`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
4350 Congress Street, Suite 600
Charlotte, North Carolina 28209
(Address of principal executive offices)
(704) 885-2555
(Registrant's telephone number, including area code)
Commission file
number
Exact name of registrant as
specified in its charter
IRS Employer
Identification No.
State or other jurisdiction of
incorporation or organization
1-03560
Glatfelter Corporation
23-0628360
Pennsylvania
(N/A)
Former name or former address, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock
GLT
New York Stock Exchange
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 at the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒.
Common Stock outstanding on April 23, 2021 totaled 44,451,658 shares.
GLATFELTER CORPORATION AND SUBSIDIARIES
REPORT ON FORM 10-Q
For the QUARTERLY PERIOD ENDED
March 31, 2021
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)
2
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)
3
Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)
5
Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)
7
1.
Organization
2.
Accounting Policies
3.
Pending Acquisition
4.
Revenue
8
5.
Gain on Disposition of Plant, Equipment and Timberlands
6.
Discontinued Operations
9
7.
Earnings Per Share
8.
Accumulated Other Comprehensive Income
10
9.
Stock-based Compensation
11
10.
Retirement Plans and Other Post- Retirement Benefits
12
11.
Income Taxes
13
12.
Inventories
14
13.
Leases
14.
Short-term Debt
15
15.
Long-term Debt
16.
Fair Value of Financial Instruments
16
17.
Financial Derivatives and Hedging Activities
18.
Commitments, Contingencies and Legal Proceedings
19
19.
Segment Information
20
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3
Quantitative and Qualitative Disclosures About Market Risks
28
Item 4
Controls and Procedures
29
PART II – OTHER INFORMATION
Item 6
Exhibits
SIGNATURES
30
PART I
Item 1 – Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31
In thousands, except per share
2021
2020
Net sales
$
225,674
231,560
Costs of products sold
186,378
194,685
Gross profit
39,296
36,875
Selling, general and administrative expenses
22,827
24,594
Gains on dispositions of plant, equipment and timberlands, net
(850
)
—
Operating income
17,319
12,281
Non-operating income (expense)
Interest expense
(1,531
(1,778
Interest income
264
Other, net
(224
(753
Total non-operating expense
(1,735
(2,267
Income from continuing operations before income taxes
15,584
10,014
Income tax provision
7,190
2,608
Net income
8,394
7,406
Basic earnings per share
Income from continuing operations
0.19
0.17
Income from discontinued operations
Diluted earnings per share
Weighted average shares outstanding
Basic
44,450
44,275
Diluted
44,869
44,530
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 2 -
GLATFELTER
Form 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Foreign currency translation adjustments
(13,193
(13,903
Net change in:
Deferred gains (losses) on cash flow hedges, net of taxes
of $(1,301) and $401, respectively
3,261
(1,317
Unrecognized retirement obligations, net of taxes
of $(73) and $51, respectively
92
(101
Other comprehensive loss
(9,840
(15,321
Comprehensive loss
(1,446
(7,915
- 3 -
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31
Assets
Cash and cash equivalents
87,366
99,581
Accounts receivable, net
126,507
122,817
203,333
196,230
Prepaid expenses and other current assets
45,844
34,297
Total current assets
463,050
452,925
Plant, equipment and timberlands, net
523,428
543,267
Goodwill
157,341
164,369
Intangible assets, net
76,182
81,835
Other assets
47,878
44,485
Total assets
1,267,879
1,286,881
Liabilities and Shareholders' Equity
Current portion of long-term debt
23,942
25,057
Short-term debt
11,725
Accounts payable
115,456
127,505
Dividends payable
6,001
5,988
Environmental liabilities
3,600
3,700
Other current liabilities
75,005
71,093
Total current liabilities
235,729
233,343
Long-term debt
271,079
288,464
Deferred income taxes
75,387
77,131
Other long-term liabilities
114,623
110,011
Total liabilities
696,818
708,949
Commitments and contingencies
Shareholders’ equity
Common stock
544
Capital in excess of par value
62,576
63,261
Retained earnings
725,756
723,365
Accumulated other comprehensive loss
(68,493
(58,653
720,383
728,517
Less cost of common stock in treasury
(149,322
(150,585
Total shareholders’ equity
571,061
577,932
Total liabilities and shareholders’ equity
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Adjustments to reconcile to net cash used by continuing operations:
Depreciation, depletion and amortization
13,733
15,402
Amortization of debt issue costs and original issue discount
153
147
Deferred income tax benefit
(410
(2,612
Share-based compensation
1,208
1,085
Change in operating assets and liabilities
Accounts receivable
(7,002
(7,203
(13,248
(3,688
Prepaid and other current assets
167
(2,315
(7,460
(11,605
Accruals and other current liabilities
(3,447
(2,931
Other
2,716
711
Net cash used by operating activities from continuing operations
(6,046
(5,603
Investing activities
Expenditures for purchases of plant, equipment and timberlands
(5,379
(7,014
Proceeds from disposals of plant, equipment and timberlands, net
876
(100
Net cash used by investing activities from continuing operations
(4,603
Financing activities
Proceeds from short-term debt
Net borrowings under revolving credit facility
1,151
2,452
Payments of borrowing costs
(35
Repayment of term loans
(6,136
(3,089
Payments of dividends
(5,990
(5,752
Payments related to share-based compensation awards and other
(536
(458
Net cash provided (used) by financing activities from continuing operations
179
(6,847
Effect of exchange rate changes on cash
(2,213
(937
Net decrease in cash, cash equivalents and restricted cash
(12,683
(20,401
Decrease in cash, cash equivalents and restricted cash from discontinued operations
(78
(316
Cash, cash equivalents and restricted cash at the beginning of period
111,665
126,201
Cash, cash equivalents and restricted cash at the end of period
98,904
105,484
Less: restricted cash in Prepaid expenses and other current assets
(2,000
(1,259
Less: restricted cash in Other assets
(9,538
Cash and cash equivalents at the end of period
104,225
Supplemental cash flow information
Cash paid for:
Interest
1,408
1,443
Income taxes, net
3,493
3,446
- 5 -
STATEMENTS OF SHAREHOLDERS’ EQUITY
Common
stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Comprehensive
Loss
Treasury
Stock
Total
Shareholders’
Equity
Balance at January 1, 2021
Cash dividends declared ($0.135 per share)
(6,003
Share-based compensation expense
Delivery of treasury shares
RSUs and PSAs
(1,893
1,263
(630
Balance at March 31, 2021
Balance at January 1, 2020
59,900
725,795
(77,896
(152,384
555,959
Cash dividends declared ($0.13 per share)
(5,761
(1,213
807
(406
Employee stock options exercised — net
(149
97
(52
Balance at March 31, 2020
59,623
727,440
(93,217
(151,480
542,910
- 6 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORGANIZATION
Glatfelter Corporation and subsidiaries (“Glatfelter”) is a leading global supplier of engineered materials. Our high-quality, innovative and customizable solutions are found in tea and single-serve coffee filtration, personal hygiene and packaging products as well as home improvement and industrial applications. We are headquartered in Charlotte, NC, and operate facilities in the United States, Canada, Germany, France, the United Kingdom and the Philippines. We have sales and distribution offices in the United States, Europe, Russia, Italy, and China. Our products are marketed worldwide, either directly to customers or through brokers and agents. The terms “we,” “us,” “our,” “the Company,” or “Glatfelter,” refer to Glatfelter Corporation and subsidiaries unless the context indicates otherwise.
ACCOUNTING POLICIES
Basis of Presentation The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Glatfelter and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
We prepared these financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. In our opinion, the financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these financial statements, we have assumed you have read the audited consolidated financial statements included in our 2020 Annual Report on Form 10-K.
Discontinued Operations The results of operations and cash flows of our former Specialty Papers business have been classified as discontinued operations for all periods presented in the condensed consolidated statements of income.
Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes actual results may differ from those estimates and assumptions.
Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). The update eliminates, clarifies, and modifies certain guidance related to the accounting for income taxes. We adopted ASU No. 2019-12 effective January 1, 2021 and it did not have a material impact on our financial statements.
PENDING ACQUISITION
On January 5, 2021, we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business ("G-P") for $175 million, subject to customary post-closing purchase price adjustments. This business includes the Mount Holly, NC manufacturing facility with annual production capacity of approximately 37,000 metric tons and an R&D center and pilot line for nonwovens product development in Memphis, TN. G-P had annual net sales of approximately $100 million in 2020.
The waiting period for regulatory review expired, satisfying one of the conditions to the closing of the proposed acquisition, which remains subject to other customary closing conditions. The transaction is expected to close by mid-May 2021. The acquisition will be financed through a combination of cash on hand and borrowings under our revolving credit facility. Upon completion of the acquisition, the acquired business will be operated as part of our Airlaid Materials reporting segment.
- 7 -
REVENUE
The following tables set forth disaggregated information pertaining to our net sales:
Composite Fibers
Food & beverage
76,953
71,458
Wallcovering
22,629
19,893
Technical specialties
23,495
20,007
Composite laminates
9,809
9,763
Metallized
8,363
11,590
141,249
132,711
Airlaid Materials
Feminine hygiene
47,641
50,096
Specialty wipes
15,916
17,212
Tabletop
6,863
15,052
Adult incontinence
4,678
6,145
Home care
3,923
5,212
5,404
5,132
84,425
98,849
Europe, Middle East and Africa
86,945
79,586
Americas
31,841
32,721
Asia Pacific
22,463
20,404
45,072
52,720
37,485
44,386
1,868
1,743
GAINS ON DISPOSITION OF PLANT, EQUIPMENT AND TIMBERLANDS
The following table sets forth sales of timberlands and other assets completed during the first three months of 2021. There were no such sales in the first three months of 2020:
Dollars in thousands
Acres
Proceeds
Gain
Timberlands
358
850
n/a
- 8 -
DISCONTINUED OPERATIONS
On October 31, 2018, we completed the previously announced sale of our Specialty Papers business on a cash free and debt free basis to Pixelle Specialty Solutions LLC, an affiliate of Lindsay Goldberg (the “Purchaser”) for $360 million.
The following table sets forth a summary of cash flows from discontinued operations which is included in the condensed consolidated statements of cash flows:
Net cash used by operating activities
Net cash used by investing activities
Net cash provided by financing activities
Change in cash and cash equivalents from discontinued operations
EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings per share (“EPS”) from continuing operations:
Weighted average common shares outstanding used in basic EPS
Effect of dilutive SOSARs, PSAs and RSUs
419
255
Weighted average common shares outstanding and
common share equivalents used in diluted EPS
Earnings per share from continuing operations
The following table sets forth potential common shares outstanding that were not included in the computation of diluted EPS for the periods indicated, because their effect would be anti-dilutive:
1,082
1,231
- 9 -
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months ended March 31, 2021 and 2020.
Currency translation adjustments
Unrealized gain (loss) on cash flow hedges
Change in pensions
Change in other postretirement defined benefit plans
(42,525
(2,496
(12,844
(788
Other comprehensive income (loss) before reclassifications (net of tax)
3,274
(9,919
Amounts reclassified from accumulated
other comprehensive income (net of tax)
(13
138
(46
79
Net current period other comprehensive income (loss)
(55,718
765
(12,706
(834
(76,346
4,316
(7,253
1,387
283
(13,620
(1,600
148
(249
(1,701
(90,249
2,999
(7,105
1,138
- 10 -
Reclassifications out of accumulated other comprehensive income and into the condensed consolidated statements of income were as follows:
Description
Line Item in Statements of Income
Cash flow hedges (Note 17)
(Gains) losses on cash flow hedges
24
(2,182
Tax expense (benefit)
(51
582
Net of tax
(27
Loss on interest rate swaps
Tax benefit
(7
Total cash flow hedges
Retirement plan obligations (Note 10)
Amortization of deferred benefit pension plans
Prior service costs
Actuarial losses
199
160
211
172
(73
(24
Amortization of deferred benefit other plans
(58
(116
Actuarial gains
(209
(325
Tax expense
76
Total reclassifications, net of tax
9.STOCK-BASED COMPENSATION
The P. H. Glatfelter Amended and Restated Long-Term Incentive Plan (the “LTIP”) provides for the issuance of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.
Pursuant to terms of the LTIP, we have issued to eligible participants restricted stock units (“RSUs”), performance share awards (“PSAs”) and stock only stock appreciation rights.
- 11 -
In 2021, we issued awards of RSUs and PSAs under our LTIP. Approximately 40% of fair value of the awards granted in 2021 were RSUs, which vest based on the passage of time, generally over a three-year period or in certain instances the RSUs were issued with five-year cliff vesting. In addition, some awards vest over one year or less depending upon the retirement eligibility of the grantees in the LTIP. The remaining 60% of the fair value of the awards granted in 2021 were PSAs. The PSAs awarded in 2021 vest based on either the achievement of a cumulative financial performance target covering a two-year period followed by an additional one-year service period or based on the three-year total shareholder return relative to a broad market index. The performance measures include a minimum, target and maximum performance level providing the grantees an opportunity to receive more or less shares than targeted depending on actual financial performance. For RSUs, the grant date fair value of the awards, or the closing price per common share on the date of the award, is used to determine the amount of expense to be recognized over the applicable service period. For PSAs, the grant date fair value is estimated using a lattice model. The significant inputs include the stock price, volatility, dividend yield, and risk-free rate of return. Settlement of RSUs and PSAs will be made in shares of our common stock currently held in treasury.
The following table summarizes RSU and PSA activity during periods indicated:
Units
Balance at January 1,
1,071,652
896,463
Granted
287,805
294,315
Forfeited
(90,355
(17,455
Shares delivered
(123,038
(78,509
Balance at March 31,
1,146,064
1,094,814
The amount granted in 2021 and 2020 includes 161,453 and 168,663, respectively, of PSAs exclusive of reinvested dividends.
The following table sets forth aggregate RSU and PSA compensation expense included in continuing operations for the periods indicated:
Stock Only Stock Appreciation Rights (“SOSARs”) Under terms of the SOSAR, a recipient receives the right to a payment in the form of shares of common stock equal to the difference, if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the exercise price. The SOSARs vest ratably over a three-year period and have a term of ten years. No SOSARs were awarded since 2016.
The following table sets forth information related to outstanding SOSARS:
SOSARS
Shares
Wtd Avg
Exercise
Price
Outstanding at January 1,
1,082,413
20.40
1,291,947
20.05
Exercised
(44,710
12.94
Canceled / forfeited
(2,841
17.27
Outstanding at March 31,
1,244,396
20.31
RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
The following tables provide information with respect to the net periodic costs of our pension and post-retirement medical benefit plans included in continuing operations.
Pension Benefits
Service cost
44
Interest cost
250
301
Amortization of prior service cost
Amortization of actuarial loss
Total net periodic benefit expense
461
517
Other Benefits
32
46
Amortization of prior service credit
Amortization of actuarial loss (gain)
Total net periodic benefit income
(272
- 12 -
INCOME TAXES
Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our condensed consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.
For the three months ended March 31, 2021, we had pretax income of $15.6 million and income tax expense of $7.2 million. The effective income tax rate for the period ended March 31, 2021, was unfavorably impacted primarily by $4.5 million in operating losses in the U.S. which generated no tax benefit and a $0.5 million impact attributable to a local income tax rate increase in Germany.
For the three months ended March 31, 2021, we recorded a decrease in our valuation allowance of $1.0 million against our net deferred tax assets. In assessing the need for a valuation allowance, management considers all available positive and negative evidence in its analysis. Based on this analysis, we recorded a valuation allowance for the portion of deferred tax assets where the weight of the evidence indicated it is more likely than not that the deferred assets will not be realized.
As of March 31, 2021 and December 31, 2020, we had $47.2 million and $46.3 million, respectively, of gross unrecognized tax benefits. As of March 31, 2021, if such benefits were to be recognized, approximately $36.7 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.
We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities.
The following table summarizes, by major jurisdiction, tax years that remain subject to examination:
Open Tax Years
Jurisdiction
Examinations not
yet initiated
Examinations in
progress
United States
Federal
2014 - 2015;
2017 - 2020
N/A
State
2016 - 2020
2015 - 2018
Canada(1)
2013 - 2018; 2020
2019
Germany(1)
France
2018 - 2020
United Kingdom
2019 - 2020
Philippines
2018
(1)
includes provincial or similar local jurisdictions, as applicable
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state and foreign examinations, and the lapse of various statutes of limitation, it is reasonably possible our gross unrecognized tax benefits balance may decrease within the next twelve months by a range of zero to $6.3 million. Substantially all of this range relates to tax positions taken in the U.S.
We recognize interest and penalties related to uncertain tax positions as income tax expense. The following table summarizes information included in continuing operations related to interest on uncertain tax positions:
In millions
Interest expense (income)
0.2
0.1
Accrued interest payable
2.0
1.8
- 13 -
INVENTORIES
Inventories, net of reserves, were as follows:
Raw materials
57,700
55,466
In-process and finished
101,830
97,109
Supplies
43,803
43,655
LEASES
We enter into a variety of arrangements in which we are the lessee for the use of automobiles, forklifts and other production equipment, production facilities, warehouses and office space. We determine if an arrangement contains a lease at inception. All our lease arrangements are operating leases and are recorded in the condensed consolidated balance sheet under the caption “Other assets” and the lease obligation is under “Other current liabilities” and “Other long-term liabilities.” We currently do not have any finance leases.
Operating lease right of use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We use our incremental borrowing rate based on information available at the commencement date in determining the lease liabilities as our leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when we are reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The following table sets forth information related to our leases as of the periods indicated.
Right of use asset
15,605
11,789
Weighted average discount rate
2.95
%
2.94
Weighted average remaining maturity (months)
89
66
The following table sets for operating lease expense for the periods indicated:
1,347
1,442
The following table sets forth required future minimum lease payments for the years indicated:
3,518
2022
3,475
2023
2,039
2024
1,537
2025
1,278
Thereafter
7,440
- 14 -
SHORT-TERM DEBT
On March 30, 2021, through Glatfelter Gernsbach GmbH, a wholly-owned subsidiary, we borrowed $11.7 million from Commerzbank AG, a German financial institution. The non-amortizing borrowing bears a fixed-interest rate of 0.75% per annum and the loan matures on March 29, 2022. The proceeds were used for general purposes.
LONG-TERM DEBT
Long-term debt is summarized as follows:
Revolving credit facility, due Feb. 2024
36,531
36,813
Term loan, due Feb. 2024
235,379
249,715
2.40% Term Loan, due Jun. 2022
2,094
2,629
2.05% Term Loan, due Mar. 2023
12,516
14,737
1.30% Term Loan, due Jun. 2023
3,769
4,382
1.55% Term Loan, due Sep. 2025
6,466
7,143
Total long-term debt
296,755
315,419
Less current portion
(23,942
(25,057
Unamortized deferred issuance costs
(1,734
(1,898
Long-term debt, net of current portion
On February 8, 2019, we entered into an amended and restated $400 million Revolving Credit Facility and a €220 million Term Loan with a consortium of banks (together, the “Credit Agreement”). The proceeds of the Term Loan due Feb. 2024 were used to redeem in its entirety the 5.375% Notes. The principal amount of the Term Loan amortizes in consecutive quarterly installments of principal, with each such quarterly installment to be in an amount equal to 1.25% of the Term Loan funded, commencing on July 1, 2019 and continuing quarterly thereafter.
For all U.S. dollar denominated borrowings under the Revolving Credit Facility, the borrowing rate is, at our option, either, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the federal funds rate plus 50 basis points; or iii) the Euro-rate plus 100 basis points plus an applicable spread over either i), ii) or iii) ranging from 12.5 basis points to 100 basis points based on the Company’s leverage ratio and its corporate credit ratings determined by Standard & Poor’s Rating Services and Moody’s Investor Service, Inc. (the “Corporate Credit Rating”); or (b) the Euro-rate plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating. For non-US dollar denominated borrowings, the borrowing rate is, at our option, based on (b) above or for Euro denominated borrowings, the Euro Interbank Offering Rate (“EURIBOR”) plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating.
The Credit Agreement contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios including: i) maximum net debt to EBITDA ratio (the “leverage ratio”); and ii) a consolidated EBITDA to interest expense ratio. The most restrictive of our covenants is a maximum leverage ratio of 4.0x provided that such ratio increases to 4.5x during the period of four fiscal quarters immediately following a material acquisition. As of March 31, 2021, the leverage ratio, as calculated in accordance with the definition in our Credit Agreement, was 1.8x. A breach of these requirements would give rise to certain remedies under the Revolving Credit Facility, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the Credit Agreement.
All remaining principal outstanding and accrued interest under the Credit Agreement will be due and payable on February 8, 2024.
- 15 -
Glatfelter Gernsbach GmbH (“Gernsbach”), a wholly-owned subsidiary of ours, entered into a series of borrowing agreements with IKB Deutsche Industriebank AG, Düsseldorf (“IKB”) as summarized below:
Amounts in thousands
Original
Principal
Rate
Maturity
Borrowing date
Apr. 11, 2013
€
42,700
2.05
Mar. 2023
Sep. 4, 2014
10,000
2.40
Jun. 2022
Oct. 10, 2015
1.55
Sep. 2025
Apr. 26, 2016
1.30
Jun. 2023
May 4, 2016
7,195
Each of the borrowings require quarterly repayments of principal and interest and provide for representations, warranties and covenants customary for financings of these types. The financial covenants contained in each of the IKB loans, which relate to the minimum ratio of consolidated EBITDA to consolidated interest expense and the maximum ratio of consolidated total net debt to consolidated adjusted EBITDA, are calculated by reference to our Credit Agreement.
Glatfelter Corporation guarantees all debt obligations of its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.
Letters of credit issued to us by certain financial institutions totaled $7.3 million as of March 31, 2021 and December 31, 2020. The letters of credit, which reduce amounts available under our Revolving Credit Facility, primarily provide financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program and for performance of certain remediation activity related to the Fox River matter. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their respective fair value. The following table sets forth carrying value and fair value of long-term debt:
December 31, 2020
Carrying
Value
Fair Value
Variable rate debt
2.40% Term Loan
2,116
2,651
2.05% Term Loan
12,669
14,873
1.30% Term Loan
3,784
4,384
1.55% Term Loan
6,544
7,210
297,023
315,646
The values set forth above are based on observable inputs and other relevant market data (Level 2). The fair value of financial derivatives is set forth below in Note 17.
FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES
As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions (“cash flow hedges”); ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables (“foreign currency hedges”); or iii) convert variable-interest-rate debt to fixed rates.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs. Currency forward contracts involve fixing the exchange for delivery of a specified amount of foreign currency on a specified date. As of March 31, 2021, the maturity of currency forward contracts ranged from one month to 18 months.
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We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases, certain production costs or capital expenditures with exposure to changes in foreign currency exchange rates. Changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. With respect to hedges of forecasted raw material purchases or production costs, the amount deferred is subsequently reclassified into costs of products sold in the period that inventory produced using the hedged transaction affects earnings. For hedged capital expenditures, deferred gains or losses are reclassified and included in the historical cost of the capital asset and subsequently affect earnings as depreciation is recognized.
We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:
Derivative
Sell/Buy - sell notional
Philippine Peso / Euro
18,522
Euro / British Pound
17,219
18,638
U.S. Dollar / Euro
1,041
Canadian Dollar / U.S. Dollar
70
Sell/Buy - buy notional
Euro / Philippine Peso
1,003,403
853,686
British Pound / Philippine Peso
1,006,093
1,081,791
Euro / U.S. Dollar
72,770
69,324
U.S. Dollar / Canadian Dollar
34,707
34,847
In October 2019, we entered into a €180 million notional value floating-to-fixed interest rate swap agreement with certain financial institutions. Under the terms of the swap, we will pay a fixed interest rate of the applicable margin plus 0.0395% on €180 million of the underlying variable rate term loan. We will receive the greater of 0.00% or EURIBOR.
Derivatives Designated as Hedging Instruments – Net Investment Hedge The €220 million Term Loan discussed in Note 15 – “Long-Term Debt” is designated as a net investment hedge of our Euro functional currency foreign subsidiaries. During the first three months of 2021, we recognized a pre-tax gain of $11.0 million and in the same period of 2020 a pre-tax gain of $5.9 million on the remeasurement of the term loan from changes in currency exchange rates. Such amounts are recorded as a component of Other Comprehensive Income (Loss).
Derivatives Not Designated as Hedging Instruments - Foreign Currency Hedges We also entered into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”
The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:
U.S. Dollar / British Pound
25,850
25,250
500
600
British Pound / Euro
2,200
1,900
7,500
These contracts have maturities of one month from the date originally entered into.
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Fair Value Measurements The following table summarizes the fair values of derivative instruments for the period indicated and the line items in the accompanying condensed consolidated balance sheets where the instruments are recorded:
Prepaid Expenses and Other
Balance sheet caption
Current Assets
Current Liabilities
Designated as hedging:
Forward foreign currency exchange contracts
1,876
577
406
4,342
Interest rate swap
108
136
Not designated as hedging:
456
349
118
The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty. The effect of netting the amounts presented above did not have a material effect on our consolidated financial position.
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”
The following table summarizes the amount of income or (loss) from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying condensed consolidated statements of income where the results are recorded:
Forward foreign currency exchange contracts:
Cost of products sold
2,182
Other – net
270
(619
The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance-sheet item.
A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income (loss), before taxes, is as follows:
(3,460
5,859
Deferred gains (losses) on cash flow hedges
4,558
463
Reclassified to earnings
1,101
4,140
We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be recorded in results of operations within the next 12 to 18 months and the amount ultimately recognized will vary depending on actual market rates.
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Credit risk related to derivative activity arises in the event the counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Fox River - Neenah, Wisconsin
Background We have previously reported that we face liabilities associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River, on which our former Neenah facility was located, and in the Bay of Green Bay, Wisconsin (collectively, the “Site”). Since the early 1990s, the United States, the State of Wisconsin and two Indian tribes (collectively, the “Governments”) have pursued a cleanup of a 39-mile stretch of river from Little Lake Butte des Morts into Green Bay and natural resource damages (“NRDs”).
The United States originally notified several entities that they were potentially responsible parties (“PRPs”); however, after giving effect to settlements reached with the Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”) and NCR Corporation.
The United States Environmental Protection Agency (“EPA”) has divided the Site into five “operable units”, including the most upstream portion of the Site on which our facility was located (“OU1”) and four downstream reaches of the river and bay (“OU2-5”).
Over the past several years, we and certain other PRPs implemented and completed all remedial actions pursuant to applicable consent decrees or a Unilateral Administrative Order.
In January 2019, we reached an agreement with the United States, the State of Wisconsin, and Georgia-Pacific to resolve all remaining claims among those parties. Under the Glatfelter consent decree, we are primarily responsible for long-term monitoring and maintenance in OU2-OU4a and for reimbursement of government oversight costs paid after October 2018. Finally, we remain responsible for our obligation to continue long-term monitoring and maintenance under our OU1 consent decree.
Cost estimates Our remaining obligations under the OU1 consent decree consist of long-term monitoring and maintenance. Furthermore, we are primarily responsible for long term monitoring and maintenance in OU2-OU4a over a period of at least 30 years. The monitoring activities consist of, among others, testing fish tissue, sampling water quality and sediment, and inspections of the engineered caps. In 2018, we entered into a fixed-price, 30-year agreement with a third party for the performance of all of our monitoring and maintenance obligations in OU1 through OU4a with limited exceptions, such as, for extraordinary amounts of cap maintenance or replacement. Our obligation under this agreement is included in our total reserve for the Site. We are obligated to make the regular payments under that fixed-price contract until the remaining amount due is less than the OU1 escrow account balance. We are permitted to pay for this contract using the remaining balance of the escrow account established by us and WTM I Company (“WTM I”) another PRP, under the OU1 consent decree during any period that the balance in the escrow account exceeds the amount due under our fixed-price contract. As of March 31, 2021, the balance in the escrow is less than amounts due under the fixed-price contract by approximately $1.6 million. Our obligation to pay this difference is secured by a letter of credit.
At March 31, 2021, the escrow account balance totaled $8.9 million which is included in the condensed consolidated balance sheet under the caption “Other assets.”
Under the consent decree, we are responsible for reimbursement of government oversight costs paid from October 2018 and later over approximately the next 30 years. We anticipate that oversight costs will decline as activities at the site transition from remediation to long-term monitoring and maintenance.
Reserves for the Site Our reserve for past and future government oversight costs and long-term monitoring and maintenance is set forth below:
18,455
21,870
Payments
(420
(131
Accretion
51
52
18,086
21,791
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The payments set forth above represent amounts due under the long-term monitoring and maintenance agreement. With respect to our total reserve for the Fox River, $3.6 million is recorded in the accompanying March 31, 2021 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remaining $14.5 million is recorded under the caption “Other long-term liabilities.”
Range of Reasonably Possible Outcomes Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, discussions with legal counsel, cost estimates for future monitoring and maintenance and other post-remediation costs to be performed at the Site, we do not believe that our costs associated with the Fox River matter could exceed the aggregate amounts accrued by a material amount.
SEGMENT INFORMATION
The following tables set forth financial and other information by segment for the period indicated:
Three months ended March 31
Other and
Unallocated
114,267
106,985
72,585
82,246
(474
5,454
Gross profit (loss)
26,982
25,726
11,840
16,603
474
(5,454
SG&A
10,917
10,624
4,643
4,581
7,267
9,389
Gains on dispositions of plant,
equipment and timberlands, net
-
Total operating income (loss)
16,065
15,102
7,197
12,022
(5,943
(14,843
Non-operating expense
Income (loss) before income taxes
(7,678
(17,110
Supplementary Data
Net tons sold
34,140
35,983
28,864
35,039
63,004
71,022
Depreciation, depletion and amortization ($ in thousands) (1)
6,981
5,848
5,451
904
3,485
Capital expenditures
2,773
3,956
1,739
2,103
867
955
5,379
7,014
The amount presented in 2020 in the Other and unallocated column represents accelerated depreciation incurred in connection with the restructuring of our metallized operations.
Segments Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table set forth above.
Management evaluates results of operations of the operating segments before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of the segments and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report on Form 10-K.
Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
i.
risks associated with the impact of the COVID-19 pandemic including global and regional economic conditions, changes in demand for our products, interruptions in our global supply chain, ability to continue production by our facilities, credit conditions of our customers or suppliers, or potential legal actions that could arise due to our operations during the pandemic;
ii.
variations in demand for our products including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;
iii.
the impact of competition, changes in industry production capacity, including the construction of new facilities or new machines, the closing of facilities and incremental changes due to capital expenditures or productivity increases;
iv.
risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
v.
geopolitical matters, including any impact to our operations from events in Russia, Ukraine and Philippines;
vi.
our ability to develop new, high value-added products;
vii.
changes in the price or availability of raw materials we use, particularly woodpulp, pulp substitutes, synthetic pulp, other specialty fibers and abaca fiber;
viii.
changes in energy-related prices and commodity raw materials with an energy component;
ix.
the impact of unplanned production interruption at our facilities or at any of our key suppliers;
x.
disruptions in production and/or increased costs due to labor disputes;
xi.
the gain or loss of significant customers and/or on-going viability of such customers;
xii.
the impact of war and terrorism;
xiii.
the impact of unfavorable outcomes of audits by various state, federal or international tax authorities or changes in pre-tax income and its impact on the valuation of deferred taxes;
xiv.
enactment of adverse state, federal or foreign tax or other legislation or changes in government legislation, policy or regulation; and
xv.
our ability to finance, consummate and integrate acquisitions.
COVID-19 Pandemic On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic as the virus spread throughout the world. The COVID-19 pandemic and the actions undertaken throughout the world in an attempt to contain the virus have had an unprecedented and significant adverse impact on global economies in terms of reduced GDP, increased unemployment, and insolvencies in a variety of industries and markets. As a result, we have experienced and may continue to experience weaker demand for certain of our products due to the effects of the pandemic. During the first three months of 2021, our financial performance and results of operations have been impacted by the pandemic primarily by weaker demand for tabletop products used by restaurants, catering and similar venues, all of which were impacted by “lockdowns” throughout many regions of the world. The majority of our other product portfolios are considered to be “essential or life-sustaining” and we continued to produce products used in the global response effort to the pandemic. We believe demand for certain of our products, such as Composite Fibers’ food & beverage filtration products and Airlaid Materials’ personal hygiene and wipes, will remain strong.
Pending Acquisition As discussed in Item 1 - Financial Statements, Note 3 “Pending Acquisition,” we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business (“G-P”) for $175 million. This business includes the Mount Holly, NC manufacturing facility, with annual production capacity of approximately 37,000 metric tons, and an R&D center and pilot line for nonwovens product development in Memphis, TN. G-P had annual net sales of approximately $100 million in 2020. Upon completion
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of the acquisition, which is expected by mid-May 2021, the acquired business will be operated as part of our Airlaid Materials reporting segment.
RESULTS OF OPERATIONS
Introduction We manufacture a wide array of engineered materials and report our results along two segments:
•
Composite Fibers with revenue from the sale of single-serve tea and coffee filtration products, wallcovering base materials, composite laminates, technical specialties including substrates for electrical applications, and metallized products; and
Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene and adult incontinence products, specialty wipes, home care products and other airlaid applications.
The former Specialty Papers business’ results of operations and financial condition are reported as discontinued operations. Following is a discussion and analysis primarily of the financial results of operations and financial condition of our continuing operations.
Three months ended March 31, 2021 versus the three months ended March 31, 2020
Overview For the first three months of 2021, we reported income from continuing operations of $8.4 million, or $0.19 per share compared with $7.4 million and $0.17 per diluted share in the year earlier period. The following table sets forth summarized consolidated results of operations:
Continuing operations
Income
Earnings per share
The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect a number of significant actions we undertook including strategic initiatives, corporate headquarter relocation, cost optimization and the restructuring and consolidation of our metallized business, among others. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $8.5 million, or $0.19 per diluted share for 2021, compared with $10.8 million, or $0.24 per diluted share, a year ago. Operating income for Composite Fibers increased by $1.0 million, or 6.4%; however, Airlaid Materials’ operating income was $4.8 million, or 40.1% lower.
In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation.
Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:
Strategic initiatives. These adjustments primarily reflect professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives including costs associated with acquisitions and related integrations.
Corporate headquarters relocation. These adjustments reflect costs incurred in connection with the strategic relocation of the Company’s corporate headquarters to Charlotte, NC. The costs are primarily related to employee relocation costs and exit costs at the former corporate headquarters.
Restructuring charge – Metallized operations. This adjustment represents the charges incurred in connection with the decision to restructure a portion of the Composite Fibers segment, primarily consisting of the consolidation of our metallizing operation from Gernsbach, Germany to Caerphilly, UK. The charge in the first quarter of 2020 included a non-cash charge of $2.5 million associated with accelerated depreciation and cash severance costs totaling $3.5 million.
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Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, including costs related to the organizational change to a functional operating model. The costs are primarily related to executive separations, other headcount reductions, professional fees, asset write-offs and certain contract termination costs. These adjustments, which have occurred at various times in the past, are irregular in timing and relate to specific identified programs to reduce or optimize the cost structure of a particular operating segment or the corporate function.
Pension settlement expenses, net. This adjustment reflects professional fees recorded in connection with the Company’s termination of its qualified pension plan and the related actions to settle all obligations to the plan’s participants. Since the pension plan was fully funded, the settlement of pension obligations did not require the use of the Company’s cash, but instead was accomplished with plan assets.
Timberland sales and related costs. These adjustments exclude gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows. These adjustments are irregular in timing and amount and may benefit our operating results.
Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020. This adjustment reflects taxes recorded as a result of the March 27, 2020 change in U.S. tax law which, among others, allows net operating losses to be carried back five years.
Adjusted earnings and adjusted earnings per share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP.
The following table sets forth the reconciliation of net income to adjusted earnings for the three months ended March 31, 2021 and 2020:
Amount
EPS
Adjustments (pre-tax)
Strategic initiatives
603
Corporate headquarters relocation
155
Restructuring charge - Metallized operations
5,987
Cost optimization actions
1,748
Pension settlement expenses, net
73
Timberland sales and related costs
Total adjustments (pre-tax)
(92
7,808
Income taxes (1)
81
(1,835
CARES Act of 2020 tax provision (benefit) (2)
93
(2,569
Total after-tax adjustments
82
3,404
0.07
Adjusted earnings
8,476
10,810
0.24
Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated.
(2)
Tax impact recorded in connection with passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) related to provisions that modified the “net operating loss” provisions of previous law to allow certain losses to be carried back five years.
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Segment Financial Performance
The amount presented in 2020 in the Other and unallocated column represents accelerated depreciation incurred in connection with the restructuring of the metallized operations.
Sales and Costs of Products Sold
Change
(5,886
(8,307
2,421
Gross profit as a percent of Net sales
17.4
15.9
The following table sets forth the contribution to consolidated net sales by each segment:
Percent of Total
Segment
62.6
57.3
37.4
42.7
100.0
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Net sales totaled $225.7 million and $231.6 million in the first three months of 2021 and 2020, respectively. On a constant currency basis, Composite Fibers’ and Airlaid Material’s net sales decreased by 1.4% and 18.8%, respectively.
Composite Fibers’ net sales increased $8.5 million or 6.4% in the first quarter of 2021, compared to the year-ago quarter, mainly driven by favorable currency translation of $10.3 million. Overall shipments, excluding metallized, which was restructured in the second quarter of 2020, were in-line with the first quarter of 2020.
Composite Fibers’ operating income of $16.1 million was $1.0 million higher, or approximately 6% favorable, compared to the first quarter of 2020 as a result of improved sales mix, which favorably impacted results by $1.1 million. Raw material and energy prices were $1.3 million higher than the same period last year, but mostly mitigated by improved operations of $1.2 million. The primary drivers of the change in Composite Fibers’ operating income are summarized in the following chart:
Airlaid Materials’ net sales decrease $14.4 million, in the year-over-year comparison. Shipments were 18% lower driven by continued softness in tabletop demand from delays in restaurant opening as well as lower shipments in the hygiene and wipes categories as customers adjusted their buying patterns following elevated year-end inventory levels maintained due to the pandemic. Currency translation was $4.2 million favorable.
Airlaid Materials’ first quarter 2021 operating income of $7.2 million was $4.8 million lower when compared to the first quarter of 2020. Lower shipping volumes unfavorably impacted earnings by $3.2 million and operations were $1.3 million unfavorable driven by lower production to manage customer demand and inventory levels. Selling price increases due to raw material pass-through provisions were more than offset by higher raw material and energy prices, reducing earnings by net $0.3 million. The primary drivers are summarized in the following chart:
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Other and Unallocated The amount of “Other and Unallocated” operating expense in our table of Segment Financial Information totaled $5.9 million in the first three months of 2021 compared with $14.8 million in the first three months of 2020. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the comparison decreased $1.0 million.
Income taxes During the first three months of 2021, income from continuing operations totaled $15.6 million and income tax expense totaled $7.2 million. On adjusted pre-tax income of $15.5 million, income tax expense was $7.0 million in the first three months of 2021. The comparable amounts in the same period of 2020 were $17.8 million and $7.0 million, respectively. The effective tax rate on adjusted earnings was 45% in the first three months of 2021.
Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British Pound Sterling, and in the Philippines the functional currency is the Peso. On an annual basis, our Euro denominated revenue exceeds Euro expenses by an estimated €150 million. For the first three months of 2021, the average currency exchange rate was 1.19 dollar/euro compared with 1.10 in the same period of 2020. With respect to the British Pound Sterling, Canadian Dollar, and Philippine Peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the Euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.
The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the first three months of 2021.
Favorable
(unfavorable)
14,527
(13,587
SG&A expenses
(863
Income taxes and other
(201
Net loss
(124
The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2021 were the same as 2020. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant expenditures for new or enhanced equipment, to support our research and development efforts, and to support our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:
Cash used by
Net cash used
(12,761
(20,717
Less: restricted cash in Prepaid and other current assets
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At March 31, 2021, we had $87.4 million in cash and cash equivalents (“cash”) held by both domestic and foreign subsidiaries. Approximately 90.6% of our cash and cash equivalents is held by our foreign subsidiaries but could be repatriated without incurring a significant amount of additional taxes. In addition to cash, as of March 31, 2021, $178.1 million was available under our existing revolving credit agreement.
Cash used by operating activities in the first three months of 2021 totaled $6.0 million compared with $5.6 million in the same period a year ago. The change in operating cash flow used reflects a slight decrease in earnings before interest, taxes, depreciation and amortization as well as by increased working capital usage primarily for inventory.
At March 31, 2021, we recorded approximately $12 million of value added tax liability and a related receivable identified while reviewing certain customer sales arrangements. We expect to fully recover all amounts owed with no net impact to earnings or cash flow of the Company. However, the timing of payment and the recovery from customers may not occur in the same quarterly period.
Net cash used by investing activities was $4.6 million compared with $7.0 million in the same period a year ago. Capital expenditures totaled $5.4 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively, and are expected to be $38 million to $42 million for the full year 2021.
Net cash provided by financing activities totaled $0.2 million in the first three months of 2021 compared with a use of $6.8 million in the same period of 2020. The change in financing activities primarily reflects a $11.7 million short-term borrowing, the proceeds of which were used for general purposes.
The 2019 Facility contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 4.0x provided that such ratio increases to 4.5x during the period of four fiscal quarters immediately following a material acquisition. As of March 31, 2021, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 1.8x, within the limits set forth in our credit agreement. As part of our proactive management of potential risks presented by the COVID-19 pandemic we assessed our liquidity position in a number of more severe scenarios projecting potential implications of the economic crises. We believe the strength of our balance sheet and our production of engineered materials essential to the global response effort provides adequate financial flexibility in this challenging time. Based on our expectations of future results of operations and capital needs, we do not believe the debt covenants will impact our operations or limit our ability to undertake financings that may be necessary to meet our capital needs.
The following table sets forth our outstanding long-term indebtedness:
In addition to the debt summarized above, on March 30, 2021, we entered into an $11.7 million one-year, fixed-rate borrowing arrangement with a commercial bank. The proceeds are available for general corporate purposes. Financing activities include cash used for common stock dividends. In both the first three months of 2021 and 2020, we used $6.0 million and $5.8 million, respectively, of cash for dividends on our common stock. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.
We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.
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As discussed earlier, we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business for $175 million, subject to customary post-closing purchase price adjustments. The acquisition will be financed through a combination of cash on hand and borrowings under our revolving credit facility.
At March 31, 2021, we had ample liquidity consisting of $87.4 million of cash on hand and $178.1 million of capacity under our revolving credit facility. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt.
Off-Balance-Sheet Arrangements As of March 31, 2021 and December 31, 2020, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries, are reflected in the condensed consolidated balance sheets included herein in Item 1 – Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Year Ended December 31
In thousands, except percentages
Carrying Value
Average principal outstanding
At variable interest rates
263,849
252,564
239,667
43,240
271,910
At fixed interest rates – Term Loans
20,704
11,289
3,797
1,796
431
24,845
25,113
Weighted-average interest rate
On variable rate debt
1.26
On fixed rate debt – Term Loans
1.83
1.73
1.58
Pay fixed/received variable (notional)
180,000
Rate paid
0.0395
Rate received
The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of March 31, 2021. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.
Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At March 31, 2021, we had $295.0 million of long-term debt, net of unamortized debt issuance costs, of which 92.2% was at variable interest rates. After giving effect to the interest rate swap agreement, approximately 20.6% of our debt was at variable interest rates. The fixed rate Term Loans and the variable rate debt are primarily euro-based borrowings and thus the value of which is also subject to currency risk. Variable-rate debt outstanding represents borrowings under our revolving credit agreement, primarily Euro-denominated, that accrues interest based on one-month Euro LIBOR, but in no event less than zero, plus the applicable margin. In addition, variable-rate debt includes U.S. dollar denominated borrowings that accrue interest based on one-month U.S. dollar LIBOR. At March 31, 2021, the weighted-average interest rate paid was equal to 1.26%. A hypothetical 100 basis point increase in the interest rate on variable rate debt would increase annual interest expense by $0.3 million. In the event rates are lower, interest expense would be unchanged.
We entered into a €180 million notional value floating-to-fixed interest rate swap agreement with certain financial institutions. Under the terms of the swap, we will pay a fixed interest rate of 0.0395% on €180 million of the underlying variable rate term loan. We will receive the greater of 0.00% or EURIBOR.
As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 1 – Financial Statements – Note 17.
We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. On an annual basis, our Euro denominated revenue exceeds euro expenses by an estimated €150 million. With respect to the British Pound Sterling, Canadian Dollar, and Philippine Peso, we have differing amounts
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of inflows and outflows of these currencies, although to a lesser degree than the Euro. As a result, particularly with respect to the Euro, we are exposed to changes in currency exchange rates and such changes could be significant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2021, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.
Changes in Internal Controls There were no changes in our internal control over financial reporting during the three months ended March 31, 2021, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 6. EXHIBITS
The following exhibits are filed herewith or incorporated by reference as indicated.
31.1
Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2
Certification of Samuel L. Hillard, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith.
32.2
Certification of Samuel L. Hillard, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its iXBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Extension Calculation Linkbase.
101.DEF
XBRL Extension Definition Linkbase.
101.LAB
XBRL Extension Label Linkbase.
101.PRE
XBRL Extension Presentation Linkbase.
104
Cover Page Interactive Data File (formatted as an inline XBRL and contained in Exhibit 101).
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Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
May 4, 2021
By
/s/ David C. Elder
David C. Elder
Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)
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