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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

 

 

 

 

LOGO

 

 

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(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   P. H. Glatfelter Company   23-0628360   Pennsylvania

N/A

(Former name or former address, if changed since last report)

 

 

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  x    No  ¨.

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company).    Small reporting company   ¨

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

Common Stock outstanding on July 29, 2016 totaled 43,547,739 shares.

 

 

 


Table of Contents

P. H. GLATFELTER COMPANY AND

SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

June  30, 2016

Table of Contents

 

         Page  
PART I - FINANCIAL INFORMATION   
Item 1   Financial Statements   
 

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2016 and 2015 (unaudited)

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2016 and 2015 (unaudited)

     3   
 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)

     4   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)

     5   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

  
 

1.      Organization

     6   
 

2.      Accounting Policies

     6   
 

3.      Earnings Per Share

     7   
 

4.       Accumulated Other Comprehensive Income

     8   
 

5.      Income Taxes

     9   
 

6.      Stock-based Compensation

     10   
 

7.       Retirement Plans and Other Post-Retirement Benefits

     11   
         Page  
 

8.      Inventories

     12   
 

9.      Long-term Debt

     12   
 

10.    Asset Retirement Obligations

     13   
 

11.    Fair Value of Financial Instruments

     13   
 

12.    Financial Derivatives and Hedging Activities

     14   
 

13.     Commitments, Contingencies and Legal Proceedings

     16   
 

14.    Segment Information

     21   
 

15.    Condensed Consolidating Financial Statements

     22   
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   
Item 3   Quantitative and Qualitative Disclosures About Market Risks      39   
Item 4   Controls and Procedures      39   
PART II – OTHER INFORMATION   
Item 6   Exhibits      40   
  SIGNATURES      40   
 


Table of Contents

PART I

Item 1 – Financial Statements

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

     Three months ended
June 30
    Six months ended
June 30
 

In thousands, except per share

   2016     2015     2016     2015  

Net sales

   $ 406,413      $ 410,803      $ 808,631      $ 828,272   

Energy and related sales, net

     2,001        715        2,667        2,783   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     408,414        411,518        811,298        831,055   

Costs of products sold

     365,691        378,685        710,732        746,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     42,723        32,833        100,566        84,941   

Selling, general and administrative expenses

     37,191        29,137        69,049        60,409   

(Gains) losses on dispositions of plant, equipment and timberlands, net

     2        (111     26        (2,765
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,530        3,807        31,491        27,297   

Non-operating income (expense)

        

Interest expense

     (3,953     (4,352     (8,069     (8,860

Interest income

     61        77        152        142   

Other, net

     317        215        (383     28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (3,575     (4,060     (8,300     (8,690
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1,955        (253     23,191        18,607   

Income tax (benefit) provision

     (10     (3,101     5,058        1,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,965      $ 2,848      $ 18,133      $ 16,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.05      $ 0.07      $ 0.42      $ 0.39   

Diluted

     0.04        0.06        0.41        0.38   

Cash dividends declared per common share

   $ 0.125      $ 0.12      $ 0.25      $ 0.24   

Weighted average shares outstanding

        

Basic

     43,558        43,377        43,539        43,315   

Diluted

     44,062        44,032        43,963        43,992   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 2 -

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6.30.16 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

     Three months ended
June 30
    Six months ended
June 30
 

In thousands

   2016     2015     2016     2015  

Net income

   $ 1,965      $ 2,848      $ 18,133      $ 16,773   

Foreign currency translation adjustments

     (14,864     16,704        (1,445     (24,633

Net change in:

        

Deferred gains on cash flow hedges, net of taxes of $(258), $956, $(201) and $(107), respectively

     944        (2,501     1,010        265   

Unrecognized retirement obligations, net of taxes of $(1,442), $(1,769), $(2,809) and $(3,779), respectively

     2,381        2,884        4,638        6,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (11,539     17,087        4,203        (18,198
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (9,574   $ 19,935      $ 22,336      $ (1,425
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 3 -

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6.30.16 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     June 30     December 31  

In thousands

   2016     2015  
Assets     

Cash and cash equivalents

   $ 58,532      $ 105,304   

Accounts receivable, net

     175,336        167,199   

Inventories

     257,623        247,214   

Prepaid expenses and other current assets

     33,094        32,650   
  

 

 

   

 

 

 

Total current assets

     524,585        552,367   

Plant, equipment and timberlands, net

     748,036        698,864   

Goodwill

     77,044        76,056   

Intangible assets

     61,625        63,057   

Other assets

     113,894        110,072   
  

 

 

   

 

 

 

Total assets

   $ 1,525,184      $ 1,500,416   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current portion of long-term debt

   $ 9,098      $ 7,366   

Accounts payable

     169,869        172,735   

Dividends payable

     5,455        5,231   

Environmental liabilities

     11,361        12,544   

Other current liabilities

     115,610        106,444   
  

 

 

   

 

 

 

Total current liabilities

     311,393        304,320   

Long-term debt

     358,366        353,296   

Deferred income taxes

     75,155        76,458   

Other long-term liabilities

     104,047        103,095   
  

 

 

   

 

 

 

Total liabilities

     848,961        837,169   

Commitments and contingencies

     —          —     

Shareholders’ equity

    

Common stock

     544        544   

Capital in excess of par value

     54,530        54,912   

Retained earnings

     970,374        963,143   

Accumulated other comprehensive loss

     (186,283     (190,486
  

 

 

   

 

 

 
     839,165        828,113   

Less cost of common stock in treasury

     (162,942     (164,866
  

 

 

   

 

 

 

Total shareholders’ equity

     676,223        663,247   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,525,184      $ 1,500,416   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 4 -

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6.30.16 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Six months ended
June 30
 

In thousands

   2016     2015  

Operating activities

    

Net income

   $ 18,133      $ 16,773   

Adjustments to reconcile to net cash provided by operations:

    

Depreciation, depletion and amortization

     33,411        31,602   

Amortization of debt issue costs

     574        599   

Pension expense, net of unfunded benefits paid

     1,964        3,699   

Deferred income tax (benefit) provision

     (2,672     2,501   

Losses (gains) on dispositions of plant, equipment and timberlands, net

     26        (2,765

Share-based compensation

     2,803        3,663   

Change in operating assets and liabilities

    

Accounts receivable

     (8,471     (20,783

Inventories

     (12,295     (8,609

Prepaid and other current assets

     (163     (1,678

Accounts payable

     (3,027     (989

Accruals and other current liabilities

     5,252        2,735   

Other

     1,105        (1,235
  

 

 

   

 

 

 

Net cash provided by operating activities

     36,640        25,513   

Investing activities

    

Expenditures for purchases of plant, equipment and timberlands

     (80,391     (44,575

Proceeds from disposals of plant, equipment and timberlands, net

     53        3,051   

Other

     (300     (1,600
  

 

 

   

 

 

 

Net cash used by investing activities

     (80,638     (43,124

Financing activities

    

Net repayments of revolving credit facility

     (11,403     —     

Payments of borrowing costs

     (136     (1,329

Proceeds from term loans

     19,428        —     

Repayment of term loans

     (3,803     (1,492

Payments of dividends

     (10,679     (9,992

Proceeds from government grants

     4,443        —     

Payments related to share-based compensation awards and other

     (976     (2,000
  

 

 

   

 

 

 

Net cash used by financing activities

     (3,126     (14,813

Effect of exchange rate changes on cash

     352        (1,651
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (46,772     (34,075

Cash and cash equivalents at the beginning of period

     105,304        99,837   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 58,532      $ 65,762   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for:

    

Interest, net of amounts capitalized

   $ 7,509      $ 8,281   

Income taxes, net

     8,486        10,234   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 5 -

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6.30.16 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and fiber-based engineered materials. Headquartered in York, PA, U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Canada, Germany, France, the United Kingdom and the Philippines, and sales and distribution offices in Russia and China. Our products are marketed worldwide, either through wholesale paper merchants, brokers and agents, or directly to customers.

 

2. 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 that you have read the audited consolidated financial statements included in our 2015 Annual Report on Form 10-K.

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 that actual results may differ from those estimates and assumptions.

Recently Issued Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment

Accounting designed to simplify certain aspects of accounting for share-based awards. The new ASU requires entities to recognize as a component of income tax expense all excess tax benefits or deficiencies arising from the difference between compensation costs recognized and the intrinsic value at the time an option is exercised or, in the case of restricted stock and similar awards, the fair value upon vesting of an award. Previously such differences were recognized in additional paid in capital as part of an “APIC pool.” In addition, the ASU also requires entities to exclude excess tax benefits and tax deficiencies from the calculation of common share equivalents for purposes of calculating earnings per share. The new standard is required to be adopted, either prospectively or retrospectively, in the first quarter of 2017 and early adoption is permitted. We do not believe the adoption of this standard will have a material impact on our reported results of operations or financial position.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU will require organizations such as us that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will be effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. We are in the process of assessing the impact this standard will have on us and expect to follow a modified retrospective method provided for under the standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The new standard is required to be adopted retrospectively for fiscal years beginning after December 15, 2017 and early adoption is permitted only for reporting periods beginning after December 31, 2016. We are in the process of evaluating the impact this standard may have, if any, on our reported results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. Under the new guidance, an allowance is recognized based on an estimate of expected credit losses. This standard is effective for us in the first quarter of 2020 and must be adopted using a modified retrospective

 

 

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GLATFELTER

6.30.16 Form 10-Q


Table of Contents

transition approach. We are currently assessing the impact this standard may have on our results of operations and financial position.

 

3. EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (“EPS”):

 

     Three months ended
June 30
 

In thousands, except per share

   2016      2015  

Net income

   $ 1,965       $ 2,848   
  

 

 

    

 

 

 

Weighted average common shares outstanding used in basic EPS

     43,558         43,377   

Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs

     504         655   
  

 

 

    

 

 

 

Weighted average common shares outstanding and common share equivalents used in diluted EPS

     44,062         44,032   
  

 

 

    

 

 

 

Earnings per share

     

Basic

   $ 0.05       $ 0.07   

Diluted

     0.04         0.06   
     Six months ended
June 30
 

In thousands, except per share

   2016      2015  

Net income

   $ 18,133       $ 16,773   
  

 

 

    

 

 

 

Weighted average common shares outstanding used in basic EPS

     43,539         43,315   

Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs

     424         677   
  

 

 

    

 

 

 

Weighted average common shares outstanding and common share equivalents used in diluted EPS

     43,963         43,992   
  

 

 

    

 

 

 

Earnings per share

     

Basic

   $ 0.42       $ 0.39   

Diluted

     0.41         0.38   

The following table sets forth potential common shares outstanding for stock options and restricted stock units that were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive:

 

     June 30  

In thousands

   2016      2015  

Three months ended

     1,368         687   

Six months ended

     1,451         687   
 

 

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6.30.16 Form 10-Q


Table of Contents
4. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months and six months ended June 30, 2016 and 2015.

 

in thousands

   Currency
translation
adjustments
    Unrealized gain
(loss) on cash
flow hedges
    Change in
pensions
    Change in other
postretirement
defined benefit
plans
    Total  

Balance at April 1, 2016

   $ (59,622   $ (159   $ (118,399   $ 3,436      $ (174,744

Other comprehensive income before reclassifications (net of tax)

     (14,864     837        —          —          (14,027

Amounts reclassified from accumulated other comprehensive income (net of tax)

     —          107        2,613        (232     2,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (14,864     944        2,613        (232     (11,539
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (74,486   $ 785      $ (115,786   $ 3,204      $ (186,283
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2015

   $ (75,561   $ 5,122      $ (116,994   $ (2,722   $ (190,155

Other comprehensive income before reclassifications (net of tax)

     16,704        (1,220     —          —          15,484   

Amounts reclassified from accumulated other comprehensive income (net of tax)

     —          (1,281     2,918        (34     1,603   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     16,704        (2,501     2,918        (34     17,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ (58,857   $ 2,621      $ (114,076   $ (2,756   $ (173,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

in thousands

   Currency
translation
adjustments
    Unrealized gain
(loss) on cash
flow hedges
    Change in
pensions
    Change in other
postretirement
defined benefit
plans
    Total  

Balance at January 1, 2016

   $ (73,041   $ (225   $ (120,714   $ 3,494      $ (190,486

Other comprehensive income before reclassifications (net of tax)

     (1,445     1,089        —          —          (356

Amounts reclassified from accumulated other comprehensive income (net of tax)

     —          (79     4,928        (290     4,559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (1,445   $ 1,010        4,928        (290     4,203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (74,486   $ 785      $ (115,786   $ 3,204      $ (186,283
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2015

   $ (34,224   $ 2,356      $ (120,260   $ (2,742   $ (154,870

Other comprehensive income before reclassifications (net of tax)

     (24,633     2,174        —          —          (22,459

Amounts reclassified from accumulated other comprehensive income (net of tax)

     —          (1,909     6,184        (14     4,261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (24,633     265        6,184        (14     (18,198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ (58,857   $ 2,621      $ (114,076   $ (2,756   $ (173,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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6.30.16 Form 10-Q


Table of Contents

Reclassifications out of accumulated other comprehensive income were as follows:

 

     Three months ended
June 30
    Six months ended
June 30
     

In thousands

   2016     2015     2016     2015      
Description                            Line Item in Statements of Income

Cash flow hedges (Note 12)

          

(Gains) losses on cash flow hedges

   $ 215      $ (1,750   $ (83   $ (2,623   Costs of products sold

Tax expense (benefit)

     (108     469        4        714      Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     107        (1,281     (79     (1,909  

Retirement plan obligations (Note 7)

          

Amortization of deferred benefit pension plan items

          

Prior service costs

     509        574        1,013        1,142      Costs of products sold
     166        187        336        379      Selling, general and administrative

Actuarial losses

     2,618        2,924        4,900        6,288      Costs of products sold
     915        1,023        1,687        2,165      Selling, general and administrative
  

 

 

   

 

 

   

 

 

   

 

 

   
     4,208        4,708        7,936        9,974     

Tax benefit

     (1,595     (1,790     (3,008     (3,790   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     2,613        2,918        4,928        6,184     

Amortization of deferred benefit other plan items

          

Prior service costs

     (38     (57     (75     (115   Costs of products sold
     (8     (13     (16     (25   Selling, general and administrative

Actuarial losses

     (269     12        (311     94      Costs of products sold
     (58     3        (67     21      Selling, general and administrative
  

 

 

   

 

 

   

 

 

   

 

 

   
     (373     (55     (469     (25  

Tax expense

     141        21        179        11      Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     (232     (34     (290     (14  
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications, net of tax

   $ 2,488      $ 1,603      $ 4,559      $ 4,261     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

5. 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 consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.

As of June 30, 2016 and December 31, 2015, we had $13.2 million and $12.2 million of gross unrecognized tax benefits. As of June 30, 2016, if such benefits were to be recognized, approximately $10.6 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
     Examination
in progress
 

United States

     

Federal

     2013 - 2015         N/A   

State

     2011 - 2015         2011 - 2014   

Canada (1)

     2010 - 2015         N/A   

Germany (1)

     2012 - 2015         2007 - 2011   

France

     2013 - 2015         2011 - 2012   

United Kingdom

     2014 - 2015         N/A   

Philippines

     2015         2013, 2014   

 

(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

 

 

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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 $1.7 million. Substantially all of this range relates to tax positions taken in Germany.

We recognize interest and penalties related to uncertain tax positions as income tax expense. The following table summarizes information related to interest and penalties on uncertain tax positions:

 

     Six months ended June 30  

In millions

   2016      2015  

Interest expense

   $ 0.2       $ —     

Penalties

     —           —     
     June 30      December 31  
     2016      2015  

Accrued interest payable

   $ 0.8       $ 0.6   
6. 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, performance share awards and stock only stock appreciation rights.

Restricted Stock Units (“RSU”) and Performance Share Awards (“PSAs”) Awards of RSUs and PSAs are made under our LTIP. The RSUs vest on the passage of time, generally on a graded scale over a three, four, and five-year period, or in certain instances the RSUs were issued with five year cliff vesting. PSAs are issued annually to members of management and each respective grant cliff vests each December 31 of the third year following the grant, assuming the achievement of predetermined, cumulative financial performance targets covering two or three year periods. 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 both RSUs and PSAs, the grant date fair value of the awards, which is equal to 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. 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

   2016     2015  

Balance at January 1,

     674,523        888,942   

Granted

     295,654        152,531   

Forfeited

     (143,209     (77,652

Shares delivered

     (149,475     (283,627
  

 

 

   

 

 

 

Balance at June 30,

     677,493        680,194   
  

 

 

   

 

 

 

The amount granted in 2016 and 2015 includes PSAs of 199,693 and 100,801, respectively, exclusive of reinvested dividends.

 

 

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The following table sets forth aggregate RSU and PSA compensation expense for the periods indicated:

 

     June 30  

In thousands

   2016      2015  

Three months ended

   $ 935       $ 453   

Six months ended

     1,402         820   

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.

The following table sets forth information related to outstanding SOSARS.

 

    2016     2015  

SOSARS

  Shares     Wtd Avg
Exercise
Price
    Shares     Wtd Avg
Exercise
Price
 

Outstanding at January 1,

    2,199,742      $ 17.82        1,864,707      $ 16.20   

Granted

    743,925        17.54        406,142        24.94   

Exercised

    (53,190     9.91        (58,343     13.52   

Canceled / forfeited

    (108,945     21.81        (3,349     26.53   
 

 

 

     

 

 

   

Outstanding at June 30,

    2,781,532      $ 17.74        2,209,157      $ 17.87   

SOSAR Grants

                       

Weighted average grant date fair value per share

  $ 4.07        $ 7.54     

Aggregate grant date fair value (in thousands)

  $ 3,013        $ 3,063     

Black-Scholes assumptions

       

Dividend yield

    2.85       1.92  

Risk free rate of return

    1.34       1.64  

Volatility

    31.97       36.48  

Expected life

    6 yrs          6 yrs     

The following table sets forth SOSAR compensation expense for the periods indicated:

 

     June 30  

In thousands

   2016      2015  

Three months ended

   $ 669       $ 680   

Six months ended

     1,401         1,268   
7. 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.

 

     Three months ended
June 30
 

In thousands

   2016     2015  

Pension Benefits

    

Service cost

   $ 2,510      $ 2,561   

Interest cost

     6,153        5,788   

Expected return on plan assets

     (11,275     (11,454

Amortization of prior service cost

     675        761   

Amortization of unrecognized loss

     3,533        3,947   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,596      $ 1,603   
  

 

 

   

 

 

 

Other Benefits

    

Service cost

   $ 250      $ 303   

Interest cost

     456        436   

Amortization of prior service cost

     (46     (70

Amortization of unrecognized (gain)/loss

     (327     15   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 333      $ 684   
  

 

 

   

 

 

 
     Six months ended
June 30
 

In thousands

   2016     2015  

Pension Benefits

    

Service cost

   $ 5,240      $ 5,696   

Interest cost

     12,240        11,738   

Expected return on plan assets

     (22,661     (22,997

Amortization of prior service cost

     1,349        1,521   

Amortization of unrecognized loss

     6,587        8,453   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 2,755      $ 4,411   
  

 

 

   

 

 

 

Other Benefits

    

Service cost

   $ 573      $ 716   

Interest cost

     996        999   

Amortization of prior service cost

     (91     (140

Amortization of unrecognized (gain)/loss

     (378     115   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,100      $ 1,690   
  

 

 

   

 

 

 
 

 

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Table of Contents
8. INVENTORIES

Inventories, net of reserves, were as follows:

 

     June 30      December 31  

In thousands

   2016      2015  

Raw materials

   $ 62,881       $ 60,098   

In-process and finished

     122,322         115,874   

Supplies

     72,420         71,242   
  

 

 

    

 

 

 

Total

   $ 257,623       $ 247,214   
  

 

 

    

 

 

 

 

9. LONG-TERM DEBT

Long-term debt is summarized as follows:

 

     June 30     December 31  

In thousands

   2016     2015  

Revolving credit facility, due Mar. 2020

   $ 48,851      $ 58,792   

5.375% Notes, due Oct. 2020

     250,000        250,000   

2.40% Term Loan, due Jun. 2022

     9,516        10,109   

2.05% Term Loan, due Mar. 2023

     40,000        42,130   

1.30% Term Loan, due Jun. 2023

     11,102        —     

1.55% Term Loan, due Sep. 2025

     10,884        2,839   
  

 

 

   

 

 

 

Total long-term debt

     370,353        363,870   

Less current portion

     (9,098     (7,366

Unamortized deferred issuance costs

     (2,889     (3,208
  

 

 

   

 

 

 

Long-term debt, net of current portion

   $ 358,366      $ 353,296   
  

 

 

   

 

 

 

The amount set forth for Long-term debt, net of current portion as of December 31, 2015, has been restated to retroactively adopt ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented as a direct deduction from the carrying value of the related debt instrument rather than as a deferred asset except for costs associated with a revolving line of credit. We adopted this standard in the first quarter of 2016 retroactive to December 31, 2015.

On March 12, 2015, we amended our revolving credit agreement with a consortium of banks (the “Revolving Credit Facility”) which increased the amount available for borrowing to $400 million, extended the maturity of the facility to March 12, 2020, and instituted a revised interest rate pricing grid.

For all US 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 daily 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 daily 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, interest is based on (b) above.

The Revolving Credit Facility 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 earnings before interest, taxes, depreciation and amortization (“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 3.5x. As of June 30, 2016, the leverage ratio, as calculated in accordance with the definition in our credit agreement, was 1.9x. 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 facility.

On October 3, 2012, we completed a private placement offering of $250.0 million aggregate principal amount of 5.375% Senior Notes due 2020 (the “5.375% Notes”). The 5.375% Notes, which are now publically registered, are fully and unconditionally guaranteed, jointly and severally, by PHG Tea Leaves, Inc., Mollanvick, Inc., Glatfelter Composite Fibers N. A., Inc., Glatfelter Advanced Materials N.A., LLC., and Glatfelter Holdings, LLC (the “Guarantors”). Interest on the 5.375% Notes is payable semiannually in arrears on April 15 and October 15.

The 5.375% Notes are redeemable, in whole or in part, at anytime on or after October 15, 2016 at the redemption prices specified in the applicable Indenture. Prior to October 15, 2016, we may redeem some or all of the Notes at a “make-whole” premium as specified in the Indenture. These Notes and the guarantees of the notes are senior obligations of the Company and the Guarantors, respectively, rank equally in right of payment with future senior indebtedness of the Company and the Guarantors and will mature on October 15, 2020.

 

 

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The 5.375% Notes contain various covenants customary to indebtedness of this nature including limitations on i) the amount of indebtedness that may be incurred; ii) certain restricted payments including common stock dividends; iii) distributions from certain subsidiaries; iv) sales of assets; v) transactions amongst subsidiaries; and vi) incurrence of liens on assets. In addition, the 5.375% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the Revolving Credit Agreement at maturity or a default under the Revolving Credit Agreement that accelerates the debt outstanding thereunder. As of June 30, 2016, we met all of the requirements of our debt covenants.

Glatfelter Gernsbach GmbH & Co. KG (“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
     Interest 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

     2,608         1.55     Sep. 2025   

May 4, 2016

     7,195         1.55     Sep. 2025   

Apr. 26, 2016

     10,000         1.30     Jun. 2023   

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 Revolving Credit Agreement.

P. H. Glatfelter Company 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 $5.1 million and $5.3 million as of June 30, 2016 and December 31, 2015, respectively. 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. 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.

10. ASSET RETIREMENT OBLIGATION

During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons has been substantially completed primarily by filling the lagoons, installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The retirement obligation was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the condensed consolidated balance sheet. The amount capitalized is being amortized as a charge to operations on the straight-line basis in relation to the expected closure period.

Following is a summary of activity recorded during the first six months of 2016 and 2015:

 

In thousands

   2016     2015  

Balance at January 1,

   $ 419      $ 4,114   

Accretion

     —          59   

Payments

     (16     (1,905

Downward revision

     —          (1,000

Gain

     (2     (286
  

 

 

   

 

 

 

Balance at June 30,

   $ 401      $ 982   
  

 

 

   

 

 

 

The amount set forth above as of June 30, 2016, is recorded in other current liabilities in the accompanying condensed consolidated balance sheet.

 

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value. The following table sets forth carrying value and fair value of long-term debt:

 

    June 30, 2016     December 31, 2015  

In thousands

  Carrying
Value
    Fair
Value
    Carrying
Value
    Fair
Value
 

Variable rate debt

  $ 48,851      $ 48,851      $ 58,792      $ 58,792   

Fixed-rate bonds

    250,000        255,625        250,000        250,938   

2.40% Term loan

    9,516        9,406        10,109        10,535   

2.05% Term loan

    40,000        38,724        42,130        42,886   

1.30% Term Loan

    11,102        10,403        —          —     

1.55% Term loan

    10,884        9,554        2,839        2,524   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 370,353      $ 372,563      $ 363,870      $ 365,675   
 

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2016, and December 31, 2015, we had $250.0 million of 5.375% fixed rate bonds. These bonds

 

 

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are publicly registered, but thinly traded. Accordingly, the values set forth above for the bonds, as well as our other debt instruments, are based on observable inputs and other relevant market data (Level 2). The fair value of financial derivatives is set forth below in Note 12.

 

12. 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”; 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.”

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 or capital expenditures expected to be incurred. Currency forward contracts involve fixing the exchange for delivery of a specified amount of foreign currency on a specified date. As of June 30, 2016, the maturity of currency forward contracts ranged from one month to 25 months.

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. The effective portion of 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. The ineffective portion of the change in fair value of the derivative is recognized directly to earnings and reflected in the accompanying condensed consolidated statements of income as non-operating income (expense) under the caption “Other, net.”

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:

 

In thousands

   June 30
2016
     December 31
2015
 

Derivative

     

Sell/Buy - sell notional

     

Euro / British Pound

     9,237         10,527   

Sell/Buy - buy notional

     

Euro / Philippine Peso

     670,402         758,634   

British Pound / Philippine Peso

     486,437         542,063   

Euro / U.S. Dollar

     48,574         51,433   

U.S. Dollar / Canadian Dollar

     33,839         34,649   

U.S. Dollar / Euro

     20,202         —     

Derivatives Not Designated as Hedging Instruments - Foreign Currency Hedges We also enter 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.”

 

 

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The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:

 

In thousands

   June 30
2016
     December 31
2015
 

Derivative

     

Sell/Buy - sell notional

     

U.S. Dollar / British Pound

     10,500         10,000   

British Pound / Euro

     2,500         3,500   

Sell/Buy - buy notional

     

Euro / U.S. Dollar

     3,500         12,500   

British Pound / Euro

     19,000         13,500   

These contracts have maturities of one month from the date originally entered into.

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:

 

In thousands

  June 30
2016
    December 31
2015
    June 30
2016
    December 31
2015
 

Balance sheet caption

  Prepaid Expenses
and Other
Current Assets
    Other
Current Liabilities
 

Designated as hedging:

       

Forward foreign currency exchange contracts

  $ 915      $ 955      $ 15      $ 1,545   

Not designated as hedging:

       

Forward foreign currency exchange contracts

  $ 124      $ 68      $ —        $ 49   

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 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:

 

   

Three months
ended

June 30

   

Six months
ended

June 30

 

In thousands

  2016     2015     2016     2015  

Designated as hedging:

       

Forward foreign currency exchange contracts:

       

Effective portion – cost of products sold

  $ (215   $ 1,750      $ 83      $ 2,623   

Ineffective portion – other – net

    73        (62     (330     288   

Not designated as hedging:

       

Forward foreign currency exchange contracts:

       

Other – net

  $ 475      $ (313   $ 1,064      $ 407   

The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance-sheet item.

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.”

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income (loss) is as follows:

 

In thousands

   2016     2015  

Balance at January 1,

   $ (178   $ 3,282   

Deferred gains on cash flow hedges

     1,294        2,995   

Reclassified to earnings

     (83     (2,623
  

 

 

   

 

 

 

Balance at June 30,

   $ 1,033      $ 3,654   
  

 

 

   

 

 

 

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be recorded as a component of the capital asset or realized in results of operations within the next twelve to twenty-five 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.

 

13. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

Fox River - Neenah, Wisconsin

Background. We have significant uncertainties 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 notified the following parties (“PRPs”) of their potential responsibility to implement response actions, to pay response costs, and to compensate for NRDs at this site: us, Appvion, Inc. (formerly known as Appleton Papers Inc.), CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”, formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation (“NCR”), U.S. Paper Mills Corp., and WTM I Company. As described below, many other parties have been joined in litigation. 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 and NCR.

The Site has been subject to certain studies and the parties conducted certain demonstration projects and completed certain interim cleanups. The permanent cleanup, known as a “remedial action” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), consists of sediment dredging, installation of engineered caps, and placement of sand covers in various areas in the bed of the river.

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”).

We and WTM I Company implemented the remedial action in OU1 under a consent decree with the Governments; Menasha Corporation made a financial contribution to that work. That project began in 2004 and the work is complete other than on-going monitoring and maintenance.

For OU2-5, work has proceeded primarily under a Unilateral Administrative Order (“UAO”) issued in November 2007 by the EPA to us and seven other respondents. The remedial actions from 2007 through 2014 were funded primarily by NCR and its indemnitors, including Appvion, Inc. In 2015, we placed certain covering and capping in OU4b as a response to the Government’s demands at a cost of $9.7 million. Georgia Pacific and NCR funded work in 2015 pursuant to a proposed consent decree that the United States did not move to enter until April 12, 2016; the court has not yet ruled on that motion. Work is scheduled to continue in OU2-5 through 2018, with monitoring and maintenance to follow.

As more fully discussed below, significant uncertainties exist pertaining to the ultimate allocation of OU2-5 remediation costs as well as the shorter term funding of the remedial actions for OU2-5.

Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional data and experience at the Site. In addition, disagreement exists over the likely costs for some of this work. On October 14, 2014, the Governments represented to the United States District Court in Green Bay that $1.1 billion provided an “upper end estimate of total past and future response costs” including a $100 million “uncertainty premium for future response costs.” Based upon estimates made by the Governments and independent estimates commissioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion. Much of that amount has already been incurred, including approximately $100 million for OU1 and what we believe to be approximately $575 million for OU2-5 prior to the 2016 remediation season.

In 2016, the Governments again seek approximately $100 million of work to be completed in OU2-5. The exact work and a more precise estimate of its cost depend on certain unresolved technical issues. We have begun an effort to place the final layer on certain caps. We do not yet know to what extent we will undertake additional work in 2016; however, we expect to spend less than $10 million.

 

 

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As the result of a partial settlement, Georgia-Pacific has no obligation to pay for work upstream of a line near Georgia-Pacific’s Green Bay West Mill located in OU4. We believe substantially all in-water work upstream of this line had been completed as of the end of the 2014 dredging season.

Allocation Litigation. In January 2008, NCR and Appvion brought an action in the federal district court in Green Bay to allocate among all parties responsible for this Site all of the costs incurred by the Governments, all of the costs incurred by the parties, and all of the NRDs owed to the Natural Resource Trustees. We have previously referred to this case as the “Whiting Litigation.” After several summary judgment rulings and a trial, the trial court entered judgment in the Whiting Litigation allocating to NCR 100% of the costs of (a) the OU2-5 cleanup, (b) NRDs, (c) past and future costs incurred by the Governments in OU2-5, and (d) past and future costs incurred by any of the other parties net of an appropriate equitable adjustment for insurance recoveries. As to Glatfelter, NCR was judged liable to us for $4.28 million and any future costs or damages we may incur. NCR was held not responsible for costs incurred in OU1.

All parties appealed the Whiting Litigation judgment to the United States Court of Appeals for the Seventh Circuit. On September 25, 2014, that court affirmed, holding that if knowledge and fault were the only equitable factors governing allocation of costs and NRDs at the Site, NCR would owe 100% of all costs and damages in OU2-5, but would not have a share of costs in OU1 — which is upstream of the outfall of the facilities for which NCR is responsible — solely as an “arranger for disposal” of PCB-containing waste paper by recycling it at our mill. However, the court of appeals vacated the judgment and remanded the case for the district court’s further consideration of whether any other equitable factors might cause the district court to alter its allocation.

We contend the district court should, after further consideration, reinstate the 100%, or some similar very high, allocation to NCR of all the costs, and should hold that we should bear no share or a very small share. However, NCR has taken a contrary position and has sought contributions from others for future work until all allocation issues are resolved.

In addition, we take the position that the “single site” theory on which the courts held us responsible for cleaning up parts of the Site far downstream of our former mill should, if applied to NCR, make it liable for costs incurred in OU1. The district court agreed with us in an order dated March 3, 2015. On March 31, 2015, NCR sought review of that order by the court of appeals which review was denied on May 1, 2015.

Appvion and NCR have had a cost-sharing agreement since at least 1998. The court of appeals held if Appvion incurred any recoverable costs because the Governments had named Appvion as a potentially responsible party, then Appvion may have a right to recover those costs under CERCLA. We and Appvion disagree over the proper treatment of amounts that Appvion incurred while a PRP that were also subject to a cost-sharing agreement with NCR; we contend Appvion may not recover costs it was contractually obligated to incur, that it has no other costs, and if it did, we would have a right to contribution of any recovery against NCR and others. However, Appvion takes a contrary position and claims approximately $200 million.

The district court has established a schedule for the Whiting Litigation under which it would hold a trial beginning in March 2017 on remaining issues.

Enforcement Litigation. In October 2010, the United States and the State of Wisconsin brought an action (“Government Action”) in the federal district court in Green Bay against us and 13 other defendants seeking (a) to recover all of the United States’ and the State of Wisconsin’s unreimbursed past costs, (b) to obtain a declaration of joint and several liability for all of their future costs, (c) to recover NRDs, and (d) to obtain a declaration of liability of all of the respondents on the UAO to perform the remedy in OU2-5 as required by the UAO and a mandatory permanent injunction to the same effect. The last of these claims was tried in 2012, and in May 2013, the district court enjoined us, NCR, WTM I, and Menasha Corp. to perform the work under the UAO. As the result of partial settlements, U.S. Paper Mills Corp. and Georgia-Pacific Consumer Products L.P. agreed to joint and several liability for some of the work. Appvion was held not liable for this Site under CERCLA.

All other potentially responsible parties, including the United States and the State of Wisconsin, have settled with the Governments. As a result, the remaining defendants consist of us, NCR, and Georgia-Pacific.

We appealed the injunction to the United States Court of Appeals for the Seventh Circuit, as did NCR, WTM I, and Menasha. On September 25, 2014, the court of appeals decided our and NCR’s appeals; the others’ appeals were not decided because they entered into a settlement. The court of appeals vacated the injunction as to us and NCR. However, it affirmed the district court’s ruling that we are liable for response actions in OU2-5 and for complying with the UAO. The court of appeals vacated and remanded the district court’s decision that NCR had failed to prove that liability for OU2-5 could be apportioned, directing the lower court to consider issues it had not considered initially.

 

 

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On remand, the district court issued an opinion on October 19, 2015, holding that NCR had not shown a reasonable basis for apportionment of its liability for the site. On January 25, 2016, the court denied NCR’s request to certify that decision for immediate appeal.

As described below, the United States has withdrawn its natural resources damages claim against us. The Governments’ remaining claims principally consist of claims for (1) unreimbursed past costs of the United States totaling $35.1 million (as incurred through September 30, 2015) and unreimbursed past costs of the Wisconsin Department of Natural Resources totaling $3.9 million (as incurred through June 30, 2015), and (2) costs incurred and/or to be incurred after September 30, 2015 and June 30, 2015, respectively. The remaining issues in the Government Action are set for trial to commence after the conclusion of the 2017 trial in the Whiting Litigation.

Interim Funding of Ongoing Work. As described above, the court of appeals vacated the allocation judgment in the Whiting Litigation on September 25, 2014, but neither court has since replaced that allocation with any other. The 2007 UAO requires the PRPs to submit annual remediation work plans. For 2015, the EPA approved the 2015 Work Plan for $100 million of remediation activities. NCR, GP, and we were not able to reach agreement on a division of the costs of that work on an interim basis, subject to reallocation in the Whiting Litigation. NCR and GP entered into a proposed consent decree with the United States under which they agreed to fund certain work estimated to cost approximately $67 million in 2015, and they would not be responsible for completing the remainder of the work in 2015, estimated to cost approximately $33 million. However, NCR and GP did not complete all of the work assigned to them under the consent decree. The United States did not move to enter that consent decree until April 12, 2016, and the court has not yet ruled on that motion. Through the issuance of the 2015 Work Plan the EPA assigned to us those remaining tasks. Under the proposed consent decree, all parties would remain jointly and severally liable for work in the 2015 Work Plan not completed in 2015, except for a small amount of work upstream of the area for which GP is responsible. We contracted for remediation work in OU4 at a total cost of $9.7 million, an amount of work less than the amount assigned to us in the 2015 Work Plan. We anticipate that the amount of work performed by us in 2015 satisfied our share of the obligation if NCR and GP perform the work assigned to them in the 2015 Work Plan. The United States disagrees. We cannot predict the outcome of these disagreements or any possible resulting litigation.

The 2016 Work Plan similarly calls for completion of work that is estimated to cost in the range of $100 million. However, unlike the 2015 Work Plan, it does not allocate

the work among NCR, GP, and us. The parties have again not come to agreement on an interim allocation among them of responsibility for completing the work called for by the 2016 Work Plan. NCR and GP have begun certain work. We have begun placement of certain capping material.

Because we may not be able to obtain an agreement with the other parties or a ruling in litigation defining our obligation to contribute to work in 2016 prior to the time that work would have to be implemented, it is conceivable that we may have to choose an amount of work that we believe satisfies any obligation we may have to complete work in 2016, which selection we will have to defend after the fact. We expect to spend less than $10 million in connection with the 2016 Work Plan. In addition, it is conceivable we may be in the same position with respect to work in OU2-5 beyond the 2016 season. Although we are unable to determine with any degree of certainty the amount we may be required to complete or to fund, those amounts could be significant. Any amounts we pay or any other party pays in the interim may be subject to reallocation when the Whiting Litigation is resolved.

NRDs. The Governments’ NRD assessment documents originally claimed we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. The Governments claimed this range should be inflated to current dollars and then certain unreimbursed past assessment costs should be added, so the range of their claim was $287 million to $423 million in 2009.

However, on October 14, 2014, the Governments represented to the district court that if certain settlements providing $45.9 million toward compensation of NRDs were approved, the total NRD recovery would amount to $105 million. The Governments stated they would consider those recoveries adequate and they would withdraw their claims against us and NCR for additional compensation of NRDs. On October 19, 2015, the district court granted the Governments leave to withdraw their NRD claims against us without prejudice to re-filing them at some later time. Some of the settling parties, including all of the settling parties contributing the $45.9 million, have waived their rights to seek contribution from us of the settlement amounts. We previously paid a portion of the earlier settlements that the Governments value at $59 million and that we contend may be somewhat more.

Reserves for the Site. Our reserve including ongoing monitoring obligations in OU1, our share of remediation of the downstream portions of the Site, NRDs and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination is set forth below:

 

 

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     Six months ended  
     June 30  

In thousands

   2016     2015  

Balance at January 1,

   $ 17,105      $ 16,223   

Payments

     (1,189     (21

Accruals

     —          —     
  

 

 

   

 

 

 

Balance at June 30,

   $ 15,916      $ 16,202   
  

 

 

   

 

 

 

The payments set forth above represent cash paid towards completion of remediation activities in connection with the 2015 and 2016 Work Plans. Our reserve as of June 30, 2016, includes our estimate of costs to be incurred for remediation work, pending clarity from the Whiting litigation. If we are unsuccessful in the allocation litigation or in the enforcement litigation described above, we may be required to record additional charges and such charges could be significant.

Of our total reserve for the Fox River, $11.4 million is recorded in the accompanying June 30, 2016 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remainder is recorded under the caption “Other long term liabilities.”

As described above, the appellate court vacated and remanded for reconsideration the district court’s ruling in the Whiting Litigation that NCR would bear 100% of costs for the downstream portion of the Site. We continue to believe we will not be allocated a significant share of liability in any final equitable allocation of the response costs for OU2-5 or for NRDs. The accompanying condensed consolidated financial statements do not include reserves for any future defense costs, which could be significant, related to our involvement at the Site.

In setting our reserve for the Site, we have assessed our legal defenses, including our successful defenses to the allegations made in the Whiting Litigation and the original determination in the Whiting Litigation that NCR owes us “full contribution” for response costs and for NRDs that we may become obligated to pay except in OU1. We assume we will not bear the entire cost of remediation or damages to the exclusion of other known parties at the Site, who are also jointly and severally liable. The existence and ability of other parties to participate has also been taken into account in setting our reserve, and setting our reserve is generally based on our evaluation of recent publicly available financial information on certain of the responsible parties and any known insurance, indemnity or cost sharing agreements between responsible parties and third parties. In addition, we have considered the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will continue to evaluate

our exposure and the level of our reserves associated with the Site.

Other Information. The Governments have published studies estimating the amount of PCBs discharged by each identified potentially responsible party to the lower Fox River and Green Bay. These reports estimate our Neenah mill’s share of the mass of PCBs discharged to be as high as 27%. The district court has found the discharge mass estimates used in these studies not to be accurate. We believe the Neenah mill’s absolute and relative contribution of PCB mass is significantly lower than the estimates set forth in these studies. The district court in the Government Action has found that the Neenah mill discharged an unknown amount of PCBs.

Based upon the rulings in the Whiting Litigation and the Government Action, neither of which endorsed an equitable allocation in proportion to the mass of PCBs discharged, we continue to believe an allocation in proportion to mass of PCBs discharged would not constitute an equitable allocation of the potential liability for the contamination at the Fox River. We contend other factors, such as a party’s role in causing costs, the location of discharge, and the location of contamination must be considered in order for the allocation to be equitable.

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, as well as discussions with legal counsel and cost estimates for work to be performed at the Site, and substantially dependent on the resolution of the allocation issues discussed above, we believe it is reasonably possible that our costs associated with the Fox River matter could exceed the aggregate amounts accrued for the Fox River matter by amounts ranging from insignificant to $190 million. We believe the likelihood of an outcome in the upper end of the monetary range is less than other possible outcomes within the range and the possibility of an outcome in excess of the upper end of the monetary range is remote.

We expect remediation costs to be incurred primarily over the next two to three years, although we are unable to determine with any degree of certainty the amount we may be required to fund for interim remediation work. To the extent we provide such interim funding, we contend that NCR or another party would be required to reimburse us once the final allocation is determined.

Summary. Our current assessment is we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter could, however, at any particular time or for any particular year or years, have a material adverse effect on

 

 

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our consolidated financial position, liquidity and/or results of operations or could result in a default under our debt covenants. Moreover, there can be no assurance our reserves will be adequate to provide for future obligations related to this matter, or our share of costs and/or damages will not exceed our available resources, or those obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. Should a court grant the United States or the State of Wisconsin relief requiring us

individually either to perform directly or to contribute significant amounts towards remedial action downstream of Little Lake Butte des Morts those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants.

 

 

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14. SEGMENT INFORMATION

The following tables set forth financial and other information by business unit for the period indicated:

 

Three months ended June 30   Composite Fibers     Advanced Airlaid
Materials
    Specialty Papers     Other and Unallocated     Total  

Dollars in millions

         
    2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  

Net sales

  $ 136.4      $ 140.4      $ 60.8      $ 57.5      $ 209.3      $ 212.9      $ —        $ —        $ 406.4      $ 410.8   

Energy and related sales, net

    —          —          —          —          2.0        0.7        —          —          2.0        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    136.4        140.4        60.8        57.5        211.3        213.6        —          —          408.4        411.5   

Cost of products sold

    109.0        112.4        51.8        52.3        202.9        211.9        2.0        2.1        365.7        378.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    27.4        28.0        9.0        5.2        8.4        1.7        (2.0     (2.1     42.7        32.8   

SG&A

    12.1        11.3        2.2        2.1        14.2        11.7        8.7        4.0        37.2        29.1   

Gains on dispositions of plant, equipment and timberlands, net

    —          —          —          —          —          —          —          (0.1     —          (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

    15.3        16.7        6.8        3.1        (5.8     (10.0     (10.7     (6.0     5.5        3.8   

Non-operating expense

    —          —          —          —          —          —          (3.6     (4.1     (3.6     (4.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 15.3      $ 16.7      $ 6.8      $ 3.1      $ (5.8   $ (10.0   $ (14.3   $ (10.1   $ 2.0      $ (0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                   

Net tons sold (thousands)

    40.7        39.4        24.4        22.6        194.7        191.3        —          —          259.7        253.3   

Depreciation, depletion and amortization

  $ 7.2      $ 6.7      $ 2.4      $ 2.1      $ 6.5      $ 6.3      $ 0.7      $ 0.5      $ 16.8      $ 15.6   

Capital expenditures

    2.3        5.6        6.1        1.5        28.7        15.6        —          0.1        37.1        22.8   
Six months ended June 30   Composite Fibers     Advanced Airlaid
Materials
    Specialty Papers     Other and Unallocated     Total  

Dollars in millions

         
    2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  

Net sales

  $ 259.9      $ 275.7      $ 121.5      $ 119.8      $ 427.2      $ 432.8      $ —        $ —        $ 808.6      $ 828.3   

Energy and related sales, net

    —          —          —          —          2.7        2.8        —          —          2.7        2.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    259.9        275.7        121.5        119.8        429.9        435.6        —          —          811.3        831.1   

Cost of products sold

    210.3        221.5        104.1        107.3        394.0        412.3        2.3        5.0        710.7        746.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    49.6        54.2        17.4        12.5        35.9        23.3        (2.3     (5.0     100.6        84.9   

SG&A

    23.2        22.9        4.2        4.0        26.6        23.9        15.0        9.5        69.0        60.4   

Gains on dispositions of plant, equipment and timberlands, net

    —          —          —          —          —          —          —          (2.8     —          (2.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

    26.4        31.3        13.2        8.5        9.3        (0.6     (17.3     (11.7     31.5        27.3   

Non-operating expense

    —          —          —          —          —          —          (8.3     (8.7     (8.3     (8.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 26.4      $ 31.3      $ 13.2      $ 8.5      $ 9.3      $ (0.6   $ (25.6   $ (20.4   $ 23.2      $ 18.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                   

Net tons sold (thousands)

    77.6        77.3        48.9        46.7        400.5        390.0        —          —          527.0        514.0   

Depreciation, depletion and amortization

  $ 14.3      $ 13.4      $ 4.7      $ 4.3      $ 13.2      $ 12.9      $ 1.2      $ 1.0      $ 33.4      $ 31.6   

Capital expenditures

    8.6        11.5        20.7        2.8        50.8        28.8        0.3        1.5        80.4        44.6   

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

 

Business Units Results of individual business units 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 business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. 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 business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

Management evaluates results of operations of the business units before pension expense, 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 business units 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 business unit 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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Table of Contents
15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Our 5.375% Notes issued by P. H. Glatfelter Company (the “Parent”) are fully and unconditionally guaranteed, on a joint and several basis, by certain of our 100%-owned domestic subsidiaries, PHG Tea Leaves, Inc., Mollanvick, Inc., Glatfelter Composite Fibers N. A., Inc. (“CFNA”), Glatfelter Advance Materials N.A., Inc. (“GAMNA”), and Glatfelter Holdings, LLC. The guarantees are subject to certain customary release provisions including i) the designation of such subsidiary as an unrestricted or excluded subsidiary; (ii) in connection with any sale or disposition of the capital stock of the subsidiary guarantor; and (iii) upon our exercise of our legal defeasance option or our covenant defeasance option, all of which are more fully described in the Indenture dated as of October 3, 2012 and the First Supplemental Indenture dated as of October 27, 2015, among us, the Guarantors and US Bank National Association, as Trustee, relating to the 5.375% Notes.

The following presents our condensed consolidating statements of income, including comprehensive income for the three months and six months ended June 30, 2016, our condensed consolidating cash flows for the six months ended June 30, 2016 and 2015 and our condensed consolidating balance sheets as of June 30, 2016 and December 31, 2015. The condensed consolidating financial statements set forth below include the addition of CFNA and GAMNA as guarantors during 2015.

Condensed Consolidating Statement of Income for the Three months ended June 30, 2016

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 209,269      $ 17,561      $ 196,675      $ (17,092   $ 406,413   

Energy and related sales, net

     2,001        —          —          —          2,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     211,270        17,561        196,675        (17,092     408,414   

Costs of products sold

     204,495        16,711        161,577        (17,092     365,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,775        850        35,098        —          42,723   

Selling, general and administrative expenses

     22,622        (36     14,605        —          37,191   

Loss on dispositions of plant, equipment and timberlands, net

     2        —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (15,849     886        20,493        —          5,530   

Other non-operating income (expense)

          

Interest expense

     (4,289     —          (814     1,150        (3,953

Interest income

     169        1,001        41        (1,150     61   

Equity in earnings of subsidiaries

     16,385        16,071        —          (32,456     —     

Other, net

     (575     (1,421     2,313        —          317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     11,690        15,651        1,540        (32,456     (3,575
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (4,159     16,537        22,033        (32,456     1,955   

Income tax provision (benefit)

     (6,124     152        5,962        —          (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,965        16,385        16,071        (32,456     1,965   

Other comprehensive income (loss)

     (11,539     (13,937     (13,490     27,427        (11,539
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (9,574   $ 2,448      $ 2,581      $ (5,029   $ (9,574
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 22 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the Six months ended June 30, 2016

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 427,157      $ 36,207      $ 381,141      $ (35,874   $ 808,631   

Energy and related sales, net

     2,667        —          —          —          2,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     429,824        36,207        381,141        (35,874     811,298   

Costs of products sold

     396,454        34,761        315,391        (35,874     710,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     33,370        1,446        65,750        —          100,566   

Selling, general and administrative expenses

     41,067        (221     28,203        —          69,049   

Loss on dispositions of plant, equipment and timberlands, net

     4        —          22        —          26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,701     1,667        37,525        —          31,491   

Other non-operating income (expense)

          

Interest expense

     (8,704     —          (1,601     2,236        (8,069

Interest income

     350        1,993        45        (2,236     152   

Equity in earnings of subsidiaries

     29,257        27,825        —          (57,082     —     

Other, net

     (1,117     (1,401     2,135        —          (383
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     19,786        28,417        579        (57,082     (8,300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12,085        30,084        38,104        (57,082     23,191   

Income tax provision (benefit)

     (6,048     827        10,279        —          5,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     18,133        29,257        27,825        (57,082     18,133   

Other comprehensive income (loss)

     4,203        (384     (373     757        4,203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 22,336      $ 28,873      $ 27,452      $ (56,325   $ 22,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 23 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the Three months ended June 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 212,920      $ 22,667      $ 194,779      $ (19,563   $ 410,803   

Energy and related sales, net

     715        —          —          —          715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     213,635        22,667        194,779        (19,563     411,518   

Costs of products sold

     212,472        21,921        163,855        (19,563     378,685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,163        746        30,924        —          32,833   

Selling, general and administrative expenses

     15,661        458        13,018        —          29,137   

Loss on dispositions of plant, equipment and timberlands, net

     (51     —          (60     —          (111
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (14,447     288        17,966        —          3,807   

Other non-operating income (expense)

          

Interest expense

     (4,608     —          (6,370     6,626        (4,352

Interest income

     169        6,498        36        (6,625     77   

Equity in earnings of subsidiaries

     17,478        11,305        —          (28,783     —     

Other, net

     (746     (29     990        —          215   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     12,293        17,774        (5,344     (28,782     (4,060
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (2,154     18,062        12,622        (28,782     (253

Income tax provision (benefit)

     (5,002     584        1,317        —          (3,101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,848        17,478        11,305        (28,782     2,848   

Other comprehensive income (loss)

     17,087        13,680        (9,958     (3,722     17,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 19,935      $ 31,158      $ 1,347      $ (32,504   $ 19,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 24 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the Six months ended June 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 432,796      $ 42,817      $ 392,877      $ (40,218   $ 828,272   

Energy and related sales, net

     2,783        —          —          —          2,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     435,579        42,817        392,877        (40,218     831,055   

Costs of products sold

     416,154        41,255        328,923        (40,218     746,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     19,425        1,562        63,954        —          84,941   

Selling, general and administrative expenses

     32,843        955        26,611        —          60,409   

Gains on dispositions of plant, equipment and timberlands, net

     (1,522     (1,183     (60     —          (2,765
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (11,896     1,790        37,403        —          27,297   

Other non-operating income (expense)

          

Interest expense

     (9,425     —          (12,764     13,329        (8,860

Interest income

     331        13,097        41        (13,327     142   

Equity in earnings of subsidiaries

     34,562        21,499        —          (56,061     —     

Other, net

     (1,460     (159     1,649        (2     28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     24,008        34,437        (11,074     (56,061     (8,690
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12,112        36,227        26,329        (56,061     18,607   

Income tax provision (benefit)

     (4,661     1,665        4,830        —          1,834   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     16,773        34,562        21,499        (56,061     16,773   

Other comprehensive income (loss)

     (18,198     (24,870     28,890        (4,020     (18,198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,425   $ 9,692      $ 50,389      $ (60,081   $ (1,425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 25 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Balance Sheet as of June 30, 2016

 

In thousands

   Parent
Company
     Guarantors     Non
Guarantors
     Adjustments/
Eliminations
    Consolidated  
Assets             

Cash and cash equivalents

   $ 6,512       $ 2,545      $ 49,475       $ —        $ 58,532   

Other current assets

     207,168         255,574        266,025         (262,714     466,053   

Plant, equipment and timberlands, net

     329,041         18,507        400,488         —          748,036   

Investments in subsidiaries

     783,479         535,117        —           (1,318,596     —     

Other assets

     112,876         —          139,687         —          252,563   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,439,076       $ 811,743      $ 855,675       $ (1,581,310   $ 1,525,184   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity             

Current liabilities

   $ 401,540       $ 28,180      $ 144,387       $ (262,714   $ 311,393   

Long-term debt

     247,381         —          110,985         —          358,366   

Deferred income taxes

     26,905         (229     48,479         —          75,155   

Other long-term liabilities

     87,027         313        16,707         —          104,047   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     762,853         28,264        320,558         (262,714     848,961   

Shareholders’ equity

     676,223         783,479        535,117         (1,318,596     676,223   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,439,076       $ 811,743      $ 855,675       $ (1,581,310   $ 1,525,184   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Condensed Consolidating Balance Sheet as of December 31, 2015

 

In thousands

   Parent
Company
     Guarantors     Non
Guarantors
     Adjustments/
Eliminations
    Consolidated  
Assets             

Cash and cash equivalents

   $ 59,130       $ 465      $ 45,709       $ —        $ 105,304   

Other current assets

     199,690         238,515        239,367         (230,509     447,063   

Plant, equipment and timberlands, net

     286,334         1,114        411,416         —          698,864   

Investments in subsidiaries

     737,450         507,116        —           (1,244,566     —     

Other assets

     106,586         —          142,599         —          249,185   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,389,190       $ 747,210      $ 839,091       $ (1,475,075   $ 1,500,416   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity             

Current liabilities

   $ 363,037       $ 9,725      $ 162,081       $ (230,523   $ 304,320   

Long-term debt

     247,075         —          106,221         —          353,296   

Deferred income taxes

     28,561         (79     47,976         —          76,458   

Other long-term liabilities

     87,270         —          15,825         —          103,095   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     725,943         9,646        332,103         (230,523     837,169   

Shareholders’ equity

     663,247         737,564        506,988         (1,244,552     663,247   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,389,190       $ 747,210      $ 839,091       $ (1,475,075   $ 1,500,416   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

- 26 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Cash Flows for the Six months ended June 30, 2016

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net cash provided (used) by

          

Operating activities

   $ 17,067      $ 2,821      $ 16,752      $ —        $ 36,640   

Investing activities

          

Expenditures for purchases of plant, equipment and timberlands

     (51,043     (18,861     (10,487     —          (80,391

Proceeds from disposals of plant, equipment and timberlands, net

     41        —          12        —          53   

Repayments from intercompany loans

     —          7,500        —          (7,500     —     

Advances of intercompany loans

     —          (7,880     —          7,880        —     

Intercompany capital contributed

     (17,000     (500     —          17,500        —     

Other

     (300     —          —          —          (300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investing activities

     (68,302     (19,741     (10,475     17,880        (80,638

Financing activities

          

Net long-term borrowings

     —          —          4,222        —          4,222   

Payments of borrowing costs

     (51     —          (85     —          (136

Payment of dividends to shareholders

     (10,679     —          —          —          (10,679

Repayments of intercompany loans

     —          —          (7,500     7,500        —     

Borrowings of intercompany loans

     7,880        —          —          (7,880     —     

Intercompany capital (returned) received

     —          17,000        500        (17,500     —     

Proceeds from government grants

     2,443        2,000        —          —          4,443   

Payments related to share-based compensation awards and other

     (976     —          —          —          (976
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financing activities

     (1,383     19,000        (2,863     (17,880     (3,126

Effect of exchange rate on cash

     —          —          352        —          352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     (52,618     2,080        3,766        —          (46,772

Cash at the beginning of period

     59,130        465        45,709        —          105,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at the end of period

   $ 6,512      $ 2,545      $ 49,475      $ —        $ 58,532   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 27 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Cash Flows for the Six months ended June 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net cash provided (used) by

          

Operating activities

   $ (4,343   $ (695   $ 30,551      $ —        $ 25,513   

Investing activities

          

Expenditures for purchases of plant, equipment and timberlands

     (30,241     —          (14,334     —          (44,575

Proceeds from disposals of plant, equipment and timberlands, net

     1,581        1,213        257        —          3,051   

Repayments from intercompany loans

     —          48,855        —          (48,855     —     

Advances of intercompany loans

     —          (38,690     —          38,690        —     

Intercompany capital (contributed) returned

     10,500        (300     —          (10,200     —     

Other

     (1,600     —          —          —          (1,600
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investing activities

     (19,760     11,078        (14,077     (20,365     (43,124

Financing activities

          

Net repayments of indebtedness

     —          —          (1,492     —          (1,492

Payments of borrowing costs

     (1,329     —          —          —          (1,329

Payment of dividends to shareholders

     (9,992     —          —          —          (9,992

Repayments of intercompany loans

     (9,158     —          (39,697     48,855        —     

Borrowings of intercompany loans

     38,690        —          —          (38,690     —     

Intercompany capital (returned) received

     —          (10,500     300        10,200        —     

Payments related to share-based compensation awards and other

     (2,000     —          —          —          (2,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financing activities

     16,211        (10,500     (40,889     20,365        (14,813

Effect of exchange rate on cash

     —          —          (1,651     —          (1,651
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     (7,892     (117     (26,066     —          (34,075

Cash at the beginning of period

     42,208        509        57,120        —          99,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at the end of period

   $ 34,316      $ 392      $ 31,054      $ —        $ 65,762   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 28 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

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 2015 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 regarding expectations of, among others, shipping volumes, selling prices, input costs, non-cash pension expense, environmental costs, capital expenditures and liquidity, 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. variations in demand for our products including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;

 

ii. the impact of competition, both domestic and international, changes in industry production capacity, including the construction of new mills or new machines, the closing of mills and incremental changes due to capital expenditures or productivity increases;

 

iii. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

 

iv. geopolitical events, including the impact of conflicts such as Russia and Ukraine;

 

v. our ability to develop new, high value-added products;

 

vi. changes in the cost or availability of raw materials we use, in particular pulpwood, pulp, pulp substitutes, caustic soda, and abaca fiber;
vii. changes in energy-related costs and commodity raw materials with an energy component;

 

viii. the impact of unplanned production interruption;

 

ix. disruptions in production and/or increased costs due to labor disputes;

 

x. the impact of exposure to volatile market-based pricing for sales of excess electricity;

 

xi. the gain or loss of significant customers and/or on-going viability of such customers;

 

xii. cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (“PCBs”) in the lower Fox River on which our former Neenah mill was located;

 

xiii. adverse results in litigation in the Fox River matter;

 

xiv. the impact of war and terrorism;

 

xv. the impact of unfavorable outcomes of audits by various state, federal or international tax authorities;

 

xvi. enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation; and

 

xvii. our ability to finance, consummate and integrate acquisitions.

We manufacture a wide array of specialty papers and fiber-based engineered materials. We manage our company along three business units:

 

    Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, nonwoven wall covering materials, metallized papers, composite laminates papers, and many technically special papers including substrates for electrical applications;

 

    Advanced Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene and adult incontinence products, wipes, and other airlaid applications; and

 

    Specialty Papers with revenue from the sale of papers for carbonless and other forms, envelopes, book publishing, and engineered products such as papers for high-speed ink jet printing, office specialty products, greeting cards, packaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications.
 

 

- 29 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

RESULTS OF OPERATIONS

Six months ended June 30, 2016 versus the six months ended June 30, 2015

Overview For the first six months of 2016 net income was $18.1 million, or $0.41 per diluted share compared with $16.8 million, or $0.38 per diluted share in the first six months of 2015. Adjusted earnings, a non-GAAP measure, were $19.1 million, or $0.43 per diluted share for the first six months of 2016 compared with $15.2 million, or $0.35 per diluted share, for the same period a year ago. Our Advanced Airlaid Materials and Specialty Papers businesses reported significantly higher operating income in the comparison driven by higher demand, improved operations within Advanced Airlaid Materials, and, with respect to Specialty Papers, less costly annual maintenance outages and lower input costs. The improved performance of these two businesses was partially offset by lower operating income in the Composite Fibers business, which was impacted by lower average selling prices. The following table sets forth summarized results of operations:

 

     Six months ended
June 30
 

In thousands, except per share

   2016      2015  

Net sales

   $ 808,631       $ 828,272   

Gross profit

     100,566         84,941   

Operating income

     31,491         27,297   

Net income

     18,133         16,773   

Earnings per diluted share

     0.41         0.38   

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted net income 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 net income consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Specialty Papers environmental compliance. These adjustments reflect non-capitalized costs incurred by the business unit directly related to the compliance with the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT).

Airlaid capacity expansion costs. These adjustments reflect non-capitalized costs incurred directly related to the start-up of a new production facility for Advanced Airlaid Materials.

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 significantly impact our operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.

Workforce efficiency charges. This includes costs that are directly related to actions undertaken to reduce costs and improve operating efficiencies. Such costs were specifically incurred as part of our initiative to reduce global headcount as part of a more broad based cost reduction effort initiated in the fourth quarter of 2014.

Acquisition and integration related costs. These adjustments include costs directly related to the consummation of the acquisition process and those related to integrating recently acquired businesses. These costs are irregular in timing and as such may not be indicative of our past and future performance.

Adjusted earnings and adjusted earnings per diluted 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 for the reconciliation of net income to adjusted earnings for the six months ended June 30, 2016 and 2015:

 

    2016     2015  

In thousands, except per share

  Amount     Diluted
EPS
    Amount     Diluted
EPS
 

Net income

  $ 18,133      $ 0.41      $ 16,773      $ 0.38   

Adjustments (pre-tax)

       

Specialty Papers’ environmental compliance

    1,125          —       

Airlaid capacity expansion costs

    257          —       

Timberland sales and related costs

    —            (2,705  

Workforce efficiency charges

    88          1,953     

Acquisition and integration related costs

    —            160     
 

 

 

     

 

 

   

Total adjustments (pre-tax)

    1,470          (592  

Income taxes (1) (2)

    (543       (963  
 

 

 

     

 

 

   

Total after-tax adjustments

    927        0.02        (1,555     (0.04
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings

  $ 19,060      $ 0.43      $ 15,218      $ 0.35   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Tax effect for adjustments calculated based on the tax rate of the jurisdiction in which each adjustment originated.
(2) Includes release of $1.4 million of tax reserves on timberland sales in 2015.

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

 

 

- 30 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Business Unit Performance

 

Six months ended June 30   Composite Fibers     Advanced
Airlaid Materials
    Specialty Papers     Other and Unallocated     Total  

Dollars in millions

         
    2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  

Net sales

  $ 259.9      $ 275.7      $ 121.5      $ 119.8      $ 427.2      $ 432.8      $ —        $ —        $ 808.6      $ 828.3   

Energy and related sales, net

    —          —          —          —          2.7        2.8        —          —          2.7        2.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    259.9        275.7        121.5        119.8        429.9        435.6        —          —          811.3        831.1   

Cost of products sold

    210.3        221.5        104.1        107.3        394.0        412.3        2.3        5.0        710.7        746.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    49.6        54.2        17.4        12.5        35.9        23.3        (2.3     (5.0     100.6        84.9   

SG&A

    23.2        22.9        4.2        4.0        26.6        23.9        15.0        9.5        69.0        60.4   

Gains on dispositions of plant, equipment and timberlands, net

    —          —          —          —          —          —          —          (2.8     —          (2.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

    26.4        31.3        13.2        8.5        9.3        (0.6     (17.3     (11.7     31.5        27.3   

Non-operating expense

    —          —          —          —          —          —          (8.3     (8.7     (8.3     (8.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 26.4      $ 31.3      $ 13.2      $ 8.5      $ 9.3      $ (0.6   $ (25.6   $ (20.4   $ 23.2      $ 18.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                   

Net tons sold (thousands)

    77.6        77.3        48.9        46.7        400.5        390.0        —          —          527.0        514.0   

Depreciation, depletion and amortization

  $ 14.3      $ 13.4      $ 4.7      $ 4.3      $ 13.2      $ 12.9      $ 1.2      $ 1.0      $ 33.4      $ 31.6   

Capital expenditures

    8.6        11.5        20.7        2.8        50.8        28.8        0.3        1.5        80.4        44.6   

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

 

Business Units Results of individual business units 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 business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. 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 business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

Management evaluates results of operations of the business units before pension expense, 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 business units 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 business unit 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.

 

 

- 31 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Sales and Costs of Products Sold

 

     Six months ended
June 30
 

In thousands

   2016     2015     Change  

Net sales

   $ 808,631      $ 828,272      $ (19,641

Energy and related sales, net

     2,667        2,783        (116
  

 

 

   

 

 

   

 

 

 

Total revenues

     811,298        831,055        (19,757

Costs of products sold

     710,732        746,114        (35,382
  

 

 

   

 

 

   

 

 

 

Gross profit

   $ 100,566      $ 84,941      $ 15,625   
  

 

 

   

 

 

   

 

 

 

Gross profit as a percent of Net sales

     12.4     10.3  

The following table sets forth the contribution to consolidated net sales by each business unit:

 

    

Six months ended

June 30

 

Percent of Total

   2016     2015  

Business Unit

    

Composite Fibers

     32.1     33.3

Advanced Airlaid Material

     15.0        14.5   

Specialty Papers

     52.9        52.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Net sales totaled $808.6 million and $828.3 million in the first half of 2016 and 2015, respectively. The $19.7 million decline was primarily driven by $18.1 million of lower selling prices and $4.5 million of currency translation. Shipping volumes increased 2.5%.

Composite Fibers’ net sales declined $15.8 million, or 5.7%, primarily due to $4.7 million of lower selling prices and $4.5 million of unfavorable currency translation.

Composite Fibers’ operating income for the first half of 2016 decreased $4.9 million to $26.4 million compared to the year-ago period. The primary drivers are summarized in the following chart:

 

LOGO

Advanced Airlaid Materials’ net sales increased $1.7 million in the year-over-year comparison as $5.6 million of lower selling prices from the contractual pass through of lower raw material costs more than offset higher shipping volumes. Shipping volumes increased 4.7% primarily due to higher shipments of hygiene products.

Advanced Airlaid Materials’ operating income totaled $13.2 million, an increase of $4.7 million, or 55.3% compared to the same period a year ago. The primary drivers are summarized in the following chart:

 

LOGO

Specialty Papers’ net sales decreased $5.6 million, or 1.3% due to a $7.9 million impact from lower selling prices partially offset by a 2.7% increase in shipping volumes. The business unit again outperformed the broader uncoated free sheet market which increased 0.1%.

Operating income totaled $9.3 million, an increase of $9.9 million compared to the first six months of 2015. The primary drivers are summarized in the following chart:

 

LOGO

The $5.7 million improvement in “Operations & Other” in the chart above includes the $7.1 million lower cost of the annual maintenance outages.

 

 

- 32 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the first six months of 2016 and 2015:

 

     Six months ended
June 30
 

In thousands

   2016     2015     Change  

Energy sales

   $ 1,818      $ 3,328      $ (1,510

Costs to produce

     (2,042     (2,256     214   
  

 

 

   

 

 

   

 

 

 

Net

     (224     1,072        (1,296

Renewable energy credits

     2,891        1,711        1,180   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,667      $ 2,783      $ (116
  

 

 

   

 

 

   

 

 

 

Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent additional sales of RECs in future periods.

Other and Unallocated The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, totaled $17.3 million in the first six months of 2016 compared with $11.7 million in the first six months of 2015. Excluding $2.8 million of gains in 2015 from sales of timberlands in the comparison, unallocated net operating expenses increased $2.8 million primarily due to higher incentive compensation and professional services partially offset by lower pension expense.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:

 

     Six months ended
June 30
 

In thousands

   2016      2015      Change  

Recorded as:

        

Costs of products sold

   $ 1,178       $ 3,495       $ (2,317

SG&A expense

     1,577         916         661   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,755       $ 4,411       $ (1,656
  

 

 

    

 

 

    

 

 

 

The amount of pension expense recognized each year is dependent on various actuarial assumptions and certain other factors, including discount rates and the fair value of our pension assets. Pension expense for the full year of 2016 is expected to be approximately $5.5 million compared with $9.1 million in 2015. The decrease reflects the impact of higher discount rates partially offset by a lower assumed long term rate of return on plan assets.

Income taxes For the first six months of 2016, we recorded a provision for income taxes of $5.1 million on pretax income of $23.2 million. The comparable amounts in the period of 2015 were $1.8 million and $18.6 million, respectively. The effective tax rate in 2015 includes the impact of a $2.6 million release of income tax reserves in connection with the completion of certain federal and state tax examinations.

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 approximately €120 million. For the six months ended June 30, 2016, the average currency exchange rate increased slightly to 1.12 U.S. dollars to 1.00 euro compared with 1.11 to 1.00 for the first six months of 2015. 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 six months of 2016.

 

In thousands

   Six months ended
June 30, 2016
 
     Favorable (unfavorable)  

Net sales

   $ (4,518

Costs of products sold

     3,211   

SG&A expenses

     375   

Income taxes and other

     37   
  

 

 

 

Net income

   $ (895
  

 

 

 

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2016 were the same as 2015. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

 

 

- 33 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Three months ended June 30, 2016 versus the three months ended June 30, 2015

Overview For the second-quarter of 2016, net income totaled $2.0 million, or $0.04 per diluted share compared with $2.8 million, or $0.06 per diluted share in the second quarter of 2015. Adjusted earnings for the second quarter of 2016 were $2.8 million, or $0.06 per diluted share compared with $1.8 million, or $0.04 per diluted share, for the same period a year ago.

The following table sets forth summarized results of operations:

 

     Three months ended
June 30
 

In thousands, except per share

   2016      2015  

Net sales

   $ 406,413       $ 410,803   

Gross profit

     42,723         32,833   

Operating income

     5,530         3,807   

Net income

     1,965         2,848   

Earnings per diluted share

     0.04         0.06   

The following table sets for the reconciliation of net income to adjusted earnings for the three months ended June 30, 2016 and 2015:

 

    2016           2015        

In thousands, except per share

  Amount     Diluted
EPS
    Amount     Diluted
EPS
 

Net income

  $ 1,965      $ 0.04      $ 2,848      $ 0.06   

Adjustments (pre-tax)

       

Specialty Papers’ environmental compliance

    1,088          —       

Airlaid capacity expansion costs

    201          —       

Timberland sales and related costs

    —            (51  

Workforce efficiency charges

    —            614     
 

 

 

     

 

 

   

Total adjustments (pre-tax)

    1,289          563     

Income taxes (1) (2)

    (487       (1,567  
 

 

 

     

 

 

   

Total after-tax adjustments

    802        0.02        (1,004     (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings

  $ 2,767      $ 0.06      $ 1,844      $ 0.04   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Tax effect for adjustments calculated based on the tax rate of the jurisdiction in which each adjustment originated.
(2) Includes release of $1.4 million of tax reserves on timberland sales in 2015.
 

 

Business Unit Performance

 

Three months ended June 30   Composite Fibers     Advanced Airlaid
Materials
    Specialty Papers     Other and Unallocated     Total  

Dollars in millions

         
    2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  

Net sales

  $ 136.4      $ 140.4      $ 60.8      $ 57.5      $ 209.3      $ 212.9      $ —        $ —        $ 406.4      $ 410.8   

Energy and related sales, net

    —          —          —          —          2.0        0.7        —          —          2.0        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    136.4        140.4        60.8        57.5        211.3        213.6        —          —          408.4        411.5   

Cost of products sold

    109.0        112.4        51.8        52.3        202.9        211.9        2.0        2.1        365.7        378.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    27.4        28.0        9.0        5.2        8.4        1.7        (2.0     (2.1     42.7        32.8   

SG&A

    12.1        11.3        2.2        2.1        14.2        11.7        8.7        4.0        37.2        29.1   

Gains on dispositions of plant, equipment and timberlands, net

    —          —          —          —          —          —          —          (0.1     —          (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

    15.3        16.7        6.8        3.1        (5.8     (10.0     (10.7     (6.0     5.5        3.8   

Non-operating expense

    —          —          —          —          —          —          (3.6     (4.1     (3.6     (4.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 15.3      $ 16.7      $ 6.8      $ 3.1      $ (5.8   $ (10.0   $ (14.3   $ (10.1   $ 2.0      $ (0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                   

Net tons sold (thousands)

    40.7        39.4        24.4        22.6        194.7        191.3        —          —          259.7        253.3   

Depreciation, depletion and amortization

  $ 7.2      $ 6.7      $ 2.4      $ 2.1      $ 6.5      $ 6.3      $ 0.7      $ 0.5      $ 16.8      $ 15.6   

Capital expenditures

    2.3        5.6        6.1        1.5        28.7        15.6        —          0.1        37.1        22.8   

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

 

- 34 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

Sales and Costs of Products Sold

 

     Three months ended
June 30
       

In thousands

   2016     2015     Change  

Net sales

   $ 406,413      $ 410,803      $ (4,390

Energy and related sales, net

     2,001        715        1,286   
  

 

 

   

 

 

   

 

 

 

Total revenues

     408,414        411,518        (3,104

Costs of products sold

     365,691        378,685        (12,994
  

 

 

   

 

 

   

 

 

 

Gross profit

   $ 42,723      $ 32,833      $ 9,890   
  

 

 

   

 

 

   

 

 

 

Gross profit as a percent of Net sales

     10.5     8.0  

The following table sets forth the contribution to consolidated net sales by each business unit:

 

    

Three months ended

June 30

 

Percent of Total

   2016     2015  

Business Unit

    

Composite Fibers

     33.6     34.2

Advanced Airlaid Material

     15.0        14.0   

Specialty Papers

     51.4        51.8   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Net sales totaled $406.4 million and $410.8 million in the second quarters of 2016 and 2015, respectively, with the decline primarily reflecting lower average selling prices. Currency translation adjustments favorably impacted the year-over-year comparison by $0.7 million

Composite Fibers’ net sales declined $4.0 million, or 2.9%, primarily due to $1.6 million from lower selling prices. Shipping volumes were higher in the comparison primarily due to improved demand for wallcover.

Composite Fibers’ second-quarter 2016 operating income decreased $1.4 million to $15.3 million compared to the year-ago period. The primary drivers are summarized in the following chart:

 

LOGO

Advanced Airlaid Materials’ net sales increased $3.3 million in the year-over-year comparison as shipping volumes increased 7.8% primarily due to higher shipments

of hygiene products. Lower selling prices impacted the comparison by $1.8 million.

Advanced Airlaid Materials’ operating income totaled $6.8 million, more than double the same quarter a year ago. The primary drivers are summarized in the following chart:

 

LOGO

Specialty Papers’ net sales decreased $3.7 million, or 1.7%, due to a $3.7 million impact from lower selling prices.

Specialty Papers’ operating loss narrowed by $4.2 million in the year-over-year comparison and totaled $5.8 million in the second quarter of 2016. The primary drivers are summarized in the following chart:

 

LOGO

Operating results for both quarters reflect the cost of annual maintenance outages at the Company’s Chillicothe, OH and Spring Grove, PA facilities. The outages adversely impacted second-quarter 2016 results by $26.3 million, which was $7.1 million less than the cost of the outages in 2015. The $0.9 million improvement in “Operations & Other” in the chart above includes the lower cost of the annual maintenance outages which was offset by lower pulp production and an increase in incentive compensation and other costs.

 

 

- 35 -

GLATFELTER

6.30.16 Form 10-Q


Table of Contents

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the second quarters of 2016 and 2015:

 

    

Three months ended

June 30

       

In thousands

   2016     2015     Change  

Energy sales

   $ 836      $ 1,163      $ (327

Costs to produce

     (934     (1,211     277   
  

 

 

   

 

 

   

 

 

 

Net

     (98     (48     (50

Renewable energy credits

     2,099        763        1,336   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,001      $ 715      $ 1,286   
  

 

 

   

 

 

   

 

 

 

Other and Unallocated The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, totaled $10.7 million in the second quarter of 2016 compared with $6.0 million in the second quarter of 2015. The increase was primarily due to higher incentive compensation and professional service fees.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:

 

    

Three months ended

June 30

        

In thousands

   2016      2015      Change  

Recorded as:

        

Costs of products sold

   $ 742       $ 1,468       $ (726

SG&A expense

     854         135         719   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,596       $ 1,603       $ (7
  

 

 

    

 

 

    

 

 

 

Income taxes For the second quarter of 2016, we recorded zero tax on a pretax income of $2.0 million due to the jurisdiction in which taxable earnings and discrete items were generated. The comparable amounts in the second quarter of 2015 were an income tax benefit of $3.1 million on a pretax loss of $0.3 million. The tax benefit was primarily due to the release income tax reserves in connection with the completion of certain federal and state tax examinations.

Foreign Currency 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 second quarter of 2016.

 

In thousands

   Three months ended
June 30, 2016
 
     Favorable (unfavorable)  

Net sales

 &