2011

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 mark 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 mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of Common Stock, no par value, outstanding as of April 29, 2011: 32,003,590.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Tredegar Corporation

Consolidated Balance Sheets

(In Thousands, Except Share Data)

(Unaudited)

See accompanying notes to financial statements.

2

Tredegar Corporation

Consolidated Statements of Income

(In Thousands, Except Per Share Data)

(Unaudited)

See accompanying notes to financial statements.

3

Tredegar Corporation

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

See accompanying notes to financial statements.

4

Tredegar Corporation

Consolidated Statement of Shareholders’ Equity

(In Thousands, Except Share and Per Share Data)

(Unaudited)

See accompanying notes to financial statements.

5

TREDEGAR CORPORATION

NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

Plant shutdowns, asset impairments, restructurings and other charges in the first quarter of 2011 include:

Plant shutdowns, asset impairments, restructurings and other charges in the first quarter of 2010 include:

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A reconciliation of the beginning and ending balances of accrued expenses associated with asset impairments and exit and disposal activities for the three months ended March 31, 2011 is as follows:

Income taxes for the first quarters of 2011 and 2010 include the partial reduction of a valuation allowance of $117,000 and $168,000, respectively, related to the expected limitations on the utilization of assumed capital losses on certain investments that was recognized in prior years.

Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During the three months ended March 31, 2011 and 2010, 78,767 and 469,567, respectively, of average out-of-the-money options to purchase shares were excluded from the calculation of incremental shares attributable to stock options and restricted stock.

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At March 31, 2011 and December 31, 2010, the estimated fair value of our investment (also the carrying value included in “Other assets and deferred charges” in our balance sheet) was $16.0 million. On the date of our most recent investment (December 15, 2008), we believe that the amount we would be paid for our ownership interest and liquidation preferences was based on significant other observable (Level 2) inputs, including investments by other investors. Subsequent to December 15, 2008, and until the next round of financing, we believe fair value estimates drop to significant unobservable (Level 3) inputs since there is no secondary market for our ownership interest. In addition, the specialty pharmaceutical company currently has no product sales. Accordingly, after the latest financing and until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, corresponding cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. Adjustments to the estimated fair value of our investment will be made in the period upon which such changes can be quantified.

Had we not elected to account for our investment under the fair value method, we would have been required to use the equity method of accounting. For the three months ended March 31, 2011, net income recorded by the specialty pharmaceutical company, as reported to us by the investee, was $436,000 compared to $1.6 million for the first three months of 2010. Operating results included $3.3 million and $4.1 million in licensing revenues in the first quarters of 2011 and 2010, respectively. Total assets (which included cash and cash equivalents of $17.3 million at March 31, 2011 and $18.8 million at December 31, 2010) were $23.9 million and $26.6 million at March 31, 2011 and December 31, 2010, respectively.

Our investment in Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”) had a reported capital account value of $8.5 million at March 31, 2011, compared with $9.6 million at December 31, 2010. This investment had a carrying value in Tredegar’s balance sheet (included in “Other assets and deferred charges”) of $5.7 million at March 31, 2011 and $6.4 million at December 31, 2010. The carrying value at March 31, 2011 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of March 31, 2011. There were no gains or losses associated with our

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investment in Harbinger in 2011 or 2010. Gains on our investment in Harbinger will be recognized when the amounts expected to be collected from our withdrawal from the investment are known, which will likely be when cash in excess of our remaining carrying value is received. Losses will be recognized when management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs within the corresponding commodity or foreign currency markets. If individual derivative instruments with the same counterparty can be settled on a net basis, we record the corresponding derivative fair values as a net asset or net liability.

In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $4.4 million (4.1 million pounds of aluminum) at March 31, 2011 and $5.8 million (5.7 million pounds of aluminum) at December 31, 2010.

The table below summarizes the location and gross amounts of aluminum futures contract fair values in the consolidated balance sheets as of March 31, 2011 and December 31, 2010:

In the event that the counterparty to an aluminum fixed-price forward sale contract chooses to not take delivery of its aluminum extrusions, the customer is contractually obligated to compensate us for any losses on the related aluminum futures and/or forward purchase contracts through the date of cancellation.

9

Losses of $32,000 ($20,000 after tax) in the first quarter of 2011 and gains of $443,000 ($275,000 after tax) in the first quarter of 2010 were recognized by the aluminum extrusions business for timing differences between the recognition of realized losses on aluminum futures contracts and related revenues from delayed fulfillment by customers of fixed-price forward purchase commitments. Such timing differences are included in “Plant shutdowns, assets impairments, restructurings and other” in the net sales and operating profit by segment table in Note 8.

We used future fixed Euro-denominated contractual payments for equipment being purchased as part of our expansion of the Carthage, Tennessee aluminum extrusion manufacturing facility. We utilized a fixed rate Euro forward contract with various settlement dates through March 2010 to hedge exchange rate exposure on these obligations. There was no outstanding notional amount of this foreign currency forward at March 31, 2011 and December 31, 2010.

These derivative contracts involve elements of credit and market risk that are not reflected on our consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers. The counterparties to our foreign currency futures and zero-cost collar contracts are major financial institutions.

The effect on net income and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the quarters ended March 31, 2011 and 2010 is summarized in the table below:

Gains and losses on the ineffective portion of derivative instruments or derivative instruments that were not designated as hedging instruments were immaterial for the three months ended March 31, 2011 and 2010. As of March 31, 2011, we expect $358,000 of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next twelve months. For the three months ended March 31, 2011 and 2010, net gains or losses realized on previously unrealized net gains or losses from hedges that had been discontinued were not material.

10

We contributed $167,000 to our pension plans for continuing operations in 2010 and expect to contribute a similar amount in 2011. We fund our other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which were $311,000 for the year ended December 31, 2010.

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The following table presents net sales and operating profit by segment for the three months ended March 31, 2011 and 2010:

The following table presents identifiable assets by segment at March 31, 2011 and December 31, 2010:

12

We claimed an ordinary loss on the write-off of our investment in our aluminum extrusions operations in Canada, which was sold in February 2008, on our 2008 consolidated tax return (included in discontinued operations in the consolidated statement of income in 2007). The Internal Revenue Service (“IRS”) has challenged the ordinary nature of such deduction, asserting that the deduction should be re-characterized as capital in nature. We plan to vigorously defend our position related to this matter and believe that we will prevail but there can be no assurance of such a result. If the Company were not to prevail in final, non-appealable determinations, it is possible that the matter would result in additional tax payments of up to $12 million, plus any interest and penalties.

Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. Generally, except for refund claims and amended returns, Tredegar is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2006. With few exceptions, Tredegar and its subsidiaries are no longer subject to state or non-U.S. income tax examinations by tax authorities for years before 2007.

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

Forward-looking and Cautionary Statements

Some of the information contained in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When we use the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, we do so to identify forward-looking statements. 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. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Factors that could cause actual results to differ from expectations include, without limitation: Film Products is highly dependent on sales to one customer — The Procter & Gamble Company; growth of Film Products depends on its ability to develop and deliver new products at competitive prices; sales volume and profitability of Aluminum Extrusions are cyclical and highly dependent on economic conditions of end-use markets in the U.S., particularly in the construction sector, and are also subject to seasonal slowdowns; our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations; our future performance is influenced by costs incurred by our operating companies including, for example, the cost of energy and raw materials; and the other factors discussed in the reports Tredegar files with or furnishes to the Securities and Exchange Commission (the “SEC”) from time-to-time, including the risks and important factors set forth in additional detail in “Risk Factors” in Part I, Item 1A of Tredegar’s 2010 Annual Report on Form 10-K (the “2010 Form 10-K”) filed with the SEC. Readers are urged to review and carefully consider the disclosures Tredegar makes in its 2010 Form 10-K. Tredegar does not undertake to update any forward-looking statement to reflect any change in management’s expectations or any change in conditions, assumptions or circumstances on which such statements are based.

Executive Summary

First-quarter 2011 net income was $6.7 million (21 cents per share) compared with $5.8 million (17 cents per share) in the first quarter of 2010. Losses related to plant shutdowns, asset impairments, restructurings and other items are described in Note 2 on page 6. Net sales (sales less freight) and operating profit (loss) from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance.

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The following table presents Tredegar’s net sales and operating profit by segment for the three months ended March 31, 2011 and 2010:

Film Products

A summary of operating results for Film Products is provided below:

Higher net sales in Film Products can be attributed to an increase in average selling prices from the pass-through of higher resin prices to customers, partially offset by lower volumes. The 3.1% year-over-year decrease in sales volumes can be primarily attributed to lower volumes in personal care products, partially offset by higher volumes in films for the specialty and construction markets.

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Operating profit from ongoing operations, which continues to fluctuate quarter to quarter, decreased in the first quarter of 2011 compared with the first quarter of the prior year due primarily to the lower volumes noted above and increased operating costs and selling, general and administrative expenses, which were primarily associated with planned expenditures in support of strategic initiatives. Additionally, preventative maintenance expense was accelerated into the first quarter to take advantage of downtime in certain facilities.

Compared to the first quarter of 2010, the impact of the lag in the pass-through of higher resin costs in the first quarter of 2011 had a favorable impact on results. Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days. The estimated unfavorable impact of the quarterly lag in the pass-through of changes in average resin costs was $1.7 million in the first quarter of 2011, compared to an unfavorable impact of $2.3 million in the first quarter of 2010. The change in the U.S. dollar value of currencies for operations outside the U.S. had an unfavorable impact of approximately $275,000 in the first quarter of 2011 compared to the first quarter of 2010.

Capital expenditures in Film Products were $4.1 million in the first quarter of 2011 compared with $1.9 million in the first quarter of last year. Film Products currently projects that capital expenditures will be approximately $16 million in 2011. Depreciation expense was $8.2 million in the first quarter of 2011 and $8.5 million in the first quarter of 2010, and is projected to be approximately $35 million in 2011.

Aluminum Extrusions

A summary of operating results for Aluminum Extrusions is provided below:

Net sales in the first quarter of 2011 increased in comparison to the first quarter of 2010 due to higher volumes and an increase in average selling prices driven by higher aluminum prices. The favorable change in the operating loss from ongoing operations of $1.8 million versus the first quarter of 2010 was primarily driven by higher volumes in most markets.

Capital expenditures in Aluminum Extrusions were $512,000 in the first quarter of 2011 compared with $1.2 million in the first quarter of last year. Capital expenditures are projected to be approximately $5 million in 2011. Depreciation expense was $2.1 million in the first quarter of 2011 compared with $2.4 million in the first quarter of last year, and is projected to be approximately $8.5 million in 2011.

Other

The Other segment is comprised of the start-up operations of Bright View Technologies Corporation (Bright View Technologies) and Falling Springs, LLC (Falling Springs). Bright View Technologies is a developer and producer of high-value microstructure-based optical films for the LED (light emitting diode) and fluorescent lighting markets. Falling Springs develops, owns and operates multiple mitigation banks. Through the establishment of perpetual easements to restore, enhance and preserve wetlands, streams or other protected environmental resources, these mitigation banks create saleable credits that are used by the purchaser of credits to offset the negative environmental impacts from private and public development projects.

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Net sales for this segment can fluctuate from quarter-to-quarter as Bright View Technologies is a late-stage development company and Falling Springs’ revenue can vary based upon the timing of development projects within its markets. Operating losses from ongoing operations were $1.2 million in the first quarter of 2011 compared to $636,000 in the first quarter of 2010. Losses increased versus the prior year as a result of lower sales for the segment and a full quarter of operating losses for Bright View Technologies, whose assets were purchased on February 3, 2010.

Corporate Expenses, Interest and Taxes

Pension expense was $556,000 in the first quarter of 2011, an unfavorable change of $512,000 from the first quarter of 2010. Most of the impact of pensions on earnings is reflected in “Corporate expenses, net” in the net sales and operating profit by segment table. We contributed $167,000 to our pension plans for continuing operations in 2010, and minimum required contributions to our pension plans in 2011 are expected to be comparable. Corporate expenses, net decreased in 2011 versus 2010 primarily due to favorable impact of the timing of recognition of certain performance-based incentives and other corporate-related expenses, partially offset by the unfavorable impact of pension expense noted above.

The effective tax rate for the first quarter of 2011 was 31.0% compared to 41.2% in the first quarter of 2010. The significant differences between the U.S. federal statutory rate and the effective tax rate for the first three months of 2011 and 2010 is shown in the table provided in Note 9 on page 13.

Net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 19.

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 ended December 31, 2010, 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, investment accounted for under the fair value method, pension benefits and income taxes. 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. Since December 31, 2010, there have been no changes in these policies that have had a material impact on results of operations or financial position. See Note 2 on page 6 for losses related to plant shutdowns, asset impairments, restructurings and other items occurring during the first quarter of 2011 and the comparable period in 2010.

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Results of Operations

First Quarter 2011 Compared with First Quarter 2010

Overall, sales in the first quarter of 2011 increased by 9.5% compared with the first quarter of 2010. Net sales (sales less freight) increased 4.4% in Film Products primarily due to an increase in average selling prices from the pass-through of higher resin prices, partially offset by lower volumes. Net sales from ongoing operations increased 25.0% in Aluminum Extrusions due to higher sales volume in most markets and an increase in average selling prices driven by higher aluminum prices. For more information on net sales and volume, see the executive summary beginning on page 14.

Consolidated gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 15.5% in the first quarter of 2011 from 17.0% in 2010. The gross profit margin in Film Products decreased primarily due to the lower volumes noted above, increased operating costs to support strategic initiatives and the acceleration of preventative maintenance expenditures. Gross profit margin in Aluminum Extrusions increased as a result of the higher sales volumes noted above.

As a percentage of sales, selling, general and administrative and R&D expenses were 10.3% in the first quarter of 2011, down from 11.2% in the first quarter of last year. The decrease in selling, general and administrative and R&D expenses as a percentage of sales can be attributed to the 9.5% increase in year-over-year net sales noted above.

Plant shutdowns, asset impairments, restructurings and other items in the first quarter of 2011 shown in the segment operating profit table on page 15 include:

Plant shutdowns, asset impairments, restructurings and other items in the first quarter of 2010 shown in the segment operating profit table on page 15 include:

Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $230,000 in the first quarter of 2011 and $168,000 in the first quarter of 2010. Interest expense, which includes the amortization of debt issue costs, was $355,000 in the first quarter of 2011 in comparison to $195,000 in the first quarter of last year. We entered into a new unsecured revolving credit facility in June 2010.

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Average debt outstanding and interest rates were as follows:

The effective tax rate for the first quarter of 2011 was 31.0% compared to 41.2% in the first quarter of 2010. The significant differences between the U.S. federal statutory rate and the effective tax rate for the first three months is shown in the table provided in Note 9 on page 13.

Liquidity and Capital Resources

Changes in operating assets and liabilities from December 31, 2010 to March 31, 2011 are summarized below:

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Cash provided by operating activities was $2.7 million in the first quarter of 2011 compared with cash used in operating activities of $1.0 million in 2010. The change is primarily related to normal volatility of working capital components.

Cash used in investing activities was $4.1 million in the first quarter of 2011 compared with $8.6 million in the first quarter of 2010. Cash used in investing activities in 2011 primarily includes capital expenditures of $4.7 million.

Net cash flow used in financing activities was $906,000 in the first quarter of 2011 and related to the payment of regular quarterly dividends of $1.4 million (4.5 cents per share), partially offset by the proceeds from the exercise of stock options. Net cash flow used in financing activities was $20.0 million in the first quarter of 2010 and related to the repurchase of 1.1 million shares of Tredegar common stock for $18.8 million and the payment of regular quarterly dividends of $1.3 million (4 cents per share).

Further information on cash flows for the quarters ended March 31, 2011 and 2010 are provided in the consolidated statements of cash flows on page 4.

Net capitalization and indebtedness as defined under our revolving credit agreement as of March 31, 2011 were as follows:

Under the revolving credit agreement, borrowings are permitted up to $300 million, and approximately $262 million was available to borrow at March 31, 2011 based upon the most restrictive covenants (no amounts borrowed at March 31, 2011).

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

At March 31, 2011, the interest rate on debt under the revolving credit agreement was priced at one-month LIBOR plus the applicable credit spread of 200 basis points.

The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the revolving credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the revolving credit agreement are not intended to represent net income (loss) or cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.

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Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and

Interest Coverage Ratio as Defined in Revolving Credit Agreement Along with Related Most

Restrictive Covenants

As of and for the Twelve Months Ended March 31, 2011 (In Thousands)