Tredegar (TG) 10-Q 2005 Q2 Quarterly report

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

FORM 10-Q

(Mark One)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________ to ________________________

Commission file number 1-10258

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

Virginia (State or Other Jurisdiction of Incorporation or Organization)	54-1497771 (I.R.S. Employer Identification No.)
1100 Boulders Parkway Richmond, Virginia (Address of Principal Executive Offices)	23225 (Zip Code)

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 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 July 29, 2005: 38,627,094.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

	June 30, 2005			Dec. 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	26,950		$	22,994
Accounts and notes receivable, net		123,813			117,314
Inventories		60,870			65,360
Deferred income taxes		8,176			10,181
Prepaid expenses and other		2,958			4,689
Total current assets		222,767			220,538
Property, plant and equipment, at cost		620,927			621,725
Less accumulated depreciation		300,505			305,033
Net property, plant and equipment		320,422			316,692
Other assets and deferred charges		95,867			89,261
Goodwill and other intangibles		137,483			142,983
Total assets	$	776,539		$	769,474
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	66,776		$	63,852
Accrued expenses		38,397			38,141
Income taxes payable		3,943			1,446
Current portion of long-term debt		14,375			13,125
Total current liabilities		123,491			116,564
Long-term debt		99,241			90,327
Deferred income taxes		65,646			71,141
Other noncurrent liabilities		10,983			11,000
Total liabilities		299,361			289,032
Commitments and contingencies (Notes 1 and 2) Shareholders’ equity:
Common stock, no par value		109,617			109,450
Common stock held in trust for savings
restoration plan		(1,280	)		(1,274	)
Unearned compensation on restricted stock		(1,170	)		(1,402	)
Unrealized gain on available-for-sale securities		31			—
Foreign currency translation adjustment		12,447			19,562
(Loss) gain on derivative financial instruments		(472	)		884
Minimum pension liability		(965	)		(1,156	)
Retained earnings		358,970			354,378
Total shareholders�� equity		477,178			480,442
Total liabilities and shareholders’ equity	$	776,539		$	769,474

See accompanying notes to financial statements.

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Tredegar Corporation
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)

	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Revenues and other items:
Sales	$	243,724	$	216,053	$	476,481	$	411,972
Other income (expense), net		938		352		3,498		6,458
		244,662		216,405		479,979		418,430
Costs and expenses:
Cost of goods sold		204,077		177,483		402,429		341,227
Freight		6,402		5,468		12,345		10,295
Selling, general and administrative		16,390		14,805		33,454		28,432
Research and development		2,566		3,818		5,366		8,135
Amortization of intangibles		106		67		212		134
Interest expense		1,093		598		2,056		1,521
Asset impairments and costs associated with exit and
disposal activities		10,491		6,004		11,358		16,787
Total		241,125		208,243		467,220		406,531
Income before income taxes		3,537		8,162		12,759		11,899
Income taxes		1,405		2,983		5,077		4,291
Net income	$	2,132	$	5,179	$	7,682	$	7,608
Earnings per share:
Basic	$	.05	$	.14	$	.20	$	.20
Diluted		.05		.14		.20		.20
Shares used to compute earnings per share:
Basic		38,453		38,235		38,446		38,232
Diluted		38,592		38,427		38,614		38,431
Dividends per share	$	.04	$	.04	$	.08	$	.08

See accompanying notes to financial statements.

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

	Six Months Ended June 30
	2005			2004
Cash flows from operating activities:
Net income	$	7,682		$	7,608
Adjustments for noncash items:
Depreciation		18,453			16,162
Amortization of intangibles		212			134
Deferred income taxes		952			(2,365	)
Accrued pension income and postretirement benefits		(1,111	)		(2,042	)
Gain on sale of assets		(2,507	)		(6,547	)
Loss on asset impairments and divestitures		6,439			12,476
Changes in assets and liabilities, net of effects of acquisitions and
divestitures:
Accounts and notes receivable		(8,441	)		(29,774	)
Inventories		3,459			72
Income taxes recoverable		—			58,633
Prepaid expenses and other		1,747			(622	)
Accounts payable		(1,033	)		13,824
Accrued expenses and income taxes payable		268			3,018
Other, net		(2,116	)		(1,506	)
Net cash provided by operating activities		24,004			69,071
Cash flows from investing activities:
Capital expenditures		(35,483	)		(24,737	)
Proceeds from the sale of assets and property disposals		3,368			7,829
Other, net		875			1,051
Net cash used in investing activities		(31,240	)		(15,857	)
Cash flows from financing activities:
Dividends paid		(3,095	)		(3,068	)
Debt principal payments		(29,336	)		(60,849	)
Borrowings		39,500			10,000
Book overdrafts		5,785			—
Proceeds from exercise of stock options		195			458
Net cash provided by (used in) financing activities		13,049			(53,459	)
Effect of exchange rate changes on cash		(1,857	)		(530	)
Increase (decrease) in cash and cash equivalents		3,956			(775	)
Cash and cash equivalents at beginning of period		22,994			19,943
Cash and cash equivalents at end of period	$	26,950		$	19,168

See accompanying notes to financial statements.

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Tredegar Corporation
Consolidated Statement of Shareholders’ Equity
(In Thousands, Except Per Share Data)
(Unaudited)

	Common Stock			Retained Earnings			Trust for Savings Restora- tion Plan			Unearned Restricted Stock Compen- sation			Accumulated Other Comprehensive Income (Loss)											Total Share- holders’ Equity
													Unrealized Gain on Available- for-Sale Securities		Foreign Currency Trans- lation			Gain (Loss) on Derivative Financial Instruments			Minimum Pension Liability
Balance December 31, 2004	$	109,450		$	354,378		$	(1,274	)	$	(1,402	)	$	—	$	19,562		$	884		$	(1,156	)	$	480,442
Comprehensive income:
Net income		—			7,682			—			—			—		—			—			—			7,682
Other comprehensive income (loss):
Available-for-sale securities adjustment
(net of tax of $17)		—			—			—			—			31		—			—			—			31
Foreign currency translation adjustment
(net of tax of $3,831)		—			—			—			—			—		(7,115	)		—			—			(7,115	)
Derivative financial instruments
adjustment (net of tax of $763)		—			—			—			—			—		—			(1,356	)		—			(1,356	)
Minimum pension liability adjustment
(net of tax of $101)		—			—			—			—			—		—			—			191			191
Comprehensive income																									(567	)
Cash dividends declared ($.08 per share)		—			(3,095	)		—			—			—		—			—			—			(3,095	)
Restricted stock forfeitures		(70	)		—			—			70			—		—			—			—			—
Restricted stock amortization		—			—			—			162			—		—			—			—			162
Issued upon exercise of stock options (including
related income tax benefits of $42)		237			5			(6	)		—			—		—			—			—			236
Balance June 30, 2005	$	109,617		$	358,970		$	(1,280	)	$	(1,170	)	$	31	$	12,447		$	(472	)	$	(965	)	$	477,178

See accompanying notes to financial statements.

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

1. In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and Subsidiaries (“Tredegar”) contain all adjustments necessary to present fairly, in all material respects, Tredegar’s consolidated financial position as of June 30, 2005, the consolidated results of operations for the three and six months ended June 30, 2005 and 2004, and the consolidated cash flows for the six months ended June 30, 2005 and 2004. All such adjustments are deemed to be of a normal, recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Tredegar’s Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three and six months ended June 30, 2005, are not necessarily indicative of the results to be expected for the full year.

2. Plant shutdowns, asset impairments and restructurings in the second quarter of 2005 shown in the segment operating profit table in Note 8 include:

• A pretax charge of $10 million related to the sale or assignment of substantially all of Therics’ assets, including asset impairment charges of $5.6 million, lease-related losses of $3 million and severance and other transaction-related costs of $1.4 million (see page 8 for additional information);

• A pretax gain of $653,000 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals of $23,000;

• Pretax charges of $500,000 related to severance and other employee-related costs associated with restructurings in Film Products ($227,000) and Aluminum Extrusions ($273,000);

• A pretax gain of $71,000 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including the reversal to income of certain severance and employee-related accruals of $474,000, partially offset by other shutdown-related costs of $403,000;

• A net pretax charge of $250,000 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $346,000 in pretax charges for employee relocation and recruitment is included in “Selling, general and administrative expenses” in the consolidated statements of income);

• Pretax charges of $105,000 for accelerated depreciation related to restructurings in Film Products; and

• A pretax charge of $27,000 related to severance and other employee-related costs associated with the shutdown of the films manufacturing facility in New Bern, North Carolina.

         Plant shutdowns, asset impairments and restructurings in the first six months of 2005 shown in the segment operating profit table in Note 8 include:

• A pretax charge of $10 million related to the sale or assignment of substantially all of Therics’ assets, including asset impairment charges of $5.6 million, lease-related losses of $3 million and severance and other transaction-related costs of $1.4 million (see page 8 for additional information);

• A pretax gain of $1.6 million related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a $1.8 million gain on the sale of the facility

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(included in “Other income (expense), net” in the consolidated statements of income), partially offset by shutdown-related expenses of $225,000;

• A pretax charge of $1 million for process reengineering costs associated with the implementation of a global information system in Film Products (included in “Costs of goods sold” in the consolidated statements of income);

• Pretax charges of $918,000 related to severance and other employee-related costs associated with restructurings in Film Products ($477,000) and Aluminum Extrusions ($441,000);

• A pretax charge of $399,000 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including $873,000 of shutdown-related costs, partially offset by the reversal to income of certain severance and employee-related accruals of $474,000;

• A pretax gain of $653,000 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals of $23,000;

• A net pretax charge of $130,000 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $545,000 in pretax charges for employee relocation and recruitment is included in “Selling, general and administrative expenses” in the consolidated statements of income); and

• Pretax charges of $205,000 for accelerated depreciation related to restructurings in Film Products.

         Plant shutdowns, asset impairments and restructurings in the second quarter of 2004 shown in the segment operating profit table in Note 8 include:

• A pretax charge of $2.7 million for impairment of the films business in Argentina;

• Pretax charges of $994,000 related to accelerated depreciation from plant shutdowns and restructurings in Film Products;

• A pretax charge of $879,000 related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;

• Pretax charges of $575,000 in Film Products and $146,000 in Aluminum Extrusions related to asset impairments;

• A pretax charge of $300,000 related to severance and other employee-related costs associated with the planned shutdown of the films manufacturing facility in New Bern, North Carolina;

• A pretax charge of $300,000 related to the estimated loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa; and

• A pretax charge of $145,000 related to severance costs in Therics.

         Plant shutdowns, asset impairments and restructurings in the first six months of 2004 shown in the segment operating profit table in Note 8 include:

• A pretax charge of $9.6 million related to the planned shutdown of an aluminum extrusions facility in Aurora, Ontario, including asset impairment charges of $7.1 million and severance and other employee-related costs of $2.5 million;

• A pretax charge of $2.7 million for impairment of the films business in Argentina;

• Pretax charges of $1.7 million related to accelerated depreciation from plant shutdowns and restructurings in Film Products;

• A pretax charge of $879,000 related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;

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• Pretax charges of $575,000 in Film Products and $146,000 in Aluminum Extrusions related to asset impairments;

• Pretax charges of $837,000 related to severance and other employee-related costs associated with the planned shutdown of the films manufacturing facility in New Bern, North Carolina;

• A pretax charge of $300,000 related to the estimated loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa; and

• A pretax charge of $145,000 related to severance costs in Therics.

         A reconciliation of the beginning and ending balances of accrued expenses associated with plant shutdowns and divestitures for the six months ended June 30, 2005 is as follows:

(In Thousands)	Severance			Asset Impairments			Accelerated Deprec.*			Other			Total
Balance, December 31, 2004	$	5,091		$	—		$	—		$	3,394		$	8,485
Changes during 2005:
Charges		1,831			5,638			205			5,141			12,815
Cash spent		(4,088	)		—			—			(2,059	)		(6,147	)
Charged against assets		—			(5,638	)		(205	)		—			(5,843	)
Foreign currency translation		(8	)		—			—			—			(8	)
Reversed to income		(839	)		—			—			(73	)		(912	)
Balance, June 30, 2005	$	1,987		$	—		$	—		$	6,403		$	8,390

* Represents depreciation accelerated due to plant shutdowns and restructurings based on a remaining useful life of less than one year.

         On June 30, 2005, substantially all of the assets of Therics, Inc., a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar. Therics received a 17.5% equity interest in Therics, LLC, valued at $170,000 and a 3.5% interest in Theken Spine, LLC, valued at $800,000, along with potential future payments based on the sale of certain products by Therics, LLC. Therics retained substantially all of its liabilities in the transaction, which included customary indemnification provisions for pre-transaction liabilities. Tredegar has no obligation or intent to fund any future losses that may occur at Therics, LLC or Theken Spine, LLC. The ownership interest in Therics, LLC will be accounted for under the equity method of accounting with losses limited to its initial carrying value of $170,000. The ownership interest in Theken Spine, LLC will be accounted for under the cost method, with an impairment loss recognized and a new cost basis established for any write-down to estimated fair value, if necessary. The potential future payments due from Therics, LLC based on the sale of certain products will be recognized as income when earned.

         Gain on the sale of corporate assets for the three and six months ended June 30, 2005 include a pretax gain of $61,000  related to the sale of corporate real estate. Gain on sale of corporate assets in 2004 includes a second-quarter pretax gain on the sale of corporate real estate of $413,000 and a first-quarter pretax gain on the sale of public equity securities of $6.1 million. These gains are included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table in Note 8.

         During the first quarter of 2005, we recognized a pretax gain for interest receivable on tax refund claims of $508,000 (included in “Other income (expense), net” in the consolidated statements of income and “Corporate expenses, net” in the operating profit by segment table in Note 8).

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3. The components of other comprehensive income or loss are as follows:

(In Thousands)	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net income	$	2,132		$	5,179		$	7,682		$	7,608
Other comprehensive income (loss), net of tax
of approximately 35%:
Available-for-sale securities adjustment:
Unrealized net holding gains arising
during the period		3			—			31			1,217
Reclassification adjustment for net
gains realized in income		—			—			—			(3,987	)
Available-for-sale securities adjustment		3			—			31			(2,770	)
Foreign currency translation adjustment:
Unrealized foreign currency translation
adjustment arising during period		(4,179	)		(2,391	)		(7,115	)		(2,982	)
Reclassification adjustment of foreign
currency translation loss included in
income (relates to films business in
Argentina sold - see Note 2)		—			1,140			—			1,140
Foreign currency translation adjustment		(4,179	)		(1,251	)		(7,115	)		(1,842	)
Derivative financial instrument adjustment		(1,191	)		44			(1,356	)		(33	)
Minimum pension liability adjustment		—			—			191			—
Comprehensive income (loss)	$	(3,235	)	$	3,972		$	(567	)	$	2,963

4. The components of inventories are as follows:

(In Thousands)	June 30, 2005		Dec. 31, 2004
Finished goods	$	11,486	$	13,452
Work-in-process		5,273		3,097
Raw materials		31,837		36,567
Stores, supplies and other		12,274		12,244
Total	$	60,870	$	65,360

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5. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:

(In Thousands)	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Weighted average shares outstanding used
to compute basic earnings per share		38,453		38,235		38,446		38,232
Incremental shares attributable to stock options
and restricted stock		139		192		168		199
Shares used to compute diluted earnings
per share		38,592		38,427		38,614		38,431

         Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During the three and six months ended June 30, 2005 and three and six months ended June 30, 2004, 1,988,055, 1,910,847, 2,329,797 and 2,301,276, 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.

6. We account for 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 stock option grants 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 net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(In Thousands, Except Per Share Data)	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net income:
As reported	$	2,132		$	5,179		$	7,682		$	7,608
Stock option-based compensation cost, net
of tax, based on the fair value method		(271	)		(597	)		(543	)		(1,591	)
Pro forma net income	$	1,861		$	4,582		$	7,139		$	6,017
Basic earnings per share:
As reported		.05			.14			.20			.20
Pro forma		.05			.12			.19			.16
Diluted earnings per share:
As reported		.05			.14			.20			.20
Pro forma		.05			.12			.18			.16

         Stock option grants during the first half of 2005 were not material. At June 30, 2005, Tredegar had stock options outstanding of 1,560,160 with an exercise price of less than $20 per share and 997,855 with an exercise price of greater than or equal to $20 per share. During the first quarter of 2004, we also granted 125,000 shares of restricted Tredegar common stock to senior management (10,000 shares were cancelled when employees left the company prior to vesting). The price on the date of grant was $13.95 per share, and compensation expense of $1.6 million ($1 million after taxes) is being amortized over the vesting period of five years, subject to accelerated vesting based on meeting certain financial targets.

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7. The components of net periodic benefit income (cost) for our pension and other post-retirement benefit programs are shown below:

(In Thousands)	Pension Benefits for 3 Months Ended June 30						Other Post-Retirement Benefits for 3 Months Ended June 30
	2005			2004			2005			2004
Service cost	$	(1,524	)	$	(1,456	)	$	(29	)	$	(29	)
Interest cost		(3,145	)		(3,266	)		(145	)		(140	)
Employee contributions		—			101			—			—
Other		(29	)		(29	)		—			—
Expected return on plan assets		5,512			5,998			—			—
Amortization of prior service costs, gains or
losses and net transition asset		(146	)		(130	)		—			12
Net periodic benefit income (cost)	$	668		$	1,218		$	(174	)	$	(157	)
(In Thousands)	Pension Benefits for 6 Months Ended June 30						Other Post-Retirement Benefits for 6 Months Ended June 30
	2005			2004			2005			2004
Service cost	$	(3,048	)	$	(2,643	)	$	(58	)	$	(57	)
Interest cost		(6,291	)		(6,022	)		(292	)		(279	)
Employee contributions		—			157			—			—
Other		68			(45	)		—			—
Expected return on plan assets		11,024			11,140			—			—
Amortization of prior service costs, gains or
losses and net transition asset		(292	)		(234	)		—			25
Net periodic benefit income (cost)	$	1,461		$	2,353		$	(350	)	$	(311	)

         We expect required contributions to our pension plans to be about $600,000 in 2005. We fund our other post-retirement benefits (life insurance and health benefits) on a claims-made basis, which were $525,000 in 2004 and $443,000 in 2003. We expect higher cost trends to continue in this area in 2005. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. Our prescription drug benefits are not actuarially equivalent to the Act and therefore we do not expect that any federal subsidies will apply.

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8. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. There have been no significant changes to identifiable assets by segment. Net sales (sales less freight) and operating profit 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.

Tredegar Corporation
Net Sales and Operating Profit by Segment
(In Thousands)
(Unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net Sales
Film Products	$	111,244		$	101,484		$	227,955		$	197,370
Aluminum Extrusions		125,963			108,981			235,929			204,176
Therics		115			120			252			131
Total net sales		237,322			210,585			464,136			401,677
Add back freight		6,402			5,468			12,345			10,295
Sales as shown in the Consolidated Statements of Income	$	243,724		$	216,053		$	476,481		$	411,972
Operating Profit
Film Products:
Ongoing operations	$	11,396		$	10,863		$	22,974		$	20,887
Plant shutdowns, asset impairments and restructurings,
net of gain on sale of assets		44			(4,834	)		413			(6,037	)
Aluminum Extrusions:
Ongoing operations		7,221			8,281			10,218			11,964
Plant shutdowns, asset impairments and restructurings		(202	)		(146	)		(840	)		(9,726	)
Therics:
Ongoing operations		(1,644	)		(2,543	)		(3,467	)		(5,034	)
Restructurings		(10,049	)		(1,024	)		(10,049	)		(1,024	)
Total		6,766			10,597			19,249			11,030
Interest income		142			72			240			146
Interest expense		1,093			598			2,056			1,521
Gain on sale of corporate assets		61			413			61			6,547
Corporate expenses, net		2,339			2,322			4,735			4,303
Income before income taxes		3,537			8,162			12,759			11,899
Income taxes		1,405			2,983			5,077			4,291
Net income	$	2,132		$	5,179		$	7,682		$	7,608

12

9. In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. It requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow, and we do not expect it to have an impact on amounts reported in the consolidated statement of income and balance sheet.

         In December 2004, the FASB revised SFAS No. 123,Share-Based Payment. This statement requires that the cost of employee services received in exchange for equity instruments be measured based on the fair value of the award on the grant date. The statement also requires that the cost be recognized over the employee service period required to receive the award. The statement applies to awards granted after the effective date and to awards modified, repurchased or cancelled after that date. The statement is effective beginning the first fiscal year that begins after June 15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow. The primary impact of adoption on Tredegar will be the recognition of compensation expense for stock options granted. Currently, we disclose the pro forma effects of treating stock option grants as compensation expense under the fair value-based method (see Note 6). We expect to continue to use the Black-Scholes options-pricing model to determine the estimated fair value of option grants but are still evaluating our transition method. We believe that the pro forma effects that have been disclosed are not materially different from compensation expense that would have been recognized if this standard had been previously adopted.

         In November 2004, the FASB issued SFAS No. 151,Inventory Costs – An Amendment of ARB No. 43, Chapter 4. This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be expensed as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. Early adoption is permitted. The adoption of this standard will have no impact on cash flow, and we do not expect it to have a significant impact on amounts reported in the consolidated statement of income and balance sheet.

         In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”),Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 and Staff Position No. 109-2 (“FSP 109-2”),Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. We do not expect that the tax benefits resulting from the AJCA will have a material impact on our financial statements.

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

Executive Summary

         Second-quarter 2005 net income was $2.1 million (5 cents per share) compared with $5.2 million (14 cents per share) in the second quarter of 2004. Net income was $7.7 million (20 cents per share) for the first six months of 2005 compared with $7.6 million (20 cents per share) for the first six months of 2004. Gains on the sale of assets and other items and losses related to plant shutdowns, assets impairments and restructurings are described in Note 2 on page 6. The business segment review begins on page 20.

         Second-quarter profits in Film Products improved over last year due primarily to growth in new apertured, elastic and surface protection materials. However, despite lower resin costs, second-quarter profits declined by $200,000 from the previous quarter due to a recent slowdown in the growth of elastics and lower volume in certain non-elastic diaper-related components and packaging film. Average prices of low-density polyethylene resin in the U.S. declined about 6 cents per pound from first-quarter levels (resin prices in Europe and Asia also declined), resulting in a positive operating profit impact of approximately $1.5 million compared with the first quarter of 2005.

         Looking ahead to the second half of 2005, the recent slowdown in the growth of our elastics business is likely to continue through year-end and resin costs are expected to increase. As a result, 2005 profits in Film Products may not exceed last year’s level. Growth in new apertured topsheets and surface protection films is expected to continue into 2006. Demand for elastics should improve in 2006 as personal care product suppliers use more elastic materials to improve comfort and fit in diapers and adult incontinence products. The films business has resin pass-through or cost-sharing agreements for the majority of its sales. However, under certain agreements, changes in resin costs are not passed through for an average period of 90 days.

         In Aluminum Extrusions, operating profit in the second quarter declined to $7.2 million compared with $8.3 million last year. A relatively strong performance in U.S. operations, driven by commercial construction activity and higher sales of hurricane shutters, was offset by softer demand across all Canadian markets. Second-quarter volume was 63.4 million pounds, up slightly from 62.0 million pounds in 2004. Overall profits continue to be hurt by appreciation of the Canadian Dollar and higher energy costs (adverse impact of about $1.2 million and $900,000, respectively). If these conditions persist, it will be difficult to improve upon 2004 full-year profits.

         On June 30, 2005, substantially all of the assets of Therics, Inc., a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar. Therics received a 17.5% equity interest in Therics, LLC, valued at $170,000 and a 3.5% interest in Theken Spine, LLC, valued at $800,000, along with potential future payments based on the sale of certain products by Therics, LLC. Therics retained substantially all of its liabilities in the transaction, which included customary indemnification provisions for pre-transaction liabilities. Tredegar has no obligation or intent to fund any future losses that may occur at Therics, LLC or Theken Spine, LLC. The ownership interest in Therics, LLC will be accounted for under the equity method of accounting with losses limited to its initial carrying value of $170,000. The ownership interest in Theken Spine, LLC will be accounted for under the cost method, with an impairment loss recognized and a new cost basis established for any write-down to estimated fair value, if necessary. The potential future payments due from Therics, LLC based on the sale of certain products will be recognized as income when earned.

         Net capitalization and other credit measures are provided in the liquidity and capital resources section beginning on page 22.

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Critical Accounting Policies and Recently Issued Accounting Standards

         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, 2004, 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, 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. There has been no significant change in these policies. See Note 2 on page 6 for losses related to plant shutdowns, assets impairments and restructurings occurring during 2005 and the comparable period in 2004.

         Recently issued accounting standards are summarized in Note 9 on page 13.

Results of Operations

Second Quarter 2005 Compared with Second Quarter 2004

         Overall, sales in the second quarter of 2005 increased 12.8% compared with 2004. Net sales (sales less freight) increased 9.6% in Film Products primarily due to higher selling prices, which were driven by the pass-through of higher raw material costs. Growth in new products and foreign exchange rate changes also contributed to the increase in sales. Net sales increased 15.6% in Aluminum Extrusions due to higher selling prices, which were driven primarily by higher metal costs. For more information on net sales and volume, see the business segment review beginning on page 20.

         Gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 13.6% in the second quarter of 2005 from 15.3% in 2004. At Film Products, an overall lower gross profit margin was driven primarily by higher resin costs. At Aluminum Extrusions, the gross profit margin declined primarily due to appreciation of the Canadian Dollar and higher energy costs.

         As a percentage of sales, selling, general and administrative (“SG&A”) expenses decreased to 6.7% in the second quarter of 2005 compared with 6.9% in 2004 due to higher sales offset by the classification of certain costs at Therics as operating versus research and development (“R&D”) consistent with the commercialization of the company’s bone void filler products last year.

         R&D expenses declined to $2.6 million in the second quarter of 2005 from $3.8 million in 2004. R&D spending at Therics declined to $1.1 million in the second quarter of 2005 from $1.9 million in 2004 due to cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year. R&D spending at Film Products dropped to $1.5 million in the second quarter of 2005 compared with $1.9 million in 2004 due to restructuring.

         Plant shutdowns, asset impairments and restructurings in the second quarter of 2005 shown in the segment operating profit table on page 20 include:

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• A pretax charge of $10 million related to the sale or assignment of substantially all of Therics’ assets, including asset impairment charges of $5.6 million, lease-related losses of $3 million and severance and other transaction-related costs of $1.4 million (see the Executive Summary on page 14 for additional information);

• A pretax gain of $653,000 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals of $23,000;

• Pretax charges of $500,000 related to severance and other employee-related costs associated with restructurings in Film Products ($227,000) and Aluminum Extrusions ($273,000);

• A pretax gain of $71,000 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including the reversal to income of certain severance and employee-related accruals of $474,000, partially offset by other shutdown-related costs of $403,000;

• A net pretax charge of $250,000 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $346,000 in pretax charges for employee relocation and recruitment is included in “Selling, general and administrative expenses” in the consolidated statements of income);

• Pretax charges of $105,000 for accelerated depreciation related to restructurings in Film Products; and

• A pretax charge of $27,000 related to severance and other employee-related costs associated with the shutdown of the films manufacturing facility in New Bern, North Carolina.

         Plant shutdowns, asset impairments and restructurings in the second quarter of 2004 shown in the segment operating profit table on page 20 include:

• A pretax charge of $2.7 million for impairment of the films business in Argentina;

• Pretax charges of $994,000 related to accelerated depreciation from plant shutdowns and restructurings in Film Products;

• A pretax charge of $879,000 related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;

• Pretax charges of $575,000 in Film Products and $146,000 in Aluminum Extrusions related to asset impairments;

• A pretax charge of $300,000 related to severance and other employee-related costs associated with the planned shutdown of the films manufacturing facility in New Bern, North Carolina;

• A pretax charge of $300,000 related to the estimated loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa; and

• A pretax charge of $145,000 related to severance costs in Therics.

         We continue to focus on reducing costs and aligning our structure to meet the needs of our customers. Three areas that we believe will generate savings are the shutdown of the films plant in New Bern, North Carolina (which occurred in the fourth quarter of 2004), completion of the restructuring of the R&D function in Film Products over the next six months, and the shutdown of the aluminum plant in Aurora, Ontario and the relocation of its largest extrusion press to our plant in Pickering, Ontario. Annual cost savings from these moves are expected to be about $4 million for the shutdown of the plant in New Bern, North Carolina, $2 million for the restructuring of the R&D function, and $2 million for the shutdown of the plant in Aurora, Ontario. Related incremental cash expenditures to achieve these savings are about $7 million (complete), $6 million (about $2.5 million remaining at June 30, 2005, including $800,000 to be expensed when incurred) and $8 million (about $1 million remaining at June 30, 2005, including $750,000 to be expensed when incurred), respectively.

         Gain on the sale of corporate assets for the second quarter of 2005 includes a pretax gain of $61,000 related to the sale of corporate real estate. Gain on sale of corporate assets for the second quarter of 2004 includes a pretax gain on the sale of corporate real estate of $413,000. These gains are included in

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“Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table on page 20.

         For more information on costs and expenses, see the business segment review beginning on page 20.

         Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $142,000 in 2005 and $72,000 in 2004.

         Interest expense increased to $1.1 million in the second quarter of 2005 compared with $598,000 in 2004. Average debt outstanding and interest rates were as follows:

(In Millions)	Three Months Ended June 30
	2005			2004
Floating-rate debt with interest charged on a
rollover basis at one-month LIBOR:
Average outstanding debt balance	$	112.9		$	88.3
Average interest rate		4.3	%		2.4	%
Fixed-rate and other debt:
Average outstanding debt balance	$	5.6		$	5.3
Average interest rate		5.2	%		7.9	%
Total debt:
Average outstanding debt balance	$	118.5		$	93.6
Average interest rate		4.3	%		2.7	%

         The effective tax rate was 39.7% in the second quarter of 2005, up from 36.5% in 2004. The increase is primarily due to a 35% tax benefit accrued on operating losses, asset impairments and restructuring charges at Therics versus a higher tax rate accrued on income-generating operations. The overall effective tax rate for the year is expected to be around 37%.

First Six Months of 2005 Compared with First Six Months of 2004

         Overall, sales in the first six months of 2005 increased 15.7% compared with 2004. Net sales (sales less freight) increased 15.5% in Film Products primarily due to growth of higher value new products (primarily apertured, elastic and surface protection materials). Net sales also benefited from higher selling prices driven by the pass-through of higher raw material costs and foreign exchange rate changes. Net sales increased 15.6% in Aluminum Extrusions due to higher selling prices, which were driven primarily by higher metal costs. For more information on net sales and volume, see the business segment review beginning on page 20.

         Gross profit (sales minus cost of goods sold and freight) as a percentage of sales decreased to 13% in the first six months of 2005 from 14.7% in 2004. At Film Products, an overall lower gross profit margin was driven primarily by higher resin costs. At Aluminum Extrusions, the gross profit margin declined primarily due to appreciation of the Canadian Dollar and higher energy costs.

         As a percentage of sales, SG&A expenses increased to 7% in the first six months of 2005 compared with 6.9% in 2004 due to the classification of certain costs at Therics as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year, partially offset by higher sales.

17

         R&D expenses declined to $5.4 million in the first six months of 2005 from $8.1 million in 2004. R&D spending at Therics declined to $2.4 million in the first six months of 2005 from $4.3 million in 2004 due to cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year. R&D spending at Film Products dropped to $3 million in the first six months of 2005 compared with $3.8 million in 2004 due to restructuring.

         Plant shutdowns, asset impairments and restructurings in the first six months of 2005 shown in the segment operating profit table on page 20 include:

• A pretax charge of $10 million related to the sale or assignment of substantially all of Therics’ assets, including asset impairment charges of $5.6 million, lease-related losses of $3 million and severance and other transaction-related costs of $1.4 million (see the Executive Summary on page 14 for additional information);

• A pretax gain of $1.6 million related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a $1.8 million gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), partially offset by shutdown-related expenses of $225,000;

• A pretax charge of $1 million for process reengineering costs associated with the implementation of a global information system in Film Products (included in “Costs of goods sold” in the consolidated statements of income);

• Pretax charges of $918,000 related to severance and other employee-related costs associated with restructurings in Film Products ($477,000) and Aluminum Extrusions ($441,000);

• A pretax charge of $399,000 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including $873,000 of shutdown-related costs, partially offset by the reversal to income of certain severance and employee-related accruals of $474,000;

• A pretax gain of $653,000 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals of $23,000;

• A net pretax charge of $130,000 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $545,000 in pretax charges for employee relocation and recruitment is included in “Selling, general and administrative expenses” in the consolidated statements of income); and

• Pretax charges of $205,000 for accelerated depreciation related to restructurings in Film Products.

         Plant shutdowns, asset impairments and restructurings in the first six months of 2004 shown in the segment operating profit table on page 20 include:

• A pretax charge of $9.6 million related to the planned shutdown of an aluminum extrusions facility in Aurora, Ontario, including asset impairment charges of $7.1 million and severance and other employee-related costs of $2.5 million;

• A pretax charge of $2.7 million for impairment of the films business in Argentina;

• Pretax charges of $1.7 million related to accelerated depreciation from plant shutdowns and restructurings in Film Products;

• A pretax charge of $879,000 related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;

• Pretax charges of $575,000 in Film Products and $146,000 in Aluminum Extrusions related to asset impairments;

• Pretax charges of $837,000 related to severance and other employee-related costs associated with the planned shutdown of the films manufacturing facility in New Bern, North Carolina;

18

• A pretax charge of $300,000 related to the estimated loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa; and

• A pretax charge of $145,000 related to severance costs in Therics.

         Gain on the sale of corporate assets for the first six months of 2005 includes a pretax gain of $61,000 related to the sale of corporate real estate. Gain on sale of corporate assets in 2004 includes a second-quarter pretax gain on the sale of corporate real estate of $413,000 and a first-quarter pretax gain on the sale of public equity securities of $6.1 million. These gains are included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table on page 20.

         For more information on costs and expenses, see the business segment review beginning on page 20.

         Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $240,000 in 2005 and $146,000 in 2004.

         Interest expense increased to $2.1 million in the first six months of 2005 compared with $1.5 million in 2004. Average debt outstanding and interest rates were as follows:

(In Millions)	Six Months Ended June 30
	2005			2004
Floating-rate debt with interest charged on a
rollover basis at one-month LIBOR:
Average outstanding debt balance	$	109.7		$	113.2
Average interest rate		4.1	%		2.4	%
Fixed-rate and other debt:
Average outstanding debt balance	$	5.7		$	5.4
Average interest rate		5.2	%		6.7	%
Total debt:
Average outstanding debt balance	$	115.4		$	118.6
Average interest rate		4.2	%		2.6	%

         The effective tax rate was 39.8% in the first six months of 2005, up from 36.1% in 2004. The increase is primarily due to a 35% tax benefit accrued on operating losses, asset impairments and restructuring charges at Therics versus a higher tax rate accrued on income-generating operations. The overall effective tax rate for the year is expected to be around 37%.

19

Business Segment Review

         The following tables present Tredegar’s net sales and operating profit by segment for the three and six months ended June 30, 2005 and 2004:

Tredegar Corporation
Net Sales and Operating Profit by Segment
(In Thousands)
(Unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net Sales
Film Products	$	111,244		$	101,484		$	227,955		$	197,370
Aluminum Extrusions		125,963			108,981			235,929			204,176
Therics		115			120			252			131
Total net sales		237,322			210,585			464,136			401,677
Add back freight		6,402			5,468			12,345			10,295
Sales as shown in the Consolidated Statements of Income	$	243,724		$	216,053		$	476,481		$	411,972
Operating Profit
Film Products:
Ongoing operations	$	11,396		$	10,863		$	22,974		$	20,887
Plant shutdowns, asset impairments and restructurings,
net of gain on sale of assets		44			(4,834	)		413			(6,037	)
Aluminum Extrusions:
Ongoing operations		7,221			8,281			10,218			11,964
Plant shutdowns, asset impairments and restructurings		(202	)		(146	)		(840	)		(9,726	)
Therics:
Ongoing operations		(1,644	)		(2,543	)		(3,467	)		(5,034	)
Restructurings		(10,049	)		(1,024	)		(10,049	)		(1,024	)
Total		6,766			10,597			19,249			11,030
Interest income		142			72			240			146
Interest expense		1,093			598			2,056			1,521
Gain on sale of corporate assets		61			413			61			6,547
Corporate expenses, net		2,339			2,322			4,735			4,303
Income before income taxes		3,537			8,162			12,759			11,899
Income taxes		1,405			2,983			5,077			4,291
Net income	$	2,132		$	5,179		$	7,682		$	7,608

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         Net sales (sales less freight) and operating profit 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.

Film Products

         Net sales (sales less freight) in Film Products increased 9.6% in the second quarter of 2005 compared with last year primarily due to higher selling prices, which were driven by the pass-through of higher raw material costs. Growth in higher value new products (primarily apertured, elastic and surface protection materials) and foreign exchange rate changes also contributed to the increase in sales. Second-quarter of 2005 profits in Film Products improved over last year due primarily to growth in new apertured, elastic and surface protection materials. However, despite lower resin costs, second-quarter profits declined by $200,000 from the previous quarter due to a recent slowdown in the growth of elastics and lower volume in certain non-elastic diaper-related components and packaging film. Average prices of low-density polyethylene resin in the U.S. declined about 6 cents per pound from first-quarter of 2005 levels (resin prices in Europe and Asia also declined), resulting in a positive operating profit impact of approximately $1.5 million compared with the first quarter of 2005.

         Net sales and operating profit in Film Products increased in the first six months of 2005 compared with 2004 primarily due to growth of higher value new products. Net sales also benefited from higher selling prices driven by the pass-through of higher raw material costs and foreign exchange rate changes.

         Looking ahead to the second half of 2005, the recent slowdown in the growth of our elastics business is likely to continue through year-end and resin costs are expected to increase. As a result, 2005 profits in Film Products may not exceed last year’s level. Growth in new apertured topsheets and surface protection films is expected to continue into 2006. Demand for elastics should improve in 2006 as personal care product suppliers use more elastic materials to improve comfort and fit in diapers and adult incontinence products. The films business has resin pass-through or cost-sharing agreements for the majority of its sales. However, under certain agreements, changes in resin costs are not passed through for an average period of 90 days.

         Aggregate capital expenditures in 2003 and 2004 totaled $102 million, and we expect to spend approximately $55 million in 2005 (we spent $28 million in the first six months of 2005), including expansion of capacity for apertured and elastic materials and surface protection films and a new global information system. Approximately one-third of our capital expenditures during 2003 and 2004 and capital expenditures during 2005 (already spent or proposed to be spent) relate to customer-specific opportunities that are covered by capital indemnification, take-or-pay or similar arrangements. Excluding these opportunities, we estimate that our ongoing capital expenditure requirement in Film Products is about $35 million annually. Long-term growth will depend on our ability to provide innovative materials at or below existing material costs. This includes lowering equipment and other capital costs.

Aluminum Extrusions

         Second-quarter of 2005 net sales in Aluminum Extrusions were up 15.6% due to higher selling prices, which were primarily driven by higher metal costs. Volume increased in the second quarter by 2.3% to 63.4 million pounds compared with 62.0 million pounds last year. A relatively strong performance in U.S. operations, driven by commercial construction activity and higher sales of hurricane shutters, was offset by softer demand across all Canadian markets. Overall profits continue to be hurt by appreciation of the Canadian Dollar and higher energy costs (adverse impact on the second quarter of 2005 compared to last year of about $1.2 million and $900,000, respectively). If these conditions persist, it will be difficult to improve upon 2004 full-year profits. We announced a price increase in April of 2005 that we believe should help offset continued higher costs.

21

         Capital expenditures for the first six months of 2005 were $8 million and are expected to be approximately $15 million for the year. Capital expenditures related to ongoing support and continuity is about $10 million annually, or approximately the same level as depreciation ($10.9 million in 2004). Capital expenditures expected in 2005 in excess of ongoing support and continuity is primarily due to the consolidation of some of our Canadian operations, including closing the plant in Aurora, Ontario. We moved the Aurora plant’s largest press to the plant in Pickering, Ontario, and invested $8 million to upgrade the press and enlarge the facility. This consolidation is expected to reduce annual operating costs by approximately $2 million.

Therics

         See the Executive Summary on page 14 regarding the sale or assignment of substantially all of the assets of Therics.

Liquidity and Capital Resources

         Tredegar’s total assets increased to $776.5 million at June 30, 2005, from $769.5 million at December 31, 2004, due primarily to the net effects of:

• Higher accounts receivable (up $6.5 million or 6%) due primarily to higher net sales for all businesses (net sales for the second quarter of 2005 were up $17 million compared to the fourth quarter of 2004)

– Days sales outstanding remains in the 50-day range in Film Products and 45-day range in Aluminum Extrusions

• Lower inventories (down $4.5 million or 7%)

– Inventory days remain in the 45-day range in Film Products and 35-day range in Aluminum Extrusions

• Higher net property, plant and equipment (up $3.7 million or 1%) due primarily to capital expenditures in excess of depreciation of $17 million, partially offset by foreign exchange changes of $8.9 million and asset impairments and disposals during the year in Film Products totaling $1.2 million and Therics totaling $2.1 million

         Cash provided by operating activities was $24 million in the first six months of 2005 compared with $69.1 million in 2004. The decrease is due primarily to the income tax refund received in 2004 related to the sale in 2003 of the venture capital portfolio.

         Cash used in investing activities was $31.2 million in the first six months of 2005 compared with $15.9 million in 2004. The change is primarily attributable to higher capital expenditures (up $10.8 million) and lower proceeds from the sale of assets and property disposals (down $4.5 million).

         Capital expenditures in the first six months of 2005 reflect the normal replacement of machinery and equipment and primarily:

• Continued expansion of capacity for apertured and elastic materials and surface protection films and a new global information system in Film Products; and

• Moving and upgrading the largest press at the facility shut down in Aurora, Ontario to the plant in Pickering, Ontario, and enlargement of the Pickering facility.

         Capital expenditures for all of 2005 are expected to be approximately $55 million in Film Products and about $15 million in Aluminum Extrusions. See the business segment review beginning on page 20 for more information.

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         Net capitalization and indebtedness as defined under our Credit Agreement as of June 30, 2005 are as follows:

Net Capitalization and Indebtedness as of June 30, 2005 (In Thousands)
Net capitalization:
Cash and cash equivalents	$	26,950
Book overdrafts		(5,785	)
Debt:
Credit Agreement:
Revolver		50,000
Term loan		58,125
Other debt		5,491
Total debt		113,616
Debt net of cash, cash equivalents and book overdrafts		92,451
Shareholders’ equity		477,178
Net capitalization	$	569,629
Indebtedness as defined in Credit Agreement:
Total debt	$	113,616
Face value of letters of credit		6,295
Liabilities relating to derivative financial instruments		726
Indebtedness	$	120,637

         Under the Credit Agreement, revolving credit borrowings are permitted up to $125 million, and $75 million was unused at June 30, 2005. The credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted EBITDA levels are as follows:

Pricing Under Credit Agreement (Basis Points)
Indebtedness-to-Adjusted EBITDA Ratio	Credit Spread Over LIBOR		Commitment Fee
	Revolver	Term Loan
> 2x but ‹= 3x	150	150	30
> 1x but ‹= 2x	125	125	25
‹= 1x	100	100	20

         At June 30, 2005, the interest rate on debt under the Credit Agreement was priced at one-month LIBOR plus the applicable credit spread of 125 basis points.

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

Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and Interest Coverage Ratio as Defined in Credit Agreement Along with Related Most Restrictive Covenants As of June 30, 2005 (In Thousands)
Computations of adjusted EBITDA and adjusted EBIT as defined in
Credit Agreement for the twelve months ended June 30, 2005:
Net income	$	29,255
Plus:
After-tax losses related to discontinued operations		—
Total income tax expense for continuing operations		10,008
Interest expense		3,706
Depreciation and amortization expense for continuing operations		36,791
All non-cash losses and expenses, plus cash losses and expenses not
to exceed $10,000, for continuing operations that are classified as
unusual, extraordinary or which are related to plant shutdowns,
asset impairments and/or restructurings (cash-related before
maximum adjustment of $12,030)		18,178
Minus:
After-tax income related to discontinued operations		(2,921	)
Total income tax benefits for continuing operations		—
Interest income		(444	)
All non-cash gains and income, plus cash gains and income not to
exceed $10,000, for continuing operations that are classified as
unusual, extraordinary or which are related to plant shutdowns,
asset impairments and/or restructurings (all cash-related of $12,385)		(10,000	)
Plus or minus, as applicable, pro forma EBITDA adjustments associated
with acquisitions and asset dispositions		7,153
Adjusted EBITDA as defined in Credit Agreement		91,726
Less: Depreciation and amortization expense for continuing operations
(including pro forma for acquisitions and asset dispositions)		(35,748	)
Adjusted EBIT as defined in Credit Agreement	$	55,978
Shareholders’ equity at June 30, 2005	$	477,178
Computations of leverage and interest coverage ratios as defined in Credit
Agreement:
Leverage ratio (indebtedness-to-adjusted EBITDA)		1.32x
Interest coverage ratio (adjusted EBIT-to-interest expense)		15.10x
Most restrictive covenants as defined in Credit Agreement:
Maximum permitted aggregate amount of dividends that can be paid
by Tredegar during the term of the Credit Agreement	$	100,000
Minimum adjusted shareholders’ equity permitted (increases by
50% of net income generated after September 30, 2003)		348,089
Maximum leverage ratio permitted:
Ongoing		3.00x
Pro forma for acquisitions		2.50x
Minimum interest coverage ratio permitted		2.50x

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         We believe that as of June 30, 2005, and currently we are in compliance with all of our debt covenants. Noncompliance with any one or more of the debt covenants may have an adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.

         We believe that existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.

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, energy prices, foreign currencies and emerging markets. See the section on liquidity and capital resources beginning on page 22 regarding Credit Agreement and interest rate exposures.

         Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as energy costs. There is no assurance of our ability to pass through higher raw material and energy costs to our customers.

         Results in Film Products continue to be affected by higher resin prices, which have been increasing steadily since early 2002. Average quarterly prices of low density polyethylene resin are shown in the chart below (a primary raw material for Film Products).

Source: Quarterly averages computed by Tredegar using monthly data provided by Chemical Data Inc. (“CDI”). In January 2005, CDI reflected a 4 cents per pound non-market adjustment based on their estimate of the growth of discounts over the 2000 to 2003 period. The 4th quarter 2004 average rate of 67 cents per pound is shown on a pro forma basis as if the non-market adjustment was made in October 2004.

         Resin prices in Europe and Asia have exhibited similar trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, we have pass-through or cost-sharing agreements covering about 65% of our sales, but many have a 90-day lag. Most new customer contracts contain resin pass-through arrangements.

         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. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements,

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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 or hedge aluminum, based on the scheduled deliveries.

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

         In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility (see the chart below) by entering into fixed-price forward purchase contracts with our natural gas suppliers. No natural gas hedging transactions were outstanding as of June 30, 2005. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $150,000 impact on the monthly operating profit of Aluminum Extrusions.

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

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         We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales from manufacturing operations related to foreign markets for the first half of 2005 and 2004 are as follows:

Percentage of Net Sales from Manufacturing Operations Related to Foreign Markets*
	Six Months Ended June 30
	2005				2004
	Exports from U.S.		Foreign Operations		Exports from U.S.		Foreign Operations
Canada	5	%	15	%	4	%	17	%
Europe	1		14		3		12
Latin America	1		2		2		2
Asia	5		4		3		3
Total	12	%	35	%	12	%	34	%

* Based on consolidated net sales from manufacturing operations (excludes Therics).

         We attempt to match the pricing and cost of our products in the same currency (except in Canada where about 75% of our sales of aluminum extrusions are U.S. Dollar-based) 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 and the Hungarian Forint.

         The relatively high percentage of U.S. Dollar-priced sales in Canada is partly due to the shifting of a large portion of the customers previously served by the aluminum extrusions plant in El Campo, Texas, in 2001. The resulting mismatch between the currency denomination of sales and costs causes lower U.S. Dollar translated profits when the Canadian Dollar appreciates since our costs are higher in U.S. Dollar equivalent terms while sales are mostly unaffected (the opposite effect occurs when the Canadian Dollar depreciates in value relative to the U.S. Dollar). We estimate that the appreciation of the Canadian Dollar relative to the U.S. Dollar had an adverse impact on the first six months of 2005 compared with the first six months of 2004 of about $2 million. In Film Products, where we have been able to better match the currency of our sales and costs, we estimate that the appreciation of the Euro and Hungarian Forint relative to the U.S. Dollar had a positive impact on results for the first six months of about $800,000 compared with the first six months of 2004.

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         We are continuing to review the loading of our aluminum extrusions plants in North America to optimize production mix and minimize cost in light of the increase in the U.S. Dollar equivalent cost structure of our plants in Canada.

Source: Quarterly averages computed by Tredegar using daily closing data provided by Bloomberg.

Forward-looking and Cautionary Statements

         From time to time, we may make statements (such as using the words “believe,” “hope,” “expect,” “are likely,” and similar expressions) 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

• Our future performance is influenced by costs incurred by our operating companies including, for example, the cost of energy and raw materials.There is no assurance that we will be able to offset fully or on a timely basis the effects of higher raw material costs through price increases. Further, there is no assurance that cost control efforts will be sufficient to offset any additional future declines in revenue or increases in energy, raw material or other costs.

• 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.Risks inherent in international operations include the following, by way of example: changes in general economic conditions, potential difficulty enforcing agreements and intellectual property rights, restrictions on foreign trade or investment, fluctuations in exchange rates, imposition of additional taxes on our foreign income, nationalization of private enterprises and unexpected adverse changes in foreign laws and regulatory requirements.

Film Products

• Film Products is highly dependent on sales associated with one customer, P&G.P&G comprised 27% of Tredegar’s net sales in 2004, 29% in 2003 and 33% in 2002. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business, as would delays in

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P&G rolling out products utilizing new technologies developed by Tredegar. While we have undertaken efforts to expand our 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 P&G.

• Growth of Film Products depends on our ability to develop and deliver new products at competitive prices, especially in the personal care market.Personal care products are now being made with a variety of new materials, replacing traditional backsheet and other components. While we have substantial technical resources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from our technologies, our inability to develop and deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business. In the long term, growth will depend on our ability to provide innovative materials at or below existing material costs, including lowering equipment and other capital costs.

• Film Products operates in a field where our significant customers and competitors have substantial intellectual property portfolios.The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents. Although we are not currently involved in any patent litigation, an unfavorable outcome of any such action could have a significant adverse impact on Film Products.

• As Film Products expands its personal care business, we have greater credit risk that is inherent in broadening our customer base.

Aluminum Extrusions

• Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economic conditions of end-use markets in the United States and Canada, particularly in the construction, distribution and transportation industries. Our market segments are also subject to seasonal slowdowns during the winter months.From 1992 to the second quarter of 2000, profits in Aluminum Extrusions grew as a result of positive economic conditions in the markets we serve and manufacturing efficiencies. However, a slowdown in these markets in the second half of 2000 resulted in a 13% decline in sales volume and 28% decline in ongoing operating profit compared with the second half of 1999. The aluminum extrusions industry continued to be affected by poor economic conditions in 2001 and 2002. In 2001, our sales volume declined 20% and operating profit declined 52% compared with 2000. Our sales volume declined 23% and operating profit declined 49% in 2002 compared with 2000. The decline in ongoing operating profit during these periods at approximately two to three times the rate of the decline in sales volume illustrates the operating leverage inherent in our operations (fixed operating costs). Moreover, in 2003 higher energy and insurance costs and the appreciation of the Canadian Dollar against the U.S. Dollar had an adverse impact on operating profits. 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 that usually accompany a downturn.

In 2004, operating profit from ongoing operations in Aluminum Extrusions increased to $22.6 million from $15.1 million in 2003. The $7.5 million or 50% increase in operating profit on 6.7% volume growth is primarily due to operating leverage and pricing improvements.

• The markets for our products are highly competitive with product quality, service, delivery performance and price being the principal competitive factors.Aluminum Extrusions has over 1,800 customers in a variety of end-use markets within the broad categories of building and construction, distribution, transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 4% of Aluminum Extrusion’s net sales. Due to the diverse customer mix across

29

many end-use markets, we believe the industry generally tracks the real growth of the overall economy (historical cross-cycle volume growth has been in the 3% range).

During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of our end-use markets. Conversely, 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. Because the business is susceptible to these changing economic conditions, Aluminum Extrusions targets complex, customized, service-intensive business with more challenging requirements which is competitively more defensible compared to higher volume, standard extrusion applications.

Foreign imports, primarily from China, currently represent less than 5% of the North American aluminum extrusion market. Foreign competition to date has been primarily large volume, standard extrusion profiles that impact some of our less strategic end-use markets. Market share erosion in other end-use markets remains possible.

There can be no assurance that we will be able to maintain current margins and profitability. Our continued success and prospects depend on our ability to retain existing customers and participate in overall industry cross-cycle growth.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

         See discussion under “Quantitative and Qualitative Disclosures About Market Risk” beginning on page 25.

Item 4. Controls and Procedures.

         Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

         There has been no change in our internal control over financial reporting during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.       Legal Proceedings.

On June 23, 2005, the United States Environmental Protection Agency, Region 4 (“EPA”), issued an Administrative Order (Docket No. CAA-04-2005-1838, the “Order”) under the Clean Air Act (as amended from time to time, the “Act”) alleging certain violations by Aluminum Extrusions’ Carthage, Tennessee facility of the refrigerant management regulations promulgated pursuant to the Act. The Order alleges that the violations occurred primarily in 2002 and 2003.

The Order requires Aluminum Extrusions to either replace the cooling system at issue or retrofit it with an EPA approved non-ozone depleting substance. The Order further requires Aluminum Extrusions to comply with certain applicable provisions of the Act and provide certified documentation verifying compliance with the Order. Aluminum Extrusions must comply with the Order within 180 days from issuance.

Although Aluminum Extrusions has not admitted any violations to the EPA pursuant to the Order, Aluminum Extrusions has elected to replace the affected cooling system. Aluminum Extrusions expects the replacement cost to approximate $110,000. While the Order does not impose penalties or fines, EPA has reserved the right to do so in the future. Management believes that future penalties or fines assessed by EPA relating to this matter, if any, should not exceed $150,000 (which has been reflected in the financial statements). Management expects to comply with the Order within the mandated time period. Tredegar does not expect that the Order or any future fines or penalties assessed by EPA with respect to this matter will have a material adverse effect on Tredegar.

Item 4.       Submission of Matters to a Vote of Security Holders.

Tredegar’s Annual Meeting of Shareholders was held on April 28, 2005. The following sets forth the vote results with respect to each of the matters voted upon by shareholders at the meeting:

    (a) Election of Directors

Nominee	Number of Votes “For”	Number of Votes “Withheld”
Horst R. Adam	36,320,233	226,054
Norman A. Scher	32,553,596	3,992,691
R. Gregory Williams	32,645,932	3,900,355

There were no broker non-votes with respect to the election of directors.

The term of office for the following directors continued after the annual meeting and such directors were not up for election at the annual meeting:

Austin Brockenbrough, III
Donald T. Cowles
John D. Gottwald
William M. Gottwald
Richard L. Morrill
Thomas G. Slater, Jr.

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    (b) Ratification of Appointment of PricewaterhouseCoopers LLP:

Ratification of appointment of PricewaterhouseCoopers LLP as Tredegar’s independent registered public accounting firm for the fiscal year ending December 31, 2005:

Number of Votes “For”	Number of Votes “Against”	Number of Abstentions	Number of Broker Non-Votes
36,132,936	289,775	123,756	None

Item 5.       Other Information.

None.

Item 6.       Exhibits.

Exhibit Nos.

31.1 Certification of Norman A. Scher, President and Chief Executive Officer of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of D. Andrew Edwards, Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Norman A. Scher, President and Chief Executive Officer of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of D. Andrew Edwards, Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) of Tredegar Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

Date: August 9, 2005
          ——————————————— Tredegar Corporation
(Registrant)


 /s/ D. Andrew Edwards
——————————————————————
D. Andrew Edwards
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

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